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MATCHING MANAGERS TO STRATEGIES:

DO MULTINATIONAL COMPANIES NEED MULTICULTURAL TOP

MANAGEMENT TEAMS?

WINFRIED RUIGROK

HARDY WAGNER

University of St. Gallen

Research Institute for International Management

Bodanstrasse 6, 9000 St. Gallen - Switzerland

Phone: (+41) 71 224 2453

Fax: (+41) 71 224 2447

E-mail: [email protected]

E-mail: [email protected]

Acknowledgements: We would like to thank Jean-Claude Gonzalez, Hansueli Keller,

Georg von Krogh, Claas van der Linde, and Simon Peck for their helpful comments on

earlier drafts of this article. We are also indebted to the many company chairmen who

kindly answered our survey questionnaire.

January 2001
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MATCHING MANAGERS TO STRATEGIES:

DO MULTINATIONAL COMPANIES NEED MULTICULTURAL TOP

MANAGEMENT TEAMS?

Abstract

Multinational companies (MNCs) increasingly nominate foreign nationals to their top

management team (TMT). It is expected that the cultural heterogeneity created by such
team reorganization benefits the firm by providing the requisite cognitive capacity to
manage increasing global complexity. To date, empirical confirmation of this assumption is
absent. In this article, we develop and empirically test: 1) a theoretical framework that links
TMT cultural heterogeneity with team processes and performance, and 2) a contingency
model for the impact on performance of a fit between the degree of MNC
internationalization and the degree of TMT cultural heterogeneity. The findings indicate
that there are benefits as well as costs associated with TMT cultural heterogeneity.
Furthermore, companies matching their TMT degree of cultural heterogeneity with the
internationalization strategies pursued outperform firms that fail to do so. Core implications
for practice and future research are outlined.

Keywords: Internationalization; TMT cultural heterogeneity; firm performance; strategy-

manager fit
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INTRODUCTION

International expansion represents the core strategic objective of companies all

around the world. The degree of internationalization of companies in terms of
foreign sales, production, employees, and equity holdings is now higher than ever
before. In fact, for the average European company, overseas sales to total sales
recently exceeded the 50% mark (UNCTAD, 2000). In the foreseeable future, US
and Japanese companies on average are expected to follow. Given that a company’s
financial success in the 21st century will depend predominantly on its foreign
operations, the question of effective management of international expansion
becomes decisive.

A major premise of research into international business is that the management of a

company with dispersed international operations differs in many significant ways
from one whose business activities are confined to the home market. In order to be
able to successfully compete in the international business environment, managers
need to foresee and address worldwide market, political, and social dynamics in a
timely, flexible, and differentiated manner (Kogut, 1985; Prahalad & Doz, 1987).
Resources need to be redistributed in response to shifting scale, scope and cost
advantages while potential problems arising from coordination, communication and
motivation in culturally dispersed subsidiaries must be continually monitored and
addressed (Hofstede, 1980; Perlmutter, 1969; Roth & O’Donnell, 1996). In view of
the considerable complexity of such a task, a central question arises: Are there
certain top management team characteristics that provide the critical competencies
requisite for effective global leadership?

By the end of the 1990s, managers had begun to believe that in order to be able to
effectively manage increasing internationalization, TMT composition needs to
reflect the multinational composition of a company’s sales, production locations,
and equity holdings (Derr & Oddou, 1993; Prahalad & Lieberthal, 1998; Ruigrok,
Peck & van der Linde, 1999). As a result, between 1995 and 1998, the proportion of
companies with one or more foreign directors increased from 39 to 60 percent on a
worldwide basis. Over the same period of time, the proportion of companies with
three or more executives of foreign nationality rose from 11 to 23 percent (The
Conference Board, 1999). In discussing the dominant driver for such TMT
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internationalization, researchers suggested that placing foreign nationals in top

management teams creates the cultural heterogeneity and concomitant cognitive
capacity requisite for the successful management of internationally dispersed firms
(Adler, 1997; Elron, 1997; Hambrick, Davison, Snell & Snow, 1998; Hitt,
Hoskisson & Kim, 1997).

Although the need for TMT internationalization in multinational companies has

intuitive appeal, researchers so far have not been able to empirically pinpoint the
exact consequences of TMT cultural heterogeneity on team processes and
performance. By employing survey research and empirical analysis of secondary
data, we shall attempt to shed some light on this issue in this article. Particularly, we
will report our findings relating to the following questions: What are the particular
costs and benefits of TMT cultural heterogeneity as perceived by members of
multinational top management teams? Do MNCs, in general, benefit from TMT
cultural heterogeneity or is it important to find a match between particular
internationalization strategies and TMT profiles?

TOP MANAGEMENT TEAM CULTURAL HETEROGENEITY AND ITS

IMPACT ON TEAM PROCESSES AND PERFORMANCE

Ever since Hambrick and Mason (1984) focused their attention on the upper
echelons of management, researchers in the field of strategic management have
attempted to understand the antecedents, dynamics and influences of TMT
composition. One significant subordinate line of inquiry sought to address the issue
of team heterogeneity and its effects on team processes and performance.

In their comprehensive review of this team heterogeneity literature, Milliken and

Martins (1996) identified four intervening variables through which group
heterogeneity, in general, influences team performance: cognitive capacity,
emotional conflict, communication fluency, and symbolic power. Below, we will
adapt these variables to the top executive level and international arena to develop
propositions concerning the impact of TMT cultural heterogeneity on team
processes and performance.
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Cognitive capacity

Research indicates that as firms expand internationally, managers face increasing

information-processing demands (Calori, Johnson & Sarnin, 1994). Compared to
single-culture TMTs, multicultural TMTs of MNCs are seen as being in a more
favorable position to identify and accurately interpret critical pieces of information
available worldwide. Due to their multicultural composition they are likely to have a
superior knowledge of foreign customer bases, investor and employee communities,
and political and social idiosyncrasies of foreign market environments. Furthermore,
they are considered to be able to more quickly locate and effectively address
coordination, communication and motivation demands extant in culturally dispersed
multinational firms (Hofstede, 1980; Schneider & Barsoux, 1997). On the whole,
TMT cultural heterogeneity can be expected to positively influence a team’s ability
to process information, identify and react to environmental change or impulse, and
generate new and more innovative ideas and alternatives for superior decision
quality. Thus:

P 1: By increasing TMT intra-group cognitive capacity, cultural

heterogeneity positively impacts decision quality.

Emotional conflict

TMT cultural heterogeneity, like member heterogeneity in general, can be expected

to have negative emotional implications for team functioning. In particular, directly
observable physical behavioral differences or diversity of demeanor can cause
emotional conflict and thus reduce group interaction by triggering off prejudices and
stereotypes. This in turn is likely to result in a loss of group cohesion and
identification, low member satisfaction, and a general disruption in communication
(Hambrick et al., 1998; Tsui, Egan & O’Reilly, 1992). In addition, a diversity of
values or the occurrence that executives exhibit different underlying belief systems
may cause low interpersonal attraction, thus exerting a negative impact on the social
integration of executives. Again, a loss of cohesion, distrust, and dwindling member
satisfaction might well be the outcome (Ancona & Caldwell, 1992; Cox, 1991;
Pfeffer, 1983). Considering these points together, TMT cultural heterogeneity is
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likely to cause emotional conflict, concomitant delays in decision making, and low
decision commitment.

P 2: By increasing TMT intra-group emotional conflict, cultural

heterogeneity negatively impacts decision timeliness and decision
commitment.

Communication fluency

Culturally heterogeneous TMTs are generally accompanied by language

heterogeneity. Language heterogeneity itself -where top executives speak different
first languages- does not necessarily imply certain costs. However, culturally
heterogeneous TMTs will communicate in a company or working language agreed
upon in advance. Executives will differ in their working language proficiency and
thus create some sort of working language diversity (Hambrick et al., 1998). The
working language ‘gap’ between executives can be expected to be detrimental to the
team’s communication fluency (Gudykunst, 1991; Hitt, Hoskisson & Ireland, 1994).
Therefore, we argue that TMT cultural heterogeneity is likely to result in working
language diversity with a negative impact on communication fluency and thus
decision timeliness.

P 3: By detracting from TMT intra-group communication fluency,

cultural heterogeneity negatively impacts TMT decision
timeliness.

Direct interaction capability

Team heterogeneity is considered to lead to more effective direct interaction with a

company’s multiple internal and external constituencies (Boddewyn, 1988; Milliken
& Martins, 1996). Culturally heterogeneous TMTs in particular are likely to exhibit
a superior understanding of the values, goals, and rules of interaction of worldwide
company stakeholders. Thus, they can be expected to more effectively communicate
and interact with global employees, clients, investors, governments, media, and
trade unions. In view of the rising importance of adequate global public and
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corporate affairs management, one may consider the capacity for inter-group
mediation, arbitration, negotiation, and networking as a major strength of culturally
heterogeneous TMTs (Ancona & Caldwell, 1988; Ghoshal, Korine & Szulanski,
1994; Hillman, Cannella & Paetzold, 2000; Krackhardt, 1990; Pfeffer, 1972).
Overall, culturally heterogeneous TMTs might be considered to be in an excellent
position to fulfill the important task of global stakeholder management.

P 4: By improving TMT inter-group direct interaction capability,

cultural heterogeneity positively impacts global stakeholder
satisfaction.

Symbolic power

TMT cultural heterogeneity may be expected to have a symbolic impact on key

company stakeholders such as employees, customers, and investors (Hambrick,
1994; Pfeffer, 1981). Firstly, cultural heterogeneity at the top executive level might
signal to employees worldwide that career advancement is not confined to national
or cultural affiliations. This perception of equal job opportunity, even at the highest
level, might serve as an invaluable stimulus for superior job performance. Secondly,
cultural heterogeneity may hold symbolic meaning for international customers, who
may feel more encouraged to engage in business ties with foreign-based companies
run by culturally diverse TMTs. Finally, culturally heterogeneous TMTs are in a
favorable position to address agency problems inherent in multinational business
operations (Peck & Ruigrok, 2000; Roth, 1995; Sanders & Carpenter, 1998; Wright,
1995). Thus, they may be expected to be more likely to enjoy credibility among
internationally active investors and lenders. All in all, it may be argued that TMT
cultural heterogeneity generates positive symbolic stimuli for key company
stakeholders and thus improves global stakeholder satisfaction.

P 5: By increasing TMT inter-group symbolic power, cultural

heterogeneity positively impacts global stakeholder satisfaction.
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Direct impact on MNC performance

The above propositions suggest that there are benefits as well as costs associated
with TMT cultural heterogeneity. Previous research findings indicate that managers
operating in multicultural teams tend to be under the subjective impression that the
group is not functioning well, although company performance may indicate
otherwise (Elron, 1997; Jehn, 1995). The reason for such behavior is that human
beings tend to overemphasize the negative consequences resulting from situations
of conflict. The costs of emotional conflict associated with cultural heterogeneity
are therefore subjectively reinforced and the benefits of constructive conflict are
undermined. Therefore:

P 6: Members of culturally heterogeneous TMTs perceive the costs to

outweigh the benefits. TMT cultural heterogeneity is therefore
believed to be detrimental to MNC performance.

PERFORMANCE IMPACT OF ,FIT’

Contingency theorists argue that the fit between TMT composition and strategic
orientation determines organizational success. Researchers have emphasized that
companies matching top executive profiles with the requirements of their strategies
outperform firms that fail to achieve such coalignment (Athanassiou & Nigh, 1999;
Bartlett & Ghoshal, 1989; Gupta, 1984; Kotter, 1982; Thomas, Litschert &
Ramaswamy, 1991; Roth, 1995).

With respect to internationalization strategies, it is assumed that the

internationalization of top management teams as reflected by a team’s degree of
cultural heterogeneity has a positive impact on the performance of MNCs (Elron,
1997; Hitt et al., 1997; Hoskisson & Hitt, 1994; Kogut, 1985, 1989). Indeed, as
suggested above, it can be argued that multicultural TMTs exhibit the requisite
cognitive capacity, direct interaction capability, and symbolic power to effectively
manage international business markets and to cultivate external dependencies with
respect to a company’s global stakeholders. However, multicultural TMTs are also
likely to be associated with major costs that adversely affect performance. As
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indicated, these costs are likely to stem from emotional conflict and communication
disruptions which result in low decision timeliness and low decision commitment.

The simultaneous existence of costs and benefits does not allow us to claim a
universalistic impact of TMT cultural heterogeneity on MNC performance.
Addressing the need for more differentiation, the concept of requisite variety in
organizational theory (Ashby, 1956; Lawrence & Lorsch, 1969; Morrison, 1992;
Weick, 1979) suggests that corporations should mirror their nature and extent of
environmental complexity in their intra-company complexity. In matched settings
the benefits will outweigh the costs and vice versa. Therefore, we argue that MNCs
facing a high degree of environmental international complexity (as reflected by a
firm’s degree of internationalization) benefit from a high degree of intra-company
international complexity (as reflected by a TMT’s degree of cultural heterogeneity)
and vice versa.

In summary, MNCs are expected to match their TMT degree of cultural

heterogeneity or group complexity with their particular degree of
internationalization or task complexity. Further, we argue that MNCs achieving a
greater degree of coalignment between group and task complexity exhibit superior
performance. The following propositions reflect these arguments:

P 7: MNCs pursuing low DOIs will be led by TMTs characterized by a

low degree of cultural heterogeneity. MNCs pursuing high DOIs
will be led by TMTs characterized by a high degree of cultural
heterogeneity.

P 8: MNCs that match their TMT degree of cultural heterogeneity with

their DOI significantly outperform companies that fail to do so.

Figure 1 depicts the tripartite research model1 proposed and Table 1 presents a
summary of the hypotheses derived from propositions 1-8.

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DEDINITIONS AND METHODS

Definition of ,top management team’

This study’s statistical analyses are based on a company sample drawn from
Germany, the European Union’s largest economy. Germany’s company board
model has a two-tier structure encompassing the Vorstand (management board) and
the Aufsichtsrat (supervisory board). Under company law, the management board is
responsible for strategic decision-making and planning, day-to-day management of
the business, and review of corporate performance in the MNC. The supervisory
board monitors and supervises the management board, yet is not empowered to
engage itself in corporate management. In the course of this study, the term TMT
refers to the management board of German companies.

Definition of ,culture’

Culture in this study is defined as the “mental program” (Hofstede, 1980: 11) shared
by a group of people as reflected in a distinct value schema. In his classical study,
Hofstede (1980) was able to reveal nation-specific cultural characteristics by
surveying 116,000 IBM employees in 40 different countries. He pinpointed four2
cultural dimensions on which nations do vary: power distance, uncertainty
avoidance, individualism/collectivism, and masculinity/femininity. Power distance
refers to the extent to which people in one country tolerate power inequality in
institutions and organizations. Uncertainty avoidance describes the degree to which
members of one society dislike uncertainty and favor predictability, security, and
steadiness. Individualism/collectivism separates nations into those in which people
tend to look solely after themselves and their immediate families (individualist) and
those in which members also cultivate major emotional bonds to other groups and
institutions (collectivist). Finally, masculinity/femininity relates to a nation’s
tendency to promote either masculine (assertiveness, competitiveness, materialism)
or feminine values (nurturing, quality of life, and relationships). In his study,
 10

Hofstede (1980) assigned national culture scores for each dimension to each of the
40 nationalities examined.

Empirical analysis of primary data

Data sources and variable operationalization

In order to identify the process implications of TMT cultural heterogeneity, a survey

instrument was developed and distributed to 686 top executives of 152 German
MNCs in four non-service industries: Chemicals, Machinery, Metals and
Construction, and Automobiles. In compiling the list of organizations, we initially
identified Germany’s largest 1000 manufacturing companies by sales volume in
1999 (Dafne, 2000). Companies without FDI nor a foreign national on the top
management team were then excluded, leaving the final company sample.

The questionnaire (both in German and English) mailed to the members of

multinational top management teams included items that assessed all team process
and performance variables of interest. A five point Likert scale was used as the
response format. The survey’s response rate was 22.4% with 154 responses from 94
companies being received (i.e., an average of 1.64 questionnaires per company). In
the 22 cases for which responses were available from two or more members of the
same team, a high level of agreement in the rating of key variables was identified.
This trend was also evident in the few cases in which the answers of members of
differing nationalities were compared. Su]TJu-e4(’)11 TF fnagewithoy sain the fa.n.sthelle f-l27lio
 11

arrived at a team-level heterogeneity composite (cf. Allison, 1978; Elron, 1997). A

top management team that is perfectly culturally homogeneous would have a
variation coefficient of zero. Hence, larger scores indicate greater cultural
heterogeneity. Table 2 illustrates the computation of the cultural heterogeneity index
for two fictitious TMTs.3

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Analysis techniques

For the testing of Hypothesis 1a-5a which posit the effects of only one independent
variable -TMT cultural heterogeneity- on team processes, we used the Pearson
product-moment correlation coefficients between the variables in question. In
contrast, multiple regression analysis was necessary to test for Hypotheses 1b-3b,
1c-3c, 1d-3d, and 4b/5b which propose that multiple independent variables have an
impact on team performance (i.e., cognitive capacity, emotional conflict, and
communication fluency on intra-group performance; and direct interaction
capability and symbolic power on inter-team performance). Multiple regression
analysis was also employed to test Hypotheses 6a-e, i.e., the direct impact of
decision quality, decision timeliness, decision commitment, global stakeholder
satisfaction, and cultural heterogeneity on company performance.

Empirical analysis of secondary data

Data sources and variable operationalization

The starting point for the second stage of empirical analysis -identification of
performance implications by way of examining secondary data, Hypotheses 7 and 8-
was the 94 MNCs for which we had the ‘TMT degree of cultural heterogeneity’
composite. Next, we sorted firms according to the availability of data for their
degree of internationalization and performance.

Under German company law, firms are only required to provide data on the ratio of
foreign sales to total sales, not on asset, employee, subsidiary, or equity dispersion
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between the home country and foreign countries. Thus, to acquire a statistically
valid sample size, we had to rely on the ratio of foreign subsidiary sales to total sales
(FSTS) as the ‘degree of internationalization’ measure.4 Data for 1999 were
obtained from the annual manual of the ‘Handbuch der deutschen
Aktiengesellschaften’ (Hoppenstedt Verlag, 2000).

In order to provide adequate research validity and comparability, we chose to

conceptualize performance on two dimensions; financial and operational. Pre-tax
ROA was used as the financial performance indicator. Cost efficiency, defined as:
one minus the sum of the ratios of a company’s material costs to sales and employee
costs to sales, was chosen as the operational performance measure. Whereas the
former represents a commonly applied accounting measure signifying book return,
the latter measure allows for the testing of the widely held belief that the reduction
of material and labor costs represents a major benefit of international expansion
(Porter, 1985). Performance data were obtained from Dafne (2000), a database with
financial figures for German companies.

Complete data were available for 88 German companies distributed across the four
industries in the following manner: Automobiles (21); Chemicals (24); Metals and
Construction (21); and Machinery (22). In summary, the company sample is
representative for medium to large German manufacturing MNCs led by
multinational top management teams in the year 1999.

Analysis Step 1: Determination of DOI clusters or core internationalization

strategies

We used the ‘degree of internationalization’ ratio to split MNCs into two sub-
groups: those companies exhibiting low and those exhibiting high degrees of
internationalization. Firms having an FSTS ratio above the sample median were
defined as pursuing high-level DOIs while MNCs with a ratio below the median
were defined as pursuing low-level DOIs.

The median FSTS ratio was determined at 51% indicating that, at that particular
point in time, German MNCs demonstrated equal distribution across two key
internationalization strategies: one half pursuing a ‘peripheral’ internationalization
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strategy considering foreign activities merely as an “adjunct to domestic business”

(Magaziner & Reich, 1985: 8) and one half pursuing ‘focused’ international
expansion with a clear strategic focus on foreign markets. The clustering procedure
assigned 40 MNCs to the ‘peripheral’ DOI cluster (sales predominantly generated in
the home market) and 48 companies to the ‘focused’ DOI group (sales
predominantly generated in foreign markets).

Analysis Step 2: Determination of ideal TMT profiles

Coalignment in the course of this study’s statistical analyses was conceptualized as

the degree of correspondence between the ideal and actual TMT profile in terms of
degree of cultural heterogeneity (Drazin & Van de Ven, 1985; Venkatraman &
Prescott, 1990). Separate ideal TMT degree of cultural heterogeneity scores for the
two DOI clusters were empirically identified as follows. First, the MNCs in each
group were ranked on the basis of the two performance criteria being used (i.e.,
ROA and cost efficiency). Then, the top 10 percent (cf. Thomas et al., 1991) of
MNCs in each cluster were used to calculate standardized means representing the
ideal TMT profiles with respect to TMT cultural heterogeneity. Table 3 presents the
identified ideal profiles for the two DOI clusters.

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Analysis Step 3: The performance impact of fit

The degree of misfit for each DOI cluster was operationalized as the Euclidean
distance from the respective ideal TMT profile and derived by the following
equation (cf. Van de Ven and Drazin, 1985):

∑( X )
2
MISFIT = i − Xj

where Xi = score for ideal TMT degree of cultural heterogeneity

where Xj = score for jth MNC on TMT degree of cultural heterogeneity
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To test for the impact of misfit on performance, this measure was correlated with the
two performance measures for both DOI clusters. Our central proposition that
MNCs should match their degree of internationalization with their TMT degree of
cultural heterogeneity would be confirmed should an increasing degree of misfit
result in declining performance.

RESULTS AND DISCUSSION

In the following we shall restate the two core research questions being addressed in
this essay and present the respective answers as suggested by our findings.5

1. What are the particular benefits and costs of TMT cultural heterogeneity as
perceived by members of multinational top management teams?

The findings suggest that cultural heterogeneity, by increasing the cognitive

capacity of the top management team, enhances decision quality. It was also shown
that cultural heterogeneity, by causing emotional conflict, reduces decision
timeliness and decision commitment. Therefore, in conclusion, Hypotheses Sets 1
and 2 are confirmed. These results are not counterintuitive and largely confirm
related research on team cultural heterogeneity at other organizational levels (for
multicultural task groups see Earley & Mosakowski, 2000 and Watson, Kumar &
Michaelsen, 1993; for multicultural management teams at overseas subsidiaries of
companies see Elron, 1997; and for multicultural project teams in international joint
ventures see Salk & Brannen, 2000).

The proposition that TMT cultural heterogeneity, by impairing communication

fluency, has a negative impact on decision timeliness was rejected (i.e., Hypotheses
Set 3). Although the effect was not significant, the results suggest rather that TMT
cultural heterogeneity improves TMT communication fluency and thus enhances
decision timeliness. There are two possible interpretations of this finding. First, the
result could indicate that the costs of working-language diversity are less significant
than expected. Top executives may have a sufficient working-language proficiency
or the application of effective translation systems minimizes time loss due to
language barriers. Secondly, an alternative explanation for the finding could be the
fact that multicultural TMTs have a better on-call knowledge of global business
 15

markets than single-culture teams. Such an advantage may compensate for any time
loss owing to slower team communication.

With respect to inter-group processes, the findings show that TMT cultural
heterogeneity has symbolic value for a MNC’s global stakeholders (Hypotheses Set
5). The demographic characteristic appears to indicate the commitment of TMTs to
adequately represent the interests of their company’s employees, customers, and
investors. As a result, TMT cultural heterogeneity can be argued to motivate the
workforce, drive sales acquisition, and induce investor loyalty on a global scale.

In contrast to its positive symbolic power, cultural heterogeneity exhibited a

negative impact on the capability of TMTs to directly interact with stakeholders
worldwide. Therefore, Hypothesis Set 4 was rejected. Contrary to our expectations,
members of multicultural top management teams appear to have significant
problems with respect to direct interaction with internal and external constituencies
of the firm. One may speculate that differing cultural value systems and/or
behavioral rules are likely to result in situations of inter-group conflict similar to
those extant within the team itself. Statements and behavior on the part of members
of multicultural TMTs may easily be misunderstood or misinterpreted by culturally
diverse company stakeholders.

Finally, Hypotheses Set 6 posited a negative relationship between TMT cultural

heterogeneity and company performance. It was expected that members of culturally
heterogeneous TMTs subjectively perceive the costs to outweigh the benefits.
Although the sign of the coefficient was negative as hypothesized, the impact turned
out to be insignificant. Thus, Proposition 6 is not confirmed.

Tables 4 and 5 present the results of the statistical analyses of survey data. Figure 2
depicts the final variable schema identified.

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2. Do MNCs, in general, benefit from TMT cultural heterogeneity or is it important

to find a match between particular internationalization strategies and TMT
profiles?

As described above, the findings obtained from the research survey indicated the
existence of benefits and costs of TMT cultural heterogeneity. Consequently, we are
unable to argue for a universalistic and direct impact of TMT degree of cultural
heterogeneity on company performance. The rejection of Proposition 6 supports this
conclusion. In order to be able to provide valuable advice regarding the necessity
and appropriate degree of TMT cultural heterogeneity in MNCs, it is necessary to
identify those settings in which the benefits outweigh the costs and vice versa.

In Hypotheses Sets 7 and 8, we suggested that the appropriate degree of TMT

cultural heterogeneity will be contingent upon the particular internationalization
strategy pursued by the MNC. MNCs pursuing a ‘peripheral’ internationalization
strategy (low DOI) were hypothesized to achieve a fit with a TMT characterized by
a low degree of cultural heterogeneity. In contrast, MNCs pursuing a ‘focused’
internationalization strategy (high DOI) were argued to achieve a fit with a TMT
exhibiting a high degree of cultural heterogeneity. In matched settings, the benefits
of TMT cultural heterogeneity will outweigh the costs. Deviation from the defined
‘fit’ scenarios was hypothesized to result in decreased performance.

The results obtained largely confirm expectations. Table 6 shows the results of the t-
test used to determine whether theoretically expected TMT profiles are indeed
related to particular DOI clusters. The findings indicate that MNCs located at
different DOI levels exhibit significantly different degrees of TMT cultural
heterogeneity in the manner expected. Therefore, Proposition 7 is confirmed. With
respect to performance implications (Table 7), the results indicate that for MNCs
operating at low DOI levels, increasing degrees of misfit are negatively related to
ROA at the 0.1 significance level. With respect to cost efficiency, the results also
suggest a negative relationship, however at an insignificant effect size. MNCs
 17

pursuing high DOI levels were found to experience a significant negative impact
from misfit on both performance measures (p<0.1 for ROA; p<0.05 for CEFF).

The insignificant relationship between misfit and cost efficiency for MNCs
operating at low DOI levels could perhaps be explained by the DOI-specific nature
of internationalization benefits. Companies following ‘peripheral’ international
expansion are argued to dominantly generate internationalization benefits that
accrue from economies of scale. Such economies of scale have a direct impact
solely on accounting performance measures such as ROA (Magaziner & Reich,
1985). In contrast, the internationalization experience gained during the expansion
process enables MNCs that pursue ‘focused’ globalization to set up the structures,
mechanisms, and systems requisite for the successful exploitation of imperfections
in global factor markets. Therefore, in addition to benefits derived from economies
of scale, MNCs operating at high DOIs are able to generate internationalization
benefits (i.e., cost efficiencies) that stem from access to cheap raw materials and low
labor costs.

Despite the lack of general statistical significance, the results obtained confirm
Hypotheses Set 8 and provide convincing support for the tripartite research model
proposed. MNCs pursuing differing internationalization strategies do not benefit
from the same degree of TMT cultural heterogeneity. Rather, companies need to
coalign their degree of internationalization with their TMT degree of cultural
heterogeneity. MNCs that accomplish this goal outperform those that fail to do so.

IMPLICATIONS

The identification of a moderating impact of TMT cultural heterogeneity on the

relationship between corporate degree of internationalization and performance has
major implications for academic theorizing and modeling in the international
business, international management, and strategic management fields of study.

Hitherto research on the relationship between degree of internationalization and

performance has produced inconsistent and contradictory findings. Those who have
reviewed the literature have concluded that, after three decades of inquiry, we do not
know whether and, if so, how international expansion affects corporate performance
 18

(cf. Annavarjula & Beldona, 2000; Ramaswamy, 1992; Sullivan, 1994). This
conclusion is based on previous studies that have tested throughout for a
universalistic impact of a firm’s degree of internationalization on its performance.
Our finding of a moderating impact of TMT cultural heterogeneity on the
relationship between degree of internationalization and performance, however,
points toward the need to apply contingency perspectives. Internationalization
appears to be a necessary but by no means sufficient condition for financial success.
Successful international expansion is likely to be contingent upon the appropriate
reconfiguration of organizational design elements in response to changing
environmental complexity. Thus, future research may seek to identify those intra-
company mechanisms, structures, and systems that fit the particular international
complexity faced by multinational corporations.

Empirical work conducted to date on the relationship between internationalization

and performance has conceptualized the degree of a company’s internationalization
on three dimensions: structural, financial, and psychological (cf. Sullivan, 1994). It
is argued that the structural degree of internationalization depicts a company’s
dependence upon foreign production and may be operationalized by a firm’s country
scope, foreign assets to total assets, and the number of foreign subsidiaries to total
subsidiaries. The financial dimension of internationalization relates to a firm’s
monetary dependence on foreign markets and can be measured with the help of
foreign sales to total sales, foreign profits to total profits, and foreign taxes to total
taxes. Finally, it is argued that a corporation’s psychological or qualitative degree of
internationalization is reflected in the international background of its TMT. TMT
national diversity, cultural heterogeneity, and international educational and
professional experience have been suggested for operationalizing a firm’s
psychological degree of internationalization (Sambharya, 1996; Sullivan, 1994). So
far, the few scholars who have tested for a direct impact of a firm’s psychological
DOI on its performance have generated insignificant findings (e.g., Peterson,
Sargent, Napier & Shim, 1996; Ramaswamy, Kroeck & Renforth, 1996). Likewise,
this study’s statistical analyses rejected the existence of a direct impact of TMT
cultural heterogeneity on company performance. However, we were able to disclose
a significant moderating impact of TMT cultural heterogeneity on the relationship
between a company’s financial degree of internationalization and its performance.
Thus, future research may start to conceptualize the psychological DOI of
 19

companies as an intra-firm moderator variable of the relationship between

structural/financial DOI and company performance.

The findings of this study offer general support for upper-echelons theory
(Hambrick & Mason, 1984). TMT characteristics appear to have a significant
impact on team processes and performance, and ultimately also on organizational
outcomes. However, the confirmation of the requisite variety concept in the course
of the statistical analyses challenges the comprehensiveness of a major assumption
underlying upper-echelons theory. The theory is built on the argument that strategic
decision-making at the top level is, in general, subject to high environmental
complexity and concomitant uncertainty. Yet, in the course of this study we showed
that, in the international context, complexity might be better operationalized as a
continuous, dynamic variable. It is argued that firms in the initial stage of
internationalization face less environmental complexity than firms with high degrees
of internationalization. Hence, the finding of a performance impact of a coalignment
between MNC degree of internationalization and TMT degree of cultural
heterogeneity suggests that the application of upper-echelons theory in the
international context requires a more specific elaboration of its underlying
assumptions.

With respect to practical implications, this study’s findings advise companies to pay
careful attention to the composition of their top management team. Given the
importance of foresighted action and selection, executive nomination committees
and boards of directors must ensure that TMT member characteristics adequately
reflect the current and future strategic needs with respect to the company’s customer
base, and employee and investor communities. Any gaps in the portfolio of required
skills will have to be identified and addressed in a timely manner. For companies
pursuing international expansion, the TMT characteristic ‘cultural heterogeneity’
was found to represent an important element in the match between strategic
demands and managerial competencies.

The findings also indicate that TMT cultural heterogeneity is likely to result in intra-
group and inter-group emotional conflict. If not properly managed, associated costs
can outweigh any benefits and thus cause TMT cultural heterogeneity to have a
negative impact on MNC performance. In view of these potentially devastating
 20

effects on group processes, adequate management of this type of diversity becomes

critical. Companies that have decided to appoint culturally heterogeneous TMTs
need to constantly confront potential negative consequences (e.g., by way of conflict
resolution strategies and socialization tactics, effective decision-making techniques
and rules of team interaction, a clear definition of TMT members’ duty of
representation, and principles of interaction with key external constituencies).

LIMITATIONS

This study’s company sample suggests that MNCs employ culturally heterogeneous
TMTs for three major reasons: 1) to acquire foreign-market knowledge; 2) to
improve the team’s symbolic appeal to, and direct interaction capability with, global
stakeholders; and 3) to cause constructive conflict in the decision-making group per
se. However, one limitation of large sample analysis is its incapacity to provide in-
depth elaboration on situation-specific and company-specific drivers and
consequences of TMT cultural heterogeneity. Thus, researchers in the future are
encouraged to pursue case-study research including interviews and observational
inquiry in order to discuss in detail the question of why particular companies
enforce certain cultural compositions of their TMT. Helpful illustrations and best
practice examples could be the result of such research.

To address a potential methodological limitation of this study, we must direct the

reader’s attention to the operationalization technique chosen for TMT cultural
heterogeneity. Critics of Hofstede’s (1980) culture scores have pointed out that the
cultural dimensions identified are not exhaustive. Further, it could be claimed that
the construction of his survey and the interpretation of results is inherently biased by
Hofstede’s own culture.6 Finally, the questionnaire used by Hofstede (1980) was
limited to IBM employees and therefore one may ask to what extent the particular
culture of that organization has influenced the findings. Despite the existence of
such valid points for criticism, Hofstede’s research is widely considered to be the
most comprehensive work on the measurement of cultural differences across nations
(Kogut & Singh, 1988). To date, numerous researchers have used Hofstede’s (1980)
numerical scales and provided convincing support for the construct validity of his
four cultural dimensions (cf. Hofstede & Bond, 1984; Morosini, Shane & Singh,
1998; Schwartz, 1994; Smith, Dugan & Trompernaars, 1996; Sondergaard, 1994).
 21

Furthermore, it is recognized that the clustering technique used to assign MNCs to

particular strategy types (‘peripheral’ and ‘focused’) is rather simplistic and coarse.
However, as Ghoshal and Nohria (1995: 50) noted, “managers need simple
organizational models and classification schemes as a starting-point for thinking
about the core attributes of their organizational needs. Similarly, academics need
them in order to build theory and develop analytical and testable propositions.” This
statement is particularly true for research subjects that, like ‘TMT
internationalization’, represent still largely uncharted territory.

Another limitation of this study is the fact that the cross-sectional research approach
used is only able to investigate isolated moments in time. Questions about the
dynamics of TMT cultural heterogeneity are left unanswered. How do multicultural
teams evolve over time? Does emotional conflict vanish and cognitive capacity and
communication capability improve, i.e. do multicultural teams learn how to
cooperate effectively over time? Similarly, matching is a dynamic process. Few, if
any, MNCs are ever in a state of ideal equilibrium. Rather, they are constantly
“shooting at a moving target of coalignment” (Thompson, 1967: 234). Here, one
may inquire into the organizational and environmental factors which, in addition to
organizational performance, drive MNCs either away from or towards a perfect state
of TMT fit (e.g., recruiting problems). In conclusion, future research may wish to
pursue path and/or longitudinal analyses able to provide answers to these and other
questions relating to the dynamics of the issue under consideration.

Finally, we used medium to large manufacturing companies for the statistical

analyses. Thus, before we are able to announce generalizations on the exact nature
of the relationships between TMT cultural heterogeneity, corporate degree of
internationalization, team processes, and team and company performance, we must
await further research that verifies this study’s findings for small MNCs and
companies operating in the services sector.
 22

Endnotes

1
The model used builds on Thomas et al.’s (1991) research framework which represents a
higher level of abstraction (i.e., that coalignment between executive characteristics and
strategic orientation should affect organizational performance).

2
In a subsequent study, Hofstede (1991) added a fifth cultural dimension: long-term
orientation. Since this new study, however, did not provide the respective culture scores
for all TMT member nationalities represented in the sample, we could not include the
‘time’ dimension in the analyses.

3
The variable TMT degree of cultural heterogeneity was significantly correlated with
another potential measure for TMT internationalization: percentage of foreign nationals
(i.e., non-Germans) on the team (r=0.592, p<0.001). However, we do believe that the
heterogeneity measure applied is more expressive. Solely distinguishing between
foreign nationals and home nationals ignores each executive’s cultural affiliation. A
TMT composed of an American, a Canadian, and an Australian manager would be
equated with a team composed of an American, a Japanese, and an Italian executive.
The TMT cultural heterogeneity index clearly distinguishes between those two teams.

4
Prior research has identified significant correlations between FSTS and other degree of
internationalization measures such as foreign-assets-to-total-assets and country scope
(cf. Gomes & Ramaswamy, 1999; Sambharya, 1995; Tallman & Li, 1996).

5
It was found that the answers were generally consistent across all four industries
examined. To test for industry impact, we applied ordinary least squares regression
analysis with a binary dependent variable (agreement=1; disagreement=0). The method
measures to what extent industry membership influenced the probability that
respondents agreed with the statements in the questionnaire. The results indicated an
insignificant (p>0.10) impact of the industry dummy variables on respondents’
perception of process and performance consequences of TMT cultural heterogeneity.

6 One could, of course, also argue that our own cultural affiliation may have led to the
application of biased research methods and distorted the interpretation of findings
reported in this article. However, given that the author team of this article comprised
two nationalities with fairly differing value schemas, this limitation applies only to a
lower degree.
 23

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 29

TABLE 1
Hypotheses derived from propositions 1 to 8

H1a: TMT cultural heterogeneity is positively related to intra-group cognitive

capacity
H1b: Intra-group cognitive capacity is positively related to decision quality
H1c: Intra-group cognitive capacity is not related to decision timeliness
H1d: Intra-group cognitive capacity is not related to decision commitment

H2a: TMT cultural heterogeneity is positively related to intra-group emotional

conflict
H2b: Intra-group emotional conflict is not related to decision quality
H2c: Intra-group emotional conflict is negatively related to decision timeliness
H2d: Intra-group emotional conflict is negatively related to decision commitment

H3a: TMT cultural heterogeneity is negatively related to intra-group communication

fluency
H3b: Intra-group communication fluency is not related to decision quality
H3c: Intra-group communication fluency is positively related to decision timeliness
H3d: Intra-group communication fluency is not related to decision commitment

H4a: TMT cultural heterogeneity is positively related to inter-group direct

interaction capability
H4b: Inter-group direct interaction capability is positively related to global
stakeholder satisfaction

H5a: TMT cultural heterogeneity is positively related to inter-group symbolic power

H5b: Inter-group symbolic power is positively related to global stakeholder
satisfaction

H6a: TMT cultural heterogeneity is negatively related to company performance

H6b: Decision quality is positively related to company performance
H6c: Decision timeliness is positively related to company performance
H6d: Decision commitment is positively related to company performance
H6e: Global stakeholder satisfaction is positively related to company performance

H7: TMTs of MNCs pursuing a low DOI (Strategy Type 1: ‘peripheral’

internationalization) exhibit lower cultural heterogeneity than TMTs of MNCs
pursuing high DOIs (Strategy Type 2: ‘focused’ internationalization)

H8a: Type 1 MNCs headed by TMTs with low cultural heterogeneity have higher
organizational performance than other Type 1 MNCs
H8b: Type 2 MNCs headed by TMTs with high cultural heterogeneity have higher
organizational performance than other Type 2 MNCs
 30

TABLE 2
Cultural heterogeneity of two fictitious TMTs
based on Hofstede’s (1980) national culture scores*

Team ‘Heterogen’ Team ‘Homogen’

PD UA I M PD UA I M
NET 38 53 80 14 SWI 34 58 68 70
NOR 31 50 69 8 GER 35 65 67 66
MEX 81 82 30 69 GER 35 65 67 66
SIN 74 8 20 48 GER 35 65 67 66
USA 40 46 91 62 GER 35 65 67 66
SPA 57 86 51 42 GER 35 65 67 66
GER 35 65 67 66 GER 35 65 67 66
Mn 51 56 58 44 Mn 35 64 67 67
Sd 19 24 24 23 Sd .35 2.45 .35 1.4
Vc .36 .43 .41 .52 .43 Vc .01 .04 .01 .02 .02

PD: Power distance; UA: Uncertainty Avoidance; I: Individualism; M: Masculinity

Mn: Mean; Sd: Standard deviation; Vc: Variation coefficient

∑x i
1 n
Mn = i =1
; Sd = ∑ (xi − x )2 ; Vc = Sd
n n i =1 Mn

* Nationality abbreviations as used by Hofstede (1980)

 31

TABLE 3
Ideal TMT degree of cultural heterogeneity for MNCs operating at different
DOI levels

Ideal TMT degree of Average TMT Ideal TMT degree of

Performance cultural heterogeneity degree of cultural cultural heterogeneity
measure for MNCs exhibiting heterogeneity for MNCs exhibiting
low DOIs (n=40) (n=88) high DOIs (n=48)
ROA .136 .152 .170
CEFF .132 .152 .167
ROA=Return on assets
CEFF=Cost efficiency
 32

TABLE 4
Means, standard deviations, and correlations

Variables Mean Sd 2 3 4 5 6 7 8 9 10
1. Cultural heterogeneity .15 .05 .351* .496** .151 -.297* .572*** .246 -.185 -.118 -.114
2. Cognitive capacity 2.13 1.03 -.027 -.158 -.155 .221 .585** .18 -.275 .274
3. Emotional conflict 3.84 .88 .473** -.231 .012 -.198 -.402** -.579** -.216
4. Communication fluency 3.09 1.18 -.248 .121 -.162 .398** .416** .01
5. Direct interaction capability 1.98 .69 .152 .115 .006 -.216 .017
6. Symbolic power 1.91 .85 .256 -.053 -.19 .279
7. Decision quality 2.04 .9 -.301* -.265 .288
8. Decision timeliness 3.2 1.12 .421** 0
9. Decision commitment 3.8 1.1 -.388**
10. Global stakeholder satisfaction 1.67 .64
*
Correlation is significant at the .05 level (2-tailed)
**
Correlation is significant at the .01 level (2-tailed)
 33

TABLE 5
Regression analysis for top management team and company performance

Top management team Company

performance performance
Decision Decision Decision Global stakeholder
Variables
quality timeliness commitment satisfaction

Cognitive capacity .508*** .145 .195

*
Emotional conflict -.198 -.362 -.636***
Communication fluency .016 .229* -.128
Direct interaction capability .087
Symbolic power .218*
Decision quality .142*
Decision timeliness .029
Decision commitment .179**
Global stakeholder satisfaction .531***
Cultural heterogeneity -2.045
Intercept 1.78*** 1.41* 1.50*** 1.36*** 1.14*
F-value 8.21*** 4.19** 9.79*** 2.87* 8.90***
Adj. R2 .33 .18 .38 .09 .47

* p<.10 ** p<.05 *** p<.01

 34

TABLE 6
TMT degree of cultural heterogeneity (CulH) for MNCs operating at
low and high degrees of internationalization (DOIs)

DOI n Mean CulH t-test

Low (FSTS<51%) 40 .11
p<0.001
High (FSTS>=51%) 48 .18

Median FSTS=.51
Median CulH=.16
 35

TABLE 7
Performance impact of a misfit between MNC
DOI and TMT degree of cultural heterogeneity

ROA CEFF
Low DOI -.342* -.269
High DOI -.39* -.456**

* p<.10
** p<.05
 36

FIGURE 1
The tripartite research model

MNC degree of TMT degree of cultural

Coalignment
internationalization heterogeneity

Organizational
performance
 37

FIGURE 2
The impact of top management team (TMT) cultural heterogeneity
on team processes and performance

Team processes Team performance

Intra-Group Intra-Group
(+)***
Cognitive capacity Decision quality

(+)* (-)* (+)*

Emotional conflict Decision timeliness
(-)***
(+)** (+)
Communication
(+) (+)* Decision commitment
TMT cultural fluency (+)** Company
heterogeneity performance
(-)*

Inter-Group
Inter-Group
Direct interaction (+)
(+)***
(+)*** capability Global stakeholder
satisfaction
Symbolic power (+)*

(-)

* p<.10 ** p<.05 *** p<.01