Transit Stud Rev (2010) 17:611–623
DOI 10.1007/s11300-010-0177-8
EUROPE-ASIA GLOBAL ISSUES
International Firm Strategies: Is Cultural Distance
a Main Determinant?
Mahamat Abdellatif • Bruno Amann
Jacques Jaussaud
•
Received: 20 July 2010 / Accepted: 1 September 2010 / Published online: 20 October 2010
Ó Springer-Verlag 2010
Abstract According to prior literature, risk determines the international strategies
firms adopt, together with cultural and geographical distance. However, the effect
of distance, whether cultural or geographical, remains insufficiently tested and
seemingly contradictory. To investigate the potential determinants of international
firm strategies, this study draws a sample of 759 Japanese subsidiaries worldwide.
Statistical analyses confirm the ambiguous effect of distance (cultural and geographical) on internationalization strategies, especially compared with the effect of
risk.
Keywords International strategy Cultural distance Subsidiaries Expatriation
policies Sôgô Shôsha Joint ventures (JVs) Wholly owned subsidiaries (WOS) Country risk
JEL Classification
M16 M51 053 F20
Introduction
According to various academic publications, risk is a key determinant of the
international strategies that firms choose (Beamish 1985; Kogut 1988; Boyacigiller
1990; Delios and Björkman 2000). In addition, both cultural and geographical
M. Abdellatif (&) B. Amann
LGC Research Team, University of Toulouse, Toulouse 3, France
e-mail: [email protected]
B. Amann
e-mail: [email protected]
J. Jaussaud
CREG Research Team, University of Pau, Pau, France
e-mail: [email protected]
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distance appear to have great impacts on international strategic management
(Perlmutter 1969; Perlmutter and Heenan 1974; Hofstede 1980; Kogut and Singh,
1988; Barkema et al. 1996; Roth and O’Donnel 1996; Tihanyi et al. 2005; Quer
et al. 2007; Jaussaud and Schaaper 2006, 2007). In this context, cultural distance
refers to differences in national cultures between the countries in which
multinational firms choose to operate. When cultural differences increase,
transaction costs and operating costs also may increase, which likely affects the
performance of multinational firms (Gomez-Meijia and Palich 1997), as well as the
very survival of joint ventures (Li 1995; Park and Ungson 1997; Meschi and Riccio
2008.
Yet to the best of our knowledge, the effect of distance, whether cultural or
geographical, remains uncertain. Existing tests provide contradictory empirical
results (Brouthers and Brouthers 2001; Shenkar 2001; Tihanyi et al. 2005;
Slangen and Tulder 2009). Perhaps systematic empirical investigations of this
question are not available because the cultural distance construct itself might
not be able to capture differences across cultures (Shenkar 2001). Another
reason might be the difficulty of collecting significant and reliable data to test
the effect of cultural distance on international management decisions and
practices.
We have collected data to address these concerns. Specifically, to investigate the
various potential determinants of international strategies of firms, we have drawn a
sample of 759 Japanese subsidiaries worldwide from the Kaigai Shinshutsu Kigyô
Sôran database (Tôyô Keizai 2004). With this unique data set, we can focus on a
crucial question: Is cultural distance a major determinant of the international
strategies of firms?
We structure the rest of this article as follows: first, we review related
theoretical and empirical literature and design a set of hypotheses to confirm the
well-established effect of risk, as well as the poorly understood effect of distance.
Second, we describe our methodology and data collection. Third, in presenting the
results and discussion, we underline the ambiguous effect of distance (both
cultural and geographic) on internationalization strategies, compared with the
effect of risk.
Background and Hypotheses
International management literature has paid close attention to three crucial
issues: (1) the nature of the subsidiaries that firms establish abroad, whether
wholly foreign owned or international equity joint ventures; (2) expatriation
policies, which provide a main control mechanism over activities abroad; and (3)
the combination of a wide range of control instruments that may be implemented
in overseas subsidiaries. Taking in account the nature of our data, our
contribution focuses on the two former issues. That is, we consider both
the nature of the subsidiaries—whether joint ventures (JVs) or wholly
owned subsidiaries (WOS)—and firms’ expatriation policies, as we summarize
in Fig. 1.
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613
Independent variables
Dependent variables
H1
Country
Risk
Nature of subsidiaries
(JVs or WOS)
H1a
H1b
H2a
Involvement of a Sôgô
Shôsha
H2b
Distance
(Cultural or
Geographic)
H2
H1c
H2c
Expatriation policies
Fig. 1 Conceptual model
Nature of Subsidiaries Firms Establish Abroad
Establishing a subsidiary in an unknown market is neither an easy nor a riskless task
(Abdellatif et al. 2010). Facing such challenges, many firms set up international
joint ventures with local partners to benefit from those local partners’ experience
and expertise in the local environment, as well as their ability to access various
resources (e.g., distributors, local suppliers, state agencies, human resources).
Although they lack these benefits, wholly foreign owned subsidiaries are easier to
control and facilitate decision-making processes, because the company does not
have to consider the local partner. As soon as they can, according to national
regulations, and have enough experience in a country, many firms avoid JVs and
develop new activities through WOSs. The development of multinational companies
(MNCs) in China represents a clear illustration (Beamish 1993; Jaussaud and
Schaaper 2006, 2007).
Yet firms still resort more to JVs when the risk level increases. Involving a local
partner in a JV offers a good way to manage high country risk (Beamish 1985;
Kogut 1988; Abdellatif 2007), such as that related to the foreign environment (i.e.,
country risk) or high levels of information asymmetry between trading partners.
With a focus on country risk, we propose:
H1: Country risk levels influence a firm’s international strategies.
The influence of country risk level on the kind of subsidiaries that firms set up
abroad extends not just to WOSs versus JVs but also to the type of JVs, such as
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M. Abdellatif et al.
whether the firm holds a majority or minority share of capital (Beamish 1985; Kogut
1988; Abdellatif 2007). Therefore, we further specify:
H1a: Country risk levels influence the nature of the subsidiaries that a firm
establishes abroad.
In Japan, Sôgô Shôsha, which refer to general trading companies such as
Mitsubishi Corp., Mitsui & Co., and Itochu, often provide the capital and staff to
establish subsidiaries abroad. This provision also reduces risk, because it provides
experience and a network of relationships in the host country, particularly in
risky areas (Miyashita and Russel 1994; Jaussaud 1999; Abdellatif 2006). Sôgô
Shôsha help reduce, through their networks and experience in the host country,
the level of information asymmetry between trading partners. Therefore, we also
assert:
H1b: Country risk levels influence the tendency of Japanese firms to engage in
Sôgô Shôsha.
Distance
Beyond risk, cultural distance, or the differences that mark national cultures,
represents a major issue in international management (Roth and O’Donnel 1996;
Tihanyi et al. 2005). When cultural distance is high, involving a local partner in a
JV can support efforts to recruit enroll and manage local personnel, for example
(Stopford and Welles 1972; Kogut and Singh 1988; Quer et al. 2007). Cultural
distance also creates difficulties in managing JVs and relationship longevity (Li
1995; Park and Ungson 1997, Meschi and Riccio 2008). Geographic distance,
though less discussed, also could matter, because it increases various costs,
including coordination (Jaussaud and Schaaper 2006, 2007). In turn, we develop
parallel hypotheses regarding distance:
H2:
H2a:
Distance (cultural or geographic) influences a firm’s international strategies
Distance (cultural or geographic) influences the nature of the subsidiaries
that a firm establishes abroad
H2b: Distance (cultural or geographic) influences the tendency of Japanese firms
to engage in Sôgô Shôsha.
Expatriation Policies
Expatriation can provide a crucial control mechanism for activities abroad
(Perlmutter 1969; Perlmutter and Heenan 1974). Subsidiaries abroad face an
unknown and uncertain environment, marked by unexpected problems that occur in
unexpected manners. One solution that can protect the interests of both the
subsidiary and the parent company is to expatriate talented and reliable staff
members to the subsidiary. They make decisions according to the objectives of the
MNC and in line with managerial culture, and they also can help prevent the leakage
of firm resources.
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615
This effort to share corporate values seems generally strong, because it can
establish a crucial mechanism of control. When local staff members share a
fundamental set of corporate values, the MNC attains a global control on behaviors,
in addition to specific control mechanisms devoted to specialized fields (e.g.,
accounting, production management, quality, investment decisions). The need to
establish shared values likely increases when cultural distance increases.
However, the high cost of expatriation and the difficulties associated with finding
staff members who are willing to be expatriated and will succeed abroad remain
major issues (Hauser 2003).
According to Perlmutter (1969) and Perlmutter and Heenan (1974), expatriation
practices should vary from destination to destination for a given MNC. For example,
the lack of well-trained local human resources and managerial experience prompts
many MNCs to expatriate more headquarters staff to developing countries, whereas
they prefer to hire local managers in more developed countries. Furthermore,
cultural distance may lessen the effectiveness of excellent managers at home, who
have trouble adapting to the new culture’s methods for behaving, interacting,
working, and making decisions. Yet as qualified human resources become less
scarce in developing countries, cultural distance may be the primary remaining
determinant. In this sense, we acknowledge the potential effect of geographic
distance, such that a long-distance expatriation likely has more significant effects on
the expatriate’s family (Jaussaud and Schaaper 2006, 2007).
Again, and according to academic research, the level of risk in the host country is
another crucial determinant of expatriation. Firms send more expatriates to
countries with higher risk levels (Boyacigiller 1990; Delios and Björkman 2000;
Chung and Beamish 2005), presumably in the hope that expatriates help prevent
damages through their intense supervision of activities and the environment and
manage any expected and unexpected consequences of the risk.
These potential effects of risk and cultural and geographic distance lead us to
propose two further sub-hypotheses that also appear in Fig. 1.
H1c:
H2c:
Country risk level influences expatriation policies
Distance (cultural or geographic) influences expatriation policies.
Methodology and Data
We justify our choice of Japanese firms as our study context in this section, then
provide further details about our risk and distance indicators.
Why Japanese Businesses?
To investigate the potential determinants of internationalization, we consider herein the
case of Japanese companies. Our investigation requires an extensive set of reliable data
about subsidiaries that firms have established worldwide. Such data are available for
Japan and Japanese companies to an extent unmatched, to the best of our knowledge, in
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other countries. Therefore, we focus on the case of Japan in our effort to develop a
general approach to a comparison of the determinants of internationalization.
We drew a random and stratified sample of 759 worldwide subsidiaries of
Japanese listed companies from the Kaigai Shinshutsu Kigyô Sôran database (Tôyô
Keizai 2004), a well-known, widely used directory of Japanese subsidiaries
overseas. This directory provides, for each country in the world, a comprehensive
list of Japanese subsidiaries, including information such as (1) the parent company
or the different partners in the case of an international JV, which could be both
Japanese and local businesses or sometimes a partner from a third country; (2) the
date of establishment; (3) the firm’s line of business, including whether the
subsidiary carries out manufacturing activities; (4) turnover; (5) number of
employees; and (6) number of expatriates on staff.
Risk Assessment
We stratified this sample on the basis of country risk level (Table 1), because of the
importance of country risk as a determinant of international strategic choices (Beamish
1985; Kogut 1988). Several international agencies assess country risk, including
France’s Coface and, until the end of the 1990s, Japan’s Ministry of Economy, Trade
and Industry (METI). In October 2000, METI and Coface strengthened their ties, and
by 2004, METI fully relied on Coface for short-term risk evaluations (the so-called
@rating service, which is available online). Therefore, we use the Coface country risk
evaluation, which is not limited to mere political risk, an overly narrow proxy for the
external uncertainties MNCs face abroad (Slangen and Tulder 2009). The Coface
country risk assessment instead includes political, legal, economic, financial, and other
environmental dimensions that may affect MNCs in a country.
The Coface assessment consists of a six-point scale, from 1 (low risk country) to 6
(high risk country). To ensure sufficiently large subsamples for some risk levels, we
aggregate these classifications into three levels: (1) a low level that refers to 1 and 2 on
the Coface scale, (2) a middle level that includes 3 and 4 scores, and (3) a high.
Cultural and Geographical Distance Indicators
In addition to risk, both cultural and geographical distance should influence the
international strategies of firms (Perlmutter 1969; Perlmutter and Heenan 1974;
Table 1 Distribution of subsidiaries according to country risk
Total
Count
% within type
Source: Tôyô Keizai (2004)
123
Country risk level
1
2
3
437
186
136
57.6
24.5
17.9
Total
759
100.0
International Firm Strategies
617
Hofstede 1980; Roth and O’Donnel 1996; Tihanyi et al. 2005; Jaussaud and
Schaaper 2006, 2007). Literature on cultural distance indicators is well developed, if
still controversial. International management scholars adopt various indicators of
cultural distance, usually in reference to Hofstede (1980) and Schwartz (1994).
Kogut and Singh (1988) also have developed a composite index of cultural
distance measures between countries, using Hofstede’s scores. Hofstede (1980)
conducted a broad study of the values among more than 117,000 IBM employees in
different countries in the late 1960s and early 1970s. His results establish four
statistically independent dimensions that describe and discriminate among cultures:
power distance, uncertainty avoidance, individualism, and masculinity. He also
estimates scores for many cultures on these dimensions. Schwartz (1994) instead
identifies the ‘‘value types’’ that characterize a culture. He uses seven categories of
values: conservatism, intellectual autonomy, affective autonomy, hierarchy, egalitarian commitment, mastery, and harmony.
To determine the most appropriate indicator, Drogendijk and Slangen (2006)
compare the choice of entry modes into foreign markets using the measures of
cultural distance proposed by both Hofstede (1980) and Schwartz (1994). They
conclude it is not possible to prefer Schwartz’s framework; furthermore, the
perceptual cultural distance measures used in some studies provide even lower
explanatory power than Hofstede’s or Schwartz’s measures. According to Tihanyi
et al. (2005), most studies related to cultural distance in the field of international
management use a composite index of cultural distance proposed by Kogut and
Singh (1988), based on Hofstede (1980). Whatever their limits (Schwartz 1994;
Drogendijk and Slangen 2006), Hofstede’s cultural dimensions remain widespread
in international management research because of their practicability.
We therefore choose to use Hofstede’s approach. However, our use of this
framework does not imply that we accept it absolutely as an ideal reference on the
subject. As do most researchers in the field, we appreciate the practicability of this
framework, but we keep clearly in mind its limits and the peculiarity of his
approach.
To build our cultural distance indicator, we note that in his hierarchical cluster
analysis, Hofstede identifies 13 groups of countries, one of which contains Japan
alone (group 4 in his classification). We adopt this hierarchical cluster analysis
and consider four cultural distance comparisons between Japan and other
countries in our sample. More than these four levels would have led to small
subsamples and thus statistical difficulties, without providing any significant
advantage.
Group 1 consists of 12 countries, including Belgium, France, Spain, Venezuela,
Columbia, Mexico, and Turkey. Group 2 comprises 17 countries, such as Chile,
Uruguay, Portugal, Korea, Thailand, Pakistan, and so on. Group 3 focuses on six
countries in South-East Asia, such as the Philippines, Malaysia, India, Singapore,
and Hong Kong. Finally, Group 4 contains 17 countries, including Austria, Ireland,
the United States, Italy, Germany, Denmark, and the Netherlands.
For geographic distance, we consider three levels, which reflect both actual
geographic distance and accessibility (i.e., whether there is a direct flight from
Japan). Most Asian countries thus are ‘‘near’’ Japan (geographic distance indicator
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M. Abdellatif et al.
coded 1); North America and most European countries are medium distance
(geographic distance indicator coded 2); and countries in Latin America, Africa, and
elsewhere have been coded as distant (i.e., 3).
Results and Discussion
Paralleling the development of our hypotheses design, we first consider the effect of
risk on international strategies, then address the effect of distance.
H1: The Effect of Country Risk
To test our general H1, we begin by testing H1a, which predicted that risk would
influence the nature of a firm’s subsidiaries abroad, according to the data we
summarize in Table 2.
At all risk levels, firms favor WOS rather than JV, for reasons widely addressed
in prior academic literature (Beamish 1993; Jaussaud and Schaaper 2006). That is,
WOSs are easier to control, and the decision-making process is easier without the
need to consider the demands of a local partner. However, firms resort more often to
JVs when the risk level increases. The Chi-square test is significant at a 1% level
(v2 = 18.46; p \ 0.01), in support of H1a.
In the specific Japanese business context, Sôgô Shôsha is another means to deal
with high levels of country risk (Miyashita and Russel 1994; Jaussaud 1999;
Abdellatif 2006). Therefore, in H1b, we predicted that country risk influences
whether Japanese firms rely on Sôgô Shôsha when setting up subsidiaries abroad.
Among the 759 subsidiaries of our sample, 149 (19.6%) acknowledge a Sôgô
Shôsha is one of their significant shareholders. This method to manage risk, as well
as increase access to crucial local resources, comes at the expense of independence,
because a Sôgô Shôsha is an exigent (talented) partner. This trade-off may explain
Table 2 Subsidiaries according
to risk level
Risk level
Subsidiary
JV
WOS
Total
Count
98
339
437
% within total
22.4
Count
69
% within total
37.1
62.9
100.0
Count
49
87
136
% within total
36.0
64.0
100.0
1
77.6
100.0
2
117
186
3
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International Firm Strategies
Table 3 Involvement in Sôgô
Shôsha according to risk level
619
Risk level
Sôgô Shôsha
No
Yes
Total
380
57
437
13.0
100.0
56
186
30.1
100.0
36
136
26.5
100.0
1
Count
% within total
87.0
2
Count
130
% within total
69.9
3
Count
100
% within total
Table 4 Expatriation related to
country risk
Kruskal–Wallis test, significance
\1%
Country risk Number of
level
subsidiaries
73.5
Average number of
expatriates
Standard
deviation
1
454
3.52
8.938
2
197
2.03
2.584
3
104
2.29
2.027
Total
755
2.96
7.125
why only one-fifth of the subsidiaries in our sample indicate a Sôgô Shôsha is
involved in their capital. We detail our findings in Table 3.
A Chi-square test of the results in Table 3 is significant (v2 = 29.16; p \ 0.01),
in support of H1b: Japanese firms resort more to Sôgô Shôsha when they face higher
risk.
Another potential response to high risk is expatriation (Boyacigiller, 1990; Delios
and Björkman 2000; Chung and Beamish 2005). However, highly qualified human
resources are less common in developing countries, which are often considered
risky countries, such that risk has become even more crucial. We thus conducted a
Kruskal–Wallis test on the data in Table 4, because it is well suited for
noncontinuous variables such as the number of expatriates. We find a negative
relationship between expatriation and risk (significant at 1%), particularly between
the low level of risk and the intermediate and high risk levels.
These results provide support for all the country risk level hypotheses, consistent
with prior literature (Beamish 1985; Kogut 1988; Boyacigiller 1990; Delios and
Björkman, 2000).
H2: Effect of Geographic and Cultural Distance
We follow a similar pattern to that we established for H1 and test our general
hypothesis (H2) by starting with our first sub-hypothesis, in which we predicted that
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Table 5 Geographic and cultural distance influence on subsidiary
Distance
Subsidiary
Total
JV
WOS
1
152 (37.53%)
253 (62.47%)
405 (100%)
2
30 (12.30%)
214 (87.70%)
244 (100%)
3
34 (30.91%)
76 (69.09%)
110 (100%)
Total
216 (28.46%)
543 (71.54%)
759 (100%)
Geographic distance (v2 = 0.000)
Cultural distance (v2 = 0.000)
1
17 (15.18%)
95 (84.22%)
112 (100%)
2
94 (40.69%)
137 (59.31%)
231 (100%)
3
40 (32.52%)
83 (67.48%)
123 (100%)
4
20 (11.98%)
147 (88.02%)
167 (100%)
Total
171 (27.01%)
462 (72.99%)
633 (100%)
Table 6 Geographic and
cultural distance and recourse to
Sôgô shôsha
Distance
Sôgô Shôsha
Yes
Total
No
Geographic distance (v2 = 0.003)
1
77 (19.01%)
328 (80.99%)
405
2
38 (15.57%)
206 (84.43%)
244
3
34 (30.91%)
76 (69.09%)
110
Total
149 (19.63%)
610 (80.37%)
759
Cultural distance (v2 = 0.391)
1
30 (24.19%)
94 (75.81%)
124
2
25 (19.08%)
106 (80.91%)
131
3
60 (19.35%)
250 (80.65%
310
4
33 (17.01%)
161 (82.99%)
194
Total
148 (19.50%)
611 (85.50%)
759
distance influences the type of subsidiary a firm establishes. As we show in Table 5,
this effect involves whether the firms chooses a JV or WOS.
It appears that for short and long distance destinations (levels 1 and 3), Japanese
firms tend to employ more JVs than they do for medium distance (level 2). At first
sight, this result seems surprising. We posit that perhaps the effect is less associated
with geographic distance in itself and more with the level of development of the
host countries. For example, level 2, which consists of the United States and
Western European countries, might be more amenable to WOS because these
countries are relatively more developed. Such an interpretation is consistent with
prior academic literature (Beamish 1985).
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With regard to cultural distance, at a medium level (Groups 2 and 3), there is a
stronger tendency to set up JVs than for the low or high levels of cultural distance.
Again though, the countries included in each cultural distance level may suggest
that this result should be interpreted in terms of development level: Groups 1 and 4
include mainly developed countries that can support WOS better, whereas Groups 2
and 3 include more developing countries.
For Japan in particular, the decision about the nature of a subsidiary involves the
option of Sôgô Shôsha. Using Table 6, we can determine if geographic or cultural
distances affect recourse to Sôgô Shôsha (H2b).
Thus geographic distance clearly influences the tendency to resort to Sôgô Shôsha
(v2 test, significance = 0.003). In relative terms, this tendency is weaker for close
countries (Asia), Europe, and North America (level 2). It is stronger for long
distance countries (level 3), but again the question arises: Is this result strictly a
matter of distance, or does it indicate risk and the degree of development of the host
country as well?
The effect is not at all significant in the case of cultural distance. That is, cultural
distance has no discernible effect on whether a Japanese company uses Sôgô Shôsha.
A comparison of Tables 3 and 6 indicates overall that cultural distance has a lesser
influence, compared with risk and geographical distance, on the tendency of
Japanese businesses to become involved in Sôgô Shôsha.
However, as we show in Table 7, both geographic distance and cultural distance
influence expatriation (p \ 0.001 for both). Firms send fewer expatriates to
geographically distant locations, a result consistent with prior literature that finds
firms avoid expatriating employees to distant places, because they have trouble
finding candidates (particularly due to family implications), face increasing
expatriation costs, and suffer decreasing efficiency (Edström and Galbraith 1994;
Latta 1999; Wong and Law 1999; Jaussaud and Schaaper 2006).
Table 7 Expatriation related to
geographic and cultural
distances
Distance
Number of
subsidiaries
Average number
of expatriates
Geographic distance (level)
1
402
3.44
2
246
2.66
3
107
1.81
Total
755
2.96
\0.001
Kruskal–Wallis test (p)
Cultural distance (group)
1
120
2.38
2
114
2.30
3
323
3.69
4
198
2.49
Total
755
Kruskal–Wallis test (p)
2.96
\0.001
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M. Abdellatif et al.
The relationship is so complicated in the case of cultural distance that it is
difficult to interpret: The cultural distance variable may be hiding or disguising
another or several other variable(s) that determine more directly the number of
expatriates. One of these variables might be the level of development of the host
country, as predicted by Perlmutter (Perlmutter 1969; Perlmutter and Heenan 1974).
Conclusion
This contribution investigates the determinants of the internationalization strategies
of firms—a topic frequently addressed in academic literature. We consider how
country risk and cultural and geographic distance influence two main decisions
associated with international strategies, namely, the nature of the subsidiaries
established abroad and expatriation policies. Japanese firms provide the empirical
basis for our investigation, because we have relevant and reliable data in this context
(Tôyô Keizai 2004).
Our investigation confirms the effect of risk on international strategies, which is
not at all surprising. In addition, we show that contrary to common expectations,
cultural distance does not matter much, without a significant effect on either the
nature of subsidiaries or expatriation policies. Although cultural issues are important
in the field of international management (Hofstede 1980; Mayrhofer 2004; Meschi
and Riccio 2008), it seems that they do not affect all aspects in this field to the same
extent.
Just as Tihanyi et al. (2005), p. 270 state, ‘‘substantial additional research is
needed before the role of cultural distance is fully understood.’’ However, our
research contributes to the understanding that organizational design, including the
nature of subsidiaries abroad, is not significantly affected by cultural distance, in
contrast with several other contributions (Hofstede 1980; Roth and O’Donnel 1996)
that insist, as far as human resources are concerned, cultural distance matters.
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