Academic journal article Management International Review

How Much Distance Do We Need? Revisiting the "National Cultural Distance Paradox"

Academic journal article Management International Review

How Much Distance Do We Need? Revisiting the "National Cultural Distance Paradox"

Article excerpt

Abstract and Key Results

* This study revisits the "national cultural distance paradox" based on a sample of Japanese foreign direct investment (FDI) in 53 countries and regions over 30 years. Earlier studies on cultural distance assumed linear relationships and showed mixed results. We examine nonlinear relationships between cultural distance (CD) and entry mode and between CD and performance.

* Results suggest that there is a nonlinear (inverted U-shape) relationship between CD and the choice of a joint venture as the preferred market entry mode, and between CD and performance.

* We also found that the relationship between CD and performance is moderated by entry mode choice: the nonlinear relationship between CD and performance is stronger for joint ventures than for wholly owned subsidiaries.

Key Words

Cultural Distance * Entry Mode * Performance * Multinationals * National Cultural Distance Paradox * Logistic Regression

Introduction

When making foreign direct investment (FD1) decisions, firms often face the issue of adapting to and integrating different cultures. Culture is a kind of collective "programming of the mind that distinguishes the members of one human group from another" (Hofstede 1980, p. 13). Culture is usually shared by people from the same country. Thus a county becomes one boundary to differentiate humans' collective programming, which is national culture (hereafter we use the word "culture" to refer to national culture, following the international business literature). Covering 40 countries, Hofstede (1980) measured culture in a systematic and large-scale empirical manner. He found that people from different countries have different cultures, and these differences load on four factors, the so called cultural dimensions, namely individualism, power distance, uncertainty avoidance and masculinity. He later expanded the study to another ten countries and three multi-country regions and added a fifth cultural dimension, long term orientation (Hofstede 2001).

Cultural distance (CD) is the cumulative difference in cultural norms between two countries (Kogut/Singh 1988). CD has the greatest impact in FDI research (Shenkar 2001) and has been associated with multinationals' entry mode decisions, diversification and performance (Kogut/Singh 1988, Palich/Gomez-Mejia 1999, Tihanyi/Griffith/Russell 2005). However, previous studies have provided mixed results regarding the impact of CD on multinationals' entry mode choices and performance, thus resulting in the "national cultural distance paradox" (Brouthers/Brouthers 2001). The need to resolve these conflicting findings has been highlighted recently (Kirkman/Lowe/Gibson 2006). Several meta-analyses suggest that there may be some moderators in these relationships (Tihanyi et al. 2005, Zhao/Luo/Suh 2004) such as investment risk (Brouthers/Brouthers 2001), multinationality (Agarwal 1994) and experience (Cho/Padmanabhan 2005). Furthermore, Shenkar (2001) argues that the prevailing logic in the literature of linear relationships between CD and other variables such as entry mode and performance may not be realistic. Our study builds on these two major areas identified for further research: the "illusion of linearity" and the existence of potential moderators.

In this study, we analyze Japanese FDI data covering a 36 year period in the 53 countries/regions included in Hofstede (2001). We attempt to reconcile the "national cultural distance paradox" and identify more elaborate relationships between CD and entry mode and performance. Our larger sample may help to overcome the limitation created by the narrower range of CD values in earlier studies. Smaller samples with fewer countries may have produced a less comprehensive view of these relationships.

In the next section, we review previous studies on CD and develop hypotheses. While a firm may enter a foreign country market through export, licensing, and other non-equity arrangements, our study is limited to two equity entry mode choices: joint venture (JV) and wholly owned subsidiary (WOS). …

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