Foreign/Native Decision-Maker: Strategic Decisions Under Uncertainty and Organizational Performance

Analyzing firms' ability to adapt to changes in their external environment scholars identify a systematic adaptation bias in foreign markets. Employing a profile deviation to examine the relationship between adaptation and performance, Dow (2006), for example, found a systematic preference among foreign businesses to under-adapt their strategies in host markets. He suggests that this is more favorable than fully adjusting foreign firms multinational strategies towards host market needs.

A focus on the decision-making, however, reveals that the strategic actions of business owners in their home market environments differ from those conducted in host market environments. Bailey et al. (2008, 2011) and Norden (2010), for example, demonstrated that foreign decision-makers are less likely to perform the necessary strategic adjustments. The foreign market setting seems to promote a status quo bias among decision-makers.

This raises questions regarding whether foreign-owned organizations under-adaptation is solely caused by organizational aspects, such as being part of a multinational enterprise, which let organizations opt for different strategic choices, or whether host market settings generate different cognitive perceptions of strategic options that let foreign and native decision-makers choose strategic decisions based on different parameters, which in turn influence organizations performance.

Focusing on decisions under uncertainty, Ellsberg (1961) argued that such decisions are not only moderated by the degree of uncertainty, but also by its source. Generally speaking, the literature distinguishes between two types (Fox and Tversky 1995): risk (the possible outcomes and odds of achieving these outcomes are perfectly known, Forbes 2006) and ambiguity (the possible outcomes and corresponding odds are not perfectly known, Camerer and Weber 1992). Uncertainty is a broader construct that comprises risk and ambiguity.

In accordance with the comparative ignorance hypothesis, decision-makers are more concerned about ambiguity if they are able to draw comparisons with similar and relevant situations that are less ambiguous. This principle suggests that individuals only respond to ambiguity in a given context if they can compare themselves against more knowledgeable individuals or against a more familiar context. The presence of ambiguity, however, increases perceived risk (Ghosh and Ray 1992, 1997, Sarin and Weber 1993), which induces psychological discomfort. This psychological discomfort, in turn, results in more conservative judgments (Sarin and Weber 1993).

Building on this line of reasoning and focusing on a foreign market setting, this study addresses the following issues. Given foreign decision-makers’ alien status within host markets, they are able to compare their host market situation with both their own home-country experience and with how locals might make decisions in the same situation. The tendency to draw such comparisons creates conditions for a foreign decision-maker to feel less familiar and less knowledgeable than those with whom they compare themselves, and they therefore perceive more ambiguity than locals. This tendency implies that foreign decision-makers are likely to perceive host markets as more ambiguous than native decision-makers, even if they have the same local market knowledge as their domestic counterparts. As a result, such perceptions of ambiguity increase foreign decision-makers’ level of perceived risk, which cause them to make more-conservative judgments.