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Firm foreign expansion and internationalization of the boards
Master Thesis, MSc International Business and Management
University of Groningen, Faculty of Economics and Business
FINAL VERSION
February 2012
Author:
Andranik Ayvazyan, S1939270
Thijs Ouwekerkstraat 51, 2132ZW, Hoofddorp, The Netherlands
a.ayvazyan@student.rug.nl
Supervisor:
Dr. Kees van Veen
Co-assessor:
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Preface
This thesis is conducted as the conclusion and the final step of my study period at the University of Groningen and the MSc program of International Business and Management. This study program and the time spent in Groningen will be an unforgettable experience for me. I am sure the MSc program followed at RUG will have a very important contribution during my professional life.
I would like to express my deepest gratitude to my supervisor Dr. Kees van Veen for his valuable input, for his feedback, comments and guidance throughout the difficult, but extremely important period and moreover for triggering my profound interest in this research area.
I am very thankful to all the people, who have supported me during this long period, first of all my family, my friends, who always stood next to me in every questio n.
3 ABSTRACT
Analyzing 59 largest companies from emerging and developed economies, this study examines the nationality diversity within the corporate boards in the process of the company‟s foreign expansion. In contrast to other studies this research analyzes the diversity within boards not only at a specific moment of time, but analyzes its changes in the period of years 2004-2008. Despite previous findings that the level of company internationalization is positively related to the foreigners‟ ratio within the boards, we find that there is no significant relationship between the changes of international posture of the firm and the nationality diversity changes within the boards including both directorship types over the time. Next to this we don‟t find any evidence to support the idea that the firms from emerging economies will be willing to employ more foreign directors in the process of international expansion in order to be able to deal with environmental difficulties. Moreover we show that even if the firms decrease the level of their global presence they don‟t lay off the foreign directors and even more hire new foreign directors to the corporate boards.
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Introduction
A scholarly interest in the boards emerged in the last decade s and has pronounced ever since (Finkelstein et al. 2009, p. 227). The recent years have witnessed a growing body of work which has outlined a number of robust conclusions. Along with this still many significant problems remain in this field, especially how certain characteristics of t he boards‟ composition and strategy of the company are related.
Although boards have an important role in the corporate strategic orientation of the firm (Kosnik, 1990), especially in the internationalization process, there are very few studies that connect the foreign expansion of the firm and ce rtain characteristics of the board composition to each other. (Rivas et al, 2009)
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Along with this over the past decade there has been a growth of interest in managerial background characteristics that had previously drawn little attention: natio nality diversity of the directors in the corporate boards of the Multinationa l Corporations. As the globalization started gaining speed, the companies started hiring more foreigners to fulfill the directorship positions. Over the last decade of the twentieth century, various multinational companies (MNCs) made first steps to recruit foreign directors. According to some scholars business is going global and the boards will do the same, or at least they should if they want to maximize their effectiveness (Mandl, 2003, in Staples 2007). Nowadays the trend continues as the labor markets for executive and non-executive directors are becoming more international (Ruigrok & Greve, 2008; Staples, 2007). As mentioned by Finkelstein et al (2009) different cultural backgrounds of directors are considered to be an important tool for solving the problems associated with the new unknown markets and environments.
Despite the fact that the corporate boards of the companies comprise out of executive and non-executive directors (Pye and Camm, 2003), none of the previous studies combined two types of directorships and analyzed the international expansion of the company and its relations to the internationalization of the boards, regarding both types of directors.
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companies go more international the necessity to recruit more foreign directors arises. As Greve et. al (2009) put it, the firms are matching the directors profiles to their strategies. This master thesis will be trying to take that direction expanding the arguments a nd the analysis of Greve et al. (2009) more broadly and over a certain period of time, stretching the arguments beyond the boundaries of one industry.
On top of this both mentioned studies were emphasizing a specific point of time and didn‟t take into consideration the changes in the national diversity within the boards and the foreign posture of the firm over a specific time period. The problem which occurs here is that the given level of company internationalization could have been reached already a long time ago. The same argument may hold for boards which could have become nationally diverse years ago and not necessarily because of the firm‟s foreign expansion. Being a continuous process the international expansion doesn‟t occur in one day, neither do the boards get more international in one instance. Thus the main research question of this study will be directed to understanding how the changes in the international posture of the firm over a specific period of time are related to the changes in the nationality diversity within the corporate boards, among both directorship types.
A great deal of the studies in this realm are basing their assumptions on the fact that the foreign activities of the firm are growing and the firm is expanding internationally. This research will continue that trend in general; however next to this research will also analyze the possible consequences within the corporate boards in terms of nationality diversity in case the firm has had a decline in the level of international posture.
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analyses of the companies from the developed world this study will include various multinationals corporations from the developing/emerging world. This will give us a chance to have a more complete picture about the consequences of the foreign expansion and the changes within the boards related to the foreign expansion. Besides this we w ill make differentiation between these 2 types of economies and try to understand whether the level of home economy development can affect the ratio of foreign nationals within the corporate boards in the process of firm internationalization. While expanding internationally the companies from emerging economies have to deal with the problem of being newcomers and as mentioned by Guillen and Garcia Canal (2009) those firms must try to upgrade their capabilities in order to be able to compete with the advanced competitors from the western world. In this sense as the directors are an essential element for coping with the external problems (Pfeffer & Salancik, 1978), the companies will be trying to address the challenges by hiring new directors who can deal with the environmental differences
Building on those arguments this study will try to analyze whether there is a difference between the firms from the developing and developed countries and the changes occurring inside the corporate boards while the firms are registering changes in the level of foreign posture. The study will namely try to understand whether in case of the emerging firms the changes in nationality diversity of the directors are more significant in comparison to the firms from the developed world, as the firms reach higher levels of internationalization.
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Theoretical background
Company strategy and heterogeneity of corporate boards
The influence of the board of directors on a firm‟s behavior constitutes a fruitful line of investigation (Deutsch, 2005). The strategic decision-making literature considers the composition of boards of directors to be an important factor in the process of corporate decision making. For instance, Golden and Zajac (2001) argued that specific demographic features of boards‟ directors contribute to strategic decision making. Past research has shown many organizational outcomes and strategies to be associated with the board composition. These can include the firm performance (Peng, 2004), internationalization expansion strategies (Datta et al., 2009), R&D investment strategies (Kor, 2006), and share price (Filatotchev & Bishop, 2002). Besides this many authors state that boards can be a mechanism to cope with uncertainty through managing external dependencies (Pfeffer & Salancik, 1978) reducing environmental uncertainty (Pfeffer, 1972) and decreasing the transaction costs linked to environmental interdependency (Williamson, 1984).
Today there is an impetus in the world to diversify corporate boards (Ramirez, 2003), based on the assumption that diversity within the corporate boards will improve the chances that different knowledge domains, perspectives, values, and ideas will be regarded in the decision- making process. According to Knight (1999) diversity in groups and teams will lead to greater creativity and innovation, thus generating better group performance. Next to this other authors such as Carter et al. (2010) suggest that the diversity within the boards may have negative effects on the firm especially from the financial performance perspective
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prior beliefs and values originate from differences in the ir experiences and backgrounds, which can be the age, gender, cultural and educational backgrounds.
According to various authors the corporate boards are groups of independent people that have the duty to actively control top management behaviors and decisions in order for securing the shareholders‟ value maximizatio n (Fama and Jensen, 1983). According to the authors the monitoring task includes a combination of related activities, such as the control of the company performance, the monitoring of firm‟s activities, the assessment of the Chief Executive‟s behavior, etc. (Huse, 2005). However this is not the only mission of the boards. The corporate boards usually include two types of directorship, namely the executive directors who are responsible for the management side of the business and for agreeing and executing the strategies, and the non-executive directors who add value by forming policy, ensuring accountability, and helping the board by criticizing constructively (Pye and Camm 2003). Furthermore in case of many European companies a dual board structure is present. Thus the board consists of the management board, led by the top officers, and comprising out of executives and the supervisory board, which consists out of non-executives (Staples, 2007). This is the reason why the provided arguments about the board diversity, its members and their impact on the organizational outcome should address not only the supervisory directors or non-executive directors, but the executive board members or executive directors as well.
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common under this type of conditions (Finkelstein et. al, 2009, p 139). Wiersema and Bantel (1992) found that changes in TMT composition were related to the organizational diversification changes.
Summarizing the section it is possible to conclude that diversity and certain characteristics of the executive and non-executive board members may influence the strategic orientation of the firm. As formulated by Finkelstein et. al (2009, p. 138) the more diverse an organization‟s environment, the more necessary it becomes to have a differentiated governance in order to appropriately monitor the diversity of the environment. The diversity of environment in its case may arise with the company internationalization, as while expanding internationally the companies have to deal with other and mostly more complex environments. Thus it becomes necessary to understand the connection between the internationalization of the firm and the characteristics and the composition of the corporate boards.
Firm inte rnationalization and board heterogeneity
In many cases it is critical for various types of companies to pursue the expansion of their markets around the world in order to remain successful (Caligiuri et. al, 2004). International expansion gives the firm a chance to increase market share, gain access to low cost resources, leverage economies of scale, make use of the best technology available over the globe, and recruit the best talented people worldwide (Bartlett and Ghoshal, 1992). Consequently, many large firms regard internationalization as an integral part of their strategy (Spreitzer et al. 1997) and are trying to search for various methods for making this strategy successful.
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been characterized by increased internationalization of firms from other geographical regions (Wang et al. 2011). Since the 1990s, the global competitive landscape is becoming steadily populated by multinationals originating from countries and economies that are not among the most advanced in the world (Guillen and Garcia Canal 2009). Those MNEs are firstly from upper- middle income economies such as South Korea, and Taiwan, emerging economic systems like Brazil, Chile, Mexico, China, India, and Turkey, developing states such as Egypt, Indonesia, and Thailand and fossil fuel-rich countries such as the United Arab Emirates, Nigeria, and Venezuela (Guillen and Garcia Canal, 2009). Those new flourishing economies are characterized by a rapid pace of growth, increasing liberalization of trade and investment regimes, and restructuring of the economic system (Hoskisson et al., 2000). When internationalizing their activities those MNEs use multiple entry modes, ranging from alliances and joint ventures up to wholly owned subsidiaries (Guillen and Garcia Canal, 2009). The main issue here is that new Multinationals are forced to deal not only with the liability of foreignness, but also with the competitive disadvantage, that stem from being latecomers, that lack the resources and capabilities of established firms from the most advanced countries (Guillen and Garcia Canal, 2009). For this reason, the international expansion of the new MNEs is supposed to be happening in parallel with upgrading processes through which those newcomer firms, will be looking for ways to gain access to external resources and capabilities in order to catch up with their more advanced competitors and to reduce their competitiveness gap with long time established multinationals (Aulakh, 2007).
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appropriate decision making during the process of internationalization (Barroso 2011). MNCs strive to obtain a transnational (Bartlett a nd Ghoshal, 1989) or geocentric (Perlmutter, 1969) orientation by overcoming home country biases and developing an international outlook.
Past research has documented a link between environmental complexity and the composition of the board (Sanders and Carpenter, 1998). Being the central decision- making unit of MNCs, the directors are faced with increasingly complex decisions as the firm expands its operations and presence beyond its home market and the complexity raises the information-processing needs for the company thereby changing the requirements for the corporate directors (Ghoshal, 1987). As suggested by Barroso (2011) directors‟ experiences, knowledge, expertise are valuable, rare, inimitable and non-substitutable resources that make up the potential of the board. These resources must be integrated with other firm resources in strategic processes through dynamics of relations (Barroso 2011).
14 Nationally diverse boards and the foreign expansion of the company
In most of the cases the frequently examined aspects of the board diversity are the age of the directors, education, professional background, etc. There has been broad research analyzing those characteristics of the board in relation to the strategy of the firm. Nationality in its turn is a rarely explored source of diversity in most demographic research (Mill iken and Martins, 1996). Recent studies by Oxelheim and Randoy (2003) and Ruigrok, et al. (2007) suggest that nationality has become a key factor in the search and selection process of executive and non-executive directors at listed companies.
Carrying out a research among non-executive directors Staples (2007) is stating that it has almost become a matter of accepted wisdom to assume that the boards of the world‟s top corporations are increasingly taking on more “foreign” directors. As put by Staples (2007), having a multinational board is becoming the mark of the truly global corporations – or at least corporations that have global aspirations. According to the observations of Staples (2007) among world‟s 80 largest TNCs in year 2005, 75% of them had at least one non-national non-executive director.
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increasingly international capital markets as well as markets for goods and services (Ruigrok 2008). Heijltjes et. al. (2003) studied nationality diversity in a selection of 35 Swedish companies 45 Dutch companies during the period 1990–1999. Compared with the situation in 1990, they saw the number rising rather quickly.
Shaw (1990) suggests that nationality can influence the fundamental values and cognitions of the decision-makers, which are used as lenses to scan, identify, organize, interpret, and utilize the acquired information, serving as a basis for strategic choices. Palmer and Varner (2007) add to this saying that the board members provide their individual and professional expertise to the company and the board of directors. If board members bring their national orientation and personal expertise to their roles as board members, the national composition will play a role in the performance of the company and result in potential synergy of different views, thus basically affecting the strategic orientation of the firm. (Palmer and Varner, 2007)
Stretching those arguments to the executives setting, Nielsen and Nielsen (2010) state that the diversity in cognitive bases and values, which result from executives‟ nationalities has a strong influence on the process of strategic decision making. As formulated by Nielsen and Nielsen (2010) the values embedded in national cultures have a n enduring and a profound effect on executives‟ orientations, independent of the logics and wisdom accrued in management development.
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Along with this there are some differences in the level of nationality diversity among directors from different parts of the world. As formulated by Palmer and Varner (2007) Europe is much more global both at executive and non-executive directors levels. One of the probable explanations for this can be geographic size. Palmer and Varner (2007) suggest that the shorter distance in combination with educational and common business practices that encourage international experience at early stages result in high levels of exposure to and awareness of languages, cultures, and laws among the population. In addition, companies from smaller European countries, such as Sweden and Denmark, may have limited native personnel and may have to rely on international board members and executives to fulfill their positions. (Palmer and Varner, 2007)
The board characteristics are believed to be important in coping with environmental complexities. In their turn the two main drivers of environmental complexity in an organization are international diversification and industrial (product) diversification (Hitt et al., 1994). Thus, demand for the people responsible for the firm will be influenced both by the posture of the firm in international as well as product markets. (Ruigrok 2008)
Nationality diversity can be seen as an important indicator for the „transnational mindset‟ of a company (Bartlett and Ghoshal 1998) and as an indicator of the formation of a transnational business class (Sklair 2001, in Van Veen and Marsman 2008). As mentioned by Kuin (1972) foreign nationals possess cultural identification, easy understanding of different markets, as well as distributors, and consumers. Moreover, the policy helps the multinational to identify itself better with the legitimate aims and aspirations of the host country.
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process more complex information and deal with the uncertainty of the foreign markets and environments. Nationality diversity is important considering the fact that individuals‟ values, attitudes, and behaviour tend to vary depending on nationality (Hambrick et al., 1998). Directors from a variety of countries are likely to possess a diversity of cultural values, attitudes, preferences, etc. (Caligiuri et al., 2004). The diversity is believed to provide the directors with broader information resources, skill sets, and “cultural capital” and is likely to give the leaders a capacity for dealing with international expansion (Caligiuri et al., 2004). The national diversity should be a reasonable proxy for the international orientation of the firm‟s top leaders (Caligiuri et al., 2004).
Given the positive effects of other aspects of top leaders‟ diversity on firm performance, top leaders‟ national diversity should be an important indicator of internationalization. Preliminary research has established relationships between nationality diversity in team composition and international expansion decis ions (Punnett and Clemens, 1999) and has also linked the national composition of foreign subsidiary management teams to the performance of the team and the subsidiary ( Elron, 1997).
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existing geographical boundaries of the firm and this is the reason why the companies are trying to find foreign managers who will be coping with the difficulties. Greve et al. (2009) suggest that the TMTs have to adapt in order to meet rising information-processing demands and increase learning capacities, which allow further exploitation of foreign markets.
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Hypotheses development
As documented by Barosso (2011) the experience, knowledge and background of directors are important for the board potential. As stated by Ramirez, (2003) many companies diversify their corporate boards, based on the belief that diversity among board directors improves the chances that different perspectives, values, and ideas are considered in the decision- making process. For being able to deal with the environmental complexity as mentioned by Sanders and Carpenter (1998), the firm leaders should be in possession of certain traits.
The diversification of the boards in its turn takes place via recruitment of foreign nationals (Heijltjes et al., 2003, Staples 2007), as the nationality is considered to be a strong factor for choosing the directors (O xelheim and Randoy, 2003) as it may be of importance for the company performance and give the companies to address the difficulties, which can also occur in the way of international expansion and the problems associated with it. So as the companies expand more there will be a need for more foreign directors. Building on those arguments Caligiuri et al (2004) found a relationship between the national diversity in the boards and the degree of firm internationalization, analyzing the firms at a specific point of time. Analyzing the executive directors Greve et al. (2009) suggest that the Top management teams will need to adapt involving more foreigners in order to meet rising information-processing demands and increase learning capacities, which allow for further exploitation of foreign markets.
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need to involve more foreign directors for combating the challenges of internationalization. This presumes that the growth of foreign activities of the firm will result into the changes in the boards over the given a period of time. Thus the companies being in the process of international expansion will need directors who will be able to cope with the difficulties of the expansion. If the companies decide to internationalize, or are in the process of that they will need the people to cope with the difficulties in the future. However if the companies already have the foreign managers this will not mean they necessarily need to internationalize if this is not a priority for the firm.
Based on the provided line of argumentation the following hypothesis is suggested. H1: The changes in the level of the companies’ international operations will be positively associated to the nationality diversity changes among the corporate boards.
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executives directors. This makes us assume that in the process of foreign expansion the firms will be trying to include more foreign executive directors than non-executives and this leads us to the following hypothesis
H1a. There will be a higher positive correlation between the company foreign expansion and changes of the nationality diversity among the executive directors, in comparison to the non-exective directors.
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The provided argumentation leads to the following hypotheses.
H2. During the process of firm foreign expansion the emerging/developing economic systems will be positively related to to the increase in the ratio of foreigners within the corporate boards.
Developing the arguments further it would be important to see whether the companies which have decreased the level of the foreign activities will be willing to lay off the foreign directors. We presume, that though the firm will be willing to hire more foreigner as it expand abroad, that doesn‟t necessarily mean it will have to lay them off if it decrease the presence beyond the national borders. One of the main reasons for this is that though the foreign managers can be important for dealing with the difficulties of foreign markets it doesn‟t necessarily mean that they don‟t have understanding of the firm local/home environment. The foreign directors may be in possession of more traits and knowledge than solely dealing with the hardship of foreign environment. Next to this today having nationally diverse boards has become a symbol of a multinational corporation, thus laying off the foreign directors may have a negative effect on the company reputation. This builds a ground for the following hypothesis.
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Methods
This study will make use of the databases of the largest multinational firms in the world in terms of foreign assets. Those databases are provided by UNCTAD for the companies from the emerging economies and the developed countries respectively. The databases of years 2004 and 2008 will be used for identifying the growth and the international expansion, as well as decrease in the foreign presence of the companies within the 4 years‟ period of time.
Though the UNCTAD lists include 100 companies for each type of economy, only the companies which appear in both years in question will be taken for the analysis, to be able to measure the change of various firm characteristics. 42 companies which have increased and 19 companies which have decreased their international presence in the period of 2004-2008 will be integrated to one database for our study. The companies chosen for this research from the UNCTAD databases will cover several industries, which will be helpful for us in this case, as focusing on one industry might not provide clear and concrete results.
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emerging economy or 0 if the firm is from a developed economic region. Another variable in this study will be the decrease of the foreign activities of the firm in the period of 2004-2008. If there has been any decrease of the activities in that period of time the variable will have the value of 1, if there was no decrease the value will be 0.
The dependent variables will be as follows. The first dependent variables will be the change in the nationality diversity ratio within the corporate boards in the period of years 2004 and 2008, the change among the executive directors and the change among the non-executive directors in the same period of time. The reason for making this separation is that though the nationality diversity ratio within the boards may change it can be do ne for example at the expense of non-executives managers only, thus leaving the executives without change, thus it is important to control the changes not only as a whole but separately as well. For operationalizing the variables first the ratios of the foreign directors among the boards will be calculated for both of the years, by the means of dividing the number of foreign directors to the total number of the people in the board, thus making the ratio vary in the boundaries of 0 and 1. Consequently the change of the ratios will be calculated from years 2004 to 2008, which will become the dependent variable. The same steps will be conducted for calculating the change among the executive and non-executive directors. In case in the first year of observation the ratio of foreigners was 0 and it has increased afterwards in 2008, it would be impossible to compute the growth on the basis of the number 0. In those cases 0 was changed into 0.01.
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databases, company information databases, such as ORBIS, newspaper articles, as well as other official corporate documentatio n for reliable confirmation of directors´ nationalities. Only the companies, where complete and accurate information regarding the nationalities of the directors for the both years of analysis was available, were included in this study. In several cases the companies disclose detailed information only about non-executive directors, in this case only this type of directorship and its change over time was measured.
It has to be mentioned that we have regarded Taiwanese and Hongkongese directors as non-Chinese. The reason for this is the different environment where the directors have grown. Besides this Hong-Kong became part of China only in 1997, whereas Taiwan still declares itself to be independent.
Another special example among the directors can be the Chairman and CEO of Coca-Cola Corporation in 2008, Muhtar Kent. Though holding American nationality, as he was born in US, he holds Turkish nationality as well, and lived most of his life in Turkey, and apparently carries more Turkish cultural values. Thus we have considered him to be a Turkish national, so in this case foreign for a US based corporation.
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period of 2004-2008, it is also important to know what the starting TNI score is. That is why we will be controlling for the initial values of TNI in the starting year 2004.
Results
The following section presents the results of the statistical analysis. The table 1 below presents the descriptive statistics of the variables included in the study.
Table 1 Descriptive Statistics
N Minimum Ma ximum Mean Std. Deviation
TNI index 2004 59 16,5 99,3 59,854 20,8181
TNI Change 59 ,5 2,2 1,122 ,2889
BOARDSIZE04 59 6 28 14,37 4,958
Change board for. ratio 04/08 56 ,1 11,1 1,622 2,1206 Change exec. For. Ratio 04/08 57 ,0 2,0 ,970 ,3187 Change non-ex. For. Ratio 04/08 55 ,1 12,5 1,780 2,4945
Economy type 59 0 1 ,46 ,502
Changes in the board size 59 0 1 ,71 ,457
Decrease of foreign Presence 59 ,00 1,00 ,2881 ,45678
Firm size 59 ,66 291,25 48,4940 66,11599
Valid N (listwise) 53
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Table 2 Correlations of the study variables
1 2 3 4 5 6 7 8 9
1 TNI index 2004 1
2 Change of TNI -,657** 1
3 Board size 2004 ,081 -,191 1
4 Change board for. ratio 04/08 -,032 -,035 -,118 1 5 Change exec. For. Ratio 04/08 -,048 ,022 ,043 ,080 1 6 Change non-ex For. Ratio 04/08
-,043 ,003 -,098 ,981** ,037 1 7 Type of Economy -,088 ,196 -,492** ,099 -,163 ,116 1 8 Changes in the board size ,176 -,045 ,025 -,212 ,199 -,217 -,017 1 9 Decrease Foreign Presence ,470** -,603** ,112 ,242 -,011 ,195 -,059 -,091 1 10 Firm Size 2004 ,122 -,199 ,082 ,044 -,085 ,045 -,016 ,035 ,378** ** Correlation is significant at the level of 0,01
Changes of TNI are highly and negatively correlated with the initial TNI index of 2004. This can basically mean that the companies with high TNI indexes didn‟t register high foreign expansion in the period of years 2004-2008. At the same time there is also a strong correlation between the nationality diversity changes within the boards in general and only with the non-executive directors. The main explanation for this can be the fact that the majority of the directors included in this study are non-executive or supervisory directors.
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The other consequent models in Table 3 will be used for analyzing the hypotheses formulated above. Thus Model 2 will help us to find the answer for the hypothesis 1, Model 3 for the Hypothesis 2 and Model 4 for the 3rd hypothesis.
Table 3
Regression analysis: predicting the level of board foreigners diversity
Model 1 Model 2 Model 3 Model 4
B P B P B P B P
Firm size 2004 0,002 0,645 0,002 0,71 0,002 0,726 -0,001 0,776 Board size 2004 -0,05 0,393 -0,057 0,346 -0,044 0,516 -0,058 0,311 Board size change -0,995 0,127 -0,969 0,141 -0,971 0,144 -0,702 0,280 TNI 2004 0,001 0,918 -0,006 0,759 -0,006 0,769 -0,013 0,410 TNI change -0,811 0,562 -0,871 0,539 Economy type 0,276 0,682 Decrease of for. Presence 1,458 0,058 R square 0,062 0,068 0,071 0,128 F Value 0,838 0,73 0,627 1,462
In order to formally test hypothesis 1, a multiple regression analysis was conducted. Hypothesis 1 predicted that the changes in the level of the companies‟ international operations will be positively associated to the nationality diversity changes among t he corporate boards. The Model 2 in the table 1 shows that increase in TNI has B=-0.811 and P= 0.562. Thus there is no significant relationship detected. Moreover as the r-square statistics indicates the model can explain only 6.8 % of the variance in the dependent variable. In this case it leads us to the rejection of H1.
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changes have a correlation of 0,022, whereas the non-executives have a correlation of 0,003. This makes us to conclude that the H1a is accepted.
Despite our expectations formulated in the H2 that firms originating from emerging economies will be associated with an increase in the ratio of foreigner in the corporate boards, the analysis doesn‟t show that. This hypothesis is rejected as well. As we can see from the Table 1, Model 3 B=0,276 and P=0,682. The r-square statistics equals 0,071, which means the model can explain 7,1 % of the variance in the dependent variable.
Hypothesis 3 was predicting that there will not be any positive relationship between the decrease of foreign activities of the firm and decrease in the ratio of foreigners in the corporate boards. As we can see from Model for in table 3 B=1.458 and P=0.058, which shows significant relationship. This makes us conclude that H3 is rejected as well. The model in this case explains 12.8 % of the variance in the dependent variable. It is important to mention that out of 59 companies analyzed in this thesis only 17 firms have registered decrease in the level of their international posture.
Findings
Building on the existing theories and producing several new approaches the main aim of this study was to investigate the companies in the process of their internationalization and to see the effects within the corporate boards. As the paper has indicated the directors reside at the strategic apex of a firm and are the information processing center of the organization in its relationship with the environment (Rivas et al. 2009).
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the companies and their boards throughout the time and not only at one point of time as it was done for example in the works of Caligiuri et al. (2004), Ho-Uk Lee et al. (2006) or Greve et al. (2009). As the previous studies haven‟t been analyzing the changes within the corporate boards throughout the time it is hard to say whether our finding corroborate the earlier finding or not. This study in its turn tried to show whether the changes in the level of international activities will be associated with changes in the nationality diversity inside the corporate boards. We had expectations expressed in the H1 that there will be a significant positive relationship between those two phenomena. Our analysis found certain but non-significant relationship to support the idea that changes in the level of international posture of the firm will be positively related to the changes of nationality diversity within the boards. Even though the level of international expansion may be related to the national diversity in the boards at a certain point of time (Greve et al., 2009), the changes in the level of foreign expansion show no relationship to the nationality diversity changes considering a 4 year period of time. One of the main reasons for the outcome can be the limited size of the sample and the fact that most of the firms already had significant levels of board internationalization during the first study year. As an example we witness within the board of Noble Group from Hong Kong that already in 2004, 9 out of 12 board members where foreigners, which is 75 % of the total number of directors, thus the possibility that there will be more foreigners hired to board is small. The same situation can be seen in the board of Astrazeneca from UK, which had a board internationalization of 70% in year 2004. This and other reasons possibly affecting the non-expected outcome of the hypothesis will be explained in the consequent sections of the thesis.
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directorship with the foreign expansion of the firm. As we saw from the analysis the foreign expansion of the firm is more correlated with the changes of nationality diversity among executive directors, in comparison to the non-executive ones. This goes in line with arguments of Palmer and Varner (2007) that executive directors will be more internationally oriented than the non-executives.
The next step of the research was making a differentiatio n between the types of economies the companies are originating from, following the classification of UNCTAD and dividing them into emerging and developed. As mentioned by Guillen and Garcia Canal (2009) the last years have witnessed a significant rise in the international expansion of firms from developing economies. As stated by Aulakh (2007) the companies from the emerging markets will be trying to seek external resources to be able to compete with the long established firms. In this case they were supposed to be involving more foreigners to cope with the difficulties of foreign expansion. However contrary to the expectations it was not possible to prove that the type of the economy the company is originating from will be related to the level of nationality diversification within the boards. Carrying out the analysis we find that though there is a relationship between the type of the economy and the ratio of foreigners‟ diversity the level of significance is low. For example America Movil, a firm originating from Mexico (an emerging economy) decreased the ratio of foreigners in the board from 30% to 20%. Another example can be Li & Fung from Hong Kong which decreased the ratio of foreign directors from 50% to 30% in the 4 years period of time. This may basically mean that the firms from emerging economies are making use of other tools and not the foreign directors for overcoming the hardship of foreign environments.
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changes of nationality diversity within the boards. This partly confirms our arguments brought up during the discussion of the H3. This basically means that if there has been any decrease registered in the level of firm foreign posture, the companies don‟t lay off the foreign directors and not only keep the current foreigners ratio, but even more they surprisingly engage more foreigners in the board. For making the picture clearer we would like to illustrate some examples. For instance Beijing Enterprises Holdings Ltd had a decrease in TNI in the period of 2004-2008, whereas the foreigners ratio within their board had an increase of 3,2 (320 %). Another example in this case can be CRH from Ireland which registered decrease in TNI as well, however the ratio of foreigners in the board had a growth of 2,2.
Theoretical and practical implications
33
outside the home economy, expansion into new industries, new geographic regions and other indicators.
Next to this, the given research made a distinction between non-executive and executive directors, which has not been very common while analyzing the nationality diversities within the boards. Most of the studies analyzing the nationality aspect of the boards have been paying attention mostly to the non-executive directors or the member of the supervisory board. Both of directorships are important for the analysis, as the executive directors are responsible for the (daily) management of the firm, having an important say in the strategic orientation of the firm (Wiersema and Bantel, 1992), whereas the non-executives are generally supervising the firm management. In this case these two types of directorships and the diversity among them may have different impacts on the corporate life. Thus it could be an interesting start for more detailed analyses of executives and non-executives diversity.
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nationality diversity, it can be still interesting to consider this more in details, as it will be also suggested in the subsequent section of further research possibilities.
As this and other previous researches have indicated next to other characteristics of the directors‟ personality, the nationality is an important component for hiring the members of the board. Analyzing the given examples and the results achieved many companies standing at the decisive moment of foreign further expansion could see a useful tool for measuring the effectiveness of the foreign directors. In case the research gets more profound analyzing more industries and companies from broader range of countries, as will be suggested in the consequent section, it could become a guideline for many firms. Using this tool various firms could measure the positive/negative outcome of the foreign directors in specific industries. This may be interesting especially for the firms from the emerging countries which usually need to deal with the problem of being the latecomer in the new markets. Thus evaluating the examples of the firms which have been in the same situation the firms can create tools for dealing with the difficult situations. Next to that this kind of researches may be interesting to understand the current market for the high ranking labor, and what the possible developments in the sphere can be.
Limitations and further research
35
members nationalities, board sizes and indications of executive and non-executive directors. The given limitation could produce blurred results and doubt the testing of the hypothesis. For overcoming this problem in future and including more companies in the research there will be a need to get in contact with each firm for obtaining information about the board members in the past for the years in question.
Next to this though the period of 2004-2008 was the longest available time span were the information on the firm internationalization posture could be obtained from UNCTAD files, this makes the study limited in scope. The changes occurring in the period of 4 years could not be necessarily representative. This issue could be solved by selecting a longer time extent, and carrying simultaneous long time and short time observations for being able to see if there is a significant variance in the level of board internationalization in short and long periods of time.
As the companies included in the research were the ones possessing the highest foreign assets in the world in both of the years, the possibility for a further foreign expansion was little, as most of the firms had already achieved substantial levels of internationalization. This holds for the companies from the emerging economies as well. Though those firms have their roots in the emerging economies, most of them have been active abroad for quite a substantial time. The examples can include Neptune Orient Lines, a global shipping company from Singapore, owning American and German shipping companies for a substantial time. The same holds companies LG Electronics, Samsung Electronics and Hyundai Motors from South Korea, which have been very active abroad for decades. We witness the same situation among the South African Natural Resources corporations such as Gold Fields and Sappi, etc.
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this problem while carrying out future research could be selection of the companies which possessed significantly smaller foreign assets or foreign sales in the starting year of the analysis and have grown a substantially towards the end of the analysis period.
From the other side the study didn‟t include so many variables for measuring the internationalization of the firm. Though the foreign sales, assets and employees are an important measure for the internationalization of the company, they may not be enough for determining the complete level of it. It would be more productive to include several other variables in the study. Those variables could be for example the ratio of foreign and local subsidiaries of the firm and the changes of the ratio over the time. This information was available in several years of the UNCTAD observations, including year 2004, however as we didn't have it for year 2008 we couldn't include it in the study at this moment. Though not applicable to most of the companies in question there could be another variable measuring the number of countries the company was operating over the certain period of time.
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by the government. This could be especially interesting for the firms from the developing countries.
Even though we made a differentiation between the executive and non-executive directors, in most of the boards the executives were in minority in relation to the non-executive directors. In most of the cases not all the top managers constituted a part of the board, even though they are responsible for the daily management of the firm next to the executive directors included in the corporate board. In this case there could be a necessity arising to carry out investigation not only among the ones constituting a part of the board, but the other high ranking top managers as well, basically the Top Management Teams. In this case as the given research progresses it could investigate the nationality diversity of the top managers in relation to the strategic moves of the firm, namely foreign expansion or oppositely decrease of foreign activities.
Though foreign directors have become a sign of a modern multinational corporation, there are still some cases even in the database we used when the firms are substituting the foreign directors with the local ones. Though as shown above the foreign directors are usually helping the firm to achieve better performance, only being foreign doesn‟t necessarily mean that the directors will be in possession of certain professional expertise. Next to this as the world is on the path of globalization many local directors/managers are having a chance to acquire certain knowledge and expertise of which the knowledge of foreign environments and different business systems. For the further research it could be interesting to see the effects of the decreasing nationality diversity in the boards on various firm indicators, such as the stock price over time, the company size, etc.
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46 Appendix 1
List of the companies included in the study
Company Name
Country
Type of
Economy
TNI
Increase
Procter & Gamble United States Developed Yes
Roche Group Switzerland Developed Yes
Alcoa United States Developed Yes
Astrazeneca Plc United Kingdom Developed Yes Johnson & Johnson United States Developed Yes Wal-Mart Stores United States Developed Yes Coca-Cola Company United States Developed Yes United Technologies Corporation United States Developed Yes
Statoil Asa Norway Developed Yes
Carrefour SA France Developed Yes
BASF AG Germany Developed Yes
Telefonica SA Spain Developed Yes
Eni Group Italy Developed Yes
E.On Germany Developed Yes
Total SA France Developed Yes
ExxonMobil Corporation United States Developed Yes General Electric United States Developed Yes Vodafone Group Plc United Kingdom Developed Yes
Metro AG Germany Developed Yes
Fiat Spa Italy Developed Yes
Volkswagen Group Germany Developed Yes
Anglo American United Kingdom Developed Yes
Huthcusion Whampoa Hong Kong emerging Yes
Cemex S.A. Mexico emerging Yes
Samsung Electronics Co., Ltd. Korea, Republic of emerging Yes Hyundai Motor Company Korea, Republic of emerging Yes Petronas - Petroliam Nasional Bhd Malaysia emerging Yes Jardine Matheson Holdings Ltd Hong Kong, China emerging Yes
América Móvil Mexico emerging Yes
Capitaland Limited Singapore emerging Yes
Sappi Limited South Africa emerging Yes
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Guangdong Investment Limited Hong Kong, China emerging Yes Steinhoff International holdings South Africa emerging Yes Gold Fields Limited South Africa emerging Yes
MTN Group Limited South Africa emerging Yes
Orascom Telecom Holding Egypt emerging Yes
Li & Fung Limited Hong Kong, China emerging Yes San Miguel Corporation Philippines emerging Yes Road King Infrastructure Limited Hong Kong, China emerging Yes China Resources Enterprises Hong Kong, China emerging No
United Microelectronics Corporation
Taiwan Province of
China emerging No
LG Corp. Korea, Republic of emerging No
First Pacific Company Limited Hong Kong, China emerging No Neptune Orient Lines Ltd. Singapore emerging No Fraser & Neave Limited Singapore emerging No Noble Group Limited Hong Kong, China emerging No
Sime Darby Berhad Malaysia emerging No
Beijing Enterprises Holdings Ltd. China emerging No
Unilever United Kingdom Developed No
Vivendi Universal France Developed No
Sanofi-aventis France Developed No
RWE Group Germany Developed No
Nissan Motor Co Ltd Japan Developed No
Hewlett-Packard United States Developed No
BP PLC United Kingdom Developed No
Philips Electronics Netherlands Developed No
Nestlé SA Switzerland Developed No
