Thursday, 20 October 2016

Literature Review and Theory Development












The paper will cover vicarious learning and the experiential learning and analyze which is the best in terms of international investment. The paper will cover various theories that explain the two modes of learning, explain the literature review under the theoretical background, the hypothesis after each of the theories, the authors who follow the theories in various papers, the empirical results and the conclusion. The connections and differences between venture capital will also be discussed and analyzed in this paper.


Vicarious learning is the kind of learning that is based on learning the behavior of another person which in simple terms can be explained by imitation. Learners observe what others do and embrace what they learn and take it as if it was there original idea and in most cases imitation is done by the weaker group and imitates the stronger one so as to succeed. Experiential learning on the other hand is the learning that occurs through experience and is also defined as the learning that occurs through the reflection of handling a task (Cohen, & Sproull, 1997). There are various ways to determine the best way to use so as to when a company want to improve its strategies in terms of performance. There are merits and demerits of choosing the strategy to be used as will be discussed in the literature review. When there is a common venture capital acquisition is likely to take place in an organization. Therefore venture capital investors are able to form a bridge between the target markets and acquiring which as a result reduces asymmetric information that is concerned with the transactions carried out by both parties.


Venture capital in organizations plays a role that is very minor in basic innovation funding. The next stage of innovation is the most critical and that is when the significance of capital venture is revealed in an organization. The venture money is not long-term it is just for the purposes of ensuring that the company’s assets are liquid and that the company can be sold to a corporation(Devinney, Pedersen, & Tihanyi, 2010).Capital markets are ruled out since there appears a niche in the venture capital. The venture capital of an organization is comprised of four main players namely the private investors, investment bankers, public markets and corporations, corporations and government and venture capitalists. The VCs are able to protect themselves against risks through coinvesting with other firms in the market.

The theory of development explains the local density and foreign subsidiary performance. In the theory development, the density dependence literature is drawn so as to forward local density as the moderator of foreign subsidiary performance. There are some theoretical implications that are used to explain the local density and foreign subsidiary performance.
Liability of foreignness
Multinational enterprises incur costs not faced by domestic firms. This makes them be affected and thus their performance is also altered with as well as the survival of their foreign subsidiaries. The exchange of trading operations of the foreign subsidiaries had lower survival rate than those of the domestic rivals. The liability of newness is a term that is used to explain the challenges following the birth of an organization while the term liability of foreignness is used to explain the challenges that a subunit faces in the host country. The problems are seen as the subunit carries on its operations and not only at birth. The main problem of the liability of foreignness is on how to avoid the liability of foreignness. It is not however clear what the cause of the liability of foreignness and thus overcoming it on the basis of whether a foreign subsidiary should be similar or same to the local companies is undefined (Devinney, Pedersen, & Tihanyi, 2010).
Local density
Pressures usually vary in strength depending on the local density. The capacity of how a population can acquire resources depends on legitimization of the members by those who usually control the resources. The institutional pressures for cognitive legitimacy are always higher early in the life of a population when the density is low. It is assumed that the increases in local density are associated with the increases in competitive pressures. The more the pressure increases on the firms the more they are expected to offer good and attractive prices to the customers.
Strategic conformity and local density
There are pressures that are dual to conform with and to differ from one’s competitors in the same industry. Research on strategic conformity also involves a competitive versus institutional dilemma.  The strategy of conformity is based on the institutional theories whereby the institutions influence the organizations to follow the policies, the practices and structures that are consistent with the institution preferences in an organizational field. This theory deals with firms in a domestic context but its arguments can also be extended to the international level (Dixon, 2000).
Market experience and local density
When operating in a host country, foreign subsidiaries face unfamiliarity and discrimination costs. As time passes, liability of foreignness is always expected to go down as foreign subsidiary accumulates knowledge about the preferences of the customers, institutions and the suppliers. Inadequate information about a foreign subsidiary on the part of host country customers, suppliers and institutions can often lead to discrimination of the foreign subsidiary for example unwillingness to do business with it as they can be overlooked as inferior. Generally, business practices in high density environments should be more similar even in to high density environments in other countries (Easterby-Smith, 2001).
Hannan & Carroll, 1992, 2000 follow the theory at the end of chapter 6, 2 and 16.
(Deephouse, 1999) follow the theory of local density at the end of paper 6 and paper 18 and 16.
Zaheer (1995) and Zaheer and Mosakowski (1997), follow the theory of liability of foreignness at the end of paper 13.
Strategic conformity is positively related to foreign subsidiary performance in low-density environments. Strategic conformity is negatively related to foreign subsidiary performance in high-density environments. Also market experience is positively related to foreign subsidiary performance. The local density is negatively related to foreign subsidiary performance. Lastly local density moderates the relationship between market experience and foreign subsidiary performance in a way that the relationship is less positive in high density environments.
These theories explain the main assumption is that most mangers think that they will prosper when they mimic the competitors. The theories in business imitation are divided into two broad categories.
Information based theories of imitation
Inthe information based theories of imitation where firms follow others that are perceived as having superior information and rivalry based theories where firms imitate others to maintain competitive parity or limit rivalry. The information based theories of imitation have been proposed in the fields of population ecology, institutional sociology, field of economics among many others. The theories apply when the manager cannot access the connections between outcomes and the actions with great confidence. At times managers may be unsure of the fundamental difficulties and the consequences. In this case, managers are receptive to information implicit of the actions of others. In many cases in uncertain environments managers may tend to imitate to signal others about their own quality (Gröne, 2010).
 Economic theories
This is where the information is developed more explicitly. The most known economic theory of imitation is called the information cascades or the social learning. Information cascades often occur when an individual follows the behaviors of those ahead of him without regarding his information. A good example is a restaurant that has a long queue. The people at the end of the queue may have intended to go to other restaurants but the queue attracted them suggesting that the restaurant may be of high quality (Hitt, Ireland, & Hoskisson, 2007).  Thus, agents always choose to go against their initial signals as they draw the suggestions from the behaviors they have observed from others. Another example of the economic theory of the herd behavior shows up when the managers ignore their own private information and imitate the decision of the other people so as to avoid a negative reputation. The managers send quality to the others by imitating others. For example a case where there are superior and inferior managers who have private information about investment. The outsiders do not know what type of manager each is rather they know that the superior managers receive informative information and the weak managers receive noisy signals. Managers ignore their own information so that they can be evaluated as superior and thus they end up imitating other firms that they think have made it so as to be viewed as superior (Meyer, 2016).
 Theories of organizational sociology and ecology
They give related explanations for behavioral similarity. Rational managers will always make their organizations similar by trying to change them. An example is when organizations model themselves on other organizations when the environment is not certain. However the model organization is thought to be very successful because it reduces the costs that occur due to uncertainty in an organization.One of the major differences between the theories of organizational sociology and ecology is that the growth in the number of entrants increases legitimacy while making competition to be more intense. One of its major components is legitimation whereby according to Carrol and Hannon, new industries acquire new industry entrants and thus making the firm to acquire legitimacy that facilities its growth (Pedersen, Asmussen, & Devinney, 2011).
Interactions between mimetic and experiential learning
They are theories that explain thatthe organizations learn by mimicking the behavior of others. Whether a firm puts so much on one mode of learning over the other depends on the time they can take before committing a decision and the time they have. In a new industry, mimetic, experiential and vicarious learning proceed together. It happens that bigger firms are mimicked by the smaller firms. Experience is more costly than imitation since to gain experience it can take one sometime but imitating can be done fast and easily. Also according to Cohen followers at times invest in the capacity of absorbing so as to facilitate learning from others and speed the implementation of things (Sleigh, & Economist Intelligence Unit, 1991).
At the end of paper 13,
Authors like Banerjee, 1992; Bikhchandani, Hirsheleifer, & Welch, 1992, 1998), Bikhchandani et al. 1992-994, follow economic theory.
Cyert & March, 1963 and DiMaggio and Powell (1983), follow the theories of organizational sociology and ecology.
Cyert and March, 1963; follow the Interactions between mimetic and experiential learning
Lower likelihood of exit for having greater multimarket contact with market incumbents, multimarket competition lowers the rate of exit and effects of multimarket competition vary across competitor yards. Also managers imitate the acquisition activities of those firms to which they are always tied through dictatorships, the prior decision by others provide legitimation and information, firms imitate the strategic behavior of other firms thus occupying the same strategic niche and later entrants always follow the entry mode of the earlier entrants.
The beliefs and routines change in response to direct organizational experience through trial and error and the organizational search.
Learning by doing
The best example of learning from direct experience is explained in the effects of cumulated production and user experience on productivity in the manufacturing sector for example the manufacture of aircrafts in the world war 11. The number of airframes led to the decrease of direct labor of producing the airframes (Verbeke, Tavares-Lehmann, & Tulder, 2011).
Competency traps
Organizations are embracing the routines that are based on trial and error. However the routine themselves are treated as fixed. In the case of multilevel learning, organizations learn simultaneously both to discriminate among the routines and to refine the routines by learning within them. Multilevel learning usually leads to specialization which is advantageous. Competency traps are usually likely to lead to maladaptive specialization if the newer routines are better than older ones for example exposure to new procedures in a new technology (Sleigh, & Economist Intelligence Unit, 1991).
Mainly the lessons of experience are drawn from a relatively small number of observations which are usually in a complex changing ecology of learning organizations. Some of the major components of interpretation of experience are individual judgment and reference. Humans are not perfect in recording things thus they are referred to as statisticians who are not perfect. They are insensitive to sample size (Sleigh, & Economist Intelligence Unit, 1991).
Organizations capture the way they carry out their activities from the experience of others. Learning from experience of others enhances the strategy of competition. It thus explains that understanding the relation between experiential learning and routines, technologies or strategies require the attention of the organization networks and the experience of the individual organization.
The organizational learning is not only important as a useful perceptive from which the organizational change is described but also as an important instrument of organizational changes.
At the end of paper 16, Cyert & March 1963 follow learning from direct experience
Thompson 1967 follows interpretation of experience
Dutton & Starbuck 1978, follow learning from the experience of others.
Brehmer 1980 follow learning as a form of intelligence
The complications of using organizational learning as a form of learning are not rival.
It occurs when the use of a practice by one or more organization increases the likelihood of being adopted by other organizations. The theory is explained by the new venture intentional entry by the hypothesis below.
A). the higher the level of internationalization, within a new venture’s home country industry, the greater the likelihood of international entry by the new venture
 B). the higher the level of internationalization by large firms within a new venture’s home country industry, the greater the likelihood of international entry by the new venture.
C). the higher the level of internationalization by the fastest growing firms within a new venture’s home country industry, the greater the likelihood of international entry by the new venture.
D). the higher the level of internationalization within a home country industry, the mere positive the association between the new venture international entry.
E). the higher the level of internationalization by the fastest-growing firms within a home country, the more positive the association between new venture international entry and performance.
Dunning 1995, follows the theory of Interorganizational imitation and internationalizationin paper 18, 7, 3, 5 and 16.


Observation has been very significant especially for banks despite the availability of market investors and bank acquisitions. Most of the banks and even the big ones have been successful as a result of observing which is simply summarized as learning by observing in this paper. Learning by doing in this paper has been summarized as what is within the firm while on the other hand learning by observing spills over the public sphere. Further, the location of an organization influences the characteristics of organizations and the internationalization of new ventures. This can be explained by the ecological conditions which greatly influence the availability of resources for an organization. it is clear from the paper that ventures are able to do well even in competitive markets even with their small sizes. Also firms that use imitation will largely depend on past experience and network position. In the case of venture capital, they make huge investments and risk failure in the run as well as make errors because of overemphasis on human capital.
Foreign subsidiaries incur a liability of foreignness when they are operating in a host country, which reflects why they perform less than their domestic rivals. The performance of foreign subsidiaries depends on the local density. It is not clear whether a foreign subsidiary can outperform local firms the results show that it can overcome the liability of foreignness and achieve high performance relative to other foreign rivals by achieving the fit between its own strategy, local environment, and market experience within the country that has hosted it (Argote, 2013).
It is important that more account is taken of the costs and benefits of imitation. Imitation has numerous merits in that it speeds up the adoption of innovations, it also gives pressure to firms thus making them improve their products it can also enhance networking as well as several positive externalities and complementaries. Some of the demerits that attribute from imitation include, it can lead to competition that is very destructive, and it can also cause overinvestment so as to be ahead of the other competitors in the market, has an aspect of increased risk and has reduced variety. In the case of imitation it is very crucial to note the benefits and costs that are accompanied by imitation so as to have a better overview of when and where to imitate so as to make imitation beneficial to a firm. In the case of organizational learning, it builds on three major classical observations drawn from the behavioral studies of the organizations (Verbeke, Tavares-Lehmann, & Tulder, 2011).The first that the behavior of organizations is determined by routine, the second is that the behaviors are history dependent and lastly is that the behaviors are oriented to targets. Given the level of uncertainty that is always associated with newness, new ventures are likely to imitate other firms in their environments so as to increase the legitimacy and access of resources. The perspective implications of interorganizational imitation on new ventures do benefit in the sense that they gain profits by conforming to industry internationalization norms. Depending on what format to use, an organization ought to analyze the importance of using each of them so that it can be of benefit to the entire working process of the organization. In this case a connection or a differentiation of the modes in which an organization can venture can be analyzed.The type of way that a company embraces affects how it performs in the near future. For example in the case of imitation an organization managers ought to analyze the advantages of using each so that an organization can maintain a competitive advantage.


The different theories explained above can be used to explain the different modes of learning that are in the firms. Both the experiential and vicarious learning are important in different fields in both the international investments and the local companies. They can be used also to explain how a country that has been hosted in another tries to survive and compete in the host country (Verbeke, Tavares-Lehmann, & Tulder, 2011).The benefits of vicarious learning have been outlined for example they can make the rival companies produce quality products and is cost saving because embracing a new way of doing things is expensive as compared to imitation and also a major advantage of the experiential learning is that it is easier and fast to embrace in a firm. Based on the empirical results above it is right to conclude that vicarious learning is important in international investment and thus it is the best to use when in a host country.









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