Cultural differences, MNE learning abilities, and the effect of experience on subsidiary mortality in a dissimilar culture: Evidence from Korean MNEs

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In a departure from prior studies presuming a beneficial experience effect in foreign direct investment (FDI), the present paper examines the conditions under which FDI experience may actually harm subsequent subsidiaries. We argue that multinational enterprises (MNEs) may draw erroneous inferences and learn incorrectly from their early expansions when new to a dissimilar culture, because their learning abilities are eroded by cultural differences. We posit that the characteristics of an MNE's international expansion, including scope, pace, rhythm, and entry mode, moderate this negative experience effect by influencing the MNE's learning ability in foreign cultures. Using a data set of FDIs by South Korean MNEs between 1990 and 2006, we find a positive relationship between subsidiary mortality and experience when an MNE has a low level of experience in a dissimilar culture. This relationship is weaker if the MNE's prior FDI has been dispersed across different cultures, is stronger if it expanded internationally at a fast pace, and becomes negative once the MNE has accumulated a high level of experience in the host culture. We conclude that, when expanding into dissimilar cultures, MNEs must establish mechanisms to mitigate incorrect learning and reexamine the correctness of inferences drawn from past experience before applying them.