Imitation in foreign location choice: The role of upper echelons' diversity

Abstract

This research investigates how the Top Management Team (TMT) characteristics impact the imitation of home country firms’ Foreign Direct Investment (FDI) location choice. A review of the FDI location choice research was performed, and various viewpoints for the selecting locations were identified. Amongst these viewpoints, the institutional perspective suggests that lack of cognition coupled with uncertainty about host markets compels firms to follow the FDI decisions of other home country firms. The review identified that the current literature in the cognitive domain had overlooked the role of TMTs. Upper echelon theory suggests that TMTs are not only a unique source of cognitive resources but also help to overcome challenges associated with internationalisation. This research applies institutional theory and the upper echelon theory to advance the argument of how and why TMT characteristics may impact the imitation of location choice decisions. Various TMT attributes like TMT international experience, TMT international experience diversity, TMT tenure diversity, TMT education diversity and TMT functional diversity were hypothesised to moderate the imitation in FDI location choice.

This research applied quantitative methods to assess the proposed hypotheses. First, a sample of 202 US-based firms (which invested in 11 Asia-Pacific countries from 2009 to 2014) was collected from FDI Markets database. This sample generated a panel dataset of 12,771 observations. Nearly 11,000 unique top manager profiles were created to compute the TMT data for the firms in the given period. Through logistic regression, this study assessed whether TMT attributes moderate the extent of imitation in FDI location choice.

The findings from this research contribute to institutional theory by highlighting the role of upper echelons. In particular, the findings show that while TMT tenure diversity weakens the effect of imitation, TMT functional diversity further exacerbates the effect of imitation in location choice. It was also found that when firms do not have a prior presence in the host country, then TMT international experience also strengthens the effect of prior FDI by other home country firms. The research also supports that the effect of various TMT attributes could be subject to environmental conditions. In particular, it shows that deep-level characteristics cause a more profound impact when host country uncertainty is high, while surface-level characteristics are impactful when host country uncertainty is low.