Understanding managers' preferences for internal markets versus business planning: A comparative study of German and U.S. managers

Journal of International Management 15 (2009) 77–91

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Journal of International Management

Understanding managers' preferences for internal markets versus business planning: A comparative study of German and U.S. managers William Egelhoff a,⁎, Erich Frese a b

b,1

Graduate School of Business, Fordham University, 113 W. 60th Street, New York, NY 10023, United States University of Cologne, Albertus-Magnus-Platz, 50923 Koeln, Germany

a r t i c l e

i n f o

Article history: Received 2 November 2007 Revised 14 December 2007 Accepted 22 July 2008 Available online 20 January 2009 Keywords: Internal markets Business planning Manager preferences Germany United States

a b s t r a c t Internal markets and centralized business planning are alternative organizational designs for coordinating the economic activities within a firm. While some preliminary theory about when to use each exists in the literature, little is known about how managers understand and decide when to use one or the other. The study develops and tests in samples of German and U.S. managers a preliminary theory about factors that influence the preferences of managers for internal markets or planning as alternative modes of coordination. Managers' preferences are influenced by key constructs of internal markets and planning theory (the perceived limits of planning, speed and efficiency of markets, motivation potential of markets), but also by differences in their institutional contexts (national government and business context, company culture, and recent company experience with planning and internal markets). The study is the first to explore the substitutability of internal markets and planning within the strategic decision process of managers, closer to where it becomes reality. © 2008 Elsevier Inc. All rights reserved.

1. Introduction The use of internal markets within firms has been increasing (Ellig, 2001). An internal market exists when subunits of a firm buy and sell goods or services among themselves, using some kind of internal pricing mechanism. Theoretically, an internal market coordinates and balances supply and demand just as external markets do (Eccles, 1985). Decisions are decentralized and made by the subunits. The alternative to an internal market is some kind of internal business planning, where decisions are centralized and legitimated by the hierarchical power of the firm (Halal, 1993; Ellig, 2001). Thus, internal markets and internal business planning can be viewed as substitutes, two alternative ways for coordinating the flow of goods and services within a firm. In the literature, the growth of internal markets is generally linked to more competitive and rapidly changing environments and increases in environmental and firm complexity (Ackoff, 1993; Halal, 1993; Cowen and Parker, 1997). Economists who recommend the use of internal markets argue that markets handle these conditions better than firm-level business planning. As these conditions continue to increase, it follows that firms will increasingly need to add internal markets to their organizational designs. Internal markets provide a different kind of coordination than formal business planning and hierarchy, which are the dominant forms of coordination in most firms. But if organizational designs need to change, what is the process for actually developing more internal markets in firms, for substituting internal markets for more traditional business planning? In response to this question, our study focuses on understanding the preference of managers for internal markets as its dependent variable, assuming such preference will contribute directly to the actual development of internal markets within firms. Thus, the study recognizes the role played by organizational decision makers (Child, 1972) and includes the strategic choices (preferences) of managers in modeling ⁎ Corresponding author. Tel.: +1 212 636 6206. E-mail addresses: [email protected] (W. Egelhoff), [email protected] (E. Frese). 1 Tel.: +49 221 470 5660. 1075-4253/$ – see front matter © 2008 Elsevier Inc. All rights reserved. doi:10.1016/j.intman.2008.07.001

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the development of internal markets. In contrast, the existing internal markets literature ignores the preference of managers and the strategic decision process which underlies the actual development of internal markets. Thus, the existing internal markets literature contains a very reduced model of how internal markets develop or come into existence. It basically links the emergence of internal markets directly to the existence of certain environmental conditions (complexity, turbulence, intense competition) and ignores the strategic decision making process within firms that mediates this linkage. The internal markets literature assumes that managers follow the implicit internal markets and planning theory that is contained in the literature, but makes no attempt to include this behavioral assumption in its model or to empirically test it. Our model includes the strategic decision process and hypothesizes that it is influenced by (1) the constructs and relationships of internal markets and planning theory, plus (2) institutional factors and (3) managers' personal values. Thus, our study conceptually includes and empirically tests more of the behavioral assumptions that underlie the linkage between the emergence of internal markets and the environmental conditions. This follows Tsang's (2006) recent call for more specified “mechanismic” explanations of economic events (like the emergence of internal markets) and for more assumption-based theory testing during the early stages of theory development. Using transaction cost theory as an example, Tsang (2006) has recently criticized both the omitting of key behavioral assumptions from theories of economic organization and the lack of assumption-based testing. We think both problems are also associated with internal markets and planning theory as it currently exists in the internal markets literature. Running parallel to the internal markets literature, which largely reflects an economics underpinning, is an organization theory literature which deals with new forms of organizational design (Zenger and Hesterly, 1997). Over the last two decades, organization theorists have increasingly recognized the limitations of traditional centralized planning and decision making in large organizations operating in rapidly changing environments (Eisenhardt, 1989; Kanter, 1989). This has led to a variety of proposed new organizational designs that function in a less hierarchical and more network-like manner. Examples include the firm as a heterarchy (Hedlund, 1986), a differentiated network (Nohria and Ghoshal, 1997; Forsgren et al., 2005), and a virtual corporation. Network relationships involving cooperation and competition among subsidiaries are especially increasing in multinational corporations (Kotabe and Mudambi, 2004). Internal markets share a number of significant characteristics with these new organizational designs: decentralized planning and decision making, voluntary participation, governance by norms of reciprocity in place of hierarchy. Daft and Lewin (1993) have previously noted the lack of theory for the new organizational designs, and this deficiency still exists today. It limits the ability of managers to successfully use these new designs. Our view is that it will be easier to develop an organizational theory for internal markets than for the other new forms of organizational design. Given the overlapping characteristics of internal markets and these designs, stronger theory about the functioning and suitability of internal markets should also be a step toward addressing the more general problem outlined by Daft and Lewin. The present study attempts to model a manager's preference when it comes to choosing between two alternative types of organizational design – internal markets and business planning. These two fundamentally different designs provide most of the formal coordination which occurs between subunits in a firm. So the choice is an important one. Our paper develops a conceptual framework that embraces several different perspectives. First we consider the potential impact of internal markets and planning theory on managers' preferences. Next, taking an institutional perspective, we weigh the impact of national and organizational pressures upon preferences. Variation is introduced by administering the study in both German and U.S. firms. Finally, we explore the impact of personal values on preferences. Since there is little previous research on the factors that might influence managers' preferences for internal markets and planning, the present study needs to be viewed as somewhat exploratory. The lack of any well-defined existing theory led to the investigation of a range of possible explanations. While this risks appearing eclectic, it seems appropriate for a preliminary study to explore a wide range of possibilities, even if this limits the depth and focus that can be given to a particular perspective. The goal of the present study is more to discover a new, and potentially attractive, way to understand and view the substitution of internal markets for central planning in firms, than it is to develop a fully specified model of the process. 2. Literature review, conceptual framework, and hypotheses In the following subsections, each of the three perspectives in our conceptual framework is individually discussed, and appropriate hypotheses are developed. 2.1. Internal markets and planning theory perspective The conceptual framework that contrasts “markets” and “planning” as alternative ways of coordinating economic activity has been employed for a variety of purposes and at different levels of analysis (the economy, the interface between firm and market, and between subunits within a firm). Over two hundred years ago the economist Adam Smith described markets as an “invisible hand” that coordinates and balances supply and demand within an economy (Smith, 1937). The alternative to markets in an economy is some form of government planning, and much has been written about this subject (Keynes, 1936; Hayek, 1945; Friedman, 1962). The contrasting virtues of “markets” and “planning” have also been applied to the problem of which activities a firm should internalize and coordinate with planning, and which it should obtain through external markets (Coase, 1937; Alchian and Demsetz, 1972; Williamson, 1975; Hennart, 1993). And more recently the two constructs (“markets” and “planning”) have been used to conceptualize a framework for more optimal coordination within a firm – across the various subunits and hierarchical levels of a firm. Firms that can choose between internal markets and internal business planning to

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coordinate their activities should have an advantage over firms that are confined to using only planning to effect coordination. It is this third level of analysis or application area that concerns the present study. There is currently no well-defined theory about how internal markets develop or how internal markets can substitute for business planning in firms. But there is a substantial and largely normative literature which describes the various characteristics of internal markets and often contrasts these with the characteristics of business planning and hierarchy in firms. We view this literature as encompassing a kind of preliminary theory about internal markets and business planning. By identifying in this literature (and also in the associated transaction cost economics literature) the relative merits and deficiencies of internal markets and business planning as coordinating mechanisms within firms, one can extract and develop a preliminary theory about the substitutability of these two organizational designs. The results of this exercise are summarized in Table 1. We take this as the starting point for developing a theory about managers' preferences. Planning failures and the limitations of planning figure prominently in the literature as a driver of internal markets (Schmalenbach, 1908; Magidson and Polcha, 1992; Cowen and Parker, 1997; Frese, 2004a). Centralized planning can become especially time consuming and overly complicated in large bureaucracies (Sinha, 1990; Mintzberg, 1994). It requires that all relevant information be brought together at a central location and integrated before decisions can be made. When rapid environmental change requires that decisions be frequently updated, the limits of such centralized decision making become readily apparent. By contrast, markets utilize decentralized, incremental decision making to address both environmental change and complexity. Instead of a single, large, fully-optimized decision, buyers and sellers make many small local decisions that incrementally alter supply and demand and allocate resources in an optimal manner (Milgrom and Roberts, 1992). As a result, the information-processing task under planning is larger and slower than that under an internal market. The limitations and costs of planning are prominent in transaction cost arguments about large hierarchies and planning systems (Williamson, 1991; Hennart, 1993; Cowen and Parker, 1997). This line of reasoning supports the following hypothesis: Hypothesis 1. The more a manager perceives limits to planning, the more a manager will prefer internal markets. One virtue of planning relative to markets as a coordinating mechanism is its avoidance of internal competition and the negative consequences that can be associated with this (Williamson, 1991). While the internal markets and planning literature tends to focus more strongly on the positive consequences of internal competition, the growing levels of interdependency in many firms also argue for higher levels of intrafirm cohesion and cooperation (Nohria and Ghoshal, 1997). By definition, an internal market implies internal competition and an incomplete sharing of information between buyer and seller. While price information is freely exchanged, the rich understanding that underlies the independently determined prices of buyer and seller is not exchanged. The immediate goals of buyer and seller are not only different (just as goals differ between subunits under a planning regime), but contradictory (which is less the case under a planning regime). Many organization theorists stress the importance of building cohesion and shared vision across interdependent subunits (Hedlund, 1986; Nohria and Ghoshal, 1994). To the extent that managers share these concerns, it should be reflected in their preferences for internal markets and planning as alternative coordinating mechanisms: Hypothesis 2. The more a manager believes that planning facilitates organizational cohesion, the less a manager will prefer internal markets. While planning has clearly recognized limitations when it comes to dealing with high levels of environmental change and complexity, markets tend to excel under these conditions. Here we want to develop the logic for this positive relationship more fully. Markets compress all the rich, heterogeneous information underlying the supply and demand of some good or service into a single, fully articulated piece of information – price. Potential buyers and sellers can interact and make decisions around this single piece of information. The complexity of the situation is greatly reduced, which allows decision making and coordination to proceed at a rapid pace (Milgrom and Roberts, 1992). Environmental changes can be picked up by either buyer or seller and in a dynamic market they quickly become reflected in the market price. As prices change, they can lead to different resource allocations among the subunits of a firm (Ackoff, 1993; Halal, 1993). The result is a dynamic and more efficient allocation of resources. While internal

Table 1 Important coordination properties of internal markets and planning in the literature Internal markets

Planning

Simplifies dealing with environmental complexity and large size organizations (Schmalenbach, 1908; Halal, 1993; Cowen and Parker, 1997) Leads to internal competition, which may hinder cooperation and goal attainment at the firm level Provides relatively quick adjustment to environmental change (Ackoff, 1993; Halal, 1993) Contributes to the efficient allocation of resources (Milgrom and Roberts, 1992; Ackoff, 1993) Strongly motivates employees to realize subunit and individual goals (Williamson, 1991); need to guard against cheating (Hennart, 1993)

Can become overly complicated, especially in complex environments and large size organizations (Sinha, 1990; Mintzberg, 1994) Leads to organizational cohesion, which facilitates cooperation and goal attainment at the firm level (Williamson, 1991) Provides relatively slow adjustment to environmental change

Doesn't motivate individual performance, need to guard against shirking (Hennart, 1993)

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markets may be more constrained and less dynamic than external markets, they, nevertheless, tend to bring these characteristics inside a firm: Hypothesis 3. The more a manager believes that markets (as opposed to planning) facilitate speed and efficiency in adjusting to environmental change and complexity, the more a manager will prefer internal markets. Another important argument of internal markets and planning theory is that markets inherently provide a higher level of individual motivation than planning (Williamson, 1991; Hennart, 1993). Internal markets decentralize decision making down to the level of subunits. At this level, goals can be more strongly linked to the personal interests of a wider range of middle managers and key personnel, their performance evaluations, promotions, and bonuses (Zenger and Hesterly, 1997). This improves personal motivation. Planning, on the other hand, centralizes decision making and calls for employees to achieve more common goals that are largely defined at the level of the firm. Since it is difficult to strongly link such higher level goals to the self-interest of most employees, the motivation potential of a planning regime is relatively low. Hypothesis 4. The more a manager believes that internal markets motivate employees, the more a manager will prefer internal markets. 2.2. Institutional theory perspective In addition to internal markets and planning theory, it is probable that the institutional context within which managers operate will also influence the preferences of managers for internal markets or planning. Parkhe distinguishes between an external institutional environment and an internal institutional environment: “The former include a company's societal culture and national context, and the latter include a company's corporate culture and operational-level variables” (Parkhe, 2003: 307). In the present study, we want to evaluate how differences in national context, company culture, and recent company experience with internal markets and planning influence managers' preferences. The logic is that differences in the above three institutional factors will lead to differences in the institutional norms of managers (Parkhe, 2003), and that such differences in norms will influence managers' preferences for using internal markets or planning to coordinate activities within firms. 2.2.1. National context The present study sampled both German and U.S. managers. This distinction represents both a cultural difference and a difference in the national government and business contexts. Looking first at the cultural differences, we examined the nine dimensions of national culture measured in the recent Globe Study (House et al., 2004). The dimensions that could conceivably influence managers' preferences for internal markets or planning tend to show little or no significant difference between German and U.S. cultures. Based on this, we concluded that cultural differences between German and U.S. managers are unlikely to be a significant predictor of differences in their preferences for internal markets or planning. Instead of cultural differences, we believe that differences between the two national government and business contexts are more likely to create different institutional norms that will in turn influence mangers' preferences between internal markets and planning. Supporting this view, Whitley (2005) recently argued that national political and legal institutions encourage varying degrees of standardization of firm governance structures and strategies, and these in turn lead to nationally distinctive forms of organizational capabilities in firms. Whitley's framework recognizes four ideal types of states, and interestingly, Germany and the U.S. belong to different ideal types. Germany is an “inclusive corporatist” state while the U.S. is an “arms length” state. This difference in national context supports the expectation that there will also be a meaningful difference in the institutional norms of German and U.S. firms. To further develop this argument, we need to briefly review and compare the history of markets and planning in Germany and the U.S., with an emphasis on the recent past. 2.2.1.1. German background. Germany has a long history of using markets for coordinating economic activity, but some intervention of state-controlled planning (establishing labor laws and social security systems) was already introduced during the late nineteenth century. The development of elaborate central planning mechanisms as a part of industrial governance occurred during the interwar years of the 1920s/1930s (Fischer, 1987; Herrigel, 1996). Key developments included the founding under government tutelage of central associations for the representation of business and labor interests and early forms of codetermination in firm governance. Since the Second World War, Germany's economy has developed into a unique combination of open markets and central government planning (Siebert, 2005). With some exceptions (agriculture, housing), Germany participates openly in world markets and has a policy of free trade. On the other hand, social protection administered by the state plays a dominant role in German society. Protection is given to individuals in general (e.g., government administered health care and old-age pensions) and to workers in particular (e.g., extensive unemployment compensation, elaborate labor laws, and institutionalized bargaining and power-sharing with management). During the 1990s, low rates of economic growth and high rates of unemployment occurred and became increasingly linked to Germany's labor market institutions and high levels of regulation in the economy (Siebert, 2005; Sinn, 2007). By 2000, a major debate had developed within Germany between those who wanted to maintain a high level of government planning in the German economy and those who wanted less government planning and control, and more of a free market economy. In recent years, this debate has become the most important issue underlying national politics. Managers of large and medium-sized German firms

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strongly favor reducing government planning and control and moving toward a more market-oriented economy. They argue that in an age of globalization, more regulated German firms will generally be at a disadvantage to less regulated competitors. Thus, German managers have a long history of working with government planning in the national economy, but they are currently rejecting large parts of this model as a viable scenario for the future. As a result, we believe that German managers presently have a strong preference for less government planning and more market at the level of the national economy. The question is whether this preference and logic at the economy level carries over to a manager's preference and associated logic at the firm level. While this is basically an empirical question, the above institutional context argues that the pro-market preference and logic managers currently have at the economy-level will probably carry over to their preference and logic at the firm-level. This view is strongly supported by the significant debate that broke out in 2003 in the German public broadcasting sector when one broadcasting company began to introduce internal market mechanisms (Frese, 2004b). 2.2.1.2. U.S. background. Since its founding, the U.S. has a history of using markets for coordinating economic activities. Generally, government planning and control were only introduced after markets failed to address problems or meet goals. This especially occurred during the Great Depression and World War II. While the history of the U.S. being the champion of free markets still exists as part of the national culture, there has developed a relatively stable but dynamic balance between government planning and free markets. Casper (2001) points out that the U.S. legal system (with a classical approach to contract law) encourages an arms-length relationship and market coordination among firms, while the German legal system (with a regulatory approach to contract law) encourages industry associations and non-market coordination among firms. Thus, U.S. managers should feel less constrained by regulation than German managers. Overall, there is no major debate involving free markets and government planning going on in the U.S., as in Germany. And, given the historical differences, U.S. government planning is less intrusive on business operations than is German government planning. As a result, U.S. managers should feel less threatened than German managers by excessive government planning. U.S. managers only need to maintain the status quo to succeed, while German managers feel that they have to significantly reduce government's role in the economy for German firms to succeed. Based on the comparison, we hypothesize: Hypothesis 5. As a result of differences in the national contexts, German managers will exhibit a stronger preference for market coordination than U.S. managers, both at the level of the economy and within firms. Aside from the history of markets and planning at the economy level, there exists a separate, very positive history about business planning within U.S. firms. From the late nineteenth century on, U.S. firms became famous for their ability to professionalize and improve both operational and strategic planning within firms (Taylor,1911; Chandler,1962). There is a significant literature on planning improvements in U.S. firms (Cleland,1976; Javidan,1984; Rigby,1999; Grant, 2003). The recent study by Grant even shows that large oil companies (four U.S., four European, no German) have largely been able to adapt their strategic planning process to cope with turbulent environments. In contrast, the history of sophisticated business planning in German firms largely begins with the period following World War II, when U.S. planning techniques first began to enter German firms. It is important to note that there is virtually no literature on business planning in German firms prior to World War II. Studies which have compared planning and control within U.S. and European MNCs have consistently found that U.S. firms tend to have more elaborated planning and control systems than do European firms (Hulbert and Brandt, 1980; Egelhoff, 1984). Thus, it seems reasonable to hypothesize: Hypothesis 6. U.S. managers will exhibit greater confidence in their firm-level planning capabilities than will German managers. 2.2.2. Company culture In addition to national context, differences in company culture represent another level of institutional diversity that can influence the norms and preferences of managers (Parkhe, 2003). Organizational culture has generally been viewed as a mechanism for social control within organizations (Wilkins and Ouchi, 1983; O'Reilly, 1989). In a company, it defines the firm-level norms and beliefs that subsequently influence the preferences and behaviors of its members (Schein, 1992). With regard to internal markets, Ellig (2001) states that the organizational culture of a firm creates a different set of utility functions and behavioral constraints than exist in external markets. Thus, to the extent that a company's culture reflects market principles, it should positively influence a manager's preference for internal markets. Consistent with this, the study sought to measure: the freedom possessed by a firm's divisions to source externally as well as internally, the importance of internal prices within a firm, and the extent to which a firm embraces the principle that market pressures help to motivate employees. Hypothesis 7. The more a manager's own company culture reflects market principles, the more a manager will prefer internal markets. 2.2.3. Company experience Another set of firm-level institutional characteristics that might influence firm norms and managers' preferences is a company's recent experience with planning and internal markets. Research supporting cognitive theories of behavior stresses the importance of recent experience in shaping expectancies and preferences for behavior (Vroom, 1964; Lawler, 1973). Managers in firms which have recently experienced significant improvements in their planning capabilities should be less inclined to prefer internal markets than managers in firms with less improvement in planning.

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Hypothesis 8. The greater the recent improvement in planning capabilities within a manager's firm, the less the manager will prefer internal markets. We don't have a comparable measure of the extent to which firms have recently experienced improvement in their capabilities to implement internal markets. But we do have a measure of the extent to which a firm has increased/decreased its use of internal markets over the previous ten years. Since there is likely to be a positive correlation between the two concepts, it is reasonable to hypothesize that managers in firms which have recently experienced significant growth in their use of internal markets should be more inclined to prefer internal markets than managers in firms with less growth in internal markets. Hypothesis 9. The greater the recent growth in internal markets within a manager's firm, the more the manager will prefer internal markets. 2.3. Personal values perspective There is an extensive literature linking personal values to individual preferences, intentions, and behaviors (Kluckhohn, 1951; Ajzen and Fishbein, 1980; Ajzen, 1991). Values act as explicit or implicit expressions of the desirable (Kluckhohn, 1951) and have been found to strongly influence human preferences and behavior. Our study operationalized the following three values from the World Values Survey (Inglehart et al., 1998), because they seem especially relevant to markets and market-related behavior: equality/individual freedom, collectivism/individualism, harmony/conflict and competition. All three values have been found to frequently influence human preferences and behavior, and also to vary across cultures (Hofstede, 1980, Schwartz, 1992). For these values we developed the following hypotheses: Hypothesis 10. Personal values will influence a manager's preference for internal markets and planning: a. Equality/individual freedom – Valuing individual freedom over equality will be associated with a preference for internal markets. Logic: Markets are associated with decentralized decision making and individual autonomy, which leads to unequal outcomes and inequality among the actors (Halal, 1993). b. Collectivism/individualism – Concern for the individual as opposed to the common welfare will be associated with a preference for internal markets. Logic: Markets optimize self-interests of the actors as opposed to higher-level group interest (Williamson, 1991; Cowen and Parker, 1997). c. Harmony/conflict and competition – Valuing competition over harmony will be associated with a preference for internal markets. Logic: Markets are naturally associated with competition among the actors, while planning assumes cooperation among the actors (Williamson, 1991). 2.4. Additional qualitative insight and support for the study In conjunction with the survey study some qualitative data was also collected and utilized. In 2003 one of the authors conducted extensive interviews with executives in the German public broadcasting sector, where a serious debate had broken out after one broadcasting company had begun to replace traditional planning coordination with internal market mechanisms. The sector represents about 60% of German TV and radio broadcasting. Sponsored by the industry research institute, the purpose of the study was to better understand the views of managers and more intelligently frame the debate. The study report (Frese, 2004b) found: (1) managers most concerned about the limitations of planning tended to be most open to trying internal markets (supports Hypothesis 1), (2) some managers believed internal markets would better motivate efficient behavior while others believed adequate monitoring was a more effective way to achieve such behavior (consistent with Hypothesis 4), (3) managers from the first broadcasting company to embrace internal markets were more favorably disposed toward internal markets than other managers (consistent with Hypothesis 9). Thus, this earlier study suggested a number of the key constructs and relationships included in the survey study and provided a broad understanding of how managers tended to view the two alternatives. Near the end of the survey study, we also attended a meeting with executives from a number of large German MNCs. The subject of the meeting was the use of internal markets versus business planning in large firms. The discussion was taped and transcribed. It provided additional support for: Hypothesis 1, that the limits managers see in planning influence their preferences for internal markets versus planning; Hypothesis 3, that internal markets, more than planning, facilitate speed and efficiency in adjusting to environmental change and complexity; and Hypothesis 6, that U.S. managers have more confidence in their planning capabilities than German managers. More important than the support for specific hypotheses, these discussions contributed to our interpretation of the survey study results by providing deeper insight into how managers view the subject. 3. Research design To execute the study we developed a questionnaire that sought to measure the relevant variables. The questionnaire was originally developed in German and subsequently translated into English. The English version was tested with U.S. business students for understandability, and revised as necessary. The final questionnaire was then translated back into German and

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checked to ensure that both questionnaires were measuring the same concepts. The German questionnaire was mailed out during the Summer of 2002 and the US questionnaire during the Summer of 2003. 3.1. Sample The German questionnaire was sent to the CEOs of 4854 firms selected from the Hoppenstedt Data Base. The sample included manufacturing, service, banking and insurance firms. The manufacturing and service firms exceeded 150 million Euros in annual revenue, the insurance firms 100 million Euros in annual revenue, and the banks 250 million Euros in capital. The size criteria were introduced to ensure that the respondents had a realistic idea of the complexity of planning systems and the functioning of internal markets. The mail survey was sent out once and 906 useable surveys were returned (18.7% response rate). Unfortunately, we don't know the industry and size of the respondents' firms. Since the response rate was quite high, we assume that the sample includes a variety of industries and sizes of firm. The U.S. questionnaire was sent to the CEOs of 4870 companies selected from the Dun and Bradstreet Directory. The size criteria used for the German sample were also used to select the U.S. sample. The proportions of manufacturing, service, banking, and insurance firms mailed to in Germany were also reflected in the U.S. sample. The mail survey was sent out once and 154 usable surveys were returned (3.2% response rate). While this rate is relatively low, we believe the overwhelming reason for the low response was that most U.S. CEOs were simply too busy to take the time to respond to the questionnaire. If this is the case, we don't believe there should be any systematic difference in the answers and data relationships associated with the respondents and non-respondents. In most cases the relationships that appear in the U.S. sample are also present in the larger German sample, and where significant differences occur we can determine a logical reason for the difference. While admittedly a weak test, it at least fails to reveal any undesirable bias in the U.S. sample. For the U.S. sample, 73% of the respondents were CEO level (chairman, president, CEO, COO), 21% were at the VP level immediately below the CEO, and 6% were directly below the VP level. Also, 52% of the firms were in manufacturing, 30% were in financial services, and 18% were in other service industries. The firms varied in annual sales from $10 million to $99 billion (with a mean of $2.3 billion). So the sample firms represent a wide variety of the population of U.S. firms. When control variables representing type of industry (dummy variables) and size of firm were introduced into analyses, they had no effect on results. 3.2. Variables A full description of the variables and measures is available from the first author. The dependent variable PREF (manager's preference for internal markets over planning) was measured by a scale comprising four measured variables (α = .54). Two of the measures are applied examples, where managers have to express their preferred solution to a realistic problem. Four variables operationalized markets and planning theory. The perceived limits of planning (LIMP) was measured by a scale comprising two measured variables (α = .75). The belief that planning facilitates organizational cohesion more than markets (COH) was measured by a scale comprising two measured variables (α = .66). The belief that markets facilitate speed and efficiency more than planning (EFF) was measured by a scale comprising three measured variables (α = .54). The belief that markets motivate people was measured by a single measured variable. Three variables operationalized firm-level institutions. The extent to which one's own company's culture reflects market principles (CUL) was measured by a scale comprising three measured variables (α = .63). The extent to which planning capabilities in a firm have improved and the extent to which internal markets in a firm have increased were each measured by single measured variables. Both are descriptive (estimate an organizational fact) rather than evaluation measures. The personal values of managers are represented by the factor scores of respondents on two significant factors that emerged from a factor analysis of six measured variables. Thus, the three sets of values were reduced to two dimensions or operational variables as a result of the factor analysis. The first variable (EQUAL) values equality and harmony over freedom and competition. The second variable (INDIV) values individualism over collectivism. And finally, a manager's preference for markets over planning at the economy level was measured by a single measured variable. 3.3. Analyses When all of the measured variables used in the study are entered in separate German and U.S. factor analyses, no dominant factor emerges. Thus, there is no evidence of any common methods variance. Separate German and U.S. factor analyses were run for (1) the items comprising the dependent variable, and (2) the items comprising the multi-item independent variables. The results reveal no significant difference in factor structure between the two samples. Thus, the study's measures satisfy two levels of metric equivalence across the German and U.S. samples: same form or dimensionality equivalence and same factorial or loadings equivalence (Bensaou et al., 1999). This adds validity to the cross-national comparison by ensuring that German and U.S. managers are viewing the measures and their underlying constructs in a generally similar manner. In both samples, each of the multi-item variables emerges as a separate factor and each item loads significantly on only one factor. This shows that there is both good discriminant validity among the operational variables and adequate consistency among the items that comprise each operational variable. This is important since some of the reliability coefficients are rather low, but still adequate for measuring broadly defined constructs (Van de Ven and Ferry, 1980). The two samples were combined for purposes of calculating (1) factor scores for the two values variables (EQUAL, INDIV) and (2) reliability coefficients.

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Table 2 Sample variables (means, standard deviations, and correlations) Mean

SD

PREF

LIMP

German sample PREF 5.23 1.03 LIMP 3.48 1.61 .23⁎⁎⁎ COH −.01 .65 −.11⁎⁎⁎ −.01 EFF .66 .47 .29⁎⁎⁎ .25⁎⁎⁎ MOT 5.85 1.02 .45⁎⁎⁎ .03 CUL 5.05 1.12 .36⁎⁎⁎ .03 PLAN 4.78 1.89 −.11⁎⁎⁎ −.27⁎⁎⁎ MKTS 5.01 1.22 .20⁎⁎⁎ .04 EQUAL −.06 1.00 −.28⁎⁎⁎ −.06 INDIV −.05 1.02 .19⁎⁎⁎ .12⁎⁎⁎ PE 6.42 .84 .29⁎⁎⁎ .06 ⁎⁎⁎p b .001; ⁎⁎p b .01; ⁎p b .05; two-tailed test (n = 861–899) U.S. sample PREF LIMP COH EFF MOT CUL PLAN MKTS EQUAL INDIV PE

4.77 2.94 .34 .42 5.38 4.89 5.69 4.44 −.13 .17 5.56

1.01 1.23 .71 .61 1.10 1.07 1.32 1.44 1.09 1.06 1.49

.13 −.26⁎⁎ .37⁎⁎⁎ .38⁎⁎⁎ .42⁎⁎⁎ −.22⁎⁎ .16 −.22⁎⁎ .19⁎ .29⁎⁎⁎

−.09 .28⁎⁎⁎ −.03 −.04 −.33⁎⁎⁎ .12 .03 .20⁎ .20⁎

COH

EFF

MOT

− .16⁎⁎⁎ − .13⁎⁎⁎ − .15⁎⁎⁎ .02 − .02 .16⁎⁎⁎ 0 − .15⁎⁎⁎

.15⁎⁎⁎ .09⁎⁎ −.08⁎ .07⁎ −.22⁎⁎⁎ .15⁎⁎⁎ .26⁎⁎⁎

.29⁎⁎⁎ 0 .14⁎⁎⁎ −.28⁎⁎⁎ .04 .22⁎⁎⁎

− .39⁎⁎⁎ − .28⁎⁎⁎ − .16 .10 − .05 .31⁎⁎⁎ − .16 − .32⁎⁎⁎

.16 .18⁎ −.15 0 −.21⁎⁎ .27⁎⁎⁎ .45⁎⁎⁎

.36⁎⁎⁎ .02 .18⁎ −.28⁎⁎⁎ −.10 .15

CUL

PLAN

MKTS

EQUAL

INDIV

.15⁎⁎⁎ −.32⁎⁎⁎ .02 .17⁎⁎⁎

− .03 − .07⁎ − .10⁎⁎ 0

−.11⁎⁎⁎ .06 .08⁎

−.06 −.32⁎⁎⁎

.04

.06 .02 −.14 −.01 .11

.01 .04 − .14 − .09

.04 .09 −.02

−.02 −.33⁎⁎⁎

.17⁎

0

⁎⁎⁎p b .001; ⁎⁎p b .01; ⁎p b .05; two-tailed test (n = 139–153).

To test most hypotheses, the study employs a series of regression analyses with PREF as the dependent variable. It sequentially enters the sets of independent variables until the hypothesized or full model is achieved. The order of entry follows the order of hypothesis development: internal markets and planning theory variables, firm culture and experience variables, value variables, and economy-level preference. This order follows the way we want to conceptualize the model. We want to explain as much of the variation in PREF as possible with internal markets and planning theory. Then we want to see if more local institutional factors (national and firm contexts) and personal values can add additional explanation. The impact of national context is largely evaluated by separately analyzing the German and U.S. samples. This allows one to evaluate the interaction of national context with the other variables at each stage of model development. 4. Results The means, standard deviations, and correlations of all the variables are shown in Table 2 for the German and U.S. samples. Table 3 contrasts the means of the German and U.S. samples across the key variables of the study. Looking first at the dependent variable (PREF), Table 3 Comparing the mean scores of German and U.S. managers on the key variables German managers

U.S. managers

Dependent variable, preference for internal markets (PREF)

5.23

4.77

5.0⁎⁎⁎

Internal markets and planning theory Limits of planning (LIMP) Cohesion of planning (COH) Efficiency of markets (EFF) Motivation of markets (MOT)

3.48 −.01 .66 5.85

2.94 .34 .42 5.38

4.8⁎⁎⁎ −5.7⁎⁎⁎ 4.7⁎⁎⁎ 4.9⁎⁎⁎

Institutional theory (own firm culture and experience) Culture reflects markets (CUL) Extent to which planning capabilities have improved (PLAN) Extent to which internal markets have increased (MKTS)

5.05 4.78 5.01

4.89 5.69 4.44

1.6 −7.4⁎⁎⁎ 4.5⁎⁎⁎

Personal values of manager Values equality and harmony (EQUAL) Values individualism (INDIV)

−.06 −.05

−.13 .17

.8 −2.5⁎

Manager's preference for markets in economy (PE)

6.42

5.56

⁎⁎⁎p b .001, ⁎p b .05 (n = 879–903 for German sample; n = 145–154 for U.S. sample).

t-value

7.0⁎⁎⁎

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German managers exhibit a greater preference for internal markets than U.S. managers. Looking next at managers' preferences for markets at the economy level (PE, bottom of Table 3), German managers again score higher than U.S. managers. Both findings support Hypothesis 5, where the underlying logic was that differences in the German and U.S. government and business contexts favor a greater preference for markets among German managers. An examination of the four internal markets and planning theory variables reveals that German managers tend to have a more favorable view of internal markets relative to planning than U.S. managers possess. To a greater extent than their U.S. counterparts, German managers believe that the limits of planning are severe, that internal markets are speedy and efficient in allocating resources, and that internal markets have high motivation potential. German managers also tend to believe that internal markets are no worse than planning when it comes to facilitating organizational cohesion within a firm. U.S. managers, on the other hand, believe planning facilitates organizational cohesion more than internal markets do. Turning to the institutional theory variables, German and U.S. managers tend to be similar in the extent to which their firms' organizational cultures reflect market principles. But over the last ten years, the U.S. sample firms have made more improvements to their planning capabilities than the German sample firms, and the German firms have increased their use of internal markets more than the U.S. firms. Looking at the personal values variables, the first variable (EQUAL) shows that there is no significant difference between German and U.S. managers when it comes to valuing equality and harmony versus freedom and competition. The negative signs indicate that managers actually tend to favor freedom and competition over equality and harmony. The second value variable (INDIV) shows that U.S. managers tend to value individualism over collectivism while German managers have a slight tendency to value collectivism over individualism (the variable is negative). This difference is statistically significant. Thus, there tend to be significant differences between German and U.S. managers in the absolute levels of the dependent variable and most of the independent variables. Now we want to examine the relationships between the dependent variable and the independent variables. While all of the relationships are hypothesized to be the same for German and U.S. managers, we want to separately test the hypotheses with each national sample. We already know that nationality influences the absolute levels of the dependent and many of the independent variables. What we don't know is how it might also influence the relationships between manager's preference and the underlying independent variables. To implement this plan the following three subsections present the respective impacts of (1) markets and planning theory variables, (2) institutional theory variables, and (3) personal values variables on PREF (manager's preference for internal markets). Table 4 shows the results of two regression analyses, where all the independent variables are used to predict a manager's preference (full model). One analysis was run with the German sample, the other with the U.S. sample. Tables 5 (German sample) and 6 (U.S. sample) provide further detail underlying the regression models shown in Table 4. Each shows how the regression model changes as the different sets of independent variables are sequentially added to it. The final models in Tables 5 and 6 are the same as the two full models being compared in Table 4. 4.1. The impact of markets and planning theory variables When interpreting and comparing Tables 4, 5, and 6, we are more interested in the effect magnitude of an independent variable on the dependent variable (as indicated by the relative magnitude of the standardized regression coefficient) than we are in the statistical significance of the associated t-statistic (Shaver, 2007). The perceived limits of planning (LIMP) are a moderate predictor of preference for internal markets (PREF) for German managers, but not for U.S. managers. An examination of Tables 5 and 6 reveals that LIMP is a meaningful predictor across all phases of development for the German Table 4 Predictors of German and U.S. managers' preferences for internal markets versus business planning Dependent variable: manager's preference for internal markets in firms (PREF)

German managers

U.S. managers

Internal markets and planning theory Limits of planning (LIMP) Cohesion of planning (COH) Efficiency of markets (EFF) Motivation of markets (MOT)

.13 (4.29⁎⁎⁎) .01 (.47) .12 (4.10⁎⁎⁎) .32 (10.57⁎⁎⁎)

−.02 (−.29) −.02 (−.20) .19 (2.12⁎) .19 (2.29⁎)

Institutional theory (own firm culture and experience) Culture reflects markets (CUL) Extent to which planning capabilities have improved (PLAN) Extent to which internal markets have increased (MKTS)

.21 (6.92⁎⁎⁎) −.06 (− 2.16⁎) .08 (2.87⁎⁎)

.29 (3.77⁎⁎⁎) −.20 (−2.66⁎⁎) .12 (1.60)

Personal values of manager Values equality and harmony (EQUAL) Values individualism (INDIV)

−.04 (− 1.31) .12 (4.25⁎⁎⁎)

−.04 (−.47) .10 (1.28)

Manager's preference for markets in economy (PE) F value Adjusted R2 (% variance explained)

.13 (4.15⁎⁎⁎) 49.2⁎⁎⁎ .368

.07 (.87) 7.6⁎⁎⁎ .326

⁎⁎⁎p b .001, ⁎⁎p b .01, ⁎p b .05 (n = 826 for German sample; n = 136 for U.S. sample). OLS regression analysis, values are standardized regression coefficients (t statistics in parentheses).

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Table 5 Predictors of German managers' preferences for internal markets versus business planning Dependent variable: manager's preference for internal markets in firms (PREF)

Markets and + Own firm culture +Own firm experience +Personal values +Preference planning theory in economy

Internal markets and planning theory Limits of planning (LIMP) Cohesion of planning (COH) Efficiency of markets (EFF) Motivation of markets (MOT)

.16 (5.41⁎⁎⁎) − .03 (−.94) .19 (6.10⁎⁎⁎) .41 (14.02⁎⁎⁎)

Institutional theory (own firm culture and experience) Culture reflects markets (CUL) Extent to which planning capabilities have improved (PLAN) Extent to which internal markets have increased (MKTS)

.16 (5.47⁎⁎⁎) 0 (−.03) .18 (6.10⁎⁎⁎) .35 (11.71⁎⁎⁎)

.14 (4.62⁎⁎⁎) 0 (.12) .17 (5.55⁎⁎⁎) .35 (11.51⁎⁎⁎)

.13 (4.28⁎⁎⁎) 0 (.14) .15 (4.90⁎⁎⁎) .33 (11.01⁎⁎⁎)

.13 (4.29⁎⁎⁎) .01 (.47) .12 (4.10⁎⁎⁎) .32 (10.57⁎⁎⁎)

.24 (7.88⁎⁎⁎)

.23 (7.52⁎⁎⁎) −.06 (−2.07⁎) .10 (3.30⁎⁎⁎)

.21 (7.02⁎⁎⁎) −.06 (− 2.07⁎) .08 (2.93⁎⁎)

.21 (6.92⁎⁎⁎) −.06 (−2.16⁎) .08 (2.87⁎⁎)

−.07 (−2.21⁎) .12 (4.15⁎⁎⁎)

−.04 (−1.31) .12 (4.25⁎⁎⁎)

51.8⁎⁎⁎ .356 .022

.13 (4.15⁎⁎⁎) 49.2⁎⁎⁎ .368 .012

Personal values of manager Values equality and harmony (EQUAL) Values individualism (INDIV) Manager's preference for markets in economy (PE) F value Adjusted R2 (% variance explained) Change in adjusted R2

81.8⁎⁎⁎ .272

82.9⁎⁎⁎ .324 .052

60.8⁎⁎⁎ .334 .010

⁎⁎⁎p b .001, ⁎⁎p b .01, ⁎p b .05 (n = 826–861). OLS regression analysis, values are standardized regression coefficients (t statistics in parentheses).

model, but that it loses the limited power it has in the early U.S. model when PLAN (extent to which planning capabilities have improved) is entered during the third phase of model development. So the perceived limits of planning are a meaningful predictor of preference for German but not for U.S. managers, which only partially supports Hypothesis 1. The perceived organizational cohesion associated with planning (COH) is not a predictor of preference (PREF) for either German or U.S. managers, a finding which fails to support Hypothesis 2. An examination of Table 5 reveals that German managers don't see any relationship between COH and PREF across all phases of model building. Table 6 reveals that U.S. managers, on the other hand, consistently reflect the hypothesized negative relationship between COH and PREF, but it is relatively weak and neither statistically significant nor meaningful. The perceived speed and efficiency of markets (EFF) is a moderate predictor of preference for German managers and a stronger predictor for U.S. managers. This supports Hypothesis 3. The perceived motivation of markets (MOT) is an extremely strong predictor of preference for German managers and a fairly strong predictor for

Table 6 Predictors of U.S. managers' preferences for internal markets versus business planning Dependent variable: manager's preference for internal markets in firms (PREF)

Markets and +Own firm culture +Own firm experience +Personal values +Preference planning theory in economy

Internal markets and planning theory Limits of planning (LIMP) Cohesion of planning (COH) Efficiency of markets (EFF) Motivation of markets (MOT)

.05 (.66) −.05 (−.66) .28 (3.33⁎⁎⁎) .32 (4.14⁎⁎⁎)

Institutional theory (own firm culture and experience) Culture reflects markets (CUL) Extent to which planning capabilities have improved (PLAN) Extent to which internal markets have increased (MKTS)

.07 (1.00) −.06 (−.73) .23 (2.82⁎⁎) .22 (2.83⁎⁎)

−.01 (−.18) −.05 (−.60) .24 (2.92⁎⁎) .19 (2.37⁎)

−.02 (−.23) −.02 (−.31) .21 (2.56⁎) .19 (2.31⁎)

−.02 (−.29) −.02 (−.20) .19 (2.12⁎) .19 (2.29⁎)

.28 (3.64⁎⁎⁎)

.29 (3.79⁎⁎⁎) −.21 (−2.78⁎⁎) .12 (1.70)

.29 (3.79⁎⁎⁎) −.20 (−2.67⁎⁎) .11 (1.56)

.29 (3.77⁎⁎⁎) −.20 (−2.66⁎⁎) .12 (1.60)

−.05 (−.64) .10 (1.35)

−.04 (−.47) .10 (1.28)

8.4⁎⁎⁎ .327 0

.07 (.87) 7.6⁎⁎⁎ .326 0

Personal values of manager Values equality and harmony (EQUAL) Values individualism (INDIV) Manager's preference for markets in economy (PE) F value Adjusted R2 (% variance explained) Change in adjusted R2

11.3⁎⁎⁎ .221

12.4⁎⁎⁎ .284 .063

⁎⁎⁎p b .001, ⁎⁎p b .01, ⁎p b .05 (n = 136–144). OLS regression analysis, values are standardized regression coefficients (t statistics in parentheses).

10.5⁎⁎⁎ .327 .043

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U.S. managers. This supports Hypothesis 4. Tables 5 and 6 show that the four markets and planning theory variables explain about 27% of the variation in the dependent variable for German managers and 22% for U.S. managers. 4.2. The impact of institutional theory (own firm culture and experience) variables Beyond internal markets and planning theory, the institutional environment surrounding managers' decisions has also been hypothesized to influence managers' preference for internal markets. The influence of the national government and business context is investigated by separately analyzing the German and U.S. samples. This will be discussed later in the paper. In this subsection we want to assess the additional impact of the three own firm culture and experience variables on preference for internal markets. The extent to which own company culture reflects market principles (CUL) is a fairly strong predictor of managers' preference for German managers and an even stronger predictor for U.S. managers, supporting Hypothesis 7. It adds five percentage points of explanation to the adjusted R2 of the German sample and six to the adjusted R2 of the U.S. sample. The extent to which planning capabilities have improved in a firm (PLAN) shows a statistically significant negative influence on preference for internal markets in both German and U.S. samples, supporting Hypothesis 8. But while the effect magnitude is fairly strong for U.S. managers, it is relatively weak for German managers. Similarly, the extent to which internal markets have increased in a firm (MKTS) shows a weak positive influence on preference in the German sample. The U.S. sample shows a somewhat larger influence, but it is not statistically significant because of the smaller sample size. Thus, there is moderate support for Hypothesis 9. While firm culture contributed heavily to the adjusted R2 of the German sample, recent firm experience with improvements in planning and increases in internal markets cause only a modest increase of 1.0 percentage points of explanation in adjusted R2. For the U.S. sample, the comparable increase is 4.3 points of explanation in adjusted R2, and it is largely driven by the extent to which planning capabilities have improved (PLAN). Thus, U.S. firms which have recently improved their planning capabilities show significantly less preference for internal markets than firms which have not experienced such improvement. This effect is nominal and for all practical purposes absent from German firms. It is important to observe in Table 6 that the entrance of PLAN into the regression model for U.S. firms reduces the previous influence of LIMP in the model. This doesn't occur in the German model in Table 5. It suggests that U.S. managers are more impressed by their own firm's recent experience with planning than they are with any abstract or general theories about the limits of planning. For German managers, the theoretically derived and hypothesized limits of planning remain more important than their own firm's recent experience with planning. 4.3. Impact of personal values variables The first value variable (EQUAL), representing a valuing of equality and harmony over freedom and competition, shows the hypothesized negative relationship with preference for internal markets, but the effect magnitude is small in both the German and U.S. samples. The second value variable (INDIV), representing a valuing of individualism over collectivism, shows the hypothesized positive relationship with preference for internal markets. The relationship in the German sample is statistically significant with moderate effect magnitude, while the relationship in the U.S. sample is not statistically significant and has a somewhat smaller effect magnitude. While all relationships directionally support Hypothesis 10, personal values are not very important when it comes to explaining the preferences of U.S. managers. The adjusted R2 in Table 6 even goes down when the value variables are added to the regression model. In the German sample, however, the value contrasting individualism and collectivism contributes more meaningfully to explaining a manager's preference for internal markets and adds 2.2 percentage points of explanation to the adjusted R2 of the regression model. 4.4. Impact of national government and business context Finally, we want to review the apparent impact of differences at the national government and business context level on managers' preferences. In Hypothesis 5 we hypothesized that differences at the national government and business context level should lead to a greater preference for internal markets among German managers relative to U.S. managers. Our rationale for this was that German managers have recently become frustrated with government planning and regulations and are clamoring for more markets coordination at the national government level. We reasoned that this logic would spill over to the firm level and result in a greater preference for internal markets at this level as well. There is evidence in the data that this in fact has happened. Not only do German managers exhibit a greater preference for internal markets than U.S. managers, but their scores on three of the internal markets and planning theory variables (LIMP, COH, MOT) show a significant pro-market bias relative to the scores of U.S. managers. Our view is that this pro-market bias largely comes from events at the national economy level. The meaningful influence of manager's preference for markets in the economy (PE) on PREF in the German regression model (but not in the U.S. model) provides further evidence that there is some spill-over from the economy level to the firm level in the minds of German managers. So there is a significant difference in national context that makes German managers more pro-market oriented than U.S. managers. But independent of the above finding, the data analysis also suggests that there is a second national context difference at work that is less obvious than the first. In Hypothesis 6 we hypothesized that U.S. managers will exhibit greater confidence in their planning capabilities than will German managers. Our rationale for this was the strong history of planning improvements in the U.S. (a second national context level difference between Germany and the U.S.). The extent to which planning capabilities have recently improved within a firm

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has a major influence on preference for internal markets among U.S. managers, but not among German managers. This difference in relationship seems consistent with the reported qualitative differences at the national government and business context level. The long history of planning improvements in U.S. firms would appear to still be intact today. The U.S. sample firms show significantly greater improvements in planning over the past ten years than the German firms. This success has apparently caused those U.S. managers with the improvements to believe that they can still address complex problems with improved planning – they don't necessarily have to go to internal markets. This relationship is absent in German managers. Even managers in firms that have recently improved their planning capabilities are not as convinced as U.S. managers that they can continue to use planning to address complex problems and avoid going to internal markets. When PLAN (extent to which planning capabilities have improved) is entered into the U.S. model, it not only emerges as a fairly strong predictor of PREF, but it also makes negligible the previous influence of LIMP (the limits of planning variable) on PREF. Thus, U.S. managers tend to see improvements in planning capabilities as a real substitute for going to internal markets. In contrast, German managers do not see improvements in planning rising to the level where they become a serious alternative to internal markets (the effect magnitude of PLAN on PREF is much lower in the German sample). We attribute this significant difference between U.S. and German managers to the strong history of planning improvement in U.S. firms relative to the lesser role that planning has played in the management of German firms. Thus, the study has identified two macro-level forces at the national level. The first is a pro-market bias in most German managers, which originates from events at the national economy level, but influences manager preference at the firm level. The second is the belief by many U.S. managers that improved planning capabilities remain a serious alternative to adopting internal markets. Jointly, these two forces explain why German managers have a significantly higher preference for internal markets than U.S. managers. 5. Discussion and conclusion In this section we want to discuss the implications of the study, its limitations, and provide some guidance for future research. 5.1. Implications of the study By modeling the preference of managers for internal markets versus business planning, we have attempted to model a key behavioral part of the organizational design process in firms. This goes beyond the current internal markets literature in explaining the emergence of internal markets. The results show that managers' preference for internal markets versus planning tends to follow internal markets and planning theory, but with significant influence from institutions at the national and firm levels. This suggests that internal markets and planning theory can be used to model and understand managers' preferences about organizational design. Hypotheses 1–4 attempted to operationalize key elements of internal markets and planning theory within the study. These elements were the limits of planning, the cohesion of planning, the speed and efficiency of markets, and the motivation potential of markets. With the exception of the cohesion of planning, these concepts play significant roles in managers' thinking about the alternatives of organizational design. Within the study they explain about 25% of a manager's preference for a design. Viewing the design problem of complex firms like MNCs in terms of internal markets and planning relationships is attractive for multiple reasons. First, the internal markets design shares many characteristics with the new design alternatives being considered in organization theory (Zenger and Hesterly, 1997). These characteristics include: decentralized planning and decision making, voluntary participation, governance by reciprocity instead of hierarchy. Since internal markets and planning theory is currently more specified and ready to apply than other theories associated with the new non-hierarchical designs, it should facilitate knowledgeably introducing more of these characteristics into the organization designs of firms. Second, the substitutability of markets and planning as coordinating mechanisms is relatively well understood by managers (the study indicates this). So there is the added advantage of developing theory that can be readily understood by those who ultimately will be expected to use it. The study also shows that national and firm level institutional influence plays a significant role in shaping managers' preferences about organizational design. In the present study, the pro-market bias of German managers and the confidence of U.S. managers in their planning capabilities are the two most pronounced effects at the national level. Both of these effects are unique in place and time and argue that organizational design will always have a local flavor. We largely explained these differences in terms of differences in government and business context rather than differences in national culture. In the study, differences in national culture only appear to contribute to the difference in managers' personal values and its modest influence on preference. But this can change from country to country. Hopefully, the impact of internal markets and planning theory on managers' preference will remain relatively stable across changes in national context – or if it varies, it will hopefully vary between a limited number of macro patterns (perhaps an emerging economy pattern and a developed economy pattern, as suggested by Narayanan and Fahey's study (2005), or an individualistic society pattern and a collectivistic society pattern). This would retain the power of the theory to more universally model organizational design alternatives. 5.2. Limitations of the study The research design of the study involves several important flaws. Since we can't correct these flaws, we can only make them explicit and attempt to establish that the impact of the flaws is bounded and doesn't unduly compromise the purpose and

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accomplishments of the paper. The two primary flaws of the research design are 1) the lack of customary control variables for the German sample and 2) weak measurement or operationalization of some of the constructs. The lack of such control variables as the industry and size of the firm raise questions about the representativeness of the sample and perhaps some doubt about the population of firms one can generalize the results to. While a shortcoming, we view this issue as less critical during the early stages of developing a theory than at a later stage when an established theory is being tested and refined. This shortcoming won't keep others from replicating the study in order to better establish the generalizability of the theory. The other issue related to this shortcoming is the potential influence of unmeasured variables. Industry and firm size could potentially influence a manager's thinking about the measured variables, although the data show this was not a problem in the U.S. sample. The present study has to assume that these effects are randomly distributed across the German sample, so that the reported results wouldn't be seriously altered if the variables were included. It is important to observe that there is a conceptual basis for nearly all of the important empirical relationships in the study. This reduces the risk that an unmeasured bias in the data is causing a spurious result and interpretation. Measurement of the key constructs is the second shortcoming of the research design. The questionnaire was not designed to provide high reliability multi-item scales, and the present scales are the best that can be extracted from the existing database. This largely results from the fact that prior to the study there was no clearly defined internal markets and planning theory to test and no previous research had sought to model managers' preferences for internal markets. As a result, many of the reliability coefficients (Cronbach alphas) indicate levels of consistency that can be more appropriately associated with exploratory research and the measurement of broad constructs than with the application and testing of well-specified theories. As already discussed in the Research Design Section, the factor analyses of the measured variables tend to support the adequacy of the measures used in the study. The other measurement problem is that three constructs are only measured by single-item measures (MOT – the motivation potential of markets, PLAN – the extent to which planning in the firm has improved, and MKTS – the extent to which internal markets in the firm have increased). This is less a problem for the last two variables, since each is more a manager's estimate of a factual characteristic than some evaluation or opinion. The motivation potential of markets is both conceptually and empirically an important influencer of preference. Although it is unfortunate that this construct relies on a single-item measure, the measure is straight-forward with good face validity, and unlikely to be misinterpreted. While the above limitations would be a serious problem if the study were testing and refining established theory, the primary purpose of the present study has been to demonstrate the feasibility of a new approach to understanding the substitution of internal markets for business planning in firms and to develop some early theory about what influences managers' preferences for internal markets. We don't believe the study's limitations have unduly compromised its achievement of this goal. 5.3. Directions for future research Given the preliminary findings and limitations of the present study, additional large sample testing and extending of the model developed by the study is needed. In our view, a high priority would be to further specify the internal markets and planning theory that the present study began to develop. This theory currently consists of the four constructs operationalized by LIMP, COH, EFF, and MOT, and the relationships developed between these constructs and a manager's preference for internal markets. But the present constructs are extremely broad. They are a necessary foundation for subsequent theory building, but their predictive power is probably too general to be of much use to practitioners. The present broad constructs need to be further specified into narrower constructs that can then be related to more specific tasks and contingencies within firms. For example, the construct that planning provides more organizational cohesion than internal markets was not a strong predictor of a manager's preference in the present study. But if one specified a task situation where a high level of knowledge sharing and cooperation among subunits was required (e.g., the development of a new product or technology within a high tech firm), one might discover that managers would put a higher value on organizational cohesion than they did in the present study. Similarly, the motivation inherent in internal markets also needs to be more fully conceptualized and empirically tested. What kinds of behaviors do internal markets motivate, and under what situational conditions are these valuable? Thus, the relative values managers place on organizational cohesion, motivation potential, and the attributes of the other constructs often tend to be contingent on a variety of different task situations. Identifying these situations and developing more specified contingency theory about them will make internal markets and planning theory more realistic and useful to practitioners. By not defining more specific task situations, the present study has developed a general model of manager preference and thinking about the substitutability of internal markets and planning. An interesting issue is whether the actual adoption of internal markets in firms tends to follow this general model of preference or more specified contingency models of preference and thinking, as discussed in the previous paragraph. The absence of any specified contingency theory within the broader internal markets literature suggests that most firms may be adopting internal markets based on general philosophy (such as that reflected in the present study) or by copying other successful firms. In any case, the development of more specified contingency models would support a more customized organizational design process in firms, where the mixture of internal markets and business planning better fits the varying task situations of a firm. Since the impact of national context on preference for internal markets or planning appears to be potentially great, the theory needs to be empirically tested across the varying cultures and government and business contexts of leading business countries. While cultural differences between Germany and the U.S. may be modest relative to the theory, one would not expect this to be true if Japan or China were included. In addition to extending and developing new content for internal markets and planning

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theory, future studies need to avoid the design limitations of the present study. Especially when constructs become narrower and more clearly defined, they need to be measured with multi-item measures that possess higher levels of internal consistency and achieve full metric equivalence across samples (Bensaou et al., 1999). The overall study also needs to include appropriate control variables like industry and size of firm, so that findings are less tentative and more defendable. Another route to improving theory about the development of internal markets would be to conduct more exploratory research using case studies. The cases should focus on situations where an internal market has been recently considered and either implemented or rejected. Issues to focus on include: the factors that were present when an internal market design was adopted, and when it was rejected; how important were the constructs in the present theory? To what extent did managers copy other successful firms or situations when they decided to adopt internal markets? Another area of inquiry concerns the activities that firms select to coordinate through internal markets. Our review of the literature suggests that internal markets may be applied more frequently to information services than to other firm activities. Yet, there is no discussion of this in the literature. Case studies might be used to explore whether managers have developed any criteria for distinguishing relatively attractive and unattractive domains for the application of internal markets. "In conclusion, our argument is that the current theory and literature on internal markets is too remote from the actual development of internal markets in firms. It largely rests on assumptions taken from general economic theory about markets and planning. 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