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The direction of cultural distance on FDI: attractiveness or incongruity?

Linghui Tang (School of Business, College of New Jersey, Ewing, New Jersey, USA)

Cross Cultural Management: An International Journal

ISSN: 1352-7606

Article publication date: 27 April 2012

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Abstract

Purpose

The purpose of this paper is to examine whether the direction of cultural distance in individualism, power distance, uncertainty avoidance, and masculinity affects bilateral foreign direct investment (FDI) activities.

Design/methodology/approach

Panel data that include bilateral FDI between 21 OECD countries, and for FDI from these OECD countries to 14 non‐OECD countries between 1980 and 2000 were used. In addition, hypotheses were tested by using Hofstede's cultural dimensions for FDI between 1980 and 1989 and then by applying the GLOBE (Global Leadership and Organizational Behavior Effectiveness) cultural indices for FDI between 1990 and 2000.

Findings

It was found that difference in individualism between two countries encourages FDI while difference in power distance discourages FDI. In addition, based on Hofstede's cultural scores, the direction of cultural distance matters when a host and a source country differ in uncertainty avoidance and masculinity. However, the finding is mixed with the GLOBE cultural measures.

Research limitations/implications

In this paper, the aggregation of human behavior theory is relied on to develop a theoretical framework. This type of analysis is valid as long as the companies involved are homogenous. Even if multi‐national companies are heterogeneous, the author believes that a bounded rationality is needed to add some discipline and substance to a more comprehensive but less structured analysis/experience at the individual or firm level.

Practical implications

The paper's findings indicate that a complementary relationship exists for FDI between collective and individualistic countries and difference in power distance discourages FDI. In addition, the direction of cultural distance matters for uncertainty avoidance and masculinity. Therefore, it is not always true that companies should shun countries that are culturally different from their home country when making FDI decisions.

Originality/value

The paper makes several contributions to the extant literature. First, the paper responds to the critique by Shenkar, by applying separate rather than the composite cultural distance in empirical research. Second, the paper suggests that cultural distance is not equal to cultural incongruence. Third, this paper is one of the first that uses a sample size that is similar to the number of countries in Hofstede's original study in 1980. Finally, in response to the stability criticism towards Hofstede's framework, this paper tests the cultural impact on FDI by applying both the Hofstede and GLOBE cultural scores.

Keywords

Citation

Tang, L. (2012), "The direction of cultural distance on FDI: attractiveness or incongruity?", Cross Cultural Management: An International Journal, Vol. 19 No. 2, pp. 233-256. https://doi.org/10.1108/13527601211219919

Publisher

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Emerald Group Publishing Limited

Copyright © 2012, Emerald Group Publishing Limited

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