Academic journal article Management International Review

Experience of Emerging Market Firms: The Role of Cognitive Bias in Developed Market Entry and Survival

Academic journal article Management International Review

Experience of Emerging Market Firms: The Role of Cognitive Bias in Developed Market Entry and Survival

Article excerpt

Abstract and Key Results

* This paper draws on organizational learning theory to explain how experience influences the propensity for emerging market firms (using an event history analysis of a sample of Latin American firms during the 1990s) to enter developed markets, and their likelihood of survival.

* We argue that developed market experience is positively related to emerging market firms' entry and survival in developed markets; however, cognitive biases affect the roles played by other types of experience in entry decisions.

* Alliance experience with developed market firms increases the likelihood of entry, but decreases the likelihood of survival. Failure experience in developed markets reduces the likelihood of entry, but increases the likelihood of survival.

Key Words

Organizational Learning, Experiential Resources, Cognitive Bias, Emerging Markets, Foreign Market Entry, Survival

Introduction

Scholars have long asserted that the strategies and actions of organizations are based partly on their experience (Cyert/March 1963, Levinthal/March 1993, March 1991, Simon 1991). Experience is a key mechanism that facilitates learning and builds knowledge-based resources (Huber 1991, Levin 2000). Experiential knowledge, an important construct in organizational learning and evolutionary theories (e.g., Cyert/ March 1963, Nelson/Winter 1982), accumulates through both positive and negative reinforcement of previous choices (Levitt/March 1988). Consequently, a firm's accumulated experiences shape its behavioral patterns and resulting strategic evolution.

International experience has been found to be important in multinational firms' market entry (Delios/Henisz 2000, Johanson/Vahlne 1977), market exit (Li 1995, Mitchell/Shaver/Yeung 1994, Shaver/Mitchell/Yeung 1997), global posture (Carpenter/Fredrickson 2001, Hitt/Hoskisson/Kim 1997), and foreign subsidiary performance (Miller/Eden 2006). As scholars enrich our understanding of the experience of multinational enterprises, it becomes apparent that there are separate forms of knowledge to be gained from different types of international experience.

An important, though often overlooked, issue pertaining to different forms of international experience is concern for optimal decision making. While fundamental to many organizational paradigms, optimal decisions are largely impossible because of bounded rationality (Simon 1991). For example, Levinthal and March argued that "learning is likely to be misleading if the experiential record on which it draws is a biased representation of past reality, and thus of future likelihoods" (1993, p. 104). Other scholars have concluded that executives are susceptible to cognitive biases that lead to flawed or sub-optimal decision making (Barker/Duhaime 1997, Barnes 1984, Lovallo/Kahneman 2003, Starbuck/Milliken 1988, Westphal/Bednar 2005). Although the organizational learning literature acknowledges that biases may arise from experiential knowledge, limited research has considered the performance implications of decisions that involve different forms of experience.

To address this important gap, we examine whether international experience is subject to cognitive bias that affects firm decision making with respect to foreign market entry and survival. We draw upon organizational learning theory to develop hypotheses linking different forms of international experience with the likelihood of market entry. In addition, we predict outcomes associated with the entry decisions by examining the relationships between different forms of experience and firm survival. We hypothesize that certain forms of experience increase the likelihood of entry, but also decrease the likelihood of survival; whereas other forms of experience reduce the likelihood of entry, but increase the likelihood of survival. We test, and find confirmation for, our hypotheses on a sample of Latin American emerging market firms in the 1990s. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.