Board Ties, Learning, and Emerging Market Entry 415 authority to influence the firm’s strategy based
Board Ties, Learning, and Emerging Market Entry 415 authority to influence the firm’s strategy based
on what s/he vicariously learns in the process of serving as a director. Beyond the application to board interlocks in particular, this suggests that organizational learning is a function of not only the characteristics of the knowledge obtained vicariously—as many studies emphasize— but also of the authority possessed by boundary spanners who carry knowledge into the firm. These findings help to make sense of inconsistent findings in prior research. Some studies (while not comparing the effects of all types of interlocks) have reported significant effects for outgoing ties (e.g. Haunschild, 1993), while other studies have reported weak or no effect (e.g. Geletkanycz and Hambrick, 1997). Our results suggest that with respect to outgoing ties, the influence is driven by whether the outgoing manager is the focal firm CEO.
Prior research has suggested— but not empir- ically shown—that indirect interlocks have the weakest influence (Haunschild and Beckman, 1998). In fact, some recent studies go as far as excluding indirect (often called ‘neutral’) inter- locks from analysis altogether (e.g. Beckman, Haunschild, and Phillips, 2004). Our findings sug- gest that indirect ties may be more influential than previously thought by highlighting when such ties are most influential. It appears that to fully exploit the coarse-grained information available from indi- rect ties, firms need a baseline of experience in order to have the absorptive capacity (Cohen and Levinthal, 1990). This insight echoes research on innovation that finds that firms investing in inter- national R&D extract learning benefits only when they already possess a knowledge base in areas that are technologically related to the new ven- ture (Penner-Hahn and Shaver, 2005). Interest- ingly, direct ties, which provide the most ‘frontal’ information to the firm, diminish in importance once the firm gains a baseline of first-hand experi- ence. These findings challenge scholars to specify more carefully boundary conditions that clarify when they expect various interlocks to influence firms.
These results contribute to the field of orga- nizational learning, which distinguishes between experiential and vicarious learning. An important tension in this literature pertains to whether the two types of knowledge are substitutes or com- plements, and reasonable arguments exist to sup- port both effects. We propose that substitution
or complementarity between the two sources of learning is contingent upon the type of vicarious knowledge brought by external ties such as inter- locks. Prior focal firm experience and vicarious learning through direct ties to other experienced firms appear to function as substitutes because they both bring specific, pointed knowledge. In contrast, indirect ties affect firms more strongly only once
a firm gains sufficient levels of prior experience. This finding may have applicability beyond board ties in particular, but future work must verify this implication.
The results of our study also have implications for the FDI literature, particularly as it applies to emerging market entry, which are particularly fraught with risk and uncertainty. Existing FDI theory suggests that firms learn from their expe- riences with prior investments in related markets, which reduces the uncertainty that might other- wise preclude or significantly reduce the likeli- hood of entry (Delios and Henisz, 2003; Johanson and Vahlne, 1977). The theoretical challenge has been that learning from first-hand experience may
be impossible when the firm seeks to enter an emerging market so different or novel that prior foreign investments provide little guidance. We have built on a small but important body of lit- erature that has begun to explore how vicarious learning from firms with relevant foreign market experience affects entry choices (Guillen, 2002; Martin, Swaminathan, and Mitchell, 1998). Our research suggests that characteristics of the indi- viduals creating the tie, which have not been studied in this context, have a significant effect on firms’ decisions to enter high-risk emerging markets.
An important contribution was to account empirically for two alternative explanations to learning: coordination or control, and endogenous selection. Besides fostering learning, board inter- locks are mechanisms of coordination and control, and we included covariates related to the institu- tional context to account for this alternative mech- anism of interlock influence. Recently scholars have recognized endogeneity of networks as one of the most critical issues in interorganizational stud- ies (Ahuja, Soda, and Zaheer, 2012). To our knowl- edge, this is the first study to control for selection effects in interlock research. The need to address this issue arises because the effects of interlocks on firm learning may not be independent of the under- lying processes the lead firms to appoint directors