Network complementaries in the international expansion of emerging market firms

Journal of World Business 55 (2020) 101045

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Network complementaries in the international expansion of emerging market firms

T

Jie Wua,*, Siah Hwee Angb a b

Faculty of Business Administration, University of Macau, Avenida Padre Tomás Pereira, Taipa, Macau School of Marketing & International Business, Victoria University of Wellington, 23 Lambton Quay, Pipitea Campus, PO Box 600, Wellington 6140, New Zealand

A R T I C LE I N FO

A B S T R A C T

Keywords: Network complementarities Domestic political ties Foreign ties International expansion Host market institutions

Can domestic political capital be transferable to more or less similar institutional contexts abroad? Motivated by contradictory results in two streams of research, this study seeks to combine the insights from two theoretical arguments and conceptualize the role of domestic political ties in international expansion as a dual problem of securing key resources from home governments and looking for opportunities in foreign markets and matching resources to capture them. We adopt the notion of network complementarity to examine the complementarity effect of domestic political ties and foreign ties on international expansion. The implication is that EMNE research that concentrates on either looking for foreign opportunities or securing domestic resources, but not both, is likely to be incomplete when international expansion is being studied. Using a longitudinal panel dataset of Chinese international new ventures expanding to 105 foreign markets, we find a positive interactive effect of domestic political ties and foreign ties on Chinese MNEs’ internationalization. This positive interactive effect on internationalization is found to be stronger for expanding to developing host markets than to developed host markets. We discuss the implications of these findings for research on domestic political ties, the international expansion literature, the network complementarity literature, and the international entrepreneurship literature.

Managerial relevance The managerial relevance of this study is two-fold. First, as they contemplate international expansion, managers need to pay attention to network complementarity with respect to domestic political ties and foreign ties because they represent two distinct types of embeddedness and provide different benefits. Overwhelmingly concentrating on one type and downplaying the other may lead to an incomplete understanding of the factors driving successful international expansion. Second, managers need to be very cautious about specific host market institutional configurations, because they basically determine the complementarity value of domestic political ties and foreign ties. 1. Introduction Can domestic political capital be transferable to more or less similar institutional contexts abroad? Addressing this question, prior studies rooted in the political strategies literature have pointed out that political ties are a key resource that allow a firm to access more information and to secure privileged access to resources embedded within its institutional environment (Haveman, Jia, Shi, & Wang, 2017; Hillman,

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Zardkoohi, & Bierman, 1999; Peng, 2003; Yamakawa, Peng, & Deeds, 2008). Two lines of international business research have directly addressed the topic of domestic political ties and internationalization (e.g., Fernandez-Mendez, Garcia-Canal, and Guillen, 2018; Guler & Guillen, 2010). In the multinational enterprises (MNEs) literature, the argument is often made that domestic political ties are country-specific and thus are not transferable to more or less similar institutional contexts abroad (Fernández-Méndez, García-Canal, & Guillén, 2018). Some scholars, drawing from the emerging multinational enterprises (EMNEs) literature, however, provide a different argument. In this literature, domestic political ties help EMNEs to access privileged information about foreign markets and business contacts and secure market power and legitimacy (Wang, Hong, Kafouros, & Wright, 2012). The discrepancy between the different arguments about the effect of domestic political ties on firm internationalization may be partly due to different foci (transfer vs. match). The conventional MNE research tends to concentrate on the country-specific problem and further explore what factors may facilitate or hinder domestic political advantages/resources transferred to a more or less similar context abroad. The second argument rooted in the EMNE literature emphasizes its conferring access to privileged information about foreign markets,

Corresponding author. E-mail addresses: [email protected] (J. Wu), [email protected] (S.H. Ang).

https://doi.org/10.1016/j.jwb.2019.101045 Received 14 April 2018; Received in revised form 22 September 2019; Accepted 16 October 2019 1090-9516/ © 2019 Elsevier Inc. All rights reserved.

Journal of World Business 55 (2020) 101045

J. Wu and S.H. Ang

ties and their interaction with foreign ties in promoting EMNEs’ international expansion. Second, we extend the literature by theoretically pointing out and empirically demonstrating that network complementarity of domestic political ties and foreign ties on international expansion varies across different institutional contexts. The findings of this study thus advance the existing literature on network complementarity by introducing host market institutional configuration as an indispensable boundary condition of the complementarity effect of domestic political ties and foreign ties on international expansion. In the next section, we discuss the theoretical background and develop the arguments for the hypotheses. A description of the data and methodology follows. We then present the results and robustness tests. Finally, we highlight the key contributions of the study and managerial implications, as well as its limitations and future directions.

business contacts, market power and so on. We draw on each line of research to consider the role of domestic political ties in internationalization as a dual problem of searching for (looking for appropriate foreign markets) and transferring the resources conferred by domestic political ties abroad to match foreign opportunities in host markets, taking account of the complexity of institutional contexts across countries. A related weakness in the existing theory concerns attention to the institutional contexts responsible for the value of domestic political ties for firm internationalization (Cuervo-Cauzurra, Ciravegna, Melgarejo, and Lopez, 2018). Firms expanding to institutionally more (less) similar contexts encounter similar (distinct) institutional requirements and regulations, which make domestic political capital more (less) applicable. Unfortunately, very few studies have stressed the impact of host country institutional features in shaping the value of domestic political ties for international expansion, though this must be included in advancing our understanding of the boundary condition with respect to the opening question. The present analysis addresses these weaknesses by examining how domestic political ties (transfer) interact with foreign ties (match) in affecting Chinese firms’ internationalization at the outset and how the value of the joint effect of domestic political ties and foreign ties on internationalization may vary depending on different institutional contexts. Domestic political ties arise when senior managers concurrently hold or have previously held senior positions in key government or political organizations, or when senior politicians or government officials concurrently hold or have previously held top positions in firms (Faccio, Masulis, & McConnell, 2006; Khwaja & Mian, 2005). Foreign ties arise when senior managers have international exposure through their foreign nationality, foreign working experience, foreign education and so on. Several observations about this empirical context motivate the present analyses. First, in the Chinese context, domestic political ties have long been considered critical for firms’ survival, growth (including international growth), and performance (Lin, Chen, & Lin, 2014; Piperopoulos, Wu, & Wang, 2018). Second, since the open-door policies and economic reformation, Chinese managers are increasingly expanding their foreign ties through various types of international exposure such as foreign working experience, foreign education, and exposure to foreign nationalities. Foreign ties are important for internationalization activities because they confer general knowledge of international markets and relational capital that extends beyond the home country and has become a key intangible resource for the internationalization of Chinese firms (Lee & Park, 2008; Shepherd & Patzelt, 2018). Third, Chinese MNEs have been expanding very actively, especially in their early stages, to various foreign markets ranging from institutionally similar to institutionally different host markets. This provides an ideal context to test how the joint effect of political ties and international ties on international expansion may vary across different institutional contexts. In addition, by limiting the analyses to internationalization helps us eliminate other possible influences (e.g., sequential learning) arising over time. We test our hypotheses with data on 671 listed Chinese international new ventures that expanded overseas for the first time in the period 2004–2012 across 105 host markets. The analysis of Chinese MNEs’ likelihood to enter into these host markets involved 210,152 firm-country-year observations, with international expansion into 30 of these host markets. Our study makes two major contributions. First, we contribute to the literature on domestic political ties and international expansion by adopting the notion of network complementarity from social network theories to investigate the interactive effect of domestic political ties and foreign ties on international expansion. We draw on insights from two relevant arguments and propose two dimensions (transfer problem vs. match problem) through which we explicitly articulate the intrinsic mechanisms underlying their interactions, thus providing a much deeper understanding of the role of domestic political

2. Network complementarity and international expansion 2.1. Domestic political ties and international expansion The question regarding whether domestic political ties could be transferable to more or less similar institutional contexts abroad has attracted increasing attention from international business researchers. This is because, although domestic political ties are critical for firm success, they have been considered country-specific resources and less transferable to foreign markets (Useem, 1985). As such, scholars in this stream of literature made efforts to identify the factors that facilitate or hinder the transferability of political resources and advantages across borders (Fernandez-Mendez, Garcia-Canal, and Guillen, 2018). Another argument rooted in the EMNE literature points out that domestic political ties enable an EMNE to access privileged information about foreign markets and business contacts that are offered by home governments and to deploy home resources to capture potential opportunities in foreign markets (Wang et al., 2012). The general thesis is that domestic political ties provide an EMNE privileged information and business contacts in foreign markets. Although both are considered relevant parts of the literature on domestic political ties and international expansion, they are two separate theses, because their emphases—transfer versus match— are different. The first stream features prominently in the structural hole view originally advanced by Burt (1992): domestic political resources are local and context-specific, and not applicable (transferable) beyond the actor’s immediate network, because “the politician has mostly domestic contacts or in specific countries” (Fernandez-Mendez, Garcia-Canal, and Guillen, 2018: 696). The second stream, in contrast, emphasizes that home governments can provide privileged information about foreign markets and business contacts, to which domestic political ties allow an EMNE to have access. Despite their different emphasis, later research often combines both arguments and extends them to the interactions of domestic political ties with other types of ties in predicting international expansion. Some scholars have argued that, although domestic political capital is country-specific and hardly applied across countries, it can be exploited in international markets if former politicians on the board have developed international knowledge (Cuervo-Cauzurra, et al., 2018). However, this interpretation involves distinct resources, markets and institutional settings: domestic political ties involve more resources/ information in the home country and encounter a transfer problem, while foreign ties involve more resources/information in the host country and encounter a match problem. We thus propose two solutions to resolve the problems in the literature. First, we need to use a consistent framework in order to determine the precise relationship between domestic political ties and international expansion. We adopted network complementarity proposed by Uzzi (1999), but advanced it in several key aspects. Network complementarity refers to the ability to synthesize the benefits of different types of ties. In the study of the acquisition and costs of financial capital 2

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J. Wu and S.H. Ang

buffer if international expansion does not go well. However, as discussed above, domestic political ties suffer from a transfer problem, due to the fact many benefits are country-specific and are less transferable to more or less similar institutional contexts. These will need other embeddedness to reinforce its advantages while mitigating its disadvantages. We argue that foreign ties serve as such an embeddedness that is complementary to domestic political ties by providing special informational (or matching) benefits. First, although domestic political ties encounter a transfer problem, strong foreign ties offer adequate information about foreign markets that helps to identify appropriate foreign markets that mitigate the transfer problem. Given that strong foreign ties increase greater awareness of international opportunities (Kundu & Katz, 2003; McConnell, 1979), an EMNE with strong foreign ties is likely to be more outward-looking and thus more willing to explore foreign markets than one without foreign ties. For example, Pisani, Muller, and Bogatan (2018) suggest that TMT members with strong foreign ties bring with them a greater openness to foreignness as they self-select into international careers that come with uncertainty. This in turn increases the firm’s level of attention to the international marketplace as well as its level of trust of international partnerships (Simmonds & Smith, 1968). Equally importantly, critical resources (e.g., financial capital, human capital, technologies) provided by home governments thanks to strong domestic political ties are indispensable for the EMNE to take advantage of emerging, promising opportunities in foreign markets. Second, to overcome the transfer problem associated with domestic political ties, an EMNE needs to develop the ability to accurately assess a foreign market to identify the match between foreign opportunities/ conditions and home-based political resources. Scholars have suggested that an EMNE with strong foreign ties will have a greater ability to gauge the attractiveness of foreign markets and be able to better manage relationships with stakeholders in these markets (Sousa & Bradley, 2008), reducing the risks associated with internationalization (Figueira-de-Lemos, Johanson, & Vahlne, 2011). This is because firms with strong foreign ties tend to proactively launch deliberate searches right from the beginning (Chandra, Styles, & Wilkinson, 2009; Oviatt, McDougall, & Loper, 1995), and have more international experience to evaluate potential foreign opportunities (Carpenter & Fredrickson, 2001; Sapienza, Autio, George, & Zahra, 2006; Tihanyi, Ellstrand, Daily, & Dalton, 2000). They are also less likely to delay internationalizing (Reuber & Fischer, 1997). Such an ability produces premium benefits for domestic political ties by effectively matching resource strengths with the most appropriate business opportunities to pursue, largely based on an accurate evaluation of the risks, costs and benefits of a foreign market (De Clercq, Sapienza, Yavuz, & Zhou, 2012). Third, despite the information benefits provided by strong foreign ties for international expansion, exploring promising opportunities in foreign markets requires not only substantial financial capital, talent, and support from the government in the home country, but also legitimacy in attracting local partners in a foreign market. Legitimacy is especially important for an EMNE entering a relatively more developed market where local stakeholders believe in a stereotype regarding its entry. Strong domestic political ties provide both resources and legitimacy benefits (Fernández-Méndez et al., 2018). Strong domestic political ties help to provide necessary legitimacy, sending legitimacy signals to host market regulators and investors, whereas an EMNE with fewer domestic political ties does not have these added advantages. This, in turn, will strengthen the benefit of foreign ties on international expansion.

in middle-market banking, Uzzi (1999: 491) argued that a network composed of different types can “moderate the shortcomings of each type of tie while preserving their strengths, optimizing the firm’s range of variable action”. The extension of this notion to the investigation of the joint effect of domestic political ties and foreign ties on firm internationalization is appropriate because, as noted above, domestic political ties and foreign ties represent two distinct types of network embeddedness. Domestic political ties arise from contact with domestic politicians and governments while foreign ties arise from business contact with foreign partners (e.g. investors, suppliers and buyers). Each provide unique, but distinct resources embedded in specific markets. Second, we advance this concept by taking account of distinct institutional contexts across host markets. Not all host markets are alike: some host markets have more developed institutions (e.g., relatively complete legislative and effective enforcement systems), whereas other host markets are characterized by under-developed institutions, lack of market intermediaries, and high political risk. Institutional configurations that are somehow similar or distinct from the home market will affect the complementarity effect of domestic political ties and foreign ties in promoting international expansion. Thus, it is important to understand not only how network complementarity works with respect to domestic political ties and foreign ties for international expansion, but also how this effect varies depending on the institutional configuration of the host market.

2.2. Network complementarity and international expansion To assess the complementarity of domestic political ties and foreign ties in international expansion, we use the transfer and match arguments developed above as two underlying mechanisms to delineate the intrinsic interactions between domestic political ties and foreign ties. As shown in Fig. 1, we contrast strong and weak domestic political ties under conditions of strong and weak foreign ties. When a firm has strong domestic political ties and strong foreign ties, it corresponds to the higher-left quadrant in Fig. 1. On the other hand, when a firm has weak domestic political ties and weak foreign ties, it corresponds to the lower-right quadrant in Fig. 1. Given our theoretical interest in the network complementarity of domestic political ties and foreign ties, we focus on the high-left quadrant in Fig. 1 and treat other quadrants as the comparisons. An EMNE with strong domestic political ties can attain critical resources (e.g., financial capital, human capital, and key technologies) that are otherwise not available for those with weak or no domestic political ties (right quadrants vs. left quadrants) (Sun, Mellahi, & Wright, 2012). Strong domestic political ties also help an EMNE gain policy support from home governments, which provides important information such as state-preferred foreign markets and subsidies for international activities. Also, strong domestic political ties provide a

Hypothesis 1. The interaction between domestic political ties and foreign ties is positively associated with the likelihood of first international expansion by EMNEs.

Fig. 1. Transfer and match effects associated with four combinations of domestic political ties and foreign ties. 3

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standards and reporting systems allows comparability of ventures across the two exchanges. Limiting our analyses to firms listed on the two exchanges allows us to compile a high-quality longitudinal sample of Chinese MNEs’ domestic political ties, foreign ties and their internationalization activities. We took the following steps to identify the sample of Chinese international new ventures. We manually reviewed the annual reports of each company to identify its international activities. Information retrieved included which foreign market(s) it entered, and the year of establishment in the foreign market(s). We then identified each company’s first time international expansion and worked out when this occurred in the company’s tenure. Most Chinese international new ventures expanded overseas for the first time in the period 2004–2012, which became the focus period for this study. This period offers a reasonable window to trace back and identify whether a Chinese new venture expanded overseas within the first six years of its establishment. To select our sample new ventures, we traced each firm from its year of establishment to its first year of international expansion. As our focus is on how new ventures can leverage domestic political ties and foreign ties to internationalize, we excluded large ventures or subsidiaries of large companies, as indicated in the China Large Enterprises Directory.1 We also excluded those new ventures with interests related to large firms. After excluding those ventures without any international expansion within the first six years of their inception, a sample of 671 Chinese new ventures remained. The international expansion activities of our sample new ventures spanned across 30 overseas markets. We then created the panel data by multiplying these ventures by the 30 overseas markets that made up the full potential set of international markets entered by a Chinese new venture in its first international expansion within the first six years of its inception. Due to some missing data on variables, our final dataset contained 210,152 firm-country-year observations. The basic unit of observation reflects the probability that a Chinese new venture would choose a particular foreign market among a set of potential foreign markets in the first six years following its establishment. We extracted firm-level variables from the China Stock Market Financial Data provided by CSMAR (China Stock Market & Accounting Research), a leading data provider focusing on Chinese listed companies. Top management team information was obtained from CSMAR’s Corporate Governance Database. We linked firm and individual level information with the help of the unique stock codes. Table 1 presents attributes of firms, where firm age and TMT size are rows, with the means and standard deviations of foreign ties and TMT domestic political ties as columns. The mean value is used to divide the sample firms into high and low groupings for firm age and TMT size. The distributions of firms for these attributes are fairly even. Older firms average 0.267 international ties, while younger firms average 0.238 foreign ties. Older firms also have 0.068 domestic political ties on average, while younger firms have 0.019 domestic political ties on average. For 305 firms with a TMT size of no more than six, average international ties are 0.193 and the average domestic political ties are 0.037. For 75 firms with TMT size more than 10, the average foreign ties are 0.406 and average domestic political ties are 0.068. In summary, older firms and those with a larger TMT size tend to have both greater TMT foreign ties and domestic political ties.

2.3. Moderating role of host market institutions We extend the existing network complementarity literature to explore host market institutions as the boundary condition that affects the complementarity effect of domestic political ties and foreign ties on international expansion. The complementarity effect of domestic political ties and foreign ties is more likely to occur for EMNEs expanding to developing host markets as compared to developed host markets. Compared to developed markets, developing home markets are characterized by poorly developed institutions, which provide weak bases from which market players generate the organizational and technological resources necessary for competing internationally (Gillespie & Teegen, 1995; Hitt, Dacin, Levitas, Arregle, & Borza, 2000). As manoeuvring in developing host markets is likely to involve the local political environment, an understanding of how to engage with the local political environment and develop political ties is likely to help in these markets. Cuervo-Cauzurra et al. (2018) suggested that although high political risks and uncertainties regarding rules and regulations in the home market reduce managers’ incentives to make long-term investments, theses indigenous firms develop uncertainty management capability that is useful for dealing with uncertainties in foreign markets. Such capability helps an EMNE to better understand the inner workings of politics and governments in host markets (Piperopoulos et al., 2018) and anticipate the actions of the host governments (Fernandez-Mendez et al. 2018). Plus, strong foreign ties provide the business with information about key local contacts and partners and their essential needs. Together, these are very useful for an EMNE to effectively mobilize domestic resources to accurately match local partners’ needs, making it feasible to take full advantage of the potential opportunities identified in developing host markets. On the other hand, given that developed host markets have greater transparency around institutions and governments’ decision-making processes, it is less difficult for an EMNE to understand how the (political) system works and how people involved in the political process think and act (Fernandez-Mendez et al. 2018). Such an environment will require less engagement around political ties. As such, a working knowledge of engaging with political ties may not be as useful as in developing host markets. Moreover, in developed host markets, the information benefits offered by strong foreign ties can be accessible through well-developed market intermediaries, which are unfortunately not available in developing host markets. Given that both the benefits of domestic political ties and foreign ties are weakened in developed host markets, their joint effect on international expansion is weakened when expanding into developed host markets compared to developing host markets. Thus, we hypothesize: Hypothesis 2. The positive interactive effect of domestic political ties and foreign ties on first international expansion will be stronger for EMNEs that expand to institutionally developing host markets as compared to institutionally developed host markets. 3. Data and methodology 3.1. Data and sample We test our hypotheses using panel data on international expansion activities by Chinese new ventures. We started with the list of publicly listed Chinese companies on the Shanghai Stock Exchange and Shenzhen Exchange, the only two major stock exchanges in Mainland China. A provision of the China Securities Regulatory Commission requires all companies listed on these two stock exchanges to disclose their key strategies and investments (e.g. foreign direct investments, setting up foreign subsidiaries) on an annual and ongoing basis. The use of publicly listed companies enables us to systematically track down the international expansion of Chinese companies over a period of time. Moreover, the fact that two stock exchanges adopt the same accounting

3.2. Variables Dependent variable. The dependent variable first international expansion equals 1 if venture i entered country j during year t, and 0 otherwise. Prior studies have labelled a new venture as being within 1 China Large Enterprises Directory is a catalog listing all large enterprises (e.g., PetroChina, China Mobile, Bank of China) in China. The catalog is updated on an annual basis.

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control for this with firm performance, measured by return on assets (Liu, Miletkov, Wei, & Yang, 2015). New ventures with more technological resources are more likely able to expand overseas using the leverage from these resources (Zhang, Ma, & Wang, 2012). We control for this using a new venture’s R&D intensity, which is calculated by the ratio of R&D expenditure over total sales. Marketing intensity is suggested to affect internationalization (Lu & Beamish, 2004). Consistent with prior studies, we control for marketing intensity, which is calculated by the ratio of marketing expenditure to total sales. Given that the Chinese government plays an important role in foreign expansion for those firms with government stakes (Zhang, Ma, Wang, Li, & Huo, 2016), we control for the effect of state ownership by including the percentage of government ownership (Wu, Wang, Piperopoulos, & Zhuo, 2016). Prior studies show that foreign ownership affects overseas expansion (Hitt, Bierman, Uhlenbruck, & Shimizu, 2006). We control for foreign ownership, which is measured by the percentage of ownership owned by foreign investors. We also included three new venture TMT-level control variables. Aged TMTs may suffer from rigidity, resulting in less willingness to take risks in internationalization (Bantel & Jackson, 1989). We control for TMT age, measured by the average age of the TMT members. The literature suggests that high levels of TMT education may result in a higher propensity to seek risk (Bantel & Jackson, 1989). We include TMT education in the analyses, measured by the average year of schooling of TMT members. A large TMT is less willing to take risks, which reduces a firm’s likelihood of expanding overseas (Bantel & Jackson, 1989). We thereby control for TMT size, measured by the number of TMT members. In addition, given that our panel data covers nine years, it offers us the opportunity to observe how a Chinese new venture expands overseas to multiple markets over a relatively long period. It is possible that certain unobservable firm-specific characteristics may affect a new venture’s foreign expansion behavior in a consistent way. To take account of this unobservable firm-level factor (rendered in the panel data with the repeated observations of each firm), we account for firm-fixed effect in our empirical model. Further, given that our sample ventures reside in multiple industries and across time, we also include 13 industry dummies and year dummies in our regression analyses to take into account industry and time effects.

Table 1 Attributes of firms, TMT international experience, domestic political ties, and TMT size. No. of firms

Firm age High Low TMT size High Low TMT TMT TMT TMT TMT TMT

size size size size size size

≤6 ≤7 ≤8 ≤9 ≤ 10 > 10

TMT foreign ties

TMT domestic political ties

Mean

S.D.

Mean

S.D.

298 373

0.267 0.238

0.842 0.821

0.068 0.019

0.334 0.172

366 305

0.352 0.193

0.202 0.231

0.062 0.037

0.335 0.230

305 410 493 556 596 75

0.193 0.211 0.218 0.229 0.243 0.406

0.231 0.230 0.222 0.780 0.230 0.122

0.037 0.037 0.035 0.041 0.045 0.068

0.230 0.231 0.230 0.265 0.275 0.280

eight years (e.g. Welbourne & De Cieri, 2001) or six years (e.g. Shrader, 2001) of the firm’s inception. Following prior studies that have used Chinese new international ventures, we observe first international expansion within the first six years of a new venture’s inception (Deng, Jean, & Sinkovics, 2018; Deng, Jean, & Sinkovics, 2017). For the testing of Hypothesis 2, our dependent variables involve first international expansion into (a) a developed host market and (b) a developing host market. We rely on the World Bank’s classification of developed and developing markets (e.g., Peng, 2003; Taussig & Delios, 2015). Our sample included 22 developed and 8 developing host markets. To construct these dependent variables, we track all foreign market entries made by our sample Chinese new ventures in the period 2004–2012. Amongst the developed host markets, Hong Kong was entered 2,506 times, the US 1,732 times, Australia 874 times, South Korea 542 times and Bermuda 436 times. The Philippines (324), Nigeria (218), and Vietnam (216) were also among the key developing host countries for Chinese new ventures in their first international expansion. Independent variables. We construct foreign ties by reviewing each TMT member’s curriculum vita and manually identifying information about their international ties. This information includes whether a TMT member has foreign working experience, foreign nationality, and foreign education (Lee & Park, 2008). If a TMT member has any one of these, her or his international ties are coded as 1, 0 otherwise. We then sum the individuals’ international ties within a TMT to arrive at the strength of TMT foreign ties (Tihanyi et al., 2000). This is divided by the size of the TMT to take into account the size difference of TMTs across new ventures and time. Consistent with prior studies on political ties (e.g., Chen, Li, Su, & Sun, 2011; Fan, Wong, & Zhang, 2007; Sun, Peng, Lee, & Tan, 2015), we measure the strength of TMT domestic political ties by the extent to which the focal TMT member has ever served as government secretary, communist party standing member, elected People’s Congress (NPC) or People's Political Consultative Committee (CPPCC) member. We review all TMT members’ curriculum vitae and manually identify whether he or she possesses the above political ties. If he or she does, this is coded as 1, 0 otherwise. We then sum the individuals’ domestic political ties across the TMT members to arrive at the strength of the TMT domestic political ties, which is further weighted by the size of the TMT. Control variables. We included control variables at the firm level that will impact on Chinese new ventures’ first international expansion. Older and larger firms are likely to have more resources for internationalization (Luo & Wang, 2012; McDougall, Oviatt, & Shrader, 2003; Sun et al., 2015). We measure firm age by the number of years elapsed since a firm was incorporated. Firm size is measured by the natural logarithm of total assets. Firms with better performance have more resources for foreign expansion (Wu, Pangarkar, & Wu, 2016). We

3.3. Analysis As the dependent variable is a binary response, i.e. whether a Chinese new venture expands into a foreign market, we employ the logit model for data analysis. To test Hypothesis 2 concerning whether the positive moderating effect of TMT domestic political ties on the TMT foreign ties-first international expansion relationship is stronger in developing host markets than in developed host markets, we conduct a seemingly unrelated estimation that is usually used to test for intramodel and cross-model hypotheses. The seemingly unrelated test estimates the simultaneous (co)variance of the coefficients of the two models of international expansion to developed and developing host markets. Therefore, we compare whether the differences of the interaction effects between these two models are statistically significantly different. If not otherwise specified, the information used to construct our independent and control variables lagged one year behind the dependent variables. 3.4. Results Table 2 reports the mean, standard deviation, and the pairwise correlations among the main variables used in the analyses. The variance inflation factor (VIF) test suggests that all VIFs are well below the acceptable level of 10 (Neter, Wasserman, & Kutner, 1985). This indicates no serious issues around multicollinearity. Models 1–5 in Table 3 report the logit regression results for the test 5

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Table 2 Descriptive statistics and correlation. (1) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)

First international expansion into developed host markets First international expansion into developing host markets Firm age Firm size Firm performance Firm R&D intensity Firm marketing intensity Firm state ownership Firm foreign ownership TMT age TMT education TMT size Domestic political ties Foreign ties Mean S.D. Min Max

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

(11)

(12)

(13)

(14)

1.000 0.037 −0.162 0.249 0.042 0.385 0.029 0.012 0.204 0.004 0.108 0.021 3.560 1.175 1 5

1.000 0.064 −0.027 −0.022 0.049 0.000 0.117 −0.007 0.044 0.007 −0.037 7.413 1.231 0 13.003

1.000 −0.087 −0.225 0.014 −0.016 0.043 0.008 0.063 0.016 0.053 0.044 0.073 −1.683 0.261

1.000 0.099 0.338 0.095 −0.037 0.265 −0.059 0.070 0.007 0.007 0.023 0 0.281

1.000 −0.060 0.112 −0.075 0.047 0.036 0.004 0.054 0.056 0.065 0 0.689

1.000 0.041 0.072 0.426 0.054 0.100 0.051 0.153 0.266 0 0.850

1.000 −0.015 0.111 0.023 0.039 0.154 0.005 0.035 0 0.558

1.000 −0.057 −0.013 −0.018 0.028 45.926 8.951 25 82

1.000 0.062 0.071 0.163 12.894 2.111 12 24

1.000 0.046 0.108 6.233 2.276 1 19

1.000 0.066 0.028 0.188 0 1

1.000 0.242 0.217 0 1

1.000 −0.011

1.000

0.032 0.073 0.005 0.044 0.166 0.025 0.194 0.049 0.054 0.050 0.062 0.094 0.035 0.183 0 1

0.037 0.053 0.013 0.026 −0.005 −0.007 −0.007 −0.006 0.025 −0.037 0.044 −0.003 0.003 0.056 0 1

N = 210,152. r ≥ 0.0039 significant at the 0.05 level (two-tailed test).

of Hypothesis 1. Models 6–7 and 8–9 present the findings for first international expansion into developed and developing host markets respectively. As predicted, firm age, firm size, firm R&D intensity, and firm marketing intensity increase a Chinese new venture’s propensity to expand to developed markets as well as to developing host markets. Both level of state ownership and level of foreign state ownership, however, decrease this propensity in the internationalization of developing host markets, but not in that of developed host markets. It is plausible that both forms of external ownership slow down the process of new ventures branching out, in this case first internationalization into markets with greater uncertainty. Likewise, TMT age may also reduce the propensity for first internationalization into developing host markets through rigidity. Both TMT education and TMT size increase a new venture’s propensity to expand to both types of host markets. Model 4 in Table 3 shows that TMT foreign ties have a positive effect on first international expansion (b = 0.120, p = 0.000). Moreover, this positive effect is shown to be significant in developed host markets (Model 6: b = 0.128, p = 0.000). Nonetheless, the results for the developing host markets case is not significant (Model 8: b = 0.005, p = 0.941). Model 5 in Table 3 presents the results for the test of Hypothesis 1. In Model 5, the interaction term, Foreign ties × Domestic political ties, is found to be positive significant (b = 0.044, p = 0.000). This result is also supported in the analysis into the two types of host markets—the coefficient of the interaction term is also positive significant in the case of developed host markets (Model 7: b = 0.031, p = 0.013) and in the case of developing host markets (Model 9: b = 0.307, p = 0.005), supporting Hypothesis 1. We plot this relationship in Fig. 2 using the unstandardized coefficients reported in Model 5. In Fig. 2, the horizontal axis represents the levels of foreign ties and the vertical axis represents first time expansion to all host markets. The solid line represents the effect of foreign ties on first time internationalization into all host markets under low levels of domestic political ties, and the dash line represents the effect of foreign ties on first time internationalization into all host markets under high levels of domestic political ties. Fig. 2 shows that the association between foreign ties and first time international expansion to all host markets is positive for both lines, and the slope of the dash line (i.e., under high levels of domestic political ties) is steeper than the slope of the solid line (i.e., under low levels of domestic political ties). Furthermore, we find that the gradient of slope for low levels of domestic political ties is 0.133 with a t-value of 13.447 (p = 0.000). The gradient of slope for high levels of domestic political ties is 0.147 with a t-value of 13.047

(p = 0.000), indicating that the line related to low levels of TMT domestic political ties is significantly different from the line with high levels of domestic political ties for foreign ties on first time international expansion to all host markets. These results provide further support for Hypothesis 2. We compare Models 7 and 9 in Table 3 for our analysis of Hypothesis 2. The interaction term, Foreign ties × Domestic political ties, in Model 9 for the case in developing host markets (b = 0.307) is larger than that for the case in developed host markets (b = 0.031) and both are significant, suggesting that the positive moderating effect might be stronger in the case of developing host markets. We also plot these relationships in Fig. 3. From Fig. 3, it is clear that the difference between high and low TMT domestic political ties is much greater in the case of developing host markets than in the case of developed host markets, indicating that the positive moderating effect of domestic political ties on the foreign ties-first international expansion relationship will be stronger for expansion to developing host markets as compared to developed host markets. Hence, Hypothesis 2 is supported.

3.5. Robustness tests We took several steps to check the robustness of our analyses. First, because our dependent variable is a dummy variable, we employed a logit regression to analyze the data. However, other statistical approaches are also appropriate for the analysis of such data, among which Probit regression has been considered a good alternative for the logit regression. Logit and Probit differ in how they define f (*). The logit model uses the cumulative distribution function of the logistic distribution while the probit model uses the cumulative distribution function of the standard normal distribution to define f (*). Both functions will take any number and rescale it to fall between 0 and 1. The difference between logit and Probit is mainly in the link function (Hahn & Soyer, 2005). Our analyses using Probit regression models show consistent results from those using the logit regression models. Second, as noted above, an international new venture is defined in our study based on the cut-off point of the first overseas expansion within the first six years. However, some prior studies use the first eight years since the establishment as the cutoff point to define an international new venture (e.g. Shrader, Oviatt, & McDougall, 2000). Accordingly, we ran our analyses again using the first eight years of the establishment as the cutoff point. A sample of 1095 Chinese new ventures satisfy this criterion. Using both the logit and probit regression 6

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Table 3 Logit regression analyses of first international expansion. All host markets Model 1 −10.734 (0.135) 0.000 0.184 (0.012) 0.000 0.433 (0.010) 0.000 3.566 (0.249) 0.000 6.269 (0.439) 0.000 6.940 (0.126) 0.000 −0.089 (0.050) 0.074 7.691 (0.159) 0.000 0.035 (0.001) 0.000 0.048 (0.005) 0.000 0.035 (0.005) 0.000

Intercept

Firm age

Firm size

Firm performance

Firm R&D intensity

Firm marketing intensity

Firm state ownership

Firm foreign ownership

TMT age

TMT education

TMT size

International ties

Model 2 −10.543 (0.135) 0.000 0.195 (0.012) 0.000 0.430 (0.010) 0.000 3.251 (0.245) 0.000 6.551 (0.433) 0.000 6.782 (0.127) 0.000 −0.099 (0.050) 0.047 7.282 (0.156) 0.000 0.034 (0.001) 0.000 0.039 (0.005) 0.000 0.028 (0.005) 0.000 0.144 (0.009) 0.000

Domestic political ties

Model 3 −10.733 (0.135) 0.000 0.174 (0.012) 0.000 0.441 (0.010) 0.000 3.441 (0.247) 0.000 6.436 (0.435) 0.000 7.035 (0.126) 0.000 −0.139 (0.050) 0.006 7.475 (0.157) 0.000 0.035 (0.001) 0.000 0.046 (0.005) 0.000 0.033 (0.005) 0.000

0.430 (0.025) 0.000

Model 4 −10.579 (0.135) 0.000 0.186 (0.012) 0.000 0.436 (0.010) 0.000 3.206 (0.244) 0.000 6.636 (0.431) 0.000 6.886 (0.127) 0.000 −0.140 (0.050) 0.005 7.144 (0.156) 0.000 0.034 (0.001) 0.000 0.039 (0.005) 0.000 0.027 (0.005) 0.000 0.120 (0.010) 0.000 0.371 (0.025) 0.000

Yes Yes −29,154*** 58,285 12 210,152

Yes Yes −29,063*** 58,153 13 210,152

Foreign ties × Domestic political ties

Industry dummies Year dummies Log Likelihood AIC df Number of observations

Yes Yes −29,257*** 58,539 11 210,152

Yes Yes −29,129*** 58,334 12 210,152

Model 5 −10.570 (0.135) 0.000 0.182 (0.012) 0.000 0.439 (0.010) 0.000 3.168 (0.243) 0.000 6.648 (0.431) 0.000 6.880 (0.127) 0.000 −0.150 (0.050) 0.003 7.197 (0.157) 0.000 0.034 (0.001) 0.000 0.039 (0.005) 0.000 0.027 (0.005) 0.000 0.126 (0.010) 0.000 0.386 (0.025) 0.000 0.044 (0.012) 0.000 Yes Yes −29,056*** 58,142 14 210,152

Developed host markets

Developing host markets

Model 6 −10.255 (0.140) 0.000 0.121 (0.013) 0.000 0.380 (0.010) 0.000 2.662 (0.235) 0.000 6.192 (0.466) 0.000 7.363 (0.130) 0.000 −0.147 (0.052) 0.005 7.524 (0.159) 0.000 0.038 (0.001) 0.000 0.020 (0.006) 0.000 0.057 (0.005) 0.000 0.128 (0.010) 0.000 0.327 (0.027) 0.000

Model 8 −15.841 (0.495) 0.000 0.851 (0.047) 0.000 1.089 (0.040) 0.000 9.278 (0.979) 0.000 10.294 (1.059) 0.000 0.316 (0.762) 0.000 −2.339 (0.168) 0.000 −17.847 (5.578) 0.001 −0.025 (0.005) 0.000 0.092 (0.016) 0.000 −0.452 (0.026) 0.000 0.005 (0.069) 0.941 0.791 (0.097) 0.000

Yes Yes −26,899*** 53,826 13 210,152

Model 7 −10.248 (0.140) 0.000 0.118 (0.013) 0.000 0.383 (0.010) 0.000 2.636 (0.235) 0.000 6.207 (0.466) 0.000 7.358 (0.130) 0.000 0.140 (0.052) 0.007 7.560 (0.159) 0.000 0.038 (0.001) 0.000 0.020 (0.006) 0.000 0.057 (0.005) 0.000 0.132 (0.010) 0.000 0.338 (0.027) 0.000 0.031 (0.012) 0.013 Yes Yes −26,896*** 53,822 14 210,152

Standard errors in parentheses; p-values in italics.

Fig. 2. Interaction effect of foreign ties and domestic political ties on first internationalization. 7

Yes Yes −3,492*** 7011 13 210,152

Model 9 −15.946 (0.496) 0.000 0.839 (0.047) 0.000 1.072 (0.040) 0.000 9.258 (0.985) 0.000 9.880 (1.062) 0.000 0.424 (0.768) 0.000 −2.399 (0.170) 0.000 −18.125 (5.631) 0.001 −0.023 (0.005) 0.000 0.107 (0.017) 0.000 0.450 (0.026) 0.000 0.026 (0.065) 0.692 0.648 (0.116) 0.000 0.307 (0.110) 0.005 Yes Yes −3,487*** 7005 14 210,152

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Fig. 3. Interaction effect of foreign ties and domestic political ties on first internationalization to developed and developing host markets. Table 4 Robustness check for 8-year and 3-year of first international expansion. All host markets Model 1 8-year window Foreign ties

Model 2

Model 4

Model 5

Model 6

Model 7

Model 8

Model 9

0.404 (0.019) 0.000

0.239 (0.008) 0.000 0.345 (0.020) 0.000

0.217 (0.008) 0.000 0.222 (0.023) 0.000

−43,860*** 87,747 13 318,280

0.221 (0.008) 0.000 0.250 (0.023) 0.000 0.057 (0.011) 0.000 −39,455*** 78,939 14 318,280

0.326 (0.020) 0.000 0.769 (0.032) 0.000

−43,984*** 87,994 12 318,280

0.246 (0.007) 0.000 0.375 (0.019) 0.000 0.110 (0.011) 0.000 −43,810*** 87,650 14 318,280

0.252 (0.026) 0.000 0.454 (0.078) 0.000 0.612 (0.116) 0.000 −7,862*** 15,755 14 318,280

2.386 (0.364) 0.000

0.381 (0.032) 0.000 1.161 (0.447) 0.009

0.380 (0.032) 0.000 0.677 (0.377) 0.073

−2,131*** 4,288 12 41,747

−2,127*** 4,281 13 41,747

0.582 (8.060) 0.942 −1.694 (128.332) 0.989 −1.919 (76.343) 0.980 −2,125*** 4,280 14 41,747

Foreign ties × Dmestic political ties

Log Likelihood AIC df Number of observations

−44,445*** 88,914 11 318,280

3-year window Foreign ties

−44,265*** 88,556 12 318,280

0.416 (0.029) 0.000

Domestic political ties

Foreign ties × Dmestic political ties

Log Likelihood AIC df Number of observations

−2,228*** 4,480 11 41,747

−2,187*** 4,400 12 41,747

Developing host markets

Model 3

0.250 (0.007) 0.000

Domestic political ties

Developed host markets

−39,467*** 78,962 13 318,280

−2,137*** 4,303 13 41,747

−7,894*** 15,816 13 318,280

0.582 (0.039) 0.000 −2.415 (.) . −1.927 (0.289) 0.000 −2,136*** 4,301 14 41,747

Standard errors in parentheses; p-values in italics. † p < 0.10; * p < 0.05; ** p < 0.01; *** p < 0.001.

foreign ties-first international expansion relationship in the case for developed host markets. Thus, domestic political ties impede rather than facilitate the linkage. For the case of developing host markets, there were only 17 countries represented and only one country (Vietnam) had more than one internationalization observation. As such, we could not do the analysis for this case as shown in Table 4.

models with a sample of 318,280 observations, the analysis with this sample produced results consistent with those from the six-year analysis. We show the findings of the key variables in Table 4. Further, a three-year window has been adopted by researchers examining globalising companies (Jones, Coviello, & Tang, 2011). As our sample are public listed companies, they would hardly fit as born global companies. Further, born globals are predominantly export-driven companies while our sample involves subsidiaries as well (Coviello, 2015). Nonetheless, we also run a robustness test using a three-year window for first international expansion. Only 269 firms involving 41,747 observations were in this sample for analysis. There is a negative moderating effect of TMT domestic political ties on the TMT

4. Discussion and conclusion The present study offers lessons for several fields of study: the literature about home country networks and international expansion, EMNE literature, and the international entrepreneurship literature. We 8

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have been previously merely assumed or even ignored in the this literature.

discuss implications for each of these areas in turn. First, we address two weaknesses in previous research about domestic political ties and international expansion. As noted at the beginning, this research was motivated by an apparent discrepancy between two lines of research in extant international business literature. Researchers studying the MNEs from developed markets have argued that political capital is country-specific and, as such, less transferable to foreign markets, though it still plays an effect, for example, when former politicians possess relevant international experience (Fernandez-Mendez, Garcia-Canal, and Guillen, 2018). On the other hand, scholars studying the EMNEs have argued that domestic political ties enable an EMNE to access privileged information about foreign markets, and business contacts and local partners (Wang et al., 2012). However, neither argument provides a comprehensive understanding of the role of domestic political ties for international expansion. We sought to combine the insights from two arguments (transfer vs match), because these two mechanisms may be intertwined and reinforce each other. If either the transfer or match arguments were considered alone, the complicated relationship between domestic political ties and international expansion would not have been elucidated. We thus conceptualize EMNEs’ international expansion as a dual problem of securing key resources from home governments via domestic political ties and looking for opportunities in foreign markets and matching resources with these foreign opportunities to capture abnormal rents. In doing so, we adopt the notion of network complementarity and extend it to examine the complementarity effect of domestic political ties and foreign ties on international expansion. The implication is that the EMNE research that concentrates on either looking for foreign opportunities or securing domestic resources, but not both, is likely to be incomplete when international expansion is being studied. Second, we also address a related weakness in the prior literature on network complementarity by identifying its boundary condition. Specifically, we introduce host market institutional development as the boundary condition that shapes the complementary effect of political ties and foreign ties on international expansion. The findings of this study show that the complementary effect of domestic political ties and foreign ties is stronger when an EMNE expands to developing host markets than to developed host markets. Existing research on network complementarity has remained agnostic with respect to various institutional contexts that strengthen or weaken the network complementarity, though institutions — rules of the game — certainly affect it, due to its fundamental influence on each transaction’s costs, the availability of information, and developmental levels of market intermediaries. The few researchers, largely from the international business field, who have considered the institutional contexts affecting the value of networks have not taken into account the different impacts of institutionally similar vs. different contexts on the complementarity of political ties and foreign ties for international expansion (CuervoCazurra, Ciravegna, Melgarejo, & Lopez, 2018). The findings in this study suggest that institutional contexts are an indispensable boundary condition when examining the complementarity relationship between domestic political ties and foreign ties of EMNEs expanding to foreign markets with highly complex institutional configurations. Third, we contribute to the literature about international entrepreneurship. Recent work from the international entrepreneurship literature (e.g. McDougall, Shane, & Oviatt, 1994) suggests that internationalization is possible for a new venture if it has access to resources embedded in organizational characteristics (e.g., Antončič & Hisrich, 2000), home or host country environments (e.g., institutional openness in Sun et al., 2015), and entrepreneurs’ characteristics (e.g., entrepreneurial orientation in Zhang et al., 2012). Nonetheless, this literature barely recognizes the joint effect of domestic political ties and foreign ties for international expansion for a new venture (Reuber & Fischer, 1997). By highlighting whether and how Chinese new ventures are able to combine two different ties to internationalize successfully, the proposed framework lends itself to the analyses of the effects that

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