Family management and internationalization: the impact on firm performance and innovation.
| Verfasser | Tsao, Shou-Min |
| Posten | RESEARCH ARTICLE - Report |
Abstract:
* Researchers in international business have long been interested in understanding the impact of internationalization on firm performance and innovation. However, because international diversification offers both advantages and agency problems, prior studies of this research stream offer mixed results.
* Based on a sample of Taiwan's publicly listed firms during the period of 2000-2009, this study contributes to this research stream by examining the impact of family management on firm performance and innovation implications of internationalization.
* This study finds that family management positively moderates the relation between internationalization and performance/innovation. These findings suggest that family management helps mitigate the agency problems associated with internationalization so that family firms experience positive benefits from internationalization in terms of innovation and performance.
Keywords: Agency problems * Family firms * Innovation * Internationalization * Performance
Introduction
Increasing global market liberation has made it necessary for firms to diversify the geographic scope of their business activities (Glauman and Oesterle 2007; Lu and Beamish 2004). Considerable research has explored the issue of the internationalization of firms, and researchers in the international business field have long been interested in understanding the influence of internationalization on firm performance (e.g., Contractor et al. 2003; Grant et al. 1988; Glaum and Oesterle 2007; Ruigrok et al. 2007) and innovation (e.g., Carlsson 2006; Hitt et al. 1994; Hitt and Keats 1992; Oesterle 1997). Prior studies have argued in favor of the performance and innovation implications of internationalization, citing factors such as achieving both economies of scale and scope (Tallman and Li 1996), exploiting foreign market opportunities and imperfections (Rugman 1981), maximizing location economies by configuring value-chain activities (Porter 1990), utilizing knowledge and ideas from multiple countries (Von Zedtwitz and Gassmann 2002), and generating the resources required to sustain a large-scale research and development (R&D) operation (Kobrin 1991).
However, other studies show that internationalization also creates higher uncertainty and complexity of tasks. The resulting increase in information asymmetry and conflicts of interest between managers and shareholders can lead to greater agency problems and thus deteriorate the performance and innovation implications of internationalization (Ruigrok and Wagner 2003; Sanders and Carpenter 1998). Because internationalization offers both advantages and disadvantages (i.e., agency problems) to multinational corporations, prior research provides inconsistent evidence on the relation between internationalization and firm performance/innovation. (1) We continue to this stream of research, mitigated by agency theory, by examining the moderating role of family management on the performance and innovation implications of internationalization.
Family firms are a common organizational form in most countries around the world (Faccio and Lang 2002; La Porta et al. 1999). They are characterized by the founding family's concentrated ownership and the founding family members' active involvement in the firm's management. These distinguishing features can affect family firms' agency problems. Specifically, compared to nonfamily firms, family firms face less severe Type I agency problems, which develops from conflicts of interest between managers and shareholders (Jensen and Meckling 1976). However, family firms are characterized by more severe Type II agency problems due to the conflicts of interest between families and minority shareholders (Villalonga and Amit 2006; Young et al. 2008). This unique management and ownership structure of family firms provides an interesting setting to explore the relation between corporate governance and internationalization.
Family firms face less severe Type I agency problems (i.e., principal-agent conflicts) because family owners have stronger incentives to oversee managers (Demsetz and Lehn 1985; Randoy and Goel 2003), better access to information (Kirchmaier and Grant 2005; Peng and Jiang 2010), and a longer investment horizon than other shareholders (Mishra et al. 2001; Thomsen and Pedersen 2000). We argue that these characteristics enable families to accentuate the performance/innovation impact of internationalization. However, the more severe Type II agency problems (i.e., principal-principal conflicts) faced by family firms may encourage entrenched family owners to extract private benefits through international diversification at the expense of minority shareholders, which, in turn, may deteriorate firm performance and innovation. Thus, as a result of the interplay between Type I and Type II problems, whether agency problems are overall more or less severe within family or nonfamily firms is unclear. Thus, whether the impact of internationalization on performance and innovation is better or worse for family or nonfamily firms is an empirical question.
Firm performance, innovation, internationalization, family management, and family ownership are the key concepts in our empirical analysis. For firm performance, we use both accounting-based (i.e., return on assets [ROA]) and market-based (i.e., Tobin's Q) performance measures. We use R&D expenditures and the number of patents as proxies for innovation. For internationalization, we apply a principal component factor analysis to combine three widely used measures: (a) foreign sales to total sales, (b) foreign assets to total assets, and (c) the number of countries in which a firm operates (e.g., Sullivan 1994; Tallman and Li 1996). Because the influence of families exerted on the firm may go beyond their ownership, following Anderson and Reeb (2003a, b), we mainly use the criteria of family management to define family firm. A firm is considered a family firm if founders or their family members hold the key management positions, sit on the board, or are the blockholders of the firm. Due to the lack of restriction on the level of family ownership for this definition, we also use family ownership in our analysis, which is defined as the fractional equity ownership of the founding family.
Our evidence is based on a sample of Taiwanese listed firms over the period from 2000-2009. Taiwan is a good setting to study the impact of family firms on internationalization because Taiwan is a highly export-reliant country and most Taiwan's listed firms are family-owned business. We find that the impact of internationalization on firm performance and innovation is stronger for family firms than for nonfamily firms. These results suggest that family owners' better monitoring of management, better access to information, and longer investment horizon lead to less opportunistic behavior arising from internationalization. Our results are also consistent with the conjecture that among agency problems arising from internationalization, Type I problems outweigh Type II problems.
This study contributes to the literature on international business and agency theory in three ways. First, extant studies on international business have shifted from simply investigating the performance/innovation implication of internationalization to identifying the contingency factors on which this relation may depend (Glaum and Oesterle 2007; Hitt et al. 2006; Singh et al. 2010). We contribute to this stream of literature by theorizing and providing evidence that family management and ownership play an important moderating role in this relation. Second, matters concerning the role of corporate governance mechanisms on internationalization have received great attention in recent years (Hitt et al. 2006). We contribute to this stream of research by providing results that contrast with research focusing on U.S. corporations (e.g., Carpenter and Sanders, 2004; Sanders and Carpenter, 1998; Tihanyi et al. 2003). Also, compared to this other body of research, our results may be more generalizable to other countries because the principal-principal model of corporate governance in Taiwan as compared to the principal-agent model of corporate governance in United States is more representative of the corporate governance process throughout the world (La Porta et al. 1999; Young et al. 2008). Third, recent studies within Asian countries (Faccio et al. 2001; Lemmon and Lins 2003) find that family firms exhibit more severe agency problems relative to nonfamily firms due to their institutional backgrounds. In contrast, we find that Taiwan's family firms are subject to less agency problems than its nonfamily firms relative to internationalization. Therefore, we suggest that even in an environment with political-regulatory and weak investor protection (e.g., Taiwan's stock market), publicly held family firms do not necessarily operate within a less effective organizational structure that leads to severe losses in decision-making efficiency.
Theoretical Background and Hypotheses
Family Firm and Agency Problems
Public corporations are constrained to varying extents by agency problems that arise from the conflicts of interests among stakeholders. The type of agency problems associated with a firm is affected by the firm's ownership structure. When ownership is diffuse or the largest shareholder is an institution, agency problems usually stem from the separation of ownership and management; that is, the problems are based on a conflict between principal and agent (Type I agency problems), This type of agency problem may lead to managers to forego the best interest of shareholders to extract private benefits. In family owner-managed firms, the nature of agency problems shifts away from manager-shareholder conflicts to conflicts between the family owners and the minority shareholders; that is, the problems are based on a conflict...
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