Too Far East is West: CEO Overconfidence Influences Firm Internationalization in Emerging Economies.

VerfasserLi, Dayuan
PostenChief executive officer

1 Introduction

Gaining deeper understanding about the driving factors on firms' internationalization has long attracted research attention from international business (IB) scholars (Boustanifar et al., 2022). Focusing on the question of "what drives firms abroad?", the scholars have explored various antecedents affecting the internationalization of multinational enterprises from multiple levels, such as institutional environments (Chan and Pattnaik, 2021; Nuruzzaman et al., 2020), organizational conditions (Cuervo and Li, 2021) and executives' attributes (Chittoor et al., 2019; Li, 2018).

An upper echelons perspective has been adopted to examine the important role of CEOs in shaping corporations' internationalization strategies (Hambrick, 2007; Hambrick & Mason, 1984). So far, scholars have concentrated on studying the impact of CEOs' cognitive framework and psychological attributes on the decision process of internationalization (Lai et al., 2017; Niittymies & Pajunen, 2020). Confidence has been regarded as the most prominent of psychological attributes affecting CEOs' decisions and their corresponding outcomes (Kahneman, 2011). For example, using a sample of US corporations, Lai et al., (2017) found that overconfident CEOs are more likely to implement aggressive foreign market entry strategies and select higher resource commitment approaches in their process of internationalization.

Extant studies seem to have reached a unanimous conclusion that conceptualizes CEO confidence as a main driving force for overseas expansion (e.g. Ferris et al., 2013; Lai et al., 2017; Picone et al., 2021). However, previous studies have ignored the negative effect that CEO confidence may have on firms' internationalization. In fact, the CEOs with higher level of confidence are more prone to make mistakes in their international strategic decision such as aggressive choices in entry strategy and excessive geographical diversification, which may challenge the findings of existing studies. Especially in the context of emerging market economy, The EMNEs lack the knowledge and experience to conduct business abroad (Nelaeva & Nilssen, 2022; Jindra et al., 2016), so the overconfidence of CEO is more likely to bring serious negative impact on the overseas expansion of EMNEs. Therefore, it is necessary to comprehensively consider both positive and negative effects of CEO confidence to explore its impact on firms' internationalization.

To answer the question "how does CEO confidence influence EMNEs' internationalization?" we use China as a research context to investigate both the negative and positive influence of CEO confidence on EMNEs' internationalization based on upper echelons theory. Our core argument is that in order to seize the opportunities for growth and gain access to knowledge and technology in a global market, CEO with a higher level of confidence will have a stronger intention to implement internationalization strategy, since they are more likely to overestimate their own abilities and are more willing to take extra risks. However, with increasing levels of confidence, CEOs tend to overvalue their internationalization knowledge, making them more likely to make inaccurate strategic decisions and thus hinder the process of their ENMEs' internationalization. Taking both the bright and dark effects together, we propose an inverted U-shape relationship between CEO confidence and EMNEs' internationalization.

Utilising 897 sample firms with 4550 firm-year observations in China, we find substantial support for our argument. As one of the first attempts to explore the curvilinear relationship between CEO confidence and EMNEs' internationalization, this study makes the following two main contributions to the current scholarship. First, we extend the literature on the relationship between CEO confidence and firm internationalization. Previous studies have mainly focused on the positive impact on firms' internationalization (e.g. Ferris et al., 2013; Lai et al., 2017; Picone et al., 2021), but these studies have failed to consider the potential negative impact of CEO confidence as well as the context of emerging economies. Our study links both the positive and negative effects of CEO confidence to EMNEs' internationalization and identifies a curvilinear relationship between them. In addition, we also explore the boundary conditions that moderate the effects of CEO confidence on EMNEs' internationalization through analysing the unique context of markets and governments in emerging economies.

Second, we enrich research on the antecedents of internationalization at a micro level in the context of EMNEs. The scholars have highlighted the importance of micro-level factors in impacting EMNEs' internationalization and call for more attention to the mechanisms at individual level (Chittoor et al., 2019). However, scholars have narrowly focused on how the demographic factors of executives have influenced EMNEs' internationalization (e.g. Li, 2018; Ng & Sears 2017): they have ignored the role of psychological attributes in the process (Agnihotri & Bhattacharya, 2019). Our study pays attention to the cognitive level of CEOs and discusses the mechanisms of CEO confidence on EMNEs' internationalization, which offers a better explanation of the rapid and risky internationalization process of EMNEs, thus extending the boundaries of the existing research in international business.

2 Theory and Hypotheses

2.1 Theoretical Background

Internationalization is defined as "a strategy through which a firm expands the sales of its goods or services across the borders of global regions and countries into different geographic locations or markets" (Hitt et al., 2007: p.251). EMNEs take internationalization as a primary strategy to acquire strategic assets in advanced world, so as to move themselves up the technological ladder and overcome their latecomer disadvantage (Luo et al., 2011; Liu et al., 2021). In this sense, the scholars have explored the driving factors that influence EMNEs' internationalization from multiple levels, such as the institutional level (Chan and Pattnaik, 2021; Nuruzzaman et al., 2020), the industry level (Saiyed et al., 2021), the organizational level (Yaprak et al., 2018) and the individual level (Agnihotri & Bhattacharya, 2019; Chittoor et al.,2019).

Focusing on the individual level, scholars have highlighted the role of the CEO as having a significant influence on an EMNE's strategic decision-making with regard to internationalization from the perspective of upper echelons theory (Agnihotri & Bhattacharya, 2019). Upper echelons theory explains how top executives' attributes exert influence on corporate strategic decisions and their consequences (Hambrick & Mason, 1984). However, extant studies mainly focus on the impact of the demographic characteristics of top managers on EMNEs' internationalization, such as top executives' age (Hsu et al., 2013), gender (Ng & Sears, 2017), international experience (Li, 2018), CEO ownership (Chittoor et al., 2019) and other attributes. In this study, we mainly focus on the impact of CEO confidence, one of the most significant cognitive attributes (Kahneman, 2011), on EMNEs' internationalization, in order to enrich our understanding of the process of firms' internationalization in the context of emerging economies.

Confidence refers to "a general tendency that permeates time, tasks and situations and constitutes deep-seated beliefs about one's competence, capability and acumen" (Heavey et al., 2022: p.8). Existing studies have mainly focused on exploring the impact of CEO confidence on firms' decisions and their consequences, such as innovation strategies (Arena et al., 2018; Tang et al., 2015), financial performance (Schumacher et al., 2020), market entry choices (Gutierrez et al., 2020), corporate social responsibility (Zhang et al., 2020) and internationalization (Agnihotri & Bhattacharya, 2022; Picone et al., 2021). On the research topic of internationalization, existing studies have conceptualized CEO confidence as a main driving factor in international strategic choices, including location selection, entry mode choices and ownership structure decisions (Lai et al., 2017; Picone et al., 2021).

Confidence is specific to contexts and consequences (Heavey et al., 2022). However, extant studies have failed to examine confidence in the unique context of EMNEs' internationalization. We propose that in the context of emerging economies, CEO confidence may exert both positive and negative effects on firms' internationalization, resulting in an inverted U-shaped relationship. Moreover, the influence of executives over firms is largely contingent on managerial discretion. Following the logic of managerial discretion, we also discussed the moderate effects of both the market (market dynamism) and the government (government subsides) in the context of emerging economies.

2.2 CEO Confidence and EMNEs' Internationalization

We propose that the CEO confidence can have both positive and negative effects on EMNEs' internationalization, thus exhibiting an inverted U-shape relationship. In the context of emerging economies, the decision makers are more likely to have less availability of information and perceive a higher level of uncertainty in international markets; thus, some EMNEs may have little intent to internationalize (Eduardsen and Marinova, 2020). We argue that CEO confidence can enhance the EMNEs' strategic intention to expand overseas. The strategic intention determines "where managers focus their attention, how much effort they put forth, how they internalize and interpret new information and what decisions and actions develop" (Casillas et al., 2015:106). First, the CEOs' confidence may increase their willingness to take excessive risks and make higher resource commitments to implement their strategy of internationalization. Internationalization is characterized as a risky strategy...

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