Do we need to distance ourselves from the distance concept? Why home and host country context might matter more than (cultural) distance.
| Verfasser | Harzing, Anne-Wil |
| Posten | RESEARCH PAPER - Report - Statistical data |
Abstract We scrutinize the explanatory power of one of the key concepts in International Business: the concept of (cultural) distance. Here we focus on its effect on entry mode choice, one of the most researched fields in international business strategy. Our findings might, however, be equally be relevant for the field of International Business as a whole. Our analysis is based on a review of 92 prior studies on entry mode choice, as well as an empirical investigation in over 800 subsidiaries of MNCs, covering nine host and fifteen home countries across the world. We conclude that the explanatory power of distance is highly limited once home and host country context are accounted for, and that any significant effects of cultural distance on entry mode choice might simply be caused by inadequate sampling. Entry mode studies in particular, and International Business research in general, would do well to reconsider its fascination with distance measures, and instead, focus first and foremost on differences in home and host country context. We argue that serious engagement with deep contextualization is necessary in International Business research to pose new and relevant questions and develop new and innovative theories that explain empirical phenomena.
Keywords Cultural distance * Entry mode choice ? International business * Home country * Host country
1 Introduction
The fascination of International Business researchers with the (cultural) distance concept can hardly be overstated. Shenkar (2001, p. 519) affirms "Few constructs have gained broader acceptance in the international business literature than cultural distance". Cho and Padmanabhan (2005, p. 309) state that "almost ... no international business study can be complete unless there is an explicit variable controlling for cultural distance". Finally, Zaheer et al. (2012, p. 19) proclaim: "Essentially, international management is management of distance". In this article we critically investigate whether the widespread reliance on the concept of (cultural) distance in International Business research is appropriate. Furthermore, we suggest that the simultaneous neglect of home and host country context might in fact hinder the field's progress and potential.
Previous contributions have already espoused many limitations of the (cultural) distance concept (see, for example, Shenkar 2001; Harzing 2003; Tung and Verbeke 2010; Zaheer et al. 2012). Whereas we concur with their concerns, the purpose of our study is not to add to this prior line of research and outline yet further conceptual weaknesses. Instead we empirically review and test the explanatory power of the cultural distance concept. It is on this basis that we question its usefulness as one of the main concepts in International Business research, and suggest an alternative approach: a focus on context, in particular home and host country context.
Our contribution is based on two pillars: an analysis of the literature and a comprehensive empirical study. We focus on cultural distance, the most frequently used distance concept, which measures the extent to which two national cultures are similar or different. Furthermore, in order to allow for a rigorous investigation, we limit our study to the effects of cultural distance on entry mode choice. Entry mode choice is arguably the concept that has most frequently been connected to (cultural) distance and, in addition, has been one of the most researched fields in International Business Strategy (Werner 2002). However, although we refer to entry mode choice in our empirical investigation, we are not interested in adding yet another (overview) study on this topic, but instead use entry mode choice as an example for our investigation of the relevance of the cultural distance concept. As we will outline in more detail in the discussion, our key arguments are equally relevant for the field of International Business as a whole.
The inclusion of cultural distance as an explanatory or control variable has become almost compulsory in entry mode studies. Nearly all studies in this field used the Kogut and Singh (1988) measure of cultural distance. This metric has been subject to trenchant criticism in Shenkar's (2001) JIBS decade award-winning article: "It masks serious problems in conceptualization and measurement, from unsupported hidden assumptions to questionable methodological properties, undermining the validity of the construct and challenging its theoretical role and application" (Shenkar 2001, p. 520). Harzing (2003) documented the concept's particular problems in the field of entry mode choice, arguing researchers in this field suffer from myopia and systematically overestimate the impact of cultural distance. However, in spite of these and several other critical voices, the popularity of cultural distance as an explanatory variable seems unassailable. Citations to Kogut and Singh (1988) continue to increase, in fact half of the article's current, nearly 1500, Web of Science citations occurred since 2010.
The tenacity with which entry mode researchers cling to this conceptualization of cultural distance is even more noteworthy given the contradictory results of their studies. Even the field's four meta-analyses report contradictory findings: two indicate non-significant results (Tihanyi et al. 2005; Morschett et al. 2010), whereas the remaining two (Zhao et al. 2004; Magnusson et al. 2008) report a negative impact of cultural distance on equity based (i.e., high control) entry mode choices. However, one of these indicates this is true only for US firms (Zhao et al. 2004), whilst the other reports the conclusion is valid only for European firms (Magnusson et al. 2008). These contradictory results they have even spawned a number of articles (e.g., Brouthers and Brouthers 2001; Wang and Schaan 2008) that have as their aim to explain this paradox.
The findings of our literature analysis and empirical investigation lead us to conclude that these contradictory results cannot be "explained away" by, for example, the inclusion of specific moderators, but are likely to result from flawed research designs. More specifically, we suggest that they can be traced to differences in sample composition and specific home country or host country differences, such as ownership restrictions, which were not made explicit in these studies. Consequently, we posit that neglecting the home and host country sample composition in entry mode studies, and most likely in other areas of International Business research, has led researchers to inappropriately attribute causality to cultural distance in studies where specific characteristics of the home or host country context are in fact far more likely explanatory factors.
After a review of prior studies that critically investigate the (cultural) distance concept, we present an analysis of more than 90 studies looking at the impact of cultural distance on entry mode choice, the phenomenon we use to illustrate our general arguments. We suggest that, instead of cultural distance, host or home country context characteristics, such as investment restrictions, political risk, economic development, access to capital, or cultural traits (rather than cultural distance) are more likely explanatory factors. Although differences between home or host country context matter, distance is in our view much less important. We then test this assumption by presenting results from our own empirical study covering MNCs in nine host and fifteen home countries across the world. Our findings suggest that cultural distance has little impact on entry mode choice once home and host country control variables are included. Finally, we discuss the implications of our findings, extend our arguments to other areas of International Business research, and present recommendations for International Business research in general.
2 Previous Debates on the Cultural Distance Concept
Prior contributions have already espoused a multitude of limitations of the cultural distance concept. So far, however, this critique did very little to affect its popularity. A first, and widely cited, conceptual critique was published by Shenkar (2001) in his JIBS decade award-winning article. In this paper, he called for a more rigorous conceptualization and measurement, overcoming the 'illusions' that are at the core of the cultural distance concept and its instrumentation and measurement biases. However, Shenkar does not reject the concept outright. To the contrary, he suggests refinements, such as the inclusion of Long Term Orientation into the Kogut and Singh formula. A stronger critique of the cultural distance concept itself was formulated by Harzing (2003) and subsequently by Kirkman et al. (2006). In these papers, the focus is not on improving the concept, but rather on warning against its inappropriate application.
Ensuing empirical papers by Selmer et al. (2007), Brock et al. (2008) and Lee et al. (2008) deal with specific operationalization problems of the cultural distance concept, such as the 'illusion of symmetry'. Two additional conceptual papers by Shenkar et al. (2008) provide a more pronounced critique of the cultural distance concept itself (in particular Shenkar et al. 2008) and the further development of the closely related cultural friction concept (in particular Luo and Shenkar 2011). Another extensive and widely recognized overview of the shortcomings of the cultural distance concept, and in particular its empirical application, was provided by Tung and Verbeke (2010).
The topical nature of the conceptual critique of what can be called the 'simplistic' (cultural) distance concept and further developments of more 'advanced' distance concepts is also clearly illustrated by a recent special issue of the Journal of International Management (for an overview of contributions see Ambos and Hakanson 2014) and other, very recent, publications. For example...
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