Corporate boards usually perform two roles: an advisory role to top management and a monitoring role on behalf of shareholders. The importance of board diversity has been shown both on the monitoring (agency theory) and in the advisory (resource dependence) side. Because diversity brings different viewpoints to the table, a diverse board can more effectively monitor executive behavior.
Board composition is influenced by both firm and country contexts. Industry type, firm size, age, and degree of internationalization as well as country industry structure, history, culture, and institutional strength are all critical to define board structure. In Germany we find union representatives as board members, in Japan it is loyal executive insiders, and in China it is government officials who occupy several board positions. In the United States, boards were traditionally made by the controlling shareholders although this model evolved to the current one where boards now include a majority of independent nonexecutive directors that have the power of making relevant decisions. Globalization has also added pressure to increase foreigners and representatives of institutional investors. Because boards are the highest-level mechanism in a firm to reduce uncertainty and add transparency, firms in need of capital or investors will probably do better if their board is perceived as up to date with board best practices. If we are dealing with firms in an emerging country environment that is usually characterized by institutional weakness and high ownership concentration, true outsider independence, family and government links will play an additional role in what is considered as best practices.
Boards have often been labeled as “supra TMTs” but we argue that they are not really a team; they have distinct features: first, boards often include “outsiders” who have their primary affiliation with another organization, serve on boards on a part-time basis, and have limited exposure to the firm’s affairs. Second, boards average 13 members versus 5.9 for TMTs. Finally, unlike many teams, boards function episodically; full board meetings are held, on average, 7 times per year. Even considering committee meetings, board members spend less than 2 weeks per year working on the boards they serve (Jehn 1995; Monks and Minow 1995). Boards are then large, elite, and episodic decision-making groups facing strategic issue-processing tasks. Since they are not involved in implementing their recommendations, their output is entirely cognitive. Also, because they are large, episodic, and interdependent, they can suffer “process losses,” which are interaction difficulties that prevent groups from achieving their full potential (Forbes and Milliken 1999; Rivas 2012a).
Research has now shown that board characteristics affect acquisitions, divestitures, diversification, research and development, strategic change, executive compensation, and CEO dismissal (Deutsch 2005; Golden and Zajac 2001; Haunschild 1993; Shen and Cannella 2002; Shimizu 2007).
We will now turn to key characteristics of public boards in Mexico taken from a unique hand-collected dataset of public firms that spans from 2008 to 2016. For readability purposes, we will only deal with three years: 2008, 2011, and 2016. Following corporate governance research practices, we exclude: financial, delisted, and minimum trading firms, which yields a total of 79 firms. A representation of this data can be found in Table 6.2.
Foreigners
International membership is an important variable of a board’s international background and orientation. Nationality is a source of knowledge on a particular region or economy. Foreign-born board members possess valuable knowledge on market insights and institutions as well as on culture, behavior, and norms of a given country. Hence, the nationalities of board members have implications for individual personalities and team dynamics as well as for strategic decision making. Such knowledge may prove invaluable in making decisions about firm strategy in a particular region and on international operations, as they connect the firm with contextual factors in order to decrease uncertainty and dependency. Foreign-born directors should also help in promoting more effective global relationships since cultural sensitivity is critical in an international environment (Carter, Simkins, and Simpson 2003).
In short, we believe that having foreign board directors should decrease uncertainty by enhancing social capital among foreign investors as well as providing knowledge on specific regions or countries.
In Mexico the percentage of board members who are foreigners has slowly gone up; it was 8 percent in 2008, 10 percent in 2011, and 12 percent in 2016.
Women
There is increasing pressure to have female presence on boards in order to reduce the gender gap and increase the diversity degree of boards.
Female directors have unique skills, experience, and networks. They are less prone to risk-taking behavior; firms with female CEOs have lower debt levels, less volatile earnings, and higher survival probabilities than firms led by male CEOs (Faccio, Marchica, and Mura 2014). Women can enhance board independence of thought and monitoring functions. Prior evidence shows that higher female board representation is associated with better attendance by male directors, more board meetings, increase in pay for performance, and more attention to stakeholders (Adams and Ferreira 2009; Adams, Licht, and Sagiv 2011; Rhode and Packel 2014).
Gender diversity has been found to facilitate creativity within groups and also to lead to clashes because others find it difficult to identify with those of a different gender (Nemeth 1992; Pelled, Eisenhardt, and Xin 1999). Thus, gender diversity has positive and negative implications for processes relevant to the board advice and counsel functions (Hillman, Shropshire, and Cannella 2007). However, because boards engage in nonroutine problem solving and meet infrequently, the improved brainstorming and creativity from considering diverse perspectives may represent “functional conflict” (Amason 1996) and benefits that outweigh the negative implications.
From a practical perspective, talented male directors are scarce and institutional investors are increasingly pressing for female directors. Having women on boards might also decrease CEO influence on board oversight, since people of the same race and gender might be less critical of each other’s ideas (Erhardt, Werbel, and Shrader 2003).
Gender quotas on boards are generally justified on the basis of business/economic rationale of board diversity. Within the European Union there are now six countries mandating female board representation: Norway (2006—40 percent), Spain (2015—40 percent), France (2017—40 percent), Italy (2012—33 percent), the Netherlands (2016—30 percent), and Belgium (2016—33 percent).
Female board representation is low in Mexico; it was 5 percent in 2008 and 2011 and climbed to 7.6 percent in 2016. This is certainly an area of opportunity for Mexican boards. According to OECD data for large public firms, there are only a few countries in the world that have less female representation than Mexico in 2016:
- A)Chile—4.7 percent
- B)Japan—3.4 percent
- C)South Korea—2.1 percent
- D)Brazil—6 percent
- E)Indonesia—5.7 percent
Age
Since one of the board’s duties is to formulate strategy, director propensity to risk-taking will play an important role upon this duty. An active promotion of age diversity should encourage diverse perspectives and also facilitates board succession planning. Most boards need to have some spread in age: while an older group can provide experience and resources, the middle group can carry more responsibilities, and the younger one provides the energy to move forward. Pointing in this direction, Hacksoon and Chanwoo (2010) found that age diversity at the board level positively affects firm valuation.
Older directors face less career uncertainty and have more experience in making complex decisions. Younger directors, on the other hand, have more energy and drive that could translate into enthusiasm, decisiveness, and ambition. They also have more ideas and are more willing to learn about new technologies in order to make more innovative decisions.
We should also be aware of the downsides of age diversity: communication can become difficult, conflict more likely, and social integration harder to achieve.
Even taking into consideration the above-mentioned downsides, we believe that risk-taking propensity should be counterbalanced with experience, wisdom, and the resources that older members usually have. We argue that with age diversity, boards will be more willing to learn, take risks, and give advice and resources to their respective work groups.
Average age of board members in Mexico is 53, 55, and 57 for 2008, 2011, and 2016, respectively. Although this is consistent with most large developed countries, we need to remember that median age for Mexico’s population is 27 (INEGI 2015). Average age also seems high when you consider that research has shown how younger board members provide a board with more risk-taking and energy. If you take a closer look at the age range in Table 6.1, you will see that there is at least one board member both in 2011 and 2016 who is 90 years old, which is far above the standard that many boards use as a maximum to retire their board members. Seventy-three percent of US public boards have mandatory retirement age and their upper limit is 75 years (Spencer Stuart 2017).
Table 6.1 Board member variables
Tenure
The length of time that members of a group stay together influences group outcomes, and this might be why tenure is the most studied of all demographic attributes. Long tenures are associated with strategic persistence to a course of action and to stability, reduced conflict, and superior communication (Finkelstein and Hambrick 1990; Katz 1982).
Group longevity can diminish a negative association with emotional conflict by having social categories based on demographic attributes blurred with time. As they develop social and economic ties, group members will likely acquire strong psychological and political commitments to the status quo (Hambrick and Canella 1993). Board members who have served on the same board for a period of time are likely to develop strong friendships and professional ties (Fredrickson, Hambrick, and Baumrin 1988). Therefore, as board tenure increases, directors develop shared beliefs and close friendships. Thus, we believe that having board members with a diverse set of tenures would work well. Older tenured members could provide guidance knowledge and resources, while newer members provide energy and different perspectives to avoid the “groupthink” bias that could stem from groups with similar tenures.
Tenure in Mexico stands at 10, 11, and 11 years for 2008, 2011, and 2016, respectively, which is quite high when you think that there are countries that limit the tenure of independent board members at 8 years. The rationale used for this regulation is that after a certain number of years because of our human nature and the events that surround most board members (meetings, social events, strategic planning retreats) most individuals will stop having an independent attitude.
Duality
CEO duality takes place when the chairman of the board and the CEO are the same person. This is explicitly forbidden by law in some countries (i.e., Chile, the United Kingdom). Generally speaking, it reduces the power balance and accountability between a board and its TMT. But when used for a special purpose, it can provide a firm with advantage. For example, in a developed country context, CEO duality may indeed threaten a firm’s legitimacy due to an inherent conflict of interest; the same individual that presides the board and is the ultimate authority in a firm is in charge of monitoring and advising the TMT that includes the CEO. But in emerging country contexts with high macroeconomic volatility where speed and decisiveness in decision making can be crucial, CEO duality can provide a board with greater capability to take decisions.
Duality in Mexico for 2008, 2011 and 2016 stands at 38, 37, and 44 percent respectively, which is high when you think that duality can be forbidden for public firms due to the potential conflict of interest for shareholders and management at the same time. If monitoring, evaluating, and compensating top management is an important board task, how can this be accomplished when the head of the board is also the head of top management?
Independence
The most “recommended” practice of good corporate governance is, still today, that firms institute a board dominated by independent directors. This comes with a presumption that they can make a positive contribution to the board’s monitoring responsibilities and subsequently toward better corporate performance. Having an independent board has been shown to be correlated with less cases of fraudulent financial reporting (Anderson, Mansi, and Reeb 2004; Dunn 2004).
Because of their lack of hierarchical affiliation to management, outsiders may promote the airing of different perspectives and reduce the probability of complacency and narrow-mindedness in board’s decision-making processes. Independent directors provide resources to deal with external factors such as the community, buyers, or suppliers, while inside directors serve on boards primarily to provide firm-specific information (Fama and Jensen 1983). Outside directors introduce a balance of power by representing shareholder interests that might not receive the same attention if the board was made mostly of insider or affiliated directors. Because of their lack of hierarchical ties with the TMT, independent directors can become a more impartial body for monitoring behavior.
Independent directors are incentivized to scrutinize management more diligently than other directors since they need to protect their reputation as effective monitors. It is interesting to note that a higher level of board independence has been shown to be influential for firm performance only in the case of emerging countries (Dahya, Dimitrov, and McConnell 2008). Black and Kim (2012) provide evidence in a sample of Korean firms of a stock price increase in boards with a majority of independent directors. Indeed, board independence plays a significant role in emerging countries where mechanisms that control insiders’ self-dealing are weak. Having independent directors in emerging country firms is not a recipe for success; independent directors of family firms show lower attendance levels than in nonfamily firms (Bianco, Ciavarella, and Signoretti 2015).
Summarizing, having more independent directors should (a) enable ties to other organizations/stakeholders, (b) decrease environmental uncertainty, (c) facilitate strategic change and risk-taking, (c) increase firm legitimacy, (d) have higher level of knowledge and advice available to the CEO, (e) have superior monitoring of management, and finally (f) improve performance in emerging country firms as long as the directors are truly independent in the context of family firms.
The percentage of independent board members in Mexico is 24, 27, and 28 percent for 2008, 2011, and 2016, respectively. This is quite low for global standards and stands just slightly above the minimum required by law: 25 percent.
International Experience
Directors with international experience tend to have more understanding of global markets and business practices and are more attuned to opportunities to compete globally. Accumulated knowledge about foreign markets is important in overcoming the “psychic distance” of doing business abroad. International experience could be a substitute for cultural knowledge, which is necessary for successfully formulating and implementing an international strategy.
International experience helps to reduce uncertainty and builds cultural knowledge within groups since it complements and expands other experiences. It also contributes to expand a firm’s network that is critical to compete in the global environment. Thus, the international experience of a board provides the firm with resources like cultural knowledge, business and social networks, and global business expertise.
Board members with international experience can also complement the experience of top executives, which can be important in the advisory function that boards perform.
Board members with international experience in Mexico are 5, 8, and 6 percent for 2008, 2011, and 2016, respectively, which would seem low for a country that is a global leader in the number of free trade agreements it has in place.
Government Experience
Government policy can affect the competitive positions of firms by imposing taxes or altering firm costs through regulation. Firms are devoting increased attention and resources to a wide array of legislative activities whether through direct or indirect political lobbying activities or campaign contributions in order to eliminate threats and create opportunities.
Governments can also be a large customer for firms and so building ties that provide unofficial links to government entities makes good business sense. Prior research has found that political ties are related to firm performance, innovation, and the formation of foreign alliances (Siegel 2007; Wang and Chung 2013; You and Du 2012). Government experience on the board can reduce transaction costs of securing information about political decisions and provide preferential access to current government officials. It can also facilitate access to bank financing, reducing the cost of capital (Farinós Viñas, García Martin, Herrero Piqueras, and Ibáñez Escribano 2016).
It is possible that government officials influence results in industries where firms are more dependent on government decisions—energy, infrastructure, defense. We also believe that in large emerging economies (i.e., Mexico), the influence of government officials can have a broader effect on large foreign firms, blurring the boundaries among industries. In many emerging economies, privatization plans periodically take place on diverse industries and infrastructure projects.
Summarizing, we believe that boards with former government officials in emerging countries could contribute to higher performance because of the increased ability of the firm to co-opt foreign governments in their favor. This should decrease environmental uncertainty by decreasing regulatory pressures and gain greater access to critical information. Having said this, directors with government experience can also exacerbate problems of minority shareholder expropriations and so this attribute should be considered with care. Government experience in Mexico for 2008, 2011 and 2016 stands at 3, 6, and 4 percent of board members.
Education
General human capital is a skill that is valuable across industries and countries. Education is an attribute associated with general human capital since it reflects not only the information learned but also an individual’s intelligence. The positive effect of education on organizational outcomes has been shown by previous research (Carpenter and Westphal 2001); directors with higher education have shown to have greater cognitive ability to contribute to an organization. Individuals with higher education are also able to find more creative solutions (Khanna, Jones, and Boivie 2014).
Board members’ academic level determines their skills and knowledge level. The higher the education level, the more willingness to use external information, create networks, use external consultants, or monitor accounting systems (Crabtree and Gomolka 1991).
Directors with higher qualifications would extend group knowledge and stimulate other board members to consider different alternatives, increasing the capacity to process problems.
As a group, a board combines a mix of competencies and capabilities that jointly represent a pool of social capital and adds value in executing the board’s governance function. Education level can be an influential factor for firm performance. Board members with higher educational qualifications will represent skills and competences as firms face demands for more sophisticated talent.
Board members with a higher level of education will also tend to be more independent minded in their decision making, confident that their educational background supports their choices. They might be more willing to suggest radical courses of action for the organization, since they are not so concerned about losing their jobs.
The institutional approach to corporate governance suggests that governance systems are affected by institutional differences. Not only board members’ culture but also their education shapes their cognitive reasoning skills and decision-making process. Directors with a higher level of education should make more informed decisions.
Finally, higher educational level is associated with innovation receptivity, tolerance for ambiguity, and the assimilation of large amounts of complex information (Goll, Johnson, and Rasheed 2007). A primary contributor to the legitimacy of CEOs and directors is human capital.
The education level of board members in Mexico has remained stable over time; 70 percent of board members had a bachelor’s degree, 28 percent a master’s, and 2 percent a PhD in 2008. For 2016, those same figures were 64, 33, and 3, respectively.
Functional Background
We define functional background diversity as the range of predominant job function where directors have worked during their careers. This variable represents the range of skill sets and network resources available to a board.
Since individuals are drawn to functional areas that suit their personalities, we can say that individuals in different functions have different cognitive models. Indeed, functional background has been found to significantly influence executives’ analytical and decision-making perspectives (Wiersema and Bantel 1992). This is probably because with time, individuals tend to adhere to their professional areas’ code of thinking. Therefore, managers will probably prefer information that fits their functional backgrounds. CEOs and board members with similar backgrounds develop common belief structures that prompt them to diagnose strategic issues analogously and to prefer similar solutions (Walsh 1988; Hambrick and Mason 1984).
Groups with a broader functional background will be better able to deal with environmental complexities (Finkelstein, Hambrick, and Cannella 2008). Boards with a more diverse set of backgrounds will benefit from the breadth of knowledge, perspectives, experiences, capabilities, and values that are represented within different fields of expertise. Further, a wider set of experiences and perspectives should lead to better and more thorough evaluation of alternatives to creatively solve complex problems, reduce groupthink, and increase the quality of decisions (Doz and Kosonen 2007).
Hambrick and Mason (1984) divided functional background in three categories: “output,” “throughput,” and “peripheral” functions. The “output” functions include functional areas related to merchandising, marketing, and sales as well as product research, development, and entrepreneurship. “Throughput” functions include engineering, process engineering, and production/operations, which intend to increase the efficiency in the transformation process. Finally, “peripheral” functions are law and finance.
Executives with “output” background tend to have greater ambiguity and less control, whereas those with “throughput” and “peripheral” background tend more to control (Hermann and Datta 2002). “Throughput” backgrounds are important in industries that are characterized by high capital intensity or concentration and lower growth. Hambrick and Mason (1984) propose that “output” functional experience of top managers would positively relate to profitability and growth in turbulent industries with observable differences, while “throughput” functional experience would be more effective in stable industries. Functional background has also been associated with selective perception in areas where the manager has a high level of competence. For example, a director with functional experience from research and development is more likely to perceive changes in competitors’ product designs than does a manager with a functional background in sales and marketing. Board members with formal education in the sciences or with a specialty in an engineering-related field have a better understanding of technology advancements and, therefore, encourage cooperative and innovative opportunities.
Overall, research evidence suggests that functional background diversity is likely to stimulate task conflict and to improve performance (Pelled, Eisenhardt, and Xin 1999).
In Mexico, 51, 8, and 41 percent had backgrounds in throughput (engineering, operations, accounting), output (marketing, sales), and peripheral (law and finance), respectively. For 2011, the measures were similar: 50, 5, and 44 percent for throughput, output, and peripheral. There is no available data for 2016.
Firm Age
Average firm age for Mexican firms stands at 38.5 years. The average age of a US S&P 500 firm is under 20 years when in the 1950s it was 60 years (Credit Suisse 2017). This is probably a signal that Mexico needs both a higher number of new public firms and related to this more firms in high-tech sectors.
Industry
We classified industry types according to the North American Industry Classification System (NAICS). Firms in the sample remain pretty stable as can be observed in Table 6.2. The only significant change in the three measured periods is in the mining, utilities, and construction sector, which went from 25 to 29 and finally 30 percent of firms in the sample.
Table 6.2 Firm variables
Reputation revolves around a firm being “known for something” (Lange, Lee, and Dai 2010). The idea of reputation as “perceived quality” (Rindova et al. 2005, p. 1035) refers to the firm’s ability to create value consistently in a way that is positively assessed by stakeholders. Reputation is an asset and can be considered an essential element of firm competitive advantage.
Firm reputation is important for its growth and survival. Trust and confidence of consumers can influence firm profitability. In the past decade, the importance of reputation has increasingly gained influence probably due to the networked world where consumers can learn in real time about product failures in faraway countries and regions, hence the importance for businesses to respond fast to crises that may question their reputation.
While it constitutes an intangible concept, a good reputation can benefit firms not only through buying preferences but also for consumer goodwill in times of crises.
Firm reputation allows product differentiation in highly competitive markets and premium pricing and can be the most important attribute that a consumer uses to decide among competing products and services.
The reputation of a business depends on different features: one is consistency in delivering on promises to customers and vendors. A second one is being transparent and responsive.
A third feature of a good reputation is how employees perceive their workplace: if they are around talented colleagues, feel well treated, and find the firm an appealing place to work, learn, and grow.
We will use this component as a proxy of firm reputation by providing evidence of the number of firms that are listed in the “Great Place to Work” list that is published every year.
Our database only has data for one year—2012—and we can see that only 14 percent of firms were included in the ranking.
Number of Committees
Committees allow the board to divide its work among directors; they also allow board members to develop specialized knowledge about specific issues. Henke (1986) argued that the board’s primary influence on strategy is through its committees.
In the United States, public company boards are required to have independent audit, nominating–governance, as well as compensation committees. Additionally, a growing number of firms are creating other types of board committees to analyze the concerns of external stakeholders. These committees are usually called public responsibility, corporate social responsibility, stakeholder relations, or external affairs committees (De Kluyver 2009).
Two factors in the past decade have combined to make board committees much more important; the first is the substantial increase in litigations against independent directors. This has made it more difficult for firms to recruit independent directors due to the exposure of potential lawsuits. The second factor is the implementation of the Sarbanes–Oxley Act in 2002. Among other issues, this act requires that firms have audit committees that include a financial expert. In 2002, the New York Stock Exchange (NYSE) amended its own rules to mandate that the boards of all NYSE firms include compensation, nominating, and audit committees made up entirely of independent directors.
Due to the recentness of these changes, there is limited empirical evidence pointing to the effectiveness of board committees; Eminet and Guedri (2010) do show how nominating committees can reduce the influence of CEOs on new directors’ appointments. In a sample of Spanish firms, García-Sánchez (2010) found a positive relationship between business technical efficiency and a higher number of board committees. Thus, we need more empirical evidence to conclude on the effectiveness of board committees.
In Mexico, securities law requires public firms to have a minimum of two board committees: audit and legal. Both committees should be made only of independent nonaffiliated directors with a minimum of three individuals in each committee.
The number of board committees in our sample went from 2.5 to 2.9 and back to 2.5 in 2008, 2011, and 2016, respectively. This means that on average Mexican public firms have 20 percent more committees than what the law requires, which probably means that most firms do not see in board committees a vehicle to improve corporate governance. These numbers could also be signaling a low commitment of government agencies to enforce regulations.
Board Evaluation
Boards must be concerned with more than organizational and management performance: they also need to review their own performance. In the past years, formal board evaluations have been increasingly used as a method of assessing the performance of boards of organizations due in part to increasing regulatory prescription.
Board evaluation can enhance board effectiveness and improve financial performance (Minichilli, Gabrielsson, and Huse 2007). Board evaluation is a good way for boards to show they are serious about their performance and that they are willing to expose themselves to the same type of processes that managers go through setting an organizational example.
Board evaluations help establish the individual and collective responsibilities of directors and identify where the board as a whole and the individual directors need to change. Evaluations allow boards to diagnose areas of concern and to identify sources of failure, translating findings into a comprehensive action plan of change.
Board evaluations confer legitimacy to a board by decreasing their dependence from the CEO and the TMT. Additionally, board evaluations contribute to improve board processes and higher qualified directors.
The number of firms with board evaluation processes has improved; it grew from 57 to 70 and then to 75 percent in 2008, 2011, and 2016, respectively.
Board Meetings
Board meetings are an important source of information for directors; more meetings mean more opportunities to obtain relevant information that will allow them to be more effective.
Board meetings are used as a measure of intensity of board activity. The effectiveness of a board partially depends on how often the board members meet to discuss the issues addressing a firm. Diligent boards will increase the level of supervision, resulting in improved firm performance. In addition to board meetings, board diligence comprises other aspects such as attentiveness during meetings, preparation, participation, and postmeeting follow-up.
Board meetings provide benefits like more time for directors to discuss, set strategy, and monitor management, but it is also a fact that these meetings have associated costs such as managerial time, travel expense, and directors’ fees.
Prior research suggests that a key impediment to board effectiveness is a lack of time to complete board duties. Hence, the more time the board spends together discussing firm issues, the more likely it is to perform their duties diligently and in accordance with shareholder interests (Lipton and Lorsch 1992). If meetings allow enough time for board members to discuss and understand in detail the operation and needs of the firm, the decision-making process will eventually be easier and take less time.
The number of board meetings in our sample has remained pretty stable. It was 3.9 meetings per year in 2008 and then went to 4 both for 2011 and 2016. This is low when compared to international standards; at S&P 500 firms, the average number of meetings is twice that of our sample (8.2). Again, like with board committees, it is significant that the figure in our sample is just what the law requires (4). This leads us to believe that board meetings are probably not perceived as a tool to improve corporate governance.
Firm Internationalization
Internationalization is a potential strategy increasingly used by business firms to learn, grow revenue, increase profitability and market share, and to eventually become an industry leader. It is an important attribute of many current strategy processes in the business world. Becoming an international firm carries serious changes in values, scope, principles, action orientation, nature of work, norms, and business regulations. The internationalization dimension is related to all these aspects of the strategy process and can transform a firm into “Transnational.” In the global marketplace, it is important to become a transnational. An internationalization process emphasizes firm development on the acquisition, integration, and use of knowledge about foreign markets and operations.
Globalization of the market is one of the most significant changes in work environment over the last decades. Long-term success and survival increasingly depend on having a strong international presence (Barkema and Vermeulen 1998). Global activities will increase firm complexity; the range of cultures, customers, and competitors will probably grow as a firm internationalizes. But globalization also provides opportunities for growth in the form of scale—scope economies and learning. Internationalization enables firms to leverage R&D costs and knowledge across countries and respond to foreign competitors in a domestic market.
Firm internationalization in our sample is measured in two ways: foreign sales and foreign assets. We do this since a firm might excel in being an international marketer but not really have much investments overseas. Foreign assets are a measure of how much “skin in the game” a firm has abroad. Our results show that the internationalization of Mexican public firms has improved significantly using either one of our proxies: with foreign sales the figure increases from 8 to 11 and then to 21 percent in 2008, 2011, and 2016, respectively. Foreign assets increase from 14 to 8 and to 21 percent for those same three years.
Listed Foreign Exchanges
Firms with access to foreign capital markets have easier access to capital. Thus, they have an incentive to implement sound governance practices. Other than more favorable terms for capital, firms also list in stronger institutional environments in order to commit to tougher disclosure and corporate governance rules in what has been termed “bonding.” Doidge et al. (2009) show how controlling shareholders that consume higher private benefits of control are more reluctant to list their shares on a US exchange despite the financing benefits. Silvers and Elgers (2015) report that bonding is an important factor to increase the valuation of non-US firms.
The percentage of firms listed in foreign exchanges has remained stable for our measured period; it was 25 percent in 2008 and then 27 percent for both 2011 and 2016.