Human Capital and CEO Compensation during Institutional Transitions

Firms appoint CEOs with different types of human capital in order to manage resource dependencies. How CEOs are compensated thus can be conceptualized as a valuation process of how boards view the value of CEOs' human capital. Two types of human capital – international experience and political ties – have emerged as potential drivers of CEO compensation during institutional transitions. But how they impact CEO compensation has remained unclear. We develop a resource dependence‐based, contingency framework to focus on the external and internal factors that enable or constrain human capital to impact CEO compensation. Because of the tremendous regional diversity within China, externally, we focus on the level of marketization of the region in which firms are headquartered. Internally, we pay attention to two corporate governance mechanisms: politically connected outside directors and compensation committee. Data from 10,329 firm‐year observations at 94 per cent of listed firms in China largely support our framework. Overall, our study contributes to resource dependence research by extending this research to the context of institutional transitions with a focus on how human capital impacts CEO compensation.     

The Who,Where, What,How and When of Market Entry

This introductory, along with the eight articles contained within this Special Issue, highlights and brings greater clarity to entrant‐incumbent interactions and to firm movement – when entrants traverse market territories for the creation and/or delivery of offerings, where ‘markets’ include service or product categories, technology or resource spaces, industries, sectors and/or geographies. Collectively, this Special Issues explains that firm movement across market boundaries is highly consequential, influencing resource‐capability mixes inside firms, interfirm relations, market logic and industry value chains, and of course, people, communities and even nations. Specifically, we develop a field‐wide perspective of market entry by expanding on the framework of market entry that Zachary and his colleagues developed (Zachary et al., 2015) – i.e., the who (players such as incumbents, entrants, suppliers, etc.), when (the timing and sequence of entry), how (the strategy, resources, capabilities, etc.), where (the space of entry) and what (product, service, business model, etc.) – to include two additional categories: complements (networks, platforms, ecosystems) and non‐market elements (government, political, social and cultural arrangements). We also summarize the eight highly diverse and insightful articles that make this Special Issue, and conclude with a discussion to highlight foundational questions that point to new directions in future research in this field. In sum, we hope to inspire scholars to go beyond counting outcomes (e.g., entry/exit rates, or profiling successful versus unsuccessful entrants), to consider contexts, processes and contingencies (e.g., cost, time, collaboration, competition, interfirm relations, etc.) and to discover boundary conditions that inform a theory of market entry.     

Institutional barriers to firm entry and exit: Case-study evidence from the Brazilian textiles and electronics industries

What are the main barriers to firm entry and exit in developing countries and how do they differ from barriers to firm operation and growth? How important is the institutional and regulatory framework in this respect? This paper examines such questions using case-study evidence from the Brazilian textiles and electronics industries. We find that not only these institutional barriers are high in Brazil but also that they seem to have risen since the early 1990s, and that their effects vary across sectors. We also provide evidence from a survey we carried out in 2005 suggesting that institutions are more important as barriers to entry than as barriers to firm operation and growth.     

BI-REGIONAL SAM LINKAGES: A MODIFIED BACKWARD AND FORWARD DISPERSION APPROACH

The aim of the paper is to apply a new backward and forward dispersion approach, starting from the original Rasmussen definition, which can give further insight into the interactions between industries and institutional sectors in a multiregional framework. The method is based on identification of the Macro Multipliers and the related impact components of a model based on a bi-regional SAM, which allows for the representation of the bi-regional multisectoral and multi-industry model in a two-dimensional space defined by the two dominating impact components. From such representation, we derive a set of indices of intraregional and interregional backward and forward dispersion that identifies key groups of industries and institutional sectors. The strength of these groups is further evaluated in terms of correlation of the impact components within the groups and cross-correlation between industry and institutional sectors groups. Comparative analysis among regional results gives a full picture of regional income policies.     

Exploring the interaction of firm-level change and national institutional environments in shaping employment and union relations: a comparative case study of four European airlines

Drawing on the example of the airline industry, this paper explores in a longitudinal comparative case study the question of how firm-level changes and national institutional environments interact in shaping employee and union relations. Adding to previous research in comparative institutional analysis and comparative employment relations, we illustrate that the way in which industry pressures and national-level effects play out to influence employee and union relations depends on firm-level changes, mainly in the form of firm growth, acquisitions and the foundation of new subsidiaries. We show in particular that depending on firm-level changes, the very same firm might engage differently with a given institutional context at different points in time. Hence, our work illustrates the importance of firm growth, acquisitions and the foundation of new subsidiaries in explaining the shifting interaction between the firm and its institutional environment, and its implications for changing employee and union relations within firms.     

Knowledge Networks and Careers: Academic Scientists in Industry–University Links*

abstract Careers are central to our understanding of the knowledge creation dynamics of network organizations. Based on the example of R&D project collaboration between firms and universities, this paper examines the emerging forms of career models that support knowledge flows between organizations. It explores how some large firms in the high‐technology sectors have sought to break away from the limitations of internal R&D and firm‐based careers for scientists by engaging in external collaborative projects to gain access to the open knowledge networks of university researchers. It examines how the firms seek to forge close institutional ties with their university partners and develop network career structures in order to engage academic scientists in joint knowledge production. It argues that firms have sought to extend their human resource and knowledge boundaries into the established internal labour markets of the universities with which they collaborate, leading to the formation of a pool of joint human resources with work experiences and career patterns straddling the two sectors. The paper develops the concept of an ‘overlapping internal labour market’ to provide a conceptual bridge between internal labour markets and network organizations.     

Cultivating Ecological Knowledge for Corporate Sustainability: Barilla's Innovative Approach to Sustainable Farming

In this paper, we link three theoretical perspectives – organizational knowledge, ecological knowledge and social–ecological systems – to derive new conceptions of multi‐disciplinary, multi‐tier, sustainability‐oriented knowledge. Our study examines how collaboration between pasta‐producer Barilla, the farmers/smallholders supplying the firm and scientists generated sustainability practices in the agri‐food industry by creating transformative ecological, technical and scientific knowledge. In 2010, Barilla initiated a sustainable farming project to significantly reduce the environmental impact of cultivating durum wheat, its most important raw material. Core components included replacing monoculture with crop rotation, collectively creating innovative approaches that support farmers’ decision making and generating widely accessible guidelines for sustainability‐oriented cropping knowledge and practices. These collaborative efforts initiated profound transformations within and beyond the organization's boundaries via increased production yields, reduced environmental impacts and improved sustainability of farming practices, which generated economic, social and ecological benefits for farmers, surrounding communities and the firm. Copyright © 2016 John Wiley & Sons, Ltd and ERP Environment     

HRM and knowledge-transfer: a micro analysis in a Middle Eastern emerging market

This is a study surrounding the interplay between Human Resource Management (HRM) and knowledge transfer within an emerging institutional petro-state. It seeks to link HRM and knowledge transfer through individual-level mechanisms in response to the recent calls for more research on micro-foundations. Our findings provide empirical evidence for HRM-related factors influencing knowledge exchange in a sample of 815 employees in the national context of the UAE. We found that individual-level perceptions and extrinsic motivation have a positive impact on knowledge exchange; however, we found evidence to suggest only an indirect effect of individual perceptions of organisational commitment to knowledge exchange, via individual intrinsic motivation and social interaction. Unlike some existing accounts from the Western world, individual perceptions of organisational commitment to knowledge sharing had no direct positive impact on knowledge exchange – an issue that may be ascribed to the distinct institutional setting of the UAE. This paper adds to the existing literature on HRM and knowledge exchange by bringing to bear new evidence from a Middle Eastern emerging market setting – an area thus far relatively neglected in the literature.     

Regional development and sources of superior performance across textile and IT sectors in Taiwan

The rapid growth and industrialization of Taiwan's textile and IT sectors, mainly comprised of small and medium-sized enterprises, has prompted an array of explanations among academics, including neoliberalism, structural-institutionalism, flying geese patterns, regional networks and economic geography. Drawing on neoliberal, structural-institutional, regional networking and economic geographic views in that strong Taiwanese entrepreneurial culture is important to its textile and IT sector development, this study shares their positive perspectives in influencing the sources of profitability differentials among Taiwan's textile and IT firms in international competitiveness. Researchers investigating the sources of performance differences among firms have focused mainly on the relative importance of industry and firm factors. Specifically, this study employs Taiwan's business database to examine industry and firm effects on profitability differentials in these sectors using return on assets and the economic performance measures of economic value added and market value added. A variance components model is proposed, and findings indicate that firm effects dominate performance while industry effects have little impact. Our discussion reconciles results with those of previous studies.     

Resources,Capabilities and Entrepreneurial Perceptions*

abstract We review and develop a subjectivist theory of entrepreneurship that focuses on individuals, their knowledge, resources and skills, and the processes of discovery and creativity, which constitute the heart of entrepreneurship. First, we establish the fundamental importance of subjectivity in entrepreneurial discovery and creativity. Second, we build on Penrose (1959 ) to elaborate how entrepreneurs' perceptions and personal knowledge shape a firm's subjective productive opportunity set. Third, we explain that entrepreneurial perceptions and knowledge partly originate from entrepreneurs' experiences in specific business settings such as the firm, the management team, and the industry. Fourth, we highlight the causal connections between subjectivity in entrepreneurship and observed heterogeneity in firm‐level economic performance. Lastly, we suggest directions for further advancing a subjectivist resource‐based approach to future entrepreneurship research.     

Will We Ever Meet Again? The Relationship between Inter-Firm Managerial Migration and the Circulation of Client Ties

A large body of research shows that the migration of managers from one professional service firm to another weakens the old employer’s relationship with its clients, because migrating managers remove their relationship-specific knowledge and expertise – i.e., human and social capital – from their old employers, redeploying it to their new employers. This study extends this research by introducing a bi-directional perspective of social capital in which both firms and managers may exploit these relationship-specific resources. We use theory on social capital to build arguments about how one form of manager mobility, manager migration between two service providers in a single market, can both lead and lag the movement of client ties between those providers, and signaling theory to hypothesize the conditions under which this is likely to occur. Analyses using longitudinal data on New York City advertising agencies generally support our arguments. Our findings contribute to theory and research on manager migration, social capital, and signaling, and raise new questions for how the portability of relationship-specific social capital shapes markets.     

Institutions and preferences in settings of causal complexity: foreign institutional investors and corporate restructuring practices in France

In this article, we illustrate how the interaction between institutional arrangements and the presence of different categories of firm stakeholders with specific preferences provides important insights to understand the conditions under which corporate restructuring practices are introduced. Institutions shape the range of actors' strategic options and mediate the translation of the preferences of firm stakeholders into corporate policies. Nonetheless, strategic choice remains possible since firm stakeholders constitute subgroups with different interests and incentives that influence how they operate in an institutional framework. In particular, we examine under what conditions UK/US-based institutional investors and equity-based compensation incentives are associated with the implementation of asset divestitures and employee layoffs in France. We uncover three key findings. First, the presence of hedge funds and equity-based pay influence the likelihood of French companies undertaking asset divestitures. Second, the impact of hedge funds on employee layoffs is contingent on the ownership structure of firms. Third, layoffs in France are driven by inferior performance – a result that contrasts with the American experience whereby employee layoffs are also used as a strategic mechanism to deal with institutional investors in good times. Our findings demonstrate the importance of the institutional constraints of (national level) employment protection and the moderating effects of ownership structure (firm level) on the strategic and employment policies of French companies.     

Patterns of business creation,survival and growth: Evidence from Africa

We study firm dynamics using a novel database of all formally registered firms in Cote d'Ivoire from 1977 to 1997, which account for about 60% of GDP. First, we examine entry and exit patterns and the role of new and exiting firms versus incumbents in job creation and destruction. We find that while the rate of job creation at new firms is quiet high – at 8% on average – the numbers of jobs added by new firms is small in absolute terms. Next, we examine survival rates and find that the probability of survival increases monotonically with firm size, but that manufacturing and foreign-owned firms face higher likelihoods of exit compared to service oriented and domestically-owned firms. We find that higher GDP growth increases the probability of firm survival, but this is a broad impact with no firm size disproportionately affected. In robustness checks we find that post-1987, size is no longer a significant determinant of firm survival for new entrants, suggesting that the operating environment for firms changed. Finally, we find that trade and fiscal reform episodes raised the probability of firm exit and attenuated the survival disadvantages faced by smaller firms, but exchange rate revaluation and pro-private sector reforms did not significantly lower the likelihood of exit.     

Driving sectoral sustainability via the diffusion of organizational eco‐innovations

Using insights from institutional literature, the resource‐based theory of the firm, and internationalization, we explain variations in the diffusion of organizational eco‐innovations. Studies have previously reported that the drivers of eco‐innovation are regulatory pressures, technology push, market pull, and firm factors. But relatively little attention has been paid to nontechnological forms of eco‐innovation, such as environmental management systems (EMS). Consequently, how exactly to encourage EMS adoption across sectors is still unclear. We attempt to address this question by combining sectoral panel data (2009–2014) from a number of sources in Spain. The econometric analysis reveals that environmental policy is driving the adoption of ISO 14001 largely due to differences across sectors in energy and pollution intensity. In addition, the adoption of ISO 9001 increases the use of ISO 14001 in industry because of complementarities between the two systems. Third, in highly internationalized sectors, firms adopt a greater amount of ISO 14001.     

The impact of government financial support on the performance of new firms: the role of competitive advantage as an intermediate outcome

This research examines the influence of government financial support on new firms' performance. Extant empirical research on the topic has found mixed results, which warrants an exploration of the theoretical basis for the impact of support policies on new firms' performance. Grounding the theoretical model in the resource-based view and institutional theories, this study contends that performance outcomes – e.g. revenues or profits – should not be the first outcomes of public policies to be examined. Instead, competitive advantage formation is suggested as a link between support policies and new firms' performance. Using new firms from the USA, we examine the impact of government financial support measures – government loans, guarantees and government equity – on firms' overall competitive advantage and more specific types of competitive advantage based on innovation, licensing-in, marketing and human capital. Controlling for family funding, bank financing, equity of business angels and venture capitalists, industry, size as well as entrepreneur's characteristics, the results reveal that government guarantees and government equity have a direct effect on new firms' competitive advantage and only an indirect impact on performance. Our results suggest to policy-makers to focus on helping new firms build the necessary capabilities to compete successfully in the marketplace.     

Untangling Goal Tensions in Family Firms: A Sensemaking Approach

While economic and non-economic goals may converge in the long term, they often lead to tensions for organizational decision-makers in the short term, especially in family firms that place much emphasis on family-related goals. We draw on a sensemaking approach to investigate such potential tensions in the decision-making of family firms. Based on a qualitative analysis of 59 interviews, 501 items of archival data and 39 observations from eight private Irish firms, we explore the perceived goal tensions of family firm decision-makers as they seek to balance economic and non-economic goals. We identify three sensemaking mechanisms – ensuring continuity in the family firm, preserving family cohesion, and delegating responsibilities to trusted advisors – that assist family firm decision-makers in managing these goal tensions. Moreover, we identify that sensegiving based on three different values – sense of commitment, community embeddedness, and family firm identity – helps family firm decision-makers to justify and communicate their decisions. Our model contributes to a more granular understanding of the management of goal tensions and of decision-making in family firms by going beyond the question of whether family firms prioritize economic or non-economic; instead, it reveals concrete processes showing how firms balance and aim to incorporate both goals. Furthermore, we advance knowledge on sensemaking in family firms by revealing how sensemaking can explain idiosyncratic family firm behaviour and by showing how family firm decision-makers use specific values when ‘giving sense’ to justify their decisions.     

The dark side of knowledge transfer: Exploring knowledge leakage in joint R&D projects

Knowledge leakage refers to loss of technological knowledge intended to stay within a firm׳s boundaries and may cause a “weakened state” in which a focal firm loses its competitive advantage and industry position. Based on multiple case studies of knowledge leakage in joint research and development (R&D) projects in large firms in Sweden, this paper makes two contributions. First, in contrast to the uni-dimensional dyadic leakage process assumed in the literature, we find that the knowledge leakage process is multi-dimensional and exists in three varieties: i) a process whereby an external party assimilates knowledge from a focal firm, ii) a process whereby an external party assimilates knowledge from another external party, and iii) a process whereby the focal firm uses knowledge already shared with an external party in such a way that it becomes sensitive. Second, where the prior literature suggests that core knowledge must be protected from leakage, we find that some core knowledge can leak without negative effects, whereas some knowledge, being non-core to a focal firm, can have severe negative effects. These insights provide novel theoretical implications and new insights into how firms can manage knowledge leakage in practice.     

A tale of two clusters: knowledge and emergence

Cluster emergence is an important topic but weakly conceptualized in the literature. Focusing on the interaction of the local knowledge pool and firm growth, the paper develops a comprehensive framework to understand cluster emergence. In the framework, the cluster formation process starts with the collision of local and external knowledge which generates an innovation and stimulates the creation of local pioneering firms in a new field. To support the growth of follow-up entrants in the new industry, the local knowledge pool needs to be expanded and deepened through local knowledge sharing and external knowledge inflows. The enlarged local knowledge pool enables local firms to grow and explore other fields further. To promote cluster emergence, public policies need to facilitate the interaction of the local knowledge pool and firm growth. The paper illustrates the interactive framework with two aluminum extrusion clusters in China that emerged in different ways over different time periods.     

Entrepreneurship and Firm Boundaries: The Theory of A Firm

abstract In this paper, we consider how a better understanding of entrepreneurial activities can help explain how firm and industry boundaries change over time and how a more comprehensive understanding of boundary setting can explain where entrepreneurial activities are directed. We start from the premise that while entrepreneurs believe themselves to have superior ideas in one or multiple parts of the value chain, they are characteristically short of cash, and of the ability to convince others to provide it. This premise motivates a simple model in which the entrepreneur has a value‐adding set of ideas for ‘upstream’ and ‘downstream’ parts of a value chain, as well as for the ways to make these two parts of the value chain work better when joined under unitary control. Assuming that the entrepreneur's objective is to maximize her wealth, we observe that even in the presence of transactional risks or other factors that might make integration preferable to specialization, initial scope depends also on relatively unexplored factors such as (a) how severe the entrepreneur's cash constraint is, and (b) how much value the entrepreneur's ideas add at each part of the value chain. Entrepreneurs will focus on the areas that provide the maximum profit yield per available cash – a criterion which implies that scope choices depend on cash availability and the depth of the demand for the new idea along the value chain. We also note that entrepreneurs make money not only from the operating profits of their firms, but also from the appreciation of the assets the firm has accumulated. This consideration can change the optimal choice of the firms’ boundaries, as entrepreneurs must be sensitive to choosing the segment that will enable them to benefit not only in terms of profit, but also in terms of asset appreciation. We propose that, in the entrepreneurial context especially, it is helpful to focus on the multiple considerations affecting the choice of boundaries for ‘a’ firm – the context faced by an individual entrepreneur – rather than on generic considerations affecting ‘the’ (representative) firm. Scope choices reflect the entrepreneur's own theory of ‘how to make money’.     

Resource Dependence and Network Relations: A Test of Venture Capital Investment Termination in China

This study examines how venture capital (VC) firms terminate investments in an emerging economy context. We contend that due to the weak institutional environment, it is appropriate to draw on insights from power and social relation perspectives for a better understanding of the phenomenon. Specifically, we argue that a termination decision hinges on not only the dependence relationship between a VC firm and its portfolio companies, but also the social relationships among VC firms. Event history analyses of approximately 12,000 VC deals made in China between 2001 and 2012 reveal that when a VC firm has a greater number of investments in an industry, it is more likely to terminate investments on a portfolio company in that industry. Moreover, such effect on termination is moderated by the focal VC's embeddedness with its syndicate partners and collaboration opportunities with other VC firms outside the immediate access of the syndicate partners. Our study sheds light on research on VC decision making in emerging markets by integrating insights from resource dependence relationships and interorganizational network characteristics.