The influence of the culture of a TMT on internationalization
Kyra van der Zee (s2353660) 09-01-2018
Master Thesis University of Groningen Supervisor: Gjalt de Jong
Abstract. The upper echelon theory states that the top management team influences decision making directly. The team is more important than one individual, since many decisions are taken in collaboration with a group of people. Internationalization decisions are influenced by the nationalities of their top management team members. Top managers have their own values through which they interpret information and take decisions differently. In this research, the influence of the culture in a multicultural TMT on internationalization decisions was
investigated. An ordinary least squares regression is used. In what way does culture influence the amount of foreign subsidiaries? Does the influence of cultural values on strategic
2 1. TABLE OF CONTENT
1. TABLE OF CONTENT ... 2
2. INTRODUCTION ... 3
3. LITERATURE REVIEW AND THEORY ... 6
3.1 Internationalization ... 6
3.2 Upper Echelons Theory ... 7
3.3 National culture ... 9
3.4 Criticism Hofstede ... 10
3.5 National culture and upper echelons theory ... 11
3.6 Hypotheses ... 12 4. METHODOLOGY ... 15 4.1 Sample ... 15 4.2 Dependent variable ... 16 4.3 Independent variables ... 16 4.4 Control variables ... 17
4.5 Evaluation of method assumptions ... 18
5. EMPERICAL RESULTS ... 20
5.1 Descriptive statistics ... 20
5.2 Regression results ... 21
6. DISCUSSION AND CONCLUSION ... 24
6.1 Discussion and conclusion ... 24
6.2 Contributions ... 25
6.3 Limitations and future research... 26
7. REFERENCES ... 28
8. APPENDICES ... 42
8.1 Appendix 1, normality distributions ... 42
3 2. INTRODUCTION
Internationalization is important for businesses to keep up with the globalizing markets, the economic integration of national states, and the high international competition (Heijltjes, Olie, & Glunk, 2003). Furthermore, it helps in spreading risk and gaining
economies of scale or scope (Zaheer, 1995). Internationalization includes a wide set of decisions that affect the externally visible aspects and the internal profile of an organization (Casillas, & Acedo, 2013). Welch and Luostarinen (1988) name for example the organization structure, the finance, the method of operation, and the target markets of an organization to be influenced by these internationalization decisions. Thus, firm internationalization decisions have an important impact on the firm.
The top management team (TMT) of a company is responsible for making internationalization decisions, as it contains the dominant coalition of individuals that is responsible for setting the direction of the firm (Cyert, & March, 1963). The growing interest in the members of this team is triggered by the upper echelons theory by Hambrick and Mason (1984). This theory shows the importance of TMTs for the success of an organization in the modern economies (Ramos-Garza, 2009). It is also used to explain the variety in the degree of internationalization of companies (Hambrick, & Mason, 1984). Evidence has been found for the association between top management characteristics and the international growth of the firm (Carpenter, 2002; Jaw, & Lin, 2009; Tihanyi, Ellstrand, Daily, & Dalton, 2000).
The upper echelons theory states that backgrounds and experiences of this dominant coalition influence how it interprets a strategic decision-making situation, and as a result, the choices made (Hambrick, & Mason, 1984). Complex strategical decisions are the outcome of behavioural factors and not of an mechanical and objective search for economic optimization (Cyert, & March, 1963; March, & Simon, 1958). The strategic decisions reflect the
knowledge and the values of the decision makers (March, & Simon, 1958; Habrick, & Mason, 1984). So, organizational performance is influenced by the cognitive orientations, perceptual processes, values and experiences of the top managers, reflected in their decisions
4 values on strategic choice and executive leadership is underrepresented (Geletkanycz, 1997). The purpose of this thesis is to address this gap, by focussing on national values.
The national origin of a top manager is an important aspect of his or her international background and orientation (Nielsen, 2010). Nationality influences the fundamental values and cognitions of an actor. As a consequence, people from different nationalities interpret, identify, organize and utilize information that serve as basis for strategic choices differently (Shaw, 1990). National origin thus influences the personality from an individual (Triandis, & Suh, 2002). The effect of their nationality has a long-lasting influence on the mind-sets of the members of a TMT (Geletkanycz, 1997) and as a consequence on their interpretations and responses to strategic issues (Schneider, & DeMeyer, 1991). So, the national culture of the executives may strongly influence the choices of how to enter and operate in international markets (Gupta, & Govindarajan, 2002). Geletkanycz (1997) found that cultural values significantly influence executives’ openness towards change in the organizational status quo, even after controlling for some determinants like experimental background. In this way, values are indirectly influencing the strategic choice process (Hambrick, & Mason, 1984; Hambrick, & Brandon, 1988). Schneider and DeMeyer (1991) state that national culture will influence strategic issues via interpretations of and responses to crisis and threat.
So what about the influence of the national culture of the TMT when a team is
culturally diverse? There is no longer a set of homogenous cultural values present in the team. Cultural characteristics of a TMT are more varied because of the increased diversity in TMTs (Nielsen, & Nielsen, 2011). Using the uncertainty avoidance dimensions and the power distance dimension of Hofstede (1980), the influence of the national culture in a (culturally) diverse TMT will be investigated. The following research question is proposed:
What is the influence of uncertainty avoidance and power distance on the internationalization of multinationals?
To answer this main question, four sub-questions are stated. 1) What is
5 composition of a TMT be proved emperically? To answer sub-question four, 65 Dutch
multinationals are investigated, looking at the composition of their TMTs and the number of non-Dutch subsidiaries they hold. An ordinary least squares regression is used to test the hypotheses.
This research will make an addition to the existing literature by giving more clarity in the impact of the national culture on strategic decision making when a TMT is culturally diverse. In practice, managers can use this information for the composition of a TMT. They can bring their cultural values in line with the company’s vision and mission statements. Also, it can help to design an effective competitive strategy, by predicting the strategic moves and responses of competitors (e.g., Pye, 1983; Tse, Lee, Vertinsky, & Wehrung, 1988).
6 3. LITERATURE REVIEW AND THEORY
First, the concept of internationalization will be elaborated based on the existing literature. Then the upper echelon theory will provide the link between internationalization and the cultural composition of a TMT, providing an answer on sub-questions one and two. Then, based on Hofstede (1980) and the upper echelon theory, the expected answer on sub-question three is provided. This information will result into two hypotheses that represents the
influence of national culture in a culturally diverse TMT on internationalization.
3.1 Internationalization
Internationalization is the process via which a company increases its level of involvement in foreign markets (Welch, & Luostarinen, 1988). Internationalization often evolves as a series of events that happen over time (Johanson, & Vahlne, 1990; Leonidou, & Katsikeas, 1996). The degree of internationalization contains the extent to which a company operates beyond the borders of its home country (Kotabe, Srinivasan, & Aulakh, 2002; Kafouros, Buckley, Sharp, & Wang, 2008). Internationalization can be measured in different ways, for example by the ratio of foreign sales to total assets, foreign sales to total sales, and the number of countries in which the company operates (Kotabe et al., 2002).
International diversification is seen as a complex decision. Partly, because of the increased opportunities and threats that executives encounter in international markets. The effects of internationalization decisions on the firm and its performance are mixed, so inconclusive (Hitt, Hoskisson, & Kim, 1997; Tallman, & Li, 1996). Both advantages and disadvantages are investigated. One part of the internationalization literature outlines the potential advantages of international expansion (e.g., Hymer, 1976; McKiernan, 1992; Rugman, 1981; Vernon, 1966). An example for an advantage is that internationalization is likely to improve the performance of a company through affecting the returns to innovation (Kafouros et al., 2002). Despite its potential benefits, the potential threats of
7 (Tihanyi et al., 2000). There is a high potential for misunderstanding about, for example, consumer tastes, access to distribution, and regulations that may lead to damaging and costly mistakes (Mitchell et al., 1992). Increased international diversification may also result in organizational problems. Higher monitoring costs may emerge because of the increased size and complexity compared to domestic firms (Fatemi, 1984; Geringer, Beamish, & daCosta, 1989).
Despite the conflicting research findings regarding the consequences, it is for sure that international diversification decisions may influence firm performance (Tihanyi et al., 2000). The management is the key driver behind the success of internationalization (Lee & Park, 2006; McDougall, & Oviatt, 1996). This argument is based on the upper echelon perspective (Boeker, 1997; Hambrick, & Mason, 1984; Miller, De Vries, & Toulouse, 1982), stating that TMTs contain the strategists that set the direction of their companies (Dimitratos, 2011; Boeker, 1997; Hambrick, & Mason, 1984; Miller et al., 1982). By focussing on the characteristics of the top management team, more clarity can be gained in how executives deal with the uncertainties associated with international markets (Athanassiou, & Nigh, 1999; Sambharya, 1996; Wiersema, & Bird, 1993).
3.2 Upper Echelons Theory
The connection between TMT composition and firm outcomes is central to the upper echelons theory. The top managers choose the strategies of the firms and influence firm outcomes via these chosen strategies (Acar, 2015). The recent focus on investigating linkages between the characteristics of the top managers and a wide scale of organizational outcomes (Bantel, 1993; Michel, & Hambrick, 1992, Wiersema, & Bantel, 1992), has emerged from two important developments in organizational studies (Tihanyi et al., 2000). First, the development of the concept of the dominant coalition (Cyert, & March, 1963), shifting the attention regarding organizational leadership from the individual CEO to the entire
8 The decisions the top managers make, are based on their individual cognitive
orientations, perceptual processes, values and experiences. On their turn, these decisions influence organizational performance (Dimitratos, et al., 2011). Strategic decision-making processes like information search and information processing are influenced by differences in the managers’ cognitive processes (Cyert, & March, 1963; Daft, & Weick, 1984; Haleblian, & Rajagopalan, 2006). Cognitive processes (i.e., external scanning, interpretation, alternative generation, and selection) are used to monitor the organization’s environment and cope with contingencies. These cognitive processes therefore effect how the top executives manage or influence organizational profiles (e.g., Mintzberg, Raisinghani, & Theoret, 1976;
Geletkanycz, 1997). The idiosyncratic lenses of managers reflect their own knowledge, beliefs, assumptions, and preferences. The decisions the managers make are therefore based on their selective filtering and interpretation of available stimuli (March, & Simon, 1958; Cyert, & March, 1963). Consequently, one can only understand the firm, when one examines the characteristics of its top managers (Carpenter, Geletkanycz, & Sanders, 2004; Finkelstein, & Hambrick, 1996; Hambrick, 1989, 2007; Hambrick, & Mason, 1984).
Often demographic variables are used as proxies for psychological constructs, like values, perceptions and cognitions (Acar, 2015). Demographic variables are easier to measure and more reliable than psychological constructs (Carpenter, 2002; Hambrick, & Mason, 1984; Pitcher, & Smith, 2001; Sambharya, 1996; Wiesema, & Bantel, 1992). Central to the upper echelons theory is the TMT composition, referring to the configuration of the attributes of the members on a team (Levine, & Moreland, 1990). In her article, Acar (2015) explains two different foci regarding the demographic characteristics of a TMT. The first is on the mean of the demographic factors in a TMT. The second is on the diversity in the demographic factors. Both influencing the strategic decisions in a TMT. Tenure, age, and education level belong to the most frequently examined attributes of the TMT members regarding the upper echelons perspective (Acar, 2015).
9 & Bantel, 1992). Demographic diversity contains the TMT’s heterogeneity with respect to demographic characteristics, like tenure and age (Horwitz, & Horwitz, 2007; Jackson, Joshi, & Erhardt, 2003). Compared to demographic and experiential characteristics of the TMT, systematic research on the direct influence of executive values on strategic choice and executive leadership is underrepresented (Geletkanycz, 1997).
3.3 National culture
Hofstede (1980, p. 19) defines culture as “The interactive aggregate of common characteristics that influence a group’s response to its environment”. Culture is a group’s set of shared assumptions, with socially constructed meanings and preferences (Hofstede, 1980, 1991; Schein, 1985). National origin influences orientations, values, and cognitions of a person (Hofstede, 1980; Schwartz, 1992). It may reflect a general tendency of a persistent preference for certain actions, social processes, rules of selective attention, interpretation and responses over others (Tse et al., 1988). “Restated, national culture can be interpreted as a common frame of reference or logic by which members of a society view organizations, the environment, and their relations to one another” (Geletkanycz, 1997: p. 617). As a result, national culture influences the way an environment is known and is responded to (Schneider, 1989). Most of the cultural patterns of feeling, thinking, and acting are created in childhood. This because children are the most susceptible to learning and assimilation. After
establishment in someone’s mind, these patterns are very fixed (Hofstede, & Hofstede, 2005). Hofstede (1980, 2001) provided a cultural framework which is largely used in
empirical literature, studying the impact of culture on economic decision making (Frijns, Gilbert, Lehnert, & Tourani-Rad, 2013). Hofstede’s (1980) first four dimensions resulted from survey data on work-related values from more than 117,000 IBM employees between 1967 and 1973 working in 40 different countries. These four dimensions were statistically independent and helped to explain inter-country variation in the responses of employees to the survey questions. The dimensions were labelled as ‘uncertainty avoidance’, ‘power distance’, ‘individualism’, and ‘masculinity’. Hofstede assigned each country a score on every
10 Later Hofstede (2001) added the fifth dimension ‘long-term orientation’. Hofstede’s (1980, 2001) five cultural dimensions reflect the cultural traits of the members of a society (Frijns et al., 2013), with the assigned score for each country-dimension pair showing how the members of a culture feel about the societal issues (Hofstede, 1980, 2001). The cultural dimensions theory helps to explain national cultural differences and its influence on the management of organizations (Hofstede, & Hofstede, 2005). The two relevant dimensions for this thesis, are defined by Hofstede as follows.
Power distance. “Power distance stands for the extent to which the less powerful members of institutions and organizations within a country expect and accept that power is distributed unequally” (Hofstede, 2001: p. 46).
Uncertainty avoidance. “Uncertainty avoidance is the extent to which the members of a culture feel threatened by ambiguous or unknown situations” (Hofstede, 2001: p. 167).
3.4 Criticism Hofstede
Despite the popularity of Hofstede’s dimensions that contributed to our understanding of national cultures and their differences, there are also great criticisms on his work (e.g., Brett, & Okumura, 1998; Schwartz, 1994; Steenkamp, 2001). The best known concerns are of Schwartz (1994). First, he beliefs that Hofstede’s cultural dimensions are not necessarily exhaustive. The survey on which Hofstede based the dimensions, was not designed to identify cultural dimensions, so not all relevant questions may be included. Second, he claims that Hofstede’s country sample did not accurately reflect the entire spectrum of national cultures. Adding additional countries could have resulted in distinct or in a different number of dimensions. Third, Schwartz states that the IBM employees investigated by Hofstede are not an accurate representation of the general population of that given country in terms of
‘scientific and technological background’, ‘education’, and ‘exposure to modernizing forces’ (1994, p.91). However, Hofstede (1980) claims this not to be a problem as long as the
11 Ohmae, 1990). Finally, Schwartz questions whether Hofstede’s value items are interpreted the same across cultures. This conceptual equivalence is necessary for an inter-country
comparison of the scores on the dimensions (Schwartz, 1994).
3.5 National culture and upper echelons theory
Laurent (1983) stated that nationality of the executives accounted for far more variation in their strategic actions than other executives’ characteristics like age, job,
education, hierarchical level, professional experience, and company type. Many researchers agree that the social values that are embedded in national cultures, are among the most influential values that affect strategic leadership and decision making (e.g., Finkelstein, & Hambrick, 1996; Hambrick, & Brandon, 1988). Managers’ cultural values and background experiences shape knowledge, assumptions and preferences, used in decision making (Geletkanycz, 1997). Values are the principles for ordering consequences and alternatives according to preference (Hambrick, & Mason, 1984: 195).
Values influence strategic decision making in two ways (Geletkanycz, 1997). First, via ‘behavior channeling’. Managers select a strategic course of action based on personal
preference, reflecting their values. Second, values influence decision making indirectly via ‘perceptual screening’ (England, 1967). Managers have a limited view of the organization and its environment, because they attend to information that suits their existing knowledge
(Simon, 1957). Executives select information that supports their preferences and formulate strategic choices consistent with those values (Hambrick, & Brandon, 1988).
So, cultural values shape managerial views of the environment and the appropriate responses to these environments (e.g., Kluckhohn, & Strodtbeck, 1961; Schein, 1985). As a result, they influence the strategy formulation process and its outcomes (Hambrick, & Brandon, 1988; Schneider, 1989). Thus, the top managers monitor and adjust to the external environment of a company (e.g., Andrews, 1971; Hambrick, & Mason, 1984). Implicit to this view, is that managers hold an attentive and adaptive stance to anticipate to the changing contingencies (Geletkanycz, 1997).
12 organizational control for Latin European managers compared to other managers. Tse et al. (1988) found that cultures (at least the difference between Chinese and Canadian executives) does influence international marketing decision making. Geletkanycz (1997) found that cultural values do influence the commitment to the status-quo. Using the data from a survey of top managers in 20 countries, she found that values of individualism, (low) uncertainty avoidance, (low) power distance, and short-term orientation are significantly related to top managers’ preference for the existing strategy and leadership profiles.
3.6 Hypotheses
The previously mentioned researches, found a difference in managers’ openness to change, that could be (partly) explained by the managers’ cultural background. Here the process of internationalization is seen as change. The average TMT scores on the power distance dimension and uncertainty avoidance dimension are used to predict the extent of internationalization. This in line with Bell (2007), stating that the mean level of a
characteristic in a TMT is assumed to relate to a level of predisposition and psychological tendencies of team members. In this case the willingness to internationalize, thus change.
Power distance. This dimension shows to what extent the members of a society assume an uneven distribution of power, often in combination with underlying social
13 perceive little sense of personal risk in proceeding their innovations (Howell, & Higgins, 1990).
Hypothesis 1: TMTs having a high average score on the power distance dimension, will show a higher internationalization than TMTs having a low average score on the power distance dimension.
Uncertainty avoidance. Values of uncertainty avoidance are associated with preferences for stability and predictability. One could expect that this would lead to preference for commitment to existing strategic and leadership profiles, as established practices is a certain and known course. It infers stability (Geletkanycz, 1997). Also, in line with the threat-rigidity arguments, reliance on well-learned or dominant responses is a reliable means of coping with threat and uncertainty (Staw, Sandelands, & Dutton, 1981).
Geletkanycz (1997), however, found evidence in line with the adaptation literature, claiming “that adherence to earlier-effected policies often possess greater risk -in effect, induces more uncertainty- than change does” (p. 629). To survive, companies need to engage in adjustment and adaptation practices (Thompson, 1967; Pfeffer, & Salancik, 1978).
Geletkanycz (1997) found indeed that managers whose background cultures are reflecting a higher uncertainty avoidance are often in line with the latter perspective. In the era of rapid technological change and globalization, these managers attempt to reduce uncertainty by a course of adaptation. Instead of relying on earlier-effected policies and coping with
uncertainties and risks in a changing environment, these managers seem to favour adjustment (Geletkanycz, 1997). These findings are in line with Schneider and DeMeyer (1991). Their findings suggest that cultures differ more in the response to perceived uncertainty than in the avoidance of this uncertainty. Managers of a high uncertainty avoidance culture respond more proactive to a changing environment than the members of other cultures (Schneider, &
14 internationalization than TMTs with a lower average score. This because they will be more proactive to reduce uncertainty that comes with a rapidly changing environment.
15 4. METHODOLOGY
4.1 Sample
To test the influence of the average culture in a TMT on internationalization, data is obtained from 65 Dutch MNEs. Dutch multinationals are used for its’ high presence of well-known multinationals, reflecting an international orientation (Heijltjes, Olie, & Glunk, 2003). The Dutch economy is characterized by its openness and long tradition of internationalization (Hickson, & Pugh, 1995). The Netherlands originate in the merchants’ business and do business all over the world (Van Iterson, & Olie, 1992; Heijltjes, Olie, & Glunk, 2003).
The data about the companies is collected using Orbis. Orbis gives the most complete information about companies. In addition to the information subtracted from Orbis, the annual reports and the websites of the company are used. The preconditions for a Dutch MNE to be included in the sample is twofold. First, the MNE should be present (with a subsidiary) in one foreign country. Second, the TMT of the MNE should contain at least two nationalities among its members. This is needed to calculate the average culture. Publicly-traded MNEs are used, since these MNEs grant access to company data in their annual reports and company websites. The access to this data is needed to collect the information needed to test the hypotheses, for example information regarding TMT members. For the internationalization variable, the most recent data is used, so the current (2017) subsidiaries. Regarding the TMT, the data of the end of 2015 or the start of 2016 is used. This because I presume that it takes time to implement internationalization decisions.
The Dutch corporate governance code accepts both one-tier and two-tier governance structures. In a two-tier board, the management board and the supervisory board are two separate bodies. In a one-tier board, there is one board consisting of executive and non-executive directors (Monitoring Committee Corporate Governance Code, 2016). In case of a two-tier board, the management board (and executive committee in case one is in place) is used to determine the members of a TMT. I choose to include the executive committee as they are “closely involved in the decision making of the management board” (Monitoring
16 example the members of a senior management team of a company. This information can be found on company websites.
4.2 Dependent variable
Firm internationalization. Firm internationalization is the firm’s degree of country diversity (De Jong, & Van Houten, 2014). I will measure firm internationalization as the number of non-Dutch subsidiaries. Foreign sales as a proportion of the total sales and the ratio of foreign production to total assets have a couple of challenges in comparison with the number of non-Dutch subsidiaries (Ni, 2016). These measurements do not show the depth (e.g., the degree of commitment to the host country) and the breadth (e.g., the number of countries) of firm internationalization (Hitt, Bierman, Uhlenbruck, & Shimizu, 2006).
According to Inkpen (2000), a cross-border subsidiary, in contrast to exporting and licensing, indicates internalization of essential capabilities and resources to operate in this foreign
market. This data is collected via Orbis. Only the first line subsidiaries are used to give a more compact image.
4.3 Independent variables
Average uncertainty avoidance in a TMT and average power distance in a TMT. These are the two independent variables. They are measured based on Geert Hofstede’s Cultures and Organizations: Software of the mind (2010). In this book, the scores on the six cultural dimensions are listed for 76 countries (Hofstede, Hofstede, & Minkov, 2010). Every dimension has a scale from 1 to 100 (Hofstede, Hofstede, & Minkov, 2010), so the average cultural score of a team will also be within this range. Nationality of every member is
17 4.4 Control variables
Size of the firm. Expected is that the size of the firm influences the
internationalization. Larger firms do often have more financial and human resources to expand to the international market (Hitt, Hoskisson, & Kim, 1997). However, larger firms may also be more resistant to strategic change (Tushman, & Romanelli, 1985). I will measure firm size by the natural logarithm of the number of employees (Yoon, Kim, & Song, 2016), in the period of 2014 to 2016 (unless no data available). I choose for the period of 2014 to 2016 to decrease the influence of potential outliers and to give a more reliable image. The
information is collected via Orbis.
Age of firm. When a firm is older, it is more likely to be more internationalized. I will control for this by the total number of years a firm is in business (Yoon, Kim, & Song, 2016). This information is collected using Orbis. This variable is transformed to the natural
logarithm of the firm age during the research.
Financial performance. The financial performance of a firm may influence its ability to enter the international market (Tihanyi et al., 2000). On the one hand, when performing poorly, organizations may seek new strategies to improve the corporate performance
(Hambrick, & Schecter, 1983), for example by entering international markets (Tihanyi et al, 2000). On the other hand, in case of poor performance, firms may lack the resources needed to implement certain strategies (Barney, 1991), for example for entering international markets (Tihanyi et al., 2000). For this reason I include the average net profit of the firms over the period of 2014 through 2016. I choose for the average of 3 years to decrease the influence of potential outliers and to give a more realistic and complete image of the financial performance of the firms. The numbers regarding this variable are given in millions of euro’s and are collected using the annual reports of the companies.
18
N Minimum Maximum Mean Std. Dev.
Internationalization 65 1 431 63,91 93,547 Power distance 65 21,3 74 43,654 8,7784 Uncertainty avoidance 65 32 90,6 59,697 11,5287 Firm age 65 3 252 47,28 49,711 Net profit 65 -287,85547 5440,333 417,0214039 942,6891707 TMT size 65 2 22 6,85 3,882 Firm size 65 1,55991 5,36881 3,5492337 1,06550094
Table 1: Descriptive data of entire sample.
Table 1 shows the descriptive data of the sample. The number of observations for every variable is 65. Internationalization, firm age and average net profit show large standard deviations. The data are spread over a wider range. For this reason, I transformed firm age in the natural logarithm of firm age. This was not possible for net profit, since multiple
companies showed an average loss. Logarithms are not possible for negative numbers. Internationalization stays also unchanged. Internationalization is the dependent variable, I choose not to transform internationalization, as after transforming the variable is harder to interpret.
I detected a lot of outliers for the sample. Since the sample is not very large, I could not delete all of them. First, I deleted two cases that showed outliers for different variables. Secondly, I deleted the outliers that were larger than three times the IQR for a variable, consisting out a number of eight cases (regarding “internationalization” and “average profit”). This leads to a final sample of N=55.
4.5 Evaluation of method assumptions
Before doing the ordinary least squares regression analysis, I will test some
assumptions for this analysis. To provide the best linear unbiased estimator (BLUE) of the coefficients using the ordinary least square, two assumptions of this test are checked for.
19 not substantially greater than 1, which does not indicate a biased regression (Bowerman, & O’Connell, 1990). In table 4 in chapter 4, the Pearson’s correlation between different variable pairs are given. This value also shows no multicollinearity in the sample, as this value does not exceed r>0,9 for any predictor pair (Field, 2009).
Tolerance VIF
Power distance 0,645 1,551
Uncertainty avoidance 0,622 1,606
Net profit 0,705 1,419
TMT size 0,906 1,104
Log firm size 0,680 1,470
Log firm age 0,852 1,173
Table 2: Multicollinearity check.
Normality. Normality is checked for in a visual way and a numerical way. Appendix 1 shows the histograms of every variable, plotted against a normality curve. The variables “internationalization” and “profit” deviate from the normality curve in two ways. First, a pile-up of data can be found on the left side of the distribution. Second, the distribution is pointy and heavy-tailed. The variable “TMT size” does also show a pile-up on the left of the distribution. To express these visual conclusions in numbers, the Kurtosis and Skewness of the distributions are calculated. Appendix 2 shows indeed a very high Skewness and Kurtosis for the dependent variable of “internationalization” and for the control variable “average profit” (relatively a Skewness of 1,656 and 2,203, and a Kurtosis of 3,544 and 5,328). The positive values of Skewness mean, as expected, a pile-up of values on the left side of the distribution, instead of the right side for negative scores. The positive values of Kurtosis mean a pointy and heavy-tailed distribution, instead of a flat and light-tailed distribution for
20 5. EMPERICAL RESULTS
5.1 Descriptive statistics
Variable Mean Min. Max. S.D. N
1. Internationalization 35,62 1 174 35,147 55 2. Power distance 43,916 21,3 74 9,377 55 3. Uncertainty avoidance 60,496 32 90,6 12,054 55 4. Net profit 132,848 -287,855 1132 259,250 55 5. TMT size 6,38 2 16 3,303 55
6. Log firm size 3,336 1,560 5,357 1,002 55
7. Log firm age 1,421 0,477 2,401 0,477 55
Table 3: Descriptive statistics of adjusted sample.
Table 4: Correlations.
** Correlation is significant at the 0,01 level (one-tailed) *Correlation is significant at the 0,05 level (one-tailed)
In the tables 3 and 4, the mean, minimum, maximum, standard deviation, and
correlations are given. N=55 shows that there are no missing values for any of the variables. The two control variables that are presented in their natural logarithm (“firm size” and “firm age”) are less informative as they do not show absolute values. The dependent variable “internationalization” shows high heterogeneity, from Dutch multinationals with 1 non-Dutch subsidiary to Dutch multinationals with 174 non-Dutch subsidiaries. This heterogeneity is
21 also shown in the high standard deviation of 35,147. Since the mean is 35,63, we can
conclude that the distribution is centred towards the left, as was shown by the Skewness and the histogram of this variable (Appendix 1 and 2). For the first independent variable “power distance”, we can conclude that this variable varies between 21,3 and 74, with a mean of 44. Knowing that Hofstede’s dimensions have a range from 0 to 100, this value is relatively close to the centre of Hofstede’s dimension. For the second independent variable “uncertainty avoidance”, we can conclude that this variable varies between 32 and 90, with a mean of 60,5. This score does deviate in larger extent from the centre of Hofstede’s dimension. The higher standard deviation of uncertainty avoidance (12) shows more heterogeneity than the standard deviation of power distance (9). Keep in mind that both independent variables are measured as the average cultural score of a TMT. As mentioned before, the control variable “profit”, expressed in the average profit over the years 2014 to 2016, shows high heterogeneity from -287,9 million to 1132 million euros and a standard deviation of 259,25. The mean of 132,8 million shows a relatively high profit for Dutch multinationals. The mean TMT size is 6,38, ranging from 2 to 16 members.
Table 4 shows the correlations between variable pairs using Pearson’s correlation. Here the correlation between independent variable pairs are important to ensure that there is no multicollinearity (chapter 4.5). Some of the correlations show a high significance, for example “power distance” and “uncertainty avoidance” of R=0,53 with a significance of P<0,01. However, chapter 4.5 showed that there is no multicollinearity between any of the variables, using the VIF. In addition, no correlation between predictors exceeds R>0,9, implying no threat of multicollinearity (Field, 2009). The correlations do not threaten the ordinary least squares regression analysis. The control variable “firm size” is most likely the best predictor of internationalization (R=0,519, P<0,01). This is in line with the argument of Hitt et al. (1997), larger companies have more resources to expand internationally.
5.2 Regression results
Model summary. Table 5 shows the summary statistics of the regression models and tells us whether they have improved our ability to predict the outcome variable
22 (R2=0,303) of the variation in “internationalization”. An extra 6,6% (R2=0,369) of variation is accounted for after adding “power distance” and “uncertainty avoidance”. Table 5 shows that only the R2 change for model 1 (R2 change=0,303) is most likely significant (F-change= 5,423, significance F-Change=0,001). For model 2, P=0,09, the change is not significant, since it is not P<0,001. The increase of the R2 and adjusted R2 between model 1 and 2 show that more variation in “internationalization” is explained by adding these two variables, but this change is not significant. The first model would explain 5,6% (adjusted R2= 0,247) less variance in the outcome in case the model was derived from the population instead of the sample, the second model would explain 7,9% (adjusted R2=0,290) less variance in the outcome.
Table 5 also shows that model 1 and 2 have both improved our ability to predict “internationalization”, since both F-values are well above 1 (model 1 F=5,423, model 2 F=4,684). Both models show a significant fit of the data overall (P=0,001 for both models). Concluded, it is not by chance that both models improve our ability to predict the value of “internationalization”. A side note has to be made however. As we saw before, the F-change for adding the two independent variables was not significant. The reason could be the relatively small sample (N=55).
Table 5: Regression model summary.
Model parameters. To test the hypotheses, the parameters of model 2 are important. Based on the parameters (B-values) of model 2 in table 6, we can conclude the following. “Firm size” affects “internationalization” to the greatest extent (B=14,991) in case the other predictors are held constant. Also “firm size” is the only predictor that makes a significant
24 6. DISCUSSION AND CONCLUSION
6.1 Discussion and conclusion
Internationalization decisions influence many aspects of an organization (Casillas, & Acedo, 2013). To explain the variety in the degree of internationalization of companies, the upper echelons theory was used (Hambrick, & Mason, 1984). Research has shown that characteristics of the top management influence the international expansion of firms
(Carpenter, 2002; Jaw, & Lin, 2009; Tihanyi, Ellstrand, Daily, & Dalton, 2000). In this thesis, I focussed on the influence of the values of managers on the strategic choices, since these values are underrepresented in the literature compared to demographic characteristics and experience (Geletkanycz, 1997). I focused on the national origin, which influences the fundamental values and cognitions of people, through which they interpret and utilize information differently (Shaw, 1990). I investigated the influence of average uncertainty avoidance and power distance in a culturally diverse TMT on the internationalization of multinationals. For this research, data of 65 Dutch multinationals was collected using Orbis, company websites and annual reports.
I expected to find a positive and significant contribution of average power distance to internationalization. This is in line with Geletkanycz (1997) findings, higher power distance is associated with less resistance to changes in the status quo. This might be explained by the fact that the power of the managers is set in stone at societal levels, so no means are needed to ensure this at organizational level (Geletkanycz, 1997). This is in line with the innovation championing literature (Howell, & Higgins, 1990). Cultures with higher power distance, are more open to change and less devoted to the status-quo. Against expectations, the contribution of average power distance was not significant, Hypothesis 1 could not be accepted.
25 nationalities with lower uncertainty avoidance accept uncertainty more as a given. Against expectations, the contribution of average uncertainty avoidance was also not significant, Hypothesis 2 could not be accepted.
Although power distance and uncertainty avoidance did improve the ability to predict internationalization, this improvement was not significant. To answer the research question posed, there is no significant influence of power distance and uncertainty avoidance on internationalization found. Internationalization was most affected by the size of a firm. For both models, firm size was the best predictor of internationalization. This unexpected results could be explained in different ways. The first way, is the methodological way. The sample of 55 is very little, the effect of the average culture might be more significant when the sample was larger. Also the skewness and kurtosis of some of the variables, like internationalization, were relatively high. This could also have influenced the results, since the normality
assumption of the ordinary least squares regression analysis was violated. At last, only Dutch multinationals were investigated. Although the TMTs of these companies were culturally diverse, I cannot rule out a potential influence of the Dutch organizational culture. Future research could focus on a sample of multinationals from a different country and compare results to rule out this potential reason. The second way, is the theoretical way. It could be the case that the influence of cultural traits decreases when the cultural diversity in a TMT
increases. Put differently, the influence of culture on internationalization becomes less clear when a TMT is culturally diverse. In addition, Nielsen and Nielsen (2011) state that national diversity in a TMT influence firm internationalization directly. Since I chose to measure the average of a factor (culture) instead of the diversity (Acar, 2015), the influence of cultural diversity could be investigated in future research with a similar sample.
6.2 Contributions
26 amount of diversity or heterogeneity in their TMT. This research could be expanded by
investigating the influence of these cultural components on other strategic decisions. This could show whether the influence of average culture also becomes less clear for other strategic decisions in a culturally diverse TMT. Also, the results can help to design an
effective competitive strategy, by predicting the strategic moves and responses of competitors (e.g., Pye, 1983; Tse, Lee, Vertinsky, & Wehrung, 1988).
6.3 Limitations and future research
As mentioned before, this research could be compared with a sample with
multinationals from a different country to rule out the influence of the home country of the multinationals. Also I mentioned the switch from a focus on the average culture to the amount of cultural diversity. The results obtained, might imply that cultural diversity plays a bigger role in strategic decision making than average culture. This might be the reason that no significant contribution is found of power distance and uncertainty avoidance to internationalization. Future research could investigate whether the influence of culture diminishes in case of increased diversity in the TMT. For example, the level of cultural diversity in a TMT could be used as moderator in this model, in which the cultural effect is increased or decreased by the diversity. Also, cultural diversity could replace the average culture as independent variable.
Nielsen (2010) states that the internationalization of a TMT influences foreign market entry and ultimately corporate performance. I measured this internationalization of the TMT only by the nationality of the top managers, and did not include the international experience of them. I deliberately chose to focus on the national values instead of TMT demographics and experience to address the gap in the recent literature. However, the exclusion of international experience has one major limitation. The nationality of the top managers captures the influence of only one culture and does not include the influence of any other culture to which the top manager has been exposed. Since both the nationality and the experience with other cultures influences the TMT’s ability to understand and deal with firm internationalization (Nielsen, 2010), future research could add the international experience of TMT members to create a more inclusive image.
27 left out (Finkelstein, Hambrick, & Canella, 2008; Nielsen, 2010). Future research should open this black box and measure the intervening mechanisms through which TMT composition influences organization performance (Lawrence, 1997; Priem, Lyon, & Dess, 1999).
In addition, research could investigate to what specific countries a TMT tends to internationalize. This could be influenced by the prevalent cultures in a TMT. For example, TMT members could be more likely to internationalize to countries they are familiar with or are similar to their own (cultural distance). Or maybe, cultures differ in the risk they are willing to take with expanding to countries they are not familiar with. This question is more about the “where to” instead of the “how much”.
In my research I used the traditional approach of internationalization, which does not make time and speed in the process explicit. Time and speed, do have however gained much attention in the recent literature regarding the internationalization process (Hisrich, & Bostjan, 2000; Humerinta-Peltomäki, 2003; Jones, & Coviello, 2005; Kutschker, Bäurle, & Schmid, 1997). Time and speed of the internationalization process could be a critical factor for the success and the long-term growth of international ventures (Prashantham, & Young, 2011). Since I only counted the non-Dutch subsidiaries since establishment, the image could be biased, measuring internationalization in an incomplete way. Future research could
investigate the influence of culture on the time and speed of the internationalization process. In case of one-tier board it was hard to distinguish the executives from the
non-executives. In case I failed to make a clear distinction, it is not that big of a problem since the non-executive directors together with the executive directors are responsible for the
management of the company (Monitoring Committee Corporate Governance Code, 2016). However, it might make the results somewhat inconsistent. To diminish this effect to certain extent, I controlled for TMT size.
Future research may also zoom in on the consequences of internationalization
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42 8. APPENDICES
44 8.2 Appendix 2, Skewness and Kurtosis
Internat. Power Dis.
Unc. Avoid.
