Ownership, strategic orientation and internationalization in emerging markets

Journal of World Business 46 (2011) 381–393

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Ownership, strategic orientation and internationalization in emerging markets§ Yi Liu a,1, Yuan Li a,*, Jiaqi Xue b,2 a b

Antai College of Economics & Management, Shanghai Jiaotong University, School of Management, Xi’an Jiaotong University, Xi’an 710049, Shaanxi, China International Business School, University of International Business & Economics, Beijing 100029, China

A R T I C L E I N F O

A B S T R A C T

Article history: Available online 31 August 2010

For firms from emerging economies, market orientation and entrepreneurial orientation are two of the most important strategic orientations to consider when entering the global marketplace. This study explores how, in emerging markets, ownership structure affects these strategic orientations and their effectiveness in facilitating international business success. Our findings, based on survey data from Chinese firms, suggest that ownership structure, specifically ownership concentration and CEO ownership, can lead firms to choose different strategic orientations. Furthermore, we find that entrepreneurial orientation directly promotes a firm’s internationalization activities, whereas market orientation has an inverse U-shaped relationship with internationalization activities. ß 2010 Elsevier Inc. All rights reserved.

Keywords: Internationalization Ownership concentration CEO ownership Strategic orientation Entrepreneurial orientation Market orientation

1. Introduction The past ten years have witnessed rapid growth of internationalization in firms from emerging markets. The World Investment Report (UNCTAD, 2006) suggests that, as a group, firms from emerging markets have emerged as significant outward investors, and scholars have therefore recently engaged in theoretical inquires into the phenomenon of internationalization by such firms. They argue that special institutional characteristics which the transformation of the economic system engenders drive these firms to pursue distinctive approaches to successful internationalization (Child & Rodrigues, 2005; Luo & Tung, 2007; Yamakawa, Peng, & Deeds, 2008). From this perspective, institutional factors and specific strategic orientations are the key triggers for achieving international goals in firms which operate in emerging markets. At first, strategic patterns of firms from emerging markets, such as the former Soviet Union and China, followed centralized, stateplanned business approaches that are not appropriate for success in a global economy which is characterized by a free market and intense competition (Boisot & Meyer, 2008; Yamakawa et al., 2008). As reform has been taking place in these economic systems, emerging economies have been experiencing massive and complex changes in institutions, including government, economic systems,

§ This study is supported by KPCEM (09JZD0030) and NSFC (70872090; 70741420172) and Program for Innovative Research Team in UIBE. * Corresponding author. Tel.: +86 29 82665093; fax: +86 29 82668957. E-mail addresses: [email protected] (Y. Liu), [email protected] (Y. Li), [email protected] (J. Xue). 1 Tel.: +86 29 82665029; fax: +86 29 82668382. 2 Tel.: +86 10 64493511.

1090-9516/$ – see front matter ß 2010 Elsevier Inc. All rights reserved. doi:10.1016/j.jwb.2010.07.012

and enterprise ownership structures (Child & Tse, 2001; Peng, Tan, & Tong, 2004). Privatization has encouraged more new entrants to come into the market as entrepreneurial startups (Peng, 2003). Firms which are inclined to pursue new opportunities, initiate changes and take risks have led to the prevalence of entrepreneurial activities in emerging markets. The open and free market has thus fostered a competitive business environment. Many firms have realized that they must put more emphasis on customers’ needs and satisfaction in order to remain viable and even to survive (Golden, Johnson, & Smith, 1995). Furthermore, an open door policy leads firms from emerging economies to enter international markets in order to obtain a competitive advantage in the global economy (Boisot & Meyer, 2008). These changes as well as the results they lead to have forced firms to recognize that successful internationalization cannot be achieved using the means and approaches of the old economic system, but instead require firms to learn new business approaches in a global market and adopt appropriate strategic orientations (Li, Liu, & Zhao, 2006; Mathews, 2006). Previous studies suggest that entrepreneurial orientation (EO) and market orientation (MO) provide the foundations on which a firm can build its interactions with dynamic foreign markets. These orientations determine the firm’s behavior and international performance (e.g., Knight & Cavusgil, 2004; Luo, Sivakumar, & Liu, 2005). Recently, research in strategy and marketing has shown that EO and MO are crucial for superior performance by firms from emerging markets (Lau & Busenitz, 2001; Li, Liu et al., 2006; Liu, Luo, & Shi, 2003; Subramanian & Gopalakrishna, 2001), and that EO is especially helpful for achieving success in foreign markets (Luo & Tung, 2007; Yamakawa et al., 2008; Zhou, 2007). However, until now research has not identified the different roles that EO and MO

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play in a firm’s internationalization, and has not explored the specific driving effects of EO and MO on a firm’s internationalization behavior. More importantly, the constant changes taking place in emerging markets have also caused institutional factors to become important drivers of a firm’s choice of strategic postures (Hoskisson, Eden, Lau, & Wright, 2000). One especially important reform is that firms formerly owned only by the government in a centrally planned economy have been allowed to have other owners, including the CEOs (Filatotchev, Dyomina, Wright, & Buck, 2001; Young, Peng, Ahlstrom, Bruton, & Jiang, 2008). Such changes in ownership structure may well influence the strategic posture of firms (Peng, 2003) and may also change the progress of their internationalization. However, precisely how these reforms in ownership structure differently affect strategic orientations such as EO and MO has been ignored in existing literature. To fill these research gaps, this study attempts to address two questions: What are the roles of (i) ownership structure and (ii) particular strategic orientations, in the internationalization of firms from emerging markets? The main contributions of this study are the following. From a theoretical viewpoint, by taking into account the different characteristics of EO and MO, this article explains the differences between the effects of ownership concentration and CEO ownership on both EO and MO, as well as the different effects of EO and MO on the internationalization activities of firms. We provide a theoretical explanation about how ownership concentration and CEO ownership affect the internationalization activities of firms from emerging markets through their choice of EO or MO. From an empirical viewpoint, unlike existing studies which have been conducted in developed economies, we here shift the focus to the context of firms in emerging economies, and investigate the case of firms in China. China, as the largest emerging market in world, has a long history of a centrally planned economy and state ownership of enterprises. Yet today, China is changing from a centrally controlled society into a market-driven economy. Many Chinese MNEs are emerging and posing a major challenge to Western MNEs (Child & Tse, 2001; Young et al., 2008). During internationalization, these Chinese MNEs have to face not only complex and competitive foreign markets but also turbulent institutional and economic environments. Thus China represents a unique opportunity to test internationalization theory. By using data painstakingly collected through face-to-face interviews with senior executives in charge of 607 Chinese firms, we provide evidence to show that ownership concentration and CEO ownership have different effects on EO and MO. Further, this study examines the positive effect of EO on internationalization activities and the inverse U-shaped relationship between MO and internationalization activities. 2. Theoretical background and conceptual model 2.1. Internationalization Internationalization, which is defined as a process of increasing involvement in international operations across borders (Welch & Luostarinen, 1988), comprises a wide variety of activities including exporting, licensing, OEM, and direct foreign investment. Here, we are interested in those substantive forms of outward internationalization associated with firms from emerging markets. Seeking and selling in foreign markets are the most common and important outward activities adopted by firms from emerging markets as they begin to internationalize (Child & Rodrigues, 2005; Filatotchev et al., 2001; Zhou, Wu, & Luo, 2007). A majority of these firms are still in the early stages of the internationalization process, with exporting being their dominant mode of foreign market

participation (Aulakh, Kotable, & Teegen, 2000). FDI is another important form of outward activity. FDI outflow from emerging markets has increased from 3% of the world’s total FDI outflow (1978–1980 average) to over 17% ($133 billion) in 2005, and is projected to grow even further (Yamakawa et al., 2008). Previous studies also suggest that FDI is the most effective way for firms from emerging markets to access and source strategic assets (Deng, 2009; Luo & Tung, 2007). Therefore, in this study, we view seeking and selling in foreign markets and FDI as the most important outward activities in the internationalization of firms from emerging markets. The big progress toward internationalization by firms from emerging markets began after the reform of the economic system (Child & Tse, 2001; Mathews, 2006). Firms in the old economy followed centralized, state planning approaches which were not appropriate for success in a global economy characterized by a market-oriented system and intense competition (Boisot & Meyer, 2008; Yamakawa et al., 2008). As these economies reformed and became transitional, firms had to develop more sophisticated strategies and identify new approaches to make space for themselves in markets that were already crowded with very capable firms (Bonaglia, Goldstein, & Mathews, 2007; Wright, Filatotchev, Hoskisson, & Peng, 2005). Luo and Tung (2007) show that firms from emerging markets tend to use a series of aggressive and risk-taking measures to compensate for their competitive weaknesses in order to overcome their latecomer disadvantage on the global stage. Firms based in emerging markets therefore need to choose an effective strategic orientation for internationalization to overcome their relatively limited resources and to improve their performance (Mathews, 2006). 2.2. Strategic orientations of firms from emerging markets The strategic orientation of firms is the deeply rooted set of values that guide their strategy-making (Gatignon & Xuereb, 1997). It creates proper behaviors to interact with the marketplace (Noble, Sinha, & Kumar, 2002), and provides a critical mindset for firms to survive and prosper in the competitive global market (Knight & Cavusgil, 2004). Existing literature has shown that MO and EO are important strategic orientations (Noble et al., 2002; Zhou, Yim, & Tse, 2005), because they provide firms with capabilities to achieve competitive advantages (Bhuian, Menguc, & Bell, 2005; Day, 1994), and success in internationalization (Knight & Cavusgil, 2004; Weerawardena, Mort, Liesch, & Knight, 2007; Zhou, 2007). From a resource-based view, distinctive resources or capabilities are firm specific, difficult to imitate, and they generate a competitive edge in the market, particularly in highly competitive or challenging environments, e.g. the global market (Barney, 1991; Grant, 1996; Teece, Pisano, & Shuen, 1997). These resources or capabilities can be used to drive subsequent strategies and fund continued development of new capabilities needed for international expansion (Luo, 2000). These capabilities can help firms identify opportunities and respond quickly to them in foreign markets. For firms based in emerging markets, resources and capabilities are critical to the success of internationalization. MO and EO build the firms’ learning capabilities (Slater & Narver, 1995) and accumulate knowledge resources about international markets and operations (Autio, Sapienza, & Almeida, 2000). Since most firms from emerging markets are young and tend to lack substantial financial, human and physical resources, these intangible resources are especially critical in the entering new foreign markets. Furthermore, because these firms may deal with diverse environments across numerous foreign markets, they can, by themselves, replicate market-based knowledge and innovation capabilities which derive from MO and EO across varied markets (Luo, 2000). Making use of these capabilities offsets the weakness

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due to poor tangible resources and supports international expansion. MO and EO are particularly relevant for internationalization of firms from emerging markets (Lau & Busenitz, 2001; Subramanian & Gopalakrishna, 2001; Yamakawa et al., 2008). Emerging markets have liberalized their economies by embarking upon an economic reform program to move from a command toward a more free-market economy. Such transformations tend to break up oligopolistic control and create a shift to a buyer’s market, which in turn fosters a competitive business environment (Filatotchev et al., 2001). As a result, management attitudes towards customers and markets have changed. Firms now not only have to put strong emphasis on customer satisfaction through enhancing quality in production and improving the responsiveness of services offered and promoting, but also must increasingly rely on market research to recognize changes in economic systems and in the market environment (Golden et al., 1995). It is important for firms from emerging markets to adopt a market orientation in order to survive the competition and gain competitive advantages during the transition to a market economy (Zhou, Yim et al., 2005). Moreover, since governments have started to loosen restrictions on the private sector, more new entrants have come into the market as entrepreneurial startups (Peng, 2003). Because EO promotes the renewal of existing practices and the pursuit of new opportunities (Lumpkin & Dess, 1996), it is quite appealing to emerging-market firms that aim to rejuvenate themselves and distinguish themselves in a highly turbulent market. Therefore, firms from emerging markets can emphasize either MO or EO or both in order to adapt to the development of a market economy. EO, which reflects a firm’s propensity to pursue new market opportunities, is associated with innovativeness, managerial vision, and proactive competitive posture (Covin & Slevin, 1989; Lumpkin & Dess, 1996). Paying more attention to the intersection of international business and EO, some scholars point out that international EO implies that firms make the leap into international markets by a posture of aggressiveness, innovativeness and boldness because of unique entrepreneurial competencies and outlook (e.g., Autio et al., 2000; McDougall & Oviatt, 2000). In this study, we use Miller’s (1983) conceptualization of EO and view EO as a multidimensional construct, consisting of dimensions of innovativeness, proactiveness and risk-taking (Covin & Slevin, 1989; Miller & Friesen, 1982; Zahra, 1991). A substantial amount of research has emphasized the inherent value in EO and the linkage between this strategic orientation and desired organizational outcomes (Barringer & Bluedorn, 1999; ˝ zsome, 2002; Jennings & Young, 1990; Matsuno, Mentzer, & O Miller & Friesen, 1982). Specifically, EO can allow a firm to see and exploit opportunities in foreign markets, can enable it to successfully enter the global market (Weerawardena et al., 2007), and can provide international firms with dynamic capabilities to engage in cross-border activities and trade (Jones & Coviello, 2005; McDougall & Oviatt, 2000; Zahra & George, 2002). For instance, Nummela, Saarenketo, and Puumalainen (2004) suggest a positive relationship between a managerial global mindset (i.e., proactive and visionary behavior) and the degree of internationalization. Zhou (2007) finds that international entrepreneurial proclivity drives the pace of early internationalization in internationalizing firms from China. In emerging markets, EO is a particularly critical force for pushing firms to enter foreign markets (Yamakawa et al., 2008; Zhou, 2007). Fierce competitiveness in domestic markets forces firms to identify and pursue opportunities in international markets (Luo & Tung, 2007). When expanding internationally, firms from emerging markets need to develop a posture that is innovative, visionary, and proactive to pursue these new opportunities and respond quickly to them, in the face of relatively limited resources (Bonaglia et al., 2007; Yamakawa et al., 2008). This strategic

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posture should make it easier for these firms to circumvent environmental uncertainties, and therefore it constitutes a potential source of competitive advantage in a foreign market. Accordingly, EO should be instrumental in motivating firms from emerging markets to enter onto the global stage, in spite of the uncertainty and risk. Unlike EO, MO places great emphasis on ‘‘customer pull’’ and places the highest priority on the profitable creation and maintenance of superior customer value (Kohli & Jaworski, 1990; Slater & Narver, 1995). Firms with a high degree of MO focus on customers, competitors and internal coordination, based on market demands (Narver & Slater, 1990). In this study, we view MO as a strategic mindset that determines the priority placed on seeking and using market information to create and deliver superior customer value (Noble et al., 2002; Zhou, Yim et al., 2005). Both academic scholars and business practitioners have pointed out the importance of MO and activities related to it, in organizational performance. They argue that a firm with a high degree of MO aims to continuously provide superior buyer value and attain superior performance (Baker & Sinkula, 1999; Kohli & Jaworski, 1990; Narver & Slater, 1990). MO drives the firm to expand and develop new markets, such as the international marketplace. Knight and Cavusgil (2004) argue that MO provides the foundation from which the firm interacts with diverse foreign markets. Firms with this strategic posture create specific marketoriented activities aimed at overcoming challenges and maximizing performance. In international markets, firms from emerging economies suffer from some weaknesses, relative to global and local competitors, because of their unfamiliarity with the foreign market (Child & Rodrigues, 2005; Luo & Tung, 2007). These firms need to nurture MO because it gives better results by taking into consideration customer attitudes and benefits, analyzing information about competitors, and providing the required products and services at the right time and place. MO can make the firms focus on knowledge derived from analyses of customers and competitors and thereby respond more appropriately to foreign markets (Narver & Slater, 1990). Market-oriented firms can recognize events and trends in a market ahead of their competitors, assimilate it, and apply it to direct decision-making and operations in the foreign market (Day, 1994). Thus, MO will favorably impact decisions made by emerging-market firms during international expansion. 2.3. Ownership structure in emerging markets In this study, we focus on two major types of ownership structure–ownership concentration and CEO ownership–because they are salient features of corporate governance in firms based in emerging markets (Li, Guo, Liu, & Li, 2008; Peng, Wang, & Jiang, 2008; Young et al., 2008). Ownership concentration represents the distribution of the size of stockholdings (Hill & Snell, 1989). The larger the proportion is, the more concentrated the ownership is (Coles, McWilliams, & Sen, 2001; Tuschke & Sanders, 2003). Although firms from emerging markets struggle to transform themselves into profitable modern corporations, a weak governance environment in which ineffective formal institutions and their enforcement have led to concentrated firm ownership is more common in emerging markets (Dharwadkar, George, & Brandes, 2000). Young et al. (2008) posit two reasons why dominant ownership is more prevalent in emerging markets. First, because institutions are often lacking or ineffective, it is difficult for firms from emerging markets to trust professional managers and outside investors and to share sensitive information with them, thus making crossing the threshold from dominant to dispersed ownership more difficult. Second, as boards of directors lack

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formal and informal institutional support, they are less likely to play a strong monitoring and controlling role. Firms from emerging markets have to depend on dominant ownership to keep potential managerial opportunism in check. Therefore, ownership concentration plays a great role in shaping corporate governance in emerging markets. CEO ownership refers to the percentage of total company stock held by the CEO (Zahra, Neubaum, & Huse, 2000). The purpose of stock-based incentives is to reduce managerial opportunism and promote shareholder-wealth maximizing behavior (Jensen & Meckling, 1976). In the past, most emerging-market firms had only weak incentive schemes to motivate managers. With the advent of economic reform, managers were allowed to share the profits generated as a way of motivating them to achieve superior corporate performance. Furthermore, in emerging economies, labour markets, takeover markets and other factors are corrupted or ineffective, and thus less effective in governing CEOs (Djankov & Murrell, 2002; Groves, Hong, McMillan, & Naughton, 1995). CEO shareholdings are essential measure to align owners’ and executives’ interests, and thus CEO ownership is a product of economic reform and has significance for corporate governance in firms from emerging markets. Previous research, primarily conducted in developed economies, has examined how ownership structure influences a firm’s strategy and performance (Hill & Snell, 1989; Tuschke & Sanders, 2003; Zahra et al., 2000). However, ever since central governments began initiating their reforms of corporate governance and encouraging privatization, emerging economies have provided a more interesting context for research. As a result, the strategy implications of the ownership structure in emerging markets have received increasingly more attention from scholars (Peng, 2004). Prior literature has shown the effects of ownership structure on a firm’s strategic orientation as well as its ability to adapt to environmental changes and uncertainties (Gedajlovic, 1993; Peng et al., 2004). Especially in emerging markets, economic liberalization is the primary engine of a firm’s growth (Hoskisson et al., 2000). Ownership structure plays a particularly important role in affecting organizational routines and determining strategic orientations (Peng, 2003). For example, Peng et al. (2004) note that different ownership leads to different managerial outlook and mentality. They also found that state-owned enterprises and privately-owned enterprises tend to adopt defender and prospector strategies, respectively. Combining these views together, we argue that during an emerging-market firm’s internationalization process, institutional factors such as ownership concentration and CEO ownership influence the firm’s strategic orientations and further affect the firm’s internationalization activities. Therefore, we propose the conceptual model in Fig. 1 to explain that, in an

emerging market, how ownership structure affects these strategic orientations and their effectiveness in facilitating international business success. 3. Hypothesis development 3.1. Ownership structure and entrepreneurial orientation High ownership concentration means that major shareholders possess controlling power in a firm. The effect of ownership concentration on entrepreneurial activity depends on whether a major powerful shareholder encourages the CEO to pursue risky long-term ventures (Zahra et al., 2000). Firms from emerging markets are characterized by large shareholdings in the hands of family and state in countries of the former Soviet Union and China (Cuervo-Cazurra, 2006; Young et al., 2008). Private ownership has been prevalent in emerging markets, but private firms, especially in the absence of effective formal institutional and financial support, often lack the ability to reduce contextual uncertainties and risks (Young et al., 2008). In an emerging market where reforms have brought about turbulence and uncertainty, family owners tend to be risk-averse. They tend to pursue steady profits for survival rather than engage in risky ventures, and they thereby jeopardize the firm’s entrepreneurial orientation (Zahra, 1996). In such a situation, shareholders are likely to pressure the CEO not to participate in innovative and entrepreneurial activities with long payback periods (Graves, 1988). Moreover, in emerging markets, firms controlled by the government as the largest shareholder may choose not to pursue innovation, risk-taking and proactiveness, because state-controlled companies prefer a stable and conservative strategic orientation (Peng et al., 2004). Compared with the domestic market, the international market is riskier and more challenging. Often times the largest shareholders know little about how to operate overseas due to lack of international experience (Child & Rodrigues, 2005; Child & Tse, 2001). Therefore, they will see the high risk and cost of internationalization (Eriksson, Johanson, Majkgard, & Sharma, 1997) and not encourage entry into the complex foreign market. Under this condition, a CEO will confront much pressure to avoid highly risky decision-making, pressure which will decrease the CEO’s willingness to seek new opportunities and undertake innovative activities during internationalization. From the above evidence, it appears that, in firms from emerging markets, major shareholders including family and state are often risk-averse, and this aversion becomes stronger as ownership concentration increases. Therefore we suggest: Hypothesis 1. In firms from emerging markets, a high level of ownership concentration is negatively related to EO.

Fig. 1. A model of internationalization in firms from emerging markets. Note: \ presents the relationship between the independent (x) and the dependent (y) is inverse Ushape, i.e., too high and too low level of x has a negative correlation with y, and a moderate level of x has a positive correlation with y.

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According to agency theory, CEO ownership is an incentive mechanism which closely aligns executives’ interests with those of other shareholders (Jensen & Meckling, 1976). A rational increase of CEO ownership can promote managerial support for entrepreneurial orientation and lead the CEO to pursue entrepreneurial projects (Jones & Butler, 1992). Since the wealth of executives and that of their shareholders are closely aligned through CEO ownership, the shareholders are willing to support innovative and risky projects chosen by the CEO, thus helping to increase the EO (Zahra et al., 2000). This result is especially apparent in emerging markets which often have inefficient external governance mechanisms and therefore are not challenged by product market competition, a managerial labor market, and the threat of takeover. In this kind of situation, internal mechanisms such as CEO ownership are relied on more heavily to substitute for or complement external governance (Young et al., 2008). When CEO ownership notably increases, the incentive effect on the innovation and proactiveness of CEOs should be more significant (Jenkins & Seiler, 1990), thereby strengthening the EO of emerging-market firms. Therefore, we propose: Hypothesis 2. In firms from emerging markets, an increase in CEO ownership is positively related to EO. 3.2. Ownership structure and market orientation The effect of ownership concentration on MO, as compared with that on EO, is more complex. When ownership concentration is very low, dispersed owners often lack the necessary internal information and motivation to monitor management’s actions and decisions effectively (Hill & Snell, 1989). This is especially true in emerging markets, because the market system is incomplete and market monitoring of firms is weak. Shareholders cannot implement effective internal monitoring of the CEO and the CEO may focus on short-term profit and not attend to the long-term benefit of the firm (Xu & Wang, 1999; Young et al., 2008). Such considerations can lead to CEO opportunism and can lead CEOs to refrain from taking part in market competition and from devoting time and resources to meeting the needs of customers. As ownership concentration increases, however, larger shareholders have a stronger incentive to deal with information about the market and the firm’s production, and to monitor the behavior of top managers (Coles et al., 2001; Lee & O’Nell, 2003). The market environment in emerging economies is highly uncertain and therefore can cause a firm’s strategy to change rapidly (Li & Peng, 2008). Under such conditions, because power in control and decision-making can be more efficiently balanced among a few larger shareholders, top managers have to pay more attention to changes in market competition and customers’ demands. They need to continuously work to obtain benefits from the market through greater efficiency in meeting the needs of customers. As a result, the MO of an emerging-market firm will be strengthened. Further, when ownership concentration is at a moderate level, some larger shareholders obtain more power in the firm’s board of directors (BOD). If CEOs deviate from the firm’s interest and do not manifest a long-term commitment to developing their markets, the majority shareholders can re-direct them to place more emphasis on market orientation. In this way, ownership concentration will further strengthen the market orientation of the firm (Jaworski & Kohli, 1993). Moreover, moderately concentrated ownership implies that there is no shareholder who can absolutely exercise control over the firm. If majority shareholders try to compel management to adopt strategies which can maximize their benefits at the expense of the firm’s long-term profits, they will be monitored by minority shareholders, who will instead encourage behaviors that create superior customer value (Narver & Slater,

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1990). In emerging markets, the demands of customers change fast and therefore require that the CEO have more flexibility (Li, Liu et al., 2006). Thus, moderately concentrated ownership can ensure an increase of MO in emerging markets. On the other hand when ownership is too highly concentrated in a specific group, the largest shareholder may have excessive control power over the BOD. Especially in emerging markets, the BOD is controlled by major shareholders, such as family and state (Cuervo-Cazurra, 2006; Young et al., 2008). These shareholders are risk-averse, and prefer to choose low-risk projects which are less responsive to the needs of potential customers and which slow the speed of attending to customers. These behaviors to reduce the risk of incurring the higher costs involved in responding promptly to customer demands (Qu & Ennew, 2005). The CEO is motivated to make decisions mainly based on the wishes of the largest shareholder rather than on information about changes in market competition and the demands of customers (Grosfeld & Tressel, 2002). As a result, the CEO does not pay enough attention to market information and does not actively respond to customer demands, and the MO of the firm becomes weak (Webster, 1988). Therefore, we suggest: Hypothesis 3. In firms from emerging markets, the relationship between ownership concentration and MO is an inverse U-shape. Existing literature reveals conflicting perspectives on the relationship between CEO ownership and MO in developed economies. For example, Donaldson and Lorsch (1983) assert that executives are interested primarily in the financial health and survival of their firms and therefore, when making decisions, do not give much consideration to the impact on their personal finances. Sanders (2001) disputes this argument and notes that once executives have ownership, they will avoid investments that do not increase the wealth of shareholders. In this study, we argue that whether CEO ownership is or is not beneficial to the improvement of MO in emerging markets mainly depends on the level of CEO ownership. When CEO ownership increases from a low to a moderate level, executives will engage in improving shareholders’ wealth because doing so will also improve their own wealth, and on the other hand, MO which emphasizes customer value and helps to capture and retain customers can also create this kind of wealth for other owners of the firm (McNaughton, Robert, Morgan, & Kutwaroo, 2001). Hence, the CEOs have a motive to encourage individuals in the firms to track changing markets, share market intelligence with others, and be responsive to market needs, thereby strengthening MO. When ownership by executives exceeds a moderate level, the firm’s market orientation may decrease. In such a case, executives, when making a decision, consider not what they might gain but what they might lose, such as the value of their stock (Sanders, 2001). Following this logic, when executives hold a large amount of stock, they may pay more attention to the price of the stock and cut various costs that could reduce the firm’s short-term benefits. Since collecting and disseminating market intelligence often require the commitment of considerable human and physical resources, and since the introduction of new products, services and programs often runs a high risk of failure (Jaworski & Kohli, 1993), large stock ownership is likely to cause executives to pursue stock value which can add to their wealth in the short term at the expense of the firm’s long-term health. Particularly, because the threat of takeovers is virtually absent in emerging markets (Young et al., 2008), CEOs are not concerned about termination of employment even when doing things which may damage long-term development. Thus CEOs would not adopt a market-orientated mindset. We therefore suggest:

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Hypothesis 4. In firms from emerging markets, the relationship between CEO ownership and MO is an inverse U-shape. 3.3. Strategic orientation and internationalization of firms from emerging markets In accord with previous sections which suggest that internationalization is certainly an act of entrepreneurship (Jones & Coviello, 2005; Zahra & George, 2002), we argue that, in emerging markets, entrepreneurially oriented firms are innovative, risk taking, and proactive (Bhuian et al., 2005). These firms should have a higher propensity to expand their cross-border activities. While many firms from emerging markets cannot afford to compete on tangible resources (e.g. funds and equipment), they excel in ‘‘intangible’’ resourcefulness (Yamakawa et al., 2008), such as new ideas, novelty, and creative processes. They generally possess dynamic capabilities to integrate and synthesize internal resources and external learning and to apply both to the competitive environment (Zhou, 2007). Such ability is vital to a firm’s survival and growth in a foreign market (Kogut & Zander, 1992). For example, some firms from emerging markets, like Mabe (Mexico), Arcelik (Turkey) and Haier (China), have invested heavily in R&D and innovation in order to generate their own distinctiveness, as witnessed by numerous national and international awards and registered patents (Bonaglia et al., 2007). Decisions with regard to international expansion imply a high level of uncertainty as firms enter physically or culturally distant markets or become more dependent on revenues generated in markets different from the more familiar domestic market (Calof & Viviers, 1995). While most firms from emerging markets probably will stay in their home market, a relatively small number of entrepreneurially oriented firms which are willing to undertake risky decisions (Lumpkin & Dess, 1996; Miller, 1983). Entrepreneurially orientated firms may more readily accept the uncertainty embedded in further increasing cross-border activity. One prominent example of a firm’s internationalization offers a clue: China’s Lenovo undertook a series of aggressive, risk-taking measures, such as acquiring IBM’s PC division, to compensate for its competitive disadvantages and to facilitate internationalization (Biediger et al., 2005; Luo & Tung, 2007). Therefore we propose: Hypothesis 5. In firms from emerging markets, EO is positively related to the level of internationalization. The generally positive performance influence of an MO is well supported (Jaworski & Kohli, 1993; Matsuno et al., 2002) particularly in international firms (Knight & Cavusgil, 2004; Luo, Zhou, & Liu, 2005). However, other researchers have contended that, for marketoriented firms, the tyranny of the served market can result in overlooking potential markets (Slater & Narver, 1995) and may increasingly prioritize the gathering and distribution of deficient information over time (Baker & Sinkula, 1999). Some studies concerning the link between MO and performance in emerging markets also report inconsistent findings (e.g. Appiah-Adu, 1998; Li, Sun, & Liu, 2006). Judging from these conflicting conclusions, we surmise that the relationship between MO and the internationalization of firms from emerging markets is more complex. As a firm’s MO increases from a low to a moderate level, its degree of internationalization is likely to increase accordingly. In an emerging market where the market is open and the business environment is competitive, a market-oriented firm is likely to take on a ‘‘learning attitude’’. This attitude will lead it to an increased understanding about how to operate in a free, competitive marketplace and how to update its knowledge base with regard to customers and competitors in the current market (Appiah-Adu, 1998). Such an attitude involves a continuous search

for ways of adapting to new situations, and it encourages firms to apply this knowledge to new conditions (e.g., foreign markets) where similar problems probably exist. When market orientation goes beyond a moderate level, however, international involvement may decrease. Christensen and Bower (1996) note that firms with a high level of MO tend to listen too carefully to their current customers and are therefore more sensitive to risks. Because of high transaction costs, firms are usually cautious about committing firm-specific resources when perceiving a highly uncertain environment (Williamson, 1985). This cautiousness is even more apparent for firms from emerging markets. It is well known that firms need to have long-haul investments in the process of international expansion, since it is costly to withdraw invested resources (Luo, 2000). However, most firms from emerging markets lack key resources and international experience (Child & Rodrigues, 2005; Yamakawa et al., 2008). As a result, firms with a high MO are more likely to operate in stable and predictable environments. They tend to allocate more resources to the current market to ensure ‘‘safe adaptability’’, rather than to increase investments in foreign markets where potential risks exist. Such resource deployment does not help a firm take advantage of emerging opportunities in an international market, and thus impedes the firm’s internationalization. Therefore we propose: Hypothesis 6. In firms from emerging markets, the relationship between MO and internationalization is an inverse U-shape. 4. Methodology 4.1. Sample and data collection To test these hypotheses, survey data were collected by means of a questionnaire administered to executives from a sample of representative firms in the Shaanxi, Sichuan, Liaoning, Shanghai, Guangdong, Shandong, Henan and Shanxi provinces of China. These provinces (and the city) were selected because the firms in these regions reflect economic development and internationalization practices in China. Additionally, these provinces and this city share cultural commonalities based on their history and geographic regions. First, we developed a set of questionnaires following the research literature. Second, after consulting extensively with several executives, we modified the instrument to accurately reflect conditions that firms face in China. Using preliminary draft questionnaires, a pilot test was conducted with 15 firms from the Shaanxi, Henan, and Shandong provinces; these responses were excluded from the final study. The questionnaire was revised using feedback from the pilot study and also in accordance with a sample frame provided by the Economy Commerce Committee (ECC, a special administrative unit of the government for managing firms) of the eight provinces, which was created by randomly selecting various types of enterprises. The sample was cross-sectional. The instrument was administered through a structured interview. In addition to reading the background references, the interviewers had been briefed on the objectives of this study and trained in interviewing techniques. These interviewers thoroughly explained how to complete the questionnaire and assured the respondents that their responses would be confidential, thus minimizing the possibility of misinterpretation of the questions and concerns about completing the survey. A total of 850 enterprises were approached. Unfortunately, some firms were not able to participate for reasons that included company policy of non-participation in surveys or company liquidation. Also, some firms’ data were discarded because of inadequate completion of the survey instrument. A total of 607 enterprises had all the necessary data. The effective participation

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rate thus was 71.4 percent (607 out of 850), which is excellent for survey research of this type. A common concern with survey methodology is non-response bias. To check for non-response bias, we obtained information about ownership type and sales of 171 non-responding firms, and compared the responding and non-responding firms along these major firm attributes using t-tests. All t-statistics were statistically insignificant. Finally, we compared the responding firms with the non-responding firms and found no significant differences in terms of firm size. Along with the high response rate, these results suggest that there is no non-response bias in this study. 4.2. Measurement 4.2.1. Ownership structure Basing our work on prior research by Pedersen and Thomsen (1999), together with consideration of Chinese firm ownership reform (Li, Sun et al., 2006), we measured ownership concentration as the ownership share of the largest owner (%). Another variable of ownership structure is CEO ownership. Using the criterion developed by Tuschke and Sanders (2003), we measured CEO ownership by the proportion of the firm’s shares owned by the CEO. Because ownership structure, especially CEO ownership, is a sensitive question in Chinese firms and most executives are not willing to provide objective data directly, ownership concentration and CEO ownership were scaled from 1 (0–15%) to 7 (91–100%) for the purpose of reducing the sensitivity of the questions and making them easier to answer. 4.2.2. Entrepreneurial orientation Our entrepreneurial-orientation scale was modified from the ones developed by Khandwalla (1977) and Covin and Slevin (1989) and adapted to the context at hand, with the addition of one item used by Li, Liu et al. (2006). The final measure included six items, all assessed on a seven-point Likert scale with the anchors 1 = totally disagree, 7 = totally agree: (1) a strong emphasis on R&D, technological leadership and innovation; (2) a strong tendency to seek high-risk high return innovation projects; (3) a strong tendency to adopt an active posture when facing uncertainty; (4) a strong tendency to initiate action that competitors respond to; (5) a strong tendency to be a leader, always being the first to introduce new products, services or technology; and (6) a strong tendency to adopt a competitive ‘undo-the-competitors’ posture. 4.2.3. Market orientation This scale was measured on fifteen items adapted from Kumar, Subramaniam, and Yauger (1998) and assessed on a seven-point scale, including customer orientation, competitor orientation, and inter-functional coordination. The items of customer orientation are the following: (1) we put strong emphasis on customer satisfaction, (2) we put strong emphasis on understanding customer needs, (3) we make use of frequent and systematic measures of customer satisfaction, (4) we pay close attention to after-sales service, (5) we frequently increase customer value or reduce costs, and (6) we emphasize high quality of products. The items of competitor orientation are as follows: (1) we respond rapidly to competitors’ actions, (2) we share competitors’ strategic information within the company, (3) top managers discuss competitors’ strength and strategies frequently, and (4) we have a competitive advantage in targeting customers. Inter-functional coordination consists of these items: (1) we share customer information among functional departments efficiently, (2) we respond to customer calls inter-functionally, (3) all functional departments contribute to customer value, (4) all employees know market information well, and (5) employees in the marketing department take part in new product development.

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4.2.4. Internationalization Following Zahra et al. (2000) and Zhou et al. (2007), three items were developed to measure internationalization specifically for firms from emerging markets, evaluating the extent of the firms’ actual outward activities along a seven-point scale (1 = very small extent, 7 = very large extent): (1) aggressively seek foreign markets; (2) sell products or services in foreign market; and (3) enter into overseas locations funded by outward FDI. In this study, the scale of internationalization indicates the intensity of outward activities that a firm has undertaken. 4.2.5. Control variables In all tests, we controlled for several variables that could possibly affect strategic orientation and internationalization as well. This group of variables includes the firm’s characteristics, domestic market strategy, industrial factors, government interference and policy influence. Firm size, measured by the number of full-time employees, was controlled because of its potential impact on entrepreneurial orientation (Luo, Zhou et al., 2005; Zahra et al., 2000), market orientation (Liu & Eddie, 1995) and internationalization (Zhou, 2007). Firm age, measured by the number of years in business, is important in an emerging market, because older firms are more risk-averse and inertial with respect to EO, MO, and international activities (Yiu, Lau, & Bruton, 2007; Zhou, Gao, Yang, & Zhou, 2005). Domestic market strategy was measured with the question ‘How much effort does your firm make to enter into a new domestic market?’ (1 = very little; 7 = very much). This variable can impact EO and MO because it shows that the managers have a favorable attitude toward change and innovation and therefore are more likely to adopt EO and MO (Powpaka, 1998; Zahra, 1991). Domestic market strategy also affects internationalization because putting more resources into building a domestic power base and competence, for the purpose of constraining activities in new foreign settings, is not conducive to international growth (Autio et al., 2000).3 Competitive intensity and industrial regulation have been considered as key determinants of market orientation (Li, Sun et al., 2006; Powpaka, 1998) and entrepreneurial orientation (Lee & Peterson, 2000; Luthans, Stajkovic, & Ibrayeva, 2000) in emerging markets, and propel firms to seek fortunes abroad (Luo & Tung, 2007; Yamakawa et al., 2008). Competition intensity was measured with the question ‘How competitive is the domestic market of your main product/industry?’ (1 = not competitive at all; 7 = very competitive), while industrial regulation was measured with the question ‘How great is the extent to which industrial regulation constrains your firm’s development?’ (1 = does not constrain at all; 7 = constrains to a large extent). Government interference and policy influence are controlled because these two institutional factors, which are typical characteristics of emerging markets (Li, Liu et al., 2006; Peng, 2000), may either support or inhibit a firm’s strategic orientation and internationalization. Government intervention, measured with the question ‘How great is the extent to which your firm independently makes decisions’ (1 = completely independent; 7 = completely controlled by government), can weaken entrepreneurial actions through promoting a conservative attitude (Child & Rodrigues, 2005), can reduce initiative in developing market orientation due to excessive protection (Li, Sun et al., 2006), and also can give encouragement 3 In their study of early internationalization in the Finnish electronics industry, Autio et al. (2000) argue that the more time managers put into developing domestic competencies which focus on learning about domestic issues and building a domestic power base, the more resistant they will be to shifting the major attention of their firms to full-fledged efforts in foreign markets. Thus we consider strategic choice of entry into new domestic market as a control variable influencing internationalization, because this variable makes it difficult for firms to move away from focusing exclusively on the domestic market in terms of resource constraints and organizational inertia.

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388 Table 1 Measurement validity assessment. Constructs

Items

Factor loadings

Ownership concentration CEO ownership Entrepreneurial orientation (a = .86; AVE = 0.52)

The ownership share of the largest owner The proportion of firm’s shares owned by CEO 1. A strong emphasis on R&D, technological leadership and innovation 2. A strong tendency for high-risk high-return innovation projects 3. A strong tendency to adopt to an active posture when facing uncertainty 4. A strong tendency to initiate actions that competitors respond to 5. A strong tendency to be a leader, always introducing new products, service or technology first 6. A strong tendency to adopt a competitive undo-the-competitors posture

– – .79 .61 .72 .79 .84 .84

Market orientation (a = .86; AVE = 0.77; x2 = 244.15;GFI = 0.95; AGFI = 0.93; NFI = 0.95; NNFI = 0.96; CFI = 0.97; RMSEA = 0.06) Customer orientation (a = .87; AVE = 0.49) 1. 2. 3. 4. 5. 6.

Customer satisfaction objectives Emphasis on understanding customer needs Measure customer satisfaction Give close attention to after-sale service Frequently increase customer value or reduce costs High quality of products

Competitor orientation (a = .87; AVE = 0.55) 7. Respond rapidly to competitors’ actions 8. Share competitor’s strategic information in company 9. Top managers discuss competitors’ strength and strategies 10. Have competitive advantage in targeting customer Interfunctional coordination (a = .89 AVE = 0.58) 11. 12. 13. 14. 15. Internationalization of firm (a = .68; AVE = 0.45)

Efficient sharing of customer information among functions Inter-functional customer calls All functions contribute to customer value All employee knowing market information Marketing employee taking part in new product development

1. Aggressively seek foreign markets 2. Sell product/services in foreign market 3. Enter into overseas locations funded by outward FDI

.87 .84 .85 .85 .81 .57 .73 .89 .83 .82 .85 .80 .89 .89 .83 .87 .76 .76 .70 .84 .75

Goodness-of-Fit Statistics (x2 = 192.85; x2/df = 2.26; GFI = 0.95; AGFI = 0.92; NFI = 0.96; NNFI = 0.97; CFI = 0.97; RMSEA = 0.07)

and support for overseas expansion through government-sponsored programs (Child & Rodrigues, 2005; Luo & Tung, 2007). Policy influence was measured with the question ‘How do policy changes affect your firm’s creative activities?’ (1 = completely adverse effect; 7 = completely favorable effect). National policies in favor of firms’ innovation will encourage market-oriented activities and entrepreneurial potential (Lee & Peterson, 2000; Qu & Ennew, 2005) and are very likely to be an influential force in MNE decisionmaking as to internationalization (Dikova & Witteloostuijn, 2007). 4.3. Reliability and validity assessment Table 1 reports estimates of construct reliability, factor loadings, and average variance extracted. As detailed in the following sections, the five latent constructs, involving 26 items, were found to be reliable and valid in the context of this study. We first diagnosed item-to-total correlations for each construct. None were below 0.4, and therefore all items continued to remain in the study. Although the construct measures used in this study are based primarily on previously validated measurement items and are strongly grounded in the literature, they were modified partly to fit the Chinese context. Inter-item consistency was assessed by Cronbach alphas. Typically, reliability coefficients of a = 0.70 or higher are considered adequate. Nunnally (1978) further states that permissible alpha values can be slightly lower (>a = 0.60) for newer scales. Therefore, an alpha value over a = 0.6 can be accepted to assess reliability in our study. As can be seen from Table 1, Cronbach alphas values of all factors were above a = 0.65, which suggests that the theoretical constructs exhibit good internal consistency. To further test the reliability of the measures, we obtained data from paired informants representing 270 of the 607 sample firms.

We categorized these informants into two groups: CEO/general manager and senior managers (such as marketing or business development managers). We found substantial congruence between answers to the same questions by the two separate respondents for the same firms (Pearson correlation coefficients were all statistically significant and ranged from 0.36 to 0.79). We then conducted a series of t-tests to determine if there were any differences among the responses of the two groups on each of our constructs and found no statistically significant differences. These data provide evidence that the interviewees’ responses are reliable. We subsequently examined the convergent validity of the constructs with a CFA, using LISREL (Joreskog & Sorbom, 1993). The fit indexes indicate that the model fits the data well (x2 = 192.85; x2/df = 2.26; GFI = 0.95; AGFI = 0.92; NFI = 0.96; NNFI = 0.97; CFI = 0.97; RMSEA = 0.07). All items loaded on their respective constructs, and each loading was beyond 0.7 except for two items. Considering new items or items used in a new context, this value can be reduced to 0.4, a common threshold for acceptance (Atuahene-Gima & Li, 2004). We analyzed the explained total variance of the constructs, and average variance extracted exceeded 42%. These results imply both the statistical significance of relationships between the items and constructs and the reliability of individual items. Furthermore, in order to test difference between a subjective scale of internationalization and the objective indicator of a firm’s internationalization using multiple secondary data sources, we succeeded in obtaining objective indicators, namely international sales as a percentage of total sales (Sullivan, 1994; Walters & Samiee, 1990). We were able to obtain data concerning 155 overlapping firms, and the measurement of internationalization was significantly correlated with this indicator (r = 0.245,

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389

Table 2 Descriptive statistics and correlations.

1. Firm age 2. Firm size 3. Competition intensity 4. Domestic market strategy 5. Industrial regulation 6. Government intervention 7. Policy influence 8. CEO ownership 9. Ownership concentration 10. EO 11. MO 12. Internationalization Means S.D. * **

1

2

3

4

5

6

7

8

9

10

11

12

1 0.45** 0.03 0.00 0.10* 0.13** 0.07 0.06 0.21** 0.07 0.02 0.06 3.34 1.46

1 0.06 0.00 0.03 0.09* 0.09* 0.09* 0.25** 0.07 0.03 0.10* 21.65 15.78

1 0.16** 0.07 0.07 0.04 0.04 0.08 0.06 0.04 0.05 4.67 3.87

1 0.16** 0.21** 0.14** 0.02 0.11** 0.30** 0.40** 0.38** 3.87 0.88

1 0.52** 0.31** 0.03 0.04 0.14** 0.13** 0.17** 3.80 1.31

1 0.29** 0.00 0.04 0.21** 0.21** 0.28** 4.25 1.50

1 0.02 0.00 0.29** 0.21** 0.18** 4.71 1.39

1 0.15** 0.03 0.03 0.05 4.36 2.25

1 0.12** 0.11** 0.01 2.17 4.86

1 0.39** 0.33** 4.86 0.89

1 0.30** 4.66 1.05

1 3.15 1.39

p < 0.05. p < 0.01.

p < 0.01), validating this subjective measure (Zahra & Hayton, 2008). We also conducted t-tests to determine if there were any differences between the responses of the overlapping firms and those of the other firms and found no statistically significant differences. This result shows that the scale of internationalization used in this study reflects the reality of Chinese firms’ internationalization. Finally, we conducted the procedure recommended by Fornell and Larcker (1981) to test discriminant validity among the constructs. Average variance extracted (AVE) of each construct exceeds the squared correlation between construct pairs, demonstrating discriminant validity between the latent factors. 5. Results The data in Table 2, which includes means, standard deviations, and correlations for all variables, shows that most of the correlations are low to moderate. We next examined the variance inflation factors for all the regression models. The values of VIFs are below 2 in all of the models, suggesting that multicollinearity is not a problem in this study. Table 3 presents the results of the

regression analysis. We tested the hypotheses using Optimal Scaling Regression analysis (Didow, Keller, Barksdale, & Franke, 1985). We chose this approach rather than SEM, because the presence of interaction effects does not satisfy the requirements of multivariate normality required by maximum likelihood estimation (Wuyts & Geyskens, 2005). For entrepreneurial orientation as a dependent variable, Model 1 is the base model, including only the control variables. When ownership concentration and CEO ownership are introduced as independent variables in Model 2, the results suggest that ownership concentration is negatively related to entrepreneurial orientation and that CEO ownership is positively related to entrepreneurial orientation. The R2 increase from 0.14 to 0.16, and the change in the R2 between Model 1 and Model 2, were also statistically significant, providing support for H1 and H3. For market orientation as a dependent variable, Model 3 includes only control variables. Because Model 4 shows that the squared terms of both ownership concentration and CEO ownership are negatively and significantly related to MO, we know that the relationships between MO and both ownership concentration and CEO ownership are an inverse U-shape. The R2 increase from

Table 3 Results of regression analysis. Independent variables

Control variables Firm size Firm age Domestic market strategy Competition intensity Industrial regulations Government interference Policy influence Ownership concentration Ownership concentration2 CEO ownership CEO ownership2 EO MO MO2 Model R2 Adjusted R2 Model F DR2 F for DR2 F¼ *

ðDR2 =DKÞðNK 2 1Þ , ð1R2 Þ

p < 0.1. 2 ** p < 0.05. *** p < 0.01.

EO

MO

Internationalization

Model 1

Model 2

Model 3

Model 4

Model 5

Model 6

0.09** 0.08** 0.23*** 0.13*** 0.11*** 0.12*** 0.20***

0.06 0.08** 0.22*** 0.12*** 0.12*** 0.12*** 0.19*** 0.07*

0.02 0.09** 0.37*** 0.11*** 0.11*** 0.15***

0.06 0.09** 0.37*** 0.10*** 0.15*** 0.10*** 0.15*** 0.14*** 0.07* 0.23*** 0.17**

0.13*** 0.06 0.31*** 0.06 0.08* 0.21*** 0.11***

0.15*** 0.05 0.25*** 0.06 0.06 0.16*** 0.07**

0.12***

0.14 0.10 4.18***

0.16 0.12 4.06*** 0.02 7.11***

where K is the number of predictors and N is the total sample size.

0.18 0.16 8.69***

0.25 0.21 6.43*** 0.07 13.88***

0.18 0.15 5.33***

0.18*** 0.13*** 0.08** 0.23 0.19 5.41*** 0.05 12.90***

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0.18 to 0.25, and the change in the R2 between Model 3 and Model 4, were also statistically significant. Thus ownership concentration, CEO ownership and their squared terms are significant predictors of market orientation, providing support for H2 and H4. Finally, we tested the effect of entrepreneurial orientation and market orientation on the internationalization of a firm, after introducing control variables in Model 5. Consistent with H5 and H6, the results of Model 6 show that entrepreneurial orientation is positively related to internationalization, and that the squared term of market orientation is negatively related to internationalization. The R2 increase from 0.18 to 0.22, and the change in the R2 between Model 5 and Model 6, were also statistically significant, providing support for H5 and H6. 6. Discussion This study focuses on the relationships between ownership structure, strategic orientations and internationalization of firms from emerging markets. Our results show that in emerging markets, a difference in ownership structure can lead firms to choose different strategic orientations, and further that different strategic orientations affect the internationalization success. This study extends the current literature in the following ways. First, this study brings into sharper focus the differing impacts of ownership concentration and CEO ownership on both EO and MO, the key antecedents affecting the internationalization of firms from emerging markets. If indeed EO and MO represent important parts of a firm’s strategic orientation, the theoretical delineation and empirical testing offer useful insights into factors contributing to both EO and MO formation during internationalization in the context of emerging markets. Second, by examining the different effects of EO and MO on the internationalization of firms from emerging markets, this study provides additional richness to the extant research. The positive effect of EO on the internationalization of firms corroborates the entrepreneurial nature of younger international firms in the context of emerging markets and thus extends the international entrepreneurship literature. The inverse U-shaped effect of MO on a firm’s internationalization challenges extant research and more effectively explains the complex influence of MO on the internationalization of firms from emerging markets. Thus, our study provides significant insights concerning the international development of firms based in emerging markets from the perspective of institutional ownership, thereby making a contribution to the literature on international business. Major findings are as follows. We find that ownership concentration is negatively related to EO in firms from emerging markets. This result shows that high ownership concentration is a disadvantageous factor which impedes entrepreneurial activities in firms from emerging markets. From this finding, we can conclude that high ownership concentration definitely constrains top managers’ use of innovation and proactiveness, because the largest shareholder is often averse to the risks involved in the internationalization of firms. Further, this result supports and further extends the research of Peng et al. (2004), which asserts that firms from transitional economies like China may not provide sufficient incentives to top managers to undertake entrepreneurial activities. We also find that CEO ownership is consistently and positively related to EO in firms from emerging markets. The result suggests that CEO ownership is clearly relevant to a firm’s decision-making direction and process, and that it can be used to provide incentives for the CEO to strengthen the firm’s EO. This finding is consistent with the study by Zahra et al. (2000), who find that managers owning an equity stake in a medium-sized firm promote entrepreneurial activities. Obviously, these two findings clearly describe the different effects of ownership structure on EO, a conclusion which further enriches

the literature about how ownership and corporate governance affect entrepreneurial activities. The second group of findings concerns the association between ownership structure and market orientation. As predicted ownership concentration has an inverse U-shaped effect on market orientation. This result shows that when ownership is moderately concentrated among shareholders, the distribution of ownership and control power not only can lead the main shareholders to monitor the executive’s decision more efficiently, but also can provide institutional space for top managers to identify and take advantage of market demands more effectively. Meanwhile, another finding is that the relationship between CEO ownership and MO is an inverse U-shape. This result shows that lower and higher levels of CEO ownership do not lead executives to increase MO, but that a moderate level of CEO ownership can ensure enhancement of MO. From this result, we can rationally explain reason why there are conflicting opinions about the relationship between CEO ownership and MO in the literature (Donaldson & Lorsch, 1983; Sanders, 2001). When CEO ownership is higher, share-holding executives will avoid investments that might negatively influence the short-term increase of shareholders’ wealth (Sanders, 2001), and therefore may make the firm lose market opportunity and decrease its future market competitiveness. Yet when, at the opposite end of the spectrum, CEO ownership is very low, the executives will again be interested primarily in quick growth of the firm’s market share (Qu & Ennew, 2005), an emphasis which may lead the firm to enhance its competitiveness but still ignore improvement in its return on investment. This finding also explains the reason why stock ownership sometimes does not motivate executives to support certain strategic orientations, such as MO, and thus extends the theory of corporate governance. We find different effects of strategic orientation on the degree of a firm’s internationalization. The results suggest that EO is positively related to internationalization, but that MO has an inverse U-shaped relationship with internationalization. The former result provides a conclusion similar to the studies of Nummela et al. (2004), Knight and Cavusgil (2004) and Zhou (2007), who found that EO is important for born-globals and small and medium-size enterprises. Our study further indicates that the internationalization behavior of firms from emerging markets, which have some common traits with born-globals in international expansion, can also be described as entrepreneurial. This finding corroborates the entrepreneurial nature of younger international firms from emerging markets, and thus extends the international entrepreneurship literature. However, differing from prior studies which suggest that MO is positively related to a firm’s internationalization (Knight & Cavusgil, 2004; Luo, Sivakumar et al., 2005), our findings indicate an important limitation of an overly strong market orientation during the internationalization process in the context of emerging markets. That is, firms with a high level of MO listen too carefully to their current customers (Christensen & Bower, 1996). This leads managers to emphasize current customers’ needs and not to spend enough time and resources exploring the potential opportunities in overseas markets. This is especially true because firms often do not have sufficient resources to accomplish these two tasks at the same time. How to meet existing demands efficiently in the domestic market becomes the main issue these firms focus on, because the main customers of such firms are often located in the domestic market at the early stages of the internationalization process. Our results provide insights into the comparative effects of EO and MO on internationalization of firms from emerging markets, thereby expanding the research of previous scholars who found that either EO or MO might have direct or indirect positive

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associations with a firm’s internationalization (e.g., Knight & Cavusgil, 2004; Weerawardena et al., 2007). Our results make a significant contribution to the literature on the internationalization of firms. Finally, accompanying the rise of the emerging economies to become new global challengers, top firms from emerging markets increasingly pose competitive challenges to companies from the developed economies. A study by Boston Consulting Group (2006) found 100 companies from emerging markets with total assets in 2006 of $520 billion, more than the world’s top 20 car companies combined. Although these challengers possess several core capabilities that drive them to develop into contenders for global leadership, such as vision of their ambitions founders and the ability to reach outside their home markets (Boston Consulting Group, 2009; The Economist, 2008), many of them are still in the early stages of globalization. For these firms in particular, it will be important to move beyond opportunistic steps toward globalization and develop appropriate and well-defined strategies. This paper may offer the theoretical guidelines for new global challengers in shaping the strategic postures which are helpful to successful internationalization. 7. Managerial relevance Besides its theoretical contributions, this article has several practical managerial implications as well. First, our study suggests that a stronger EO can improve an emerging-market firm’s internationalization, and, with respect to antecedents, that CEO ownership is beneficial for strengthening EO but that ownership concentration decreases EO. Thus, when firms hope to increase EO for the purpose of improving their internationalization, their BODs should increase CEO ownership and reduce ownership concentration in order to motivate CEOs to take more innovative measures and to proactively grasp opportunities in the international market, thereby helping firms from emerging markets to improve their competitive position in global markets. Second, from the results of the inverse U-shaped relationship between ownership structure and MO, firms should understand that either a very high or a very low level of ownership concentration and CEO ownership is not helpful in improving market orientation. Therefore, when firms markets want to improve their MO, ownership should be moderately concentrated in shareholders so that the governance mechanisms not only ensure efficient monitoring of executives’ decision-making but also establish a suitable constraint system among shareholders. Meanwhile, the BOD should require the CEO to hold an appropriate level of ownership, since either too little or too much CEO ownership can decrease a firm’s market-oriented activities. Third, because of the different effects of EO and MO on the degree of internationalization, firms from emerging markets should increase their EO in the process of internationalization and rationally balance their MO. In this way, these firms can improve the development of their internationalization, because top managers will be encouraged to take proactive actions in international competition by introducing innovative products and services and by taking more risks in the global market. Meanwhile, firms from emerging markets should balance the demands of current customers in the domestic market with those of potential customers in international markets, and effectively allocate resources, deploying them between current and new foreign markets when implementing their market orientation. 8. Limitations and future research directions This study has the following limitations which should be addressed in future research. Clearly, the results of the current

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study are context-specific. Although it is theoretically feasible to extend this study to other contexts, the specific differences between China and other emerging economies may restrict the generalizability of the findings. Therefore, a useful extension would be to conduct this study in other emerging-market settings such as eastern European countries. Further, in emerging markets, internationalization may take many forms (e.g., licensing, OEM, joint venture, and strategic alliance). In future research, it is necessary to overcome any constraints in measuring this factor. A more valid measure to describe the various situations in which firms are internationalizing is needed. Moreover, the firm’s experience, length of involvement internationally, international sales ratio and or international profitability could influence the relationships between governance mechanisms and strategic orientations. For most firms from emerging markets, the progress of internationalization can help them to adjust the influence of governance mechanisms on the choice of strategic orientation, and further influence the performance of their internationalization. Future research should focus on the moderating effects of these factors on the relationships between governance mechanisms and strategic orientations, and/or the moderating effect of ownership structure on the relationships between other strategic behaviors and firm internationalization performance. Finally, in addition to its contributions to an understanding of strategic orientation, we hope that this article can provide an important first step for further examination of key antecedents and consequences of the internationalization of firms and thereby promote future studies in this important area. Acknowledgement The authors would like to thank Professor Peter W. Liesch and the two JWB reviewers for their insightful comments. References Appiah-Adu, K. (1998). Market orientation and performance: Empirical tests in a transitional economy. Journal of Strategic Marketing, 6(1): 25–45. Atuahene-Gima, K., & Li, H. Y. (2004). Strategic decision comprehensiveness and new product development outcomes in new technology ventures. Academy of Management Journal, 47(4): 583–597. Aulakh, P. S., Kotabe, M., & Teegen, H. (2000). Export strategies and performance of firms from emerging economies: Evidence from Brazil, Chile, and Mexico. Academy of Management Journal, 43(3): 342–361. Autio, E., Sapienza, H. J., & Almeida, J. G. (2000). Effects of age at entry, knowledge intensity, and imitability on international growth. Academy of Management Journal, 43(5): 909–924. Baker, W., & Sinkula, J. (1999). The synergistic effect of market orientation and learning orientation on organizational performance. Journal of the Academy of Marketing Science, 27(October): 411–427. Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1): 99–120. Barringer, B., & Bluedorn, A. (1999). The relationship between corporate entrepreneurship and strategic management. Strategic Management Journal, 20(5): 421–444. Biediger, J., DeCicco, T., Green, T., Hoffman, G., Lei, D., Mahadevan, K., et al. (2005). Strategic action in Lenovo. Organizational Dynamics, 34(1): 89–102. Bhuian, S. N., Menguc, B., & Bell, S. J. (2005). Just entrepreneurial enough: The moderating effect of entrepreneurship on the relationship between market orientation and performance. Journal of Business Research, 58: 9–17. Boisot, M., & Meyer, M. W. (2008). Which way through the open door? Reflections on the internationalization of Chinese firms. Management and Organization Review, 4(3): 1–17. Bonaglia, F., Goldstein, A., & Mathews, J. A. (2007). Accelerated internationalization by emerging markets’ multinationals: The case of the white goods sector. Journal of World Business, 42(4): 369–383. Boston Consulting Group. (2006). The new global challengers. Boston: The Boston Consulting Group Inc. Boston Consulting Group. (2009). The 2009 BCG 100 new global challengers. Boston: The Boston Consulting Group Inc. Calof, J. L., & Viviers, W. (1995). Internationalization behavior of small and mediumsized South African enterprises. Journal of Small Business Management, 33: 71–79. Child, J., & Rodrigues, S. (2005). The internationalization of Chinese firms: A case for theoretical extension? Management and Organization Review, 1(3): 381–410. Child, J., & Tse, D. K. (2001). China’s transition and its implications for international business. Journal of International Business Studies, 32(1): 5–21.

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