Abstract
The final chapter synthesises the study’s empirical results on the impact of managerial discretion on performance to generate far-reaching implications for research and practice that work towards resolving the discretion puzzle. There are five major contributions: (1) a proof of the importance of granularity for resolving the discretion puzzle; (2) a new empirically-validated discretion model (as a tool kit for future applications) that accounts for granularity; (3) for empirical research, an appraisal of existing research designs and recommendations for future research designs that can help avoid the discretion puzzle’s arbitrary results; (4) for theoretical research, evidence on the applicability of principal-agent theory and stewardship theory, and recommendations for future theory development; and (5) for practice, actionable advice to the top management of Chinese firms and multinationals on how to manage managers in China. This chapter concludes with a discussion of the present study's limitations and accordingly suggests new avenues of research.
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Notes
- 1.
- 2.
The present study’s discretion puzzle relates to the managerial discretion of managers in organisations and is therefore distinct from the puzzle of discretion (Pratt and Sossin 2009) that concerns judicial discretion in law.
- 3.
Managerial discretion theory (e.g. Abrahamson and Hambrick 1997; Berman et al. 2005; Carpenter and Golden 1997; Caza 2007, 2011; Huiyuan Chen 2006; Crossland 2007; Crossland and Hambrick 2007; Datta et al. 2003; Finkelstein and Boyd 1998; Finkelstein and Hambrick 1990; Finkelstein and Peteraf 2007; Haleblian and Finkelstein 1993; Hambrick and Abrahamson 1995; Hambrick and Finkelstein 1987; Hambrick et al. 1993; Hutzschenreuter and Kleindienst 2007; Keegan 2006; Keegan and Kabanoff 2008; Key 2002; Yougen Li and Zhao 2004; Magnan and St-Onge 1997; Quigley and Hambrick 2009; Rajagopalan and Finkelstein 1992; Thomas and Peyrefitte 1996; Zhang and Li 2008b; Zhang et al. 2006a, b).
- 4.
Principal-agent theory (e.g. Agrawal and Knoeber 1996; Baysinger and Butler 1985; Berger et al. 1997; Brush et al. 2000; Chang and Wong 2003; Childs and Mauer 2008; Denis et al. 1997; Eisenhardt 1989; Fama 1980; Fama and Jensen 1983a, b; He et al. 2009; Jensen 1986; Jensen and Meckling 1976; Jensen and Murphy 1990; Jensen and Ruback 1983; Laffont and Martimort 2002; Lang et al. 1995; Levinthal 1988; Ongore 2011; Shleifer and Vishny 1997; Spremann 1987; Thépot 2007; Thomsen and Pedersen 2000; Walters 1995; Wang et al. 2008; Weidenbaum and Jensen 1993; Werner and Tosi 1995, p. 1673; Xu et al. 2005; Zou 1989).
- 5.
Stewardship theory (e.g. Albanese et al. 1997; Arthurs and Busenitz 2003; Corbetta and Salvato 2004; Davis et al. 1997a, b; Dicke and Ott 2002; Donaldson 1990; Donaldson and Davis 1989, 1991, 1993, 1994; Eddleston and Kellermanns 2007; Fox and Hamilton 1994; Lane et al. 1999; Liu and Cai 2004; Miller and Le Breton-Miller 2006; Mills and Keast 2009; Muth and Donaldson 1998; Salvato 2002; Tian and Lau 2001; Tosi et al. 2003; Van Slyke 2007; Vargas Sánchez 2001, 2004, 2005; Zahra 2003).
- 6.
The fictitious scatter plot format has been used throughout the present study (e.g. Fig. 2.1 in Sect. 2.2.2). In terms of the algebraic notation utilised throughout Chap. 2, Fig. 7.1 depicts performance as a linear function of discretion (i.e. \( P=d\cdot D+c\cdot C+m\cdot \left( {D\cdot M} \right) \)), with the impact of discretion on performance (i.e. \( {{{\partial P}} \left/ {{\partial D}} \right.}=d+m\cdot M \)) represented by the slopes of the lines. When the impact of discretion on performance is positive (\( {{{\partial P}} \left/ {{\partial D}} \right.}>0 \)), the line is upwards-sloping and when the impact is negative, it is downwards-sloping.
- 7.
The influences derived from principal-agent theory include the manager’s natural predisposition to performance maximisation, compensation control mechanisms, the nature of managerial activities, monitoring control mechanisms, and the manager’s ability, knowledge, and information (see Table 2.9 in Sect. 2.3.2.2; e.g. Caza 2007, 2011; Chang and Wong 2003; Cheng et al. 2006; Davis et al. 1997b; Eisenhardt 1989; Fama and Jensen 1983b; Finkelstein and Peteraf 2007; Jensen and Meckling 1976; Xiaoyang Li 2007; Wang et al. 2008; Zhang and Li 2008b). Likewise, stewardship theorists have argued that the principal’s and manager’s psychological characteristics, perceptions of the organisation’s situational characteristics, and expectations may act as potential influences on whether managers use their discretion so as to increase or decrease performance (see Sect. 2.3.3.2; e.g. Argyris 1973a, b; Brown 1969; Caza 2007; Davis et al. 1997b, pp. 27–43; French and Raven 1959; Gibson et al. 1991; Hofstede 1980, 1991; Katz and Kahn 1978; Khanchel 2009, p. 98; Lane et al. 1999, p. 1079; Lawler 1986, 1992; Maslow 1970; McGregor 1960; Mills and Keast 2009; Simon 1957a, b; Triandis 1990, 1995; Triandis et al. 1993; Turner 1981; Van Slyke 2007, p. 164; Vargas Sánchez 2001, 2004, 2005; Walton 1980, 1985).
- 8.
This difference in hiring discretion’s impact by firm type is significant (see Sect. 6.2.2). As explained in Box 2.6 in Sect. 2.4.2, this might be due to cultural and management philosophy differences (e.g. Aminpour and Woetzel 2006, pp. 46–47; Hanne Chen 2004, p. 128; Crossland and Hambrick 2007, p. 14; Hexter 2006, pp. 4–6; Hexter and Woetzel 2007a, p. 4; Hoover 2006, p. 92; McGregor 2005, pp. 273–274). In addition, Sect. 6.2.3 finds that firm size influences the impact of discretion on performance in the present study.
- 9.
As discussed in Sects. 2.2.3 and 7.3.2, there are several modelling methodologies for differentiating research designs by influences on managers, such as investigating only managers subject to similar influences (e.g. only managers in comparable Chinese firms), investigating groups of managers each subject to similar influences (e.g. splitting managers into Chinese firms and multinationals) or combining managers in a sample but accounting for differences by modelling influences as moderators (e.g. Arnold 1982; Carte and Russell 2003, pp. 480–495; Chin et al. 2003, pp. 196–200; Henseler and Fassott 2010, pp. 719–721; Irwin and McClelland 2001, p. 105; Rigdon et al. 1998, p. 1; Venkatraman 1989, p. 426). The corollary is that if a unit of analysis is broadly-defined (e.g. Chinese firms and multinationals) and the modelling methodology does not distinguish between influences on managers via grouping or moderators, granularity may be too limited to accurately reveal the underlying impacts of discretion on performance.
- 10.
In short, as to dimension of discretion, whenever discretion’s impact on performance granularly differs by dimensions of discretion (as for plant managers in Table 7.1), arbitrarily positive, neutral or negative impacts of discretion may be estimated by research designs that do not differentiate between discretion dimensions (i.e. unidimensional measures, as the ones presented above). Whether discretion is then found to improve, not alter or reduce performance would depend on the discretion dimensions into which the measure principally taps, e.g. capital investment discretion versus hiring discretion. As to influences on managers, whenever discretion’s impact on performance granularly differs by influences on managers (as for plant managers in Table 7.1), then arbitrarily positive, neutral or negative impacts of discretion may be estimated by research designs that do not differentiate between these influences (i.e. combine managers under distinct influences into a single broadly-defined unit of analysis without using grouping or moderators). Whether discretion is then found to improve, not alter or reduce performance would depend on the influences on the managers that predominate in the sample, e.g. the management philosophy and culture of Chinese firms.
- 11.
As to condition (i), a number of empirical studies demonstrate that the underlying landscape of impacts of discretion on performance differs in a granular way (as in Table 7.1, e.g. positive for one discretion dimension under one set of influences on managers and negative for another dimension under another set of influences). In other words, various studies confirm the postulate that there is no single positive, neutral or negative impact of discretion on performance but rather that managers may use their discretion differently to impact on performance depending on the area of work in which discretion is granted (i.e. dimension of discretion; e.g. Groves et al. 1994; Xiaoyang Li 2007) and depending on various influences on the manager (e.g. Caza 2007; Cheng et al. 2006; López-Navarro and Camisón-Zornoza 2003; Wang et al. 2008; Zhang and Li 2008b; Zhao et al. 2010). As to condition (ii), Sects. 1.1 and 2.2.3 have shown that many existing studies have indeed employed research designs with limited granularity, often failing to differentiate the estimated impact of discretion on performance by dimensions of discretion and influences on managers (e.g. Bowen et al. 2008; Chang and Wong 2003; Gammelgaard et al. 2010; Groves et al. 1994; He et al. 2009; Xiaoyang Li 2007; Stano 1976; Venaik 1999; Werner and Tosi 1995; Zhang 1997). As to condition (iii), distinct non-granular research designs (e.g. measures tapping into distinct discretion dimensions or units of analysis facing distinct influences) were found to be prevalent in existing studies in Sect. 2.2.3 (e.g. Adams et al. 2005; Huiyuan Chen 2006; Cheng et al. 2006; Heinecke 2011; Thomas and Peyrefitte 1996; Walters 1995; Wang et al. 2008; Xu et al. 2005; Yan et al. 2010; Zhang and Li 2008b).
- 12.
Notwithstanding this compelling step towards resolving the discretion puzzle by establishing the importance of granularity for future research, this study recognises its limitations and allows for the fact that other approaches to resolving the discretion puzzle might exist (see Sect. 7.6).
- 13.
The importance of granularity was established in Sect. 7.1 by confirming the postulate that discretion does not universally have a single positive, neutral or negative impact on performance by virtue of a thorough, in-depth review of managerial discretion theory, principal-agent theory, and stewardship theory (see Chap. 2), an empirical proof-by-counter-example for plant managers in China (see Chap. 6), and various studies with complementary findings (e.g. Caza 2007; Cheng et al. 2006; Groves et al. 1994; Xiaoyang Li 2007; López-Navarro and Camisón-Zornoza 2003; Wang et al. 2008; Zhang and Li 2008b; Zhao et al. 2010).
- 14.
Managerial discretion, industry technology intensity, and firm size explain nearly a third of the variation of performance among plant managers in Chinese firms and multinationals in this study (see Sect. 5.1.2). More detailed descriptions of the new discretion model appear elsewhere in this study, i.e. in Chap. 4 (derivation and specification), Chap. 5 (validation), Chap. 6 (application), and Chap. 7 (interpretation).
- 15.
These empirical results are used in Sect. 7.5 to derive recommendations for top management on how to adjust the degrees of managerial discretion granted to their plant managers in China so as to raise performance.
- 16.
See Equation (6.1) in Sect. 6.1, which for the average Chinese firm estimates how expanding firm size empirically alters a manager’s discretion (\( D \) by \( a \)) and thereby his/her managerial action, that via the direct effect (\( d \)) impacts on performance (\( P \) by \( d\cdot a \))—yielding the ‘Mediating Effect (d ⋅ a)’ in Fig. 7.2.
- 17.
One may view the new discretion model as a general model and many of the existing studies reviewed in Sect. 2.2 as special cases of this model. These special cases tend to oversimplify the context of managerial discretion in terms of granularity: They frequently model discretion as a unidimensional construct instead of differentiating discretion by multiple dimensions as in the new discretion model, and they often aggregate many managers into one unit of analysis instead of differentiating by influences on managers (see Sects. 1.1 and 2.2.3; e.g. Bowen et al. 2008; Chang and Wong 2003; Gammelgaard et al. 2010; Groves et al. 1994; He et al. 2009; Xiaoyang Li 2007; Stano 1976; Venaik 1999; Werner and Tosi 1995; Zhang 1997).
- 18.
In order to account for greater granularity, the theories are woven into the new discretion model with more fine-grained granularity than in many previous studies (see Sect. 2.2), simultaneously differentiating the impact of discretion on performance by dimensions of discretion (as derived from managerial discretion theory) and by influences on managers (as derived from principal-agent theory and stewardship theory).
- 19.
The limitations of the new discretion model are discussed in Sect. 7.6.
- 20.
Table 7.1 shows discretion’s performance impact in average-sized Chinese firms and multinationals in China.
- 21.
The study’s four discretion dimensions in Table 7.2 are examples that demonstrate the multidimensionality of discretion for plant managers in China. Nevertheless, there may well be other dimensions of discretion beyond these four dimensions, which will need to be further investigated in future research (see Sect. 7.6).
- 22.
Principal-agent theory (see Sect. 2.3.2) and stewardship theory (see Sect. 2.3.3) have tended to treat discretion as a single overall (i.e. unidimensional) construct that either reduces or improves performance across the different dimensions of the manager’s work rather than differentiating between these dimensions (see Sect. 2.1.2; e.g. Chang and Wong 2003; Dicke and Ott 2002, p. 468; Fox and Hamilton 1994, p. 74; He et al. 2009; Spremann 1987, p. 18; Vargas Sánchez 2005, p. 19; Xu et al. 2005). In contrast, by using the counter example of plant managers in China, this study has empirically found that managers may use discretion differently to impact on performance depending on the dimension of their work in which discretion is granted (see Sect. 6.2.1). E.g. in average-sized multinationals, granting discretion to plant managers raises performance in the area of capital investments but reduces performance in the dimension of hiring workers.
- 23.
As described in Sect. 2.1.2, most empirical studies have assumed that discretion is unidimensional in the sense that discretion (across multiple areas of the manager’s work) can be measured overall by a single construct, which then is expected to either increase, not alter, or decrease performance.
- 24.
As explained in Sect. 2.1.2, only a small minority of studies have treated discretion as multidimensional, assuming that multiple constructs are needed to represent discretion overall (across multiple domains of the manager’s work) and that single constructs can only meaningfully represent a specific dimension of discretion.
- 25.
Acemoglu et al. (2007) measure autonomy for British firms only in the domain of employment decisions and autonomy for French firms only in the domain of investment decisions in two out of their three datasets.
- 26.
For instance, Caza (2007, pp. 14–16) combines indicators on the manager’s discretion in training resources, hiring, firing, and assigning specific tasks into a unidimensional discretion construct to investigate its impact on performance, although he later finds that discretion covers multiple dimensions (pp. 26–82).
- 27.
For example, Agarwal et al. (2009, p. 2221) proxy managerial discretion by the length of lockup, notice, and redemption periods for the hedge funds under investigation.
- 28.
For example, Venaik’s (1999) construct aims to represent discretion in marketing decisions.
- 29.
Xiaoyang Li (2007) uses separate constructs for investment decision discretion and labour decision discretion.
- 30.
Thomas and Peyrefitte (1996) investigate the impact of discretion on performance using Finkelstein and Hambrick’s (1990) industry-level discretion, which has been further advanced in subsequent studies (e.g. Abrahamson and Hambrick 1997; Datta et al. 2003; Hambrick and Abrahamson 1995; Hambrick et al. 1993; Keegan 2006; Keegan and Kabanoff 2008).
- 31.
Either direct indicator(s) within one dimension of discretion to represent one specific dimension of discretion or direct indicators across several dimensions of discretion separated into multiple discretion constructs.
- 32.
The study’s influences on managers in Table 7.2 (e.g. firm type) are only examples of the realm of influences, which are specified more fully in the study’s general theoretical discretion model in Fig. 4.4 in Sect. 4.1.2.
- 33.
E.g. Table 7.2 shows that hiring discretion hardly impacts on performance in average-sized Chinese firms but reduces performance in multinationals, suggesting that firm type influences discretion’s impact on performance. As explained in Box 2.6 in Sect. 2.4.2, this might be due to cultural and management philosophy differences (e.g. Aminpour and Woetzel 2006, pp. 46–47; Hanne Chen 2004, p. 128; Crossland and Hambrick 2007, p. 14; Hexter 2006, pp. 4–6; Hexter and Woetzel 2007a, p. 4; Hoover 2006, p. 92; McGregor 2005, pp. 273–274). Section 6.2.3 finds that firm size can also influence the impact of discretion on performance.
- 34.
E.g. with hiring discretion not significantly altering performance in Chinese firms but reducing it in multinationals (see Table 7.2), a research design that fails to differentiate between these firm types could arbitrarily estimate either an insignificant or negative overall impact of hiring discretion on performance, depending on the sample’s composition (i.e. whether the influences of Chinese firms or multinationals predominate).
- 35.
Section 4.1.2 has presented the general theoretical discretion model in Fig. 4.4, which includes various influences on managers derived from principal-agent theory (see Table 2.9 in Sect. 2.3.2.2; e.g. Caza 2007, 2011; Chang and Wong 2003; Cheng et al. 2006; Davis et al. 1997b; Eisenhardt 1989; Fama and Jensen 1983b; Finkelstein and Peteraf 2007; Jensen and Meckling 1976; Xiaoyang Li 2007; Wang et al. 2008; Zhang and Li 2008b) and stewardship theory (see Sect. 2.3.3.2; e.g. Argyris 1973a, b; Brown 1969; Caza 2007; Davis et al. 1997b, pp. 27–43; French and Raven 1959; Gibson et al. 1991; Hofstede 1980, 1991; Katz and Kahn 1978; Khanchel 2009, p. 98; Lane et al. 1999, p. 1079; Lawler 1986, 1992; Maslow 1970; McGregor 1960; Mills and Keast 2009; Simon 1957a, b; Triandis 1990, 1995; Triandis et al. 1993; Turner 1981; Van Slyke 2007, p. 164; Vargas Sánchez 2001, 2004, 2005; Walton 1980, 1985).
- 36.
In the above example where sales & marketing discretion has a positive impact in small Chinese firms but a negative impact in large Chinese firms, a research design failing to granularly differentiate by firm size might find a positive impact if its sample focused on small firms and a negative impact if it focused on large firms.
- 37.
Section 2.2.3 has explained that the unit of analysis has varied across studies in terms of influences on managers and that these studies have rarely differentiated their research designs by these influences (e.g. Adams et al. 2005; Agarwal et al. 2009; Barnabas and Mekoth 2010; Caza 2007, 2011; Chang and Wong 2003, 2004; Huiyuan Chen 2006; Cheng et al. 2006; Crossland and Hambrick 2007; Gammelgaard et al. 2010; Groves et al. 1994; He et al. 2009; Heinecke 2011; Khanchel 2009; Xiaoyang Li 2007; Yougen Li and Zhao 2004; López-Navarro and Camisón-Zornoza 2003; Ongore 2011; Stano 1976; Tang 2008; Thomas and Peyrefitte 1996; Venaik 1999; Walters 1995; Wang et al. 2008; Werner and Tosi 1995; Williamson 1963; Xu et al. 2005; Yan et al. 2010; Zhang and Li 2008b; Zhang and Xie 2008; Zhang 1997; Zhao et al. 2010).
- 38.
This is the multi-group comparison approach for testing moderating effects (see Sect. 4.3.1; e.g. Arnold 1982; Henseler and Fassott 2010, pp. 719–721; Rigdon et al. 1998, p. 1; Venkatraman 1989, p. 426).
- 39.
This is the product term approach for testing moderating effects (see Sect. 4.3.1; e.g. Carte and Russell 2003, pp. 480–495; Chin et al. 2003, pp. 196–200; Irwin and McClelland 2001, p. 105). The relationship between the multi-group comparison approach and the product term approach was discussed in Sect. 2.2.4. Moreover, this study has explained how the product term approach (i.e. ‘Moderators’) can be combined with the multi-group comparison approach (i.e. ‘Grouping’) to test for three-way interaction (see Box 2.2 in Sect. 2.3.2.2; e.g. Henseler and Fassott 2010, p. 722) and thereby establish that e.g. firm size amplifies capital investment discretion’s positive performance impact in Chinese firms but dampens it in multinationals.
- 40.
For instance, scholars could tailor the model to alternative units of analysis (e.g. sales managers in Germany), investigate other dimensions of discretion, and examine other influences on managers than those analysed in the present study (e.g. as taken from the general theoretical discretion model in Fig. 4.4 in Sect. 4.1.2).
- 41.
- 42.
The empirical discretion model’s system of multiple structural equations in vector/matrix notation can be tailored to an arbitrary number of dimensions of discretion and influences on managers, and the comparative statics and hypothesis tests can be specified to cater for alternative research objectives. E.g. the model can be harnessed to evaluate the total impact of firm size or any other antecedent on any type of discretion and on performance. For deriving the comparative statics, the appropriate structural equation in Box 4.6 (see Sect. 4.3.1) is simply differentiated partially with respect to the construct of interest, such as firm size. As shown in Equation (6.1) in Sect. 6.1, this yields an expression of the total ceteris paribus impact of e.g. firm size on performance as a combination of various effects. Such a comparative static can be used (as Sect. 6.1 shows) to investigate whether e.g. greater firm size incites top management to grant more capital investment discretion to plant managers, who in turn utilise this greater latitude of action in a performance-enhancing manner, in which case part of the better performance in larger firms would be mediated via managerial discretion. Moreover, future research can model other moderating or control effects than the ones in this study. E.g. the moderating effects of industry technology intensity (\( {A_1} \)) can be modelled by not constraining the respective moderating effect parameters (\( {m_{1,1 }} \) to \( {m_{4,1 }} \)) in the matrix \( \mathbf{m} \) in Equation (4.24) in Sect. 4.3.1 to be zero. Likewise, one might control for other confounding factors—either by including more control variables in the vectors \( \mathrm{ A} \) and \( \mathrm{ c} \) or by including them as grouping variables for multi-group comparisons (cf. firm type).
- 43.
Scholars may also choose to harness the comprehensive assessment system for other partial least squares (PLS) models and potentially even tailor the output of PLS software packages (see Sect. 5.1.1) to report in the structure of this new holistic cascading hierarchy of evaluation criteria, assessment tests, and thresholds.
- 44.
For example, as described in Box 7.2, scholars can examine how antecedents (e.g. firm size) affect a manager’s discretion and how they affect performance via a variety of channels, such as by inciting top management to adjust the granular mix of managerial discretion granted (see Equation (6.1) in Sect. 6.1). Future studies can also test the impact of discretion on organisational outcomes other than performance, given that discretion might significantly affect managerial power (Carpenter and Golden 1997), managerial compensation (Finkelstein and Boyd 1998; Magnan and St-Onge 1997; Rajagopalan and Finkelstein 1992; Werner and Tosi 1995; Wright and Kroll 2002; Zhang and Xie 2008), workers’ incentives (Groves et al. 1994), a successor chief executive officer’s age (Wang 2009), top management team tenure, trust (Perrone et al. 2003), strategic attention (Abrahamson and Hambrick 1997), environmental commitment (Aragon-Correa et al. 2004), pricing (Cameron 2000), organisational knowledge creation (Oh 2002), and research and development (Zhang et al. 2006a, b).
- 45.
- 46.
Both principal-agent theory and stewardship theory as well as many empirical studies in the extant literature have tended to treat discretion as unidimensional (i.e. as having a single overall performance impact) rather than treating it granularly (i.e. differentiating between multiple distinct dimensions of discretion; see Sect. 2.1.2; e.g. Barnabas and Mekoth 2010; Bloom et al. 2008; Caza 2007, 2011; Chang and Wong 2003; Cheng et al. 2006; Dicke and Ott 2002, p. 468; Fox and Hamilton 1994, p. 74; Gammelgaard et al. 2010; He et al. 2009; Marin and Verdier 2006; Spremann 1987, p. 18; Vargas Sánchez 2005, p. 19; Xu et al. 2005).
- 47.
The reader can find a thorough, in-depth literature review on the existing theories in Sect. 2.3 as well as empirical hypothesis tests on the theories’ applicability in Sect. 6.2.4.
- 48.
In addition to the overall positive (stewardship theory) and negative (principal-agent theory) impact of discretion on performance, the theories specify moderating influences on managers that may affect the extent to which managers behave in a performance-enhancing versus performance-reducing way (see Sects. 2.3.2 and 2.3.3). These influences are further examined in the subsequent sections (see Sects. 7.4.2 and 7.4.3).
- 49.
Since the final theory reviewed in Sect. 2.3.1, managerial discretion theory, does not specify the direction of discretion’s performance impact as either positive or negative, it does not explain discretion’s impact and makes no prediction that needs to be tested (e.g. Abrahamson and Hambrick 1997; Berman et al. 2005; Carpenter and Golden 1997; Caza 2007, 2011; Huiyuan Chen 2006; Crossland 2007; Crossland and Hambrick 2007; Datta et al. 2003; Finkelstein and Boyd 1998; Finkelstein and Hambrick 1990; Finkelstein and Peteraf 2007; Haleblian and Finkelstein 1993; Hambrick and Abrahamson 1995; Hambrick and Finkelstein 1987; Hambrick et al. 1993; Hutzschenreuter and Kleindienst 2007; Keegan 2006; Keegan and Kabanoff 2008; Key 2002; Yougen Li and Zhao 2004; Magnan and St-Onge 1997; Quigley and Hambrick 2009; Rajagopalan and Finkelstein 1992; Thomas and Peyrefitte 1996; Zhang and Li 2008b; Zhang et al. 2006a, b).
- 50.
Principal-agent theory (e.g. Agrawal and Knoeber 1996; Baysinger and Butler 1985; Berger et al. 1997; Brush et al. 2000; Chang and Wong 2003; Childs and Mauer 2008; Denis et al. 1997; Eisenhardt 1989; Fama 1980; Fama and Jensen 1983a, b; He et al. 2009; Jensen 1986; Jensen and Meckling 1976; Jensen and Murphy 1990; Jensen and Ruback 1983; Laffont and Martimort 2002; Lang et al. 1995; Levinthal 1988; Ongore 2011; Shleifer and Vishny 1997; Spremann 1987; Thépot 2007; Thomsen and Pedersen 2000; Walters 1995; Wang et al. 2008; Weidenbaum and Jensen 1993; Werner and Tosi 1995, p. 1673; Xu et al. 2005; Zou 1989).
- 51.
Stewardship theory (e.g. Albanese et al. 1997; Arthurs and Busenitz 2003; Corbetta and Salvato 2004; Davis et al. 1997a, b; Dicke and Ott 2002; Donaldson 1990; Donaldson and Davis 1989, 1991, 1993, 1994; Eddleston and Kellermanns 2007; Fox and Hamilton 1994; Lane et al. 1999; Liu and Cai 2004; Miller and Le Breton-Miller 2006; Mills and Keast 2009; Muth and Donaldson 1998; Salvato 2002; Tian and Lau 2001; Tosi et al. 2003; Van Slyke 2007; Vargas Sánchez 2001, 2004, 2005; Zahra 2003).
- 52.
The geometric mean of the number of employees in mainland China in the study’s representative sample of 467 firms is approximately 800 employees for Chinese firms and 1,000 for multinationals (see Sect. 7.5.2).
- 53.
The inapplicability of the theories is further exemplified by the insignificant performance impact of sales & marketing discretion in Table 7.2, which neither principal-agent theory nor stewardship theory predicts. Although principal-agent theory can be consistent with an insignificant impact in exceptional cases—i.e. when control mechanisms are so effective that they unhinge the theory’s assumptions (see Box 2.1 and Box 2.2 in Sect. 2.3.2.2; e.g. Agrawal and Knoeber 1996, p. 377; Chang and Wong 2003, p. 7)—the main prediction of principal-agent theory is that discretion decreases performance, i.e. has a significantly negative impact on performance (see Sect. 2.3.2; e.g. Caza 2007, p. 10; Caza 2011; Chang and Wong 2003, p. 7; Davis et al. 1997b, p. 38; Hutzschenreuter and Kleindienst 2007, p. 4; Jensen and Murphy 1990; Zhao et al. 2010).
- 54.
The Chinese firms investigated have between 150 and 5,000 employees in mainland China, whereas the multinationals employ between 200 and 5,000 employees in mainland China (see Box 7.4 in Sect. 7.5.2).
- 55.
Future research might explore whether managers tend to consistently use their capital investment discretion to improve performance (as stewards) across studies and explore reasons why stewardship theory might apply.
- 56.
These influences have been embedded into the study’s new discretion model (see Fig. 4.4 in Sect. 4.1.2). As these influences shift the manager’s natural predisposition to performance maximisation towards those of an agent (i.e. assumption 1: self-serving utility maximisation and assumption 4: less performance-maximising interests than the principal), the impact of discretion on performance becomes more negative. By contrast, as these influences shift towards stewardship (i.e. assumption 1: pro-organisational utility maximisation and assumption 4: equally or more performance-maximising interests than the principal), the impact of discretion on performance becomes more positive. These moderating influences on managers have been derived from a wide range of studies reviewed in section 2.3.3.2 (e.g. Argyris 1973a, b; Brown 1969; Caza 2007; Davis et al. 1997b, pp. 27–43; French and Raven 1959; Gibson et al. 1991; Hofstede 1980, 1991; Katz and Kahn 1978; Khanchel 2009, p. 98; Lane et al. 1999, p. 1079; Lawler 1986, 1992; Maslow 1970; McGregor 1960; Mills and Keast 2009; Simon 1957a, b; Triandis 1990, 1995; Triandis et al. 1993; Turner 1981; Van Slyke 2007, p. 164; Vargas Sánchez 2001, 2004, 2005; Walton 1980, 1985).
- 57.
Figure 6.9 in Sect. 6.2.4 visualises this on a calibrated scatter plot for average-sized firms, which measures performance (on the vertical axis) as a function of different dimensions of discretion (on the horizontal axis). According to the existing reconciliation, a sample might be dominated by agents (leading to a downwards-sloping negative impact of discretion), dominated by stewards (leading to an upwards-sloping positive impact) or similarly mixed between agents and stewards (leading to a horizontal insignificant impact of discretion). However, Fig. 6.9 reveals that the same sample of plant managers in the same average-sized Chinese firms and multinationals in China is dominated by significant agency behaviour (downwards-sloping line) in some dimensions of the manager’s work and by significant stewardship behaviour (upwards-sloping line) in others.
- 58.
See Sects. 2.1.2 and 2.3.3.2 (e.g. Albanese et al. 1997, p. 610; Chang and Wong 2003; Davis et al. 1997a, p. 612, Davis et al. 1997b, pp. 27–43; Dicke and Ott 2002, p. 468; Fox and Hamilton 1994, p. 74; He et al. 2009; Lane et al. 1999, p. 1079; Spremann 1987, p. 18; Vargas Sánchez 2001, 2004, 2005, p. 19; Xu et al. 2005). Similarly, empirical studies in the existing literature have often modelled discretion as having a single overall impact on performance (see Sect. 2.1.2; e.g. Barnabas and Mekoth 2010; Bloom et al. 2008; Caza 2007, 2011; Chang and Wong 2003; Cheng et al. 2006; Gammelgaard et al. 2010; Marin and Verdier 2006).
- 59.
Although the reconciliation does not differentiate between dimensions of discretion, it allows a relationship between a principal and a manager to change over time (e.g. from agency to stewardship) and a principal to have stewardship relationships with some managers and agency relationships with others (Albanese et al. 1997, p. 610; Davis et al. 1997a, p. 612). However, this does not overcome the need to differentiate by dimension of discretion, since the observed stewardship behaviour for capital investments and agency behaviour for e.g. hiring were observed at the same point in time and relate to the same set of managers.
- 60.
Studies often fail to differentiate by dimension of discretion and by influences on managers (see Sects. 1.1 and 2.2.3; e.g. Bowen et al. 2008; Chang and Wong 2003; Gammelgaard et al. 2010; Groves et al. 1994; He et al. 2009; Xiaoyang Li 2007; Stano 1976; Venaik 1999; Werner and Tosi 1995; Zhang 1997).
- 61.
In other words, whether managers use their discretion to improve performance (as stewards) or to reduce performance (as agents) may not only depend on various influences on managers (columns) that promote stewardship or agency behaviour but also may granularly depend on the dimension of discretion in which discretion is granted (rows; i.e. area of the manager’s work). Indeed, this study empirically confirms that the extent to which plant managers in China use their discretion more like stewards (i.e. performance-improving) or more like agents (i.e. performance-reducing) depends on the area of their work in which discretion is granted (i.e. dimension of discretion) and on influences on managers (e.g. firm type and firm size; see Sect. 6.2.4). As to dimensions of discretion, Sect. 6.2.1 has found that in average-sized firms, plant managers tend to use discretion for making capital investments in a significantly more performance-improving way (i.e. as in stewardship theory) than they do when using discretion for any other dimension investigated. As to influences on managers, Sects. 6.2.2 and 6.2.3 have established that the degree of performance-improving versus performance-reducing uses of discretion significantly differs between firm types and firm sizes in a granular way, as specified in the new discretion model (i.e. with three-way interaction; see Box 2.2 in Sect. 2.3.2.2; e.g. Henseler and Fassott 2010, p. 722). For instance, firm size amplifies capital investment discretion’s positive performance impact in Chinese firms but dampens it in multinationals.
- 62.
- 63.
Principal-agent theory predicts discretion’s performance impact to be mostly negative (e.g. Caza 2007, p. 10; Caza 2011; Chang and Wong 2003, p. 7; Davis et al. 1997b, p. 38; Hutzschenreuter and Kleindienst 2007, p. 4; Jensen and Murphy 1990; Zhao et al. 2010); stewardship theory predicts it to be positive (e.g. Corbetta and Salvato 2004; Davis et al. 1997b, pp. 25–26; Donaldson and Davis 1991, p. 52; Eddleston and Kellermanns 2007, p. 547; Khanchel 2009, pp. 98–99; Liu and Cai 2004, p. 4; Mills and Keast 2009, pp. 14–15; Tosi et al. 2003, p. 2054; Van Slyke 2007, pp. 165–167; Vargas Sánchez 2004, p. 3, 2005, pp. 18–19).
- 64.
E.g. the same manager may be psychologically motivated to act as a steward in some dimensions of work (e.g. capital investments) and as an agent in other dimensions (e.g. hiring workers). Likewise, a manager enticed to diligently work as a steward in multiple dimensions of work might only have the ability to realise his/her performance-enhancing intentions in dimensions where he/she is well-versed (e.g. capital investments) but not in dimensions outside the scope of his/her core competences (e.g. sales & marketing activities). This might explain why the impact on performance in average-sized multinationals (see Table 7.2) is positive for capital investment discretion, negative for hiring discretion, and insignificant for sales & marketing discretion.
- 65.
As explained in Sect. 7.4.2, principal-agent theory and stewardship theory tend to treat discretion as a unidimensional construct that respectively reduces and improves performance regardless of the area of the manager’s work in which it is granted (see Sect. 2.1.2; e.g. Chang and Wong 2003; Dicke and Ott 2002, p. 468; Fox and Hamilton 1994, p. 74; He et al. 2009; Spremann 1987, p. 18; Vargas Sánchez 2005, p. 19; Xu et al. 2005). The existing reconciliation of principal-agent theory and stewardship theory inherits this unidimensional view that a given manager behaves as either an agent or a steward at a given point in time across the various dimensions of his/her work (see Sect. 2.3.3.2; e.g. Albanese et al. 1997, p. 610; Davis et al. 1997a, p. 612; Davis et al. 1997b, pp. 27–43; Lane et al. 1999, p. 1079; Vargas Sánchez 2001, 2004, 2005). As the multidimensionality of discretion was derived based on managerial discretion theory (see Sect. 2.1.2; e.g. Carpenter and Golden 1997, p. 195; Caza 2007, pp. 26–82; Chen 2006; Finkelstein and Peteraf 2007, p. 245; Hambrick and Abrahamson 1995, p. 1439; Hambrick and Finkelstein 1987, pp. 371–402; Hambrick et al. 1993, p. 409), one may view this extension of the existing reconciliation of principal-agent theory and stewardship theory as an integration of all three theories (as in the study’s new discretion model).
- 66.
Based on the literature in Sect. 2.3.3.2 (e.g. Argyris 1973a, b; Brown 1969; Caza 2007; Davis et al. 1997b, pp. 27–43; French and Raven 1959; Gibson et al. 1991; Hofstede 1980, 1991; Katz and Kahn 1978; Khanchel 2009, p. 98; Lane et al. 1999, p. 1079; Lawler 1986, 1992; Maslow 1970; McGregor 1960; Mills and Keast 2009; Simon 1957a, b; Triandis 1990, 1995; Triandis et al. 1993; Turner 1981; Van Slyke 2007, p. 164; Vargas Sánchez 2001, 2004, 2005; Walton 1980, 1985).
- 67.
The study’s general theoretical discretion model synthesises these influences on managers into two distinct shapes at the top-left corner in Fig. 4.4 in Sect. 4.1.2. Influences in the upper shape moderate the direction of discretion’s impact on performance (i.e. positive or negative) and include compensation control mechanisms as well as the aforementioned psychological characteristics, situational characteristics, and expectations. Influences in the lower shape amplify or dampen this impact and include the nature of managerial activities, monitoring control mechanisms as well as ability, knowledge, and information (see Sect. 4.1.2). These influences can help explain differences by columns in the granular landscape of impacts of discretion in Table 7.2. E.g. among these influences on managers, differences in an organisation’s situational characteristics (e.g. management philosophy and cultural differences) between Chinese firms and multinationals might explain why plant managers tend to use hiring discretion to significantly reduce performance in average-sized multinationals but not in average-sized Chinese firms in Table 7.2 above (see Box 2.6 in Sect. 2.4.2).
- 68.
E.g. a plant manager might view capital investments as an important means to improve performance and thus be motivated to diligently enhance performance when granted capital investment discretion (as in Table 7.2). Yet the same manager might derive greater satisfaction from using hiring discretion to fulfil a personal desire (e.g. leading a large factory or fulfilling social obligations in a ‘guanxi’ network by hiring acquaintances; e.g. Schramm and Taube 2003; Taube and Schramm 2006).
- 69.
See Box 2.2 in Sect. 2.3.2.2 (e.g. Berger et al. 1997, p. 1411; Burkart et al. 1997, p. 705; Caza 2007, 2011; Chang and Wong 2003, p. 6; Eisenhardt 1989, p. 60; Fama and Jensen 1983b; Finkelstein and Peteraf 2007, pp. 237–243; Holmstrom 1979; Jensen and Murphy 1990; Levinthal 1988, p. 153; Rumelt 1984; Spremann 1987, pp. 10–11; Tirole 1988; Verhoest 2003, pp. 2–5; Wang et al. 2008; Werner and Tosi 1995, p. 1673).
- 70.
Finally, one should note that compared with the existing theories, this approach has at least two advantages. First, it helps explain why a manager is not always a pure agent or a pure steward but rather might use discretion to reduce performance in certain dimensions of his/her work and to improve performance in other dimensions. Second, it helps explain why managers might use discretion to not affect performance. As Sect. 7.4.2 describes, a neutral impact of discretion (e.g. sales & marketing discretion) would need to be interpreted in existing theories as resulting from an insufficiently granular research design that mixes agents and stewards in a sample so that their negative and positive impacts statistically average out. This new approach still allows for such an explanation (i.e. when research designs do not fully distinguish between dimensions of discretion or influences on managers). Yet it also draws attention to the possibility that the individual manager might actually use discretion in a way that does not affect performance, which might occur if e.g. he/she has limited abilities (see above) or control mechanisms are completely effective (see Sect. 2.3.2, especially Box 2.1).
- 71.
As explained in Sect. 7.6, the dimensions of discretion and influences on managers in Table 7.2 are only examples of the possible realm of relevant dimensions and influences by which scholars should differentiate. One may naturally believe that the accuracy of results increases with the degree of granularity adopted, so it remains to be determined what granularity degree is suitable for obtaining consistent findings across studies. Theoretical research can motivate which granular differentiation might be required (e.g. by ability, as in the preceding discussion). Empirical research can verify whether such differentiations between dimensions of discretion and influences on managers are necessary (i.e. reveal distinct impacts of discretion) or whether they can be aggregated. For instance, the study’s empirical tests in Sect. 6.2.1 have confirmed the need to separate dimensions of discretion, and the tests in Sects. 6.2.2 and 6.2.3 have underlined the need to distinguish between influences on managers (e.g. firm type and firm size). Existing empirical studies finding significant influences on managers that moderate discretion’s impact on performance can also give indications on what differentiations might be necessary, e.g. managerial experience (Caza 2007), managerial incentives (Cheng et al. 2006), top management pay gap (Zhang and Li 2008b), corporate control via performance monitoring, incentive systems, and social integration (Wang et al. 2008), export joint venture group composition (López-Navarro and Camisón-Zornoza 2003), and market competition (Zhao et al. 2010).
- 72.
E.g. the same manager may be psychologically motivated to act as a steward in some dimensions of work (e.g. capital investments) and as an agent in other dimensions (e.g. hiring workers). Likewise, a manager enticed to diligently work as a steward in multiple dimensions of work might only have the ability to realise his/her performance-enhancing intentions in dimensions where he/she is well-versed (e.g. capital investments) but not in dimensions outside the scope of his/her core competences (e.g. sales & marketing activities). This might explain why the performance impact in average-sized multinationals (see Table 7.2) is positive for capital investment discretion, negative for hiring discretion, and insignificant for sales & marketing discretion.
- 73.
According to stewardship theory, discretion tends to increase performance (see Sect. 2.3.3; e.g. Corbetta and Salvato 2004; Davis et al. 1997b, pp. 25–26; Donaldson and Davis 1991, p. 52; Eddleston and Kellermanns 2007, p. 547; Khanchel 2009, pp. 98–99; Liu and Cai 2004, p. 4; Mills and Keast 2009, pp. 14–15; Tosi et al. 2003, p. 2054; Van Slyke 2007, pp. 165–167; Vargas Sánchez 2004, p. 3, 2005, pp. 18–19).
- 74.
According to principal-agent theory, discretion tends to decrease performance (see Sect. 2.3.2; e.g. Caza 2007, p. 10; Caza 2011; Chang and Wong 2003, p. 7; Davis et al. 1997b, p. 38; Eisenhardt 1989; Fama 1980; Hutzschenreuter and Kleindienst 2007, p. 4; Jensen and Meckling 1976; Jensen and Murphy 1990; Spremann 1987; Zhao et al. 2010).
- 75.
See Sect. 1.1 on the discretion puzzle (e.g. Agarwal et al. 2009; Barnabas and Mekoth 2010; Caza 2011; Chang and Wong 2003; Gammelgaard et al. 2010; Groves et al. 1994; He et al. 2009; Heinecke 2011; Khanchel 2009; Yougen Li and Zhao 2004; López-Navarro and Camisón-Zornoza 2003; Stano 1976; Venaik 1999; Williamson 1963; Xu et al. 2005).
- 76.
The underlying indicator of capital investment discretion ranges from approximately zero to 600,000 USD (converted from RMB using purchasing power parity) in the sample of Chinese firms and from approximately zero to 1,000,000 USD in the sample of multinationals. For both Chinese firms and multinationals, the underlying indicators of hiring discretion, new product introduction discretion, and sales & marketing discretion range from scores of 1 to 5, where 1 indicates that all decisions are taken at corporate headquarters and 5 that the plant manager has the full discretion to make all the decisions (see Sect. 4.2.2).
- 77.
E.g. in average-sized multinationals, performance is empirically predicted to fall by 0.23 standard deviations for every one standard deviation increase in hiring discretion—whether from a low to a medium level or from a medium to a high level of hiring discretion (see Chap. 6). The reason is that each discretion construct is modelled as having a constant linear effect on performance (see Sect. 4.3.1). It should be noted that as the construct of capital investment discretion (which has a constant linear effect on performance) logarithmically transforms the indicator of capital investment discretion, which is recorded as a monetary limit in USD (see Sect. 4.2.2), the plant manager’s capital investment discretion in USD has a diminishing effect on performance: Extending capital investment discretion from 1,000 USD to 10,000 USD (factor ten) is modelled as having the same performance impact as a rise from 10,000 USD to 100,000 USD (factor ten).
- 78.
See Sects. 1.2, 5.4, and 7.6 (e.g. Caza 2007, p. 46; Corcoran 2001, p. 154; Finkelstein and Hambrick 1990, p. 500; Galavan 2005, p. 174; Granger 1969; Grant and Rice 2007, p. 367; Keuzenkamp 2000, p. 261; Rosenbaum 1989, p. 341; Sánchez 2008, p. 5; Shaughnessy et al. 2005, p. 367; Simon 1954, pp. 477–478; Wagner 2002, pp. 287–292; Wald et al. 1988, p. 72).
- 79.
Chapter 3 has meticulously specified the unit of analysis as (1) the plant manager (i.e. the most senior manager at a plant below the firm’s CEO in mainland China) (2) of small and medium-sized enterprises (i.e. firms with 150–5,000 employees in total in mainland China) (3) in the manufacturing sector (i.e. primary US SIC code from 20 to 39) (4) throughout mainland China (i.e. all of China excluding Hong Kong, Macao, and Taiwan) (5) in the latter half of 2007 (i.e. July to December 2007).
- 80.
In fact, managerial discretion, industry technology intensity, and firm size alone explain nearly a third of the entire variation of performance among plant managers in Chinese firms and multinationals (see Sect. 5.1.2).
- 81.
For plant managers in China, performance in Chinese firms is significantly higher in more technology-intensive industries (e.g. medical, precision, and optical instruments; Loschky 2008, p. 7) than in less technology-intensive industries (e.g. wood and products of wood and cork; Loschky 2008, p. 7).
- 82.
While there is comparatively little evidence that the plant manager’s discretion systematically varies with industry technology intensity, significant evidence is found that Chinese firms in higher-technology industries tend to award lower new product introduction discretion, i.e. tend to take decisions for introducing new products at corporate headquarters in China instead of placing them at the discretion of their plant managers.
- 83.
The representative sample of 467 Chinese firms and multinationals was collected using a standardised scoring system during 467 detailed ‘double-blind’ interviews with plant managers of approximately 45 min each by specially-trained native Chinese graduate students from top business schools (see Sects. 5.2 and 5.5).
- 84.
- 85.
Given that managerial discretion measures the leeway of a manager to take action and therefore to influence performance, adjusting the discretion granted to middle managers is a potentially significant lever for top management to pull when managing their middle managers in China (see Sect. 2.1.1; e.g. Adams et al. 2005; Crossland and Hambrick 2007; Finkelstein and Hambrick 1990; Hambrick and Finkelstein 1987; Misangyi 2002; Quigley and Hambrick 2009; Tang 2008; Zhao et al. 2010). In addition to discretion having a potentially important impact on performance, it has been empirically demonstrated that discretion may significantly affect managerial power (Carpenter and Golden 1997), managerial compensation (Finkelstein and Boyd 1998; Magnan and St-Onge 1997; Rajagopalan and Finkelstein 1992; Werner and Tosi 1995; Wright and Kroll 2002; Zhang and Xie 2008), workers’ incentives (Groves et al. 1994), a successor chief executive officer’s age (Wang 2009), top management team tenure, trust (Perrone et al. 2003), strategic attention (Abrahamson and Hambrick 1997), environmental commitment (Aragon-Correa et al. 2004), pricing (Cameron 2000), organisational knowledge creation (Oh 2002), and research and development (Zhang et al. 2006a, b).
- 86.
As explained in Sect. 4.2.2, capital investment discretion is measured as the z-score of the natural logarithm of the maximum capital investment (as a monetary limit) that a given plant manager can undertake without prior authorisation from corporate headquarters in China.
- 87.
This positive impact of capital investment discretion on performance (and the negative impacts of certain other dimensions of discretion; see Sect. 6.2.4) is not limited to the sample of 467 Chinese firms and multinationals but can indeed be generalised to the entire population of tens of thousands of relevant plant managers in China: There is a nearly 0 % chance (see the p-values in Table 6.6 in Sect. 6.2.4, i.e. 0.0000000001 % for Chinese firms and 0.02 % for multinationals) that capital investment discretion’s impact on performance as estimated in the sample (+0.40 for average-sized Chinese firms and +0.41 for average-sized multinationals) diverges from zero by as much as observed due to sampling error when the true population parameter is zero. In large Chinese firms (which are two standard deviations larger than average), the performance improvement is estimated to be even stronger: +0.64 standard deviations (see Sect. 6.2.3).
- 88.
On the performance scale that assesses the extent to which the plant manager’s practices reflect best practices (see Sect. 4.2.1), a top-performing Chinese firm (i.e. third quartile) exceeds average performance by 0.82 standard deviations in the sample. Hence, improving performance by 0.4 standard deviations by extending capital investment discretion closes nearly half (\( 0.40/0.82\approx 0.5 \)) of the performance gap among Chinese firms.
- 89.
The reader can also infer these results for average-sized firms from Fig. 7.4 below by checking whether the lines measuring discretion’s performance impact are positive, neutral or negative at average firm size (\( {A_2}=0 \)).
- 90.
The horizontal axis gauges firm size (\( {A_2} \)) in terms of by how many standard deviations a firm exceeds average size. Firm size measures the z-score of the natural logarithm of the number of employees in mainland China in the firm in which the plant manager works (see Sect. 4.2.4). This includes employees at the firm’s plants in mainland China and at the firm’s other organisational entities in mainland China (e.g. corporate headquarters in mainland China) but excludes employees outside of mainland China. As the 5,000 employees threshold for the unit of analysis (see Chap. 3) refers to employees in mainland China, the implications apply to multinationals with an arbitrarily large number of employees outside of mainland China, provided they employed no more than 5,000 employees within mainland China at the time of investigation.
- 91.
As explained in greater detail in Sect. 6.2.3, the vertical axis measures the impact of discretion on performance (\( {{{\partial P}} \left/ {{\partial {D_k}}} \right.} \)) in terms of by how many standard deviations performance changes as managerial discretion (\( {D_k} \)) is extended by one standard deviation. Using the example of average-sized Chinese firms from above, extending capital investment discretion (\( {D_1} \)) by one standard deviation (from e.g. 10,000 to 100,000 RMB) was found to improve performance by 0.40 (\( ={{{\partial P}} \left/ {{\partial {D_1}}} \right.} \)) standard deviations. This is precisely where the solid line (Chinese firms) crosses the vertical axis (\( {{{\partial P}} \left/ {{\partial {D_1}}} \right.} \)) at average firm size (\( {A_2}=0 \)) in the top left graph.
- 92.
As the sample estimates may differ from the true population values by sampling error (see Sect. 4.3.3), practitioners are advised to conservatively view only strongly positive (e.g. at least \( +0.22 \)) and strongly negative (e.g. at most \( -0.22 \)) impacts in the sample as significant impacts in the population (see Box 7.4).
- 93.
E.g. as inferences should be limited to the sample’s domain to avoid extrapolation, Chinese firms should have 150–5,000 employees in mainland China and multinationals 200–5,000 employees in mainland China.
- 94.
E.g. when such influences as the manager’s ability are extremely weak or no monitoring control mechanisms are in place, then their moderating effects may be so strong that discretion’s impact on performance changes.
- 95.
The underlying indicator of capital investment discretion ranges from approximately zero to 600,000 USD (converted from RMB using purchasing power parity) in the sample of Chinese firms and from approximately zero to 1,000,000 USD in the sample of multinationals. For both Chinese firms and multinationals, the underlying indicators of hiring discretion, new product introduction discretion, and sales & marketing discretion range from scores of 1 to 5, where 1 indicates that all decisions are taken at corporate headquarters and 5 that the plant manager has the full discretion to make all the decisions (see Sect. 4.2.2).
- 96.
E.g. in average-sized multinationals, performance is empirically predicted to fall by 0.23 standard deviations for every one standard deviation increase in hiring discretion—whether from a low to a medium level or from a medium to a high level of hiring discretion (see Chap. 6). The reason is that each discretion construct is modelled as having a constant linear effect on performance (see Sect. 4.3.1). It should be noted that as the construct of capital investment discretion (which has a constant linear effect on performance) logarithmically transforms the indicator of capital investment discretion, which is recorded as a monetary limit in USD (see Sect. 4.2.2), the plant manager’s capital investment discretion in USD has a diminishing effect on performance: Extending capital investment discretion from 1,000 USD to 10,000 USD (factor ten) is modelled as having the same performance impact as a rise from 10,000 USD to 100,000 USD (factor ten).
- 97.
Practitioners should thus bear in mind that instead of proving that granting plant managers more e.g. capital investment discretion will cause an improvement in performance, the results only establish that those firms granting more capital investment discretion tend to exhibit stronger performance than firms granting less capital investment discretion (see Sects. 1.2, 5.4, and 7.6; e.g. Caza 2007, p. 46; Corcoran 2001, p. 154; Finkelstein and Hambrick 1990, p. 500; Galavan 2005, p. 174; Granger 1969; Grant and Rice 2007, p. 367; Keuzenkamp 2000, p. 261; Rosenbaum 1989, p. 341; Sánchez 2008, p. 5; Shaughnessy et al. 2005, p. 367; Simon 1954, pp. 477–478; Wagner 2002, pp. 287–292; Wald et al. 1988, p. 72).
- 98.
In the study’s representative sample of 467 firms, the average-sized Chinese firm (defined by \( A_2^{Chinese }=0 \)) has approximately 800 employees in mainland China and the average-sized multinational (defined by \( A_2^{Multi. }=0 \)) has approximately 1,000 employees in mainland China. As \( {A_2} \) logarithmically transforms the number of employees (see Sect. 4.2.4), these average numbers of employees are geometric means. The arithmetic means are higher: approximately 1,100 employees for Chinese firms and 1,400 employees for multinationals, since before the logarithmic transformation the firm size distribution exhibits stronger positive skewness.
- 99.
This includes employees at the firm’s plants in mainland China and at the firm’s other organisational entities in mainland China (e.g. corporate headquarters in China) but excludes employees outside of mainland China.
- 100.
Assuming the impacts of discretion on performance (that combine direct and moderating effects in Fig. 7.4) have standard errors no larger than the largest standard error estimated in the sample for either direct effects or moderating effects (which is \(+0.13\)), then an estimated impact of discretion on performance of \(+0.22\) has a t-value of at least \(t=+0.22/+0.13=1.69\) (see Equation (4.46) in Sect. 4.3.3), which is significant at the 10 % level. The thresholds of \(+0.22\) and \(-0.22\) are therefore used as rough heuristics for significance.
- 101.
E.g. finding a strongly positive impact of capital investment discretion on performance (e.g. \(+0.64\)) would suggest that practitioners should extend their plant managers’ managerial discretion for capital investments.
- 102.
As explained in Chap. 2, principal-agent theory (see Sect. 2.3.2) and stewardship theory (see Sect. 2.3.3) have tended to treat discretion as a single overall construct that either reduces performance and thus should be constrained (in principal-agent theory) or improves performance and thus should be extended (in stewardship theory; see Sect. 2.1.2; e.g. Chang and Wong 2003; Dicke and Ott 2002, p. 468; Fox and Hamilton 1994, p. 74; He et al. 2009; Spremann 1987, p. 18; Vargas Sánchez 2005, p. 19; Xu et al. 2005). Likewise, empirical studies in the existing literature have often modelled discretion as having a single overall impact on performance (e.g. Barnabas and Mekoth 2010; Bloom et al. 2008; Caza 2007, 2011; Chang and Wong 2003; Cheng et al. 2006; Gammelgaard et al. 2010; Marin and Verdier 2006).
- 103.
This was formally established by testing Hypothesis 1 in Sect. 6.2.1 for the counter example of plant managers in China, where significant differences in the impact on performance were observed by dimension of discretion. E.g. in average-sized Chinese firms, a plant manager’s capital investment discretion has a positive impact on performance but new product introduction discretion has a negative impact (see Sect. 7.5.2).
- 104.
As formally tested in terms of Hypothesis 2 in Sect. 6.2.2 and as depicted in Fig. 7.4 in Sect. 7.5.2, the success factor of managerial discretion can have significantly different impacts on performance in Chinese firms versus multinationals and thus needs to be adjusted in different ways. Hiring discretion, for example, is only found to significantly reduce performance in average-sized multinationals but not in average-sized Chinese firms, which implies that the best practice to constrain hiring discretion in these multinationals cannot be expected to enhance performance in average-sized Chinese firms. Likewise, capital investment discretion significantly improves performance and thus ought to be extended in large Chinese firms but not in large multinationals. This study’s findings even suggest that among large companies, sales & marketing discretion strengthens performance and thus should be extended in multinationals but harms performance and thus should be constrained in Chinese firms (see Sect. 7.5.2).
- 105.
These influences on the manager may play a role in determining the extent to which best practices on harnessing the success factor of managerial discretion can be exchanged between Chinese firms and multinationals. They were derived from the literature and embodied in the study’s new general theoretical discretion model (see Fig. 4.4 in Sect. 4.1.2 and Box 2.6 in Sect. 2.4.2). E.g. the organisation’s situational characteristics (i.e. management philosophy and cultural differences) may differ between Chinese firms and multinationals (e.g. Aminpour and Woetzel 2006, pp. 46–47; Hanne Chen 2004, p. 128; Crossland and Hambrick 2007, p. 14; Hexter 2006, pp. 4–6; Hexter and Woetzel 2007a, p. 4; Hoover 2006, p. 92; McGregor 2005, pp. 273–274), which stewardship theorists have argued to affect the extent to which managers use their discretion to positively rather than negatively affect performance (see Sect. 2.3.3.2; e.g. Davis et al. 1997b, pp. 32–43; Lawler 1986, 1992; Triandis 1990, 1995; Triandis et al. 1993; Van Slyke 2007, p. 164; Vargas Sánchez 2004; Walton 1980, 1985). Similarly, with different types of firms attracting different people, the psychological characteristics and expectations that stewardship theorists have argued to influence how managers use discretion might differ between Chinese firms and multinationals (see Sect. 2.3.3.2; e.g. Argyris 1973a; b; Brown 1969; Caza 2007; Davis et al. 1997b, pp. 38–43; French and Raven 1959; Gibson et al. 1991; Katz and Kahn 1978; Khanchel 2009, p. 98; Maslow 1970; McGregor 1960; Mills and Keast 2009; Simon 1957a, b; Turner 1981; Van Slyke 2007; Vargas Sánchez 2004, pp. 4–5, 2005, pp. 24–25). In addition, Chinese firms and multinationals might differ in terms of their compensation control mechanisms, which can moderate the impact of discretion on performance in principal-agent theory (see Sect. 2.3.2; e.g. Agrawal and Knoeber 1996, p. 378; Berger et al. 1997, p. 1411; Burkart et al. 1997, p. 705; Chang and Wong 2003, p. 6; Cheng et al. 2006; Eisenhardt 1989, p. 60; Fama and Jensen 1983a, p. 345; Jensen and Meckling 1976; Jensen and Murphy 1990, p. 226; Levinthal 1988, p. 153; Spremann 1987, p. 10; Wang et al. 2008; Werner and Tosi 1995, p. 1673; Zhang and Li 2008b).
- 106.
Box 2.6 in Sect. 2.4.2 gives a potential explanation for why firm size can moderate discretion’s impact on performance. E.g. firm size might affect monitoring control mechanisms, which aim to reduce the principal’s asymmetry of information regarding the manager’s actions and thus aim to improve the impact of discretion on performance (see Sect. 2.3.2; e.g. Berger et al. 1997, p. 1411; Burkart et al. 1997, p. 705; Caza 2007, 2011; Chang and Wong 2003, p. 6; Eisenhardt 1989, p. 60; Fama and Jensen 1983b; Levinthal 1988, p. 153; Spremann 1987, pp. 10–11; Verhoest 2003, pp. 2–5; Wang et al. 2008; Werner and Tosi 1995, p. 1673). In particular, Caza (2007, pp. 12–20) argues that a larger firm with multiple units (here plants) that are similar to that led by the (plant) manager under consideration provide the principal with more informational benchmarks to assess the (plant) manager’s performance and thus potentially constrain his/her misconduct.
- 107.
Furthermore, as firm size expands, the impact of capital investment discretion on performance becomes more positive among Chinese firms and less positive among multinationals (see Hypothesis 3 in Sect. 6.2.3).
- 108.
In addition to firm size, the general theoretical discretion model derived in Sect. 4.1.2 (see Fig. 4.4) presents other possible influences on managers that may alter the impact of discretion on performance over time and thus should be monitored for changes that may require practitioners to adjust the discretion mix granted. E.g. as the practitioner’s assessment of the manager’s ability and the extent to which the manager can be trusted evolve over time, the impact of discretion on performance may change (see Box 2.4 in Sect. 2.3.3.2 and Sect. 4.1.2; e.g. Caza 2007, 2011; Chang and Wong 2003; Davis et al. 1997b, pp. 23–43; Xiaoyang Li 2007; Mills and Keast 2009; Van Slyke 2007; Vargas Sánchez 2004, pp. 4–5, 2005, pp. 24–25). Practitioners are therefore advised to examine whether these influences in the general theoretical discretion model have undergone changes in their company and accordingly adjust the discretion granted over time.
- 109.
E.g. the positive impact of capital investment discretion and the negative impact of hiring discretion could average out to a positive, neutral or negative overall impact on performance in a non-granular research design.
- 110.
E.g. hiring discretion’s impact on performance is negative in multinationals but insignificant in Chinese firms.
- 111.
This can be achieved by postulating that the influences on managers in the study’s new discretion model (see Sect. 7.2) which entice them to behave in performance-reducing ways (as agents) or performance-enhancing ways (as stewards) differ between the dimensions of the manager’s work (see Sect. 7.4.3). For example, the same manager may be psychologically inclined to act as a steward in some dimensions of work (e.g. capital investments) and as an agent in other dimensions (e.g. hiring workers). Likewise, a manager enticed to diligently work as a steward in multiple dimensions of work might only have the ability to realise his/her performance-enhancing intentions in dimensions where he/she is well-versed (e.g. capital investments) but not in dimensions outside the scope of his/her core competences (e.g. sales & marketing activities). This might explain why the performance impact in average-sized multinationals (see Table 7.2) is positive for capital investment discretion, negative for hiring discretion, and insignificant for sales & marketing discretion.
- 112.
The tool kit allows scholars to rapidly tailor the new discretion model to various units of analysis (e.g. R&D managers in India or top management in the United States) and various research objectives (e.g. investigating how antecedents affect discretion and thereby performance). It comprises a general version of the new discretion model in graphical and mathematical terms, corresponding measurement and structural models, a new assessment system for validity and reliability, and tutorial examples on how to apply and interpret the model.
- 113.
- 114.
For instance, scholars might extend the study’s granularity by dimensions of discretion to the dimensions of performance. If discretion improves some dimensions of performance but reduces others, then the different unidimensional performance measures in the literature might tap into different dimensions of performance and thus reveal different positive, neutral, and negative impacts of discretion. Indeed, e.g. Khanchel (2009) and Wang et al. (2008) find a positive impact of discretion on some performance measures but a neutral or negative impact on other performance measures. Another extension to be explored is that discretion’s performance impact might be inversed U-shaped rather than linear (e.g. Huiyuan Chen 2006; Zhang and Li 2008b), so linear impacts might turn out positive if studies focused on lower levels of discretion and negative if they focused on higher levels. Section 7.5 accounts for this possibility by warning practitioners not to extend discretion beyond the study’s specific domain of discretion (e.g. beyond 1,000,000 USD of capital investment discretion in multinationals).
- 115.
For plant managers of small and medium-sized enterprises in the manufacturing sector throughout mainland China in the latter half of 2007 (see Chap. 3).
- 116.
These four dimensions of discretion include capital investment discretion, hiring discretion, new product introduction discretion, and sales & marketing discretion (see Sect. 4.2.2).
- 117.
As noted above, this might be achieved by synchronising future empirical and theoretical research using the new discretion model in an effort to uncover a consistent granular landscape (see Table 7.2 and Sect. 7.4.3). As to the dimensions of discretion, it might then be found that additional dimensions are required (e.g. strategy discretion), that the existing dimensions need to be further differentiated (e.g. hiring shop-floor workers versus hiring supervisors) or that dimensionality is not best distinguished between the areas of work (but rather between e.g. work that is easy to monitor versus hard to monitor). As to influences on managers, one might investigate further influences (e.g. industry, region or ability; see the new discretion model in Sect. 4.1.2) or further differentiate existing influences (e.g. multinationals in firm type by country of origin or by underlying differences in management philosophy) so as to obtain the appropriate degree of granularity.
- 118.
The model fulfils every assessment test of statistical conclusion validity, reliability, construct validity, internal validity, and external validity, even when faced with particularly conservative thresholds from the literature.
- 119.
The dynamics of discretion (i.e. the analysis of discretion over time, such as differentiating between short-term and long-term effects) have been kept out of the scope of the research objective (see Sect. 1.2). Nonetheless, this study advises future studies to explore the dynamics of discretion, given that the dynamics are at an early stage of research in the literature (e.g. Finkelstein and Peteraf 2007, pp. 243–245; Hutzschenreuter and Kleindienst 2007, p. 1; Kayhan 2008, pp. 1–6) and the study’s findings underline their potential importance: E.g. Sect. 7.5.3 establishes that practitioners might need to adjust the discretion granted over time so as to achieve the full potential performance benefits from harnessing the success factor of managerial discretion.
- 120.
First, introducing all necessary controls is a prerequisite for establishing that an association is causal rather than spurious, but can generally not be achieved in practice (e.g. Bachman and Schutt 2010, p. 170; Corcoran 2001, p. 154; Davis 1985, pp. 63–64; Galavan 2005, p. 174; Grant and Rice 2007, p. 367; Hanssens et al. 2003, p. 298; Hellevik 1988, p. 38; Jaccard and Turrisi 2003, pp. 1–2; Jackman 1975, p. 182; Keuzenkamp 2000, p. 261; Rosenbaum 1989, p. 341; Sánchez 2008, p. 5; Shaughnessy et al. 2005, p. 367; Simon 1954, pp. 477–478; Wald et al. 1988, p. 72). This study has successfully introduced relevant controls to remedy spurious effects and has established robustness to further controls (see Sects. 5.4.1 and 5.4.3). Second, even after including all relevant controls, the direction of causality (e.g. from discretion to performance) cannot be empirically verified in observational cross-sectional studies (e.g. Caza 2007, p. 46; Finkelstein and Hambrick 1990, p. 500; Wagner 2002, pp. 287–292). To mitigate this threat to internal validity (see Sect. 5.4), this study has carefully scrutinised the theoretical mechanisms suggested in the literature, which support the direction of causality to run from discretion to performance (see Sects. 2.3.2 on principal-agent theory and 2.3.3 on stewardship theory). Nevertheless, it cannot be ruled out that past performance can also affect the levels of discretion granted, thereby potentially introducing reverse causality with feedback (e.g. Bloom and Van Reenen 2007, p. 1375; Chang and Wong 2003, p. 22; Glaister et al. 2003, p. 316; Hutzschenreuter and Kleindienst 2007; Walters 1995).
- 121.
E.g. instead of proving that granting plant managers more capital investment discretion will cause an improvement in performance, the results only establish that those firms granting more capital investment discretion tend to exhibit stronger performance than those firms granting less capital investment discretion.
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Wülferth, H. (2013). Conclusion. In: Managerial Discretion and Performance in China. Contributions to Management Science. Physica, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-35837-1_7
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