Foreign board members and firm innovativeness: an exploratory analysis for setting a research agenda

• DOI: https://doi.org/10.1108/CG-12-2017-0301
• Date: 03 December 2018
• Pages: 1057-1073
• Published date: 03 December 2018
• Author: Teemu Makkonen,Allan M. Williams,Antoine Habersetzer
• Subject Matter: Strategy,Corporate governance

Foreign board members and firm

innovativeness: an exploratory analysis for

setting a research agenda

Teemu Makkonen, Allan M. Williams and Antoine Habersetzer

Abstract

Purpose –This paper aims to assess the oftenrepeated, but empirically unconfirmed, suppositionthat

there is a positiveconnection between foreign board members(FBMs) and firm innovativeness and to set

a researchagenda for future studies on the topic.

Design/methodology/approach –The analyses are based on a large sample of firms within the

European Union,utilizing patent and trademark data together with informationon the national diversity of

the boards.

Findings –The analyses confirm that there is a positive association between FBMs and firm

innovativeness. Contrary to expectations, FBMs from less innovative countries than the countries of

their host companies are more associated with innovative firms than are FBMs from more innovative

countries.

Research limitations/implications –This study provides empirical support for propositions, drawn

from resource dependency theory and group effectiveness/diversity theories, that diverse boards of

directors can lead to greaterfirm-level creativity and innovativeness.It also outlines a detailed research

agendafor future studies to build on the tentativefindings presented in this paper.

Practical implications –The findingssuggest that greater national diversityin the board of directors can

enhanceinnovation.

Originality/value –Earlier studies on boarddiversity have not analyzed empirically the issue of national

diversity. The originality of this paper lies in itsattempt to address this gap in the corporate governance

literature.

Keywords Innovation, Diversity, Corporate governance, Boardsof directors, European Union,

Foreign board members

Paper type Research paper

Introduction

Research on corporate governance has recently begun to investigate the links between

board diversity, particularly in terms of gender diversity and innovation (Torchia et al.,

2011;Galia and Zenou, 2012;Adams et al., 2015). While most accounts hypothesize

that national diversity (e.g. foreign workers) provide different perspectives that

contribute to greater variety of ideas and enhanced innovation in the firm, these notions

have mostly remained entirely theoretical (Solheim and Fitjar, 2016).Thisappliesalsoin

the case of board diversity and innovation: there is no systematic empirical evidence

corroborating the supposition of a positive relationship between foreign board

members (FBMs) and firm innovativeness[1]. Therefore, the originality of this paper lies

in its attempt to address this gap between the theoretical debates and the lack of

empirical accounts within the corporate governance literature. Specifically, the

following two research questions are addressed:

Teemu Makkonen is based

at the Institute for

Advanced Social

Research, University of

Tampere, Tampere,

Finland, and Department of

Business and Economics,

University of Southern

Denmark, Odense,

Denmark. Allan M. Williams

is Professor at the School of

Hospitality and Tourism

Management, University of

Surrey, Guildford, UK.

Antoine Habersetzer is

Researcher at Universitat

Bern Geographisches

Institut, Bern, Switzerland.

Received 4 May 2017

Revised 31 July 2017

17 December 2017

15 March 2018

Accepted 26 March 2018

DOI 10.1108/CG-12-2017-0301 VOL. 18 NO. 6 2018, pp. 1057-1073, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 1057

RQ1. Are firms with FBMs more innovative?

RQ2. Are firms with FBMs frommore innovative countries more innovative thanthose with

FBMs from less innovativecountries?

To address these questions, the relationship between FBMs and the innovation activities of

some 1,545,000 currently active firms in the European Union (EU) are explored using the

Orbis database (Bureau van Dijk, 2016).

Literature review and hypotheses

A definite trend toward boards becoming more multinational has been observed, indicating

that having FBMs and foreigners in other top management positions has become

increasingly commonplace (Staples, 2007;Nielsen and Nielsen, 2010). Accordingly, in the

1980s, Hambrick and Mason (1984) had already argued that firm-level innovations are

strongly associated with the views, backgrounds and experiences of top management

teams, i.e. the “upper echelons”. In the contemporary globalized world, FBMs may play an

important role in the innovativenessof their host companies. While no direct evidence exists

on the link between FBMs and firm-level innovativeness, some studies have investigatedthe

potential impacts that FBMs could have on firm-level performance and corporate

governance (Oxelheim and Randøy, 2005;Choi et al.,2012). This literature has commonly

agreed that board diversity has a positive impact on firm reputation and performance,

supporting the positive aspectsof “national diversity” in board rooms.

With the positive relationship between firm performance and FBMsin mind, the question arises

to what extent FBMs might be associated with firm innovativeness. Innovation is commonly

understood as a social process which heavily relies on the recombinati on of existing

knowledge to form new knowledge (Kogut and Zander, 2007). Consequently, a diverse board

with board members (BMs) with different backgrounds supposedly grants more opportunities

for novel knowledge combinations, and thus innovations. When framing the discussion on

board diversity and firm-level innovativeness, two commonly identified reference points are:

1. resource dependency theory; and

2. group effectiveness/diversity theories.

The resource dependency theory focuses on the availability of, and the possibilities for

controlling, critical resourcesthat are of utmost importance for the performance and survival

of firms (Pfeffer and Salancik, 1978). Similarly, the group effectiveness/diversity theories

assume that a diverse board of directors will lead to a wider set of perspectives, ideas,

expertise and skill, which can result in greater creativity and innovativeness (Ruigrok et al.,

2006;van Veen et al., 2014). Thus, a diversified board of directors with varying nationalities

can be a valuable asset because of the variety of additional (knowledge) resources that the

FBMs bring into the firm via their skills and expertise (Ruigrok et al.,2006;Eulerich et al.,

2013). In the case of FBMs, this is particularly related to their additional international

network contacts and knowledge sources (Arnegger et al., 2014). Notably, firms with FBMs

can be expected to engage in a wider set of international relationships, which in turn are

expected to lead to higher levels of innovation(cf. Solheim and Fitjar, 2016).

Based on these general theories, diverse boards, for example in terms of ethnicity and

gender, have been empirically linked to strongerfirm-level performance (Arena et al.,2015;

Toumi et al.,2016) and innovativeness (Galia and Zenou, 2012;Zona et al.,2013;Cook and

Glass, 2015). Of course, with increasing national board diversity, there are potential time-

consuming conflicts and transaction costs associated with cultural and institutional (e.g.

laws and regulations) distance and the use of non-native languages in board meeting.

However, the existing literature has frequently conceptually deduced that firms with FBMs

are likely to be more innovative and creative than firms with solely national BMs (Eulerich

et al.,2013;van Veen et al.,2014;Piekkari et al., 2015). Moreover, the assumption of a

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