The Importance of Social Capital to the Management of Multinational Enterprises: Relational Networks Among Asian and Western Firms

Social capital is an important concept for multinational firms. Firms operating in global markets rarely have adequate resources to compete effectively in global markets; they access the needed resources through formal and informal relationships with other firms. The cultures in Asian countries have emphasized relationships much more strongly than Western firms. Thus, relational capital, based on guanxi (China), kankei (Japan) and inmak (Korea), provides the framework for business dealings in many Asian countries. As a result, the social capital of many Asian firms gives them a potential competitive advantage in global markets. Western firms must develop social capital and learn to manage relational networks to gain and sustain a competitive advantage in global markets. Western firms can learn how to develop and manage social capital from Asian firms. Alternatively, social capital has some disadvantages. Firms are limited by their networks and thus experience opportunity costs and path dependence. Additionally, while Asian firms often have strong network ties in their domestic markets, they have to develop many more ties globally to operate effectively in global markets. As a result, the development and management of social capital has become of critical importance for competitive advantage in global markets.     

The Impact of Global Capital Market Exposure and Stable Ownership on Investor Relations Practices and Performance of Japanese Firms

This paper examines whether greater exposure to global capital markets, stable share ownership, and group affiliation of Japanese firms have any impact on the quality of their investor relations practices (IR) and market-value added (MVA). The results indicate that foreign ownership and foreign listings are positively associated with IR. Foreign listings are also positively associated with MVA. However, stable ownership and group affiliation do not seem to have any impact on IR. These findings suggest that Japanese firms that are more exposed to global capital markets are more likely to adopt shareholder-oriented policies rather than stakeholder-oriented policies.     

Alternative Corporate Governance Systems in Japanese Firms: Implications for a Shift to Stockholder-Centered Corporate Governance

In Asia, the recent catastrophic decline in regional stock markets, continuing currency crisis and failures of major financial institutions and industrial corporations have increased domestic and international interest in corporate governance. Nowhere is this greater than in Japan where financial institution reform has catapulted this to the fore. In this paper, we use agency theory and institutional theory, together with comparative case examples, to derive some propositions on the dynamics of changing corporate governance systems in Japanese firms. We argue for the co-existence of stakeholder and shareholder-centered corporate governance systems in Japan. This argument has an important implication for corporate governance research and agency theory. Namely, changes in ownership structure and institutional expectations would force firms to focus on maximizing shareholder value even where the interests of stakeholders are more emphasized. It suggests an environmental selection mechanism to ensure the emergence of appropriate corporate governance mechanisms to solve the agency problem. Further, the loss of competitiveness and the prolonged poor performance of firms can change the institutional norms to emphasize asset efficiency and transparency rather than stability and business ties.     

How capital structure influences diversification performance: A transaction cost perspective

Extant theories agree that debt should inhibit diversification but predict opposing performance consequences. While agency theory predicts that debt should lead to higher performance for diversifying firms, transaction cost economics (TCE) predicts that more debt will lead to lower performance for firms expanding into new markets. Our empirical tests on a large sample of Japanese firms support TCE by showing that firms accrue higher returns from leveraging their resources and capabilities into new markets when managers are shielded from the rigors of the market governance of debt, particularly bond debt. Furthermore, we find that the detrimental effects of debt are exacerbated for R&D intensive firms and that debt is not necessarily harmful to firms that are either contracting or managing a stable portfolio of markets. Copyright © 2013 John Wiley & Sons, Ltd.     

Global equity offerings,corporate valuation,and subsequent international diversification

Researchers have long wondered why U.S. firms offer their equity in multiple global capital markets even though they have access to a deep domestic capital market. Based on a propensity score‐matching sample of IPOs for U.S. firms from 1990 to 2003, this paper offers some potential answers. We find strong evidence that issuers who choose global equity offerings experience higher valuations at the IPO stage, as measured by Tobin's q. Our evidence also shows that global equity offerings serve as a deliberate strategic tool to increase issuers' international visibility and their propensity to diversify operationally to international markets. Copyright © 2010 John Wiley & Sons, Ltd.     

Allocating Control over Firms: Stock Markets versus Membership Markets

The theory of the firm must explain howdecision-making powers are allocated between suppliersof capital and labor. Most large enterprises awardformal control to investors rather than workers. Isuggest here that this asymmetry can be traced in partto differences between stock markets and membershipmarkets as institutional mechanisms for allocatingcontrol over firms. The attractive theoreticalproperties of membership markets are examined, alongwith some factors that may account for their rarity inpractice. These practical difficulties help explainthe rarity of labor-managed firms themselves, alongwith various facts about their design, behavior, anddistribution across industries.     

Boards of Directors,Innovation, and Performance: An Exploration at Multiple Levels

This work reports on an investigation of the dynamics of governance over breakthrough innovation within Fortune 1000 firms. The primary research question investigates the boundary of agency theory within the firm. Using agency and stakeholder theoretic perspectives, the study tests the hypothesis that innovation will thrive in firms that combine a board of directors operating in accordance with a high agency theoretic focus in addition to an innovation governance board operating deeper within the firm that employs a strong stakeholder theoretic orientation in its behavior. The model is tested with data from 98 large firms. Results suggest that the relationship between board of directors' behavior and the firm's overall innovativeness is mediated by innovation decision‐making boards that (1) promote projects that are breakthrough in scope, (2) incorporate input of diverse constituencies within the firm, (3) exhibit patience with financial results, and (4) engage in frequent, informal interactions with project teams. Firms exhibiting high board of director agency orientation in combination with loyalty to mandate, patient financial capital disposition, inclusiveness, and project team interaction as described above for innovation governance board decision‐making prove to be the most innovative as measured by external indicators. For firm innovativeness, consolidated managerial power and behavior is frequently present at the upper levels of the firm, but must be broken down at deeper levels of the firm. This research offers implications to innovation decision‐makers as to how to proceed if the intent is to offer commercializably successful breakthrough innovations.     

PRODUCT MARKET COMPETITION AND AGENCY COSTS*

We model the effects of competition on managerial efficiency and isolate the agency effect of competition, present only in firms subject to agency costs, from the direct pressure effect of competition, which is present in all firms. Using a unique set of Canadian data that surveys both firms and their employees, we then evaluate the empirical significance of these two effects. We find that competition has a significant direct pressure effect as well as a significant agency effect. Both effects increase the importance firms place on quality improvements and cost reductions as well as on contractual incentives and employee effort.     

Sources of Competitive Rivalry in Japan

The fact of the Japanese competitive success on a world scale is well established and we have been offered many reasons for that success. But we know much less about their competitiveness on their domestic markets. And we know even less of the underlying sources of their competitive behavior. Nigel Campbell has studied many facets of Japanese life—the history and culture, the geography and economic structure, the present-day patterns of thinking—and draws for us the structure of the rivalry that we see expressed in global competition. His article is a useful background for any manager seeking a competitive advantage.     

Inside Ownership, Risk Sharing and Tobin's q-Ratios: Evidence from REITs

We investigate relations among inside ownership, managerial expenses, risk sharing and equity valuations. Our engine of analysis—Real Estate Investment Trusts (REITs)—provides a unique and rich framework for analysis since we can calculate extremely accurate measures of asset replacement costs, and hence relative valuation (Tobin's q ). Further, the nature of the financial statements allows us to examine the impact of insider ownership on agency costs since we can accurately measure the costs of the entire management team. Our results show that firms with greater insider holdings tend to invest in assets with lower systematic risk and use less debt in their capital structure. At the same time, managerial expenses are lower as inside ownership increases. Finally, higher levels of insider ownership are associated with higher relative valuation as measured by both higher premiums to net asset value and higher multiples of cash flows. The results have implications for the design of optimal management contracts for both REITs and firms in general.     

Family ownership and acquisition behavior in publicly‐traded companies

Much of the literature on corporate acquisitions has focused on managerial incentives for making acquisitions but has underemphasized the role played by the social context of major shareholders. This study of Fortune 1000 firms argues that the priorities and risk preferences of family owners can have important implications not only for the volume but also for the diversifying nature of their acquisitions. Agency and family business perspectives are used to derive expectations concerning the acquisitions behavior of family owners. Consistent with both perspectives, and owners' desire to reduce business risk, we find that family ownership is inversely related to the number and dollar volume of acquisitions. However, whereas agency theorists differ about how ownership concentration influences whether acquisitions are diversified, the family firm literature is more definitive. The latter suggests that given family owners' desire to retain control of their firms for offspring, their wealth must remain concentrated. Hence they can most easily reduce the risk of their wealth portfolio by diversifying the business—that is, through diversifying acquisitions. Consistent with this logic, we found the propensity to make diversifying acquisitions to increase with the level of family ownership. Copyright © 2009 John Wiley & Sons, Ltd.     

Whom are you promoting? Positive voluntary public disclosures and executive turnover

Research summary: This paper uses signaling theory to bring together two complementary research streams that have largely ignored each other: strategic human resource management and media relations management. We argue that when publicly traded firms voluntarily and publicly disclose positive information about their value creation and appropriation activities, they also send positive signals to managerial labor markets regarding executives' capabilities. Accordingly, we hypothesize a positive association between public disclosures and voluntary executive turnover. An analysis of pharmaceutical and communications equipment firms from 1990 to 2004 supports this prediction, underscoring the need to understand better the effects of voluntary public disclosures on a firm's ability to protect its human capital. More generally, our results highlight the importance of considering the impact of a single signal on multiple receivers. Managerial summary: Given the organizational benefits of positive media coverage, the considerable effort that firms put into managing their image in the media is not surprising. We argue and show, however, that when a firm enhances its public image it also improves its executives' positions in the managerial labor market and, by so doing, increases their likelihood of voluntarily leaving the firm. In particular, we find that corporate press releases, an important mechanism for managing information released in the public domain to signal a firm's competitive advantages, may result in unintentional loss of senior management talent. This trade‐off suggests that firms should increase coordination between their strategy, human resources, and corporate communications/investor relations departments to ensure that they collectively weigh the benefits and costs of publicly disclosing value‐relevant information. Copyright © 2015 John Wiley & Sons, Ltd.     

Financial reporting quality and investment decisions for family firms

This study investigates the association between investment decisions and financial reporting quality in the context of family firms versus non-family firms. Building on the classic agency theory and the behavioral agency theory, we argue that financial reporting quality may play a different role on investment decisions for family and non-family firms. We address our research question by using a sample of listed firms in Taiwan from 1996 to 2011. Consistent with the behavioral agency theory, our findings suggest that family firms are more likely to under-invest than non-family firms in order to protect their socioemotional wealth, and financial reporting quality is more negatively associated with family firms’ under-investment behavior. The existence of internal financing channels attenuates this negative association. However, this study does not find a significant role on such association when a family member serves as the chief executive officer. These results are robust after controlling for the potential endogeneity issue of financial reporting quality, alternate measures of inefficient investment as well as internal financing channels, family firm subsample, and different industry groups. This study contributes to the literature on the relation between financial reporting quality and investment decisions by highlighting the unique characteristics of family firms.     

A comparative analysis of layoff announcements and stock price reactions in the United States and Japan

Downsizing and layoffs are an important mechanism for U.S. firms to cope with their strategic and economic environment. In contrast, the Japanese tradition of lifetime employment limits the ability of firms to employ layoffs as a strategic measure, relegating its use to conditions of financial distress. This paper provides the first comparison of layoffs in Japan and the United States and examines stock price reactions to layoff announcements in each country from 1990 to 1994. Agency theory and Aoki's cooperative game theory are employed to discuss differences in the governance structures of U.S. and Japanese firms and their implication for stock price reactions. Results show that layoff announcements trigger negative returns for both U.S. and Japanese firms. Specifically, layoff announcements of U.S. firms are associated with a negative 1.78 percent abnormal return, while layoff announcements for Japanese firms are associated with a negative 0.56 percent abnormal return. To better understand the impact of layoffs, this study examines the relationships between stock price reactions and various layoff characteristics (such as whether the layoff is proactive or reactive or whether the layoff is the first in the industry). Implications of the findings are discussed. © 1997 John Wiley & Sons, Ltd.     

The Sources and Advantages of Japanese Industrial Organization

Using agency theory, this paper investigates advantages linked to Japanese industrial organization. Three variables theoretically linked to keiretsu organization, ownership structure, inter-firm investment, and financing flexibility were able to correctly classify U.S. and Japanese firms. We detect polarization of U.S. and Japanese firms in terms of performance and strategic decisions.     

Firms' technological resources and the performance effects of diversification: a longitudinal study

While agency theory claims managerial self‐interest creates a diversification discount, strategic theory explains that firms with certain kinds of resources should diversify. Longitudinal data on 227 firms that diversify between 1980 and 1992 reveal that the sample firms invest less in R&D and have greater breadth of technology (based on patent citations) than their industry peers prior to the diversification event. Also, acquiring firms may appear to have lower performance because of accounting conventions and because firms that use internal growth rather than acquisition pursue less extensive diversification. These findings help explain how diversification and financial performance are endogenous. Copyright © 2004 John Wiley & Sons, Ltd.     

Supporting product innovativeness and customer value at the bottom of the pyramid through context-specific capabilities and social ties

Local firms operating in bottom of the pyramid (BoP) markets face significant challenges in managing their innovation practices and creating value for customers. Operating in resource-constrained environments, local BoP firms need to behave as bricoleurs, deploy capabilities that help creatively combine and leverage their limited available resources to innovate and create value for customers. Employing the capability-based view (CBV) of the firm and social capital theory (SCT), we develop a research model to explain the extent that local BoP manufacturers use bricolage to develop innovative products that create value for BoP customers. Analysis of data obtained from 150 local BoP manufacturing firms (three managers in each firm) and two of their major customer firms shows that the relationship between bricolage and product innovativeness is more complex than previously understood. Results show that the curvilinear relationship is attenuated differently by social ties with government versus ties with civil society organizations. Furthermore, findings also support the contingency role of BoP firms' marketing capabilities in translating product innovativeness into customer value in BoP markets. These findings present specific implications for scholars and practitioners interested in BoP markets.     

Ownership structure and innovation: An emerging market perspective

Considerable attention has been focused on the ways in which emerging market firms can obtain and mobilize the knowledge and resources required for innovation. Innovation is a particular challenge in emerging markets because of inadequate external institutions. In this study, we focus on the importance of ownership structure, and in particular on ownership type diversity and ownership concentration. Using transaction cost and agency theories embedded in an emerging market context, we argue that ownership structure provides an important mechanism by which firms can assemble and direct the resources necessary for innovation in the context of inadequate external institutions. Specifically, we hypothesize that ownership type diversity improves innovation performance and that increasing ownership concentration has the same effect, but only up to a point. Using a panel dataset of 487 and 475 Chinese listed companies during 2004–2005 and 2005–2006 respectively, we find supportive empirical evidence for our hypotheses. Our findings also suggest that ownership type diversity is a more important factor in explaining innovation performance than ownership concentration, although most of the extant literature focuses on the latter.     

Factors Influencing Brand Launch in a Global Marketplace

The purpose of this study is to explore the factors that influence the launch of brands into new markets in a global environment. Although multiple streams of literature exist with respect to the entry of brands into new markets and the diffusion of new brands within and across markets, the process of launching products and brands globally over time has received relatively limited attention. To address this issue, this study incorporates multiple indicators of activities that can contribute to experiential learning relevant for launching brands in a global marketplace. Market uncertainty and experiential learning provide a conceptual foundation for the development of relevant hypotheses, which are tested in the context of the global automotive industry from 1981 to 2004. A discrete time event history analysis with time‐varying independent variables is employed to estimate the effects of the independent variables on the probability of a brand being launched in a specific market. The global brand launch observations are extracted from a proprietary dataset containing the global dispersion of automotive brands including 22 countries of origin and 42 countries of brand entry. The sample yields 50,572 spells, derived from 99 companies, 173 brands, and 700 market entries. The results of this study contribute to the literature in a variety of ways. Market attractiveness positively influences the propensity of a brand to be launched into a new market. This supports the idea that potential demand conditions are an important managerial consideration in product introduction decisions. The results reveal significant effects with respect to the role of psychic distance and experiential learning. Brands are reluctant to launch into countries that are culturally and economically less similar to the home market. Yet firms tend to place a lower degree of emphasis on factors of cultural distance when launching brands into larger markets, and global experience enables companies to overcome the uncertainties associated with launching brands into international markets that are economically distant. The results also suggest that companies are more likely to introduce additional brands in markets where they already have a presence. Overall, global dispersion and geographic scope, coupled with local market knowledge facilitate the launch of brands globally. From a managerial perspective, this study suggests companies should focus on acquiring both local and global experience to facilitate the launch of products and brands in the global marketplace.     

Leveraging foreign institutional logic in the adoption of stock option pay among Japanese firms

Research summary : We investigate why Japanese firms have adopted executive stock option pay, which was developed with shareholder‐oriented institutional logic that was inconsistent with Japanese stakeholder‐oriented institutional logic. We argue that Japanese managers have self‐serving incentives to leverage stock ownership of foreign investors and their associated institutional logic to legitimize the adoption of stock option pay. Our empirical analyses with a large sample of Japanese firms between 1997 and 2007 show that when managers have elite education, high pay inequality with ordinary employees, and when firms experience poor sales growth, foreign ownership is more likely associated with the adoption of stock option pay. The study shows the active role of managers in facilitating the diffusion of a new governance practice embodying new institutional logic. Managerial summary : Why have Japanese firms adopted stock option pay for executives? Inconsistent with Japanese stakeholder‐oriented tradition in corporate governance, such pay has been believed to prioritize managerial attention to the interests of shareholders over those of other stakeholders. However, to the extent that shareholders' interests are legitimate in the Japanese context, executives who have self‐serving incentives to adopt such pay can leverage the need to look after shareholders' interest in their firms to legitimize their decisions. In a large sample of Japanese firms, we find that foreign ownership (representing shareholders' interests) is more likely to be associated with the adoption of stock option pay when managers are motivated to receive such pay, such as when they have elite education, high pay inequality with ordinary employees, or poor sales growth. Copyright © 2015 John Wiley & Sons, Ltd.