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The effect of cultural distance on entry modechoice, international diversification, and MNEperformance: a meta-analysis

Laszlo Tihanyi1 ,David A Griffith2 andCraig J Russell1

1Michael F Price College of Business, University of Oklahoma, Norman, USA; 2The Eli Broad Graduate School of Management, MichiganState University, East Lansing, USA

Correspondence:Dr L Tihanyi, Michael F Price College of Business, University of Oklahoma,Norman, OK 73019-4006, USA.Tel: 1 405 325 5699;Fax: 1 405 325 7688;E-mail: [email protected]

Received: 25 February 2004Revised: 10 September 2004Accepted: 29 September 2004Online publication date: 3 February 2005

Abstract Although a growing literature indicates that cultural distance that is,

differences between national cultures is an important determinant of organizational actions and performance, both empirical and theoreticalconcerns abound. In this study, the relationships of cultural distance withentry mode choice, international diversification, and MNE performance areexamined by meta-analyzing data from 66 independent samples, withcumulative sample sizes ranging from 2,255 to 24,152. Regression resultsfailed to provide statistical evidence of significant relationships between culturaldistance and entry mode choice, international diversification, and MNEperformance. The examination of moderator effects, however, yieldedimportant results. We found a strong negative association between culturaldistance and entry mode choice for US-based MNEs. The cultural distanceinternational diversification relationship was negative for high-technologyindustries, while it was positive for other industries. Cultural distance also had a

strong positive effect on MNE performance for developed country investments. A similar, strong positive relationship was found between cultural distance andinternational diversification in studies with more recent samples. Results of thisstudy indicate that substantial additional research is needed before the role of cultural distance is fully understood. Journal of International Business Studies (2005) 36, 270283.doi:10.1057/palgrave.jibs.8400136

Keywords: meta-analysis; cultural distance; measurement

IntroductionCross-border business transactions involve interaction with differ-ent societal value systems. Although national boundaries do not

always correspond with homogeneous value systems, there arestrong forces within nations to create and maintain a sharedculture (Rokeach, 1973; Hofstede, 1980). Adapting to local culturalvalues that are transmitted through nations political economy,education, religion, and language may create an additional burdenfor multinational enterprises (MNEs) operating in different coun-tries (Schwartz, 1999). The study of principal differences innational cultures between the home country of MNEs and theircountries of operation, that is, cultural distance, has gained a broadinterest in international business research (Ricks et al ., 1990). 1

Underlying the employment of cultural distance in internationalbusiness research is the assumption that differences between

Journal of International Business Studies (2005) 36, 270283& 2005 Palgrave Macmillan Ltd. All rights reserved 0047-2506 $30.00

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foreign and home country cultures increase thecost of entry, decrease operational benefits, andhamper the firms ability to transfer core compe-tencies to foreign markets (Bartlett and Ghoshal,1989; Palich and Gomez-Mejia, 1999). Cultural

distance has been used to explain a wide range of MNE strategies and organizational characteristics,such as entry mode choice (Barkema et al ., 1996),international diversification (Grosse and Trevino,1996), subsidiary management (Roth and ODon-nell, 1996), and MNE performance (Gomez-Mejiaand Palich, 1997; Morosini et al ., 1998).

Prior research, however, has provided mixedempirical evidence regarding the specific influenceof cultural distance (Brouthers and Brouthers,2001). Whereas some studies have indicated anegative relationship between cultural distance

and MNE performance (e.g., Luo and Peng, 1999),other studies have found a positive effect (e.g.,Morosini et al ., 1998). Further, managing portfoliosof foreign operations with greater cultural distancehas been found to increase transaction and operat-ing costs, resulting in an increased survival hazardamong MNEs (Li, 1995; Park and Ungson, 1997).Meanwhile, high cultural distance has been asso-ciated with low rates of joint venture failure (Parkand Ungson, 1997). Similarly, past research has beenunable to provide consistent evidence on the role of cultural distance in entry mode choice (Barkemaet al ., 1996; Benito, 1997; Erramilli et al ., 1997).

Despite the growing popularity of the study of cultural distance effects, researchers have begun todiscuss the constructs potential limitations. Forexample, Brouthers and Brouthers (2001) and Evansand Mavondo (2002) argue that the results derivedfrom decades of research provide no clear consen-sus regarding the effect of cultural distance.Shenkar (2001) went further by suggesting thatmany conceptual properties of existing culturaldistance measures are at best illusory. Althoughthese criticisms may be valid, we know very littleabout whether cultural distance is, in fact, a usefulpredictor of other important strategic and organi-zational constructs used in the international busi-ness literature. Therefore, a systematic assessmentof the effects of cultural distance across studieswould help to answer whether the construct shouldbe part of future research (Hunter and Schmidt,1990).

We set out to examine the effect of culturaldistance on three important variables in theinternational business context: entry mode choice,international diversification, and performance. We

used meta-analysis techniques to assess the bivari-ate association of cultural distance with othervariables. To increase the robustness of our analysis,we completed multivariate tests, using a typicalsample size across studies. We also tested the effects

of five moderators: measurement, MNE origin,industry, country of investment, and sample timeframe. The empirical results we report below havebeen integrated from 66 independent samplespublished in 55 articles.

Background and hypothesesThe provision of an adequate definition of culturehas been a challenging task for different areas of social research (Triandis, 1994). Culture, in general,is the homogeneity of characteristics that separatesone human group from another. Culture provides a

societys characteristic profile with respect tonorms, values, and institutions that affords under-standing of how societies manage exchanges (Hof-stede, 1980; Trompenaars and Hampden-Turner,1998). At the national level, culture is an aggregateof individual values. As personal experiences andshared societal values shape the views of indivi-duals equally, there might be variation in theirvalue priorities. The concept of culture at thenational level attempts to capture the typicalindividual value priorities in a society, whichreflect the central thrust of their shared encultura-tion (Schwartz, 1999, 26).

Differences in national culture systems or therelative cultural distance between countries havebeen an important concern in the study of MNEstrategies and organizational characteristics (Barke-ma et al ., 1996; Brouthers and Brouthers, 2001).Researchers focusing on the transaction costs andrisks associated with cross-border business opera-tions and managerial decision-making in MNEstend to consider the implications of culturaldistance. Cultural distance in recent research mostoften refers to the underlying differences innational cultural values for managers between theirMNEs home and foreign operations.

When examining the role of cultural distance,most studies theorize that, as the cultural differ-ences between an MNEs home country and a hostmarket increase, the underlying ability of the MNEto operate effectively in the host market decreases(Gomez-Mejia and Palich, 1997; Hennart andLarimo, 1998). Increased operational difficultiesresulting from cultural distance are in generalderived from a lack of understanding of the norms,values, and institutions that afford social exchange

Effect of cultural distance: a meta-analysis Laszlo Tihanyi et al 271

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across markets. Cultural distance may also lead tohigher levels of complexity and uncertainty formanagerial decision-making regarding MNE strate-gies and organizational choices (Shane et al ., 1995).To assess the consistency of cultural distance effects

across studies, we summarize their implications forthree important variables in prior literature: entrymode choice, international diversification, andMNE performance.

Entry mode choiceEntry mode choice refers to the initial preferencesof MNEs when they decide to enter differentforeign markets. Research typically classifies entrymode choice decisions according to the amount of equity invested. Joint ventures and wholly-ownedsubsidiaries (e.g., acquisitions and greenfield invest-

ments) tend to represent equity market entries.Non-equity entries include exporting and licensing.The latent constructs underlying entry modechoice have generally been the degree of controlembodied within each choice, and the desire toreduce risk (Anand and Delios, 1997; Hennart andReddy, 1997; Brouthers and Brouthers, 2003).

One theoretical position is that the higher thecultural distance between the home and the foreignmarket, the higher the level of equity ownership inentry mode choice. According to this stream of theliterature, large differences in cultures promptMNEs to exert greater control in their entry inorder to minimize transaction costs (Hennart andReddy, 1997). Greater control might be necessary ina culturally distant market, because transactions insuch markets generate higher information costsand are associated with greater difficulties intransferring competencies (Li and Guisinger,1992). Through higher percentages of equity own-ership, MNEs are able to establish greater control of their international operations, potentially mitigat-ing differences in cultural values and institutions.Increased control may therefore improve socialexchange across markets. Higher levels of controlcan also lead to an increase in overall operatingeffectiveness of the MNE. Thus:

H1a : Cultural distance is positively related tohigher equity entry mode choice.

Although control is an important consideration,entry mode choice in relationship to culturaldistance can also be explained by a risk-reductionrationale of MNE managers. In a recent study of Western European MNEs, Brouthers and Brouthers(2003) found that manufacturing MNEs preferred

joint ventures to wholly-owned subsidiaries as theirmode of entry in uncertain Central and EasternEuropean markets. Gatignon and Anderson (1988)argue that, under conditions of high culturaldistance, MNEs may require greater flexibility,

resulting in preferences for modes of entry withlower control, such as licensing or a joint venture.By relying on joint ventures as a primary mode of

entry, MNEs are able to restrict their resourcecommitment and thus reduce their risk exposurein culturally distant markets, leading to a negativerelationship between cultural distance and entrymode choice (Kim and Hwang, 1992; Grosse andTrevino, 1996). A number of other studies havefound that greater cultural distance is associatedwith entry modes based on lower percentages of equity ownership (Barkema et al ., 1997; Barkema

and Vermeulen, 1998). Some of these studies (e.g.,Barkema et al ., 1996) further note that localpartners unique knowledge may help to reducethe risks associated with entry into culturallydistant markets. Such local knowledge, therefore,can effectively compensate for the loss of control inlower equity entry modes. More formally stated:

H1b : Cultural distance is negatively related tohigher equity entry mode choice.

International diversificationInternational diversification refers to the share of foreign operations (sales, assets, subsidiaries, orprofit) within the MNEs business portfolio, thuscapturing the firms level of international involve-ment. It has been theorized that through diversify-ing internationally MNEs can obtain new resourcesand transfer their core competencies to newmarkets (Bartlett and Ghoshal, 1989; Kobrin,1991). These benefits may lead to higher MNEperformance and risk-adjusted returns (Kim et al .,1993; Gomes and Ramaswamy, 1999). However,diversifying into international markets can increasean MNEs risk owing to the increased organizationalcomplexity and the uncertainty related to operat-ing in new markets. Among the likely dangers of increased international diversification is the man-agement of an MNEs portfolio of foreign subsidi-aries from a culturally diverse country base.

To avoid the potential complexities associatedwith the differences in values and institutionsbetween their home country and foreign countriesof operations, MNEs may initially select culturallysimilar locations for their foreign direct investments




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(Johanson and Vahlne, 1977). When firms enterforeign markets, greater similarities between cul-tures enable them to access new customers at alower cost, establish and successfully managemanufacturing operations, and compete with a

relatively homogeneous group of local firms (Bar-kema and Vermeulen, 1998). Owing to increasedcompetition in culturally similar markets, MNEs areoften forced to find opportunities in countries withdissimilar cultures. As the international diversifica-tion of an MNE increases, so does the culturaldistance between its home country and its portfolioof foreign operations. Increased cultural diversitymay lead to the noted trade-offs of internationaldiversification, such as uncertain demand,increased competition, and management problemsassociated with local production (Benito, 1997). As

an MNE expands into culturally distant countryenvironments, managers may also face greaterchallenges in making decisions (Roth and ODon-nell, 1996; Geletkanycz, 1997). In summary, priorliterature indicates a positive relationship betweencultural distance and international diversification.Thus:

H2: Cultural distance is positively related tointernational diversification of MNEs.

MNE performanceMNE performance has been a dominant researchtheme, and a growing number of studies considercultural distance in the MNE portfolio of operationsan important predictor of performance (Luo andPeng, 1999; Palich and Gomez-Mejia, 1999). Toincrease their performance in the internationalenvironment, MNEs need to reduce productioncosts, increase customer demand for their products,and reduce the overall risk of their businessportfolio. However, these tasks may becomeincreasingly complex as the cultural distance inthe MNEs countries of operation increases.

Some researchers contend that doing businessunder conditions of higher cultural distance leadsto lower performance for MNEs (e.g., Li and Gui-singer, 1992; Chang, 1995). Luo and Peng (1999)argue that incongruence in national cultures resultsin lower performance when MNEs enter newmarkets. The theoretical argument underlying thishypothesis is that high cultural differences tend tolead to intra-organizational conflicts and poorimplementation of organizational actions, giveninconsistencies in values and institutions between

home and foreign market operations. MNE man-agers in culturally distant markets are also less ableto take advantage of economies of scale and scopein relation to technology development, jointproduction, advertising, and distribution. Further,

high cultural distance can limit MNE performanceowing to increased training, monitoring, andcontrol costs, as well as differences in managerialcognition of environmental and organizationalissues (Egelhoff, 1982; Schneider and DeMeyer,1991). At the extreme, cultural differences maylead to differences in investment preferencesbetween partners, resulting in the failure of foreignoperations of MNEs (Li and Guisinger, 1992):

H3a : Cultural distance is negatively related toperformance of MNEs.

Alternatively, a number of studies consider cul-tural distance in the MNEs portfolio as having apositive influence on performance (Gomez-Mejiaand Palich, 1997; Park and Ungson, 1997). Rootedin internalization theory (e.g., Buckley and Casson,1976), the performance-enhancing argument of cultural distance suggests that MNEs are often ableto enter culturally distant markets because of thenumerous organizational advantages their foreignoperations can provide. Regardless of the differ-ences in national value systems, MNEs can sustaintheir internal capabilities by acquiring key

resources or by amortizing expenses across a largercustomer base (Kotabe, 1990; Kobrin, 1991). MNEsmay also realize innovation-related performancebenefits in culturally distant markets by locatingtheir foreign subsidiaries in advanced R&D envir-onments (Birkinshaw, 1997; Ha kanson and Nobel,2001). Cultural distance from this perspectivetherefore enhances MNE performance because of the associated creativity benefits (e.g., Shane et al .,1995). Along this line, as MNEs expand intoculturally diverse markets, the integration of newlyacquired skills with their existing resources can leadto unique resource combinations enhancing overallMNE performance (Morosini et al ., 1998). Thus:

H3b: Cultural distance is positively related toperformance of MNEs.

Methods

SampleIn all, 67 articles studying cultural distancewere initially identified through a systematic




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search of: ABI/Inform and JSTOR databases; pub-lished reviews in the literature; and tables of contents of the Academy of Management Journal , Administrative Science Quarterly , Journal of Interna-tional Business Studies , Journal of Management , Jour-

nal of Management Studies , Management International Review , Management Science , Strategic Management Journal , and other journals. Our article selectionwas confirmed through communication withresearchers in this area and through the reviews of recent articles on cultural distance. Of the 67articles, 55 included the correlation estimatesbetween cultural distance and entry mode choice,international diversification, and performance. The55 articles contained k66 independent samplesand constituted the final set of effect sizes for themeta-analysis.

A random subset of five studies was initially readfor purposes of developing a standard method of coding effect sizes and study characteristics. Subse-quently, all studies were read and effect sizes codedby two independent, trained judges (Cohenskappa 0.83). Consensus discussion took place toresolve any disagreements in coding. Correlationswere harvested among measures of constructsreflecting cultural distance, entry mode choice,international diversification, performance, and twocovariates (environmental uncertainty and firmsize).

Independent and dependent variables A common difficulty with secondary research isthe use of different measures for the same con-struct. In this stream of research, we found thatmost studies rely on the same measure of culturaldistance, providing an opportunity for a morerobust meta-analysis. Cultural distance was mea-sured using a Euclidian distance measure (Kogutand Singh, 1988) in 55 independent samples. 2 Atotal of 11 samples in the study used survey-basedmeasures or absolute differences in cultural dimen-sions developed by Hofstede (1980). Entry modechoice was measured as the amount of capitalinvested, equity position, and the level of controlin joint ventures, acquisitions, and greenfieldinvestments. International diversification was mea-sured in the studies as foreign sales divided by totalsales, foreign assets per total assets, and the numberof foreign subsidiaries as a percentage of the totalnumber of subsidiaries. Performance measuresincluded return on equity, return on investments,return on assets, and survey-based measures of performance.

Covariates Two covariates (environmental uncertainty andfirm size) were examined to partition variance morethoroughly in observed correlations across studies.Selection of covariates was based on extant theories

or models of cultural distance. For example,Barkema and Vermeulen (1998) and Loree andGuisinger (1995) suggest that managers cope withincreased levels of uncertainty operating in marketsthat are culturally different from their domesticmarket. Environmental uncertainty was measuredby uncertain market conditions, government reg-ulations, composite country risk measures, andsurvey items of environmental characteristics. Firmsize has also been theorized to be important in thiscontext. Large firms tend to have a portfolio of culturally diverse international operations. Small

firms, by contrast, are vulnerable to culturaldifferences in their relatively narrow portfolio of foreign operations (Erramilli et al ., 1997; Gomez-Mejia and Palich, 1997). Firm size was measured bythe amount of sales and assets and the number of employees.

Meta-analytic proceduresAll meta-analyses reported used Hunter andSchmidts (1990) procedures to estimate averagecorrelations among variables weighted by samplesize,

r Er r r Pki1 n ir i

Pki1 n i

where kthe number of studies; the observedvariance of correlations across studies,

s2r E s

2r ; s

2r P

ki1 n i r i r r

2

Pki1 n i

;

the expected variance among correlations due torandom sampling error,

s2e E s

2e

; s2e

1 r r 2

2k

Pki1 n i

;

and the residual variance after correcting forthe expected effect of random sampling error,s 2r Es

2r ; s

2r s

2r s

2e . These statistics were

derived from correlations reported between mea-sures of cultural distance, entry mode choice,performance, international diversification, environ-mental uncertainty, and firm size (i.e., a 6 6matrix of r r s).

Hunter and Schmidts (1990) proceduresprovide simple estimates of the true population




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correlation r between any two measures (i.e., r r ) aswell as the proportion of observed variance in r (sr

2 )due to random sampling error ( se

2 ) vs residualvariance ( sr

2 ). Note that if in fact all of the studiesdrew samples from a common population charac-

terized by one 6 6 r matrix, then when all studieshave been drawn from a population with a singlevalue of r and in the absence of other statisticalartifacts (e.g., range restriction), one would expectsr

2 0 and that 50% of any sr2 estimates would be

positive and 50% negative. When a study reportedmore than one correlation between any twovariables (e.g., owing to the use of two measuresof firm performance), correlations were averagedand counted as one effect size in subsequent meta-

analyses (Schmitt et al ., 1984; Hunter and Schmidt,1990).

ResultsTable 1 contains the 6 6 matrix of r r derived

between measures of the constructs cultural dis-tance, entry mode choice, international diversifica-tion, performance, environmental uncertainty, andfirm size. Table 1 also includes variance in theobserved correlations ( sr

2 ), expected varianceamong correlations due to random sampling error(se

2 ), residual variance after correcting for randomsampling error ( sr

2 sr 2 se

2 ), and the percentage of observed variance due to random sampling error (%error). Note that the range of S n across the r r

Table 1 6 6 Meta-analytic r r estimates of r1 2 3 4 5

Cultural distance

Entry mode choice r r 0.0644S n24,152s r

2 0.0215s e

2 0.0011s r

2 0.0204% error 5.3%

Performance r r 0.0351 r r 0.0538S n7,848 S n5,484s r

2 0.0152 s r 2 0.0176

s e 2 0.0033 s e

2 0.0015s r

2 0.0119 s r2 0.0162

% error 21.7% % error 8.2%

International diversification r r 0.0796 r r 0.0798 r r 0.0537S n7,558 S n4,713 S n2,699s r

2 0.0520 s r 2 0.0375 s r

2 0.0051s e

2 0.0027 s e 2 0.0013 s e

2 0.0018s r

2 0.0493 s r2 0.0363 s r

2 0.0033% error 5.3% % error 3.3% % error 3.6%

Environmental uncertainty r r 0.0885 r r 0.1229 r r 0.0185 r r 0.0078S n17,840 S n16,117 S n2,255 S n2,911s r

2 0.0206 s r 2 0.0223 s r

2 0.0154 s r 2 0.0235

s e 2 0.0011 s e

2 0.0005 s e 2 0.0022 s e

2 0.0024s r

2 0.0195 s r2 0.0229 s r

2 0.0132 s r2 0.0211

% error 5.3% % error 2.4% % error 14.4% % error 10.2%

Firm size r r 0.0265 r r 0.0250 r r 0.0900 r r 0.2116 r r 0.0169S n15,863 S n10,705 S n7,555 S n6,832 S n4,491s r

2 0.0120 s r 2 0.0127 s r

2 0.0199 s r 2 0.0065 s r

2 0.0053s e

2 0.0028 s e 2 0.0017 s e

2 0.0026 s e 2 0.0021 S e

2 0.0027s r

2 0.0093 s r2 0.0110 s r

2 0.0173 s r2 0.0627 s r

2 0.0026% error 23.0% % error 13.3% % error 13.1% % error 3.3% % error 50.4%




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reported in Table 1 varies from 2,255 to 24,152.To put the r r in perspective of statistical testsconducted in traditional primary research, r xy 0.040.04 rejects H 0 : r 0 at pr 0.05 (two-tailed) when nis conservatively set at the lowest value found in

Table 1 (i.e., 2255).Initial examination of the results reported inTable 1 revealed two important trends. First, r r between cultural distance and all other measuresare relatively small and close to 0. Indeed, only oner r in the entire matrix exceeds 0.20 ( r r 0.2116between firm size and international diversifica-tion). Second, using virtually any meta-analyticheuristic one might care to select (e.g., Sackett et al .,1985; Hunter and Schmidt, 1990), a relatively smallproportion of observed variance in r xy across studiesis due to random chance. The second finding

suggests the set of k66 effects sizes were obtainedfrom samples of populations characterized bydifferent values of r . Values of r r close to 0could be due to samples drawn from populationswith r o 0 being meta-analytically combinedwith samples drawn from populations with r 4 0,yielding r r D 0. These results suggest that examina-tion of moderators be pursued in order to detectthe defining characteristics of these differingpopulations.

Table 2 reports the results of an OLS multipleregression analysis regressing entry mode choiceonto cultural distance, performance, internationaldiversification, and the control variables using a

typical sample size across studies ( N 200). Resultsindicated that cultural distance did not signifi-cantly contribute to the prediction of entry modechoice in the presence of the other predictors.However, environmental uncertainty demonstrated

a marginally positive relationship with entry modechoice. Table 3 summarizes the results of the OLSregression of international diversification onto theother variables. Again, cultural distance did notsignificantly contribute to prediction. Results sug-gested that firm size contributed significantlypositively to international diversification predic-tion in the presence of the other predictors,consistent with the simple correlation estimate of r r 0.2116. Finally, results of an OLS regression of firm performance are presented in Table 4. Theestimate of the multivariate relationship indicated

that cultural distance was not meaningfully relatedto firm performance.Given the lack of statistically significant results in

the examined relationships via meta-analysis, weexplored the potential moderator effects. Two

Table 2 OLS regression of entry mode choice onto environ-mental uncertainty, performance, cultural distance, internationaldiversification, and firm size a

Independent variable

Standardized regressioncoefficient

t p(two-tailed)

Environmental uncertainty 0.1179 1.6581 0.0989Performance 0.0505 0.7081 0.4797Cultural distance 0.0582 0.8147 0.4162International diversification 0.0788 1.0805 0.2812Firm size 0.0093 0.1279 0.8983R2 0.0275F 1.0965 0.3637a Analyses in Tables 2 4 were conducted using the 6 6 r r matrixreported in Table 1 as input into the Systat 10.2 regression module. Aseach r r estimate was derived on a different combination of effect sizes(r xy ), and hence yielded different S n, we elected to specify a typicalsample size across studies. The typical sample size is 200, the average of N from the largest S n (24,152) and smallest S n (2,255). N 200 wasused as N for purposes of estimating t statistics and their associatedp-values.

Table 3 OLS regression of international diversification onto entrymode choice, environmental uncertainty, firm size, performance,and cultural distance

Independent variable Standardized regressioncoefficient

t p(two-tailed)

Environmental uncertainty 0.0044 0.0622 0.9505Performance 0.0726 1.0385 0.3003Cultural distance 0.0932 1.3333 0.1840Entry mode choice 0.0759 1.0805 0.2812Firm size 0.2187 3.1315 0.0020R2 0.0637F 2.6384 0.0247

Table 4 OLS regression of performance onto cultural distance,entry mode choice, international diversification, environmental

uncertainty, and firm sizeIndependent variable

Standardized regressioncoefficient

t p(two-tailed)

Cultural distance 0.0432 0.6007 0.5487Entry mode choice 0.0510 0.7081 0.4797International diversification 0.0761 1.0385 0.3003Environmental uncertainty 0.0274 0.3804 0.7041Firm size 0.1080 1.4820 0.1400R2 0.0186F 0.7337 0.5990




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judges coded the 66 independent samples accord-ing to five moderator variables:

(1) measurement of cultural distance (Euclidiandistance measure vs other measures);

(2) MNE origin (US-based MNEs vs MNEs fromother countries);

(3) industry type (high-technology industries vsothers);

(4) investment country type (developed or devel-oping countries); and

(5) sample time frame (international business acti-vities in the 1980s (early) vs the 1990s (late)).

The choice of measurement may be attributed tothe lack of consistent relationships between cultu-ral distance and the other variables. We found thatthe use of the Euclidian distance measure compared

with other measures did not lead to significantrelationships between cultural distance, entrymode choice, international diversification, andperformance. We did, however, find a strongnegative relationship ( r r 0.2646) between culturaldistance and environmental uncertainty in the caseof other cultural distance measures. This relation-ship was relatively weak and positive ( r r 0.1003)across studies using the Euclidian distance measure.

The second moderator effect, whether the studyfocused on MNEs headquartered in the US or onMNEs from other countries, such as France, Ger-many, Italy, Japan, Korea, the Netherlands, Spain,Sweden, and the United Kingdom, was also inves-tigated. Prior research implies that MNE behaviormay be different depending on the origin or homebase of MNEs (e.g., Forsgren et al ., 1995; Barkemaand Vermeulen, 1998). In the case of entry modechoice, the MNE home base may indicate theMNEs risk propensity or its willingness to acceptdifferent transaction cost levels (Brouthers andBrouthers, 2003). The examination of this mod-erator yielded an important difference in therelationship between cultural distance and entrymode choice. Whereas studies focusing on MNEsfrom a diverse set of countries found little negativeeffect ( r r 0.0531), studies concerning the entrymode choice of US based MNEs showed a relativelystrong negative effect for cultural distance(r r 0.3501). 3

Type of industry (high-technology vs otherindustries) was investigated, as prior literaturesuggests that MNEs from high-technology indus-tries are motivated to internationalize to recouptheir extensive investments in technology (Cant-well, 1989; Kobrin, 1991). This moderator was

important for the relationship between interna-tional diversification and cultural distance.Although the sizes of the correlations were rela-tively low, a significant difference was evidentbetween international diversification in high-tech-

nology industries and in other industries. Therelationship was negative for high-technologyindustries ( r r 0.1200), but it was positive for otherindustries ( r r 0.1038).

The rationale behind comparing investment intodeveloped countries with that into developingcountries, our fourth moderator, is rooted inmodernization theory. Despite the relative persis-tence of some cultural traditions, economic deve-lopment tends to be associated with culturalchanges toward an increasingly participatory,rational, tolerant, and trusting value system (Ingle-

hart and Baker, 2000). Under these conditions,cultural distance may indicate favorable marketconditions for MNEs. This moderator showed asignificant difference between cultural distance andperformance. The correlation coefficient was smalland negative for developing country investments(r r 0.0374), but it was strong and positive fordeveloped country investments ( r r 0.3100).

The last moderator, early or late samples, is aresult of the median split of the time frame of research on cultural distance. Whereas early studiesfocused on MNE activities in a narrow set of countries, MNEs have been increasingly active indiverse emerging economies since the early 1990s.Among these newly open markets perhaps the mostimportant is China, the focus of a number of recentstudies (e.g., Luo, 1999, 2001a). This moderatorshowed a significant difference for the relationshipbetween cultural distance and international diver-sification. The correlation coefficient was small andpositive for the early samples ( r r 0.0108), but astrong positive relationship was found for samplesin more recent studies ( r r 0.2328). This resultsuggests that international diversification isincreasingly associated with a culturally diverseset of countries.

DiscussionThe purpose of this study was to provide anempirical synthesis of prior research by exploringthe relationships between cultural distance andentry mode choice, international diversification,and MNE performance. Meta-analytic results indi-cated that the relationship between cultural dis-tance and the three key variables (and two controlvariables) was near zero across the 66 independent




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samples. Further, when examined in a multivariatecontext, cultural distance again failed to contributesignificantly to prediction. Hence, when exploredin the context of the existing literature, ourconclusion is that cultural distance is not directly

related to the three key constructs of entry modechoice, international diversification, and MNEperformance.

A potential explanation for the lack of findingsmight be moderator effects (Hunter and Schmidt,1990). Our review of the original correlationssuggested that the examination of moderators couldprovide greater insights: cultural distance waspositively related to entry mode choice, level of international diversification, and MNE performancein some samples, and negatively related to thesesame variables in other samples. Moderator candi-

dates examined included cultural distance measure-ment instrument, MNE origin, industry type,country of investment, and sample time frame.

Consideration of the instrument used to measurecultural distance provided little help in explainingthe observed variation in cultural distances rela-tionships with the three variables of interest. Thestrong negative relationship between environmen-tal uncertainty and cultural distance in the case of survey and other measures may indicate that surveyrespondents view the two variables as distinctconstructs. It is also likely that the uncertainty of the political and economic systems in a countrymay overshadow the perceived differences inculture for MNE managers.

The result on the MNE origin moderator isconsistent with the risk-minimization hypothesisin the literature. This hypothesis suggests that US-based MNEs tend to dedicate smaller amounts of capital and maintain lower equity positions incountries that present them with higher culturaldistance. It is possible that, because of the gover-nance system in the US (e.g., ownership concentra-tion and managerial compensation), US MNEmanagers are more risk averse in their entry modechoice than their counterparts in other developedcountries (e.g., Brouthers and Brouthers, 2003).Another reason for this result might be thepotential learning benefits for MNEs. Studies fromthe organizational learning perspective note thatgreater cultural distance may be associated withentry mode choice with lower equity stakes (e.g.,Barkema et al ., 1997).

The relationship between cultural distance andinternational diversification depends, to someextent, on industry characteristics. High-technology

industries exhibited a negative relationshipbetween cultural distance and international diver-sification, while the relationship was positive inother industries. These results indicate that MNEsfrom high-technology industries face higher risk

levels than do other MNEs due to the size of theirinvestments in technology (e.g., Kobrin, 1991).These MNEs may hesitate to increase their furtherrisk levels and thus seek to expand into marketswith familiar cultures. Such behavior of high techMNEs can also be explained by Vernons (1966)product life cycle theory, as these MNEs tend toexhibit less interest in culturally dissimilar marketsuntil customer demand in their home or existingmarkets becomes saturated.

Further moderator results indicate that highcultural distance may provide performance benefits

when MNEs operate in other developed countries.This relationship may be due to the similarities inmarket conditions and their associated institutionsacross developed countries (Inglehart and Baker,2000). This result is consistent with a stream of literature that associates cultural distance withinnovation and creativity (e.g., Shane et al ., 1995).As MNEs expand into culturally diverse but devel-oped markets, new knowledge and resources canlead to enhanced MNE performance (Morosini et al .,1998).

Finally, we found a positive and significantassociation between cultural distance and inter-national diversification in studies using morerecent samples of MNEs. This relationship can beexplained by the following recent changes affectingMNEs. First, MNEs increasingly locate their produc-tion and gain market share today in previouslyisolated emerging and transition economies. Eventhough these countries provide new businessopportunities for MNEs, their national cultures areoften quite different from the home cultures of many MNEs (Luo, 2002b). Second, managers of MNEs are more aware of cultural differences todaythan they were 20 years ago. Owing to theireducation and increased knowledge through mediaand communication technology, managers may bemore comfortable diversifying into countries withdissimilar cultures. Third, geographically proximateand culturally similar markets have likely becomesaturated for many MNEs, thus forcing them toexplore distant and often culturally differentmarkets.

There are important implications of these resultsfor future studies. Most importantly, cultural dis-tance does not appear to be directly related to entry




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mode choice, international diversification, or MNEperformance across prior empirical studies. Owingto the relatively weak bivariate relationships, wehave gone beyond the conventional meta-correla-tions by completing a series of OLS regressions with

a typical sample size across studies to test formultivariate effects. While disturbing, the lack of significant relationships in these tests accentuatesthe concerns raised in recent qualitative reviews of the literature. The articles by Brouthers andBrouthers (2001) and Shenkar (2001) outline anumber of potential problems with the culturaldistance construct, mostly scrutinizing its measure-ment properties.

Culture is extremely difficult to define. Kroeberand Kluckhohn (1952) identified over 140 concep-tual definitions of culture. Given the plethora of

definitions, it is probably unrealistic to expect thata single measure can fully and accurately discernthe underlying differences resident across culturesin relation to a wide variation in topics studied. Togain better insights, additional research is neededto develop measures of the fundamental differencesin culture relevant to organizational decisions . Somerecent studies have offered alternatives to thewidely used cultural dimensions that formed thebasis of present cultural distance measures (e.g.,Schwartz, 1999; Inglehart and Baker, 2000).

It is also important to note that most priorresearch employs a relatively narrow definition of cultural distance. Whereas empirical studies almostexclusively examined differences in cultural values,many other important dimensions can be consid-ered for the development of future cultural distancemeasures. In addition to values, Triandis (1994)recommends studying national cultural differencesacross four other components: language (e.g.,membership in language families), family struc-tures, religion, and wealth (measured by GNPper capita). Alternative measures of culturaldistance may provide an opportunity to improvethe construct validity of future cultural distancemeasures.

A related issue is the appropriateness of culturaldistance measures for organization, group, andindividual level research. National cultural distanceis constructed as an aggregate of perceived indivi-dual values in most studies. Such measures may notbe suitable for different levels of analysis. Forexample, organizational culture and subsidiarydifferences within MNEs may create meaningfullydifferent cultural phenomena. In a study of jointventure performance, Pothukuchi et al . (2002)

found that organizational culture differencesaccount for more of the negative effects of partnerdissimilarity on joint venture performance thannational culture.

Meta-analysis can play an important part of the

development of research fields by systematicallyintegrating findings across published empiricaltests. However, the technique is limited to exam-inations of variables that can be coded post hoc fromalready completed primary research. Although wefound no significant results regarding the mainrelationships of our interest, the identification of moderator effects provided promising results forthe existing cultural distance measures. Priorstudies did not concentrate on moderating effects,with the exception of the research by Brouthers andBrouthers (2001) that identified investment risk of

a target market to be a moderator of the relation-ship between cultural distance and entry modechoice. Our results of moderator effects across priorstudies yielded some important findings that can beused in future research. Researchers exploringcultural distance in future studies also need toconsider a greater range of moderator effects at theMNE level for the field to advance.

Alternative theoretical rationale may exist toexplain the relationship of cultural distance withentry mode choice, international diversification,and performance. Present international businessresearch models are overwhelmingly based on thetheoretical assumptions of transaction cost eco-nomics (Caves, 1996). Even though operating indifferent countries may require different manage-rial skills and MNE strategies, national culturaldifferences may have little direct effect on specificstrategic variables and MNE performance. It ispossible, for example, that past experiences withinternational operations in culturally distant mar-kets influence future perceptions and internationalexpansion decisions more heavily than actualsituations. Thus, deeper insights may be gainedthrough the examination of decision heuristicsfrom the perspectives of prospect theory and othertheories.

Further, to improve the replicability of findings,authors and editors should include basic statistics,such as means, standard deviations, and correla-tions, in published articles. Although failure toreport basic statistical information is likely due tojournal page limitations, these data are necessaryfor secondary research, such as meta-analysis. Thatis not to suggest that reporting basic statisticsshould consume limited journal pages. Rather, to




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overcome this limitation, authors and editors couldmake basic statistics of articles available on thejournals websites.

In conclusion, this study examined the relation-ship of cultural distance with entry mode choice,

international diversification, and MNE perfor-mance. Results of the meta-analysis provided noevidence of a systematic direct effect of culturaldistance. However, meta-analytic examination of moderators, such as measurement instrument used,MNE-origin, industry type, country of investment,and sample time-frame, have yielded importantinsights that can provide direction for buildingmore rigorous research. The results of this studyhave important implications for the futuredevelopment of the field. Most importantly,researchers need to guide their work by considering

alternative theoretical reasons and methodologicalchoices for the examination of the effect of culturaldistance on international strategies and MNEperformance.

Acknowledgements We thank Keith Brouthers, David Ralston, and partici-pants of the International Management Division at the Academy of Management 2003 Annual Conferencefor their helpful comments on earlier drafts of thispaper. We also thank Departmental Editor AnandSwaminathan and the JIBS anonymous reviewers for

their insights and suggestions.Notes

1 Studies examining the effects of cultural distanceon international strategies and MNE performance tend

to focus on the differences in national value systems.Consistent with prior studies in this area, we rely on avalue-based conceptualization of culture . National dif-ferences can be studied along other characteristics,such as religion, wealth, or membership in language

families (e.g., Triandis, 1994).2 This measure is calculated as:

CD j X4

i1 I ij I ih

2 V ih i, 4where CD j stands for the cultural distance betweenthe j th country and the home country (US), I ij isthe index of the i th cultural dimension (e.g., indivi-duality, power distance, masculinityfemininity, anduncertainty avoidance), I ih is the cultural dimensionindex for the multinational firms home country(US), and V i is the variance of the index in the i th

dimension.3 To gain further insights into this issue, we con-ducted supplemental analysis employing the riskpropensity of the MNEs home country, followingthe study by Brouthers and Brouthers (2003). Wecoded our studies as using samples of MNEs from highor low uncertainty avoidance cultures by employingthe quartiles of Hofstedes (1980) uncertainty avoid-ance index. Results did not indicate a statisticallysignificant association between cultural distance andentry mode choice for MNEs emanating from highuncertainty avoidance cultures ( r r 0.0299), such as

Japan and Korea. However, we found a strongnegative relationship between cultural distance andentry mode choice for MNEs from low uncertaintyavoidance cultures ( r r 0.2353), such as Sweden, theUK, and the US.

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About the authorsLaszlo Tihanyi is an assistant professor of manage-ment at the Michael F Price College of Business,University of Oklahoma. He received his Ph.D.from Indiana University. His research interestsinclude international diversification, corporategovernance in multinational firms, and organiza-tional adaptation in transition economies.

David A Griffith is an assistant professor of marketing and supply chain management at the




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Eli Broad Graduate School of Management, Michi-gan State University. His current research interestsare in the areas of international marketing/supplychain management strategy and the influence of culture in international business.

Craig J Russell is a professor of business administra-tion and psychology at the University of Oklahoma.He received his Ph.D. degree from the University of Iowa. His research interests focus on personnelselection, EEO compliance, and research methods.

References marked with * indicate those studies included in the meta-analysis.

Accepted by Anand Swaminathan, Departmental Editor, 29 September 2004. This paper has been with the author for two revisions.




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