What skills do hospitality executives need for better financial outcomes from internationalization?

Abstract

This study examines how characteristics of top executives moderate the effect of internationalization on hospitality firms’ performance. Using US publicly-traded hospitality firms, this study conducts hierarchical linear modeling to investigate how executives’ functional background and operating ability influence the relationship between internationalization and financial outcomes. Findings of this study indicate that the functional background and operating ability of top executives significantly affect internationalization’s impact on firm performance. This study also reveals different measurements of internationalization and a firm’s financial performance matter for the relationship of interest. Considering the lack of research on the moderating effects of hospitality executives’ characteristics and how they connect to internationalization and firm performance, this study bridges this gap in the literature.

Keywords

Internationalization top executives functional background operating ability firm performance

Introduction

Responding to the worldwide growth in the hospitality industry, many researchers have explored various implications of internationalization, including its impact on firm performance. While the effects of internationalization have proven controversial, internationalization has been perceived as a key strategy for a firm’s general success because it can facilitate the achievement of economies of scale and scope (Frynas et al., 2006), create innovation, and transfer valuable knowledge and skills (Gupta & Govindarajan, 2000). On the contrary, internationalization may also endanger multinational firms due to its need of extensive resources and engagement with different cultures (Gomez-Mejia and Palich, 1997). These conflicting perspectives toward internationalization have been reflected in previous literature. Some researchers found internationalization to have a positive effect on firm performance (Lee et al., 2014), while others found it to be negative (Tong and Reuer, 2007). These conflicting findings may be due to contingent factors, such as industry- or firm-specific characteristics (Birkinshaw et al., 1995). Therefore, considering potential moderators in empirical research may reveal effects that would have been otherwise undetected or obscured.

The upper echelons theory (Hambrick and Mason, 1984) suggests that executives’ various experiences, values, capabilities, and personalities affect their actions and decision-making processes, which in turn affect their firms’ decisions. Especially, the effect of top managers on organizational outcomes would become substantial especially in ambiguous and complex environments (Finkelstein et al., 2009). The hospitality industry is considered to have unstable demand and a high product differentiation relative to other industries. For example, during economic downturns (e.g., financial crisis, SARS, and COVID-19), the hospitality industry often experiences one of the worst impacts because of various restrictions and extreme decrease in demand. In an effort to survive in such environments, hospitality firms attempt to create innovative products and services. During COVID-19, for example, restaurants quickly shifted to outdoor seating and delivery services instead of indoor dining service (New York Times, 2021), while hotels established new sanitation policies to alleviate customers’ concerns and adopted contactless services by removing concierge and room services (Liu and Yang, 2021). Under these circumstances of the hospitality industry where a high level of uncertainty and complexity exist, hospitality firms’ top executives tend to exert more managerial discretion than ones from other industries. The international expansion of hospitality firms would therefore create more uncertainty and complexity because they are more prone to being affected by economic conditions that each country faces (Ottenbacher and Harrington, 2009) and they need to be physically present in local markets to produce and consume products and services (Buckley et al., 1992). Thus, top executives of hospitality firms are likely to play a crucial role in developing firms’ strategic choices and achieving desired firm performance.

While previous hospitality research has attempted to examine the direct effect of top executives’ characteristics on strategic choices and financial performance (Bloom and Jackson, 2016; Lee et al., 2016; Song and Lee, 2021), none of hospitality studies have paid attention to the moderating effect of top executives’ characteristics, such as their functional background and operating ability, in the relationship between internationalization and financial performance. Strategic fit literature suggests that the degree of congruency between its context and strategic choices has significant performance implications (Uyar et al., 2022; Xu et al., 2006; Yeon et al., 2023; Zheng and Tsai, 2019). Similarly, a strategic contingency perspective states that the alignment between firm strategy and leadership style is associated with a firms’ operational effectiveness and financial performance (Werbel and DeMarie, 2005). Thus, leveraging the upper echelons perspective as a guide, this study investigates the moderating effect of executives’ characteristics on the relationship between internationalization and financial performance. Among various characteristics of top executives, this study focuses on two in particular: their output-functional background as being more valued in contexts characterized by greater ambiguity and uncertainty in means-end linkages (Hambrick and Mason, 1984); and their operating ability as a representation of their capacity to efficiently utilize a given level of resources and generate revenues (Choi et al., 2015). Given a high level of uncertainty and complexity involved in operating and managing international operations, we propose that top executives’ output-functional background and operating ability would be conducive to better financial performance.

This study presents several theoretical and practical implications. First, the findings of this study contribute to the upper echelons perspective by showing that top executives’ functional backgrounds and operating ability matter in generating a positive financial performance via internationalization. Second, this study sheds light on hospitality leadership research by showing that while previous hospitality literature tends to pay little attention to top executives’ impacts on a firms’ strategic choices and organizational outcomes, this study partially unravels the black box of the relationship between internationalization and financial performance. Third, while previous leadership studies focused on either CEOs or top executives, this study considers both CEOs and top executives’ characteristics since they may yield different explanations in regards to organizational outcomes. Finally, this study takes into account both market-based and accounting-based performances in measuring a firms’ financial performance in order to present more rigorous results and also considers the measure of internationalization in terms of degree, diversification, and speed, making this study’s findings more comprehensive and robust. The practical implications of this study relate to hospitality operators and investors who, when cognizant of the importance of a CEO’s characteristics, can better understand the relationship between these characteristics and strategic choices to achieve better financial performance.

Literature review

Theories behind the consequences of internationalization

With regard to the effect of internationalization on firm performance, there are two dominant theoretical perspectives, suggesting positive and negative consequences. Organizational learning theory (Zahra et al., 2000) suggests that firms can gain a competitive advantage by leveraging knowledge transfer and interdependence among subsidiaries in different international locations. Following the same perspective, imperfect capital market theory posits that international hospitality firms can achieve more diversified business portfolios (Doukas and Travlos, 1988) and increase their flexibility in exploring and exploiting new resources that can enhance their competitive positioning (Baek, 2004). On the other hand, agency theory suggests a negative impact of internationalization on firm performance since greater information discrepancy between owners and managers can occur in an international context, which may then lead to greater agency costs (Jensen and Meckling, 1976).

Considering these two conflicting arguments in the hospitality context, we argue that the expectation of the impact of internationalization on firm performance is positive. It is because when expanding business abroad, many hospitality firms use a franchising strategy which is designed to alleviate agency problems (Ni and Alon, 2010). With globalization, hospitality firms have also developed global strategies, such as branding efforts and standardized products, which can facilitate international operations (Song and Lee, 2021). Accordingly, this study expects that the benefits of internationalization outweigh its costs for hospitality firms, supporting the organizational learning theory. Therefore, following hypothesis is proposed:

Hypothesis 1. Hospitality firms’ internationalization will improve their financial performance.

It should be noted, however, that this study emphasizes the moderating role of top managers’ characteristics rather than the direct link of the internationalization-firm performance relationship because the direct link has been rather extensively investigated in past hospitality literature (Song and Lee, 2021; Woo et al., 2019).

While a consensus on the financial effects of internationalization has not been formed in previous studies, scholars have posited the possibility of mixed findings about this relationship due to the varying measures of internationalization and firm performance (Hsu et al., 2013). Therefore, the present study utilizes a variety of measures of internationalization and firm performance to investigate the relationship more comprehensively. Additionally, inconsistent results in previous studies may also be due to contingent factors. In other words, the link can be better understood when considering important contingent factors such as the idiosyncratic structure of different industries and business environments (Birkinshaw et al., 1995), the type of firm (Rhou and Koh, 2014), the firm’s organizational core competencies (Frynas et al., 2006), and the process of internationalization (Vermeulen and Barkema, 2002). However, previous literature on internationalization has paid little attention to the significance of top management teams as a potential moderating factor in examining the financial outcomes of internationalization.

In the general strategic management literature, few studies have attempted to examine the effect of top executives’ characteristics on internationalization. For instance, Nielsen (2010) investigated the positive relationship between a top management team’s international diversity and a firm’s performance mediated by foreign entry; however, Nielsen (2010) focused on the internationalization of top management teams measured by their nationality and international experiences as well as its role as a motivation for a firm’s international expansion. In hospitality literature, Lee et al. (2016) found that a CEOs’ gender and tenure affect the degree of internationalization in the restaurant industry; however, Lee et al. (2016) only examined the direct effect of executives’ characteristics on internationalization, which differs from our study as it investigates the moderating role of executives’ characteristics on internationalization and firm performance. More recently, Song and Lee (2021) suggested that a national profile of top management teams positively affects the financial performance of internationalization in the hospitality industry. Both Song and Lee (2021) and Nielsen (2010)’s studies focused only on executives’ demographic characteristic (i.e., nationality and international experiences) without considering other possible attributes (e.g., executives’ functional backgrounds and abilities). Outside of these studies, such examination has been surprisingly scarce in both general internationalization and hospitality literature, considering the important role of top executives and their characteristics when examining the link between internationalization and firm performance. Therefore, this study attempts to bridge this gap by incorporating multiple measures of internationalization and firm performance as well as top executives’ functional backgrounds and operating abilities.

The upper echelons perspective

The upper echelons perspective (Hambrick and Mason, 1984) states that attributes of top managers can be good indicators of the psychological constructs influencing their interpretation of external and internal situations and their formulation of appropriate strategies. Hambrick and Finkelstein (1987) later suggested the notion of managerial discretion, which is defined as a top executive’s ability to affect organizational outcomes. Many researchers have established a framework to assess the extent of managerial discretion for numerous industries, discovering that some industries with strong market growth rates, demand instability, and product differentiability offer more discretion than others (Finkelstein et al., 2009). This framework showed that executives in the hospitality industry are granted a relatively high level of managerial discretion due to unstable demand and high product differentiation.

Moreover, with the notion of strategic fit in strategic management, the strategic implementation school emphasizes tailoring the administrative and organizational mechanisms in line with firms’ strategies (Venkatraman and Camillus, 1984). It means that careful attention needs to be given to the fit between organizational strategy and other key elements such as reward systems, organizational culture, and managerial characteristics. Specifically, the concept of managerial fit illustrates that a firm’s performance largely depends upon the degree to which the competencies and profiles of its top managers align with the strategic choices of the firm (Venkatraman and Camillus, 1984). Thus, when examining a firm’s performance influenced by internationalization, a fundamentally important question arises as to whether or not top managers in an organization possess the experiences and capabilities that can cope with the uncertainty and complexity involved in managing international operations (Kochhar and Hitt, 1995). Put differently, firms with top managers who are competent and capable of operating an international business are more likely to lead firms to better performance than firms without such managers.

Despite the importance of top managers’ experiences and capabilities when managing international operations, hospitality studies have yet to examine the moderating effect of top executives’ functional backgrounds and operating ability concerning internationalization and financial performance. Therefore, using the notions of fit and the upper echelons perspective, this study suggests that executives’ past experiences focusing on innovation and revenues would be more advantageous in the hospitality industry’s ever-changing and complex environment. Moreover, given the ambiguity of foreign marketplaces, hospitality firms may face higher-than-average complexity when managing overseas operations; thus, top executives with high operating ability in the hospitality industry may be particularly critical to a firm’s success in international markets. With these factors in mind, this study focuses on exploring the role of hospitality executives’ functional backgrounds and operating ability. Specific arguments for each moderation effect are provided in the following section.

Executives’ functional backgrounds

Hambrick and Mason (1984) proposed that each executive brings to their job an orientation established through experiences in their functional areas. Depending on an executive’s primary functional areas, Hambrick and Mason identified production, process engineering, and accounting/finance areas as throughput backgrounds, and marketing, sales, and research and development areas as output backgrounds. Top executives with throughput backgrounds often pursue cost control, asset adjustment, and efficiency; whereas top executives with output backgrounds tend to emphasize increasing revenue, seeking new opportunities, and monitoring products and markets (Chen and Hambrick, 2012). Since distinctive functional areas encourage top managers to put an emphasis on different facets of business, a firm’s strategies often include management teams made up of people with different functional backgrounds which will inevitably influence the likelihood and degree of their effectiveness and success.

The degree to which a functional background is more valued depends on how much means-ends linkages are uncertain and ambiguous (Herrmann and Datta, 2005). In their seminal paper, Hambrick and Mason (1984) suggest that output-functional experience improves a firm’s performance in turbulent and uncertain environments, such as in an international operation, that demand more flexible and differentiated strategies. Furthermore, Chen and Hambrick (2012) suggest that output-oriented executives can better position firms to pursue market expansion and revenue growth, which can directly extrapolate to internationalization.

Based upon the arguments above, it can be reasonably argued that, as top executives with more output-functional experiences are highly capable of creating new and innovative opportunities and managing the uncertainty and complexity in an environment, their capabilities are better aligned with internationalization strategies. In other words, when firms are managed by top executives with a higher level of output-functional background, the effect of internationalization on their financial performance would be positively enhanced. Since a focus on either entire top executive members or a single CEO may generate different organizational outcomes, separate hypotheses are developed for top executive members and CEOs. Accordingly, this study proposes the following hypotheses:

Hypothesis 2a

The proportion of top executives with output-functional backgrounds will positively moderate the effect of a firm’s internationalization and its financial performance.

Hypothesis 2b

A CEO with an output-functional background will positively moderate the effect of a firm’s internationalization and its financial performance.

Executives’ operating ability

Executives’ operating ability is defined as the ability to generate profits through an efficient utilization of firm resources (Choi et al., 2015). Accordingly, executives with superior operating ability are likely to make efficient and effective decisions regarding cost-cutting, capital and labor investment, and revenue-generating activities. Also, they tend to create an efficient plan to grow from current accruals to future cash flows. For instance, in the case of production purchases, executives with a higher operating ability are less likely to purchase certain items subject to a high rate of obsolescence. Moreover, highly able CEOs make more efficient investment decisions for their firms (Gan, 2019).

When firms expand into foreign markets, additional complexity and uncertainty naturally arise, triggering a period of learning and adjustment for the firms (Lu and Beamish, 2001). Analyzing, entering, and managing foreign markets require significant managerial ability and time, which increases the demand on executives (Reuber and Fischer, 1997). In such a more complex and uncertain situation, executives with a high operating ability should be more capable of creating operational conditions in which their transactions in foreign markets can be executed in a more efficient and effective manner.

Especially for multinational hospitality firms, executives’ operating ability may be particularly critical to their success in international markets. Hospitality firms differ from manufacturing firms in that products and services are produced, consumed, and customized simultaneously (Buckley et al., 1992). In other words, hospitality firms cannot achieve global integration in the same manner as some other industries, such as the manufacturing industry, because they need to tailor goods to the locale and satisfy local needs by production being physically done in foreign markets. Furthermore, the hospitality industry is highly sensitive to its economic environment and has limited cash holdings because the profit margin is often very narrow (Ottenbacher and Harrington, 2009), which can further amplify the importance of executives’ operating ability, especially in their international operations. Thus, this study proposes that hospitality executives with a high operating ability are more suitable to efficiently execute an internationalization strategy with a tight budget, cope with different economic conditions, manage complex international contexts, and achieve savings for the purpose of successful outcomes from internationalization. Based on these rationales, the following two separate hypotheses are proposed for top executives and CEOs, respectively:

Hypothesis 3a

Top executives with a higher operating ability will positively moderate the effect of a firm’s internationalization and its financial performance.

Hypothesis 3b

CEOs with a higher operating ability will positively moderate the effect of a firm’s internationalization and its financial performance.

Methodology

Sample

This study uses a sample of publicly-traded US hospitality companies, including casinos (721,120), hotels (721,110), limited-service restaurants (722,513), and full-service restaurants (722,511) based on the North American Industry Classification System (NAICS). Initially, this study utilized the COMPUSTAT database to extract firms’ financial information (e.g., Tobin’s q, total assets, liabilities, liquidity, and capital intensity), which returned 4472 firm-year observations from 1992 to 2021. Then, we collected firms’ internationalization and franchising data using firms’ annual financial reports (10-Ks). Since many firms do not provide information about international properties in their annual financial reports, we dropped 3534 firm-year observations at this stage. Information on executives (e.g., executives’ ages, tenure, and equity compensation) was collected from various sources including Execucomp, BoardEx, proxy statements, Marquis Who’s Who, and Bloomberg. Missing data was eliminated after the data from all sources had been integrated. Additionally, this study detected and excluded outliers using the criteria of an absolute value of a studentized residual of 4 (Younger, 1979). As specified in each results table, the final sample size for the analyses ranged from 764 to 811 firm-year observations. The sample sizes vary between analyses due to the removal of outliers in each model.

Variables

Firm performance

This study measures financial and operational dimensions of firm performance with three measures (Tobin’s q and return on assets). Financial performance shows the market’s expectations for the prospective performance of a firm, while operational performance shows the historical performance of a firm (Venkatraman and Ramanujam, 1986).

This study measures approximate Tobin’s q, a financial performance measure, following the Chung and Pruitt (1994)’s study: [(share price × common shares outstanding) + outstanding preferred stock + (short-term assets – short-term liabilities + long-term debt)]/total assets. This study then uses return on assets (ROA = net income/total assets) to measure the firm’s operational performance (Song and Lee, 2021).

Internationalization

The operationalization of internationalization has long been the subject of critical discussion. It has been argued that the use of a single internationalization measure—such as the percentage of a firm’s foreign sales compared to its overall sales, or the number of its foreign units—is inadequate to fully encapsulate the multifaceted nature of internationalization (Glaum and Oesterle, 2007). To address this issue, this paper operationalizes a firm’s internationalization in three ways, degree, speed, and diversification, for a more comprehensive examination. The degree of internationalization (INTDegree) is measured as a ratio of international units to total properties (Lee et al., 2014, 2016). The speed of internationalization (INTSpeed) is measured by the annual change in the number of international properties (international properties (t) – international properties (t-1)) (Vermeulen and Barkema, 2002). The international diversification (INTBerry) is measured by the Berry-Herfindahl index, following previous studies (Grant et al., 1988; Nachum 2004), as follows:

INTBerry = 1 - Ʃ P_{i}^{2}

where P_i is the proportion of properties in each nation (i) to the total number of properties. The larger this index becomes, the more internationally diversified a firm is.

Identification of top executive members

Following Hambrick et al. (2015), the current study identifies top executive members at the level of senior vice president or higher (e.g., chief executive officer, chief financial officer, chief operating officer, executive vice president, and senior vice president). If a sampled firm’s top executives totaled less than five, we added the next executive(s) in the hierarchy.

Executives’ functional backgrounds

To classify functional background, this study follows the classification suggested by Datta and Rajagopaln (1998). The functional backgrounds of CEOs and TMTs are divided into throughput and output categories. Executives who have experience in production, process engineering, general counsel, secretary, accounting/finance, and administrative functions are classified as throughput-oriented executives. Those who have experience in all other functional areas, such as marketing, sales, and research and development, are classified as output-oriented executives. The top executives’ functional backgrounds (TMTFunc) were measured as the proportion of output-oriented executives to all members. The functional background of a CEO (CEOFunc) is measured by a binary variable: 1 for CEOs with output-functional backgrounds and 0 for CEOs with throughput functional backgrounds.

Executives’ operating ability

A number of previous research implemented a potentially weak measurement of operating ability. For example, Fee and Hadlock (2003) measured top executives’ operating ability as a firm’s prior industry-adjusted stock return. Rajgopal et al. (2006) used a CEO’s exposure to financial press and a firm’s prior industry-adjusted return on assets. These previous studies have noted that their operating ability measures are prone to noise and they are difficult to relate exclusively to the executives. More recently, the most compelling evidence that individual executives have a quantifiable impact on their organizations comes from research analyzing executives’ fixed-effects (Demerjian et al., 2012). Therefore, following Choi et al. (2015), this study measures executives’ operating ability using a regression method to estimate the degree to which individual-specific effects correlate with the operating performance of a firm. The regression model is designed to evaluate each executive’s operating ability while controlling for a firm’s time-varying and time-invariant factors as well as yearly fixed-effects.

The following regression was used to estimate executives’ operating ability:

{IROA}_{i t - 1} = β_{0} + β_{1} X_{i t - 2} + β_{t} {Year}_{t - 1} + β_{i} {Firm}_{i} + β_{m} {CEO}_{m} + β_{n} {NonCEO}_{n} + ε_{i t - 1}

(1)

where IROA is the return on assets adjusted by industry median ROA (= income before extraordinary item_t/total assets_t-1 – industry median ROA_t). X includes time-varying control variables at the firm level, which are the same as control variables in the main analysis. Year_t and Firm_i are dummy variables for year- and firm-specific effects. CEO is a binary variable for the CEO of each firm, and β_m is the estimated CEO operating-specific ability (CEOAbility). Therefore, a positive coefficient of the CEO variable indicates a high operating ability, and vice versa. Fixed effects for the group of managers who are non-CEOs are included because this research intends to disentangle CEO effects from those of other managers. The coefficient of NonCEO (β_n) is the estimated non-CEOs’ operating-specific ability (TMTAbility). Finally, when estimating the regression equation, this study clustered standard errors of estimates at the firm level to account for serial correlations within the cluster.

When estimating regression (1), it is evident that executives’ fixed-effects cannot be estimated separately for managers who remain at a given firm during the sample period because of perfect collinearity. Thus, it is statistically appropriate to only consider executives who stayed in a firm for a subset of the entire sample period. Thus, CEOs’ and non-CEOs’ fixed-effects in the regression equation (1) include only executives who worked for a subset of the sample period.

Control variables

Overall, we considered eight variables throughout this study to achieve the most accurate dataset. First, this study controls firm size (SIZE) to account for possible confounding effects from economies of scale, market power, and other relevant effects related to a firm’s size (Nachum, 2004). Firm size is measured as the log of total assets. Second, this study controls a firm’s leverage considering the positive impacts of tax savings and the negative impacts of financial distress (Brealey and Schoar, 2003). Leverage is calculated as a firm’s total liabilities divided by its total assets. Third, the study includes a firm’s capital intensity (=fixed assets/total assets) that can serve as collateral to alleviate negative effects of any unfavorable business conditions on the firm (Charalambakis et al., 2008). Fourth, a firm’s liquidity measured by quick ratio (= sum of cash, securities, and accounts receivable divided by current liability), is controlled due to its buffering role against market volatilities and/or surprises. This helps the firm better respond to market conditions, thus enhancing its performance (Lin et al., 2011). Fifth, our study considers a firm’s franchising strategy seeing how a firm can decrease risk through franchising (Hoover et al., 2003). Franchising is measured as the proportion of franchised units to a total number of units. Sixth, the study put a lagged value of return on assets in the models to control for its impact on the firm’s subsequent performance. Seventh, this study includes three characteristics of executives that change over time: age, tenure, and compensation. According to previous studies (Geletkanycz and Hambrick, 1997), the average number of years that top executives serve in a given firm is used as a proxy for tenure. The amount of equity compensation granted to TMT members was used as a proxy for compensation. Lastly, this study accounts for year effects by including year dummies.

Analytical technique

This study employs the following model for the full analysis:

{ROA}_{i t} (Q_{i t}) = η_{0} + η_{1} INTDegree {(Speed, Berry)}_{i t - 1} + η_{2} {EXE (CEO)}_{i t - 1} + η_{3} INTDegree (Speed, Berry) \times {EXE (CEO)}_{i t - 1} + η_{4 - 11} Control s_{i t - 1} + ϵ_{i t}

(2)

where INTDegree (Speed, Berry)_it-1is the degree, speed, and diversification of internationalization for firm i and year t-1, respectively. EXE and CEO represent the two characteristics (functional background and operating ability) of executives and the CEO for firm i and year t-1, respectively. Controls are the control variables defined in the previous section of this study.

The sample of this study has a panel structure, combining cross-sectional (individuals executives, firms, and industries) and time-series (1992–2021) data. Pooled OLS produces biased estimates because of unobserved effects from individuals, firms, industries, and time (Wooldridge, 2002). To alleviate the problem of analyzing panel data, the current study used traditional fixed-/random-effects models as well as hierarchical linear modeling (HLM). However, as results from both techniques were qualitatively the same, this study reports findings using HLM due to its analytical strengths. Hierarchical Linear Modeling (HLM) accounts for three levels of random variation nested in the analysis: top executives (the bottom level) within firms and firms (the middle level) within industries (the top level) for accurate inferences (Hofmann et al., 2000). Industries are defined as casinos, hotels, restaurants, etc. HLM has the advantage of estimating multilevel influences by simultaneously investigating relationships within and between hierarchical levels in the sample (Hair and Fávero, 2019). Furthermore, as previous research suggested, standard errors should be clustered at the highest level (Cameron and Miller, 2015). This study estimates robust standard errors clustered by industry to alleviate the possibility of inflating coefficient estimation (Petersen, 2009).

Results

Descriptive statistics

Table 1 shows the sample’s structure, which is composed of full-service restaurants (46.98%), limited-service restaurants (23.37%), hotels and motels (17.08%), and casino hotels (12.57%). Table 2 presents descriptive statistics of the data. Tobin’s q (Q) ranges from 0.01 to 17.21, and it has a mean of 1.96. This means that, on average, the sampled firms present approximately 1.96 times the market value over their replacement value. Return on assets (ROA) ranges from −1.87 to 7.84 and averages at 0.04. International sales growth (ISG) ranges from −31.29 to 678.61 with a mean of 3.19%. The three internationalization measures (INTDegree, INTBerry, and INTSpeed) have mean values of 0.21, 0.94, and 0.19, respectively. Looking at internationalization more closely, the percentage of international units in the hospitality industry is 21% on average. Meanwhile, the hotel and motel industry has 39%, the casino industry has 37%, the full-service restaurant industry has 12%, and the limited-service restaurant industry has 16% of their properties in international locations. The two moderators (functional background and operating ability) are also described in Table 2. The output-functional executive averages at 0.59 and the output-functional CEOs at 0.44. This means that 60% of top executives are output-oriented, while there are more throughput-oriented CEOs in the hospitality industry. The operating ability of TMTs and CEOs has a mean of 0.00 and −0.01, respectively. The operating ability of top executives in the hospitality industry shows more variations in our study (−0.44 to 0.11 for CEO operating ability and −0.22 to 0.10 for executive operating ability) compared to those in Choi et al.’s (2015) study (−0.044 to 0.024 for executives of all firms from ExecuComp database between 2000 and 2011). Control variables show no particular abnormality in their descriptive values.

Table 1.

Sample structure.

NAICS		Freq.	Percent
721,110	Hotels and motels excluding casino hotels	144	17.08
721,120	Casino hotels	106	12.57
722,511	Full-service restaurants	396	46.98
722,513	Limited-service restaurants	197	23.37
Total		843	100.0%

Table 2.

Descriptive statistics.

Variable	Obs.	Mean	Std. Dev.	Min	Max
Q	843	1.96	2.01	0.01	17.21
Return on assets	843	0.04	0.35	−1.87	7.84
INTDegree	843	0.21	0.26	0.00	1.00
Hotels and motels excluding casino hotels	144	0.39	0.35	0.00	0.89
Casino hotels	106	0.37	0.26	0.00	0.91
Full-service restaurants	396	0.12	0.18	0.00	1.00
Limited-service restaurants	197	0.16	0.17	0.00	0.78
INTBerry	843	0.94	0.18	0.00	1.00
INTSpeed	843	0.19	1.04	−0.85	17.36
Output-functional CEO	843	0.59	0.49	0.00	1.00
Output-functional executives	843	0.44	0.22	−0.50	1.00
CEO operating ability	843	−0.01	0.09	−0.44	0.11
Executives operating ability	843	0.00	0.05	−0.22	0.10
Firm size	843	3.01	0.74	0.00	4.49
Leverage	843	0.74	0.57	0.00	4.35
Capital intensity	843	0.55	0.22	0.00	0.94
Liquidity	843	1.38	4.76	0.10	113.75
Franchising	843	0.35	0.36	0.00	1.00
Avg. executives’ tenure	843	8.95	4.83	1.00	25.33
3-year CEO equity	843	0.44	0.45	0.00	4.64

According to the results of the Pearson correlations in Table 3, we did not find any extremely high correlations between variables, except for CEO operating ability and top executive operating ability (ρ = 0.71). Since each moderating variable is considered in separate models, the high correlations between CEO and executives’ operating ability would not influence the estimation. Additionally, we checked variance inflation factors (VIFs) for main analyses that resulted in less than 10. Thus, the estimation from the analyses is considered reliable (O’brien, 2007).

Table 3.

Pearson’s correlations.

		(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)	(13)
(1)	lINT degree	1.00
(2)	lINT berry	−0.50***
(3)	lINT speed	−0.14*	0.09
(4)	CEOFunc	−0.21**	0.32***	0.00
(5)	TMTFunc	−0.07	0.22***	0.01	0.50***
(6)	CEOAbility	0.05	−0.30***	0.11	0.03	−0.00
(7)	TMTAbility	−0.14*	−0.10	0.15*	0.16*	0.17**	0.71***
(8)	Size	0.31***	−0.27***	−0.08	−0.25***	−0.11	0.12	0.05
(9)	Leverage	0.33***	−0.02	−0.09	−0.18**	−0.04	−0.29***	−0.30***	−0.17**
(10)	Capital intensity	−0.22***	−0.20**	0.06	−0.06	−0.25***	0.32***	0.30***	−0.08	−0.35***
(11)	Liquidity	0.23***	−0.31***	0.02	−0.03	−0.01	0.13*	0.09	0.25***	−0.05	−0.13*
(12)	Franchising	0.03	0.31***	−0.03	0.09	0.31***	−0.33***	−0.29***	−0.33***	0.46***	−0.70***	−0.15*
(13)	Avg. executives’ tenure	−0.22***	0.07	0.03	0.09	0.09	0.32***	0.39***	0.33***	−0.23***	0.07	0.04	−0.23***
(14)	3-year CEO equity	−0.12	0.23***	−0.03	0.23***	0.24***	0.12	0.31***	−0.03	−0.06	−0.01	−0.06	0.06	0.25***

*p < .05, **p < .01, and ***p < .001.

Main analyses: hypotheses testing

Table 4 shows the direct effect of internationalization on a firm’s performance. Models 4-(1) and 4-(2) present significant and positive coefficients of INTDegree_t-1 for each measure of firm performance (β = 1.613, p < .05 in Model 4-(1) and β = 0.018, p < .05 in Model 4-(2)). In Models 4-(3) and 4-(4), the coefficients of INTBerry_t-1 are significant and positive for Q (β = 3.282, p < .05 in Model 4-(3)), but marginally significant for ROA (β = 0.032, p < .10 in Model 4-(4)). In Models 4-(5) and 4-(6), the coefficients of INTSpeed_t-1 are significant and positive for ROA (β = 0.004, p < .05 in Model 4-(6)), but marginally significant for Q (β = 0.018, p < .10 in Model 4-(5)). Our analyses, thus, support Hypothesis 1 by showing that internationalization generally has a positive effect on a firm’s performance.

Table 4.

Hypothesis 1: Main relationship between internationalization and firm performance.

	DV: Q_t	DV: ROA_t	DV: Q_t	DV: ROA_t	DV: Q_t	DV: ROA_t
	4-(1)	4-(2)	4-(3)	4-(4)	4-(5)	4-(6)
INTDegree _t-1	1.613* (0.73)	0.018* (0.00)
INTBerry _t-1			3.282* (1.69)	0.032^† (0.01)
INTSpeed _t-1					0.018^† (0.05)	0.004* (0.00)
ROA_t-1	2.341*** (0.73)	0.062 (0.05)	2.736*** (0.73)	0.429** (0.05)	6.110*** (0.82)	0.285*** (0.09)
Size_t-1	−0.817** (0.26)	−0.041*** (0.01)	−0.875*** (0.26)	−0.021* (0.01)	−0.389 (0.26)	−0.040† (0.02)
Leverage_t-1	0.430† (0.25)	0.04*** (0.01)	0.834 (0.25)	0.024** (0.01)	0.637* (0.26)	0.029 (0.02)
Capital intensity_t-1	0.822 (0.67)	0.034 (0.04)	0.712 (0.67)	0.023 (0.03)	0.762* (0.37)	0.066 (0.06)
Liquidity_t-1	0.047 (0.14)	0.009 (0.01)	0.159 (0.15)	0.001 (0.01)	0.096 (0.23)	−0.002 (0.01)
Franchising_t-1	0.345 (0.47)	0.032 (0.02)	0.294 (0.47)	0.040* (0.02)	1.381 (0.98)	0.234*** (0.06)
Avg. executives’	0.066***	0.004***	0.067***	0.002**	0.047	0.002*
tenure_t	(0.02)	(0.00)	(0.02)	(0.00)	(0.03)	(0.00)
3-year CEO equity	−0.012 (0.13)	0.019* (0.01)	−0.007 (0.13)	0.011 (0.01)	−0.063 (0.06)	0.007 (0.01)
Year fixed-effects	Yes	Yes	Yes	Yes	Yes	Yes
Industry fixed-effects	Yes	Yes	Yes	Yes	Yes	Yes
Wald chi²	187.11***	170.34***	191.06***	333.52***	210.68***	331.34***
Obs.	811	811	810	810	764	764
No. of firms	58	58	58	58	49	49
No. of cluster	4	4	4	4	4	4

^†p < .10, *p < .05, **p < .01, and ***p < .001.

( ) contains robust standard errors.

Tables 5 through 8 present the main results from testing our hypotheses. The control variables produced qualitatively similar patterns to those in Table 4. However, we omitted them from the tables to make the presentation more concise. The results of testing Hypothesis 2a are in Table 5. In Models 5-(1) and 5-(2), none of the coefficients of INTDegree_t-1 × TMTFunc _t-1 are statistically significant. In Models 5-(3) and 5-(4), the coefficient of INTBerry_t-1 × TMTFunc _t-1 is positively significant for ROA (β = 0.016), but negatively significant for Q (β = –8.841). In Models 5-(5) and 5-(6), the coefficient of INTSpeed_t-1 × TMTFunc _t-1 is negatively significant for ROA (β = –0.019).

Table 5.

Hypothesis 2a: The moderating effect of TMT functional background.

	DV: Q_t	DV: ROA_t	DV: Q_t	DV: ROA_t	DV: Q_t	DV: ROA_t
	5-(1)	5-(2)	5-(3)	5-(4)	5-(5)	5-(6)
INTDegree _t-1	1.870* (0.71)	0.033 (0.04)
INTBerry _t-1			1.633* (0.87)	0.029 (0.12)
INTSpeed _t-1					−0.004 (0.04)	0.003 (0.00)
TMTFunc _t-1	0.439 (0.36)	0.035* (0.02)	0.258 (0.32)	0.029 (0.01)	−0.193 (0.55)	0.027* (0.01)
INTDegree_t-1× TMTFunc _t-1	1.327 (1.24)	0.059 (0.07)
INTBerry _t-1 × TMTFunc _t-1			−8.841** (3.33)	0.016* (0.09)
INTSpeed _t-1× TMTFunc _t-1					0.622 (0.34)	−0.019*** (0.00)
Year fixed-effects	Yes	Yes	Yes	Yes	Yes	Yes
Industry fixed-effects	Yes	Yes	Yes	Yes	Yes	Yes
Wald chi²	186.60***	911.92***	190.52***	349.95***	202.43***	349.32***
Obs.	811	811	810	810	764	764
No. of firms	58	58	58	58	49	49
No. of cluster	4	4	4	4	4	4

^†p < .10, *p < .05, **p < .01, and ***p < .001.

Table 6.

Hypothesis 2b: The moderating effect of CEO functional background.

	DV: Q_t	DV: ROA_t	DV: Q_t	DV: ROA_t	DV: Q_t	DV: ROA_t
	6-(1)	6-(2)	6-(3)	6-(4)	6-(5)	6-(6)
INTDegree _t-1	2.371*** (0.74)	0.017 (0.03)
INTBerry _t-1			5.080 (5.14)	0.258 (0.20)
INTSpeed _t-1					0.009** (0.00)	0.004* (0.00)
CEOFunc _t-1	0.129 (0.11)	0.002 (0.01)	0.120** (0.05)	0.024** (0.01)	0.132* (0.07)	−0.001 (0.00)
INTDegree _t-1 × CEOFunc _t-1	0.530 (0.70)	0.006 (0.04)
INTBerry _t-1 × CEOFunc _t-1			−3.929** (0.74)	0.387* (0.18)
INTSpeed_t-1 × CEOFunc _t-1					−0.054 (0.14)	−0.008* (0.00)
Year fixed-effects	Yes	Yes	Yes	Yes	Yes	Yes
Industry fixed-effects	Yes	Yes	Yes	Yes	Yes	Yes
Wald chi²	2210.13***	327.82***	184.30***	174.27***	212.38***	334.41***
Obs.	811	811	810	810	764	764
No. of firms	58	58	58	58	49	49
No. of cluster	4	4	4	4	4	4

†p < .10, *p < .05, **p < .01, and ***p < .001.

Table 7.

Hypothesis 3a: The moderating effect of TMT operating ability.

	DV: Q_t	DV: ROA_t	DV: Q_t	DV: ROA_t	DV: Q_t	DV: ROA_t
	7-(1)	7-(2)	7-(3)	7-(4)	7-(5)	7-(6)
INTDegree _t-1	1.710* (0.91)	0.008 (0.01)
INTBerry _t-1			3.843* (1.80)	0.025 (0.10)
INTSpeed _t-1					0.055 (0.12)	0.002 (0.00)
TMTAbility_t-1	5.392* (2.12)	0.836*** (0.10)	5.518** (1.87)	0.639*** (0.21)	0.365 (2.33)	0.412 (0.13)
INTDegree _t-1 × TMTAbility _t-1	3.935** (1.94)	0.903** (0.30)
INTBerry _t-1× TMTAbility _t-1			−4.456 (2.77)	0.634 (1.81)
INTSpeed _t-1× TMTAbility _t-1					0.710 (1.47)	0.012 (0.03)
Year fixed-effects	Yes	Yes	Yes	Yes	Yes	Yes
Industry fixed-effects	Yes	Yes	Yes	Yes	Yes	Yes
Wald chi²	193.69***	395.66***	195.47***	375.77***	211.88***	431.99***
Obs.	811	811	810	810	764	764
No. of firms	58	58	58	58	49	49
No. of cluster	4	4	4	4	4	4

^†p < .10, *p < .05, **p < .01, and ***p < .001.

Table 8.

Hypothesis 3b: The moderating effect of CEO operating ability.

	DV: Q_t	DV: ROA_t	DV: Q_t	DV: ROA_t	DV: Q_t	DV: ROA_t
	8-(1)	8-(2)	8-(3)	8-(4)	8-(5)	8-(6)
INTDegree _t-1	2.160 (1.31)	0.007 (0.02)
INTBerry _t-1			2.900 (3.45)	0.232* (0.09)
INTSpeed _t-1					−0.030 (0.03)	0.003^a (0.00)
CEOAbility _t-1	1.489*** (0.48)	0.010* (0.04)	0.959 (0.88)	0.186** (0.06)	0.824 (0.65)	0.119*** (0.03)
INTDegree _t-1 × CEOAbility _t-1	2.563** (0.34)	0.246** (0.09)
INTBerry _t-1 × CEOAbility _t-1			1.147 (18.14)	1.943*** (0.47)
INTSpeed _t-1 × CEOAbility _t-1					0.131* (0.05)	0.019*** (0.00)
Year fixed-effects	Yes	Yes	Yes	Yes	Yes	Yes
Industry fixed-effects	Yes	Yes	Yes	Yes	Yes	Yes
Wald chi²	189.94***	357.69***	184.63***	387.34***	211.40***	369.92***
Obs.	811	811	810	810	764	764
No. of firms	58	58	58	58	49	49
No. of cluster	4	4	4	4	4	4

†p < .10, *p < .05, **p < .01, and ***p < .001.

Table 6 provides the results from testing Hypothesis 2b. In Models 6-(1) and 6-(2), none of the coefficients of INTDegree_t-1 × CEOFunc _t-1 are significant for firm performance. In Models 6-(3) and 6-(4), the coefficient of INTBerry_t-1 × CEOFunc _t-1 is negatively significant for Q (β = –3.929); yet it is positively significant for ROA (β = 0.387). Models 6-(5) and 6-(6) show that the coefficient of INTSpeed_t-1 × CEOFunc _t-1) is not significant for Q, while it is negatively significant for ROA (β = -0.008).

The results of testing Hypothesis 3a are in Table 7. Models 7-(1) and 7-(2) show positively significant coefficients of INTDegree_t-1 × TMTAbility_t-1 for all performance measures (β = 3.935 for Q and β = 0.903 for ROA). The coefficients of INTBerry_t-1 × TMTAbility_t-1 in Models 7-(3) and 7-(4) are statistically insignificant for all performance measures. Similarly, Models 7-(5) and 7-(6) present statistically insignificant coefficients of INTSpeed_t-1 × TMTAbility_t-1 for all firm performance measures.

Table 8 displays the results of testing Hypothesis 3b. Models 8-(1) and 8-(2) show positively significant coefficients of INTDegree_t-1 × CEOAbility_t-1 for all performance measures (β = 2.563 for Q and β = 0.246 for ROA). In Models 8-(3) and 8-(4), the coefficient of INTBerry_t-1 × CEOAbility_t-1 is positively significant for ROA (β = 1.943), but insignificant for Q. In Models 8-(5) and 8-(6), the coefficients of INTSpeed_t-1 × CEOAbility_t-1 are positively significant for all performance measures (β = 0.131 for Q and β = 0.019 for ROA).

We conducted additional analyses to compare the degree to which the moderating effect of executives’ characteristics vary across subsectors (restaurants, hotels, hotels/casinos, etc.) of the hospitality industry. The results of individual subsectors are qualitatively similar to the original and aggregated results.

Discussion and conclusion

This study investigates the effect of top executives’ and CEOs’ functional backgrounds and operating ability on the link between internationalization and financial performance. The findings of this study support a positive effect of internationalization on a firm’s financial performance. By empirically quantifying the effect of internationalization, we conclude that a one-standard deviation increase in INTDegree increases Q by 0.419 units (1.613 × 0.26). Relative to the variability of Q (2.01), this represents approximately a 21% influence. Furthermore, a one-standard deviation increase in INTDegree increases ROA by 0.005 units (0.018 × 0.26). Relative to the variability of ROA (0.35), this represents approximately a 1.3% influence. Moreover, a one-standard deviation increase in INTBerry increases Q by 0.59 units (3.282 × 0.18). Relative to the variability of Q (2.01), this represents approximately a 29% influence. A one-standard deviation increase in INTSpeed increases ROA by 0.004 units (0.004 × 1.04). Relative to the variability of ROA (0.35), this represents approximately a 1.2% influence. Our findings demonstrate more meaningful impacts on Q than ROA from a managerial perspective.

Summarizing the moderating effects of executives’ functional backgrounds and operating ability, this study suggests that the effect of executives’ functional backgrounds is more apparent when a hospitality firm internationally diversifies its geographic portfolio, whereas the effect of executives’ operating ability is more influential when a hospitality firm increases the number of international subsidiaries.

In general, the findings of the current study generally support upper echelons theory and also align with the results of previous studies. However, our findings also suggest a different viewpoint depending on the measure of internationalization and firm performance. As for the moderating effect of executives’ functional backgrounds, we argued that output-oriented executives (e.g., marketing, sales, and R&D) would be more helpful in generating better performance from international operations, which is consistent with the argument in Li and Singal’s (2019) study. However, according to our findings, this argument seems to be significant only for operational performance, or when a firm operates in diverse international locations. These results support Hambrick and Mason’s (1984) suggestion that output-functional experiences of executives are valued more in situations that demand flexible and differentiated strategies. In other words, a firm investing in diverse foreign markets may need to develop a variety of international strategies to meet diverse local needs. In such conditions, output-focused executives would be a better fit. On the other hand, the results of this study suggest that output-focused executives are unable to make significant improvements in operational performance when a firm expedites its internationalization. This result is aligned with the perspective of absorptive capacity (Kostopoulos et al., 2011), defined as an ability to perceive the value of new information, integrate it, and apply it to organizational goals. Thus, output-oriented hospitality firms may take some time to develop greater efficiencies to absorb the fast growth of the number of international units.

In contrast to previous studies suggesting the positive effect of output-oriented top executives on a firm’s stock performance (You et al., 2020), our results also show that market-based performance suffers for a firm with output-functional executives as they diversify their international operations into diverse countries. This finding indicates that the market may well understand the characteristics of hospitality firms, such as high business risk, high competition, and tight margins (Guillet and Mattila, 2010). Therefore, the market may view that operations across different nations may burden a hospitality firm more severely and, as a result, cost-efficiency and controls may be more pertinent than innovative international management.

Thirdly, the positive effect of executives’ operating ability on the relationship between internationalization and financial performance is a meaningful finding in that operating ability was assessed by the amount to which executives’ fixed-effects correlate with firm performance. Most strategic management literature estimated this correlation by using firm-level operating efficiency (Demerjian et al., 2012). Interestingly, the operating ability of CEOs appears to matter more than that of top executives as a whole. While the operating ability of top executives positively moderates the relationship only when a firm increases its degree of internationalization, the operating ability of CEOs seems beneficial for all measures of firm performance, regardless of internationalization strategies. These findings can be well-aligned with the findings of Hayes and Scharefer’s (1999) study in that the market highly evaluates firms with more-talented executives. Also, this result is consistent with the findings of Bennedsen et al.’s (2020) study in that the effects of CEOs and other executives are dissimilar. Therefore, this study’s findings generally support the argument that executives with high operating ability are better at dealing with complexities in international settings. The characteristics of the hospitality industry (e.g., low profit margins, high volatility to economic environment, and high business risk) also support this finding. Within such a tight budget, executives with better operating ability tend to be more capable of efficiently managing international operations.

In summary, the results of this study contribute to the internationalization and upper echelons literature in both general and hospitality-specific contexts. This research explores characteristics of top executives as moderators based on the proposition of upper echelons perspective (Hambrick and Mason, 1984). Considering the scarcity of research on internationalization as viewed through the scope of upper echelons theory, this study bridges the gap in the literature and finds that firm performance derived from internationalization in the hospitality industry depends on the executives’ experiences and capabilities. In addition, many internationalization studies focus on a single measure of internationalization and firm performance (Lee et al., 2016; Nielsen, 2010). However, by implementing multiple measures of internationalization and firm performance, this study suggests that different internationalization strategies (i.e., degree, diversification, and speed) and performance measures have varying effects depending on the top managers’ characteristics.

Finally, the findings of this research provide some practical implications for top managers and investors in the hospitality industry. These investors and top managers need to be aware that a firm’s financial performance through internationalization can be further improved when executives’ experiences and characteristics are suited to operating an international business. For example, when a hospitality firm attempts to diversify its international geographical portfolio, it may hire more executives with marketing, research and development, and sales experience to better manage international subsidiaries. Furthermore, the results of this study suggest that the role of CEOs in an organization seems to have a significant influence on a firm’s international performance. Therefore, to better manage international operations, boards of directors may need to consider CEOs or executives with qualifications appropriately suited to the pattern of internationalization that they initiate. As noted in the descriptive statistics, the operating ability of hospitality executives, in particular, is much lower than those of other industries. Thus, given the unique characteristics of the hospitality industry, shareholders of hospitality firms may need to focus on a CEO’s operating ability rather than their other characteristics to maximize the firm’s performance, especially when a firm increases the number of international operations and its speed of internationalization. With many closed international units and fast environmental changes during the era of COVID-19, hiring a CEO with high operating ability would be particularly critical to managing subsidiaries in the most efficient way.

Limitations and recommendations for future study

This study suggests several limitations and recommendations for future studies. First, investigating different characteristics of TMTs across various countries may be necessary. For example, Crossland and Hambrick (2011) documented how the effects of executives differ in various nations. Thus, cross-national convergence or divergence in TMTs’ effects would be an interesting area for future study. Second, although the measurement of executives’ operating ability used in this study has been validated in previous studies (Choi et al., 2015), the possibility of measurement error in the selection of variables at a firm level might still have occurred. Thus, future research can replicate our measurement to provide further validation of, or even expand upon, the variable set to generate a more refined measure of operating ability. Finally, an increased sample size may provide better statistical power and robustness of findings. The limitation of the data in the current study arises from the limited data for international diversification and some executives’ characteristics. Future researchers are encouraged to collect more data, especially for these mentioned factors, in hopes of arriving at more solid findings.

Footnotes

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: This work is supported by the Dong-A University.

ORCID iDs

Sujin Song

Sungbeen Park

Seoki Lee

Author biographies

Sujin Song (email: ssong@deu.ac.kr) is currently an assistant professor in the International Tourism Management department at Dong-eui University. Her primary research interests focus on diversification strategies, internationalization, corporate social responsibility, and strategic leadership in the hospitality industry from strategic and financial management perspectives.

Sungbeen Park (email: sbpark1@dau.ac.kr) is currently an assistant professor in the department of Tourism Management at Dong-A University. His primary research interests focus on strategic management, strategic leadership, corporate social responsibility, and risk-taking behavior of hospitality firms.

Seoki Lee (email: leeseoki@psu.edu) is a professor of the School of Hospitality Management at the Pennsylvania State University. His research mainly focuses on hospitality and tourism issues in the financial and strategic management including following topics: corporate social responsibility, internationalization, franchising, and diversification.

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