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Behavioural Perspectives in International Business Management

Current Assumptions in International Management

Scholars of international business management point out that the research agenda is “running out of steam” (Buckley et al., 2017; Doh, 2015), noting that we need to extend current theories totackle topics which better reflect developments in the international business environment such as the outcomes of globalisation, new technologies, the role of stakeholders on firm strategy, the emergence of EMNEs and the impact of our field on relateddisciplines (Mudambi et al., 2018; Narula and Verbeke, 2015; Narula, 2017; 2018). Some scholars have gone further and argued that international management requires a “shift” whereby “old” theories/perspectives on MNE growthcan and should be “replaced” with “new” theories, although this view remains controversial. Perhaps we experience a failure to see beyond dominant assumptions associated with MNE growth (as such, it may be possible that there has, in fact, not been a shift). Although there is now greater theoretical diversity, recent literature reviews (Mudambi et al., 2018; Surdu and Mellahi,2016; Teagarden, Von Glinow & Mellahi, 2018) confirm that international management-related choices continue to be studied primarily through an organisational economics lens whoseunderlying assumptions remain deeply rooted in either the Simonian view of bounded rationality, or the neo-classical view of the rational actor. The focus remains on finding “new” (and presumably, better) theories, rather than gain a more nuanced understanding the microfoundations of the theories used and their relevance, as well as inherent limitations.

In light of the growing empirical evidence on the heterogeneity with which MNEs strategise (e.g.,Benito et al., 2009; Buckley et al., 2007; Elia et al., 2019; Kano and Verbeke, 2015; Surdu et al., 2019), theories which use (bounded) rationality as a micro-foundation are gradually making room for complementary, behavioural perspectives. This is because managers do not always behave rationally (Aharoni et al., 2011; Buckley et al., 2007; Dörrenbächer and Geppert, 2017; Elia et al., 2019; Schubert et al., 2018; Strange, 2018; Surdu et al., 2019). Behavioural economics, allied with recent psychological discoveries (Ardalan, 2018; Muradoglu and Harvey, 2012) provides relevantinsight into the nature of business decisions, with particular relevance for international business. For instance, behavioural scholars argue that cognitive biases and judgement heuristics ofteninfluence economic decision making, and they tend to be stronger in circumstances where decision-makers are faced with a specific threat, e.g. the uncertainty associated with entering unstable and distant international markets.

The objective of this chapter is to propose a revitalisation of core arguments to diversify and hopefully, improve the manner in which we analyse decisions about international expansion. Our focus is on convincing the reader that not all MNE decisions can be adequately explained by using Henley Discussion Paper Series predominantly rational models of decision making. For instance, once a firm has decided to internationalise, it is left with a multitude of choices, including those related to whether to escalate its commitment into that market, adapt its organisational practices, and at the other end of the spectrum, to de-escalate commitment, or exit the market completely. Further, it is not useful to take a static, single-period view. Over time, attitudes towards that market andperceptions associated with its attractiveness, may have changed and some firms may return topreviously exited markets; whilst others may opt to change the locations of their international operations. Many international expansion-related choices are therefore decided in dynamic anduncertain host environments, and in situations of imperfect information about the alternatives available. In other cases, the choices we observe may, in fact, be ex-post justifications for decisions made with little forethought or significant prior deliberativerationalization (Weick, 1995; Weick, Sutcliffe and Obstfeld, 2005).

Henley Discussion Paper Series

Mainstream international business management research does not capture how managers face constraints and make choices about entering and competing internationally, nor does it discuss what may bound their ability to act as rational economic actors. For us, taking a simplistic view of bounded rationality (which underpins many of our ‘pet’ theories) makes it difficult to explain differences in managerial choices and understand why, in the same contexts, two managers wouldbehave differently. A narrow focus on (bounded) rationality holds us back from understanding the behaviour of managers.

This chapter starts with an overview of dominant ideas in international business management and their limited potential to explain, on their own, the dynamic behaviour of the MNE. We explain the concept of bounded rationality as a complex and multi-faceted micro-foundation, which goes beyond the idea that managers make decisions bounded only by their information processing capabilities. We provide examples of notable studies published in IB and management journals and which incorporatecomplementary ideas about managerial cognitive limitations, biases andother related behavioural concepts, and propose directions for future research. Overall, this chapter aims at building intellectual bridges between international business, strategic management, economics and social psychology in order to identify how behavioural perspectives can enrich our knowledge of the modern MNE.

Most IB and management theoretical perspectives recognise that decisions are made under unavoidable constraints. In conditions of considerable uncertainty often associated with  John H Dunning Centre for International Business internationalisation choices, managers may be unable to specify strategic outcomes and their associated probabilities. Transaction cost economics (TCE) based theories such as earlier versions of internalisation theory (Buckley and Casson, 1976; Hennart, 1982; Rugman, 1980) focused onopportunism as a primary constraint. Broadly speaking, this early work posited that, in order toavoid the risk of opportunistic behaviour when internationalising, managers might opt for high control governance choices that help them reduce transaction costs associated with incomplete market contracts (Buckley and Casson, 1976; Verbeke and Greidanus, 2009). In this manner, firmresources with a high level of specificity are protected from opportunistic behaviour, andknowledge transfer between the international subsidiary and its parent MNE is more likely to take place (Delios and Beamish, 1999). Thus, the expectation was to reduce opportunism-based transaction costs through higher investment. Brouthers and Hennart’s (2007) review concluded that many internalisation predictions have been validated in empirical work at the time.

Building on TCE thinking, internalisation studies assumed the existence of bounded rationality by recognising that economic actors are, indeed rational but only boundedly so (Simon, 1955). When decision makers are boundedly rational and as market/contracts tend to be incomplete, opportunistic behaviour was expected to arise primarily because decision-makers are limited in their ability to process information. Later versions of internalization theory integrate TCE, entrepreneurial and resource-based view (RBV) logics, recognising that firms make decisions based on their own resources whose utilisation depends on the experience and capabilities of the manager (Narula and Verbeke, 2015, Narula et al., 2019). MNEs are therefore likely to incurbounded rationality-based transaction costs associated with international expansion. While new internalisation theory emphasises that managers are boundedly rational, the few empirical studies which draw on new internalisation theory do not usually specify what the boundaries ofrationality are and how they change over time. For instance, Nguyen and Almodóvar (2019) explain the export intensity of foreign subsidiaries as a function of funding access and overall financial resources, significantly underplaying the role of management.

Other notable international management perspectives (Johanson and Vahlne, 1977) have placed emphasis on the characteristics and patterns of internationalisation, linking them to firm-level knowledge acquired in time through experience and learning. From a learning perspective, knowledge acquired through experience leads to more hierarchical modes of operation such as wholly owned subsidiaries (Vahlne and Johanson, 2017). Further, knowledge acquired in onemarket can be transferred to other markets, leading to MNEs increasing their location scope by entering more institutionally and culturally distant host countries. Recent studies examine how experience accumulated by the MNE over time will lead to favourable attitudes towardsrisk, faster  market entries and increased market commitment (e.g., Casillas and Moreno Menendez, 2014; Casillas et al., 2015). Such an approach makes a series of (often unsupported) assumptions. First that managerial preferences, and thus their behaviours, do not change over time; second that the external environment of the firm remains stable; third that irrespective of corporate governance all firms have the same risk attitudes and decision-making horizons; and fourth, there is the implied assumption that after an extensive period of experiential knowledge acquisition, MNE behaviour will increasingly resemble rational behaviour.

However, experiences also create biases, which in turn, may significantly influence MNE choices. The considerable heterogeneity observed in firm behaviour (Buckley et al., 2007; Strange, 2018; Surdu et al., 2019) suggests that managers do not value choice attributes equally such as the attractiveness of a market location, the need to access to new resources, or the importance of experiential learning to reduce risk. For instance, to some, knowledge acquired from experience may be a valuable source of learning, resulting in a firm-specific advantage, whilst to others, it may represent a source of path dependency. In a similar vein, a new partner may be a source of increased opportunism and transaction costs or an opportunity to learn about the market and diversify the firm’s network resources and capabilities. There is therefore a differential effect on strategic choices due to managers having different biases and points of reference when assessing strategic trade-offs associated with growth or expansion. These biases and reference points may also change over time, as the environment of the MNE changes. As such, our position in this chapter is that we require a more nuanced understanding of what managerial rationality is bounded by. The different facets of bounded rationality become the focus of our next section and, we propose, a foundation for future international business management theorising.

An important first step forward in understanding how ideas from behavioural economics and social psychology can complement extant international management theorising, is to better understand the idea of individuals being boundedly rational. Bounded rationality is, itself, multifaceted. In fact, bounded rationality has various dimensions that build on one another (Foss and Weber, 2016; Simon, 1982; 1990). Extant literature has focused on one dimension, namelythe Simonian (1947; 1990) view of processing capacity that a decision maker’s ability to processand interpret existing information is limited by their short-term memory and attention. Such restricting views of the short-term horizons of managers are no longer credible. Academic thinking has moved on to acknowledge that managers are not so myopic and are able to estimate probable outcomes of strategic choices.

Behavioural and experimental economics, and more recently, social psychology, place more emphasis on the complementary dimensions of bounded rationality such as cognitive economising (Fiske and Taylor, 1991) and cognitive biases(Tversky and Kahneman, 1974; see also Weick, 1995; Weick et al., 2005). These help our understanding of what information managers prioritise to make strategic choices and why. Namely, cognitive economising refers to the use of heuristics to select a subset of the most relevant available information to make quick decisions in complex situations (Gigerenzer, 2003). Hence, instead of seeking to process all information available, managers may seek to organise the most relevant information; this may be the information most retrievable at a point in time (Tversky and Kahneman, 1974) or the information most salient to them (Frost et al., 2002).

In turn, the concept of cognitive biases recognises the errors in judgement that may arise from unintentionally distorting the information available. For instance, a decision maker may search for, interpret, and recall information that affirms their already existing beliefs (i.e. confirmation bias, see Wason, 1960; see also Weick et al., 2005 on ‘self-fulfilling prophecies’). To illustrate how embedded and inconspicuous cognitive biases are, we invite the reader to consider for a moment, a central tenet of management theories, that, for any resource capable of serving as a source of competitive advantage, it must be ‘rare’. Attributing disproportionate value to ‘rarity’ is one of our longest held biases (Ditto and Jemmott, 1989). This cognitive bias to value rare qualities, traitsand resources is central to many areas of modern ethical contention such as the procurement of rhino horns, shark fins, diamonds, lithium, oil and truthful politicians. If there is a scarce resource, is this a main source of advantage or could we be misattributing performance outcomes to those rare resources? Psychologically, individuals find it difficult todecouple ‘value’ from ‘rarity’ (Dittoand Jemmott, 1989). For instance, a firm that has been around for 100 years is rare. The distinctionbetween rarity and value is important because rare resources need to be perceived as valuable;when perceptions of value change, rarity alone may not constitute a source of advantage in themarket. This may also mean that, a constantly changing market environment, flexibility to adapt is more valuable than age and even experience.

Cognitive biases are therefore complex. Cognitive biases may prove harmful to both managers and the firm in certain circumstances, but also advantageous in others. Biases have been found most obvious when circumstances present humans with an unexpected threat (Kanouse et al., 1972); in the case of the MNE – the uncertainty associated with entering (distant) and constantly changing international markets. Duhaime and Schwenk (1985) explained how biases play a role in the decision to divest a business unit, noting that once divestment of a failing unit is considered,it becomes the key strategic alternative for decision-makers. This is because, when dealing with complex, uncertain decisions, rather than specifying, and rationally analyzing, all the known alternatives and their associated probabilities – as traditional theory posits – managers reduce uncertainty by limiting themselves to one option and avoid the stress-inducing trade-offs inherent in choosing amongstcomplex strategic options. Importantly, these cognitive biases are extensiveand present throughout human behaviour, including behaviours associated with the pursuit of goals (Labroo and Kim, 2009). In order to support the attainment of goals and the reduction of threats to those goals, judgement heuristics, in addition to deliberate, rational cognition, may be deployed as a more ‘efficient’ modality.

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