The Effect of Cultural Distance on Subsidiary
Performance: Influencing the relationship
through MNE assets and strategy
Roos Miltenburg
11921684
23 June 2018
Msc. Business Administration – International Management
Amsterdam Business School
Supervisor: Dr. Niccolò Pisani
Second Reader: Dr. Vittoria Scalera Master Thesis – Final version
STATEMENT OF ORIGINALITY
This document is written by Roos Miltenburg who declares to full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used to create it.
The faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
ABSTRACT
Cultural distance and its effects on internalization have received extensive attention in the academic literature. Nevertheless, the empirical evidence remains inconclusive on the role of cultural distance on subsidiary performance. Central to much of the international management literature is the belief that cultural distance results in negative performance outcomes. However, recent studies have offered a more positive perspective on the impact of cultural distance. The objective of this study is to balance these two perspectives and provide more clarity on the relationship between cultural distance and subsidiary performance. Furthermore, this research examines how the relationship between cultural distance and subsidiary performance can be influenced by the firm’s corporate level by incorporating marketing, technological and financial assets as well as strategy. By applying data from the Global Fortune 500 for the fiscal year 2016, this research finds that cultural distance is positively related to subsidiary performance. Moreover, the findings provide support for a negative moderating effect of MNE marketing assets and a positive combined moderating effect of MNE marketing assets and a global MNE strategy. The other moderating effects are not supported. This research contributes to the academic literature by shedding a positive light on the complex relationship between cultural distance and subsidiary performance as well as providing novel insights on the factors that moderate it.
Keywords: Cultural distance, subsidiary performance, MNE, marketing assets, technological assets, financial assets, strategy
TABLE OF CONTENTS
1.INTRODUCTION………………5
2. LITERATURE REVIEW………....9
2.1 Cultural distance………...9
2.2. Cultural distance and performance……….….……….13
2.2.1 MNE performance………. ….…...13
2.2.2 Subsidiary performance………...15
2.3 Research gap………...17
3. THEORY DEVELOPMENT…… ………...19
3.1 Cultural distance and subsidiary performance………...19
3.2 MNE marketing, technological and financial assets………...………...23
3.2.1 MNE marketing assets………...23
3.2.2. MNE technological assets……….26
3.2.3. MNE financial assets……….28
3.3 MNE strategy……….………....30
4. METHODS………...………...……34
4.1 Sample and data collection………...34
4.2 Variables………...35
4.2.1 Dependent variable………...35
4.2.2 Independent variable………..35
4.2.3 Moderating variables………...36
4.2.4. Control variables………...37
4.3 Data analysis and results………...39
5. DISCUSSION………...47
5.1 Academic relevance………...48
5.2 Managerial implications………...51
5.3 Limitations and further research………...52
6. CONCLUSION………...54
ACKNOWLEDGEMENT………...56
REFERENCES………...57
LIST OF FIGURES………... Figure 1. Conceptual model………...33
LIST OF TABLES………... Table 1. Variable operationalization………...38
Table 2. Descriptive statistics………...44
1. INTRODUCTION
During the last decades, the world is becoming more interconnected than ever before.
Worldwide trade and internationalization are increasing and firms come into contact with various cultures. The exposure to distinct cultures creates ample opportunities but also presents challenges in dealing with cultural differences.
Firms that are especially concerned with different cultures are multinational enterprises (MNEs). MNEs are firms that conduct business through local subsidiaries in different host countries (Kostova, Marano & Tallman, 2016a). These subsidiaries operate within the MNE’s network that consists of regional, divisional and corporate headquarters. The corporate headquarter relates to the office where the MNE’s parent is located and which is, thus, the MNE’s home country (Goold & Campbell, 2002). The global dispersion of subsidiaries exposes MNEs to diverse cultural environments. (Bartlett & Ghoshal, 1998; Johanson & Vahlne, 1977; Kostova & Zaheer, 1999). In this regard, the differences in national culture that MNEs face, between their home country and the countries were their subsidiaries are located, is defined as cultural distance.
The role of cultural distance in MNE’s internationalization paths attracted the interest of many scholars. Notably, the extensive attention for this construct within the international management literature leds some to claim that “essentially, international management is the management of distance” (Zaheer, Schomaker & Nachum, 2012:19). Central to much of the international management literature is the belief that cultural distance has a negative effect on MNE’s internationalization (Beugelsdijk, Kostova, Kunst, Spadafora, & van Essen, 2018).
Especially, concerning performance, the role of cultural distance is considered to be negative. The existing literature distinguishes between MNE level and subsidiary level of performance (Beugelsdijk et al., 2018). In this regard, subsidiary performance entails the performance outcomes at the local subsidiary level, while MNE performance is the performance
of the overall MNE at the corporate level.
The previous literature seems to conclude that there is no evident relationship between cultural distance and MNE performance (Tihanyi, Griffith and Russel, 2005). However, in relation to subsidiary performance, the literature holds the dominant belief that cultural distance decreases performance (Stahl & Tung, 2015). Due to the increased complexity and uncertainty resulting from culturally different environments, subsidiary performance is likely to be impacted negatively (Beugelsdijk et al., 2018). Nevertheless, recent studies offer a more positive view of the effects of cultural differences. According to these scholars, the dominant focus on the negative aspects of cultural distance has de-emphasized the potential advantages of distance, such as exploration benefits and enhanced creativity (Stahl & Tung, 2015).
Moreover, the empirical evidence on this relationship between cultural distance and subsidiary performance remains inconclusive. Although there is support for a negative role of cultural distance, other academics find positive effects (Beugelsdijk et al., 2018; Park & Ungson, 1997). Therefore, there is a need to revisit the existing assumptions about cultural distance and provide more clarity on the relationship between cultural distance and subsidiary performance.
Furthermore, the previous literature argues that this inconsistency in findings results from oversimplification of the association between cultural distance and subsidiary performance (Beugelsdijk et al., 2018; Zaheer, 1995). Therefore, the objective of this research is to develop a more inclusive view of the relationship between cultural distance and subsidiary performance and the factors that influence it. The existing literature shows that relatively little is known about how MNEs affect this specific relationship. Hence, by investigating how MNEs can influence the relationship between cultural distance and subsidiary performance, this research provides more clarity on the complicated relationship and identifies ways to enhance subsidiary performance in
culturally distant countries. Accordingly, this research answers the following question: “How can MNEs influence the relationship between cultural distance and subsidiary performance?”
This research especially analyses how the relationship between cultural distance and subsidiary performance is influenced by the MNE’s corporate headquarter. Therefore, this work researches this question within the internal organizational context of the MNE, which consists of the procedures, strategies, and assets applied by the MNE and its subsidiaries (Kostova, Nell & Hoenen, 2016b) Notably, this research studies the moderating effects of the MNE’s corporate level marketing, technological and financial assets, as well as strategy (Delios & Beamish, 2001; Kostova et al., 2016b). The impact of these factors in relation to subsidiary performance and cultural distance is proven. However, the moderating effects of a multinationals corporate assets and strategy on the relationship between cultural distance and subsidiary performance provides new insights.
The relationship between cultural distance and subsidiary performance as well as the moderating effects of MNE assets and strategy are empirically tested among the Fortune Global 500 firms and their subsidiaries. Previous studies that examine this relationship only include one home or host country as a reference for cultural distance. However, this makes it difficult to ascribe the findings to cultural differences (Van Hoorn & Maseland, 2016). In contrast, this research studies these relationships among multiple home and host countries, which increases the reliability of the results.
The outcomes of this research provide strong empirical support for a positive association between cultural distance and subsidiary performance. Regarding the moderators, the results indicate a combined positive effect of MNE strategy and MNE marketing assets, as well as a negative influence of MNE marketing assets. Other moderating variables do not seem to influence the relationship between cultural distance and subsidiary performance.
This research contributes to the international management literature by shedding a different light on the role of cultural distance on subsidiary performance. By providing support for a positive relationship, this research shows that the existing ideas underlying cultural distance need to be revisited. Furthermore, this research presents new insights on how MNE’s can influence the effect of cultural distance on subsidiary performance by combining a global strategy with MNE marketing assets. These are practical findings that are highly valuable for MNEs.
The next section of this research discusses the relevant literature related to cultural distance and performance. Next, the theoretical model and hypotheses are presented, after which the methods and results will be described. The final section discusses the findings in the light of the existing research and provides a conclusion.
2. LITERATURE REVIEW 2.1 Cultural Distance
MNEs operate through a network of local subsidiaries, involving geographic distance and diverse contextual settings, which inevitably creates challenges. Managing these different contexts is an essential task for MNEs in order to improve performance and operations at the level of the MNE as well as the subsidiary (Beugelsdijk et al., 2017; Kostova et al., 2016b).
The concept of distance can be divided into cultural, institutional, geographic and economic distance (Ghemawat, 2003; Hutzschenreuter, Kleindienst & Lange, 2016). Of these constructs, cultural distance is often believed to be one of the most significant issues for MNEs when internationalizing. These challenges are resulting from the idea that culture is tacit and has a significant influence on knowledge sharing, management and employee behavior within the MNE and its subsidiaries (Håkanson & Ambos, 2010; Hutzschenreuter & Voll, 2008).
Since the 1980’s, the number of studies that focus on the effects of cultural distance is rising enormously (Beugelsdijk et al., 2018). However, the first articles emphasizing the importance of culture in internationalization processes date back to Johanson and Vahlne’s (1977) Uppsala model and even to Beckerman’s (1956) analysis of distance and trade in Europe.
The first major research on cultural distance is Kogut and Singh’s (1988) operationalization of Hofstede’s dimensions of national culture. According to Hofstede (1980), national culture can be identified by investigating core norms and values (Magnusson, Baack, Zdravkovic, Staub, & Amine, 2008). His survey on work-related values in IBM subsidiaries in over 40 countries led to the development of four dimensions of national culture: power distance, individualism, masculinity and uncertainty avoidance (Beugelsdijk et al., 2018). Eventually, the four dimensions expanded to six by the addition of long-term orientation and indulgence versus restraint (Beugelsdijk et al., 2018; Hofstede & Minkov, 2010). Hofstede (1980) argues that the distance between national
cultures can be calculated via the differences on the cultural dimensions (Magnusson et al., 2008). This suggestion provided leeway for Kogut and Singh (1988) to develop a cultural distance index based on the scores of Hofstede’s dimensions between country pairs (Beugelsdijk et al., 2018; Magnusson et al., 2008).
Although the Kogut and Singh Index (KSI) remains the most popular method in cultural distance studies, it has received a lot of criticism (Kirkman, Lowe & Gibson, 2006). Multiple scholars argue that the index is conceptually and methodologically flawed (Shenkar, 2001). Furthermore, scholars claim that Hofstede’s data is outdated and lacks exhaustiveness among the cultural dimensions and sample (Drogendijk & Slangen, 2006; Schwartz, 1994; Shenkar, 2001). The critique on Hofstede’s database led to the development of different culture studies and cultural distance measures. Schwartz’(1994) dimensions of national culture, perceptual measures, and the Mahanalobis index are other studies and measures that are frequently employed (Drogendijk & Slangen, 2006). Nevertheless, the majority of cultural distance studies still apply the Kogut and Singh index (1988), including Hofstede’s (1980) dimensions (Hutzschenreuter et al., 2016; Kirkman et al., 2006). Its popularity is mainly a result of its usefulness, high explanatory power and the large sample of countries and people included (Drogendijk & Slangen, 2006; Hutzschenreuter et al., 2016).
The popularity of the measure also significantly increased the amount of cultural distance research. The topic is studied in relation to numerous internationalization processes, such as entry mode strategies (e.g. Malhotra, Sivakumar, & Zhu, 2011; Morschett, Schramm-Klein & Swoboda, 2010), location choice (e.g. Holburn & Zelner, 2010) and performance (Beugelsdijk et al., 2018; Gomez- Mejia & Palich, 1997). Although the outcomes of these studies differ, they often claim that culture has a profound effect on the internationalization process of MNEs (Beugelsdijk et al., 2018; Kostova et al., 2016a).
Central to much of the cultural distance research is the belief that entering culturally distant countries comes with benefits and costs. Internationalizing into distant countries allows MNEs to share knowledge, link dispersed operations and exploit their existing assets in many more markets than before (Beugelsdijk et al., 2017; Birkinshaw, 1997; Morosini, Shane & Singh, 1998). Furthermore, the exposure to different ideas and norms increases creativity and the potential for new knowledge discovery.
Nevertheless, MNEs also face complexity and uncertainty when entering culturally distant environments, which results in high coordination, control and communication costs (Beugelsdijk et al., 2018). This complexity is the result of the different values, norms, and beliefs that every country is characterized by. In turn, these cultural differences influence product demand, consumer preferences, supplier relationships and employee management styles (Abrahamson & Fombrun, 1994; Delios & Beamish, 2001). Additionally, in dealing with these differences, the MNE is at a disadvantage against local competitors who are familiar with the market (Lu & Beamish, 2004; Vermeulen & Barkema, 2002). These challenges not only require the MNE to adapt to the cultural environment in order to gain legitimacy, but it also obliges them to deal with local competitors. These issues relate to the liabilities of foreignness and newness (Abrahamson & Fombrun, 1994; Beugelsdijk, Slangen, Maseland & Onrust, 2014; Delios & Beamish, 2001; Nachum, 2003; Zaheer, 1995
Next to pressures from the subsidiaries’ country the MNE is also influenced by their domestic home country. Integrating the subsidiary within the MNE network while also adhering to the local regulations of the home country opposes the subsidiary with dualistic pressures (Beugelsdijk et al., 2014). Additionally, it can create communication challenges.
As this section indicated, cultural distance has become a widespread construct within the international management literature. Nevertheless, the effect of cultural distance on performance
is creating some discussion among scholars. Therefore, the following section will provide more clarity on this association. First, the effect on MNE performance will be considered, followed by a discussion on the relationship between cultural distance and subsidiary performance.
2.2 Cultural distance and subsidiary performance
2.2.1 MNE performance
The motivation for entering culturally distant countries differs per MNE, but the goal is often similar; reaping potential opportunities and improving performance. MNE performance relates to the firms’ performance at the level of the MNE. This is often defined as the level of the corporate, divisional or regional headquarter. However, this research is interested in the performance of the MNE as well as the subsidiary. Therefore, the focus will be on the level of the corporate headquarter (Goold & Campbell, 2002).
Although multiple scholars study the impact of cultural distance on MNE performance, no clear direction of this relationship is concluded. The most prevailing view in the theoretical literature is that cultural distance has an adverse effect on MNE performance (Beugelsdijk et al., 2018; Hutzschenreuter & Voll, 2008). According to multiple scholars, this is due to the increased complexity and uncertainty that MNEs face when they enter culturally distant countries. This complexity and uncertainty increases the costs of communication, coordination, and control, as well as the transaction costs. Moreover, distance complicates integration and knowledge transfer within the MNE’s network and limits standardization, thereby negatively affecting performance at MNE level (Beugelsdijk et al., 2018; Kostova et al., 2016b; Luo & Peng, 1999).
In contrast, other scholars argue that cultural distance can improve MNE performance. These studies state that MNEs can acquire new complementary competencies in distant countries that enhance their resource and development capabilities and positively influence performance (Birkinshaw, 1997; Morosini, Shane & Singh, 1998). Additionally, O’Grady and Lane (1997) and Evans and Mavondo (2002: 518) claim that when entering culturally distant countries “firms will undertake more extensive research and planning, which improves their strategic decision making and, ultimately, organizational performance” in contrast to close-by countries.
Nevertheless, the empirical evidence for this relationship remains rather mixed. In meta-analyses on the role of cultural distance on MNE performance Tihanyi, Griffith and Russel (2005) and Magnusson et al. (2008) present a small negative relationship. However, Tihanyi et al. (2005) argue that this outcome is the result of a small sample size and conclude that no direct association is evident. Reus and Rottig (2009) come to the same conclusion and show that the effect of cultural distance on performance is unclear. Furthermore, Morosini et al. (1998) present a positive relationship between cultural distance and merger and acquisition performance, while Gomez-Mejia and Palich (1997) claim that entering culturally similar countries does not lead to higher MNE performance.
As the presented studies show, there are conflicting and incomplete results regarding the relationship between cultural distance and MNE performance (Zaheer et al., 2012). According to Beugelsdijk et al. (2018), these incomplete outcomes might be the result of a failure of the existing research to differentiate between MNE and subsidiary performance. Therefore, in the next section, the impact of cultural distance on subsidiary level performance is discussed.
2.2.2 Subsidiary performance
Although the effect of cultural distance on performance is generally reviewed at MNE level, Beugelsdijk et al. (2018) indicate that comparing performance between MNE and subsidiary level provides more interesting insights.
Previous literature studied the factors that influence subsidiary performance. Chang, Gong and Peng (2012) show that expatriate competencies positively influence subsidiary performance, whereas Delios and Beamish (2001) present a positive relationship between intangible assets, host country experience and subsidiary performance. Furthermore, cultural distance is researched in relation to subsidiaries, such as Kostova et al. (2016b), who propose a new model for MNE – subsidiary relationships within the organizational, institutional and cultural context of the MNE
Nevertheless, the findings of studies that investigate the direct effect between cultural distance and subsidiary performance remain empirically mixed (Berry, Guillén, Zhou, 2010; Shenkar, 2001). Beugelsdijk et al. (2018) examine multiple studies on the relationship between cultural distance and performance. By distinguishing between MNE and subsidiary level of analysis, they claim that the relationship between cultural distance and subsidiary performance is negative. In contrast, cultural distance does not affect performance at the level of the MNE. The conclusion that the relationship between cultural distance and MNE performance is not negative seems logical since MNEs would not be internationalizing if it would result in negative performance. Hence, according to these scholars, it seems that the benefits of internationalization to culturally distant countries are reaped at MNE level, while the costs arise at the level of the subsidiary. Consequently, the costs surpass the benefits at the subsidiary level, which results in negative subsidiary performance. Li and Guisinger (1991) also find support for a negative relationship. According to these authors, subsidiaries are primarily influenced by their MNE’s home country culture. Whenever the cultural distance between the MNE’s home country and
subsidiaries’ countries increase, this decreases the MNE’s capacity to manage foreign subsidiaries. As a consequence, subsidiaries from culturally distant MNEs are more likely to fail than subsidiaries owned by MNEs from culturally close countries (Kogut & Singh, 1988; Li & Guisinger, 1991).
In contrast, Park and Ungson (1997) present different findings. These scholars show that joint ventures that experience a larger cultural distance face lower dissolution rates. This outcome is the result of the positive effects of cross-border learning that surpass the negative impact of cultural distance (Barkema, Bell & Pennings, 1996). Culturally different environments provide opportunities for enhanced creativity and acquiring valuable new knowledge, which can create synergies with the MNE’s existing assets (Stahl & Tung, 2015) In this manner, new strategic assets are created that lead to competitive advantages in the subsidiary’s country and positively impact performance (Stahl & Tung, 2015).
Furthermore, Stahl and Tung (2015) and Stahl, Tung, Kostova and Bruhn (2016) argue that the existing literature on cultural diversity predominantly focusses on the negative relationship between cultural distance and organizational outcomes, including subsidiary performance. Consequently, the positive relationship between cultural distance and subsidiary performance is neglected in the international management literature.
The empirical evidence on the relationship between cultural distance and subsidiary performance thus remains debated. Multiple scholars state this inconsistency in findings is a result of the complexity of the relationship and the fact that it is often oversimplified (Zaheer et al., 2012). Therefore, this research aims to provide more clarity on this relationship and the factors that moderate it.
2.3 Research gap
As the literature review indicates, the relationship between cultural distance and performance is highly debated (Beugelsdijk et al., 2018). The prevalent view in the theoretical literature is that cultural distance has a negative impact on MNE performance. However, the empirical evidence shows little support for a direct relationship.
Previous studies also remain inconclusive about the role of cultural distance on subsidiary performance. Although some scholars present a positive relationship (Park & Ungson, 1997), others find for a negative effect of cultural distance on subsidiary performance (Beugelsdijk et al., 2018; Li & Guisinger, 1991). Furthermore, a recent stream of literature argues that the existing studies are biased towards the adverse effects of cultural difference. Accordingly, more attention should be paid to the advantages of cultural distance (Stahl & Tung, 2015; Stahl et al., 2016). Therefore, this research believes that there is a need to revisit the existing assumptions about cultural distance and provide more clarity on the relationship between cultural distance and subsidiary performance.
Additionally, multiple scholars argue that the inconclusive findings concerning the relationship between cultural distance and subsidiary performance are a result of oversimplification of the relationship (Zaheer, 1995). Moreover, little is known of the factors that moderate this relationship (Beugelsdijk et al., 2018; Zaheer, 1995). Consequently, this research expands the existing literature by developing a more inclusive model of the relationship between cultural distance and subsidiary performance, and the factors that moderate it. By investigating this relationship within the MNE’s internal organizational context, this research investigates the influence of the MNEs’ corporate level on the relationship between cultural distance and subsidiary performance. Accordingly, the following question is answered: “How can MNEs influence the
relationship between cultural distance and subsidiary performance?”
In order to provide an answer to this question, this research discusses the moderating effect of MNE’s marketing, technological and financial assets and strategy. The existing literature shows the relevance of these factors in relation to cultural distance and subsidiary performance (Delios & Beamish, 2001; Kostova et al., 2016b). However, the influence of these factors on the relationship between cultural distance and subsidiary performance is not investigated yet. Therefore, this remains an interesting line of research.
3. THEORY DEVELOPMENT 3.1 Cultural distance and subsidiary performance
The relationship between cultural distance and subsidiary performance is under discussion in the existing literature. From a theoretical and empirical perspective, there seems to be an indication for a negative as well as a positive relationship. Therefore, this research presents two alternative hypotheses. First, the arguments that support a negative effect of cultural distance on subsidiary performance are presented. Thereafter, claims in favor of a positive relationship are made.
One advantage of entering more countries is the possibility to exploit the MNE’s existing assets in more markets. Nevertheless, these exploitation effects are not always positive in culturally distant countries. Whenever the cultural differences between the MNE’s home country and the subsidiary’s country become too large, this creates difficulties for the subsidiary in understanding local norms, values, and preferences. In turn, this complicates the adaption and implementation processes of the subsidiary and the introduction of products (Stahl et al., 2015). Thereby, increasing operation costs at the level of the subsidiary (Edman, 2016). According to this perspective, exploitation benefits can be best achieved whenever the cultural differences between countries are not too significant (Barkema & Drogendijk, 2007). Furthermore, cultural distance also has the potential to decrease legitimacy in the new host country (Kostova & Zaheer, 1999; Stahl et al., 2016). Consumers and suppliers in the local host country often perceive subsidiaries originating from MNE’s of culturally distant countries as foreign and outsiders, especially compared to local competitors (Edman, 2016). According to the traditional international management literature, this is liability for the subsidiary (Hymer, 1976; Stahl et al., 2016; Zaheer, 1995). The perception of being foreign often results in high relational and transactional costs, due to difficulties in adapting to the local culture and a failure to become integrated with local networks (Kostova & Zaheer,
1999; Stahl et al., 2016). In turn, this leads to challenges in gaining credibility and legitimacy in the subsidiary’s country (Henisz, 2002).
Although entering culturally distant countries increases costs, it also brings benefits. Nevertheless, these benefits are more likely to be reaped at the MNE’s corporate level, while the costs appear at the level of the subsidiary. Thus, although internationalizing has positive outcomes, these are not realized at the subsidiary level. In contrast, the costs exceed the benefits at this level and result in a negative relationship between cultural distance and subsidiary performance (Beugelsdijk et al., 2017; Beugelsdijk et al., 2018).
Additionally, the costs of internationalization are often underestimated at the subsidiary (Winkler, Dibbern & Heinzl, 2008; Larsen, Manning, & Pedersen, 2013). Judging the costs and benefits of internationalization is difficult since managers are influenced by biases, such as over-optimism about their qualities or downplaying previous negative experiences with distance (Kahneman and Tversky, 1979). Moreover, cultural distance comes with ‘hidden costs’ that increase when the distance is larger (Larsen et al., 2013). Through these mechanisms, the costs of entering culturally distant countries are often underestimated. Consequently, the actual costs surpass the benefits (Beugelsdijk et al., 2017; Foss & Lindenberg, 2013).
Hence, since cultural distance is likely to bring increased costs at the subsidiary level, this will create an imbalance between the costs and benefits and results in negative subsidiary performance. Therefore, this research proposes the following hypothesis:
However, others scholars, including Stahl & Tung (2015) and Stahl et al. (2016), shed a different light on this discussion. According to these academics, the international management literature is predominantly focused on the negative aspects of cultural distance. Thereby, de-emphasizing the positive role of cultural distance on organizational outcomes, such as subsidiary performance. According to this perspective, scholars and firms generally perceive cultural distance as a barrier, which leads to a clear focus on the costs, difficulties, and challenges associated with entering culturally distant countries. However, the empirical evidence on the role of cultural distance remains mixed, indicating that cultural differences also have a positive impact on subsidiary performance (Stahl & Tung, 2015; Stahl et al., 2016). By taking the Positive Organizational Scholarship (POS) lens, these scholars argue for more research on the positive effects of cultural differences (Stahl & Tung, 2015; Stahl et al., 2016).
One of the most noted advantages of entering culturally distant countries are the possibilities for exploration. Exploration relates to the search, analysis, and experimentation with new skills, knowledge, and resources in order to enlarge the MNE’s existing knowledge and skills base (March, 1991). Culturally distant environments expose subsidiaries to different views, ideas, and routines through which new processes, innovations, and products can be developed that are complementary to the MNE’s existing assets (Barkema & Vermeulen, 1998; Björkman, Stahl & Varaa, 2007; Stahl et al., 2015). These cultural differences and opposing ideas help the subsidiary to overcome inertia and rigidity with their competitive assets (Morosini et al., 1998). Moreover, as O’Grady and Lane (1997) argue, entering culturally distant environments makes the cultural differences between countries more salient and encourages subsidiaries to conduct more in-depth research on the new environment to understand it. Accordingly, this increases the possibility of identifying knowledge, skills or processes that provide a synergy with the MNE’s existing assets. In contrast, these differences may be overlooked in less distant countries, through which
opportunities for discovering new knowledge and skills are also missed (O’Grady & Lane, 1997). According to the Resource Based View, MNE’s assets create a sustainable competitive advantage that is positively related to performance (Verbeke & Yuan, 2013). Whenever foreign subsidiaries effectively identify and combine the new strategic assets with the MNE’s existing assets a competitive advantage is created that is difficult to imitate for competitors (Morosini et al., 1998; Stahl et al., 2015). Consequently, this has a positive effect on subsidiary performance in the host country.
As discussed, the international management literature generally perceives ‘foreignness’ as a liability (Hymer, 1976; Stahl et al., 2016; Zaheer, 1995). However, emphasizing your cultural differences can also bring advantages by differentiating the subsidiary from local competitors. In this way, highlighting the subsidiary’s foreignness provides a sustainable competitive advantage over local players, which positively influences subsidiary performance (Edman, 2016; Stahl et al., 2016). Accentuating your culturally distinct features as a subsidiary is effective when marketing products and services. However, it also works when attracting employees (Edman, 2016; Fuller, 2009).
The traditional international management literature predominantly focuses on the costs of cultural distance. Therefore, the relationship between cultural distance and subsidiary performance has long been hypothesized as negative. Nevertheless, recent studies pay more attention to the benefits of cultural distance, which can outweigh the costs and result in a positive relationship between cultural distance and subsidiary performance. Hence, this research presents the following competing hypothesis:
3.2 MNE marketing, technological and financial assets
3.2.1 MNE marketing assets
Multiple factors have the potential to influence the relationship between cultural distance and subsidiary performance. Assets are one of these factors. MNE assets are items, knowledge or properties owned by the MNE that help the firm to reach its goals (Barney, 1991). Especially, corporate level assets are of value for the subsidiary, since subsidiaries frequently rely on assets created in the corporate headquarter for their competitiveness (Birkinshaw & Hood, 1998; Delios & Beamish, 2001).
As the earlier section indicated, entering culturally distant countries comes with costs as well as benefits, which result in negative or positive subsidiary performance. Every country is characterized by different cultural values, product demands, competitors, suppliers, and employees (Abrahamson & Fombrun, 1994; Delios & Beamish, 2001). These uncertainties and cultural differences require the MNE to understand the local environment and adapt to it in an adequate manner (Abrahamson & Fombrun, 1994; Delios & Beamish, 2001). For example, through marketing knowledge and skills
Marketing knowledge relates to the ability to gain market insights, develop brands and sell products (Fang, Wade, Delios & Beamish, 2007). Previous studies show that marketing assets held by the MNE are positively related to subsidiary performance (Delios & Beamish, 2001; Fang, Wade, Delios &Beamish, 2013). However, these assets can also influence the relationship between cultural distance and subsidiary performance.
Due to the distinct culture of every country the subsidiary is required to adjust their marketing strategies, product offerings and advertising campaigns to the host country. Especially, whenever a subsidiary is new in a country, large cultural differences urge the subsidiary to acquire local marketing knowledge. In this situation, applying general marketing assets or transferring
brands from the MNE’s corporate level is less useful, because of to the need for local knowledge and adaptation (Fang, Jiang, Makino & Beamish, 2010). Therefore, during the first steps of internationalization in a new country, the moderating impact of MNE marketing assets on the relationship between cultural distance and subsidiary performance is limited (Fang et al., 2010).
However, in order to achieve long-term competitiveness in the culturally distant country, MNE level marketing knowledge is valuable. The longer a subsidiary is established in the host country, the more local marketing knowledge and experience is gained. When the subsidiary combines this local knowledge with general marketing knowledge and skills from the MNE, they create a competitive advantage against local competitors. Since local firms lack this MNE marketing knowledge, this bundle of knowledge is difficult to imitate. Accordingly, the combination of MNE and local marketing knowledge can overcome the issues concerning legitimacy in the host country and positively influences subsidiary performance. Moreover, the subsidiary’s urge to acquire local marketing knowledge increases the absorptive capacity for different types of knowledge, including skills and knowledge held by the MNE, which will, therefore, be better integrated in the subsidiary (Fang et al., 2010).
According to scholars in favor of a negative relationship between cultural distance and subsidiary performance, large cultural differences increase costs and diminish the subsidiary’s legitimacy in the host country. However, when a subsidiary enters a culturally distant country it is urged to acquire local knowledge. By combining this local knowledge with MNE marketing knowledge, the subsidiary can positively use its cultural differences to create a competitive advantage over local competitors and increase its legitimacy. Consequently, a higher level of MNE marketing assets mitigates the negative and strengthens the positive effect of cultural distance on subsidiary performance.
differences between the subsidiary’s country and the MNE’s home country are often overestimated. In relation to Shenkar’s (2001) critique, Beugelsdijk et al. (2014) argue that cultural differences also exist within a country due to the existence of multiple subcultures. With regard to the marketing tactic of segmentation, this provides an opportunity for the subsidiary to make use of the cultural heterogeneity. Segmentation is the idea that firms deliberately focus on a couple of homogenous consumer groups who share specific characteristics (Beugelsdijk et al., 2014). Whenever the subsidiary pays attention to target groups that are culturally more similar to their MNE’s home country culture, this provides the possibility to use the MNE’s existing marketing knowledge and skills, as well as surpass some of the impact of cultural distance. Consequently, this also decreases the costs and challenges faced when exploiting products in segments or markets that are culturally too different. Therefore, the more a subsidiary segmentizes the market, the smaller the effect of cultural distance on subsidiary performance is. Additionally, the higher the level of marketing assets, including segmentation skills, held by the MNE’s corporate level, the more proficient the subsidiary is in segmenting the marketing and picking the most relevant target groups. Hence, this research presents the following hypothesis:
Hypothesis 2. The level of marketing assets held by the MNE positively moderates both the relationships hypothesized in H1a and H1b.
3.2.2 MNE technological assets
Next to marketing assets, technological assets also benefit subsidiaries in culturally distant countries. In discussing the moderating effect of the MNE’s technological assets the literature distinguishes between technological knowledge and technological knowledge transfer tools.
Technological knowledge relates to product research and development, machinery development and technological skills and processes (Fang et al., 2013). This type of knowledge is obtained through research and development (R&D) efforts and is often developed at the MNE’s corporate headquarter (Birkinshaw & Hood, 1998; Song, Droge, Hanvanich & Calantone, 2005). As stated earlier, knowledge positively influences the competitive position of the subsidiary. Consequently, this overcomes challenges associated with a liability of newness and a lack of legitimacy, which are negatively related to subsidiary performance. Especially technological knowledge helps subsidiaries in acquiring a competitive advantage in distant countries since it is highly valuable and difficult to duplicate for competitors. Moreover, technological knowledge held by the MNE is generally standardized across multiple countries. Therefore, this type of knowledge requires less modification in the host country compared to marketing knowledge (Ambos & Ambos, 2009).
Nevertheless, weak property rights and transfer difficulties can diminish the potential of knowledge, including technological knowledge, in obtaining a competitively advantageous position (Fang et al., 2007). In particular, knowledge transfer becomes more troublesome with larger cultural distances. Whenever the sender and receiver of knowledge share the same cultural values this makes it easier to decode, comprehend and integrate knowledge. However, in cases of significant cultural distance, as with MNEs and subsidiaries, misinterpretation and misunderstanding may occur (Ambos & Ambos, 2009). Consequently, this results in a loss of knowledge and restricts the possibility to acquire a competitive advantage. Nevertheless,
technological tools held by the MNE can mitigate this issue and improve the transfer of knowledge. These tools include, amongst others, communication mechanisms, knowledge storage systems, and virtual collaboration programs. According to Ambos and Ambos (2009), technological knowledge transfer tools can effectively relocate knowledge to culturally distant countries. To transfer knowledge through these tools, it needs to be codified, which makes it easier to share and decreases misunderstanding. Consequently, this knowledge more easily be ‘de-contextualized and re-contextualized in the new environment’ (Ambos & Ambos, 2009:10). By increasing the effectiveness of knowledge transfer, technological tools improve the flow of knowledge towards the subsidiary. In turn, this positively influences the subsidiary’s competitive advantage and performance.
Hence, this research argues that through the influence of technological knowledge and tools, MNE’s technological assets moderate the relationship between cultural distance and subsidiary performance. This research presents the following hypothesis:
Hypothesis 3. The level of technological assets held by the MNE positively moderates both the relationships hypothesized in H1a and H1b.
3.2.3 MNE financial assets
Aside from marketing and technological assets, one other asset is likely to affect the relationship between cultural distance and subsidiary performance; money. In this regard, the financial health of the MNE, its financial assets and the ability to pay its liabilities, is important. Research shows that the MNE’s financial health and assets have a positive effect on MNE performance (Deloof, 2003; Saleem & Rehman, 2011). However, MNE’s financial assets are also crucial to the subsidiary.
Entering culturally distant countries requires MNEs to adapt their products and services to the local environment in order to overcome cultural differences (Anand & Delios, 2002; Fang et al., 2007). Understanding unfamiliar cultures and adjusting to it takes time and money. Therefore, it is likely that MNEs that are financially healthier have more capabilities and resources to adequately research the local environment and adapt to it in a suitable way.
Furthermore, one recurring problem for subsidiaries in culturally distant countries is their lack of legitimacy. As explained, this issue holds in the face of consumers. However, it can also present problems with local banks or money lenders when the subsidiary tries to raise capital. Luckily, foreign subsidiaries can receive aid from the MNE’s corporate headquarter. When in need of financing, local firms have to obtain money from local institutions. In contrast, the subsidiary can also receive funding from its MNE headquarter, if the MNE has enough financial assets (Manova, Wei & Zhang, 2015). This results in a comparative advantage for the subsidiary in comparison to local competitors and positively influences the relationship between cultural distance and subsidiary performance.
Additionally, issues between local suppliers and subsidiaries are not uncommon when a high level of cultural distance is involved. Due to different cultural values, norms, and miscommunication, this relationship can become problematic. Whenever the MNE has more
financial assets, it can choose to integrate the supplier into the MNE’s network. Via this way, the effect of cultural distance on subsidiary performance is diminished (Manova et al., 2015).
Therefore, based on the idea that financial assets held by the MNE can overcome issues with understanding the local culture, suppliers and raising capital, the following hypothesis is presented:
Hypothesis 4. The level of financial assets held by the MNE positively moderates both the relationships hypothesized in H1a and H1b.
3.3 MNE strategy
MNE strategy is another factor that influences the role of cultural distance on subsidiary performance. An MNE’s strategy relates to the actions taken to achieve an overall goal (Mintzberg & Ahlstrand, 1998). This strategy is often developed and implemented from the corporate headquarter of the MNE. The international management literature has presented multiple typologies of MNE strategy, of which Rugman and Verbeke’s (2004) model on the strategic orientation of MNEs is one of the most prevalent. According to this model, an MNE either uses a regional or global strategy based on the geographic spread of sales. In their research, Rugman and Verbeke (2004) find that the majority of the MNEs apply a regional, instead of a global, strategy. This entails that the sales and focus of these MNEs are dispersed within their home region with, inevitably, lower levels of cultural distance. In contrast, MNEs that apply a global strategy are more internationalized and have their sales and subsidiaries spread over the entire world. These MNEs conduct business in multiple geographical regions and, thus, face more cultural distance (Tihanyi et al., 2005).
Although entering culturally distant countries does inescapably bring cost, this research argues that subsidiaries from MNEs that apply a global strategy face fewer difficulties in distant environments. This outcome is mainly due to two factors.
First of all, since MNEs that employ a global strategy are present in more distant environments, they are more aware of the cultural differences. As explained, when entering these countries, the cultural differences between one’s home country and the new host country become more salient. Accordingly, subsidiaries become more alert and attentive to the differences (Evans & Mavondo, 2002). In order to deal with these cultural discrepancies, subsidiaries will better prepare for the new environment by conducting in-depth research, acquiring country-specific knowledge and paying more attention to adaption (Evans and Mavondo, 2002; O’Grady and Lane,
1997). In contrast, MNEs following a regional strategy are used to focus on countries with a relatively high level of similarity between them. Therefore, significant cultural differences between the MNE’s home country and new culturally distant countries might be overlooked and neglected by the subsidiary. In turn, this could harm subsidiary performance (Dikova, 2009).
A global strategy pays more attention to the cultural differences that exist per country. Hence, the entry of distant countries is not executed in a standardized fashion, but more on a country-to-country base (Evans and Mavondo, 2002; O’Grady and Lane, 1997). In this regard, MNEs do not only rely on their general international experience but especially acquire country-specific knowledge. Something which, according to Dikova (2009), is crucial in overcoming cultural distance and its effects.
Second, as MNEs apply a global strategy, they obtain more practices on how to deal with cultural differences. Through their international diversification in distant countries, experience is gained in tackling cultural distance related issues. Additionally, MNEs obtain international management capabilities and practices that are useful in culturally distant environments. (Siripaisalpipat & Hoshino, 2000). Although adaptation of processes to specific host countries is needed, these experiences and practices can be transferred to other distant countries. Consequently, this decreases the complexity and uncertainty of these new environments (Dikova, 2009). In this manner, a global strategy can limit the effects of cultural distance and moderate the relationship between cultural distance and subsidiary performance. Hence, this research proposes the following hypothesis:
Hypothesis 5. An MNE’s global (versus regional) strategy positively moderates both the relationships hypothesized in H1a and H1b.
MNE marketing and technological assets are argued to moderate the relationship between cultural distance and subsidiary performance. However, the influence of these two assets is further increased a global strategy.
MNE marketing knowledge, as well as local market knowledge, is vital in achieving a competitive advantage in culturally distant countries (Fang et al., 2010). A global strategy further improves the effectiveness of MNE marketing knowledge in distant countries. According to Kim and Aguilera (2015), the world is in a state of semi-globalization. This indicates that the world is divided into multiple regions, consisting of countries characterized by a relatively high level of similarity between them.
Although country-specific marketing knowledge is crucial, this demonstrates that regional marketing and market knowledge are also an advantage to the subsidiary, due to similarities in the environment. Moreover, in this regard, knowledge of applying technological assets in the region can also be beneficial. As a result of their worldwide spread, MNEs applying a global strategy are more likely to have knowledge and experience of multiple regions. Consequently, in this way, a global strategy increases the moderating impact of MNE marketing and technological assets.
Furthermore, a global strategy also supports the transfer of intangible assets to the local subsidiary (Delios & Beamish, 2001). The MNE transfers marketing and technological assets from their corporate headquarter to the culturally distant subsidiaries. Nevertheless, the difficulties associated with transferring knowledge across borders can limit the potential of these assets. Technological tools, such as communication and collaboration mechanisms ease the transfer of knowledge. However, whether knowledge transfer is successful also depends on the MNE’s own ability to relocate assets across borders to distant countries (Delios & Beamish, 2001; Kogut & Zander, 1993). It is likely that MNE’s transfer capabilities are better whenever
the MNE has more experience and subsidiaries in distant countries. Accordingly, an MNE that employs a global strategy is more proficient in transferring knowledge from the corporate headquarter to the culturally distant subsidiary. In turn, this strengthens the moderating impact of marketing and technological assets on the relationship between cultural distance and subsidiary performance. Hence, this research presents the following hypotheses:
Hypothesis 6. Applying a global (instead of a regional) strategy increases the moderating impact of MNE’s marketing assets on both the relationships hypothesized in H1a and H1b.
Hypothesis 7. Applying a global (instead of a regional) strategy increases the moderating impact of MNE’s R&D assets on both the relationships hypothesized in H1a and H1b.
H1a –, H1b + H5 + H2 + H3 + H6 + H4 + H7 +
Figure 1. Conceptual model MNE strategy MNE assets • Technological • Marketing • Financial
Subsidiary
Performance
Cultural
Distance
4. METHODS 4.1 Sample and data collection
This research gathers empirical data among the 500 MNEs of the Fortune Global 500 list. This involves a list of the 500 largest MNEs in the world based on revenue in 2016. Information for the fiscal year 2016 is applied, since not all MNEs have disclosed information on the fiscal year 2017 yet.
The Global Fortune 500 list is an appropriate sample for this research since the majority of these firms are MNEs and the sample size is large, which increases the generalizability of the outcomes (Rugman & Verbeke, 2004). Furthermore, the list provides the possibility to study the hypotheses among a large variety of MNEs and subsidiaries from different countries and industries.
Data for subsidiary performance, MNE and subsidiary countries, MNE strategy, assets and the control variables is collected via Orbis and annual reports for the fiscal year 2016. Data on national culture is obtained from Hofstede’s national culture dataset, which is updated in 2015. Kogut and Singh’s (1998) formula is applied to operationalize the dataset, in order to determine the cultural distance scores (Dimension Data Matrix, n.d.).
The final sample applied in this research is based on some additional criteria. First, Global Fortune 500 firms and subsidiaries located in countries not covered by Hofstede’s (1980) study of national culture are deleted. Furthermore, only wholly-owned subsidiaries are involved in the analysis and MNEs for which no information on their subsidiary performance, strategy or assets could be obtained are not included in the final sample.
4.2 Variables
4.2.1 Dependent variable
Subsidiary performance relates to the performance of the foreign subsidiary. This research operationalizes this variable by subsidiary turnover for the fiscal year 2016, which is in agreement with earlier studies (Christmann, Day & Yip, 1999; Ramsey & Bahia, 2013). Data for this variable is gathered from Orbis.
4.2.2 Independent variable
Cultural distance is defined as the differences in national culture between two countries (Hofstede, 1980). Data for national culture is gathered from Hofstede’s national culture database, which has been updated in 2015 (Dimension Data Matrix, n.d.). Hofstede’s original dataset consisted of four dimensions of national culture, which have eventually been expanded to six. This research focusses on the first five dimensions since these are widely validated (Kirkman, Lowe & Gibson, 2006). The fifth dimension, Long-term orientation, is added since it improves rigor within the construct (Shenkar, 2001). The first four dimensions include power distance, the extent to which unequal distribution of power is accepted, uncertainty avoidance, the extent to which people feel threatened by ambiguity, masculinity versus femininity, whether gender roles are clearly distinct within societies, and collectivism versus individualism, which refers to the degree to which a society is focused on cohesiveness and the group over the individual and finally. The fifth dimension is long-term orientation, which relates to extent to which people are focused on the long or short-term future (Hofstede, 1980; Hofstede & Minkov, 2010).
countries of their subsidiaries, the dataset is operationalized using Kogut and Singh’s formula (1988). The applied formula is found below:
CDj =∑4i=1{(Iij- Ihome)2∕Vi}/4
In this respect, CDj is the ultimate cultural distance score between the MNE home and subsidiary country. Iij stands for the subsidiary’s score on Hofstede’s ith dimension, whereas Ihome is related to MNE’s home country score on this dimension. Finally, Vi is the variance of the specific dimension.
Although the dataset and its operationalization are criticized, it remains one of the most popular methods to calculate cultural distance, due to its large sample and explanatory power. Therefore, this research used this operationalization (Hutzschenreuter et al.,2016; Drogendijk & Slangen, 2006)
4.2.3 Moderating variables
4.2.3.1 MNE marketing, technological and financial assets.
The first moderating variables in this research are MNE’s marketing, technological and financial assets. Marketing and technological assets are the two intangible assets. These variables are operationalized using MNE’s advertising and R&D intensity, as is common in the international management literature (Delios & Beamish, 2001; Kirca, Hult, Roth, Cavusgil, Perryy, Akdeniz & Miller, 2011; Lu & Beamish, 2004). This research calculates advertising and R&D intensity by taking MNE’s advertising and R&D expenditure as a ratio of the MNE revenue
The third moderating variable is financial assets. This variable is measured using gearing, which is the ratio of the total debt divided by the total equity of the MNE. A higher level of gearing thus relates to a lower level of financial assets held by the MNE.
Marketing, technological and financial assets are chosen since they can be transferred from the MNE’s corporate level to the subsidiary and are likely the relationship between cultural distance and subsidiary performance (Kirca et al., 2011).
4.2.3.2 MNE strategy
The second moderating variable is MNE strategy, which involves the overall strategy applied by the MNE. In order to operationalize this variable Rugman and Verbeke’s (2004) model of regional and global strategy is used. Whether a firm employs a global or regional strategy is measured using the percentage of total sales outside the home region of the MNE. Data is collected for the following geographic areas: North America, Europe, Asia, South and Central America, Oceania and other regions. According to Rugman and Verbeke (2004), an MNE employs a global strategy whenever they have a sales dispersion of at least 20 % in Europe, Asia or North America, but less than 50% in any of these regions. In contrast, an MNE applies a regional strategy when at least 50% of their sales comes from their home region (Rugman & Verbeke, 2004). However, following this operationalization Rugman and Verbeke (2004) only found nice MNEs that follow a global strategy. Therefore, in this research, the operationalization of global strategy is loosened. In agreement with other scholars, an MNE applies a global strategy when at least 50% of its sales originates from outside its home region (Oh & Rugman, 2014).
4.2.4. Control variables
For the statistical analyses control variables will be added. The first control variable is firm size, which is via the number of employees. Whenever a firm increases its size it is able to take advantage of economies of scale. However, other studies have shown that a too large size can
also result in negative performance (Lu & Beamish, 2004). Therefore, it should be taken into account (Chao & Kumar, 2010).
The second control variable, firm age, is based upon MNE’s year of incorporation in Orbis. MNE age has shown to impact performance and is consequently relevant to include (Du & Temouri, 2011)
Finally, MNE performance, thus the performance at the corporate level, will be added as the third control variable. It is possible that MNE performance influences subsidiary performance and vice versa and therefore this variable is added.
Table 1. Variable operationalization
Variable Operationalization
Dependent variable
Subsidiary Performance Subsidiary turnover for the fiscal year 2016 in millions of Dollars.
Independent Variable
Cultural Distance Data collected from Hofstede’s dataset on national culture for five dimensions of national culture. Operationalized to measure cultural distance between MNE’s home country and the countries of subsidiaries by the Kogut and Singh (1988) formula.
Moderating variables
MNE Marketing assets Operationalized as marketing intensity. The ratio of MNE marketing expenditure on MNE revenue.
MNE Technological assets Operationalized as R&D intensity. The ratio of MNE R&D expenditure on MNE revenue. MNE Financial assets Operationalized as gearing. The total MNE
debt divided by equity.
MNE strategy A binary variable is created in which a global
strategy is distinguished from a regional strategy. An MNE applies a global strategy whenever more than 50 percent of its revenue originates from outside its home region. Control variables
MNE size The number of employees.
MNE age 2016 - MNE’s year of incorporation.
4.3 Data analysis and results
Before testing the hypothesis, the outliers are removed and missing values are deleted list-wise for subsidiary performance, cultural distance, MNE strategy and the control variables. Due to the limited number of companies reporting information on marketing, technological and financial assets pairwise deletion of these missing values is applied in order to use the dataset to the fullest. After deletion of missing values and outliers, the overall sample of subsidiaries included 4362 affiliates from 85 MNEs. The descriptive statistics for the dataset can be found in table 2. This table indicates that the average subsidiary performance is 576$ million, whereas the average MNE performance is 93,502$ million. The statistics also reveal that the average cultural distance between the MNE’s home country and the host countries of its’ subsidiaries is 1,35, with 0 being the smallest and 6.73 being the largest value. Furthermore, the average MNE age is 87 years and the average size of firms in the sample relates to 238,257 employees.
In order to test the hypotheses hierarchical multiple regression analyses and multiple regressions using the Ordinary Least Square (OLS) method are applied. Before conducting the analyses, a logarithmic transformation is applied on the dependent variable in order to ensure normality (Field, 2009). Furthermore, the correlation between all variables are checked for multicollinearity issues (Field, 2009). Too high correlations between variables might result in misinterpretations and therefore, this value should not be higher than .7. As table 2 indicates, all correlations are lower than .7. Additionally, Tolerance statistics and Variance Inflation Factors (VIFs) are checked (Field, 2009) to further test for multicollinearity. All the tolerance values are below 10 and all the VIFs are above .2, which indicates that there are no multicollinearity issues with this sample.
To test the first two hypotheses, a hierarchical multiple regression model is applied. In the first model, the three control variables are entered and their ability to predict subsidiary
performance is measured. The findings of all the analyses can be found in table 3. This table presents information on the standardized beta coefficients, the standard errors, levels of significance and model fit. Model 1 is statically significant (F (3,4363) = 12.068, p= .000) and explains .4% of the variance of subsidiary performance (Adj. R2= .003). The control variable MNE
performance is not significant, which indicates that there is no support for an effect of this variable on the dependent variable. In contrast, MNE Size (= -.057, t= -2.836, p=.005) and MNE Age (= -.036, t= -2.319, p= .02) are both negatively related to subsidiary performance.
In the model 2, the independent variable cultural distance is added. The addition of cultural distance, next to the control variables, results in an explained variance of .7% (R2 change = .003,
F(1, 4351) = 7.557, p= .000). Interestingly, cultural distance is statistically related to subsidiary performance ( =.050, t= 3.331, p= .001). Cultural distance shows, across all the models, to have a positive, instead of negative, effect on the subsidiary performance. Therefore, hypothesis 1b is accepted in favor of hypothesis 1a.
The next models examine the moderating impact of marketing intensity, R&D intensity, gearing and MNE strategy on the relationships hypothesized in H1a and H1b. In order to analyze the moderating effects of these variables in a regression analysis, the interaction terms are computed. The interaction terms are not mean-centered, since a value of zero is meaningful for cultural distance, as it represents the smallest value possible. In model 3 the variable marketing intensity, as well as the interaction term between marketing intensity and cultural distance, is added to the hierarchical multiple regression model. The model is statically significant and explains 1.2% of the variance on subsidiary performance (R2 change = .005, F(2, 1835)= 3.672, p=.000). When
controlling for all the other predictors, this model indicates that marketing intensity is positively related to subsidiary performance (= .123, t= 2.676, p= .008). Furthermore, the interaction term
between cultural distance and marketing intensity is also statistically significant (= -.123, t= 2.670, p= .002). Nevertheless, the presented direction of the interaction term is negative, instead of the hypothesized positive relationship. Although this does indicate that there is a moderating effect of marketing intensity on the relationship between cultural distance and subsidiary performance, the direction of this influence is negative and therefore, hypothesis 2 is not accepted. Model 4 investigates the moderating impact of MNE R&D intensity on the relationship between cultural distance and subsidiary performance. In order to examine this impact a multiple regression model is used, in which the control variables, cultural distance, the moderating variable R&D intensity and the interaction term between cultural distance and R&D intensity are entered. The results are presented in table 3. Model 4 shows that R&D intensity is positively related to subsidiary performance (= .133, t= 4.087, p= .000). However, the interaction term between cultural distance and R&D intensity is not significant (-.033, t= -.865, p=.387). Consequently, hypothesis 3 is rejected.
Model 5 in table 3 presents the results on the moderating impact of MNE financial assets on the relationship between cultural distance and subsidiary performance. Multiple regressions are conducted, that include the control and independent variables as well as gearing and the interaction term between cultural distance and gearing. MNE’s gearing is statistically related to subsidiary performance ( =-.169, t= -6.105, p= .000). This outcome indicates that for every higher level of gearing, and thus lower level of MNE’s financial assets, subsidiary performance decreases. However, the interaction term is not statistically significant (= -.007, t= -.190, p= .849). Hence, hypothesis 4 is not supported.
The next model examines the moderating impact of MNE strategy on the relationship between cultural distance and subsidiary performance. Multiple regression analysis is applied in
