**Table 1.**

*Review articles description.*

## *Agency Theory and Internationalization: A Critical Assessment of Literature DOI: http://dx.doi.org/10.5772/intechopen.99192*

**Figure 1.**

*Year-wise publication trend in sample studies.*

the firm strategy [17]. Various studies have found the link between the board composition and characteristics with firm internationalization decisions such as diversification, innovation, and acquisition [25]. Hooghiemstra et al. [17] studied the impact of board internationalization on the monitoring quality of the board. They proposed that the internationalization of the board make communication difficulties due to language and culture difference. This impacts the perception of the individual director toward earning management. Board internationalization cause difficulties in the understanding of accounting laws of the host nation and reduce the quality of monitoring. Foreign directors are found to be less influenced by management. The lack of country-specific accounting knowledge and a language barrier in the board meeting causes less effective monitoring which causes high earning management.

*Agency Theory and Internationalization: A Critical Assessment of Literature DOI: http://dx.doi.org/10.5772/intechopen.99192*


#### **Table 2.**

*Theory used in the sample studies.*

Board diversity is also an emerging issue in the governance literature. Saeed et al. [19] studied the impact of ownership on women's presence on the board in the emerging economies context of India and China. They found that women's presence on the board is negatively related to the family and state ownership in the firm. Firm internationalization has a positive impact on the independence of the female BOD. As per the resource dependence theory [39], the presence of female directors motivates the female employee in the firm and increases the legitimacy of the firm in the international context. The diverse board provides a pool of skills and knowledge to make a better decision [19]. In the emerging economies context, board diversity has different implications as compared to developed economies. Emerging economies have weak legal protection, less defined property rights, and


#### **Table 3.**

*Research method used in the sample studies.*

the infrastructure is also not well developed. State-owned firms have high government influence due to top management appointed by the state. The politics in the male-dominated arena of the emerging economies hurt the selection of the female members on the board [19].

The independence of the directors from the top management team reduces the cost of an agency. The independent director has the human and social skills to influence the firm internationalization decisions [26]. Chen et al. [10] examine a sample of US manufacturing firms and find that directors' independence provides appropriate resources and information's in multinational firms. Integrating agency theory with the resource dependence view, they argue that independent directors possess international experience in the specific industries with the interlocking ties which increase firm willingness to internationalize.

#### *3.2.2 Top management team (TMT)*

The agency theory is used to explain the divergence of interest between the top management team (as agent) and shareholders (as principals). Agency theory literature is well developed to explain the actions and behavior of the TMT and the opportunistic decision by the managers to maximize their benefits [16]. Internationalization increases competition in the industry from the domestic as well as foreign multinational firms. This increased competition increases the TMT focus on the decision to improve the firm value and reduce the agency conflict [27].

CEO (chief executive officer) pay structure is used to mitigate the agency problem by aligning the owner-managers interest. In the international business context, a contingent pay structure of the CEO can increase her/his effort in managing the complexity and get the rewards [25]. Higher and Long term based CEO pay can

#### *Agency Theory and Internationalization: A Critical Assessment of Literature DOI: http://dx.doi.org/10.5772/intechopen.99192*

reduce the agency cost and increase information processing in the multinational context [21]. Elosge et al. [16] examined the role of CEO succession on the German firm's internationalization. They combine agency theory, institutional theory and upper echelons approach to identify CEO succession influence on internationalization decisions. They find that CEO succession leads to higher firm internationalization. The new CEO tries to peruse the legitimacy and try to maximize the personal benefit by international diversification. This positive impact is reduced after a threshold of the CEO changes due to the disturbance caused in the firm's management. Finally, they found an inverted-U-shaped relationship between CEO succession and internationalization.

Dauth et al. [15] integrated upper echelons perspective, agency theory, and human capital theory to examine the impact of TMT internationalization on accounting quality. They found that TMT internationalization improves the accounting quality and the effect size is small in the case of CFO (chief financial officer) internationalization compare to CEO. TMT internationalization help in coping with the complex accounting standards and reduce the incentive to exert earning discretion.

#### **3.3 Ownership and agency**

Existing studies show that the ownership structure of the firms influences the firm's decision-making and behavior of risk-taking [40]. Emerging economies firms also face the principal-principal agency issue [41, 42]. Heterogeneity of the strategic preferences among the institutional investors is established in the existing studies [26, 40, 43]. This section reviews the studies using agency theory to establish the link between the ownership structure and internationalization decisions.

### *3.3.1 Domestic ownership*

Domestic ownership includes ownership by domestic individuals, corporates, and institutions. Singla et al. [13] examined the role of domestic corporate ownership on internationalization. This corporate invest in the other firms and form a cross-holding and pyramidal ownership structure. This improves the relative competitiveness of the firm in the home market by reducing the supply and demand uncertainty and providing access to resources. Tihanyi et al. [26] study the impact of institutional ownership on the US firm's international diversification. They find that institutional investors (professional investment funds and pension funds) have a long-term interest in the firm and they effectively monitor the manager's action due to their large ownership. The long-time horizon and risk-taking behavior of the institutional investors increase the focal firm's international diversification.

Zhou et al. [20] integrated agency theory with the institution-based view to understanding the relationship between institutional ownership and crossborder acquisition success in Chinese firms. They find that institutional ownership improves firms' governance quality and acquisition success. They are more informed to evaluate the cross-border acquisitions decisions by the firms and their large shareholding incentives to monitors the other shareholders and managers active in the acquiring firms.

#### *3.3.2 Foreign ownership*

It includes ownership by foreign corporations and institutional investors. Ray et al. [29] argued that the high foreign institutional ownership reduces the fear of complex unknown practices in the international market by improving

understanding of the foreign market based on their international experience. They found that foreign corporate and institutional ownership is positively associated with firm internationalization. Foreign corporate investors are not only motivated by financial goals but also want to enter into the new market and develop organizational capabilities [13]. In the emerging market multinational firms the foreign institutional help in building credibility and reputation in the foreign market. Institutional investors are active monitors and sent a positive signal of good governance in the focal firms. In sum, institutional ownership is positively associated with firm internationalization [13]. Foreign investors are also associated with the high commitment entry modes selection by the firms [25]. Mersland et al. [14] examined the influence of microbanks internationalization on their social and financial performance. Internationalization of the microbanks helps in getting international BOD, international debt access, international network access which improves their social performance.

#### *3.3.3 Business group ownership*

Business group ownership is very dominant in the emerging economies context such as India. Gaur and Delios [28] integrated agency theory with institutional theory to examine the impact of international diversification on firm performance. They examined a sample of Indian multinationals and found that high domestic and foreign ownership is positively associated with the firm international diversification. They found a negative impact on firms' international diversification of financial performance. Business group affiliation positively moderated the relation between the firm international diversification and financial performance. The group affiliated firms have a less negative impact of international diversification of the firm's performance due to the resource availability support in the affiliated firms.

#### *3.3.4 Family ownership*

There are various definitions of family firms in the literature. Ray et al. [29] defined family firms as "firms given founding business have a shareholding of 20% or more with a director position by founding family members and at least a member from the founding firm is managing director/CEO/board chairperson". Tsao and Lien [33] defined family firms as "firms in which the founders or their family members hold the key management positions, sit on the board, or are the block-holders of the firm". Singla et al. [13] examined the impact of family ownership on firms' internationalization. Based on the principal-principal (PP) agency theory and the resource-based view they argue that the various shareholders have different preferences and favor firm internationalization differently. They find that a lower level of family ownership is positively associated with firms' internationalization while a higher level does not favor internationalization.

Ray et al. [29] investigated the influence of family management and ownership on firm internationalization decisions in emerging economies (India). They integrated the "socioemotional wealth perspective and agency theory" to examine the relationship. They adopted the willingness and ability perspective [44] to establish the relationship. Where the willingness is related to "disposition to act" and ability is related to "discretion to act". The family firms have less willingness to take the risk and lower internationalization. The risk aversion of the family firms is more strong with the control of the increase as they have ownership as well as management position in the affiliated firms. The family members can influence the manager's actions. The negative impact of family ownership on internationalization is reduced with higher foreign institutional ownership.

#### *Agency Theory and Internationalization: A Critical Assessment of Literature DOI: http://dx.doi.org/10.5772/intechopen.99192*

Tsao and Lien [33] examined the moderating role of family ownership on firm internationalization and innovation/performance. They took a sample of Taiwan's publicly listed firms and find that family firm's experience positively moderate the relationship between internationalization and innovation/performance. The presence of the family management mitigates the agency due to high family firm control over firm strategic actions. The family firm has principal-principal agency conflict with the minority shareholders.
