Introduction
Firms from emerging markets are often latecomers to the global market, and their limited resources make it difficult to compete with entrenched rivals (Luo & Tung, Reference Luo and Tung2007). Top management teams’ (TMT) experience and knowledge create vital managerial and strategic resources and capabilities for all firms. These capabilities play a critical role in these firms’ allocation of resources, impacting in turn the firms’ rates of growth (Athanassiou & Nigh, Reference Athanassiou and Nigh1999; Hutzschenreuter & Horstkotte, Reference Hutzschenreuter and Horstkotte2013). The upper echelons theory proposes that the demographic characteristics of a firm’s top executives are associated with strategic choices and performance (Hambrick & Mason, Reference Hambrick and Mason1984). The executives’ demographic backgrounds shape their perception, cognitive value and preferences, which informs the TMTs’ knowledge and skills. The success or failure of a firm entering a foreign market depends on the TMTs’ knowledge, experience and ability to identify market opportunities (Sambharya, Reference Sambharya1996; Carpenter & Fredrickson, Reference Carpenter and Fredrickson2001).
TMTs influence important strategic decisions relating to activities such as innovation investments, diversification, strategic alliance formation and internationalization-each of which will have important impacts on performance (Bantel & Jackson, Reference Bantel and Jackson1989; Tihanyi, Ellstrand, Daily, & Dalton, Reference Tihanyi, Ellstrand, Daily and Dalton2000; Carpenter & Fredrickson, Reference Carpenter and Fredrickson2001; Cabrera-Suárez & Martín-Santana, Reference Cabrera-Suárez and Martín-Santana2013; Wang, Reference Wang2015; Xie, Wang, & Qi, Reference Xie, Wang and Qi2015). Prior studies have focused more on evaluating the effect of TMTs on innovation and internationalization in the context of developed countries (e.g., Finkelstein & Hambrick, Reference Finkelstein and Hambrick1990; Wiersema & Bantel, Reference Wiersema and Bantel1992; Hambrick, Cho, & Chen, Reference Hambrick, Cho and Chen1996; Tihanyi et al., Reference Tihanyi, Ellstrand, Daily and Dalton2000; Carpenter & Fredrickson, Reference Carpenter and Fredrickson2001; Herrmann & Datta, Reference Herrmann and Datta2005). Scholars have argued that the literature on the role of TMTs in the strategic decisions of firms from emerging countries remains underdeveloped (Carpenter & Fredrickson, Reference Carpenter and Fredrickson2001; Lee & Park, Reference Lee and Park2006; Barkema & Shvyrkov, Reference Barkema and Shvyrkov2007). These findings of firms from developed markets may not be relevant to firms from emerging markets, since such firms are often in the early stage of internationalization. Compared with large firms from developed countries, firms from emerging markets frequently cope with limited resources and low levels of innovation.
The difference in composition and assumption between TMTs from emerging countries and those from developed countries reveals a need to study the influence of TMTs on strategic decisions, concentrating on firms from emerging markets. First, TMTs in developed countries benefit from greater diversity in terms of ethnicity, nationality and gender than firms from emerging markets (Heijltjes, Olie, & Glunka, Reference Heijltjes, Olie and Glunka2003). The decision-making process in firms from emerging markets tends to exhibit characteristics of high-power distance and uncertainty avoidance (Hofstede, Reference Hofstede1980; Carpenter & Fredrickson, Reference Carpenter and Fredrickson2001). We argue that the benefit of the TMTs heterogeneity on multiple perspectives and information processing will be more apparent under a Chinese context, which typically emphasizes group orientation and interpersonal harmony (e.g., Tjosvold, Poon, & Yu, Reference Tjosvold, Poon and Yu2005). Qian, Cao, and Takeuchi (Reference Qian, Cao and Takeuchi2013) also demonstrate that the development of guanxi and interpersonal relationships are prized in a Chinese society. TMTs with a diverse background value harmony, which leads to less aggressive debate and interpersonal conflict in the strategic decision-making process. A significant association between TMT diversity and conflict should not be assumed under a Chinese context. Instead, TMTs are likely to provide multiple perspectives and viewpoints in a harmonious decision-making process. Firms in emerging markets typically have limited managerial, human and financial resources, therefore a TMT’s knowledge and experience is crucial for innovation and internationalization (Tan & Meyer, Reference Tan and Meyer2010). Their managerial experience guides the firms’ allocation of resources and influences the firms’ rate of growth in emerging markets (Luo & Tung, Reference Luo and Tung2007).
The existing research throws little light on how firms from emerging markets can innovative and achieve success in the global market despite the limited resources embedded in TMTs. Taking the perspective of firms from emerging markets, we explore how the TMT’s knowledge and experience affect strategic decisions related to innovation and internationalization. Moreover, this study investigates the association between innovation and internationalization in order to evaluate how these two factors affect a firm’s performance. In this study, we highlight those two strategic decisions because we focus on the Taiwanese electronics industry. Previous literature found that these firms operate in relatively short technology and product cycles; therefore they are forced to carve out market share quickly in order to survive in a highly competitive industry. They also enhance their innovative capabilities and improve their competitive position through entering global markets (Mitchell, Shaver, & Yeung, Reference Mitchell, Shaver and Yeung1992). Internationalization provides firms with opportunities to gain technological knowledge and achieve sales growth (Autio, Sapienza, & Almeida, Reference Autio, Sapienza and Almedia2000; Zahra, Ireland, & Hitt, Reference Zahra, Ireland and Hitt2000). Since firms from emerging markets, such as Taiwanese companies, are latecomers in the global market and have to compete with large firms from developed countries, investment in research and development (R&D) and tapping into foreign markets is a critical strategy to exploit new business opportunities (Leonidou & Katsikeas, Reference Leonidou and Katsikeas1996; Coviello & Munro, Reference Coviello and Munro1997), and this is especially true for high-technology firms (Autio, Sapienza, & Almeida, Reference Autio, Sapienza and Almedia2000; Santos, Doz, & Williamson, Reference Santos, Doz and Williamson2004). Recognizing that the efficient allocation of resources is required to ensure effective internationalization and innovation (Kor & Mahoney, Reference Kor and Mahoney2005), we concentrate on how TMT experience and knowledge affect internationalization and innovation.
This study contributes to a better understanding of how TMTs’ experience and knowledge influences strategic decisions in emerging markets, building on the empirical findings of prior studies that dealt with the role of TMTs in strategic decisions in firms from developed countries. This expands our comprehension of how such firms, despite possessing fewer resources and capabilities, are able to successfully innovate and internationalize.
The paper is structured as follows. In the next section, we review the extant research related to the association between the TMTs’ characteristics and strategic decision making. We then formulate our hypotheses. The method and empirical findings are described in the third and the fourth section, respectively. We discuss the results in the fifth section and provide a conclusion in the final section.
Research Background and Hypotheses
Previous studies stated a variety of perspectives to explain the influence of managers’ knowledge and experience on a firm’s strategic decisions. Several studies applied prospect theory to propose that decision makers tend to be risk-averse in a domain of gains (Kahneman & Tversky, Reference Kahneman and Tversky1979). Managers with a long tenure are generally more knowledgeable about the firms’ prospects (Kor, Reference Kor2006). This long experience, however, may also indicates that decision makers are more likely to be risk-averse because they are psychologically and tangibly invested in the firm (Simsek, Reference Simsek2007). Long-tenured managers are more likely to commit themselves to the status quo and have a lower willingness to embrace strategic change (Cyert & March, Reference Cyert and March1963; Hambrick & Fukutomi, Reference Hambrick and Fukutomi1991). In addition, Simon (Reference Simon1957) also proposed bounded rationality to refer to the concept that the managers make satisficing choices rather than pursuing optimizing strategies due to limited information, time and intellectual abilities. For the research, we apply the upper echelons theory developed by Hambrick and Mason (Reference Hambrick and Mason1984) to explain that the executives’ experience represents their cognition, values, skills and knowledge base, which affects the firms’ strategic choices. The organizational outcomes of strategies and effectiveness reflect the values and cognitive bases of the executives in the organization (Hambrick & Mason, Reference Hambrick and Mason1984; Carpenter, Geletkanycz, & Sanders, Reference Carpenter, Geletkanycz and Sanders2004). The individual characteristics of the top managers determine their perception of the environment, and this perception informs their strategic decisions. We also employ this theory to explain how the functional experience and international experience of the TMTs influences innovation and internationalization and performance.
According to the upper echelons theory established by Hambrick and Mason (Reference Hambrick and Mason1984), the TMTs’ characteristics, previous experience and psychological beliefs influence the firms’ behaviors and strategic decisions (Kor & Mahoney, Reference Kor and Mahoney2005). A TMT’s demographic heterogeneity, such as age, gender, tenure, functional background and educational background, represents its awareness, preferences, experiences and skills, which benefit innovative thinking and strategic outcome (e.g., Wiersema & Bantel, Reference Wiersema and Bantel1992; Hambrick, Cho, & Chen, Reference Hambrick, Cho and Chen1996; Tihanyi et al., Reference Tihanyi, Ellstrand, Daily and Dalton2000; Carpenter & Fredrickson, Reference Carpenter and Fredrickson2001). Research demonstrates that diverse cognitive perspectives are rooted in distinct knowledge and experience, which, in turn, promote constructive debate and strategic innovation (e.g., Hambrick & Mason Reference Hambrick and Mason1984; Tihanyi et al. Reference Tihanyi, Ellstrand, Daily and Dalton2000; Xie, Wang, & Qi, Reference Xie, Wang and Qi2015). Access to a diversity of information sources provides heterogeneous TMTs with the broad range of options required to resolve complicated problems (Certo, Lester, Dalton, & Dalton, Reference Certo, Lester, Dalton and Dalton2006).
Another research line, resource-based theory, stresses that a firm with resources that are valuable, scarce, inimitable and nonsubstitutable can outperform other firms (Barney, Reference Barney1991). TMTs’ backgrounds and experience, such as international experience and network relationships, represent the firm’s scarce, inimitable and nonsubstitutable resources (Athanassiou & Nigh, Reference Athanassiou and Nigh2000; Castanias & Helfat, Reference Castanias and Helfat1991, Reference Castanias and Helfat2001). Such knowledge is critical to the firm because the TMT’s decisions impact resource allocation and deployment (Kor & Mahoney, Reference Kor and Mahoney2005) and influence the firm’s strategic choices (Athanassiou & Nigh, Reference Athanassiou and Nigh1999). Furthermore, the nonsubstitutable experience and knowledge of the TMTs enable them to recognize market opportunities. Therefore, the specific resources embedded in TMTs affect the firms’ investments and how effectively these strategic investments are managed (Kor & Mahoney, Reference Kor and Mahoney2005). As a result, the superior allocation of resources is a critical competitive advantage for firms.
TMT’s functional background heterogeneity
Functional background heterogeneity refers to the accumulated knowledge and skills by executives from prior work experiences (Ancona & Caldwell, Reference Ancona and Caldwell1992). Diverse functional backgrounds enhance the managers’ task-related knowledge and awareness of market trends, as well as affect the way problems are defined, information is processed and strategic choices are made. Since innovative decisions are actualized based on the manger’s ability, knowledge and experience, innovation is more likely to occur when people of diverse disciplines, backgrounds and areas of expertise share ideas (Walsh, Reference Walsh1988). Diversified and multiple sources of information benefit the process of solving complex problems (Milliken & Martins, Reference Milliken and Martins1996; Certo et al., Reference Certo, Lester, Dalton and Dalton2006). The multiple perspectives and knowledge of TMTs tend to produce a variety of opinions and interpretations when assessing alternatives, thereby facilitating creativity and innovative decision making (Auh & Menguc, Reference Auh and Menguc2005; Boone & Hendriks, Reference Boone and Hendriks2009). Studies have indicated that TMTs with a variety of characteristics tend to receive information from a wide range of sources and are more likely to propose innovative ideas (Bantel & Jackson, Reference Bantel and Jackson1989; Wiersema & Bantel, Reference Wiersema and Bantel1992). However, the other stream argues that the diverse values and backgrounds may cause conflicts which will hinder information-sharing (O’Reilly, Snyder, & Boothe, Reference O’Reilly, Snyder and Boothe1993; Smith, Smith, Olian, Sims, O’Bannon, & Scully, Reference Smith, Smith, Olian, Sims, O’Bannon and Scully1994; Jehn, Northcraft, & Neale, Reference Jehn, Northcraft and Neale1999).
Adopting the positive side, this study demonstrates that diversity will fuel innovation due to the benefit of multiple information sources and perspectives from heterogeneity. We argue that the positive effect will be more obvious under a Chinese context, which typically emphasizes interpersonal harmony (Tjosvold, Poon, & Yu, Reference Tjosvold, Poon and Yu2005). Qian, Cao and Takeuchi (Reference Qian, Cao and Takeuchi2013) also state that in a Chinese context, society cares more about the development of guanxi and interpersonal relationships. In this paper, we propose that, under a Chinese context, TMTs tend to provide multiple perspectives and viewpoints in a harmonious decision-making process and avoid aggressive forms of debate and interpersonal conflict in the strategic decision-making process. Thus, diversity contributes to innovation instead of damaging creativity.
TMTs that draw experience from the members’ different functional backgrounds are more open to innovative ideas and novel strategies, which is the foundation of innovative solutions. A diversity of information predicates high levels of creativity (Williams & O’Reilly, Reference Williams and O’Reilly1998). Moreover, when TMTs have a diverse background, it stimulates debate and improves judgment. This situation is particularly relevant to the application of creative ideas to solve complex problems during the innovative process (Hambrick & Mason, Reference Hambrick and Mason1984; Simons, Pelled, & Smith, Reference Simons, Pelled and Smith1999).
Since innovation entails environmental change, a heterogeneous TMT enables a firm to approach problems from various perspectives in a way that reduces uncertainty (Herrmann & Datta, Reference Herrmann and Datta2005). A TMT with a diverse functional background will have a higher tolerance toward risk during environmental change, and is more willing to invest in innovation (Bantel & Jackson, Reference Bantel and Jackson1989; Camelo-Ordaz, Hernández-Lara, & Valle-Cabrera, Reference Camelo-Ordaz, Fernández-Alles and Valle-Cabrera2005).
TMTs that have heterogeneous functional backgrounds can contribute to their firms’ knowledge base while fostering the ability to identify risk and opportunities inherent in environmental change (Jackson, Reference Jackson1992). Bantel and Jackson (Reference Bantel and Jackson1989) studied the banking industry and found that TMTs with more heterogeneous functional backgrounds bring greater administrative innovation. Recognizing a relationship between functional background and TMT openness, we proposed that greater functional background heterogeneity would result in a TMT that emphasizes innovative strategic decisions. Thus
Hypothesis 1a: A TMT’s functional background heterogeneity will be positively associated with the firm’s level of innovation.
Functional background heterogeneity also affects the firms’ internationalization process. Firms entering a foreign market typically face high uncertainty, ambiguity and substantial environmental change (Herrmann & Datta, Reference Herrmann and Datta2005). Studies have demonstrated that the functional background diversity of TMTs strengthens the ability of firms to deal with the environmental complexities within internationalization (Tihanyi et al., Reference Tihanyi, Ellstrand, Daily and Dalton2000; Carpenter & Fredrickson, Reference Carpenter and Fredrickson2001; Herrmann & Datta, Reference Herrmann and Datta2005; Rivas, Reference Rivas2012).
Research suggests that the executives’ prior experience provides firms with positional advantages that may be leveraged to grow operations (Sapienza, Autio, George, & Zahra, Reference Sapienza, Autio, George and Zahra2006; Boone & Hendriks, Reference Boone and Hendriks2009). Furthermore, executives provide advice for firms dealing with complex decisions arising from internationalization (Athanassiou & Nigh, 1999).
The TMTs’ valuable external networks contain local connections and social capital that improve access to foreign markets (Hitt, Bierman, Shimizu, & Kochhar, Reference Hitt, Bierman, Shimizu and Kochhar2001). Experience that spans various functional backgrounds helps firms to identify critical external factors, and then integrate a diversity of resources and skills that enable them to evaluate and make effective international investment decisions. During the internationalization process, TMTs with more heterogeneous functional backgrounds are especially capable of observing opportunities and threats in foreign markets, and then responding flexibly to such environmental uncertainties. Thus
Hypothesis 1b: A TMT’s functional background heterogeneity will be positively associated with the firm’s level of internationalization.
TMT’s international experience
The behavior and characteristics of TMTs are primary determinants of success in the global environment. International experience acquired while studying or working abroad shapes the executives’ perceptions, cognition and personalities (Herrmann & Datta, Reference Herrmann and Datta2005). Top managers with international experience are more likely to possess the vision required to develop innovative products than managers with less international experience. Studies have also suggested that international experience is a crucial determinant of executives’ strategic visions, which are related to the companies’ innovation (Camelo-Ordaz, Fernández-Alles, & Valle-Cabrera, Reference Camelo-Ordaz, Hernandez-Lara and Valle-Cabrera2008).
Innovation requires long-term, rather than short-term strategic investment. Global mind-set training provides executives with a high tolerance for environmental uncertainty (Carpenter & Fredrickson, Reference Carpenter and Fredrickson2001). TMTs with a global mind-set are particularly sensitive to environmental change and market opportunities, and possess the flexibility required to develop innovative ideas. This implies that a higher tolerance of market risk drives executives to aggressively devote resources to innovative activities. International experience also brings a broader range of information from external networks, enabling executives to rapidly become familiar with changing environments. In summary, the TMTs’ international experience helps firms to assess innovative sources and build innovative capabilities. Thus
Hypothesis 2a: A TMT’s international experience will be positively associated with the firm’s level of innovation.
The international experience and knowledge gained from prior studies or work experience gives the executives a more global view and cultivates an open attitude (Sambharya, Reference Sambharya1996). In addition, a TMT’s knowledge of the international environment helps it to perceive lower risk while evaluating international investments (Carpenter & Fredrickson, Reference Carpenter and Fredrickson2001). Firms that enter foreign markets are confronted with a different economic, cultural and institutional environment where the acquisition of foreign knowledge is required to succeed. This understanding of other cultures, regulations and market risk helps TMTs surmount the obstacles of operating in foreign markets.
When entering foreign markets, firms face complexity and a highly competitive environment. International experience increases the managers’ ability to exploit organizational capabilities and deploy resources efficiently to succeed in foreign markets (Tihanyi et al., Reference Tihanyi, Ellstrand, Daily and Dalton2000; Carpenter & Fredrickson, Reference Carpenter and Fredrickson2001). The accumulation of international experience can also reduce the time required to become familiar with a foreign market.
Individuals that study or work abroad create a network of foreign partners, which provides firms with windows into new markets, as well as greater opportunities to cooperate with foreign firms (Bloodgood, Sapienza, & Almeida, Reference Bloodgood, Sapienza and Almeida1996; Hitt, Lee, & Yucel, Reference Hitt, Lee and Yucel2002). Such experience also facilitates access to potential foreign suppliers and customers. International cooperation enables firms to access local resources and local market information in a way that facilitates a firm’s entry into foreign markets (Carpenter & Fredrickson, Reference Carpenter and Fredrickson2001). Thus, firms have a higher level of internationalization when the TMTs have more international experience:
Hypothesis 2b: A TMT’s international experience will be positively associated with the firm’s level of internationalization.
Innovation and internationalization
In previous research, scholars have raised a number of arguments about the relationship between innovation and internationalization. Some have advocated that innovation can create a monopoly for firms, enabling them to leverage this competitive advantage in other countries (Teece, Reference Teece1980). Others have advocated that international expansion produces opportunities for multinational companies to gain new resources and knowledge in new markets (Kotabe, Reference Kotabe1990; Hitt, Hoskisson, & Kim, Reference Hitt, Hoskisson, Ireland and Harrison1997). In our study, we propose that innovation is positively associated with internationalization. Faced with constraints, such as a shortage of capital and managerial talent, firms based in emerging markets must concentrate their limited resources on several innovative products and services to target niche markets (Luo & Tung, Reference Luo and Tung2007). Otherwise, many firms in emerging markets first enter the global market as subcontractors for foreign brands.
Firms with firm-specific or ownership advantages tend to generate more foreign direct investment (Dunning, Reference Dunning1988). Managerial and marketing skill, technology or production differentiation are usually identified as types of firm-specific advantage (Hymer, Reference Hymer1960). Firms exploit such advantages in foreign markets to compete with local firms in the host country (Caves, Reference Caves1974). Research has found that innovative firms have a greater motivation to progress in internationalization. In the complex and competitive global market, innovative abilities help firms develop new products and assess opportunities to enter new markets.
Innovation affects a firm’s productivity, which increases the likelihood of the firm entering a foreign market (Cassiman & Golovko, Reference Cassiman and Golovko2011). Firms increase productivity and bring better products and services that increase competitive advantages to compete with rivals while entering foreign countries. Li (Reference Li1999) also found that innovation experts have a positive impact on new product performance in foreign markets. Lee and Habte-Giorgis (Reference Lee and Habte-Giorgis2004) demonstrated that firms use innovative advantages to earn high profits and acquire market share in a host country. Thus, we propose a positive relationship between innovation and internationalization:
Hypothesis 3: A high level of innovation relates positively to the level of internationalization.
Innovation, internationalization and performance
Innovation represents a firm’s ability to develop products and, in turn, to improve its current competitive position (Li, Reference Li1999; Zahra, Ireland, & Hitt, Reference Zahra, Ireland and Hitt2000). Innovation is associated with lowering costs by enhancing operational efficiency. Upgrading the current base in order to provide customized products and services can earn higher levels of customer satisfaction. Thus, innovative activities improve production and the managerial processes that lead to enhanced product quality, and ultimately increase the firms’ competitive positions (Filatotchev & Piesse, Reference Filatotchev and Piesse2009).
Innovation provides firms with tacit knowledge and substitutable capabilities, which enable them to rapidly introduce new products and technologies. By adopting innovations in products, technology and administration, firms can compete with rivals and respond to environmental change swiftly. It emerges that innovation allows firms to sustain their competitive advantage, which makes them difficult for rivals to imitate; this in turn allows firms to earn higher profits (Barney, Reference Barney1991). Innovation helps to increase both market penetration and profitability (Hitt, Hoskisson, & Ireland, Reference Hitt, Hoskisson and Ireland1994; Kim & Mauborgne, Reference Kim, Hwang and Burgers2002). The skillful exploitation of innovative knowledge and technology makes it easier for firms to enter new markets, which will fuel the firm’s growth (Autio, Sapienza, & Almeida, Reference Autio, Sapienza and Almedia2000). All of the above-mentioned actions help firms achieve higher performance:
Hypothesis 4a: Firms’ innovation relates positively to performance.
Numerous studies have examined the relationship between internationalization and performance; however, the findings are inconsistent (e.g., Tallman & Li, Reference Tallman and Li1996; Hitt, Hoskisson, & Kim, Reference Hitt, Hoskisson, Ireland and Harrison1997; Delios & Beamish, Reference Delios and Beamish1999; Gomes & Ramaswamy, Reference Gomes and Ramaswamy1999; Geringer, Tallman, & Olsen, Reference Geringer, Tallman and Olsen2000). Studies that have explored larger companies in developed countries have found a positive relationship between internationalization and firm performance (i.e., Grant, Jammine, & Thomas, Reference Grant, Jammine and Thomas1988; Tallman & Li, Reference Tallman and Li1996). These studies suggest that firms outperform due to stretching their core competences, such as advanced technology, reputation, learning experience and organizational ability, in international markets (e.g., Grant, Reference Grant1987; Geringer, Beamish, & daCosta, Reference Geringer, Beamish and daCosta1989; Kim, Hwang, & Burgers, Reference Kim and Mauborgne1993). They can allocate their intangible resources through networks of headquarters and subsidiaries. Through the process of sharing, integrating and coordinating key resources among headquarters and subsidiaries, firms earn the advantages of economies of scale and achieve higher profitability (Grant, Jammine, & Thomas, Reference Grant, Jammine and Thomas1988).
Research has suggested that firms from emerging markets, with limited management resources and international experience, find that costs exceed benefits in the early stages of internationalization, which creates a negative relationship between internationalization and a firm’s performance (Contractor, Kundu, & Hsu, Reference Contractor, Kundu and Hsu2003; Contractor, Kumar, & Kundu, Reference Contractor, Kumar and Kundu2007). However, firms in emerging markets often use their organizational and strategic innovative capabilities to compensate for a lack of financial and managerial abilities (Mathews & Zander, Reference Mathews and Zander2007).
Many firms from emerging markets are affiliations of business groups, so they enjoy shared internal capital and managerial resources that facilitate entry to foreign markets (Contractor, Kumar, & Kundu, Reference Contractor, Kumar and Kundu2007). Firms from emerging markets demonstrate strong networking and absorptive abilities that convert constrained managerial resources into a positive performance (Kotabe, Jiang, & Murray, Reference Kotabe, Jiang and Murray2010; Musteen, Francis, & Datta, Reference Musteen, Francis and Datta2010). A highly competitive home country may also lead firms in emerging markets to exploit particular capabilities and knowledge of weak institutional environments to develop unique competences that they can leverage in foreign markets. Thus, we argue that there is a positive relationship between internationalization and firms’ performance in emerging markets:
Hypothesis 4b: High levels of internationalization relate positively to firms’ performance.
Methods
Sample and data
We sampled firms from the electronics industry that were listed on the Taiwan Stock Exchange and the Gre Tai Securities Market from 2007 to 2009. The choice of one industry reduced the potential for confounding influences (Tihanyi et al., Reference Tihanyi, Ellstrand, Daily and Dalton2000). We obtained data on innovation and firms’ performance from the Taiwan Economic Journal, while the demographic profile (including functional background, international experience and size) of TMTs was gathered from the companies’ annual reports, which contain the educational background, including the highest level of education and graduated school, and prior job experience of the managers who implement critical decisions in the firm, as well as the prior job title and company name of the manager. Thus, we coded the functional background heterogeneity and international experience based on whether or not the manager had study experience or work experience outside Taiwan. According to the measurement of functional background heterogeneity, the managers’ background was categorized according to the criterias and procedures outlined in Wiersema and Bantel (Reference Wiersema and Bantel1992). This categorization and measurement was based on prior TMT literature (e.g., Bantel & Jackson, Reference Bantel and Jackson1989; Tihanyi et al., Reference Tihanyi, Ellstrand, Daily and Dalton2000; Carpenter and Fredrickson, Reference Carpenter and Fredrickson2001; Carpenter, Reference Carpenter2002). Initially, our study sample consisted of 589 listed firms in the electronics industry. Following Carpenter’s (Reference Carpenter2002) suggestion, TMT characteristics from time t were used to predict firm innovation, internationalization and performance at t+1 and t+2 and the control variables were from time t as well. After excluding firms that had incomplete information regarding TMT characteristics, innovation, internationalization and performance, our sample comprised 1,005 observations from 335 companies over a period of 3 years.
Measures
Dependent variables
Innovation
In this paper, we used R&D intensity as a proxy of a firm’s innovation. R&D intensity was measured as the percentage of R&D expenditure within total sales. R&D intensity is also considered as a proxy measure of innovation in other studies (e.g., Hitt, Hoskisson, & Kim, Reference Hitt, Hoskisson, Ireland and Harrison1997). Several research studies have argued that R&D intensity is an input measurement of innovation and highly associated with innovative outputs, such as patents (Hitt, Hoskisson, Ireland, & Harrison, Reference Hitt, Hoskisson and Kim1991) and new product introduction (Hitt, Hoskisson, Johnson, & Moesel, Reference Hitt, Hoskisson, Johnson and Moesel1996). It thus follows that firms in emerging markets are generally in the early stages of innovation and their innovation output may be limited. Applying innovative output indicators, such as patents and new product introductions, to examine the firms’ innovations in emerging markets may not be appropriate. Thus, we followed this approach and employed R&D intensity to measure the firms’ innovation.
Internationalization
A number of foreign subsidiaries served as a proxy for internationalization. Previous research has adopted different measures of internationalization, including the number of foreign subsidiaries, ratio of foreign sales to total sales, ratio of foreign revenue to total revenue and ratio of foreign assets to total assets (Geringer, Beamish, & daCosta, Reference Geringer, Beamish and daCosta1989; Tallman & Li, Reference Tallman and Li1996). Among these measures, the ratio of foreign sales to total sales (or the ratio of foreign assets to total assets) was widely used in prior research (e.g., Geringer, Beamish, & daCosta, Reference Geringer, Beamish and daCosta1989). These studies, however, have focused on firms from developed countries. Firms in emerging markets may have just started to enter foreign markets, consequently they exhibit low ratios of foreign sales to total sales. This situation reflects a different stage of internationalization compared with firms from developed countries, thereby reducing the relevance of adopting this proxy to measure the level of internationalization of firms from emerging markets (Lall, Reference Lall1996). Thus, the number of foreign subsidiaries is a more appropriate measurement of internationalization in our study (e.g., Grant, Reference Grant1987; Geringer, Beamish, & daCosta, Reference Geringer, Beamish and daCosta1989; Collins, Reference Collins1990). Regarding the number of subsidiaries with skewed attributes, we performed a logarithmic transformation in such cases (Russell & Dean, Reference Russell and Dean2000; Hutzschenreuter & Horstkotte, Reference Hutzschenreuter and Horstkotte2013).
Performance
Researchers have adopted a range of measurement of firms’ performance. Return on assets is one of the most widely accepted indicators of performance. This measure is useful in assessing the performance implications of business strategies because it captures the firm’s ability to manage and deploy assets effectively. It is also an objective assessment of a firm’s performance.
Independent variables
Prior studies have employed various TMT definitions and obtained mixed results regarding the impact of TMT characteristics on strategic decision making (Certo et al., Reference Certo, Lester, Dalton and Dalton2006). For example, several studies have identified the top two tiers of an organization’s management as TMTs (i.e., Carpenter & Fredrickson, Reference Carpenter and Fredrickson2001; Carpenter, Reference Carpenter2002). Other studies have defined all executives above the vice president level (i.e., Hambrick, Cho, & Chen, Reference Hambrick, Cho and Chen1996; Tihanyi et al., Reference Tihanyi, Ellstrand, Daily and Dalton2000). In this study, we identified TMTs as the members of the managerial board or the executive committee listed in the firms’ annual reports. This definition is broader than that used in previous studies; however, in emerging markets, managers tend to employ a collective decision-making process. These executives were reported in the company annual reports as having power in critical organizational decisions, which also reflect the profile of their firm’s strategic decision team.
Functional background heterogeneity
Information about the TMT members’ work experience was obtained from the biographies published in the company annual reports. Following the previous studies, we measured functional background heterogeneity and classified the executives’ functional background experience into eight categories: general business, engineering, finance and accounting, marketing, R&D, production and operations, legal, and other (Bantel & Jackson, Reference Bantel and Jackson1989; Tihanyi et al., Reference Tihanyi, Ellstrand, Daily and Dalton2000). Employing Blau’s (Reference Blau1977) heterogeneity measure, we evaluate functional background heterogeneity as 1-Σ(P i )2, where i is the proportion of the team in the ith functional category. A score close to 1 indicated a TMT with a higher level of heterogeneous functional background.
International experience
Based on prior studies, we measured international experience according to the number of TMT members who had studied or worked abroad (Wiersema & Bantel, Reference Wiersema and Bantel1992). This dimension was scored either 1 or 0, where the former indicated that the executive had studied or worked outside Taiwan and the latter indicated that they had not. The final measure was the proportion of members of the TMT who had international experience.
Control variables
TMT size
The TMT’s size influences the extent of the firm’s managerial resources. Larger TMTs might contain members with more diverse knowledge and skill backgrounds that improve their teams’ strategic decision-making abilities (Tihanyi et al., Reference Tihanyi, Ellstrand, Daily and Dalton2000). We measured TMTs’ size by the number of TMT members and data that were extracted from the firms’ annual reports.
Educational background heterogeneity
Educational background heterogeneity was measured with Blau’s (Reference Blau1977) heterogeneity index:
$H{\equals}1{\minus}\mathop{\sum}\limits_{i{\minus}1}^n {Si^{2} } $
, where H is the homogeneity index, S the percentage of TMT members with dominant educational track i, and n the number of different educational backgrounds (Wiersema & Bantel, Reference Wiersema and Bantel1992). We coded educational background into six categories: arts, sciences, engineering, business and economics, law and other. This indicator varies between 0 and 1, where a value close to 1 represents higher heterogeneity in educational backgrounds and a lower value indicates a uniform TMT educational background.
Firm size
Firm size relates to both a firm’s ability to engage in innovative and international activities and its competitive position in the industry (Chatterjee & Wernerfelt, Reference Chatterjee and Wernerfelt1991). The larger firms tend to have more diverse TMTs, which also reflect the relationship between the TMTs characteristics and the organizational outcomes (Carpenter, Reference Carpenter2002). Thus, we controlled for firm size and measured it as a natural logarithm of the number of employees.
Firm age
A firm’s age is related to its experience, knowledge and ability to identify environmental changes and opportunities in international market (Autio, Sapienza, & Almeida, Reference Autio, Sapienza and Almedia2000). It potentially influences its experience and ability to make decisions regarding innovation and internationalization. We calculated the log of the number of years that the firm had been operating until 2007 to represent its age.
Leverage capability
Firms in emerging markets typically exhibit low debt-to-equity ratios in a way that reflects superior levels of unabsorbed slack resources and leverage capability (Tan & Peng, Reference Tan and Peng2003; Chang & Rhee, Reference Chang and Rhee2011). Innovation and internationalization require financial investment, which depends on the firm’s ability to leverage financial resources (Li & Meyer, Reference Li and Meyer2009). Thus, we included the leverage ability as a control variable and measured it as the ratio of total debts to total assets.
Industry dummy
Innovation and Internationalization may vary across industry factors. As a result, we controlled for the possible effects of the industry and created dummy variables to categorize the firm engaged in manufacturing-oriented activities (code as 0) or service oriented (code as 1).
Year dummy
Year dummy is created (code as 1) if the company is listed in 2007–2009, respectively.
Results
Table 1 lists the descriptive statistics and variables. The firms, on average, owned 6.4 subsidiaries and had an R&D intensity of 6.25%. The average functional background heterogeneity of team managers was 0.566 and the proportion of executives who had studied or worked abroad was 0.167. The correlation table indicates that no two variables exhibited a correlation of >0.5. Our finding shows a significant positive correlation between firm size and international experience of TMTs (correlation=0.0810, p<.01) but a nonsignificant correlation with functional background heterogeneity of TMT members (correlation=−0.0313, p>.1). It suggests that larger firms tend to recruit more international-oriented executives but this is not associated with prior functional experience diversity. The variance inflection factor was checked respectively for all of the models to lessen the possible of multicollinearity and autocorrelation problem. The variance inflection factor ranged from 1.01 to 1.28, which demonstrates that multicollinearity is not a concern.
Descriptive statistics and correlations
TMT, top management teams.
***p<.01; **p<.05; *p<.1.
Table 2 displays the results of the ordinary least squares regression analysis. Model 1 in Table 2 is the base model while Model 2 examines the effect of the TMTs’ characteristics on innovation. The effect of firm size, firm age and debt ratio is negatively related to innovation (β=−0.128, p<.01; β=−0.142, p<.01; β=−0.299, p<.01). The results represent the tendency of smaller and younger firms to have a higher performance on innovation. We can also see that the firms with lower debt ratios are likely to use their own capital prudentially. The year dummy of 2008 also influences innovation (β=−0.085, p<.05). The results in Model 2 indicate that functional background heterogeneity relates positively to firms’ innovation (β=0.054, p<.1). This result supports Hypothesis 1a. We also found a significantly positive relationship between international experience and innovation (β=0.179, p<.01), thereby supporting Hypothesis 1b.
The effect of TMT characteristics on innovation, internationalization and performance
TMT, top management teams.
***p<.01; **p<.05; *p<.1.
Model 4 presents the relationship between TMTs’ characteristics and internationalization. The effect of firm size and firm age is positively related to internationalization (β=0.544, p<.01; β=0.108, p<.01). The results reflect the higher internationalization of larger and older firms. The year dummy of 2007 and 2008 also influenced internationalization (β=−0.122, p<.01; β=−0.113, p<.01). The result also indicates that the effect of functional background heterogeneity on internationalization is nonsignificant (β=−0.038, p>.1). This suggests that the TMTs’ functional background heterogeneity does not drive internationalization, which does not support Hypothesis 2a. However, we did discover a positive relationship between international experience and firms’ internationalization (β=0.060, p<.05). Therefore, Hypothesis 2b is supported.
Model 4 also demonstrates the influence of innovation on internationalization. The results also show that the effect of innovation on internationalization is positively significant (β=0.071, p<.05). This suggests that firms’ innovative activities drive internationalization, which supports Hypothesis 3. Model 6 displays the influence of innovation and internationalization on performance. The effect of firm size is positively related to performance (β=0.255, p<.01), which indicates that larger firms with more resources and capabilities can thereby perform better. Moreover, firm age and debt ratio are negatively related to performance (β=−0.068, p<.05; β=−0.364, p<.01). The results represent the ability of younger firms with a lower debt ratio to achieve a better performance. The year dummy variables also have an influence on performance as well (β=0.283, p<.01; β=0.128, p<.01). The results reveal that innovation relates negatively to performance (β=−0.147, p<.01). This suggests that firms’ commitment to innovative activities may hamper their performance; this result is contrary to Hypothesis 4a. However, the result indicates a nonsignificant relationship between internationalization and performance (β=0.005, p>.1). Firms with more international experience achieve superior performance, and this finding does not support Hypothesis 4b.
Discussion
In this study, we examined the influence of TMTs’ functional background heterogeneity and international experience on firms’ innovation and internationalization. The relationship between innovation, internationalization and performance was also investigated. We found that the TMTs’ functional background heterogeneity contributes to the firms’ innovation. Moreover, the TMT’s international experience relates positively to innovation and internationalization. Firms with higher levels of innovation contribute to higher levels of internationalization. However, the benefit of internationalization on organizational outcome is only shown in the 2-year lag performance.
Our results also reveal a nonsignificant relationship between functional background heterogeneity and internationalization. This result departs from our argument in Hypothesis 2a that the TMTs’ diverse functional background would tend to generate firms with greater levels of internationalization. This finding indicates that TMTs with a heterogeneous background do not contribute to internationalization. Both our finding and other studies with samples from Western developed countries discovered a nonsignificant effect of heterogeneous functional background on internationalization (e.g., Tihanyi et al., Reference Tihanyi, Ellstrand, Daily and Dalton2000; Herrmann & Datta, Reference Herrmann and Datta2005). The explanation of this finding may be that the success in operation of international business needs to be combined with other experience, such as industry experience and operational experience related to the host country, and bundled with local contexts, (Meyer, Mudambi, & Narula, Reference Meyer, Mudambi and Narula.2011) in order to have a higher predictability on the influence on internationalization. Tihanyi et al. (Reference Tihanyi, Ellstrand, Daily and Dalton2000) suggest that the lack of an association may be due to the industry selected. Industries with a dynamic environment, such as the electronics industry, would be likely to attract executives with similar functional backgrounds.
Furthermore, according to our findings of the positive effect of international experience on innovation and internationalization, we determined that the positive effect of international experience is confirmed both in firms from Western developed countries and emerging markets (e.g., Bantel & Jackson, Reference Bantel and Jackson1989; Carpenter & Fredrickson, Reference Carpenter and Fredrickson2001; Tihanyi et al., Reference Tihanyi, Ellstrand, Daily and Dalton2000; Herrmann & Datta, Reference Herrmann and Datta2005). Our results extend these earlier findings from developed countries to emerging markets. This study suggests that the strategic decisions of innovation and internationalization are associated with the TMT’s international experience.
Contrary to our expectations, we found that high levels of innovation neither contribute to nor hamper performance. A possible explanation is that firms in emerging markets are in the early stage of innovation. R&D spending is an unconvertible investment, and the contribution to superior performance may need a longer period of time. Prior study also demonstrated that R&D investments convert into revenue-generating products typically within a period of 3 years (Kor & Mahoney, Reference Kor and Mahoney2005). In a highly competitive industry, such as the electronics industry, the firms’ superior performance quickly dissipates in the extremely volatile environment. Thus, in our study, innovation causes a negative impact on performance for firms from emerging markets.
Finally, we did not find a link between internationalization and performance, which may reflect the lag effect of internationalization on performance. We employed a 2-year lag between internationalization and performance to check if the positive effect of internationalization on superior performance appears 2 years later. This approach allowed enough time for the potential benefit of internationalization to become apparent (β=0.086, p<.05). The finding indicates that firms with a higher level of internationalization tend to have a superior performance 2 years later. The explanation may be that firms from emerging markets usually have less managerial experience and resources and are latecomers to the international environment (Luo & Tung, Reference Luo and Tung2007). They need more time to accumulate experience and knowledge of the international environment (Lu & Beamish, Reference Lu and Beamish2001). Even if the firms set up subsidiaries in foreign countries, an improved performance may not appear immediately. Therefore, a firm’s engagement in international activities and leverage of resources from the international environment may not yield any significant rise in revenue generation.
According to the findings of the control variables, smaller and younger firms with lower debt ratio have a better innovation performance. Compared with large companies, smaller and younger firms have a greater willingness to take risks during the innovative process. Employing greater flexibility while engaged in innovative process, they tend to have higher innovation. Companies with lower debt ratios tend to evaluate risky innovative activities more cautiously, and thereby have more innovative outcomes. The findings also suggest that larger and older companies tend to have higher internationalization, which may reflect the companies’ greater resources and knowledge related to international environment. They also possess the confidence required to face the uncertainty of global market. Thus, they tend to have a higher level of internationalization. The findings also show that young larger firms with lower debt ratio have a better performance, which indicates that young firms have a higher willingness to embrace risk and uncertainty. They also possess more managerial and financial resources, and thereby perform better than other companies.
Particularly, according to the findings of the influence of control variables on performance. Carpenter (Reference Carpenter2002) found that firm size is negatively related to firm performance but our finding shows that firm size contributes to performance. This finding also supports the argument from prior literature that firm size is related to both a firm’s resources and capabilities to engage in innovative and international activities and to enhance its competitive position in the industry (Chatterjee & Wernerfelt, Reference Chatterjee and Wernerfelt1991). However, Carpenter (Reference Carpenter2002) concluded that a heterogeneous educational background is positively related to performance but we obtained a nonsignificant finding. Our sampling of the firms in the electronics industry demonstrated that the executive’s educational background is more uniform. Given the fast-changing environment in the electronics industry, the knowledge learned from school contributes less to performance. Thus, we obtained a nonsignificant effect of educational background heterogeneity on performance.
Finally, we found the year dummy has an influence on innovation, internationalization and performance. The findings reveal that the TMTs characteristics have less influence on innovation and internationalization in the year after 2007. A possible explanation is that the 2008 financial crisis lowered the TMTs’ willingness to engage in innovation and internationalization. The financial crisis may have driven the TMTs to adopt a more conservative attitude and detailed evaluation toward innovation and internationalization that contributes to enhanced performance.
Conclusions
Our study extends previous research that focused on examining the role of TMTs on firms in developed countries, to consider the role of the TMTs’ strategic decisions in emerging markets. We investigated how the TMTs’ functional background heterogeneity and international experience impacts strategic decisions towards innovation and internationalization for firms in emerging markets. In this study, we also considered the relationship between internationalization and innovation with respect to the firms’ performance.
Theoretical implications
According to our results, higher levels of TMTs’ functional background heterogeneity and international experience are associated with the firms’ higher level of innovation (Hypotheses 1a and 1b). This supports the notion that the TMTs’ diverse information sources and knowledge accumulated from functional background and international experience provide firms with more opportunities and time to develop innovative thoughts and ideas (Carpenter & Fredrickson, Reference Carpenter and Fredrickson2001).
We also found support for the positive relationship between the international experience of TMTs and internationalization (Hypothesis 2b), which provides evidence that the TMTs’ international experience is a critical driver of international strategic decisions for firms in emerging markets. International-oriented TMTs benefit firms by allowing them to overcome the challenge of uncertainty and complexity in international markets. While other studies have found that TMTs’ international experience relates to the firms’ international involvement, they have focused on the context of firms in developed markets (e.g., Sambharya, Reference Sambharya1996; Tihanyi et al., Reference Tihanyi, Ellstrand, Daily and Dalton2000). Our study contributes to revelations that the TMTs’ international experience is also important for smaller firms and those with fewer resources in emerging markets when making decisions about international investments. This highlights the importance for firms to cultivate their executives’ knowledge of international markets.
Our finding of the positive impact of TMTs’ innovation on the level of firms’ internationalization (Hypothesis 3) is also consistent with previous studies. Innovation can create a competitive advantage and build an intangible asset that will result in a higher competitive position in the international environment (Caves, Reference Caves1974).
We contribute to the literature by addressing the application of the upper echelons theory to emerging markets. The results demonstrate that the executives’ international experience is highly associated with achieving high levels of innovation and internationalization. The findings provide evidence to generalize the importance of TMTs’ international experience to firms from emerging markets. For firms from emerging markets, developing executives with a global mindset and diverse functional experience is critical for success in international markets.
Managerial implications
The TMTs’ international experience helps executives to accept novel situations, which creates an environment conducive to innovation. For Taiwanese firms, developed countries are a vital export market. The higher international experience of executives enables them to develop innovative products and services that match the preferences of foreign customers. Thus, innovation-oriented firms should target candidates with international experience when recruiting managers. Providing job rotation opportunities also helps executives to accumulate more international experience. We found that functional background heterogeneity is not positively related to internationalization. We suggest that firms provide learning opportunities for the managers to better understand the resources and institutions in a local context, in order to gain more localized knowledge related to practical operation and industry experience.
Research limitations
This study had several limitations. We only used objective archival data to measure the TMTs’ experience and knowledge, therefore we suggest that future studies employ survey data to identify the managers’ experience and knowledge. It also useful to combine and compare with the multiple data sources from published data and survey data respectively, and provide a more reasonable explanation about the influence of the TMTs attributes on strategic decision and performance. Future studies can gather the TMTs’ cognitive variables, such as power relationship and trust between members, through survey data to acquire a more in-depth understanding of the cognitive processes in strategic outcomes. Second, we only focused on examining the effect of the TMTs’ experience and on internationalization and innovation. Future studies can expand the focus to investigate the different influence on other strategic decision options, such as designing and planning strategies, mergers and acquisitions, internal reorganizations, disinvestments, making and buying options, to better comprehend the effect of the managers’ experience and knowledge on the strategic decision-making process.
Furthermore, we concentrated on firms from emerging markets that are in the early stage of innovation and are latecomers to innovation. We recommend that future studies use survey data to collect various types of innovation, such as technological innovation, product innovation or administration innovation, which may cause different innovative effects on performance. Finally, the sample employed in this study consisted of listed companies in the electronics industry. We suggest that future research expand this study into other industries in order to compare types of innovative and international activity. We also did not consider other innovative performances, such as patents and new product development, as potential factors affecting firm performance. Future research could regard new product development as another measurement of innovation.
Acknowledgement
Peng-Yu, Li acknowledges financial support from the National Science Council (NSC 101-2410-H-030-084-MY2).
