The international business literature traditionally assumes that internationalization decisions are purely rational and scholars tend to ignore strategic decision-making research in explaining how foreign investment decisions are made (Brouthers & Hennart, 2007). Foreign expansion does not occur in a vacuum, however, but is determined by a certain set of strategic choices made my executive decision-makers. Yet, past research primarily focuses on the rational, measurable attributes of the transaction without considering the top management team (TMT) as decision-maker. While empirical research on entry mode choice for foreign direct investments (FDI) has identified and tested numerous predictor variables, such as firm, industry and country characteristics (for reviews, see Brouthers and Hennart, 2007 and Kumar and Subramaniam, 1997), it largely neglects to account for the individuals and teams making the actual decisions (for notable exceptions, see Herrmann and Datta, 2002 and Herrmann and Datta, 2006 on the role of CEO characteristics).
Based on the behavioral theory of the firm (Cyert and March, 1963 and March and Simon, 1958), strategic decision-making research focuses on how decisions are conditioned by bounded rationality of individuals. For instance, upper echelons theory suggests that executives’ backgrounds and experiences greatly influence their interpretations of strategic decision-making situations, and, in turn, affect their choices (Hambrick & Mason, 1984). A large body of research has linked manager's education, functional background, age, tenure, etc. to a number of strategic outcomes. Lately, this line of enquiry has been extended to the global arena. The increase in market globalization over the past decades and the ensuing pressures on top management to internationalize their firms puts a premium on decision-makers with international orientations.
Internationally oriented TMTs are believed to be better at coping with diverse cultural, institutional, and competitive environments and make strategic decisions that result in superior performance (Bartlett and Ghoshal, 1989 and Gupta and Govindarajan, 2002) than domestically oriented TMTs. Research has linked TMT characteristics, particularly international experience, to firm international involvement (Athanassiou and Nigh, 2002, Reuber and Fischer, 1997, Sambharya, 1996 and Tihanyi et al., 2000). Yet, the potential value of heterogeneity in executive's nationalities and the cultural composition of the TMT has thus far been neglected, constituting a critical omission in our understanding of international strategic decision-making.
While both international experience and nationality diversity are likely to influence international decision-making, they lead to different preferences and strategic choices. Specifically, whereas international assignment experience brings benefits such as international market knowledge, skills, and informal network contacts to the decision-making process, such experiences are limited in time and scope (Caligiuri & DeSanto, 2001). Nationality, on the other hand, influences the fundamental values and cognitions of the decision-maker, which are used as lenses to scan, identify, organize, interpret, and utilize information, which, in turn, provides the basis for strategic choice (Shaw, 1990). The values embedded in national cultures have a profound and enduring effect on executives’ orientations, independent of the logics and wisdom accrued in management development. In a TMT setting, the diversity in cognitive bases and values resulting from executive nationalities has a strong influence on strategic decision-making.
The contribution of this paper is threefold. First, we integrate entry mode theories with the upper echelons perspective in order to illuminate the role of managerial characteristics in international entry mode decisions. While existing TMT research focuses primarily on the role of TMT (and CEO) characteristics in determining firm internationalization, the composition of the TMT has not been explicitly linked to the choice of foreign entry mode. By the same token, entry mode research has considered a range of factors at country, industry, and firm level to influence the entry mode decision, however, largely ignoring the influence of the managerial team making such decisions.
Second, our paper compares and contrasts two specific characteristics relevant to firm internationalization: TMT international experience and nationality diversity in order to illustrate their distinct roles in international strategic decision-making. Specifically, we argue that TMT international experience and nationality diversity influence the perception of risks associated with entering foreign markets differently, thereby leading to different preferences for modes of entry. Our results demonstrate that TMT nationality diversity is positively associated with a preference for shared-control entry modes, such as international joint ventures (IJVs), whereas internationally experienced TMTs are more likely to prefer full-control entry modes, such as greenfield or acquisitions, as mode of entry into foreign markets.
Third, as entry mode choice is influenced by variables at multiple levels (e.g., country, industry, firm and decision) it can be considered a multilevel phenomenon (Arregle, Hebert, & Beamish, 2006). Parent firms can have multiple foreign direct investments and hence these cannot be considered as independent. We use hierarchical linear modeling (HLM) to account for the nested structure of the data and thus contribute to the growing literature utilizing multilevel theory and method in international business research.
Foreign market entry mode is a critical decision with regards to international expansion. The choice between entering a foreign market via shared-control equity joint ventures versus full-control greenfield or acquisition investments has strong implications for risk of investment, organizational control, and commitment of resources. Ultimately, this decision is made by a team of executives at the apex of the organization. Surprisingly, no prior studies have attempted to understand the influence of TMT composition on such foreign market entry choice decisions. This study was motivated by the desire to address this gap by examining how the managerial characteristics of the TMT may influence the choice of entry mode.
We contribute to the entry mode literature by simultaneously investigating the role of rational factors and TMT characteristics in relation to international strategic decision-making. In particular, we focus on two dimensions of TMT background characteristics that are deemed important in the process of firm expansion abroad. Our results suggest that both international experience and nationality diversity at the top management team level are relevant predictors of the foreign market entry mode decision, even after controlling for other factors. While prior research has established that CEO international experience influences the choice of international market entry modes, we consider the composition of the entire TMT in this decision (Hambrick & Mason, 1984).
A main contribution of our study was to establish the validity of nationality diversity as an important yet understudied TMT diversity dimension. Despite the upward trend of hiring foreign nationals in the upper echelons of large corporations and the anticipated benefits in times of increasing globalization, the effects of TMT nationality diversity on strategic decision-making have remained largely unexplored. As evidenced by our theoretical model and empirical results, nationality diversity differs from other TMT diversity attributes, such as international experience, functional or educational diversity, lending support to the value-added of accounting for it in studies of TMT diversity. Specifically, our study confirms that TMT nationality diversity and international experience are two distinct characteristics influencing international strategic decision-making in disparate ways. We find that nationality diversity among TMT members leads to a preference for shared-control (IJV) entry modes over full-control (greenfield and acquisition) modes, whereas internationally experienced TMTs are more likely to choose full-control modes over shared-control modes. Together, these findings suggest that international experience and nationality diversity represent different managerial resources in the international strategic decision-making process, leading to different strategic choices.
International experience provides valuable international market knowledge and network contacts, which instills in the decision-maker a sense of confidence about his or her ability to accurately estimate the risk and uncertainty associated with foreign market entry. Such perception often translates into a preference for fully owned foreign operations as the risk and cost of such investments are deemed less than the potential high returns and benefits. Nationality diversity, on the other hand, brings different benefits which cannot be acquired through international assignments. Such benefits arise from the variety of values and cognitive schemas deeply rooted in individual's national culture that shape the strategic mindset of strategic decision-makers (Caligiuri & DeSanto, 2001). The diverse national backgrounds may lead to constructive debate and cognitive conflict, which is likely to affect scanning, selection, and interpretation of relevant information, in turn, influencing perceptions of uncertainty and costs associated with strategic choices. Attending to a wider range of environmental cues, TMTs composed of different nationalities are likely to perceive the risk and complexity of foreign expansion to be higher compared to purely domestic TMTs. As a result, they may choose collaborative shared-ownership entry modes in order to mitigate institutional and market-based risks. At the same time, such culturally diverse TMTs are skilled in multicultural teamwork and collaboration, which may lead them to look more favorably at collaborative entry mode choices, such as IJVs. Despite the seemingly higher barriers associated with “double layered acculturation” (Barkema et al., 1996) of international JVs, nationally diverse TMTs might feel confident in their ability to integrate and manage a foreign partner.
These results point to the value of studying various aspects of managerial backgrounds in international strategic decision-making. Consistent with Geletkanycz's (1997) work, we find that both prior experiences and cultural socialization contribute to the shaping of executives’ strategic mindset. Top decision-makers remain deeply rooted in their own cultures and their strategic mindset is to a large degree shaped by their nationality. Executives’ cultural identity is not lost over time, nor is it overshadowed by professional acculturation associated with firm or industry experience. Therefore, it is critical to examine the independent effects of both international experience and nationality diversity in studies of managerial decision-making in an international context.
This study relied on the nationality of top executives as a proxy for the degree of cultural diversity in the team. While prior research shows that nationality has profound influence on the values, cognitions and behavior of individuals (e.g., Hofstede & Hofstede, 2005), the use of demographic measures as proxies for managerial cognitions remains a source of criticism in upper echelons research. Previous research suggests that demographic diversity is not necessarily related to the degree of cognitive diversity in the TMT (Miller et al., 1998), and future research may benefit from directly measuring the cultural cognitive dimension of individual TMT members using primary survey data.
Our study also opens up some exiting new avenues for future research. While we focused on TMT nationality diversity, future studies may seek to explore the effects of TMT cultural composition. Researchers may investigate how Hofstede's national cultural dimensions influence international strategic decisions. For instance, the average uncertainty avoidance at the TMT level may impact the choice of entry mode. In the past TMTs were culturally homogenous and shared the same cultural attributes as the home country, however, the increasing diversity leads to intra-country variation of TMT cultural characteristics. While such cultural diversity brings benefits to TMT decision-making, it also creates certain challenges and future research may investigate how faultlines (Lau & Murnighan, 1998) emerge based on the individual level Hofstede national culture scores.
Furthermore, it would be interesting to study the effects of TMT nationality diversity and cultural composition on international strategic decision-making in different cultural settings. The extent to which our results for the Swiss sample are generalizable to firm populations from other countries may depend on a number of factors. For instance, as our sample is from one country, the generalizability of our findings may be higher to countries with similar cultural and institutional characteristics, such as Germany, Austria or Western Europe at large, than to other countries. Moreover, while Switzerland is a multicultural society, comprised of four areas, each with their own language and culture, other countries (e.g., China, India and the US) may represent a larger variety of cultures and ethnicities. Future studies may seek to modify the nationality diversity measure in order to account not only for the country of origin but also for intra-country cultural diversity (e.g., ethnical, racial, and cultural subgroups). In addition, in countries with high immigration, nationality or citizenship may not be a reliable indicator of cultural diversity. Place of birth could be a better measure in such contexts. A cross-country multilevel study may provide novel insights; however, such studies are made difficult by the different reporting practices and availability of relevant information.
6.1. Managerial relevance
Our study has important implications for practitioners. While nationality may not be among the primary selection criteria for TMT members, this study demonstrated its strong influence on international entry mode choice. For executive selection this means that it is important to pay attention not only to international assignment experience but also to the national composition of the TMT. Moreover, awareness of the potential strategic orientations resulting from the individual backgrounds and experiences can help explain the bounded rational elements of strategic choice in international business. Decisions regarding international expansion are not only based on rational consideration related to cost/benefit and risk but are also influenced by individual characteristics of the decision-makers. Understanding and attending to their own predispositions – as well as those of the other TMT members – top managers may be better able to balance rational motives with their own strategic orientation.
Finally, our study also provides evidence of the long-lasting effects of cultural identity among top executives. The fact that top managers’ strategic mindset remain deeply embedded in the culture of the country of their origin has important implications for executive training and development. While international experience may be obtained via expatriation abroad, such experiences are, to some extent, conditioned by the nationality of the individual top manager. Hence, human resource management practices aimed at developing top managers with international mindsets via expatriation must recognize that such experiences cannot substitute for having foreigners on the top management team. While you can learn from experiences abroad, your cultural heritage may determine your strategic mindset.
