Firm-level Decisions Research Articles

The microfoundations of strategy: empirical explorations under conditions of environmental uncertainty

PurposeStrategy scholars have argued that microlevel behavioral decisions by firms play a disproportionate role in making a firm nimble. Central to this issue is the interplay among several factors, such as actions by individual actors, firm-level decisions and broader changes in the economic environment that lead to a firm being successful in a competitive environment. The purpose of this paper is to offer a theoretical exploration of microfoundations research and subject the idea to empirical analysis using the constructs of customer orientation, competitor orientation and technology orientation as microfoundations of strategy.Design/methodology/approachData collected through a key informant survey of executives were tested through a hierarchical regression analysis.FindingsThe results of the study suggest that the microfoundations of strategy are located more in a firm’s customer and competitor focus, rather than a technological orientation. The findings also suggest that that customer orientation is a significant component of firm-level strategy and needs to be incorporated into decision-making in firms.Originality/valueThis study provides a framework that integrates the structural determinants of firm performance with microfoundations theory to refine our understanding of market knowledge capability.

Firms Entangled in Geopolitical Conflicts: Evidence from the Russia-Ukraine War

We examine the reactions of US-based multinationals and subsequent financial market reactions to Russia’s invasion of Ukraine in February 2022. The multinationals’ firm-level decisions range from clean exits from the Russian market, all the way to ‘digging in’ as if the war never happened. Findings show that, in the short-term, markets favour ‘middle ground’ decisions which balance shareholder interests with regulatory and ethical concerns. This is manifest through those firms taking extreme decisions, on either end of the spectrum, experiencing more negative returns. In the longer term, however, investor ethical concerns and other considerations dominate such that firms announcing clean breaks incur lower losses compared to their peers. In other words, sitting on the fence and playing both sides does not pay off for long. We also show interesting differences in investor reactions between two major non-US markets: China − a Russia-leaning country − vs India − a neutral country. While Indian investors behave largely similar to US investors, Chinese investors do not significantly punish firms that stay put in Russia. We re-examine the situation one year into the war and show that markets reward a Russia-opposing corporate position in the longer term.

Environmental regulations and capital investment: Does green innovation allow to grow?

With rising pollution emissions, it is vital to devise regulatory policies that ensure sustainable development. Green innovation offers an alternative strategy, fostering economic progress and environmental sustainability. While existing literature supports the positive role of green innovation in firm-level decisions, its specific impact on alleviating environmental regulation pressures remains unexplored. This study aims to fill that gap by investigating the role of green innovation in the nexus between environmental regulations and capital investment. It analyzes a 10-year dataset (2010–2019) of publicly listed enterprises from 10 Asian economies. The empirical results indicate a significant negative relationship between environmental regulations and investment decisions. It further shows the positive impact of environmental regulations on green innovation. The current analysis suggests green innovation's positive moderating/mediating impact on the relationship between environmental regulations and capital investment. The results support Porter's win-win model and recommend sound policies to environmental economists and industry managers regarding the significance of green innovation in environmental sustainability and corporate investment.

Share pledging, social trust and cash dividend payout: evidence from China

ABSTRACT Paying less cash dividend is one type of pledging shareholders’ opportunistic behaviour. Previous literature leaves unclear evidence about the impacts of share pledging on such firm-level decisions. Using the data of listed firms between 2014 and 2020 in China, we fill this void by examining the relationship between share pledging and cash dividend payouts from the perspective of social trust. Using a Heckman two-stage model, we find that share-pledging firms are less likely to pay cash dividend and the cash dividend payout is negatively related to pledged shares. We employ a hierarchical linear model and find that the level of social trust positively moderates the relationship between share pledging and cash dividend payout. Further, we find the effect is more pronounced for firms with higher free cash flows. The results indicate that social trust reduces the moral risk of pledging shareholders of listed firms in emerging market.

Development of a Modeling Tool To Assess and Reduce Regulatory and Recall Risks for Cold-Smoked Salmon Due to Listeria monocytogenes Contamination

Although public health risk assessments for Listeria monocytogenes (Lm) have been published for various foods, firm-level decision making on interventions targeting Lm involves considerations of both public health and enterprise risks. Smoked seafood is a ready-to-eat product with a high incidence of Lm contamination and has been associated with several recalls. We used cold-smoked salmon as a model product to develop a decision support tool (the regulatory and recall risk [3R] model) to estimate (i) baseline regulatory and recall (RR) risks (i.e., overall risks of a lot sampled and found positive for Lm, e.g., by food regulatory agencies) due to Lm contamination and (ii) the RR risk reduction that can be achieved through interventions with underlying mechanisms such as reducing the prevalence and/or level of Lm and retarding or preventing Lm growth. Given that a set number of samples (e.g., 10) are tested for a given lot, the RR risk equals the likelihood of detecting Lm in at least one sample. Under the baseline scenario, which assumes a 4% Lm prevalence and no interventions, the median predicted RR risk for a given production lot was 0.333 (95% credible interval: 0.288, 0.384) when 10 25-g samples were tested. Nisin treatments, which reduce both the prevalence and initial level of Lm, reduced RR risks in a concentration-dependent manner to 0.109 (0.074, 0.146) with 5 ppm, 0.049 (0.024, 0.083) with 10 ppm, and 0.017 (0.007, 0.033) with 20 ppm. In general, more effective reduction in RR risks can be achieved by reducing Lm prevalence than by retarding Lm growth; the RR risk was reduced to 0.182 (0.153, 0.213) by a 50% prevalence reduction but to only 0.313 (0.268, 0.367) by bacteriostatic growth inhibitors. Sensitivity analysis indicated that prevalence and initial level of Lm and storage temperature have the greatest impact on predicting RR risks, suggesting that reliable data for these parameters will improve model performance.

Two-stage technology opportunity discovery for firm-level decision making: GCN-based link-prediction approach

In this study, we propose a graph convolution network (GCN)-based patent-link prediction to predict technology convergence. We address the limitations of previous works, which neglect both the global information of a convergence network and the node features. We employ three features: GCN node features to represent global information, node features to characterize what kinds of information they have and how they are similar, and edge similarity to represent how frequently the two nodes are connected. Considering three categories of information, we conduct link prediction using machine learning (ML) to identify potential opportunities. To identify areas of technology convergence, we also support firm-level decision making using portfolio analysis. This study consists of two main stages: opportunity discovery which employs both GCN-based link prediction and ML, and opportunity validation which evaluates whether the identified technology opportunities are suitable from the firm's perspective. A case study is conducted for the mobile payment industry. A total of 17,540 patent documents with 36,871 positive links are used for GCN link prediction and ML. As a result of firm-level opportunity validation, a total of 395 cooperative patent classifications (CPC) were predicted to be possibly linked with 32 current CPCs of the target firm. The contributions come from two main aspects. From a theoretical perspective, this study employs GCN and node features to reflect the global graph structure for technology convergence. From a practical perspective, this study suggests how to validate the identified opportunities for firm-level applications.

What Determines AI Adoption?

Over the recent years, firms have showed an increased demand for leveraging the performance potential of Artificial Intelligence (AI) technologies. However, the general applicability of AI to many settings raises important managerial questions about whether aspects such as potential for in-house versus external AI development, the presence of complementary technological resources (e.g. access to cloud computing), or even the specific use of AI (e.g. product/service development, operational management) would guide firm-level decisions underlying AI adoption. While recent research has provided some insight on worker-level decisions about using AI, knowledge about firm-level AI adoption, as well as heterogeneities in adoption, remains scant. To address this empirical gap, this preliminary paper provides one of the first comprehensive assessments of firm-level determinants of AI adoption while accounting for the heterogeneous sources, applications, and complementary technological resources of AI in organizations. Specifically, this paper reports the first results of a novel firm-level AI adoption survey deployed to a representative sample of South Korean firms from 2017 and 2018. Econometric assessments identified that firm size and use of existing intangible assets are important for AI adoption. However, while these characteristics are significant for AI adoption regardless of whether the technology was produced in-house or obtained from a vendor, analyses suggest that there may be heterogeneities on the determinants of AI adoption depending on the operational application of AI. Furthermore, AI adoption also ensues in tandem with the adoption of other digital technologies (e.g. big data, cloud computing, and the Internet of Things) and with contemporaneous firm reorganization.

Powerful political corporate appointments and firm bribery channels

PurposeThe authors examine the influence of powerful political corporate appointments on the usage of firm bribery channels. Party Secretaries within Chinese state-owned enterprises (SOEs) may simultaneously hold top management positions, thereby endowing powerful firm-level decision rights on those appointees, hereafter referred to as powerful dual role Party Secretaries.Design/methodology/approachThis study employs panel data analysis with industry and year fixed effects. The authors use a sample of 1,143 Chinese SOEs listed on the Shanghai and Shenzhen Stock Exchanges from 2004 to 2015.FindingsThe authors find that powerful dual role Party Secretaries are associated with greater bribery channel usage. Following the ongoing anticorruption campaign, SOEs with the powerful appointments significantly reduce their usage of both transparent (entertainment and travel costs) and opaque bribery (abnormal management expenses) channels. However, in general, Chinese SOEs respond to the anticorruption shock by switching from the more transparent to the opaquer bribery channel.Originality/valueThe authors contribute to the ongoing debate of politicians on corporate boards by examining the relatively unexplored area of government appointed top management and their influence on bribery at the firm level.

THE GOVERNANCE ROLE OF LABOR UNIONS IN IMPROVING INVESTMENT EFFICIENCY

We focus on the role that labor unions can play in influencing firms’ efficiency in corporate investment decisions where investment efficiency is defined as the extent to which deviations from optimal investment levels are minimized. We argue that unions may not simply be adversaries of managements as is often believed but have incentives to monitor managements in ways similar to that of other corporate governance players. These incentives stem from the fact that unions, like other corporate stakeholders, are adversely affected by investment inefficiencies that may result from firm-level overinvestment and underinvestment decisions. Consistent with this explanation, we find that labor unionization is indeed positively associated with improvements in investment efficiency and that these effects are generally stronger in bargaining environments that are favorable to unions. For instance, union effects in improving investment efficiencies are stronger in states where the Democratic Party is more influential and in states which have not enacted legislations that restrict union activities. These results indicate that union monitoring of investment efficiency is more likely to occur through channels that are a part of unions’ collective bargaining processes. Our results are robust to different measures of investment efficiency, different empirical specifications, and endogeneity of union membership.

On the role of institutional factors in shaping working capital management policies: Empirical evidence from European listed firms

The study examines the impact of institutional factors on working capital management for a sample of 5431 European listed firms over the period 2010–2018. Employing a weighted least squares (WLS) methodology, we provide empirical evidence on the role of institutional quality in shaping the working capital policies of European listed firms. The results indicate that firms located in countries with a stronger institutional framework maintain lower levels of working capital on average. The results are robust to different subsamples of firms. The study complements the extant literature by analyzing the effects of institutional quality on working capital management, across a large number of different institutional systems specific to developed and transition economies alike. The results are useful for practitioners and policy makers in understanding the relationship between institutional quality and short-term firm-level decisions.

The Dynamics of Global Sourcing

<ns3:p>This paper studies an import model that incorporates both static crosscountry interdependence and dynamic dependence in firm-level decisions. I find that the benefit of sourcing from one country increases as a firm imports from more countries. Furthermore, using a partial identification approach under the revealed preferences assumption, I provide evidence for the sunk costs of importing, which make establishing relationships with new sellers costlier than maintaining existing ones. The coexistence of cross-country interdependence and sunk costs implies that temporary trade policy changes can have long-lasting effects on both the targeted and non-targeted markets through firm-level decisions.</ns3:p>

Dominant Currencies: How Firms Choose Currency Invoicing and Why it Matters

Abstract We analyze how firms choose the currency of invoicing and the implications of this choice for exchange rate pass-through into export prices and quantities. Using a new data set for Belgian firms, we find currency invoicing to be an active firm-level decision, shaped by the firm’s size, exposure to imported inputs, and the currency choices of its competitors. Our results show that a firm’s currency choice, in turn, has a direct causal effect on the exchange rate pass-through into prices and quantities. Moreover, the differential price response of similar firms that invoice in different currencies is large, persists beyond a one-year horizon, and gradually wanes in the long run. This results in allocative expenditure-switching effects on export quantities, which build up over time, suggesting a role for quantity adjustment frictions in addition to price stickiness. Our findings shed light on the mechanisms that make or break a dominant currency and the consequences it has for the international transmission of shocks.

On the Cyclicality of Real Wages and Employment: New Evidence and Stylized Facts from Performance Pay and Fixed Wage Jobs

Abstract Using the National Compensation Survey between 2004 and 2017, we document four stylized facts and quantify cyclical heterogeneity among performance pay (PP) and fixed wage (FW) jobs. First, there is substantial dispersion in the incidence of PP, even within the same occupation; hourly compensation growth in PP jobs has been nearly three-times as large as that in FW jobs; the share of PP is increasing in employer size; the provision of PP is largely a firm-level decision. Second, we find that hourly compensation growth among PP (FW) jobs increases (decreases) in response to state employment growth. Furthermore, FW jobs respond primarily by adjusting the extensive margin of employment. Our estimates are identified off of comparisons of similar jobs within the same establishment over time. These business cycle dynamics are consistent with models that feature heterogeneity in organizational practices, allowing firms to adjust to uncertainty over the business cycle under flexibility in compensation contracts. (JEL J21, J22, J31, E32, M55).

Value Creation and Appropriation in Firms: Methodological Challenges and Research Opportunities

The stakeholder value creation and appropriation (VCA) approach is a new lens for understanding how the economic value created through the firm’s activities is shared among its immediate stakeholders—employees, customers, suppliers, government, and capital owners. A series of recent articles in the Strategic Management Journal have conceptualized the approach, developed the method, and shown its application in comparative case study analysis (Garcia-Castro and Aguilera, 2015; Lieberman, Garcia-Castro and Balasubramanian, 2017; Lieberman, Balasubramanian and Garcia-Castro, 2018; Kern and Gospel, 2020). The approach holds potential beyond the Strategy field: as a tool for investigating how firm-level decisions and practices create winners and losers, but also as a new way of linking these micro-level patterns to macro-level pressures and outcomes, thereby helping Management scholars contribute to addressing one of the world’s grand challenges. The need to better understand inequality in and around organizations has been acknowledged in recent years (Suddaby, Bruton and Walsh, 2018; Amis, Mair and Munir, 2020; Bapuji, Ertug and Shaw, 2020) but has been laid bare in particular during the Covid crisis (Bapuji et al., 2020; Munir, 2020). The goal of this panel symposium is therefore to take stock of how the stakeholder VCA approach has been used so far, reflect on considerations and practicalities of applying it to new empirical settings and research questions, and engage in a discussion of how it could be used to help us unpack the complex relationship between organizations and inequality. To this end, we bring together scholars who are experts on the approach with those who are pursuing research that could stand to benefit from it.

Are firms' expectations on the availability of external finance rational, adaptive or regressive?

PurposeThis study investigates which expectation formation mechanism governs Eurozone firms regarding their expectations on external finance availability.Design/methodology/approachIn this study, we link consecutive surveys from the Survey on the Access to Finance of Enterprises to bring new evidence on how non-financial corporations shape their expectations on external finance availability.FindingsIn line with the past literature, we demonstrate that the data reject the Rational Expectations hypothesis, and we find evidence in favor of the Adaptive Expectation mechanism.Originality/valueThis is the first study studying firms' expectations of external finance availability, implementing survey data of firms' expectations from the SAFE database on a country level. The formation of firm expectations is vital in directing policymakers in designing appropriate monetary policies, as both the employment and inflation targets of central banks around the world are highly dependent on the firm-level decision process.

Pattern and Trends of Financing in the Indian Manufacturing Sector

The firm’s choice to finance its asset reveals the pattern of flow of funds, the availability and reliance on sources of such funds. We study ‘Sources of fund’ statement for an unbalanced panel of nearly 3400 firms in the manufacturing sector during the financial year 2011–2018. We find that financing has been mostly met through internal sources, and the reliance on external financing has decreased during this period. We introduce a methodological improvement by studying change in total assets to understand financing. A series of empirical models was formulated to identify factors that influences external financing. The result shows that unlisted, non-exporting, new-aged and small-sized firms have higher share of external financing. Further, profitability ratios like return on asset and operating profit margin, tangibility ratio like gross fixed assets to total assets, and reserves to total assets, shows negative and significant relationship with share of external financing to total funds and external financing to total assets. Our results add the dimension that interaction of change in assets with firm specific characteristics provides a meaningful way to extend the results of existing models. We argue that while existing methods use limited balance sheet items for analyzing internal versus external finance, firm level decisions ought to include all sources of finance. JEL Classifications: D22, G30, G32

Interlocking margins: A framework on the interaction of offshoring and outsourcing decisions

I develop a multi-country general equilibrium model on global sourcing which considers individual firm’s decisions on outsourcing as well as offshoring. These decisions are closely connected as more extensive offshoring provides incentives for further integration of inputs. The firm-level decisions aggregate to produce gravity style equations of trade flows between countries, and intra-firm transactions.

Performance indicators to support firm-level decision-making in the wine industry: a systematic literature review

Purpose The purpose of this paper is to conduct a systematic literature review (SLR) to identify the main firm-level performance indicators and group them in dimensions that support decision-making in the wine industry. Design/methodology/approach To achieve this goal, an SLR approach was conducted in the Scopus database from 2009 to 2019. From a set of 607 articles, only 25 studies related to firm-level performance indicators were considered and, following an inductive thematic analysis and an interpretative synthesis, separated into different specific foci that include social, economic and environmental dimensions. Findings There is a limited number of papers identifying indicators regarding the firm-level performance of wine firms, and even fewer studies including indicators on an integrated approach to measure the different dimensions of firm performance. This paper documents that economic and environmental indicators cover 78.2% of all SLR indicators analyzed. As this group of indicators is limited to a set of sub-dimensions, this paper found that several groups of indicators are misrepresented, such as product portfolio or certifications related to marketing activities and indicators covering purchasing and supply chain activities, which play a crucial role in the competitiveness of the wine industry. Practical implications For practitioners, it discloses the most pertinent indicators they need to improve to craft their business strategies. This framework is of added value for policymakers to customize their support programs for specific producers to develop their competitive strategies. It could be deployed in teaching programs as a tool to address the importance of aligning different types of indicators to achieve firm-level performance in the wine industry. Originality/value This study contributes to the literature identifying a framework of analysis that includes indicators of four dimensions, namely, economic, social, territorial and environmental. This framework aims to relate performance measures to corporate strategy as a management control tool. The framework intends to improve the fit between firms’ activities and their competitive context and to be flexibly adapted to various products/firms in the wine industry.

The impact of terrorism on international mergers and acquisitions: Evidence from firm-level decisions

Does terrorism inhibit a country’s ability to attract international direct investment? If so, terrorism may have large costs in terms of employment losses, macroeconomic instability, and missed development opportunities. However, do investors fear terrorism because of direct risks to their assets, or because the opportunities in the host country deteriorate? And how do they adjust investments? We study the impact of terrorism on merger and acquisition decisions of 8,872 firms over 116 countries over 16 years. The firm-level perspective allows the isolation of host-country terrorism from firm-level characteristics such as size or experience as an explanation, by comparing decisions for the same firm across destinations. It also allows separation of investment responses into reductions or entire withholding of investment. A sample standard deviation increase in terrorism reduces merger and acquisition investment by around 30%. Firms do not generally reduce the size of their investment in the face of terrorism – instead, they decide not to enter the country altogether. We find no evidence to suggest that multinational firms are more sensitive to attacks on local business assets. A country-level analysis, which necessarily does not control for firm-level characteristics, yields materially different conclusions.

Geopolitical risk and shipping firms’ capital structure decisions in Belt and Road Initiative countries

ABSTRACT Geopolitical uncertainty can disrupt global supply chains and increase frictional costs in international trade, thus affecting firm-level decisions. This study investigates the role of geopolitical risk (GPR) in the financial leverage choices of shipping firms from Belt and Road Initiative (BRI) countries and those from non-BRI countries. The current paper uses panel data methodology and considers 118 globally-listed shipping firms for the period 1987–2017. The results indicate that shipping firms lower their financial leverage as GPR rises. However, this negative effect is observed in shipping firms from BRI countries, but not in those from non-BRI countries. Moreover, the impact of GPR on BRI firms’ financing decisions is more than twice that of the global GPR. This result remains unchanged when the relevant macroeconomic factors are controlled. The negative effect of GPR on capital structure decisions is more pronounced during periods of high freight rates, high economic growth, and tranquillity. This study can serve as input for policy formulation to facilitate shipping firms operating in BRI countries.