Do foreign entrepreneurs benefit their firms as managers?
| DOI | http://doi.org/10.1002/smj.2618 |
| Date | 01 August 2017 |
| Published date | 01 August 2017 |
| Author | Elena Kulchina |
Strategic Management Journal
Strat. Mgmt. J.,38: 1588–1607 (2017)
Published online EarlyView 4 January 2017 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2618
Received 5 May 2015;Final revision received26 August 2016
DO FOREIGN ENTREPRENEURS BENEFIT THEIR
FIRMS AS MANAGERS?
ELENA KULCHINA*
Fuqua School of Business, Duke University, Durham, North Carolina, U.S.A.
Research summary:The entrepreneurship literature has extensively studied an individual’s
decision to found a new venture, but it has little to say about the individual’s choice to
operate this venture personally or hire an agent. This decision is particularly challenging for
foreign entrepreneurs, who, in addition to traditional factors, such as agency costs and personal
preferences, need to take into consideration the benets and liabilities of foreignness. Using
novel data on foreign entrepreneurial rms and instrumenting for the owner-manager choice
with a visa policy change, we nd that managing foreign entrepreneurs signicantly improve rm
performance. Our results further suggest that foreignowner-managers reduce operating costs but
have no effect on the rm’s productivity and growth.
Managerial summary:Immigrants represent a signicant part of the population in the United
States and Europe and are often more entrepreneurial than local nationals. However, a person
starting a rm in a foreign country faces unique challenges. One important choice that a foreign
entrepreneur has to make is whether to operate the rm personally or hire a local agent. Foreign
entrepreneursare often believed to be worse managers because they have limited local knowledge
and skills. However,our results point to the contrary: Wend that managing foreign entrepreneurs
signicantly improverm performance by decreasing rms’ operating costs. This happens because
foreign owner-managers often have access to unique resources, higher work incentives, and
superior management skills acquired at home. Copyright © 2016 John Wiley & Sons, Ltd.
INTRODUCTION
For nearly a century, the question of why peo-
ple become entrepreneurs has been an issue of
major concern in a variety of elds (e.g., Blanch-
ower and Oswald, 1998; Hamilton, 2000; Klep-
per, 2007; Nanda and Sorensen, 2010; Schumpeter,
1949; Sorenson and Audia, 2000). However, the
literature that studies transition to entrepreneur-
ship has largely mixed together two important
issues— having an idea for a new business and
Keywords: choice of manager; immigrant entrepreneurs;
owner-manager; founder-CEO; management practices
*Correspondence to: Elena Kulchina, 100 Fuqua Drive,
Durham, NC 27708, U.S.A. E-mail: elena.kulchina@
duke.edu
Copyright © 2016 John Wiley & Sons, Ltd.
being the right person to operate this venture. Up
until recently, researchers have largely believed
that entrepreneurs operate their ventures personally
(e.g., Berglann et al., 2011; Hamilton, 2000; Nanda
and Sorensen, 2010). However, it is not clear from
either a theoretical or an empirical standpoint why
this should be the case (e.g., Chen and Thompson,
2015). Indeed, a founder may not always be the best
person to manage his or her business (e.g., Wasser-
man, 2016). Entrepreneurs are blamed for plac-
ing personal motives ahead of nancial returns and
having limited expertise (e.g., Chen and Thomp-
son, 2015; Gomez-Mejia et al., 2007). Such poor
motives and abilities of entrepreneur-managers may
perhaps be one reason why the majority of new
establishments die in the rst ve years.
The choice of whether to operate a rm person-
ally or hire a manager is even more challenging
Do Foreign Entrepreneurs Benet Their Firms as Managers? 1589
for foreign entrepreneurs, who found ventures out-
side of their native countries. In addition to gen-
eral issues common to all entrepreneurs, they have
to take into consideration the liabilities of being
a foreigner. In this article we examine how for-
eign entrepreneurs affect rm performance when
they choose to manage their ventures personally as
opposed to hiring a local manager.
Fueled by waves of international migration,
foreign entrepreneurship has grown into a very
signicant phenomenon, such that foreign-born
individuals now constitute almost a quarter of
all entrepreneurs in the United States, employ
almost 5 million people, and earn over half a
billion U.S. dollars in revenue annually (Kallick,
2012). A similar situation is observed in Europe,
where foreign entrepreneurs, for example, own
over 165,000 businesses in Italy (The Financial
Times, 2009), 464,527 rms in London, United
Kingdom (Centre for Entrepreneurs and DueDil,
2014), and 18 percent of small businesses in Swe-
den (Andersson and Wadensjo, 2009). Moreover,
countries compete for new foreign entrepreneurs.
Spain and Chile, for instance, put signicant effort
into attracting foreign founders in the hope of
revitalizing their economies (The New York Times,
2014).
Despite the inuential role of foreign
entrepreneurs, we still have limited under-
standing of the behavior of their ventures. The
related academic literature focuses primarily on
the entrepreneurs’ founding choice (e.g., Portes,
Guarnizo, and Haller, 2002; Saxenian etal., 2007),
whereas many other strategic decisions accom-
panying this choice, such as the choice of rm
manager, remain largely unexplored. Given the
importance of foreign entrepreneurship in the
global economy, we believe that this decision and
its consequences to rm performance should also
be of interest to a broader academic and business
audience.
From the theoretical standpoint, the effect
of foreign owner-managers on rm perfor-
mance is unclear. Although owner-managers
may have higher effort incentives relative to
hired managers (Jensen and Meckling, 1976),
entrepreneur-managers may hurt their rms by
placing nancial benets below nonnancial
objectives (Benz and Frey, 2008; Blanchower and
Oswald, 1998). It is believed that entrepreneurs
are often driven by their personal nonpecuniary
motives, such as a sense of control, exible work
hours, or preferred location (Benz and Frey,
2008; Blanchower and Oswald, 1998; Dahl and
Sorenson, 2012; Hamilton, 2000; Moskowitz and
Vissing-Jorgensen, 2002; Wasserman, 2016). In
order to retain such private benets, entrepreneurs
may make strategic choices that would nega-
tively affect rm performance (e.g., Dahl and
Sorenson, 2012; Hamilton, 2000; Moskowitz and
Vissing-Jorgensen, 2002). Foreign entrepreneurs,
for example, may become managers if this allows
them to relocate and live in an attractive country
(Kulchina, 2016a). Furthermore, the desire to
preserve power may lead founder-CEOs to worse
operating practices than those of professional
managers (Bennett, Lawrence, and Sadun, 2015).
The situation with foreign owner-managers is even
less clear, since international business literature
suggests that their “liability of foreignness” (Zaheer
and Mosakowski, 1997) may further decrease their
value relative to that of local managers. It is gen-
erally suggested, for example, that multinational
rms hire local managers for their subsidiaries to
mitigate this problem (e.g., Berger, Choi, and Kim,
2011; Mezias, 2002).
To examine how foreign entrepreneurs affect
rm performance when they choose to manage their
rms personally, we exploit a unique dataset con-
taining rich information on foreign entrepreneurial
rms in Russia from 1997 to 2008. The other
data sources used in entrepreneurship research
often focus on self-employed individuals and
owner-managers, thereby omitting entrepreneurial
startups with hired managers (e.g., Berglann et al.,
2011; Nanda and Sorensen, 2010). Our dataset
includes both types of entrepreneurial startups and
allows us to determine whether an entrepreneur
manages a rm personally or hires a local agent.
To address the critical endogeneity issue of the
manager choice, we use a visa policy change in
Russia that arguably provides exogenous variation
in the CEO assignment.
We nd that the manager type strongly affects
the performance of a foreign entrepreneurial rm.
In particular, when foreign entrepreneurs choose
to manage their rms personally, they make a sig-
nicant contribution to rm performance. We also
nd that foreign entrepreneurs primarily reduce
costs but do not increase rms’ revenue or rev-
enue growth. Moreover, our results provide evi-
dence consistent with three potential mechanisms
underlying such cost reduction: low agency costs,
more direct access to cost-efcient home-country
Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 1588–1607 (2017)
DOI: 10.1002/smj
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