The Direction of Cultural Distance and the Performance of Foreign Subsidiaries in Latin America

Abstract

Despite being an important construct, there is an ever-growing concern related to the conceptual and methodological aspects of the Cultural Distance (CD) construct. Critiques suggest that several important properties of CD might have been neglected. While most studies focus on the magnitude (size) of CD, we argue that the construct is incomplete as it does not account for the direction and the specific characteristics of each cultural dimension. Furthermore, although cultures may not be compared in terms of better or worse, when it comes to the implication to foreign subsidiary firms, some cultural characteristics in the host country can be more or less favorable to doing business. We use panel data including foreign subsidiaries from developed countries, emerging markets and Latin America operating in 10 host countries in Latin America totaling 4226 firm-year observations and a combination of 168 home and countries. The asymmetric effects for the direction of CD are highlighted as some cultural characteristics in the host country seem to affect firms in similar ways regardless of cultural similarities between home and host countries. While firms from the region do not seem to be in advantage in dealing with CD, the positive and significant effects for the Power Distance dimension reveals the legitimate use of power attributed to developed country firms operating in Latin America. The asymmetric effects are highlighted as some cultural characteristics in the host countries can be more or less favorable for foreign subsidiary firms to do business. The study highlights important characteristics of CD and points venues for future research.