Technological competence and international diversification: the role of managerial incentives.
* This paper shows that the role of managerial incentives is highlighted by a relatively complex relationship between technological competence and international diversification International diversification
The attempt to reduce risk by investing in more than one nation. By diversifying across nations whose economic cycles are not perfectly correlated, investors can typically reduce the variability of their returns. . 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 curvilinear
a line appearing as a curve; nonlinear.
see curvilinear regression. relationship (an inverted inverted
reverse in position, direction or order.
inverted L block
a pattern of local filtration anesthesia commonly used in laparotomy in the ox. 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 Corporate Governance
The relationship between all the stakeholders in a company. This includes the shareholders, directors, and management of a company, as defined by the corporate charter, bylaws, formal policy, and rule of law. * Managerial compensation. Innovation
International diversification provides an essential alternative means for firms to grow, beyond the options of internal growth and product diversification Diversification
A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance.
Diversification is possibly the greatest way to reduce the risk. 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 Internal Operations (I.O., IO or I/O) is a fictional American Intelligence Agency in Wildstorm comics. It was originally called International Operations. I.O. first appeared in WildC.A.T.S. volume 1 #1 (August, 1992) and was created by Brandon Choi and Jim Lee. . 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 spe·cial·ize
v. spe·cial·ized, spe·cial·iz·ing, spe·cial·iz·es
1. To pursue a special activity, occupation, or field of study.
2. 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). Thus, we think that showing how agency theory is related to the international diversification decision and how incentives might alter the relationship between technological competence and international diversification are important extensions to the international business literature. Figure 1 illustrates the relationships that we seek to explore in this paper.
[FIGURE 1 OMITTED]
Even though managerial pay has been regarded as one of the most powerful incentive mechanisms to improve the assessment of environmental factors and firm capabilities (Jensen/Murphy 1990), empirical research Noun 1. empirical research - an empirical search for knowledge
inquiry, research, enquiry - a search for knowledge; "their pottery deserves more research than it has received" on pay, as a mechanism to control managerial interest in international diversification, has been largely absent. We seek to contribute to the literature by examining how two different types of managerial pay, contingent pay (e.g., long-term bonuses and stock options) and non-contingent pay (e.g., cash), differentially influence the level of international diversification (Barkema/Gomez-Mejia 1998, Jensen/Murphy 1990). We also seek to enhance agency theory research by examining the potential moderating effect of managerial pay as a governance mechanism on the relationship between technological competence and international diversification. Thus, our study of a sample of Standard & Poor's 500 member firms provides additional evidence on the complex interplay in·ter·play
Reciprocal action and reaction; interaction.
intr.v. in·ter·played, in·ter·play·ing, in·ter·plays
To act or react on each other; interact. of contributing factors leading to international strategies.
In the next section, we provide theoretical background on technological competence in the international environment as well as on managerial pay. We then develop hypotheses regarding the relationships between technological competence, managerial pay, and international diversification, including hypotheses suggesting contingent and non-contingent managerial pay as moderator moderator - A person, or small group of people, who manages a moderated mailing list or Usenet newsgroup. Moderators are responsible for determining which email submissions are passed on to the list or newsgroup. variables. We conclude by discussing implications for theory and future research.
Extending Technological Competence Through International Diversification
Firms may sustain their competitive advantage as well as their capabilities by expanding their activities internationally. Whereas the early international literature was dominated by studies on market position, more recent studies have given details on how international diversification can help firms to leverage their technological competence (Tallman/Fladmoe-Lindquist 2002). Furthermore, international diversification can provide economies of scale benefits, partners, and R&D-supportive governments for spreading the cost of R&D activities (Cantwell 1989, Feinberg/Gupta 2004, Franko 1989, Kogut/Chang 1991).
Despite an advanced understanding of the importance of international diversification for technological competence, previous literature has been relatively silent about the risks of this strategy. For example, high levels of investment in technological competence may limit firms' abilities to allocate the necessary financial resources for international expansion. Technological competence may also be difficult to transfer to little known overseas markets where concerns for intellectual property rights would be more acute. Similarly, firms may experience problems when they attempt to transfer technological knowledge from foreign countries. Perhaps the main reason for the lack of consideration of the international diversification trade-offs is the exceeding focus on firm-level explanations in previous literature. Actions of firms, however, are "a product of reflective Refers to light hitting an opaque surface such as a printed page or mirror and bouncing back. See reflective media and reflective LCD. actors constrained con·strain
tr.v. con·strained, con·strain·ing, con·strains
1. To compel by physical, moral, or circumstantial force; oblige: felt constrained to object. See Synonyms at force.
2. and enabled by their access to authority, resources, and structural opportunities" (Kogut/Walker/Anand 2002, p. 163).
As technological intensity fosters international diversification, it concomitantly con·com·i·tant
Occurring or existing concurrently; attendant. See Synonyms at contemporary.
One that occurs or exists concurrently with another. increases the potential for agency problems. A critical agency problem arises from goal incongruence in·con·gru·ent
1. Not congruent.
in·congru·ence n. between principals and agents because of the difficulty in verifying the agent's behavior. When information asymmetries are costly or difficult to overcome, incentive-based governance mechanisms may become more salient (Conlon/McLean Parks 1990, Sanders San´ders
n. 1. An old name of sandalwood, now applied only to the red sandalwood. See under Sandalwood. 2001). Shareholders of the firm may prefer aligning the interests of managers with that of their own by managerial compensation (Mishra/Gobeli 1998, Roth 1995). Previous studies in domestic settings have shown that different forms of managerial pay may provide incentives for managerial actions (e.g., Balkin/Gomez-Mejia 1990, Daily et al. 1998), including innovation in high-technology firms (Balkin et al. 2000). On the one hand, contingent pay has been suggested to motivate managers for the longer term (Finkelstein/Boyd 1998). For example, in a study by Kahn and Sherer (1990) executives anticipated that their performance would influence the bonus their firm pays them in the future. Moreover, Leonard (1990) found that contingent pay is a more effective motivator of executives than their promotion. Non-contingent pay, on the other hand, is expected to generate managerial interest for the shorter term, although results on the effectiveness of cash compensation as a governance mechanism have been mixed (Jensen/Murphy 1990, Gomez-Mejia/Tosi/Hinkin 1987).
Managerial compensation alone may not eliminate the problem of asymmetric information Asymmetric Information
Information available to some people but not others.
In other words, the asymmetric information is held by only one side, meaning someone is keeping a secret. between owners and managers but it may ensure that the link between technological competence and international diversification is more optimally managed. Accordingly, we seek to contribute to the working knowledge of behavioral agency theory by examining the direct and indirect effects of managerial pay in relation to technological competence and international diversification.
The Effect of Technological Competence
Managers with a focus on their firms' technological capabilities in general have a strong strategic motivation to pursue international diversification (Hitt et al. 2006). Based on results from firms operating in 15 countries between 1960 and 1986, Franko concluded that firm R&D "emerges as a principal, perhaps the principal, means of gaining market share in a global competition" (1989, p. 470). Often the scale of R&D in domestic businesses requires managers to amortize amortize
To write off gradually and systematically a given amount of money within a specific number of time periods. For example, an accountant amortizes the cost of a long-term asset by deducting a portion of that cost against income in each period. their firms' expenses across a larger customer base and recover investments before the technologies become obsolete (Kotabe 1990). International diversification from this point of view helps firms to acquire additional resources, sell new products and services, and re-invest income streams from current innovations (Delios/Beamish 1999, Hitt/Hoskisson/Kim 1997).
Despite the intrinsic need for innovative firms to increase their international expansion, it is conceivable con·ceive
v. con·ceived, con·ceiv·ing, con·ceives
1. To become pregnant with (offspring).
2. that there is an inflection point Inflection Point
An event that changes the way we think and act.
-Andy Grove, Founder of Intel.
For example, the fall of the Berlin Wall was an inflection point in global politics and the commercialization of the Internet was an inflection point in technology. in the relationship between technological competence and international diversification. As managers confront a number of potential problems, they may begin to limit their firm's further expansion into foreign markets. Setting up new operations in foreign countries and managing a dispersed dis·perse
v. dis·persed, dis·pers·ing, dis·pers·es
a. To drive off or scatter in different directions: The police dispersed the crowd.
b. portfolio of foreign operations, for example, is inherently expensive (Geringer/Beamish/daCosta 1989). Along this line, Feinberg and Gupta (2004) found that if firms already have a large number of R&D units in foreign locations, the addition of new R&D units starts to become less attractive. It is conceivable that managing an increasingly dispersed portfolio of foreign R&D units, compared to just sourcing or production operations, would pose an even greater challenge to most firms. Furthermore, the risks of technological expropriation The taking of private property for public use or in the public interest. The taking of U.S. industry situated in a foreign country, by a foreign government.
Expropriation is the act of a government taking private property; Eminent Domain is the legal term describing the by competitors may increase by additional international expansion (Barkema/ Vermeulen 1998). Thus, firms having proprietary technology may limit investing in additional countries owing to owing to
Because of; on account of: I couldn't attend, owing to illness.
owing to prep → debido a, por causa de the risk of leakage of their valuable know-how, especially when they expand further into emerging and transition economies (Tihanyi et al. 2003). Viewed in this light, even if a firm's management has strong incentives to pursue international diversification to sustain technological competence, it is likely that at a certain point the increase in international diversification will taper off Verb 1. taper off - end weakly; "The music just petered out--there was no proper ending"
fizzle, fizzle out, peter out
discontinue - come to or be at an end; "the support from our sponsoring agency will discontinue after March 31"
2. . Therefore,
Hypothesis 1: The relationship between technological competence and international diversification is curvilinear (an inverted U-shape).
Contingent and Non-Contingent Managerial Pay Effects
The proposed curvilinear relationship above indicates an enhanced role for managerial incentives. Managers may in particular face ambiguity Ambiguity
ultimate authority in ancient Greece; often speaks in ambiguous terms. [Gk. Hist.: Leach, 305]
pledge to husband has double meaning. [Arth. when they attempt to extend the scale of their firms' R&D by pursuing international diversification. They may want to amortize the costs of R&D or find new capabilities, but international diversification may not always be the appropriate solution. The potential weight of managerial actions under these uncertain conditions provides a basis for corporate governance. We suggest that the managers' willingness to increase their firms' international diversification would differ depending not only on the level of compensation they receive but also its form, contingent or non-contingent pay.
Contingent pay may be an appropriate incentive to managers to seek new international markets for their firm. International diversification in general provides long-term opportunities for firms to extend their customer base, to acquire resources, or to hire talent for future growth. Stock options may reduce the potential agency conflict between managers and shareholders with a long term interest in investing firms with higher international diversification (Harris/Ravenscraft 1991). Contingent pay may also facilitate prudent managerial assessment in the case of international diversification because of the difficulties associated with monitoring overseas operations (Roth/O'Donnell 1996) and the increased information asymmetry Information asymmetry
Condition that information is known to some, but not all, participants. regarding foreign operations between managers and shareholders (Ellstrand/Tihanyi/Johnson 2002). Furthermore, contingent pay can be an effective incentive for managers with increased discretion over a broad scope of international operations (Finkelstein/Boyd 1998, Hambrick/Abrahamson 1995, Leonard 1990). Thus, we suggest:
Hypothesis 2: There is a positive relationship between contingent pay and international diversification.
Cash compensation provides a stable income stream to managers with little incentive for their higher efforts in identifying new opportunities (Kahn/Sherer 1990). Thus, when managers concentrate on annual results, increased international diversification may adversely impact the scope of their required managerial tasks. Firms may face higher costs when they expand their business internationally, especially, when they operate in unfamiliar country environments. These costs can be attributed to increased organizational complexity, market-related uncertainties, hostility, and lack of knowledge of local institutions (Hitt et al. 1997). Given these new challenges in the international environment, non-contingent pay may not provide appropriate incentives for managers to expand their businesses into foreign markets. Furthermore, prior research in domestic settings indicates that the focus on short-term incentives may induce in·duce
1. To bring about or stimulate the occurrence of something, such as labor.
2. To initiate or increase the production of an enzyme or other protein at the level of genetic transcription.
3. managers to limit the diversified diversified (di·verˑ·s scope of the firm (Baysinger/Hoskisson 1990). Limiting the scope of international diversification may be a particularly effective means of cost savings in the short term. Thus, given their already secure cash compensation, managers may not have a strong incentive to increase the scope of their firms' international operations. Therefore,
Hypothesis 3: There is a negative relationship between non-contingent pay and international diversification.
The Moderator Effect of Managerial Pay
In addition to its direct link with international diversification, managerial pay is likely to be a crucial indirect component when the relationship between technological competence and international diversification is considered. Previous research indicates that managerial compensation is a relevant governance mechanism for innovation strategies, particularly in the cases of new product intensity and R&D activity (Hoskisson et al. 2002). Managers receiving higher levels of stock options and bonuses are in general expected to be interested in their firms' international diversification (e.g., Sanders/Carpenter 1998), and thus facilitate the extension of their firm's technological competence by additional foreign expansion. In contrast, when managers receiving non-contingent pay are already faced with increased complexity in managing innovative firms, they would be especially hesitant hes·i·tant
Inclined or tending to hesitate.
hesi·tant·ly adv. to manage additional international operations.
The level of risk managers perceive may influence their predisposition predisposition /pre·dis·po·si·tion/ (-dis-po-zish´un) a latent susceptibility to disease that may be activated under certain conditions.
1. toward accepting further risk (Guay 1999, Lubatkin/Chatterjee 1994, Miller/Wiseman/Gomez-Mejia 2002). Beatty and Zajac (1994), for example, found that managers of firms with a high degree of perceived risk prefer less incentive based (contingent) compensation. Investing in different countries around the world may be seen by managers with contingent pay as an opportunity for risk reduction for their firms with heavy R&D investments (Agmon/Lessard 1977). Because managers may make less risky decisions at the margin given the curvilinear nature of the proposed relationship of technological competence and international diversification, less risky decisions may still be encouraged with contingent pay incentives.
Perceiving favorable fa·vor·a·ble
1. Advantageous; helpful: favorable winds.
2. Encouraging; propitious: a favorable diagnosis.
3. environmental conditions in regard to currency and domestic equity values may enhance the above scenario. For instance, if the home country has a strong currency relative to other countries (e.g., the effects of Asian currency crisis for U.S. firms) and equity values are high domestically; international diversification might be increased because the economic situation provides such an opportunity. This is especially true if there are still resources available to invest in a broader set of countries in which to spread the cost of creating technological assets. Although international diversification to extend technological competence may level off at some point, we expect that contingent pay provides an incentive for managers to curtail cur·tail
tr.v. cur·tailed, cur·tail·ing, cur·tails
To cut short or reduce. See Synonyms at shorten.
[Middle English curtailen, to restrict this risk such that the negative slope of an inverted-U curvilinear relationship will be lessened less·en
v. less·ened, less·en·ing, less·ens
1. To make less; reduce.
2. Archaic To make little of; belittle.
To become less; decrease. . In other words Adv. 1. in other words - otherwise stated; "in other words, we are broke"
put differently , managers would be induced by contingent pay to sustain the efforts to extend their firms' technological competence internationally, in a sense stretching the risk tolerance Risk Tolerance
The degree of uncertainty that an investor can handle in regards to a negative change in the value of their portfolio.
An investor's risk tolerance varies according to age, income requirements, financial goals, etc. level. Therefore, high levels of contingent pay may weaken the curvilinear relationship between technological competence and international diversification. Hence, we posit:
Hypothesis 4: The curvilinear relationship between technological competence and international diversification becomes weaker at higher levels of contingent pay.
Previous literature suggests that non-contingent compensation in general does not expose managers to the same degree of risk or offer the same rewards as contingent pay does (Daily et al. 1998). Managers rewarded primarily with non-contingent compensation do not normally participate in the upside Upside
The potential dollar amount by which the market or a stock could rise.
This is basically an educated guess on how high a stock could go in the near future.
See also: Bull, Downside of risky strategies. Accordingly, when their firm's investment in technological competence is high, they may seek to minimize the costs of overreaching Exploiting a situation through Fraud or Unconscionable conduct. through international diversification. As such, non-contingent pay may lead more loss-averse among managers (Wiseman/Gomez-Mejia 1998).
Because managers receive no compensation for taking on additional risk, they may be more sensitive to perceptions of additional risk which may lead to potential failure and loss of reputation. In other words, the non-contingent incentive makes them more loss averse a·verse
Having a feeling of opposition, distaste, or aversion; strongly disinclined: investors who are averse to taking risks. and they perceive more risk associated with international diversification than do those who have incentives that emphasize continent pay. Thus, it is not that the international diversification decision is more risky, but that managers' perceptions change given the type of incentive that is emphasized. Accordingly, non-contingent pay may result in managers considering the potential limitations of international diversification, especially when seeking to extend their firm's technological competence. Because their pay incentive does not reflect the necessary risk-considerations, they would pursue lower levels of international diversification in their firms. Therefore,
Hypothesis 5: The curvilinear relationship between technological competence and international diversification becomes stronger at higher levels of non-contingent pay.
The sample of 156 firms for our study was drawn from the list of 2002 Standard & Poor's (S&P) 500 on the COMPUSTAT Annual Data Tape and the COMPUSTAT Business Segment Tape. To increase the validity of our dependent variable, we included firms in our study that reported data on three different indicators of international diversification, including assets, sales, and subsidiaries. These data as well as the required R&D data were available only for 156 firms out of the potential sample owing to the limitations of the COMPUSTAT dataset. We conducted t-tests on differences in firm size, leverage, and performance between our sample and the S&P 500. The tests were not statistically significant suggesting that our sample was not biased along the dimensions examined. Furthermore, the sample represents firms from 84 different 4-digit SIC code industries ranging from SIC codes 1311-9997.
Prior studies on international diversification have recommended the use of multiple measures to improve validity (Hitt et al. 2006, Sullivan 1994). Consistent with prior research, we measured international diversification by averaging three widely-used measures: 1) firm sales from foreign operations divided by total firm sales, 2) foreign assets divided by total assets, and 3) the number of foreign subsidiaries divided by the total number of subsidiaries. The results of a factor analysis indicated that these three individual variables loaded on the same factor. The factor loadings for the three measures were 0.89 (foreign sales per total sales), 0.66 (foreign assets per total assets), and 0.83 (foreign subsidiaries per total subsidiaries); the Cronbach-alpha for the factor was 0.71, indicating a moderately low level of reliability of our composite measure. Sales and assets figures from foreign operations and subsidiary data were obtained from Worldscope and Compact Disclosure in 2001 and 2002. Total sales and assets data were obtained from COMPUSTAT for the same year.
Technological competence was measured as firm R&D expenditures divided by total firm sales. We collected these data from COMPUSTAT for 1999. Managerial pay data were collected for members of the top management team, including the CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. , in each firm. The literature on managerial pay covers management, finance, labor economics, and other areas resulting in the development of a wide range of available valid measures (Bloom/Milkovich 1998, Kahn/Sherer 1990, Leonard 1990, Murphy 1999). We included two measures of managerial pay used in previous studies: Non-contingent pay (salary and other annual cash compensation) and contingent pay (stock options). These measures enabled us to assess the impact of short-term and longer-term incentives on international diversification (Daily et al. 1998). Non-contingent pay was collected from the S&P ExecuComp and proxy statements for 1999. Managerial stock options were valued using the Black-Schotes method as provided by S&P ExecuComp dataset. Stock option data were also collected from the S&P ExecuComp dataset for 1999.
In addition to their technological competence, firms may increase their international diversification to acquire knowledge from innovative environments of different countries. Locating plants in countries with favorable or sophisticated R&D environments may help firms to sustain their competitive advantage (Cantwell 1989, Furman/Porter/Stern 2002, van Pottelsberghe de la Potterie/Lichtenberg 2001). Thus, we included a variable in our models to control for the effect of country R&D environments. Of the measurement options available to us, Technology Achievement Index (TAI), developed by the United Nations Development Program (UNDP UNDP United Nations Development Programme
UNDP Unión Nacional para la Democracia y el Progreso (National Union for Democracy and Progress) ), offered the best measurement opportunity. Published first in 2001 by the UNDP, TAI measures the technological competence of 72 countries from 1995 and 2000. TAI is a composite of four technological capacity dimensions measured by two indicators each, such as creation of technology (patents granted per capita [Latin, By the heads or polls.] A term used in the Descent and Distribution of the estate of one who dies without a will. It means to share and share alike according to the number of individuals. , receipts of royalty fees and license fees from abroad per capita), diffusion diffusion, in chemistry, the spontaneous migration of substances from regions where their concentration is high to regions where their concentration is low. Diffusion is important in many life processes. of old innovations (internet hosts per capita, high- and medium-technology exports as a share of all exports), diffusion of new innovations (logarithm logarithm (lŏg`ərĭthəm) [Gr.,=relation number], number associated with a positive number, being the power to which a third number, called the base, must be raised in order to obtain the given positive number. of telephones per capita, logarithm of electricity consumption per capita), and human skills (mean years of schooling, gross enrollment ratio at tertiary tertiary (tûr`shēârē), in the Roman Catholic Church, member of a third order. The third orders are chiefly supplements of the friars—Franciscans (the most numerous), Dominicans, and Carmelites. level in science, mathematics, and engineering).
In a recent study, Archibugi and Coco (2004) found high correlation between TAI and the World Economic Forum's Technology Index (WEF WEF World Economic Forum
WEF Water Environment Federation
WEF Winter Equestrian Festival (Wellington, FL)
WEF With Effect From (aviation)
WEF World Environment Fund
WEF Weight Enumerating Function ) (0.93), TAI and the Science and Technology Capacity Index (SCTI SCTI Stanford Center for Technology and Innovation
SCTI Sodium Components Test Installation
SCTI Southern California Transplantation Institute (and Liver Center)
SCTI Small Component Test Installation ) (0.95), and TAI and ArCo, an index developed by the authors (0.98). These results indicated that TAI provided a comparable estimate of country technology environment to those of other measures. We constructed our control variable of country R&D environments by using the weighted average of TAI for each firm. We used the number of subsidiaries the firm had in each country as our weight. Subsidiary data were collected from Compact Disclosure for 2000.
In addition to country level R&D, CEO international experience has been shown to impact international diversification (Carpenter/Sanders/Gregersen 2001, Sambharya 1996, Takeuchi/Tesluk/Yun 2005). We operationalized CEO international experience using two indicators: 1) whether the CEO has international work experience and 2) whether they had international education experience (e.g., Tihanyi et al. 2000). International work experience data was coded from Dun & Bradstreet's Reference Book of Corporate Managements from 1999. In cases where international work experience was evident the variable was coded "1" otherwise the variable was coded "0." CEO educational experience was also coded from the Reference Book of Corporate Managements in a similar fashion. In cases where one or both CEO international work experience and CEO international education were present then CEO international experience was coded "1 ."
Prior research suggests that managers with higher equity holdings tend to have an increased interest in firm strategies, including international diversification (Eisenmann 2002, Sanders/Carpenter 1998). We included managerial ownership, measured by the percentage of managerial equity holdings of total equity holdings, as a control. This variable was collected from proxy statements from 1999. The board of directors may also influence the level of international diversification in their governance role as a monitoring mechanism (Rediker/Seth 1995). Because outside directors may be better able to represent the interest of shareholders (e.g., Rechner/Dalton 1991), the outside director ratio of the board of directors was included as a control variable in our analysis. This variable was measured as the number of directors not employed by the firm divided by the total number of directors. We excluded directors with an affiliation as specified by the SEC Regulation 14A, Item 6(b), as such affiliation has been known to limit impartiality im·par·tial
Not partial or biased; unprejudiced. See Synonyms at fair1.
impar·ti·al of a director (Daily 1996). Board of director data were collected from Compact Disclosure and proxy statements for 1999.
The presence of large institutional holdings may also motivate firms to extend their levels of international diversification (Tihanyi et al. 2003). Institutional ownership was the ratio of shares held by large institutional holdings to total shares outstanding in 1999. We collected these data from Compact Disclosure. The monitoring of the board might be reduced when the CEO presides over the board (Rechner/Dalton 1991). Prior research indicates that duality facilitates decision making by establishing a unified chain of command, whereas others suggest that separating the CEO and chair positions improves the corporate decision-making process through shared responsibility (Finkelstein/D'Aveni 1994). We expected that CEO duality would reduce the level of international diversification (e.g., Ellstrand et al. 2002). We coded CEO duality as a "1" when the CEO also served as chairperson chairperson Chairman The head of an academic department. See 'Chair.', Cf Chief. of the board and a "0" when different individuals served as CEO and board chairperson. CEO duality data for 1999 were also collected from Compact Disclosure.
International diversification requires substantial capital for new plants, (domestically unavailable) human resources The fancy word for "people." The human resources department within an organization, years ago known as the "personnel department," manages the administrative aspects of the employees. , and information systems owing to increased organizational complexity (Dunning Dunning
The process of communicating with customers to ensure the collection of accounts receivable.
Dunning can start with gentle reminders and then progress to nearly threatening letters as accounts become more past due. 1993, Kotabe 1990). For example, large firms tend to have the resources to be more internationally diversified (Tallman/Li 1996, Wolf 1977). Accordingly, we controlled for firm size as measured by the logarithm of total employees. Prior research has found that firm performance may be associated with international diversification (e.g., Gomes/Ramaswamy 1999, Lu/Beamish 2004). For instance, firms with abundant resources may be able to cover the potential costs of doing business globally. Thus, we included firm performance as a control variable, measured by return on assets Return on assets (ROA)
Indicator of profitability. Determined by dividing net income for the past 12 months by total average assets. Result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets). (ROA). Firms may also enter foreign markets to offset their problems in the domestic markets, such as low performance and high debts (Shapiro 1982). We included firm leverage, measured by debt/sales, as a control variable. In all cases the Compustat data was collected for the year 1999.
Lastly, differences in demand conditions, market characteristics, and government regulations across countries may lead to different motivations for firms to internationalize in·ter·na·tion·al·ize
tr.v. in·ter·na·tion·al·ized, in·ter·na·tion·al·iz·ing, in·ter·na·tion·al·iz·es
1. To make international.
2. To put under international control. across industries (Chung 2001). Industry dummy Sham; make-believe; pretended; imitation. Person who serves in place of another, or who serves until the proper person is named or available to take his place (e.g., dummy corporate directors; dummy owners of real estate). variables, based on their 4-digit SIC codes were included as controls, using eight industry groups: extractive extractive /ex·trac·tive/ (-tiv) any substance present in an organized tissue, or in a mixture in a small quantity, and requiring extraction by a special method.
1. , processing, equipment manufacturing, electrical/electronic equipment, textiles/apparel, consumables, software/business services, and trade. Effect coding was used because we had no preference to select any industry as a reference group (Kerlinger/Pedhazur 1973).
Hierarchical regression regression, in psychology: see defense mechanism.
In statistics, a process for determining a line or curve that best represents the general trend of a data set. was used to estimate all models. To test hypotheses involving curvilinear and curvilinear/linear interactions we followed the procedure outlined in Cohen cohen
(Hebrew: “priest”) Jewish priest descended from Zadok (a descendant of Aaron), priest at the First Temple of Jerusalem. The biblical priesthood was hereditary and male. , Cohen, West, and Aiken (2003). Within this procedure, control variables were entered first (Model 1), linear terms of technological competence and the effects of contingent and non-contingent forms of pay were entered next (Model 2), followed by the squared-term of our technological competence variable (Model 3). The curvilinear interactions between managerial pay and technological competence were entered in subsequent models (Models 4-6). Curvilinear interactions were tested and interpreted following the steps in Cohen et al. (2003).
Table 1 presents the means, standard deviations, and correlations for all the variables. All variables used to test the interaction hypotheses were centered in order to alleviate Alleviate
To make something easier to be endured.
Mentioned in: Kinesiology, Applied the potential problem of multicollinearity resulting from the multiplication of the variables (Aiken/West 1991). We report non-centered means and standard deviations in Table 1 to simplify interpretation and to facilitate further analyses. Examination of variance inflation factors (VIF VIF - VHDL Interface Format. Intermediate language used by the Vantage VHDL compiler. "A VHDL Compiler Based on Attribute Grammar Methodology", R. Farrow et al, SIGPLAN NOtices 24(7):120-130 (Jul 1989). ) indicate that some collinearity collinearity
very high correlation between variables. is present though the levels are not extreme considering the complex nature of the interactions. In Model 6, two of the standardized regression coefficients with values over 1 slightly exceed the VIF threshold of 10.0. As noted by Cortina cor`ti´na
n. 1. (Biology) a cobwebby remnant of the partial veil which in some mature mushrooms hang from the edges of the cap.
Noun 1. (2002) regression coefficients greater than 1 may not indicative of a serious problem if complex interactions are being estimated. In these cases it is important to follow procedures designed to take the effects of collinearity into account, including centering variables and entering interactions one at a time (Cohen et. al. 2003, Cortina 2002).
In order to evaluate the impact of the lag period we estimated models using three different lag periods: 1.5, 2.5 and 3.5 years respectively. As noted above, independent and control variable data were collected for 1999. To test for sensitivity to our reported lag period we collected international diversification data for two additional time periods 2000-2001 and 2002-2003). Results are very consistent across all three lag periods though the relationships are slightly weaker using the shortest lag (1.5 years). We chose to report the findings from the 2.5 year lag in the results section below.
Results of the hierarchical regression used to test the hypotheses are presented in Table 2. Model 1 included the control variables. Although all the industry dummy variables were included in the regression model, they are not reported in the table, as none of the coefficients were significant. As expected, managerial equity ownership, and CEO international experience were significant and positive predictors of international diversification. Marginal positive effects were found for board outsider Outsider often refers to one identified as on the periphery of social norms, one living or working apart from mainstream society, or one observing a group from the outside, as used in:
Hypothesis 1 predicted that technological competence would exhibit a curvilinear (inverted U-shaped) relationship with international diversification. The statistically significant change in [R.sup.2] of 0.032 between Model 2 and Model 3 (F=6.38, p<0.05) coupled with the positive and significant linear coefficient coefficient /co·ef·fi·cient/ (ko?ah-fish´int)
1. an expression of the change or effect produced by variation in certain factors, or of the ratio between two different quantities.
2. ([beta]=0.33, p<0.01) and the negative and significant coefficient of the squared-term ([beta]=-0.27, p<0.05) in Model 3 in Table 2 indicate support for Hypothesis 1.
Hypothesis 2 predicted a positive relationship between contingent pay and international diversification. These results are reported in Model 2 in Table 2. The change in [R.sup.2] between Model 1 and 2 was 0.094 (F=5.97, p<0.001). The positive and significant coefficient ([beta]=0.30, p<0.001) in Model 2 indicates support for Hypothesis 2. Non-contingent pay (Hypothesis 3) was hypothesized to have a negative relationship with international diversification. Results from Model 2 indicate no significant relationship between non-contingent pay and international diversification. Therefore, Hypothesis 3 was not supported.
Models 4-6 were used to test the moderator effects of contingent and non-contingent managerial pay on the relationship between technological competence and international diversification. The significant change in [R.sup.2] of 0.048 between Model 4 and Model 5 (F=10.33, p<0.01) indicates a moderator effect of contingent pay over the control variables and the direct effects of our independent variables. The coefficient of the interactive term of technological competence-squared and contingent pay was positive and significant ([beta]=0.93, p<0.001) in Model 5, thus Hypothesis 4 received support. This result indicates that the curvilinear relationship between technological competence and international diversification becomes weaker at higher levels of contingent pay. A graph depicting the relationship is presented in Fig. 2.
The significant change in [R.sup.2] of 0.022 between Model 5 and Model 6 (F=4.82, p<0.05) together with the negative and significant coefficient ([beta]=-0.30, p<0.05), indicates a moderator effect of contingent pay over the effects of other variables on international diversification. These results provide support for Hypothesis 5. Specifically, the curvilinear relationship between technological competence and international diversification becomes stronger at higher levels of non-contingent pay. Figure 3 presents a graph of the interaction plot.
[FIGURE 2 OMITTED]
[FIGURE 3 OMITTED]
As noted above we examined the sensitivity of our results to the lag period used. Data for the independent variables were collected for two additional time periods. Results of our main effect hypotheses were similar to our results using 1999 data and a 2.5 year lag. Interestingly, we found additional support for the negative effect of non-contingent pay on international diversification in our earlier sample (Hypothesis 3). Next, we discuss the implications of these results.
We found supporting evidence in this study that both technological competence and managerial pay are related to international diversification, and that the relationships are more complex than previously understood. These results contribute to international business research in different ways. Previous studies considered international diversification as a never-ending process and paid relatively less attention to its limits. Our findings of the curvilinear relationship suggest that the advantages of international diversification (e.g., Almeida 1996, Chung 2001, Sanna-Randaccio/Veugelers 2007) may not be unlimited for firms when they extend their technological competence. When firms operate in many locations, their managers may begin to feel that additional expansion overseas would strain the coordination and control abilities of their firms. The benefit of maximizing firm capabilities may also taper off for technology firms because strong technological competence does not necessarily entail entail, in law, restriction of inheritance to a limited class of descendants for at least several generations. The object of entail is to preserve large estates in land from the disintegration that is caused by equal inheritance by all the heirs and by the ordinary superior competitive advantage in many less-developed countries. Thus, this more complex relationship between technological competence and international diversification points toward an increased role for managerial discretion.
In contrast to prior international business literature relying largely on firm-level or country level explanations for international diversification, we emphasize the roles of managers and their motivations. Specifically, our focus on managerial incentives contributes to the managerial decision making perspective of foreign direct investment (e.g., Aharoni 1966) from an agency theoretic point of view. Results of this study indicate that managerial incentives (as collective members of the top management team) are associated with firms' level of international diversification beyond the effects of technological competence. The positive relationship between contingent pay and international diversification indicates that this form of incentive induces managers to focus more on the potential benefits of international diversification even though such strategy may incur costs and raises complexity.
We also found that contingent pay weakens the curvilinear relationship between technological competence and international diversification. This finding represents another meaningful extension of international business research. It indicates a substantial governance role for contingent pay to facilitate the relationship between international diversification and technological competence. Even though the potential hazards of high levels of international diversification are especially salient for technological advanced firms, these managers would be willing to take on additional risks by continuing to pursue international expansion in order to realize the benefits of their contingent compensation.
In contrast to contingent pay, non-contingent pay was found to strengthen the curvilinear relationship between technological competence and international diversification. If managers are mainly compensated by non-contingent pay, they appear to be aware of the limits of international diversification for technology competent firms. To the extent that high levels of international diversification may jeopardize jeop·ard·ize
tr.v. jeop·ard·ized, jeop·ard·iz·ing, jeop·ard·izes
To expose to loss or injury; imperil. See Synonyms at endanger. the overall operations of the whole firm, these managers would want to limit their firm's exposure to often uncontrollable international hazards. Because their pay is not tied to risks, the potential benefits of international diversification would matter less to these managers whereas the potential problems would seem to matter more.
The results on the effect of contingent pay on international diversification and the significant moderator effects of different forms of managerial pay contribute to the behavioral stream of agency theory. Whereas managerial pay has been viewed as an essential governance mechanism, empirical findings regarding its role and effectiveness have been mixed. Emphasizing the relevance of managerial pay in the international context is important considering the growing scope of international business activities and the level of complexity associated with such activities. Studying the effectiveness of governance mechanisms in multinational firms, including the role of managerial pay, may open up new directions for agency theory research.
The point is particularly emphasized in our finding for Hypothesis 4 and 5. These results suggest that the curvilinear (inverted U-shape) relationship between technological competence and international diversification can be softened soft·en
v. soft·ened, soft·en·ing, soft·ens
1. To make soft or softer.
2. To undermine or reduce the strength, morale, or resistance of.
3. through the manipulation of contingent pay (see Fig. 2) and strengthened through the manipulation of non-contingent pay (see Fig. 3). Thus, how managers are motivated mo·ti·vate
tr.v. mo·ti·vat·ed, mo·ti·vat·ing, mo·ti·vates
To provide with an incentive; move to action; impel.
mo through the compensation structure is likely to have a significant effect on the ultimate strategic relationships that evolve in a firm. Thus, paying attention Noun 1. paying attention - paying particular notice (as to children or helpless people); "his attentiveness to her wishes"; "he spends without heed to the consequences"
attentiveness, heed, regard to the behavior consequences of incentives is an important strategic issue for both theory and practice in understanding and governing gov·ern
v. gov·erned, gov·ern·ing, gov·erns
1. To make and administer the public policy and affairs of; exercise sovereign authority in.
2. a multinational firm's strategic approaches.
Limitations and Future Research
Although our results have offered a glimpse of the complex relationships across firm- and managerial-level variables, it is possible that the relationships we examine take time to develop. Therefore, the selection of the lag period used may affect results. In order to test how sensitive our results are to the lag structure of our design, we collected international diversification from two additional time periods. Results from estimated models, however, were quite consistent across the three lag periods. The most obvious difference was the weaker but still marginally significant results associated with the shortest lag period (1.5 years). This result suggests that time is an important issue and that the impact of managerial incentives and technological opportunity on the decision to change the level of international diversification takes several years. Results from the two other lag periods were consistent indicating that it may take somewhere between 2.5 and 3.5 years for changes to take place. Further research using longitudinal lon·gi·tu·di·nal
Running in the direction of the long axis of the body or any of its parts. data and different levels of analyses over a longer time frame could help to further clarify the directions of the relationships among the variables and provide additional interesting explanations for the specific effects of different forms of managerial pay beyond the direct and moderator relationships we found. For example, although we could not test the possibility that international diversification may influence pay (a reverse causal causal /cau·sal/ (kaw´z'l) pertaining to, involving, or indicating a cause.
relating to or emanating from cause. relationship) (e.g., Jin 2002), future research might address this issue.
There also might be other managerial, organizational, and environmental factors in play in relation to international diversification beyond the joint effects of technological competence and managerial pay. Managers, for instance, may rely on outside experts to assess technological competence of different country environments or learn from their existing partners and competitors when entering international markets. Additional organizational factors for international diversification may include motivations to find new markets and resources, improve operational efficiency, or the learning of new skills (Nachum/Zaheer 2005). Another area for future research is the in-depth study of international R&D environments. Because our main focus in this study was technological competence of the firm, we concentrated on examining the role of managerial incentives in extending firm capabilities with international diversification. We used country R&D environment only as a control variable. However, it is possible that managerial incentives are important in identifying favorable R&D environments in foreign countries. The growing literature on knowledge acquisition in the international environment could particularly benefit from the consideration of managerial incentives in selecting international locations for innovation.
The underlying assumption of agency theory research is the influence of managerial perceptions and actions by appropriate governance. We included a variable on CEO experience and found its significant association with international diversification. However, governance research does not normally examine directly how managers and top management teams view opportunities and implement strategies in the international marketplace. Given the illustrated role of managerial incentives, future qualitative studies may provide additional in-depth evidence on how managers extend their firms' capabilities by diversifying into different countries.
In the present study, we focused on the role of managerial pay as a potentially relevant governance mechanism in international business situations. Improving the effectiveness of corporate governance mechanisms, nevertheless, is one of the most challenging tasks for both researchers and practitioners. Thus, future research would do well by outlining the complex effects of different governance mechanisms and studying the relationship between owners and managers during the implementation of critical strategies. For example, analysts and investors face difficulties in evaluating firms in R&D settings (Useem 1996). As a result, one would expect investors to discount high-tech investments. However, managers with contingent pay, especially stock options, would likely be interested in reducing such information asymmetry. This might be done through signaling to investors that the firm has more value in its R&D activities than assumed by the market. Stock repurchasing programs may be one signal to reduce this asymmetry Asymmetry
A lack of equivalence between two things, such as the unequal tax treatment of interest expense and dividend payments. . Interestingly, Sanders and Carpenter (2003) found that such signals were more salient if managers had contingent pay. Future research might address whether signals to expand internationally are another way to reduce information asymmetry between owners and managers of the firm.
This study has added to the international business and agency theory literatures by a joint study of technological competence and managerial compensation in relation to international diversification. By adopting a behavioral agency theoretical perspective, we found new evidence that, beyond the curvilinear effects of technological competence, different forms of managerial pay have different effects on international diversification. These results offer some promising lines for future research. Researchers could address additional environmental issues such as the characteristics of country environments that facilitate the development of technological capabilities. The complexity of relationships in this study and the expected change in the effects of pay over time provide additional motivations for firm owners to be vigilant in regard to setting pay policies for managers, board members, and others responsible for international strategies.
DOI (Digital Object Identifier) A method of applying a persistent name to documents, publications and other resources on the Internet rather than using a URL, which can change over time. 10.1007/s11575-009-0002-y
Acknowledgements: We thank Lorraine Eden, Michael A. Hitt, and Stephen Tallman as well as the editors and anonymous reviewers of the mir Mir, Soviet and Russian space station
Mir, Soviet and Russian space station: see space exploration; space station.
mir, former Russian peasant community
mir (mēr), former Russian peasant community. Focused Issue for their helpful comments and suggestions.
Received: 30.12.2007 / Revised: 22.10.2008 / Accepted: 22.10.2008
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Assoc. Prof. L. Tihanyi ([mail])
Department of Management, Mays Business School Mays Business School is the business school at Texas A&M University. The school educates over 4,800 students in undergraduate, master's and doctoral programs and consistently ranks among the top public business schools. , Texas A&M University, College Station, USA.
Prof. R. E. Hoskisson
Jesse H. Jones Graduate School of Business, Rice University Houston, Houston, USA.
Prof. R. A. Johnson
Department of Management, Robert J. Trulaske, Sr. College of Business, University of Missouri, Columbia, USA
Assoc. Prof. W. P. Wan
Area of Management, Rawls College of Business Rawls College of Business is the AACSB-accredited business school at Texas Tech University in Lubbock, Texas. It became the first college on the Texas Tech campus to be named after it received a $25 million gift from alumnus Jerry S. Rawls. , Texas Tech University, Lubbock, USA.
Table 1: Means, Standard Deviations and Correlations (1) Variable Mean SD International Diversification 0.42 1.40 Firm Size (log) 1.26 0.58 Firm Performance 0.07 0.09 Firm Leverage 0.24 0.20 Managerial Ownership 0.05 0.05 Outside Director Ratio 0.48 0.16 Institutional Ownership 0.60 0.19 CEO Duality 0.76 0.43 Country R&D Environment 0.51 0.06 CEO International Experience 0.22 0.42 Extraction 0.03 0.18 Processing 0.28 0.45 Equipment Manufacturing 0.21 0.41 Electrical Equipment 0.21 0.41 Textiles, Apparel 0.01 0.08 Consumables 0.10 0.31 Software 0.08 0.28 Technological Competence 0.05 0.06 Contingent Pay (log) 3.36 0.90 Non-Contingent Pay (log) 6.31 0.19 Variable 1 2 3 4 5 6 1. Intl. Diversification 2. Firm Size (log) -0.05 3. Firm -0.05 0.07 Performance 4. Firm Leverage -0.14 0.01 -0.31 5. Managerial 0.18 -0.11 0.01 -0.03 Ownership 6. Outside Direc- 0.03 0.04 -0.07 0.12 -0.15 for Ratio 7. Institutional 0.09 -0.12 -0.01 0.08 0.04 0.15 Ownership 8. CEO Duality -0.01 0.11 -0.15 0.07 0.01 -0.15 9. Country R&D -0.25 -0.13 0.05 0.06 -0.03 0.09 Env. 10. CEO Intl. 0.15 0.07 0.07 0.09 0.03 -0.08 Experience 11. Extraction -0.05 0.06 0.15 -0.02 0.02 0.01 12. Processing -0.03 -0.07 0.09 0.02 -0.04 0.10 13. Equip. Manu- 0.07 -0.09 -.O1 0.02 0.06 -0.15 facturing 14. Elec. Equip. 0.10 0.01 -0.01 -0.13 0.01 -0.05 15. Textiles, 0.10 -0.10 -0.04 -0.09 -0.01 -0.11 Apparel 16. Consumables -0.15 0.14 -0.12 0.11 -0.05 0.04 17. Software -0.05 0.02 -0.01 0.04 0.04 -0.02 18. Technological 0.24 -0.16 0.15 -0.15 0.18 0.09 Comp 19. Contingent 0.31 0.33 0.10 -0.01 0.16 0.09 Pay 20. Non-Contin- 0.04 0.64 0.07 0.02 -0.06 -0.01 gent Pay Variable 7 8 9 10 11 12 1. Intl. Diversification 2. Firm Size (log) 3. Firm Performance 4. Firm Leverage 5. Managerial Ownership 6. Outside Direc- for Ratio 7. Institutional Ownership 8. CEO Duality -0.10 9. Country R&D 0.05 -0.16 Env. 10. CEO Intl. 0.14 0.19 0.08 Experience 11. Extraction -0.04 0.10 0.00 0.08 12. Processing -0.01 -0.13 -0.03 0.06 -0.11 13. Equip. Manu- 0.01 -0.01 -0.10 0.03 -0.10 -0.32 facturing 14. Elec. Equip. 0.06 0.03 0.01 -0.09 -0.10 -0.32 15. Textiles, -0.09 0.05 -0.09 -0.04 -0.02 -0.05 Apparel 16. Consumables 0.02 0.04 0.21 0.08 -0.06 -0.21 17. Software 0.01 0.01 -0.07 -0.10 -0.06 -0.19 18. Technological -0.06 -0.14 -0.03 0.07 0.09 -0.16 Comp 19. Contingent -0.15 0.09 -0.13 0.07 -0.01 -0.01 Pay 20. Non-Contin- -0.13 0.14 -0.09 0.21 0.01 0.07 gent Pay Variable 13 14 15 16 17 18 1. Intl. Diversification 2. Firm Size (log) 3. Firm Performance 4. Firm Leverage 5. Managerial Ownership 6. Outside Direc- for Ratio 7. Institutional Ownership 8. CEO Duality 9. Country R&D Env. 10. CEO Intl. Experience 11. Extraction 12. Processing 13. Equip. Manu- facturing 14. Elec. Equip. -0.27 15. Textiles, -0.04 -0.04 Apparel 16. Consumables -0.18 -0.18 -0.03 17. Software -0.16 -0.16 -0.02 -0.10 18. Technological 0.01 0.15 0.01 0.15 0.10 Comp 19. Contingent -0.12 0.02 0.08 0.06 -0.11 0.21 Pay 20. Non-Contin- -0.10 -0.01 -0.10 0.23 0.16 -0.01 gent Pay Variable 19 1. Intl. Diversification 2. Firm Size (log) 3. Firm Performance 4. Firm Leverage 5. Managerial Ownership 6. Outside Direc- for Ratio 7. Institutional Ownership 8. CEO Duality 9. Country R&D Env. 10. CEO Intl. Experience 11. Extraction 12. Processing 13. Equip. Manu- facturing 14. Elec. Equip. 15. Textiles, Apparel 16. Consumables 17. Software 18. Technological Comp 19. Contingent Pay 20. Non-Contin- 0.34 gent Pay Correlations greater than 0.15 or smaller than -0.15 are significant at the 0.05 level. N=156. (1) Non-centered means and standard deviations are reported for centered items to simplify interpretation. Spearman Rank correlations are reported where ordinal data are used. Table 2: Results of the Hierarchical Regressions Estimating the Effects of Technological Competence and Managerial Pay on International Diversification Dependent Variable: Model 1 Model 2 International Diversification Firm Size -0.07 -0.12 Firm Performance -0.08 -0.14 ([dagger]) Firm Leverage -0.13 -0.13 Managerial Ownership 0.20 * 0.15 ([dagger]) Outside Director Ratio 0.14 ([dagger]) 0.06 Institutional Ownership 0.11 0.05 CEO Duality -0.06 -0.04 Country R&D Environment -0.26 ** -0.21 ** CEO International 0.22 ** 0.18 * Experience Technological Competence 0.17 * Contingent Pay 0.30 *** Non-Contingent Pay -0.01 Tech, Comp. Squared Tech. Comp. X Contingent Pay Tech. Comp. X Non Cont. Pay Tech. Comp. Sq X Cont. Pay Tech. Comp. Sq X Non Cont. Pay Model [R.sup.2] 0.194 0.288 Adjusted [R.sup.2] 0.101 0.188 Model F-Statistic 2.09 * 2.89 *** Change in [R.sup.2] 0.194 0.094 F-Statistic for Change 2.09 * 5.97 *** Dependent Variable: Model 3 Model 4 International Diversification Firm Size -0.13 -0.14 Firm Performance -0.16 * -0.17 * Firm Leverage -0.12 -0.11 Managerial Ownership 0.13 ([dagger]) 0.12 Outside Director Ratio 0.06 0.05 Institutional Ownership 0.03 0.03 CEO Duality -0.04 -0.04 Country R&D Environment -0.20 * -0.19 * CEO International 0.16 * 0.17 * Experience Technological Competence 0.33 ** 0.38 ** Contingent Pay 0.29 *** 0.29 *** Non-Contingent Pay 0.01 0.01 Tech, Comp. Squared -0.27 * -0.23 * Tech. Comp. X -0.18 ([dagger]) Contingent Pay Tech. Comp. X Non 0.16 ([dagger]) Cont. Pay Tech. Comp. Sq X Cont. Pay Tech. Comp. Sq X Non Cont. Pay Model [R.sup.2] 0.320 0.343 Adjusted [R.sup.2] 0.219 0.235 Model F-Statistic 3.18 *** 3.16 *** Change in [R.sup.2] 0.032 0.023 F-Statistic for Change 6.38 * 2.36 ([dagger]) Dependent Variable: Model 5 Model 6 International Diversification Firm Size -0.15 -0.18 ([dagger]) Firm Performance -0.15 * -0.16 * Firm Leverage -0.1 -0.07 Managerial Ownership 0.09 0.09 Outside Director Ratio 0.03 0.09 Institutional Ownership 0.03 0.03 CEO Duality -0.05 -0.04 Country R&D Environment -0.19 * -0.20 ** CEO International 0.15 * 0.15 * Experience Technological Competence 0.52 *** 0.57 ** Contingent Pay 0.09 0.07 Non-Contingent Pay -0.01 0.14 Tech, Comp. Squared -0.98 *** -1.17 *** Tech. Comp. X -0.42 ** -0.44 ** Contingent Pay Tech. Comp. X Non 0.09 0.28 * Cont. Pay Tech. Comp. Sq X 0.93 *** 1.06 *** Cont. Pay Tech. Comp. Sq X Non -0.30 * Cont. Pay Model [R.sup.2] 0.391 0.413 Adjusted [R.sup.2] 0.285 0.305 Model F-Statistic 3.68 *** 3.83 *** Change in [R.sup.2] 0.048 0.022 F-Statistic for Change 10.33 ** 4.82 * N=156. ([dagger]) p < 0.10. * p < 0.05, ** p < 0.01, *** p < 0.001.