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Strategic Management Journal

Strat. Mgmt. J., 20: 625–636 (1999)

MATCHING METHOD TO PARADIGM IN STRATEGY
RESEARCH: LIMITATIONS OF CROSS-SECTIONAL
ANALYSIS AND SOME METHODOLOGICAL
ALTERNATIVES
HARRY P. BOWEN1 and MARGARETHE F. WIERSEMA2
1
Department of Economics, University of California, Irvine, California, U.S.A.
2
Graduate School of Management, University of California, Irvine, California, U.S.A.

A central focus of empirical research in strategic management has been to understand the
relationships associated with the structure–strategy–performance paradigm. To examine these
relationships, investigators have relied extensively on cross-sectional methods that embody the
implicit assumption that model parameters are stable across firms and over time. Yet, many of
the theoretical constructs used in strategic management have clear firm- and time-specific
components. Hence, it might be expected that the parameters of the relationships investigated
empirically will vary across firms and over time. Whereas recent research has raised concerns
about the use of cross-sectional analysis when parameters vary over time, little attention has
been given to the issue of parameter variability across firms. Given the focus of strategy
researchers on firm-level effects and the predominant reliance on cross-sectional analysis,
accounting for across-firm variability is a significant methodological issue. Failure to account
for such variability can lead to biased parameter estimates and incorrect inferences. This paper
argues for the adoption of alternative methods that can overcome the limitations of a cross-
sectional analysis and it offers guidance on how researchers can proceed to use these alternative
methods to explicitly incorporate or test for variation in model parameters across firms or
over time. Copyright  1999 John Wiley & Sons, Ltd.

INTRODUCTION aspects. In particular, a central premise of most
strategy research is that of interfirm variation—
A central focus of empirical research in strategic that firms do differ in their response to environ-
management has been to understand the mental factors and in their determination of firm
structure–strategy–performance paradigm. In this strategy and performance results. Therefore, the
regard, researchers have investigated a variety of links between strategic choice and firm perform-
hypotheses concerning the link between a firm’s ance, or the firm’s strategic responses to changes
competitive environment, its strategy and its per- in its competitive environment, are all expected
formance, and similarly, how managers’ strategic to depend on firm-specific characteristics. Despite
choices influence firm performance. Most of the this emphasis on firm-specific effects, strategy
theoretical constructs that underlie these investi- researchers have used mostly cross-sectional
gations have clear firm-specific and time-related methods to empirically investigate the relation-
ships of interest. But such methods implicitly
assume that model parameters are stable
Key words: cross-sectional analysis; statistical (constant) across firms and over time. The use
methods; parameter variation of cross-sectional methods is therefore glaringly
*Correspondence to : Prof. M. Wiersema, 350 GSM, at odds with the firm-specific aspects of the theo-
Graduate School of Management, University of Califor- retical models employed in strategic management.
nia, Irvine, CA 92697-3125, U.S.A. Moreover, if cross-sectional methods are used to

CCC 0143–2095/99/070625–12 $17.50 Received 29 October 1997
Copyright  1999 John Wiley & Sons, Ltd. Final revision received 16 November 1998

2 For example. 1986. survey is available from the authors upon request. specification errors such as those implicitly equal concern is that almost 90 percent of the discussed in the paper involve a trade-off between bias and efficiency. cross-sectional parameters. of cross-sectional methods have received only Therefore. cautions. F. Copyright  1999 John Wiley & Sons. Bergh and Holbein (1997) note that the survey results validate the concerns of Bergh most researchers still fail to examine the stability (1995). and testing for heteroscedasticity. Efficiency therefore remains important for studies using multivariate techniques failed to test determining the ‘best’ estimator. 1986) while others have evaluated the application of period studied. Bowen and M. for only a single year could be indicative of data gation. cross-sectional data samples egy research. issues of measurement continue to be 3 identified as problematic (Chakravarthy. J. 1995. the ological issue in empirical strategy research. focus has mostly been the issue of time-varying Despite recent cautions. 1996). over 70 percent of the studies sur- reliance on a single year of data can result in a veyed used secondary data sources (e. But across- mation may fail to yield statistically valid infer. property for an estimator this is not necessarily true. Moreover. only two of the studies surveyed attempted to control for firm-specific effects and only six 1 While it is common to regard unbiasedness as a necessary attempted to control for time-specific variation. Under the mean square formal test of this assumption was made. data samples by using either time-series or pooled mine the true causal relationship. cross-sectional data methods. included time-related change in their empirical Among the 90 studies surveyed. Rumelt (1991) cautions researchers that a limitations.’ Despite such time-series. Venkatraman and of attributes including statistical method. This is 2 While this issue has recently received attention. Mgmt. Hill and Hansen (1991). most studies simply assumed para- squared error loss criterion there is always an estimator that dominates the (unbiased) least-squares estimator (original meter stability across firms or over time—no reference is James and Stein. method- ological concerns are not new in strategic management research. Ltd. Robins and Wiersema. logit. in strategic management research. are obtained may not be efficient. The simple fact is that Hill and Hansen (1991: 187) state that ‘cross. Strat.626 H. Lubatkin and Chatterjee (1991) MANOVA. in those cases where pooled data sets a large body of econometrics literature shows that by a were used. for the presence of heteroscedasticity. Not only can the estimation fail to identify strategy research since the hypothesized linkages the true model parameters but the estimates that between strategic choice and firm performance. P. ANOVA.or time-specific effects. regression-based models. Overall.’ Similarly. In yet another study. the seem. Bergh (1995: 1697) states in scored by a review of the methodologies used his review of empirical research on diversification by empirical studies published in the Strategic and performance that ‘researchers have not Management Journal between 1993 and 1996. failure to detect the true nature. in empirical strategy research. time Grant. use of single-year. and discriminant analysis were note that the reliance on cross-sectional data for predominate and 75% of the studies used only a a single year prevents strategy researchers from single year of data. issue of parameter instability over time. This the field (Ketchen and Shook. In fact.1 or the firm’s strategic response to changes in its Despite its obvious importance. few studies have attempted to exploit these larger sectional studies suffer from an inability to deter. 1995. can all be expected to parameter variation and the associated limitations depend on characteristics specific to each firm. the issue of competitive environment. controlling for parameter constancy across alternative statistical techniques to major research issues in firms and over time. 20: 625–636 (1999) . of the Compustat) which often provide firm-level data relationship investigated. and thus that inferences may be methods remain the predominate mode of analysis dependent on the sample year chosen for analy.3 Whereas a reliance on data accounting for any trend effects in their investi. This fact is under- sis.. and Lubatkin of their empirical relationships over time despite and Chatterjee (1991) regarding the widespread the increasing use of longitudinal studies in strat. the possibility of parameter variability limited attention in the empirical strategy litera. When the issue has been discussed.g. Godfrey and A detailed survey of the 90 SMJ studies tabulated a variety Hill. ation has gone almost unnoticed. Wiersema estimate models whose parameters do in fact vary ingly more important issue of across-firm vari- across firms (or over time) the resulting esti. factor. either as a structural component or as a techniques such as linear regression.. source of data. Of error loss criterion. over a number of years. For example. across firms would seem a significant method- ture. if any. 1961). Whereas concerns have been raised about the As to the issue of firm. firm variation appears particularly important for ences.

Such failings may of the form: reflect that. 20: 625–636 (1999) . Limitations of Cross-Sectional Analysis 627 troubling not only because heteroscedasticity Overview of methodological issues commonly arises in cross-sectional data but. cross-sectional how researchers can proceed to use these alterna. Copyright  1999 John Wiley & Sons. ␣it = ␣t and ␤it = ␤t ).g. Failure to performance and diversification): correct for heteroscedasticity when it exists leads to parameter estimates that are not efficient and Model 1 Yit = ␣it + ␤itXit + uit hence incorrect inferences regarding the statistical significance of a model’s independent variables.. the coefficients at time t are constant across firms agement literature. This assumption is The purpose of this paper is therefore twofold: needed since otherwise the number of coefficients first is to discuss and clarify the limitations of a to estimate would exceed the number of obser- cross-sectional analysis. (i.4 STRATEGY RESEARCH The continuing reliance of strategic management Using cross-sectional analysis in the presence research on cross-sectional techniques warrants of parameter variation a discussion of what a cross-sectional analysis The issues that arise when cross-sectional specifically investigates and what assumptions are methods are used to estimate a model whose embodied in this approach. But there is a second (implicit) assump- the importance of across-firm variation for strat. In this context. When these assumptions about cross-sectional analysis and it offers guidance on parameter constancy are valid. estimation of Model 2 can be thought to be tive methods to explicitly incorporate or test for uncovering a stable. This section addresses parameters vary across firms or over time can be this issue in the context of cross-sectional illustrated by assuming that the parameters ␣it regression methodologies and focuses on the assumptions these methods impose regarding 4 coefficient variation. See Pant and Starbuck (1990) for discussion of arise when these assumptions are violated. empirical mally distributed with mean zero and constant research in strategic management has often failed variance. as discussed below. and the statistical issues that The issue of parameter stability also has implications for forecasting.. Using data framework and it has generally failed to deal for a single year. a discussion of the Model 2 Yit = ␣t + ␤tXit + uit assumptions and limitations of cross-sectional In comparison to Model 1. Strat.e. long-run relationship between variation in model parameters across firms or Y and X. a cross-sectional analysis would with the important issue of parameter variation estimate relationship in Model 1 using a model across firms or over time. This latter assumption is made when infer- methods is then inappropriate. the ences based on the results from estimating Model paper argues for the adoption of alternative 2 are thought to apply to years different from methods that can overcome the limitations of a the sample year. despite the continued reliance on cross-sectional methods. As written. ␣t = ␣ and ␤t = and why the continued reliance on cross-sectional ␤).. do vary across firms or over time. J.e. some of the pitfalls associated with forecasting techniques in management research. But when these assumptions are not over time. Ltd. where the disturbance uit is assumed to be nor- As the survey results indicate. second is to emphasize vations. the coefficients in Model 1 to give appropriate attention to some common have both firm (i) and time (t) subscripts and statistical issues that can arise in a cross-sectional thus vary across firms and over time. heteroscedasticity can be Consider the following simple yet general rep- expected to arise when cross-sectional methods resentation of a relationship hypothesized to exist are used to estimate a model whose parameters between two firm-level variables Y and X (e. Model 2 assumes that methods has been absent from the strategic man.. tion associated with Model 2: the coefficients are egy research—why it can be expected to arise also constant over time (i. Mgmt. valid Model 2 is incorrectly specified and esti- mation using cross-sectional data can fail to iden- tify the true model parameters and lead to incor- REGRESSION ANALYSIS IN rect inferences regarding parameter significance.

and hence W and strategy literature argues.. 6 Bergh (1995) states that strategy researchers ‘have not tested how yearly shifts and changes between diversification and longitudinal relationship between diversification and perform- performance are related. vit = 0 and ␩it = 0 in Models 3 and 4. In summary. as depends fundamentally on its ability to have a noted. For example. Whereas the issues arising firms. this requires the researcher to recognize that a sectional estimation of the relationship between coefficient varies either across firms or over time Y and X will yield an estimate of a0 and some and to then specify the variable(s) determining ‘average’ estimate for ␥it (equivalently ␤it ). a firm’s performance Z. it is evident from Model 5 that cross. not only can systematic year-to-year variations dramatically change the results Model 3 ␣it = a0 + a1Wit + vit depending on the time period studied but. Ltd. heteroscedasticity would not arise if the relationships for ␣it and ␤it where deterministic. the disturbance where ␥it = (b0 + b1Zit ) and ⑀it = ␩itXit + a1Wit + variance is again heteroscedastic. since Xit and Wit vary across heteroscedasticity). But the latter is in fact highly likely being investigated6 and it also underscores for the models commonly investigated in strategic management. this relationship is assumed to be the same across In this case the problem is identical to the case of an omitted firms. and b1 are assumed Examination of Model 5 suggests possible so- constant over time and across firms and the dis- lutions to the preceding problems. including Wit and Zit (the latter enters Model 6 This formulation assumes that Wit and Zit are not as an interaction variable) would permit estimates observed. in the context of the diversification–performance relationship.628 H. turbances vit and ␩it are each assumed to be suppose both Zit and Wit are observed. Estimates normally distributed with mean zero and constant of the true model parameters can then be obtained variance.e. J. relying on data for only a single Model 4 ␤it = b0 + b1Zit + ␩it year limits one’s ability to uncover the true relationship. Mgmt. b0. the possibility that model for time-varying effects limits the scope for parameters vary across firms has received scant understanding the true nature of the relationship attention. and b1 cannot researcher is unlikely to be able to articulate the be identified. Although uit + vit is the disturbance term of the model. as shown above. The parameters a0. For example. Copyright  1999 John Wiley & Sons. but such variation. as the explanatory variable. But this assumption is untenable if. Substituting Model 3 and Model 4 into by estimating the following model in cross-sec- Model 1 gives: tion: Model 5 Yit = (a0 + a1Wit ) + (b0 + b1Zit )Xit Model 6 Yit = a0 + a1Wit + b0Xit + b1(ZitXit ) + vit + ␩itXit + uit + ⑀it = a0 + ␥itXit + ⑀it Since ⑀it = ␩itXit + vit + uit. a1.5 This discussion therefore makes explicit from possible time-varying effects have been Bergh’s (1995) concern that a failure to account noted in the literature. F.’ and as a result. Strat. assum- 5 If the relationships for ␣it and ␤it where deterministic. complete list of variables involved. Bowen and M. However. P. ences about a theoretical relationship is highly ing to the following relationships: problematic. not only would a cross-sectional The above analysis indicates that when model analysis fail to provide estimates of the true parameters vary across firms or over time a cross- model parameters but inferences regarding the sectional analysis will fail to identify the true significance of the explanatory variables would model parameters and will lead to parameter esti- also be biased because the disturbance variance mates that are not efficient (due to is heteroscedastic. of ⑀it. i. Ignoring for the moment the properties of the true model parameters to be obtained. b0. vary only over time or only across firms. Wiersema and ␤it each depend on some variable that varies Rumelt’s (1991) concern that a reliance on a across firms and over time. they ‘have left the ance largely untested’. let the single year of data for testing and making infer- values of these parameters be determined accord. then heteroscedasticity ing parameter constancy across firms means that would still arise due to the presence of Wit in the disturbance. The latter is problematic since the the true model parameters a1. We also remark that heteroscedasticity would remain an issue even if ␣ and ␤. 20: 625–636 (1999) . Specifically.

the firm will choose to exit eroscedasticity. Detection of the true para. that firms respond to weak performance or stra- sectional regression analysis to account for coef. 1993. or decrease its investment in those businesses ies in the empirical strategy literature even test where it cannot maintain its competitive position. 8 For a detailed discussion on pooling time-series. non-imitable. Mgmt. related to the level of international competition strategy researchers need to adopt alternative in the industries in which the firm competes. the data and form of the model used here are for all firms. What is This will result in a greater strategic focus and needed is greater recognition on the part of reduced diversification. Ravenscraft and Scherer. ological issues that arise from a cross-sectional empirical tiveness may not actually exist and furthermore the presence investigation. Peteraf. attractive to the firm. petition. develop or test a theory about international competition. 1991. As such. differ This section offers an illustration of this method- across firms. (Hopkins.7 In terms of Model 2. this distinc. cross- outcomes across firms. Hence. Researchers have posited In summary. that is. In reality. few of the recent stud. This methodologies that can alleviate the potential hypothesis is investigated in the context of the biases introduced if model coefficients vary across following model of firm diversification:9 firms and over time. can be expected to have parameters the addition of a new set of players in the that are firm specific. non-transferable. POOLED DATA ANALYSIS specific resources (Barney. ological course of action in a specific research Extrapolating from the above argument. 1987). Wernerfelt. tainable in light of significant foreign-based com- ation across firms or over time engenders het. cross- sectional data see. Ltd. 1991.8 these remarks imply that ␤.. for example. In addition. cross. Strat. the limited ability of a cross. identical diversification strategies would parameters vary across firms or over time can be not be expected to result in identical performance addressed by the use of pooled time-series. of the relationships commonly examined in strat. 20: 625–636 (1999) . It to each firm or a pooled time-series. such as those relating strategic age between firm diversification strategy and choices to organizational outcomes or a firm’s international competition as measured by industry strategic response to changes in its competitive import penetration. Foreign competitors represent environment. firm. The firm’s competitive position across its recent empirical research indicates few attempts portfolio of businesses is unlikely to be sus- to use this method. tence of certain general associations between concepts across Rather. The analysis of the linkage 7 Resource-based theorists make implicit that every firm is between a firm’s diversification strategy and international unique due to its combination of distinctive competencies competition allows us to focus on the significant method- acquired and developed over time. Copyright  1999 John Wiley & Sons. parameter vari. illustrative purposes. The theoretical model investigated is the link- egy research. tation of this methodology in the context of stra. However. as Barney (1986) Many of the problems that can arise when model notes. we expect the researchers that these statistical issues exist and level of firm diversification will be negatively can lead to severe biases. J. 1984). the model used here was chosen for convenience in order to provide an example of the use of LSDV. As a result. for the presence of heteroscedasticity. Greene (1993). While interaction in the industries in which a firm competes will variables could be used to allow for firm-specific result in a defensive response on the part of the variation in model parameters. many context. the survey of firm. 1980). 9 While not inconsistent with the existing literature. tegic position by moving out of current businesses ficient variation across firms is an important limi. our intent in this paper is not to fully of these firm-specific differences may not invalidate the exis. and possibly ␣. More appropriately. is hypothesized that increasing import penetration sectional analysis that allows for firm-specific makes an industry more competitive and less differences in model parameters. sustainable competitive advantage MODELING PARAMETER which derives from the possession and utilization VARIATION: AN ILLUSTRATION OF of unique. industry resulting in a heightened level of compe- meters that characterize such relationships then tition which left unheeded will result in a deterio- requires either a time-series analysis with respect ration of competitive position (Porter. sectional data and associated statistical methods. Limitations of Cross-Sectional Analysis 629 distinctive. We therefore expect that international competition tegic management research.

Importantly. Mgmt. F. Industry Capital–Labor Intensity = ⌺isiCLi in each year. and correlations for treatment of the hypotheses being investigated all variables. where. the estimate for Industry Advertising we investigated an alternative change model. for each 4-digit SIC industry ‘i’. Table 1 presents trate the use of pooled data techniques. and 1983. which is calculated as of coefficient stability over time (a formal test is conducted below). comparison over time and Berry’s (1979) entropy measure of diversifi- provides an informal analysis of the hypothesis cation. one might conjecture that the strategic degrees of freedom. it should be each of three years 1977. Data and variables 1983) estimates as well as the fully pooled esti- mates. 20: 625–636 (1999) . all of which have single-business firms and data limitations been shown in the literature to be linked to firm resulted in a consistent sample of 133 firms in diversification. CLi is the ratio of real capital stock to total +␤it1 (Industry Import Penetration) industry employment. firm in 1980 as listed by Fortune. 1980. and ADVi is the ratio of +␤it2 (Industry Capital–Labor Intensity) advertising expense to revenues. pool- ing yields higher t-statistics due to increased 10 In particular. the overall equation is significant and the model explains between 37 and 40 per- Industry Advertising Intensity = ⌺isiADVi cent (adjusted R2 ) of the variance in diversifi- cation across firms. P. Ltd. A fuller means. Firm market share is measured as the relative +␤it3 (Industry Advertising Intensity) market share of the firm’s businesses in each of +␤it4 (Firm Market Share) its industries. But despite the increase in response to increased import penetration would involve lagged or other dynamic effects. In response to reviewer comments. These emphasized that the above model and the analysis were the only years available in the TRINET to be presented below are only intended to illus- and FTC LOB data bases. the range of expected variation as measured by The industry control variables are calculated the coefficient’s standard deviation) while the using measures weighted by si to reflect a firm’s estimates for Firm Market Share and Firm Size relative sales in the different industries rep- rise over time. J. Since the cross-sectional estimates relate Firm diversification is measured with Jacquemin to specific sample years. A sample of 200 firms was randomly selected This model includes controls for industry capital– from the 1000 largest U.630 H. Wiersema Model 7 Firm Diversification = ␣it the ratio of imports to total domestic purchases. the coefficient on import penetration obtained in these alternative models remained negative and appear to imply similar inferences about the statistically significant. as expected. the coefficients Firm Diversification = ⌺siln(1/si ) appear stable in that there are no reversals in sign. manufacturing firms labor intensity. Finally. precision. standard deviations. The dropping of market share. and the appropriate form of the underlying model are the subject of ongoing research by the authors. Strat. and firm size.10 Cross-sectional and fully pooled estimates Table 2 shows both single-year (1977. relationship between diversification strategy and Copyright  1999 John Wiley & Sons. The estimate for Industry Import Penetration where si is the share of a firm’s total sales in a rises and then falls (but each estimate lies within given 4-digit SIC industry i. Bowen and M. obtained were essentially unchanged from those presented The cross-sectional and fully pooled estimates here. 1980. In this regard. industry advertising intensity. The results Intensity remains statistically insignificant. Before proceeding.. Firm size is measured as the natural logarithm of a firm’s total sales as reported by +␤it5 (Firm Size)it + ⑀it COMPUSTAT. The estimate for Industry Advertis- resented in its business portfolio as follows: ing Intensity in 1977 is statistically significant only at the 12 percent level and becomes increas- Industry Import Penetration = ⌺isiIPi ingly insignificant in later sample years. IPi is The results for the fully pooled model (last column of Table 2) show that.S.

Copyright  1999 John Wiley & Sons. the null hypothesis approaches simply impose the restriction of para.05. 1980. Hence.69*** 0.01 0.0 Penetration 3. Limitations of Cross-Sectional Analysis 631 Table 1.0 n = 399.02 0..09* 0. *p⬍0.0 0.001 international competition.11 However. Hence. method adopted here is Least Squares Dummy larity between the simple average and fully pooled estimate for each coefficient reflects the relative constancy of the 12 sample variances for each variable over time (see Table 1). ***p⬍0.07 0.78*** n = 133 for years 1977.16** 1.07 −0.46*** 0.09 0. Before turning to this homoscedastic disturbances. Descriptive statistics and correlation matrix: Pooled sample Mean S.65*** 0.05. Firm Market 0. sequent analysis maintains the assumption of tions are statistically valid. To test the assumption of parameter constancy sectional estimates for a coefficient is close to the estimate across firms or over time it is first necessary to derived from the fully pooled model.23 0.06 Intensity Firm Market Share −0.02 −0. Firm Size 6. Note: Standardized beta-weights reported.0 Adjusted R2 0.10 0. 1 2 3 4 5 6 1.20** −0.59 0.37 0.68*** Constant 0.0 Capital–Labor Intensity 4.40 F-statistic 16. n = 399 for pooled sample. 1983. Ltd.10. Industry Import 0.12 In each year. See Greene (1993: 392). 20: 625–636 (1999) . Firm 1.11 −0.14** 1.00 −0.01 −0. Mgmt.02 1.39*** Firm Size 0. sub- proper analysis should first test if these restric. *p⬍0.0 0.34*** −0.44*** −0. The ‘average’ estimates reflects mostly differences in the variance of the associated variable between sample years.D. simi.76 1. we note that tests for heteroscedasticity were conducted using the cross-sectional results.41*** −0. **p⬍0. J.38 0. Strat.08 −0.11 −0.37*** 53. ***p⬍0.21*** Industry Capital–Labor −0. **p⬍ 0. both these eralized test. Any difference in these adopt a method for modeling such variation.16* −0.10 1.21*** 1.43*** 1.71*** 0.40 0.0 Advertising Intensity 5.10.10 0.56*** 17. and 1983. A reasonable level of significance.32 45. Industry 0.21** −0.21** −0. and pooled sample (all model coefficients restricted to be constant over time and across firms) 1977 1980 1983 Pooled Industry Import Penetration −0.01 0.19*** Intensity Industry Advertising −0.0 Diversification 2.20*** −0.02 −0. Testing for parameter constancy across firms the specific procedure used was White’s gen- and over time 11 Note that a simple average (over time) of the cross. of homoscedasticity could not be rejected at any meter constancy across firms and over time. Industry 41.22*** 0.0 Share 6.0 0. issue. 1980.15* −0.001 Table 2.21** −0.12* 0.78*** 18. Regression results for firm diversification model for 1977.

we first assume that any zero otherwise. For example. the exact variables that + 冘 t ␤t2(Dt × Industry Capital– may determine such variation need not be speci.18 Comparing these results to the cross- 14 LSDV is easily implemented using statistical packages such sectional estimates (Table 2) indicates that the as SPSS.17 13 Table 3A shows the results of estimating Chapter 14 of Greene (1993) contains a comprehensive discussion of LSDV and associated procedures for testing Model 8 using the pooled sample of 399 obser- coefficient homogeneity. J. SYSTAT includes a CATEGORY command for use with its regression pro. significant firm specific intercepts as random variables rather than ‘fixed variation was evident. For example. + ␤t1 (Dt × Industry Import Penetration) t ables capture model and coefficient variation across firms or over time regardless of the under- lying source of the variation. 16 Formally. This model nests the freedom owing to the potentially large number of parameters hypotheses of time and firm variation in one complete model to be estimated. This speci- work. Labor Intensity) fied. it is then possible to test whether the to model coefficient variation. a 17 more direct analysis of the current hypothesis would forgo For each explanatory variable we constructed three new the analysis of time variation in the slope coefficients and variables—the value taken by each is the value of the explana- instead just assume that the model’s intercept varies over tory variable corresponding to each year. testing if ␣it = ␣it =%= ␣Nt = ␣t in Model 7). + ␤t4 (Dt × Firm Market Share) t lying source of coefficient variation. P. Mgmt. Similarly. F..632 H. An alternative method that reduces this rather than proceeding sequentially. vations. the firm-specific dummy variables coefficients in a model can be allowed to vary (Di ) take the value 1 when the observation is for both across firms and over time.15 While LSDV permits one to model coefficient 冘 + t ␤t5(Dt × Firm Size) + ␮it variation.13 In this frame. the firm i and zero otherwise.. SYSTAT. or SAS. as done here. the coefficient linking effects’ so that these terms become part of the disturbance import penetration to firm diversification varies significantly term. that is. In fact. variation in the overall model over ferences in the overall model. testing whether variation in a parameter fication leads to the following form of Model 7: (or set of parameters) is statistically valid is made using the common joint F-test for parameter Model 8 Firm Diversification homogeneity (e. effects model. Ltd. bias is mitigated in Model 8 since the combined duced by not controlling for coefficient variation across firms. 20: 625–636 (1999) . we also conducted components model. Instead. See Greene (1993) for more discussion of the random across firms. In particular.g. the time dimension across which the hypothesis of para- specific dummy variables (Dt ) take the value 1 meter constancy is investigated is somewhat prob- when the observation is for time period t and lematic. This model interprets firm. 18 time and across firms and that the coefficient on Industry Although flexible. + 冘 t ␤t3 (Dt × Industry Advertising Intensity) 冘 sible heteroscedasticity but it fails to provide information about the variables that are the under.and time- the above ‘direct’ analysis. variation across firms is entirely reflected by dif- respectively. As such. which uses ‘dummy’ variables Given this.16 in the slope coefficients is indicated by their t subscript. Strat. latter generally show greater variability over time. unlike using interaction terms. The ␣t and ␣i therefore capture. by differ- time and across firms while variation over time ences across firms in the model’s intercept. = 冘 ␣tDt + t 冘 i ␣iDi 冘 Modeling coefficient variation using the LSDV method is very general in that the dummy vari. the problem remains that not all the In Model 8. As found here. cedures that automatically creates dummy variables based on This suggests that the cross-sectional estimates different values of category variables. This generality alleviates problems associated with omitted variables bias and pos. the dummy variables capture the combined influence of all such variables. LSDV uses up considerable degrees of Import Penetration varies across firms. For illustration. Bowen and M. may be subject to an omitted variables bias. the hypotheses to be investigated will help guide the choice of assumed parameter variation.14 Hence. Wiersema Variables (LSDV). Such 15 It may be argued that the identification of the underlying variables is less important than mitigating the biases intro. to examine degrees of freedom penalty is the random effects or error first time and then firm variation. slope coefficients vary over time. Copyright  1999 John Wiley & Sons.

10 umn 1. Mgmt.26*** The statistical tests in Table 3B indicate that only 1980 −0.05.24*** that for the Industry Capital–Labor ratio are 1983 −0. the hypothesis that the relationship between Firm Diversification and Industry Import Penetration is firm specific is influence of omitted variables that vary across modeled by replacing the time-specific dummy firms is captured by the firm-specific intercepts variables for Industry Import Penetration in (␣i ) and hence removed from the regression dis.19 The F-statistic Model 9 Firm Diversification = ␣ + 冘 i ␣iDi values shown in the first column are for testing the null hypothesis that the indicated coefficients are jointly constant either over time or across + 冘i Di␤t (Industry Import Penetration) firms. n = 399. in SYSTAT. **p⬍0.16*** 1980 −0.91 on characteristics specific to that firm. Copyright  1999 John Wiley & Sons. From the results in column 1983 −0.52*** Testing for parameter variation across firms in one explanatory variable Industry Advertising Intensity 1977 −0.. Strat. model to estimate then takes the form: The statistical importance of allowing variation in the overall model and in the individual coef- ficients is evaluated in Table 3B. For example..52** a firm’s Diversification strategy in response to 1983 0.15*** 2.10. The turbance. 20: 625–636 (1999) .20 Imposing Firm Market Share these restrictions (i.26*** the coefficient on Industry Capital–Labor ratio 1983 −0.22*** stable over time).54*** ficient does vary across firms it would imply that 1980 0.e. Industry Import Penetration. the with respect to Model 8 by exploiting possible nonzero con- EFFECT command is used for this purpose. *p⬍0. the null hypothesis that each set of coefficients is jointly equal to zero can be rejected in all Industry Capital–Labor Intensity cases except for the time-specific intercepts. Regression results for unrestricted firm coefficients are jointly equal to zero. Rejecting diversification model using pooled data sample the latter hypothesis means that the variables (coefficients allowed to vary over time or across firms) associated with these coefficients are jointly sig- Intercepts nificant for explaining a portion of the variance Overall 0. temporaneous covariances. Ltd. the null hypothesis of coefficients stability 1983 0. Model 8 with firm-specific dummy variables. The F-values in the second column are for testing the null hypothesis that the indicated 20 If additional time-series observations were available it 19 All statistical packages include the option to test the equality would be possible to increase the efficiency of estimation of different coefficients. From the results in col- 1980 0. Similarly.001 Using the LSDV approach.25*** 1980 −0. that all coefficients except 1977 −0. we can then explore if the coefficient on Import Penetration varies across Firm Size firms.52*** 1980 −0. we cannot Industry Import Penetration reject the hypothesis that the overall model is 1977 −0. 1977 −0.17*** stable across firms. Limitations of Cross-Sectional Analysis 633 Table 3A. This find- F-statistic 27. This is an important issue.53*** 1983 −0. If this coef- 1977 0.0*** in Firm Diversification. ***p⬍0.22*** can be taken to be invariant over time whereas the overall model varies across firms.14 over time can only be rejected for Industry Capital–Labor Intensity. J.50** changes in Industry Import Penetration depends Adjusted R2 0.92*** ing would then preclude making generalizations about how ‘firms’ would respond to increased Note: Standardized beta-weights reported.

06.32** 10. **p⬍0. n = 399. Diversifi- * p⬍0.79*** representative of those commonly used in stra- Firm Market Share −0. J. *p⬍ 0.23** specific to each firm we can nonetheless summarize the average effect across firms.93 firms) of the coefficient for Industry Import Penetration was F-statistic 19.81*** Firm Size 0.15 1..26 5. the average for all estimated coefficients was −0. mates were negative.89*** Firm Market Share 0. P. F. Tests of parameter constancy and joint significance: Unrestricted firm diversification model using pooled data sample Parameter constancy Joint significance Value of F-statistic Value of F-statistic Constancy over time Explanatory variables (␤t = ␤ for all t) Industry Import Penetration 0.76*** n = 399.35*** Industry Advertising Intensity 0. 20: 625–636 (1999) . Strat. approximately 83 percent of the significant esti- Note: Standardized beta-weights reported. Again. Hence.001 + 冘 t Dt␤t2 (Industry Capital– 9 using the pooled sample of 399 observations. Comparing these results to those in Table 3A. The null hypothesis that the Table 4A. **p⬍0.05. we note that allowing the coefficient on Industry Labor Intensity) Import Penetration to vary across firms leads to an increase in the relative importance of Industry + ␤t3 (Industry Advertising Intensity) Advertising Intensity and in Firm Market Share + ␤t4 (Firm Market Share) and a reduction in the importance of Firm Size. we can reject the hypothesis that Table 4A lists the results of estimating Model the coefficient on Industry Capital–Labor ratio is constant over time.10. ***p⬍0.001 cation is negatively related to Industry Import Penetration. for the ‘average’ firm. Bowen and M.634 H. the findings of this analysis indi- Industry Capital–Labor Intensity 1977 −0. Ltd.31 2. To the extent the model and data presented here are Industry Advertising Intensity −0. Wiersema Table 3B.0* jointly equal to zero can be rejected in all cases.82*** 17. Mgmt. for those estimates significant at the 10 percent level. Copyright  1999 John Wiley & Sons. ***p⬍0.07 Constancy across firms Firm-specific intercepts (␣i = ␣ for all i) 17.02 17.21 From the results in column 2.45*** in the relationship linking firm diversification 1983 −0.55* Time-specific intercepts (␣t = ␣ for all t) 0.46*** cate statistically significant variation across firms 1980 −0.66*** Industry Capital–Labor Intensity 3.05. Regression results for unrestricted firm coefficient for Industry Import Penetration is con- diversification model using pooled data sample stant across firms can be rejected. the hypothesis that each set of coefficients is Intercept 0.12.10. In this regard.35*** 21 While the coefficients for Industry Import Penetration are Firm Size 0. Table 4B lists the F-statistic values for testing + ␤t5 (Firm Size) + uit parameter constancy either across firms or over time. In summary.14 6. the average value (across Adjusted R2 0.6*** −0.44*** strategy and international competition. as can the null (coefficient on import penetration allowed to vary hypothesis that the overall model is independent of across firms) firm-specific effects. In addition.

Ltd. J. **p⬍0. predominant form of analysis used to examine Given the potential for biased inferences when this paradigm is based on cross-sectional methods cross-sectional methods are used to study the that assume model parameters are constant across relationships commonly investigated in strategy firms and over time. the that is the focus of much empirical research in hypothesized linkages between firm strategies and strategic management has both firm-specific and firm outcomes. this paper examined across firms or over time through formal sta. one should offered by these studies. Mgmt. The Import Penetration. failed to adequately in Industry Import Penetration. 1991) that most empirical research in mean that no general statement is possible about strategic management has. Instead..55*** Firm-Specific Intercepts (␣i = ␣ for all i) 3.91*** 6. This key finding is that the overall regression and the analysis reinforced the concerns recently coefficient for Industry Import Penetration differ expressed in the literature (Bergh. or competitive environment and time-related characteristics. depend importantly on charac- a focused survey of recent strategy research. hold in a more detailed analysis then it would Rumelt. Further research address the possibility that the relationships inves- would then be needed to uncover the character. important concern is a failure to account for cation strategy in response to changes in Industry variation in model parameters across firms. If this finding were to Hansen. cross-sectional heteroscedasticity. the results suggest also indicated that few studies have adequately caution is warranted in accepting the findings of addressed the issues of coefficient variation and studies based on a single-year. Tests of parameter constancy and joint significance: Unrestricted firm diversification model using pooled data sample Parameter constancy Joint significance Value of F-statistic Value of F-statistic Constancy over time Explanatory Variables (␤t = ␤ for all t) Industry Capital–Labor Intensity 4. Yet. but.001 tegic management research. Hill and significantly across firms. by its reliance on the Diversification response of ‘a firm’ to changes cross-sectional methods. the paper then argued that many of the methods commonly used in strategy research are limitations of a cross-sectional analysis can be glaringly at odds with the theoretical paradigm overcome by adopting analytical methods that use that is the focus of this research. 1991. the teristics specific to each firm. Instead.05. Limitations of Cross-Sectional Analysis 635 Table 4B. Lubatkin and Chatterjee. 1991. the analytical and statistical issues that arise in a tistical procedures as demonstrated here.10. importance of this issue is not only the potential for biased inferences when cross-sectional methods are used. Hence. Strat.42** 1. The survey pooled time-series and cross-sectional data. tigated might vary systematically over time. cross-sectional regression framework when model For the Diversification model studied here. then no statement about the general applicability of these relation- The structure–strategy–performance paradigm ships across firms is possible. These inadequacies raise seri- analysis regarding the response of firms to their ous questions about the validity of the inferences competitive environment. a parameters vary across firms or over time.02*** n = 399. *p⬍0. ***p⬍0. as illustrated by strategic choices. But istics responsible for the apparent differences the paper also argued that an equally if not more across firms regarding the choice of Diversifi. if these relationships do CONCLUSION have firm-specific components. 20: 625–636 (1999) . the empirical research. The Copyright  1999 John Wiley & Sons.09*** Constancy across firms Coefficient for Industry Import Penetration 1. 1995.01*** 3. attempt to assess the possibility of variation either In response to these issues.

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