Academic journal article Management International Review

Technological Competence and International Diversification: The Role of Managerial Incentives

Academic journal article Management International Review

Technological Competence and International Diversification: The Role of Managerial Incentives

Article excerpt

Abstract:

* This paper shows that the role of managerial incentives is highlighted by a relatively complex relationship between technological competence and international diversification. By studying a sample of Standard & Poor's 500 member firms, we explore the relationships between technological competence, managerial pay, and international diversification.

* Results indicated a curvilinear relationship (an inverted U-shape) between technological competence and international diversification.

* In line with agency theory, contingent pay (stock options and bonuses) was positively related to international diversification.

* Beyond these direct effects, both contingent and non-contingent pay (cash compensation) moderated the relationship between technological competence and international diversification.

Keywords: International strategy. Corporate governance * Managerial compensation. Innovation

Introduction

International diversification provides an essential alternative means for firms to grow, beyond the options of internal growth and product diversification in the domestic market. Managers often pursue international diversification to gain monopolistic advantages for their firm, reduce operational risk, and lower transaction costs. International diversification also allows managers to extend their firm's capabilities (Chung/Alcacer 2002). One of the most important firm capabilities emphasized in previous research on international diversification is technological competence (Almeida 1996, Feinberg/Gupta 2004, SannaRandaccio/Veugelers 2007). In this line of research, technological competence represents research and development (R&D) capabilities that managers seek to extend by operating their businesses in foreign markets.

Whereas employing international diversification may be a logical option to extend technological competence, doing so is often associated with increased hazards or risks (Hitt et al. 2006). The hazards of international diversification may directly stem from the complex international environment or, perhaps equally importantly, from the poor managerial assessment of firm capabilities. The difficulties associated with the assessment of capabilities needed in the international environment indicate an enhanced role for managers in multinational firms. As such, we suggest that the level of international diversification may not always increase with growing technological competence, as the literature suggests (e.g., Franko 1989, Kobrin 1991). Managers seeking to balance the benefits and risks of both exploiting and extending their firm's technological competence may extend or limit their portfolio of international operations. This phenomenon is perhaps best described by a curvilinear relationship between technological competence and international diversification, similar to the relationship between international diversification and performance driven by higher costs (e.g., Lu/Beamish 2004). However, we contend that it is more due to risk than cost.

Previous studies on the managers' importance in multinational firms have focused on foreign market entry decisions, learning, and organizational performance (e.g., Barkema/ Vermeulen 1998, Hitt et al. 2006, Luo/Peng 1999). However, in extending this line of inquiry, our study from an agency theory perspective posits that managers can have a substantial role in assessing when international diversification extends their firm's technological competence and thus provides value for the firm's owners. Because both innovation and international diversification incur significant risks or hazards as noted above, the alignment of managerial interest with that of shareholders of the firm becomes particularly important in multinational firms (Carpenter/Sanders/Gregersen 2001, Harris/Ravenscraft 1991). Furthermore, the required specialized knowledge of the firm's technological competence and the high level of understanding of foreign markets enhance the role of managerial incentives relative to other governance mechanisms, such as monitoring (Sanders/Carpenter 1998). …

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