A bottom-up role of information asymmetry: opening the black-box of firms’ resource allocation mechanism
| DOI | https://doi.org/10.1108/GKMC-08-2021-0135 |
| Published date | 01 December 2021 |
| Date | 01 December 2021 |
| Pages | 210-230 |
| Subject Matter | Library & information science,Information behaviour & retrieval,Information in society,Information literacy,Library & information services |
| Author | Riffat Blouch,Muhammad Majid Khan,Wajid Shakeel |
A bottom-up role of information
asymmetry: opening the black-box
of firms’resource
allocation mechanism
Riffat Blouch,Muhammad Majid Khan and Wajid Shakeel
Department of Management Sciences,
COMSATS University Islamabad –Islamabad Campus, Islamabad, Pakistan
Abstract
Purpose –Drawing on the concept of resource-based theory of the firm; the purpose of this study is to
analyze the influence of firms’strategic approaches on the firm performance via indirect effect using a
multilevel,bottom-up approach.
Design/methodology/approach –Using the survey method, the present study obtains data from104
diversified manufacturing firms and analyzes the bottom-up effect of firms’strategic approachon efficient
resourceallocation using Mplus.
Findings –Given the prevailing conditions,the study found that the motive of most firms is growth rather
than risk mitigation or collaboration in the manufacturing sectorof Pakistan. Furthermore, the study found
that the bottom-level employees’information asymmetry has a significant impact on the strategic resource
allocationdecision, which can lead to resource allocation inefficiency.
Research limitations/implications –Despite making a unique contribution, the present study has few
limitations requiring researchers’attention to in the forthcoming. These include a low amount of data, self-reporting
technique and failure to include all the possible reason that could cause resource allocation inefficiency.
Practical implications –The present research has potential applications for managers of the
manufacturing industry. First,the study alerts managers about the challenges of resource allocation. At the
same time,this study provides critical implicationfor managing bottom-level employees.
Originality/value –The current study has made a sizable impression in theliterature of resource-based
theory of the firm by recommending a model that augments the theoretical foundation of strategic
management of the firm. So, closely considering these insights would be helpingfor the firms for allocating
resourcesefficiently in the manufacturing industry.
Keywords Internal resource allocation, Resource allocation efficiency, Information asymmetry,
Bottom up effects
Paper type Research paper
Introduction
The allocation of capital within firms is a core managerial function, yet a topic that has
recently resurged in the management of businesses. The scholars of strategic management
have long been concerned withthe management decision-making process Bower (1970) and
its connection to organizational motive (Bower, 2017;Sengul et al., 2019;Busenbark et al.,
2017). Busenbark et al. (2017) claim that management decisions related to capital allocation
lead to a specific strategy and these strategies are derived from a theoretical motive (i.e.
growth, risk mitigationand value creation through collaboration).
The scholarly discussions on the resource allocation studies Maritan and Lee (2017),
Bower (2017),Levinthal (2017) emphasize that the motive for the resource allocations are
GKMC
72,1/2
210
Received26 August 2021
Revised10 October 2021
Accepted7 November 2021
GlobalKnowledge, Memory and
Communication
Vol.72 No. 1/2, 2023
pp. 210-230
© Emerald Publishing Limited
2514-9342
DOI 10.1108/GKMC-08-2021-0135
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/2514-9342.htm
associated with the specific strategies. The first drive (growth) of resource allocation
decisions is linked to the winnerpicking strategy (Stein, 1997). The winner-picking strategy
(WP) proclaims thatallocating resources to the best performing prospectunits among all the
business units leads to allocation efficiency. The second motive, mentioned above is risk
eversion, which involves a diversification approach. The “diversification strategy”(DS) of
the firm refers to the allocation of the resource to the related or unrelated business to save
the firm from exposing to the market risk and to enhance product scope (Lang and Stulz,
1994;Liebeskind, 2000;Shin and Stulz, 1998). However, the third purpose of resource
allocation takes into place the synergy strategy. This strategy preaches about the sharing
and lending of the resources among the business units (Cremers et al., 2011;Williamson,
1991). As a strategy is attached to a particular goal it is good to know when and why a
particular strategyis important.
Regardless of a great deal of attention paid to the understandings of an appropriate
strategy and its aftermaths, there remain black holes in capital allocation decisions by the
corporate management. While reviewing the literature on resource allocation, it was found
that irrespective of the compatibility between strategic choice and organizations’objective,
some forces that have a deep impact on the resource allocation decision is the information
asymmetry (IA) at the bottom level of the organization (Busenbark et al., 2017;Bergh et al.,
2019). This is also considered as one of the most crucial reasons for the inefficient resource
allocation that leads to strategic failure.Bergh et al. (2019) and Akerlof (1970) define IA as a
condition; under which one party possesses superior information than the other. However,
such problems usually occur at different levels in an organization. Under this,the divisional
managers misrepresenting information to top management and top management acting
unscrupulouslyat the cost of stockholders (Auronen, 2003).
The current study has been conducted in the manufacturing sector of Pakistan, because of
the turbulent environments when it comes to strategies and policie s. Pakistan is a low-income
developing country located in South Asia with a population of more than 200 million, faced
with the abundance of labor and scarcity of capital, industrial raw material. However, being
surrounded by such an environment makes it very important for Pakistani organizations to
come up with strong strategies to dealwith the allocation of scarce resources. Because like most
of the countries in the world, Pakistan also relies on its industrial power to reduce its trade
deficit and strengthen foreign exchange reserves. Finance Division (2020), claimed the negative
growth of this sector, which has slowed down the economy, and the growth rate of the
manufacturing industry far behind the neighboring countries (Kazmi et al., 2019). However, this
is primarily due to deindustrialization, Kazmi (2018). Despite the above, the practices of efficient
resource allocation in Pakistani organizations have always been remaining a white spot on the
map, causing Pakistan not to integrate well into the global value chains. Unfortunately, Altaf
and Iftikhar (2018) revealed that most of the firms in Pakistan do not follow a clearly defined
strategy. However, given the current situation, a firm should have a consistent strategic plan
backed by operational objectives to compete in today’s competitive business climate
(Al-Surmi et al.,2020). Therefore, there is a dire need for the firm to identify the strategy based
on their objective to be achieved, as a successful strategy can only be realized if there is
compatibility between the intended strategy and the organizational motives.
Thus, based on the resource-based view (RBV) of the firm, the present study offers
insights into the compatibility between the organizational motives and the choice of
strategy, as well as the impact of those choices on firm performance (FP) in the presence of
the impediments that leads to the resource allocationinefficiency from the perspective of the
managers of a developing country. However, this study looks at both internal capital
allocation processes and impediments to allocation efficiency that cause management to
Bottom-up role
of information
asymmetry
211
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