Why We Should Stop Using the Kogut and Singh Index.
| Verfasser | Konara, Palitha |
| Posten | RESEARCH ARTICLE |
1 Introduction
The existence of differences between countries and regions in which firms do business is the conditio sine qua non for the discipline of international business. The concept of distance capturing the degree to which countries and regions differ lies at the core of international business and management research. Zaheer et al. (2012, p. 19) stress that international management is "essentially, [...] the management of distance". Depending on the type of difference studied, prior research has suggested various types of distance, although cultural distance, i.e., the extent to which countries differ in cultural values, remains the most widely used type of distance in international business (Beugelsdijk et al. 2018b; Shenkar et al. 2008; Tihanyi et al. 2005). Research into the effects of cultural distance exploded with the introduction by Kogut and Singh (1988) of an index to measure this distance. The Kogut--Singh Index (KSI) aggregates cultural differences along Hofstede (1980) four dimensions, i.e., power distance, uncertainty avoidance, individualism, and masculinity, into a single value. Kogut and Singh (1988) developed their index to explore the effect that cultural distance has on firms' choice of foreign market entry mode choice. They argued that increasing cultural distance between an investor's home country and the target market would lead to a greater preference for joint ventures or wholly-owned green-field ventures over acquisitions. Subsequently, the KSI has not only been employed in empirical studies of the choice of firms' foreign market entry, but also been used to capture cultural distance in empirical studies on a very wide range of IB topics at the macro- (e.g., Liu et al. 2018), meso- (e.g., Morosini et al. 1998; Shin et al. 2017; Yu and Maula 2016), and micro-level (e.g., Kraimer et al. 2012; Varela and Gatlin-Watts 2014).
To this day, the KSI remains the most widely used approach to measuring cultural distance (Beugelsdijk et al. 2018a; Cuypers et al. 2018). Studies reviewing research on cultural distance conclude that almost all of the reviewed studies used the KSI (Harzing and Pudelko 2016; Kirkman et al. 2006); thus, the original Kogut and Singh (1988) article is one of the most cited papers in the broader area of management, with more than 6000 citations to date (Beugelsdijk et al. 2018b; Harzing and Pudelko 2016). Further, the use of the KSI to measure (cultural) distance continues to increase (Harzing and Pudelko 2016) (see Fig. 1) despite repeated criticism levelled at the relevance of and the assumptions underlying the concept of cultural distance as such and/or the nature of the KSI to measure cultural and other types of distance (e.g., Berry et al. 2010; Harzing and Pudelko 2016; Lopez-Duarte et al. 2016; Shenkar 2001; Tung and Verbeke 2010). Within the former group, scholars have questioned the implicit assumption of cultural distance being an absolute and symmetrical construct, as opposed to a relative and asymmetrical construct. Although these concerns are valid, we do not intend to engage in this generic debate on the usefulness of the notion of cultural distance, but instead aim to contribute to improving the measurement of cultural distance. Prior research in this latter group has suggested the use of perceptual data as opposed to relying on the data provided by Hofstede, Globe, or similar studies. Scholars have also raised the sensitivity of the index depending on the data that is used for its calculation (e.g., Beugelsdijk et al. 2018b) or problems associated with using the index on particular data (Gerschewski 2013).
We aim to contribute to improving the measurement of cultural distance in empirical research by showing that the KSI is a biased measure of cultural distance and fails to capture what it claims to capture. First, we demonstrate that the KSI differs fundamentally from the Euclidean distance. We show that because of a misspecification of the KSI, it corresponds to the squared Euclidean distance. As a result, empirical research that has employed the KSI has in fact used a squared function of cultural distance, leading to potentially misleading findings. We present the correct form of the Euclidean distance formula that we believe researchers should use in future studies. We also show that the KSI's deviation from the correct measure has important implications for the meaning of findings on the effects of cultural distance that were based on the KSI and that it is not possible to adjust or reinterpret the findings of prior empirical studies that employed the KSI.
The use of a squared function of cultural distance associated with the use of the KSI is likely a central explanation for the persistently inconclusive findings in research on the effects of cultural distance (Beugelsdijk et al. 2018b; Kirkman et al. 2006; Maseland et al. 2018). Rather than questioning the concept of cultural distance, we suggest that replacing the KSI with a correctly specified measure of cultural distance is likely to result in more consistent findings in future cultural distance research.
Replacing the KSI with a correct measure of distance is also important given that the KSI is increasingly being used for measuring cultural distance based on alternative cultural dimensions, such as the nine cultural dimensions reported by the GLOBE program (see for example, Chen et al. 2010; Hutzschenreuter and Voll 2008; Reus and Lamont 2009). Worryingly, the KSI is increasingly being used for capturing other types of distance. For example, recent research has used the KSI to measure regulatory distance (Salomon and Wu 2012), governance and economic distance (Hutzschenreuter et al. 2014), differences in leadership (Koch et al. 2016) and business distance (Evans and Mavondo 2002). To prevent the problems characterizing the existing empirical research on the effects of cultural distance based on the KSI from spreading to these related areas of inquiry, we propose that researchers should opt for the correct measure of distance instead of using the KSI.
2 The KSI as a Biased Estimator of (Cultural) Distance
In their seminal article examining the effect of national culture on the choice of entry mode, Kogut and Singh (1988) introduced a composite index to measure the extent to which the country of the investing firm and the country of entry differ on the Hofstede's four national cultural dimensions of power distance, uncertainty avoidance, individualism, and masculinity. Based on this composite index, they showed that "the greater the cultural distance between the country of the investing firm and the country of entry, the more likely a firm will choose a joint venture or a wholly owned greenfield investment over an acquisition" (Kogut and Singh 1988, p. 414). Since then, their index "has become the field's standard-bearer, supplanting virtually all other modes of gauging cultural variations, including the prior concept of psychic distance" (Shenkar 2012, p. 12).
Kogut and Singh (1988) present the following formula to calculate the cultural distance between two countries. [KSI.sub.ij] is the cultural distance between country i and country j. [I.sub.ki] and [I.sub.kj] are the values of cultural dimension k (k= 1-4) for country i and country j, respectively. [V.sub.k] is the variance of the cultural dimension k.
[KSI.sub.ij]=[4.summation over (k=1)].[([I.sub.ki]-[I.sub.kj]).sup.2]/[V.sub.k]/4).(l)
Kogut and Singh (1988, p. 422) do not provide a detailed explanation of this index apart from stating that "deviations were corrected for differences in the variances of each dimension and then arithmetically averaged" [emphasis added]. The standardization of the cultural dimensions scores prior to their summation is sensible to correct for the differences in the variances in each of the dimensions. However, the use of the arithmetic average of the standardized and squared differences creates a fundamental difference between the KSI and the Euclidean distance measure, despite some studies referring to the KSI as a 'Euclidean distance measure' (see for example, Beugelsdijk et al. 2018b; Cuypers et al. 2018; Tihanyi et al. 2005).
First, we look at the Euclidean distance measure. If p = ([p.sub.1], [p.sub.2],..., [p.sub.n]) and q = ([p.sub.1] [p.sub.2],..., [p.sub.n]) are two points in the Euclidean n-space, then the distance ([d.sub.pq]) between p and q is given by the following (Anton and Rorres 2014, p. 145):
[d.sub.pq] = [square root of [n.summation over (k=1)][([p.sub.k]-[q.sub.k]).sup.2].(2)
In the case of four cultural dimensions (n = 4), we obtain the following equation for calculating Euclidean (cultural) distance.
Euclidean (cultural) Distance [e.sub.ij] = [n.summation over (k=1)] [([I.sub.ki] - [I.sub.kj]).sup.2]. (3)
A key difference between the KSI (Eq. 1) and the (non-standardized) Euclidean distance (Eq. 2) is that Kogut and Singh (1988) have adjusted (standardized) the deviations in each cultural dimension to address the differences in the variances across dimensions (by dividing each difference [p.sub.k]-[q.sub.k] by the respective standard deviation [SD.sub.k]). Similar to the Euclidean distance calculation, Kogut and Singh (1988) square these differences and sum them. Then, importantly, instead of taking the square root of the sum of the squared differences as per the Euclidean distance, Kogut and Singh (1988) divide this sum by four, i.e., they take the arithmetic average of the squared differences. By failing to take the square root of the sum of the squared differences, the KSI creates a second-degree (quadratic) function of distance.
A small number of studies have used the (non-standardized) Euclidean distance (Eq. 3) to calculate cultural distance (see for example, Brouthers and Brouthers 2001; Manev and Stevenson 2001; Morosini et al. 1998). Although these studies have not standardized the individual cultural dimensions, Kogut and Singh (1988)'s standardization...
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