The Effect of National Diversity in Executive Boards on the Degree of Firm Internationalization

The Effect of National Diversity in Executive

Boards on the Degree of Firm

Internationalization

University of Groningen

Faculty of Economics and Business

Date: 21-06-2017

Student: Myrthe Hassink

Student number: S2806517

Supervisor: M. Ridder de van der Schueren

Co-Assessor: A. Muller

Abstract

Table of Contents

1. Introduction ... 4

2. Theoretical background ... 8

2.1 Internationalization ... 8

2.2 Internationalization and the role of board of directors ... 9

2.3 TMT diversity and strategic decision making ... 12

2.4 Influence of culture and institutions ... 13

2.5 National diversity and internationalization ... 15

2.6 Conceptual model ... 17 3. Methodology ... 18 3.1 Data collection ... 18 3.2 Dependent variable ... 19 3.3 Independent variable ... 20 3.4 Control variables ... 20 4. Empirical results ... 22 4.1 Descriptive statistics ... 22 4.2 Data analysis ... 24 4.2.1 Linearity ... 24 4.2.2 Outliers ... 24 4.2.3 Multicollinearity ... 24 4.2.4 Normality ... 25 4.3 Regression analysis ... 25

5. Discussion and conclusion ... 27

6. Limitations and future research ... 30

6.1 Limitations ... 30

6.2 Future research ... 30

7. References ... 32

Appendix A: Hofstede’s cultural dimensions ... 39

Appendix B: Sample firms ... 41

1. Introduction

The rise of globalization in the last decades has been leading to more competition than ever. Firms are continuously seeking to improve their strategies and are acquiring other firms to compete in the global environment. This year, Kraft Heinz made a $143 billion bid on Unilever and would thereby become one of the biggest mergers. After Unilever rejected the bid, they announced to revise their strategic options in order to increase the value for their shareholders (Worstall, 2017). Next to this, Ziggo, the largest cable operator in the

Netherlands and Vodafone, a British multinational telecommunications company, merged this year. Because of this, they will likely become a stronger competitor and have the ability to increase its value for their shareholders (Briel, 2017). In order to compete in today’s business landscape, it is therefore essential that firms preserve prosperous expansion strategies. The main reason that firms try to compete in foreign markets, is to acquire a competitive advantage. This competitive advantage should be sufficient for firms to cover the risks and costs of competing in foreign markets. According to Friedman (2005) a firm’s international strategy is of upmost importance because globalization has made the world flat. Hence, the question of how firms deal with the complexity and uncertainty of internalization strategies becomes crucial. Internationalization is seen as a complex process with many obstacles. Companies who want to internationalize need to make it an integral part of the strategy of the company, in order to be successful at internationalization. When companies do succeed at internationalization it brings important benefits such as economies of scale, improving revenue and generating more knowledge. However, when internationalization fails, negative effects will emerge. These effects are among others: creating a higher uncertainty and a higher complexity of tasks.

There are several factors at stake for the successfulness of internationalization of firms. One of the factors considered to make an impact on firm internationalization is top management. The upper echelon theory of Hambrick (2007) suggests that the decisions top managers make are greatly influenced by their own personal experiences, values, and personalities. “A critical determinant of a firm’s ability to successfully address the complexity that accompanies

(Rivas, 2012). They act on behalf of its shareholders and need to oversee the management and give advice to managers formulating the firm’s strategy. In the last couple of years there has been much discussion about the composition of executive boards. One of these discussions has been regarding the women quota for corporate boards. Since Norway introduced the “Women on Boards” Act in 2003, which requires to have at least 40% of women in company boards, lots of countries have followed their example. In 2016, Deloitte has executed the Missing Pieces Report: The 2016 Board Diversity Census of Women and Minorities on Fortune 500 Boards (Deloitte, 2016). This report investigated the diversity of boards of Fortune 500 companies in terms of gender and race. Even though they found that diversity had increased at some points, firms only made incremental progress in obtaining a diverse board. The report stated that approximately 31% of boards from Fortune 500 companies consist of women and minorities, which was only a minor increase of the last four years. Next to this, about over 65% of board seats are given to white men. Which implies that still a big change needs to happen in terms of race. Furthermore, this year the Singapore Council of Women’s Organisations formed the PAP Women’s Wing and BoardAgender initiative (Ying, 2017). This initiative calls for the need to include board gender diversity in annual reports. Furthermore, they argued that more diverse boards are very likely to have more different insights, increase competitiveness and are better at identifying risks. Even though at a slow pace, company board composition has become more and more diverse in the past decades. Considering the business environment and new global trends, the need for diversity in

Different scholars have argued about the effect of board diversity on a firm’s strategic decision making and it is linked to both positive and negative effects. Strange and Jackson (2008) found that diversity can lead to more enhanced creativity and more innovative strategic decisions because of a greater variance in board members. While Pfeffer (1983) found that diversity can lead to more struggles and tense communication conflicts. However, only a few studies have fully explored the effect of national diversity in executive teams. Whereas age, tenure, international experience, and gender have been more extensively investigated, the effects of national diversity still remain partially unknown (Wang, Holmes, Oh, & Zhu 2016; Nielsen & Nielsen, 2013). Therefore, this research focuses on the effect of national diversity. Nationality is seen as determinant of identity which is rooted from birth and is likely to be more pertinent than an organizational culture (Hofstede, 1991; Earley & Mosakowski, 2000). “As greater numbers of global organizations utilize multinational or global teams to manage their international projects, researchers need to shed more light on how people with different nationalities work together to achieve their collective goals” (Shore et al., 2009).

Nowadays it still remains partially unknown how exactly national diversity influences the internationalization strategy of multinational firms. The underlying idea of this research is that individuals’ characteristics and thus also those of the board of directors have an influence on decision making. Which in turn has an influence on the internationalization strategy the firm decides to take. The aim of this research is to examine the effect of national diversity on the internationalization strategy. The following research question is therefore formulated: What is the effect of national diversity in executive boards on the degree of firm

internationalization?

The research question will be examined by collecting a sample of publicly listed firms from the Netherlands, Germany and Finland. This sample is compromised from Orbis and resulted in a sample of 239 firms. These firms are considered for this research, as they are all in the same range of GDP per capita. In order to test the hypothesis, an Ordinary Least Squares regression is used. This type of regression is used to see whether there is a relationship, and when a relationship exists, to what extent.

collection as well as the dependent, independent and control variables. Then, the results are presented and a data analysis will be given and discussed. Finally, the conclusion will outline the main findings of this research as well as its limitations and suggestions for future research.

2. Theoretical background

2.1 Internationalization

Internationalization can be described as a firm’s process of increasing in international markets. Hitt, Ireland and Hoskisson (2007) define internationalization as the process

‘‘through which a firm expands the sales of its goods or services across the borders of global regions and countries into different geographic locations or markets’’. Here, the term

internationalization can be applied to a variety of organizational elements such as strategy, organizational structure, products, and so forth. The main motive for firms to internationalize is to gain a competitive advantage which gives firms enough return in order to cover the additional risks and costs of going abroad. The Ownership, Location and Internationalization (OLI) framework of Dunning (2001) was composed with the underlying intention to explain foreign direct investment. The framework describes ownership, location, and

internationalization advantages, which gives firms an incentive to internationalize. Ownership advantages relate to firm-specific advantages which allow firms to overcome the costs of doing business abroad. Location advantages relate to where multinational corporations (MNC) choose to locate. They can opt to invest in foreign countries with exceptional market opportunities compared to foreign countries with mediocre market opportunities.

Internationalization advantages refer to how a MNC selects to operate in foreign countries. Firms can for example choose to export their products, acquire a wholly-owned subsidiary or operate through a joint venture. The prevailing assumption of the OLI framework is that firms internationalize as they want to exploit their current ownership advantages. Previous research has pointed at both the positive and negative effects of internationalization. Positive effects of internationalization are amongst others; economies of scale and scope (Athreye & Kapur, 2009), increasing a firm’s competitive advantage (Nachum & Zaheer, 2005), exploiting foreign market opportunities and imperfections, maximizing location economies by

configuring value-chain activities (Porter, 1990), utilizing knowledge and ideas from multiple countries and generating the resources required to sustain a large-scale research and

Ruigrok and Wagner (2003) argue that the benefits of internationalization are suggested and described by two core theory streams: theories of foreign direct investment (FDI) and theories of the multinational firm. FDI theories, which are mostly economics-driven and focused on factors located in the firm’s external environment, aim to explain why MNCs exist.

Imperfections in international product, factor, and financial markets are postulated to benefit firms that internationalize. Theories of the multinational firm focus on the organization’s internal environment. The main source of benefits from internationalization is not seen in the reactive exploitation of external opportunities, as proposed by FDI theories, but in the

proactive induction and exhaustion of intra-firm comparative advantages. Fayerweather (1982) suggested that international resource transfer and the integration potential of worldwide corporate structures, systems, and processes can provide MNCs with company-specific competencies not available to the domestically operating firm.

In the internationalization process Ruzzier, Hisrich, and Antoncic (2006) distinguish between two models, the first one is the Uppsala-Internationalization Model (U-Model) and the second one is the Innovation-Related-Internationalization Model (I-Model). The theory of the

Uppsala model states that companies first have to gain experience in the host market before moving to foreign markets and that firms will internationalize first to culturally and

geographically close countries. Furthermore, it explains that firms will start their foreign operations from a low-resource commitment mode and gradually move using more intensive operation modes. This process has its origin in the liability of foreignness, a concept that originally explained why a foreign investor needed to have a firm-specific advantage to more than offset this liability. The larger the psychic distance the larger is the liability of

foreignness (Johanson & Vahlne, 2009). Models within the

Innovation-Related-Internationalization category focus on the learning sequence in connection with adopting an innovation. In other words, the internationalization decision is considered as an innovation for the firm (Ruzzier et al., 2006). The model sees internationalization as a process, consisting of stages. Each stage implies more experience than previous stages and the stages are regarded as innovation towards the firm. The most used model is the U-model, as this one is applicable for firms of all sizes, whether the I-model may only be applied to small sized firms.

2.2 Internationalization and the role of board of directors

The board of directors is a body of either elected or appointed members who act as

the board of directors are able to help the firm’s management by obtaining the needed resources and providing the necessary information. Furthermore, Zahra and Pearce (1989) identified three interrelated roles for the board of directors: (1) being the link with the stakeholders; (2) exerting control; and (3) being involved with the firm’s strategy. Rivas (2012) explains that there is a significant difference between TMTs and a board of directors. The board of directors are responsible for determining and monitoring a firm’s strategy, while TMTs are responsible for carrying out strategic decisions and day to day operations. The most important tasks for the board of directors are service and control. Service relates to giving advice and counseling the CEO and top managers, who are formulating a firm’s strategy. The control task includes overseeing the management with devotion and care on behalf of the shareholders. The importance of the board of directors can be linked to the agency cost theory. Agency theory explains the relation between the principals (shareholders) and the agents (managers), where the agent acts on behalf of the shareholder. The board of directors are considered as solution towards the problematic aspects of a peculiar set of manager-shareholder cooperation. Carter, Simkins and Simpson (2003) argue that the role of the board of directors within an agency perspective is to find solutions for any problems between shareholders and managers. They do this by replacing managers who do not generate shareholder value and by establishing salaries. One of the most important elements of an agency view of the board of directors is that outside directors will not make an effort to conspire with inside directors to undermine shareholder interests (Carter et al., 2003). Therefore, in order to act in the best interest of shareholders, it is important that a board consists of independent directors. Diversity might increase board independence considering that a board consisting of different cultural backgrounds, ages, and education might raise different questions than boards consisting of individuals with more or less the same characteristics.

The internationalization of firms brings risks and challenges with it. According to Hitt, Tihanyi, Miller and Connelly (2006) international diversification is related to considerable problems, risks and complexities. But it also leads to additional costs arising from the liability of foreignness. The liability of foreignness can arise from costs associated with geography, a lack of legitimacy and a MNCs unfamiliarity with the local environment leading to a

(Herrmann & Datta, 2005). Mishra and Jhunjhunwala (2013) argue that boards must

understand the global environment as well as the different countries and industries firms want to operate in. To do so, the board must possess over a broad range of skills, knowledge and perspectives. A diverse board can help overcome the problems associated with international diversification. Furthermore, a board consisting of individuals with different backgrounds will likely lead to a board with a wide range of expertise, skills and perspectives. Kaczmarek and Ruigrok (2013) argue that MNCs who have included foreign executives in their management teams are matching managers to a firm’s strategy. An internationalization strategy includes an effective execution of management tasks such as dealing with uncertainty, scanning the international climate and preserving contact with important persons in the foreign market. “TMT foreign nationals who typically spent their formative years in a different country to that of the MNC’s headquarters enhance and align the cognitive map of the TMT members with the geographic map of an MNC’s international operations” (Kaczmarek & Ruigrok, 2013). Therefore, the chances that board members will match with their high demanding jobs will increase as they have had experience with other complex, foreign markets. According to Finkelstein, Hambrick, and Cannella (2008) board members are faced with tasks that require creativity, which are leading to decisions of a more strategical nature compared to those of a tactical nature. In firms with an international scope these kinds of decisions are likely to become even more complex, as management teams have to operate within different social, legal and economic systems. The capability to operate within these different systems lies within a firm’s ability to work with the different cultures of a firm’s home country and the foreign markets they are operating in. Furthermore, national diverse teams are believed to work best when encountering creative tasks. “Therefore, in such international environments, mixing nationalities in the executive suite can be seen as the central resource for creativity, and exploitation of managerial talent from different countries in which a MNC operates may be one of the sources of its competitive advantage” (Kaczmarek & Ruigrok, 2013).

2.3 TMT diversity and strategic decision making

In the last decades, lots of research has been built upon Hambrick’s (2007) upper echelon theory. Their theory suggests that the experiences, personalities and values of top managers greatly influence the decisions they make. Hambrick (2007) argues that there is a strong relationship between the executive team’s demographic traits and their socio-cognitive capabilities. This suggests that the strategic actions a firm takes, depend on the demographics of the executive team (Das & Teng, 2001). The upper echelon theory proposes that the strategy a firm takes largely depends on the choices the CEO makes (Wang et al., 2016). Furthermore, Acar (2016) argues that the upper echelon theory proposes that a higher diversity among demographic attributes leads to more diverse viewpoints, networks and knowledge. Therefore, this theory is especially relevant for top executives facing complex and difficult tasks. Their decisions are based on the available information, but also the way they interpret and respond to this information.

Earlier work on TMT demographic diversity (Finkelstein et al., 2008; Strange & Jackson, 2008) found that it leads to more creative decision making and more innovative strategic decisions. Later studies however partially supported their outcomes. Carpenter and

Fredrickson (2001) found that TMT tenure diversity is negatively related to strategic change in high technology firms and Ancona and Caldwell (1992), found that TMT tenure and functional diversity leads to a decreasing product innovation. Many researches have argued that TMT characteristics can play a very important role in the performance of firms,

innovation of firms and the internationalization process (Herrmann & Datta, 2005). Cavusgil and Naor (1998) argue that there is a relation between export marketing activity and

characteristics of managers like the extent and type of education, open mindness, international orientation, growth aspirations, knowledge of foreign languages and risk-taking preferences. Such factors are likely to lead to a reduction in the cost of collecting, transmission, and interpretation of information milieu in which foreign entry decisions are taken. Herrmann and Datta (2005) suggest that international experience has a huge impact on how managers

perceive risk. Managers who have not gained any international experience are more

and effective in foreign environments” (Herrmann & Datta, 2005). Furthermore, firms that have managers with international experience are likely to achieve a global competitiveness more easily. Kaczmarek and Ruigrok (2013) argue that a diverse board have more access to available information which is used for solving problems and therefore increases a board’s capability to come up with more creative solutions. “This is because such diverse team members are likely to possess their own professional networks underpinning their social capital, based on which they can tap a wider array of information and bring it in to enhance the quality of the focal team’s work” (Kaczmarek & Ruigrok, 2013). Furthermore, diversity in a team creates more collaborative norms which leads to more positive interactions between team members. According to Rivas (2012) diversity in a TMT positively contributes to

companies who are internationalizing and have to deal with complicated decisions. Moreover, in a poor business climate heterogeneous teams are likely to be more useful compared to homogeneous teams. Also, Sambharya (1996) suggests that when being able to integrate the learned culture with their own, they are better equipped to deal with the uncertainties and ambiguities associated with international operations. Therefore, the experience of living abroad and dealing with different cultures, norms and values have an important impact on the personality and orientation of managers.

2.4 Influence of culture and institutions

The cultural characteristics of a country, influence how people interact with each other, but also how they interact with institutions and companies (Ghemawat, 2001). Schwartz (1999) explains culture as “the rich complex of meanings, beliefs, practices, symbols, norms, and values prevalent among people in a society”. Cultural values shape the behaviour, goals, and decision making of individuals. Institutions, norms, and policies all contribute to the cultural values of a country. “A combination of formal and informal institutions in a country guide individuals and organizations in dealing with uncertainty, deciphering the environment, and taking appropriate actions” (Crossland & Hambrick, 2007). Formal institutions are openly codified and are communicated through officially accepted channels. The informal

perception, and interpretation of strategic situations” (Hambrick, 2007). Both formal and informal institutions have a huge influence on how people view information and how decisions are being taken. In order to understand how culture can have an influence on an individual’s behaviour, one of the most comprehensive cultural frameworks will be explained, namely that of Hofstede (2011). This framework consists of six dimensions of national

culture, based on years of extensive research. These six dimensions will be briefly described below. A more extensive explanation of the six dimensions together with examples of countries possessing certain dimensions is given in Appendix A.

(1) Power distance. The first dimension indicates the degree of which less powerful members within a group accept that power is unequally distributed. People in cultures with a high power-distance accept that there is an unequal, hierarchical distribution. People in cultures with a low power-distance expect an equal distribution of power.

(2) Individualism vs. collectivism. This relates to the degree of integration with other members of a group. Individualist cultures place emphasis on achieving personal goals. Collectivist cultures place an emphasis on being part of a group and fitting in. The goals of the group are placed above those of the individual.

(3) Uncertainty-Avoidance Index. This is the degree of which individuals feel comfortable with uncertainty and ambiguity. Cultures with a high uncertainty-avoidance index are not keen with change, tend to avoid conflict and take fewer risks. A low uncertainty-avoidance culture is related to taking more risks and openness to change.

(4) Masculinity vs. femininity. This describes the distribution of roles between gender. Masculinity refers to a society with a preference for power, ambition and materialism. A feminine culture refers to a preference for quality of life and relationships, less differences between men and women and cooperation.

(5) Long-term orientation vs. short-term orientation. Long-term oriented cultures place more emphasis on the future than the past and present. Cultures with a short-term orientation take time for building relationships and are more past and present oriented.

(6) Indulgence vs. restraint. Indulgence cultures allow free satisfaction of individuals’ own emotions and drives such as having fun. In a restraint culture, there is more emphasis on stricter social rules and norms. (Hofstede, 2011).

behaviours and decisions people make (Riggio, 1996). Therefore, people will influence the decision making process within a firm based on their attitudes. Especially the top

management team is likely to influence the firm with their decisions. Therefore, it is

important to gain insights in how the attitudes of top management influences organizational outcomes. Several TMT characteristics have already been linked to a range of organizational outcomes, such as innovation and creativity (Finkelstein et al., 2008), corporate strategic change (Strange & Jackson, 2008), firm performance and strategic decision making (Nielsen & Nielsen, 2013). Thus, it is likely that TMT characteristics also have an influence on the internationalization strategy of a firm.

2.5 National diversity and internationalization

According to Kaczmarek and Ruigrok (2013) “a firm’s degree of internationalization, capturing the extent to which companies depend on foreign markets for revenues and factors of production, appears as the relatively most pertinent strategic contingency under which to assess the value-creating implications of the TMT nationality diversity”. This is because national diverse teams may be located in a wrong position when companies do not have foreign operations. Only when firms do operate in foreign environments, the benefits of a national diverse team will become noticeable. According to Nielsen & Nielsen (2013) national diversity within a TMT is likely to improve the quality of TMT strategic decisions which in turn will influence firm performance. Furthermore, Richard and Shelor (2002) argue that diversity in a firm increases creativity and enhances problem-solving capabilities. This is because values, beliefs and attitudes differ with demographic variables like gender, race, and age. National diverse teams aim to integrate with one another and with their institutional ingrained experiences. However, they will also experience more in depth discussions and be able to construct more creative ideas (Hambrick, Davidson, Snell & Snow, 1998). As a result, multinational teams are better at solving complex problems and will create more innovative solutions. Luo (2005) argues that diversity in corporate boards may lead to reduced

performance” (Nielsen & Nielsen, 2013). Having foreign directors in a corporate board can also lead to a firm recognizing the importance of foreign markets and resources. Furthermore, when foreign directors are also located abroad, they will be part of foreign networks. This can bring important networks and knowledge toward the firm. In turn, this can all lead to a firm making better operating and investment decisions, acquiring foreign resources and opening up to new opportunities (Oxelheim, Gregorič, Randøy, & Thomsen, 2013). Turner (1987) argues that national diversity can also lead to a deteriorated team dynamic. As team members from various nationalities, who bring their cultures with them, have to communicate with each other, they can experience more conflict, more time-consuming decision making and longer discussions. At the same time Elron (1997) suggests that even though national diverse teams may experience more conflict, it is positively linked towards team performance and

subsidiary performance. The benefits accompanied with national diverse teams such as increased creativity and more dynamic problem solving, is likely to surpass the increased costs of increased conflict and more time-consuming decision making (Nielsen & Nielsen, 2013). Furthermore, Heijltjes, Olie and Glunk (2003) argue that in order to attract more diverse board members, an international workforce and diversification may not be enough. A shift towards the orientation of international activities is required for this. Heijltjes et al. (2003) also give an explanation why nationality among board members in different countries might differ by the classification of ethno-centric, polycentric and geocentric companies. Ethno-centric multinationals are defined by a home country orientation. These companies are domestic multinationals with foreign expansions and key management positions at the

headquarter. The subsidiaries are reserved for individuals coming from the home country. Polycentric companies mostly give local persons a position in local subsidiaries as they know how the local environment works. However, key management positions at the headquarter are mostly filled by people from the firm’s home country. Geocentric companies are open to appoint foreign people at key management positions. Therefore, the way companies position themselves and are open to foreign individuals for key management positions, play a huge role for national diversity among board members.

uncertainty, one could argue that they are more likely to avoid information sharing and

interpret strategic points more as a threat (Hofstede, 2011). This shows that culture plays a big role in the behaviour of individuals. It is believed that national culture has an influence on control of the environment and perceptions towards uncertainty and therefore it is expected that national culture has an influence on strategic decisions as well (Hofstede, 2011). This study investigates the effect of national diversity on the one hand and the degree of firm internationalization on the other hand and it is proposed that more national diversity in executive teams leads to a greater degree of firm internationalization. This leads to the following hypothesis.

H1: A higher nationally diverse executive team will be positively related to the degree of firm internationalization

2.6 Conceptual model

The previously mentioned relationship is shown as a conceptual model in figure 1 and is based on the abovementioned discussion.

3. Methodology

3.1 Data collection

The aim of this research is to examine the influence of national diversity in executive teams on the degree of firm internationalization. In order to test this relationship, this research adopts a sample from publicly traded firms headquartered in the Netherlands, Germany and Finland. The Netherlands has an international orientation, which can also be recognized by the presence of well-known MNCs (Heijltjes et al., 2003). Hence, this country is included in the sample. Germany is considered as the largest economy in the European Union (The World Bank, 2015). It would therefore be interesting to include this country in the sample. Next to this, Finland is included in the sample as it has roughly a similar GDP per capita as the Netherlands and Germany (The World Bank, 2016). For this research, a database from Orbis is compromised. Orbis is a database provided by Bureau van Dijk and contains information on over 200 million private companies worldwide, such as financial statements and

information regarding management teams. With this database, it is possible to make comparisons between different firms from different countries. This is important for the research in order to look at the relationship of national diversity and the degree of firm internationalization. The Orbis database is considered as the most appropriate database for this research as it one of the most comprehensive European databases. Furthermore, it contains detailed information of both private and public companies in most European countries. From Orbis, a sample was composed consisting of companies in the Netherlands, Germany and Finland. Furthermore, the sample was drawn according to the following criteria:

• Companies had to be publicly listed

• Information on the board of directors and subsidiaries had to be available • Companies needed to have at least one foreign subsidiary

missing, additional information was gathered from Orbis as well as from websites of the subsequent firms. To assess the internationalization aspect of firms, information on the firms’ subsidiaries was gathered. For this research, information regarding the number of total

subsidiaries and the number of foreign subsidiaries of firms was collected. This data was mostly collected through Orbis. When information was missing, annual reports of the relevant firms were used as well.

After searching for the data of the 257 firms, 18 firms were excluded from the sample. This is because either annual reports were not accessible or annual reports from Finnish companies were only available in Finnish. Due to some exclusions, the final sample consists of 239 firms. From these firms, 63 firms are from the Netherlands, 65 firms from Germany and 111 firms from Finland. An overview of all the firms used for this research can be found in Appendix B.

3.2 Dependent variable

The dependent variable is the degree of firm internationalization. There are several methods to measure the internationalization of firms. One of these measurements is the

Transnationality Index (TNI). The TNI is considered as a common way to measure

internationalization of firms. This index is developed by the United Nationals Conference on Trade and Development (UNCTAD, 2003) and uses three different ratios to measure the degree of internationalization, namely:

• Foreign sales as percentage of total sales • Foreign assets as percentage of total assets

• Number of employees located abroad as percentage of total employees

subsidiaries as a percentage of the firms’ total subsidiaries is used to indicate the degree of firm internationalization.

3.3 Independent variable

The independent variable is national diversity of members in the board of directors. For this variable, information from annual reports of the subsequent firms and companies’ websites was used to gather information on the members of the board of directors and their nationality. When data was incomplete, the Orbis database was also used to find information on the members of the board of directors. There are several methods to calculate national diversity in top management teams. In this study, national diversity is calculated with Blau’s index (Blau, 1977) as it is a common measurement in team diversity studies. Blau’s index is calculated as follows:

Blau′_{s index = [1 − ∑( 𝑝} 𝑖 )2].

Where p is the percentage of group members in the ith _{group (nationality). This index is}

chosen as it is often being used when calculating national diversity and it is suitable for a large number of data (Garcia Martinez, Zouaghi, & Garcia Marco, 2016; Nielsen & Nielsen, 2013). Because national diversity is being used for this index, the values will range from 0 till 1. In the case that a group is homogeneous, the Blau’s index of the group is 0. In the case that a group is heterogeneous, the Blau’s index of the group is 1. The higher the value will be, the higher the degree of national diversity within a team. As reaching a value of 1 is nearly impossible for this research, it is expected that with the variables used in this sample, values of 1 will not be reached.

3.4 Control variables

Firms size

The first control variable is the firm’s size. Firm size is often believed to influence the degree of firm internationalization as it might lead to better financial and human resources used for internationalization. Lee and Park (2006) argue that firm size has an impact on numerous organizational outcomes. For this research, firm size is measured by looking at the number of employees in a firm.

Firm age

The second control variable is a firm’s age. It is important to include this as a control variable as older firms are found to have larger internationalization market commitments and also have more available resources than younger firms (Yip, Biscarri & Monti, 2000). Firm age is measured by the year of incorporation of the firm.

Board size

4. Empirical results

4.1 Descriptive statistics

Table 1 shows the descriptive statistics including the means, standard deviations and the correlations coefficients. First of all, in this research the values of Blau’s index for calculating national diversity are ranging from 0 to 0.83 as reaching a Blau’s index of 1 is nearly

impossible within this dataset. The highest Blau’s index regarding the board of directors within this sample is 0.83. This board consisted of eleven members from eight different countries and could therefore be considered as most diverse. As can be seen in table 1, national diversity has a mean of 0.26 with a standard deviation of 0.28. This relatively low mean indicates that the board of directors in this sample are considered to be not very diverse. Furthermore, as can be seen in figure 2 the distribution of national diversity tends to have a non-normal distribution. This can be explained since there are many homogeneous boards in this sample. These boards have a 0.0 score for national diversity and as can be seen there are quite some boards with a score of 0.0. The dependent variable, degree of firm

internationalization, measured as foreign subsidiaries divided by total subsidiaries, has a mean of 65.10 and a standard deviation of 27.09. This means that the firms in this sample are

considered to be rather internationalized. There are some correlations found in the correlation matrix in Table 1. National diversity is significant positively correlated with the degree of firm internationalization (p<0.01). National diversity is also significantly correlated with firm size (p<0.01). Furthermore, national diversity is significantly correlated with board size (p<0.01). The degree of firm internationalization is found to be significantly correlated with board size (p<0.01). Moreover, firm size is significantly correlated with board size (p<0.01).

TABLE 1

Descriptive statistics and correlations

Next to this, an independent analysis for national diversity of the board of directors and the degree of firm internationalization for the Netherlands, Germany and Finland have been executed as well. For Dutch companies, national diversity of board members gave a mean of 0.37 with a standard deviation of 0.32. The degree of firm internationalization has a mean of 75.21 with a standard deviation of 25.12. In German companies, national diversity of board members gave a mean of 0.19 with a standard deviation of 0.23. The mean for degree of firm internationalization is 59.35 with a standard deviation of 27.76. National diversity of boards in Finnish companies gave a mean of 0.23 and a standard deviation of 0.26. The degree of firm internationalization at Finland has a mean of 62.71 with a standard deviation of 26.45. As can be seen, there are quite some differences between the three countries. The Netherlands can be considered as having the most diverse board of directors and having the most

internationalized firms. While Germany has the least diverse board of directors and is also being considered as least internationalized compared to the Netherlands and Finland. The differences between these countries could be attributed to the fact that they are operating in a different economic, social and political environment. An overview of the distribution of Dutch, German and Finnish firms for national diversity and the degree of firm

internationalization can be found in Appendix C.

FIGURE 2

4.2 Data analysis

In order to test the relationship between the degree of internationalization and board national diversity, an Ordinary Least Squares (OLS) regression is used. Before testing the hypothesis, several assumptions need to be tested. The following assumptions are; outliers, linearity, multicollinearity and normality. These assumptions need to be met, in order to perform a reliable regression analysis. The following sections will show a detailed analysis of these assumptions.

4.2.1 Linearity

First of all, a linear relationship between the dependent and independent variable was tested. This was done by creating a scatterplot, with the dependent variable on the y-axis and the independent variable on the x-axis. The scatterplot confirmed that there is a linear relationship between the dependent and independent variables.

4.2.2 Outliers

The following assumption which need to be tested are outliers. Outliers can be described as an observation that is distant from other values in the sample. With the use of boxplots, it is tested whether any outliers could be identified. These boxplots did not identify any outliers in the sample.

4.2.3 Multicollinearity

Another assumption which needs to be checked is multicollinearity. Multicollinearity exists when two or more predictor variables are highly correlated with each other. If collinearity exists “there is no guarantee that the data will be rich in information nor that it will be

TABLE 2

Test for multicollinearity

Variable Tolerance VIF

National diversity 0,765 1,307 Firm size 0,928 1,078 Firm age 0,991 1,009 Board size 0,750 1,333 Mean 0,859 1,182 4.2.4 Normality

Another assumption, is that the variables are normally distributed. The assumption of normality is that the underlying random variable of interest are normally distributed. A violation of the normality assumption can have consequences for the calculation of p-values for significance testing. The data was tested for skewness and kurtosis. It was found that two control variables were somewhat skewed to the right. Therefore, a logarithmic transformation was used and this resolved the issue for normality.

According to the previous tests, all the assumptions for using an OLS regression are met. No problems with linearity, outliers, multicollinearity and normality were found. Therefore, an OLS regression can be used.

4.3 Regression analysis

In this section, the regression results are presented in order to test the hypothesis. The first model in table 3 shows the results of the regression analysis of the three control variables; firm size, firm age and board size, excluding the independent variable. The results show that both firm size and firm age are not significant and thus have no effect on firm

internationalization. However, board size does show a significant effect on firm

Model 2 in table 3 presents the results of the regression analysis including all the control variables and the independent variable, national diversity, in order to test the hypothesis. The results show that the relation is positive and strongly significant (p<0.01). As a result of this, hypothesis 1 is supported. Therefore, a higher degree of national diversity in executive boards is significantly associated with a higher degree of firm internationalization.

TABLE 3

Results of regression analysis

Variable Model 1 Model 2

5. Discussion and conclusion

The underlying concept of this research is that the characteristics of members of the board of directors have an influence on decision making and therefore also influence the

internationalization strategy of a firm. This is linked to the upper echelon theory. This theory proposes that a manager’s characteristics, experiences and values influence the decisions they make and thus also the decisions related to a firm’s internationalization strategy. According to Hambrick (2007) there is a strong link between the norms, values and characteristics of team members and their socio-cognitive capabilities. Furthermore, individuals who are part of a board will influence a firm’s strategic choices as a result of differences in personalities, characteristics and values. Several outcomes of top management teams related to internationalization have been found. Finkelstein et al., (2008) and Strange and Jackson (2008) found that diversity among boards leads to more innovative strategic decisions and enhanced creative decision making. Furthermore, Herrmann and Datta (2005) argue that international experience among board members leads to a greater confidence in estimating the risks of a company and are thus likely to be more combative in committing resources.

However, also some negative effects of top management teams on internationalization have been found. Fredrickson (2001) found tenure diversity in boards to be negatively related to strategic changes in high technology firms. Furthermore, Ancona and Caldwell (1992) found a negative relationship between the tenure and functional diversity of board members and product innovation.

When looking to other studies, they have mostly included characteristics such as the influence of gender, tenure and age. While the effect of national diversity has not been so extensively researched yet. Therefore, the objective of this research was to find if a relationship between national diversity in executive boards and the degree of firm internationalization exists. For this research, boards with different nationalities are considered to notably influence the internationalization of firms as these boards will experience a greater creativity amongst team members, have a broader range of perspectives and are better at solving complex problems. What also needs to be considered when looking at national diversity is the influence of culture and institutions on this. Ghemawat (2001) explains that cultural characteristics have an

information, deals with this information and take strategic decisions accordingly. Therefore, when individuals become part of a board in a foreign country, their formal and informal institutions will still have an impact in how they make decisions and deal with complex situations.

Research has indicated that characteristics of top managers have a considerable influence on the strategy the firm decides to take (Hambrick, 2007; Das & Teng, 2001). And as mentioned before, national diversity in executive teams are considered to have an influence on the internationalization of firms. This has led to the following research question: What is the effect of national diversity in executive boards on the degree of firm internationalization? In order to study this proposition, a sample of publicly listed firms from the Netherlands, Germany and Finland was used as they are considered to be in the same range when looking to GDP per capita and are also all part of the European Union. Data on national diversity of the board of directors and internationalization of firms was collected from annual reports, company websites and the database Orbis. It was predicted that a higher national diverse board would lead to a more internationalized firm. In the end, the sample consisted of 239 firms. From these firms, 63 firms are from the Netherlands, 65 firms from Germany and 111 firms from Finland.

In order to get an answer on the hypothesis, a regression analysis was used. The results show a positive and significance relationship and thus support hypothesis 1. Implying that national diversity has a positive and significant effect on the degree of firm internationalization. Furthermore, quite some differences between the three countries used for the sample were found. The Netherlands is considered as being the most nationally diverse in executive boards and also has the highest internationalization rate of the three countries. While Germany is considered as being the least nationally diverse and also has the lowest internationalization rate. Even though Germany is considered as the largest economy in the European Union, it has the lowest score of firm internationalization. This could be explained due to the different environments, countries are operating in. The Netherlands was found to have the highest degree of firm internationalization. This is consistent with the finding that the Netherlands has a presence of well-known MNCs. An explanation for the differences in national diversity could be found in the different policies the countries have established for diversity in

avoidance is found to be more careful in entering foreign countries, but also more careful in attracting foreign people for key management positions.

This research makes several contributions. The first and main contribution is understanding of how national diversity in executive boards might have an influence on the degree of firm internationalization. In this research, it is found that national diversity has a positive and significant effect on firm internationalization. Next to this, there are quite some differences found between national diversity in the board of directors and the degree of firm

internationalization among the three researched countries. This can be explained due to differences in the political, social and economic environment the countries are operating in. Such as different policies on national diversity regulated by the home country, but also

differences in cultures among the different countries. Furthermore, this research contributes to the understanding of the importance of national diversity and the degree of firm

6. Limitations and future research

Several limitations of this research should be mentioned. First of all, the sample of this research is rather small and included three countries; the Netherlands, Germany and Finland. Because of a limited amount of time it was not possible to include more countries. This sample was chosen as they were a good fit, because they are in the same range of GDP per capita and are all part of the European Union, however with the inclusion of more countries, this research could have given a more thorough and broader view and would possibly arrive at different results. Next to this, this research only focused on European countries which were all part of the European Union. The inclusion of other countries outside Europe, such as Asian and American multinationals may also have given a more thorough and broader view. Another limitation of this research is the calculation of internationalization. To calculate the internationalization of firms, this research uses the ratio; number of foreign subsidiaries to total subsidiaries. However, there are more applicable ways to measure the

internationalization of firms. One of these is the transnationality index, which was not used for this research due to missing data. Yet, this transnationality index could have given a more thorough and accurate measurement for the internationalization of firms as it includes several measures of internationalization all together.

Another limitation is that only annual reports, information from websites of firms and information from Orbis was used. Even though it is a good approach for gaining data, using other types of sources such as information through surveys or interviews could have given more extensive information. A comparison with the sample of Orbis and information

retrieved from interviews or surveys could have given interesting observations. However, this type of information is not used due to time constraints.

6.2 Future research

After the limitations, several suggestions for future research will be given. First of all, this research only takes the effect of national diversity on the degree of firm internationalization in account. Even though national diversity becomes more important and is an interesting part towards firm internationalization, more factors could be included. In order to arrive at more thorough understandings on what effect diversity of board members has on

the influence of individuals’ characteristics in a board on internationalization could be analyzed as well by including factors such as age, gender and tenure.

As already mentioned in the limitations this study only focuses on three countries in Europe. For future research, more countries from different continents could be considered. As different countries and especially countries from different continents have very different cultures, rules and regulations this would lead to different conclusions. In this way, a much more reliable and extensive database can be created. Next to this, it would be interesting to make comparisons between the different continents to see if the effect on internationalization differs between the continents.

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Appendix A: Hofstede’s cultural dimensions Power distance

High Low

Characteristics - Emphasis on hierarchy - Centralized organization - Not much trust among co- workers

- Power differences and inequality is accepted

- Flat organization structures - Less centralized organization - People are considered equal - Trust among co-workers - People have equal rights Countries - Malaysia - Venezuela - Singapore - Sweden - New Zealand - Austria Uncertainty avoidance High Low

Characteristics - Tend to avoid risk - Respect for authority - Strict rules and laws - People try to avoid risks

- Acceptance of different opinions - Openness to change

- Less strict rules and laws - People take risks

Countries - Greece - Portugal - Chile - Denmark - Sweden - Singapore Individualism vs. collectivism High Low

Characteristics - Emphasis in personal enjoyment - Everyone has the right on their own opinions

- Decisions are made individually - Work and private live are separated

- Emphasis on harmony and hierarchy within a group

- Opinions are shaped by the group - Everyone is part of a larger group - Work and private live are combined Countries - Netherlands - U.K. - U.S.A. - Colombia - Panama - Indonesia Masculinity vs. femininity High Low

Characteristics - Money and achievement are important

- Cleary distinct gender roles - People who achieve success are admired

- Men should be dominant in society

- More focused on quality of life - Overlapping of social gender roles - Relationship oriented

- You work to live

Long-term orientation vs short-term orientation

High Low

Characteristics - Orientation on future - Emphasis on perseverance - Savings for future investment - Preserving one’s own face

- Orientation on past and present - Focus on respect for tradition - No money saved for investments - Focus on stability Countries - China - Hong-Kong - Japan - Canada - U.K. - U.S.A. Indulgence vs. restraint High Low Characteristics - Optimistic - Importance of freedom of speech

- Focus on personal happiness

- Pessimistic

- More controlled behaviour - Strict social norms

Appendix B: Sample firms Company name Country ISO Code 1 AAREAL BANK AG DE

2 ABN AMRO GROUP N.V. NL

3 ACCELL GROUP NV NL

4 AD PEPPER MEDIA

INTERNATIONAL NV NL

5 AFARAK GROUP OYJ FI

6 AFFECTO OYJ FI

7 AIRBUS GROUP SE NL

8 AKTIA BANK PLC FI

9 ALBA SE DE

10 ALLIANZ SE DE

11 ALMA MEDIA OYJ FI

12 AMER SPORTS OYJ FI

13 APETIT OYJ FI 14 ARCADIS NV NL 15 ARGEN-X N.V. NL 16 ASM INTERNATIONAL NV NL 17 ASML HOLDING N.V. NL 18 ASPO OYJ FI

19 ASPOCOMP GROUP OYJ FI

20 ASTARTA HOLDING N.V. NL 21 ATRIA OYJ FI 22 AXEL SPRINGER SE DE 23 BASF SE DE 24 BASWARE OYJ FI 25 BATENBURG TECHNIEK N.V. NL 26 BAUER AKTIENGESELLSCHAFT DE 27 BAUMOT GROUP AG DE 28 BAYER AG DE

29 BCRE-BRACK CAPITAL REAL

ESTATE INVESTMENTS B.V. NL 30 BIOHIT OYJ FI 31 BITTIUM OYJ FI 32 BRUNEL INTERNATIONAL NV NL 33 C/TAC NV NL 34 CAPMAN OYJ FI 35 CARGOTEC OYJ FI 36 CATALIS S.E. NL 37 CAVERION OYJ FI

38 CHICAGO BRIDGE & IRON

45 COMPTEL OYJ FI

46 CONSTELLIUM N.V. NL

47 CRAMO OYJ FI

48 DATRON AG DE

49 DELTA LLOYD NV NL

50 DETECTION TECHNOLOGY OYJ FI

51 DEUFOL SE DE 52 DEUTSCHE BANK AG DE 53 DEUTSCHE BORSE AG DE 54 DEUTSCHE LUFTHANSA AG DE 55 DEUTSCHE PFANDBRIEFBANK AG DE 56 DEUTSCHE POSTBANK 57 DEUTSCHE TELEKOM AG DE 58 DIEBOLD NIXDORF AG DE 59 DIGIA OYJ FI 60 DNA OYJ FI

61 DOVRE GROUP OYJ FI

62 DPA GROUP N.V. NL

63 DVB BANK SE DE

64 ECOLUTIONS GMBH & CO.

KGAA DE 65 EFORE OYJ FI 66 EINHELL GERMANY AG DE 67 ELISA OYJ FI 68 ELUMEO SE DE 69 ENVIPCO HOLDING N.V. NL 70 EQ PLC FI 71 ESPERITE N.V. NL 72 ETTEPLAN OYJ FI 73 EUROCOMMERCIAL PROPERTIES N.V. NL

74 EUROKAI GMBH & CO. KGAA DE

75 EVLI BANK PLC FI

76 EXEL COMPOSITES OYJ FI

77 F-SECURE OYJ FI 78 F24 AG DE 79 FERRARI N.V. NL 80 FERRATUM OYJ FI 81 FIAT CHRYSLER AUTOMOBILES N.V. NL 82 FINNAIR OYJ FI

83 FISKARS OYJ ABP FI

84 FORFARMERS N.V. NL 85 FORIS AG DE 86 FORTEC ELEKTRONIK AG DE 87 FORTUM OYJ FI 88 FRANK'S INTERNATIONAL N.V. NL 89 FUCHS PETROLUB SE DE 90 GEMALTO N.V. NL 91 GFT TECHNOLOGIES SE DE

93 GRAMMER AG DE 94 GRENKE AG DE 95 HANNOVER RUCK SE DE 96 HEIDELBERGER DRUCKMASCHINEN AG DE 97 HEINEKEN HOLDING NV NL

98 HERANTIS PHARMA OYJ FI

99 HKSCAN OYJ FI 100 HONKARAKENNE OYJ FI 101 HUHTAMAKI OYJ FI 102 HYDRATEC INDUSTRIES N.V. NL 103 ICTS INTERNATIONAL N.V. NL 104 INCAP OYJ FI 105 INNOFACTOR OYJ FI 106 INTERXION HOLDING N.V. NL 107 INTICA SYSTEMS AG DE 108 IXONOS OYJ FI 109 JUNGHEINRICH AG DE 110 K+S AKTIENGESELLSCHAFT DE 111 KARDAN N.V. NL 112 KEMIRA OYJ FI 113 KESKO OYJ FI 114 KESLA OYJ FI 115 KIMBERLY ENTERPRISES N.V. NL 116 KONE OYJ FI 117 KONECRANES OYJ FI 118 KONINKLIJKE DSM N.V. NL 119 KRONES AKTIENGESELLSCHAFT DE 120 KUKA AG DE

121 LASSILA & TIKANOJA OYJ FI

122 LASTMINUTE.COM N.V. NL

123 LEHTO GROUP OYJ FI

124 LEMMINKAINEN OYJ FI 125 LINDE AG DE 126 M4E AG DE 127 MARIMEKKO OYJ FI 128 MARTELA OYJ FI 129 MBB SE DE

130 MENSCH UND MASCHINE

SOFTWARE SE

DE

131 MERCK KGAA DE

132 METRO AG DE

133 METSA BOARD OYJ FI