Master Thesis
The Impact of Top Management Team Characteristics on
Firm Performance in Developed and Emerging Countries and
the Moderating Effect of Home Country Formal Institutions
A comparative Study between
Dutch, German, Brazilian and Indian MNE´s
Handed in by Finn Hoellen B7067871 (Newcastle) S3615979 (Groningen) For the Double Degree in
M. Sc. Advanced International Business Management (Newcastle) M. Sc. International Business and Management (Groningen)
Supervisors University Submission Date
Master Thesis
The Impact of Top Management Team Characteristics on
Firm Performance in Developed and Emerging Countries and
the Moderating Effect of Home Country Formal Institutions
A comparative Study between
Dutch, German, Brazilian and Indian MNE´s
Abstract
I At first, I would like to express my appreciation to my supervisors, Dr. Gubbi (University of Groningen) and Dr. Jha (Newcastle University). Their critical, but always constructive and qualitative feedback added high value for the entire process of this master thesis. Further, a very special gratitude goes out to all the people I have met during the program for an unforgettable and magnificent experience.
III
Figure 1: Conceptual Model ... 19
Table 1: VIF Values – Emerging Country set ... 28
Table 2: Descriptive Statistics ... 30
Table 3: Correlation Matrix Emerging Country Set ... 34
1 1 Introduction
Understanding the performance consequences of a diverse top management team (TMT) is widely recognized as a seminal issue in strategic management, given the increasing importance of top executives for firms’ strategic choices and the ability to anticipate and respond to environments (Carpenter et al., 2004). Over the past three decades, numerous empirical studies in management and international business have examined the performance effects of various TMT characteristics presenting positive as well as negative and nonsignificant linear impacts (e.g. Wiersema & Bantel, 1992; Earley & Mosakowski, 2000). Unfortunately, scant studies explore the role of TMT diversity aspects on corporate outcomes in an emerging country context. Instead, the main focus of the TMT diversity literature has been on developed western countries, primary the United States, with little to no attention paid to different contextual settings (Glunk et al., 2001). Given its potential to account for variation in the world economy, it is striking that the Upper Echelon perspective has marginally been empirically applied to emerging markets or more general contextual frameworks. Therefore, it is vital to analyse if and how top management team background characteristics influence firm performance in various contexts, specifically emerging markets.
2 with respect to moderators that may influence the relationship between team diversity and corporate outcomes.
The limited attention paid to the role of home country formal institutions on the TD – FP relationship is surprising, given that IB research has firmly established the importance of institutions for firms’ strategies and outcomes (Peng et al., 2008). To understand the effects of home country formal institutions with respect to the TD – FP relationship, the study focuses on the Upper Echelon and institution-based views in strategic management. In this regard, the ability and effectiveness of an organization to anticipate and respond to opportunities or challenges depends heavily on how its TMT triggers and interprets strategic issues (Nielsen, 2009). Moreover, a firm’s strategy is a product of its home country's institutional profile, defined as ‘the set of all relevant institutions that have been established over time, operate in that country, and get transmitted into organizations through individuals’ (Kostova, 1997, p. 180). Although the institution-based view of international business has gained momentum in the literature, studies investigating the effect of formal home country institutions on companies’ performance are still incipient (Peng et al., 2008). Recent literature, however, acknowledges that companies emerge from and have to react to heterogeneous institutional contexts and that strategies and performance may be influenced by the home country institutional context (Marano et al., 2016).
Hence, this paper will add to existing literature by specifically comparing TMT diversity aspects in developed and emerging countries and the moderating effect of home country formal institutions in order to show the distinct effects on firm performance. Therefore, the following research question is being addressed:
3 Empirically, this study uses multiple regression analysis in order to examine the posited hypotheses about the effects of diverse TMT characteristics and the moderating influence of home country formal institutions on firm performance. Specifically, an analysis of a sample of 120 companies from two developed (Germany, Netherlands) and tow emerging (Brazil, India) countries, based on their employee size, is carried out. By expanding the research area into emerging markets this study enables a comparison between heterogeneous TMTs operating in various contexts. Additionally, the moderating influence of home country formal institutions on this relationship is explored for both contexts.
4 2 Literature Review
Aligning with the fact that organizations and their management have become increasingly heterogeneous in terms of their demographic composition (Homan et al., 2008), an extensive body of literature indicates the advantages of TMT diversity for firm performance. However, the literature review of the effects of individual TMT diversity aspects on organizational performance does not show consistent results, leading to the question of intervening moderators and mechanisms. Indeed, most extant research in this field has been examined under the scope of developed countries, especially the United States (Escriba-Esteve et al., 2012), making the extension of the theory into an international context and, thus, the generalizability at least questionable. Inspired by the idea that the embeddedness of the Upper Echelon theory in a national or institutional context is limited, this study aims to compare individual TMT diversity aspects and their influence on firm performance within a developed and an emerging country set. Moreover, it examines whether the relation TMT Diversity – Firm Performance is contingent upon home country formal institutional effects.
2.1 TMT Characteristics and Firm Performance
5 (Finkelstein & Hambrick, 1996), and performance levels (Nielsen & Nielsen, 2013; Acar, 2016). Therefore, it is argued that the characteristics and functioning of the top management team have far greater potential for predicting organizational outcomes than do the characteristics of the chief executive officer (CEO). At the core of TMT heterogeneity research stands the theoretical argument reasoning that high levels of diversity among work groups lead to improved performance (Nielsen, 2010). Often referred as the information-decision-making perspective, this approach underlines that heterogeneous TMTs possess a larger resource base, including knowledge and cognitive resources, which increases problem-defining and -solving skills (Hambrick et al., 1996) and ultimately has the potential to enhance organizational performance. Recent literature provides evidence and describes the benefits of this collective approach as advancing the strategy field past methodological individualism (Bolden, 2011). For instance, Sanders and Carpenter (1998) argue that, particularly in the context of differing environmental conditions, national diversity in executive backgrounds increases the information-processing capacity of the top management team.
6 organizational outcomes, criticism (Lawrence, 1997) and recent literature cite a fervent need for inquiry into intervening processes. These scholars argue that previous Upper Echelon research is lacking other determinants (processes) of their behaviour and moderators or mediators in this relation, defined as the ‘Black Box’ of the UE theory (Carpenter et al., 2004). Scholars such as Denis et al. (2001) and Smith et al. (1994) explicitly call for the need for an improved understanding of the environmental context and it´s mechanisms and processes by which TMT characteristics shape firm outcomes. In particular, the institutional environment has been identified by these updated models as an important antecedent of TMT characteristics, but as well as a moderator in the relation TMT composition – organizational outcomes (Carpenter et al., 2004; Finkelstein et al., 2009).
7 2.1.1 TMT Educational Diversity and Firm Performance
Compared to gender or age characteristics, the educational background can be categorized as a task-oriented diversity construct, reflecting the heterogeneity of specialised expertise within a TMT (Talke et al., 2011). Educational diversity is argued to drive firm performance by increasing from the richness of various information, knowledge and professional perspectives (Bantel & Jackson, 1989). Addressing the association between demographic diversity of top managers and firm performance, numerous scholars have, thus, included educational diversity as one of the key background characteristics of Upper Echelons and linked to various aspects of firm outcomes (Hitt & Tyler, 1991; Wiersema & Bantel, 1992; Dahlin et al., 2005).
8 therefore, may be beneficial in the increasingly complex business environment, requiring a wide array of specialised knowledge (Plessis, 2007), as top management teams need to cope with multiple dimensions of business decisions. In this regard, the educational diversity of a top management team and its impact on expertise and information processing may be helpful in developed and emerging countries. However, in developed countries functional expertise may rather be relevant for state of the art innovations and value adding chains, leading to competitive advantages (Blome et al., 2014). In contrast, Khanna et al. (2005) provide evidence that companies in emerging markets need ‘a different genre of innovation’ (p. 5), arguing that these TMTs require different strategies than those in developed countries. Characterised by unstable and dynamic markets and environments (Purkayastha et al., 2012), companies from emerging countries may benefit from a functional diverse TMT due to the ability to formulate appropriate strategies fitting to the environment. Based on the above argumentation, it is argued that educational background diversity leads to higher firm performance in both, developed and emerging countries. Hence,
9 2.1.2 TMT National Diversity and Firm Performance
Given the fact that large firms nowadays operate in multiple countries (Kostova & Zaheer, 1999), it is not surprising that the strategic management literature presents a recent interest on the impact of a diverse top management team in terms of their national background. In contrast to educational background, providing specialised task-oriented expertise, the nationality determines the mind-set and perception that executives have to certain aspects of the world around them (Earley, 2006). Therefore, it was chosen to represent the category of relation-oriented diversity characteristics.
10 Particularly in developed countries with strong Corporate Governance regulations, a TMT´s national diversity is considered as a major source of enhancing firms' proficiency and productivity (Jindal & Jaiswall, 2015). In this regard, studies found that the inclusion of national minorities on the executive team can improve a firm’s public image and signal diversity within the firm (Zhang, 2012). These factors, in turn, have as well been found to improve the performance and market value of the respective organisation (Rose & Thomsen, 2004). However, firms in emerging markets as well indicate the advantages of multinational TMTs. For instance, Harvey et al. (1999) argue that in emerging markets the context-specific social knowledge brought about by foreigners and non-foreigners becomes the strategic value-adding mechanism to differentiate firms.
However, studies taking a social identity perspective suggest that national diversity may as well result in costs for team dynamics. Due to the fact that nationality is highly connected to communication patterns and interaction styles, multinational teams may experience affective conflict, lower cohesiveness, and slower decision-making (Hambrick et al., 1998; Earley & Mosakowski, 2000). Moreover, scholars like Richard et al. (2007) provide evidence that national diversity increases in-group/out-group formation which may reduce organizational effectiveness and, ultimately, performance. This may be especially relevant in emerging markets, where, as indicated by the results from Mahadeo et al. (2012), executives may rather not be used to work with foreigners. Nevertheless, Elron (1997) found that while national cultural diversity may increase issue-based conflict, it is positively related to overall team and subsidiary performance. Therefore, on balance, the benefits associated with national diverse top management teams, like enhanced creativity and problem solving, are likely to outweigh critical arguments. Accordingly,
11 2.2 Home Country Institutions and Firm Performance
In the last decade, scholars have recognized the influence of institutional theory aspects, diverting the academic discussion on TMT diversity and its effect on firm performance in a new direction. While attempts to explain the mixed findings of the TD – FP relation have examined a variety of firm-, industry- and host country-level factors, scarce attention has been paid to the role of firms’ home country institutional environment (Chen et al., 2018). Given the point of view that home country institutions help shape the firms’ strategies and their ability to succeed at home and abroad (Marano et al., 2016) by influencing transaction costs and managers’ abilities to implement strategic actions (Tan & Chintakananda, 2016), this finding seems surprising.
12 characteristics affect the ability of firms to utilize and exploit their assets (e.g. Batjargal et al., 2013) and have indicated that these home country institutions also directly affect firm performance (Peng et al., 2008). However, while home country environments shape the direction and the economic course of action for organizations, the impacts of this institutional dimensions are far from being fully understood (Chen et al., 2018).
13 2.3 The Moderating Effect of Home Country Formal Institutions
Formal institutions, as defined by Hodgson (2006), are a multidimensional concept including aspects such as political, economic and legislative systems having an impact on how the organization operates. According to scholars like Roy and Oliver (2009) and Aldashev (2009), political and legal institutions are two key home country institutions that play major roles in supporting the development of firms. Therefore, and following the approach from Tan and Chintakananda (2016), this study conceptualises home country formal institutions as an indicator that comprises aspects such as the political stability, the government effectiveness and the regulatory quality in the country where the respective firm has its operating headquarter. These dimensions decrease uncertainty, increase the availability of financial and other resources (Holmes et al., 2013) and support the full functioning of the market economy enabling corporate performance (Meyer, 2001). In general, formal institutions provide the framework of credibility and resources that organizations and their TMTs need for business transactions (North, 1990; Monticelli et al., 2018).
Scholars, like Feng (1997, 2001) and Alesina et al. (1996), argue that political stability leads to greater certainty in governmental policies and allows predictability for TMTs and, thus, to develop long-term strategic actions. Secondly, a stable political environment is positively associated with the increased usage of market resources and the economy, since political institutions are primarily related to the credibility and effectiveness of a countries bureaucratic infrastructure (Aisen & Veiga, 2011). This implies that TMTs have easier access to resources, which enhance the ability to implement appropriate strategies to fit the external environment.
14 of others and allow actors to make credible commitments (Marano et al., 2016). Therefore, these dimensions have an impact on the effectiveness of transactions between firms and other players as well as the availability of resources. In this context, scholars have found that improved laws and regulations lead to a more efficient environment (Dutz & Vagliasandi, 2000). Further, an environment with a transparent and high regulatory quality mitigates the risks taken by the agents who provide funds for firms (Estrin et al., 2018). This facilitates access to financial and other resources, being a key resource and factor for implementing strategies and, thus, performance (Rajan & Zingales 1998).
In sum, developed countries, characterized by better-developed home country formal institutions, possess strong national economies and environments that can provide more tangible and intangible resource and business support for TMTs to develop and employ strategic resources and skills, and, thus, possess competitive advantages (Kirca et al., 2011). This is in line with the idea from Batjargal et al. (2013) proposing that an environment, characterized by high formal institutions, may be helpful for the firm to better exploit resources and assets in favor of the firm´s strategies. The availability and utilization of present resources in the economy allows diverse TMTs, therefore, to generate higher efficiencies which may result in a greater ability to achieve high firm performance. This implies that high-quality formal institutions generate an environment which enhances the positive effects of TMT diversity on firm performance.
15 resources that could have been used for implementing strategies and, thus, the efficiency and outcomes although the TMT may possess high cognitive skills. The findings from Qian et al. (2013) support this idea, giving evidence that a highly uncertain environment is likely to make a TMT less capable of implementing innovative ideas. This approach is based on Whitley’s (1992) conceptualization of cross-national institutions arguing that institutions differ across countries generating nationally distinct ‘business systems’. LiPuma et al. (2013) encourage this concept, arguing that the quality of formal institutions across countries is not uniformly distributed. Indeed, researchers give evidence that formal institutions tend to be less robust in emerging countries than in developed ones (Meyer et al., 2009).
16 2.3.1 TMT Educational Diversity and Home Country Formal Institutions
When determining the moderating effect of home country formal institutions on the relation TMT Educational Diversity – Firm Performance, the previous assumptions in regard to educational diversity are followed. At first, firm performance is assumed as a function of how well the top management team addresses both internal and external sources of complexity and their ability to plan and implement appropriate strategies to fit the international environment (Tan & Chintakananda, 2016). Further, educational background diversity is argued to be highly important, since it allows a broader scope of task-relevant perspectives being applied to strategic choices (Talke et al., 2011). Providing a framework for categorizing information and broad task-related knowledge (Dahlin et al., 2005), it has been hypothesized that a heterogeneous TMT in terms of education constitutes a valuable resource when reaching strategic decisions. The strategic decision-making process of an educational diverse TMT may be enhanced by strong home country formal institutions, providing a high efficiency environment.
17 capability development and implementation process of highly knowledge-specific strategies, created by an educational diverse top management team. Moreover, since high levels of regulatory effectiveness encourage firms to invest in more specific assets, and contractual rights make firms’ assets less imitable or substitutable by competitors (Batjargal et al., 2013; Tan & Chintakananda, 2016), these highly strategic and tactical decisions may be more feasible. Based on the above argumentation, home country formal institutions may have a moderating effect on the relation TMT Educational Diversity – Firm Performance. Therefore,
18 2.3.2 TMT National Diversity and Home Country Formal Institutions
As argued above, particularly from countries with strong Corporate Governance regulations, the TMT´s national diversity is considered as a source of enhancing productivity (Jindal & Jaiswall, 2015). Possessing deeply anchored differences in cognitive frameworks and mental models (Stahl et al., 2010), it is postulated that a heterogeneous team in terms of nationality engages in in-depth discussions and the consideration of various alternatives (Hambrick et al., 1998). A strong formal institutional environment may enhance the efficiency of a multinational top management team. Reducing the uncertainty about the behavior of actors and creating predictability of outcomes (Marano et al., 2016), such an environment may stimulate in-depth discussions and the consideration of various alternatives allowing to incorporate divergent experiences and approaches. Moreover, the inclusion of heterogeneous mind-sets and approaches may be enhanced by a political stable environment. Since political stability produces strong national economies and environments that provide resource and business support (Kirca et al., 2011), this may allow a multinational TMT to incorporate various experiences implementing the most efficient strategies.
19 2.4 Conceptual Model
Based on the provided theoretical context and the posited hypotheses, the following conceptual model was conceived. First of all, the conceptual model illustrates the proposed positive relationship between the independent variables of top managemen team diversity in terms of educational (H1) and national (H2) diversity on firm performance. Figure 1, further, displays the postulated moderating effects of home country formal institutions (H3a, H3b) in regard to the influence of the two individual diveristy characterisitcs on firm performance examined in this study.
20 3 Methodology
The research methodology is chosen in alignment with the ‘Research Onion’ (p. 138), introduced by Saunders et al. (2009). To formulate an effective research methodology, a positivist approach has been deployed with the assumption that the reality is examined objectively and universal propositions can be deducted and tested (Burrell & Morgan, 1979). This implies that the researcher observes the world in a value-neutral and external way and avails this position to the data collection process. In line with a deductive research approach, the proposed hypotheses are built upon existing theory. The data collection can be carried out in order to test the hypotheses after the underlying concepts are converted into variables. This kind of research methodology is chosen, as the study aims to process and analyze secondary data using a quantitative empirical model (Crowther & Lancaster, 2009). In order to reveal the relationship between the variables, a multiple regression analysis will be carried out.
3.1 Sampling and Participants
21 for the emerging-country group set, providing a stabile foundation for comparison. Given the rule that a sample should include at least 10 observations per variable, 60 observations should be the minimum sample size to account for two independent, one moderating, and three control variables (Harrell, 2001). In order to generate a representative sample, it is, therefore, suggested to gather data from the biggest 30 publically listed companies from each country in regard to firm size. As a result, the research is based on a sample of 60 companies for the emerging and the developed country context, composed on ORBIS (Bureau van Dijk).
Relying on secondary data to test the derived hypotheses, the data collection process consisted of two main steps. First of all, in order to obtain valid data on firm performance, the database ORBIS (Bureau van Dijk) and the company’s annual reports were employed. The second step, the gathering of each individual TMT member background characteristics, portrayed the more time-consuming activity. Since there is no existing up-to date database on executives educational and national background characteristics (especially for the emerging country set), a total of 704 curricula vitae were thoroughly analyzed. In this regard, data for these TMT diversity aspects was gathered from companies' annual reports, corporate websites, and Bloomberg.
22 Upper Echelon research concerned with strategic outcomes (Wiersema & Bantel, 1992; Finkelstein & Hambrick, 1990). The following sections will elaborate on the measurement and data source of each individual variable in more detail.
3.2 Dependent Variable – Firm Performance
Since the data sets comprise firms from various industries, Return on Sales (ROS) was applied to measure firm performance, equalling operating profit divided by net sales. Following previous TMT research (Murray, 1989; Smith et al., 1994; Terjesen et al., 2016), Return on Sales (ROS) serves as a highly valuable indicator to apply for firm performance as the dependent variable. Moreover, ROS is used as a measure of competitive advantage that avoids biases in accounting method and as a perceptible measure of firm performance which executives are likely to drive towards in large firms (Shrader et al., 1997; Audia et al., 2000). As a robustness test, the dependent variable was exchanged with Return on Assets (ROA) which is the ratio of net income to the book value of the firms’ assets. The accounting-based ratio has been suggested to be one of the most comprehensive measures of firm performance is commonly used in studies of board composition (e.g., Easterwood et al. 2012; Terjesen et al., 2016).
Since a data set that includes only listed companies is applied, the firms are generally obliged to adopt International Financial Reporting Standards (IFRS) or U.S. generally accepted accounting principles (GAAP) when disclosing their accounts (Ball, 2006). As such, the issue of comparability between the ROS of different countries is negligible.
23 antecedent and dependent variables to ensure that these effects are captured accurately (e.g. Keck, 1997; Geletkanycz & Hambrick, 1997). In order to ensure that this temporal precedence is given and avoid the mentioned problems with causality of the studied relationship (Hambrick, 2007), a one-year lag structure between the dependent and the independent variables was chosen for this study.
3.3 Independent Variables – TMT Demographics
In this paper, two top management team diversity characteristics, namely education and nationality, were applied as independent variables. In contrast to previous literature (Erhardt et al., 2003; Talke et al., 2011), this study does not rely on combined diversity scores, as this may mask the true effects of each element of diversity (Mahadeo et al, 2012). Moreover, following the prior theoretical argumentation, diversity in this study constitutes variety rather than separation or disparity (Harrison & Klein, 2007). Therefore, after gathering the characteristics of each top management team for the year 2016, the heterogeneity level for the two independent variables was determined with the help of Blau‘s Index (Blau, 1977). Considered as a well validated measure of heterogeneity, Blau‘s index measures the proportion of each specific characteristic within the TMT. The index captures the dispersion of team members across all possible categories of a certain dimension using the formula:
Heterogeneity = (1 − å$%&),
24 3.3.1 TMT Educational Diversity
As described above, educational diversity is computed in a conventional fashion, using Blau´s index of heterogeneity (Blau, 1977). Therefore, executives' educational backgrounds were classified for the entropy-based measure regarding their educational field of studies. As a next step, the educational diversity level of the TMT was computed based on the classification of each TMT member according to their field of study and it´s frequency within the TMT.
3.3.2 TMT National Diversity
National diversity refers to the degree of different nationalities within a top management team (Staples, 2007). To quantify heterogeneity in national backgrounds, the same entropy based index of dispersion was used as already applied for educational diversity. In this regard, data on the national background of each member of a top management team was gathered. After this, the TMT´s national diversity was computed based on the frequency of nationalities within the respective TMT.
3.4 Moderator Variable – Home Country Formal Institutions
25 two key home country institutions which play major roles in supporting the development of firms. The index may further be justified, as the chosen WGI dimensions identified by Kaufman et al. (2010) are highly correlated between each another. Lastly, based on an analysis of several hundreds of variables measuring aspects of governance quality in 213 selected countries, the WGI´s are well-recognized institutional and environment indicators and widely used in recent studies on the impact of institutions on firm outcomes (Cantwell et al., 2010; Slangen & Beugelsdijk, 2010).
3.5 Control Variables
In order to minimize the possibility of alternative explanations and extraneous influences in the model, it was decided to include the following control variables. According to previous studies of organizational performance firm size, firm age and industry type were added as control variables. These variables have been frequently identified as factors that can influence organizational outcomes (e.g. Finkelstein & Hambrick, 1996; Miller et al., 1998) and will be explained in the following.
3.5.1 Firm Size
26 3.5.2 Firm Age
While there is no spurious correlation when it comes to firm age and performance (Coad et al., 2018), the age of a firm appears to be a relevant variable when analysing firm performance. A more experienced firm may have built up resources, capabilities and networks and employs the benefits of learning alleviating the effect of market changes (Cucculelli, 2017). Moreover, Pellegrino (2017) finds that young firms seem to be more affected than mature ones by shortages of financial resources while Radipere and Dhliwayo (2014) give evidence that older firms have good relationships to financial resources, leading to better firm performance. Thus, firm age may affect firm performance and was measured by the number of years since the companies’ foundation.
3.5.3 Industry Type
27 3.6 Empirical Data Analysis
The suggested hypotheses were evaluated using IBM SPSS Statistics (Version 23). As the study examines multiple independent variables to explain one continuous dependent variable, a multiple linear regression analysis based on the ordinary least square (OLS) method was applied. Moreover, since this thesis inhibits moderation effects, the independent variables and the moderator were mean centered. Before conducting the main regression analysis, the preliminary requirements for linear regression were tested to ensure an adequate interpretation of the regression results.
As a first step, the data was tested for potential outliers. Potential outliers are observations with discordant values having the potential to influence the results of a regression model if not detected and modified (Cousinesau & Chartier, 2010). Following the approach from Wilson (1993), the statistical test ‘Cooks Distance’ should be applied in the case a model portrays multiple independent variables. Since all of the values were below 1.00, the dataset seemed to contain no outliers.
Linearity presents another requirement for a linear regression. With the help of scatterplots the correlation among the independent and dependent variables was observed, to ensure that the data does not create non-parametric, non-linear effects. In this regard, scholars evaluate scatterplots as especially useful, as the datasets for the two country groups are rather small. The optical examination suggested that linearity was given.
28 correlated with each other, the separate effects on the dependent variable can hardly be identified. This condition was statistically evaluated with the variance inflation factor (VIF). Some scholars argue that the VIF values must not be higher than ten, others classify VIF values higher than 5, as an indicator for multicollinearity (O’Brien, 2007). Since all values in the emerging and developed country set were even below 5, multicollinearity was not given (See Table 1 below and Appendix B, Table 1).
Table 1: VIF Values – Emerging Country set
Independence of errors was tested by using a Durbin-Watson test to show whether there is autocorrelation between the error terms. With an accepted range between 1.5 and 2.5, the results of the test statistic were close to a value of 2 (Field, 2009). Therefore, the requirement of independence of errors was fulfilled (See Appendix B, Table 2a and 2b).
29 3.7 Robustness Test and Post Hoc Analysis
30 4 Results
After having tested the preliminary requirements for a multiple regression analysis, the results of the two data sets are presented in this section. At first, the descriptive statistics and the correlation of the data are outlined. Afterwards, the results of the regression analysis in order to test the hypotheses are described.
4.1 Descriptive Statistics
The descriptive statistics of the dependent, independent and control variables are presented in Table 2. The 120 sampled companies originate from two developed countries (Germany and the Netherlands) and two emerging countries (Brazil and India), each being represented by 30 companies per country.
Table 2: Descriptive Statistics
31 4.1.1 Emerging Country Sample
The emerging country sample encompasses data of 349 top management team members creating a dataset of 698 background characteristics. The educational background diversity of executive boards in emerging countries ranges from 0 to 72.20% (Mean=48.18%; SD=18.49%).
32 4.1.2 Developed Country Sample
33 4.1.3 Correlations
The correlation matrix for the emerging country set is presented in Table 3 and for the developed country set in Appendix C, Table 2.
In the emerging country sample, both independent variables, Educational Diversity and National Diversity, do not seem to correlate significantly with Firm Performance measured through ROA. Moreover, all chosen control variables show no significant correlations to the dependent variable. However, it is noticeable that National Diversity appears to significantly correlate with the moderating variable Home Country Formal Institutions and Industry Type in the emerging country set. This observation may indicate that foreigners may be preferred in certain types of the industries.
35 4.2 Regression Results – Emerging Country Set
As mentioned above, the control variables, the two independent variables and the moderator are separately analyzed in order to structure the process and examine the individual effects on firm performance. The results of the OLS regression are presented in Table 4 and Appendix D.
First, the effects of the three control variables on firm performance are tested in Model 1. The control variable Industry Type has significant explanatory power on the dependent variable in this sample (p≤.05). While Firm Size (B=.058; p=.645) and Firm Age (B=.139; p=.275) have no effect and might create unnecessary variance in the Model, both are not dropped out of the regression model. This is justified with the fact that the control variables might impede other disruptive factors.
To test hypothesis 1, the independent variable Educational Diversity is separately added to the control variables in Model 2. When examining the results, Educational Diversity portrays no significant effect in this model .062; p=.636) as well as in Model 4 (B=-.062; p=.639) at a significant level (p≤.1). Hence, Educational diversity does not seem to impact firm performance and hypothesis 1 finds no support.
As a next step, hypothesis 2 and the impact of National Diversity on firm performance is assessed in Model 3. However, the hypothesis is not confirmed, as the independent variable National Diversity does not show significant effects in this model (B=-.004; p=.979). This is confirmed in Model 4 (B=-.004; p=.978). Due to the weakness and instability of the effect, hypothesis 2 is rejected.
36 an Adjusted R Square value of .003 (F=1.041; p=.403), the results should be interpreted with caution.
38 4.3 Comparison – Regression Results Developed Country Set
The results of the regression analysis of the developed country set generally seem to be congruent with the emerging country set (See Appendix D).
In Model 1, the non-significance of the control variable Firm Size is confirmed (B=.058; p=.645). In contrast to the emerging country set, Industry Type has continuously a significant effect on firm performance (p≤0.05). Moreover, while Firm Age has a significant effect in the emerging country set, the control variable shows a non-significant effect in the developed country set. The significance of Educational Diversity is tested in Model 2 (B=.176; p=.165) and Model 4 (B=.178; p=.178). Confirming to the non-significant results from the emerging country set for this independent variable, hypothesis 1 is rejected. Further, National Diversity also does not show a significant effect on firm performance in Model 3 (B=.039; p=.764) and regression Model 4 (B=-.008; p=.950). Aligning with the emerging country set, this result supports to reject hypothesis 2.
In contrast to the emerging country set, the direct effect of the moderator Home Country Formal Institutions in Model 5 is significant (B=.270; p=.090). However, it becomes non-significant in interaction with the independent variables (B=-.506; p=.309). Moreover, the interaction with Educational Diversity seems to be positive in the developed country set (B=4.253; p=.327) while with National Diversity negative (B=-4.410; p=.252), opposing the findings from the emerging country set. However, these results should again be interpreted with caution, as both interactions are non-significant. As a result, hypotheses 3a and 3b are both rejected aligning with the findings from the emerging country set.
39 4.4 Robustness Test and Post Hoc Analysis
The robustness test and post hoc analysis seem to be generally consistent with the results of the main analysis. At first, applying Return on Assets as the dependent variable, the control variables Firm Age and Firm Size present non-significant effects while Industry Effect seems to have an effect in the developed country set (p≤0.05). Model 2 and 3 confirm the decision to reject hypotheses 1 and 2, since the independent variables Educational (EM: p=.362; DE: p=.746) and National Diversity (EM: p=.922); EM: p=.629) present non-significant results. However, the robustness test depicts a difference when looking at Model 5 in the developed country set showing a non-significant direct effect of the moderator Home Country Formal Institutions (B=-.052; p=.761). Moreover, the interaction Educational Diversity X Home Country Formal Institutions presents a significant effect for the developed country set (B=9.337; p=.047). Lastly, the interactions with National Diversity (EM: p=.553; DE: p=.382) continues to be insignificant in Model 6. As a result, the decisions to reject hypotheses 3a and 3b are partially supported. Taken all findings together, apart from hypothesis 3a, the analysis using Return on Assets as the dependent variable confirms the results from the main regression analysis (See Appendix E, Table 1 and 2).
40 5 Discussion
The key objective of this study is to contribute to the field of research on the influence of top management team diversity on firm performance by examining the effects of educational and national aspects within emerging and developed country sets. In order to compare these diversity dimensions, top management teams from two developed and two emerging countries and the inherent home country formal institutions have been analysed. By including an emerging country data set and, secondly, investigating if home country formal institutions have a moderating effect on the discrete independent variables, this thesis aims to expand the knowledge of Upper Echelon theories and its applicability.
41 5.1 Independent Variables
Contradictory to prior expectations, Educational Diversity shows non-significant results for the emerging and developed country set. This is in line with prior studies like Smith et al. (1994) arguing that educational heterogeneity does not have an impact on corporate outcomes. Thus, the market context appears to be indifferent to the influence of educational diversity in top management teams. Furthermore, the emerging country set shows even negative effects. These findings may be reasoned, as other factors like work experience may be a better indicator for task-related and, thus, specialised specific knowledge (Quinones et al., 1995). Another explanation for the non-significance in both country groups may lay in the idea that different expertise and experiences imply different specialized opinions about a certain situation. These different opinions can cause conflicts within the top management team. Although conflicts can lead to new and innovative ideas, they can also negatively affect the team collaboration and consequently the efficiency (Curseu et al., 2012).
42 Another explanation may lay in the idea that foreign managers have adapted to the cultural environment of the respective corporation (Ang et al., 2007). Since the measurement only includes origin of birth, but not the time frame an executive has been exposed to the new cultural or the previous experiences, both listed factors may be better proxies in order to determine the actual effect of national diversity.
5.2 Moderating Variable
The hypothesized positive moderating effect of Home Country Formal Institutions on the diversity aspects of top management team members on firm performance is not supported by this study. Further, the results are congruent within the conducted country context analyses.
First of all, the data (Model 5) does show a significant direct effect of Home Country Formal Institutions on firm performance in the developed country set, but a non-significant direct effect in the emerging country sample. This finding aligns with previous literature (e.g. Khanna & Palepu, 2010), arguing that formal institutions have a direct impact on firm performance in developed countries, while in emerging countries for instance informal institutions have a higher magnitude for corporate outcomes. Consistent with this, Peng and Heath (1996) show that in situations whereby formal institutions are weak, informal institutions rise to play a larger role in driving firm strategies and performance. Moreover, Tan and Meyer (2010) prove that firms from countries with lower levels of institutional development develop and rely on capabilities such as personal relationships.
43 that low formal institutions do not significantly influence the relation between TMT educational diversity and firm performance. Therefore, one can argue that the home country formal institutional context appears to be indifferent on its impact on educational diversity and firm performance. Moreover, Home Country Formal Institutions do not seem to influence the relation from National Diversity on firm performance in the emerging country context, presenting non-significant results. Since the developed country context, however, as well presents non-significant results, this may be an indicator that the quality of home country formal institutions does not interact with National Diversity. The above argumentation outlining that a strong formal institutional environment may enhance the efficiency of a multinational top management team may therefore be rejected. Therefore, one can argue that the home country formal institutional context appears to be indifferent on its impact on national diversity and firm performance.
44 5.3 Control Variables
Lastly, the control variables show interesting effects. In the emerging country context Firm Age shows significant effects on firm performance. Given this empirical finding, it aligns with previous literature arguing that the age of a company positively influences firm performance through corporate learning and its sophisticated place in the business environment (Radipere & Dhliwayo, 2014). The finding that none of the other control variables, however, has a significant effect on firm performance in the emerging country sample, suggests that other factors must interplay with firm performance in respective countries. This aligns with previous literature, suggesting that firm performance in emerging markets depends heavily on factors like ownership structure (Lemon & Lins, 2003) or other macroeconomic variables (Rehman et al., 2014).
45 6 Conclusion
This study takes a small step in advancing the understanding of the relation between TMT diversity aspects and firm performance and the moderating effects answering the research question: Does TMT Diversity influence Firm Performance in Emerging and Developed Countries, and if so is this relationship moderated by Home Country Formal Institutions? By expanding the research area into an emerging country context, the study enables a comparison between TMT diversity aspects and their influence on firm
performance in developed and emerging countries. It also explores whether home country formal institutions have an impact on this relation. Derived from the provided literature and the discussed findings of the conducted study, this section presents several relevant implications for theory as well as managers, operating in developed or emerging country contexts. Finally, the limitations of this study in connection with an outlook for future research are enumerated.
6.1 Managerial Implications
The findings of this study have some important implications for management practice. Based on the findings in this study, diversity aspects in terms of education and nationality may be overrated or should at least be carefully interpreted. The results show that the chosen diversity aspects in top management teams do not have an effect on the financial performance of a firm whether in a developed or in an emerging country. Additionally, the selected and proved control variables likewise do only partially have an effect on firm performance in the emerging country group.
Therefore, it may be advisable for companies to rather focus on other aspects than diversity in the top management team or at least on other types of diversity when composing their executive suites. For the recruitment process, this would imply to rather look at
46 Another approach when assembling their TMTs would be that firms should rather focus on appointing high-quality individuals than striving to increase diversity in order to ensure the best organizational and environmental fit and, thus, increasing their financial performance. Moreover, since Industry Type showed in all models from the developed country group positive and significant effects, decision makers may enhance the firm performance through fitting firm and TMT capabilities to the operating industry. Lastly, home country formal institutions seem to have a direct effect on firm performance in developed
countries. Therefore, policy makers may encourage the preservation of these factors in respective countries. In contrast, in the emerging country set home country formal
institutions seem to have an insignificant direct effect on firm performance, indicating that managers may rather focus on informal institutions. This follows the approach from Peng and Heath (1996), arguing that in situations whereby formal institutions are weak, informal institutions become a key determinant for firm strategies and performance.
6.2 Theoretical Implications
This study has several significant theoretical implications to advance the knowledge of the Upper Echelon theory underlining the importance of this research.
47 of performance may lead to variations of results. Moreover, these observations also support the approach from Harrison and Klein (2007) to examine diversity in separate effects and not as an aggregated index.
Secondly, the findings endorse research stressing that individual diversity aspects have only an indirect and low explanatory power on firm performance. Consistent with prior studies, the regression models, especially the emerging country group analysis, only explain a limited percentage of the variation which seems to be an import issue in Upper Echelon research. In line with scholars like Carpenter et al. (2004) and Denis et al. (2001), the findings support the idea of a ‘Black Box’ in the UE theory, arguing in favor of other determinants and moderators or mediators in the Diversity – Performance relation. As a result, although TMT diversity may not have an impact on firm performance in this case, it needs to be set and interpreted in the right context and it might be more conclusive in combination with other variables and mechanisms.
Finally, the study does not support the moderating effect of Home Country Formal Institutions on the relation TMT Diversity – Firm Performance. The emerging and
48 6.3 Limitations and Future Research
Looking at the findings of this study, these should be interpreted with consideration of the following limitations. However, the identified limitations might provide opportunities for future research.
At first, contributing to advance the understanding of UE theories by expanding to
emerging markets, the study sacrifices validity in terms of sample size by only focusing on TMT members from the 30 biggest companies in two developed and two emerging
countries. As a result, the sample for each country group consists of 60 companies
restricting the significance of the results and, further, may be rather representative for large firms in the respective countries. A sample consisting of small and/ or medium sized companies (SME´s) may present divergent results, since respective companies are often more dependent and connected to home country conditions (OECD, 2017). Moreover, as the study employs Germany and the Netherlands as developed and Brazil and India as emerging markets, the results may be audited by including more countries for each context. In this regard, future research could explore and compare the effects of TMT diversity aspects on firm performance in more environmental and institutional contexts, such as frontier markets.
49 Due to methodological issues, other important limitations may arise. While this study
acknowledges that the measurement of the TMT diversity aspects did not directly capture the differences in cognition between TMT members highlighted in the hypothesizing, such indirect measures are the norm in Upper Echelons research (Pisani et al., 2018). However, this limitation should be kept in mind. Moreover, the inclusion of educational and national backgrounds may not provide a powerful analytical construct. It may not completely deterministic as other diversity aspects and factors (e.g. age, gender, marital status, work and industry experience, team tenure) can influence an individual’s experiences,
knowledge and perspectives resulting in specific strategic decision-making. In this regard, this study argues that TMT diversity brings benefits to strategic decision-making,
ultimately resulting in firm performance. However, it does not formally measure strategic choice. Taken these two limitations together, future research may benefit from developing more fine-grained measures of top management team diversity constructs. Moreover, although the conceptual framework applied in this study investigated a non-significant moderator, it is likely that other important moderating variables exist (Horwitz & Horwitz, 2007). Future research may, thus, seek to explore other moderating and mediating
mechanisms (e.g. various strategic decisions) through which TMT diversity aspects influence performance.
50 performance (e.g. Geletkanycz & Hambrick, 1997), raising the opportunity for future
research to investigate this relation in emerging market contexts.
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