Julia Johanna Kronenberger Student number: Discipline of study: M.Sc. in Business Administration -International Management

Transcription

1 Master Thesis: Organizational structure of MNEs: A determinant for financial performance? Julia Johanna Kronenberger Student number: Discipline of study: M.Sc. in Business Administration -International Management Submission date: January 31, 2015 Supervisor: Dr. Lori DiVito Second supervisor: Dr. Ilir Haxhi

2 Statement of Originality This document is written by Student [Julia Johanna Kronenberger] who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

3 1. Introduction Literature Review Different types of organizational structures Functional Structure Divisional Structure Matrix Structure Hybrid Structure Underlying Theory Information Asymmetry Agency Theory The Multinational Enterprise MNE s Stakeholders MNEs strategies for serving internal stakeholders Worldwide learning Global Integration National Responsiveness Organizational structure as measure to achieve MNEs strategies Research Gap and Research Question Defining Hypothesis Research Design Data Sample Sample Selection and Method Theoretical Framework Analysis Multiple Linear Regression Analysis Reliability and Validity PROCESS Analysis Discussion Literature Implications Managerial Implications Strengths and Limitations Conclusion References Appendix

4 Abstract: In this work I test whether organizational structures of Multinational Enterprises (MNEs) have an impact on their financial performance and if so which of the four organizational structures (functional, divisional, matrix or hybrid structure) leads to the best financial output and therefore should be chosen in a preferred manner. First, the different organizational structures and their underling theories are going to be explained, followed by MNE s essential theory. Then I run a regression analysis as well as a mediator analysis to answer the research question if MNEs perform better financially when their management chooses a certain organizational structure in order to serve their internal stakeholders. I find that the hybrid structure delivers the highest financial performance. The explanation could be found in the fact that with a hybrid structure, MNEs are either able adapt to local markets or focus on correct usage of information flows in those enterprise areas where they see the necessity. Key Words: Multinational Enterprise (MNE); organizational structure: functional, divisional, matrix and hybrid; financial performance; transnational solution: worldwide learning, national responsiveness, global integration 3

5 1. Introduction In our current time of continuously growing and changing markets with high competition, a variety of different enterprises with different organizational structures exists. Every enterprise pursues internal goals to achieve cost benefits and profit optimization. Due to these challenges enterprises must choose the most beneficial organizational structure to be able to compete on global markets. This correct choice is a challenging task since it depends on many internal and external factors. More precisely, enterprises have to consider incentive problems and information asymmetry when choosing the optimal structure. Many scholars have previously examined the determinants for organizational structure and factors that lead to better economic performance of Multinational Enterprises (MNEs) extensively (e.g. Rugman & Verbeke, 1992; Bartlett & Ghoshal, 1989). However, few scholars have yet investigated if MNEs success, in terms of cost benefits and profit optimization, is also dependant on the choice of a specific organizational structure. Generally, organizational factors which have an impact on the financial performance have not been examined thoroughly (Capon, Farely & Hoenig, 1990). This study, therefore, focuses on MNEs and will examine how they align their organizational structures while doing business abroad, which means pursuing international growth strategies. Further, I will test whether there is a preferred organizational structure and, if so, which of these are leading to the highest economic success. 2. Literature Review 2.1. Different types of organizational structures In many firms, hierarchies in which managers are reporting to managers of the next/higher level are present. This structure varies in its number of levels and in the set of activities grouped together (Harris & Raviv, 2002). Chandler (1962) describes in his book how structures are designed. Two aspects must be considered: first, the authority and 4

6 communication lines between the different administrative departments and managers and second, the flow of information and data which runs through these authority and communication lines. These information flows are crucial to guarantee the effective coordination, appraisal and planning in order to achieve the goals and policies of an enterprise. Enterprises resources such as physical and financial capital, as well as its personnel s marketing, technical and administrative skills, play an important part in contributing to the goals and policies. The complexity of the different structural designs also leads to incentive problems (e.g. in case of setting the right manager incentives to achieve best outcomes) or information asymmetry (e.g. due to the variety of different communication lines: information can get lost or misunderstood). These issues will be discussed in section 2.2. in detail. The existing literature describes a variety of important organizational structures. As a result of this I have chosen the following four structures which I will describe in the next section, as follows: 1. Functional Structure, 2. Divisional Structure, 3. Matrix Structure and 4. Hybrid Structure. Organization charts are used to represent the different structures visually Functional Structure In a functional hierarchy, activities which are related to particular functions are organized into different departments (Harris and Raviv, 2002). The hierarchy of the functional structure is organized along functional lines, which illustrates how the functional structure is a simple structure in which every single manager is in charge of a separate function (Harris and Raviv, 2002). Several authors, such as Maskin, Qian and Xu (2000) and Sloan (1963), use the Ford Motor Company, before the Second World War, as a classical example of the functional structure. During that time, Ford was organized into numerous functionally specialized 5

7 departments, for example, sales, manufacturing, research, distribution and personnel. The distribution department in a functional structure would, for example, coordinate all activities for the produced products. Maskin, Qian and Xu (2000) point out that the number of departments were responsible for different tasks which were complementary to each other. These separations lead to the independence of single departments. The structure of the functional form therefore enacts clear, separated and easy controllable functional areas. Potential benefits of the functional structure are mainly exploitation of scale economies (Maskin, Qian and Xu, 2000). The decision of geographical dispersion, meaning a decision into new types of functions, requires a central office and multi-departmental structure. This is better described as the emergence of the divisional organizational structure, as follows (Harris and Raviv, 2002). Figure 1: Functional structure (Galbraith, 1971) Divisional Structure The divisional form structures the activities of the organization on the basis of divisions and delegates control over the resources needed to create economic value to the stakeholders. These divisions are either defined by product or geography rather than in a functionally sense (Harris & Raviv, 2002; Strikwerda & Stoelhorst, 2009). 6

8 Further, the divisional structure provides new systems for capturing information, allocating recourses and controlling behavior (Roberts, 2007). Harris and Raviv (2002) summarize several authors statements, explaining that the choice for this structure is driven by the relative importance of coordination of functional activities (within a product line) and economies of scale (combining similar functions across product lines). According to Roberts (2007), an advantage of the divisional structure is its ability to coordinate and motivate a large number of staff performing complex interrelated activities among the various functions in different locations. A disadvantage of the divisional structure is the separation of the different functions by divisions, resulting in diseconomies of scale, for example if all products are distributed by a central distribution department (Harris & Raviv, 2002). Managers of organizations must trade off the advantages and disadvantages of the functional and the divisional structure for their decision making (Harris & Raviv, 2002). The divisional structure provides a better system of managerial incentives due to the fact that middle-level managers performance can be compared internally and all managers of the one level face similar industry conditions (Maskin, Qian & Xu, 2000). Figure 2: Divisional structure (Harris & Raviv, 2002). 7

9 Matrix Structure The matrix structure is a mixture of the functional and the divisional structure which optimally combines the advantages of both (Harris & Raviv, 2002). Matrix structures imply dual or multiple authorities, also known as a two manager situation (Knight, 1976). As a result, managers are influenced by two factors and coordination through lateral relationships which enhances cross-departmental boundaries (Knight, 1976). In the early 1980 s, when enterprises were redefining their strategies and reconfiguring their operations due to changing external factors such as the growing globalization of markets, increasing competition or increasing life cycles, many enterprises were faced difficulties of strategy and structure (Bartlett & Ghoshal, 1990). The only solution was to create a new structure - the matrix structure - which enabled multiple, simultaneous management capabilities. In this structure authority is being shared between project and functional managers as well as individuals having roles which involve dual reporting (Galbraith, 1971). Its parallel reporting relationships lead to functional, product and geographic management groups. The various information channels allow the organization to capture and analyze complexity that it is facing in the economy (Bartlett & Ghoshal, 1990). Bartlett and Ghoshal (1990) state that the matrix structure proved manageable especially in the international context. However, the authors also critique this structure due to the fact that dual reporting leads to conflicts and confusion. The complex system of reporting channels are also influenced negatively by factors of distance as for example language, culture or time (Bartlett & Ghoshal, 1990). The authors further describe a phenomenon which can be observed when enterprises are getting more complex is that managers focus more on managing people and processes instead of concentration on organizational strategy and structure issues (Bartlett & Ghoshal, 1990). 8

10 Figure 3: Matrix structure (Galbraith, 1971) Hybrid Structure In the 1980s the hybrid structure evolved as a new form of organizational structure. From then on enterprises were able to react better to customer needs through greater flexibility and speed (Lentz, 1996). The main characteristics of a hybrid structure are that it decentralizes decision-making to the operating units and enables the centralization of administrative functions to the corporate staffs (Lentz, 1996). Hybrid structures focus on a balanced approach between customer focus and economies of scale. On the one hand, the individual operating units act like small companies, for example when dealing with customers (similar to divisional structures). On the other hand, they come under control of the enterprise, such as when dealing with cost issues and strategic direction (similar to functional structures) (Lentz, 1996). A crucial characteristic of a hybrid organization is that operating units become totally responsive to customers while at the same time corporate staff are dealing with maximization 9

11 of economies of scale and the integration of operating units to one corporate identity. Hybrid structures learn how to achieve both goals simultaneously (Lentz, 1996). Dessein, Garciano and Gertner (2006) describe the existence of a typical design issue in the decision about which activities are going to be integrated and which are going to be held on the specific divisions. Hybrid structures require a management which is able to control activities on functional level as well as on business unit level. Managers of business units try to create value through the standardization of activities whereas managers of business unit level try to create value through alignment of activities to maximize their profits. Because managers pursue different interests, concrete decision making of the standardization of numerous activities is not easy. Therefore, it is important to create incentive systems and authority structures to allow the development of synergies out of standardizations (Dessein, Garicano & Gertner, 2006). Figure 4: Hybrid structure ( 10

12 2.2. Underlying Theory Enterprises pursue serving customers demands while keeping the costs as low as possible. These two factors stand in contradiction to each other and challenge enterprises in their decision making as the required information for optimal decisions is distributed to many different individuals and expensive to transfer (Brickley, Smith & Zimmerman, 2007). The following sections ( and ) deal with the two most important theories in this context Information Asymmetry Information asymmetry describes the situation in which two or more parties make use of different information during the fulfillment (precontractual) or the completion of a task or contract (postcontractual). Due to these differences, issues of misunderstanding and misinforming arise (Brickley, Smith & Zimmerman, 2007). Most frequently, asymmetric information is studied in the context of principal-agent theory which shall be described in the following section Harris, Kriebel and Raviv (1982) see the phenomenon of asymmetric information in firms from another perspective: different individuals perform or manage various tasks for which they own special information or expertise. Typically, other individuals as well as the top management do not have access to that specific information. Furthermore, individuals can make use of exclusively available information to their private benefits, which might not converge with the objectives of the company, and therefore find it disadvantageous to disclose this information freely. (Harris, Kriebel & Raviv, 1982) Agency Theory Manager incentives and information flows play a crucial role for the choice of the right organizational design. Athey and Roberts (2001) believe that incentives are a part of the 11

13 enterprise s organizational structure. They also argue that the design of incentive schemes and the allocation of decision rights become interlinked. This phenomenon can be observed often in the principal-agent-theory: This attempt formulates organizational problems as a problem of unequal distributed information, between the principal and the agent, in which the principle acts on behalf of the agent. In this relationship, achieving individual goals are foremost and make it difficult for the principal to monitor the agent and to set up the incentives (Schreyögg, 2008; Shapiro, 2005). In order to gain overall economic success, enterprises depend on their employees, especially on their managers, who are leading their division to the highest possible success. Success and efficient organizational design create economic rents, which tend to be achieved by their managers. Therefore, the right incentives must be set to achieve those economic rents. Maskin, Qian and Xu (2000) show that managers performance and their information differs among various organizational structures. The right phrasing of incentives is therefore a vital prerequisite. McAfee and McMillan (1995) describe organizational diseconomies of scale as a particular form of an influencing negative factor: managers in enterprises try to turn decisions to their interests, whereby private information about certain abilities provides them with increasing power. They use these benefits to gain personal rents. McAfee and McMillan (1995) further show, how those information asymmetries between the single managers can lead to inefficiencies, although they act in terms of the enterprise. In order to counteract those inefficiencies or to keep them as low as possible the principle can use a number of measures: for example to create controls, threat sanctions, extend the information system or create incentives for the agent in such a way that deviation of his goals become unlikely, which is favored by the agency-theory (Schreyögg, 2008). 12

14 Brickely, Smith and Zimmerman (2007) conclude that designing firms (also in terms of organizational structure choice) has to be performed in a way that all decision makers have the necessary information available which enables them to make good decisions as well as the incentives to use that information efficiently The Multinational Enterprise In the current literature and the scholarly context a number of definitions and perceptions exist, which describe the complex terminology of organizations. Mintzberg (1979) describes the structure of an organization as the simple sum of ways through which the organization splits its labor into different tasks and where coordination is captured among those tasks. Living in a continuously changing world forces firms to constantly modify their growth strategies to keep up with the emerging competition. Through this phenomenon the so-called Multinational Enterprise (MNE) arises. Buckley and Casson (2009) define a MNE as a firm which owns and controls its activities in more than one country. This diversity of activities is a more complex and challenging task in terms of managing these enterprises and their vast resources, compared to firms which are only located in a single environment (Geringer, Beamish & dacosta, 1989). Rosenzweig and Singh (1991) state that a MNE can be described as: (a) a single firm which operates in a global environment and controls it s widely spread subsidiaries, or (b) a set of organizations which operate in separate national surroundings. Mudambi and Swift (2011) show that MNEs must accomplish two things to be able to succeed globally: first, local adaption to each context in which they operate and second, knowledge and competencies leveraging across the contexts as well as integrating them. 13

15 In the following section I will present the underlying theory and will link these theories to the attributes of an MNE and its choice of choosing the optimal organizational structure MNE s Stakeholders Taking into consideration that MNEs are operating in many different countries around the world, enterprises have to deal with complex structures of different stakeholders to achieve their goals. A stakeholder is defined as an individual or a group of individuals that has any interest in a business. Businesses can be understood as systems in which value is created for its different stakeholders (Freeman, 2010). Stakeholder theory states that enterprises have to be responsible for their actions, objectives or policies also regarding to their stakeholders because enterprises are able to affect its stakeholders, and vice versa. Fassin (2012) describes this phenomenon as stakeholder reciprocity which also must be taken into account. Usually the stakeholder structure is quite heterogeneous in terms of different interests. For example, customers expect different pricing strategies then employees who are more interested in attractive working conditions. R. Edward Freeman was the first to address the concept of stakeholder theory by identifying and modeling different groups of stakeholders within corporations. Freeman (2010) states that compared to the traditional view of a corporation (shareholder view), in which only the owners or shareholders play an important role for its value creation, the stakeholder view, which incorporates the internal (e.g. owners, customers, suppliers and employees) as well as the external environment (e.g. government, competitors), also must be considered. In particular, multinational enterprises and their different subsidiaries are forced to serve the needs of different stakeholders to achieve best outcomes. The management has the 14

16 power and the measures to primarily serve internal stakeholders by choosing several strategies. Under these circumstances Rugman and Verbeke (1992) define several strategies based on the work of Bartlett and Ghoshal (1989) to overcome MNEs challenges MNEs strategies for serving internal stakeholders Due to new worldwide pressures, companies must rethink their traditional strategies and processes in which the choice of organizational structures plays an important role (Rugman & Verbeke, 1992). The authors take a deeper look at the fit between environment, strategy and structure which is solved with worldwide learning, national responsiveness and global integration. They further state that the traditional use of firm specific advantages (FSAs) and country specific advantages (CSAs) needs to be modified: MNEs cannot only rely on FSAs developed in their home country due to national responsiveness as a key factor for competitive success. Location bound-fsas need to be developed in each country where specific need exists for national responsiveness; and CSAs in a specific host country can contribute to the development of new FSAs; and Internalization advantages depend on a company s transactional FSAs to operate foreign subsidiaries (Rugman & Verbeke, 1992) Worldwide learning MNEs can be described as knowledge-sharing networks in which knowledge and learning can be understood as the root of gaining and sustaining competitive advantage (Foss & Pedersen, 2004). This competitive advantage can be further explained as a firm s greater ability to transfer, create, integrate and deploy certain kinds of knowledge more efficiently than markets. Foss and Pedersen (2004) further state that it is important to relate 15

17 organizational structure issues to knowledge processes because existing literature considers them only separately, never combined. In addition, the authors describe that MNEs create FSAs mostly through intangible assets, in other words, their core resources do not physically exist (e.g. intellectual property, know-how or reputation). To understand MNEs and their operations, it is crucial to understand the subject of organizing the enterprise and its knowledge processes (Foss & Pedersen, 2004). Several authors like Mudambi and Navarra (2004) highlight the importance of knowledge transfers due to increasing subsidiaries responsibilities and therefore more bargaining power which in reverse leads to overall increasing performance. Headquartersubsidiary relations can be characterized as a principal-agent relationship in which knowledge flows crucially depend on the motivation of the subsidiary to acquire knowledge and its sharing. Subsidiary managers can abuse this power due to the fact that they pursue their own goals and can increase their share of resources provided by the headquarters and in turn increases performance. It is therefore essential to create incentives and control mechanisms to avoid this exploitation (Mudambi & Navarra, 2004) Global Integration Bartlett and Ghoshal (1989) describe this phenomenon also with the lack of global efficiency. This arsis due to the fact, that companies have changed their way of doing business from a classical local model to a more global one. Firms always pursue possibilities to catch economies which are available abroad by aligning their products on their manufacturing operations. The forces that lead such alignments are present in the whole bandwidth between industries, where structural changes through discontinuity are necessary to industries where new possibilities of creating profitable business arise. If an enterprise is leading its subsidiaries as independent profit centers, it is disadvantaged to firms which acting as one 16

18 (global) entity. Global integration forces enterprises to setting up their business in a global integrated way in order to be able to earn efficiency benefits. Acting more globally is not as easy as it seems due to several factors which influence the way of operating as well as the performance of an enterprise. To gain further economic success and competitive advantage it is therefore important to gain benefits from global integration as well as from national responsiveness (Bartlett & Ghoshal, 1989) National Responsiveness Bartlett and Ghoshal (1989) describe in their book the need for responsiveness as the force for local differentiation where short- and medium-trends play an important role while operating abroad. Barriers and countertrends have forced managers of MNEs to be more sensitive to differences of international and host country markets. The development of products which can be sold worldwide does not necessary lead to economic success due to the fact that consumers reject homogenized products. This fact leads to openings for competitors who are willing to meet the local needs. Therefore it is important to think about local responsiveness as well as to serve the local customers with locally differentiated products and services (Bartlett & Ghoshal, 1989). Rugman and Verbeke (1992) suggest that local responsiveness is necessary in order to generate location bound FSAs (LB-FSAs) which cannot be transferred easily. An enterprise s competitive advantage in a host country or restricted region is mainly consisting of LB-FSAs. Such LB-FSAs can be developed by serving local customer or specific market needs as well as government requirements. Additionally it can be said that the strategies serve internal stakeholders by enabling the MNE to create more financial value by a) cost beneficial knowledge sharing in terms of worldwide learning, b) integrated operation by aligning all activities globally in the scope of 17

19 global integration and c) adapting to local markets via national responsiveness to perfectly serve local markets needs and to be able to gain economic rents from it Organizational structure as measure to achieve MNEs strategies The abovementioned measures serve MNEs internal stakeholders by creating a higher financial value. As a matter of fact, the different organizational structures foster different strategies as they set different incentives within an MNE. The following strategies can be pursued by choosing the subsequent organizational structure: Functional organizational structure for worldwide learning (e.g. due to its easy, simple and controllable structure MNEs are able to exploit economies of scale); and Divisional organizational structure for national responsiveness (e.g. due to its decentralized decision processes MNEs are able to perfectly align their products and services to local, regional demands. Furthermore, due to higher flexibility and internal control, MNEs are able to react faster towards changing markets); and Matrix structure for handling both factors with the same importance (customers and worldwide learning) and additionally fostering global integration (e.g. due to shared authority MNEs are able to capture and analyze the complexity of this combination); and Hybrid structure for finding the perfect balance between national responsiveness and worldwide learning (e.g. MNEs are able to generate synergies in single divisions and able to make use of local knowledge in combination with economies of scale of a large enterprise). As the functional structure provides global functional units that act in different countries simultaneously, R&D activities and other knowledge is held in a global unit. This leads to a central management of the globally acquired knowledge and enables the MNE to 18

20 achieve high economies of scale due to the fact that research activities are never performed parallely. On the other hand, the divisional structure provides units per country which are independent from each other. This enables the several divisions that are typically structured by regions to adapt to the local demands perfectly and therefore to earn higher economic rents. However, knowledge gaining across different divisions is not fostered due to the fact of lacking cooperation incentives, which is why in this organizational structure the economies of scale within which, for example, the R&D section cannot be earned. The matrix structure encases both factors and should therefore enable a MNE to make use of both advantages at the same time. They can therefore be considered as global integrated. However, since in the matrix structure the power is basically split between functions and divisions, the firm cannot adopt to those factors that lead to higher financial success. The hybrid structure is, as mentioned, closely related to the matrix structure, but also allows choosing a functional structure in some parts of the firm and a divisional structure in other parts of the firm. Therefore, the MNE can decide for which unit it wants to focus more on national responsiveness to better serve the markets needs or to focus, for example, on worldwide learning in order to achieve positive scale effects in the R&D section. It provides the possibility to make an MNE globally integrated and constantly adapting to gain advantages. Considering this, it is interesting to see whether the choice of an organizational structure has an impact on the MNEs financial performance and, if so, which choice of organizational structure leads to the best outcome. 19

21 3. Research Gap and Research Question Due to fact that MNEs have dispersed subsidiaries all over the world which need to be aligned to a firm s global strategy, I have linked the growth strategies to the choice of their organizational design in the previous section. As discussed earlier financial performance is a strategic goal of every MNE and used to serve its internal stakeholders. Therefore, as a further step, it would be interesting to discover which of the chosen organizational structures in connection to the desired strategy (worldwide learning, global integration and national responsiveness) achieves a better financial performance. Determinants for organizational design and factors that lead to better financial performance of MNEs have been examined extensively in present literature: MNEs financial performance can be influenced trough several factors. Environmental variables (e.g., industry concentration, size and growth) and strategy variables (e.g., market share and R&D) have proven to have a significant, positive impact on MNEs financial performance (Capon, Farely & Hoenig, 1990). However, few scholars have investigated if MNEs success is also depending on the choice of a specific organizational structure. The framework by Capon, Farely & Hoenig (1990) shows that organizational factors also determine MNEs financial performance. Lenz (1981) describes that financial performance is determined by the adaptation of an organizational structure to deal with changing competitive circumstances. Further, he states that organizational structures affect financial performance. In their article, Lu and Beamish (2004) mention organizational design as an important moderator of the relationship between multinationality and performance. Bartlett and Ghoshal (1990) describe how the characteristics of an organization s strategic decision process is affected by its structure and which patterns of strategic process characteristics are likely to be 20

22 associated with different types of structures. Ghoshal and Nohria (1993) describe the idea of organization theory which focuses on the fit between organization s structure and management process with its environment. Furthermore, they show that the complexity of a firm s structure must match the complexity of the environment in which it is acting. Goerzen and Beamish (2003) consider the relationship between geographic scope and performance of MNEs and describe the differences in this relationship found by several scholars. In doing so, they look at the elements of international asset dispersion and country environment diversity. Scholars as Kim, Hwang and Burgers (1989) found a positive, linear relationship between geographic scope and the performance which is consistent with the findings of other research. Geringer, Beamish and dacosta (1989) show that a firm s diversification as well as its internationalization strategy are important determinants which explain corporate performance. Grogaard s work (2012) builds on the integration-responsiveness framework by Bartlett and Ghoshal (1989) which helps to understand and analyze international strategies and highlights the importance of aligning strategy and organizational structure to influence performance positively. It is clear that choosing the right organizational structure and making the right decision of where and when to invest has an important impact on the firm s financial performance. A vast majority of scholars focus on the strategy that worldwide learning, global integration and national responsiveness lead to better financial performance. Only a few academics, however, address the choice of organizational structure as a measure to improve financial performance. As in this work the link between strategy and organizational structure is established, the following research question arises: Which organizational structure leads to the best financial performance in terms of profitability and returns and what does that imply for the three strategies of an MNE, meaning worldwide learning, national responsiveness and global integration? 21

23 4. Defining Hypothesis Accepting the information about MNEs, their strategies and their organizational structures in existing literature, I define four hypotheses able to answer the abovementioned research question. The hypotheses will be examined in an empirical analysis in section 7. This analysis will provide the answers to the hypothesis validity. The hypotheses are defined as followed: H1: MNEs perform best if they choose a functional structure to incentivize knowledge sharing globally (worldwide learning). H2: MNEs perform best if they choose a divisional structure to better respond to local market demands (national responsiveness). H3: MNEs perform best if they choose a matrix structure to focus on global complexity. H4: MNEs perform best if they choose a hybrid structure to balance customer focus and economies of scale resulting from global integration. To test the hypothesis and answer the research question, the empirical analysis will be conducted with the S&P Global 100. The procedure and analysis of the quantitative research is explained and described in the following sections. 5. Research Design 5.1. Data Sample As an appropriate sample for my study I chose the constitutes of the S&P Global 100 due to the fact that I am looking at the organizational structures and financial performance of MNEs. With this sample I want to test whether the organizational structures of enterprises around the world can be used as a determinant of their financial performance. The following attributes of the S&P Global 100 are therefore suitably appropriate: The S&P Global 100 is a stock market index from Standard & Poor s and includes 100 large-cap enterprises drawn from the S&P 22

24 Global 1200, operating in multiple countries around the world. It is weighted by marketcapitalization, measuring the performance of multinational, large-cap companies and covers seven distinct regions and 29 countries (S&P Index Methodology, 2014) Sample Selection and Method To create my dataset I used Wharton Research Data Services (WRDS). At WRDS I used COMPUSTAT from Standard and Poor s to gather the S&P Global 100 data. Within the Index Constituents I first used the Compustat Global - Index Constituents Code Lookup to receive the Ticker for the S&P Global 100 (I6UNK111). Following this, I added the codes to the list and completed the query for the year 2013 which was finally generated in an Excel datasheet. The data output provided me with the following information: company name, company ticker (SEDOL) and number of employees. To gather financial data I used Thomson ONE database. The use of financial data is necessary for the performance analysis of my study which will be examined via a multiple linear regression. With Thomson ONE and the company ticker (SEDOL) I was able to gather the following data: debt ratio, gross income, EBIT, operating cash flow, net income, ROA, ROE, sales and total assets. Unfortunately Thomson ONE was not able to provide me with information about the abovementioned MNEs organizational structures (functional, divisional, matrix and hybrid). Due to my knowledge no database exist which provides this information. Therefore, I made use of the businesses homepages and their 2013 annual reports in order to gain the required data. In those cases where I was not able to gain any information through these two sources I contacted the enterprises personally by telephone or by . In my thesis I conduct a quantitative experiment where I look at the impact of firms` organizational structure on performance in terms of profitability (e.g. EBIT/Sales) and returns 23

25 (e.g. Net Income/Total Assets). I test which organizational structure leads to a higher financial performance in order to be able to advise if a MNE should choose a specific organizational structure to gain a higher financial performance. To test the correlation between the organizational structures and performance of the particular firms I conduct a multiple linear regression analysis by using SPSS. A regression analysis is a common and widely used statistical technique for analyzing the relationship between a dependent variable Y (key performance indicator) and an independent variable X (organizational structure) (Edwards, 1976). With this procedure I observe if the choice of a certain organizational structure leads to a higher financial performance. Furthermore, I execute a mediation analysis in SPSS using the macro PROCESS. This is used to test whether the effect of the independent variables on the dependent variables is direct. To be able to test the relationship between organizational structures of MNEs (independent variable) and their financial performance (dependent variable), I defined variables for financial performance by calculating several ratios via excel. These are represented through six performance indicators for the year 2013: GrossMargin/Sales, EBIT/Sales, OperatingCashFlow/Sales, NetIncome/TotalAssets, return on assets (ROA) and return on equity (ROE). Due to the fact that I aim to test the effect not only on a specific year, I created six more variables representing the 10 year s average of each performance indicator. I therefore run two sets of multiple linear regressions: the first set is run with the performance indicators of the year 2013, while the second set is run with the mean of the performance indicators of the last ten years. Finally, the analysis of the outcome shows if a significant correlation between the financial performance and the choice of the organizational structure exists. To capture other effects that could be also driving the performance indicators 24

26 but do not have anything to do with the organizational structure, I used one mediator variable (employees). To test my hypothesis including the different organizational structures I recoded the organizational structures into three dichotomous (binary) dummy variables (1 = representing the organizational structure s variable name, 0 = not represent the organizational structure s variable name) in order to perform a multiple regression analysis in SPSS. The dummy variables are: DummyFunctional, DummyDivisional and DummyMatrix, hybrid structure is used as the baseline organizational structure and indicated when all dummies show 0. The regression equation appears as follows: where PI represents the performance indicator, F the functional structure, D the divisional structure and M the matrix structure. 6. Theoretical Framework In order to generate a theoretical framework, I created a correlation matrix (appendix 1) from the abovementioned variables and additional ones that might also impact the financial performance, such as size (measured by number of employees) and financial leverage (debt ratio). This enabled me to determine which variables can be considered as control variables, which may be mediators, and if there are preliminary signs for rejecting or accepting the different hypotheses. This correlation is interpreted by the so called Pearson s correlation coefficient (r). The correlation coefficient (r) measures the strength and direction (+/-) of a linear relationship between two variables and ranges between +1 (perfect positive correlation) and - 1 (perfect negative correlation). Positive correlation means a positive relationship, while negative correlation means a negative relationship between the variables (Field, 2009). 25

27 I found that the variable debt ratio can be considered as a control variable because there is no relationship (correlation) between the independent variables and debt ratio (DummyFunctional: r = , DummyDivisional: r = & DummyMatrix: r = ), but that there is a correlation between the control variable and the performance indicators of the dependent variable (e.g. EBIT/Sales10yrs: r = , ROE10yrs: r = ). Furthermore, it can be seen that there is a ranking of preferred organizational structures: the functional organizational structure tends to be the best suitable (most positive correlation values towards performance indicators), the matrix structure tends to be the second best suitable (less positive correlation values towards performance indicators), and the divisional structure tends to be the least suitable due to the most negative correlation values towards performance indicators. The resulting framework describes my project visually. A dependent factor (financial performance) and an independent factor (organizational structure) are included. Furthermore, one mediator ( employees ) is incorporated. With the framework s information I tested the hypothesis, by running multiple linear regressions, in order to answer whether any type of organizational structure is beneficial to the financial performance. Figure 5: Conceptual Framework. 26

28 7. Analysis Before analyzing my data I ran frequencies of the string variables (organizational structure) to check my dataset on any errors or missing data. The output (Table 1) shows that there are no errors or missing data and the number of organizations is valid, meaning it consists of 100 enterprises with different organizational structures. Additionally, the frequency table provides first information about possible preferences of MNEs organizational structure choice. It shows that 46 MNEs chose a divisional organizational structure to obtain best results. 24 MNEs chose a functional organizational structure as the most appropriate. The matrix structure is presented by 16 MNEs and the hybrid structure by 14 MNEs. These results can be seen in the following table: Table 1 Frequencies of organizational structures Valid percent Cumulative percent Frequency Percent Valid Divisional Functional Hybrid Matrix Total Missing System 0 Total 100 Furthermore, the descriptive analysis of the dummy variables (Table 2) shows that the organizational structure dummies were created in a correct manner (see the mean) and that no data is missing or wrong. As a result, the output from the abovementioned frequency table can be considered as valid. 27

29 Table 2 Descriptive analysis of dummy variables DummyFunctional DummyDivisional DummyMatrix Valid N Missing Mean Standarderror of mean Standarddiviation Variance Skewness Standarderror of Skewness Kurtosis Standarderror of Kurtosis Minimum Maximum Based on the distribution of organizational structures within the sample, it is interesting to find out whether the preferred organizational structures lead to optimal financial performance, or whether the majority of those firms managers have made wrong decisions and other, not so common organizational structures lead to better financial performance. Therefore, I run multiple linear regression analysis using SPSS (upcoming section 7.1.) to see whether there is any indication to support this first result and to be able to give managerial advice about organizational structure choice Multiple Linear Regression Analysis I ran 12 multiple linear regressions (all 12 performance indicators separately including all three independent variables and the control variable) to find the most significant output to further test. Due to the fact of using dummy variables for my regressions I have to choose the Forced entry (also known as Enter ) method. I do not enter the variables in a specific order 28

30 because I do not want to rank them, the variables are coequal. This method is known to force all independent variables (predictors) into the model simultaneously (Field, 2009). Five cases were found in which organizational structures have a significant (p <= 0.05; resulting from a t-value > 1.96) effect on the respective performance indicators. These were as follows: DummyDivisional on EBIT/Sales (β = ; t = ), DummyMatrix on EBIT/Sales (β = ; t = ), DummyDivisional on NetIncome/TotalAssets (β = ; t = ), DummyFunctional on ROE (β = ; t = ) and DummyDivisional on NetIncome/TotalAssets10yrs (β = ; t = ). I further found two cases in which the confidence interval was in the 90% range (p <= 0.10): DummyFunctional on EBIT/sales (β = ; t = ), DummyMatrix on NetIncome/TotalAssets (β = ; t = ). The significance regression output (p < 0.05 = significant, p < 0.1 = fairly significant) can be found in the tables below: Table 3 Regression model of EBIT/Sales R R² R² Change B SE ß t DummyFunctional ** DummyDivisional * DummyMatrix * Debtratio Statistical significance: *p<0.05; **p<0,01; **p<0,001 29

31 Table 4 Regression model of NetIncome/TotalAssets R R² R² Change B SE ß t DummyDivisional * DummyMatrix ** Debtratio Statistical significance: *p<0.05; **p<0,01; **p<0,001 Table 5 Regression model of ROE R R² R² Change B SE ß t DummyFunctional * Debtratio Statistical significance: *p<0.05; **p<0,01; **p<0,001 Table 6 Regression model of 10yrs' NetIncome/TotalAssets R R² R² Change B SE ß t DummyDivisional * Debtratio Statistical significance: *p<0.05; **p<0,01; **p<0,001 30

32 Beta values tell the relative difference between each group on the outcome variable (Field, 2009). By interpreting the beta values of the organizational structures, I identified some form of pattern which was already shown in the correlation matrix: in general the betas of all three organizational structure dummies (functional, divisional and matrix) were negative and ranked in the order of (1) functional, (2) matrix and (3) divisional. Here, negative betas mean that the change in the outcome variable decreases as an MNE chooses either a functional, matrix or divisional organizational structure over the hybrid structure. This can be seen for example by comparing the three different beta values of the organizational structure dummies on EBIT/Sales: The beta value of the functional structure (ß = ) is lower than the beta value of the matrix structure (ß = ) and again lower than the beta value of the divisional structure (ß = ). As all betas have a t-value greater than 1.64 and the betas for divisional and matrix organizational structure generate a t-value higher than 1.96, all results can be considered fairly significant (at least) and are therefore a factor to answer my hypotheses. Consequently, I can say that H4 can be accepted, while the other ones can be rejected. Further, the example of the organizational structure dummies on NetIncome/TotalAssets support this result: the beta value of the functional structure (β = ) is lower than the beta value of the matrix structure (β = ), which in turn is lower than the beta value of the divisional structure (β = ). However, only the dummy for the divisional and for the matrix organizational structures are in the range of a 90% confidence interval and are therefore at least fairly significant (t-value of functional dummy is with 1,288 below the threshold of 1.64, t-value of divisional structure is with over the 1.96 threshold for 95% confidence, and the t-value of matrix dummy is with over the % confidence interval threshold). This indicates that H2 and H3 can be rejected, while the analysis does not provide an answer whether to accept H1 and reject H4 or vice versa. 31