A primary task for corporate decision-makers is to increase the growth of their businesses. In addition to penetrating the existing market, growth can be pursued through product diversification (Rumelt, 1974) or an international expansion strategy (Kim, Hwang, & Burger, 1989). The strategy of international expansion has emerged as one of the most important growth vehicles among both management practitioners and researchers due to the rise of intense global competition pressure (Pla-Barber & Alegre, 2007; Sapienza, Autio, George, & Zahra, 2006).
There are a variety of antecedent factors that may affect a firm’s internationalization (Hitt, Bierman, Uhlenbruck, & Shimizu, 2006; Hitt, Tihanyi, Miller, & Connelly, 2006), including financial resources brought by institutional ownership (Tihanyi, Johnson, Hoskisson, & Hitt, 2003), external information brought by relational networks (Araujo & Rezende, 2003), human resources gained by top management team (TMT) heterogeneity (Herrmann & Datta, 2005; Tihanyi, Ellstrand, Daily, & Dalton, 2000) and human capital holding (Hitt, Bierman, et al., 2006; Hitt, Tihanyi, et al., 2006). In addition to these factors, a resource-based view of the firm sees organizational resources, both tangible and intangible, to hold the potential for influencing the direction of a firm’s global expansion and helping the firm achieve a sustainable competitive advantage (Wernerfelt, 1984). For example, Calof and Beamish (1995) highlight that a change in a firm’s resources may alter its internationalization patterns. They found that when firms owned sufficient slack resources to engage in a higher form of foreign direct investment, these firms proceeded more rapidly and would not follow a sequential process of international development. George (2005) also notes that slack is a potentially utilizable resources that can be diverted or redeployed for the achievement of organizational goals. Organizational slack critically affects a firm’s ability to grow both in foreign market exploitation and in domestic market expansion. Interestingly, few studies consider the direct effect of organizational slack upon a firm’s internationalization (Tseng, Tansuhaj, Hallagan, & McCullough, 2007). There exists a major gap in our understanding of how organizational slack is related to a firm’s internationalization strategy. Two such gaps relate to (a) whether organizational slack influences the internationalization of firms and (b) the extent to which a firm’s ability to internationalize is related to different organizational slack forms.
Organizational theorists have already conducted a substantial amount of research focusing on the effects of organizational slack on organizations, including behavior theory of the firms (Cyert & March, 1963: 30), resource-based theory (Barney, 1991), resource constraint literature (Baker & Nelson, 2005; George, 2005), and agency theory (Jensen & Meckling, 1976). Nonetheless, researchers have only recently paid attention to organizational slack in different forms as a predictor of organizational performance (George, 2005; Tan & Peng, 2003), organizational innovation (Nohria & Gulati, 1996), and risk-taking (Wiseman & Bromiley, 1996). Studies have thus far have ignored firm’s internationalization, leaving a gap in understanding the ways in which organizational slack may influence the internationalization of firms. Our study seeks to bridge the gap through an examination of the relationship between organizational slack and firm’s internationalization. We hope to contribute to both organizational theory and the international business by providing a better understanding of whether or not distinct forms of organizational slack reflect firm’s internationalization strategy.
The purpose of this research is to understand how organizational slack affects firm’s internationalization. With results supporting four hypothesized relationships, our findings lend credence to Wiseman and Bromiley (1996) and Nohria and Gulati (1996) contention that organizational slack is an indicator that governs international strategic choices. Different slack resource levels will lead managers to develop entirely different international expansion strategies.
What do the results imply? First, they support the argument that high-discretion slack leads managers to choices that lower their firms’ internationalization. This is because firms that possess ample high-discretion slack may lead managers to develop dysfunctional practices. For instance, these managers are likely to be lax in discipline, breed inefficiency, possess irrational optimism for themselves and neglect foreign competitors. Moreover, slack provides them with the power to make self-interested decisions. Thus, more high-discretion slack leads managers to decrease their firm’s internationalization. Second, it might be a reflection of the positive relationship between low-discretion slack and firm’s internationalization. Third, the observed positive relationship between more high-discretion slack and firm’s internationalization as the slack increases beyond a certain range might be attributed to the fact that managers are alert to the environmental changes, but then lose their touch and become ‘stale in the saddle’. As a result, they perceive that they use slack resources as a facilitator for strategic behavior to initiate changes in international strategy and enhance risk-taking in foreign markets.
We argue that different slacks may interact differently with different firm’s internationalization. Different types of slack will motivate diverse strategic actions on the part of managers. From an academic standpoint, an important contribution of our study relates to the use of organization theory and economic theory in explaining the relationship between organizational slack and the international strategies of firms. While prior work (e.g., Smith, Grimm, Gannon, & Chen, 1991) had examined organizational slack and the environmental implications of strategic choices, these studies have only been conducted in the context of domestic strategies.
