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The Journal of International Business Research and Practice Vol. 7, 2013

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The Journal of

International Business

Research and Practice

(JIBRP)

Volume 7, 2013


2

The Journal of

International Business

Research and Practice

Volume 7, 2013 The Journal of International Business Research and Practice (JIRBP) is a scholarly-refereed

journal. The objectives if the JIBRP are to attract and publish theoretical, conceptual, and

empirical manuscripts from both academics and professionals. The JIBRP promotes the

advancement, theory, and practice of global business in contemporary research and teaching. The

aims of the JIBRP include: (1) to disseminate knowledge, (2) provide a reference in this field,

and (3) facilitate the communication between academics and research experts with business

professionals and executives. The JIBRP is a publication of the U.S. Midwest Chapter of the

Academy of International Business (http://aib.msu.edu/events/chaptermeet.asp)

Editors:

Etienne Musonera, PhD Ramin Cooper Maysami, PhD Associate Professor of Marketing Dean, School of Business

Stetson School of Business and Economics Professor of Economics and Finance

Mercer University-Atlanta University of North Carolina

3001 Mercer University Drive At Pembroke

Atlanta, Georgia 30341 One University Drive, P.O. Box 1510

E-mail: [email protected] Pembroke, NC 28374

[email protected] E-mail: [email protected]

http://aib.msu.edu/events/chaptermeet.asp

mailto:[email protected]




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Journal of International Business Research and Practice (JIBRP) is listed in the CABELL’S

DIRECTORY of Refereed Publication

International Standard Book Number: ISBN 13: 978-0-9815910-7-0 ISBN 10: 0-9815910-7-8

The Journal of International Business Research and Practice (JIBRP)

Volume 7 — 2013

Editors: Etienne Musonera & Ramin Maysami

Papers are selected through a double-blind review process from papers actually presented at the

Annual AIB-Midwest conference held in conjunction with the MBAA-International meetings.

Authors intending to submit their papers form publication consideration in the JIBRP will have

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received during their presentation. Papers received will be subject to another review process and

only papers accepted after this review process will be published in the JIBRP.

The sponsoring association assumes no responsibility for the views expressed by authors whose

contributions appear in the JIBRP.

This journal is published once a year.

Guidelines for intending authors are posted on the internet at http://www.aib-

midwest.utoledo.edu

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CULTURE’S IMPACT ON STRATEGIC FLEXIBILITY: ARE FIRMS FROM

CERTAIN CULTURES MORE STRATEGICALLY FLEXIBLE THAN FIRMS FROM

OTHER CULTURES?

Abhay Shah

Colorado State University - Pueblo

ABSTRACT

Strategic flexibility has been defined as the ability of a firm to change course based on new

information that may be different than previous information. Culture has been defined as a

shared set of values and beliefs of a group which are distinct from the values and beliefs of

another group. This paper develops a model of the antecedents and causes of strategic flexibility

and then offers propositions on how culture (based on Hofstede’s five cultural dimensions)

influences strategic flexibility of firms from different cultures.

Keywords: Strategic Flexibility, Hofstede’s Cultural Dimensions, Uncertainty Avoidance,

Collectivism/Individualism, Power Distance, Long/Short term Orientation,

Masculinity/Femininity.

INTRODUCTION

The concept of strategic flexibility has been around for quite some time, however, there is no

comprehensive study that investigates all of the factors (the antecedents) that influence the

strategic flexibility of firms, and consequently, the results (the consequences) of these

antecedents on strategic flexibility. There a number of factors that influence the strategic

flexibility of a firm, and a firm can be strategically flexible on one or all of its functional areas in

order to gain competitive advantage (consequence) in the marketplace.

This paper first provides a comprehensive review of the literature on strategic flexibility and one

of the factors that affect the strategic flexibility (culture) of a firm. The paper uses Hofstede’s

five cultural dimensions (that have been used to represent culture in a global context) and offers

five propositions on how these five cultural dimensions affect strategic flexibility. The paper

then proposes a model of the antecedents and consequences of strategic flexibility.

The following section contains the literature review on strategic flexibility and culture, and is

divided into two parts. The first part is a review of the studies that have been conducted on the

issue of strategic flexibility. The second part is a review of the studies that have been conducted

on culture’s influence on consumption and managerial decision making (in relation to strategic

flexibility) in different cultures (countries).

LITERATURE REVIEW

Strategic flexibility

Strategic flexibility is the ability of a firm to identify major shifts in its external environment and

change courses by reallocating resources to meet the challenges of these changes – even halt or

reverse course if need be. Firms that are strategically flexible are prepared for a future they

cannot predict. On the other hand, strategically committed firms pursue a strategy based on a


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single view of the future (Shimizu & Hitt, 2004). Firms should be flexible and focus on doing

something other than originally intended (Roberts & Stockport, 2009) as a competitive priority

(Narain et. al., 2000) to fend off competition (Yusuf et. al., 2003) and precipitate strategic

changes (Evans, 1991; Harrigan, 1985) in order to maintain competitive advantage (Hitt, 1998;

Hitt et al., 1998).

Firms that are strategically flexible are capable of rapidly responding to changes in the external

environment (Aaker & Mascarenhas, 1984; Bahrami, 1992; Evans, 1991; Buckley, 1997;

Matusik, 1998; Johnson et al., 2003). Such firms should be able to continuously rethink their

current strategies and resource allocation (Slack, 1983) to unexpected consequences of

predictable changes (Lei et al., 1996). In the European environment, TQM companies were

found to have greater flexibility and were able to adjust much better to their environment than

non-TQM companies (Gomez-Gras & Verdu-Jover, 2005). Strategic flexibility has a positive

relationship with profitability and labor productivity when there is a high degree of uncertainty

and the environment is changing (Zhang, 2006). However, strategic flexibility also has some

disadvantages like cost, stress, and the lack of focus (Das & Elango, 1995).

Strategic flexibility has been shown to affect firm performance in different industries (Abbott &

Banerji, 2003; Ginn & Lee, 2006; Grewal & Tansuhaj, 2001; Javalgi et al., 2005; Nadkarni &

Narayanan, 2007; Worren et al., 2002). A firm’s productivity is significantly affected by the

flexibility of a firm’s buyers and suppliers (Young et. al., 2003), and a firm’s relationships with

its network affects its competitive position in an ever changing environment (Achrol & Etzel,

2003; Beverland, 2005). The strategic flexibility of a firm, and ultimately its performance is

positively affected by logistics and marketing activity (Abrahamson, et al., 2003).

Nadkarni and Herrmann (2010) investigate the relationship between CEO personality, strategic

flexibility and firm performance and find that a CEO’s personality either encourages or

discourages strategic flexibility, ultimately affecting performance. The two scholars theorize,

“that psychological attributes of CEOs serve as lenses through which CEOs subjectively view

strategic situations and decide on appropriate responses, by shaping their fields of vision, their

selective perception , and their interpretation of perceived cues”, (Nadkarni & Hermann, 2010,

pp. 1051).

Leadership agility and knowledge management have been considered as necessary conditions for

strategic flexibility (Lakshman, 2007; Uhlenbruck, 2003). Managers have psychological and

organizational biases that may prevent them from recognizing problems and changing courses

(Shimuzu & Hitt, 2004). Some managers think that the secret to success is being committed to a

course of action until it is successful. Managers who believe this feel that frequent changes in

strategies waste resources and ultimately fail. However, being overly committed, especially in a

changing environment, will definitely lead to failure (Shimuzu & Hitt, 2004). Shimuzu and Hitt

(2004) recommend three steps in maintaining strategic flexibility: (1) paying attention to

negative feedback (2) collecting and assessing negative data in an unbiased and objective

fashion, and (3) initiating and completing changes in a timely manner.

Matthyssens et al., (2005) conceptualize strategic flexibility as dynamic capability and

absorptive capacity. Dynamic capability is when a firm reconfigures its resources and adapts

itself to a changing environment (Eisenhardt & Martin, 2000), while absorptive capacity is when


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a firm is able to create knowledge and use it to enhance its ability to be competitive in the

marketplace (Zahra & George, 2002). Decision making that is decentralized is positively related

with strategic flexibility, and a creative organizational culture is also positively related with

strategic flexibility (Bock et al., 2012). Combe and Greenley (2004) develop a theoretical

cognitive content framework that shows the relationship between the differing thought processes

of managers and their capability of generating different types of strategic flexibility. A real

options approach is proposed by Ford et al., (2002) for being strategically flexible in construction

projects.

Managers’ psychological attributes like openness to change affects their ability to be strategically

flexible (Datta et al., 2003). Psychological attribute like the propensity to take risk also affects

strategic flexibility (Finkelstein & Hambrick, 1996). Managers with levels of dependability do

not like to take actions that are not compatible with their past experience (Miller & Droge, 1986).

Conscientious managers have a strong need to reduce uncertainty, and long range planning is key

in their decision making process, and they are thus not very flexible in their strategic planning

(Bogner & Barr, 2000; Judge et al., 2002; Lepine et al., 2001). Managers with compliant,

conflict avoiding and excessive agreeableness personality tend to be less flexible since they

conform to what people may think of them (Nadkarni & Herrmann, 2010). Experienced

managers typically develop a mindset when making decisions and ideas and actions that are far

removed than current routines are not considered legitimate (Shimuzu & Hitt, 2004). CEOs of

firms that have strategies that are flexible have better performance and higher pay than their

counterparts who do not (Gopalan et al., 2010).

Organizations that are older and larger become set in their ways when approaching a problem

and early signs of changes in external environment usually get ignored. This tends to happen

more so when success is rewarded and mistakes are punished which leads organizations and their

managers to be very cautious and not deviate from the routine. Strategic stability often makes

firms commit and lock resources into products and processes that may be outdated, leading to

poor performance (Nerkar & Roberts, 2004). However, firms that are strategically flexible can

become more profitable by taking advantage of opportunities offered by a market that is

continuously changing.

Scholars have found a positive relationship between strategic flexibility and technology (Celuch

et al., 2007; Evans, 1991; Sanchez 1995; Worren et al., 2002), resources (Harrigan, 1985;

Young-Ybarra & Wiersema, 1999; Zhang, 2005), entrepreneurship (Timmons & Spinelli, 2004),

manufacturing strategies (Beach et al., 2000; Claycomb et. al., 2005; Gerwin, 1993; Lau, 1996;

Price et al., 1998; Tsubone et. al., 2002; Van Hoek, 2001), product innovation (Zhou & Wu,

2010), process innovation (Kotabe et al., 2007), purchasing/supply chain (Giunipero et. al.,

2005), relationship quality (Ivens, 2005), commitment to employees and performance (Roca-

Puig et al., 2005), and network structure (Young-Ybarra & Wiersema, 1999). Intra- and inter-

firm flexibility affects performance in a business-to-business environment Fredericks (2005).

Culture’s Influence on Consumers and Managers

Culture is a shared set of values and beliefs (Hofstede, 1980) which is common to members of

the group (Hall, 1966) and it separates one group from another group (Hofstede, 1997). These

cultural values play a dominant role in defining the values, self and personality of people in


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different cultures (countries), and ultimately their behavior (Hofstede, 1980, 2001a, 2007;

Markus & Kitayama, 991).

Culture’s influence on a variety of factors has been studied by a number of scholars. For

instance, culture affects a firm’s foreign ownership decisions (Krishna, 1996), international joint

venture decision (Barkema & Vermeulen, 1997), diffusion of new products (Dwyer et al., 2005),

acceptance of new products (Yeniurt & Townsend, 2003), attitudes toward global and local

products (Steenkamp & Jong, 2010), consumption decisions (Chui & Kwok, 2008), branding (de

Mooij, 2010), advertising (de Mooij & Hofstede, 2010), innovation (Tellis et al., 2003),

entrepreneurship (Morris et al., 1993), tourism (Money & Crotts, 2005), and organizational

behavior (Hofstede, 1983).

THE PROPOSED MODEL

The following is a model of the antecedents and consequences of strategic flexibility. The model

shows that the strategic flexibility of a firm is influenced by cultural variables, organizational

variables, CEO personal variables, and finally environmental variables. A firm can be

strategically flexible in any one or all of its functional areas – manufacturing, marketing, finance,

human resources, information systems, and supply chain. Being strategically flexible gives a

firm competitive advantage in the marketplace through higher productivity and higher profits.

Figure 1 – The Proposed Model of the Antecedents (determinants) and

Consequences of Strategic Flexibility

Cultural -individualism

-uncertainty avoidance

-power distance

-masculinity

-long term

Organizational -centralization

-size

-age

CEO (personal) -psychological attributes

-experience

Environmental -economy

-competition

Strategic Flexibility: -manufacturing

-marketing

-finance

-human resources

-information systems

-supply chain

Competitive Advantage -productivity

-profits


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As stated earlier, there are four antecedents to strategic flexibility. Organizational factors are

those that are internal to an organization. There are a few studies that have investigated the

effect of some of these organizational variables on strategic flexibility – specifically the size, age

and the degree of centralization in the organization. The next factor that affects strategic

flexibility is CEO-specific. There are studies that have investigated the effect of such variables

as CEO’s psychological makeup and their business experience in the field on strategic flexibility.

The third factor is environmental. Even though strategic flexibility has been defined as a firm’s

ability to change its strategy based on new information, there is no study that investigates

whether changes in the information about the environment force all firms (or only some firms) to

be strategically flexible. For instance, can a firm be forced to be strategically flexible if its

competitors are being flexible and are successful, or if the economy has gone into a recession??

Finally, do cultural factors affect the strategic flexibility of a firm, i.e., given the same

information, will firms (managers) from different cultures (countries) vary in their strategic

flexibility?? This has also not been studied by scholars.

Even though this paper proposes a model of the antecedents and consequences of strategic

flexibility, the goal of the paper is not to develop such a comprehensive model. The focus of the

paper is the relationship between the five cultural dimensions and their effect on strategic

flexibility. The following section develops five propositions on how these cultural dimensions

affect strategic flexibility.

RESEARCH PROPOSITIONS

Hofstede and Hofstede (2005), and Hofstede (2001b) proposed five dimensions of cultural

values: power distance (low vs. high), uncertainty avoidance (low vs. high), individualism (vs.

collectivism), masculinity (vs. femininity), and long term (vs. short term). Cultures with high

power distance index have a lot of inequality between superiors and subordinates, and it is

accepted by followers and leaders of the society. Cultures with high uncertainty avoidance index

have a society where people avoid uncertainty and ambiguity and prefer security and safety in

everyday life. Cultures that rank high in the individualism index have societies that promote self

interest rather than the interest of the group. Finally, cultures that score high on the masculinity

index have societies where the societal and status gap between men and women is very wide, and

men are treated better and differently than women. The following is a review of the literature on

the different cultural dimensions and its influence on people in different cultures.

Uncertainty Avoidance (High vs. Low)

Uncertainty avoidance is defined as, “the extent to which people feel threatened by uncertainty

and ambiguity and try to avoid these situations” (De Mooij & Hofstede, 2010, pp. 89).

Uncertainty accepting cultures do not demand high levels of documentation and formal plans and

projections before making decisions and they have greater tolerance for different ideas and prefer

autonomy (Hofstede, 1980), have less formal organizations (Hofstede, 1997), and less

regulations and high codes of conduct(Rodrigues & Kaplan, 1998).

Uncertainty avoidance affects advertising appeals (Albers-Miller & Gelb, 1996), innovativeness

of consumers (Steenkamp et al., 1999), country-of-origin effects (Lee et al., 2007), involvement

(Broderick, 2007) and service evaluations (Voss et al., 2004). Uncertainty avoiding societies


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may be less innovative than societies that accept uncertainty (Hoffman & Hegarty, 1993; Kedia

et al., 1992; Shane et al., 1995; Steenkamp et al., 1999). In business-to-business dealings,

customers from cultures with higher uncertainty avoidance index were less satisfied with service

defects than customers from cultures with lower uncertainty avoidance index (Reimann et al.,

2008). Tourists from countries with different uncertainty avoidance indexes behave differently

when traveling overseas (Money & Crotts 2003, Litvin et al., 2004).

Uncertainty avoidance moderates the effect that scarcity has on purchase intention (Jung &

Kellaris, 2004). Managers from cultures with higher uncertainty avoidance were far more

sensitive to controllability in perceiving strategic issues than their counterparts from lower

uncertainty avoidance index countries (Barr & Glynn, 2004). When collecting and comparing

online information, consumers from Japan (high uncertainty avoidance) showed drastic change

in behavior in comparison to those from Germany and the U.S. (Vishwanath, 2003). Consumers

from lower uncertainty avoidance cultures have higher internet shopping rates than their

counterparts from higher uncertainty avoidance cultures (Lim et al., 2004). In recent years,

countries with low uncertainty avoidance showed a higher rate of entrepreneurship than countries

with a higher uncertainty avoidance index (Wennekers et al., 2007). Firms have also used

uncertainty avoidance index to determine entry mode strategies (Brouthers & Brouthers, 2001).

Uncertainty avoiding and cooperative societies showed a very strong relationship with forming

technology and equity alliances (Steensma et al., 2000). Based on the above, it is easy to assume

that managers from different cultures have different appetites for risk, thus, the following is

proposed:

P1: Managers of firms from cultures with lower uncertainty avoidance index

will be more strategically flexible than managers of firms from cultures

with higher uncertainty avoidance index.

Power Distance (High vs. Low)

Power distance is the degree to which a society accepts and expects power to be distributed

unequally amongst members of the society, i.e., inequality in society is accepted by followers

and leaders of the society (Hofstede, 1991). Cultures with low power distance index prefer to

consult with and depend on other individuals/groups that differ from them in status or power

while cultures with high power distance index place a lot of importance on social and

professional standing, reputation and self image (Hofstede, 2001), and people from these cultures

are under a lot of societal pressure to meet their expectation and maintain ‘face’ (Hu et al., 2008).

Cultures that have low power distance index have less inequality in social status and privilege in

comparison to cultures with high power distance index that emphasize prestige, wealth, power

hierarchy and even discrimination (Yoo & Donthu, 2005). Power distance also affects

consumers’ preference for luxury status brands (Kim & Zhang, 2011).

Countries with high power distance index have lower innovation in comparison to countries with

lower power distance index (Shane et al., 1995, Van Der Vegt et al., 2007). On the other hand,

people from countries with high power distance index rely on autocratic rule and usually don’t

trust each other (Hofstede, 1991, 2001), and ideas coming from lower status employees are

usually ignored and discounted (Silver et al., 1994). People from lower power distance cultures


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react positively to transformational leaders than do people from higher power distance cultures

(Kirkman et al., 2009).

In a study involving bank customers in India and Canada, power distance moderated the effect of

interdependence and relationship quality (Dash et al., 2006). In a high power distance index

country like China, Humborstad et al., (2008) found a positive relationship between

empowerment and higher service willingness by employees. Consumers from cultures with

higher power distance index display less impulsive buying behavior than consumers from

cultures with lower power distance (Zhang et al., 2010). Consumers from higher power distance

cultures evaluate service quality differently than consumers from lower power distance cultures

(Dash et al., 2009). Firms operating in lower power distance countries are very likely going to

make decisions based on economic and transaction-cost issues in comparison to firms in higher

power distance countries (Steenkamp & Geyskens, 2012).

Cultures (managers) that are high in power distance are much more rigid and set in their ways

and have a hierarchical structure that is difficult to break, and will thus not be strategically

flexible. Managers will adopt a strategy and stick to it and expect others to follow these

strategies. Based on this conclusion, the following is proposed:

P2: Managers of firms from cultures with lower power distance index will be more

strategically flexible than managers of firms from cultures with higher power distance

index.

Collectivism (vs. Individualism)

In an individualistic society everyone is expected to look after himself/herself, while in a

collective society people are very dependent on each other as a group (Hofstede, 2001).

Individualistic societies value power, achievement, and hedonism while collective societies value

benevolence, tradition, and conformity (Schwartz et al., 2001). Individualistic societies act

independently and have a strong self-concept and a sense of freedom for personal achievement

while collectivist societies give priority to the goals of the group before their own (Oyserman et

al., 2002). Researchers have studied the impact of individualism on the values and lifestyles of

consumers (Dutta-Bergman & Wells, 2002), values and attitudes (Gregory et al., 2002), ethics

(Yoo & Donthu 2002; Smith & Hume, 2005), propensity to voice complaints (Chelminski &

Coulter, 2007a), self confidence (Chelminski & Coulter, 2007b) and corporate entrepreneurship

(Morris et al., 1994). Consumers from individualistic countries also have higher internet

shopping rates than consumers from collectivist cultures (Lim et al., 2004).

Managers from cultures with low collectivism (high individualism) will be very flexible since

they do not need to have group consensus (which tends to be very time consuming and rigid)

before making a decision and changing the strategic direction of a firm. Individuals can change

much more rapidly than groups. There is also a very high correlation between cultures that are

high in power distance index and cultures that are high in collectivism. Based on the above, the

following is proposed.

P3: Managers of firms from cultures with low collectivism (high individualism) index will be

much more strategically flexible than managers of firms from cultures with high

collectivism (low individualism index).


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Long Term (vs. Short Term) Orientation

This describes a society’s “time horizon” and how important they think the future is in

comparison to the present and past. Societies that are long term oriented are thrifty and have

perseverance in order to attain future rewards (Hofstede & Hofstede, 2005), while short term

oriented societies value normative statements, respect for tradition and focus on the past or the

present and do not give a lot of importance to the future (Yoo & Donthu, 2002). However, lately

Bearden et al., (2006b) take a different view and state that respect for tradition (i.e., the past and

the future) is also a long term value. Long term societies typically have traits of Confucianism

ethics, and are hard workers, pragmatic, thrifty, benevolent, moral, non-materialistic, and

socially conscious while short term oriented societies have been associated with western cultures

that focus on immediate gratification and do not have the patience to wait for rewards in the

future (Hofstede, 2001).

Consumers from long-term oriented cultures prefer reputable national or international brands

since they seek a long term relationship with the brands while consumers from short-term

oriented cultures prefer private labels since it has the immediate benefit of lower prices (de

Mooij & Hofstede, 2002). Consumers from long term oriented cultures have a lower usage of

credit cards and save more and they also tend to be more loyal (Soares et al., 2007) and are more

innovative (Van Everdingen & Waarts, 2003) than their counterparts in short term oriented

cultures. Reaction to service failure is influenced by long term orientation (Hui & Au, 2001), so

is customer complaint (Poon et al., 2004).

Long term oriented cultures like Japan and other Asian countries are dynamic in their thought

process, accept constant changes and have been very successful with their hard work and

perseverance, and this may explain the reasons for their success (Franke et al., 1991). Long term

orientation should be considered as a combination of tradition and prudence (Sharma, 2010).

According to Bond (1988), cultures that emphasize tradition (heritage) also respect traditional

values, encourage hard work, promote non materialism, social consciousness and morality.

Similarly, cultures that rate high on prudence will encourage its people to plan for the future,

persevere with their goals, and to be thrifty (Puri, 1996).

This leads one to conclude that managers from cultures that are long term oriented plan and

strategize for the future and will pursue and stick to that plan. However, societies that are short

term oriented are characterized as cultures that are very flexible and change rapidly and adjust to

the ever evolving environment. Based on the above analysis, the following is proposed:

P4: Managers of firms from cultures with higher long term orientation (higher short term

orientation) will be less strategically flexible than managers of firms from cultures with

higher long term orientation (lower short term orientation).

Masculinity (vs. Femininity)

Masculine cultures place a very high value to being competitive, assertive, ambitious, the

acquisition of money and things and do not care for others, the quality of life or people, while

feminine societies place more value to relationships, modesty, nurturing, caring for others and


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quality of life (Hofstede, 2001). Masculine cultures also emphasize independence and gender

roles that are different while feminine cultures focus on interdependence and fluid gender roles.

Initially it was thought that masculinity and femininity are at the two ends of a continuum.

However, this view has changed lately. It is now thought that an individual or a society can be

masculinity as well as feminine, i.e., the two can coexist (Spence, 1993; Stern et al,. 1987; Stern

& Resnik, 1991), and cultures that advocate gender equality perceive women to be equal to men

in society, with equal rights and responsibilities (Schwartz & Rubel-Lifschitz, 2009)

Masculine societies also value self-ego and consumption that may be status based and symbolic

in nature (De Mooij & Hofstede, 2002), for emotional and hedonic reasons (Tsikriktsis, 2002),

and are engaged in conspicuous consumption to demonstrate success (Steenkamp et al., 1998).

The masculinity/femininity of a culture dictates how sex roles are portrayed in advertising

(Milner & Collins, 1998). Masculine cultures respond differently to advertisements images

using utilitarian and image appeals than do cultures that are feminine or androgynous (Chang,

2006). A study by An and Kim (2007) found that a feminine culture like Korea preferred ads

that featured relationship themes with women in family or recreational settings. The masculinity

or femininity of a culture also influences consumer innovativeness in that culture (Van

Everdingen & Waarts, 2003), involvement (Broderick, 2007), and service evaluations (Birgelen

et al., 2002). Masculine cultures also favor information related to product performance (Tai &

Chan, 2001). The choice of media is also influenced by whether the culture is feminine or

masculine (Hofstede, 2001).

This leads one to believe that since masculine cultures are competitive and assertive, and they do

not seek group consensus and the need to please others (like feminine cultures) and will thus

change direction based on available information.

P5: Managers of firms from masculine cultures will be more strategically flexible than

managers of firms from feminine cultures.

The following table summarizes the propositions given above:

TABLE 1. SUMMARY AND EXPECTATIONS OF THE FIVE PROPOSITIONS

Hofstede’s Cultural

Dimensions

Strategically Flexible

Cultures (generally western

cultures)

Not Strategically

Flexible Cultures

(generally eastern

cultures)

Power Distance Higher PD Lower PD

Individualism/Collectivism Higher Individualism Higher Collectivism

Uncertainty Avoidance Lower Uncertainty Avoidance Higher Uncertainty

Avoidance

Long/Short Term Orientation Short Term Orientated Long Term Oriented

Masculinity/Femininity Masculine Feminine


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DISCUSSION AND CONCLUSION

This paper investigates how Hofstede’s five cultural dimensions affect strategic flexibility in

different cultures and since managers are responsible for the strategic flexibility (changing

directions) of their firms, their inclination to change or not change is strongly affected by the

culture in which they were raised. Firms venturing into foreign countries should take a hard look

at the cultural differences between the home country and the host country. Unfortunately, this is

usually not done and firms assume that executives in foreign markets will behave like executives

in the domestic market. Culture affects consumers and managers and a firm should adapt to such

cultural differences.

Even though the goal of this paper was not to develop a model of the antecedents and

consequences of strategic flexibility, it attempted to develop such a model based on studies that

have been done in the past. The proposed model is not comprehensive by any means. The

relationships between only some of these factors and strategic flexibility have been studied in the

past. The model needs to be developed further by scholars in the future.

The focus of the paper was to offer propositions on the effect the five cultural dimensions have

on strategic flexibility, i.e., will managers from a culture interpret the same information

differently and will thus be more (or less) strategically flexible than managers from another

culture. These propositions can also be tested empirically to see whether these relationships are

supported by data from different cultures (countries).

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THE VALUE OF CASES AND COMPUTER-BASED SIMULATIONS AS TEACHING

METHODS FOR INTERNATIONAL BUSINESS STUDIES

Raffaele DeVito

Emporia State University

Ronald Freeze


Anand Pore


ABSTRACT

The use of cases in the teaching of international business has long been a tradition. However,

how cases and computer-based simulations are used today to maximize learning varies across

the spectrum of disciplines and institutions. As a follow-up to an earlier paper, the authors

utilized a pilot survey, face-to-face interviews and a review of the literature to ascertain how

faculty use textbook cases, computer-based simulations, real-life/current event (heavy media

coverage) cases, and face-to-face real world (usually local companies) cases as methods to

enhance the teaching/learning experience. It is important to find ways to prepare students for

their roles in global business. This pilot survey suggests preliminary findings and provides the

foundation for a future survey across a number of institutions with the expectations that the

results will help improve the international teaching experience.

Keywords: Business cases, CB-Sim, current event cases.

INTRODUCTION

The changing global environment and rapidly changing technological tools have presented

international business faculty with a wider range of choices and challenges as they seek ways of

enhancing the teaching/learning experience. Cases have long been part of the teaching tradition.

Cases are a method to maximize learning, but how do faculty define and utilize cases? There are

many choices, including both extensive and short textbook cases, computer-based simulations

(CB-Sim), current event (heavy media coverage) cases and face-to-face real world (usually local

companies) cases.

It is true that for many years the traditional textbook cases have been the old standby for faculty.

Textbook cases permitted the instructor to teach analytical, decision making and strategic

thinking skills. Today, faculty members have a broader array of tools at their disposal. The

question is will faculty avail themselves of these tools, and if so, which tools are best in what

teaching situation?


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This particular paper is an extension of earlier work by the authors who explored previous

research on alternative teaching styles. Based on those earlier efforts, the authors crafted a pilot

faculty survey which included face-to-face interviews. A future step is to construct a formal

survey that can be used on Zoomerang and submitted to faculty at three other universities with

business schools in the United States and then extend the study to other countries for

comparison.

It should be noted that although our intent is to understand better the case teaching methods that

may be applied in international business, the pilot itself reached out to faculty in a cross-section

of disciplines. Our goal is to grasp why and how faculty choose a particular case methodology.

REVIEW OF LITERATURE

In our earlier published paper we covered extensively the use of the case study method. Here we

will highlight a few of these references and add several up-to-date research findings. Harvard

Business School cases have been used for many years across most disciplines, including

international business (Andres and Noel, 1986). The cases were usually complex with the

expectations that students would analyze data, identify problems, issues or opportunities and

provide alternative solutions. This process usually requires an extensive amount of class time

(Chapman, 1992).

In 1999, Schullery described five specific criteria for selecting a case method. First, given

student backgrounds, cases should be applicable to all students in your class. This becomes

more challenging with the greater diversity of students in our classes. Second, cases should be

complex enough to provoke questions and lead students to develop alternatives. Third, cases

should lead to a range of solutions. Fourth, cases should be able to be covered and processed in

the allotted class time. Fifth, the case should be sufficiently complex to be challenging but not

discouraging to the students. Schullery’s findings leads us to questions regarding how

appropriate are cases in the classroom. Cases may require considerable effort from the instructor

and students. This effort becomes more important and demanding as the number of international

students in classes increases. Instructors must develop appropriate teaching styles to use this tool

(Hackney, McMaster & Harris, 2011). But first the question of defining what in meant by a

“case” must be addressed.

In their E-Handbook of Teaching with Business Cases, Ganglewski and Helm (2010) interview

faculty and students to solicit definitions across disciplines and identified a number of common

threads in the responses in including:

Cases should tell a story and describe action characters;

There should be a problem with facts, issues and background;

The case must have workable outcomes and usually more than one;

It needs to be authentic. Students prefer real-world experiences with the potential for real-

life decision making;

The case should test critical thinking skills in students;

For international business, cross-cultural learning opportunities should be present; and


26

Cases should enable students to connect theory to practice.

Leonard and Cook (2010) comment that “…the case method has proven to be a successful

pedagogical approach because it reflects a democratic type of teacher-student… relationship… it

enables the college professor to become closely involved with students in the classroom and yet

maintain his or her professional role. A teacher’s status with students rests upon scholarly

knowledge, on ability to teach, and (shows) interest in students as individuals” (p.101).

Computer based simulations (CB-Sim) have become popular worldwide in recent years as a

teaching tool. Students are more comfortable today with computers and gaming in general

(Bobot, 2010). Experiential learning or “Learning by doing” is the phrase being heard on more

campuses today (Martin, 2005). However, a distinction between different CB-Sims must be

recognized. There exist distinct learning differences that turn-based simulations provide when

compared to interactive simulations. Interactive simulations have been shown to be a valuable

and effective approach to teaching operations management as a problem-based learning tool

(Leger et. al, 2012). Simulations have been used to extend theory, test hypotheses, and provide

good practice for critical thinking exercises. However, some courses, core courses in particular,

may not lend themselves to simulation applications (Antonoaie & Antonaie, 2010).

Real Life/current event cases, usually incorporating heavy media coverage, present another

opportunity for faculty. Most of the time these cases deal with large MNCs. The research in this

area is limited. Questions in our pilot survey point to some of the challenges and opportunities in

using this approach. A variation of the current event approach can be designed by a faculty

member developing his or her own case and fictional company around a current issue (Bowers,

2010). An example of this would be the concept of corporate social responsibility (CSR) and

issues relating to the impact global companies have on resources in developing countries. Using

this approach, international current event CSR topics focused on real companies can be

addressed creating a fictional company in that selected industry. Students would then apply their

analysis skills to the fictional firms as a player among real companies in the focused industry. A

possible shortcoming remains in that students prefer real cases over fictionalized versions.

A more common approach is the face-to-face real world case usually conducted with local

companies. Schick (1997) describes a public relations course where student teams worked to

help a client resolve issues. One of this paper’s authors has utilized international small- and

medium-sized enterprises (SMEs) in two ways. The first way involves having company officials

visit the class, present internal and external information, followed by student teams working on

the stipulated issue or issues, as presented by the companies. A variation of this approach is to

have the class receive as much information as possible about the company and the issue at hand

(e.g. entering a new country). At the end of the semester, all class teams go to the company and

present their findings and recommendations to the CEO and other members of management.

Feedback is immediate.

An additional benefit of real world local companies cases is presented by Pitt and Watson (2011)

who proffer that cases can be a valuable teaching tool for students in emerging economies

because it provides those students the necessary (local) realism to make it a valuable learning

experience.


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Regarding the use of cases and the teaching of business ethics, there are questions centered

around whether or not true learning takes place (Cahn & Glass, 2011). Students may show a

high level of ethical integrity when analyzing a business-ethics issue in a current event or

textbook case, however, that attitude changes when the ethical issues become more personal and

has a direct financial impact on the student. As these do become more personal, the first priority

shifts to financial rather than ethical criteria. The lasting effects of cases as learning tools in the

teaching of business ethics is brought into question.

Pennell and Miles (2009) advocate problem-based learning (PBL) as an approach that merits

consideration. Rather than teaching the concepts first, and then presenting a problem/case, the

situation is presented first. In order to analyze and present alternatives for the problem/case,

students must ask “What do we know?” “What do we need to know?” and “How will we learn

it?”. Student teams, on their own must use the text and outside sources to identify the concepts

that are involved in a particular problem/case. This inverted instructional sequence has proven to

move effectively implant an understanding of the course concepts.

The case approach is not an easy path for an instructor to follow. As a result of their study,

Parent, Newfeld, and Gallupe (2002, p.9) suggest “The case method is at once one of the most

difficult and most rewarding of pedagogies. For instructors to successfully use it as a central part

of their curriculum implies a willingness to forego some of the control and rigidity associated

with lecture-based approaches…”.

RESEARCH QUESTIONS

As referenced in the abstract and introduction, the research questions are as follows:

1. Which case approach does faculty use?

2. Which case approach is actually preferred by faculty?

3. Which case approach is more effective in achieving course goals?

PILOT SURVEY

Survey Construction and Administration

A pilot survey was conducted at a Midwestern university’s school of business. Sixteen faculty

members out of a total of twenty-nine were randomly selected. The survey collected information

about various case teaching methods used by the faculty. The survey was paper-based with an

added face-to-face interview, and the respondents were encouraged to analyze critically the

survey and suggest any improvements. The pilot survey was divided into three sections. The first

section collected data related to demographics, the second section related to teaching methods


28

using closed-ended questions and the final section collected additional information related to

teaching methods using open-ended questions. The results of this survey and the feedback from

the respondents will be used to develop an online survey which will be circulated to a wider

range of institutions for the purpose of collecting data related to faculty case teaching methods.

Respondent Demographic Information

The first survey section collected information related to gender, rank, highest degree earned,

experience in years (in academic teaching, nonacademic teaching and professional experience)

and teaching area.

Thirteen males and three females filled out the survey; the ranks of the respondents were one

instructor/ lecturer, three assistant professors, seven associate professors and five professors.

Eleven of the respondents had earned a PhD along with two MBAs, one MCPA, one Ed.D and

one JD.

Academic teaching experience of the respondents ranged from 1-2 years (one respondent), 3-5

years (two respondents), 6-10 years (two respondents), 11-15 years (three respondents), over 16

years (five respondents) and two respondents did not provide an answer. As far as nonacademic

teaching experience (e.g., corporate training) is concerned: no experience (three respondents), 1-

2 years (one respondent), 3-5 years (three respondents), 11-15 years (one respondent) and six

respondents did not provide any answer. Professional (nonacademic) experience of the

respondents was: no experience (one respondent), 1-2 years (one respondent), 3-5 years (one

respondent), 11-15 years (two respondents), over 16 years (three respondents). Five respondents

did not provide any answer.

As far as teaching area of the respondents is concerned, four of the respondents teach courses

related to Accounting; two, related to Economics; one, Finance; two, Information Systems; three,

Marketing; one, Law; and three in Management.

Information related to teaching methods

Survey information collected is related to use of the four teaching methods, faculty preference

for teaching methods, effectiveness of teaching methods related to various goals such as critical

thinking, mastering discipline related knowledge, preparing students for employment after

college and understanding basic operation of business, interrelatedness of business processes

and the importance of decision making. Also, for some of the questions in this section,

respondents were asked to think of a particular course and answer questions related to percentage

of total course points allotted, percentage of total class period spent and optimal class size for

each of the four teaching methods. The final question in this section was about the frequency of

discussion related to various teaching methods amongst colleagues and the faculty and graduate

students.

The second survey section relates to the four basic case teaching methods.

Textbooks Cases refer to cases that are typically at the end of a textbook chapter, contain some

information about a situation a company is facing and also provide some discussion questions

that the students can use to analyze them. Real Life Cases include cases based on current news


29

events (e.g. BP oil spill). The instructor provides some guidelines on the issues to be discussed

related to the company in the news. Real World Cases are based on local companies a firm

geographically close to the faculty’s university. The instructor provides some guidelines on the

issues to be discussed related to the real-world company. Finally, Simulations (CB-Sim) refer to

running a virtual company in head-to-head competition against companies managed by other

class members. The instructor provides guidelines on the objectives of the game.

RESULTS

Survey results for this pilot study were analyzed according to frequency for five key closed-

ended questions and according to responses for open-ended questions related to faculty likes and

dislikes regarding the four case methods.

Use of Teaching Methods

Textbook cases were used in: none of the course (one respondent), some of the course (eight

respondents), most of the course (four respondents), all of the course (two respondents) and one

respondent did not answer this question. Real Life (local company) cases were used in: none of

the course (three respondents), some of the course (eight respondents), most of the course (one

respondent), all of the course (three respondents) and one respondent did not answer this

question. Real World (current event) cases were used in: none of the course (five respondents),

some of the course (seven respondents), all of the course (three respondents) and one respondent

did not answer this question. Simulations (CB-Sim) were used in: none of the course (eleven

respondents), some of the course (three respondents), most of the course (one respondent) and

one respondent did not answer this question.

The pilot survey data suggests that majority of the respondents used Textbook cases (eight

respondents), Real Life cases (eight respondents) and Real World cases (seven respondents) in

some of the courses, whereas Simulations (CB-Sim) were not used by majority of the

respondents (eleven).

Ranking of Teaching Methods

Preferred teaching method The Real Life case was rated as the most preferred (five

respondents), followed by Real World cases (three respondents), Simulation (two respondents)

and Textbook cases were given the highest ranking only by one respondent. Also, Textbook

cases was rated least favored (seven respondents), closely followed by Simulation (five

respondents) and Real Life cases (one respondent).

Most effective teaching method Along similar lines, the Real Life case was rated as the

most effective (five respondents), followed by Real World cases (four respondents), Simulation

(two respondents) and none of the respondents indicated that Textbook cases were the most

effective. Also, the Textbook case was rated least effective (seven respondents), closely

followed by Simulation (three respondents) and Real Life cases (one respondent).


30

Effectiveness of Teaching Methods in Achieving Certain Goals

Critical thinking Both Real Life cases and Real World cases were rated as the most

effective (five respondents) in terms of helping students think critically, followed by Simulation

(three respondents) and Textbook cases were given the highest ranking with respect to achieving

this goal by only one respondent.

Mastering discipline related knowledge In terms of helping students master discipline-

related knowledge, Real Life cases were rated as the most effective (four respondents), followed

by Real World cases (two respondents), Simulation (one respondent) and none of the

respondents felt that Textbook cases were the most effective in achieving this goal.

Preparing students for employment after college Both Real Life cases and Real World

cases were rated as the most effective (four respondents each) in terms of preparing students for

employment after college, followed by Simulation (three respondents) and none of the

respondents felt that Textbook cases were the most effective in achieving this goal.

Understanding basic operation of business The questions in this section were designed

to see which of the teaching methods would be most effective in helping students understand the

basic operation of business. Except for Textbook cases (no respondents) the other three methods

Real Life cases, Real World cases and Simulation (three respondents each) were reported as the

most effective in achieving this goal.

Understanding interrelatedness of business processes Simulation was rated (four

respondents) as the most effective method in this regard, followed by Real Life cases and Real

World cases (two respondents each) and Textbook cases were given the highest ranking with

respect to achieving this goal by only one respondent.

Understanding the importance of decision making Real Life cases was rated (six

respondents) as the most effective method in this regard, followed by Simulation (four

respondents), Real World cases (three respondents) and Textbook cases were given the highest

ranking with respect to achieving this goal by only one respondent.

Specific Course Related Questions Respondents were asked to think of a specific course in which they used one or more of the four

teaching methods and provide the approximate values for each method

Percentage of total course points allotted The majority of respondents allocated less

than 10% of the course points to Textbook cases (eight respondents), Real Life cases (six

respondents), and Simulation (four respondents), whereas for Real World cases respondents were

split between allocating between less than 10% to between 31% to 40% (three respondents each).

Percentage of total class period spent Majority of respondents spent less than 10% of

the class period on Textbook cases (seven respondents) and Real Life cases (four respondents).

There were no clear trends for this variable for both Real World cases and Simulation.


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Optimal class size For this variable a class size between 11-20 was the most preferred

class size - Real Life cases and Real World cases (five respondents each) and Simulation (four

respondents). A slightly larger class size between 21-30 was the most preferred class size for

Textbook cases (six respondents).

Discussing Teaching Techniques

In this portion of the survey respondents were asked to indicate how often they discussed their

teaching techniques with

Colleagues: The teaching method that encourages the most communication between

colleagues seems to be Real World cases (six respondents) with discussion occurring 1-3 times a

month, followed by Real Life cases (eight respondents) and Textbook cases (five respondents),

being discussed 1-3 times a semester. Also both Textbook cases and Simulation (five

respondents each) were not discussed amongst colleagues.

Graduate students: The survey indicated that various teaching method were rarely

discussed with graduate students.

Additional information

This section contained opened-ended questions aimed at finding out what the respondents liked,

disliked and any other comments about the various teaching methods.

Textbook Cases

a) Likes- Respondents indicated that they liked the following about Textbook cases: Applicable

to chapter; short description and covers main points; can be tailored to suit requirements;

demands critical thinking; stimulate good, relevant discussion; provides important decisions

typically; good information given in the case; already developed; simple to use; can use for class

discussion; mostly students are familiar with the firms and good for discussion as specific topics

are covered; I'm ok with the textbooks cases; the cases give the students some exposure to the

real world; these allow engaged students to practice on real problems with fairly available

information; I can tie the team presentation to appropriate topics and often can extract additional

thought from peers not presenting so that vicarious learning takes place; these cases are typically

designed to address one or more specific components that are taught in the course; have been

selected to illustrate specific and discrete issues, which can be helpful in understanding more

issues.

b) Dislikes- Some of the dislikes for the Textbook cases were: too simplistic; questions are

heavier than the content; limited content and scope; students need additional context or learning

from outside class; dated (too old) (5 comments); too much detail; lose sight of the objective;

sometimes too short or too long; variable quality; must solve carefully; even if the instructor

explain the usefulness of studying an "old" case, students typically are not very motivated;

insufficient depth; too prescriptive for development of analytical skills; can find answers on

internet; students often have access to the solutions manual and have the answers and some

questions seem to be, generally, too early; another problem is that the case situation is too

"removed" from the student’s life and that makes it hard (sometimes) to make a connection (2

comments); there is a cultural shift from being willing to read. This makes it difficult to get


32

students to fully engage in the case; the ones in my textbook are not very suitable; getting current

material from newspapers and Wall Street Journal is far more appropriate; there really is no case

book or collection of cases for the class I teach.

c) Additional comments- Additional comments about the Textbook cases were that the students

gain knowledge about the companies stated in the cases. They also can develop the critical

thinking skills when they analyze the cases.

Real Life Cases (Current Event)

a) Likes - Respondents indicated that they liked the following about Real Life cases: Possible to

illustrate a certain teaching content element with a news story; helps to understand concepts

better than theoretical or fictional cases; students relate to these better (2 comments); usually

more controversial than textbook cases; spawns more discussion; more complex than textbook

cases; current issues & better for job preparation; evolving; practical; stimulate good, relevant

discussion (2 comments); keep the students up-to-date; important organizational decision, the

student can see/feel the importance; timely information can be used; allows the opportunity to do

research; great when they happen and not deal with media biases and can use current material in

class; I use these as current events that directly tie to the topics in the lesson; I don't really try to

develop them as an ongoing formal endeavor because of the vagaries of the media coverage and

the often incomplete nature of the information; students often stumble upon relevant information

in their daily grind so I can almost always get some response.

b) Dislikes - Some of the dislikes for the Real Life cases were: take additional time; events don't

always fit in with a particular subject matter that is discussed; can be too complex for specific

legal principles we are learning; difficult to find; missing components; does not relate to current

course issues; some cases are not close to the life of the students and too unpredictable; many of

the mediums that faculty use differ from those used by the students; this presents a problem in

that the coverage is spotty (on both sides of this); they may have an entirely disparate view form

mine.

c) Additional comments – Additional comments about the Real Life cases were: Students love

the Real Life cases and they (students) always want to know what's going on around them; it is

surprising how often those stories contain inaccuracies, language, and often inappropriate or

unhelpful information.

Real World Cases (Face-to-Face usually Local Companies) a) Likes - Respondents indicated that they liked the following about Real World cases: Very

beneficial; face to face interactions; students learn a lot from these cases; helpful in developing

critical thinking skills; students can see more closely how the real decisions are made in a

company and this gives them a sense of hands-on learning; resume builder--almost like an

internship; provide great structure for in depth analysis, creativity; allows for assessment of

communication skills and team work skills; not canned and has real potential to make a

difference for the client the class is serving; increases student engagement for the more involved

students over a cut-and-dried casebook example and since it doesn't involve media vagaries, isn't

subject to the hit-or-miss of exposure; it serves to build the University's reputation and ties us to

the community; they're "squishy," not easily conformable problems that are, by their very nature,

realistic. There is a real sense of accomplishment for all (most of time); real World/"close to

home" type of issues; real world problem for students; relative feedback from company and


33

students connect easily with the firm and become motivated; instructor can design assignment to

cover several aspects matching the curriculum.

b) Dislikes - Some of the dislikes for the Real World cases were: high maintenance for

instructor; time consuming for the instructor; extremely hard to find; missing components;

sometimes it's hard to get hold of the "clients"; lack of structure; difficult to recruit companies

and implement the learning processes; grading; time-wise, these are an almost bottomless pit;

they're squishy; students are afraid to dig in to the mess because they don't have a clear path in

their viewpoints; this increases their perceived risk; for those who don't fully engage, the

increased risk and the lack of tangible reward limits their sense of achievement.

c) Additional comments – Additional comments about the Real World cases were: I almost never

run this; not opposed to it, just more good stuff in other categories; it has been a great learning

experience for the students; I always ask the students to work as a teacher; during the process

they have learned how to work as a teacher; at the same time, they have developed interpersonal

skills, time management skills and communication skills; requires an instructor who can manage

multiple projects.

Simulation (CB-Sim)

a) Like - Respondents indicated that they liked the following about Simulation: encourages

critical thinking; firsthand experience; hands on; practical; helps in understanding group

coordination; visual actions; requires students to analyze using what they've learned in other

classes; students are intensely engaged; good structure; the interdependence of various

business decision can be built into the game; real exposure to the system; allows for planning

between periods; allows for analysis of approach and results; as someone who has written

simulations in the distant past and who has worked with commercial simulations leading to

professional certifications and career advances, I like a well running, realistic simulation;

they can induce the stresses that a live encounter can induce; the students that are able to deal

with these things in more-or-less real time and survive succeed; they allow someone to train

in an environment that they might never encounter as a junior employee and see impact of

their good, or bad, decisions; provides realistic challenges to students; it is possible to model

many different situations and explain theoretical concepts; it is very difficult to find a case

that addresses all the points discussed in theory, and simulations are particularly suitable for

these situations.

b) Dislike - Some of the dislikes for the Simulation were: difficult to develop; preparation time is

higher; learning curve; very time consuming if it is done right; should be 50%-100% of the entire

course; besides the fact that the game is not "real" (not a real-life company); it is possible the

game produces the training whose focus is on the "money"; the larger picture (the firm's

relationship with the society and long-term customer value) is lost; randomness; some variable

do not react reliably; the majority of simulations that I've seen/used/participated in as an educator

are a) unrealistic; b) random in input/outcome relationships; c) overly simplified (or overly

complex); and d) too unstable, too buggy to be of real use to the student and a real hair-pulling,

reputation breaking pain for the instructor. They induce bad behaviors because of the random

nature of outcomes (well, I pushed this button and got a banana pellet, let's push it 500 more

times); they're subject to "gaming" by the participants (What'd you do? We did this ...); often,

students come into other faculty members' classes and talk about "the bogus" simulations that are


34

running and how they're just "playing the game" ... learning may be taking place but not of the

nature intended by the faculty; also, training time for students, dependent on software.

c) Additional comments – Additional comments about the Simulation were: simulate work

environment (not necessarily head to head competition; I haven't used any simulation in my

classes yet; actually I haven't found a "perfect" game for the classes; simulations are not real

world situations and should not be used instead of real world/life cases; they should be used

along with cases.

DISCUSSION

Value of Pilot

The use of cases will continue to grow in importance in the teaching of international business.

This pilot survey including written and face-to-face interviews of sixteen faculty members across

seven business disciplines provided an excellent opportunity to explore further the use of cases

as part of a teaching methodology. This pilot will serve as a foundation upon which to build an

effective and efficient online survey to be circulated to a wider range of institutions.

The pilot survey was useful in two specific ways. First, it enabled the researchers to identify

ambiguities and cumbersome aspects of the question format. Second, the actual responses

identified subject matter regarding the four case methods that would permit the authors to better

design the next survey in a more focused manner to help ensure the integrity and quantity of

responses.

Findings

Although this was a limited survey (sixteen respondents) and was meant to serve as an

exploratory study where statistical analysis other than frequencies could not be applies, there

were several interesting preliminary findings. First, Textbook cases are easier to use (for the

instructor) and can be plugged into the course more efficiently. It is also true that the older the

Textbook cases were the less valuable they were perceived to be in the eyes of students. In

general, faculty felt Textbook cases were least effective for teaching relative to the other case

methods. With regard to international business cases in Textbooks, the implication is that cases

should be as current as possible in order to keep the student interest at a high level.

Real World (local companies) and Real Life (current event) cases appear to be considered more

effective teaching tools, especially in preparing students for employment after college. This

same finding was true for critical thinking skills, mastering discipline related knowledge,

understanding basic business operations, understanding business processes interrelatedness and

understanding the importance of decision making. Real world local and international companies

would appear to present a greater challenge in the time and energy for faculty to develop.

International business faculty will have to become more involved with companies in their

regions. Developing Real Life MNC (current event) cases should be less of a problem.

Simulations (CB-Sim) ranked above all other approaches (including Real World and Real Life)

when it comes to understanding business processes interrelatedness. We are slowly seeing more

international business simulations being made available for the classroom.


35

At the heart of these questions and subsequent responses seems to be that although faculty know

which approaches might be more effective on multiple fronts, they are constrained by the

economic reality of time and money. Smaller classes are not likely solution, given budget

considerations today.

Future Study

Given the information gleaned from this pilot survey and corresponding interviews, the

researchers will develop a more streamlined and targeted survey to be administered to school of

business faculty at other Midwestern universities in the United States. There is also the

possibility of extending the survey range to universities in Europe and China.

Cases are and will continue to be a valuable tool in the teaching of international business.

Faculty time, energy, and resources will be important factors to consider if schools of business

are to design ways to enhance and increase the use of these cases in the future.

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37

THE EFFECTS OF MANAGERIAL CONCERNS ON MODE OF OFFSHORING: A

STUDY OF LARGE US CORPORATIONS

Anand Pore


ABSTRACT

This study explores the effects of managerial concerns on the selection of mode of offshoring of

large US corporations. Firms can offshore services through wide spectrum of modes ranging

from i) complete internalization (foreign subsidiary), to ii) complete externalization (arm’s

length transactions), or iii) intermediate cooperative modes (such as licensing, joint venture

etc.). Managerial concerns over data security/privacy, intellectual property rights, host country

political or economic uncertainty, cultural difference between host and home country and lack of

partners/vendors in the host country are proposed to affect the selection of offshoring modes

available to the firm in a particular country location.

Keywords: Offshoring, mode of offshoring, managerial concerns

INTRODUCTION

According to US Bureau of Economic Analysis (BEA) (2011), ‘offshoring’ of services is the

relocation of production of services from the US to a foreign location. Sourcing, global sourcing

and international sourcing are some other terms used to refer to the phenomena of offshoring.

Mode of offshoring is the method by which a firm procures/produces services from/in a foreign

location. The terms ‘mode of offshoring’, ‘offshoring mode’, ‘mode of sourcing’ and ‘sourcing

mode’ mean the same thing and are used interchangeably in this study.

Academicians have started exploring various aspects of offshoring such as effects of offshoring

on domestic workforce (Hill, 2007; Poole, 2004), relationship between the firms and their

foreign vendors (Lavie, 2006), performance of offshoring firms (Bengtsson & von Hartman,

2005; Farrell, 2005; Gianelle & Tattara, 2007; Kotabe, Murray, & Javalgi, 1998; Kotabe &

Murray, 2004), offshoring location preferences (Blinder, 2006; Bunyaratavej, Hahn, & Doh,

2007; Contractor & Mudambi, 2008; Doh, Bunyaratavej, & Hahn, 2009) and various other

aspects of offshoring. However, not much attention has been paid to ‘how to source’ (mode of

offshoring) in the field of International Business (IB) and Management.

As mode of offshoring is an important factor affecting firm’s offshoring performance (especially

financial performance) the author feels that mode of offshoring is an important area of research

that needs to be studied in order to better understand the concept of offshoring.


38

Scope of this study

This study explores the effects of managerial concerns (over data security/privacy, intellectual

property rights, host country political or economic uncertainty, cultural difference between host

and home country and lack of partners/vendors in the host country) on the choice of mode of

offshoring of large US corporations. Small Business Administration (SBA) classifies US firms

with more than five hundred employees as large firms. This study focuses on the offshoring (of

services) practices of large US corporations, as large firms have the necessary resources to take

advantage of various modes of offshoring. Small and Medium Enterprises (SME) have limited

resources, and because of this (lack of resources) are more likely to form joint ventures

(Contractor & Lorange, 1988; Fayerweather, 1982; Stopford & Wells, 1972).

The remainder of this paper is organized as follows. The next section discusses the effects of

various managerial concerns on mode of offshoring. This is followed by research methodology

and ways for testing the propositions. Finally the conclusion, implications and limitations of the

study are discussed.

MANAGERIAL CONCERNS AND MODE OF OFFSHORING

Data Security/Privacy concerns and offshoring mode

Online fraud is on the rise and firms are increasingly becoming concerned about the

security and privacy of financial and other sensitive data. Data security and privacy concerns are

one of the top concerns indicated by various surveys. Ventoro Consulting’s, 2005 survey, which

involved 5231 executives across Europe and North America, reported that 81% of the firms were

concerned about security issues. Also, another survey conducted by Duke University

CIBER/Archstone Consulting in March 2005, which involved more than 100 largest US firms,

reported that 45% of the firms and 70% of service providers were concerned about data security

and privacy.

Furthermore, a survey conducted by Information Week in June 2008, which involved 372

business technology professionals from 272 companies, also reported data security as number

one disadvantage of business process offshoring (Information Week, 2008). A number of surveys

have similarly reported managerial concerns over data security/privacy in offshoring of services.

This concern over data security/privacy would make firms reluctant to handover sensitive

data to vendors or partners and hence firms would prefer to internalize the

production/performance of the service.

P1: The higher the concern over data security/privacy, the higher is the likelihood of the firm

opting for an internal mode of offshoring over either a cooperative or an external mode; and a

preference for a cooperative mode over an external mode.

Intellectual Property Protection concerns and offshoring mode

Dissemination or misuse of proprietary knowledge is difficult to monitor and control (Agarwal &

Ramaswami, 1992). For services, it is even more difficult to protect (patent, copyright, etc.) the

proprietary knowledge as it is derived from intangible assets (Erramilli & Rao, 1993). With

increase in uncertainty over protection of proprietary assets, the cost of contracting and/or a joint


39

venture increases because of the increased risk of leakage or unwanted dissemination of

proprietary assets (Williamson, 1996).

Even though services are protected by copyright laws, enforcing copyright laws in foreign

countries may not always be possible as intellectual property laws are not uniform throughout the

world; and in some countries intellectual property laws may not be enforced for

products/services of foreign origin (Rosenbaum, 1995; Spector, 1995).

In the absence of laws/enforceability of laws regarding intellectual property firms would prefer

to internalize sourcing of services in order to minimize threat of imitation by local vendors.

P2: The higher the concern over the presence and enforceability of laws respecting intellectual

property rights in the host country, the greater the preference for an internal mode of offshoring

over either a cooperative or an external mode; and a preference for a cooperative mode over an

external mode.

Host Country Risk and offshoring mode

Host country risk is “the uncertainty over the continuation of present economic and political

conditions and government policies which are critical to the survival and profitability of a firm's

operations in that country.” (Agarwal & Ramaswami, 1992, pp. 5). In other words host country

risk firstly, decreases firms profitability either by changes in the macroeconomic environment

such as currency fluctuations, inflation, price controls or other governmental interventions and

secondly may make it difficult for firms to repatriate earnings and in extreme cases, the firms

may also risk losing their assets because of expropriation by government (Root, 1987). In entry

mode literature host country risk is also referred to as environmental uncertainty or external

uncertainty.

According to Williamson (1979) in volatile or unstable environments, firms should avoid

ownership and shift risk to outsiders, as this gives firms flexibility and minimizes risk. On

similar lines, Anderson and Gatignon (1986) argue that under high environmental uncertainty,

firms may be better off selecting non-equity, low-investment entry modes, as this avoids

resource commitment and frees entrants to change partners or renegotiate contract terms and

working arrangements relatively easily as circumstances develop and change. Several

researchers (Gatignon & Anderson, 1988; Goodnow & Hansz, 1972; Mascarenhas, 1982)

recommend the use of shared-control arrangements under high country risk. Also, firms can

reduce the host country risk and incur lower transaction cost by utilizing lower ownership modes

(Hennart, 1988; Hill et. al., 1990)

P3: Increase in managerial perception of the host country risk will lead to increase in preference

for an external mode of offshoring over either a cooperative or an internal mode; and a

preference for a cooperative mode over an internal mode.

Cultural Distance and offshoring mode

Differences in language, work ethic, social structure, ideology and so on between the home

country and the host country collectively encompass cultural distance (Goodnow, 1985). Cultural

distance has a significant influence in failure rate of service industry subsidiaries abroad (Li &


40

Guisinger, 1991), also cultural distance can create problems with quality control and feedback

that may hurt a service firm’s market performance (Kotabe et. al., 1998). Increase in cultural

distance reduces preference for sole ownership (Ekeledo & Sivakumar, 1998; Kogut & Singh,

1988; Erramilli & Rao, 1993; Fladmoe-Lindquist & Jacque, 1995).

Johanson and Vahlne (1977) argue that more economic activity occurs between socio-culturally

similar countries than those which are dissimilar. Socio-culturally similar countries share similar

business practices, similar language, and comparable educational levels and cultural

characteristics (Johanson & Vahlne, 1977; Kogut & Singh, 1988). This socio-cultural similarity

reduces the cultural distance between the two countries. The lower the cultural distance, the

lower is the cost involved in transferring proven business model from the home country to the

host country and hence higher is the preference for sole venture. Root (1994) argues that cultural

similarity between US and Canada is one of the major factors, for preference for sole venture by

US firms when entering Canada.

On similar lines, researchers (Alpander, 1976; Davidson, 1980; Richman & Copen, 1972) argue

that cultural distance increases the difficulty of transferring marketing, technology, human

resources and home management techniques and values. Various studies (Agarwal, 1994;

Gatignon & Anderson, 1988; Kogut & Singh, 1988; Stopford & Haberich, 1978; Erramlli & Rao,

1993) have found that increase in cultural distance leads to an increase in preference for joint

venture, as according to Root (1983), a local partner can lessen the difficulty and cost associated

with transferring firm specific knowledge from home country to the host country.

According to Transaction Cost Analysis (TCA) increase in cultural distance (uncertainty) leads

to decrease in desire for control, as firms retain flexibility and avoid high levels of ownership

(Williamson, 1975). Also, Johanson and Vahlne (1977), argue that perceptions of significant

cultural distance between the home country and the host country results in lower resource

commitment. On similar lines, Gatignon and Anderson (1988) argue that propensity to integrate

(internalize) decreases with increase in host country’s socio-cultural distance from the US.

In addition, if the cultural distance between the home country and host country is high, the

organization may not have managers/executives capable of managing operations in a culturally

distant environment, so the organization would start off by using cooperative sourcing or

external sourcing for global sourcing of services.

P4: The greater the managerial perception of the cultural distance between a firm’s host country

and home country the higher would be the likelihood of the firm using cooperative sourcing or

external sourcing for global sourcing of services.

Concerns over lack of reliable partners/vendors and offshoring mode

High supplier competition decreases the potential for opportunistic behavior (Williamson, 1975),

which reduces the transaction cost and hence increases likelihood of buying (externalizing) over

making (internalizing). Number of suppliers influences intensity of competition and the

bargaining power of buyers. Also, availability of alternate suppliers increases with increase in

number of vendors providing the service (Porter 1990). Kotabe et. al. (1998) found that the

extent of foreign sourcing increases with increase in availability of services from independent

suppliers. According to (Contractor & Kundu, 1998b; Erramilli, Agarwal & Dev, 2002;


41

Dunning, 1988) preference for management service contracts (non equity mode) in the host

country increases with increase in qualified and trustworthy partners with complementary

capabilities.

TCA refers to lack of partners/vendors as small numbers bargaining. Lack of competition

between existing suppliers may results in opportunistic behavior by some of the existing

suppliers. Transaction costs may be minimized through internalization of production, under

conditions of limited supplier competition (Williamson, 1988). Various studies (Caves &

Bradburd, 1988; Levy, 1985; McDonald, 1985; Pisano, 1990) have found support for

internalization as a result of limited number of exchange partners.

Therefore, as the number of partners/vendors providing the service (needed by the firm)

increases, the firm would have more choices and would be less concerned about opportunistic

behavior (by the partners/vendors) and the firm would also have higher bargaining power, hence

the firm would be more inclined to use outside partners/vendors to procure that service. But

when there is scarcity of reliable partners/vendors in the host country, the firm will have no

choice but to internalize the offshoring operation or cooperate with a local vendor to

produce/perform the service.

P5: The higher the concern over lack of partners/vendors providing the service in the host

country, the greater the preference for an internal mode of offshoring over either a cooperative

or an external mode; and a preference for a cooperative mode over an external mode.

RESEARCH METHODOLOGY

Sample

The propositions in this paper could be tested by collecting data from senior executive of large

US firms. Senior executives in a firm are in a position to understand their firm’s strategy, have

information regarding firm’s offshoring activities and are more likely to be involved in the

offshoring decision making process. Various studies (Agarwal & Ramaswami, 1992; Erramilli &

Rao, 1990; 1993; Kotabe et al., 1998; Murray & Kotabe, 1999) have obtained similar kinds of

information (information related to entry mode choice of the firm) from top executives.

Dun & Bradstreet’s Million Dollar Database, Hoover’s (a Dun & Bradstreet company) and

various company websites could be used to collect email addresses of top executives of various

firms in order to send them a questionnaire/invitation to an on-line survey. Data from online

surveys are very efficient and cost effective means of gathering perceptual data. Guidelines

suggested by Dillman (2000) will be used to create the survey and also to collect data through

the survey.

Unit of Analysis

Previous studies (Kotabe et al., 1998; Murray & Kotabe, 1999) in sourcing of services have

either used the entire firm, or a subsidiary or a business unit as the unit of analysis. However,

since each firm is involved with several projects or functions – each with different strategic

drivers, characteristics, motivations and concerns – a more appropriate unit of analysis would be


42

just one service function offshored by the firm. Another drawback of using the entire firm as unit

of analysis is that the person responding to the survey may not have complete knowledge of the

different offshoring activities of the entire firm. Moreover, the same firm may be using multiple

modes of offshoring to offshore different functions along the value chain, which may not be

accurately reflected in aggregate firm level data. Hence, one service function will be used as the

unit of analysis in this research.

Operationalization of variables

Dependent Variable - Mode of Offshoring. Mode of Offshoring has not been used as a

dependent variable in IB and management, but a similar concept ‘mode of entry’ has been widely

researched. Previous studies (Brouthers, 2002; Brouthers & Brouthers 2003; Erramilli & Rao,

1993; Kwon & Konopa, 1993; Murray & Kotabe, 1999; Sanchez-Peinado, Pla-Barber, & Hebert,

2007) have conceptualized the mode of entry as a dichotomous variable. Meyer (2001) used four

values for mode of entry (trade, contractual arrangement, joint ventures and wholly owned

subsidiary). Ekeledo and Sivkumar (1998) also used four values for entry modes

(franchising/licensing, exporting, joint ventures and wholly owned operations). On the other

hand, Lacity and Willcocks (1998) came up with three sourcing modes; total insourcing, total

outsourcing and mixed sourcing. On similar lines, in this study mode of offshoring will be

operationalized as a nominal\ordinal variable with three possible values: Mode of Offshoring = 1

for External sourcing or externalization, = 2 for Cooperative sourcing and = 3 for Internal

sourcing or internalization.

Independent Variables

Data on independent variables will be collected using a 5-point Likert scale. Data

Security/Privacy concerns: Data security/privacy concerns has also not been used as an

independent variable in IB and management literature. It measures the degree of managerial

concern over security/privacy of data in the host nation.

Intellectual Property Protection: Delios and Beamish (1999) used this variable, but used

secondary data (World Competitiveness Report – the data reported by this report are based on

hard data (country level data) and survey data (managerial perceptions)). The researcher

believes that concern over intellectual property protection is a straight forward variable trying to

understand managerial concern over intellectual property protection in the host country and

hence could be measured using a single-item measure.

Host Country Risk: Entry mode studies have used risk variables from secondary data

using various factors such as economic risk and political risk. However, managerial perceptions

of host country risk may be more appropriate. The offshoring decision makers are influenced by

their perceptions of a country (that may vary from secondary data rankings), their own

experience with the host country, cultural background and the manager’s risk aversion.

Cultural Distance: Various studies (Erramilli & Rao, 1993; Goodnow, 1985; Hofstede,

1983; Kogut & Singh, 1988) have used Hofstede’s cultural index to measure cultural distance.

But the researcher feels that the manager’s perception of the cultural distance between the home

country and the host country, would be influenced by variety of factors (not limited to Hofstede’s

cultural measures), such as his own experience with the host country, his own cultural


43

background and his willingness to take risk. Manager’s perception of the cultural distance would

ultimately supercede a measure such as Hostede’s cultural index. On similar lines Buckley and

Chapman (1997) argue that different managers perceive, weigh and judge things differently and

it is reflected in the differences in the firm structures.

Cultural distance could be measured by making a list of all the variables affecting managerial

perceptions of the cultural distance. A researcher would need a fairly long list of items to

measure this variable and still might miss something. Hence the researcher believes that a single-

item to measure would be more appropriate to measure this variable.

Lack of reliable partners/vendors: Kotabe et. al., (1998) used this variable as part of an item in a

scale; this item was measured using 5-point Likert scale. This is a straight forward variable and a

single-item Likert scale is sufficient to capture this variable.

Pilot Survey

The pilot online survey will be previewed by five professors and five managers (who are

involved in the decision making process of offshoring of services). Modifications to the survey

will be made based on their feedback. The professors would provide content validity and the

managers would provide face validity to the survey.

CONCLUSION, IMPLICATIONS AND LIMITATIONS

The purpose of this study is to develop and test a conceptual framework to test the effects

of the managerial concerns over data security/privacy, intellectual property rights, host country

political or economic uncertainty, cultural difference between host and home country and lack of

partners/vendors in the host country on the mode of offshoring of services.

This study plans to covers various industries so that it will be of interest to a wide spectrum of

strategists. Moreover, the factors (influencing the mode of offshoring) considered in this study

are very generic and easily applicable to most industries.

Limitations of this study

A limitation of this study is that it explores only the effects of managerial concerns over data

security/privacy, intellectual property rights, host country political or economic uncertainty,

cultural difference between host and home country and lack of partners/vendors in the host

country on the mode of offshoring of services. In addition to these factors, there are numerous

factors related to the firm, partner/vendor, host country, home country and others factors that can

influence the mode of offshoring of services. Although this is a valid limitation, it is not practical

for one study to look at all the possible factors affecting mode of offshoring.


44

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Williamson, O.E. (1988) ‘The logic of economic organization’, Journal of Law, Economics and

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Williamson, O. E. (1999) ‘Strategy research: Governance and competence perspectives’,

Strategic Management Journal, Vol. 20: 1087.


49

INTERNATIONAL ASSIGNMENTS AND EXPATRIATE PREPARATION

Gyongyi Konyu-Fogel, Ph.D., DBA

Walsh College of Accountancy and Business Administration

ABSTRACT

The role of expatriates continues to increase as companies expand into global markets.

However, research indicates a lack of cross-cultural skills as one of the main reasons for failure

in international assignments. A related factor overseas is experiencing culture shock and an

inability to communicate with the locals effectively. Culture shock affects not only the expatriate

but also the family members. This paper examines the role of international human resource

management in preparing expatriates to succeed in international assignments. Recommendations

are made with implications for practice and research for expatriate training and organizational

development.

Key words: human resource management, expatriates, cross-cultural training, international

assignments

INTRODUCTION

The importance of expatriates in the complexity of multinational operations has been

widely recognized. It is argued that, in many multinational companies, international experience

has become the requisite for higher level management positions, but there is a lack of

competently experienced multinational company managers, and training has thus become an

important issue (Kabst, 2004). Cross-cultural training is essential for the success of expatriates

in an international assignment to ensure success in meeting business objectives. Multinational

Corporations may also assess local staff and use expatriate managers to effectively train host

country natives in order to contribute to the development of the local operation, the career

advancement of local talent, and the diversity of the parent business.

Traditional forms of international staffing have their particular advantages; however,

there are many disadvantages as well, including high coordination costs for headquarters, dual

career implications and reintegration problems (Baumgarten, 1995). As a result, new

alternatives of staffing such as short-term delegations as well as virtual assignments are

becoming more popular which also require cross-cultural training. The scope of expatriate

assignments includes many unknown situations including learning and adjusting to the foreign

country’s culture, language, and social differences. There are several reasons for an expatriate to

be the preferred manager compared to a local manager in the host country. However, studies

show that there are many factors that can make it difficult for expatriates to function effectively

in the foreign environment. Therefore, it is important to conduct pre-departure orientation and

training to help expatriates and their families prepare appropriately for the experience of living

and working in the foreign country.


50

LITERATURE REVIEW

The impact of cross-cultural differences on training has created a lot of attention. The

cross-cultural training of expatriates has been under extensive study for over a decade (Black,

Mendenhall, & Oddou, 1991). It is believed that the competence and skills of expatriates may

not be applied in various cultural environments without adjustment. Black et al.,(1991) note that

cross-cultural adjustment should focus on three issues: adjustment to work, adjustment to

interacting with host nationals and adjustment to the general environment. Previous cross-

cultural training for expatriates has tended to concentrate more effort on the training of

adjustment to work rather than on the role of pre-departure and cross-cultural training.

Expatriate training has been found useful in preparing people for overseas assignments.

However, the specific training program used depends on the needs of the expatriates and the

complexity of the overseas assignment (Hodgetts & Luthans 2000). Expatriates who are

unfamiliar with the host culture may experience many problems in their assignments (Kabst).

Depending on the needs of the expatriates, cross-cultural training programs should be offered to

enable them to increase communication and interpersonal skills with the overseas workforce and

to deal with the related high degrees of stress (Tung, 1982). Expatriates who do not appreciate

the host culture and have difficulties adapting to it can present various problems, including

diminished work performance, substance abuse, workaholism as well as psychological and

infidelity problems (Webb, 1996).

Hodgetts and Luthans found that the greater the difference in culture between the parent

country and host country, the higher levels of effort are required for training. This implies that

expatriates that have overseas assignments in a country with a culture that is significantly

different from their parent country require higher levels of training A contingency fit between the

teaching modes of the instructor, the learning style of the student and the perceived cultural

differences between parent country and host country may significantly influence the

effectiveness of expatriate training (Vance and Paik, 2002). In addition to cross-cultural training,

job-related training and on-site training have been regarded as critical issues to promote

expatriate competence (Solmon, 1995). Vance and Paik contend that on-site training through

long-term planning of expatriate assignments could be an important way to promote expatriate

competence. Cross-cultural training was found effective in developing important cross-cultural

skills, in facilitating cross-cultural adjustment, and in enhancing job performance (Black et al.,

1991). Cross-cultural training, language training, and job-related training were found to

facilitate cross-cultural interaction, which also indicated higher confidence and higher expatriate

satisfaction with the assignment (Hodgetts & Luthans).

Through conducting investigational surveys and regression analysis, Puck, Kittler, and

Wright (2008) arrived to three main conclusions. First, if the expatriates’ perceived need for

training was higher, there tended to be higher levels of training effectiveness. Second, if an

expatriate perceived that his or her learning style was consistent with the instructor’s teaching

method, and simultaneously perceived higher need for expatriation training, they could achieve a

higher level for training effectiveness. Last, if expatriates perceived that the cross-cultural

difference between home country and host country was high, and their demand for expatriation

training was also high, these expatriates tended to achieve a high level of training effectiveness.


51

Overall, pre-departure expatriate training does have a positive impact on the adjustment and

performance of the expatriate while enduring an overseas project.

DETERMINANTS OF EXPATRIATE ADJUSTMENT

Research indicates that international adjustment is the process of making changes in

oneself or in one’s environment to meet fairly well the demands of working and living in a

foreign environment. More specifically, international adjustment includes a cross-cultural

adjustment that requires learning new skills, behaviors, and competencies to be able to

effectively function in the foreign environment through exercising sensitivity, cross-cultural

understanding, cross-cultural adaptation, and cross-cultural interactions with the host country

environment. Living and working in a foreign country for an extended time requires a significant

adjustment in the conceptual, physical, social, and emotional level of an individual’s

understanding and coping with the foreign environment (Konyu-Fogel, 1997, 1999, 2011).

There are a variety of characteristics that may contribute to expatriate adjustment. Figure 1

outlines five important factors in expatriate adjustment.

Figure 1. Determinants of Expatriate Adjustment

Expatriate Adjustment

Self-Efficacy

Stress Management

Family-Spouse Adjustment

Ongoing Organizational

Support

Perceptual Abilities


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Perceptual Abilities

The expatriate’s ability to understand why host nationals behave and think the way they do, and

to make correct interpretation as to the motives behind these behaviors, could result in effective

relationships with host country nationals and the local workforce. Knowing the reasons and

motives allows the expatriate to feel comfortable working with host country nationals. Most

importantly, the ability not to be judgmental when faced with confusing situations can help the

manager in an international assignment work with local employees more effectively. The ability

to differentiate and integrate complex information, cross-cultural sensitivity, cross-cultural

understanding, and cross-cultural adaptability were found to increase global mindset competency

that seems to improve leadership behavior in global business (Konyu-Fogel, 2011).

Self-Efficacy

Self-Efficacy constitutes the confidence in one’s abilities. As expatriates have to deal with

unexpected cross-cultural challenges, a sense of self-efficacy, a belief in one’s own ability to

deal with these challenges, also called optimism, is important to effective adjustment. Self-

efficacy can be assessed by behavioral testing such as the Meyers’-Brigg five-type personality

test. Open-minded, high-energy, and optimistic attitudes were found as characteristics of high

self-efficacy abilities. The attributes of being open-minded, flexible, and sensitive to differences

were components of a Global Mindset and Leadership Behavior (GMLB) instrument (tested high

on validity and strong on reliability) which was used to examine the effects of global mindset on

leadership behavior indicating that high global mindset tends to significantly improve leadership

behavior in global business (Konyu-Fogel, 2011).

Stress Management

Expatriates often are confronted with high uncertainty, social differences, conflicting norms and

behaviors and may experience extreme difficulties in conforming to their new environment,

differences in housing, climate, cuisine, or experiencing loneliness; all of which can be very

stressful. Therefore, it is important to provide stress reduction training programs to reduce some

of the stress factors that are often part of an international assignment. Some activities that could

be helpful in managing stress include mediation, writing a diary, physical activity, hobbies,

religious worship, or other personal interests such as sports, art, culture, or entertainment.

Family-Spouse Adjustment

The expatriate may have excellent cross-cultural skills and could be performing well on the job.

However, research shows that when the expatriate’s spouse and family members have trouble

adjusting, the expatriate will have problems that could lead to an early departure from the

assignment. Particularly difficult is a dual career situation, as the international assignment may

cause a loss of family income and opportunity for the accompanying spouse. Organizational

support may help alleviate the difficulties in assisting the spouse and family to find alternative

opportunities based on their qualifications and career goals.


53

Ongoing Organizational Support

Ongoing organizational support is crucial for an effective international adjustment. The support

of the home office as well as local organizations and networks are instrumental in assuring that

the expatriate and his/her family can feel comfortable and equipped to handle the many

differences of the foreign assignment and living in a new environment. Beyond initial

adjustment assistance, support may come from local mentors who can provide task-related

guidance or psychological and social support.

INTERNATIONAL ADJUSTMENT

The international adjustment may be described as a multi-stage process or cycle that

begins with excitement of the pre-departure anticipation and extends through arrival at the

international assignment. The effectiveness of the international adjustment depends on the

ability of the individual to achieve a psychological comfort, a sense of efficacy, with being able

to live and work successfully in the new environment. Figure 2 shows the stages of the

international adjustment process and how these are related to international adjustment and

assuring success for expatriates.

Stage 1: Tourist/Honeymoon

At the beginning of the experience of an international assignment, generally there is a lot of

excitement and new adventure that often fascinate and capture the employee’s attention and the

family’s experience in adjusting to the new living environment, including getting children

enrolled in school, finding appropriate transportation, trying new food, shopping, and

entertainment, meeting new people, sightseeing, and finding lot of attractions in the city and

foreign country environment. Some of these experiences are absorbed by individuals as positive

and interesting. However, the excitement of the newness usually subsides after a few months or

in some cases after a few weeks, when the differences in every day routines and the loss of

familiarity with the home country environment begin to hit in the reality of loneliness, being

away from friends and coworkers in the home country, often causing a psychological discomfort

also known as culture shock.

Stage 2: Culture Shock

After the initial period of support by the home office, the expatriate and family are left to

themselves. That’s when what seemed as exotic or exciting often becomes frustrating or

confusing. At this point, homesickness may cause a culture shock making the individual and

his/her family experience increased discomfort and difficulty with being able to meet the host

country’s demands and differences in living and working conditions. This stage may last for

several months and can be particularly difficult for the spouse and family. The expatriate during

the culture shock stage must be able to find ways to adjust to the new work conditions and

demands of the job as well as make general adjustments to the local environment, requiring

accommodating differences in communication and culture of the local workforce and


54

psychological adjustment to the new work and living environment. The spouse and family have

more difficult daily tasks to accomplish and thus may encounter more of the challenges. Some

people may never adjust fully, and can even suffer depression or psychological trauma. The

expatriates are the ones who end up being described as failures

Figure 2. Stages of International Adjustment

Stage 3: Adjustment

Adjustment occurs when the expatriate begins to learn the norms and ways of getting things done

in the foreign culture and on the job. This is a gradual adaptation and occurs usually from about

the ninth month on. However, the time frame for international adjustment may vary greatly by

individual circumstances and situational factors. In addition, the degree of difference between

the home and host country’s culture (cultural distance) also influences the international

adjustment process and time requirements for effective functioning in the host country. Other

factors influencing the adjustment process may include the nature of the job/assignment in the

host country, local conditions, and the response and willingness of the local workforce,

relationships between host country managers and the expatriate, and the home office. The

expatriate’s performance will start improving when he/she is able to effectively adjust to the new

environment. This includes developing new skills and an ability to cope effectively with the host

country environment.


55

Stage 4: International Mastery

At this stage of the adjustment, the expatriate is able to understand the why differences exist

between the home and host country and how to address these differences in an integrative

fashion that includes working effectively with locals and the home country office. The

employee’s performance improves and he/she develops an appreciation for the differences and

learns to live among the locals and even enjoy the cross-cultural experience of sharing more than

one culture. By reaching an international mastery, the assignee not only may become more

valuable to the parent company but he/she can rise up in the career ladder to higher levels when

global understanding is necessary in the organization.

PRE-DEPARTURE CROSS-CULTURAL TRAINING

Physical, cultural and interpersonal adjustments to the new host environment have been

identified as being indicative of expatriate success (Baumgarten). The cross cultural training

(CCT) programs should accordingly focus on developing the expatriate’s knowledge, skills and

abilities needed for the adjustment to the host country’s environment and cultural differences.

Eschbach, Parker, and Stoeberl (2001) argue that culture shock and fatigue are the important

indicators of an expatriate failing to make the required cross-cultural adjustment. Increasing an

expatriate’s ability to adjust to the host culture can increase his or her productivity (Dowling,

Festing, & Engle, 2008). Therefore, CCT undertaken before cultural ambiguity sets in may help

to lessen the severity and duration of culture shock.

With increasing economic internationalization and globalization, effective and efficient

international human resource management (IHRM) is recognized as providing competitive

advantages for a business. If CCT is to be effective, it needs to be well planned and tailored to

the needs of multinational enterprises (MNEs) and individual expatriates (Adler & Bartholomew,

1992).

According to the research, it is important to develop orientation trips and short-term

assignments as the major forms of CCT for expatriate candidates who do not have prior overseas

experience. Based on my experience as Director of Programs of Global Leadership Center at a

Midwest University, the cross-cultural training programs for international assignments must

include cross-cultural awareness training to the employee and the family. Language training can

be helpful in understanding local social and cultural differences. Expatriates must be required to

complete training for language and cultural competencies prior to any foreign placement.

Expatriate assignments can be very expensive and may carry the risk of assignment

failure that could result in a premature return of the assignee and his/her family. Other

difficulties in international assignments may relate to the not being able to accomplish the

assigned tasks in the foreign country as expected by the home office or failure to achieve the

organizational goals effectively. HR managers should be careful in the selection of an expatriate

for an extended foreign assignment. Critical HR activities should focus on pre-departure

orientation and training, supporting the expatriate and his/her family’s adjustment to the foreign


56

country and assignment experience, and repatriation to assure the individual employee and the

company’s success of the expatriate assignment investment.

Human resource managers should conduct individual consultation, provide films and

readings on the foreign country’s cultural, social, legal, and economic environment, and when

necessary, offer mentoring and on-going assistance to both the employee and family members.

The pre-departure orientation should include important practical aspects of everyday living in the

country of assignment.

RECOMMENDATIONS AND IMPLICATIONS

In order to help employees better understand, adapt, and perform well in international

assignments, human resource managers must assist host country management in assessing the

needs of the host-country workers to devise training programs that enable expatriates

successfully achieve their work objectives, whether in manufacturing, marketing, sales, after-

sales services, or business processes such as accounting or records management.

The primary objective of the Preparation and Training for International Assignments

should be to increase the expatriates’ effectiveness abroad to assist them achieve the expected

company goals which may include increasing company performance, employee productivity, and

overall effectiveness in global operations. There are many skills and competencies that are

required from employees when they work in international assignments.

The pre-departure preparation and training must focus on the developing desirable skills

and competencies to assure that expatriates will have sufficient knowledge and understanding of

the foreign country’s political, legal, social, and cultural environment as well as an ability to

function effectively in the host country by adapting to cultural and social differences through

their cross-cultural sensitivity, flexibility, language skills, and global mindset competencies that

require a high level of ability to differentiate and integrate complex and often ambiguous

information to make decisions effectively in a global context (Konyu-Fogel, 2012).

Language and cross-cultural training programs have been found quite beneficial in

preparing expatriates and their families prior to going on for an international assignment (Konyu-

Fogel, 2011). Language skills and cross-cultural understanding and adaptability can allow the

expatriates to communicate and share information with host country employees, suppliers,

customers, government officials and local organizations more effectively. Interpersonal and

social skills, self-reference criterion, reduction in ethnocentric orientation and global mindset

competencies were found to increase the likelihood of success of expatriates and global leaders

operating in a foreign environment

Figure 3 shows a proposed Model for Preparation and Training for International

Assignments. According to the model, there are three main areas that must be evaluated and

considered in developing preparation and training for international assignments:


57

1. Identifying the desirable qualities that expatriates must possess.

2. Determining the emphasis of the preparation and training program.

3. Selecting and developing the training methods for achieving program goals.

The pre-departure training should aim to help employees avoid possessing a self-

reference criterion, a tendency to view other cultures through the lens of one’s own culture. It is

important to not only conduct cognitive training on the differences of the host and home

countries cultural, political, social, legal, economic, and business environments and management

practices but also conduct behavioral training for cross-cultural sensitivity, critical incident

analysis, simulations, case studies, and role-playing experiential learning of the host country’s

management practices and differences in workforce behavior.

The preparation and training should include multiple methods for providing a balance

between the degree of knowledge and interaction required in the international work environment

and the cultural distance between the employee’s native country and the host country’s cultural

and business environment.

The pre-departure preparation should also be provided to the accompanying family

members, including describing expectations about the conditions of living and working in the

foreign country and networks for support and assistance to adapt to differences between the

home and host country environments.

Critical information in pre-departure preparation should include personal details involved

in relocation, factors of adjustment to cultural, political, legal, social, and economic differences

that can help cross-cultural understanding and sensitivity to cope with uncertainties and

differences in living and working environments. Family members should be asked to make

personal arrangements. In addition, there must be sufficient time allotted for preparing the

employee and his/her family to learn cross-cultural skills, understand the expectations,

difficulties, opportunities, and uncertainties involved in the foreign assignment.


58

Figure 3. Model for Preparation and Training for International Assignments

In addition to formal training on the host country’s language, history, and culture, it is

recommended to engage in informal conversations with the assignee and his/her family members

to share helpful tips and advice through company gatherings and other social events, informal

networking with former expatriates and employees and their families from the foreign country.

Informal meetings could be arranged with former expatriates and other parent company nationals

(PCNs) who have recent experience traveling, working or living in the host country.

Furthermore, mentors or coaches from the home country could provide assistance and regular

contact during the assignment through telephone and e-mail.

CONCLUSION

This paper examined the importance of training expatriates who are embarking on an

overseas assignment. It has been shown that there are numerous benefits for both the expatriate

Desirable employee qualities

- Technical competence - Self-reliance - Adaptability - Interpersonal skills - Cross-cultural skills - Leadership ability - Physical and emotional health - Spouse and dependents, family prepared for living abroad

Training emphassis

- Host country political, economic, social, legal, and cultural factors - Practical knowldege - skills to work effectively in host country - Cultural awareness - cross cultural sensitivity communication, language skills, negotiation skills, reduction of ethnocentric orientation, global mindset, self-reference criterion

Training methods - Assigned readings - Videos, case studies, role plays, web-based learning - Simulations, ---- Language training, cross-cultural training field experience - Short-term or long-term travel


59

and the multinational corporation when expatriate training is offered. It is important to provide

an appropriate cross cultural training program to ensure success regarding effective

communication in the foreign country of the assignment. It is also beneficial for multinational

corporations to invest the time in training locals when appropriate, in order to save the cost of an

expatriate in the long run.

Cross-cultural training is noted to help achieve higher adjustment of expatriates and their

families in international assignments. Effective international adjustment is likely to result in

higher involvement in the local host country culture and employee engagement that further

seems to lead to better performance during the expatriate assignment. Cross-cultural training is

likely to enhance the expatriate’s motivation to learn about the differences in the host country’s

business environment and managing better employee relations. Understanding and adjusting to

the foreign country’s environment effectively can help the expatriate interact with local

employees and transfer knowledge and learning to the employees of the host company that

eventually may enhance the success of the expatriate’s international assignment and the overall

performance both the parent and host company.

There is a great need for future research on discovering a successful model for training

and preparing expatriates and their families for international assignments. However, all

organizations understand the need for pre-departure preparation and cross-cultural training due to

the costs involved and the high failure rates for overseas assignments. Human resource

management’s involvement in the development of planning and training is essential.

To assure success in expatriate assignments, it is important that the expatriates

understand clearly their role and responsibilities before going on the assignment. The expatriates

must also learn as much as possible about the host country environment, including understanding

the political, economic, legal, social, cultural, and ethical differences and developing cultural

awareness and sensitivity to help adjust to the host country’s management practices, working

with local employees, being able to conduct business transactions, everyday living, and family

transition effectively. With careful planning and training, the expatriate experience can be a

successful one for all stakeholders involved including the organization, employee, and the

expatriate’s family.

Future research may examine the relationship between factors that are likely to contribute

to the international adjustment process and the types of training and preparation needed to assist

the expatriate success and organizational effectiveness.

REFERENCE

Adler, N. J., & Bartholomew, S. (1992). Managing globally competent people. Academy of

Management Executive, 6, 3, 52–65.

Baumgarten, K.E.E. (1995). Training and development of international staff. London: Sage.


60

Black, J. S., Mendenhall, M., & Oddou, G. (1991), Toward a comprehensive model of

international adjustment: An integration of multiple theoretical perspectives, The Academy of

Management Review, 16, 2, 291–317.

Dowling, P. J., Festing, M., & Engle, S (2008). International human resource management. 5th

ed. London: Thomson Learning.

Eschbach, D. M., Parker, G.E., & Stoeberl, P. A. (2001). American repatriate employees’

retrospective assessment of the effects of cross-cultural training on their adaptation to

international assignments, International Journal of Human Resource Management, 12, 2, 270–

287.

Hodgetts, R. M., & Luthans, F. (2000). International management: Culture, strategy, and

behavior., New York: McGraw-Hill.

Kabst, R. (2004). Human resource management for international joint ventures: Expatriation and

selective control, International Journal of Human Resource Management, 15, 1, 1– 16.

Konyu-Fogel, G. (1997). Country of origin factors in international adjustment, The International

Review, Journal of Phi Beta Delta Honor Society for International Scholars, 7, 41– 62.

Konyu-Fogel, G. (1999). Factors of academic success of international students: A conceptual

model, International Review, Journal of Phi Beta Delta International Scholars, 9, 7-18.

Konyu-Fogel, G., & Cole, M. (2011). Analysis of the effects of demographic and organizational

factors of global mindset of business leaders: An empirical multi-industry study from five

continents, Journal of International Business Research and Practice, 5, 4-38.

Konyu-Fogel, G. (2012). Exploring the effects of demographic and organizational factors of

global mindset of business leaders: An empirical multi-industry study from five continents,

Academy of International Business Midwest Proceedings, 96-112.

Puck, J. F., Kittler, M. G., & Wright, C. (2008). Does it really work? Re-assessing the impact of

pre-departure cross-cultural training on expatriate adjustment. International Journal of

Human Resource Management, 19, 12, 2182-2197.

Tung, R. L. (1982). Selection and training procedures of US, European, and Japanese

multinationals, California Management Review, 25, 57–71.

Vance, C.M., & Paik, Y. (2002). One size fits all in expatriate pre-departure training? Comparing

the host country voices of Mexican, Indonesian and US workers, The Journal of Management

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Development International, 1, 5, 38–44.


61

AN INSTITUTIONAL MODEL OF INTERNATIONAL FIRST-MOVER ADVANTAGES

Shobha S. Das1

Qatar University

Krishna Udayasankar2

Nanyang Technological University

ABSTRACT

Research on first mover advantages has been extensive and undertaken in different disciplines

(such as economics, entrepreneurship, marketing, and strategy). However, the examination of

first-mover advantages based on theoretical arguments from the resource-based view of the firm,

transaction cost economics, resource-dependency, network externalities, and regulatory

framework has tended to be domestic in focus. We use an institutional lens to extend the theory

of first-mover advantages to the international arena. We develop propositions about the sources

of first-mover advantages when mimetic, normative, and coercive processes operate alone or in

combination.

Keywords: first mover advantages, international entry, institutional theory, normative, mimetic,

coercive

INTRODUCTION

The increasing internationalization of business has been identified as one of the key reasons why

institutional perspectives have gained importance (Ingram & Silverman, 2002). Country

environments embody different institutional contexts, providing both opportunities and

challenges to firms doing business in the international arena. Of these firms, the set of firms that

expand internationally as ‘first-movers’ are of particular interest, since these firms often initiate

the first processes of interaction between foreign firms, and different host institutional contexts.

Institutional scholars have suggested that firm responses to the institutional environment are

more strategic, than reactionary (Oliver, 1991; Scott, 2001). In keeping with this trend,

researchers have shown that institutional environments affect firm action and strategy, (e.g. Das

1 Shobha Das is an Associate Professor in the College of Business & Economics at Qatar University. She obtained

her Ph.D. from the Carlson School of Management, University of Minnesota. Her research interests are in the areas

of business and corporate strategy, and technology management.

2 Krishna Udayasankar is a Lecturer at the Nanyang Business School in Nanyang Technological University (NTU).

She holds a Ph.D. in Strategic Management from NTU, a graduate degree in International Business from the

University of Sydney, and an honours degree in Law from the National Law School of India University. Her

research interests are in the areas of International Corporate Governance, Corporate Social Responsibility and

Business-Government-Society interactions.


62

& Van de Ven 2000; Ramaswamy et al., 2002; Tihanyi et al., 2003), firm structure and

organization (Kostova & Roth, 2002), and firm evolution and change (Barnett & Hanses, 1996;

Baum & Haveman, 1997), particularly in the context of institutional differences in economies.

In this paper we focus on the less-explored question of how firms can strategically maximize

international first-mover advantages (FMA), using an institutional perspective. We examine how

firms operating in a first-mover capacity in new international markets can leverage on the

different country environments, based on the mimetic, normative and coercive processes that

operate in the country.We propose that firms can benefit from first-mover advantages by creating

specific types of barriers to entry for later entrants.

LITERATURE REVIEW OF FIRST MOVER ADVANTAGES (FMA)

Comprehensive reviews on the topic of FMA (Kerin et al., 1992; Lieberman & Montgomery,

1998 and 2012) show this to be a well-researched area in terms of theoretical and empirical

studies. Some studies have shown a positive relationship between pioneering and performance

after controlling for managerial skills (Murthi et al., 1996) indicating an important role for

environmental factors.

There have been studies about the timing of entry into international markets (Mascarenhas, 1992;

Shaver et al., 1997), into emerging economies (Nakata & Sivakumar, 1997), and into specific

emerging economies such as China (Gaba et al., 2002; Isobe et al., 2000; Johnson & Tellis,

2007; Luo, 1998; Luo & Peng, 1998) and India (Johnson & Tellis, 2007; Rahman &

Bhattacharya, 2003). The issue of first-movers, particularly, has been explored in the context of

differences between firms, classified on the basis of their order of entry, and the directly

imputable consequences thereof. While, no doubt, this perspective has served to enhance our

understanding of what contributes to first-mover performance in general, it fails to address the

issue of how firms can create first-mover advantages by interacting with the unique institutional

processes that operate in the country which they enter. We therefore apply findings by

institutional researchers (Das & Van de Ven 2000; Ramaswamy et al., 2002; Tihanyi et al.,

2003) that firms can strategically respond to and interact with their institutional environments,

towards enhancing the current understanding of first-mover strategy and performance.

Briefly, the consensus in extant first-mover literature is as follows: First-movers and immediate

followers show better performance than late follower firms (Bond & Lean, 1977; Parry & Bass,

1990; Robinson, 1988; Whitten, 1979). Early followers have higher market shares than late

followers (Lambkin, 1988; Robinson & Fornell, 1985), but the difference in market shares

between the first-mover and the early followers is much smaller (Robinson & Fornell, 1985;

Robinson et al., 1992). Longer lead times increase the first-mover’s advantage, but, over time

immediate followers who offer sustained competition catch up, though later entrants still trail

behind (Huff & Robinson, 1994). While first-movers and immediate followers, when compared

to late entrants, have been found to have advantages under some conditions (rapid technology

evolution – Suarez & Lanzollo, 2007, lead markets – Cleff & Rennings, 2012), these conditions

are not effective in explaining the differences in international FMA. For instance, Johnson &

Tellis (2007) found that there was significant difference in FMA between India and China,

though both are emerging markets with similar technology and market characteristics.


63

Though timing of entry broadly includes the decision of when to enter a new or existing market

(Green et al., 1995) through new products, processes, brands or businesses (Kerin et al., 1992),

we focus on international first movers, those firms that are the first to enter an international

market with a product or service that is not similar to those available in that country in terms of

features and/or price-performance ratio (Rahman & Bhattacharyya, 2003). We propose that the

use of an institutional perspective is of relevance to international first-movers because such firms

deal with distinctly identified, varying, institutional environments, at the country level. Such a

perspective is not likely to be relevant for firms that enter domestic markets. The institutional

perspective allows for an understanding of first-mover performance by contextualizing the firm

amidst the institutional processes of the country which it enters.

Researchers have explored the role of external factors, such as industry and market conditions

(see Ketchen, Snow & Hoover, 2004, for a review), as well as dimensions and characteristics of

the country environment, for example regulation (Cleffs & Remmings, 2012; Nehrt, 1998;

Sarkar et al., 1999). Our paper offers a unique contribution to the domain of FMA by looking at

the effect of interaction of a firm with the institutional processes of the international

environment.

AN INSTITUTIONAL MODEL OF FIRST-MOVER ADVANTAGES

Sources of FMA

There are several classifications of the sources of FMA. Lieberman & Montgomery

(1998,1988) classify the sources of FMA as technological leadership, switching costs, and

resource pre-emption, while Kerin et al. (1992) group them as technological, economic, pre-

emptive action, and behavioral advantages. Makadok (1998) offers the concept of industry-

specific ‘resource position barriers’ (at. p.394) to distinguish between barriers that prevent

follower entry into a market, and barriers that allow entry, but prevent followers from enjoying

the same levels of performance as incumbents. Other authors have suggested scale economies

and marketing cost asymmetries, translation of technology gaps into competitive advantages

(Porter, 1983), cost asymmetry in factor inputs and geographic and segment preemption

(Lieberman & Montgomery, 1988), and behavioral factors such as switching costs (Porter, 1985)

lead to FMA. Despite some differences, all the authors attribute FMA to the creation of what

could broadly be termed ‘barriers of entry’ by which first movers are able to enjoy higher

performance for a longer period of time. We use the sources of FMA discussed by Lieberman &

Montgomery (1998,1988) because they are widely used, encompass rather succinctly the various

FMA sources identified by other researchers, and the authors have recently presented further

validation of their arguments (Lieberman & Montgomer, 2012).

Briefly, FMA arises from technological leadership, buyer switching costs / choices under

uncertainty, and preemption of scarce resources. Firms that are technological leaders, move

ahead on the learning curve, and in patent & R&D races. For such firms, FMA arises from

falling costs with cumulative output and knowledge advances arise from R&D expenditures

respectively. FMA may accrue due to buyers making their decisions amidst uncertainty. In an

uncertain environment, buyers incur learning costs to find out about the products of the first

mover, and transaction costs to purchase these products. They enter into contracts with first

mover firms to get good deals, and develop brand loyalty for the products of first mover firms.


64

The learning and transaction costs, contractual obligations, and brand loyalty make it difficult for

later entrants to persuade these buyers to switch to their products. A third source of FMA is the

preemption of scarce resource and it works in three ways – first mover firms avail of critical

input factors so later entrants can’t get them, occupy premium geographic and product feature

space, and invest in plant and equipment to deter entry by later entrants.

Irrespective of the sources of FMA, all researchers are unanimous in their conclusion that

first movers do incur tremendous costs. The high costs associated with being the first-mover

often set-off the advantages gained (Boulding & Christen, 2001), and such advantages may

accrue only given the presence of moderating conditions, such as strong patent protection and

limited consumer learning (Boulding & Christen, 2003). In fact, follower firms may acquire the

same technology or resources at lower costs, leading to free-rider effects (Golder & Tellis, 1993;

Guasch & Weiss, 1980; Lieberman & Montgomery, 1988). So far, researchers have examined

the characteristics of the environment and not the processes. Institutional researchers (DiMaggio,

1988; Oliver, 1992) suggest that firms may need to pay heed to the institutional processes that

prevail in their environment.

Institutional processes affecting FMA

DiMaggio & Powell (1983) identify three types of institutional processes: coercive,

mimetic, and normative. We draw on Scott’s (2001) arguments that institutional influences may

operate at different levels, or may be “layered”, to suggest that at any given point of time, in a

given institutional context, one or two of the processes – coercive, mimetic, or normative – may

be in operation. Given the likely contradictory effect of these processes, we think it is unlikely

that all three instititutional processes are likely to be in operation at the same time in any country.

Each of these institutional processes occurs with particular characteristics of the country

environment. Coercive processes arise from formal and informal pressures on organizations in a

country. Mimetic processes operate when organizations are in an uncertain environment, while

normative processes occur when establishing legitimacy is important.

Coercive processes. A country where there is a high degree of regulation and effective

implementation is likely to have greater coercive processes, whereby all firms (first movers,

early entrants, and late followers) that operate in this context have to abide by the well-laid out

rules and procedures. Environments which can be classified as dominantly coercive may often

offer greater clarity and availability of information, due to the higher levels of

institutionalization, in such environments. The higher quality of regulation in such environments,

and consequently, the importance of legally mandated corporate procedures, could also serve to

reduce informational advantages that first-movers may have.

In such environments, the advantages available to first-movers would tend to be based on

technological leadership. First-mover firms, which enter such environments, can undertake large

technological investments because they are assured of high R&D appropriability (Kim & Lee,

2011). They can benefit from both economies of scale, as well as greater market share. Doh

(2000) outlines the advantages enjoyed by telecom firms, in different Latin American countries

from entry before privatization. In the dominantly coercive, government-controlled,

telecommunications industry, prior to its privatization, international first movers benefitted from

technological investments that locked-in the customers of the country to a particular provider.


65

Proposition 1: In countries with predominantly coercive institutional processes,

international first-mover advantages arise from technology leadership.

Mimetic processes. First-mover firms in dominantly mimetic environments, which have

high uncertainty, cannot rely on technology leadership. FMA cannot arise from technology

leadership if legal protection is not available. A dominantly mimetic environment is based on

three broad conditions: a) imitative behavior is relatively unfettered by law, b) informational

asymmetry may be high and c) imitative behavior is seen as a means of competition. To enjoy

FMA, first mover firms will need to focus on increasing buyer switching costs. When firms first

enter a country where there is high uncertainty (Henisz & Delios, 2001), they can focus on

teaching buyers about their products, building brand loyalty, and entering into contracts with

buyers. The time and money buyers have spent in learning about the products of the first mover,

buying and trying out the products of the first mover, as well as the terms of the contract signed

between the buyers and the first mover are the components of the buyer switching costs. Buyer

switching costs may be increased due to the intial transactions costs, learning costs, and

uncertainty about the products of later firms. When Electrolux AB of Sweden entered India in

the early 1980s and introduced the Indian consumer to products such as vacuum cleaners, and

water purifiers (Rahman & Bhattacharya, 2003), they had to educate their customers about the

very concept of the product category in addition to the methods of using the product. The higher

the buyer switching costs, the more the FMA because in an uncertain environment follower firms

would tend to replicate first-mover strategies that have been successful and imitate first mover

products that have been adopted by customers.

Proposition 2: In countries with predominantly mimetic institutional

processes,international first-mover advantages arise from buyer switching costs.

Normative processes. Strong normative effects may be likely in environments where

firms come under the influence of business associations, and professional and trade bodies. Scott

(2001) identifies “social obligation” as the basis for such compliance, achieved through

normative influences. Social sanctions can have a strong persuasive force, particularly in the

form of accreditation for certain practices, or social demand. Consumer and investor satisfaction

can be highly dependent on the legitimacy that a firm gains from paying heed to social demands

(Hooghiemestra, 2000). DiMaggio & Powell (1983) identify that normative influences are build

out of professional association over time. This can lead to the eventual setting of industry

standards or business practices.

Firms in such an environment can hope to benefit from the normative prescriptions

therein, by ensuring that resource suppliers, including raw material suppliers and infrastructure

providers, be tied-in to the first-mover firm through social sanction and routine. Similar tie-ins

can be created with distributors, thereby securing distribution space and consumer access (Kerin

et al., 1992; Lieberman & Montgomery, 1988). Once institutional costs are incurred towards

building relationships with resource providers, these relationships can act as entry barriers to

follower firms. Later entrants will also have a less attractive position, in terms of the market,

distribution and perceptual space available (Hauser & Shugan, 1983), if a first-mover is able to

capitalize on preemptive factors, which restrict later entrants’ access to resources. For example,

early movers in China have befitted from their collaboration with the government, whereas later

entrants have not. A particular example is that of Volkswagen, which operates as a key player in


66

the market, whereas later entrants such as Ford, Mercedes-Benz and General Motors found it

comparatively more difficult to secure government approvals (Luo & Peng, 1998).

Proposition 3: In countries with predominantly normative institutional

processes,international first-mover advantages arise from preemption of scarce resources.

Coercive and Mimetic processes. More than one of the institutional processes may

operate in a country. In a country where there is a high level of regulation but weak

implementation, both coercive and mimetic processes are in operation. There may be legal

protection for technological products but uncertainty prevails about the procedures and their

implementation.

First-mover firms may have formal laws to protect their intellectual property and

innovations, but there may uncertainty about how they can seek legal help to punish violators.

Technology lock-in by adapting technology to the country increases buyer switching costs. The

integration of suppliers and manufacturers through supply chain software, where a manufacturer

(or supplier) would benefit from adopting the technology that most suppliers (or manufacturers)

have already installed. Buyer-supplier relationships therefore, may continue to the exclusion of

follower firms. Further, the availability of complementary goods positively influences customer

adoption of such a technology (Schilling, 2002), and positive network externalities from the

installed base of technologies (Katz & Shapiro, 1986; Arthur, 1989) also contributes to the

success of a product (Brynjolfsson & Kemerer, 1996). Suzuki, a Japanese car manufacturer,

entered India in 1983. It retains market leadership with not just the quality of its cars but also

with its extensive network of service centers all over India that have specialized equipment,

personnel and detailed manuals for repairing cars adapted for the Indian market, which increases

buyer switching costs and makes it difficult for follower firms to take away its FMA (Rahman &

Bhattacharyya, 2003).

Proposition 4: In countries with coercive and mimetic institutional

processes,international first-mover advantage arise from technology adapted to increase buyer

switching costs.

Coercive and Normative processes. When a country has a high level of regulation and

laws, but legitimacy is important for implementation, then coercive and normative institutional

processes are in operation. Such environments are also more supportive of the advantages gained

from ‘prototypicality’ (Kerin et al., 1992). First-movers can, through marketing efforts, establish

their products as a standard against which followers’ product offering would be compared

(Carpenter & Nakamoto, 1989, 1990). Normative environments are characterized by the

emphasis on standards and accepted normative judgments. In such an environment setting up a

product to be a standard, and a basis for comparison, could provide the first-mover firms, which

set such standards, with a clear advantage over followers. Buyers prefer to purchase products that

are accepted as standards or deemed to be acceptable by professional organizations. This could

help explain the first mover advantage enjoyed by Toyota’s environmentally friendly Prius car

which was introduced in the US in 2000, a country with well established regulations that was

amidst a movement towards environmentally friendly products in that country (Tuttle, 2012).


67

Proposition 5: In countries with coercive and normative institutional

processes,international first-mover advantage arise from technology that adheres to norms of

legitimacy.

Mimetic and Normative processes. In countries that are characterized by high

uncertainty and information asymmetry arising from varying sources of legitimacy, it is prudent

for first mover firms to have switching costs based on norms of legitimacy determined by

professional organizations such as supplier associations or legal bodies.

First mover firms can focus on infrastructure related or business support technologies

such as Customer Relationship Management or Supply Chain software, or they may have also

invested in further specialized assets with restricted technological compatibilities, such as

operating systems. For example, in China, American firms such as LSI Logic and On2

Technologies, which met the new technological standards particular to the Chinese environment,

benefited from obtaining intellectual property rights to such inventions (Association of Patent

Law Firms, 2003), whereas companies such as Intel faced delays and restrictions in entering the

market, on the same issue, despite their size and market power. Frynas et al. (2006) provide

several case studies of firms enjoying FMA from managing the political legitimacy in the

country they entered.

Proposition 6: In countries with mimetic and normative institutional

processes,international first-mover advantage arise from increasing buyer switching costs based

on norms of legitimacy.

In summary, we have developed propositions about the sources of FMA when

international first mover firms enter a country based on the type of institutional processes that are

in operation in that country.

--------------------------------

Figure 1 here

--------------------------------

CONTRIBUTIONS, LIMITATIONS, AND IMPLICATIONS FOR RESEARCH AND

PRACTICE

In this paper we use an institutional perspective on entry into international markets, to

offer propositions on the nature of barriers to entry that can be created by first-mover firms,

across various environments. Our paper makes, in our opinion, two important contributions to

literature. First we extend the applicability of institutional perspectives, from the mainstream

literature on international management, to the specific issue of international first-movers. While

institutional tenets have strongly guided much of the international business literature, particularly

research on the mode of entry of firms into various country environments, our paper represents,

to the best of our knowledge, the first attempt to link mimetic, normative and coercive processes

to the timing, or order of entry. We thereby open new vistas for alternate epistemological

perspectives in the study of international first-mover strategy. Secondly, by doing so, we have

offered additional explanations for why and how first-movers enjoy certain advantages.


68

The theoretical model we offer is affected by industry and firm-specific characteristics.

The nature of the industry may determine the imitability of key resources, which then has

implications for the sustenance of first-mover advantages (Makadok, 1998). Certain barriers to

entry, notably those in dominantly normative environments, are based on intangible resources

such as endorsement and business relationships, the importance of which can vary significantly

from industry to industry. Furthermore, firm-specific features, such as market positioning and

advertising expenditure (Urban et al., 1986), attributes of the innovative product introduced by

first-movers (Robinson, 1990), and life-cycle stage of the firm (Lester et al., 2003), are relevant

to determining first-mover performance. The size of a firm and the nature of its competition may

also influence firm decisions to exploit first-mover advantages (Wernerfelt & Karnani, 1987).

The findings on the most advantageous order of entry are also affected by the debate on

the empirical methods used (Golder & Tellis, 1993), including issues of survivor bias

(VanderWerf & Mahon, 1997). Indeed, the exclusion of firm-specific variables from our

propositions is a limitation of this paper. Our attempt to provide innovative and more general

explanations from an institutional perspective has necessitated the exclusion of important micro-

explanations, such as role of the industry, and specific firm initiatives in branding and marketing.

An immediate extension of this work lies in the direction of empirical testing. Measures

of institutional environment such as those used by Glaeser et al., (2001) and Wan & Hoskission,

(2003), suggest that identifying environments as dominantly mimetic, normative or coercive is a

well-founded extension of current literature. By using such measures, it would be possible to

empirically validate our model, a task we are currently embarking on. Further exploration of the

characteristics of the host country may also add value. For example, the degree to which local

producers have a presence in the market may moderate the applicability of the barriers to entry

we propose. Another research project that could be carried out is to build on our model by

including firm- and industry-level variables, developing hypotheses and carrying out empirical

tests. Such a study would require careful collection of data on not just the time of entry of firms

into international markets, and the institutional processes operating in that country, but also

details about firm characteristics and industry features.

Our paper provides insights that could be useful for managers. Instead of focusing on just

the timing of entry into an international market, managers could attempt to understand the

institutional processes that are in operation when they are planning to enter an international

market. The predominance of coercive, mimetic, or normative processes, or their combination

would imply different actions by managers in order to capture FMA. Managers could move from

creating general barriers to entry to directing their attention to erecting specific types of barriers

to entry that are aligned with the institutional processes in operation in the particular country at

the time that they are planning to enter the market there. A finer-grained understanding of the

institutional processes operating in a country could help firms convert the concept of first mover

advantages into a reality.


69

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Brands: An Empirical Analysis and Strategic Implications', Management Science 32: 645-659.

Vanderwerf, P. A., and Mahon, J. F. (1997) 'Meta-Analysis of the Impact of Research Methods

on Findings of First-Mover Advantage', Management Science 43: 1510-1519.

Wan, W. P., & Hoskission, R. E. (2003) 'Home Country Environments, Corporate

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74

FIGURE 1: INSTITUTIONAL MODEL OF INTERNATIONAL FIRST MOVER

ADVANTAGES

Coercive Mimetic Normative

Coercive High regulation with

effective

implementation

Technological

leadership

High regulation, but

with uncertainty

about

implementation

Adapted technology

switching costs

High regulation but

legitimacy important

for implementation

Technology that adheres

to country norms

Mimetic High uncertainty,

and information

asymmetry

Buyer switching costs

High uncertainty and

information asymmetry

due to varying sources

of legitimacy

Switching costs based on

country norms

Normative Legitimacy is based on

“social obligation”

Resource pre-emption

Characteristics of the institutional environment (in bold)

Source of first-mover advantage from the literature (in italics)

Modified sources of first-mover advantages (in italics and underlined)


75

THE INFLUENCE OF INDUSTRY STRUCTURE AND FIRM LEVEL FACTORS ON

THE RELATIONSHIP BETWEEN REGIONAL ORIENTATION AND FIRM

PERFORMANCE

*Terence Motsi

Cleveland State University

Department of Marketing

E-mail:[email protected]

Tel: (216) 687-4784

**Ji Eun Park

Department of Marketing

Cleveland State University

E-mail:[email protected]

Tel: (216) 687-4787

*Terence Motsi is a doctoral candidate at Cleveland State University; research interests include

international consumer behavior, MNE strategy and entrepreneurship.

** Ji Eun Park is an Assistant Professor at Cleveland State University; research interests include

website localization, consumer animosity, shopping style, multinational enterprise, and e-

commerce.

ABSTRACT

The theory of regionalization is still in its infancy. Previous research has shown that most firms

are regional, as opposed to global in nature. This paper examines the relationship between the

adoption of a regional strategy and firm performance and develops theoretical propositions. We

use the main external drivers of performance i.e. market structure and insights from the

adaptation/standardization approach and propose them as the main drivers that will help

explain the relationship between regionalization and firm performance. Theoretical propositions

are developed to further understanding of the relationship.

Keywords

Regionalization, Standardization/Adaptation, Liability of Foreignness, Industry Concentration,

Firm Performance

INTRODUCTION

The theory of a regional firm is still in its infancy because firms were previously assumed to be

global by virtue of a presence in multiple foreign countries. (Rugman & Verbeke, 2004) Rugman

and Verbeke (2004) defined a global firm as a firm with 50% of its sales in its home region of

the broad triad of the European Union, the NAFTA zone and Asia, and a minimum 20% sale in

each of the two other regions. This criterion led the authors to find only 9 truly global firms


76

among the Fortune 500. The bulk of the firms were found to have concentrated sales within their

home region.

Theories that have been used to explain why firms experience spatial limitations include

transaction cost theory (Williamson, 1985) and the Resource Based View (Barney, 1991).

Rugman and Verbeke (2007) argue that Firm specific advantages (FSA) decay over space such

that outside their home region they are less useful. The authors characterized the type of firm

specific advantages that decay over space as the more upstream and value added activities.

Liability of foreignness (Zaheer, 1995) is also used to explain why firms are reluctant to expand

beyond their home region because of differences in institutions and culture.

Relationship between Regional Strategy and Firm Performance

The adoption of a regional strategy has an impact on performance. Empirical results have been

mixed (Lee & Marvel, 2009; Elango, 2004). Lee and Marvel (2009) found a moderating effect

of regional orientation on international SME performance when they used low cost or

differentiation strategies whereas Elango (2004) did not find any significant link between

regional orientation and performance. Banalieva and Santoro (2009) studied emerging market

MNEs from 28 countries and found that regional strategies improve performance of firms that

had a local orientation compared to industry rivals. Elango (2004) used 130 firms in a sample

dominated by European firms with a smaller number of MNEs from North America and Japan.

The conflicting results could be a result of the context of the research, for example in Lee and

Marvel (2009) regional orientation is a moderating variable but Elango (2004) uses it as an

independent variable. The research could be reconciled by adopting a multi-level analysis of firm

performance. The multilevel analysis should be at the firm, country and industry level. Firm

performance is affected by a number of factors both external and internal to the firm.

While the decay of FSA advantages is used to explain the limitations to the expansion of firms

outside the home region ,an interplay between firm specific advantages (FSA)and country

specific advantages (CSA) (Rugman ,Oh & Lin,2012) in addition to specific industry factors will

help explain the performance of firms that adopt a regional strategy.

INDUSTRY LEVEL FACTORS

Resource based theories and the Industrial Organization (IO) approach have been used to explain

firm performance. The resource based view (Barney, 1991) focuses on heterogeneity of firm

resources as the main determinant of performance whereas the IO approach focuses on strategic

positioning by firms in their industries. In the resource based view of the firm, the nature of the

firm resources i.e. non inimitability and non-substitutability explain firm differentials in

performance.

We adopt the IO school of thought to explain inter industry differentials in firm performance.

Specifically we adopt the Structure-Conduct-Performance paradigm to examine what makes

some industries more profitable than others and by extension explain why firm profitability also

differs by industry. In general the structure of an industry is expected to affect performance such


77

that more concentrated industries i.e. those dominated by a few firms have higher profit margins

(Lee & Mahmood, 2009; Shaik et al, 2009). Market structure relationship to profitability is

channeled through distribution of market share, product differentiation, barriers to entry, growth

rate of market demand, and barriers to exit (Delorme, 2002; Lee & Mahmood, 2009)

Industry concentration is an important aspect of the market structure element that affects

performance. Empirical evidence supports the general form of the concentration performance

relationship across different sectors and countries (Shaik et al, 2009; Caloghirou et al, 2004;

Delorme, 2002). We chose industry concentration because we believe it is the most relevant in

analyzing MNEs, including regional focused MNEs. Most companies face some form of global

competition and competitors who are likely to have considerable market power through their

brand recognition among other things.

Qian et al (2008) found a relationship between industry effects and firm performance in a study

of regionally diversified multinationals. In following the conventional approach, the study used

the Standard Industrial Classification to group the various firms; this method however does not

explicate the specific industry dynamics that affect performance. We are left to speculate as to

how the general industry effects as identified by the authors affect firm performance. Therefore,

we use industry effects as a moderating variable instead of a control variable as it is used in

previous research (Qian et al, 2008)

Other researchers have used more product market factors such as product diversification and

industrial diversification (Elango, 2004; Banalieva & Santoro, 2009; Li & Qian, 2005). These

factors significantly explain the relationship between regional orientation and firm performance

such that increased product diversity in well diversified firms reduces firm performance. We

believe product diversity and industry or sector diversification are a result of industry factors.

Market structure factors such as buyer concentration and sellers concentration affects the

strategy chosen by firms, for instance in very competitive markets there is likely to be a greater

need for product diversity in order to stand out from competitors. We therefore adopt industry

concentration as a proxy for the product and industry effects used in previous research.

FIRM LEVEL FACTORS

The issue of standardization versus adaptation has been prominent in the international marketing

literature. The main driving force of the debate is the globalization of business activities that

leads companies to make a choice between standardization of marketing activities across several

markets or adaptation to suit a particular market.

The literature is not settled on which approach is more favorable but issues such as cost savings

(Alashban, Hayes, Zinkhan, & Balazas, 2002; Szymanski, Bharadway, & Varadarajan, 1993) are

seen to be a key driver for standardization. The concept of semi-globalization (Firat, 1997;

Ghemawat, 2003; Douglas & Craig, 2011) is also a likely explanatory factor because some

researchers have observed that the world is not fully globalized which calls for an international

business strategy that takes this fact into account. Douglas and Craig (2011) identify five clusters

(developed markets, global and regional segments, country –centric elements, rural markets and

urban poor and country clusters) and suggest appropriate marketing strategy for each of the


78

segments. The lack of complete integration of global markets suggests that the optimal strategy

or decision between adaptation and standardization will be driven by both external and internal

factors.

The key internal driver for regional strategies identified by Rugman, Oh, and Lim (2012) is the

interplay between firm specific advantages (FSA) and country specific advantages (CSA).

Specifically, the authors looked at the ability of firms to transfer their FSA’s from the domestic

base to a home region or foreign region based on its existing capabilities. This suggests that

some activities are not home region bound (Rugman et al, 2012). From the perspective of the

regionalization approach, the key driver of adoption of regional strategy is the link between the

location based advantages in a foreign region with the appropriate FSA that a firm possesses.

This approach implies the need for a fit between the existing internal capabilities with external

attractiveness.

The regionalization approach does not take into account some contextual factors such as the

nature of the product market as well as the competitive structure of the industry the firm is

competing in. The transferability of marketing based FSA identified by Rugman et al (2012) is

contingent upon factors that are also well beyond the firm’s control. The

standardization/adaptation literature will complement the question of transferability of FSAs.

O’Donell and Jeong (2000) found that in global industries such as high tech and industrial

products, global standardization is positively related to performance. Alashban et al (2002) show

that market structure factors like competitive, buyer, and distribution intensity are significant

drivers for the decision to adapt or standardize brand names. We can logically make a connection

between an adoption of a global (adapted) brand and the adoption of a commensurate strategy.

Figure 1 here.

The conceptual model shows the relationship between the adoption of regional strategies and

firm performance. The two broad intervening factors are the industry level factors and the firm

level factors. These factors affect the profitability of the firm because of competitive dynamics

with an industry and the internal firm resources at its disposal. The role of country level factors

and institutions affect the ease of firms to enter a foreign region. The country level factors such

as similarity in institutions will likely make it easy for foreign firms to enter a foreign market or

region. The industry level driver will likely drive certain firms towards globalization at the

expense of regionalization. In global industries or industries that have common product features

not subject to taste the regionalization strategy is unlikely to be profitable compared to a fully

globalized strategy.

PROPOSITION DEVELOPMENT

The choice of strategy by a multi-national firm contains a cost element particularly with regards

to coordination costs of a firm. A strategy with regional headquarters is more likely to be costly

compared to a global strategy because the overheads, R&D costs and fixed costs of headquarters

cannot be spread among many countries (Contractor, Kundu & Hsu, 2003). We expect the driver

of strategic choice to be both cost driven as well as profit seeking, this may distinguish the

relationship between the main drivers of strategic choice and the outcome of those choices.


79

Transaction cost theory suggests that diversification of firms into international markets imposes

coordination costs, market entry costs and information processing costs (Williamson, 1985).

However there is an overriding aim of gaining market share that firms possess like seeking

different markets (Dunning 1993). Firms with products that are made to suit local conditions are

able to gain more market share than firms with products not tailored for the market because they

can be more responsive to local demand.

Industry concentration affects strategy due to market share considerations as a result of an

entrenched market structure. The dominant firms in a concentrated industry are capable of

defending their market share because of their size such that the non-dominant firms face

difficulties in expanding market share beyond that which dominant firms are not targeting. The

dominance of an industry by a few players means that there are limits for expansion for the non

dominant firms and those firms may have to carefully target which markets to sell their products.

Belderbos and Sleuwagen (2005) found that plant configuration was driven by firm and industry

competitive drivers. Specifically dominant Japanese firms in a product market with weak foreign

competition chose a global plant configuration. Home region bound configuration was associated

with weaker firms with standardized manufacturing technologies.

The choice of a strategy should take into account both external and internal influences. The

external influence of interest in this study is industry structure and how it affects strategy choice.

According to Hawawini et al (2002) firm specific assets for firms that are outliers in performance

terms are more significant explanatory variable than industry factors. This means that industry

factors will be significant factor affecting choice of strategy.

The firms in highly concentrated industry will choose the regional strategy because they have to

expand within the limits of the market share not accounted for by the dominant firms. The firms

in less concentrated industries don’t have the same restrictions in potential market share and

might face less pressure to expand beyond its national boundary and may choose to remain local.

Less concentrated industries whilst competitive because of a lack of a clear market leader will

not need the adoption of a regional strategy for a firm to be competitive. If there are no dominant

groups of firms accounting for a large share of the market they may be a significant market to

capture. In order to capture market share firms in less concentrated industries may be more prone

to target a larger global market than concentrate on a few regional markets.

Proposition 1: A firm in a highly concentrated industry will choose a regional strategy over a

global strategy.

Proposition 2: A firm in a less concentrated industry will be less inclined to expand outside its

home boundary.

The choice of a regional strategy affects firm performance (Lee & Marvel 2009) and the

performance outcome can be moderated by the influence of industry factors. Regional

diversification affects firm performance in a curvilinear manner (Qian, Li, Li, & Qian 2008; Li &

Qian, 2005). This suggests a threshold where continued regional diversification does not improve

performance of a firm. The exact threshold is not determined in the research and increased


80

coordinating costs are the reasons given for the leveling off of performance outcomes (Hitt,

Hoskissson, & Kim. 1997)

Qian et al (2008) and Li and Qian (2005) both found a positive relationship between industry

effects and firm performance. The researchers used industry as a control variable based on their

Standard Industrial Classification (SIC) but did not account for intra industry dynamics that

determine profitability of a firm(Delorme et al, 2002).The use of industry concentration instead

of the SIC will make comparisons easier because of use of a similar standard. In Li and Qian

(2005) the researchers found a significant relationship for only 3 out of 13 industry groups

studied using the SIC. Wiersema and Bowen(2008) concluded that a firm’s international

diversification is influenced by the extent of foreign competition in its domestic market,

specifically a firm operating in industries that have a high level of foreign competition is likely to

have a high level of foreign sales.

Industry factors such as market structure, number of competitors and industry standards affect

firm performance (Short et al 2007). Short et al (2007) concluded that industry factors account

for 19% of firm performance using return on assets (ROA). Industry structure is therefore an

important determinant of firm performance.

The performance of a firm will affect its strategy and it’s likely that firms that are not outliers in

terms of performance will adopt similar organizational strategy because they don’t have the

advantages possessed by the best practice firms nor the deficiencies by the weaker firms,

Hawawini et al (2002).

The industrial and competitive structure will determine performance from a profitability

perspective. Industry concentration is associated with a high level of R&D and advertising

expenditure and product diversification (Lee & Mahmood,2009), following the IO approach the

high level of product diversity is used as a market closing activity first suggested by Bain

(1951).Firms in oligopolistic industry will have market closing power that enables them to

ensure returns whereas firms in less concentrated industry will have a more competitive market

that may reduce their margins and profitability Industries that are not highly concentrated do not

have market share dominated by few firms and are likely to be competitive. In such a scenario

companies may need to differentiate their products in order to gain market share and ensure

profitability.

Firms with high product diversity are able to perform better when they internationalize than

firms with less product diversity, in other words the more diverse the product line the easier it is

for firms to internationalize and perform better (Hitt et al 1997).The liability of regional

foreignness(Rugman & Verbeke, 2007) can potentially be overcome using product diversity.

However, the literature suggests that increasing product diversity interacts with regional diversity

in a curvilinear manner such that increased product diversity negatively affects more regionally

diversified firms. Therefore, firms that expand into more regions tend to perform poorly. Highly

concentrated industries are associated with product diversity and we expect that industry effects

will be captured by the level of product diversity such that:


81

Proposition 3: Firms in less concentrated industries with a global strategy will perform better

than similar firms with a regional strategy.

Proposition 4: Firms in highly concentrated industries with a regional strategy will perform

better than similar firms with a global strategy.

Regional trade agreements are an important driving force shaping trade issues (Fratianni & Oh,

2009). The relative ease of doing business within a home region is driven by similarities in

institutions and culture. Boeh and Beamish (2012) suggest that low internal monitoring costs

driven by a small geographic distance between the foreign market and the firm is significantly

associated with a high control mode as opposed to a shared control mode. Firms will find it

easier to monitor a subsidiary that is closer to them than one that is distant from their home base.

According to Boeh and Beamish (2012) in the intermediate range, increased heterogeneity

through expanding members will reduce not only trade bias but also external openness. Firms

outside the home region in this case will find it difficult to enter an expanding foreign region.

Proposition 5: Regional openness is associated with a home region bias and thus a regional

strategy.

Some industries are more standardardized than others as a result of the product architecture of

the nature of the industry itself (O’Donell & Jeong, 1999) whilst others are heavily determined

by local taste such as food (Cleveland et al 2009; Alashban et al, 2002) and maybe less culturally

bound. Global industries will foster a form of uniform tastes across different countries and

products are less likely to be adapted to different countries.

Proposition 6: Globalized industries are likely to be associated with adoption of a global

strategy.

Proposition 7: Non –globalized industries are likely to be associated with the adoption of a

regional strategy.

CONCLUSION

The regionalization perspective has provided scholars with a new way of viewing globalization.

Globalization held the promise of a boundary less world but this has not been the observed

situation. The semi-globalization reality calls for new ways of viewing old questions such as the

relationship between multinationality and firm performance. Empirical evidence is still not

settled on this question and it is important for scholars to broadly examine all possible influences

of such firm performance.


82

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Figure 1: Conceptual Model

Industry

Structure

Industry

Concentration

Regional

Strategy

Degree of

Standardization

Regional

Opennes

s

Firm

Performance


86

Foreign Subsidiary Divestment Decision Process: A Descriptive Model Based on the

Multiple Case Studies of Puerto Rico Pharmaceutical Industry

Luis M. Baquero-Rosas, PhD

Professor of Management

College of Business Administration

Pontifical Catholic University of Puerto Rico

Email: [email protected]

[email protected]

Abstract.

This study seeks to use divestment activities of foreign subsidiaries in the pharmaceutical

industry to create an outline of the phases of the decision process followed by multinational

companies. First, executives of subsidiaries are active in all stages of the decision process.

Second, the process begins with an analysis of changes and restructuring to do in their global

operations. They then move on to the analysis of foreign plants to be included. Third,

executives’ defense struggled to keep plants open. Finally, executive was in charge of several

activities subsequent to dispose manufacturing plant, the reopening of operations or abandon the

structures.

Keywords Divestment decision process, subsidiary divestiture, pharmaceutical manufacturing,

production networks, relocation decisions.

INTRODUCTION

Foreign subsidiary divestment decisions are an important component of the current

multinational corporation restructuring phenomenon. Although the vast majority of multinational

companies continuously make restructuring, adjustments and downsize production structure in

production structures, presently there is not much written that addresses the decision process to

divest business units, specifically of foreign manufacturing plants.

The purpose of our paper is to explore the decision process used to divest manufacturing

plants in the pharmaceutical industry. Through 17 case studies regarding the divestment

experiences of Caribbean pharmaceutical subsidiary executives, we will contribute to the

literature by defining new concepts that are observable in the stages (steps) of the decision

process for the divestment of foreign subsidiaries. The approach of our paper was selected on the

basis of two important observations. First, there is a limited amount of research that addresses

the decision process in specific stages and foreign activities in the decision to divest

manufacturing plants of multinational companies where executives of the subsidiaries are

involved (see Griffin, 2003; Belderbos and Zou, 2006; Simões, 2005, others). Second, it was

observed through a review of previously published articles that most studies addressed

divestiture decision-making topics using primary sources of information on the experiences of

executives of the parent companies, mainly U.S. and European companies (e.g., Sachdev, 1976;



87

Gilmour, 1976; Bodewyn, 1976, 1979 and 1983; Ness, 1979 and 1981, Duhaime, 1984;

Ghertman, 1988; Hamilton and Chow, 1993; Benito and Welch, 1997; Hayes, 1997, others).

The paper is structured as follows. In the second section, we state two research questions to

explore empirically. The third section discusses the insight of relevant literature that integrates

international divestment seminal research, specifying the unresolved issues it holds. The fourth

section addresses the study framework, participant selection, data collection and data analysis.

The fifth section represents the main body of the paper and describes the results of 17 case

studies from an empirical analysis of pharmaceutical plant divestment experiences in Puerto

Rico. Finally, it presents a discussion of key issues emerging from the study, and the conclusions

drawn. At the end, implications for theory, corroborations and refutations about some literature

on the divestment decision process are established.

RESEARCH QUESTIONS

Given the lack of data on the experiences of foreign subsidiary executives in manufacturing

affiliates in the divestment decision process, this qualitative article tries to answer the following

to ensure an open dialogue that might provide significant insights into the issue of divestment

decision models. Two questions were asked: First, what are the steps or stages in the divestment

decisions process followed by high-tech pharmaceutical subsidiaries? The second question, what

were the managers’ perceptions about subsidiary divestment decisions realized in Puerto Rico

between 1990 and 2008?

RELEVANT LITERATURE AND CONCEPTUAL FOUNDATIONS

Divestment Decision Process

There has been a profound evolution in thinking about international divestiture studies

during the past few years, but a limited number of models of the divestment decisions process

have been developed, including Gilmour (1973), Ness (1979) Duhaime (1981) and Boddewyn

(1977, 1979 and 1983), according to Duhaime and Schwenk (1985). Traditionally, academic

models assumed that HQ had extensive control of all activities followed for the divestment of

foreign subsidiaries. An empirical study by Bettauer (1967) identified three stages in the process

of divestment: decision, planning and implementation. Another study realized by Gilmour (1973)

established that the decision process starts with the discrepancies in results, poor performance

and problems faced by parent companies, such as a lack of financial liquidity. By merging the

findings of previous studies mentioned above and the gap in specific areas, Ness (1981)

identified four scenarios that occur during the decision process: the identification of situations,

development of solutions, solution selection and implementation of the divestment decision.

According to her, the process begins with the recognition and identification by executives in the

parent company that something is not performing according to their plans; the comprehensive

search of information for a greater understanding of what is happening and the design of a team

composed primarily of executives from the parent companies. This resulted in the creation of

decision models where the information came only from executives in the parent companies,

indicating that executives of the subsidiaries had negative attitudes, endeavored to obstruct and

sought to block and limit the decisional making process.


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As previously stated, divestment decisions are made quickly by eliminating operations with

loss to avoid distracting their executives (Sachdev, 1976), without rigorous analysis (Gilmour,

1973), to remove corporations from a painful process (Boddewyn, 1979) and to avoid a negative

impact on the financial performance of operations in the stock market (Duhaime, 1984). A body

of previous studies (Gilmour, 1973; Tornenden, 1975; and Boddewyn, 1979) concluded that it is

a necessary impetus of a person within senior management to initiate and move the idea of

divestment for acceptance and sanctioned by the boards of directors of multinational companies.

In accordance with this, Ness (1979) established that the process of divestment includes the

appointment of a coordinator chosen by the parent company to organize the activities necessary

to accomplish it. Ness (1979) contended that divestment decisions are initiated when

management has lost either all confidence or any interest in the decision.

The contribution of extent literature however, falls short in at least two points. The first is

the absence of studies about the different phases or stages to divest a manufacturing plant.

Second, there is insufficient consideration of subsidiary characteristics, specifically those of

pharmaceutical plants. In particular, none of the research reviewed adopted a typology of foreign

executives’ roles and participation in the divestment decision process.

Theoretical Framework for Foreign Subsidiary Divestment Decision Process

The literature has long witnessed a gap regarding the role of foreign local managers

during the decision process to divest their subsidiaries and their participation during the analysis

of factors that triggered the decision to divest their operations. We proposed that most of the

previous studies attempt to evaluate the decision process to divest foreign subsidiaries, assuming

that subsidiary executives have limited participation in the divestment decision process.

The framework developed in this study builds on the three major perspectives, each of

which allows consideration of different aspects of the divestment decision process: the role and

the participation of the subsidiary in the decision process, the behavior exhibited by the

executives of foreign affiliates in different stages of decision-making, and the relationship that

existed between the executives of the parent companies and manufacturing plants in different

stages of the process of disinvestment.

Figure 1 depicts the divestment decision process model and the specific subsidiary

executives focus of the research. According, the conceptual framework presented in Figure 1 this

research will evaluate if the initiation of the divestment process will depend only on parent

company management decisions as Nees (1981) concludes in his empirical research We can

argue according to previous studies, domestic executives and subsidiary managers feel more

closely associated with the survival of the plant, and they know more than anyone else about the

factors and situations established during the divestment decision process. An integral part of the

theoretical framework is the stages of the divestment decision process. In this study we want to

evaluate previous academic conclusions by Ness (1981) that concludes that division manager,

in our study subsidiary executives are in charge to carried out the implementation of divestiture

decision.


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Figure 1: Conceptual Framework

CONCEPTUAL FRAMEWORK

EXPECTED ROLE OF UNIT MANAGER DURING DIVESTMENT DECISION PROCESS by Ness (1979)

Autocratic Behavior

Information Withholding

Participative

NEVER INITIATOR

Maintain Morale

Productivity

Welcome Visitors

ROLE (Ness, 1979)EXPECTED BEHAVIOR (Ness, 1979)

Relation between

HQ-Subsidiary Executive Manager

Ghertman, 1998

TRADITIONAL HQ PERSPECTIVE STAGES OF DIVESTMENT DECISION PROCESS by Ness (1979)

LIMITED PARTICIPATION OBSTRUCTIVE BEHAVIOUR FOLLOW INSTRUCTIONS

In each stage of the decision process, narratives presented by executives in the interviews

are integrated, allowing the researcher to develop a model to be updated that is suitable for the

present operations of international companies. While retaining the titles presented by the


90

original model of Ness (1979 and 1981), our model in Figure 2 has substantially restructured

components analyzed at each stage of the decision process. This model assumes, similarly to

Ghertman (1988) that the relationship between actors change as the process goes through the

different stages of the decision process. Our argument is that the flow of information and process

moves substantially controlled by headquarters in the initial stages toward a shared monitoring

between the parent companies and subsidiaries, in the intermediate stages up to total control of

information and decisions in the subsidiary at the final stage and the implementation (execution)

of the divestiture decision.

Figure 2 Steps on the Subsidiaries Divestment Decision Process

Previous Stage 1 Stage 2 Stage 3 Stage 4 After

Motivating

Environment Identification

Solution

Development

Selection of

Alternatives Implementation After Epilogue

Source: Adapted from original divestment decision process by Ness (1979)

RESEARCH DESING AND METHODOLOGY

In terms of theoretical studies in the field of international divestiture, some of the most cited

previous research recently published (e.g. Three US companies in Gilmour, 1973; fourteen

Belgians cases in Ness, 1976 and 1981; three US, Canadian and French companies in Ghertman,

1988; one Irish company in Griffin, 2003) have used specific cases in their countries or regions

to develop their theory. This study undertakes a case-study-based analysis of the phenomenon

from the viewpoint of local manufacturing plant executives and is an attempt to clarify the

divestiture decisions and activities realized by pharmaceutical corporations based on their Puerto

Rico experiences.

Case Participants

The setting for this case study is among executives from the pharmaceutical manufacturing

subsidiaries located in Puerto Rico and divested between 1990 to 2008. Participants in this case

study were purposefully selected based on their lived experience with the studied subject: all are

pharmaceutical industry executives who participated in the decision process for the divestment of

pharmaceutical manufacturing plants located in Puerto Rico. The number of executive

interviewed in this multiple case, 17 in total, gave us an appropriate amount of experience to

obtain the point of saturation to collect information. The investigator concentrated on

participants of this study within the following positions: General Manager of Puerto Rico

Operations, Plant Managers, Production Managers, President of Pharmaceutical Operations in

Puerto Rico, Human Resources Manager, QC Manager and Supervisor. (See Table 2)

Data Gathering Procedure

Face to face interviews were chosen as the primary method of data collection because

they allowed probing questions for more in-depth information, given that little data was found in

written documentation to fully address the research questions. All interviews were conducted by

the same researcher. The interview process evolved into a relatively unstructured exploration of

each executive’s experiences in the divestment decision process. The entire process took more

than 14 months (from February 2010 to April 2011) to complete. The participants were


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interviewed with the questions templates that collected data about their personal perceptions and

feelings regarding the divestment decision process faced in their pharmaceutical companies. (See

Appendix 1)

Data Analysis

The names of all the participants have been changed and quotes are attributed to them by

identifying the place they occupied in the order of the interviews. The interviews were digitally

recorded using a micro recorder, with each interview lasting approximately 90 minutes. The

interpretation of the data in this multiple case was done following the pattern matching

techniques that involve the development of themes and subthemes from the data and the

matching of data to the themes and subthemes. The content analysis of the qualitative data was

performed through an interpretive approach of moving between data, decisions stages and

literature to identify a chain of analysis and develop a coherent explanatory framework to the

decisions process. First, each executive experience case in the research was treated as a single

case. Once a full account of each divestment experience was obtained through the in-depth

interviews, a cross case comparison was then developed.

EMPIRICAL STUDY RESULTS

Based on the comparative case analysis, we have generated a structure that captures the

theoretical insights that emerged in each stage of the divestiture decision process during the

qualitative study. This case study was inductive in nature, further reorganized the numerous

themes that resulted from the triangulation process. Reorganizing the many themes into smaller

related groups helped to increase data manageability and significance and thus added substantive

meaning to the study. The themes and subthemes that emerged from the interviews, observations,

and review of documents were then examined to elicit several main patterns of learning strategy

outcomes from the data. (See Table 1)

Table 1 Major Themes

Stages Themes in Order of Stages

(Motivating

Environment)

Environmental

Screening

Analysis of competitive environment

Evaluation of MNC’s situation, Overcome resistance

Identification Analysis of productive structure, determination of future

possibilities, establishment of strategic avenues

Solution

Developments

Participation in executives meetings, communication of

solutions to parent company, subsidiary executive power

Selection of

Alternatives

Coalitions creations, alternatives pipelines, presentation of

alternatives for survival, announcement final decisions

Implementation

Planning Activities

Divestment plan design, budgets estimates for plant disposal,

reduction of operations, external and internal communication,

process and product transfers, search of potential buyers


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Execution Activities

Teamwork selection, confidentiality of the process, notice to

the workforce, host potential buyers, workforce reduction

process

After Epilogue Representation of headquarters, document Management,

disposal of the affiliate, plant sale “as it”, demolition,

abandonment of the plant Table 2 Case Studied - Synopsis

Interviewees

Title Position

Year of

Divestment

Activity

Subsidiary

Functions

Type of

Divestment

Stages of Divestment Process in which Interviewees Participated

Environmental

Screening Initial

Solution

Development

Alternative

Selection Implementation

After

Epilogue

1 Financial Manager 1996 Pharma/Drugs Plant Closeout X X X

2 Quality Supervisor 2006 Pharma/Drugs Plant Closeout X X X

3 Production Manager 2001 Pharma/Drugs Closeout & Sales

X X X X X X

4 Plant Manager 1996 Pharma/ Drugs Closeout & Sale X X X X

5 Capital Project 2007 Pharma/ Drugs Plant Closeout X X X

6 Public Affair Director 1996, 2004 Pharma/Drugs Closeout & Sale X X

7 General Manager 1999 Medical Devices Closeout &

Demolition X X X X X X

8

Production Sup. 2007 Pharma/Drugs Plant Closeout

X

9 General Manager 2001 Medical Devices Spin-off X X X X X X

10 Plant Manager 2008 Pharma/ Drugs Closeout X X X X X

11 Financial Officer 2005 Medical Devices Spin-off X X X X X X

12 General Manager 1996 Medical Devices Closeout X X X X X X


14 Plant Manager 2005 Medical Devices Closeout X X X X X X

15 Plant Manager 2001 Medical Devices Closeout X X X


17

Production Supervisor

2007 Medical Devices Closeout

X


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STAGES ON THE DIVESTMENT DECISION PROCESS – EVIDENCES FROM

PUERTO RICO PHARMACEUTICAL INDUSTRY

PREVIOUS STAGE - MOTIVATING ENVIRONMENT

This first node describes several situations in the external business environment faced by

multinational enterprises, in the context of the global economy, which are motivating the

beginning of the decision process for the divestiture of subsidiaries. At this early stage we cannot

conclude that the decision to divest subsidiaries has been established. The three common themes

echoed for the participants were analysis of competitive environment, evaluation of multinational

corporations’ situation and the resistance faced in the organization.

Analysis of Competitive Environment

One of the first activities to be carried out continuously in the normal course of

operations is to monitor the external environment globally. The majority of executives, (76% or

13 out of 17 cases) mentioned that among their duties while managing the operations of the

subsidiaries was the assessment of the overall situation of the products manufactured by plants in

order to identify challenges, constraints, and opportunities that could be exploited for the

financial benefit of the multinational corporation.

Evaluation of MNC’s Situation

A second activity that takes place in this analysis prior to the formal launch of the steps

for disinvestment of subsidiaries is the analysis of the anticipated impact on the operations of the

subsidiaries that the potential changes and emerging situation have in the external environment.

The immense majority of executive commented responses (88% or 15 out of 17) showed that in

several cases, financial and operational problems of the parent company were presented as

initiators of the process of disinvestment.

Overcome Resistance

The resistance to overcome at this stage includes the difficulties in obtaining information

from executives outside the corporation, and the use of rumors to create false impressions and

ideas in business forecasts. The existence of an integrated global network of lymph production of

multinational companies has significantly decreased the resistance sources that do not allow it to

begin the analysis process for the divestment of affiliated outsiders.

STAGE 1 IDENTIFICATION

This second node describes the activities of subsidiaries executives during the initial

phase of identifying the need for the divestiture in the global supply chain of multinational

companies. While previous studies (eg. Ness 1979; Duhaime, 1984; Hayes, 1997, etc.) relate

this phase of identification with the identification of the units to be divested, our findings show

that the current international operations identification phase refers to a macro assessment of all

subsidiaries for deciding whether to make changes or restructure. The three common themes


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echoed for the participants were analysis of the productive structure, determination of future

possibilities, and establishment of strategic avenues.

Analysis of Productive Structure

All of middle level executives interviewed (76% or 13 out of 17) indicated that they

annually participated in meetings coordinated by the parent companies that included top

executives of global subsidiaries with operations in major global production centers in USA,

Canada, Puerto Rico, Singapore, Europe and Japan. These meetings presented the strategic plans

of multinational corporations and international operating performance in different global

production sites, allowing managers to define the level of robustness of their operations in

regards to domestic competitors.

An important aspect of the evaluation of production operations is directed by the parents,

but the executives of the subsidiaries have the opportunity to obtain information in order to

compare their operations to other subsidiaries within the productive structure. One finding of the

interviews was that they do not have to be in a crisis to evaluate the desirability of maintaining

the operations of subsidiaries. The question to answer was: should we or should we not boost the

divestment of subsidiaries?

Determination of Future Possibilities

Interestingly, in several cases where divestiture was considered, executives indicated that

foreign plants have to demonstrate how their operations comply and contribute to the future

plans of the parent company. An interesting finding is that managers performed the analysis did

not report (kept secret) to low level management about activities in which they had participated.

Establishment of Strategic Avenues

It was confirmed in only a few cases that executives participated in the evaluation of

alternatives by providing information to the parent companies without an active participation in

decision-making stages. Must we divest plants? If this question is answered, a new phase begins

involving a more detailed analysis of operations. At this stage the highest level management

learns of corporate plans and internal secrets and starts its own levels of subsidiary plans to

respond to upcoming changes in manufacturing operations.

STAGE 2 SOLUTION DEVELOPMENTS

This third node describes the challenges faced by the executives of the subsidiaries in the

process of developing solutions for the divestiture decision. This section is very important in this

study because it addresses the question of which solutions are available to adjust to the global

operations? The three common themes echoed for the participants were participation in HQ

meetings, communication of solutions to parent offices and executive power.

At this stage, formal teams are structured to decide what adjustments, changes and

reductions will be made in manufacturing operations that result in the divestiture of some plants

worldwide. In disagreement with previous studies about the alternative evaluation stage, the goal

is not whether or not to divest. At this stage, the alternatives are evaluated to decide which

subsidiaries will be in the process of disinvestment.


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Participation of the Subsidiary Executives in Meetings

At this stage it is the responsibility of top management of foreign operations involved in

the process of developing solutions to meet the plans of the parent company. In several cases

interviewees stressed that the meetings and the presentation of solutions was confidential and

strategic information was not disclosed to plant level and local operations.

Communication of Solutions to Parent Company

In several cases, the executives interviewed indicated that the identification of the

subsidiaries that would be under analysis for closure selection was made in these meetings and

all major plant managers had the opportunity to contribute ideas, defend their arguments and

struggle to keep their operations open if they were being evaluated for closure. It is important to

note that elements outside of the divisional managers and staff from head offices are almost

never aware of the information.

Subsidiary Executives Power

The executives indicated that at meetings held at the stage of defining the solutions to the

division they used the power they had for the nature and extent of their processes in the global

production structure. In 82% of cases, 14 of out 17 executive interviewees said that they had to

fight to be heard in the decision structure of the company. According to them, the importance of

the plants, the level of sophistication of operations and the impact on earnings of manufactured

products gave them the power to be included in all meetings held and to present alternatives.

STAGE 3 ALTERNATIVE SELECTIONS

This fourth node describes the evaluation and fighting force relationships facing

managers of subsidiaries in the negotiations for the final selection of the subsidiaries that will be

part of the final divestiture process. The themes that emerge in this stage arise from the

interviews and have gone directly to the questions posed as executives assessed subsidiaries that

were closed or sold. This section is very significant in this study because it demonstrates the

struggles faced by executives of the subsidiaries to ensure the survival of their operations in the

production chain. The following topics will be addressed in the analysis of evaluations: coalition

building, the pipelines of alternatives available for selection and alternatives with their own

subsidiaries for survival.

At this stage of the decision process, in all of the case interviewees (17 out of 17) found

that the parent companies had the final say about choosing the subsidiaries to be included in the

divestiture process. This is the stage where it is decided whether or not to continue operating

subsidiaries or to start implementing the final divestiture of operations. This phase also takes

place with great confidentiality and secrecy as not to disclose strategic information such as the

divestment of a foreign affiliate. In this phase, the headquarters executives will communicate

which plants have been selected to be part of the divestment plan.

An important aspect of the study is that managers increased their participation in

decision-making activities because they knew that at that stage they were fighting for the

survival of their plants. Until now operational levels of the plants only heard rumors of what

happens at the parent office but had no official communication of the final stage of this process.

In 6 of the 17 cases, executives indicated that they were responsible demonstrate and justified


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why their plants and operations should not be included in the divestiture process. In accordance

with information provided by most executives, the assessment of alternatives becomes a gory

and fierce competition from all global operations for the survival of their operations.

Coalitions Creations

This rumble phase begins the decision process where there is a struggle between all

global operations not to be included in the divestiture. One of the first activities implemented by

most of the executives was to establish coalitions with key people in the parent company to have

support within the board. In several cases, (7 of 17) the middle level executives interviewed

indicated that they sought to obtain the support of executives with the power of opinion in the

decision processes that took place in the parent companies, to ensure that their proposals were

heard and supported.

Alternatives Pipeline

Since high-tech plants have to maintain a high level of use of their productive capacities,

executives acknowledged that the difficulty in finding products to replace those that have lost

patent protection or require a massive production capacity would result in losses that increased

operational costs from affiliates. In several of the cases studies, the executives proposed

alternative products, called for the arrival of new products and processes and its subsidiaries,

made changes to increase efficiency in their operations and asked for help from local

governments to improve the operational conditions of their plants.

Presentation of Alternatives for the Survival of Subsidiary

The analysis of the cases studies showed that in 41% of the cases (7 out of 17) middle

managements of local subsidiaries sought to develop innovative alternatives to present to the

parent company for the survival of their operations. In all cases, the executives indicated that a

final decision about the arrival of new products and processes to foreign plants was at the

complete discretion of the executive head offices. In 29% of the cases, respondents reported that

managers of local operation plants had the opportunity to make written submissions of cost

analysis, efficiency, and productive capacity that were compared against the proposals presented

by the other plants within the production chain that had an interest in obtaining the transfer of

products and processes that could be drawn from the plants considered for divestment.

Announcement Final Decision of Global Corporate Divestment Decision

Once the parent has finished an analysis of its international operations, it then identifies

the plants that are to be included in its divestiture plans. Most cases studied included divestiture

announcements for several plants in different parts of the world and reduced the workforce of

employees globally. This final stage of selection of alternatives is tempered by the announcement

of the estimated future date the plant will cease operations, in a number of cases reported

between one and three years after the announcement at a global level.


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STAGE 4 IMPLEMENTATION

This node describes the final stage of the decision process for the divestiture of the

subsidiaries in which executives of the manufacturing plants had a major role in the design of

closure activities for the termination of operations in these subsidiaries. In these following two

stages, we present an analysis of stages identified by several of the executives in the procedure to

divest their own affiliate plants. These sections are important conceptualization for the activities

of foreign subsidiaries because, according to the previously reviewed empirical, the divestiture of

articles which identifies the activities that take place in the divestment of manufacturing plants

does not exist.

The steps or activities that are defined in the interviews were grouped into two main areas in

order to facilitate analysis of this paper. First, we define the activities related to planning the final

divestment process of the plant and second, we detail the execution activities of the final

divestiture of the subsidiary. Now, the executives of foreign affiliates act as coordinators of the

implementation process of final release of the subsidiaries in the productive chain of the

multinational corporation

Planning Activities

The common themes echoed for the participants were divestment design plan, budget

estimate, reduction of operations, product transfers and search of potential buyers.

Divestment Plan Design

To demonstrate the magnitude of the level of delegation, in several of the cases

studied, (5 out of 17) the executives said they did not receive any guidance or corporate

guidelines that indicate a process to follow to implement the closure or sale of the plant.

Contributing to the final process that must occur with foreign manufacturing plants, executives

are responsible for conducting cost-benefit analysis to choose between closing for future sale or

immediate demolition of the plant, drawing up plans for demolition of structures, and evaluating

the potential environmental costs and remediation of environmental damage caused by

contamination of plant operations in several years.

Budget Estimates for Plant Disposal

One of the first projects for executives of foreign plants is to determine and document a

budget that is required to complete the divestment process of plants. This budget should include

aspects such as financial responsibilities to employees, the costs of the transfer of products and

processes, and the resources needed to meet production projects that must be met before closing

the production lines. We can say that for most of all executives interviewed a very important

aspect that should be included in the budget is the costs of the “worst scenario”, which means

that is destroying the structures to return the land to its natural state in case of a failure to sell the

plants.

External and Internal Communication

Communication with management team occurred in two main phases: first, communication

with a selected team of executives who participated in the design of the plan, followed by a final

confidential release of the manufacturing plant. In most cases studied, the executives devised a

plan of communication where employees were gathered in a spacious cafeteria to be informed of


98

the decision that it would take six to 18 months to complete. The executive was present, along

with the management team, support staff in crisis situations and personal envoy of the parent

company to show the employees that they were there to support them.

Reductions of Operations

An important aspect of the executives in charge of foreign plants was to design a plan for

reducing the manufacturing operations of the plants that would not affect the obligations of

production. In several cases (29% or 5 out of 17), the executives indicated that they had to meet

and coordinate plans for the transfer of specialized machinery and highly sophisticated processes

to other plants in Europe, Asia and America. The coordination of the transfer not only included

the processes and products but also staff with expertise, management of validation

documentation processes and the training of employees at other plants in the process prior to

divestiture.

Process and Products Transfers

Once the plant decides on the process to transfer products, meetings are held with

technical teams with the intention of planning the transfer stages. A recommendation made in

one case (17) was to prevent visits by technicians from the production plants before the closure

or sale of the plant was announced to employees. It is important to note that the decision to

choose destinations for transferring the products and processes is taken by executives of the

parent companies, but the decision process of the implementation of the transfer is made together

with executives of divested subsidiaries. For some executives, transfer processes were difficult

because many of the employees who would lose their jobs were responsible for training

employees of the plants where the products were going.

Search of Potential Buyers

One of the most important findings of this research differ from Figure 1 Ness’

Traditional Model in which he states that the executives of foreign plants have the responsibility

to receive potential buyers. In several cases, (7 out of 17 cases) executives of foreign plants had

the primary responsibility to seek alternatives for the possible sale "as is". In one case the

executive had the authority to visit China, Japan, Europe and Australia looking for potential

buyers of the plants.. Among the strategies mentioned by executives includes placing ads in

newspapers of countries to report the availability of plants.

Execution Activities

The common themes echoed for the participants were teamwork selection, confidentiality,

host potential buyers and workforce reduction.

Teamwork Selection

The team for the implementation of the divestiture decision included executives from

quality, manufacturing operations, technical services, human resources and finance departments.

Once members have signed confidentiality forms planning begin for manufacturing projects

needed before the closure or sale, the communication plan, and reporting dates and meetings


99

with the legal group of the plant to develop a plan to comply with all legal obligations of the

plant at the termination of its operations on the island.

Confidentiality of the Process

In three cases studied, executives indicated that it was required signature of informed

consent to require confidentiality consent to all members of the planning team. This aspect

confirms previous literature (Gilmour,1973; Boddewyn, 1976; Ness, 1979; Ghertman, 1998;

others) that concluded that divestment decisions are viewed by executives as an integral part of

future business strategies and should not be disclosed to prevent employees from becoming

discouraged, as this, could undermine operations and alerting the competition of the next steps

in the company. This confirms that decisions are kept secret until the implementation plans are

designed.

D-DAY Notice to the Workforce

Under the plan developed by one of the executives interviewed management must be

prepared to inform employees and the community of the impending closure or sale of the

subsidiary plants. In 7 of 17 cases, the announcement was made on a Friday, and management

said they planned to give employees the weekend to digest the news. Once back in production

employees are informed of the impending closure or sale of the plant production by supervisors

who had the responsibility to ensure production levels and the level of support to employees and

between employees.

Host Potential Buyers

Reaffirming the traditional activities of the executives, in many cases they of the plants

were hosts of potential foreign buyers. In 18 % or 3 out of the 17 cases of executives reported

presentations that were given on the capabilities of plants to potential buyers from Japan,

Singapore, China, Europe and the U.S

Workforce Reduction Process

No previous study of divestment of foreign subsidiaries has addressed the steps and

activities undertaken within the plant to decrease planned human resources engaged in

production processes. In the case of high-tech plants where employees have high levels of

expertise and technical education, it’s the responsibility of executives to determine which plant

personnel is essential to perform all activities of investment until the end.

STAGE 5 EPILOGUE

This node describes the responsibilities and activities of the executives of the subsidiaries

after the final cessation of plant operations. The literature review only supported Ness (1979 and

1981) who discussed the activities that occur when the end of the operations of a divested

business unit is reached. There are no corroborations between the narrative and previous studies

for these themes. The three common themes echoed for the participant were representation of

headquarters, document management and disposal of plant.


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Representation of Headquarters

In 5 out of 17 cases or 29 % the executive responsibilities varied according to the

responsibilities incurred after subsidiaries were divested. A very important finding, is

responsibilities assumed by the executives of the divested plants included maintaining the

production capabilities and certifications of the plant to offer it to potential buyers. In other

cases, the executives said they assumed the responsibility of being available to return to the

plants for potential buyers requiring explanations during visits for the potential acquisition to the

closed facilities.

Document Management

One of the main responsibilities of the former executives of the closed, sold, or separated

affiliates is to respond to the reports submitted to governmental entities and regulatory agencies,

government agencies and interest groups. In accordance with information provided by

interviewed (7 out of 17) executives not only were responsible for the secure storage of

operational documents but had to respond to any situation related to closed or abandoned plants

for several years.

Disposal of the Plant

A responsibility that some executives said was voluntarily was taking prospective buyers to

find closed plants before deterioration and vandalism made them unusable. In 29% of cases, 5 of

out 17 executive interviewees said that after many months, they had the ability to find buyers for

the plants while facilities remained in good condition and certified for immediate use was a door

of hope to attract jobs for their subordinates who were unemployed as a result of the divestiture.

Plant Sale "As it"

A very important finding, which goes against previous studies, is that in several cases, after

closing the plant the executive had to search for a potential buyer of operations and was

responsible for maintaining all operational processes at the plant.

Demolition of Manufacturing Facilities

An important aspect of the study is that several executives (3 of 17 cases) indicated that the

divestiture of an unsold pharmaceutical plant involved the investment of approximately $40

million for the demolition of the structures and to leave the land in its original state. In other

cases, the executive considered the demolition of the facilities to be the "worst case scenario."

Abandonment of the plant The interviewees indicated that in 7 in out of 17 cases, indicated that the plants are at present

abandoned because after a while they ran out of the money allocated to pay the high costs of

maintain a structure that no longer produced anything. At this stage, once the facility was

removed from the productive structure of the corporation and met the divestment process there

was never any concern by the parents about what happened to these facilities if they were not

able to sell.


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CONCLUSIONS

The analysis of the qualitative survey of executives in Puerto Rico showed that most of

executives interviewed played an important part in decision-making to divest plants that were

under their authority in the Caribbean region. Compared to the literature, (Gilmour, 1973;

Sachdev, 1976; Boddewyn, 1979; Ness, 1979 and 1981; Duhaime, 1981; Duhaime and Grant,

1984; Ghertman, 1988; others) traditional perspective always gave the impression that the

positions held by executives of the subsidiaries were of minor decisional power and hierarchy

within corporations.

None of the previous studies (eg. Gilmour, 1973; Boddewyn 1977, Ness 1979, 198;

Duhaime, 1984; Duhaime and Grant, 1984; Duhaime and Baird, 1987; Hayes, 1997; Griffin,

2003; Ketkar, 2006, etc.) had entered the inner details of what happens inside the plants. They all

had only said local executives were in charge implementing the decision. Several cases studied

suggest activities taking place inside the affiliate that include the definition of a budget, the

selection of the execution team, the design of product transfer plans, the design of closing

announcements to employees, creating a layoff plan and decreased strength employment, the

training of employees in plants where they are transferred to the products, and designing a plan

to keep the plant operating to achieve their sales after the end use for production, others.

Implications for Theory

The findings of this research, corroborate and refute some of the literature on the foreign

subsidiary divestment decision process. These findings fully corroborate Ness (1979 and 1981)

by indicating that the executives of the subsidiaries are in charge of the implementation process

of the divestment decision. The research also extended the assertion by Boddewyn, (1979),

Ghertman (1988) and Hayes (1997) that established that communication processes and decision

control moves between the executive head offices and foreign subsidiaries. Our findings added

that in the initial stages of decision-making control is in the parent companies and subsidiaries

are participants receiving information, but once the plant has decided to divest, all control of the

planning and execution of the decision is eventually transferred to the executives of the plants.

To demonstrate this change in the decision process, many of the executives indicated that they

took the initiative to design plans to divest their plants in the absence of structured plans from

head offices.

An important finding that impacts the theories of international trade on the decision

process for the divestment of foreign subsidiaries is the initiation of decision-making processes

at the level of international corporations at the assessments that make those of all plants and

international operations. The first thing to decide is who should make changes in international

production operations, then move the detailed analysis of each of the plants to see how they can

defend their place in the overall structure.

The findings from this qualitative survey did not support the construct established by

Ness (1979 and 1981) which indicated that process reached the final decision on implementing

the decision. Our evidence provides a very significant finding in international business literature,

showing that there are a number of activities that executives do after the divestment of plants.

First, they look for buyers for the plants. Second, they keep the plants in operating condition to


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increase the likelihood of being sold. Third, represent the divested operations in cases of

complaints or to provide information on operations already ceased.

Another finding that refutes the literature upon which the model was developed shows

that in the early stages there is no active involvement of the executives of the subsidiaries beyond

that of mere information providers. According to Ness (1981), "the beginning of the process

depends only on corporate management in the parent company.”

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Duhaime, I. and Schwenk, Ch. (1985). Conjectures on cognitive simplification in acquisition and

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What was Wal-Mart’s Role in the Mexican Corruption Scandal?

Michael Menefee

The Thomas Professor of Entrepreneurship

School of Business

University of North Carolina At Pembroke

Pembroke, North Carolina 28372

John E. Spillan

Professor of Business

School of Business

University of North Carolina At Pembroke

Pembroke, North Carolina 28374

ABSTRACT

This paper explores the role of Wal-Mart, the world’s largest retailer, in the Mexican

marketplace and the charges of corruption that has been leveled against the company. The paper

traces Wal-Mart back to its roots in Arkansas and follows the company into the international

marketplace where the first country to have Wal-Mart stores outside of the United States was

Mexico. The Foreign Corrupt Practices Act was examined as a basis for any corruption charges

against Wal-Mart. The concept of corruption in business was also explored with an emphasis on

causes and effects. The paper explores what Wal-Mart did and how it could impact the business

in the long run.

INTRODUCTION

Wal-Mart History and Strategy

Wal-Mart has its roots to Sam Walton buying a store from Luther E. Harrison in Bentonville,

Arkansas in 1950. That store became Walton’s 5 & 10. Thus, the Ozark Mountain town of

2,900 residents would become the headquarters for the world’s largest retailer (Wikipedia,

2012). On July 2, 1962, Sam Walton opened the first Wal-Mart Store in Rogers, Arkansas (Wal-

Mart, 2012). The company became international in 1991 with expansion into Mexico and now

has operation in 27 countries from Argentina to Zambia in five continents (Wal-Mart, 2012).

Wal-Mart Stores, Inc. is presently the leading retail corporation in the world with over $444

billion in annual sales in 2010 and 2.2 million employees spread among its 10,390 stores (Wal-

Mart, 2012). Wal-Mart has dominated the retail or mass merchandizing area for more than a

decade. Its emphasis on discount retailing and the “everyday low price” slogan has attracted

millions of repeat customers all over the world. Slater (2003) states that the company’s founder,


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Sam Walton, was a merchandiser who believed that price reductions led to increase in sales

volume. His business strategy was based on the philosophy of well-developed highly efficient

distribution systems. Wal-Mart works to dominate each market by offering an a broad

merchandising mix that promotes sales volume. Its saturation strategy method locates stores in

profitable markets with the goal of maximizing market penetration. Markets are considered

saturated if the number and size of retail establishments satisfy the needs and demands of the

population and any new entrants can only succeed only at the expense of existing stores

(Hornbeck, 1994).

The purpose of this paper is to describe, examine and explain the case of Wal-Mart as a possible

perpetrator and victim of international corruption. The paper is organized as follows. In the first

section we discuss Wal-Mart generally and as an international business in Mexico. Then we

outline the ideas related to corruption and how it affects companies, employees, management and

the society as a whole in a developing nation. Next, we discuss the causes of corruption. After

that we present the types of corruption, the case of Wal-Mart and its impact. Finally, we end the

paper with our conclusions and our thoughts on the managerial implications.

Wal-Mart Mexico

In 1991, Wal-Mart entered into a joint venture with Cifra with the opening of Sam’s Club in

Mexico City, the first market in Wal-Mart’s International Division. In 1997, Wal-Mart acquired

a majority position in Cifra, and in February 2000 the name changed to Wal-Mart do Mexico

(WALMEX). In 2006, Wal-Mart de Mexico received a license from Mexico’s Finance Ministry

to organize and operate a bank in the country Wal-Mart, 2012). This marked the first

international venture by Wal-Mart after 29 successful years in the United States. Currently, Wal-

Mart has 2,197 retail units in Mexico under the names of Wal-Mart Supercenter, Sam’s Club,

Bodega Aurrera, Mi Bodega Aurrera, Bodego Aurrera Express, Superama, Suburbia, VIPS

Restaurants, El Porton, Ragazzi, and Farmacia Wal-Mart (Wal-Mart, 2012). Recently, Wal-Mart,

the world’s largest retailer and most profitable company in the world are reported to have been

involved in corruption in Mexico. Allegedly, the Wal-Mart organization was establishing a

business structure in Mexico and had been attempting to obtain an official approval to move

forward on the project. After a lengthy wait, Wal-Mart supposedly became frustrated with the

prolonged bureaucratic process and hired someone to accelerate the process. Knowingly or

unknowingly, the parties involved became involved in a major bribery scandal that has put the

Wal-Mart Corporation on the front pages of major newspapers. The Sunday New York Times of

April 22, 2012 ran a major story entitled: “Vast Mexico Bribery Case Hushed up by Wal-Mart

After Top-Level Struggle”. It appears that the thoughts and actions of Wal-Mart management

had been involved with this activity since 2005. Now it has been exposed and Wal-Mart is

scrambling to save it name, and its reputation.

The Foreign Corrupt Practices Act and Corruption

In 1977, Congress passed The Foreign Corrupt Practices Act to address what United States

multinational corporations perceived as open and flagrant participation in the corruption of

foreign governments. This law makes it a violation of United States law to bribe a foreign


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government official in order to obtain or maintain business over which that foreign official has

authority, and requires all publically traded companies (whether or not they are involved in

international trade) to keep records that are detailed enough to allow someone reviewing the

records to determine whether a violation of the Act has occurred Stackhouse, 1993).

The United States is unique in having this kind of law, and unfortunately, in many countries

where corruption is prevalent, the Act has made it difficult for the United States companies to

compete. In fact, some executives have reportedly complained that many of the activities that

the Act prohibits as “corrupt practices” are, in some countries, standard operation procedure

(Stackhouse, 1993).

Corruption is a pervasive problem among companies and countries around the world. No matter

where a business locates there is always some element of corruption that exists. The

industrialized nations seem to have less corruption than developing nations (DCs), or at least

corruption is not reported as much as it is in the DCs. Those who travel to developing countries

are many times exposed to the actual transaction of corruption or at least read about its

occurrence in the local newspaper or periodicals. Everywhere there seems to be an article in

some newspaper about a particular corruptive act that has occurred somewhere in the world. The

Internet is full of official stories and blogs relating stories of corruptive practices that have

occurred or are being investigated among government officials, corporate executives/managers

or all of them collectively.

Literature Review

‘Corruption is a global phenomenon that exists whether we like it or not. It is a permanent

reality that exists in every country and in almost all domains of living activities. It is a harmful

practice that injures the individual, the company/organization(s) involved and the society where

it is located. While there seems not to be a direct cure for corruption, the study and

understanding of the concept has helped firms and authorities find solutions to rid society of

some of its practices and negative externalities (Pakdel, 2012). This is important because

corruption has a negative impact on the social political and economic dimensions of everyone’s’

life. As in anything else, there is no free lunch where corruption occurs. Some one pays for the

cost of damage, loss or disruption that corruption causes (Pakdel, 2012). In very simple terms,

corruption can be defined as “efforts to secure wealth or power through illegal means for private

gain at public expense, or misuse of public power for private benefit”, (Pakdel, 2012, p.194).

Many think that corruption is caused by weakness in a country’s political, social, legal and

economic system. While this would seem logical, it is not totally accurate because even where

governments and societal institutions are strong, corruption exists i.e. United States. We could

qualify this by saying that while corruption exists all over the world the severity of corruption

activity varies from country to country (Pakdel, 2012).

Ideas of Corruption

There are different ideas about corruption. Some have been rolled into substantive theories. The

common theory among all theories is the abuse of power and trust that was given to any elected

or appointed individual(s) (Pakdel, 2012).


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One interesting dimension that is quite commonly used in explaining corruption relates to the

notion of “the culture of bribery”, (Pakdel, 2012, p. 196). This point of view could mean that

within a government or an organization there is a value structure that promotes or allows

corruption practices to occur i.e. the Nixon Administration Watergate, 1973-74. Or the company

that allows certain corrupts activities to occur that are hidden from the public but have a major

impact on the individual and society as a whole, i.e. Enron Corporation, in the 1990s. Either way,

government or private corporate corruption is morally, ethically, and socially wrong but it is

economically wrong because it disadvantages societal members who are playing by the rules. If

we are gong to be a world, country, or society, which continuously legislates rules to safeguard

the well being of all people, then the laws and regulations have to be applicable to everyone

(Pakdel, 2012). There is a huge cost both economically and humanly when corruption continues

to exist unabated.

Causes of Corruption:

There are a variety of understood and not understood reasons for corruption. One author, Leslie

Holmes, (1993), has established three major categories of corruption: a.) Cultural, b.)

Psychological, or c.) System-related. These three corruption typologies seem to characterize the

most common ways in which corruption takes place in the world today. A short overview of

these causes of corruption will provide the reader with a context for understanding corruption in

various countries around the world. Specifically:

a.) Cultural cause- this is typically described as emanating from tradition and consists of

types of corruption that are more or less acceptable in a traditional or political sense.

They are part of the family or kinship relationships that exist in countries.

Additionally, they generally emerge from weak laws or a low level of respect for

laws. Such corruption practices exist in Africa, Latin America, Asia and some parts of

Europe (Yerevan, 2000);

b.) Psychological cause – this can be explained through the power of peer pressure or

peer comparison. When one sees people around him/her benefiting from corruption

then they may want to get benefit from the same practices. Human weakness being

what it is, is a big component of this motivation to participate in corruption (Yerevan,

2000);

c.) System-related cause – this relates to how people trans act business in certain

environments where for a very long period of time, a dominant force has controlled

their lives. For example the communist system. This was a corrupt system to the core

and when it was disassembled and converted to a free market oriented system, it

provided opportunities for more corruption to happen. The change from state owned

enterprises to private market oriented enterprises gave people opportunities to get

involved but in many cases the involvement meant bribes and corruptive acts to take

advantage of the opportunities (Yerevan, 2000).

d.) A bad apple theory – organization or business or agency has a person or group of

people with bad moral character. They/h/she have a predisposition to criminal

activity.

e.) Organizational culture theory – culture and structure of business is conducive to

corruption. It is where the agent is working.


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f.) Clashing moral value theory – values and norms of society directly influence human

behavior (Olantunde, 2011).

Weak institutional structures in any economy have pushed individuals and corporate businesses

to explore opportunities for bribery. Corruption is critical obstacle to social development. It has

contributed to capital flight. It impedes business growth, lowers greatly public services.

One way to look at the corruption concept is through a pictorial approach. Figure 1 below

provides a summary of examples of various forms of corruption and their interaction with public

and private entities:

Figure 1 Various forms of Corruption

(Adapted from: Source: Olatunde Julius Otusanya (2011). “Corruption as an obstacle of development in

developing countries: A review of the literature”, Journal of Money Laundering Control, Vol. 14, No. 4,

pp. 387-422).

Embezzlement

Conflict of Interest

Identity Theft

Abuse of Power

Fraud

Bribery Intimidation

Illegal Contributions

Misuse of Office Private, Public, Non-Profit for Private Gain


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There can be great pressure to engage in corrupt practices. Unfortunately, corruption continues

to be a normal pattern of business rather than an exception. Realistically from a sheer business

point of view engaging in corruption becomes a strategic decision to disregard or follow the

corruption norms. In the long run, corruption influences businesses regular operations along

with its reputation and its performance. The bottom line is that accepting and participating in

corruption has strategic implications.

Research has demonstrated that when the qualities of corruption are so institutionalized that they

become fundamental components of a country’s institutional environment companies have to

develop new and more effective strategies to not only counter the pressures but to do business

successfully without the intervention of corruption. Pressure to engage in corruption varies

depending on how the elements of corruption are institutionalization in the host and home

country’s organizational infrastructure. The institutional pressure to follow the societal practices

and expectations can state in three (3) ways:

a.) Coercive - pressure imposed by an authority

b.) Normative – pressure by established paradigms of society

c.) Mimetic – pressure from firm to imitate processes reflect pressure for

firm to imitate successful organizations in their field (Spencer, 2011).

This leads us to the recent Wal-Mart Case. According to the published evidence they chose to

engage in the corruptive activities in order to expedite the construction and development of their

retail business across Mexico. The subsequent section outlines a summary of the case and how it

evolved.

The Case of Wal-Mart

In 2005 a Wal-Mart lawyer received an email from a former executive who managed the

company’s Wal-Mart de Mexico. In this email the former executive disclosed that Wal-Mart had

had been involved in an operation of bribery to achieve market dominance in Mexico. Because

Wal-Mart had a burning desire to quickly build stores all over Mexico, it allegedly paid bribes to

secure permits to build stores throughout Mexico (Barstow, 2012). This informing former

executive was quite comprehensive in his assertions by giving names, dates and amounts of the

bribes. This informant was so knowledgeable because he was the lawyer in charge of getting the

permits for Wal-Mart de Mexico.

The Wal-Mart central office was astounded with disbelief and hence sent its own investigative

team to Mexico to find out the facts and determine what was really going on. The investigative

team’s findings clearly indicated that there was extensive evidence of bribery. More specifically,

the team discovered a paper trail leading to $24,000,000 in payments. Additionally, they learned

that executives in Wal-Mart de Mexico were knowledgeable of the bribes and tried to hide the

evidence from Wal-Mart Central in Bentonville (Barstow, 2012). There was a struggle within

Wal-Mart management suggesting two directions. One recommendation was to expand the

investigation the other was to terminate it all together. This struggle at the highest levels of

management seemed to be prolonged and difficult because historically Wal-Mart has had a


110

serious commitment to high moral and ethical standards even though its vision and actions

promoted non-stop growth. This consternation and indecision exacerbated the problem (Barstow,

2012). It is interesting that neither the Mexican nor the U.S. authorities were notified or informed

about this major scandal. This problem has become a huge distraction from Wal-Mart’s main

mission of providing superior retail management and distribution of low cost goods to its

customers.

Impact

Some experts believe that this scandal will have major impact on Wal-Mart’s share value, its

reputation and its ability to do business in other international locations. It also may be difficult

for Wal-Mart to recruit or attract management talent that is needed in its international operations.

Additionally, a major management change could negatively affect the company’s ability to be

effective in the international environments (Cox, 2012).

Other consequences of Wal-Mart’s actions could be the levying of heavy penalties and the loss

of major contractors that Wal-Mart needs to do business effectively in Mexico. One of Wal-Mart

Central’s big worries is whether it violated the U.S. Foreign Corrupt Practices Act (FCPA). An

investigative group internal to Wal-Mart is doing research on FCPA compliance. This is an

important investigation and will help Wal-Mart determine its culpability in the entire affair.

Some anti-Wal-Mart voices have been saying that this event is just another example of the

company’s “bribery, scheming and corruption among a litany of other despicable business

practices” (Clark, 2012, p. 2). Some of these critics have stated that they do not want this type of

business in their communities.

When one looks at this entire corruption case, it is evident that doing business in foreign lands

raises the risk of making mistakes that may begin to haunt the company in its future. How to stop

corruption is the unanswered question. Even with the FCPA on the books, it is almost impossible

to monitor and enforce this law without having a very large police force and lots of espionage of

millions of daily business transactions. One of the major issues that companies doing business in

the global arena is the engagement of third party or agents to assist foreign companies in their

business transaction in national and local environments. A company could be well intentioned

when entering a business deal attempting to make the correct decisions and then being betrayed

by the third party agent that the company employed to help transact business in the country.

These are major risk points that multi-national companies need to analyze and evaluate as they

enter major foreign markets (Tsikoudakis, 2012). Multinationals (MNC) need to develop

contingency plans and solutions that are effective in meeting the FCPA guidelines. To do this,

MNCs need to:

a. institute internal controls;

b. develop formal compliance programs

c. training and understanding about the nature and importance of creating “arms length

transaction” by the agents that the MNC’s employ;

d. MNCs should use independent FCPA experts to help them design strategies to

address any risk that may exist in transacting business in any foreign country;

e. MNCs need to supervise, monitor and audit agents they use in doing country work.

(Tsikoudakis, 2012).


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This scandal could cost Wal-Mart $4.5 billion dollars. This is a tremendous financial hit and

could create other collateral problems in future negotiations of business in Mexico and else

where around the world (Brown, 2012).

The entry into a foreign market presents risks that are many times unknowable by the MNC or

anybody else. They are like land mines that need special devices to detect in order to avoid them.

This means that MNCs need to focus on risk assessment more extensively and more diligently

than in the past. These MNCs need to consider the host country’s culture, its history and the

experience of other MNCs during their tenure of doing business in the country. Methods must be

established within the company management systems to mitigate the risk of corruption. While it

will increase the cost of doing business, the alternatives are much more costly in the long run.

While Wal-Mart is a powerhouse in the retail sector, this power can be easily dissipated when

continuous problems emerge with its corruption scandals. Wal-Mart needs to really focus on

transparency and controls to not only avoid but also significantly minimize the chance of any

corruption scandal happening. Wal-Mart’s credibility is on the line and its success in

international business is critical to their overall business. Its international operations present a

major competitive difference between Wal-Mart and other United States’ companies. They

cannot blow it now that would be a huge disaster (Edelson, 2012).

Conclusion:

Wal-Mart has been charged with bribery in the Mexican market. It appears that Wal-Mart

violated the Foreign Corrupt Practices Act. The question quickly becomes what will be the

impact of this on Wal-Mart worldwide. It may well be that Wal-Mart has used these tactics

elsewhere in the world or this could be an isolated incident. It any event, it will be interesting to

see what impact on this has on Wal-Mart as an international retailer.

Another issue that arises in this discussion of corruption is the extent to which United States’

companies engage in bribery to get business in other countries. In many countries, bribery is a

natural part of doing business and not bribing an official will also surely mean losing the

business deal. The extent of bribery by foreign companies doing business in the United States

may prove to be an interesting topic for future research.

Managerial Implications

There are always risks of doing business in a developing or emerging nation. There is potential

for loss or various adverse risks to operations or profitability due to unforeseen issues. Some of

these issues are uncontrollable and others are not. By and large, avoiding corruption is possible

and necessary. Nothing of value is gained by engaging in bribery or corruption. In fact,

corruption is bad for the companies, for the cities, for the employees and for the country

residents. As such, abiding by the Foreign Corrupt Practices Act (FCPA) is critical and its

statutes must be adhered to closely. While there have been complaints by some CEOs that the

law prevents them from being competitive since many other local firms do not have to obey the

law, it is important that businesses adhere to the law so that their reputations and social


112

responsibility positions are not jeopardized. To this end, businesses need to have training

programs and human resource expertise that gives employees the necessary competencies to deal

with corruption, implement transparency and honestly do business in host countries. They must

create an environment of “no toleration” for corruption of any kind.

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Yerevan, Frunzik Voskanyan (2000). “A Study Of The Effects Of Corruption On Economic And

Political Development Of Armenia” A Master’s Essay Submitted To The Faculty Of The

Graduate School Of Political Science And International Affairs For Partial Fulfillment Of The

Degree Of Master of Arts, American University Of Armenia

Pages 1-61

http://www.icemiller.com/publication-detail/id/45/index.aspx

http://corporate.walmart.com/global-responsibility/

http://cororate.walmart.com/our-story


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Sustaining and Extending Corporate Social Responsibility in China: One Company

Initiative

Maria Lai-Ling Lam

Malone University

ABSTRACT

This research is based on the author’s six year field work in China (2006-2011). It is designed to

examine the perceptions of thirty Chinese executives from twenty different foreign corporations

about their corporate social responsibility programs in China and explore the changes after

Sichuan earthquake in 2008 and the international financial crises in 2010. Only the rescue work

after Sichuan earthquake made one of the twenty companies’ values of caring visible. This

company added substantive support to the government’s capacity in dealing with natural

disasters.

Keywords: corporate social responsibility, sustainability, caring, foreign multinational

enterprises in China

INTRODUCTION

Many Chinese subsidiaries of foreign multinational enterprises (MNEs) were found in the

elementary stage of corporate citizenships and needed substantial investment from their

headquarters if they needed to incorporate corporate social responsibility (CSR) as their main

corporate culture (Lam, 2007; 2011a). The Chinese government increasingly expect foreign

MNEs to approach economic growth, social progress, and environmental protection in a “holistic

and integrated manner” (China Entrepreneurs’ Survey System, 2007; National Development and

Reform Commission of China, 2009; Syntao, 2010). The international non-government

organizations and scholars keep on demanding international foreign enterprises to be transparent

and accountable in China (Lam, 2011b; Organization for Economic Co-operation and

Development, OECD, 2011; Sum & Ngai, 2005; United Nations Global Compact, 2011;

SACOM report, 2010a; 2010b). The Chinese citizens increasingly request foreign MNEs to be

sensitive to the needs of communities and to take disaster relief as the core corporate social

responsibility (Wang and Chaudhri, 2009). During 2008, the Chinese citizens boycotted some

MNEs when their donations for the disaster relief in the Sichuan earthquake did not coincide

with the presence in the Chinese market (McGinnis et al., 2009).

In this study, only one out of twenty foreign multinational enterprises in China

transformed its relationships with the local community, government, and corporations through

corporate volunteer work in the Sichuan earthquake and provided on-going care to the

communities for more than three years and defiled non compliance with the normative corporate

social responsibility practices in China. In this article, the author will describe the institutional

environment in which this exemplary company operates and then how the company identifies its

structural limitations in China and develops innovative volunteer programs in its corporate social

responsibility programs.


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METHODOLOGY

This article is based on the author’s extensive literature review, six years’ field work in

China, Japan, and the U.S., and personal reflections (Lam, 2000). She uses the process model of

organizational sensemaking explaining how Chinese managers, who are working for foreign

multinational enterprises in China think, discuss, and act with their key stakeholders and the

world (Basu and Palazzo, 2008). During her six years of field work in China, she interviewed

thirty Chinese executives from twenty different foreign multinational enterprises which are

classified as global corporate citizens (Logdson & Wood, 2005). Research was conducted in

Beijing (2006, 2008, 2009, 2010); Shanghai (2006, 2010); Hangzhou (2007, 2010), Guangzhou

(2011), and Chongqing (2006, 2007, 2009). The data for the perception of the corporate social

responsibility practices of foreign multinational enterprises in China by Chinese executives were

collected through semi-structured, in-depth personal interviews during 2006—2011. Several

interviewees were interviewed twice during these six year periods.

Each interview was conducted in the interviewee’s native tongue and lasted from one to three

hours. The data was interpreted and validated by the interviewee’s corporate reports, their

American and Japanese headquarters’ interviews, published Chinese documents, articles, and

Chinese students’ dissertations about corporate social responsibility and multinational enterprises

(Huberman & Miles, 1984; Glaser & Strauss, 1967). In addition, the author’s field work in

various cities in China during the last six years afforded her an opportunity to see the changing

power relationships between the Chinese government and foreign multinational enterprises

before and after financial crisis. The author also validated her findings through presentations and

the listening to participants’ feedback in various professional conferences in the U.S. and China

(Lam, 2006; 2007; 2008; 2009; 2010; 2011; 2012).

FINDINGS ABOUT THE INSTITUTIONAL ENVIRONMENT

The institutional environment includes the social norms shared by the interviewees in this study.

These norms can provide legitimacy, reward, or punishment to companies’ corporate social

responsibility programs in China. Companies can choose acquiesce, compromise, avoid, defy,

and manipulate strategies to react to institutional norms (Oliver, 1991). Their choices range from

passive compliance to proactive manipulations. Their choices also show us the future trend of

corporate social responsibility and possible ways of sustaining and extending it in China. In the

author’s six years study, many companies tended to superficially comply with the Chinese

government’s CSR guidelines. Many interviewees were not sure of their CSR performance even

though their companies had received several CSR awards from the Chinese government. Many

did not know their companies’ CSR strategies and just wanted to maintain good relationships

with the local Chinese government. It seems that the CSR activities are mainly to gain legitimacy

from the powerful stakeholder, the local government (Lam, 2010).

Perceptions of thirty Chinese executives about their corporate social responsibility programs in

China: What are the legitimate corporate social responsibility practices in China? Many

interviewees perceived that corporate social responsibility practices were related to internal


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operational efficiency and charity. Corporate social responsibility programs of foreign

companies were used to complement the corporate political activities in China and in the

international arena. Sixteen out of thirty (53%) interviewees perceived that the goal of their

subsidiary was making profits rather than solving social problems. They accepted the fact that

many foreign firms were operating in China primarily to obtain inexpensive labor and to gain

access to local markets. The subsidiary’s responsibility was to make profits and to pay taxes.

Many interviewees expected the government, not foreign companies, to address social and

environmental problems. These interviewees saw social and external environmental

responsibility programs as adding to the operational cost of their enterprises and thereby

reducing profit. Some CSR managers complained to the author that their insights about CSR

practices were not integrated into their corporate strategies and structures. Many executives in

functional areas, such as marketing and sales, tended to have an apathetic attitude toward CSR.

They changed their attitude toward CSR when they were transferred to CSR positions.

A normative response to Sichuan earthquake in May 2008: Sichuan, China was struck by an

earthquake with a magnitude of more than 7.0 on the Richter scale on April 20, 2013 and May

12, 2008. The 2008 earthquake caused at least 87000 people to be dead or missing and left five

million homeless. It was the first time the public demanded foreign corporations’ donations to be

comparable to the local Chinese companies’ contributions. Companies were ranked in the social

media according to their donations in China. Several well-known multinational enterprises, such

as Nokia and Coca Cola, responded to the harsh public critique and quickly tripled their

donations from May 14 to May 17, 2008. White & Lang (2012) commented the motive of

American companies’ donations in the 2008 Sichuan earthquake as commercial rather than

humanitarian concerns:

American-based companies competing to make humanitarian donations, and in the process

hoping to leverage brand recognition and customer market bases in China. Given the Chinese

government did not necessarily require external assistance, corporate donations for this disaster

are viewed to have been widely driven by commercial calculation rather than by acute

humanitarian concerns.... The Business Roundtable and the U.S.-China Business Council

functioned as the primary platforms for consolidating and aggregating the bulk of corporate

donations (White & Lang, pp.9)

In this study, all participating foreign companies donated money to the victims and confirmed

the social norm of being good corporate citizens in the Chinese media. Some participants used

the opportunities to increase their visibility and contacts with the Chinese government officers

through public service and public forum. They clearly articulated their contributions in the

Sichuan earthquake relief programs in China in their corporate social responsibility reports and

even set benchmarks about the best practices of public relations in reporting corporate

philanthropic responses in China. Many local Chinese companies were also advised to follow

these foreign companies’ rhetoric in their corporate social responsibility reports (Sun, 2010).

Some foreign companies with strong financial resources and a local Chinese market can easily

frame their disaster relief programs after Sichuan earthquake as long-term commitment in China

even though their corporate social responsibility programs are not embedded in their

organizational culture and strategy.


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Normative practices rationalized after a financial crisis: There was an international financial

crisis and numerous corruption scandals done by expatriates in China during 2009. After the

international financial crisis, the power of the Chinese government increased. The Chinese

media and the state-funded corporate social responsibility centers tend to attribute the corruption

problems to the foreign corporations and ask foreign corporations to take more responsibility.

Many foreign corporations did not participate in the next earthquake which occurred in the ethnic

dispute areas in China in 2009. Sadly, the public also did not demand corporations to donate

money to their neighbors that are denounced by the Chinese government.

Now foreign corporations are more sensitive to their relationships with the local Chinese

government. Indeed, many foreign companies tend to use their corporate social responsibility

programs (CSR) to please the Chinese government without incorporating these programs

seriously in their core business and strategic plans because the Chinese government holds

excessive power over local stakeholders. Many foreign companies rely on the local government

to protect their economic interest and disregard any negative criticism from the local non-

government organizations (Lam, Lam, Lam, 2010). Many corporations sustain their CSR

programs as complementary to their political activities in China (Lam, 2010).

During the 2010 and 2011 field work in China, the author found the working conditions

of corporate social responsibility officers of foreign multinational enterprises were more

restrained than after the financial crisis occurred. Some CSR officers keep their jobs by focusing

on reducing the operational costs inside their companies and working with the colleagues for

internal operational efficiency. Many do not like to develop practical collaboration work with

local non-government organizations for the interest of communities as this causes more distrust

from their existing employers in China. Faced with increasing pricing pressure and increasing

scrutiny from international non-government organizations in the international market, foreign

corporations must find many alternatives to cut costs and document their practices in China to

fulfill international corporate social responsibility standards. The common practice is to

compartmentalize these activities and make the CSR officers not to be responsible for the

conditions of local manufacturing or supply-chain management.

ONE EXEMPLARY

Although the environment for foreign MNEs to sustain their existing corporate social

responsibility programs in China is not positive, one out of twenty companies in the study

initiated to provide long-term growth for the community following the Sichuan Earthquake in

May of 2008 through its company’s four-year volunteer service model and microfinancing

programs. In a four-phase volunteer and care program, the company managed a group of

company employees as volunteers and worked with three local non-government organizations

and three local district governments to reconstruct the community. In Phase 1, the company

immediately matched employees’ cash donations and sent many medical devices to the affected

community. In Phase 2, the company supported the education of young people in the community

and enabled the students to go back to their respective schools. In Phase 3, the company

launched its volunteer program at the end of August, 2008. More than 100 corporate volunteers

contributed their skills and talents for a week in the earthquake-stricken area. Many volunteers

had to cover a significant amount of their travel costs. A permanent staff was assigned for a year

to support its corporate volunteers and facilitate their contributions of talents and skills to


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reconstruct the community. After one-year of work in the Sichuan area, the company launched

its phase 4 program that introduced a four-year program which helped affected communities to

access loans to develop small businesses and to learn how to plan and live in healthy conditions.

There is no corporate social responsibility in the company’s headquarters. All corporate

social responsibilities in China were handled by the corporate social responsibility office in

China. The capacity of the Chinese office is systematically increased when more and more staff

support the corporate social responsibility in their daily operations. The new four-year volunteer

service model, led by the Chinese government, coordinated by non-government organizations,

supported by the exemplary company, emerged as new organization dynamics to the process of

helping the earthquake-stricken company. At the same time, the exemplary also trained the

Chinese officials in the rural areas and non-government organizations to learn some new

technologies and managerial skills. The implementation of corporate social responsibility

programs of this exemplary is an on-going learning process. The two leaders of corporate social

responsibility programs of the exemplary were committed to the community development in

China. Internally, they knew how to persuade their corporate lawyers and finance officers to

support their corporate social responsibility programs in the framework of the existing “caring”

corporate culture. These two leaders facilitated their corporate volunteer programs to be visible,

transparent and innovative in the Chinese and international media. Through this innovative

governance structure, the exemplary enabled the local government to have a sense of ownership

and trained the officials to assess their accomplishments. The company also provided public

service and added substantiality to the government’s capacity in dealing with natural disasters,

and learned how to facilitate employees’ internalization process of its company’s corporate

social responsibility program. The staff also learned how to sell and customize its product and

service to the Chinese government. It also brought business opportunities through innovative

corporate social responsibility practices. The CSR programs are sustained and extended through

innovative volunteer programs.

IMPLICATIONS

The exemplary has started to incorporate its corporate social responsibility in the daily

operations in China through community works and committed leaderships before the disaster

relief programs in Sichuan. The exemplary knows how to organize its compassion activities for

four years and increase its organizational capability in generating and coordinating resources to

implement corporate social responsibility programs. The company also increases its

competitiveness through its innovative corporate social responsibility programs. Its strategic

initiatives, organization culture, and leadership sustain and extend corporate social responsibility

beyond the legitimate norms (Lyon, 2004; Vaill, 2007; Zadek, 2004). When corporate social

responsibility (CSR) activities are integrated with existing business operations, CSR will be

valuable to corporations and will not diminish when the external economic situation is poor. The

cost of the corporate social responsibility program has been paid-off in the exemplary!

Acknowledgments: This paper is dedicated to my mentors and friends, Dr. Martha Cook, Dr.

Georgia Eshelman and Dr. Peter B. Vaill. I thank all participants and helpers in this on-going

corporate social responsibility project.


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A CASE STUDY OF THE CHALLENGES OF SUSTAINABLE BUSINESS

DEVELOPMENT IN CHINA

Maria Lai-Ling Lam

Malone University

ABSTRACT

This case study concerns about the sustainable development of a Chinese private enterprise in the

green industry. The data was collected through personal interviews and field work in China in

2012. The practices of the company are interpreted in the institutional context in China and the

author’s seven year (2006-2012) field work in 11 cities in China. The company became

shareholder-oriented when it was acquired by a state-owned public listed company in 2011 and

moved away from its community practices.

Keywords: sustainability, Chinese private enterprises, biotechnology, leaders’ commitment.

INTRODUCTION

Approaching economic growth, social progress, and environmental protection in a “holistic and

integrated manner” is the key for Chinese enterprises to be sustainable in the future! (China’s

twelfth five year plan, 2011). However, many local Chinese enterprises in the green industry

cannot access capital and are frustrated with Chinese bureaucratic practices. For example, some

privately-owned Chinese companies supported the Chinese government’s decision to adopt clean

production programs in Changzhou and Nantong, Jiangsu Province; they were denied the

privilege to access bank loans easier or apply technological innovation funds organized by the

Chinese environmental agency (Oliver & Ortolano, 2006). From analysis of the author’s seven

year fieldwork in China, many Chinese companies are highly restricted by their accessibility to

capital markets to finance their businesses and some even chose to be jailed or even commit

suicide when they failed to get suitable finance for their businesses. They frequently expect the

Chinese government to support them to be leaders in the industry and subsidize their

international activities. The main objective of internationalization is to be worthy of a positive

reputation in their domestic circles (Williamson, 2012). Since 2010, the number of corporate

social responsibility reports produced by Chinese enterprises supersedes those foreign

multinational enterprises. However, these reports produced by Chinese enterprises are evaluated

to be very superficial (Syntao, 2010). Many reports were largely symbolic! Many Chinese

enterprises just want to fulfill international audit requirements and produce standardized

corporate social responsibility reports without much learning in the process of producing the

report. Many practice “sustainability-washing” activities and reports to increase their visibility

and credibility (Lam, 2013; Syntao 2010).

Given all institutional impediments of implementation of sustainability solutions in many cities

in China and the capital constraints of many Chinese enterprises in the green industry, what


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productive lessons should Chinese firms learn if they would like to achieve corporate

sustainability in China? How should Chinese enterprises enhance their capabilities, designs,

strategies and actions for multi-generational development? This paper will describe how one

Chinese pro-environmental enterprise changes into another direction from sustainability after

being acquired by a state-owned public listed company. It will recommend some strategies for

other Chinese enterprises to link with, leverage on, and learn from a network of internal and

external organization actors in their journey toward sustainability. The author will use the

literature about the stages of development of sustainability and corporate social responsibility

(Baumgartner & Ebner, 2010; Lyon, 2004; Mirvis & Googins, 2006; Nidumolu et. al., 2009;

Vaill, 2007; Zadek, 2004) to recommend strategies for Chinese enterprises to be sustainable.

METHODOLOGY

This article is an inductive study. It is about the change of a sustainable Chinese enterprise in the

biotechnology industry to a shareholder-oriented company after it was acquired by a state-owned

public listed company. The insights of this case is grounded on the author’s seven years’ field

work in eleven cities in China, extensive literature review, and personal reflections (Lam, 2000,

2007, 2008, 2009, 2010, 2011, 2012, 2013). The Chinese enterprise was visited in 2012. She

used the process model of organizational sense-making which explains how Chinese managers

thought, discussed, and acted with their key stakeholders and the world (Basu and Palazzo,

2008). During her seven years of field work in China, she interviewed thirty Chinese executives

from twenty different foreign multinational enterprises and two Chinese executives from one

Chinese pro-environment enterprise.

She conducted her research in various cities with different levels of economic development.

These included the most advanced ones along the east coast of People’s Republic of China:

Beijing (2006, 2008, 2009, 2010); Dalian (2006), Shanghai (2006, 2010); Hangzhou (2007,

2010); Guangdong (2011), Tianjin (2009), Qingdao (2007), Nanjing (2007). The western city is

Chongqing (2006, 2007, 2009). The central city is Wuhan (2012). She also visited her home

town, Hong Kong (2006—2012) to analyze the increasing investment from Chinese enterprises

in Hong Kong and political power of the Chinese government in the international business arena.

The data for the perception of these Chinese executives about their corporations’ sustainability

practices were collected through semi-structured, in-depth personal interviews during 2006—

2012. Each interview was conducted in the interviewee’s native tongue and lasted from one to

three hours. The interview instrument included four major parts: personal experience, internal

organization practices, impact of the companies’ sustainable programs, and the expectations and

recommended changes in their companies’ sustainable programs. She also validated the data and

her interpretations by evaluating the interviewees’ corporate reports, their American and

Japanese headquarters’ interviews, published Chinese documents, articles, and Chinese students’

dissertations about corporate social responsibility and multinational enterprises (Huberman &

Miles, 1984; Glaser & Strauss, 1967). She also used feedback from different professional

communities such as the International Center for Corporate Accountability, Corporate

Responsibility Officers, and the Academy of Management. In addition, her field work in various

cities in China during the last seven years afforded the author an opportunity to talk with more


125

than 100 Chinese citizens and employees about their expectations regarding the role of business

enterprises in China.

A CASE STUDY OF A CHINESE ENTERPRISE IN THE JOURNEY OF

SUSTAINABILITY

In 1999, a privately-owned Chinese biotechnology company was established to be aligned with

the Chinese government’s environmental policy. The company was surrounded by many

university biotechnology scientists and focused on the production of organic fertilizers in the

middle part of China. It had 60 talented staff members in the area of biotechnology. During

1999-2003, the company focused on exporting and earned international recognition through

exporting its products to nations with higher environmental standards. Later, the company

leveraged on this reputation and launched the products to the local customers, including the local

government. It received numerous local and national awards for its innovative bio-products and

bio-mimic production processes. It was a prototype and pioneer in the “green economic”

industry. The founder was persistent and adopted an operating standard that was much higher

than the local government’s requirements. The company advocated its sustainable process of

making these organic fertilizers in China and many international forums. During 1999-2006, the

company invested in projects of community work and farmers’ education. “It seemed that the

company was running a community, rather than an enterprise” (one interviewee’s comment). The

founder was proud of being environmentally friendly and truthful to its corporate missions. He

was even teased by his subordinates not to earn quick money in real-estate markets. After years

of hard work, in 2008 the company was chosen by the local Chinese government as the “dragon

head” of the entire industry because of the company’s commitment to bio-mimic production with

technological innovations. Once the company received the endorsement from the Chinese

government, it experienced its first profit during 2009-2010.

However the company still encountered many challenges. There was a weak legal enforcement

system in China. The company even had to be accountable for the damages done by the

counterfeited products produced by its competitors. “The market was immature, no

institutionalized practices” (one interviewee’s comment). The interviewee hoped the Chinese

government used its strong political power to divest itself of controversial members in the

industry. During 2011, when there was increasingly stringent international food safety standards

and a poor economy in developed countries, the company focused entirely on the local market. It

was acquired by a state-owned public listed enterprise. The focus was the interest of

shareholders, not community. The state-owned company needed to have a higher return on

investment quickly to justify the fee of acquisition of this privately-owned enterprise. It quickly

externalized the cost without much accountability to local constituents when the local demand of

organic fertilizers in China was high and the information about the quality of the product was not

transparent. The company easily obtained the national government’s approval of products which

did not fulfill the requirements from European Unions and the U.S. through its endowed

relationships with the Chinese government. It was very easy for this company to bypass the

local environmental standards in China and be sustainable by selling its products to government

organizations. The company was not accountable when the Chinese customers did not follow the

right approaches in a particular weather condition. The ambiguities in the power of Chinese

government officials and the effectiveness of the product created many opportunities for the


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company to sell those products in China that were not accepted by international food safety

standards.

On the other hand, the state also subsidized international activities of the company and increased

its international networking. The state also enabled the company to compete on an economics of

scale and earned a competitive advantage when the state legalized particular norms and practices

in the entire industry in favor of this company. The company expected to be similar to other

well-known international drug companies. It also depleted the growth and innovative activities of

small and medium private enterprises in China in the biotechnology industry.

Thus, the state-owned Chinese enterprise is now more oriented to seeking lower costs and

production efficiency. The company can easily bypass many social and environmental

responsibilities in China in which there is a weak legal enforcement system and an unconcerned

civil society. It also can circumvent many evasive national standards and is not accountable to

the safety and health of its local customers, including the local legislators and farmers. Ironically,

the company can embellish it image of sustainability in the green industry through being present

in many international exhibitions.

WHAT PRODUCTIVE LESSONS SHOULD CHINESE ENTERPRISES LEARN IN THE

JOURNEY TOWARD SUSTAINABILITY?

How can Chinese enterprises achieve the objectives of sustainability in contested financial and

political areas with many bureaucratic decision processes? The author believes that some leaders

of Chinese enterprises need to take the initiative and develop their capacities of being sustainable

for multi-generations. The changes must start from personal commitment and individual choices.

The persistence and commitment of the founder of the previously mentioned Chinese enterprise

is a good illustration. Why did the Chinese enterprise move away from sustainability after being

acquired by the state-owned public-listed company? Many good Chinese enterprises need to

learn how to reduce their dependence on the government and use their social and monetary skills

to make these state-owned enterprises be accountable to social and environmental costs in China.

Good Chinese enterprises may consider five simple rules to become sustainable (Nidumolu et al.,

2009): 1. Don’t start from the present; 2. Ensure that learning precedes investments; 3. Stay

wedded to the goal while constantly adjust tactics; 4. Build collaborate capacity; 5. Use a global

presence to experiment. Leaders of Chinese enterprises must ask what their desired future is and

examine whether they are moving in the right direction. Then they should start to experiment on

a small scale the best practices such as investing $2 training per worker each year or having open

house for their factories to the local community. They gradually learn how to develop better

practices. They are willing to practice and continually make many tactical changes. They also

learn how to identify the moments of mounting emotions among workers and manifest the

culture of care through volunteer programs or institutionalized compassion programs. They learn

how to collaborate with external stakeholders, government and non-government organizations, in

the process of implementing corporate-caring programs. They can also use their experiences in

China to civilly know how to introduce sustainable products and processes to the less fortunate

in the world. Gradually, they know how to develop new business models which generate new

revenues and enhance their collaborative capacity.


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From the author’s twenty years’ working experience in China, she believes that the missing part

of many Chinese enterprises in the journey toward sustainability is the embracement of

sustainability as “the possibility that human and other life will flourish on the planet forever”

(Ehrenfeld, 2008, pp.6). Many interviewees told the author that human dignity was not respected

in China. If companies really want to start the journey of sustainability, the idea of embracing

the realization of human potentialities in Chinese enterprises needs to be seriously discussed and

internalized because sustainability is a part of our spirituality (Pruzan, 2008; Vaill, 2007, 1989)

and social connectedness (Young, 2008). The Chinese enterprises need to strengthen their

internal culture of sustainability through increasing the awareness and commitment of the

individual worker’s dignity in daily operations. The development of a sustainability culture will

also include rewarding and recognition, managing learning and change, being aware and

involved, questioning culture and flexibility underpinned by mutual respect (Lyon, 2004). The

top management must initiate and support sustainability programs so that its corporate

employees are engaged and well-equipped to incorporate sustainability in their professional

careers.

Many Chinese enterprises need to use their industrial associations as platforms for public and

private collaboration and advocate for better practices that are higher than current legal standards

(Davis & Thompson, 2004; Deng & Kennedy, 2010; Kostova & Roth, 2002; Kostova & Zaheer,

1999; McAdam &Scott, 2005; McAdam et al., 1996). Through the sharing of best practices and

corporate data for higher common good, these companies can lobby the Chinese government for

better operating environments through their industrial associations. Later, they can also nurture

the capacities of selected suppliers to fulfill higher standards through more training and

development between their companies and supply chain partners in China (Vaill, 2007; Wood &

Kaufman, 2007; Zadek, 2004). The followers, according to institutional theory, may conform to

higher standards in the sustainability practices and be influenced by the social skills of

innovators (DiMaggio & Powell, 1983; Fligsten, 1997; Oliver, 1991). These new industry

standards might inspire other companies to increase their contributions in environmental and

social sustainable programs in China (Gilbert & Rasche, 2007; Kanter, 2009; Logsdon &Wood,

2005).

Chinese enterprises must learn how to adopt a strategic approach of corporate sustainability

(Burke &Logsdon, 1996; Porter & Kramer, 2006; Husted & Allen, 2007). They need to discern

how to add values to their stakeholders and their competitiveness in their sustainability

programs. These sustainability programs will give them opportunities to help the local

government to solve many employment, social, environmental, and economic problems. The

relationships can help Chinese enterprises to have more innovations and overseers in the local

community. The Chinese enterprises must learn how to address the societal and environmental

issues in their core management processes before they can integrate with their core business

strategies and promote new environmental benchmarks in their own industries (Zadek, 2004).

They must maintain relationships “with the broad matrix of society where there are net benefits

flowing from socially responsible action in the long run, as well as in the short term” (Quazi &

O’Brien 2000, pp.36). When sustainable activities are integrated with existing business

operations, new strategic business models for solving social and environmental problems will be

implemented (Husted & Allen, 2007).


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The above recommended strategies will follow the five stages of development of sustainability:

viewing compliance as opportunity, making value chains sustainable, designing sustainable

products and service, developing new business models, and creating next-practice platforms

(Nidumolu et al., 2009). Chinese enterprises are recommended to make organizational cultural

change in the process of developing adequate sustainable strategies (Lyon, 2004; Mirvis &

Googins, 2006; Zadek, 2004). Gradually, the concept of “holistic and integrative” approach of

sustainable development will be part of the corporate culture. Corporate employees become

engaged and equipped to incorporate sustainability in their daily operations when they are

respected. Chinese enterprises can transfer their insights, from their sustainable experiments in

China and the global supply chain to other members. The exchange process in the global market

economy may encourage more companies to move from their “risk averse approaches to

visionary practices” in their corporate sustainable strategies when they are becoming more

mature in their journey of sustainability (Baumartner & Ebner, 2010).

CONCLUSION

Chinese enterprises can develop their best practices. They start to increase their capacities for

multigenerational development in China through small-scale experiments with their internal and

external stakeholders. Some leaders of these Chinese enterprises will examine if their companies

are moving toward sustainability and mobilizing their employees, suppliers, and partners to be

committed to pursue economic growth, social progress, and environmental protection in a

“holistic and integrated manner” through social skills in the contested Chinese operating

environment. They may bring their learning from good partners in sustainable global supply

chains to their local businesses and strengthen their companies’ innovative capacity and

competitiveness through adopting better social and environmental programs. When Chinese

enterprises are committed to develop an internal culture of sustainability, they will empower

their Chinese employees to develop collaborative work with local stakeholders without being

afraid of losing control of their organizations. Sustainability will emerge when corporations start

to learn to know how to link with, leverage on, and learn from a network of internal and external

organization actors to manage environmental and social issues in the journey of sustainability.

Each step each company and each employee takes is that much closer to the realization of

accountability for one’s organization and each participant. Both the group and the individuals

will garner an intangible spiritual internally and a tangible materialistic externally.

Acknowledgments: This paper is dedicated to my mentors and friends, Dr. Martha Cook, Dr.

Georgia Eshelman and Dr. Peter B. Vaill. I thank all participants and helpers in this on-going

corporate social responsibility project.


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THE IMPACT OF FIT BETWEEN ANTICIPATED AND ACTUAL ENTRY MODE

SELECTION ON FIRM PERFORMANCE: EVIDENCE FROM CHINA

Jun Wu

Savannah State University

Maureen I. Muller-Kahle Penn State University

Anshu Saxena Arora


Reginald Leseane


ABSTRACT

International business researchers have extensively studied entry mode choice, but only a very

few studies have examined whether anticipated entry modes by determinants would lead to

higher firm performance. By analyzing approximately 17,000 foreign entries in seven industries

into China from 1979 to 2004 we test the impact of determinants, such as host countries’

experience, cultural distance, industry asset intensity, resource commitment and location on entry

modes choices into China. Furthermore, we examine how the fit between anticipated and actual

entry modes selection affects firm performance. Findings indicate that firms who choose entry

modes based on cultural distance and location advantages theories outperform other firms.

Keywords: Determinants, Entry Modes, Performance, Fit, China

INTRODUCTION

Previous research studies (Nakata and Sivakumar, 1997; Alon and Banai, 2000; Claver and

Quer; 2005; Kouznetsov, 2009) have demonstrated that economic, legal, political, socio-cultural,

and technological conditions in emerging markets can have complex positive and negative

influences on all components of firm’s entry strategy. A substantial area of research within

international business involves entry mode choice and how that entry mode choice can have an

impact on firm performance. Yet how the fit between predicted mode of entry and actual entry

mode impacts firm performance is a relatively unexplored area of research. Furthermore,

research efforts in the area of entry mode selection have neglected certain entry modes such as

contractual joint ventures (CJVs) and joint stock companies (JSCs). Choices among broad modes

such as exporting, licensing, and foreign direct investment (Agarwal and Ramaswami, 1992;

Kim and Hwang, 1992); or narrow modes such as wholly owned enterprises (WOEs) and equity


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joint ventures (EJVs) (Brouthers, 2002; Hennart & Larimo, 1998), or between green-field

investment and acquisitions (Chang & Rosenzweig, 2001) have been widely studied. However,

recently scholars such as Wei, Liu and Liu (2005) have argued that although modes of CJVs and

JSCs are “specified by the law and regulations of China, both modes signify ownership and

control by foreign partners and are officially recorded as foreign direct investment (FDI) by both

China authorities and world organizations such as the United Nations” (p.1495). Wei et al (2005)

were among the first to examine how various factors influenced choices between CJVs and JSCs,

as well as WOEs and EJVs.

We focus on three research questions. One, what are the antecedents of entry mode choice? We

empirically test the predictions of transaction cost theory, institutional theory, culture and

portions of the Dunning’s (1988) eclectic paradigm. Two, is there a model of entry mode choice

that is a better predictor of actual entry mode selection? Three, what is the ultimate impact of

entry mode fit on firm performance? We make a contribution to the literature on entry mode

choice in several areas. First, we set the study in a Chinese context. Second, we test the

influence of the host country’s experience3, cultural distance, industry asset intensity, resource

commitment and specific location on the choice of entry modes including WOEs, EJVs, CJVs

and JSCs by using more current dataset based on Wei et al. (2005). Finally, we test the normative

implications of the model by examining the performance implication of fit between predicted

and actual entry mode choice and firm performance. We argue that if firms choose entry modes

predicted by our model, they will have better firm performance.

The rest of this paper is organized as follows. In the subsequent sections, we review the literature

on entry mode choice and performance; and develop our hypotheses. Following that, we

empirically test our hypotheses using 2004 Chinese foreign direct investment data. This

empirical part includes two studies: the first study is to test the influence of entry mode

determinants (factors) on entry mode choice. The second study is to test the performance

implications. The last section will present the discussions and conclusions of our study with

future research directions.

ENTRY MODE THEORIES

While international business research has traditionally been focused primarily on multinational

enterprises (MNEs) from developed nations (Buckley and Lessard, 2005), there is an increasing

amount of trade being conducted in Asia and developing economies (Ahearne et al., 2003;

Maneepong and Wu, 2004; Hipsher, 2008). Entry mode choice has been extensively studied

from many perspectives, including the nature of entry mode, determinants of entry mode choices

and the relationship between entry mode and performance. In this section, we will review

literature and advance our hypotheses.

3 Host country’s experience is the experience of host country in dealing with foreign investors. It is

different from the frequently used concept—“Host country experience”, which means the experience of

foreign investors doing business in the host country.


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Types of Entry Modes

The international business literature has mainly focused on equity joint ventures and excluded

other forms of partnerships. Wei et al. (2005) defined that an EJV as a limited liability company

where resource commitment, profit distribution, risk sharing, and the control and management is

based on equity shares between foreign and local partners. A contractual joint venture (CJV),

which is only seen in China, is similar to EJV except that each party’s rights and obligations are

set out in contracts, which may or may not be in proportion to the party’s investment. Compared

to EJVs, CJVs are more flexible in that the partners can structure the organization in whatever

way they think appropriate (Wei et al., 2005).

Another entry mode only seen in China—a joint stock company (JSC), is defined as a company

with the status of a legal person that divides its share capital into equal shares with a par value,

usually RMB 1.00. Certificates of ownership or stocks are issued by a company in exchange for

each contribution. Thus, JSCs can be owned by a large number of people compared to a limited

number of owners of EJVs (Wei et al., 2005). In summary, EJVs, CJVs and JSCs are all joint

ventures where in EJVs and JSCs, ownership and control are determined by equity shares, and

CJVs, by contract. The common feature of WOEs, EJVs and JSCs is that they are all equity-

based entry modes.

Previous literature compares entry modes in terms of risk, cost of implementation, or level of

control (e.g. Hill, Hwang and Kim, 1990, Woodcock et al., 1994). In addition, Wei et al. (2005)

note that MNEs tend to make entry mode choices based on creating or maintaining firm-specific

advantages and/or location-specific advantages (Dunning, 1981). One mode of entry is not

necessarily better than another.

Theories of Entry Mode Choices

In this paper, we build on numerous theoretical foundations to develop our model of the

determinants of entry mode choice including transaction cost theory, institutional theory, culture,

OLI-factors (Ownership advantages, Locational advantages and Internalization advantages), and

resource based view (RBV). Research efforts in the choice between WOEs and EJVs tend to

focus on transaction cost explanations (Hennart and Larimo, 1998, Anderson and Gatignon,

1986). Transaction cost theory compares the costs of integrating an operation within the firm

with the costs of using an external party to act for the firm (Williamson, 1985). Typical

transaction costs consist of searching for and negotiating with potential partners and as well as

the costs of monitoring their actions (Williamson, 1985, Gatignon and Anderson, 1988). Thus,

many researchers have found that transaction costs can influence entry mode choice (Agarwal

and Ramaswami, 1992, Erramilli and Rao, 1993, Hennart, 1991, Hill, 1990, Williamson, 1985).

A firm will try to choose the entry mode that minimizes firm’s transaction costs. Scholars have

found that when transactions costs are low, firms tend to make use of market based modes since

a firm can benefit from the scale economies of the marketplace (Williamson, 1985). If

transaction costs increase, for instance, when the firm has firm-specific technology, higher

transaction costs may be involved to safeguard its technology and lead firms to choose more

hierarchical modes, such as WOEs (Erramilli and Rao, 1993, Hennart, 1991, Gatignon and

Anderson, 1988, Anderson and Gatignon, 1986).


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Institutional theory and the impact of culture are two theoretical frameworks used to explain

entry mode choice (Kogut and Singh, 1988, North, 1990, Brouthers, 2002). North (1990) defined

the institution as one who has to follow the “rules of the game”, which includes the laws and

regulations in the host country. When institutions see that formal rules exist in target countries,

market-based entry modes can be considered by firms as a viable entry mode because of the

higher potential of contract enforcement (North, 1990, Williamson, 1985). Brouthers and

Brouthers (2000) suggest that culture via cultural distance can influence managerial uncertainty,

evaluation, and further ultimately lead to increases in transaction costs in a host country.

Other theories have been used by scholars to explain entry mode choice. The Eclectic framework

(also known as the OLI), advanced by Dunning (1988), suggests that entry mode choices are

based on multiple factors in an effort to gain Ownership, Location and Internalization (OLI)

advantages. In addition, the resource based view (Barney, 1991) suggests that the driving force

underlying a firm’s entry mode choice be determined by the need to develop and deploy the

firm’s capabilities (Madhok, 1997). This paper amalgamates these theories to examine our

research framework and analysis.

RESEARCH FRAMEWORK AND HYPOTHESES

Our review of literature suggest that multiple factors can influence entry mode decisions

including national characteristics (like host country market, legal systems and market potential),

cultural characteristics (like cultural distance), industry characteristics (like industry

concentration) and firm characteristics (like product type, firm size and experience). We examine

these factors below.

Host Country Experience

Many studies have noted the role of host countries in entry mode choice (Tse, Pan & Au, 1997;

Pan & Tse, 2000; Luo, 2001). The experience of the host country in working with foreign

investors can play a powerful role in entry mode choice. Wei et al. (2005) argue that emerging

countries, like China, are enormously difficult to perform (foreign-based) business activities and

functions due to extensive government intervention in business operations, lack of established

institutional regimes to enforce contracts, lack of reliable information to support business

operations, and lack of experience in economic liberalization especially during the early stages of

opening up to the outside world. The lack of established institutional regimes makes transactions

less efficient, and from an investor’s perspective, creates a significant amount of uncertainty and

increases transaction costs (Wei et al., 2005).

With more experience, a host country can learn how to create an attractive and stable investment

environment (Zhan, 1993). During its process of economic reforms and operations in the past 30

years or so, China has gained much experience and has been progressively liberalizing its

investment regime. As Beamish (1993) stated, China has followed evolutionary thinking from

“requiring JVspermitting WOEs encouraging WOEs”. According to Xia, Tan and Tan

(2008), EJVs dominated the entry modes into China until 1997 and then WOEs slowly began to

exceed EJVs. Experience and policy efforts can reduce environmental uncertainty and improve

the efficiency of business transactions.


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A host country’s experience in attracting FDI can facilitate MNE’s adoption of more equity-

based entry modes to non-equity based entry modes (Tse, Pan and Au, 1997). The less

experience a host country has, the more likely a foreign investor will choose a non-equity entry

mode of entry. Conversely, the more experience the host country acquires, the more equity

modes investors will choose. Wei et al. (2005) found empirical support that that the more

experience the host country gained in attracting FDI, the more likely it is that a foreign investor

would choose a WOE entry strategy over an EJV or JSC, and the less likely they would be to

choose a CJV entry mode. Thus,

Hypothesis 1: The more experience a host country has in attracting FDI, the more likely

foreign investors will adopt WOEs over EJVs and JSCs, and the less likely they will select

CJVs.

Cultural Distance

Cultural distance has been studied extensively in entry mode choice (e.g. Hennart & Larimo,

1998). Hennart and Larimo (1998) discussed two schools of thought about cultural distance.

One school suggests that countries vary systematically in cultural characteristics, and, thus,

increase the complexity of doing business. Scholars argue that in countries with high cultural

distance, MNEs prefer full ownership modes of entry in order to avoid communicating with

foreign partners. Another school argues that local partners are crucial to a successful operation,

as foreign investors have different cultural backgrounds. The higher the cultural distance, the

more the firms need to learn, and the more assistance they need to get from their local partners.

Thus, a joint venture will be more a suitable mode of entry than will a wholly owned enterprise

(WOE).

Using transaction cost logic, we argue that cultural distance impacts mode of entry decisions and

lead investors with high levels of cultural distance to select joint venture modes of entry. In

China, there are two types of investors: ethnic Chinese and investors from all other countries.

First, Wei et al. (2005) argues that the ethnic Chinese (Chinese from Hong Kong, Taiwan and

Macao) share language, cultural traits, and ethics with mainland Chinese. They know how to do

business in mainland China. They know how to sign contracts and how to build relationship

networks. In addition, it is easier for ethnic Chinese investors to gain the trust of their partners.

From this logic, we argue that these characteristics give ethnic Chinese investors more

confidence to do business alone. In addition, it is easier for them to handle the complexity of

contracts than other foreign investors. Using transaction cost theory, we posit that transaction

costs for ethnic Chinese investors are lower than for other foreign investors. Furthermore, Wei

et al. (2005) found evidence that low cultural distance of ethnic Chinese led ethnic Chinese

investors to prefer CJVs and WOEs. On the contrary, foreign investors face high levels of

cultural distance and are more likely to favor EJVs. In addition, we posit that cultural distance

has no impact on the selection of JSCs. Specifically,

Hypothesis 2a: Low cultural distance for ethnic Chinese investors is positively associated with

a preference for the CJV and WOE mode of entry.

Hypothesis 2b: Other foreign investors are more likely to favor EJVs over other entry modes.

Hypothesis 2c: Cultural factors have no influence on the choice of JSC.


138

Industry Asset Intensity

Asset intensity is defined as the level of fixed assets needed to conduct business. For example, a

newspaper publishing company is a high fixed asset business as the printing presses that are need

to print newspapers run in the hundreds of millions of dollars. Industry-level factors such as asset

intensity can effect entry mode selection (e.g. Chen and Hu, 2002). There are two schools of

thought about the influence of asset intensity (Wei et al., 2005). One school argues that firms in

industries with large capital investments would be more likely to choose a full ownership mode

of entry such as a WOE as ownership facilitates the recovery of their sustained investment.

Additionally, ownership in such industries has had few risks since large capital requirements

minimized the threat of new entrants (Porter, 1980) and preserved competitive advantage

(Barney, 1990), enabling these firms to experience monopolistic or oligopolistic profits over the

long run. The second school argues that large capital investment translates to large amounts of

risk, so companies in high asset intensity industries should find partners to diversify the risk

(Chen and Hu, 2002). Both schools have experienced some empirical support (e.g., Luo, 2001;

Erramilli and Rao, 1993).

China is experiencing fast growth and returns in intensive capital industries are especially high.

Thus, most investors do not want to share their returns with another partner, even when high risk

is involved. Considering Chinese practice and building on Porter’s (1980) theory of competition

and the resource based view (Barney, 1991), we argue that asset intensity will drive entry mode

choice in that foreign investors in high asset intensity industries are more likely to select WOE’s

over other types of entry modes. Hence,

Hypothesis 3: Assets intensity of a Chinese industry is positively associated with foreign

investors choosing WOEs modes of entry over EJVs, CJVs or JSCs.

Resource Commitment

Entry mode choice is affected by resource commitment (Larimo, 1993; Hennart & Larimo,

1998). High investment usually brings high nominal profit. If foreign investors make a large

amount of investments, they will be less willing to share the profit (Larimo, 1993), so they prefer

high control and high return entry modes like WOEs that facilitate the return of sustained

investment. Other researchers argue that large capital investment translates to large levels of risk

and firms should find partners to share the risk (Chen & Hu, 2002). Taylor, Zhou and Osland

(2000) found evidence that Japanese MNEs tend to select low control modes when resource

commitment was high. Wei et al. (2005) also found Chinese firms prefer high control modes

under this situation. Again, building on logic from the RBV, if large investments provide the

opportunity for sustained competitive advantage and high profits, a firm will be more likely to

choose a WOE over any other type of entry mode. Thus,

Hypothesis 4: Foreign firms making large investments prefer WOEs over EJVs, CJVs, or

JSCs.


139

Specific Location

Dunning (1998), via the eclectic paradigm, posits that location specific advantages can drive FDI

into a country. Some scholars have found evidence that location is related to foreign firm

performance in China, because some areas have better infrastructure (Li, 2004), a more open

business environment and better contacts with the outside world (Pan & Tse, 2000). China has

set up special economic zones and open cities to attract FDI. In these areas, foreign investors

have priority making it easier and less risky to do business there. Investors are more likely to

choose equity modes in locations that provide better protection of equity (Zhang, 1994). Thus,

location advantages help firms make entry mode choices between equity and non-equity entry

modes. Building on OLI theory, we posit that location can provide foreign investors with

advantages that affect entry mode choice. Specifically,

Hypothesis 5: A preferable specific location encourages foreign investors to choose WOEs,

EJVs, and JSCs over CJVs.

Entry Mode, Fit and Performance

Early literature on the relationship between entry mode and firm performance highlight the

differences in firm performance due to entry mode choice. Woodcock, Beamish and Makino

(1994) compare joint ventures with new ventures and acquisitions and conclude that on average,

joint ventures perform worse than new ventures, but better than acquisitions. Similarly, Nitsch,

Beamish and Makino (1996) found evidence that joint ventures perform worse than Greenfield

ventures yet better than acquisitions. For Chinese firms, Pan, Li and Tse (1999) found that EJVs

and WOEs had higher market share than CJVs, and EJVs had higher profitability than CJVs.

More recently, literature has addressed the link between factors that influence entry, the actual

entry mode choice, and firm performance. Brouthers and his colleagues (Brouthers, 2002,

Brouthers, Brouthers and Werner, 2003, Brouthers and Nakos, 2004) argue that institutional

factors, cultural distance and transaction costs would influence entry mode choices. They found

evidence that if entry modes could be predicted by transaction costs, institutional factors, and

cultural distance, firms performed better. Specifically, scholars have argued that entry modes

selected based on the transaction cost theory logic enable firms to minimize costs and maximize

efficiency leading to better firm performance (Williamson, 1985, Shrader, 2001). Shrader (2001)

and Hill (1990) thought that transaction cost based mode of entry decisions should consider not

only transaction costs incurred as a result of the transaction itself but also the costs of internal

coordination and control. On the other hand, Dyer (1997) and Zajac and Olsen (1993) suggested

that transaction cost based mode of entry choices that focus on cost minimization tend to ignore

value enhancement. Brouthers (2002) argues that these concerns about value enhancement can

be addressed by adding value enhancement variables such as location specific and cultural

context variables. While cultural context is a variable that focuses on the market potential of

investment and location specific costs, institutional variables examine the ability of a firm to

enhance its competitive advantage. Based on these arguments, Brouthers and his colleagues

(Brouthers, 2002, Brouthers, Brouthers and Werner, 2003, Brouthers and Nakos, 2004) found

evidence that if modes of entry can be predicted by these variables, a firm would perform better.

However, researchers did not separate the fit between each variable and entry modes. In their

studies, Brouthers and his colleagues (Brouthers, 2002, Brouthers, Brouthers and Werner, 2003,


140

Brouthers and Nakos, 2004) calculated one “fit” between determinants and the actual entry mode

selection. The problem is, if transaction cost logic suggests the choice of a WOE, and

institutional variables direct an investor to choose a EJV, which entry mode should the firm

choose? The Brouthers studies (Brouthers, 2002, Brouthers, Brouthers and Werner, 2003,

Brouthers and Nakos, 2004) examined only a small group of institutional, cultural and

transaction cost variables. Among this small number of variables, the transaction cost variables,

institutional variables and cultural variables had consistent suggestions, so that all the Brouthers

studies could calculate one measure “fit”. However, when the situation becomes more complex

and more variables are included in the analysis, and there are more entry mode choices, variables

may point to conflicting entry modes. When these entry mode options contradict each other,

how will managers make their entry mode decisions? Thus, this paper aims at five fits based on

the following five variables reviewed earlier: experience of the host country, cultural distance,

asset intensity, resource commitment, and location. Thus, if existing theory guides firms to

choose one type of entry mode, and if the firm does choose this entry mode, we called this “fit”.

If there is fit, we hypothesize that the firm will perform better. This leads to our next

hypothesis.

Hypothesis 6: Entry mode choices that fit with the prediction (based on the model developed

above) will have better firm performance than those entry modes that do not fit the model.

RESEARCH METHODOLOGY

We collected data from the 2004 Chinese Industrial Census, which is conducted by the Statistical

Bureau of China. The census includes all manufacturing firms except extremely small family-run

businesses. The total number of firms (both foreign and local) in the data set for 2004 is 279,092.

For each firm, the database contains the following information: identity code, ownership type,

year of founding, number of employees, fixed assets, current assets, revenues, profit, geographic

location, and product sector. In China, all firms, local or foreign, are required by law to complete

the census conducted by the State Statistical Bureau.

There are 57,284 foreign firms in the 2004 census. These include all foreign firms who have

entered into China, some as early as 1920s. Since China opened its door to economic

liberalization in 1978 and began to adopt a market-based economy, we excluded those foreign

firms entering China prior to 1978. We follow Wei et al. (2005) and chose a sample from seven

2-digit industries: food manufacturing, garment, pharmaceuticals, general machinery, transport

equipment, electrical goods and electronics products. Our final sample consisted of 17,233

foreign firms each uses one of the following modes of entry: EJV, CJV, WOE or JSC. The

sample distribution is shown in Panel A in Table 1. The major entry modes into China are WOE

and EJV, with 55.0% and 40.0% of the total, respectively. The percentages of CJV and JSC

shares are very small at 3.9% and 1.1% respectively.

----------------------------------------

Table 1 here

----------------------------------------

In this paper, we have two dependent variables: entry mode choice and firm performance. For

this reason, we separate our analysis into two studies – entry mode decision study and entry

mode fit and firm performance study.


141

Study I - Entry Mode Decision Study

Entry mode decision study examines the relationship between antecedents of entry mode choice

and actual entry modes (those shown in Hypotheses 1-5). The four entry modes (EJV, CJV,

WOE, and JSC) are dependent variables. We coded EJV as 1, CJV as 2 and WOE as 3 and JSC

as 4. In this study, we have five independent variables. The first is host country’s experience

(EXPER). Because China began its process of economic reform and opened to the outside world

in 1978, we use that year as the base. For instance, if a foreign investor entered into the Chinese

market in 2004, then the observation for the host country experience is 2004-1978=26. Thus, the

maximum amount of experience China has with managing foreign firms is 26-years.

The second independent variable is cultural distance (CULTU). Many researchers use Hofstede’s

(1980) measures of culture. However, our data set does not include the home country of the

foreign investor; it only distinguishes foreign investors from Hong Kong, Taiwan and Macao

with those from other foreign countries. As we have stated before, Hong Kong, Taiwan and

Macao are ethnic Chinese and share language and culture with mainland China. Thus, the

cultural distance between ethnic Chinese and mainland Chinese is closer than that between other

foreign countries and mainland of China. Thus, we use a dummy variable to measure cultural

distance, with 0 indicating investors from Hong Kong, Taiwan and Macao and 1 from other

foreign countries.

The third independent variable is industry asset intensity (IAI). Following Wei et al. (2005), we

define industry asset intensity as the average level of fixed assets in the industry in terms of the

2-digit Chinese industry classification (CIC) code.

The fourth independent variable is financial resource commitment (FORINV). One limitation of

our dataset is that is does not include any information about the foreign parent. We have no data

on firm size, R&D, technological capabilities, or international experience of the parent firms.

However, as Wei et al. (2005) argued, the amount of investment into their affiliates can reflect

the parent firm’s financial resource commitment. Thus, we follow Wei et al (2005) and use

foreign investment as a proxy for the resource commitment of the parent firm.

The last independent variable is Specific location (LOCAT). Firm location in China can

positively affect foreign firm performance. Li (2004) developed a location index by summing

three infrastructure measures to create a continuous measure for location advantages. This

continuous measure can better describe location advantage than a dichotomous dummy variable.

In general, coastal areas provide more location advantages than inner lying areas. However,

since we want to compare our study with Wei et al.’s (2005), we follow their methodology and

use a dummy variable, with 0 indicating the inner areas and 1 the coastal areas.

Following Wei et al (2005), we control for industry by creating six industry controls for the

following seven industries: food manufacturing, garment, pharmaceuticals, general machinery,

transport equipment, electrical goods and electronic products.

Panel B in Table 1 provides the descriptive statistics. The average host country’s experience is

20.1, indicating that the average foreign firm entered into China in 1998. The average cultural

distance is 0.52, which shows almost half of these firms are from Hong Kong, Taiwan and

Macao and another half of them are from other foreign countries. The industry asset intensity and


142

foreign investment averages are 36.15 and 19.28, respectively. In addition, most of these firms,

(90%) are located in coastal areas, which provides more location advantages.

Since this is a choice among four entry modes: EJV (1), CJV (2), WOE (3) and JSC (4), we have

four potential outcomes for our dependent variable leading us to choose multinomial logistic

regression. We put the four entry modes as the dependent variable and five determinants as the

independent variables, and we controlled industry effect using six dummy variables. Table 2

shows the analysis results. In both Panel A and Panel B, Model 1 includes all four types of entry

modes. In Model 2, we removed JSCs because the sample size is small compared to the other

three. Nonetheless, the corresponding results in Model 2 are very similar to those in Model 1.

Panel A shows the effects of the explanatory variables on the marginal utility of the entry mode

compared to the reference WOE. Thus, significant estimates with a positive sign imply less

preference to the reference mode of entry, WOE. In contrast, significant estimates with a

negative sign indicate a preference to the reference mode WOE. In Panel B, the reference mode

of entry is CJV. Similarly, positive signs imply less preference to CJV, and negative signs

indicate preference to the CJV.

----------------------------------------

Table 2 here

---------------------------------------

Hypothesis 1 argued that the more experience the host country has, the more likely investors

would choose WOEs over EJVs, JSCs, and CJVs. In Panel A of Table 2, all the coefficients of

the host country’s experience are negative and statistically significant, which indicates that in

host countries with more experience, investors are more likely to choose WOE over EJV, JSC

and CJV. In Panel B, all the coefficients of the host country experience are positive and

statistically significant, which suggests investors are less likely to choose CJVs into host

countries with more experience. Thus, Hypothesis 1 is supported.

Hypothesis 2a states that ethnic Chinese investors with lower levels of cultural distance are more

likely to choose CJVs or WOEs over EJVs. Hypothesis 2b posited that the higher cultural

distance of foreign investors would lead them to choose an EJV mode of entry. Finally,

hypothesis 2c states that cultural distance will have no impact on the choice of JSC. In Panel A

of Table 2, all the coefficients of cultural distance are positive and statistically significant

suggesting that when cultural distance is low, investors are more likely to choose WOEs. Thus,

Hypothesis 2a is supported. In Panel B, the estimate of cultural distance in EJV is positive and

significant, and in WOEs is negative and significant suggesting that investors with high levels of

cultural distance are more likely to choose EJV and are less likely to choose WOE. Thus,

Hypothesis 2b is supported. Finally, we find that there is no preference for JSC compared to

CJV when cultural distance is low. Thus, hypothesis 2c is supported as well. In summary,

Hypotheses 2a, 2b and 2c are largely supported.

Hypothesis 3 suggests that when industry asset intensity is high, investors are more likely to

choose WOEs over EJVs, CJVs or JSCs. In Panel A, all the coefficients of asset intensity are

negative and significant suggesting that when an industry has high asset intensity, foreign

investors are more likely to choose WOEs. Thus, Hypothesis 3 is supported.

Hypothesis 4 posits that when the level foreign investment is high, investors are more likely to

choose WOEs over EJVs, CJVs or JSCs. In Panel A, the coefficients of investment level in EJVs

and CJVs are negative and significant, and in JSCs are zero and insignificant, which suggests

investors are more likely to choose WOEs over EJVs and CJVs and has no difference between

JSCs and WOEs. Thus, hypothesis 4 is supported.


143

Hypothesis 5 posits that location advantages would make investors prefer WOEs, EJVs, JSCs

over CJVs. In Panel B of Table 2, the estimates of coastal locations for EJVs and JSCs are

negative and significant, and that for WOEs, is positive and insignificant. These results imply

that for investors in coastal locations, investors are more likely to choose WOEs and CJVs, over

EJVs and JSCs. Thus, Hypothesis 5 is partially supported. From these analyses, we find an

empirical support that transaction cost theory, institutional theory, RBV, culture, and OLI help in

determining entry mode choice in the context of China.

Study II - Entry Mode Fit and Firm Performance Study

Entry mode fit and firm performance study examines the relationship between entry mode fit and

firm performance (Hypothesis 6). The dependent variable is firm performance, which is

measured by return on assets (ROA). We have five independent variables describe the degree of

fit between predicted and actual: experience fit, culture fit, industry asset intensity fit, foreign

investment fit and location fit. We divide each of the five variables into high and low based on

the median value as the split. All fit variables are constructed as dummy variables taking on 0/1

values. We code 1 if the actual investment fits the hypothesized entry mode and 0 if the actual

investment does not match the predicted entry mode for each determinant of entry mode choice.

Experience fit (EXPERfit). In Hypothesis 1, we argue that in host countries with more

experience, investors were more likely to choose WOEs over EJVs or JSCs and less likely to

choose CJVs. Based on this argument, we divide the host country’s experience into high and low

groups in terms of its median 21.0. When the host country experience is greater than the mean

21.0 years, investors are more likely to choose WOEs over EJVs or JSCs. When host country

experience is less than 21.0 years, investors are more likely choose CJVs. EXPERfit is a dummy

variable coded 1 when the actual investment fits the hypothesized entry mode; otherwise it is

coded as 0.

Cultural distance fit (CULTUfit). In Hypothesis 2, we argue in situations of low cultural

distance, investors are more likely to choose CJVs or WOEs over EJVs and that cultural distance

had no influence on entry mode choice of JSCs. Similarly, if cultural distance is high and is set

equals to 1, investors are more likely to choose CJV, WOEs or JSCs. Last if the cultural distance

equals to 0 (i.e. is low) and investors choose EJVs or JSCs. Again, if the predicted entry mode

choice is the actual entry mode choice, CULTUfit is coded 1, otherwise, it is coded as 0.

Asset intensity fitness (IAIfit). Hypothesis 3 argued that in industries with high asset intensity,

investors are more likely to choose WOEs. Panel B of Table 1 shows that industry asset intensity

is highly skewed. Thus, we divide asset intensity into two groups, high and low, in terms of its

median 23.8. If in high asset intensity group, investors choose WOEs, or in low assets intensity

group, investors choose EJVs, CJVs, or JSCs, IAfit is coded 1; otherwise, it is coded as 0.

Foreign investment fit (FORINVfit). Hypothesis 4 argues that the larger the investment, the

more likely the investor to choose a WOE mode of entry. Similarly, we divide foreign

investment into two groups, high and low, with the median 5.6 as the dividing line. Thus when

investors make large investments and choose WOEs, or if they make small investments, they

choose EJVs, CJVs, or JSCs; IAfit is coded 1. Otherwise, it is coded 0.


144

Location fit (LOCATfit). Hypothesis 5 argued that in coastal areas, investors have an additional

location advantage, leading investors would be more likely to choose EJVs, WOEs and JSCs. So,

when the firms choose locations in coastal areas and investors choose EJVs, WOEs or JSCs, or

when the firms choose locations inner areas and investors choose CJVs; LOCATfit is coded as 1.

Otherwise, it is coded as 0.

We create a series of control variables for this analysis. First, we controlled for industry effect

with six dummies standing in for seven industries. Second, we controlled the firm level effects

including firm experience, firm size, firm fixed capital and working capital. Firm experience is

calculated as the difference between 2004 and their founding year. Firm size is measured by the

log of the number of employees. Firm fixed capital and working capital are measured as the log

of total fixed or working capital over total number of employees, respectively. Third, we

controlled for the effect of entry modes. Three dummies were included to measure four types of

entry modes with JSCs as the base.

Table 3 shows descriptive statistics of all these dependent variables, independent variables and

control variables. The average ROA of these firms is 5.15%. The five measures of fit are .76, .81,

.56, .68 and .90 for culture, asset intensity, level of investment, location, and experience,

respectively. These fit numbers show that more than half of firms choose modes of entry as the

theories posited. Because of missing data, our sample size reduces to 16,981. The correlation

matrix shows that the highest correlation (0.567) is between Log (working capital) and Log

(fixed capital). Our VIF test results show no concern about multicollinearity.

----------------------------------------

Table 3 here

---------------------------------------

For this analysis, we use OLS regression to analyze the data. The results are shown in Table 4.

The dependent variable is firm performance as measured by ROA. All five coefficients of fit are

statistically significant, and two of them are positively related. Specifically, entry modes that

predicted by cultural distance and specific location variables will perform better. The fit between

industry asset intensity, foreign investment and host country’s experience is negatively

associated with firm performance, which is not consistent with our hypotheses. Thus, Hypothesis

6 is partially supported. Thinking about the industry asset intensity, foreign investment and the

host country’s experience variables, their effect on entry mode choice may be inter-dependent;

suggesting that the “fit” of one variable may lead to “unfit” in another variable. We believe that

the negative effects are the results of trade-offs.

In the third column of Table 4, we provide the standardized coefficients, which can approximate

the relative importance of these coefficients. Among these five variables, the variables with

positive fit effects have relatively higher importance than variables with negative fit effects

(except for host country’s experience), which proves again that their effects are neutralized. For

future research, we can explore more about this fit effect.

----------------------------------------

Table 4 here

---------------------------------------

We controlled for entry modes in this regression by using three dummy variables for EJV, CJV

and WOE with the intercept capturing the influence of the base JSC. All EJV, CJV and WOE

modes of entry are negative and significant indicating that these three modes perform worse than

JSCs, even though they have a greater share than JSCs. Some other control variables have

significant and expected signs.


145

RESEARCH IMPLICATIONS

This paper tested the relationship between determinants, entry modes choices and the impact of

fit on firm performance, based on a sample of approximately 17,000 foreign firms in China

between 1979 and 2004. We conclude that the host country’s experience, cultural distance,

foreign investment and location specification can have an impact on the choice of the four types

of entry modes. Thus, transaction cost theory, culture, the resource based view, and the eclectic

paradigm all contribute towards explaining a firm’s entry mode decisions. Furthermore, firms

that choose entry modes based on the cultural distance and location advantages outperformed

other firms.

This paper contributed to the literature by connecting determinants, entry modes and

performance, and by making systematic choices among WOEs, EJVs, CJVs and JSCs. However,

it has some limitations. First, the R-square is low in our second entry mode fit and firm

performance study. It has very low explanatory power. This paper is attempting to explore and

prove the relationship between fit and firm performance. We are not seeking to explain what

factors lead to good (better) performance in these foreign firms. From this perspective, the low

R-square does not affect our conclusion. Second, we only have one firm performance measure,

which is not systematic to compare performance implication, since performance has many

dimensions, such as growth rate, market share, and market price. Third, our first entry mode

decision study replicated the Wei et al. (2005) study. All hypotheses were supported in Wei et al.

(2005) study; but in our study, some hypotheses were only supported partially, even though we

used the same seven industries that they did. We suspect that the environment for FDI in China

has evolved very rapidly. Some variables may have changing influence on entry modes choices.

Nonetheless, we believe that this study makes a valuable contribution to the entry mode

literature. One practical implication is that managers of MNE’s have empirical evidence that

culture and location variables in entry mode decisions are crucially important and that making

entry mode choices based on these two variables will lead to the highest firm performance.

For Chinese policy makers effecting FDI and smoothing the process for foreign firms doing

business in China, this study provides evidence that policy can drive MNE entry mode behavior

and that both firms and the nation of China can benefit by continuing to set up special economic

zones and open cities to attract FDI. In addition, China can work to lessen the cultural barriers to

make it easier for foreign investors to do business in China.

CONCLUSION

The research examines the impact of fit between determinants of entry mode choice and actual

entry mode selection on firm performance. We investigated the impact of determinants, such as a

host country’s experience, cultural distance, industry asset intensity, resource commitment, and

location; and how they affect the following entry modes choices: wholly owned enterprises,

equity joint ventures, contractual joint ventures and joint stock companies. The research has

strong theoretical and practical implications. We utilized Chinese evidence to provide basis to

our framework and hypotheses. We hope we have generated new insights into entry mode

strategies in the context of China and that future research will continue to explore new issues

around entry mode antecedents and effects.


146

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150

Table 1

Descriptive statistics of variables in Study I

Panel A: Entry mode distribution

EJV CJV WOE JSC Total

Frequency 6890 669 9482 192 17233

Percent 40.0 3.9 55.0 1.1 100.0

Panel B: Descriptive statistics

MEAN MEDIAN STD. EXPER CULTU IAI FORINV

EXPER 20.1 21.0 4.30 1

CULTU 0.52 1.0 0.50 .103*** 1

IAI 36.15 23.8 26.14 .025** .054*** 1

FORINV 26.4 5.6 113.14 -.050*** .080*** .132*** 1

LOCAT 0.90 1.0 .30 .030 -.089*** -.065*** -.045***

* if p < 0.1; ** if p < 0.01; *** if p < 0.001.


151

Table 2

Multinomial logistic regression estimates

Panel A: Multinomial logistic regression estimates: comparison with WOE

Model 1 Model 2

EJV CJV JSC EJV CJV

Constant 4.426***

(.219)

1.794***

(.490)

1.717**

(.636)

4.425

(.219)***

1.787

(.490)***

EXPER -.061***

(.004)

-.131***

(.009)

-.082***

(.017)

-.061***

(.004)

-.131***

(.009)

CULTU .351***

(.034)

.209**

(.083)

.386***

(.152)

.351***

(.034)

.210**

(.083)

IAI -.048***

(.003)

-.028***

(.007)

-.055***

(.010)

-.048***

(.003)

-.028***

(.007)

FORINV -.003***

(.000)

-.005***

(.001)

.000

(.000)

-.003***

(.000)

-.005***

(.001)

LOCAT -.755***

(.057)

-.096

(.155)

-.748***

(.202)

-.758***

(.057)

-.098

(.155)

Food

Manufacturing

-1.338***

(.130)

-.455

(.284)

-1.152**

(.363)

-1.341***

(.130)

-.456

(.284)

Garment -2.448***

(.187)

-1.349**

(.422)

-3.451***

(.546)

-2.444***

(.144)

-1.338**

(.422)

General

Machinery

-1.444***

(.144)

-1.110**

(.331)

-2.400***

(.436)

-1.440***

(.144)

-1.103**

(.331)

Transport

Equipment

1.294***

(.076)

.498**

(.197)

1.191***

(.304)

1.291***

(.076)

.490**

(.197)

Electrical

Goods

-1.675***

(.138)

-1.186***

(.316)

-2.367***

(.410)

-1.673***

(.139)

-1.181***

(.316)

Electronic

Products

-.728***

(.042)

-.456***

(.102)

-.001

(.165)

-.727***

(.042)

-.455***

(.102)

Log likelihood function 27871 25834

Chi-square 1794.9*** 1735.8***

Nagelkerke R-Square 12% 12%

Standard error is in the parenthesis. * If p < 0.1; ** if p < 0.05; *** if p < 0.001.


152

Table 2 (continued)

Multinomial logistic regression estimates

Panel B: Multinomial logistic regression estimates: comparison with CJV

Model 1 Model 2

EJV WOE JSC EJV WOE

Constant 2.632***

(.471)

-1.794**

(.490)

-.078

(.761)

2.639***

(.472)

-1.787**

(.490)

EXPER .070***

(.009)

.131***

(.009)

.049**

(.018)

.070***

(.007)

.131***

(.009)

CULTU .143*

(.084)

-.209**

(.083)

.177

(.170)

.141*

(.067)

-.210**

(.083)

IAI -.020**

(.007)

.028***

(.007)

-.027**

(.011)

-.020**

(.001)

.028

(.007)***

FORINV .002*

(.001)

.005***

(.001)

.005***

(.001)

.002*

(.001)

.005***

(.001)

LOCAT -.660***

(.152)

.096

(.155)

-.653**

(.218)

-.660***

(.152)

.098

(.155)

Food

Manufacturing

-.883**

(.276)

.455

(.284)

-.697

(.437)

-.885**

(.276)

.456

(.284)

Garment -1.099**

(.407)

1.349**

(.422)

-2.102**

(.656)

-1.106**

(.407)

1.338**

(.422)

General

Machinery

-.334

(.319)

1.110**

(.331)

-1.290**

(.522)

-.337

(.319)

1.103**

(.331)

Transport

Equipment

.796***

(.198)

-.498**

(.197)

.693*

(.355)

.801***

(.198)

-.490**

(.197)

Electrical

Goods

-.490

(.305)

1.186***

(.316)

-1.182**

(.493)

-.492

(.305)

1.181***

(.316)

Electronic

Products

-.272**

(.105)

.456***

(.102)

.454**

(.191)

-.272**

(.105)

.455***

(.102)

Log likelihood function 27871 25834

Chi-square 1794.9*** 1735.8***

Nagelkerke R-Square 12% 12%

Standard error is in the parenthesis. * If p < 0.1; ** if p < 0.05; *** if p < 0.001.


153

Table 3: Descriptive statistics of variables in Study II

Mean STD

. 1 2 3 4 5 6 7 8 9 10 11 12

1 ROA 5.15 14.1

9

1.0

0

2 Firm

Experence 5.93 4.3

-

0.0

2

1.0

0

3 LogFCapi

tal 3.55 1.47

-

0.0

3

0.0

3

1.0

0

4 LogWCap

ital 4.48 1.3

0.0

9

0.0

6

0.5

7

1.0

0

5 LogEmplo

yee 5.19 1.13

0.0

2

0.1

7

-

0.1

1

-

0.2

7

1.0

0

6 EJV 0.4 0.49

-

0.0

4

0.1

2

-

0.0

4

-

0.0

2

0.0

2

1.0

0

7 CJV 0.06 0.24

-

0.0

1

0.0

3

-

0.0

2

-

0.0

1

0.0

0

-

0.2

1

1.0

0

8 WOE 0.55 0.5

-

0.0

6

-

0.1

4

-

0.0

2

-

0.1

1

0.0

6

0.0

3

-

0.0

6

1.0

0

9 CULTUfit 0.81 0.4

-

0.0

1

-

0.1

3

0.0

5

-

0.0

2

0.0

4

0.0

2

-

0.1

2

0.5

4

1.0

0

1

0 IAIfit 0.56 0.5

-

0.0

4

-

0.0

3

0.0

3

-

0.0

3

0.0

7

0.0

1

-

0.0

2

0.1

5

0.1

1

1.0

0

1

1

FORINVfi

t 0.68 0.47

-

0.0

3

0.0

1

0.0

3

-

0.0

6

0.0

6

-

0.0

1

0.0

0

0.1

3

0.0

4

0.2

6

1.0

0

1

2 LOCATfit 0.9 0.3

0.0

1

-

0.1

1

-

0.0

4

-

0.0

8

0.0

1

-

0.0

6

0.0

0

0.3

6

0.1

6

0.0

2

0.0

3

1.0

0

1

3 EXPERfit 0.39 0.49

-

0.0

2

-

0.4

4

-

0.0

2

-

0.0

2

-

0.0

7

-

0.0

3

0.0

2

0.1

4

0.1

2

0.0

5

-

0.0

1

0.0

2


154

Table 4

OLS regression results in Study II

Dependent variable: ROA

Independent Unstandardized Standardized Std. Error t-value

Constant -1.156 1.043 -1.108

Food Manufacturing .297 .005 .494 .602

Garment -.060 -.002 .336 -.179

General Machinery 2.760*** .068 .363 7.606

Transport Equipment 1.019** .021 .408 2.497

Electrical Goods .108 .003 .327 .330

Electronic Products -.319 -.009 .260 -1.228

Firm Experience -.168*** -.051 .031 -5.396

LogFCapital -1.194*** -.124 .093 -12.890

LogWCapital 1.704*** .156 .109 15.573

LogEmployee .909*** .072 .103 8.792

EJV -1.111*** -.038 .227 -4.898

CJV -.762* -.013 .458 -1.666

WOE -2.673*** -.094 .318 -8.407

CULTUfit 1.297*** .036 .328 3.956

IAAfit -.671** -.023 .229 -2.925

FORINVfit -.413* -.014 .243 -1.704

LOCATfit 1.489*** .031 .396 3.758

EXPERfit -1.337*** -.040 .344 -3.885

N 16981

R-square 3.1%

F-value 30.81***

* If p < 0.1; ** if p < 0.05; *** if p < 0.001.


155

Board of Reviewers

Alyatama, Sundus

Department of Insurance-Kuwait

Antoniou, Peter

San Marcos State University

Bahhouth,Victor

The University of North Carolina at

Pembroke

Barnes, William O.


Blanchard, Mallory

North Central College

Boggs, David J.

Eastern Illinois University

Carayannis, Elias G.

GWU

Castater, Nichole M.

Barry University

Coble, Kyle

Saint Louis University

Damman, Ed

Allen College

DeVito, Cornett-


DeVito, Raffaele


Dlabay, Les

Lake Forest College

Efthymiopoulos, Marios

Johns Hopkins University

Farris, John

Grand Valley State University

Fogel, Gyongyi (Georgine) K

Lawrence Technological University

Gammoh, Bashar S.

University of Toledo

Geib, Peter

Minnesota State University-Moorehead

Hosseini , Hamid

King’s College

Huang , Tung-Chun

Ching Yun University

Hunt-Oxendine, Cammie

University of North Carolina at Pembroke

Ibeziako, Charles

St. Augustine’s College

Karsaklian , Eliane

OCRE - EDC Paris

Karuranga , Egide

Universite Laval-Quebec

Khoueiri, Roy

Notre Dame University-Lebanon

Khattab, Adel Al

Al-Hussain Bin Talal University

Koh , Anthony C.

University of Toledo

Lam, Dan

ONR


156

Lam , Maria Lai-Ling

Malone University

Lane, Paul

Grand Valley State University

Lenz, Rainer

Fachhochschule Bielefeld-Germany

Maheshwari, Suneel

Marshall University

Maysami , Ramin


Morawcczynski, Rafal

Cracow University of Economics

Moussetis, Robert

North Central College

Nakos, George

Clayton State University

Musonera , Etienne

Mercer University

Nyamulinda , Bideri

INILAK, Kigali, Rwanda

Okoroafo, Sam C.

The University of Toledo

Park, Yu-hwal

Saint Louis University

Pfaff, Lucie

College of Mount Saint Vincent

Rao, C.P.

Morgan State University

Richter, Ulf

Pontifica Universidad Catolica del Peru

Rothstein, Nick

Saint Mary’s College

Steinhaus, Carlos S.

Northern Michigan University

Spillan, John E.


Sterrett, Jack L.


Sun, Huachen

Indiana University-Purdue University

Ziemnowicz, Christopher

The University of North Carolina at Pembroke


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Abbay Shah

The Value of cases and Computer-based Simulations as Teaching Methods for

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Raffele DeVito, Ronald Freeze , Anand Pore

The Effects of Managerial Concerns on Mode of Offshoring: A Study of large US

Corporations 37

Anand Pore

International Assignments and Expatriate Preparation 49

Gyongi Konyu-Fogel

An Institutional Model of International First-Mover Advantages 61

Shobha S. das, Krishna Udayasankar

The Influence of Industry Structure and Firm level factors on the Relationship between

Regional Orientation and Firm Performance 75

Terence Motsi, Ji Eun Park

Foreign Subsidiary Divestment Decision Process: A Descriptive Model Based on the

Multiple case Studies of Puerto Rico Pharmaceutical Industry 86

Luis M. Baquero-Rosas

What Was Wal-Mart’s Role in the Mexican Corruption Scandal? 104

Micahel Menefee, John E. Spillan

Sustaining and Extending Corporate Social Responsibility in China: One Company

Initiative 114

Maria Lai-Ling Lam

A Case Study of the Challenges of Sustainable Business Development in China 123

Maria Lai-Ling Lam

The Impact of Fit between Anticipated and Actual Entry Mode selection on Firm

Performance: Evidence from China 133

Jun Wu, Maureen I. Muller-Kahle, Anshu Saxena Arora, Reginald Leseane

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