Agency effects and escalation of commitment: do small national culture differences matter?

Abstract

In order to test for hypothesized effects of national culture on management control systems with a cost-effective sample size, most cross-cultural studies rely on large differences in culture in their experimental design. However, much of the world's cross-border investment takes place between nations that are culturally close, for example, the USA, Canada and the UK. Case evidence indicates that even apparently small cultural differences, such as that between the USA and Canada, can be particularly troublesome since it is widely assumed that small differences do not matter, when, in fact, they do. This study explores the effect of an apparently small difference in national culture on the ability of agency theory to explain escalation of commitment to failing projects in two countries with significant cross-border investment, i.e., USA and Canada. We found that the effect of adverse selection conditions was significantly stronger among managers from the more individualist USA. We also found that more experienced managers were less likely to escalate commitment. We discuss the implications of this finding for the design of control systems in US–Canada cross-border subsidiaries.