Identifying management factors that motivate domestic companies to pursue international activities
Weinzimmer, Laurence G
There is only limited knowledge of determinants that precipitate international business activity. If managers of organizations want to increase their involvement in international business activities, they should understand the stimuli that motivate these types of behaviors. This study examines the management literature to develop a conceptual framework in order to identify new determinants that may motivate managers to become involved in international activity. Three sets of determinants are identified: industry factors, organizational attributes, and characteristics of top management teams. Implications for researchers and practitioners are discussed.
INTRODUCTION
What motivates organizations to initiate multinational strategies? When faced with similar situations, why do some firms suddenly become involved in international activities, while others remain exclusively domestic? This study develops a model that addresses these important questions.
Business conditions in the U.S. have become increasingly influenced by international economic factors. The ability of many domestic corporations (DMCs) to isolate themselves from world economic problems faced by large multinational corporations (MNCs) has diminished as the economies from other countries become more interdependent. Moreover, if a firm is located in a global industry but its managers choose not to become involved in international activities, that firm increases its likelihood of failure (Porter, 1986). Given this need for DMCs to become more involved in global activities, the international business literature has devoted considerable attention to the study of MNC characteristics. For example, several researchers have examined the effects of multinational diversification on firm profitability and performance (Johansson & Yip, 1994; Kim, Hwang & Burgers, 1989; Li, 1995). Others have studied differences between MNCs and DMCs, examining differences such as capital structure (Lee & Kwok, 1988), survival (Shaked, 1986), and performance (Grant, 1987; Michel & Shaked, 1988; Porter, 1986).
These studies have made important contributions to our understanding of international business behavior. However they only examine firms that are already involved in multinational diversification, not firms that are still considering whether to become involved in international activities. Ramanujam and Varadarajan (1989) suggested that actual motives of diversification strategies must be identified in order to extend our knowledge of the strategic choice, including the decision to become involved in international activity. Therefore, given the need for many DMCs to consider involvement in international activities, it would be beneficial for both managers and researchers to understand the stimuli that initially motivate managers to pursue international strategies.
BACKGROUND
Nearly two decades ago, Bilkey (1978) argued that the major shortcoming of international business strategy research was the limited number of studies that considered the start of international activity. This shortcoming remains a problem today as evidenced by the limited bibliography attempting to explain why a DMC becomes involved in international activities. Previous research in this area has typically focused on determinants that influence a particular entry strategy adopted by a firm. For example, several studies have examined determinants influencing export behavior (Bilkey & Tesar, 1977; Cavusgil & Naor, 1987; Gripsrud, 1990), while other studies have examined determinants affecting the choice of a particular entry mode (Anderson & Gatignon, 1986; Davidson & McFetridge, 1985; Kogut & Singh, 1988; Li, 1995; Shane, 1994). Most of these studies have focused exclusively on concepts from the marketing literature. While the decision to become involved in international activity is considered to be a strategic choice, there is an absence of concepts from the management literature when attempting to identify motives of international activity, with the exception of factors identified in Prahalad and Doz’s (1987) Integration-Responsiveness identify motives of international activity, with the exception of factors identified in Prahalad and Doz’s (1987) Integration-Responsiveness (IR) framework.
The IR framework identified pressures for global integration, including reaction to changes in the competitive nature of an industry and development of cost advantages by exploiting low labor costs or access to raw materials in other parts of the world.
While previous studies have increased our understanding of some factors that may stimulate international activity, the application of determinants from the management literature may provide additional insight when examining why managers of domestic firms become involved in international activities. Management determinants add an additional dimension to this area of inquiry — the likelihood that domestic managers will perceive international expansion as a potential strategic choice. Therefore, this study examines concepts from the management literature (including both the strategy and organization theory literatures) that may offer new insights into the stimuli that motivate a firm’s managers to pursue international strategies.
MODEL DEVELOPMENT
Three sets of determinants have been widely used in the organization theory and strategy literatures to influence strategic choice and firm performance: industry factors, organizational attributes, and characteristics of top managers. Several researchers have exclusively examined organizational strategy factors (Grinyer, McKiernan, & Yasai-Ardekani, 1988; Hamilton & Shergill, 1992) and top management team factors (Wiersema & Bantel, 1992; Michel & Hambrick, 1992; Waller, Huber, & Glick, 1995). Additionally, several researchers have tried to examine multi-level effects of determinants by considering combinations of environmental, organizational, and topmanagement characteristics (Eisenhardt & Schoonhoven, 1990; Feeser & Willard, 1990; McDougall, Robinson & DeNisi, 1992). Therefore, based on findings from previous organization theory and strategy studies, the model developed in Figure 1 considers the effects of industry, organizational and topmanagement determinants on the likelihood that managers of DMCs will become involved in international business.
Industry Determinants
The first set of determinants to consider when trying to predict whether managers of a DMC will perceive international business opportunities is industry-environment conditions. Previous management studies have suggested that the industry environment in which the organization exists will have substantial impact on the strategic direction of the firm (Miller & Friesen, 1984).
Dess and Beard (1984) and Hill, Hwang and Kim (1990) suggested that there exists a number of exogenous industry variables that will have an effect on a firm’s strategic choice or entry mode into the international arena. Therefore several industry factors are considered as potentially influencing the degree to which DMCs’ managers become involved in international business.
Industry Munificence. The concept of industry munificence is defined as the amount of growth that a particular industry experiences (Dess & Beard, 1984). Thus an industry with high munificence has experienced sustained growth — usually measured by annual change in industry sales — while an industry with low munificence is characterized by slow growth, thus making it difficult for firms in that industry to achieve growth. Therefore, an environment with high munificence contains ample resources, facilitating considerable growth; an environment with low munificence contains minimal resources, constraining or thwarting organizational growth (Porter, 1980).
When an environment is characterized by low munificence, resource scarcity increases the risk to organizations that remain in that environment (Keats & Hitt, 1988). Resource scarcity will cause competition to intensify (Porter, 1980). As resources become more scarce, increased intensity in competition may lead to a zero-sum game (Castrogiovanni, 1991). Growth for individual firms becomes more difficult because firms must compete with each other for resources and demand needed to sustain growth. Therefore, firms in low munificent industries need to expand into new markets to decrease dependencies from the present benign situation. Similarly, if domestic demand is reduced, the firm faces excess capacity problems, therefore increasing the firm’s interest in expanding to international activities.
Therefore increased competition for resources and demand may motivate managers of DMCs to consider alternative markets for their products or services. If munificence is low, international opportunities may be perceived as an attractive alternative. Conversely, if a firm is located in an environment with high munificence in the domestic market, there will be little incentive to expand into multinational markets because demand in the domestic market may be sufficient for the firm to achieve desired levels of growth.
Proposition 1: The likelihood that managers of a DMC will perceive international expansion as a potential strategic choice is negatively related to the amount of munificence in the domestic industry environment.
Mobility Barriers. Mobility barriers may affect a firm’s access to munificent environments by either constraining entry to or exit from a certain strategic group. Mobility barriers, such as economies of scale, capital requisites, and brand loyalty, can be defined as structural factors that protect successful firms from competitors within the same industry, as well as from potential new entrants outside of that industry (Harrigan, 1985). Specifically, mobility barriers can be described as entry barriers internal to an industry that create boundaries between different strategic groups of competitors (McGee & Thomas, 1986). Mobility barriers deter outside competitors from entering any segment of the industry (Harrigan, 1985), thus protecting the level of munificence. Additionally, high mobility barriers may prohibit a firm from exiting a mature or declining industry.
Therefore, when mobility barriers are high, firms are protected from the threat of outside or foreign competition identified in Prahalad and Doz’s (1987) IR framework. Thus incentives to become involved internationally due to the influx of foreign competition is minimal. Moreover, if mobility barriers are high, it may be quite costly for the firm to expand operations outside the strategic group or industry. Therefore, high mobility barriers may decrease the likelihood that a DMC’s managers would engage in global activities.
Proposition 2: The likelihood that managers of a DMC will perceive international expansion as a potential strategic choice is negatively related to height of mobility barriers in the domestic industry environment.
Organizational Determinants
Research focusing on organizational variables in the strategy and organization theory literatures considers the planning process, strategic choice and organizational structure. The planning process of an organization may influence the degree to which environmental scanning mechanisms are used by top management (Miles & Snow, 1978). Empirical data suggest that strategic planning and environmental scanning expose managers to new growth opportunities (Miller & Toulouse, 1986) including the identification of international expansion opportunities. Therefore, characteristics of the strategic planning process and implementation of environmental scanning mechanisms may be considered as important factors in predicting the degree to which DMCs become involved in international activity.
Planning Characteristics. The strategic planning process of an organization influences the degree to which proactive searches for opportunities are performed by top management (Miles & Snow, 1978). An important characteristic of the strategic planning process that may influence the degree to which managers of DMCs gain exposure to international opportunities is planning formality. Planning formality can be defined as the extent to which written procedures and schedules guide the planning process (Dutton & Duncan, 1987). It may be argued that if this process is formalized, international opportunity identification will become more routinized and systematic. The more technical and systematic the international opportunity identification process, the more effective the search for new opportunities.
Another planning variable that may influence international opportunity identification intensity is planning intensity, which can be defined as the degree to which the planning participants have personal contact with one another (Dutton & Duncan, 1987). Frequent face-to-face contacts and lengthy discussion would characterize high intensity. Conversely, infrequent written communication would characterize low intensity. The more intense the strategic planning process, the more visible international opportunities will be to managers.
Proposition 3: The likelihood that managers of a DMC will perceive international expansion as a potential strategic choice is positively influenced by the degree of planning formality used to guide the planning process.
Proposition 4: The likelihood that managers of a DMC will perceive international expansion as a potential strategic choice is positively related to the degree of planning intensity among planning participants
Environmental Scanning. Environmental scanning can be defined as the gathering of pertinent information and the introduction of results to the organizational decision-making process (Lenz & Engledow, 1986). It is a technique used to keep organizations aware of the nature of the environments in which they exist (Fahey, King, & Narayanan, 1981), including international activities. The more cognizant a firm is of the international environment, the better the chance that managers will recognize international opportunities.
Two sets of information sources can be identified: internal sources and external sources. Internal sources of information that can help to identify international opportunities for managers include production and marketing information. In attempting to identify international opportunities, managers can question salespeople, technical representatives, suppliers and customers. This is a very inexpensive technique and can help managers to identify potential international opportunities.
In addition to internal environmental scanning, several external scanning methods are available. The first external source is the use of publications. General business periodicals, trade journals, government publications, industry studies (e.g., Business International, Country Reports, National Trade Data Bank, Standard and Poor’s Industry Surveys and the U. S. Industrial Outlook) and demographic studies are all potentially important sources of information. Pearce, Chapman, and David (1982) label the use of publications as the cornerstone of any environmental scanning system.
Another external source of information available to businesses is consultants. Specifically, institutions such as universities and government organizations (e.g., NAFTA Trade Centers, Small Business Development Centers) can provide low-cost access to managers when trying to identify international opportunities. Therefore, the use of environmental scanning mechanisms widens the planning breadth. The wider the planning horizon, the greater the chance that the firm will be exposed to multinational stimuli.
Proposition 5: The likelihood that managers of a DMC will perceive international expansion as a potential strategic choice is positively influenced by the degree of environmental scanning performed by the firm.
Top Management Determinants
Hambrick and Mason (1984) suggested that beliefs and characteristics of powerful individuals in organizations can have a pronounced impact on the initiation of strategic change. Dutton and Duncan (1987) discuss the important role managers play in the planning process, where influential individuals can actually determine the direction of the firm. Axinn (1988) argued that managers’ perceptions are important in understanding global decisions. Given past support as to the importance of top managers in the direction of a firm, several managerial characteristics identified in the literature are considered as important predictors of international activity.
Risk Averseness. Business decisions, including the decision to become involved in international activity, have been suggested to be a function of managers’ perceived risks and anticipated profits (Roy & Simpson, 1981). The multinational behavior of a firm is based on managers’ perceptions of the costs and benefits related to the international business strategy. Therefore a multinational decision is a function of the perceived risk of top managers.
By nature, most individuals are risk averse (Cyert & March, 1963). Additionally, most small DMC managers avoid multinational activity because they do not want to expose the firm to additional risks (Vozikis & Mescon, 1985). Roy and Simpson (1981) found that CEOs of strictly domestic firms perceived risks in exporting to be greater than CEOs of firms involved with international activities when exposed to the same stimuli. Thus, given that risk is an important consideration in undertaking a multinational strategy, the lower the level of risk averseness possessed by top managers, the higher the likelihood that the firm would engage in multinational activities.
Proposition 6: The likelihood that managers of
a DMC will perceive international expansion as a potential strategic choice is negatively influenced by the level of risk averseness exhibited by a firm’s top managers.
Tolerance of Uncertainty. The degree to which managers can tolerate uncertainty is also an important consideration in examining the likelihood that managers of a DMC would engage in a particular level of multinational activity. When managers decide to undertake non-domestic activities, uncertainty of operations increases due to customs laws, different cultures, transportation of goods and conversion of currencies (Poorsoltan, 1990). If perceived uncertainty is too high and tolerance for uncertainty is low, then no matter what stimuli exist in the environment, top managers may decide that the firm remains a DMC. Moreover, faced with uncertainty from an unknown foreign market, managers may be unwilling to commit substantial resources to that market (Hill, Hwang & Kim, 1990). Therefore, the level of uncertainty created by multinational activities would require that top managers be relatively tolerant of uncertainty.
Proposition 7 The likelihood that managers of a DMC will perceive international expansion as a potential strategic choice is positively influenced by the level of tolerance for uncertainty exhibited by a firm’s top managers.
Age of top management team members. Hambrick and Mason (1984) proposed that age of the upper echelon would affect the aggressiveness an organization. Older executives tend to be more conservative and have a bias for maintaining the status quo. Perhaps executives in the latter years of their careers would not feel as mobile as younger executives and, therefore, would not want to take the risks often necessary when seeking to increase firm growth through international expansion. Younger executives typically take more risks, so youthfulness of executives may lead to international activity.
Proposition 8: The likelihood that managers of a DMC will perceive international expansion as a potential strategic choice is negatively influenced by the average age of a firm’s top managers.
IMPLICATIONS AND CONCLUSIONS
The model developed in this study is an initial attempt at incorporating organizational theory and strategy stimuli that encourage DMCs’ managers to perceive international expansion as a potential strategic choice. This study may provide new insights for both researchers studying international business as well as for practicing managers that want to increase their firms’ level of international activity.
Research Implications
This study contends that to better understand why a firm becomes involved in multinational activities, the researcher must know what factors have contributed to the firm’s pre-international state. Even though MNC-based studies have yielded a considerable amount of research, due to the shortcomings cited by Bilkey (1978) and Ramanujam and Varadarajan (1989), suggesting that we must develop a better understanding of the stimuli that initiate strategic change, there is a need for this type of research. The integrative model developed in this study has attempted to provide needed insight by discussing the effects of determinants supported by the organizational theory and strategy literatures.
While the purpose of this study was to offer organizational theory and strategy factors previously absent in multinational-business research, it does not represent comprehensive inclusion of all factors that may stimulate international participation. For example, macro factors such as domestic-government incentives (e.g., the recent U.S. 65 incentives for exporting) and host government incentives (e.g., tax holidays, investment, reduced cost of capital, relaxed EPA standards) may provide additional insights. Additionally, financial-portfolio analysis may provide additional insights regarding reducing systematic risk through portfolio diversification. Finally, additional factors from the management literature may also provide new insights. Given that this study was only an initial attempt to apply management factors as determinants of international participation, only a select set of factors from the management literature (c.f., Eisnenhardt & Schoonhoven; 1990; Feeser & Willard, 1990; Miller & Toulouse, 1986) was used. Other factors identified in previous studies, such as slack resources in the form of excess capacity, and unsolicited orders from foreign customers (Bilkey & Tesar, 1977) could also be considered. Therefore, there is a clear need for further research in this area to increase our understanding of factors that lead to international activity.
Managerial Implications
The propositions developed in this study also provide practicing managers with new insights into environmental, organizational, and managerial factors that may motivate them to become more involved in multinational activities. For example, if a manager of a DMC is interested in pursuing international strategies, formalized planning and scanning mechanisms should be implemented in order to provide decision makers with necessary information to proceed with international expansion.
Additionally, managers of firms interested in expanding internationally should give careful consideration to the composition of the top management team. Members should be willing to accept risk and be tolerant of uncertainty. Norburn and Birley (1988) found that younger managers are more willing to accept risky strategies, so youthfulness of the top management team may be an important consideration. Several previous studies have already found that background experience of top managers may have a direct influence on the level of multinational activity that a firm undertakes. Wiedersheim-Paul, Olson, & Welch (1978) suggested that if top managers had previous experience in international operations, the level of uncertainty would decrease, therefore making an international strategy more attractive. Moreover, if a manager was born abroad or had experience living abroad, that individual will have an international orientation, thereby increasing the opportunity that the person will be exposed to international attention evoking factors.
Therefore, potential exists for managers to use factors traditionally found in the organizational theory and strategy literatures to improve the likelihood that their firms will increase international activity. Given the present need for many DMCs to become globally oriented, determinants from this study may have important implications for managers attempting to pursue international opportunities.
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