Manag Int Rev (2010) 50:185–206

DOI 10.1007/s11575-010-0029-0

R e s e a r c h Art i c l e

Top Management Team Internationalization

and Firm Performance
The Mediating Role of Foreign Market Entry

Sabina Nielsen

Abstract: 
0 This paper develops a multi-dimensional construct of top management team (TMT) interna-
tionalization reflecting TMT ability to deal with challenges of managing firm foreign opera-
tions in the process of ongoing globalization.
0 Drawing upon upper echelons and firm internationalization theories, the relationships between
TMT internationalization, foreign market entry and performance are empirically investigated
in a sample of 165 Swiss listed companies.
0 The results confirm the validity of the multi-dimensional construct and suggest that TMT
internationalization leads to subsequent foreign market entries, which in turn are positively
related to firm performance.

Keywords:  TMT internationalization · Nationality diversity · International experience ·

Firm internationalization · Foreign market entry · Corporate performance · Executive effects

Received: 25.11.2007 / Revised: 11.12.2008 / Accepted: 16.12.2009 / Published online: 20.03.2010

© Gabler-Verlag 2010
Ass. Prof. S. Nielsen ()
Department of International Economics and Management,
Copenhagen Business School, Frederiksberg, Denmark
e-mail: sta.int@cbs.dk

Ass. Prof. S. Nielsen
School of Marketing,
University of Technology, Sydney, Australia
186 S. Nielsen

Introduction

The Uppsala internationalization process model (Johanson and Valne 1977) empha-
sizes the use of experiential knowledge in expanding and managing firm international
operations. Consistently, the role of learning from experience in the process of gradu-
ally increasing firm international involvement has been investigated extensively in the
internationalization literature (e.g., Andersen 1997; Barkema et al. 1996; Barkema and
Vermeulen 1998; Melin 1992). Yet, in most of these studies emphasis is placed on firm
level experience, whereas the impact of individual (managerial) level of knowledge and
expertise remains largely unexplored. At the same time, upper echelons theory has long
recognized the influence of managerial characteristics and experiences on firm strategic
choices and behavior (Finkelstein and Hambrick 1996; Finkelstein et al. 2008).
Focusing on the team level of analysis, upper echelons theory suggests that the compo-
sition of the top management team (TMT) creates the basis for managerial decisions and
ultimately firm behavior (Hambrick and Mason 1984). Over the past twenty years upper
echelons research has provided coherent evidence for a link between TMT backgrounds
and firm strategy/performance (for reviews see Carpenter et al. 2004; Certo et al. 2006;
Finkelstein et al. 2008). However, only over the past decade has the discussion of the
effects of top management team composition been extended to the context of MNCs and
firm internationalization (Herrmann and Datta 2005).
A number of influential international business scholars argue the importance of having
top managers who know and understand the logic and dynamics of firm foreign markets
(e.g., Bartlett and Ghoshal 1989; Luo 2005). Extensive experience from a particular coun-
try helps a manager to better understand the local market and institutions and to make
sound managerial decisions (Kobrin 1984). However, international assignment experi-
ence is often limited in time and regional scope and thus also limited in its impact (Cali-
giuri et al. 2004; Caligiuri and DeSanto 2001). Instead, Perlmutter and Heenan (1974)
suggest the use of foreign nationals as top managers. With the increasing globalization
and emerging markets opening up, foreign-born managers have become more prevalent
among the leaders of the world largest multinationals (Greve et al. 2010; Staples 2007;
van Veen and Marsman 2008).
The existing upper echelons studies dealing with international contexts (Athanassiou
and Nigh 2002; Carpenter and Frederickson 2001; Carpenter et al. 2001; Herrmann and
Datta 2005; Reuber and Fischer 1997; Sambharya 1996; Sanders and Carpenter 1998;
Tihanyi et al. 2000) are based on North-American samples and focus primarily on top
managers′ international experience as an important source of competitive advantage for
multinational corporations. Only a few studies, mostly outside the US, address the nation-
ality diversity in top management teams as related to firm internationalization (e.g., Calig-
uri et al. 2004; Greve et al. 2010; Heijltjes et al. 2003; Nielsen and Nielsen 2008; Nielsen
and Nielsen 2011). This article suggests that in the context of firm internationalization
both top management team members′ national origins and international experiences are
important sources of managerial competence and ability to deal with the complexity of
foreign expansions of multinational corporations (MNCs).
Whereas nationality and international experience are two distinct sources of knowledge
and expertise, both are associated with similar advantages pertaining to decision-making
Top Management Team Internationalization and Firm … 187

related to foreign market entry. Yet, the ability of the top management team to deal with
the challenges of firm international operations and make sound managerial decisions is a
latent construct, which is not directly observable and therefore difficult to measure. The
diversity in nationality and international experience of top managers are two possible
indicators of this latent variable. This paper proposes a multi-dimensional construct of
top management team internationalization and applies structural equation modeling to
empirically test its validity.
The contribution of this article to the international business and upper echelons litera-
tures is three-fold: first, by focusing on individual rather than firm level knowledge and
experiences, it emphasizes the role of top managers in shaping firm internationalization
strategy and performance. Second, it proposes and tests the validity of a new, multi-
dimensional construct of TMT internationalization, comprised of both TMT international
experience and nationality diversity. Third, this study introduces foreign market entry
strategy as a mediator between TMT internationalization and firm performance. Meth-
odologically, it responds to recent calls for increasing construct validity in upper echelons
research (Carpenter and Reilly 2006) and makes strides towards addressing issues of
causality between TMT and firm internationalization.

Theoretical Background

Uppsala Internationalization Process Model and Upper Echelons Theory

Firms expanding operations beyond their national borders face significant challenges
related to increased environmental uncertainty and lack of knowledge about the local
political, legal, tax, etc. systems. The Uppsala internationalization process model (Johan-
son and Vahlne 1977; Johanson and Wiederheim-Paul 1975) argues that firms tend to
initially expand into markets that are geographically and culturally close; once firms
accumulate experience with operating abroad, they enter geographically distant markets.
Hence, the model regards experiential learning as an important source of knowledge and
expertise to deal with the uncertainty of entering new geographical markets (Eriksson et
al. 1997). Grounded in the behavioral theory of the firm (Cyert and March 1963) and the
growth theory of the firm (Penrose 1959), the Uppsala model emphasizes the bounded
rationality of managerial choices and the uncertainty under which they are made.
Similarly, building on the behavioral view of the firm (Cyert and March 1963; March
and Simon 1958) and strategic choice theory (Child 1972), upper echelons theory sug-
gests that top managers′ human boundaries/limitations, such as limited field of vision,
selective perception and interpretation bias, influence the strategic choices executives
make (Finkelstein and Hambrick 1996). Hence, under high environmental uncertainty
(such as expanding abroad) organizational choices and behavior are strongly influenced
by the background characteristics and previous experiences of managers. As a result, firm
strategic choices and behavior can be explained by the characteristics of the top man-
agement team (Child 1972; Hambrick and Mason 1984). In line with the logic of both
Uppsala internationalization process model and upper echelons theory, the international
backgrounds and experiences of TMT members can be expected to have a significant
188 S. Nielsen

influence on firm decision-making pertaining to foreign market entry strategies and ulti-
mately on firm performance.

The Construct of Top Management Team Internationalization

National origin is an important aspect of a top manager′s international background and

orientation. The cross-cultural psychology literature suggests that national origin influ-
ences individual personality (Triandis and Suh 2002), underlying orientations and values
(Hofstede 1980). These nationality-derived qualities, in turn, affect a person′s behavior as
well as how the person is perceived in a multinational team (Hambrick et al. 1998). In the
context of firm strategy, executives′ nationalities have implications not only for individual
personalities and top management team dynamics but also for strategic decision-making
(Elron 1997; Geletkanycz 1997; Kilduff et al. 2000). Top manager foreign nationality
is a source of knowledge about doing business abroad. Foreign-born executives posses
valuable knowledge about economic and market factors and institutions as well as about
culture, behavior and norms of foreign countries, that may be invaluable in making deci-
sions about a firm′s internationalization strategy. Luo suggests that “foreign natives have
natural advantages in processing information pertaining to their home countries and in
finding solutions that improve information processing.” (2005, p. 34).
Besides individual level knowledge, the diversity in executive nationalities is impor-
tant for firm strategy. Sanders and Carpenter (1998) argue that, particularly in the context
of firm internationalization, diversity in executive backgrounds increases the informa-
tion-processing capacity of the top management team. Diversity in top management team
members′ backgrounds leads to different perspectives on and interpretations of a particu-
lar situation, thus reducing the individual bias and group think and increasing the quality
of the decision-making of the team. Diversity in top managers′ nationality is recognized
as one of the emerging dimensions of top management team heterogeneity (Finkelstein
and Hambrick 1996). According to the notion of requisite variety (Ashby 1956), the com-
position of a company′s top management team should reflect the complexity of its envi-
ronment (Keck 1997). Hence, diversity in TMT national backgrounds may help the team
as a whole to better understand and interpret the complexity of the firm′s international
environment. In support of this reasoning, a practitioners′ oriented study conducted by
the U.S. Conference Board found that successful global companies have multinational
top management (Berman 1997).
The benefits of top managers′ international assignment experience for multinational
firms are well established in the literature (Athanassiou and Nigh 1999; Carpenter et al.
2001). Top managers′ previous experience with foreign markets is viewed as a valuable
resource, which increases the competitive advantage of the firm (Daily et al. 2000; Roth
1995). Important network contacts and access to sources of information are acquired
through executive foreign assignment experience (Athanassiou and Nigh 2002). Moreo-
ver, international experience has an influence on managers′ perceptions and personalities
and contributes to higher international orientation of top executives (Gunz and Jalland
1996). At the same time, while a number of empirical studies found support for a positive
relationship between TMT international experience and firm internationalization, only
Top Management Team Internationalization and Firm … 189

two provide evidence for positive effects of executives′ international experience on firm
performance (Carpenter 2002; Carpenter et al. 2001).
Previous research has primarily used single proxies for top management team interna-
tionalization, i.e. either top managers′ nationality or international experience. Carpenter
and Reilly (2006) note the lack of construct validity measures in upper echelons research
and cite Cook and Campbell′s remark that “since single operationalizations both under-
represent constructs and contain irrelevancies, construct validity will be lower in single
exemplar research than in research where each construct is multiply operationalized”
(1979, p. 65). A major limitation of using nationality as a single proxy for top managers′
internationalization is that it only captures the impact of one country/culture and does not
consider the influences of other countries/cultures to which the person has been exposed.
International experience, however, is a dimension that takes into account a person′s expo-
sure to various cultural environments. This article argues that top executives′ nationali-
ties and international experiences are two distinct sources of the top management team′s
ability to better understand and successfully deal with the challenges of firm international
expansion. Such ability is an unobservable characteristic at the top management team
level that is difficult to measure directly. Nationality diversity and international experi-
ence are two distinct dimensions of the construct of TMT internationalization reflecting
different sources of expertise and knowledge that enable a TMT to effectively manage an
internationalized corporation.
The use of multiple indicators of theoretical constructs is strongly advocated in social
science research. Nunnaly and Bernstein argue that “because constructs concern domains
of observables, a better measure of any construct is obtained by combining the results
from a number of measures than by taking any one of them individually… Similarly, com-
bining several observables provides greater construct validity and scientific generaliz-
ability in the domain as a whole relative to a single measure” (1994, p. 86). Furthermore,
diversity researchers recently raised the argument that diversity dimensions within a team
do not influence team dynamics and performance independently from each other (Jackson
and Joshi 2004). Hence, top executives should be regarded as a “bundle of attributes”
(Carpente et al. 2004; Kor 2003) and the effects of their background characteristics inves-
tigated simultaneously rather than studying single attributes or multiple characteristics
independently. Thus, international experience bundled with the diversity in top managers′
national origin may form the ability of the TMT to deal with the challenges of firm for-
eign expansion and globalization.

TMT Internationalization and Firm Performance

In line with upper echelons theory (Finkelstein and Hambrick 1996; Hambrick and
Mason 1984), top management team internationalization is an important factor that may
influence firm strategic decision-making and ultimately performance. While TMT inter-
nationalization is regarded an ability to manage the complexity of firm foreign operations
and cope with the challenges of globalization, it has additional effects on other aspects of
executives work and strategic decision-making, which may not necessarily be advanta-
geous. It is important to note that diversity in top managers′ international backgrounds
and orientation has both positive and negative influences on team dynamics and strategic
190 S. Nielsen

decision-making (Elron 1997). Whereas a positive impact of top management team inter-
national experience on corporate performance is supported in the strategy literature (Car-
penter 2002; Carpenter et al. 2001), the performance effects of nationality diversity are
less straightforward (Elron 1997; Kilduff et al. 2000; Richard et al. 2004).
In the group effectiveness literature, diversity is often characterized as a “double-
edged sword” which is beneficial only if managed successfully (Miliken and Martins
1996). Nationality diversity is associated with certain advantages, such as creativity and
generation of more numerous and higher quality solutions (Cox et al. 1991). At the same
time, diversity is often associated with increased team conflict (e.g., Simons and Peterson
2000) which in turn reduces performance. Interestingly, however, the negative conse-
quences of nationality diversity on team processes and performance tend to diminish over
time (Earley and Mosakowski 2000; Watson et al. 1993). Hence, top management team
diversity may have both positive and negative influences on executive strategic decision-
making and ultimately on corporate performance.
Finkelstein et al. (2008) suggest that the inconsistent findings emerging from stud-
ies that test for a direct relationship between TMT diversity and performance may be
due to the omission of important organizational factors. Hence, while direct relationship
between TMT internationalization and firm performance may be difficult to argue theo-
retically and establish empirically, according to upper echelons theory firm strategy may
be an important mediator in this relationship. This work focuses on one aspect of firm
strategy that can be expected to be directly influenced by the international capacity and
orientation of top executives, namely foreign market entry.

TMT Internationalization and Foreign Market Entry

As top managers are the key decision-makers, ultimately responsible for firm strategic
choices, the international backgrounds and orientation of the top management team is
likely to have significant influence on firm internationalization strategy. Specifically, it
can be expected that TMT internationalization will lead to higher international involve-
ment because of the superior ability of TMTs with high nationality diversity and interna-
tional experience to process complex information and to consider and evaluate different
strategic alternatives pertaining to foreign market entry.
Empirical evidence supports the proposed positive association between top manage-
ment team characteristics and different aspects of firm internationalization, such as over-
all degree of internationalization (DOI) (Athanassiou and Nigh 2002; Lee and Park 2006;
Reuber and Fisher 1997; Sambharya 1996), degree of international diversification (Her-
rmann and Datta 2005; Tihanyi et al. 2000) and change in international diversification
(Wally and Beccerra 2001). However, these studies fail to account for possible reverse
causality, i.e. that firm internationalization may be a factor driving the internationalization
of top management teams. In fact, several studies argue that TMT international experi-
ence and nationality diversity may be a response to firm internationalization strategies
(e.g., Athanassiou and Nigh 1999, 2000; Heijltjes et al. 2003; Greve et al. 2010; Nielsen
2009).
The causal relationship between top management team internationalization and firm
internationalization is an example of a complex temporal interaction of executive and
Top Management Team Internationalization and Firm … 191

organizational attributes. Whereas managers are selected to fit a firm′s strategy (Szilagyi
and Schweiger 1984), they subsequently have significant influence on the development
of this strategy (Hambrick and Mason 1984). Over time, a reinforcing spiral probably
occurs: managers select strategies that mirror their beliefs and preferences; successors
are selected according to how much their qualities suit the strategy. Hence, a clear causal
relationship between executive and organizational characteristics is difficult to establish.
Finkelstein, Hambrick and Cannella argue that given “the challenge and the reality of
two-way causality… there is a need for an integrative theory that can model the dynamic
nature of the covariation between executive and organizational characteristics” (2008,
p. 115). Similarly, Carpenter et al. (2004) argue that the observance of recursive effects
underscores the need for more comprehensive, if not dynamic, theoretical approaches in
ensuing upper echelons research that bring to our attention the multi-directional nature of
the upper echelons model.
In order to address the causality issue, this paper focuses on foreign market entry as
an aspect of firm strategy that mediates the relationship between TMT internationaliza-
tion and performance. Recognizing that both TMT nationality diversity and international
experience may be influenced by prior internationalization, this investigation focuses on
new foreign market entries as an outcome of TMT internationalization, while controlling
for prior degree of firm internationalization and its effects on corporate performance.
Remarkably, only one prior study has linked TMT composition to foreign expansion
(Barkema and Chvyrkov 2007). Based on a longitudinal dataset of 2159 foreign market
entries, the authors linked TMT tenure and educational diversity to the novelty of the
geographic location of new foreign direct investments. Interestingly, however, the effect
of TMT characteristics such as nationality diversity and international experience that are
highly relevant in the process of firm internationalization was not explored.
TMT nationality diversity and international experience are two important sources of
knowledge and expertise about foreign markets and conducting business abroad. In addi-
tion, TMTs with international backgrounds and orientations have extensive international
networks that help them to adequately assess foreign environments and gather informa-
tion relevant to future foreign market entries. Prior knowledge, expertise and network
contacts represent a vital resource for strategic decision-making pertaining to foreign
market entry, since such decisions are highly complex and uncertain and require cultural
and strategic knowledge and careful consideration of different alternatives.
Diversity in top managers′ nationalities and international experiences may provide
firms with greater sources of valuable information and superior capacity to process this
information. First, such diverse TMTs are more likely to identify potential opportunities
for foreign expansion via more thorough environmental scanning and careful evalua-
tion of different options. Through their international network contacts and understanding
of the international business environment, such managers may be alert to international
investment opportunities and foreign market developments. Such information, in turn,
serves as a valuable resource in international strategic decision-making. Second, given
the bounded rationality and cognitive limitations of decision makers (Cyert and March
1963), TMT internationalization may help decision makers reduce the complexity of
available information by filtering the abundance of stimuli through selective perceptions
and interpretations (Hambrick and Mason 1984). As such, TMTs with high diversity in
192 S. Nielsen

nationality and international experience may draw on past experiences and the broader
knowledge base and cognitive capacity in order to more effectively make complex and
uncertain strategic decisions pertaining to foreign market entry. Moreover, Luo (2005, p.
34) suggests that increased nationality diversity at the top management team and board
levels further facilitates the development and utilization of firm level experiences as sug-
gested by the Uppsala internationalization process model (Johanson and Valhne 1977).
In addition, executives′ strategic orientation is likely to determine their preferences for
certain strategic actions (Finkelstein et al. 2008; Geletkanycz 1997). Accordingly, inter-
nationalized TMTs are likely to look favorable upon foreign direct investments as they
perceive foreign expansion as being less risky compared to executives without such back-
grounds and experiences (Herrmann and Datta 2006). Hence, internationalized TMTs are
likely to engage in a high number of foreign expansions.
Hypothesis 1: Top management team internationalization is positively associated with
the number of subsequent foreign market entries.
Beyond the natural preference of foreign nationals and executives with international
experience to engage in more international activities, the diversity in top management
team members′ national backgrounds and international assignment experiences is likely
to enhance the decision-making pertaining to foreign direct investments. In order to
increase the probability of successful foreign direct investments, top executives need to
collect as much relevant information as possible through a variety of sources and care-
fully evaluate this information in order to reach a decision. The international backgrounds
and experiences of the top management team will allow the TMT to select foreign market
entries that are most beneficial to the firm.
The broader knowledge base and diversity in values and cognitions stemming from
different nationalities and the network contacts and expertise resulting from international
experience may contribute to the accurate assessment of the factors involved in foreign
market expansion. For instance, internationalized TMTs are likely to draw on their expe-
riences and multicultural backgrounds in evaluating potential risks and returns associated
with particular foreign market entry options. As a result, nationally and experientially
diverse TMTs are likely to generate more alternatives and make better judgments regard-
ing which foreign market entry opportunities to pursue. Moreover, TMT internationaliza-
tion may also enhance the process of contract negotiations with local partners, suppliers
etc, as such TMTs have higher cultural and institutional awareness.
Foreign market entry is an important factor that transmits the benefits of top manage-
ment team internationalization into better corporate performance. This logic is similar
to prior research which demonstrated that nationally diverse TMTs are better at manag-
ing foreign subsidiaries as evidenced by improved subsidiary performance (Elron 1997;
Gong 2006). Similarly, Roth (1995); Carpenter (2002) and Carpenter et al. (2001) found
support for the arguments that the international experience of firm upper echelons results
in superior performance for highly internationalized organizations. While the relationship
between firm degree of internationalization and corporate performance is highly contro-
versial (e.g., Contractor 2007; Hennart 2007; Verbeke et al. 2009), this paper suggests
that foreign market entry decisions undertaken by internationalized TMTs are likely to
positively influence subsequent firm performance (Fig. 1).
Top Management Team Internationalization and Firm … 193

Fig. 1: Theoretical Model

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Hypothesis 2: Foreign market entry decisions undertaken by international top manage-

ment teams are positively associated with corporate performance.

Methodology

Study Sample and Data Sources

From all 269 companies listed on the Swiss Stock Exchange (SWX) in September 2004,
the sample was reduced to n = 165 based on availability of information and the nature
of the company (investments trust, local cantonal banks and state-owned energy com-
panies were excluded from the sample as they would jeopardize the generalizability of
this study′s findings). Data was collected for a three-year period (2002–2004) resulting
in a total of 495 company/year observations. Company level internationalization and per-
formance data was obtained from the Datastream and the Worldscope databases. Data
on foreign direct investment was collected from the SDC Platinum and the LexisNexis:
Directory of Corporate Affiliations databases. Data on top management team composition
and executive compensation was obtained from the companies′ annual reports. Informa-
tion on top managers′ nationality and international experience was collected from execu-
tives biographies published on companies′ websites and in annual reports. Subsequently,
individual manager′s records were cross-checked across companies to complete missing
records.

Variables

Independent Variables

The top management team of a company was defined as the officers who were members
of the management board or executive committee as identified in the firm′s annual report.
The members of the extended executive committee were generally not included in the top
194 S. Nielsen

management team, following the commonly employed definition of the TMT as a group
of the most important decision-makers in a company (Murray 1989; Pettigrew 1992).
Degree of nationality diversity in a top management team was calculated using a Blau
index, a measure of group heterogeneity, which is commonly used in TMT research (Car-
penter 2002; Finkelstein and Hambrick 1996). The Blau index captures the dispersion
of team members across all possible categories of a certain dimension (i.e. all different
nationalities represented on the top management team) using the formula
 
B = 1 − (pi )2

where p is the percentage of members in the ith group (i.e. nationality). The higher the
value of B, the greater is the heterogeneity on a particular variable. The nationality of
the CEO was recorded as a dummy variable equal to one if the CEO did not have Swiss
nationality and zero otherwise. Diversity in international experience was operationalized
by applying a simple ratio measure of the proportion of top management team members
who had previous work experience outside Switzerland. The international experience of
the CEO is a dummy variable equal to one if the CEO has previously worked abroad
and zero otherwise. While more precise measures of international experience, such as
number of years of international assignment experience (e.g. Carpenter 2002) or intra-
personal diversity in multiple countries in which each executive has experience (Greve
et al. 2010), is desirable, such detailed information is not available for Swiss executives.
At the same time, Sambharya (1996) reports that the percentage of TMT members with
international experience is highly correlated (p = 0.80) with the number of years of inter-
national experience. TMT Internationalization was measured as a composite index of the
two measures TMT nationality diversity and TMT international experience, with a pos-
sible range between 0 and 1.

Dependent Variables

Corporate performance was measured as the return index for each company and year, an
objective measure of stock market returns.
Foreign Market Entry was measured as the number of foreign direct investments
undertaken by a company in a particular year. From all greenfield investments, merg-
ers and acquisitions and joint ventures that a company engaged in, only those outside
the national borders were counted. In order to avoid problems with reverse causality
and allow for sufficient time-lag between independent and dependent variables, TMT
composition was measured on January 1 of the respective year, foreign market entries
were counted for the duration of a calendar year (January 1 until December 31), and firm
performance was measured at the year end.

Control Variables

A company′s prior degree of internationalization was operationalized using a multi-item

measure based on Sullivan′s (1994) conceptualization. The composite measure accounted
for the extent to which each company had international sales and assets as well as for the
Top Management Team Internationalization and Firm … 195

geographical dispersion of the sales. The proportion of foreign sales to the total sales of a
company (FSTS) was used as an indicator of the performance dimension of firm DOI. A
measure of the dispersion of foreign sales was used in addition to the ones initially pro-
posed by Sullivan (1994). The degree of geographical diversification was measured using
the entropy measure (GSENTR) of firm diversification (Palepu 1985) similar to previous
research in the upper echelons field (Jensen and Zajac 2004; Hoskinsson et al. 1993;
Wiersema and Bantel 1992). The entropy measure is calculated with the formula
  
Pi In(1/Pi )2

where Pi is the percentage of segment i sales of the total firm sales and (1/Pi) is a weight
to account for the importance of each segment in the total sales of a company. Proportions
were defined as sales per geographical segment. The ratio of foreign assets to the total
assets (FATA) was employed to represent the structural dimension of the internationaliza-
tion measure, as an indicator of firms′ resources invested abroad. Information on foreign
employees is not available in the Thomson One Banker database. Furthermore, the for-
eign employees figure was not consistently reported in the annual reports of Swiss com-
panies. Therefore, a measure of the proportion of foreign employees to the total number
of employees (FETE) was not applied in this study.
Firm size is likely to influence both foreign market entry and corporate performance
and was therefore included as a control variable. The total number of firm employees was
used to control for firm size. The performance and firm size variables were transformed
using a logarithmic function in order to meet normal distributions requirements. TMT
size, measured as the count number of TMT members as reported in the company annual
reports, was controlled for as suggested by Carpenter et al. (2004). Executive compensa-
tion data was collected from annual reports and measured as the average compensation
of the top management team members (the total compensation divided by the number
of TMT members, including the CEO). Executive compensation was controlled for as it
may have important influences on both foreign market entry and corporate performance
(Finkelstein et al. 2008).
As another factor influencing firm profitability, firm leverage was entered as a con-
trol and operationalized as the percentage of long-term debt to total capital (Geringer
et al. 2000). In addition, product diversification, measured with the entropy measure of
firm diversification (Palepu 1985), was used as a control. Operational performance is
an important determinant of stock market performance and return on assets (ROA) was
controlled for. Year dummies were entered in order to control for temporal effects. Finally,
industry dummies were used to account for possible industry effects. Based on their SIC
codes, the 165 companies were separated in five categories representing the largest indus-
try groups: (1) Machinery & electronics; (2) Pharmaceuticals; (3) Banking; (4) Other
services; and (5) Other manufacturing.

Data Analysis

Structural equation model (SEM) analysis was applied to test the multi-dimensionality
of the proposed construct of TMT internationalization using the EQS software. SEM is
196 S. Nielsen

particularly suitable to test for the validity of latent (unobservable) constructs (Loehlin
2004). Panel data analytical technique was used for the hypothesis testing in order to uti-
lize the time series dimension of the data. A random effects model was chosen over a fixed
effects approach as the number of years of observations in this study is limited (Jensen
and Zajac 2004). The graphical analysis and the White tests indicated the presence of het-
eroscedasticity in the data. Autocorrelation or serial correlation (correlation of error terms
over time periods) is another common problem in time-series resulting from the fact that
factors omitted from the regression are correlated across periods. The Durbin-Watson as
well as the Box-Pierce Q tests indicated the presence of serial correlation in the dataset.
Consequently, generalized least squares (GLS) correcting for heteroscedasticity and first
order autoregression AR(1) was chosen for the analysis of the data (Stata 2003). This
approach corrects for the autocorrelation in the data by calculating a unit-specific factor,
which is then applied to transform each individual firm′s data. An autoregressive-hetero-
scedastic model for the pooled time-series cross-sectional data model was specified as
follows: Yit = b1Xit1 + b2Xit2 + … + bkXitk + eit where i equals 1,2,3 … N and corresponds to
the number of the cross-sectional units; t equals 1,2,3 … T is the number of time periods;
and K is the number of explanatory variables. The models with foreign market entry as
the dependent variable were analyzed with random effects poisson regression, which is
the appropriate analytical technique for count variables.

Results

Table 1 presents the means, standard deviations and the correlations between the observed
variables.
The confirmatory factor analysis provided support for the multi-dimensionality of the
top management team internationalization construct. The two diversity dimensions loaded
significantly on the TMT internationalization construct (β = 0.75 for nationality diver-
sity and β = 0.45 for international experience). The three items of FSTS (β = 0.90), FATA
(β = 0.72) and GSENTR (β = 0.75) loaded to a single factor that captures the internation-
alization of the firm in terms of operations abroad. The results supported the convergent
validity of the measurement model as all freely estimated parameters had significant and
high factor loadings. In support of discriminant validity of the latent constructs, the mul-
tivariate Lagrange-Multiplier (LM) modification tests suggested no cross-factor loadings.
To further support the discriminant validity of the hypothesized factors, two alternative
measurement models were assessed (Kline 2005).
The theoretical reasoning and the sequence of testing the measurement models was
as follows. First, according to current research by Caligiuri et al. (2004) a first-order
confirmatory factor analysis was conducted to test whether all items load to one construct
(measurement model 1). Subsequently, according to upper echelons theory (Hambrick
and Mason 1984), a distinction was made between upper echelons internationalization
and firm internationalization (international strategy measured as the degree of commit-
ment of resources and profits abroad) and a two-factor measurement model was tested
(measurement model 2). The third measurement model (the result of which were pre-
sented above) tested the multi-dimensionality of the TMT internationalization construct
Table 1:  Means, Standard Deviations and Correlations*
Mean SD 1 2 3 4 5 6 7 8 9 10
  1 TMT internationalization 0.27 0.21 1
  2 TMT size 6.07 2.64 0.34 1
  3  Firm size 7.45 1.77 0.41 0.41 1
  4  Product diversification 0.76 0.49 0.16 0.22 0.36 1
  5  Return on assets 2.60 8.99 0.03 0.13 0.14 −0.02 1
  6 Leverage 28.95 32.90 0.00 −0.02 0.07 0.10 −0.21 1
  7  Foreign market entry 0.89 3.40 0.26 0.25 0.39 0.20 0.07 0.01 1
  8  Firm internationalization 0.56 0.39 0.37 0.22 0.43 0.20 0.02 0.00 0.16 1
  9  Executive compensation 6.26 0.84 0.31 0.11 0.57 0.17 0.18 0.03 0.27 0.26 1
10  Firm performance 4.76 1.65 0.16 0.23 0.46 0.15 0.37 0.02 0.25 0.09 0.40 1
*
All correlations above 0.10 are significant at p < 0.05
Top Management Team Internationalization and Firm …
197
198 S. Nielsen

Table 2:  Fit Indices Comparison for Alternative Measurement Models

Nr. Model Df ‫א‬2 NFI NNFI CFI RMSEA
1 One factor DOI 56 245.783 0.844 0.859 0.875 0.085
2 Two factors (UE & INT) 55 109.875 0.930 0.958 0.964 0.046
3 Two factors (UE (NAT and EXP) 53 45.735 0.971 1.006 1.000 0.000
& INT)

by distinguishing between nationality and international experience diversity that were

considered separate dimensions (measurement model 3). This model recognized that firm
internationalization and upper echelon internationalization are two separate yet correlated
constructs. Table 2 reports the fit indices used to assess the fit of the measurement models
or the extent to which the proposed models adequately describe the sample data (Byrne
2006).
‫א‬2 statistics is one of the conventional methods for assessing model fit. However, the
sensitivity of ‫א‬2 statistics to sample size has been extensively criticized (Byrne 2006;
Kline 2005) and a number of alternative fit indices are proposed. Comparative fit indices
measure the proportional improvement of the model fit by comparing the hypothesized
model with a restricted, baseline model. The Normed Fit Index (NFI) (Bentler and Bonett
1980) ranges from zero to one and a value higher than 0.95 (or less conservative 0.90)
is considered as a good model fit. The CFI index (Bentler 1990) is a revised version of
the NFI index that takes into consideration sample size and has the same range of cut-off
values. The Non-Normed Fit Index (NNFI) is also a modification of the NFI index that
takes into account model complexity and can take values higher than one. The Root Mean
Square Error of Approximation (RMSEA) has recently been recognized as one of the
most informative criteria in structural equation modeling (Byrne 2006) as it is also sensi-
tive to model complexity. Values lower than 0.05 indicate a very good model fit whereas
values lower than 0.08 are acceptable and values between 0.08 and 0.10 are considered
indicators of a weak fit.
The one-factor model of firm DOI (measurement model 1) clearly did not fit the data
adequately. The distinction between two factors, upper echelons internationalization and
operational internationalization (measurement model 2) showed a significant improve-
ment in model fit (∆χ21df = −135.91, p < 0.001) with acceptable fit to the variance of the
data (RMSEA = 0.046 and CFI = 0.964). Measurement model 3, however, fitted the data
significantly better than measurement model 2 (∆χ22df = −64.14, p < 0.001) and had very
good fit statistics (RMSEA = 0.000 and CFI = 1.000).
As predicted in hypothesis 1 and shown in Table 3 (Model 1) the relationship between
TMT internationalization and foreign market entry was positive and significant (b = 1.47,
p < 0.01). In support of hypothesis 2, foreign market entry, in turn, was positively related
to corporate performance (b = 0.01, p < 0.05 in Table 3, Model 3). Not surprisingly, no
direct relationship was established between TMT internationalization and firm perform-
ance (Table 3, Model 2). The relationship between firm degree of internationalization
was found to be curvilinear. In support of the S-curve hypothesis (Lu and Beamish 2004),
the results suggest that the relationship between firm internationalization and perform-
ance is cubic. Specifically, the relationship was negative at low and high degrees of
Top Management Team Internationalization and Firm … 199

T��������
able 3:  TMT Internationalization, Foreign Market Entry and Firm Performance
Foreign market entry Firm performance
Model 1 Model 2 Model 3
TMT internationalization 1.47** −0.12 −0.16
TMT size 0.02 0.02 0.02
Executive compensation 0.00 0.10* 0.11**
Firm size 0.83 ***
0.47*** 0.45***
Firm internationalization 1.20 ***
−3.37*** −3.41***
Firm internationalization1
4.61*** 4.57***
Firm internationalization2
−1.93*** −1.88***
Product diversification −0.14 0.03 0.03
Return on assets 0.04* 0.02*** 0.02***
Leverage 0.00 0.00 0.00
Industry group 1 −0.16 −0.27** −0.42***
Industry group 3 −0.17 0.21 −0.18
Industry group 4 −0.19 −0.52*** −0.69***
Industry group 5 −1.78 −0.84*** −1.03***
Year 2002 1.11 ***
−0.39*** −0.40***
Year 2004 0.02 0.19*** 1.20***
Foreign market entry 0.01*
Constant −9.20*** 1.56*** 1.78***
Wald Chi2 239.29*** 1222.13*** 1215.32***
p < 0.001; **p < 0.01; *p < 0.05
***

internationalization and positive at medium levels of internationalization. The results

further suggest that prior degree of internationalization is positively associated with the
number of new foreign market entries.

Discussion

This study was stimulated by a recent trend in multinational corporations—the increas-

ing internationalization of their top management teams. A multi-dimensional measure
of top management team internationalization as a latent variable, capturing the upper
echelon′s ability to deal with the challenges of firm international operations, was applied.
The results suggest that the construct has strong validity and supported its relationships to
foreign market entry and ultimately to corporate performance.
This paper makes a contribution to the international business literature by emphasizing
the impact of managerial level knowledge and experience in the firm internationalization
process and its subsequent effects on corporate performance. As noted by Hennart, supe-
rior management is one of the major sources of super-normal profits for firms; yet, the
internationalization-performance literature has largely underplayed the role of managers
(2007, p. 447). Furthermore, the majority of firm internationalization literature focuses
200 S. Nielsen

on firm level experience and mostly ignores or finds no support for the effects of previous
international experience at the managerial level (e.g., Carlsson et al. 2005).
In contrast, this study shows that managers′ international backgrounds and experiences
are positively related to foreign market entry. The evidence suggests that in the European
context, top management team internationalization plays an important role in the firm
internationalization process. Diversity in both international experience and top manager
nationalities was found to be a reliable proxy for the international orientation of top man-
agement teams in Swiss multinational companies that leads to sound foreign market entry
decisions, which in turn have a positive impact on firm performance.
At the same time, the relationship between firm internationalization and corporate per-
formance is not as straightforward. As noted by Contractor (2007) firm internationaliza-
tion does not always improve performance and existing theories point at a non-linear
nature of the relationship. The empirical results of this study suggest that at high and
low levels of internationalization, the degree of firm internationalization is negatively
associated with firm performance, while at moderate levels of internationalization, it
results in higher performance. These findings lend support to the S-curve hypothesis (Lu
and Beamish 2004) which simultaneously accounts for the costs and benefits encoun-
tered in the process of firm internationalization. The present study illuminates the role
of TMT internationalization in this context. Specifically, the results suggests that com-
panies with low degrees of internationalization may benefit from internationalization at
the TMT level, as the increased international ability of the upper echelons may propel
the firm towards the threshold degree of internationalization, at which point the benefits
outweighs the costs. By the same token, companies operating at the optimum level of
internationalization, which have highly internationalized TMTs, may run the risk of over-
internationalizing (that is increasing their international involvement beyond the profitable
phase). This is consistent with the findings by Ruigrok et al. (2007) on a similar sample
of Swiss firms who found that over-internationalized companies report weaker perform-
ance. Together, these findings point to the importance of establishing where a firm is on
the internationalization curve before considering an increase in TMT internationalization.
At the same time, it should be noted that it is unlikely that TMTs will be internationalized
to extreme degrees as some embededness in the local home country cultural and business
environment persists.
Finally, this study addresses the gap in research on international experience of top
executives of European companies (Carpenter and Fredrickson 2001) and supports previ-
ous findings of the emerging research stream on nationality diversity of top management
teams (Caliguri et al. 2004; Heijltjes et al. 2003; Greve et al. 2010; Nielsen and Nielsen
2008; Nielsen and Nielsen 2011). Switzerland was chosen as the primary context for the
empirical investigation for a number of reasons. First, Switzerland is a preferred home
base for many multinational companies (MNCs) due to its political stability, central loca-
tion and tax advantages. Moreover, MNCs report that the second most important reason
for location decisions is the presence of qualified managers (Swissinfo 2004). Switzer-
land is among the most competitive executive labor markets in Europe, with one of the
highest percentages of foreign top executives and executives with extensive interna-
tional experience thus offering a suitable context for studying TMT internationalization.
In addition, as Switzerland is a small country, firms are more likely to expand abroad.
Top Management Team Internationalization and Firm … 201

Hence, Switzerland can be seen as a country which is at the forefront of both firm and
TMT internationalization (Greve and Ruigrok 2008). At the same time, the multicultural
nature of the Swiss society could jeopardize the generalizability of the results beyond the
Swiss context. However, since the majority of large Swiss firms are located in the Ger-
man-speaking part of the country and their native executives are predominantly Swiss
German, the risk of biasing the results seems minimal.
Like any other study, this work has several limitations. For instance, demographic
variables are used as proxies for underlying psychological processes and team dynamics,
which were not measured and accounted for in the theoretical model and the empirical
analysis. Finkelstein et al. (2008) suggest that the inconsistent findings emerging from
studies that test for a direct relationship between TMT diversity and performance may
be due to the omission of important organizational factors as well as process variables.
Future research needs to open the black box of organizational demography and provide
explanation for some intervening mechanisms through which TMT composition influ-
ences firm level performance (Lawrence 1997; Priem et al. 1999). This is particularly
important in the context of TMT internationalization, as the growing literature on multi-
national teams reveals that culturally diverse groups encounter significant process losses
before being able to realize the potential benefits of diversity.
While trying to address the issues of causality between executive and organizational
characteristics, the present study relies on very limited time series. Future research may
apply longitudinal designs using cross-lagged correlations, change scores (or first-differ-
ence scores), and simultaneous equation modeling to shed clearer light on the degree to
which executive characteristics give rise to organizational characteristics, as opposed to
the reverse (Finkesltein et al. 2008). Hambrick (2007) suggests the use of instrumental
variable that measures the likelihood (or expected value) of the independent variable and
including that likelihood score in the regression analysis.
Moreover, while this study links TMT internationalization and foreign market entry to
corporate performance, it was not possible to study the relationship to the performance
of foreign subsidiaries (operations). As corporate performance has a significant domes-
tic element, ideally TMT internationalization would be related to the foreign perform-
ance of the new market entries. Future research can possibly undertake such fine-grained
inquiries.
While the multi-dimensional construct proposed in this study improves our under-
standing of the role of TMT internationalization for firm international strategy and per-
formance, further refinements are needed. For instance, future research may explore the
possible interaction effects between the two dimensions of TMT nationality diversity and
TMT international experience. The two dimensions of the TMT internationalization con-
struct may be complementary in building the top management team′s ability to deal with
the complexity of firm foreign operations. Previous research on group diversity indicates
that cultural diversity has some negative effects on group dynamics (Earley and Mosa-
kowski 2000; Watson et al. 1993). Yet, these negative effects may be less pronounced
contingent upon the level of international experience of the team members. For instance,
the role that a foreign national plays in a TMT and the way his/her national characteristics
influence team processes and performance may largely depend on the experience that the
rest of the top executives have made with foreign cultures. The extent to which the other
202 S. Nielsen

top managers speak the language and are used to common beliefs and values of a foreign
team member′s culture may have an impact on team interactions (Hambrick et al. 1998).
In addition, future research may consider other possible sources of top managers′ inter-
national orientation as additional dimensions of the TMT internationalization construct,
such as different types of international experience (e.g. Takeuchi et al. 2005), interna-
tional education (Kobrin 1984), the languages that executives speak as well as interna-
tional network contacts (Athannassiou and Nigh 2002). Considering a bundle of relevant
executive attributes (Carpenter et al. 2004; Kor 2003) and their cumulative effects in the
team context may help advance the current understanding of what contributes to devel-
oping international capability at the upper echelons level of business organizations. A
recent multi-level study by Athanassiou and Roth (2006) showed that both individual
managerial international attributes and the MNC top-management-team′s international
attribute profile have joint effect on a manager′s centrality in providing international busi-
ness advice to the team. Similarly, an investigation of the combined effects of individual
manager′s international profiles and the top management team international orientation
may help advance our current understanding of the executive effects on firm internation-
alization and performance.

Acknowledgements:  Sabina Nielsen would like to acknowledge financial support from the
Marie Curie European Re-Integration Grant PERG-2008-239310.

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