Power to the outsiders: External hiring and decision authority allocation within organizations

• DOI: http://doi.org/10.1002/smj.3182
• Published date: 01 September 2020
• Author: Bryan Hong
• Date: 01 September 2020

RESEARCH ARTICLE

Power to the outsiders: External hiring and

decision authority allocation within

organizations

Bryan Hong

Department of Management and

Organizations, Stern School of Business,

New York University, New York,

New York

Correspondence

Bryan Hong, Department of Management

and Organizations, Stern School of

Business, New York University,

New York, NY.

Email: bhong@stern.nyu.edu

Funding information

Social Sciences and Humanities Research

Council of Canada

Abstract

Research Summary: This study examines the relation-

ship between external hiring and the allocation of deci-

sion authority within organizations, and how they

interact to affect organizational change and innovation.

We test our hypotheses using panel data for a nationally

representative sample of businesses in Canada. We find

that the practice of external hiring of managers and

high-skilled nonmanagerial employees predicts greater

decision authority allocated to each respective level of

the hierarchy. Reallocation of authority is positively

moderated by the strategic priority of (a) workplace reor-

ganization for managerial hiring, and (b) new product

development for nonmanagerial hiring. We also find evi-

dence of related associations with workplace reorganiza-

tion and product innovation. The findings suggest that

decision authority allocation is essential to effectively

utilize externally acquired human capital.

Managerial Summary: This study examines how the

effectiveness of hiring managers and high-skilled nonman-

agerial employees from outside the firm is related to how

much decision authority they are granted. We show that

for both types of employees, external hiring predicts

greater decision authority allocated to each respective level

of the organization. For managers, external hiring predicts

a greater likelihood of organizational change when more

decision authority is granted. Similarly, for high-skilled

nonmanagerial employees, external hiring predicts the

Received: 16 November 2017 Revised: 5 March 2020 Accepted: 7 March 2020 Published on: 30 June 2020

DOI: 10.1002/smj.3182

1628 © 2020 John Wiley & Sons, Ltd. Strat Mgmt J. 2020;41:1628–1652.wileyonlinelibrary.com/journal/smj

development of more novel innovations when more deci-

sion authority is given. Overall, the results suggest that

hiring talent from outside the firm by itself is not sufficient

to expect benefits to the organization—instead, firms must

also empower outside hires with the authority needed to

translate their knowledge into performance.

KEYWORDS

decentralization, external hiring, human capital, innovation,

organizational change

1|INTRODUCTION

A well-established perspective in the strategic management literature is the importance of

knowledge embedded in human capital as a determinant of firm performance outcomes (Cas-

tanias & Helfat, 1991; Coff, 1997). For firms lacking such knowledge, hiring talent from outside

the firm provides a compelling option to acquire capabilities that cannot be easily obtained

through other means (Rao & Drazin, 2002). Although difficult to estimate, available evidence

suggests that there has been a substantial shift over the last several decades of firms becoming

increasingly reliant on external labor markets for human capital at all levels of the organization

(Bidwell & Keller, 2014; Royal & Althauser, 2003; Somaya, Williamson, & Lorinkova, 2008).

While firms may benefit from acquiring human capital, prior studies have also shown that

knowledge gained through external hiring may not fully translate into firm outcomes. Contex-

tual factors such as firm size (Almeida, Dokko, & Rosenkopf, 2003) degree of path dependence

(Song, Almeida, & Wu, 2003), and firm-specificity of human capital (Groysberg, Lee, &

Nanda, 2008; Huckman & Pisano, 2006) have been identified as important contingencies that

determine the degree to which acquired human capital may be beneficial for firms. However,

the role of organizational design choices in enabling (or detracting) from the benefits of external

hiring has remained largely unexplored. This is surprising, given that both the organization the-

ory and organizational economics literatures highlight human capital as a key determinant of

organizational design choices to produce firm outcomes, as organizations adopt specific struc-

tures to achieve particular goals (Aghion & Tirole, 1997; Barnard, 1938; Burns & Stalker, 1961;

Dessein, 2002; Thompson, 1967). As the nature of human capital changes within an organiza-

tion, organizational design elements may also adapt to utilize relevant knowledge, ultimately

affecting firm outcomes (Grant, 1996). Scholars have also increasingly recognized the role of

organizational design choices in influencing the relationship between human capital and firm

performance (Barney & Wright, 1998; Mawdsley & Somaya, 2016; Nyberg, Moliterno, Hale Jr,

& Lepak, 2014; Wright & McMahan, 2011), which offers one potential explanation for the

considerable heterogeneity of effects found in previous studies (Newbert, 2007).

1

As firms

1

Of the 33 tests considered in the meta-analysis by Newbert (2007), only one-third found evidence of a positive

relationship between human capital and firm performance. In a separate meta-analysis, Crook, Todd, Combs, Woehr,

and Ketchen (2011) generally find a positive relationship between human capital and firm performance, but also find

substantial variance.

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