Who needs experts most? Board industry expertise and strategic change—a contingency perspective

Research summary: We analyze the effects of board industry expertise on corporate strategic change and the moderating role of institutional quality. We suggest that country‐level contingency factors mitigate the effect of experienced boards on strategy formation by providing alternative sources of information and control in strategic matters. We develop institutional quality as institutional information provision and institutional control provision to test our hypotheses on a sample of firms from MSCI Europe and the S&P 500. Our findings confirm that industry expertise is a salient driver of strategic change across countries. The strength of the effect, however, depends on the institutional quality. We submit that weak institutions require greater board industry expertise as an alternative channel of information and control. Management summary: This study provides new empirical evidence that experience in the firms' industries enables directors to increase strategic change. Our findings show that this effect is even stronger in countries with weak regulatory environments. We hereby provide guidance for multiple stakeholders. First, shareholders seeking a more active adjustment of their firms' strategies may want to compose boards that leverage such experienced directors. Second, directors can use their industry experience to control and to challenge managers better to move beyond the status quo. Third, managers lacking access to information on potential strategic change can use such experienced directors for strategic advice and as a source of information. Overall, we add to the understanding of the corporate board's role in shaping strategy and the influence of weak regulations. Copyright © 2016 John Wiley & Sons, Ltd.     

The use of favors by emerging market managers: Facilitator or inhibitor of international expansion?

This article explores the use of favors by emerging market managers, the impact of using favors on their firms’ growth, legitimacy, and reputation in a variety of business environments, and how the use of favors affects firms’ paths to international expansion. We discuss the concept of favors, and to illustrate the process of favors, we look at culturally rooted examples of their use by managers from the BRIC countries of Brazil, Russia, India, and China. Utilizing neo-institutional theory, we create a typology of four types of environments in which managers and firms from emerging markets conduct business with various relational entities (e.g., governments, customers, suppliers, competitors, alliance partners). We posit that the use of favors by managers compensates for the relatively weak legitimacy of formal institutions in emerging market environments, with favors illustrating the resulting reliance upon informal cultural-cognitive institutions. We develop propositions regarding the impact of the use of favors on the organizational outcomes of growth, legitimacy, and reputation of emerging market firms doing business in each of the four environments. This leads to further propositions regarding how the use of favors can influence their firms’ internationalization growth paths. We conclude that the impact of favors on international growth paths results from the fit or non-fit of their use with the level of legitimacy of the formal institutional environment of the focal relational entity in various business transactions.     

Diversification and performance: evidence from East Asian firms

We examine the impact of diversification on performance for firms operating in different institutional environments during a relatively stable period and during a major economy‐wide shock. We locate our study in six Asian countries at different levels of institutional development. Results indicate that diversification negatively impacts performance in more developed institutional environments while improving performance only in the least developed environments. Even in the least developed institutional environments, diversification offers limited benefits when an economy‐wide shock strikes. Though successful diversifiers are sometimes affiliated with business groups, diversification is associated with poorer performance for both affiliated firms and independent firms. In sum, we find that the outcomes of diversification are influenced by institutional environments, economic stability and affiliation with business groups. Copyright © 2007 John Wiley & Sons, Ltd.     

THE INTERACTIONS OF ORGANIZATIONAL AND COMPETITIVE INFLUENCES ON STRATEGY AND PERFORMANCE

Despite much debate in the strategy literatures, there is little consensus as to whether organizational capabilities or market competition are more important in shaping firms’ actions and performance. We suspect that simply comparing firm-level and industry-level influences will continue to prove fruitless for two reasons. In the first place, both organization and competition are clearly important in shaping strategy and performance. In the second place, we suspect that the inconclusive nature of much of the existing research reflects the fact that organizational capabilities, competition, strategy, and performance are fundamentally endogenous. That is, reciprocal interactions at multiple levels of analysis between the environment and the firm shape business strategy and performance, while interactions between strategy and performance, in turn, shape both organizational capabilities and competitive environments. This special issue of the Strategic Management Journal includes papers that focus attention on several dimensions of these interactions. A common theme emerges from the work concerning the sequential nature of the interrelationships. The papers suggest that firms develop organizational capabilities as they act in competitive, institutional, and cognitive environments, where capabilities arise both by design and as the unexpected by-products of firm actions. The capabilities, managers’ understanding of the capabilities, and the historical context that surrounds them then condition firms’ reactions to changes in their environment. The reactions and firm performance in turn affect the structure of the industry, and all these changes generate new information which in turn creates new learning opportunities. Thus, the papers view strategy and performance as an ongoing sequence of capabilities-conditioned adaptations by firms which in turn become exogenous events in the environments of the managers of other firms. For strategy researchers, the important question is not that of which disciplinary perspective or mode of explanation is a more appropriate one, but rather that of the conditions under which a given mode of explanation is most appropriate. © 1997 by John Wiley & Sons, Ltd.     

Political hazards and entry modes of Chinese investments in Africa

Africa has achieved the fastest growth rate of inward foreign direct investment (FDI) recently. Yet heightened political hazards present substantial challenges to foreign firms in Africa. This study examines the entry strategies that firms may take to mitigate such hazards by exploring the relationship between political hazards and entry mode choices in Africa. We further consider how an investing firm’s host country experience and foreign aid provided by its home country government to host countries in Africa can influence this relationship. In a sample of listed Chinese firms’ investments in Africa from 2000 to 2014, we find that Chinese firms tend to use the joint venture mode when political hazards are high in an African country. This relationship is weakened when they accumulate host country experience and when the Chinese government’s foreign aid to an African country increases. Our findings point to firm-level strategies to mitigate political hazards as well as instruments available to home country governments to help their multinational firms operating in host countries characterized by unstable political environments.     

Joint ventures and competitive strategy

A framework for using joint ventures (and other forms of cooperative strategy) within varying competitive environments is constructed, and hypotheses are developed concerning the impact of particular industry traits upon firms' options in pursuing them. Industry examples illustrate the framework's hypotheses. In this framework, demand traits suggest what types of cooperative strategies are needed. Competitor traits suggest how firms will respond to these needs for cooperation. Since joint ventures can be inherently unstable organizational forms, it is important for managers to (1) select the right cooperative strategy option and (2) modify the autonomy from (and coordination with) sponsoring firms that ventures enjoy as their industry structures evolve. Familiarity with cooperative strategy options is important because (1) as growth slows, (2) as markets shrink or become crowded, (3) as industries become global, or (4) as technological change accelerates to speeds where individual firms cannot recover their initial investments, managers will have less margin for error. If managers do not learn how to use cooperative strategies advantageously their firms may encounter difficulties in delivering adequate value to their customers, replenishing their base of skills, and/or safeguarding their abilities to increase long-term shareholder value.     

Firm non‐market capabilities and the effect of supranational institutional safeguards on the location choice of international investments

Research Summary : We investigate the extent to which firms rely on supranational institutional safeguards versus their non‐market capabilities to offset the risks of investing abroad. We argue that firms with non‐market capabilities are insensitive to supranational institutional safeguards when choosing the location of their international investments. We show that supranational agreements between an investor's home and host nation, operationalized as bilateral investment treaties (BITs), increase the likelihood of investment, but there is substantial firm heterogeneity with respect to this relationship. Firms with various forms of non‐market capabilities are not sensitive to BITs, whereas other firms are more likely to invest under BITs. We advance the understanding of how firm non‐market capabilities can substitute for supranational institutional arrangements in addressing risks associated with host country institutional weaknesses. Managerial Summary : The risk of expropriation is one of the main concerns companies have when investing abroad. Because of this, many countries implement bilateral investment treaties (BITs) to safeguard foreign investments, alleviate foreign investor concerns, and promote investments. We show that only those companies without political competence or political connections favor countries with BITs when choosing where to invest. Companies with political competence or political connections, on the other hand, ignore BITs and apparently rely on their ability to influence governments whenever their foreign investments face expropriation threats. As a result, politically connected or competent companies can enter markets most of their competitors lacking these capabilities shy away from. They can, therefore, do business in environments in which they face less competition.     

The Context-Specific Nature of Competence and Corporate Development

Based on an analysis of knowledge-intensive innovations, this paper argues that much of the knowledge that provides distinctive competence for sustained competitive advantage is context specific. The development of this competence is a path-dependent process of numerous learning events in particular situations and practices. Because competence is embedded in the specific context in which it was created, it is very difficult to imitate and can become the basis for sustained competitive advantage. This represents an important opportunity for firms who have grown up in a developing country and learned how to compete successfully there. Firms from developing countries who run in packs to build and expand on their context-specific competencies can be more successful in expanding into other developing countries with similar national political institutional contexts than firms from developed countries who have not acquired this tacit knowledge of local practices.     

The Form of Relationship between Firm‐Level Product Innovativeness and New Product Performance in Developed and Emerging Markets

This study compares the new product performance outcomes of firm‐level product innovativeness across a developed and emerging market context. In so doing, a model is constructed in which the relationship between firm‐level product innovativeness and new product performance is anticipated to be curvilinear, and in which the nature of this relationship is argued to be dependent on organizational and environmental factors. The model is tested using primary data obtained from chief executive officers and finance managers in 319 firms operating in the United Kingdom, an advanced Western market, and 221 firms from Ghana, an emerging Sub‐Saharan African market. The model is assessed using a structural equation model multigroup analysis approach with LISREL 8.5. In the United Kingdom and Ghana, the basic form of the relationship between firm‐level product innovativeness and business success is inverted U‐shaped, but the strength and/or form of this relationship changes under differing levels of market orientation, access to financial resources, and environmental dynamism. While commonalities are identified across the two countries (market orientation helps firms leverage their product innovativeness), differences are also observed across the samples. In Ghana, access to financial resources enhances the relationship between product innovativeness and new product performance, unlike in the United Kingdom where no moderation is observed. Furthermore, while U.K. firms leverage product innovativeness to their advantage in more dynamic environments, Ghanaian firms do not benefit in this way: here, high levels of innovation activity are less useful when markets are more dynamic. If the study's findings generalize, there are a number of implications for managers of both emerging and developed market businesses. First, managers in both developed and developing market firms should focus on determining and managing an optimal balance of novel and intensive product innovativeness within the context of their unique institutional environments. Second, for emerging market firms, a market orientation capability helps businesses leverage local market intelligence, enabling them to compete with multinational giants flocking to emerging markets, but typical developed market learning approaches may be insufficient for multinational firms when seeking to compete in emerging markets. Third, for emerging market firms, access to finances helps deliver product innovation success (although this is not the case for developed market firms, possibly due to strong financial institutions). Finally, unlike developed market firms, burdened by institutional voids at home, emerging market firms appear to be less capable of competing on an innovation front in more dynamic market conditions. Accordingly, policymakers in emerging markets should consider identifying ways to help businesses raise market orientation levels, and seek to create conditions that enhance access to financial capital (e.g., direct financing, matching grants, tax rebates, or rewarding firms that innovate creatively and intensely). Likewise, since environmental dynamism is likely to be a growing issue for emerging markets, efforts to help firms become more adept at keeping up with more agile developed market counterparts are needed.     

MNEs and corruption: the impact of national institutions and subsidiary strategy

We argue that the pressure MNE subsidiaries face to engage in corrupt practices in their host country varies positively with the institutionalization of corrupt practices in both host and home country environments. We further argue that the relationship between an MNE's home country environment and the pressure it faces in the host country is moderated by its localization strategy. Results suggest a positive relationship between the host country corruption environment and the pressure subsidiaries face to engage in bribery locally. Mixed results emerged concerning MNEs from home countries participating in the OECD Convention for Combating Bribery. Results concerning the impact of the home country corruption environment are best viewed in light of significant moderating effects. When MNEs did not have local partners, firms from less corrupt home countries reported less pressure to engage in corrupt practices locally; however, the presence of local partners eliminated this relationship. Results will help managers understand the pressures their firm is likely to face when operating in corrupt host country environments, and also offer guidance concerning how the firm might reduce its exposure to those local institutional pressures. Copyright © 2010 John Wiley & Sons, Ltd.     

The deterrence effect of Guanxi on opportunism: The moderating effects of “three institutional pillars”

Marketing channel members are subject to opportunism, and guanxi (i.e., interpersonal ties) is a useful mechanism to deter it. This article argues that the effect of guanxi on opportunism depends on the institutional environments in which firms are embedded in. Drawing on institutional theory and guanxi literature, we investigated the effects of the “Three pillars” of institutional environments. Specifically, we examined whether legal effectiveness, Confucianism, and organizational culture incongruence moderate the impact of guanxi on exchange partners' opportunism. We collected survey data from both sales managers and salespersons in 268 manufacturing firms and merged the dataset with secondary data that measure institutional factors. The results show that guanxi deters opportunism more effectively when legal effectiveness is high, where Confucianism is more prominent, and when exchange firms' organizational cultures are more incongruent. This study provides implications for marketing channel members on how to use personal ties under different institutional conditions.     

Competing capitalisms: capital investment in American,German, and Japanese firms

This study explains one way the home country institutional environment causes strategy differences across firms from different countries. It contrasts the investment conduct of American, German, and Japanese firms in the 10 largest manufacturing industries. We find profound national differences among these firms that are stable across industries. These differing conducts are tied to the institutional environments of the home market. The shareholder firms of the United States make investments primarily in response to expected investment returns, measured by Tobin’s Q ratio. The coalitional firms of Germany and Japan make investments primarily in response to the availability of internal finance, measured by operating cash flow. Copyright © 1999 John Wiley & Sons, Ltd.     

Recognition of entrepreneur’s social ties and firm innovation in emerging markets: explanation from the industrial institutional environment and survival pressure

Despite the extensive attention to the role of entrepreneurs’ business or political ties, few studies have distinguished the basis of those social ties. The aim of this study is to explore the different roles of the entrepreneurs’ personalized and formal social ties on the firms’ innovation performance. Based on renqing and formal rules, this study extends the social ties’ typology into four categories, namely, transactional business ties, transactional political ties, guanxi business ties, and guanxi political ties. Using data collected from 209 Chinese firms, we further identify the distinctive contributions of the different ties on the entrepreneurial firm’s innovation performance under different institutional environments and entrepreneurs’ survival pressure. This paper will help researchers and managers better understand the function of social ties in innovation in emerging markets, such as China.

     

Slack resources,firm performance,and the institutional context: Evidence from privately held European firms

Research summary : Integrating the behavioral and institutional perspectives, we propose that a country's formal institutions, particularly its legal frameworks, affect managers' deployment of slack resources. Specifically, we explore the moderating effects of creditor and employee rights on the performance effects of slack. Using longitudinal data from 162,633 European private firms in 26 countries, we find that financial slack enhances firm performance at diminishing rates, whereas human resource (HR) slack lowers performance at diminishing rates. However, financial slack has a more positive effect on firm performance in countries with weaker creditor rights, whereas HR slack has a more negative effect on performance in countries with stronger employee rights. The results provide a richer view of the relationship between slack and firm performance than currently assumed in the literature. Managerial summary : A key dilemma managers often encounter is whether, on the one hand, they should build in excess resources to buffer their firms from internal and external shocks and to pursue new opportunities or whether, on the other hand, they should develop “lean” firms. Our study suggests that excess cash resources—which are usually viewed as easy to redeploy—benefit firm performance, especially when firms operate in countries with weaker creditor rights. However, excess human resources—which are usually viewed as more difficult to redeploy—hamper firm performance, particularly when firms operate in countries with stronger labor protection laws. Thus, the management of slack resources critically depends on the characteristics of these resources (e.g., redeployability) and the institutional context in which managers operate. Copyright © 2016 John Wiley & Sons, Ltd.     

State ownership of Chinese firms and their outward foreign direct investment: Political and economic contingencies

The extant literature offers inconsistent predictions and conflicting evidence regarding the relationship between state ownership and the internationalization of emerging market firms (EMFs). Drawing on institutional theory, we examine the moderating roles of political and economic institutions at the subnational and national levels in the link between state ownership and EMFs’ outward foreign direct investment (OFDI). Based on a sample of 1421 OFDI projects involving 286 Chinese listed firms in 115 host countries between 2003 and 2016, we find that state ownership can scale up OFDI when Chinese firms are headquartered in subnational regions with high institutional development or low economic development, or when political relationships between home and host countries are amicable or market growth in a host country is slow; otherwise, state ownership hinders OFDI. These findings offer new insights into the relationship between state ownership and the internationalization of EMFs.

     

The impact of current and founding institutions on strength of competitive aspirations in transition economies

Northian institutional theory argues that firms adapt to their current institutional environments. Organizational imprinting theory argues that firms will be constrained by their founding institutional environments. We explore the combined influence of these two institutional environments on the strength of competitive aspirations using a unique dataset of firms in the shifted institutional environment of Central European transition economies. Our results indicate founding institutional environments temper adaptation to current institutional environments for certain competitive aspirations and this effect increases as the size of the shift between current and founding institutional environments increases. Copyright © 2011 John Wiley & Sons, Ltd.     

Does imitation reduce the liability of foreignness? Linking distance,isomorphism, and performance

Research summary : Research demonstrates that foreign firms from institutionally distant countries imitate the practices of domestic firms (i.e., adopt an isomorphism strategy). The conjecture has been that pursuing such a strategy can help foreign firms counteract the deleterious performance consequences associated with institutional distance; yet there is scant evidence of such. This study treats isomorphism as an endogenously selected strategy influenced by institutional distance to examine its performance consequences. Using a dataset of 80 foreign banks from 25 countries operating in the United States, we find that foreign firms from institutionally distant home countries benefit initially from selecting an isomorphism strategy. However, the benefits diminish with experience. Managerial summary : Multinational companies experience great difficulty in managing institutional distance, and research suggests that one way to overcome distance‐related constraints is to imitate the strategies of local companies. Unfortunately, we do not know enough about the performance‐related consequences of engaging in such imitative behavior. This study examines whether imitating local firms improves performance for multinational companies from institutionally distant markets. We find that imitation improves a firm's performance at first; however, with experience those same strategies result in performance decrements. Managers of multinationals should therefore be careful not to get locked into imitative strategies that provide performance benefits upon entry, but that fail to provide benefits over time. Copyright © 2015 John Wiley & Sons, Ltd.     

State equity and outward FDI under the theme of belt and road initiative

State capitalism is attracting burgeoning attention but comes with inconsistent findings toward internationalization. Given its prevalent appearances, the study has investigated the effect of state equity on outward foreign direct investment (OFDI) under the Belt and Road Initiative (BRI), which may constitute a challenge to the international business theory and new hope for companies in emerging economies. Anchoring on the agentic perspective of institutional theory and a sample of Chinese public listed firms, we have unveiled that higher state equity pushes greater proactiveness in investing in those BRI destinations. However, state equity generates stronger pushing effects when the equity source is not from the central government whereas the organizational top managers’ foreign exposures attenuate such pressures. At the institutional level, furthermore, the coastal locale attenuates the effects of such pressures whereas firms are more likely to invest in countries with bilateral investment treaties (BITs) under the BRI theme. Overall, the study should extend our understandings toward the BRI phenomenon and enrich the theoretical knowledge of state capitalism from a political perspective.

     

Reaching through the fog: Institutional environment and cross‐border giving of corporate foundations

Research Summary : Corporate philanthropy has long been recognized as an important part of multinational strategy, yet we know relatively little how charitable giving is allocated across countries. Using a sample of 208 U.S.‐based corporate foundations from 1993 to 2008, we find that the foundations give more in countries with opaque institutional environments, but they do so through international intermediaries. They also give more when the funding firms have new entries in countries with weak institutions—hence greater needs for the social license to operate—or when their operations require stronger connections with local suppliers or customers. These findings point to the use of corporate philanthropy as part of corporate diplomacy when the local institutions are ineffective and the importance of reaching out to local constituents is high. Managerial Summary : Corporate foundations play an important role in firms' charitable giving across countries. This article analyzes how foundation giving is associated with the funding firm's need to navigate the local business environments. Using a sample of 208 U.S.‐based corporate foundations from 1993 to 2008, we find that foundations give more in countries characterized by weak rule of law and high levels of corruption, and when the funding firms have newly established subsidiaries or stronger need to connect with local stakeholders there. However, donations to countries with weak institutions are more likely to go through international intermediaries to avoid potential liabilities. The results are consistent with the view that corporate foundations support corporate diplomacy and help obtain the social license to operate in the host countries.     

Clear and present danger: Planning and new venture survival amid political and civil violence

Many entrepreneurs in developing economies face unstable environments due to violence and civil unrest. Yet, we know very little about how environments characterized by high levels of political and civil violence affect new venture processes and survival. Moreover, it is unclear whether standard theories about organizational strategy, such as planning, hold true in such environments. We explore these issues using a sample of 730 new ventures in Colombia from 1997 to 2001. We find that political and civil violence decreases firm survival, increases the benefits of incremental (operational) planning, and decreases the benefits of comprehensive (strategic) planning. Copyright © 2013 John Wiley & Sons, Ltd.