Cultural Distance and Entry Modes in Emerging Markets: Empirical Evidence in Vietnam

Nguyen Minh Ha,Pham Phi Dang,Quan Minh Quoc Binh

doi:10.3390/jrfm13010014

Nguyen Minh Ha, Pham Phi Dang + Show 1 more

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https://doi.org/10.3390/jrfm13010014

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Abstract

Cultural distance is acknowledged as a crucial factor that significantly affects the entry mode selection of multinational enterprises. The purpose of this article is to analyze the relationship between cultural distance and entry mode choice by exploring a novel dataset of 5236 firms in Vietnam with foreign investment during the period 2005–2016. Although many studies were conducted about the cultural distance and entry mode nexus, most of the research mainly focuses on developed and developing countries, where a market economy is already established. It is important to expand the research to a transition economy such as Vietnam, where the government is committed to attracting foreign investment. The results indicate that, when the cultural difference between Vietnam and their home country is high, foreign-invested firms prefer wholly-owned subsidiaries (WOS) over equity joint ventures (EJV). The study contributes to the general understanding about cultural distance and entry mode decision of foreign-invested firms in emerging markets.

Highlights

Multinational companies invest in foreign markets for a variety of reasons: Some may find new markets for their goods and services, while others are attracted by the cheap and abundant resources of the host country (Dunning 2002)
We argue that the role of cultural distance on entry mode selection cannot be ignored in the context of the transition economy
This study broadens our knowledge of the entry mode choice of foreign-invested firms in a transition economy, in this case, Vietnam

Summary

Introduction

Multinational companies invest in foreign markets for a variety of reasons: Some may find new markets for their goods and services, while others are attracted by the cheap and abundant resources of the host country (Dunning 2002). Many scholars believe that the cultural distance between the investing and host countries is one of the most important factors that influences the entry mode choice by investors (Kogut and Singh 1988; Agarwal and Ramaswami 1992; Erramilli 1996). According to transaction cost theory, there are two opposing arguments about the impacts of cultural distance on entry mode selection. The first argument states that cultural distance influences the perception of costs and uncertainty of the investing firm (Kogut and Singh 1988). A larger cultural distance between home and host countries encourages multinational corporations to select equity joint ventures (EJV) over wholly owned subsidiaries (WOS) to limit their exposure to uncertainty and risk. Many researchers (Meyer and Nguyen 2005; Dikova 2012) state that the entry mode strategy is totally different in transition countries and developed countries due to different institutional frameworks

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