Information Exchange In Multinationals
An Evaluation Of Institutions And Their Consequences On Information
Exchange Within The Multinational Corporation And Financial Performance
Faculty of Economics and Business
Master Thesis
MSc, International Business and Management Supervisor: Dr. Drogendijk
Robert Belke S2449706
ACKNOWLEDGEMENTS
I hereby would like to thank several people for supporting me throughout the finalizing of this thesis and the consequent accomplishment of my International Business and Management studies.
First and foremost I was deeply grateful to have, to my best knowledge, the most competent, helpful and available supervisor. Without the immense help of and pleasant meetings with Dr. Drogendijk, this work would not have reached the quality and rigidity it incorporates now. Secondly, I thank Dr. Hammad ul Haq for his competent co-assessing of this work.
ABSTRACT
After the rise of multinationals and their following fast spread around the globe, new challenges became apparent concerning the adaption to their different bases of operations. A key point to that adaption is information exchange within a multinational. This research examined several formal and informal institutions and their effect on information exchange and ultimately financial performance. This was accomplished by running a mediation analysis with a sample of 286 firms from the industry of manufacturers of motor vehicles, bodies for motor vehicles, trailers and semi-trailers. The results show that there is no mediation effect. However, institutions play a significant role in the information-exchange within multinational corporations. Specifically, institutional environments at headquarter location that favor information-exchange include those with an effective government and low levels of corruption in the domain of formal institutions and a high long-term orientation, low individualism, low indulgence, high masculinity and high uncertainty avoidance as informal institutions.
Table of contents Page
1. Introduction 5
2. Literature review
a. Formal and informal institutions
b. The Multinational Corporation and headquarter-subsidiary relations c. Information sharing within the Multinational Corporation
8
3. Hypotheses and conceptual model 16
4. Methodology
a. Independent Variable,Mediator and Dependent Variable b. Sample
c. Control variables d. Model estimation
12
5. Analysis and result
a. Outliers, Multicollinearity and Factor Analysis b. Single and Multiple Regression Results
28
6. Discussion and conclusions 34
7. Limitations 38
8. References 41
1. INTRODUCTION
Since the year 1990, the phenomenon of globalization has become widely known and acknowledged (Keohane & Nye, 2000) and its intensity has been increasing ever since (Bertucci et al., 2002). Multinationals have to diversify and adapt themselves to different environments, which brings challenges that were non-existent before (Thakur, 2008). To stay competitive, these challenges have to be overcome. If not taken into account, a loss of competitiveness towards other companies that anticipate the new, worldwide change of business conduct, is likely to lead to insolvency (Cantwell et al., 2010). Businesses that adapt, which most scholars are in consensus about, will have a competitive edge over others that do not adapt to their environment (e.g. Dow, 2006; Douglas & Wind, 1987; Porter, 1979).
The type and scope of this adaptation is sensitive to the location of operations. The different environments in which firms operate have been of significant attention in the last decades. Distinguished scholars have risen in this field, especially in the domain of institutional (including especially cultural) differences (e.g. Hodgson, 1998; North, 1990; Scott, 1995; Hofstede, 1980, Shenkar, 2001, Schwarz, 2006).
To adapt to these institutionally different environments, it is evident that multinationals have to share information between their entities to ensure competitiveness, as multiple scholars report (e.g. Wu, 2007, Hantala & Lutta, 2009, Fey et al., 2008).
information exchange. Literature about headquarter-subsidiary relationships elaborated on power plays of subsidiaries competing for their headquarters attention (Mudambi & Navarra, 2004). This includes, for instance, the actual willingness of subsidiaries to share information with headquarters (Mudambi et al, 2014). While all these variables were connected using information system theories and management views such as the resource based view and the agency theory, few have taken into account the vast impact that different environments in terms of cultures and institutions potentially have in this particular framework. There are significant differences in which ways business is conducted, depending on the culture (Hooker, 2012). While the general impact of cultural distance on information and knowledge flows have been tested (Qin, Wang & Ramburuth, 2016), there has not been, to the best of my knowledge, a scholar so far investigating the specific impact of certain aspects of cultural dimensions in a political bargaining setting within an MNE, such as that one described by Mudambi and Navarra in 2004. To highlight an application possibility, let's look at a business which wants to expand or relocate its headquarters. Its responsible personnel has to look at a number of variables that determine where the biggest rents can be realized. While there might be a large number of decision-determinants which are case-dependent, such as a pharmaceutical firm seeking collaboration with a specific, chemically oriented university or a designer of semiconductors requiring differently specialized technological assistance and therefore expanding to the silicon valley, there might also be formal and informal institutions that need to be considered. Rodriguez (2002) for example looks at decisions made in types of foreign direct investments and entry modes in the hotel business. In this regard she looks for formal institutional factors, such as political/ economic risk and the level of economic development, but also at the cultural distance between the headquarter’s home country and the investment location. From this one can observe that formal and informal institutions play a role in the choice of location of multinationals.
internationalization strategy was very poor, especially local adjustments to the German culture, or rather the lack thereof (Hurth, 2003). Germans were uncomfortable with in-store practices such as the greeting when entering by employees and having their groceries packed by them as well, both uncommon practices in Germany. One might theorize at this point why Wal-Mart did not change that behaviour, why they did not adapt. One possible answer would be that not enough information was exchanged between the subsidiary and the headquarters, which leads to an inability to act upon problems due to a lack of information. The inquiry that must be made here is what might have been the cause for this missing communication. A possible explanation are institutional properties that lead to retaining of knowledge to create bargaining power, as described by Mudambi and Navarra (2004).
Returning to the beginning of the paragraph, the question is whether and how institutions affect information sharing within a multinational corporation. Having established that businesses need to adapt to stay competitive which includes information sharing within the firm, this research attempts to identify institutions that impact information sharing within multinational corporations. Specifically:
Do formal and/or informal institutions influence the information-sharing intensity within multinationals and does higher intensity consequentially lead to better firm performance?
2. LITERATURE REVIEW
First of all we will look at three different main themes, namely the research concerned with institutional differences (while specifically looking at culture), the relations of headquarters and subsidiaries, and finally the intra-firm-information-sharing. Then, we will develop hypotheses based on that review which will be concerned with the effect of several institutional dimensions on the intensity of information sharing. After that, the empirical study will be introduced that was designed around testing these hypotheses.
a. Institutions and Culture
Formal institutions are transparent and information about them is publicly available. In the popular institutional theory, they consist of constitutions, statutes, common law and regulations (North, 2004). In his book ‘Institutions, Institutional Change and Economic Performance’ (1990), North describes institutions as ‘the rules of the game’ and organizations as ‘the players’. Formal rules, in this analogy, are seen as necessary for the enforcement of institutions for the system to have an impact. One of the most popular databases for this are the World Governance Indicators, created by the world bank (Kraay & Mastruzzi, 2011). It created six dimensions of formal institutions which were measured on country-level, which will be explained now. ‘Voice and accountability’ describes the citizens ability to choose their government and express themselves freely through media. ‘Political stability and absence of violence’ measures the probability of political instability and terrorism. ‘Government effectiveness’ concerns the public service, policy formulation and implementation and overall credibility of the government concerning their policy support. ‘Regulatory quality’ is focused on the quality of policy formulation and implementation and the development of the private sector. The ‘Rule of law’ describes to what extent the law is enforced, inclusive property rights. Finally, ‘Control of corruption’ describes “the extent to which public power is exercised for private gain” (Hofstede et al., 2010) and the unorthodox influence of the private sector on the government. Some of these variables will be used to measure the influence of the formal part of institutions.
(2015) looks at the impact of cultural variables on the CSR practice of immigrant entrepreneurs and finds a ‘robust relation between national culture and environmental and social practices’. The important fact here is that the shaping of business conduct by the cultural environment should not be ignored and definitely taken into account when looking at the interactions within a firm, especially at an international level.
The division of cultures into manageable variables that can be applied to any culture is an important part of the cultural research that made it possible to advance in the field of business due to the expression of these in numerical values and the consequent possibility of using them in statistical analysis. In the field of international business, one of the most known and utilized attempts to capture culture as numerical values are Hofstede's cultural dimensions (1980). A later emerged and also popular concept are the world value survey studies (1981-2015).
versus restraint’ was added in his 2010 edition of ‘Cultures and Organizations’. A higher score represents less constraint to natural human behaviour, in other words, less attempted control of impulses.
Being a majorly cited source in business, specifically in management literature, and used in numerous studies concerning information exchange in multinationals (as will be seen in the sections below), his dimensions will be used for this study as well.
Having discussed the institutions, formal and informal, the environment in which they have an impact on information exchange will be further conceptualized in the next section, where the multinational setting in which headquarters and subsidiaries are embedded and their nature of relation is specified.
b. The Multinational Corporation (MNE) and headquarter-subsidiary relations
Two major contradictory theories, sub alias, have been applied to the governance of multinationals that created considerable streams of research after being published, namely agency theory and stewardship theory. The first one describes the dispersed interests of a principal and his or her agent(s), resulting in insufficient representation of the principal’s interests by said agent (Jensen et al, 1976). It shaped the economics-based literature for many years after (Feldman & Stanley, 1982). The latter theory developed, as an alternative, some years later and suggests that the agent indeed represents the principal's interests appropriately (Donaldson & Davis, 1991). Both theories manifested themselves fundamentally in the field of corporate governance, where scholars try to answer the question if executives do represent shareholders or pursue their own interests, and how, if the latter applies, this can be controlled for (Kiel & Nicholson, 2003). Further below it will be argued that this framework can also be applied to the evolving relationship between headquarters and subsidiaries.
March already argued in 1964 that a firm is an organization in which decision making, goal and objective setting is handled by the individuals and groups within the firm, and therefore subject to formulation through bargaining. Provan et al. (1980) expanded this idea with the notion that subsidiaries are more or less efficient in obtaining resources from headquarters. They acknowledge here that there were some cases where subsidiaries, located in bigger countries than their headquarters, became independent with the help of local financial institutions. Looking back at the above discussed opposing theories, this event can be attributed to agency theory, where a subsidiary started to develop its own interest and pursue it, regardless of its headquarters origin. Many years later, Mudambi and Navarra (2004) illustrated this as a result of the transformation of MNCs from hierarchy-based structures to more network-based structures which work like political systems of opposing powers. This happened, according to them and other researchers, due to two forces: the increasing operational responsibilities of subsidiaries and the dispersal of knowledge-creating activities within the MNCs. Due to these two developments, information-sharing issues arise, as Assakawa (2001) reports. The reason for this is the interplay of the new commodity of strategically relevant information, which was not previously held by subsidiaries in such a significant amount, and the network-like structure in MNCs. Mudambi and Navarra argue that this combination creates a situation where subsidiaries may use this information as a way to apply pressure against their headquarters in order to achieve their own goals. They further describe that this can be solved by shifting resources from subsidiaries that are doing very well to weaker ones. However, this is said to destroy shareholder value and is therefore in the high interest of headquarters to be avoided.
One can observe a similar pattern again, as the subsidiary that could have been seen more as a ‘steward’ developed its own interests, which eventually showed in their operations, and achieved independence in this study.
Looking at the existing literature, one can derive that the issue of rising subsidiary autonomy due to higher responsibilities seems to become increasingly important, especially as globalization progresses and consequently more firms internationalize (into a higher number of countries). This new relationship has to be taken into account when studying the firm-internal, dynamic relationships of large firms. In extreme cases, as the one investigated by Mudambi and Navarra (2004), it even becomes a major change in the internal MNC dynamic where a former agent becomes a principal.
c. Information sharing within the MNC and Institutions
As established in the introduction, information sharing in the MNC is crucial to the adaptability to the different environments it operates in. Some even argue that information sharing is not the tool by which they adapt, but rather one of the primary purposes they exist for (e.g. Gupta and Govindarajan, 1994). Wang & Wang (2012) conducted an empirical study involving 89 high-technology firms operating in China, measuring the impact of knowledge exchange practices on innovation and performance. They found that these practices, irrelevant of being tacit or explicit, increase innovation and subsequently performance. Noorderhaven and Harzing (2009) argue that due to the lower emphasis in MNCs on the authoritative aspect (which fits the view of Mudambi and Navarra in 2004, illustrated in the previous section), more attention is given to the information exchange of headquarters with subsidiaries. Gupta and Govindarajan even conceptualized the MNC ‘as a network of knowledge flows’ (1994).
have limited resources available to allocate between the subsidiaries. The fact that subsidiaries need to make themselves attractive fits the previously described environment of a network based on bargaining power such as described by Mudambi and Navarra (2004).
As will be seen below, many scholars have investigated the impact of information flow (mostly on different kinds of firm performance) and also variables that might impact information exchange itself within the multinational. In particular, one will see in the next section if and what role institutions have played in the information exchange literature within multinationals to date. Formal institutions have been connected to information sharing in several studies. The main points raised were the impact of regulatory institutions, such as the government and its quality and corruption level, on the information flow possibilities of firms and knowledge-based economies (Mantzavinos et al., 2003; OECD, 1996; Mauro, 1998; Andres et al., 2013). In all studies, the quality of formal institutions had a positive impact on knowledge exchange and knowledge economies. How specifically this impact happens and which specific formal institutions are most impacted will be discussed in the hypotheses development.
barriers in knowledge management. They found a significant impact created by ethnic boundary and ethnic competition, which are constructed in terms of Hofstede's national cultural values of individualism, masculinity, power distance and uncertainty avoidance. This shows that informal institutions, specifically culture, do not only have an impact on willingness to exchange information but also the management of the resulting knowledge.
3. HYPOTHESES
In this section the research model will be introduced, containing three sets of hypotheses. The first one is concerned with the relation of knowledge sharing on MNC performance, the second set with the impact of formal institutions on information sharing and the third one with the effect of culture on information sharing.
Before introducing institutions into the model, the baseline consists of the hypothesis that information-sharing, fostering innovation, has a positive impact on the firm performance. This is not only in line with the findings of Wang & Wang (2012) and Qin, Wang & Ramburuth (2016), which were introduced in the previous section, but also with the fact that MNCs need to share information in order to adapt to their varying environment (Wu, 2007, Hantala & Lutta, 2009, Fey et al., 2008). Therefore I propose:
Hypothesis 1: The higher the information flow within the MNC, the better its performance.
In the following part including first the impact of formal, then of informal institutions on information exchange within the MNC, the location of the relevant institutions will be specified as the ones of the domestic country of the headquarters due to the strategic significance they exert on the MNC. Specifically, Björkman & Barner-Rasmussen (2004) argued that headquarters implement control mechanisms that directly influence information exchange and management. Due to the strategic power and foremost network centrality (Tsai & Wenpin, 2001) they have, communication with the headquarters may largely determine the path the MNC takes or not takes to adapt itself to differing environments.
al. (2013) researched the impact of formal institutions on knowledge economies in 22 countries, using world bank governance indicators. Knowledge-based economies are defined as ‘economies which are directly based on the production, distribution and use of knowledge and information’ by the OECD (1996). It seems appropriate to assume that a knowledge economy favors the knowledge exchange possibilities of a firm operating in that economy. Therefore I will interpret two points from Andres et al.’s paper that influence knowledge economies as influencing knowledge exchange in a multinational operating there. First, they find that IPR protection rights have a positive impact on knowledge economies, but only if they have mature human capital and technological infrastructure in a way that it could imitate other technologies. This could be seen as a more specific version of Mantzavinos et al.´s claim, as IPR protection is indeed a part of the regulatory, legal environment. Furthermore, they argue that corruption, leading to less efficient public facilities, defective institutions and therefore lowering the development of human capital and the attractiveness of foreign direct investment (Mauro, 1998), will hamper the development of knowledge economies. This would lead to less efficient knowledge exchange for firms operating there. There seems to be a clear focus in the knowledge exchange/ formal institutions literature on regulatory quality, especially legal quality and the degree of corruption.
From the first section of the literature review we have seen that institutions, shaping the environment firms operate in, guiding their transaction costs regarding exchange of knowledge, limiting their possible course of actions and influencing their cognitive map through which actions are chosen, have a significant impact in terms of how firms operate.
Formal institutions are openly affecting behaviour, including information exchange. As seen above, Mantzavinos et al (2003) and Andres et al. (2013) argued that legal rules and regulations as well as quality of formal institutions will determine the efficiency of knowledge exchange. Since the organization of MNCs and therefore also the center of information exchange within the firm is organized by headquarters, I argue that:
Mantzavinos et al. (2003) furthermore argued that the efficiency of public facilities positively influences knowledge economies. As seen theorized above, firms operating in knowledge economies are expected to have more efficient information exchange. Therefore:
H2b: The higher the government’s effectiveness in terms of public services and policy implementation in the headquarters’ domestic country, the more information will be exchanged within the MNC.
As also described by Mantzavinos et al. (2003), corruption has a negative impact on knowledge economies. Accordingly:
H2c: The lower the corruption in the headquarters’ domestic country, the more information will be exchanged within the MNC.
The third and last section of hypotheses will be about the impact of informal institutions, specifically dimensions of culture, on information exchange. All of these will be evaluated under the assumption of a firm environment that corresponds to Mudambi and Navarra’s notion of a system of politics and bargaining power, as elaborated in section 2c. In one of the latest published studies, Prim et al. (2017) looked at the relationship between Hofstede's cultural dimensions and the degree of innovation on a national level. They found full support for a positive influence of individualism, long-term orientation and indulgence and partial support for power distance, uncertainty avoidance and masculinity, which will be taken into account and further refined below within the context of this study.
Hypothesis 3a: The higher the score of Hofstede's Power Distance in the headquarters’ domestic country, the more information will be exchanged within the MNC.
Masculinity versus femininity is especially interesting in this concept, as femininity is specifically described as a preference for cooperation, while masculinity represents values of achievement and material rewards. Therefore, and consistent with the findings of Prim et al., as willingness to cooperate also increases the willingness to share information, the next hypothesis is as follows:
Hypothesis 3b: The higher the score of Hofstede's Masculinity in headquarters’ domestic country, the less information will be exchanged within the MNC.
Uncertainty avoidance describes the notion of whether one wants to control the future and avoid uncertainties, or submit him/herself to an external locus of control. As the information flows in the MNC represent losing leverage in this framework and subsequently having less tools available for control, the third hypothesis, also conforming with the results of Prim et al., is described as follows:
Hypothesis 3c: The higher the score of Hofstede's Uncertainty Avoidance in headquarters’ domestic country, the less information will be exchanged within the MNC.
developed structure. High collectivism may lead to a higher spreading of the value by the headquarters that all units of the MNC are part of the same ingroup, belong together and therefore share more information within this group. However, high collectivism could also result in the exclusion of subsidiaries, as it could be seen as an outsider due to the different country of origin. A high score on individualism does not have this strong outsider-insider thinking, however, it could lead to the withholding of information to increase one's subsidiary’s uniqueness, as described in Michailova et al.`s work (2006). As these effects for each spectrum of the dimension contradict each other and the outcome will only be seen after testing, it can only be speculated if it has a positive or negative effect. However, looking at the study of Prim et al. again, one can see that they found full support that individualism influences innovation in a positive way on a country-level, arguing that innovation happens as individuals, having more autonomy, are able to propose ideas easier. Therefore, the next hypothesis will be as follows:
Hypothesis 3d: The higher the score of Hofstede's Individualism in headquarters’ domestic country, the more information will be exchanged within the MNC.
A high score on long-term orientation highlights nations that are less linked to the past and more inclined to deal with problems in the future. Everdingen and Waarts (2003) investigated the impact of Hofstede’s cultural dimensions (except indulgence versus constrained) on the adoption of innovations. They argue that Long-term orientation, due to a willingness to deal with the future, leads to higher adoption rates. That said, a higher score should lead to richer communications of headquarters with subsidiaries to enhance awareness of changes in the host-environment and be able to react upon it. Consequently:
Hypothesis 3e: The higher the score of Hofstede's Long-term orientation in headquarters’ domestic country, the more information will be exchanged within the MNC.
knowledge, there are no studies yet about the impact of indulgence versus constraint on information-exchange than the one by Prim et al. (2017), one can theorize that, due to the fact that high indulgence leads to less restraint to share ideas (especially new, innovative ones), and therefore more free-flow speech, higher indulgence might lead to a higher diffusion of information due to sheer higher amounts of shared information. That is in adherence with Prim et al.’s research results as well. Due to this I argue:
Hypothesis 3f: The higher the score of Hofstede's Indulgence in headquarters’ domestic country, the more information will be exchanged within the MNC.
The conceptual model, including the three sections of hypotheses, is displayed below:
4. METHODOLOGY
This section will be split in three parts. First, the sample will be specified. Then, independent variables, mediator and dependent variables will be introduced including their measurements. Third, the control variables will be introduced and the model estimation of the mediation analysis presented. At the end, there is a summary of the variables, measurements and sources presented in table one.
a. Sample
A search on this database returns 1424 firms that fit these criteria. This study will sample, in regard to the employees, the biggest 286 MNCs (see Appendix, table 1) with all information that is necessary available.
Most research about information flow, strategy and bargaining power is measured in qualitative data, such as the use of surveys and interviews, and therefore data including individual viewpoints of respondents. This study tries to use a different approach to have a more independent standpoint. The use of patents as information exchange proxy does have drawbacks, such as the fact that the number of patents might have more dimensions to it than the exchange of information. However, this study might confirm the results that have been reached in previous studies in a meaningful way, as a differentiating technique, using alternate measures, would support the previous findings in terms of reliability. Furthermore, due to the use of a quantitative technique, I am able to use a higher number of sampled firms than I would have been able to using surveys and interviews (due to accessibility).
b. Independent variables, Mediator and Dependent variables
Independent Variables
Whether citizens have the perception if they can participate in the election of government and having free media does not relate to the concept of this study, as communications within an MNC are usually kept company-internal. Lastly, Political Stability does not seem to fit anywhere into the three formal institution measurements and will therefore also not be considered (Kaufmann et al, 2011).
The cultural variables Power Distance, Uncertainty Avoidance, Individualism, Masculinity, Long-term Orientation and Indulgence will be measured by their scores, which can be found in the 2010 edition of Hofstede’s book ‘Cultures and Organizations: Software of the Mind’ (2010). The Hofstede data is vulnerable to critique due to the fact that the data was collected between 1967 and 1973. However, as argued above, Beugelsdijk et al. (2015) investigated whether they are outdated or still applicable, and found that the the data stayed robust and is still usable today. The scores reflect the culture of the headquarter’s domestic country due to the strategic influence and network centrality of headquarters within the MNC (Tsai & Wenpin, 2001), as explained in the hypotheses development.
Mediator
The mediator in this study will be the information exchange between subsidiaries and headquarters. It will be measured if the relevant formal institutions and Hofstede's cultural variables have an impact on firm performance mediated by it. Blomkvist et al. (2017), even though being a stand-alone observation, shows that patents can be used to measure the diffusion of technological capabilities in MNCs. Diffusion of any capability in MNCs requires information exchange. This is particularly interesting as scholars in the field of innovation connect information exchange positively with innovation (e.g. Eppinger, 2001; Swanson, 1994) This bridge between studies therefore effectively means that one could measure information exchange proxied by innovation, which will be pursued in this study.
Also, Branstetter (2005) uses patent citation patterns to measure international knowledge spillovers. Although spillovers take place outside the organization and are undesirable, it can still be observed that even in different contexts, in this case inside-outside information flow, it can be measured with patents. One can conclude that patents within the MNC might be a viable alternative for the (usually) used surveys and interviews. The patent citations can be found in the ‘Orbis database’. The number of patents the firm holds will be drawn from that database in the latest time available.
Dependent variable
As we have established before, more information flow is expected to lead to better performance of the whole firm, which will be evaluated by the net profitability ratio (or: profit margin), namely: Net Income / Sales. This ratio will be calculated by using the data of the consolidated balance sheet of the respective holding. Due to the narrowing of the type of firm to one industry, Becker and Huselid (1998) suggest that a bottom-line performance measure (such a net income) can be used. Due to the fact that both GAAP and IFRS record patents as part of intangible assets, one will see an identifiable, clear increase in this ratio by a rise of innovation in the case of increased information sharing and resulting higher innovation. The dependent variable will be observed for the latest information available, hence the end of the fiscal year of 2016.
c. Control Variables
The first control variable will be firm size (number of employees), as a bigger firm might be more profitable due to a more known public image, more experience, monetary capital and developed human capital which in turn again grants a higher access to new funding, all together resulting in a lower weighted average cost of capital (Stulz & Rene, 1999).
capital markets, resulting from differentiating risk preferences (Stulz & Rene, 1999). Carlsson et al. (2005) investigated the subsidiary performance of scandinavian firms in China, and found that it is higher when the firm has other subsidiaries outside of China. This conforms with Stulz and Renes´ (1999) work that a wider spread of subsidiaries’ presence in host countries might lead to higher performance
d. Model Estimation
The statistical model features a single-mediator analysis with the mostly used causal steps approach, adopted from Baron and Kenny (1986):
Y=i1+cX+e1 Y=i2+c′X+bM+e2 M=i3+aX+e3
Using this model, the components are specified as:
Y: dependent variable (firm performance → profitability ratio) X: independent variables (formal institutions + informal institutions ) M: mediator (information exchange → measured in number of patents)
Variables Measurement Source Independent Variables Formal Institutions: Regulatory quality → Government’s effectiveness → Corruption → Informal Institutions: Power Distance → Masculinity → Uncertainty Avoidance → Individualism → Long-term Orientation → Indulgence →
World Governance Indicators:
Rule of Law
Government Effectiveness Control for Corruption
Hofstede's Dimensions:
Power Distance Index (PDI) Masculinity vs. Femininity (MAS) Uncertainty Avoidance (UAI)
Individualism versus Collectivism (IDV)
Long-term orientation versus Short-term Normative Orientation (LTO) Indulgence versus Constraint (IND)
(World Bank Group, 2016)
(Hofstede, 2010)
Mediator
Information Exchange within
the MNC → Number of Patents Orbis
(2015-2017)
Dependent Variables
MNC Performance Profit Margin Orbis
(2015-2017) Control Variables Size → Differentiated Information access → Number of Employees
Number of countries the MNC is operating in
Orbis (2015-2017)
Orbis (2015-2017)
5. ANALYSIS AND RESULTS a. Outliers, Multicollinearity and Factor Analysis
SPSS is used to conduct the statistical tests. First, the sample was tested for outliers. A screening on Z-scores and box-plots (see table 2, appendix) has shown several outliers in some of the dimensions. The ones contained in Hofstede's cultural dimensions and the World Governance Indicators were investigated with no indication of errors in the data. All outlier scores were within the spectrum of measurement (Hofstede's Variables between 0 and 100, WGI between -2.5 and 2.5) and corresponded to the first-hand data found in the official sources (Hofstede, 2010; World Bank Group, 2016). The number of subsidiary countries shows five outliers. However, while they are some of the biggest companies in that industry, they were rechecked and their profile corresponds with the data found online on their websites. The same goes for number of employees. The biggest firms are shown as outliers, yet there is no reason to exclude them from the sample, as they were specifically chosen because of their size. There are six outliers in the variable Profit Margin. When investigating them it becomes clear that their profit margin is unreasonably high / low compared to the other firms in the industry. As there is no clear indicator of why this occurs and there is no data available online (presumably due to the small size of these companies in the sample), it was chosen to exclude these observations due to possible errors in the data obtained from orbis. The number of patents yields several outliers. It is in the interest of this study to also include these into the analysis. However, six of these firms have an unreasonable amount of patents, where the top firm has circa 120000 more than the median. The median amounts to mere 99 patents and the variance in the sample is very high, which seems to be appropriate for the industry. However, these six firms seem to pursue patenting as a major strategic interest in contrast to the others, and will therefore, as having a lack of representativeness, be excluded from the sample as well.
A test for correlations (see Table 3, appendix) indicated possible multicollinearity problems (significant correlations above 0.7 or very close with p<0.05) between Power Distance, all six World Governance Indicators and Individualism. Furthermore, Individualism also correlates with Voice and Accountability and Indulgence/ Restraint. Most interesting is that all World Governance Indicators correlate significantly (p>0.01) and very highly (>0.7, mostly even >0.8) with each other. Due to this outcome, collinearity tests were run for these variables using factor analysis, based on Eigenvalues greater than one. The first one concerns the WGI and the second one Hofstede's variables, as these two theoretical concepts are measuring two different things (formal and informal institutions).
Multicollinearity diagnostics for the relevant WGIs were run and revealed very high variance inflation factors. Due to this outcome, all WGIs were tested for multicollinearity, the results are reported in the table below.
Multicollinearity Test Tolerance VIF
Control for Corruption 0,032 42.584
Government Effectiveness 0.037 26.809
Political Stability and Absence of Terror 0.162 6.169
Regulatory Quality 0.084 11.924
Rule of Law 0.018 56.328
Voice and Accountability 0.144 6.968
Table 2: Multicollinearity test for the World Governance Indicators
Principal Component Analysis Component 1
Control for Corruption 0.970
Government Effectiveness 0.952
Political Stability and Absence of Terror 0.927
Regulatory Quality 0.916
Rule of Law 0.989
Voice and Accountability 0.874
Table 3: Factor analysis for World Governance Indicators
This reveals that all of the WGIs might measure the same theoretical construct. Because of this outcome, the test was repeated with all six of the WGI, showing the same result. Due to theoretical rigidity, the regression analysis will be run first with the relevant WGIs individually (following the hypotheses) and after that with a compound variable (WGI Compound) containing all six WGIs to see if the results differ and maybe to confirm that they measure the same theoretical construct.
Next the test was run with the variables of Hofstede. As seen below, the Variance inflation factors are all below 4,5, indicating no problems with multicollinearity.
Multicollinearity Test Tolerance VIF
Power Distance Index 0.281 3.557
Individualism versus Collectivism 0.223 4.493
Masculinity versus Femininity 0.721 1.387
Uncertainty Avoidance Index 0.837 1.195
Long Term Orientation versus Short Term Normative Orientation
0.319 3.131
Indulgence versus Restraint 0.317 3.154
Before the regression analysis was run, the Profit Margin variable and Number of Patents variables were tested for normality. The Levene's test for the profit margin was insignificant, which means that the error variance of the dependent variable seems to be equal across groups, however, the descriptives indicate a possible problem with the Kurtosis (Statistic: 6,296). The Kolmogorov-Smirnov test is significant, rejecting the null-hypothesis and indicating a non-normal distributed population. The same results appear for the Number of Patents variable, indicating a non-normal distribution. Therefore a logarithmic transformation will be applied to both variables. The Profit Margins are skewed negatively by -0,269 and the Patents are skewed positively by 3,539, therefore two different types of transformation will be applied. A log transformation is not possible for both variables as they have negative values (Profit Margin) and zero values (Number of Patents). It is possible to transform the Patents by first adding the minimum value plus one to every data point and then transform it. However, the Profit Margins also have negative skewness and therefore require further editing. This is done by reflecting the values, specifically subtracting every value from the maximum value plus one.
Even though the skewness of Patents was reduced significantly (0,037), Profit Margins skewness became higher (-3,092) and after the transformation of both variables The KS-Test is still significant. Therefor the original variable for Profit Margin will be used, while the transformed variable of Number of Patents will be taken into account due to less skewness. The non-normality of the data should be kept in mind due to its possible corruption of the outcome of the regression analysis. However, due to the large number of samples one may expect the same results as if the data were normally distributed. Therefore, a violation of the model assumption in regression analysis is seen as acceptable.
b. Linear regression results
First, a linear regression analysis was conducted testing the impact of information exchange (here: Number of Patents) on the dependent variable (here: Profit Margin) as specified in hypothesis 1.
While having a very low adjusted R^2 value of -0,004, the Anova test was insignificant (p=0.572). It does not seem like the Number of Patents have a significant impact on the Profit Margin, rejecting hypothesis one. Concerning Baron and Kenny (1986), a mediation effect is not possible when the mediator is not significantly correlated with the dependent variable, therefore there will be no further mediation tests.
Next, the impact of the three formal institutions as specified in Hypotheses 2a, b and c will be tested. As seen above, Rule of Law is not significantly correlated with number of patents (p=0.334), rejecting hypothesis 2a. Government Effectiveness is significantly (p=0) correlated with the number of patents at a standardized beta of 21.3%. Hypothesis 2b is therefore supported. Hypothesis 2c is also supported given a p-value of 0.016 and a standardized beta of 14.5%.
Lastly, given the above reported multicollinearity between all WGI scores, I tested the notion of the WGIs all measuring the same construct in this situation, which could be formulated as the quality of governance in general, by employing a compound variable incorporating all of them.
Even though the Anova test was significant (p=0.00), the impact of the WGI compound variable turns out to be insignificant (p=0.152). This shows that the WGI might be correlated with each other, however, they still measure (in the context of information exchange) different constructs.
Next, regression analyses were run with the six informal determinants.
6. DISCUSSION AND CONCLUSIONS
The aim of this study was to investigate the impact of institutions on the information-sharing intensity within multinational corporations. The institutions have been further defined into formal institutions, measured by the World Governance Indicators, and informal institutions, measured by Hofstede's cultural dimensions. It was originally hypothesized that the information sharing intensity within a MNC mediates the effect between institutions and the firm's financial performance. The regression analysis shows no significant result in this regard, therefore a mediation effect does not exist in this setting. There could be several reasons for that. First, the profit margin might be a volatile measure that does not accurately display firm performance, even if controlled for industry. Second, the significance of other factors which determine the profit margin and which have not been controlled for might be too big and distort the results. For example, Macusi (2008) quantitatively tested the impact of international knowledge spillovers on the innovation of MNCs in six countries. She concluded that, in countries which lag technological advancement compared to others, the absorptive capacity of a unit within the MNC has a large impact on knowledge absorption. For now, it can be concluded that, in the industry of motor vehicles, trailers and semi-trailers, it does not seem to be a major determinant of the financial performance of a multinational. Another possible alternative explanation might include the number of patents not being the best possible measure of information exchange within the MNE. Even though there is no mediation effect, this research revealed some insights about the impact of institutions on the information exchange within the MNC, as will be discussed below.
Mantzavinos et al, 2003; Andres et al., 2013). Coming back to the original research question, this study found that not all formal institutions in the country of headquarters have a considerable impact on information exchange with subsidiaries. The effectiveness of the domestic government and level of corruption do impact information exchange, Rule of Law does not. That has not only the academic implication that WGIs measure different concepts in the domain of information exchange in multinationals, but also practical implications. If a firm is looking to first locate or relocate its headquarters and is in a setting where information exchange is a key to the performance, its preferences should include countries with an effective government and low levels of corruption.
Now, the results of the tests involving informal institutions will be discussed. Five of the dimensions of Hofstede have a statistically significant impact on the number of patents the MNC holds. Power Distance does not have an impact in this case. The theory that Power Distance leads to information-sharing with headquarters due to the higher position of these might also have an alternative explanation. Due to the implied horizontal status distance between them and subsidiaries, the employees at headquarters might not be open to information transfer from said subsidiaries. Masculinity behaved in the opposite direction as expected. A possible explanation might be that the thrive for material rewards is a stronger force than the will to cooperate and might therefore lead to this outcome. Also, the chosen measure (Number of Patents) possibly influences the results conforming to this explanation, as patents often result in material rewards for the innovator from the firm as an incentive. Uncertainty Avoidance, not as theorized, leads to a higher number of patents. One may conclude that the sharing of information to anticipate future events instead of keeping it as leverage is a stronger determinant for information sharing. It was expected that Long-Term Orientation leads to more information flow due to the fact that more awareness of possible future events is risen due to the willingness to deal with the future, which was supported by the data.
argumentation taken from Michailova et al. (2006), stating that in a collectivistic culture information exchange might increase the degree someone is seen as an ingroup member. In this alternative theory, the results of this study indicate that the headquarters would see themselves in one firm (as in-group) with the subsidiaries, creating a higher willingness for information-sharing and consequently more patents. Lastly, contrary to expectations as well, Indulgence has a negative impact on information flow within the firm. It was argued that the less restraint to share innovative and new ideas would lead to a higher amount of information exchanged. As this hypothesis was not tested before, specifically with this dimension of Hofstede, a negative relation cannot be explained at this point in time. One can only guess about this topic, as further research is required to gain a deeper understanding of this dimension on information exchange. As described above, Masculinity influences information-exchange positively. If a society that strives for and motivates itself by personal gains and material rewards (Hofstede & Minkov, 2010) reaches higher levels of information exchange, a higher level of restraint to reach these goals might support that notion more than to engage in indulgence. Another possible explanation might be that Restraint leads to a longer working schedule, as Indulgence (enjoyment, possibly also more free time) results in less working hours and consequently simply less time spent communicating.
major implication besides the two theoretical insights that Mudambi and Navarra’s framework and Prim et al.´s work should only be used with additional care concerning their applicability to different settings.
In practice, based on the results with regard to informal institutions, it seems as if it is favorable to have headquarters located in those countries with high long-term orientation (and therefore the willingness to exchange information to deal with future events), low individualism (to see all firm-intern entities as in-group members), low indulgence (presumably due to higher working times), high masculinity (due to possible consequential compensations) and high uncertainty avoidance (to increase willingness to share information as a means to better anticipate future events).
7. Limitations and future Research
As explained before, this study uses alternative measurements, especially for the mediator. The chosen Number of Patents might be replaced by one reflecting most other studies, such as the use of surveys (see section 2c). The use of number of patents as a proxy for information sharing bares shortcomings. First of all, information exchange happens between people, making surveys a seemingly more valid measure. Second, in order to quantify this concept, patents are the closest possible measure. However, they are also influenced by many other factors and information exchange might be a significant one, yet only a part of the explanation. This leads to a need to rely on the results of this study with care as this fact might dilute them in terms of validity. The measure of Profit Margin as a proxy for Firm Performance was controlled for industry as advised by Becker and Huselid (1998), but still might be subject to volatility and could therefore be replaced by longer-term measures such as an average of recent years. As an example, firms that pursued other strategies such as rapid growth at the time the profit margin was recorded might have invested a significant amount of capital into high-maturity projects that only yield a financial performance in the long-term. Future research might therefore replicate the study using longer-term financial measures.
might be used in the future, as advised by Kogut and Singh (1988), to inquire if results would differ.
Another explanation for the disconformity of the results to the expectations is the negligence of corporate culture due to missing accessibility. Certain firms attract certain employees (Sokro, 2012; Coldwell, 2008). Therefore, in a time where international hiring and working abroad becomes gradually more likely (Sparrow, 2007), the role of headquarters influencing subsidiaries information sharing quantity might not be accurately measured using only the headquarters domestic country values anymore, but rather a weight-based system depending on the national composition of executives in the respective headquarters. Therefore, replicating this study with a weighted cultural value system in the future might yield results that better reflect the proposed hypotheses.
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