The Effects of Cultural Differences on Knowledge Assets and U.S. MNCS' Firm Value

Abstract

This study examined the effect of cultural differences (CD) between U.S. multinational companies (MNCs) and their foreign subsidiaries on the value of the U.S. parent companies as calculated using Tobin's Q. The findings suggested that CD had an inverse relationship with U.S. parent company firm value, and implied that cultural differences can impede knowledge transfer within the MNC. The results also revealed that: (1) risks or rewards can result from cultural distances in the transfer of knowledge assets, and (2) no conclusions can be drawn as to whether MNC value is enhanced or reduced as a consequence. Knowledge assets (intangible assets) were characterized by Forrester Research (2004) as essential determinates in an assessment of corporate value by investors and analysts. In a dissertation by this study's corresponding author, the impact to firm value of cultural differences (Hofstede, 1980a, 1980b, 1991a, 1991b & 1993) that existed between the foreign subsidiaries and U.S. parent companies was examined. The dissertation looked at the value impact of cultural differences on three different valuation models: (1) Tobin's Q (Anita, Lin, & Pantzalis, 2005); (2) Weighted Cost of Capital (WACC) (Copeland, Koller, & Murin, 2000); and (3) Market Value Added (MVA) (Pratt with Niculita, 2005) to test for consistency in the findings. Under the valuation model Tobin's Q, a discount in firm value of the U.S. parent company was found. In contrast, the WACC and MVA models improved the firm value of the U.S. parent company. These findings implied that CD can influence firm value, but no conclusions can be drawn as to whether it enhanced or reduced firm value of U.S. MNCs. The research implied that cultural differences and knowledge assets may result in risks or rewards to the firm value of U.S. MNCs. The study concluded that other variables could have had an effect on the firm value of the U.S. parent company because the methodology was multiple regression and correlation analysis.