What types of top management teams' experience matter to the relationship between political hazards and foreign subsidiary performance?

Abstract

Although the relationship between political hazards and foreign subsidiary performance has been well documented in the prior literature, the contingent roles of the top management team (TMT) in managing political hazards have largely been ignored. Drawing upon the institution-based view, upper echelons theory, and TMT experience literature, this study focuses on foreign subsidiaries' TMT and contends that TMT's different types of experience will distinctively influence the degree to offset substantial costs associated with political hazards so as to obtain superior performance. More specifically, in the current study, we consider duration, location, distance, and the direction of distance as the main dimensions of TMT experience. Using a panel dataset of 11,292 foreign subsidiaries across 53 countries from 2004 to 2013, we find that the duration of TMT's international experience exacerbates the negative impact of political hazards on subsidiary performance, while the duration of TMT's local experience does not have a significant moderating effect. In addition, we also find that the negative performance impact of political hazards is significantly alleviated only for subsidiaries whose TMT experienced a higher level of political hazards than the focal country in the past. Our study offers a comprehensive understanding of what types of top managers' experience matter to the management of political hazards.

Introduction

Political hazards, defined as the presence of instability in a country's political institutions (Delios and Henisz, 2003; Henisz, 2000a; North, 1990), is one of the most important dimensions in the institutional environment and has drawn substantial attention from international business scholars and practitioners (Delios and Henisz, 2000, Delios and Henisz, 2003; Getachew and Beamish, 2017). In politically hazardous countries, multinational corporations (MNCs) are more likely to limit their exposure to political hazards in various ways, such as deterring entry (Delios and Henisz, 2003), reducing foreign direct investment flows (Busse and Hefeker, 2007; Feinberg and Gupta, 2009), lowering equity entry mode (Delios and Henisz, 2000; Lu et al., 2018), and choosing diversification (Jiménez et al., 2015). Undoubtedly, prior political hazards studies have dominantly agreed that political hazards inhibit firm performance (Dai et al., 2013; Getachew and Beamish, 2017; Lee and Song, 2012; Song, 2014; Song and Lee, 2017; Zhong et al., 2019). Conversely, a few researchers have found an insignificant or positive impact of political hazards on performance, arguing that managing political hazards effectively can also be the root of profits because, for example, markets in political hazardous countries are underdeveloped and less competitive compared to stable markets (Click, 2005; Cuervo-Cazurra et al., 2018; Jiménez and Delgado-García, 2012; Kobrin, 1979; Liu et al., 2016). Such contrasting ideas implicitly highlight that the proactive management of political hazards is the key to firm success (Jiménez and Delgado-García, 2012).

However, researchers of political hazards have thus far paid less attention to managers, especially TMT, who are actually managing and are responsible for foreign subsidiaries in the context of political hazards. Such an incomplete understanding of the TMT's impact on the management of political hazards in foreign subsidiaries would be problematic for two reasons. First, TMT members in the foreign subsidiaries (interchangeably used as TMT or local TMT) have first-hand information on the local environment and are direct decision-makers with substantial power in the upper echelons of subsidiaries (Giambona et al., 2017; Hambrick and Mason, 1984; Rickley, 2019). Their characteristics, especially their prior experience, will significantly affect their responses to political hazards and, consequently, determine whether MNCs are able to reduce costs and capture the growth opportunities associated with political hazards in their subsidiaries (Giambona et al., 2017; Hambrick and Mason, 1984; Maitland and Sammartino, 2015; Vahlne and Johanson, 2017). Therefore, we cannot sufficiently resolve the aforementioned inconclusive findings regarding the political hazards–performance relationship if we omit TMT factors (also see a summary of prior political hazards studies in Appendix A1). Second, it is established in the TMT experience literature that TMT's experience, particularly international experience, homogenously facilitates MNCs' internationalization and performance (e.g., Carpenter et al., 2001; Herrmann and Datta, 2006; Nielsen, 2010). However, in the context of political hazards, which is highly uncertain and dynamic, it is likely that TMT's experience cannot necessarily contribute to foreign subsidiaries' performance. Thus, an underestimated but important question emerges: When does TMT's experience mitigate or exacerbate the negative impact of political hazards on subsidiary performance?

In this study, we attempt to address the aforementioned gap by investigating the divergent roles of different types of TMT's experience in the relationship between political hazards and subsidiary performance. First, we build on the institution-based view by arguing that political hazards, as an important component of the institutional environment, significantly increase the costs of doing business and thus inhibit subsidiary performance (North, 1990; Peng et al., 2008). Second, drawing upon upper echelons theory and the TMT experience literature (Hambrick, 2007; Hambrick and Mason, 1984), we propose that TMT's experience is multifaceted, having a time dimension (i.e., when the experience was accumulated) and spatial dimension (where the experience was accumulated). Following this, we particularly investigate the duration of TMT's local experience, defined as the length of time on average a TMT has worked in a country where the subsidiary was situated, and the duration of TMT's international experience, which is defined as the length of time on average a TMT has worked outside of the focal country. On the one hand, we expect that long duration of both TMT's local experience and international experience make foreign subsidiaries more capable of mitigating costs and taking advantage of the growth opportunities associated with political hazards. On the other hand, we also propose a competitive hypothesis that, as a result of managers' bounded rationality (Cyert and March, 1963), the long duration of both types of experience may also cause managers' overconfidence regarding their prior knowledge and skills, making decision-making less adaptable and efficient in a highly uncertain environment (Ener, 2019; Kiesler and Sproull, 1982), which in turn increases costs of coping with political hazards in the focal subsidiary.

Then, to further deconstruct TMT's international experience effect, we particularly incorporate “distance” and the “direction” of distance into TMT's international experience. Distance has been the central topic in international business (IB) studies for decades and plays a significant role in interpreting and applying prior experience to a new context (Berry and Zhou, 2010; Johanson and Vahlne, 1977; Xu and Shenkar, 2002). Resonating with other distance in IB, we define political hazards distance as the extent of dissimilarity in political instabilities between the focal country and the foreign country. In addition, recent authors have recommended the inclusion of the direction of distance and suggested that positive distance (i.e., international experience in higher political hazards [HPH] countries than the focal country) and negative distance (i.e., international experience in lower political hazards [LPH] countries than the focal country) may have asymmetric effects on foreign operations (Hernández and Nieto, 2015; Zaheer et al., 2012). In this light, we separate TMT's international experience into that in HPH countries and that in LPH countries. We further contend that TMT's international experience in HPH countries is more supportive for mitigating the adverse impact of political hazards than the experience in LPH countries that, on the contrary, is harmful for coping with the highly dynamic environment.

Through a large sample of global MNCs from the Orbis dataset, this study endeavors to make two contributions. First, we go beyond the existing literature that limits their focus to the direct influence of political hazards on performance while ignoring the human factors, namely TMT's different types of experience. The significant interplays between TMT's experience and political hazards in determining various levels of subsidiary performance add a missing piece in the political hazards literature that not only highlights the imperative role of top managers in managing political uncertainties but also offers a contingent explanation for the inconclusive findings on the political hazards–subsidiary performance relationship. We also respond to the recent call for considering subsidiary managers in the subsidiary management research (Meyer et al., 2020).

Second, our divergent moderations of different types of TMT's experience significantly advance the TMT experience literature whose authors not only assumes homogenous effects of TMT's experience in internationalization but also primarily focuses on “general” international experience without considering when and where the experiential knowledge and skills were accumulated and developed (Nielsen, 2010; Piaskowska and Trojanowski, 2014; Sambharya, 1996). However, the distinctive interplays between political hazards and different types of TMT's experience delineate that TMT's experience does not always contribute to the mitigation of costs associated with political hazards; sometimes it leads to the opposite outcome. Such distinctive moderating effects underscore the multifaceted construct of TMT's experience and provide a more comprehensive picture of how different types of learning contribute to subsidiary performance in the context of political hazards. Furthermore, our work on asymmetric effects of TMT's international experience builds on that of prior researchers who assumed the key condition for effective experience and capability transfer is context similarity (Perkins, 2014; Trąpczyński and Banalieva, 2016; Zeng et al., 2013). Our positive moderating effect of TMT's international experience in HPH countries complements this idea and suggests that, under the condition of political hazards, high context dissimilarity in terms of political hazards distance with positive direction is also useful. Empirically, by considering distance and direction, our operationalization of TMT's international experience resonates with the emerging trend for a fine-grained measure of top executives' experience (Le and Kroll, 2017; Rickley, 2019) and serves as a strong case for future researchers to improve theoretical understanding of the asymmetric effects of TMT's international experience.