Journal of World Business 46 (2011) 135–142
Contents lists available at ScienceDirect
Journal of World Business
journal homepage: www.elsevier.com/locate/jwb
Managerial decision-making in international business: A forty-five-year
retrospective
Yair Aharoni a,*, Laszlo Tihanyi b, Brian L. Connelly c
a
Faculty of Management, Tel Aviv University, Ramat Aviv, Tel Aviv, Israel
Mays Business School, Texas A&M University, College Station, TX 77843, United States
c
Department of Management, Auburn University, 415 W Magnolia Ave, Auburn, AL 36849, United States
b
A R T I C L E I N F O
A B S T R A C T
Article history:
Available online 11 June 2010
We identify key theoretical developments in international managerial decision-making research,
synthesize how they have been employed, and discuss contributions that may emerge as researchers
devote increased attention to bounded rationality. Since behavioral factors were first introduced into the
international business literature, there has been an increasing trend toward acknowledging the decision
makers’ role in foreign direct investment and related strategies. However, the reasoning, which explains
the characteristics and outcomes of managerial decision-making in the multinational enterprise (MNE),
remains implicit and ambiguous. There are a number of potential concerns associated with the
assumptions of dominant rational decision-making models and with models that omit decision makers.
We highlight these concerns and discuss the benefits of, and opportunities for, models that incorporate
bounded rationality, decision-making biases, and judgments by managers.
ß 2010 Elsevier Inc. All rights reserved.
Keywords:
Managerial decision-making
Bounded rationality
Multinational enterprise
Foreign direct investment
Environmental uncertainty
1. Introduction
Foreign direct investments require decisions that routinely
involve risk and uncertainty, lack of information, and rely on
multifaceted organizational processes. MNEs that are better
managed may have better chances for survival in the international
environment than MNEs with poor management. Yet, forty-five
years after the publication of The Foreign Investment Decision
Process (Aharoni, 1966a), a relatively large segment of international business research continues to leave limited or no room for
decision-making on the part of managers. Many models in
international business do not take into account the consequences
of different decision-making styles on investment decisions, the
difficulties in trickling down such styles, or the role of increasing
knowledge and experience on foreign environments. Specifically,
in most models of entry modes, international expansion or
internalization of subsidiaries, decisions are made by organizational units, and most often by MNE headquarters. Headquarter
executives in these models tend to choose from a narrow set of
options that are outlined in earlier literature. These decisionmaking options are often based on assumptions originated from
the Anglo-Saxon business culture, including specific corporate-
* Corresponding author.
E-mail addresses: yairah@post.tau.ac.il (Y. Aharoni), ltihanyi@tamu.edu
(L. Tihanyi), bconnelly@auburn.edu (B.L. Connelly).
1090-9516/$ – see front matter ß 2010 Elsevier Inc. All rights reserved.
doi:10.1016/j.jwb.2010.05.001
level strategies (e.g., global efficiency or local responsiveness) or a
defined set of entry modes (e.g., acquisitions, greenfield investments, or joint ventures). Headquarters’ decisions about different
actions in the international environment in these models are
assumed to be precise indicators of the MNE’s optimal interest.
Actions in these models are also assumed to closely follow distinct
organizational strategies, such as multidomestic, global, or
transnational. Once strategies are selected, MNEs often implement
them without change or variation in their effectiveness.
In most of these models, managers do not have any role (Kogut,
Walker, & Anand, 2002). To the extent individual managers are
incorporated into conceptual frameworks, they portray rational
managers from a pre-Simonian era. Specifically, managers in these
studies tend to act based on their own self-interest or, with
appropriate governance mechanisms in place, in accordance with
interests that are aligned with that of the MNE’s owners (see
Carpenter, Geletkanycz, & Sanders, 2004; Werner, 2002 for
reviews). Interests in these models are translated to international
strategies and actions without distortions. The assumption of full
rationality by the management of the MNE simplifies the problem
of decision-making and shifts the focus from the process to the
effectiveness of the MNE governance mechanism. Further, such an
omission of the decision maker and the assumption of full
rationality may lead to particularly erroneous results: conclusions
about MNE actions are generally derived from uncertainty that
arises from variation in institutional, cultural, and market
conditions across countries and from organizational complexity
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Y. Aharoni et al. / Journal of World Business 46 (2011) 135–142
resulting from international expansion. Whereas changes in
communication and transportation may offset some of these
trends, managerial decision-making continues to be extremely
important to MNEs and their stakeholders.
In this article, we review prior international business research
regarding the role of managerial decision-making, identify
problems associated with the assumption of rationality in
decision-making, discuss research that considers behavioral
factors for MNE actions, and summarize the seven articles included
in this issue. We use our review to outline recommendations for
the development of different theoretical perspectives within the
field of international business. Furthermore, we attempt to redirect
future research toward studying the role of managerial perceptions
and the decision-making process in MNE actions.
2. Theoretical foundations of managerial decision-making
Three related areas form the theoretical basis for research on
the managerial decision-making process in the MNE. Initial
contributions were made by Simon and his colleagues and
students, often referred to as the Carnegie School. The central
thesis of this line of research is bounded rationality, in contrast to
the rational choice model advocated by neoclassical economics.
Owing to their cognitive limitations, boundedly rational actors
seek satisfactory solutions. Satisfying, as opposed to maximizing, is
based on the manager’s perception of a complex environment
(Cyert & March, 1963; March & Simon, 1958; Simon, 1947).
Decision-making in this model is constrained by cognitive ability
of the decision maker and is influenced by a wide range of factors,
such as personal goals, evaluation criteria, and identity (Certo,
Connelly, & Tihanyi, 2008). Findings of the Carnegie School were
derived from empiricism or ‘‘administrative experiments’’ (Dasgupta, 2003). Shifting the focus from earlier theoretical models of
microeconomics to the empirical study of organizational settings
has led to a more realistic picture of the managerial decisionmaking process.
A second line of research has demonstrated that human
cognitive processes are intended to reduce cognitive effort through
the use of heuristics that create systematic biases (Kahneman &
Tversky, 1979). Much of the recent work integrating behavioral
decision theory into the organizational literature has been based
upon the principles of prospect theory (Slovic, Fischhoff, &
Lichtenstein, 1977; Tversky & Kahneman, 1974). This line of work
has devoted significant attention to explaining cognitive biases,
which are a form of heuristics that typically result in inaccurate
judgments. The search for new and increasingly complex biases
and heuristics has continued in studies (e.g., Gilovich, Griffin, &
Kahneman, 2002; Kahneman, 2003), with significant attention to
the problems of managerial decision-making (Miller & Chen, 2004;
Schwenk, 1995).
According to prospect theorists, the framing of an outcome or a
decision by economic agents affects the utility that these agents
expect. In particular, given the same variation in absolute value,
there is a bigger impact on the decision maker for losses than there
is for gains. Thus, decision makers may be more risk averse when
they frame a strategic decision as potential for loss and less risk
averse than when a decision is framed as potential for gain (March
& Shapira, 1987; Miller & Chen, 2004). Evaluations around losses
and gains in prospect theory are developed starting from some
particular reference point. The utility function takes different
shapes on either side of this reference point, which is in contrast
with the additive utility underlying neoclassical economics. From
this perspective, a manager’s choice of reference points plays an
important role in subsequent decision-making. Risk preferences
above the reference point will be greater than risk preferences
below. These reference points are selected based upon internal
capabilities and external conditions considered over time (Shoham
& Fiegenbaum, 2002).
A third area of research contributing to the theoretical
foundations of managerial decision-making lies at the intersection
of psychology and economics (e.g., Arieli, 2008; Rabin, 1998;
Thaler, 1991). This stream of behavioral economics advances the
earlier findings of the Carnegie School and behavioral theory. This
line of research has challenged conventional economic analysis
that rests on mathematical formalization and methodological
individualism and has started to add significant behavioral
findings to today’s mainstream economics (Rabin, 2002). Rabin
(1998), for example, examines the role of learning and expertise in
reducing decision-making biases. Other areas of research by
behavioral economists include reference levels, anchoring, and
altruistic behavior. Considering the traditional influence of
economic theories on the evolution of international business
models, findings of behavioral economics are expected to generate
new research on managerial decisions in the MNE.
The three related areas described provide effective answers to a
number of important anomalies in neoclassical economics and in
related organizational fields. Although many researchers continue
to use rationality assumptions in their models, bounded rationality, cognitive limitations, biases, and other behavioral findings
suggest that models relying on choices made by rational decision
makers are no longer coherent (e.g., Kuhn, 1962). New findings on
the decision-making process have led to a paradigm shift in
economics and organization science, with important consequences
for the field of international business (Dasgupta, 2003; Rabin,
2002). In the next section, we provide a brief overview of
international business research regarding the role of managerial
decision-making. Our overview concentrates on three main
approaches to decision-making research, including behavioral
models of foreign investment decisions, decision frameworks with
the implicit assumption of bounded rationality, and models that
are based on the notion of full rationality.
3. Managerial decision-making and international business
3.1. Behavioral perspectives of the MNE
Behavioral explanations of foreign direct investment appeared
relatively early in international business research. The Foreign
Investment Decision Process, published in 1966, outlined a model of
internationalization that focused on the role of managerial
decision-making. It outlined a perspective that sought to answer
the questions ‘‘what motivates managers to make a foreign
investment decision’’ and ‘‘how do MNE managers make foreign
investment decisions under environmental uncertainty?’’ The
stated aim of the behavioral theory of foreign investment was to
identify the variables that influence the managerial decision
process in order to explain the process itself. From this perspective,
foreign investment decisions were examined at the group level, but
with greater emphasis on individual members within the group
who are responsible for making the decision to invest abroad. Five
elements of the decision process were delineated:
The social system in which the process takes place.
Time over which the process occurs.
Perception of uncertainty surrounding the decision, and risk
propensity of decision makers.
Interaction of the goals of managers, business units, and the
organization as a whole.
Constraints on the actions of the decision maker.
The Foreign Investment Decision Process discussed two of these
elements in depth: uncertainty and the social environment.
Y. Aharoni et al. / Journal of World Business 46 (2011) 135–142
Uncertainty placed a spotlight on the decision maker, bringing
issues of experience, affect, risk propensity, and cognitive
constraints to the fore. Decision makers vary in regard to how
comfortable they are with uncertainty. Foreign investment
alternatives also have varying levels of uncertainty for different
individuals, based in part on the individuals previous experience
abroad and knowledge base. The social element focused on the
decision maker’s relations with others. These include relations
among individuals within the MNE and relations that individuals
have with others outside the MNE, such as customers, suppliers,
and competitors. Together, these two elements highlighted the
role of the individual and their social network, serving as the basis
for a behavioral theory of foreign investment (Aharoni, 1966a).
Decision makers start the decision process because of an outside
force that causes a decision to look abroad. The strength of this
force determines the investigation process – throughout which
decision makers accumulate psychological commitments toward
other organizations and individuals. The more committed they
become, the higher the probability of a decision to invest. In this
sense, the decision to invest is not necessarily the last part of the
decision process. Thus, if the force that caused the look abroad is
strong enough, the decision to invest abroad is already made and
the investigation process may concentrate on minimizing the size
of the investment and the risks involved.
Another model of MNE actions within the behavioral tradition
was put forward by Johanson and Vahlne (1977). They conceptualized internationalization as an incremental process that results
from the interplay between cumulative market knowledge and
decisions to increase commitment to international markets. The
authors use this dynamic model to explain two frequently
observed patterns of internationalization. First, the model explains
increasing firm engagement according to a typical chain: from
export, to joint venture representation, to sales subsidiary, to
resource development subsidiary. Second, it explains entrance into
new markets with successively greater psychic distance.
Knowledge, decision-making, and psychic distance stand at the
core of this model, sometimes referred to as the Uppsala model.
These constructs are considered at the firm – not the individual –
level. ‘‘In our model, we consider knowledge to be vested in the
decision-making system. We do not deal explicitly with the
individual decision maker’’ (Johanson & Vahlne, 1977: 26). By
implication, organizations learn and with learning the perception
of uncertainty in foreign operations changes. Investments previously perceived as risky become acceptable. Johanson and Vahlne’s
paper on the Uppsala model was based on Scandinavian
experience. It may well be that managers from other countries
also make decisions to accept or discard choices based on previous
(and limited) information. Thus, for example, Chinese managers
may be more familiar with other Asian countries. Further, ‘‘Born
Global’’ may be a result of managers’ experience and knowledge of
more countries of the world – not only a consequence of
technological changes.
In subsequent work, Johanson and Vahlne (1990) expanded the
notion of knowledge development to include knowledge gained
through relationships with other bodies on the foreign market.
Industrial networks that develop as a result of interactions with
other firms were described in terms of how they affect foreign
investment activities, which in turn shapes a firm’s market
knowledge. Many authors have invoked this model to describe
the evolutionary and often sequential nature of internationalization (Benito & Gripsrud, 1992; Hitt, Tihanyi, Miller, & Connelly,
2006). Others have sought to develop the model in more detail by
testing its generalizability in various contexts, delineating different forms of knowledge, and clarifying the construct of psychic
distance (Bjorkman & Eklund, 1996; Dow & Karunaratna, 2006;
Eriksson, Johanson, Majkgard, & Sharma, 1997).
137
Research by Doz and Prahalad attempted to expand on this
work by structuring MNE headquarter and subsidiary relationships
from managerial perceptions (e.g., Doz, 1986; Prahalad & Doz,
1987). In their model, MNE decisions are made based on the
collection and analysis of multi-level organizational data. The
decision process is influenced by the interpretation of headquarters and subsidiary managers. Managers in different business units
develop their own cognitive maps of the MNE based on their
understanding of its environment, their personal international
experience and education, and so on. Through discussion of a
number of case studies, Doz and Prahalad suggest that this
‘‘cognitive variety is useful to improve the quality of decisions by
bringing together different sources of data and rubbing different
interpretation schemes one against another’’ (Doz & Prahalad,
1984: 59).
Another stream of research that is related to behavioral theory
considers learning at the organizational level (Kogut & Zander,
1993). This line of research is premised on the idea that
organizations learn from experience (Levitt & March, 1988).
Lessons learned are captured by routines such that the lessons,
but not the history, are accessible to organizational members.
Organizational learning theory has been particularly useful in
research on international joint ventures, helping to explain their
formation, performance, and likelihood of survival (Barkema,
Shenkar, Vermeulen, & Bell, 1997; Parkhe, 1991). It has also served
as an important theoretical basis to describe firms’ choice of entry
mode, management of international human resources, and
knowledge transfer processes within and between firms (Gong,
2003; Simonin, 2004). Organizational learning theory is primarily
concerned with the behavioral aspect of experience accumulation,
but it also incorporates a cognitive dimension insofar as it
addresses knowledge articulation and knowledge codification
(Zollo & Winter, 2002).
3.2. Top management teams as decision makers
Another stream of literature studying top management teams
(TMTs) in MNEs acknowledges bounded rationality. Models in this
line of research, however, do not focus on the decision-making
process and provide limited measurement of cognitive capacity.
Research on TMTs and MNE governance has considered the
influence of executives in determining the depth and scope of
internationalization and other international strategies. One line of
research builds off upper-echelon theory (Hambrick & Mason,
1984) to explore the role of the TMT in making international
business decisions. The upper echelons perspective is focused on
executive cognition and values and their influence on strategic
choice. The preponderance of upper-echelon research invokes
principles of demography to suggest that managerial characteristics are reasonable proxies for underlying cognitive capacities.
This perspective contends that organizations will be a reflection of
their TMTs, and that firm-level choices, including internationalization decisions, are a function of the teams’ cognitive processes.
The prominent role of psychological constructs in the upper
echelons perspective, such as perceptions, biases, and values,
derives from executives’ bounded rationality. In upper-echelon
research, managers experience information overload, ambiguous
cues, and competing objectives, and as such stimuli are often
filtered and interpreted through their own cognitive biases and
heuristics. Complex decisions require increased emphasis upon
simplification heuristics on the part of boundedly rational decision
makers, making the role of cognitive processes increasingly
important (Einhorn & Hogarth, 1981). In upper-echelon studies,
biases and heuristics are proxied and assumed to be relatively
consistent across similar characteristics such as age, functional
background, and educational experience. Empirical research has
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Y. Aharoni et al. / Journal of World Business 46 (2011) 135–142
linked upper-echelon demographic characteristics and experience
with strategic choices such as internationalization (Carpenter
et al., 2004).
Agency theory offers an alternative perspective to upperechelon research on managerial decisions. From an agency theory
perspective, ownership gives CEOs and other members of the top
management team an incentive to assume risk and align their goals
with those of other firm owners. Empirical studies support the
notion that top managers with ownership interest tend to be more
risk averse and have a lower proclivity to increase firm
internationalization than do external owners (George, Wiklund,
& Zahra, 2005; Sanders & Carpenter, 1998). Managers with
ownership favor a more conservative approach to internationalization that aims to minimize uncertainty and the potential for loss
of personal wealth. Using similar logic, scholars have also
considered the influence of outside directors on the corporate
decision-making process, finding that they too influence an
important set of cognitive tasks: scanning, interpretation, and
choice (Forbes & Milliken, 1999).
In a related stream of research, managerial knowledge, skills,
problem-solving ability, discipline, and motivation are viewed as
MNE resources embodied within human capital (Hitt et al., 2006).
When managers have either more or higher quality human capital,
this resource may be leveraged for competitive advantage in the
international marketplace. One such way that firms may leverage
the human capital of their TMT is to facilitate internationalization.
The measurement of the human capital construct in this stream of
research, however, often replicates the demographic and experience variables of upper-echelon theory. This is problematic
because a body of research has identified significant problems
with using individual-level demographic variables as indicators of
decision-making in TMTs (e.g., Lawrence, 1997). Markóczy (1997),
for example, suggests that individual demographic characteristics
are poor measures of managerial cognition. Kilduff, Angelmar, and
Mehra (2000) examine TMT diversity, measuring cognitive
diversity via a survey with measures validated in the psychology
literature. They find no evidence of any effect of demographic
diversity on cognitive diversity. Similarly, Priem, Lyon, and Dess
(1999) encourage TMT researchers to eschew demographic
variables in favor of measures that are more difficult to capture.
Others have added that, even if demographic characteristics are
representative of cognitive constructs, they cannot be treated
independently because executives embody a bundle of attributes
that continuously interact with each other (Harrison, Price, & Bell,
1998).
3.3. The rational model of entry mode decisions
Despite the rich findings of behavioral economics, researchers
often overlooked these findings by assuming perfect rationality in
their models. One example of research that relies on a rational
model of decision-making is the literature on entry mode
decisions. Entry mode has been described as the institutional
and organizational arrangements that enable an MNE to enter a
market with its products, technology, human skills, management,
and other resources (Sarkar & Cavusgil, 1996). While this line of
research finds its roots in economic and internationalization
theories (e.g., Anderson & Gatignon, 1986), more recently scholars
have sought to incorporate non-economic factors that are both
external and internal to the firm.
Researchers have considered the influence of national cultures
and home/host country institutions, finding that these external
factors add significant explanatory power above the transaction
cost economics model (Brouthers, 2002). There is even some
evidence that external factors may influence patterns of managerial cognitions with respect to the entry mode decision (Laurila &
Ropponen, 2003), but cognitions are not specifically explored in
this line of research. Internally, organizations appear to build on
prior foreign market experience in making entry mode decisions
(Malhotra, 2003). However, researchers have primarily been
concerned with organizational-level learning, rarely delving into
the cognitive attributes of individual managers. We found no
research that specifically addresses the role of managers in the
entry mode decision process, leaving some scholars to conclude
that micro level research seems to have been overlooked (Werner,
2002).
The validity of studies on entry modes could be significantly
improved by studying the decision-making heuristics of these
decisions. Past experience of TMT members and their organizational knowledge are expected to shape their cognitive maps of
entry decisions. For example, previous working experience or
studies in foreign countries may help managers to develop their
understanding of local customer preferences and the requirements
of subsidiary control. For an entry mode decision to be effective,
managers also need to be aware of the opportunity to exploit their
organizational capabilities in a foreign country or region.
Differences in the perception of organizational capabilities can
lead to wide variation across MNEs regarding their success in
entering foreign markets. As well, it is feasible that the perception
of competitors’ entry strategies influences managers’ assessment
of different entry mode options. Another interesting factor could
be the effects of news and media on managerial perceptions of
economic and political risks of countries or regions.
Entry may be decided as a result of relations of a top manager to
the CEO of another firm. Aharoni (1966a) shows that Henry Ford
agreed to Harvey Firestone’s plea for an investment in a rubber
plantation in Latin America. In this case, a long investigation
process was designed to mitigate the risks of an entry decision that
was already made. Careful analysis of more recent entry decisions
could uncover many similar cases. What Aharoni termed ‘‘the
decision to look abroad’’ is motivated by many different forces, and
the strength of these forces influences the process of investigation.
Thus, for example, entry into a new geographic market could occur
as a result of a plea of an important sales agent.
Managers from different countries may also perceive entry
mode conditions differently and follow diverse decision-making
scenarios. Cultural variation in risk preferences across managers
from different countries may be a powerful explanatory factor of
entry mode choices (Schneider & DeMeyer, 1991). For example,
Japanese managers tend to prefer entry modes that allow higher
control to technology (Bartlett & Ghoshal, 1989). The study of
decision-making biases and heuristics at the team level would
allow researchers to develop dynamic models of entry mode
decision. Because many MNEs already operate in a broad range of
countries, studying the decision-making process could help us to
understand how managers weigh the trade-offs between different
entry modes and make adjustments in their choices over time.
4. Discussion
Research on managerial decision-making offers a variety of
insights that are relevant to the field of international business.
Even though top managers may make few decisions, their
decisions likely impact every aspect of the MNE, including its
business portfolio, capabilities, market position, and performance.
Nevertheless, decision-making is based on several characteristics
of the manager, including personal experience, knowledge, and
tolerance for uncertainty and risk. Furthermore, decision makers in
MNEs come from different cultures and therefore make choices
differently. When these factors are considered, it is unrealistic to
expect different managers to make similar choices from ‘objective’
facts (Kahneman & Tversky, 1984).
Y. Aharoni et al. / Journal of World Business 46 (2011) 135–142
Omission of the decision maker and the assumption of perfect
rationality can lead to underspecified models of MNE actions.
Although these problems may inflate results in a broad range of
organizational science disciplines, the problem likely runs deeper
in international business, given the field’s foundational arguments
about the importance of cultural differences and high levels of
environmental uncertainty and risk. Further incorporating the role
of managerial decision-making, therefore, holds the potential of
extending the field of international business in several different
directions. We sketch out a number of prospective contributions
below. Specifically, we identify key theoretical applications and
methodological issues that deserve attention; we address some
potential areas of international business research that are
particularly germane, including managerial distance, investment
in uncertain markets, and behavioral economics; lastly, we suggest
changes to international business education that may correct for
the underemphasized role of managers in MNEs.
Existing theories of international business can be further
developed by incorporating choices made by decision makers
with bounded rationality. Similar to other fields focusing on
organizational actions, most international business models work
from either selection or adaptation explanations of MNE survival.
Models working from a selection perspective, such as theories of
monopolistic advantage, product life cycle, and the resource-based
view of the firm, could add the decision maker as an asset of the
MNE. Because of environmental uncertainty and limited knowledge about complex organizational capabilities, managers tend to
develop heuristics for international decision-making. There is
important variation between managers with respect to their
perception of the environment. Variations in information-processing speed, accuracy, and scope of processed information may lead
to organizational capabilities and advantages that influence the
likelihood of MNE survival in the long term.
Models of adaptation, on the other hand, include theories of
oligopolistic competition and institutional theory. These models
could conceptualize variation in the level of decision-making skills
across managers as an explanation for the degree of fit with the
environment. Adaptation perspectives may particularly benefit
from increased attention to decision makers. For example,
institutional theory frameworks from the cognitive tradition could
offer interesting evidence on the impact of managerial decisionmaking and serve as a bridge connecting institutional theory with
findings on managerial decision-making.
International business research has become more rigorous over
the past forty-five years, owing to developments in computing
technology and statistical software and to broader availability of
international databases. While methodological improvements and
the availability of longitudinal data have helped establish tests of
causality in many studies, increased methodological rigor has
often come at the cost of practical relevance. We found no
longitudinal studies in our review of the international business
literature that considered the process of international decision or
bounded rationality. Limited attention to the international
decision-making process is partly related to validity concerns,
including problems associated with the use of ‘‘soft’’ statistical
methods and cross-sectional and qualitative data. Without
reversing the positive trend of methodological rigor, international
business researchers should consider validating findings on the
decision-making process by using qualitative and survey data via
means of data triangulation. The development of new longitudinal
databases could concentrate on repeated surveys of MNE
managers from different countries. Such surveys could be
Internet-based, accessing regional and subsidiary levels within
the MNE.
We also think the field would benefit from collaborations with
psychologists via the use of laboratory studies and experiments.
139
Along this line, experiments by Devinney, Buckley, and Louviere
(2005) have illustrated the different roles of information, biases,
and managerial experience in two phases of a foreign investment
decision process. In the consideration phase of investment options,
managers employed more rational measures, including return
ratios, cost measures, and market conditions. In the investmentchoice phase, however, managers focused more on foreign
investment experience and host country specific factors, such as
the political environment and language. These and other findings
from the international business context could provide new
evidence on managerial decision-making to the broader field of
human behavior.
Decision-making heuristics and biases likely vary between MNE
managers from different countries. Prior research on cultural
distance has attempted to capture the role of cultural differences in
MNE strategies (e.g., Benito, 1997; Brouthers & Brouthers, 2001)
and performance (e.g., Gomez-Mejia & Palich, 1997; Li & Guisinger,
1992; Park & Ungson, 1997). Furthermore, the role of environmental uncertainty for managers has been explicit in many studies
on cultural distance (Barkema & Vermeulen, 1998). Shifting the
focus from underlying country-level cultural indicators to indicators of managerial decision-making may address some of the
recent criticism of cultural distance research (e.g., Shenkar, 2001;
Tihanyi, Griffith, & Russell, 2005). The construct managerial
distance could capture variations in decision-making heuristics
and biases across managers from different cultural traditions.
Measuring how managers from different cultures perceive similar
decisions could enhance upper echelon and governance research.
Managerial distance may also have a role in the transfer of
decision-making patterns between organizational units within
MNEs. Studying managerial distance could deepen our understanding of the way decisions are made at different levels within
the MNE. Because managerial decisions need to be implemented at
different organizational levels, cultural variations in interpreting
environmental conditions and organizational capabilities are
expected to further influence the outcome of MNE actions. For
example, biases about country conditions and cultures may lead
managers to decline expatriate assignments or advocate alternative locations for FDI. Furthermore, in addition to individual-level
contributions, developing a better understanding of the cultural
foundations of heuristics could improve the validity of research on
decision-making by diverse TMTs.
Studies of actual cases of foreign investments may also
substantiate the salience of commitment to different stakeholders,
including policymakers, accumulated during the investigation
process. A better understanding of the decision-making process
has significant policy implications. Aharoni (1966b) illustrated
these policy implications by showing that, because of the sequence
of investigation, a government is actually better off spending funds
on marketing a country than on granting tax holidays.
Whereas early international business research focused on
investments by developed-country MNEs into other (mostly
developed) countries, international opportunities are increasingly
found in emerging economies. In contrast to the trend of increasing
international experience by most developed-country MNEs, there
is a growing share of investments into emerging economies that
increases the level of uncertainty for MNE managers. Because the
population of MNEs today also increasingly includes firms
originating from emerging economies, MNE managers likely
exhibit greater variance in perceived uncertainty than their
counterparts did forty-five years ago. This trend is further
amplified by growing sophistication in customer demand and
the rise of nationalist movements (e.g., the emphasis on local
customer preferences) in several influential emerging markets.
International expansion into emerging economies thus provides
rich ground for the study of managerial decision-making.
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Y. Aharoni et al. / Journal of World Business 46 (2011) 135–142
Research on the international decision-making process also
holds the potential to contribute to behavioral economics. Most
prior research on the intersection of psychology and economics
focuses on general buyer behavior. The study of decision-making in
MNEs may provide insights about the interaction of managerial,
organizational, and country-level interests. Furthermore, investments into new countries and uncertain foreign markets provide a
research setting that compels researchers to consider the effects of
factors that are hard to control in familiar customer settings (e.g.,
prior experience in buying consumer products). In addition to
providing insights into decision-making under conditions of
environmental uncertainty and organizational complexity, MNEs
are appropriate settings to study the effects of biases and heuristics
that are embedded in culture (e.g., Schneider & DeMeyer, 1991).
Future studies in behavioral economics would benefit from crosscountry comparisons of preferences in decision-making. The study
of managerial decisions in MNEs from different countries may
contribute to such efforts. Research on behavioral aspects of
decision-making may also shed more light on cases in which a
dominant TMT makes internationalization decisions – even
without full investigation. Such research could also explain the
importance of commitment to others and that of forces leading to
the initiation of investigation.
Another potential extension of managerial decision-making in
MNEs involves international business education. International
business is taught at different levels in business schools. Its
importance in the curriculum fluctuates over time depending on
the practical view of the field and the institution’s heritage (see
Vernon’s (1994) review). Insights into the decision-making
process, awareness of biases, and techniques to reduce uncertainty
in the international environment could all be useful tools for
students interested in careers in MNEs. Because decisions in MNEs
tend to be made by teams that involve managers with different
nationalities at multiple organizational levels, team exercises and
simulations conducted by international business instructors and
psychologists could offer a valuable learning experience. Participation in area and regional studies and international exchanges
may also help future managers to reduce the uncertainty
associated with select markets.
5. Articles in the special issue
According to the call for papers, our goals were to evaluate the
state of research on international decision-making since the
publication of The Foreign Investment Decision Process (Aharoni,
1966a), to bring together a group of high quality papers on the
subject, and to identify new directions for future research. We
were interested in both empirical and conceptual papers using
different theoretical perspectives and methodological approaches.
Most importantly, we hoped that the selected papers for the
special issue would make meaningful contributions to the
international business literature, consistent with the mission of
this journal.
The seven articles included in this issue seek to answer some of
the questions on managerial decision-making that we consider
relevant for future international business research. The first paper,
‘‘Risk management in the internationalization process of the firm,’’
by Francisco Figueira-de-Lemos, Jan Johanson, and Jan-Erik Vahlne
explores the risk formula in the Uppsala model. The authors
demonstrate how the risk level for the MNE changes during the
internationalization process, owing to changes in environmental
uncertainty and organizational commitment. The authors’ detailed
examination of risk integrates findings from the behavioral theory of
the firm and provides an interesting extension of the Uppsala model.
In the second article, ‘‘The structure of location choice for new
U.S. manufacturing investments in Asia-Pacific,’’ Raymond Mata-
loni examines the extent to which managers of U.S. MNEs consider
factors at different levels when selecting new manufacturing
locations in Australia, China, Japan, and South Korea. The findings
reveal a sequential decision-making process in which managers
identify a host country and then choose a region within that
country. Managers consider different attributes at the different
levels, including the presence of an investor’s prior experience in
the host country at the national level and productivity-enhancing
attributes at the regional level. Productivity-enhancing attributes
in the Asia-Pacific context consist of industrial agglomeration,
transportation infrastructure, and worker skills.
Mike Kotabe, Crystal Jiang, and Janet Murray, in their article,
‘‘Managerial ties, knowledge acquisition, realized absorptive
capacity and new product market performance of emerging
multinational companies: A case of China,’’ presents another
aspect of managerial decision-making. The subject of this article
(third article in this issue) is the role of managerial ties in
international decisions involving knowledge acquisition. Using
survey evidence, the authors show how ties with local government
officers and foreign MNE partners influence product and process
technology acquisitions in Chinese MNEs. The results of this study
also point to the need for absorptive capacity to effectively
integrate external knowledge. Specifically, new product performance in Chinese MNEs may increase when knowledge acquisition
is coupled with realized absorptive capacity.
The fourth article, ‘‘A multi-level model of global decisionmaking: Developing a composite global frame-of-reference,’’
presents a theoretical perspective on how managers may rely
on different points of reference when making various international
decisions. In their model, Michael Harvey, David Griffith, Tim
Kiessling, and Miriam Moeller integrate group, organizational, and
societal factors to illustrate the complexity of managerial decisions
in the global context. Using reference point theory, the authors
provide an overview of the cognition of complex information at
each level and describe how such information might be combined
by MNE managers to improve the effectiveness of their decisions.
The next article, ‘‘The role of top management team nationality
diversity in international strategic decision-making: The choice of
foreign entry mode,’’ by Bo Bernhard Nielsen and Sabina Nielsen
extends upper-echelon theory by introducing the concept of
nationality diversity. Nationality diversity, an attribute of top
management team heterogeneity, is a proxy of team members’
cultural values based on their national origin. Nationality diversity,
according to the authors, complements other international
diversity characteristics of MNE top management teams. Using
longitudinal data of Swiss firms, Nielsen and Nielsen find that
international experience in the top management team results in
decisions involving full-control foreign entry modes. In contrast
with these findings, nationality diversity in the team is associated
with shared-control entry modes.
The fifth article, ‘‘Strategic decision-making processes in
internationalization: Does national culture of the focal firm
matter?’’ by Pavlos Dimitratos, Andreas Petrou, Emmanuella
Plakoyiannaki, and Jeffrey Johnson, studies strategic decisionmaking processes in over 500 internationalized small and medium
sized enterprises (SMEs) in Cyprus, Greece, United Kingdom, and
United States. The contribution of this article is the examination of
the effects of national culture on structural characteristics of
organizations, such as hierarchical decentralization, lateral communication, and formalization. When studying these characteristics, the authors draw attention to their implication for strategic
decision-making processes within SMEs. Findings of this study
support the relationships between power distance and hierarchical
decentralization and uncertainty avoidance and formalization.
The last article, ‘‘Real options in multinational decision-making:
Managerial awareness and risk implications,’’ explores another
Y. Aharoni et al. / Journal of World Business 46 (2011) 135–142
aspect of managerial decision-making in the international context.
In this article, Tarik Driouchi and David Bennett study the
performance and risk implications of decision-making in MNEs
using real options. The authors consider real options as a decisionmaking tool for managers interested in expanding the international scope of their MNEs. Consistent with their focus on the
managerial application of real options, they develop the concept of
‘‘real options awareness.’’ Results of this study suggest that
managers with higher real options awareness may be able to
reduce the MNE’s downside risk from international operations. The
authors also find support for the positive performance implications
of real options awareness in MNEs.
These seven articles represent a broad range of research on
managerial decision-making in international business. Nevertheless, as our retrospective indicates, there are areas that the papers
submitted to the special issue did not cover. Thus, we would like to
encourage researchers to continue to explore different aspects of
managerial decision-making. Among these are:
More direct tests of bounded rationality.
Ethnographic studies of managerial decision-making in MNEs.
Studies on headquarter-subsidiary relationships through the
lenses of managers.
Studies on the impact of the force leading to look abroad,
cataloguing such forces, and the process of commitment
accumulation.
New theoretical perspectives of the MNE that consider bounded
rationality.
Decision-making processes in international teams, and
Studies on the international variation of decision-making
heuristics.
In closing, we would like to thank all the authors who submitted
their work for publication in this issue. We also gratefully
acknowledge the support of our colleagues who served as
reviewers for the issue: Dana Brown, Oxford University; Brian
Connelly, Auburn University; Pavlos Dimitratos, Athens University
of Economics and Business; Tarik Driouchi, Cranfield University;
Francisco Figueira-de-Lemos, Portuguese Catholic University;
Crystal Jiang, Bryant University; Tim Kiessling, Bond University,
Dan Li, Indiana University; Toyah Miller, Indiana University; Lilach
Nachum, Baruch College; Steve New, Oxford University, Bo
Bernhard Nielsen; Copenhagen Business School; Sabine Nielsen,
Copenhagen Business School; Roberto Ragozzino, The University of
Texas at Dallas; Tony Tong, University of Colorado; William
Worthington, Baylor University; Kehan Xu, Texas A&M University;
Daphne Yiu, Chinese University of Hong Kong.
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