Does language matter to foreign subsidiary performance?

Abstract

PurposeThis paper examines the role of language in foreign subsidiary performance.Design/methodology/approachWe develop hypotheses relating to the effects of language difference and its interplay with cultural distance and market size. Considering languages that can be directly used and that can be acquired by MNEs, we employ language variables representing major languages and a population of 60 home and 57 host countries to study the performance of a sample of 1,751 subsidiaries between 2002 and 2013.FindingsLanguage difference is found to have a negative impact on subsidiary performance. The positive effects of cultural distance on performance become stronger when the language difference is smaller. The language effects are also more pronounced in small markets.Practical implicationsThis study reveals that subsidiary success depends on language difference, and such effects are more pronounced in small markets. The results also suggest that MNEs need to give more attention to bridging language barriers when they invest in culturally distant countries so that they can benefit from the positive effects of cultural distance.Originality/valueGiven that there is no systematic research investigating the role of language in the foreign subsidiary performance of MNEs, we make an important contribution by presenting a quantitative investigation of the language–performance relationship. The novelty of the paper also lies in examining the interplay of language difference with cultural distance and market size.