Ambidexterity in Asian Emerging Markets

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Ambidexterity in Asian Emerging Markets

Lauri Erik Lehikoinen

S3413969

Faculty of Economics and Business

Master Thesis in Business Administration Supervisor: Jana Oehmichen MSc BA – Small Business and Entrepreneurship Co-assessor: Samuele Murtinu

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ABSTRACT

This study examines the relation between ambidexterity and performance in an unexplored setting, in Asian Emerging Markets (AEMs). The benefits of ambidexterity for firms from developed countries have been widely acknowledged, however, the benefits for large firms from AEMs are unknown. I investigated the ambidexterity hypothesis in the energy sector of India and China. Both countries have faced unprecedented growth and are considered two completely different powerhouses in regard to their business environment. Therefore, expanding the ambidexterity hypothesis in this setting would increase the generalizability of ambidexterity as an organizational theory. My findings did not provide significant results to the relationship between ambidexterity and performance. Hence, this study provides a fruitful starting point for further research as the non-significant findings are thoroughly discussed.

Keywords: Ambidexterity, Organizational Learning, Asian Emerging Markets, Exploration,

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1 Introduction

Firms ability to exploit its existing knowledge and explore new domains to acquire new knowledge are crucial factors for the long-term survival of the firm (March, 1991). The trade-off between the two learning strategies has been debated extensively. While many scholars argue that a firm should focus on one or the other, recent findings indicate that by executing both, exploitation and exploration simultaneously, a firm can enhance its results (He & Wong, 2004; Piao, 2010). This so-called ability to be ambidextrous (i.e., simultaneous exploration and exploitation) combines two fundamentally different approaches to organizational learning (He & Wong, 2004), which has been increasingly intriguing domain for recent strategy research, as well as to the organizations that are struggling to find the right fit in their resource allocation to either exploration or exploitation.

To clarify what is included in the concept of exploitation and exploration in the context of organizational learning, March (1991, p. 71) concisely defines exploitation as “such things as refinement, choice,

production, efficiency, selection, implementation, execution” while exploration includes “search, variation, risk taking, experimentation, play, flexibility, discovery, innovation”. According to

Oehmichen, Heyden, Georgagakis, and Volberda (2017), exploitative strategies tend to be beneficial in the short run, while exploration is more unpredictable even though the new knowledge that can help the firm to innovate is being acquired. In addition, March (1991) suggests that extensive exploration strategy may drain firms’ resources and therefore, the return on investment may be very limited. Firms overarching exploitation may conversely reduce the learning of a firm, which may endanger firms long-term success (Uotila, Maula, Keil, Shaker & Zahra, 2009). This further demonstrates the importance of balancing the two activities to create a firm that thrives for years to come. By being ambidextrous the firm can dodge the risk of missing out on the benefits of creating something new and utilizing the acquired knowledge by creating faster returns.

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Previous research has failed to reach a consensus regarding the conceptualization of ambidexterity and the focus regarding ambidexterity research has remained rather ambiguous (Simsek, 2009). This has lead to questions that managers are constantly struggling with. How do they know when they are reaching an optimal level of ambidexterity and should they have a balance between exploitation and exploration (Cao, Gedajlovic & Zhang, 2009)? This study seeks to clarify this dilemma and provide further evidence does the ambidexterity hypothesis hold in an unexplored setting, Asian Emerging Markets (AEM) context. Firms from emerging markets have faced unprecedented growth and development in the past two decades, however, what remains rather vague are the theoretical explanations that explain the growth of firms from these countries (Davis & Marquis, 2005). Several institutional and cultural differences exist comparing to western firms, which may influence the organizations learning curves and hence, their long-term performance. Since exploration and exploitation belong to the learning organization paradigm, a closer investigation to AEMs and their ambidexterity will provide fruitful insights to the patterns and underlying reasons how firms from AEMs have been able to challenge the western counterparts. In addition, the institutional and cultural differences between different AEM countries may be extremely high, it is fascinating to understand whether the country of the firm influence the firm's ambidexterity and performance relationship. By studying the country effects, I can enrich the field of organizational ambidexterity by providing answers to the important component of theory, “where” the phenomena may hold and where it may not (Whetten, 1989).

To get an answer to my research questions: “Does a firm located in Asian Emerging Markets benefit from being ambidextrous?” and “Does the country where the firm is located influence the firm’s ambidexterity – performance relationship?”, I investigated publicly listed companies from India and China. These firms were part of the energy sector between 2007-2011. According to best of my knowledge, this has not been investigated before and by using longitudinal research design I am able to enrich the research field of ambidexterity and learning organizations even further. As Raisch, Birkinshaw, Probst and Tushman (2009, p. 693) stated: “studies that take a longitudinal perspective of

organizational ambidexterity are scarce”. To further clarify the effect ambidexterity has on the

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2 Theory and hypotheses

2.1 Ambidexterity and emerging markets

Organizational ambidexterity represents firm’s ability to explore new knowledge while simultaneously utilize its existing knowledge to recognize opportunities (March, 1991). By exploring new knowledge, a firm is able to create novel ways of anticipating constantly changing customer needs and hence stay ahead of the competition (Benner & Tushman, 2003). On the other hand, when a firm needs to aim for an increase in short-term cash flow, the ability to utilize its acquired knowledge becomes vital (Uotila et al., 2009). The operating environment of the firms is constantly changing. No matter where the firm is located, the environment modifies the playground. Therefore, to avoid bankruptcy and ensure survival, firms need to balance more certain activities (i.e., exploitation) with uncertain ones (i.e., exploration). Uotila et al. (2009) demonstrated the importance of achieving harmony between variance increasing activities (exploration) and with exploitative activities since by doing so, the firm can ensure smoother adaption process to the constantly changing environment. This highly changing environment is particularly evident in several AEMs (e.g., India and China) where the institutional reforms (e.g., privatization of the state-owned enterprises) has completely changed the way firms conduct business. Emerging markets have become increasingly important to the world economy and their rapid growth has led many western countries to be jealous of their success. Variety of explanations can be given to the success stories of AEMs firms, however, what is lacking is a better understanding does organizational ambidexterity play any role in this success. Ambidexterity and its link to greater success have been empirically investigated in firms from developed countries (e.g., Nosella et al., 2012, Uotila et al., 2009). According to Raisch and Birkinshaw (2008), organizational ambidexterity has been investigated by using several different theoretical lenses (e.g., organizational learning, technological innovation, and strategic management). These theoretical approaches are important to further enhance organizational ambidexterity’s possible positioning as an organizational theory (Raisch & Birkinshaw, 2008). Duncan (1976) was the initiator of organizational ambidexterity, however, the bursting interest grew only after March’s (1991) article where organizational learning was used as the theoretical lens to analyze organizational ambidexterity. Since then, the increasing number of research and the ambivalent results regarding the benefits of organizational ambidexterity have generated confusion. Therefore, to gain clarity, I want to go back to the original theoretical lens used by March (1991) by defining a learning organization as a firm that is ambidextrous (i.e., firms constant ability to learn new things while simultaneously utilizing its existing knowledge).

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(Hitt, Li & Worthington, 2005). Internal skills may be relatively narrow when the firm does not have access to global talents that would bring new knowledge and skills to the firm. Firms from AEMs may not face scarce financial resources, however, the institutional environments are underdeveloped, which may cause difficulties to ease the process of doing business (Hitt et al., 2005). Therefore, it is crucial to constantly acquire new knowledge to tackle the inefficiencies of the environment. When new knowledge is not coming in, the firm faces the risk of relying solely on the existing knowledge that will create difficulties to adapt to changing conditions in the environment, leading to decreased success in the market (Levinthal & March, 1993; Smith & Tushman, 2005).

As mentioned earlier, exploitation tends to be beneficial in the short-run and in stable environments (Uotila et al., 2009;Jansen, Van Den Bosch & Volberda, 2006). Due to high fluctuation in the business environment in AEMs, a firm’s ability to adapt becomes a crucial success factor. Thus, exploration activities ensure the inflow of new knowledge that can be used to tackle the environmental challenges, further increasing the long-term survival of the firm (Uotila et al., 2009). On the other hand, it is not recommended to have a higher emphasis on exploration for long periods at once. This so-called “over exploration” may cause a constant juggling with new ideas and knowledge, which will decrease proper execution of knowledge and eventually lead to decreased revenues (Levinthal & March, 1993). Previous research has shown that by creating a strategy where exploration and exploitation are being balanced (i.e., doing both simultaneously) can bring a great increase to the performance of the firm (see e.g., Junni et al., 2013). As organizational learning theory posits (Levitt and March, 1988), routines, codes (i.e., norms and values) and procedures which take into account the history of the firm, educate the employees of the firm what could be done better in the future. In order to not get stuck in the existing routines that hinder exploration, a firm must adapt to the uncertain and ambiguous environment (Hitt et al., 2005) by constantly attracting novel ideas outside of the firm. These ideas will in time turn into codes that are applied throughout the firm and benefit the long-term performance. Constant learning by doing (i.e., trial and error) is advantageous for firms from AEMs to acquire knowledge that can create a sustainable competitive advantage.

2.2 Balanced dimension of ambidexterity (BD)

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Cao et al. (2009) clarified that a clear distinction must be made when one is depicting the collective magnitude of exploration and exploitation and when one is depicting the balance between exploration and exploitation. When utilizing the balanced dimension of ambidexterity (BD), a firm is being ambidextrous when the amount of exploration and exploitation activities are close to being equal (i.e., resources dedicated to exploring new knowledge and exploit current knowledge are as extensive). When a firm is said to be highly ambidextrous in the combined dimension of ambidexterity (CD), a firm is collectively dedicating more resources to both exploration and exploitation.

March (1991) argues that exploration and exploitation activities are constantly fighting from scarce resources and both activities create benefits in different settings. I reason that in order for a firm to create harmony within the organization (i.e., the whole firm and its employees are striving for the common purpose instead of competing among each other), the firm must create a balance between the two activities (i.e., strive for BD of ambidexterity). In pursuit of a high CD of ambidexterity, the firm might fall into the trap of thinking that its current strategy is highly ambidextrous and therefore they should perform well, hence, forgetting to devote resources to constantly learn new things. This is particularly important to avoid for the firms from AEMs that are trying to compete with firms from developed countries (Hitt et al., 2005). Firms from AEMs differ greatly comparing to firms from developed countries. Higher uncertainty in the business environment of AEMs causes the resource allocation process (to either exploration and exploitation) to be rather challenging. By striving for the fit between exploration and exploitation the firm can enhance its competitiveness and long-term success.

Therefore:

HYPOTHESIS 1: BD positively influences firm performance.

2.3 Contingencies of ambidexterity

This section develops two hypotheses which depict the moderating effects of environmental and organizational contingencies. I investigate two variables that influence the resources that a firm can utilize. The first contingency variable “environmental munificence” has been thoroughly examined (Cao et al., 2009) and the second contingency variable “country of the firm” and its effect to the balanced dimension of ambidexterity has remained unexplored. Both contingencies depict the possible instability of the external environment.

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available in AEMs, which creates difficulties on achieving ambidexterity where resources need to be allocated to activities in which the returns may remain unrecognized for a long time (i.e., exploration). Another challenge of AEMs is the cultural differences between western countries. Ambidexterity and its effects on performance in western countries are widely recognized (see e.g., Uotila et al., 2009; Nosella et al., 2012). However, due to the rather similar cultures within most of the western developed countries (Hofstede, 1984), the ambidexterity hypothesis might be affected in different ways in AEMs, where culture varies from western ones. Overall developed countries (e.g., USA and Finland) are facing a lot more stable environments that will enable better circumstances for the firms to achieve ambidexterity. Therefore, in countries such as India and China, where the resources are scarcer, and the operating cultures differ greatly compared to western countries, a closer look at these contingencies will be taken.

2.3.1 Environmental munificence

Firms are part of the environment where they operate. Political and economic institutions constantly shape the way business is conducted and therefore the environment plays a huge role on how well firms can achieve their goals (Acemoglu & Robinson, 2013). Firms from developed countries have convenient access to highly educated labour, capital markets provide access to finance and other institutions determine how well goods can be transported within a country. This might be more challenging to firms from AEMs. This is in line with Hannan and Freeman (1977) line of thought that environments have differences at their resource bases that can be conveyed to firms.

Differences within the environments can be measured by determining how munificent the environment is. Dess and Beard (1984) define a munificent environment as one where firms have the freedom to pursue their growth ambitions without the need to worry about the lack of resources. This includes access to skilled labour (e.g., high education levels within the country), and institutions that sustain protection for firms’ trade secrets (e.g., patents). AEMs face obstacles to attaining crucial resources to the success of the firm when compared to developed countries. Hitt et al., (2005) state that the access to human capital and other strategically important factors are less developed in AEMs.

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conveniently available the firm is better equipped to pursuit harmonious match between exploration and exploitation (i.e., BD). As Porter (2000) stated, clusters enhance the competitiveness of the firm which may be due to better access to resources. Thus, environments with high munificence will advance the pursuit of ambidexterity which will further increase firm performance.

Therefore,

HYPOTHESIS 2: Environmental munificence positively moderates the relationship between BD and

firm performance. High environmental munificence is more beneficial.

2.3.2 Country of the firm

Both India (the largest democracy in the world) and China (the largest communist economy in the world) have faced unprecedented growth in the past two decades. India and China are the powerhouses of emerging markets (Peng, Wang & Jiang, 2008), which have several different attributes in their institutional and cultural environment. Therefore, it is fascinating to investigate does the country of the firm play any role in the firm’s relationship between ambidexterity and firm performance. Both countries have gone through enormous structural changes in their regulatory framework (Peng et al., 2008) which provides an interesting starting point for this investigation. Previous ambidexterity studies have focused on developed countries where the structural reforms have not been as rapid and therefore, may have provided a stable platform for ambidexterity to occur in the first place.

According to Hofstede (1984), culture of the country plays a crucial role in how an organization behaves. Therefore, it is important for the organizations that want to become ambidextrous, to understand its people. And to understand its people, firms must understand their values and beliefs that will shape their behaviour (Sui & Yuquan, 2002). In India, people tend to be more willing to take risks and explore the unknown, whereas people in China would rather play safe and where the outcome is more predictable (Hofstede, 1984; Hofstede, 1993). For firms desiring to both explore and exploit knowledge (i.e., being ambidextrous) in this type of an environment, difficulties may occur. Exploration activities require strong belief that the endeavours will someday pay off and a great preservation is crucial. As Oehmichen et al., (2017, p. 284) state “exploration tends to have more long-term and

uncertain payoff structure, but helps rejuvenate the knowledge base of the firm”. This high uncertainty

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one specific activity (March, 1991). Another major difference in the cultural dimensions of India and China is the level of individualism (Hofstede, 1984). People in India seem to prefer taking care of the individual (i.e., “I” first type of attitude) (Hofstede, 1984) while Chinese culture can be seen as more collectivistic where the needs of “we” and the close ones of an individual come before one’s self. (Hofstede, 1993). The danger of failing in being ambidextrous increases when the people in the organization are not creative (Jelinek & Schoonhoven, 1993). Since, the balance between exploration and exploitation is very difficult to control and they require completely different organizational settings to thrive (i.e., strategic orientation combined with the structure of the organization), ambidexterity may hinder firm performance (Tushman & O’Reilly, 1996). Especially, in countries where the culture is more against creativity and change (e.g., China) rather than encouraging it, the performance of the firm will decrease due to the high costs of ambidexterity.

When a firm is operating in a collectivistic society, the strong desire to connect at a societal level may hinder the execution of different tasks where larger knowledge capabilities are needed. Hofstede (1984) stated that in countries like China where the strong desire to share virtually everything among family members prevails, family members will be hired without looking into more capable candidates. Thus, leading to very specified knowledge set, which is in support of exploitative activities but hinders firms’ ability to simultaneously dedicate resources to new activities (March, 1991). Difficulties in attracting novel and critical ideas into the firm will occur. One can say that the firms in high collectivistic countries are “trapped” into their existing knowledge base. Exploration and exploitation activities are hard to balance without the other and hence, ambidexterity becomes rather difficult since new knowledge is not coming in, and the employees remain ignorant to the potential ideas outside of their inner circle. Thus, in this type of setting where there is lack of new knowledge and resistance to new ideas, the firm may be better off at focusing on exploitative activities instead of striving for ambidexterity. Complexity increases when attempts to achieve ambidexterity are taking place, which leads to increasing costs (Van Looy, Martens & Debackere, 2005). Therefore, if the culture of the country where the firm is located is not “culturally” ready to be ambidextrous, the costs are too high that the firm should think twice should they put a strategic emphasis on both explorative and exploitative activities. Simplicity is the key and the firms should focus on what they do best and this way they can even outperform ambidextrous firms in performance (Van Looy et al., 2005).

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the firm’s do not like internal criticism, especially criticism towards managers from subordinates (Hofstede, 1984), which hinders critical conversations and idea sharing, leading to decreased knowledge exploration. The risk of high inefficiency and costs of ambidexterity increase (March, 1991; Van Looy et al., 2005), thus leading to decreasing performance.

In summary, in collectivistic and high uncertainty avoidance countries such as China, the ability to achieve successful exploration activities remains lower compared to India where the people are more tolerant for uncertainty and have a higher need of achievement. The costs of achieving ambidexterity become too high. Hence, ability to be ambidextrous evaporates, which causes a decrease in firm performance (Gibson & Birkinshaw, 2004; Tushman & O'Reilly, 1996).

Therefore,

HYPOTHESIS 3: Country of the firm moderates the relationship between BD and performance. In

countries that have high uncertainty avoidance and high level of collectivism, low level of BD is more beneficial.

2.4 Conceptual model

Based on the formerly described relationships, following conceptual model was constructed. The sample, research design, and all the measurements included will be elaborated in the following chapter.

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3 Method

3.1 Sample and research design

I tested my hypotheses on a longitudinal panel on publicly listed Chinese and Indian energy firms from 2007 to 2011. Financial data was collected from Datastream and ambidexterity data was collected from annual reports. The final sample included 21 firms (11 from China and 10 from India) and the total amount of annual reports equaled to 77. I follow the majority of the previous ambidexterity studies that chose the unit of analysis to be a firm. According to Raisch and Birkinshaw (2008), the confusion regarding the results of ambidexterity may be explained by a different unit of analysis. Both China and India have faced enormous economic growth (Bosworth & Collins, 2008) and they are the biggest emerging economies (Zhao, 2017). In addition, they are the most populous countries in the world, which has created challenges to meet the increasing energy demand. For instance, “India will require an

assured supply of 3-4 times more energy than the total energy consumed today” (Kumar, Kumar,

Kaushik, Sharma & Mishra, 2010, p. 2434). Therefore, the practical relevance of ensuring that the energy firms will be able to deliver enough energy for this increasing populations is high. Electricity is still a privilege in many rural parts of India and China, and by ensuring that the energy firms will be constantly looking for new opportunities on top of generating enough cash that they do not go bust is vital. Therefore, educating about the effects of ambidexterity can provide increased value for the countries and the firms in AEMs.

In addition, Simsek et al. (2009) stated that ambidexterity has different effects in different industries. I am aware of that and by testing hypothesis solely in one industry may reduce the generalizability of the results. However, by testing my hypotheses in the energy sector, I will tap into an unexplored industry, which will enhance the robustness of the ambidexterity and performance relationship in the whole research field (Junni et al., 2013). In addition, I will explore a country setting (i.e., where ambidexterity hypothesis may hold) that is an important factor in enhancing the generalizability of organizational ambidexterity as a theory (Whetten, 1989).

3.2 Data and measures

3.2.1 Dependent variable: Firm performance

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my dependent variable. The effect of exploration on performance is unreliable to grasp in the short-run. Therefore, to truly get anywhere close to clarifying the effects of ambidexterity on performance, Tobin’s Q is more reliable, since it is able to measure long-term effects and not only short-term (Uotila et al., 2009). The common goal of the strategic research is to show that strategy matters, especially how well the firm will do (Lubatkin & Shrieves, 1986). How can we do that? How can we show that strategy matters? Accounting based measures (e.g., sales growth) can provide a proxy regarding strategy’s influence on performance. However, since implemented strategies may reap the benefits several years from inception, accounting-based measures do not seem to be that attractive when trying to find the answer “does BD matter in firms’ attempts to do better?”. By having Tobin’s Q as a performance measure, I am able to tackle some of the issues of traditional performance measures (Uotila et al., 2009) and provide more reliable assessment criteria for strategic acts such as the simultaneous pursuit of exploration and exploitation (Lubatkin & Shrieves, 1986)

I follow Uotila et al. (2009, p.223) in their operationalization “Tobin’s Q as the market value of assets divided by the book value of assets”. This operationalization has been used by many researchers in the field (e.g., Kaplan & Zingales, 1997; Brown & Caylor, 2006; Bebchuk & Cohen, 2005), thus, enhancing the reliability of my measurement. Several robustness tests were conducted to increase the reliability of the results. I follow Uotila et al. (2009) and used accounting-based measures in the additional regression analyses and they provided consistent results.

3.2.2 Independent variable: Balanced dimension of ambidexterity (BD)

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Junni et al. (2013) demonstrated that it is crucial for a researcher to report and select ambidexterity measures in a way that instrument bias can be reduced. This is in line with a previously discussed problem of unclear ambidexterity measures. Birkinshaw and Gupta (2013) have demonstrated the need for clearer and consistent ambidexterity measures. CATA will provide a great tool to increase this clarity. One can delve into the content of studied phenomena and transform rich texts to quantitative data by calculating the frequency of words (Short & Palmer, 2008). To increase the reliability of the study, CATA provides a fruitful tool to utilize the accuracy of a computer (Krippendorf, 2004). To grasp when a firm is being ambidextrous, I use a validated dictionary (see Table 1 in Appendix) from McKenny, Aguinis, Short & Anglin (In Press). This dictionary will expand on March (1991) and his search terms and contains a more extensive list of “words” than the dictionary created by Uotila et al. (2009). These words can be seen as a proxy of the firm being either explorative or exploitative. Dictionaries will always face limitations regarding the actual indication of a specific word to the variable being investigated. Exemplification of the dictionaries may create generalizability issues (McKenny et al., 2016), however, I argue that utilization of CATA to capture the exploration and exploitation activities of a firm, is the most objective measure to date.

3.1.3 Moderating variables: Environmental munificence and Country of the firm

The moderating effects of environmental contingencies on BD-performance relationship were studied by focusing on environmental munificence and the country of the firm. Randolph and Dess (1984, p.121) depict environmental munificence as “the extent to which the industry can support present

organizations, enable the present organizations to grow and prosper, and enable new organizations to gain entrance into the industry”. I follow Cao et al. (2009, p.19) and measure environmental

munificence “as the average sales growth of firms in the same industry for the past three years”. This is consistent with prior studies (see e.g., Dess & Beard, 1984; Keats & Hitt, 1988) and it depicts the opportunity to attain readily available resources in the environment (Cao et al., 2009). In addition, environmental munificence includes the year effects of this study. Munificence score was calculated for each year from 2007 to 2011 and therefore, includes the variation among the years.

To grasp the effects of the country of the firm, I measure the country effect with a dummy variable. All the firms from China were marked as 1 and all the firms from India were marked as 0.

3.1.4 Control variables

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4 Analysis and results

The data was analyzed by using OLS regression to test the hypotheses. In addition, the hierarchical moderated method was utilized to test the two interaction hypotheses. To overcome the issue of missing values in the study variables, the final sample excluded all of those firms. Table 2 highlights the descriptive statistics and correlations of all variables included. To test multicollinearity problems, I tested variance inflation factors (VIF). All the VIF values were below 4 (highest VIF was 3.84). The critical level of 10 was not reached, indicating that multicollinearity issue has been tackled well (Kleinbaum, Kupper & Muller, 1988; Hair, Anderson, Tatham & Black, 1998). To further decrease inference issues, I tested heteroscedasticity by applying the method of Breusch and Pagan (1979). By conducting the Breusch-Pagan test in Stata I found additional proof that heteroskedasticity issue is minimal in this study. Table 2 present the descriptive statistics and Table 3 presents the regression results for firm performance.

Table 2: Descriptive statistics.

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18 Table 3: Test of hypotheses

Model 1 includes three control variables and has an R-square of 0.158 and the F-value (6.07) is significant (p < 0.01). Model 2 includes three control variables and the ambidexterity measure (BD), country dummy and environmental munificence. The R-square for model 2 is 0.177 and the F-value (6.29) is significant (p < 0.001). In addition, Model 3 includes the two interaction variables, thus reporting the full model. The R-square for model 3 is 0.205 and the F-value (5.71) is significant (p < 0.001).

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have shown a positive relationship between ambidexterity and performance of the firms (see e.g., Gibson & Birkinshaw, 2004; Tushman & O'Reilly, 1996).

Model 3 includes the moderating effects of environmental munificence and country of the firm. Hypothesis 2 predicts that high environmental munificence positively moderates the relationship between BD and firm performance. The results show that the relationship is negative but not significant (β = -0.041, ns) and therefore, Hypothesis 2 is not supported. Regarding hypothesis 3, the country of the firm does not have a significant influence on the relationship between BD and firm performance (β = 0.001, ns). Thus, Hypothesis 3 is not supported either.

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5 Discussion

At the start of this paper, I stated that confusion and ambiguity regarding ambidexterity studies have prevailed in the past. Most of that confusion comes from misaligned conceptualization (Cao et al., 2009). As mentioned in the beginning I wanted to go back to the roots of ambidexterity literature and examine ambidexterity through the simultaneous balance of exploration and exploitation activities. I examined the link between BD and performance and two contingency variables (environmental munificence and country of the firm) and their effect on this relationship. I hypothesized that BD positively influences firm performance (Hypothesis 1). In addition, I argued the importance of resources in this relationship and thus hypothesized that environmental munificence positively influences the relationship between BD and firm performance (Hypothesis 2). Finally, I demonstrated the country effects (Hypothesis 3) in which country of the firm moderates the relationship between BD and performance. By studying the country effects, I can further enhance ambidexterity as a management theory since this unexplored setting provides further implication “where” ambidexterity may have an influence (Whetten, 1989). To date, the ambidexterity literature remains incomplete if the country effects are not included. This study enriches the ambidexterity field and provides practical guidance for managerial decision making.

5.1 BD and performance

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(i.e., exploration and exploitation), the firm will be threatened to perform worse than firms that are ambidextrous.

Ambidexterity and its positive influence on firm performance has been taken for granted in the literature field which has caused a shift in research interests towards the antecedents of ambidexterity and how a firm can become ambidextrous (He & Wong, 2004). However, as Cao et al. (2009) vividly demonstrated, the results on ambidexterity – performance relationship are widely contingent on the operationalization of ambidexterity. I suggest that the focus should not be neglected at investigating the performance implication of ambidexterity, not now, or in the near future. Several previous studies have operationalized ambidexterity as the multiplicative of exploration and exploitation (see e.g., Oehmichen et al., 2017; Cao et al., 2009; Jansen et al., 2012; Mom, Fourné, Jansen, 2015). However, in this study, I operationalized ambidexterity as the absolute difference between exploration and exploitation. Therefore, this may be a plausible explanation for the different results. My non-significant findings between BD and firm performance are in line with the findings of Cao et al. (2009) where CD (combined dimension of ambidexterity) was significantly related to firm performance and BD was not. This is additional proof that when a firm is making it its budgeting decisions, resources should not necessarily be allocated to balance exploration and exploitation activities.

BD protects the firm not committing too many resources to either exploration or exploitation (Cao et al., 2009). Therefore, the firm should be able to both learn new things without falling to the “over-exploration” trap where new ideas will never be commercialized (Levinthal & March, 1993). Thus, leading to long-term success for the firm (Uotila et al., 2009). The non-significant findings of the BD – performance relationship may indicate that large firms in AEMs (such as the firms investigated in this study), simply should not focus on striving for a perfect fit between the two activities. Publicly listed companies have better capabilities for economies of scale than small firms, which encourages the large firm to specialize in what they do best. Cao et al. (2009) vividly explain how large firms are protected from many adverse effects that over exploitation or exploration may bring due to their abundance of resources. Therefore, Cao et al. (2009) suggested that small firms should actively strive for BD while large firms should not.

Uotila et al. (2009) provide support that firms should strive for a better balance between exploration and exploitation. They found in their study that “specifically, around 80% of companies we studied

engaged in exploration at levels below the optimum in our sample”. However, this study has

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ambidexterity and performance in industries where R&D investments (e.g., technology firms) are typically high (Uotila et al., 2009; Cao et al., 2009). In addition, Junni et al. (2013) found no significant link between ambidexterity and performance while investigating manufacturing firms. Further research is needed to fully understand in which settings different operationalizations of ambidexterity will enhance performance and in which industries, as recommended by other scholars (Birkinshaw & Gupta, 2013; Markides, 2013).

5.2 Moderating effect of environmental munificence

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5.3 Moderating effect of country of the firm

Previous research has depicted the impact that the environment plays a huge role in firm’s ability to explore or exploit (Zahra, 1996). Culture is part of the environment and culture derives from the country where the firm is located (Hofstede, 1984). My findings did not provide significant support for the previously unexplored importance of “country” and its effects on ambidexterity – performance relationship. This indicates that firms operating in countries such as India and China should not necessarily place strategic emphasis on achieving a perfect balance between exploration and exploitation activities. Thus, adding an important note of the limitations regarding the benefits of ambidexterity and especially when it is operationalized as a balanced dimension of ambidexterity. Possible explanation why the results were non-significant is that AEMs have faced comprehensive changes in the regulatory framework of the countries (Peng et al., 2008) and since they have occurred so recently, the nations have not had the time to build its internal resource base (e.g., highly skilled labour, which are needed for ambidexterity) to a high enough level. Thus, the leadership abilities of the Indian and Chinese managers are not as well developed as in western developed countries, indicating that the lack of leadership provides issues (Smith & Tushman, 2005; Carmeli & Halevi, 2009; Nemanich & Vera, 2009). Pursuing ambidexterity, in this setting may create inefficiencies in strategic execution and therefore, becomes too expensive.

To dig deeper into the reasons why the moderating effect of country of a firm did not have a significant impact on the ambidexterity – performance relationship, I conducted additional regression analyses by adding the relative amount of explorative activities as an independent variable. I did this to test does exploration activities in different countries influence performance, which may explain that simultaneous pursuit of exploration and exploitation is not desirable. Table 4 presents the descriptive statistics, Table 5 additional regression results and Figure 2 presents the moderating effect of country of the firm on the exploration – firm performance relationship (see tables and figure in Appendix B). Exploration was measured by following Uotila et al. (2009, p. 224) where they measured firms’ exploration activities by “dividing the number of exploratory words by the sum of exploratory and exploitative words per

company-year”.

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will increase the costs of pursuing exploration. When the costs of exploration increase and since the returns of exploration remain ambiguous (March, 1991), ambidexterity may not be desirable. Thus, indicating that the firms in China are not ready to be ambidextrous and therefore, non-significant results may have occurred. This is in line with several scholars that have demonstrated the situational negative effects (i.e., inefficiency) of firm ambidexterity (Van Looy et al., 2005; Ebben & Johnson, 2005; March, 1991). The fear of uncertainty hinders exploration to the unknown and without exploration new knowledge about new market opportunities will never be generated (March, 1991). In addition, O’Reilly and Tushman (2013, p. 4) stated: “exploration, by its nature, is inefficient and is associated with an

unavoidable increase in the number of bad ideas”. Therefore, in cultures such as in China where the

risk-taking capabilities are low and the benefits of exploration are hard to measure, increase in the opportunity costs of pursuing exploration may occur. Hence, the pursuit of ambidexterity may be so expensive due to costs of exploration which may lower firm performance.

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6 Conclusion and future research

In this research, I build on the extensive research on ambidexterity by providing intriguing insights into previously unexplored effects that the country of the firm has on ambidexterity – performance relationship. As a reminder, I embarked on this investigation based on two research questions: (1) “Does a firm located in Asian Emerging Markets benefit from being ambidextrous?” and (2) “Does the country where the firm is located influence the firm’s ambidexterity – performance relationship?”. To find answers to these research questions I investigated 77 annual reports from 10 Indian firms and 11 Chinese firms. My empirical tests focused on the years between 2007 and 2011 and the firms of investigation only included the energy sector. I cannot conclude that firms from AEMs benefit or do not benefit from ambidexterity since my findings did not provide any significant results. Further research is needed to provide conclusive answers. Also, the country of the firm does not play a significant role in the ambidexterity – performance relationship. In countries where the culture is highly collectivistic, and people are highly uncomfortable in uncertain situations, the negative effect of exploration may hamper the pursuit of ambidexterity in a way that conclusive answers cannot yet be given. This study focused specifically on the balanced dimension of ambidexterity (BD), hence providing further clarification on the operationalization and conceptualization to the literature field.

6.1 Implications for managers

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6.2 Limitations and future research

This study has several limitations that can guide the way for future research. For instance, I operationalize ambidexterity as the balanced dimension of ambidexterity (BD). Future research should take a closer investigation on the different operationalization of ambidexterity and its effects on performance (i.e., the multiplicative of exploration and exploitation activities). It very well may be that the non-significant results found in this study could be significant if operationalization of ambidexterity is modified. Also, the sample used in this study contains only large publicly listed corporations from one industry and from two countries with relatively few annual reports investigated. To increase the generalizability of the results, different industries, multiple countries from AEMs from different time period would provide fruitful additions to the findings of this study. Especially, since this study measured the effects of the firms between 2007-2011, the world economy was going through highly turbulent times due to the financial crisis of 2008. Thus, indicating greater than the normal variance in the financial performance of the firms.

The utilization of CATA provides its own limitations as a method to capture firms’ exploitation and exploration strategies (McKenny et al., 2016). This study used “Wordstat” software to capture ambidexterity. McKenny et al. (2016) suggests that researchers should use at least two software’s and manually check some of the ambidexterity results derived from annual reports. However, since Wordstat is considered as one of the most recognized software tools in content analysis, I am confident of the reliability of the ambidexterity scores. McKenny et al. (2016) also suggest several tests to overcome the suspicions regarding CATA and its reliability as an instrument (e.g., tests to tackle the issues regarding the transient error, specific factor error, and algorithm error). By conducting all of these tests in future studies, the validity and reliability of the results in this paper will increase.

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functionally diverse board of directors and how their varying knowledge base can be beneficial for the firm, while Piekkari et al. (2015) emphasize the role that board of directors plays in setting processes that enhance the firm’s performance. Also, additional analyses on other cultural dimensions such as power distance, masculinity and long-term orientation of the people (Hofstede, 1993) would provide additional generalizability regarding the impact of country of the firm and the culture of its people on firm’s ability to reap the benefits of being ambidextrous.

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Appendix A

Table 1: Search dictionary for content analysis

Exploitation

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Appendix B

Table 4: Additional descriptive statistics

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Ambidexterity in Asian Emerging Markets