Leader narcissism and outward foreign direct investment: Evidence from Chinese firms

Highlights

• We use a leader narcissism index to examine the relationship between Chinese leader narcissism and OFDI.

• Leader narcissism has a positive and significant impact on Chinese firm’s outward foreign direct investment (OFDI).

• State ownership shows a positive effect of leader narcissism on the firm’s OFDI.

• Political connections strengthen the positive relationship between narcissistic leaders and OFDI.

• Leader narcissism affecting foreign investments has important implications for managers.

Abstract

Researchers use the upper echelons theory to establish how leaders’ attributes affect firms’ outward foreign direct investment (OFDI), a proxy for foreign operations. This extant literature has largely ignored the impact of leaders’ psychological attributes, particularly, narcissism. We use a narcissism index of leaders of Chinese listed companies to examine the relationship between leader narcissism and firm-level OFDI for the period 2007-2017. We show that leader narcissism has a positive and significant impact on firm-level OFDI. In addition, we find that firms with state ownership and political connections show a greater positive effect of leader narcissism on the firm’s OFDI. Our results suggest that leader narcissism appears to be a stimulus to corporate OFDI, and thus in recruiting top corporate executives who are responsible for managing the international investments of the corporation, this psychological trait should be given special consideration in addition to other qualifications.

Introduction

The upper echelons theory (UET) relates the effect of the attributes of corporate leaders to a firm’s outward foreign direct investment (OFDI). Previous studies have examined primarily the effects of demographics of corporate leaders, such as age, gender, tenure, and international experience, on the firm’s OFDI (Herrmann & Datta, 2002; Hsu, Chen, & Cheng, 2013; Ramón-Llorens, García-Meca, & Duréndez, 2017; Xie, 2014). Evidence from the psychological research has also shown that leaders’ personalities significantly influence the firm’s strategic decisions (Chatterjee & Hambrick, 2007, 2011; Zhu & Chen, 2015a,2015b). Narcissism, which is a fundamental personality dimension, could influence the firm’s OFDI activities. For instance, Oesterle, Elosge, and Elosge (2016)) show that narcissistic leaders accelerate foreign business activities of German manufacturing firms. Nevertheless, there remains a lack of understanding of how leader narcissism may impact OFDI decisions of firms in emerging economies, whose international motives, characteristics, and ownership are different from those of companies in developed economies such as Germany (Buckley et al., 2007). This study seeks to fill this research gap by examining the effect of narcissism of a corporate leader (CEO/Board chair) on the firm’s OFDI in China, one of the emerging economies.

Narcissism reflects a collection of psychological attributes including overconfidence, feelings of personal superiority and entitlement, a desire for power and admiration, as well as a willingness to manipulate others for personal gains (e.g., Buyl, Boone, & Wade, 2017; Chatterjee & Hambrick, 2007, 2011; Rosenthal & Pittinsky, 2006; Olsen, Dworkis, & Young, 2013; Tang, Mack, & Chen, 2018; Young, Du, Dworkis, & Olsen, 2015). Narcissistic traits have been shown to influence managerial decision-making in significant ways (Chatterjee & Hambrick, 2007; Gerstner, König, Enders, & Hambrick, 2013; Zhu & Chen, 2015a,2015b). For instance, CEO narcissism is shown to be linked to a firm’s performance (Chatterjee & Hambrick, 2007; Judge, LePine, & Rich, 2006), entrepreneurial orientation (Wales, Patel, & Lumpkin, 2013), and accounting reporting and auditing behaviors (Judd, Olsen, & Stekelberg, 2017; Olsen et al., 2013). Previous studies also find that narcissistic corporate leaders tend to take more risks (Buyl et al., 2017; Ham, Seybert, & Wang, 2018; Zhu & Chen, 2015a), implement more new corporate strategy (Aktas, De Bodt, Bollaert, & Roll, 2016; Zhu & Chen, 2015b), and engage more in technological innovation (Gerstner et al., 2013; Kashmiri, Nicol, & Arora, 2017) as well as corporate social responsibility initiatives (Petrenko, Aime, Ridge, & Hill, 2016; Tang et al., 2018).

Thus, it is reasonable to believe that a corporate leader’s psychological trait plays a role in his/her decision-making concerning the firm’s investment in international operations, which are typically associated with greater risks and returns. Yet, research on this topic is scanty (Aharoni, Tihanyi, & Connelly, 2011). To our knowledge, only one previous study has examined how leader narcissism affects a firm’s decision in taking risk in the internationalization of firm operations (Oesterle et al., 2016). Given that leader narcissism has been found to be associated with more risk-taking (e.g., Chatterjee & Hambrick, 2011; Zhu & Chen, 2015a; Dutta, Malhotra, & Zhu, 2016; Oesterle, Richta, & Fisch, 2013), the lack of research in the connection between corporate leader narcissism and risky decision-making motivates us to examine how narcissistic corporate leaders influence a firm’s OFDI.

China provides an appropriate setting for this study because it has become a major contributor of OFDI among emerging economics with a 30% annual growth rate in OFDI. In 2016, China was ranked second globally with a total amount of $191.15 billion OFDI in 190 countries.¹ Narcissism is a personality trait that is primarily discussed in Western cultures that tend to promulgate individualism (Chatterjee & Hambrick, 2007). In contrast, Chinese society is rooted in the Confucian philosophy and largely collectivistic. Narcissism is traditionally considered to be less acceptable in China than in Western societies (Wang, Hong, Kafouros, & Wright, 2012; Wang, Waldman, & Zhang, 2012), but news reports have heralded an increasing trend of narcissism in China (Meisel, Ning, Campbell, & Goodie, 2016). China has become a more market-oriented economy after its economic reforms started in 1979 and has taken big steps toward establishing an open market economy. As China has experienced economic growth at an unparalleled rate for 30 years, narcissists are apt to emerge and flourish (Meisel et al., 2016; Rosenthal & Pittinsky, 2006). For example, Jack Ma, who founded Alibaba and revolutionized China's e-commerce, is known for entertaining his employees by wearing lipstick and wild wigs on stage to show attention-grabbing behaviors associated with narcissism (Zhang, Ou, Tsui, & Wang, 2017).

Additionally, China’s transition from a centrally planned to a market-oriented economic system provides us an opportunity to identify and examine contextual factors that might moderate the link between leader narcissism and firm’s OFDI. Prior research has shown that emerging economies such as China are characterized by the coexistence of state ownership and political connection, both of which enable firms to obtain resources (Li, He, Lan, & Yiu, 2012; Xia, Ma, Lu, & Yiu, 2014). Drawing on this research, we explore the possible interaction effect that these two contextual factors may have on the relationship between leader narcissism and firm’s OFDI.

This paper contributes to the extant literature on corporate leadership and on firm-level OFDI in emerging economics in several ways. First, we provide new insights into the upper echelons theory (UET). Specifically, we shed light on the relationship between a narcissistic corporate leader and the firm’s OFDI in China, an important emerging economy. Compiling a leader narcissism index from a video survey, we show that firms with narcissistic leaders engage in more OFDI activities. Second, we show both state ownership and political connections enhance the positive relationship between leader narcissism and firm-level OFDI, extending and enriching the literature of narcissism on foreign engagement (e.g., Deng, Yan, & van Essen, 2018; Oesterle et al., 2016). Leader narcissism has a stronger effect on firm-level OFDI under the boundary conditions of state ownership and political connections. More importantly, we expand the theory of OFDI, which is primarily based on rational models, such as the eclectic paradigm (e.g., Buckley et al., 2007), resource dependence theory (e.g., Deng et al., 2018; Huang, Xie, Li, & Reddy, 2017), and institutional theory (Li, Xia, Shapiro, & Lin, 2018; Luo, Xue, & Han, 2010; Wang, Hong et al., 2012, 2012b). By relating leaders’ psychological characteristics such as narcissism to explain OFDI decision making, we open up doors for future research on the discretionary determinants of OFDI.

Our findings also provide several practical implications for managers and other decision makers of the firms. First, CEOs are the key decision makers of their firms. Their psychological traits, such as narcissism, are imperative for firms to succeed in today’s highly competitive global environment. Despite narcissism is commonly perceived to be a bad trait, our study shows that corporate leader narcissism could be beneficial to the firm. Under the leadership of narcissists, companies are likely to go to foreign markets to search for more potential opportunities. Thus, when recruiting top corporate leaders, in addition to evaluating the candidates’ work experience and credentials, companies should also look for particular psychological traits in candidates such as narcissism to see if they are the right person for the firm’s future strategic plans. Second, Chinese society is rooted in the Confucian philosophy and collectivistic in nature. Chinese corporate leaders are perceived to have a low level of variation in narcissism scores. However, some corporate leaders who are more narcissistic than others are more likely to better help the company expand overseas. As China is becoming more integrated with the global economy, Chinese firms will engage in more OFDI over time and should look for corporate leaders whose psychological traits are more aligned with the company’s strategic plans. Moreover, this research helps corporate leaders of Western companies to better understand their Chinese counterparts. Realizing that some Chinese corporate leaders may be more narcissistic than the impression they presented to the world, Western competitors may need to adjust their strategies when facing challenges posed by their narcissistic Chinese counterparts.

The rest of this paper is organized as follows. Section 2 reviews the literature of leader narcissism and discusses the hypotheses. Section 3 explains the sample, data sources, and variable measures. Section 4 presents the empirical results. Section 5 discusses the implications and limitations of this paper.