Developing and Extending Theory in Strategic Management and International Business

1. Developing and Extending Theory in Strategic Management and International Business YADONG LUO University of Miami March, 2011

2. Apparently, it is a tough task... • Theoretical development is, perhaps, the most difficult part in research development • Lack of consensus on exactly how to evaluate theoretical contribution • Lack of agreement about which theoretical perspectives are best suited for the topic in question • Reviewers may be biased or lack adequate knowledge, and your theoretical domain may clash with their personal tastes and preferences

3. Apparently, it is a tough task • Tough to make tradeoffs between generality, simplicity, and accuracy • Writing strong theory is time consuming and fraught with error for even the most skilled management scholars • Theoretical assumptions may not be universally shared • A topic in question may be so complex that it requires multiple lenses to theorize • Not every paper necessarily needs theory or theories

4. But it is the heart of research… • A paper without theoretical logic is tantamount to a body without heart • It is the theoretical part (framework and hypotheses) that tells why. Data describes which empirical patterns were observed and theory explains why empirical patterns were observed or are expected to be observed • Theory guides propositions, research methods, and even analytical tools

5. Theory is….. • A theory is a system of constructs and variables in which the constructs or variables are related to each other by propositions or hypotheses, within the boundary that sets the limitations and assumptions in applying it (e.g., values, context, space, time). • Its purpose is (1) to organize (parsimoniously) and to (2) communicate (clearly). • Theory is developed by which to explain AND predict complex events, objects or phenomena. A theory is useful (i.e., utility value) if it can both explain and predict (e.g., TCE; Resource dependence). • An explanation establishes the substantive meaning of constructs, variables, and their linkages, while a prediction tests that substantive meaning by comparing it to empirical evidence. • Strong theory delves into underlying processes so as to understand the systematic reasons for a particular occurrence or nonoccurrence.

6. Theory comprises ..... • What (constructs, variables, concepts) – It requires sensitivity to (a) Comprehensiveness (are all relevant factors included?) and (b) Parsimony (should some factors be deleted because they add little additional value to our understanding?) (e.g., institutional theory; RBV) • How – How a set of factors are related? Operationally, it uses “arrows” to connect the “box” and to show the pattern. The more complex the set of relationships under consideration, the more useful it is to graphically depict them (TCE: transaction traits – transaction cost – governance and control)

7. Theory comprises ..... • Why - What are the underlying psychological, economic, or social dynamics that justify the selection of factors and the proposed causal relationships? It defines logic, the most important criterion to evaluate a theory (e.g., coopetition theory and alliance theory) • Researchers should push back the boundaries of our knowledge by providing compelling and logical justifications for altered views • The soundness of fundamental views of human nature, organizational requisites, or societal processes often provides the basis for judging the reasonableness of the proposed conceptualization • Without whys underlying the model, it would lead to data-driven or empirically, rather than theoretically, dominated discussions of the implications of a study’s results • Who, where, when – define a theory’s boundary constraints (e.g., temporal and contextual factors) and its generalizability. Researchers should be encouraged to theoretical sensitivity to context (e.g., time, space, environment, regulation, market structure, etc.) (e.g., IO theory)

8. Making your assumptions clear

9. Theory is an approximated continuum Theoretical originality and completeness

10. Theoretical Scope & Completeness Vary scope Completeness

11. Theoretical originality varies High Originality (Level 1) Organizational Justice Interactional Justice Low Originality (Level 3)

12. Developing theoretical Framework • Most studies do not generate new, novel theories from scratch. Instead, they generally work on improving what already exists • The additions or deletions of factors are not of sufficient magnitude to substantially alter the core logic of the existing theory. Relationships, not lists, are the domain of theory • Authors must be able to identify and delineate how proposed changes affect the accepted relationships between the factors and what contributions you will make • It is a common approach to explain why and strengthen logic by borrowing a perspective from other fields, which encourages an alternative explanation or challenge the underlying rationales of accepted theories • Theories are often challenged because their assumptions have been proven unrealistic (e.g., structuration theory and social exchange theory)

13. please do ….. • Explicate pertinent logic from past theoretical work so that the reader can grasp the author’s developmental arguments • Strong theory usually stems from a single or small set of research ideas, though their implications are widespread • Papers with strong theory often start with a few sharpened conceptual statements and build a logically detailed case; they have both simplicity and interconnectedness (e.g., population density theory) • Read the diverse literature in multiple fields (e.g., economics, sociology) • Avoid mentioning those variables or process that you cannot measure and test

14. please do ….. • Use diagrams or figures. Although they by themselves do not constitute theory, such diagrams or figures are a valuable part of theoretical development • Diagrams provide structure to otherwise rambling or amorphous arguments. More helpful are figures that show causal relationships in a logical ordering so that readers can see a chain of causation or how a third variable intervene in or moderates in a relationship. Moderating and mediating models become popular in recent years • Also useful are temporal diagrams showing how a particular process unfolds over time • Rich verbal explication on arrows is always necessary. Arguments must be rich enough that processes have to be described with sentences and paragraphs so as to convey the logic behind the causal arrow

15. please do ….. • Typology and metaphors are powerful literary tools and extremely useful in describing what – helping researchers to meet one of the goals of theory – eliminating some of the complexity of the real world. In this context, they may well serve as precursors to theories • Typology is a mental construct or categorization formed by the synthesis of many diffuse, complex and interrelated phenomena which are arranged, according to certain one-sidedly accentuated points of view, into a unified analytical construct (e.g., Miller and Friesen emphasized the environment-strategy configurations) • A metaphor is a statement that maintains that two phenomena are isomorphic (e.g., the notions of organizations as “loosely coupled systems” by Weick in 1976 and as “garbage cans” by Cohen, March, and Olsen in 1972; LOF by Hymer in 1976) • Typologies and metaphors are the source of material of theories, they themselves are not theories • To be use in theory development, typology and metaphors must go beyond description (what) and be a useful heuristic device - categorization and imagery must assist in deriving specific propositions and/or hypotheses

16. Please do not ….. • Just as a collection of words does not make a sentence, a collection of constructs and variables does not necessarily make a theory. A theory must explain why variables or constructs come about or why they are connected • Applying an accepted theory or model to a new setting and merely showing that it works as expected is not instructive by itself. A paper has theoretical merit only if qualitative changes in the boundaries or notions of a theory

17. Please do not ….. • References and citations are not theory. References to theory developed in prior work help set the stage for new conceptual arguments. Authors need to acknowledge the stream of logic on which they are drawing and to which they are contributing • But listing references to existing theories and mentioning the names of such theories is not the same as explicating the logic they contain. References are sometimes used, along a flurry of citations, like a smoke screen to hide the absence of theory • Previous empirical findings are not theory: Often, authors try to develop a theoretical foundation by describing empirical findings from past research and then quickly move from this basis to a discussion of the current results. Mere citing previous findings without offering logical reasoning does not justify your argument

18. Now, hypotheses • Not all theoretical contributions require propositions (involving concepts and constructs) or hypotheses (involving variables and measures), nor should all papers need follow the same format • However, when the paper is designed to make some theoretical contributions, testable hypotheses are very useful, and they can be an important part of a well-crafted theoretical framework • Hypotheses serve as crucial bridges between theory and data, making explicit how the variables and relationships that follow from a logical argument will be operationalized.

19. Developing your hypotheses • Hypotheses must be conceptually logical. Compiling literature reviews and citations without underlying logic does not constitute good hypotheses development • Hypotheses must be empirically testable: Empirical adequacy embodied in hypotheses cannot be achieved if the hypothesized relationships do not meet standards of a good measurement model or if they are inherently untestable • Hypotheses must be context-specific (environmentally- or spatially bound?). The predictive adequacy of a hypothesis is judged in terms of its ability to make predictions within delineated spaces and time

20. Developing your hypotheses • Constructs and variables with broader scope allow hypotheses to have greater overall explanatory power. A good hypothesis is the one that achieves a balance between scope (range of arguments) and parsimony (ratio of hypotheses to propositions/arguments) • Individual hypotheses must satisfy the two criteria: (a) they must be non-tautological, and (b) the nature (e.g., strength or form) of the relationship between antecedent and consequent must be specified

21. Developing your hypotheses • A good hypothesis contains (1) the substantive element (explanatory potential) and (2) the probabilistic element (predictive adequacy) • A hypothesis with explicit assumptions is clearly preferable to one without spelling out assumptions (e.g., the strategic choice perspective assumes the interdependence of units within and across organizational boundaries) • Although path and structural equation (e.g., LISREL) models provide a systematic format for expressing the proposed relationships, the actual ordering of the variables and the nature of their relationship (e.g., causal, simultaneous, associative, reciprocal, recursive, dialectical) must be conceptually clarified and justified

22. Developing your hypotheses • A hypothesis’s explanatory power is also continent upon the extent to which the actual empirical form of the relationship (e.g., linear, curvilinear, U-shape, inverse U-shape, J-curve, S-curve) is stated. • Even though this is an empirical question, it is preferred to think further whether your hypotheses will be strengthened or more contributory when including the above forms

23. Developing your hypotheses • Proposing a relationship is the most common way in hypothesis building. Note, however: • Types of Relationships • Strength • Multiplexity • Asymmetry • Status • Structure of Relationships • Structural holes • Centrality • Density

24. Developing your hypotheses • Predictive adequacy of two competing hypotheses derived from two alternative theories needs to be comparatively assessed on the basis of the degree of confidence researchers have in the theory (statistical significance) • Empirical results cited from previous works can provide useful support for your hypotheses; but they should not be construed as theory or hypotheses themselves. Prior findings cannot by themselves motivate hypotheses, and the reporting of results cannot substitute for causal reasoning • It is not advisable to pose a wide range or a long list of hypotheses to show your rich labor and/or rich data

25. Developing your hypotheses • If your hypotheses are based on a cumulative body of more-or-less universally accepted theories, then the first task is to select an appropriate theory to underpin hypotheses • Connectivity – the ability of a selected theory to explain and justify the central logic of your argument • Transformationality – the ability of hypotheses to make the theory enlightening in a new study setting • Should we use single or multiple theories to underpin hypotheses in one study? Depending on necessity and compatibility

26. Extending Theory via Contextualization • A moderating approach - Contextualization often resembles the sort of “add a moderator” research that is already quite common • A conditioning approach – Including new conditions under which the main effect takes place; these conditions are often very macro-global, regional, national, or industrial PEST parameters • A predicting approach – Incorporating more or new antecedents or predictors (IVs) that can increase theoretic explanatory power • A process or path approach – Revamping the processes in which the main effect specifically occurs in a new context; some old process variables may nullify but some new concurrent forces may arise

27. Extending Theory via Contextualization • A mediating approach – Proposing new mediating force(s) that work in a new context, and such mediating channels can be insightful • A new means-end approach – Suggesting different means, different ends (outcomes), as well as different causal paths in a different context • A supposition approach – repudiating some old assumptions and setting new assumptions (e.g., motives) in a new context • A linearity approach – Envision changes in linearity in a different context, also allowing one to address dynamism of the theory • A “to-the-extent” approach – Theory is only partially true in the new setting, with some notions valid but others only work under certain conditions or not work at all

28. Theory Verification in Empirical Research • From theory development to theory verification • Most theories stay short in detailing specific conditions, processes and outcomes of principal relationships they argue • This provides opportunities of theory verification in empirical research through specifying and articulating concrete hypotheses showing directions, magnitude, path, causality, and the like • Opportunities to generalize a theory in different contexts (nation, industry, market, environment) abound • Contextualization through capturing a new set of antecedents, concurrent and consequent variables

29. Theory Verification in Empirical Research

30. Elaboration of Theoretical Implications • Within-theory elaborations • What confirmed, what extended, and what rectified • Apply the theory in a new context and related generalizability • Unveil and specify the processes, conditions, and outcomes • Within-field or domain elaborations • Within literature – How this theory complements or contradicts other prevalent theories in the field • Within context – How this theory advances our understanding of the context-specific issues • Beyond theory elaborations • Beyond theory – practical and managerial implications • Beyond today – Future research suggestions

31. Further Readings on Theory Development General Readings on Theory Development • Argyris, C. and Schon, D.A. 1977. Theory in practice: Increasing professional effectiveness. San Francisco: Jossey-Bass. • Bacharach, S.B. 1989. Organizational theories: Some criteria for evaluation. Academy of Management Review, 14(4): 496-515. • Blalock, H.M. 1969. Theory construction: From verbal to mathematical formulation. Englewood Cliffs, NJ: Prentice Hall. • Cohen, B. 1980. Developing sociological knowledge: Theory and method. Englewood Cliffs, NJ: Prentice Hall. • Davis, J.P., Eisenhardt, K.M. and Bingham, C.B. 2007. Developing theory through simulation methods. Academy of Management Review, 32(2): 480-499. • Dubin, R. 1969. Theory building. New York: Free Press. • Eisenhardt, K.M. 1989. Building theories from case study research. Academy of Management Review, 14(4): 532-550.

32. DiMaggio, P.J. 1995. Comments on “what theory is not”. Administrative Science Quarterly, 40: 391-397. • Freese, L. 1980. Formal theorizing. Annual Review of Sociology, 6:187-212. • Poole, M.S. and Van de Ven, A.H. 1989. Using paradox to build management and organization theories. Academy of Management Review, 14(4): 562-578. • Smith, K.G. and Hitt, M.A. 2005. Great minds in management: The process of theory development. Oxford: Oxford University Press. • Sutton, R.I. and Staw, B.M. 1995. What theory is not. Administrative Science Quarterly, 40: 371-384. • Tsang, E.W.K.1999. Replication and theory development in organizational science: A critical realist perspective. Academy of Management Review, 24(4): 759-780. • Weick, K.E. 1989. Theory construction as disciplined imagination. Academy of Management Review, 14(4): 516-531. • Weick, K.E. 1995. What theory is not, theory is. Administrative Science Quarterly, 40: 385-390. • Whetten, D.A. 1989. What constitutes a theoretical contribution. Academy of Management Review, 14(4): 490-495.

33. Further Readings on Theory Development Suggested Readings on Theory Extension • Bowman, E.H. & Hurry, D. 1993. Strategy through the option lens: An integrated view of resource investments and the incremental choice process. Academy of Management Review, 18(4): 760-782 • Oliver, C. & Holzinger, I. 2008. The effectiveness of strategic political management: A dynamic capabilities framework. Academy of Management Review, 33(2): 496-520 • Kostova, T. & Roth, K. 2003. Social capital in multinational corporations and a micro-macro model of its formation. Academy of Management Review, 28(2): 297-317 • Kostova, T. 1999. Transnational transfer of strategic organizational practices: A contextual perspective. Academy of Management Review, 24(2): 308-324 • Lepak, D. & Snell, S. 1999. The human resource architecture: Toward a theory of human capital allocation and development. Academy of Management Review, 24(1): 31-48 • Nahapiet, J. & Ghoshal, S. 1998. Social capital, intellectual capital and the organizational advantage. Academy of Management Review, 23(2): 242-266

34. Further Readings on Theory Development Suggested Readings on Theory Testing and Verification • Betton, J. & Dess, G.G. 1985. The application of population ecology models to the study of organizations. Academy of Management Review, Oct, pp.750757 • Boyd, B. 1990. Corporate linkages and organizational environment: A test of the resource dependence model. Strategic Management Journal, 11: 419-430 • Casciaro, T. & Jan Piskorski, M. 2005. Power imbalance, mutual dependence and constraint absorption: A closer look at resource dependence theory. Administrative Science Quarterly, 50(2): 167-199 • Bottom, W., Holloway, J., Miller, G. Mislin, A. & Whitford, A. 2006. Building a pathway to cooperation: Negotiation and social exchange between principal and agent. Administrative Science Quarterly, 51(1): 29-58 • Colquitt, J. & Zapata-Phelan, C. 2007. Trends in theory building and theory testing: A five-decade study of the Academy of Management Journal, Academy of Management Journal, 50(6): 1281-1303 • Capabilities, contractual hazards, and governance: Integrating resource-based and transaction cost perspectives. Academy of Management Journal, 49(5): 942-959 • Seibert, S., Kraimer, M. & Liden, R. 2001. A social capital theory of career success. Academy of Management Journal, 44(2): 219-237