In at the deep end of firm internationalization: nationality diversity on top management teams matters.

JurisdictionGermany
Date01 Julio 2013
AuthorKaczmarek, Szymon

Abstract:

* The purpose of this research is to examine the consequences of top management team (TMT) internationalization: why and under what conditions can TMT nationality diversity be beneficial?

* On the basis of the upper echelons theory from the strategic leadership literature, the relationship between the TMT nationality diversity and firm performance in the strategic context of firm internationalization is investigated in moderated multiple regressions models (MMR) for a sample of Dutch, Swiss, and UK companies.

* The study findings suggest that the TMT nationality diversity becomes advantageous only in firms with high degree of internationalization. Companies have to be strongly committed to foreign markets so that the benefits of the TMT nationality diversity can materialize.

* The arising managerial implication is that the TMT nationality diversity can be a powerful tool in building a firm's competitive advantage, provided that companies are strongly exposed to the international environment. The study also provides corroborative evidence that the search for moderating and mediating variables in the TMT demography research represents a step in the right direction.

Keywords: Firm internationalization * Nationality diversity * Top management team. Upper echelons theory

Introduction

In today's borderless world of global competition, the demands placed on the managerial elites have risen to a level that was inconceivable 20 or 30 years ago (Beck 2008; Ohmae 1990). These developments led international business scholars to appreciating the potential sources of a firm's competitive advantage in an international marketplace in thoughtfully composed and managed human resources at different managerial levels, however especially at the top of organizational hierarchies. Top management teams (TMT) composed of members understanding the dynamics of a firm's international environment and with strong cross-cultural awareness and knowledge have been advocated as an organizational solution, thanks to which companies can effectively navigate through complex and uncertain foreign markets (Bartlett and Ghoshal 1989; Greve et al. 2009; Luo 2005).

Academic research has documented that over the last 20 years the incidence of foreigners in executive ranks or supervisory boards of the world's largest multinational corporations (MNCs) increased considerably, and 75 % of the world's 80 largest MNCs had at least one foreign member on their boards in 2005 (Staples 2007). There is also evidence that both firm internationalization and a country's governance regime explain whether and to what extent foreigners can be admitted to executive ranks (Van Veen and Marsman 2008; Van Veen and Elbertsen 2008). Moreover, in the research stream on global teams in general, the mechanisms of developing cross-cultural competence and learning, as well as the conditions under which an internationally experienced member can effectively contribute to the proceedings of the global team, have been studied (Athanassiou and Roth 2006; Bartel-Radic 2006; Maznevski and Athanassiou 2006). However, except for a handful of studies (Gong 2006; N ielsen 2010a; Nielsen and Nielsen 2011), there is a paucity of research that would examine the consequences of the internationalized TMTs. Why and under what conditions are they supposed to be beneficial for companies?

Building on the upper echelons theory, which specifies that organizational outcomes and performance are reflections of attributes of senior management (Finkelstein et al. 2008; Hambrick and Mason 1984), and based on the setting of three developed economies from Western Europe, we explore these research questions in this work. Our findings suggest that the TMT nationality diversity becomes advantageous only in firms with high degree of internationalization. Companies have to be strongly exposed to foreign markets along multiple dimensions of firm internationalization so that they can reap the benefits of the TMT cross-cultural awareness and knowledge. This is because only when companies are confronted with serious challenges of operating in multiple and frequently culturally and institutionally distant markets, the human and social capital of the nationally diverse TMTs can be fully utilized. Moreover, we find that there are some national idiosyncrasies attributable to a country's economic factors and corporate governance regimes, which influence the level of nationality diversity among the TMT members. Overall, our study contributes to the international business and strategic leadership literature, answering the recent calls for introducing contextual variables to the TMT demography research and demonstrating that the search for moderating and mediating variables represents a step in the right direction (Carpenter 2002; Certo et al. 2006; Hambrick 2007).

The paper is structured as follows. In the next two sections we present the literature review and derive the hypotheses. Then, we elaborate on our research design and data analysis. The subsequent two sections comprise the presentation and discussion of findings, together with the discussion of managerial implications and limitations of the study as well as potential future research avenues. Concluding thoughts are contained in the final section.

Literature Review

The upper echelons theory, as a central tenet in the strategic leadership literature, proposes that organizations represent reflections of their senior managers' characteristics. Observable demographic attributes of top managers are construed as proxies for their cognitions, values and personality traits, such as charisma or locus of control, which consequently influence strategic choices and outcomes (Finkelstein et al. 2008; Hambrick and Mason 1984). Until recently, the academic contributions to this stream of literature concentrated primarily on TMT's age (Tihanyi et al. 2000; Wiersema and Bantel 1992), functional background (Carpenter 2002; Hambrick et al. 1996), organizational tenure (Carpenter and Fredrickson 2001), and educational level and/or background (Eisenhardt and Schoonhoven 1990; Wiersema and Bantel 1992). Yet, as illuminated by Carpenter et al. (2004), the original Hambrick and Mason (1984) model is being extended to incorporate the upper echelons internationalization variables, which indeed represent its dominant enhancement recently.

In today's globalizing world, in which international trade and foreign direct investment (FDI) have increased to the extent that some MNCs generate revenues greater than the gross domestic products (GDP) of some smaller national economies, such as Walmart's or Exxon Mobil's revenue exceeding the GDP of Turkey or Austria (Rugman and Collinson 2009), MNCs have to accommodate a high degree of nationality diversity among their employees at different managerial levels, and especially at the top of the organizational hierarchy (Beck 2008). Gupta and Govindarajan (2002, p. 120) proposed that, indeed, such globally-oriented companies should be on 'the quest for a global mindset' in order to be able to be open to and aware of diversity across cultures/markets and to synthesize across this diversity.

Facilitating cultural knowledge-building among individuals through formal education abroad, participation in cross-border endeavours, cultural learning programmes, or expatriate assignments is likely to be a lengthy process fraught with difficulties (Gupta and Govindarajan 2002). This is because learning through experience across multiple cultures is pre-determined by a person's personality traits, which are typically shaped in the early childhood and throughout the formative years spent in that person's homeland. Although building a global mindset is ultimately possible (Bouquet 2005), nationality imprinting is generally not easily erased (Hofstede and Hofstede 2005). Therefore, Gupta and Govindarajan (2002) rightly conclude that MNCs have the greatest degrees of freedom with regard to cultivating a global mindset of their managers in selecting and managing the demographic make-up of particular teams, and especially the TMT, by creating geographic and cultural diversity on the TMT.

There are two main sources of TMT internationalization: (1) domestic, but internationally experienced, managers, and (2) foreigners. The common denominator of both cases is that both internationally experienced and foreign managers are likely to have cultural knowledge in terms of cognitions, values, norms, etc., on countries in which they spent their international assignments and where they come from, respectively. However, whereas foreign managers are likely to embody and live up to those cognitive cultural schemas of their country of origin, domestic, internationally-experienced managers can at best understand them, but not be governed by them (Greve et al. 2009; Nielsen 2010a). In line with this argument, Nielsen and Nielsen (2011) demonstrated that differently composed TMTs in terms of nationality and international experience diversity are likely to have proclivity for the shared- and full-control entry modes to international markets, respectively.

Whereas the variable of TMT international experience has been comparably well researched in the academic literature so far (e.g., Athanassiou and Nigh 1999, 2000; Carpenter and Fredrickson 2001; Carpenter et al. 2001, 2003; Daily et al. 2000; Reuber and Fischer 1997; Sambharya 1996), the stream of research on the TMT nationality variable is only emerging, despite its intuitive appeal in studies based on samples of European companies (Caligiuri et al. 2004; Greve et al. 2009; Heijltjes et al. 2003; Van Veen and Elbertsen 2008; Van Veen and Marsman 2008). All of those studies focused specifically on the antecedents of the TMT nationality diversity, such as a firm's degree of internationalization, breadth and scope of internationalization, merger and acquisition deals, or a country's governance regime. There is, however...

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