Simultaneous determination of optimal cultural distance and market potential in international market entry

Abstract

PurposeThe purpose of this paper is to develop and test a theoretical model of managerial decisions involving international market entry.Design/methodology/approachThe authors propose a mathematical model that seeks the optimal level of cultural distance between the host and the home country and the market potential of the host country that maximizes a firm's investment in an international market. The authors illustrate the intuition and the managerial application of the model using a large data set of cross‐border acquisitions, then the results of this data set are used to validate the model in a specific data context.FindingsThe authors find that cultural distance and market potential have curvilinear and interaction effects on the level of equity participation. The empirical results are further used to conduct sensitivity analysis of decisions for changes in parameters.Research limitations/implicationsThe authors’ general approach can be used to analyze any two variables that have interaction effect on a variable of interest related to market entry strategies.Practical implicationsThe authors illustrate the intuition and the managerial application of the model using a large data set of cross‐border acquisitions. Managers can use this approach in choosing CBA targets.Originality/valueThe study provides a mathematical framework and an empirical illustration of optimizing the cultural distance and market potential for maximizing equity participation in foreign market acquisitions. This is a new unique contribution to the literature.