Does managers’ Cultural Intelligence inﬂuence the company’s performance by overcoming the Liability of Foreignness

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Does managers’ Cultural Intelligence influence the

company’s performance by overcoming the Liability of

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1 Introduction

With the development of globalization and diversification, more and more companies choose to go abroad and explore new markets for their products and services. Companies realize the importance of culture differences. To manage a multinational firm requires leaders that not only recognize the technical dimensions of executing business strategies, but also have an acute understanding of the nature of international trade and culture. However, it is common that some companies or people make cultural blunders. Why are some firms or managers more successful than others in a cross-cultural business situation? Cultural Differences in-curred by cultural distance is one of the primary reasons. Alon and Higgins (2005) say that global leadership succeeds through emotional and cultural intelligence. Cultural intelligence (CQ)1is a system of interacting knowledge and skills, linked by cultural metacognition, that allows people to adapt to, select, and shape the cultural aspects of their environment (Elron et al., 2008). Dyne (2012) predicted a variety of impacts of CQ, such as cultural adaptation, expatriate performance, global leadership, intercultural negotiation, and multicultural team processes. These factors decide whether a manager can successfully lead his company.

The concept of liability of foreignness (LoF), was developed by Zheer (1995). The author mentioned that LoF can arise from at least four, not necessarily independent, factors: cost directly related to spatial distance, firm-specific costs, costs from the host country environ-ment and costs from the home country environenviron-ment. It has been argued that to overcome the liability of foreignness and compete successfully against local firms; companies need to provide their overseas subunits with some firm-specific advantages, often in the form of organizational or managerial capabilities (Caves, 1982). Currently, an increasing number of firms choose to expand their business internationally. However, these companies doing busi-ness abroad face costs which domestic companies do not have (Hymer, 1976). Those costs reflects companies’ LoF. When these additional costs are less than the profits, companies can not survive.

Resource-based view of strategy which was introduced by Barney (1991) has stressed the importance of firm-specific resources and organizational capabilities in providing

sus-1_{CQ is short for cultural-intelligence quotient. Originally, the term cultural intelligence and the abbreviation}

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tainable competitive advantage to firms. Barney (1991) argues that human capital is one of the three essential business resources, which includes the capacity of individual managers. Thus, managers’ CQ can be a significant contribution to firm-specific resources and manage-rial capabilities. The intercultural capability of a manager in the company may impact the decision-making, strategic implementation and other performances of the company. This paper is going to discuss whether the manager’s CQ influences the company’s performance of overcoming the LoF. The article investigates if managers in a company who have a higher CQ are better than others to overcome the cultural differences incurred by culture distance, and help companies to reduce the costs of overcoming the LoF and perform better.

The Research Question is: Does managers’cultural intelligence influence the company’s performance by overcoming the Liability of Foreignness?

Firstly, the paper will review previous theory on this issue. Secondly, by means of a case study, four propositions are explored. Two companies will be the research subjects, one is a Chinese company doing business in Netherland, another one is an American company doing business in China. Both companies are small-sized companies and experience LoF in host countries. Through a survey, the managers’ cultural intelligence results will be col-lected. By combining the survey and interviews results, the relationship of managers’ CQ and company performance on overcoming the LoF will be discussed. LoF can be indicated through proxies, such as employee turnover rate and related financial terms. Finally, the paper comes to a conclusion, and limitations are presented.

2 Literature Review

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2.1 Liability of Foreignness

2.1.1 Concept of Liability of Foreignness

Hymer (1976) introduce the theoretical foundation of LoF, indicating that foreign firms face additional costs, which local firms are not subject to. Hymer argued that these additional costs arise from a company’s unfamiliarity with the foreign environment in which it en-gages in operations; discriminatory attitudes of customers, suppliers, government agencies, to name a few; and additional costs associated with operating internationally. For example, for US investors doing business in China, a culture founded in face-to-face communication, cross Pacific travel and jet lag often turn out to be major challenges (Maler, 2001). Compa-nies from various industries can be affected by these costs, no matter whether the business operate in the service or in the manufacturing industry. These costs are the main reason why companies have higher costs to enter a new market and lower profits at the beginning of a new business relationship compared to local firms.

Previous literature also identified various sources of LoF: unfamiliarity with the host country due to a lack of information or sociocultural differences between home country and host country (Zaheer, 1995); discrimination against foreign firms as a result of stereotyping or differential standards maintained against it (Mezias, 2002b); lack of integration of the foreign firms into the local network (Zaheer, 1995); nonconformity to local norms (Mezias, 2002a); environmental characteristics such as regulatory restrictions, costs associated with spatial, institutional, and cultural distance, competitiveness level in home country versus host country, autonomy from home country ( Mezias, 2002). The society cultural differences, discrimination, environmental characteristics are resulting from the cultural distance.

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chal-lenge. These resources used to overcome the LoF can be shown on the extra operation costs to build a connection with local institutions, to hire bilingual people who can translate local regulations and to provide understanding of the rules, even to bribe local officials in some certain countries, especially in the beginning phase.

There are plenty of researchers working on the concept of LoF. The survival rate of the companies is also used as an indicator of LoF (Daamen et al., 2007). In a way, this means that companies operating in a foreign country may have difficulties to survive.

2.1.2 Internal and External Sources of the Liability of Foreignness

As we discussed before, geographic, cognitive, and material distance are the reasons causing extra costs for companies doing business in foreign countries. Moeller et al. (2012) make a distinction between internal and external sources of the LoF based on the organization level. Internal sources such as the size of workforce, top management team composition, composition of operating management, number of personnel coming from home country versus host country, belong to the tangible category. Internal sources such as morale of host country and home country personnel, career opportunities for the host country and home country workers belong to the intangible category. The external sources can be tangible, such as market assets of the organization, immigration requirements for home country nationals, level of visibility in host country and government regulations related to the foreign entity operating in host country. External sources which are intangible can be the reputation of the company, country-of-origin reputation, historical government relations and so on. By understanding these resources and properly using them, a manager can help his company to overcome LoF.

2.2 Cultural Intelligence

2.2.1 Concept of Intelligence

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attention. It can be a particular type of mental ability, the ability to acquire knowledge, the ability to have abstract thinking, the ability to gain experience. It also can be a sensory capa-bility, including quick response, perceptual cognition, and flexibilities. It can be described as a wide range of cognitive process such as perception, imagination, memory, judgment and so on. Some researchers believe that intelligence also relates to non-cognitive characteristics such as persistence.

According to the analysis of the attributes of intelligence, three theories of intelligence are published: Biological Theories of Intelligence, Intelligence at the Mental-Functioning Level, and Behavior Theories of Intelligence. Each theory has its sub-theories, which can be seen Figures 7, 8 and 9 shown in Appendix 1.

Combining all these theories, Earley and Ang (2003) believe that the best concept of ligence is the individual and environmental perspective of intelligence, meaning that intel-ligence is a characteristic of the individual, the context, and the interaction of the individual and the context.

2.2.2 Concept of Cultural Intelligence

Having a detailed analysis of the concept of intelligence, the concept of cultural intelligence becomes easier for us to understand. As mentioned before, intelligence can not exist without the influence of the environment. It is a combination of the individual, the context, and the individual behavior in a certain environment. Cultural intelligence is a concept of intelli-gence analyzed in a particular cultural environment.

Thomas, Elron et al. (2008) define cultural intelligence as a system of interacting knowl-edge and skills, linked by cultural metacognition, allowing people to adapt to, select, and shape the cultural aspects of their environments. So CQ is not merely a piece of knowledge and skill, it is the result of intercultural behavior in different cultural settings. It can be an individual’s ability to think, the ability to acquire cultural knowledge, the ability to adapt to new or various cultural contexts, and the ability to profit from cultural differences.

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CQ-cognitive refers to knowledge and skills. This is the knowledge that managers learn about CQ. It can be obtained from books, lectures, training. Nowadays, multinational firms are looking for different ways to expand their manager’s cultural knowledge. Knowing this knowledge can be simple, acquiring it is not easy, because it requires practice and real experience.

CQ-drive can be interpreted as motivation. Managers gain the knowledge of cultural dif-ferences, in this case motivation to get involved is the key point. Motivation and the estab-lishment of confidence will enable managers to handle cross-culture management. Co-drive includes three components: self-enhancement, self-efficacy, and self-consistency (Earley and Ang, 2003). Strong self-enhancement may cause problems. For example, someone would distort the reality to maintain a positive self-image because of a higher self-enhancement (Markus, and Heiman, 1997). It does not mean a greater self-enhancement equals a higher CQ. Managers who can not accept the reality in the new cultural environment, and keep ig-noring company problems raised by the cultural differences, they will lead their companies into a deadlock. No company can survive with blind optimism. Self-efficacy also plays a crucial role in CQ because it is a measurement of one’s capability to accomplish a certain level of performance (Bandura, 1986). Their managerial behavior reflect managers’ capabili-ties. A high self-efficacy represents an ability in accomplishing tasks. Self-consistency refers to the desire for individuals to maintain coherence and consistency in their experiences and cognition (Earley and Ang, 2003). If a person wants to have a higher CQ, a relatively low self-consistency is necessary. Lower-consistency means higher adaptability. The new cul-tural environment will always have plenty of elements opposing manager’s existing experi-ence and knowledge. If someone has a higher self-consistency, it is difficult for him or her to change the old ideas and adapt new ideas and values.

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that a person high in behavior-CQ integrates and mimics these cues and behaviors. Mimicry sometimes can be very subtle and unconscious, and it usually generates positive effects in a social encounter (Earley and Ang, 2003). If the managers can mimic the local customs in an unconscious way, it will help them to increase the satisfaction of interactions in host countries.

2.3 Cultural Intelligence & Liability of Foreignness

The previous sector discusses the internal and external sources of LoF. The top management team and operating management are internal components. At this point, a good top man-agement team, and an efficient operating manman-agement are helpful to overcome LoF. Zheer (1995) writes that to overcome LoF and compete with local firms, a company needs to ei-ther bring to its foreign subunit resources or capabilities unique to the firm (firm-specific advantages) or attempt to mimic the advantages of successful local firms.

Firm’s specific advantages and managerial capability are helpful to reduce these costs and overcome LoF in a long-term perspective. The company managers are crucial because they are one of the most important components of firm-specific advantages and they ac-quire the managerial capabilities. The mediating role of a manager’s cultural intelligence in bridging the gap between LoF and company performance becomes crucial, especially in the multicultural environment. Managers working for multinational corporations hardly need to be reminded of the wide variety of management practices found around the world (Javidan, et al., 2006).

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managerial capabilities. Managers who are doing business or are assigned to foreign coun-tries face new cultural settings, which may conflict with their own cultural value systems.

Smith and Peterson (1988) find both commonalities and differences across cultures em-bedded in a manner by which managers handled relatively routine events in their work. People rely on their current experiences and knowledge, combine with the consultation from others and use formal procedures and rules to deal with the issues in a new environment. Managers do the same thing. However, there are major differences between countries in the degree to which managers use formal company rules and procedures in contrast to more in-formal ways, and these differences convey with national cultural values (Smith, 2003). How does a manager with his previous cultural value adapt to a new cultural setting? CQ is es-sential, and it is a powerful tool. Higher CQ means a excellent capability of CQ-cognition, a higher level of CQ-motivation, and the ability of CQ-action. Metacognitive and Cogni-tive CQ can influence expatriate managers’ task performance that requires high levels of cultural-related cognitive processing and knowledge about different cultures, because such performance calls for effective decision making and problems solving, which are critical aspects of managers performance (Earley and Ang, 2003). For example, metacognitive and cognitive CQ may have remarkable effects on international marketing and sales assignments because such tasks typically require more knowledge about a host country’s culture, appro-priate recognition and interpretation of cultural issues in the host country (Ang et al., 2007). Cultural differences are one of key components of LoF. When managers understand the local culture, they take advantage of the cultural diversity in the operation, choose the best way to approach customers, fully use local resources and successfully manage the local staff, they are confident to make decisions for the company and know how to overcome cultural differences. Local people feel these managers with higher CQ are members of their con-nection, thus it is common and natural to share information with insiders. For example, in some countries business operations are involved in bribery and corruption. A manager with a higher CQ gathers the information and naturally mimics the routine tasks of a local manager.

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2.3.1 Cultural Differences

The influence of cultural differences in business is necessary for each company to consider and evaluate before it enters a new market. As one of the critical reasons behinds LoF, cultural differences affect company’s performance through manager behaviors and environ-mental settings. Lincoln et al. (1981) argue that because differences in national cultures have been shown to result in different organizational and administrative practices and employee expectations, it can be expected that the more culturally distant two countries are, the more distant are their organizational characteristics on average. Hofstede et al. (2005) develop a five-dimension model which represents elements of typical structure in the cultural systems of the countries: Individualism VS Collectivism, Large VS Small Power Distance, Strong VS Weak Uncertainty Avoidance, Masculinity VS Femininity, Short VS Long-term Orientation.

Figure 1: Hofstede’s Cultural Dimensions

Note: Long-Term Orientation is added a few years later, and there are only 39 countries in that research. Source: Hofstede et al. (2005)

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the Netherlands have a big difference in Masculinity which means that the Chinese society is more assertive, focuses more on material success than the Dutch society. At last, China has the highest score for Long-Term Orientation, which stands for fostering virtues oriented toward future rewards, in particular, perseverance and thrift (Hofstede et al., 2005).

Javidan et al. (2006) analyze the leadership differences based on different cultural clus-ters. China, the Netherlands, and the USA belong to different cultural clusters, the leader-ship among these countries showing varying levels of cultural dimensions as Figure 2. In this research, China and the USA, are different in Human orientation, Institutional Collec-tivism, In-Group CollecCollec-tivism, and Uncertainty Avoidance. China and the Netherlands have differences in Assertiveness, Future Orientation, Institutional Collectivism, In-Group Collec-tivism and Uncertainty Avoidance, while the scores of Institutional CollecCollec-tivism, In-Group Collectivism between two countries have a larger difference than others.

Figure 2: GLOBE project: Cultural Differences

Source: Javidan et al. (2006)

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which organizational and societal institutional practices encourage and reward collective distribution of resources and collective action. In-Group collectivism refers to the degree to which individuals express pride, loyalty, and cohesiveness in their organizations or families.

Proposition 1a: China and the Netherlands have major cultural differences in Institu-tional Collectivism, In-Group Collectivism, Masculinity and Long-Term Orientation. Chi-nese companies doing business in the Netherlands should consider high individualism in the Dutch community, encourage and reward more about the individual distribution of re-sources and individual actions, understand their values.

Proposition 1b: China and the USA have major cultural differences in Institutional Col-lectivism and In-Group ColCol-lectivism. American companies doing business in China should consider high collectivism in the Chinese community, encourage and reward more about the collective distribution of resources and collective actions.

2.3.2 Information Collection

A foreign company always has difficulty when entering a new market with numerous unfa-miliar information such as new regulations, rules, marketing policies, different consumption patterns and so on. Companies are going to make many strategic decisions. Each of these decisions might be of significance to whether the company can survive or not. The success of decision-making depends on the manager’s information collection and processing. How to promote the products/services, where to place the advertisements, on the websites or on the TV? Who are the first targeted customers, which city might be the best city to start the business in a foreign country? All these answers depend on the collected information.

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in making wise decisions and avoiding unnecessary costs for companies when being new-comers in the market.

First and foremost, to collect the information, managers need to identify and scan the en-vironments. Previous theoretical and empirical findings argue that the way managers scan their environments is significantly dependent on their personal experiences and values ( Sut-cliffe, 1994). When the managers are engaged in the global business, understanding cultural differences as a crucial part of managerial capability are likely to influence how a manager searches for information in a new cultural setting. Ang and Dyne (2008) suggest that man-agers with a higher level of CQ have specific knowledge and structures for understanding culturally diverse settings (based on the cognitive lens of CQ). They are more likely to search through a wider range of information-rich and culturally diverse locations for information. Second, managers’ CQ will also influence the information process. Strong motivational CQ indicates that managers are confident of their capability and intrinsically interested in expe-riencing culturally diverse setting (Templer et al., 2006). This suggests that managers with higher CQ would be more willing to search out direct and embedded sources of cultural-specific information than other managers (Ang and Dyne 2008). In this way, managers are more likely to find the first-hand information and high-quality information because of their internal motivation to experience the local culture and integrate themselves into the local environment. When the research scale is broader, the information is updated and closely related to the circumstances, the quality of information will be improved spontaneously.

Proposition 2: The higher the level of cultural intelligence the managers have, the better information of the new market will be acquired by the company. This decreases the LoF, and saves company costs on overcoming the LoF.

2.3.3 Network Building

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customers, local employees and local partners such as suppliers and distributors. A good network helps a company acquire knowledge about the host country and building up trust with partners and customers.

Managers with higher CQ make it easier to build a high-quality relationship with foreign partners despite partners’ differences (Ang and Dyne, 2008). Entering a culturally different and unfamiliar market is risky for any organizations. Such risks can be mitigated by man-agers with higher CQ. They are highly adaptable because of strong behavioral flexibility, and they have the intrinsic motivations to engage fully with culturally distant partners (Ang and Dyne, 2008). Managers’ willingness to integrate themselves into the local cultural envi-ronment improves company’s interactions with local networks, enhances the trust between each other, improves the company’s performance and decreases the level of LoF.

It is unavoidable to prepare many documents such as business plan, official applications before a company enters new markets. Sometimes a good relationship with local govern-ment or organizations will help the company speed up the process and reduce the red tape. For example, a company’s subunit in a host country is ready to open, the office is finely deco-rated, the staff are hired and are waiting to start working, all the equipment and facilities are installed, advertisements are placed. However, the office can not officially operate because the government has not yet issued all permits, the reason behind this is that the company does not have a good relationship with local officials, which delays the approval procedure. However, every single day delayed for the opening costs the company a certain amount of money. This kind of situation does happen in some countries. Hence, it is very impor-tant that top management team realizes this and finds the reason for it. If managers have expected this situation caused by the local cultural norms, they may do some extra work in advance. Fixing the problems in this emergent moment costs extra money and energy. Building up connections is not a one-day task. It requires time and efforts. At that moment, managers should take the responsibility because only they have the authority to deal with these problems.

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atten-tion, the consequences can be real bad, which intensifies the company’s LoF.

Proposition 3: The higher the level of cultural intelligence the managers have, the bet-ter local network relationship the companies will have. This decreases the LoF, and helps company to overcome the LoF.

2.3.4 Employees Retention

Human Resource is one of the critical parts in management. Understanding how human re-sources contribute to a firm’s competitive advantage, knowing how to manage the staff from different cultural backgrounds, and motivating them to work efficiently towards a same goal are always the key points for a leader. As a manager working in a foreign country, these skills become even more important. The ability to communicate in a culturally sensi-tive manner and display appropriate behavior when interacting with people from different cultural backgrounds should influence expatriate managers’ ability to increase their knowl-edge about cultural acceptable norms and behaviors form their local coworkers, and in turn, should influence job performance (Ang and Dyne, 2008). The loss of skilled employees is especially troublesome because of the difficulty to find skilled replacements for them (Tay-lor III and Poyner, 2008). Unstable employees will increase a firm’s costs. The replacement of employees incurs a significant amount of recruitment and training costs. Finding a new qualified employee is always harder than retaining a qualified one. An efficient human re-source manager is always helpful to improve the performance of a firm. The purpose of human resource management is to employ and train individuals that would become a pro-ductive part of the company. It is always desirable to bring human resource management into effect at a minimum cost (Kao, 1959).

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Foreign staffing strategies affect a company’s ability to minimize effects from LoF (Mezias, 2002). A manager with a higher motivational CQ and behavioral CQ can relate the informa-tion to an acinforma-tion orientainforma-tion (Ang and Dyne, 2008). They understand the local staff’s needs, requirements, and certain behaviors better than those managers with a lower CQ. As the morale of employees is one of the internal intangible sources of LoF, manager’s capability to motivate employees becomes paramount. Different cultural settings have different meth-ods for managers to interact with subordinates. For example, in Mexico, culture favors high power-distance, in this situation, an American manager is better to keep a certain power distance with his subordinates, searches a proper way to support his employees, wisely uses the bureaucratic control.

Simply stated, committed employees are less likely to leave an organization voluntarily (Buck and Watson,2002). Previous research also shows that an individual’s commitment to an organization can be significantly influenced by organizational activities (Hom and Grif-feth, 1995; Lee and Mowday, 1987). To be more specific, an organization’s management prac-tices can influence an employee’s level of commitment to the organization (Allen and Meyer, 1990; Saks and Ashforth, 1997). In this research, I want to know the local employee turnover rate and find out the stability of a company’s labor force. The local employee turnover rate can be calculated the number of employees who Left During the Year divided by the average number of employee at the beginning of the year and employee at the end of the year.

Proposition 4: The higher the level of cultural intelligence the managers have, the lower local employee turnover rate of the company. This means a manager with a higher CQ can help a company to maintain qualified employees, enhance the morale among the employees which leads to a stable development. Therefore, CQ reduces the costs of overcoming the LoF related to the labor costs.

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3 Methodology

3.1 Case Study

The case study is a research strategy which focuses on understanding the dynamics present within single settings (Eisenhardt, 1989). Some people believe case study is not reliable, because the conclusions and results are generated from single or several chosen cases, which lack of the generalization (Simons, 1996). Critics frequently believe that single case can not offer powerful fundamental resources for generalization. This problem has been a significant barrier in doing the case study.

Yin (2009) says that case studies rely on analytic generalization. In analytic generaliza-tion, the investigator is striving to generalize a particular set of results to some boarder the-ory. Simons (1996) writes that one of the advantages cited for case study research is its uniqueness, its capacity for understanding complexity in particular contexts. In another perspective, a case study gives us a holistic view and direct perception.

When we are using cases to illustrate theories or build theories, we need to understand the situations from different angles. Simons (1996) thinks paradox is the key point of case study. Living with paradox is crucial to understanding. A case study contains ambiguity and challenges. Dealing with the ambiguity and facing the challenges require us to be creative and confident. What’s more, case studies will often be the preferred method of research because they may be epistemologically in harmony with the reader’s experience and thus to that person a natural basis for generalization (Simons, 1980).

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3.2 The Sample of this Case Study

To find the relationship between the managers’ CQ and companies’ performance on over-coming the LoF, I chose two companies that have business and subunits in foreign countries. Company A is a Chinese company doing business in the raw metal trading field, and it has a subunit in the Netherlands. It was founded in 2009. The headquarter of this company is in Shanghai, China. The subunit in the Netherlands has five employees total, two of them are Dutch. The general manager is Chinese, when he first started the business in the Netherlands, he experienced cultural differences between China and the Netherlands. The company trade raw metal between China and the Netherlands. According to the Project GLOBE (House, Javidan and Dorfman, 2001), Company A, the home country China belongs to Confucian Asia, the host country the Netherlands belongs to Germanic Europe, host and home countries have many different cultural dimensions.

Company B is an American trading company, and their products are medical supplies and pharmaceuticals. It was founded in 2010. The headquarter of the company is located in the USA, and the director is an American, Company B has a subunit in China. The sub-unit in Shanghai have ten employees, four of them are Chinese employees. As an American manager, leading a subunit in China, he experiences enormous cultural differences. Com-pany B purchases pharmaceutical and medical supplies from Chinese suppliers, pack and sell them to the USA and other countries. According to the Project GLOBE (House, Javidan and Dorfman, 2001), For Company B, the home country the USA belongs to Anglo cultures, host country China belongs to Confucian Asia. These two countries also have some different cultural dimensions.

3.3 Survey

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same types of feelings and experiences (Kelly and Meyers, 2004). There are fifty questions in the test which can check the managers cultural intelligence on four aspects:

(1) the emotional resilience scale: the individual can respond positively to a new setting. (2) the flexibility/openness scale: the different approaches of people in cross-cultural situa-tions.

(3) the perceptual acuity scale: the extent to which a person pays attention to and realizes the diversity of the environment

(4) the personal autonomy scale: the extent to which a person has evolved a personal system of values and beliefs and at the meantime pays respect to others and their value systems.

Each question is described in one sentence. Interviewee can choose one from six answers: ”Definitely True”, ”True”, ”Tends to be True”, ”Tends to be not True”, ” Not True”, ” Defi-nitely Not True”. The final CCAI instrument consists of 50 items designed to reflect the above four dimensions or sub-scales of cultural adaptability, with Emotional Resilience measured by 18 items, Flexibility/Openness by 15 items, Perceptual Acuity by 10 items and Personal Autonomy by 7 items (Kelly and Meyers, 2004). According to the manager’s choices, I can compare and see who has a stronger ability to adapt to cultural differences, which refers a higher CQ.

In this study, both companies have Chinese managers, the Instrument, CCAI, was also translated into Mandarin. In order to make the transaction accurate, I have followed the suggestion, had the translation checked by a native English and a Chinese speaker, and did a forward and backward translation to increase the accuracy.

3.4 Interviews

Interview is the major source for my case study. It provides information in a qualitative way. The interviewees’ ideas, needs, opinions in a new cultural situation can be expressed through an interview. Earley (2003) writes that the most direct way of assessing how an individual functions in another culture is to interview the person who is involved in the intercultural exchange.

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impera-tive to ask the questions in an unbiased manner. The words used in questions are carefully chosen. And some questions asked in these interviews are related to the descriptions in the survey, which keep the consistency of the research (Appendix 2, Figure 10). At the same time the interviews provide us with more detailed information, helping us to interpret managers’ behaviors.

Each company will have three managers who participate in the interviews. Because of the limited time, all the interviews will be finished within an hour. Yin (2013) mentioned that in this kind of interview, the specific questions must be carefully worded, and that the interviewer needs to appear genuinely blank about the topic which allows the interviewees to provide a fresh commentary on it.

3.5 Dependent Variable

The dependent variable companies’ performance on overcoming the LoF was measured as companies’ overall financial performance including the profit margin growth rate and the return on equity, companies’ employee turnover rate, companies’ ability of information collection and companies’ ability of connection building.

3.6 Independent Variable

The independent variable managers’ CQ was measured as the average score of CCAI survey. Each company has three managers take this survey. Three managers’ average score will represent managers’ CQ level of this company.

3.7 Control Variable

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dealing with the LoF, companies need to think about how to efficiently use the limited re-sources to achieve the goal. SMEs do not have enough capital and rere-sources to try again and again. One failure may terminate the whole business.

Company ageis another aspect I need to control for a reliable analysis. Covin and Slevin (1990) classifies a firm as young if it is less than 12 years old. For a young firm, it tends to be more flexible than adolescent and old firms because it relies on resources that are less specialized, and its management structures is more flexible and management maintains a proactive attitude towards opportunity exploitation (Bausch and Krist, 2007). Company A was founded in 2009. Company B was founded in 2010. Thus far, Company A and B are both young firms, the comparison is not applicable in this research.

Industry-performanceis crucial. There are six industry classes classified by Worldscope: in-dustrial, transportation, banking, utility, insurance, and other financial. Worldscope’s classi-fication is based on a firm’s primary business activity (Wan and Hoskisson, 2003). Company A does business in raw metal trading field, and company B is doing medical supplies and pharmaceutical trading business. As two companies have businesses in different fields, their incomparable products and markets will cause distinctive levels of LoF.

Institutional condition will also influence companies’ business performance. Scott (1995) makes a distinction between regulative, normative and cognitive institutions. These three concepts are widely accepted by public. The corruption level of a country, government reg-ulations and policies also belongs to institutional conditions. The host country’s corruption level may dramatically increase a company’s LoF. Other factors such commercial infrastruc-ture, internal market dynamics etc are all essential to a company’s success.

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4 Analysis

In this section, I would analyze the results of data collected from survey and interviews. Managers’ CQ scores will be reflected in the survey of CCAI. Detailed information about how the managers deal with cultural differences to help company overcome the LoF and survive in the foreign market is obtained from the interviews. The companies’ employee turnover rate and their financial performance will give us a general picture of the operation in Company A and Company B.

4.1 Survey Analysis

Managers took the Cross-Cultural Adaptability Inventory Test (Kelly and Meyers, 2004), their choices in the test reflect their cross-culture adaptability, and the adaptability can be referred as an indicator for CQ. Examinees are asked to indicate the extent to which each item is true according to them using a scale ranging from 6 (definitely true) to 1 (definitely not true). A high score on a particular subscale indicates a high level of the construct (Davis and Finney, 2006).

All six managers in the research have taken the survey. In Company A, the average man-agers’ CCAI score is 204.3, for Company B, the average manman-agers’ CCAI score is 201.3, from this perspective, managers in Company A have a slightly better score than that of Com-pany B. As we discussed before, there are four factors analyzed in the CCAI: Emotional Resilience, Flexibility/Openness, Perceptual Acuity and Personal Autonomy. After I calcu-late managers’ average score on each factor, the results show that managers in Company A have better score in Flexibility/Openness factor, indicating that managers in Company A enjoy diverse approaches to behavior and thinking in cross-cultural environment more than managers in Company B. For the other three factors (Emotional Resilience, Perceptual Acu-ity and Personal Autonomy), managers in both companies have similar scores (Appendix 3).

4.2 Company Overall Performance

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by the business for the period and the financial condition of the business at the end of the period. Profit margin, return on equity which is called as Du Pont Identity are valuable financial information. Companies pay a great attention to their profit margin. Profit margin helps a manager to measure how efficiently the firm uses its assets and how effectively the firm manages its operation (Ross et al., 2011).

I will check the profit margin and return on equity of the first three years since companies are founded. Results show that Company A has a profit margin of 25.7%, 26.4% and 26.6% in the beginning three years. Company B has a profit margin of 0.39%, 1.79%, 2.26% in the beginning three years; both show a growing momentum. Considering the ROE, they are 15.5%, 16.1% and 15.9% in Company A for the beginning three years. For Company B, the numbers are 13%, 35% and 25%.

Generally speaking, company A has a much higher profit margin than that of Company B, since they are not in the same industry, the number can’t directly imply Company A has a better financial performance than Company B, so I compare the growth rate of the profit margin. It turns out that Company A’s growth rate of profit margin are 2.7% and 0.7%, Company B’s growth rate of profit margin are 358.9% and 26.25%, meaning that Company B has an impressive growth momentum. On the other hand, regarding the ROE, Company A is quiet stable, Company B experiences a dramatic rise from first year to second year.

Figure 3: Profit Margins of Two Companies

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Regarding employee turnover rate, Company A has two local Dutch employees, it keeps a stable employee retention, the local employee turnover rate is zero. The Dutch employees have stayed with the company since 2009 when the company was founded. Company B has four local Chinese employees, it has replaced the local employees several times since 2000, the company’s turnover rate of the past year is 0.05.

4.3 Industry Overall Performance

Company A is in the Metal Trading industry. According to the 2013 report from Ministry of Commerce of the People’s Republic of China, China is one of EU’s major suppliers of rare metal. EU imported a significant amount of heavy rare earth, light rare earth, antimony, magnesium and tungsten from China. The close business relationship between China and EU in metal trading industry supports Company A’s business. Company B is in the Phar-maceutical and Medical Supplies trading industry. The trade of PharPhar-maceutical and Medical Supplies have higher requirements than that in metal trading industry. The registration of pharmaceutical in some countries takes more than two years. Some countries needs five years to finish the whole registration procedure. In this case, Company B needs more invest-ments and resources to develop business. From this perspective, Company B faces a greater LoF than Company A.

4.4 Institutional Condition

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connections with government organizations.

Figure 5: Institution Condition in Three countries(2015)

Note: Governmental support and policies: The extent to which public policies support entrepreneurship. Commercial and professional infrastructure: The presence of property

rights, commercial, accounting and other legal and assessment services and institutions that support or promote SMEs. Internal market dynamics: The level of change in markets from year to year. Internal market openness: The extent to which new firms are free to enter

existing markets.

Source: www.gemconsortium.org

The Netherlands has the highest score in Commercial and professional infrastructure and Internal market openness, and it has an excellent performance in transparency. It proves the message from Manager A1, who thinks that doing business in the Netherlands is easier than doing business in China because of a transparent business environment with strong institution infrastructure.

4.5 Interviews Analysis

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Figure 6: Institution Condition

Note: The country with a higher score ranks in the top, which means this country has a low level of corruption and bribery. For example, the Netherlands scores 8.8, ranks No.1 for

Bribe Payers Index, which means the Netherlands has the lowest level of bribery. Source: www.transparency.org

4.5.1 Cultural Differences

Six managers all describe the cultural differences between home and host countries. Man-ager A1 thinks Dutch people have different mindset and value. Chinese employees are will-ing to work overtime if they are paid well, while Dutch people will refuse. Dutch people value their personal time, they prefer to spend time with their families, spend time on their hobbies. Most Chinese people overvalue money, undervalue the strength of spirit. They prioritize their life goals in terms of money. This reflects Hofstede et al., (2005)’s fourth and fifth cultural dimension: Masculinity and Long-Term Orientation. China has a high score in both. Masculinity means that Chinese society focuses more on material success. Long-Term Orientation refers that Chinese people are perseverant, they have the virtue of thrift and hard work. The influence of cultural differences excerts on business. Chinese focus more on price and profits, while Dutch people pay more attention to quality and reputation, they have a long term vision on business.

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together. For a long time, they are taught that unity creates strength. And they are always rewarded because of collective action and loyalty to their country and organization.

As a human resource manager, Manager A3 feels that Dutch people are straight and inde-pendent. ”For example, if a Dutch employee feels that his salary is unfair, he will come and ask me directly. A Chinese employee is feeling unfair paid will encourage other employees to complain together.”

Manager B3 thinks that the Chinese culture has a huge effect on organizational culture. When she compares the differences between the Chinese company and the American com-pany, she thinks that the Chinese organization has a strict hierarchy system and complex interpersonal relation. The American company is different because everyone is independent and treat fairly. She says in the interview:

”In traditional Chinese organization, if you want to be promoted, seniority is a deciding factor. If you are not ”old” enough, or you don’t have the connection here, you are hardly get promoted. So you need to be very careful about handling the relation within the company, need to be careful about what to say and what to do. In this company, I feel that American employees don’t care so much, they pay attention to their individual achievements, they believe they can succeed through their efforts and capability. They believe in individualism. Self-reliance and self-renovation are their life philosophy. They don’t allow their personal life to be influenced by the government, religions or any other organizations. So they are always active to express their opinions.”

Manager B2 thinks that American culture encourages people to show their personality and express their feelings. She says in their company meeting, American employees are active to present their ideas and always argue for their opinions, while Chinese employees only express their thoughts when they are asked to do so.

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in the middle with our suppliers and customers. This increases our workloads and costs to negotiate.” as Manager B2 says.

4.5.2 Managers’ Cross-Cultural Adaptability

Concerning managers’ cross-cultural adaptability, Manager A1 thinks it is necessary for managers to learn and understand Dutch culture. For himself, he did not get to know the Dutch culture systematically; however, he has lived in the Netherlands since 2003. This ex-perience has exerted a significant influence on him, which increases his knowledge of Dutch culture. Since he can speak some Dutch, he said it is helpful to give Dutch people a good first impression, and trigger their interests to do business with him. Considering the importance of cultural differences, he provides his employees with company trips to the Netherlands. During their trips, employees have a chance to experience Dutch custom and culture. Man-ager A2 mentions that he has studied the Dutch in a Dutch university, and that the company shows great support for his study. This Dutch learning program not only helps individual managers gain knowledge of Dutch culture, but also increases the company’s managerial capability to understand the regulations and rules in the Netherlands.

Manager B1 has lived in China more than nine years, the time he spent in China helps him to know Chinese culture and understand how to communicate with Chinese. Manager B1 says in the interview:

”Chinese people care about Renqing Shigu[Renqing Shigu refers to understand-ing people’s intentions, and to wisely handle the Interpersonal Relationship]RY, I try to accept this and put myself in their shoes to think and behave. For instance: I send wedding gifts to some of our closely connected Chinese suppliers. It helps me earn their trust and getting better prices, because they are touched that I am considering them as friends.”

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4.5.3 Costs of LoF

Speaking of the costs of overcoming the LoF, manager A1 says attorney’s expense is their major cost doing business in the Netherlands. Due to the unfamiliarity of the Dutch law and legitimation of regulations, the company has spent huge amounts of money on hiring lawyers to check the contracts and legitimate the company procedure.

”Dutch companies believe in legitimacy they strictly follow the contract. A cor-rect contract is very important in our cooperation, we need to hire Dutch lawyer to check the contract. In the Netherlands, lawyers are charging by hours. Because the cultural differences, the language problem, communications have problems, it takes more time for us to make things clear, and it takes many hours for a lawyer to check one contract, which increases our operating costs.”

Unable to handle the relationship with Dutch partners will increase company costs. Man-ager A2 suggests that it is necessary to know the boundary between work and friendship in the Netherlands. ”I have a very good relation with one of my Dutch partners who in charge of the products quality control. I think he is my friend, and he may help me pass the inspec-tion easily, however, he scrupulously checked the products as ususal.”

Manager A3 who in charge of Human Resource department says that it also costs more to hire a Dutch employee than to hire a Chinese employee. Because Dutch employees care more about their social Insurances, medical insurances and other related welfares.

”But it is worthy because a local employee can help us understand the regula-tions and avoid some unnecessary costs. If I know Dutch well, I probably can read all these terms by myself, but still I can’t understand all of them, so a Dutch employee who knows these and has experiences deserves a higher salary.”

Manager B1 thinks that doing business in China, the most difficult task is to get approval from the authorities. At first, Company B hired two Chinese to deal with the red tape and finish the standard procedure. He says:

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Manager B2 says the most expensive initial expenses are used to build connections. She says the costs are high, how long the company can finish the procedure depends on the relationship they have with the local authorities. Company B spends a lot of time and efforts to build connections with government offices, such as the industrial and commercial bureau.

4.5.4 Information Collection

The managers who attend these interviews agree that the knowledge of local culture is help-ful to collect information. Manager A3 and B1 both mention that when they know local people’s norms and minds, it becomes easy to join their conversations. ”Understanding lo-cal culture will be the first step to get wanted information, more interactions often leads to a better relationship and high-quality information” as Manager A3 suggests in the interview. Joining the local communities and being a part of it help managers scan the environment, get more chances to receive tips and inside news. A good relationship is partially derived from managers’ familiarity with the local culture. In this way, managers’ CQ not only helps to collect information, but also contributes to bond with local partners.

4.5.5 Network Building

For a foreign company, a good connection with local network is essential to achieve success-ful business. Managers from both companies admit that it is not easy to become an insider of local business connections, and it takes some time for them to build the relationship with local partners and earn their trust. Manager A1 says:

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them for a while, they are loyal towards us. We admire their loyalty and show our patience and intention to work sincerely with them, and it works well now.” Considering what local people care about, following their social norms, foreigners can be accepted by local people. Managers B1 realizes that Chinese people care about their ”Face” which stands for the kind of prestige that is emphasized in this country: a reputation achieved through getting on in life, through success and ostentation (Hu, 1944) and they are afraid of ”Losing face”, so every time he negotiates and discusses with Chinese suppliers, he will pay attention to saving his Chinese partners’ face. Because of this, he thinks Chinese suppliers are more willing to do business with him.

Manager A1, A2, B1 and B3 all mention that the distinction between business and en-tertainment affects their business relationship. In China, it is normal to discuss cooperation during a dinner, however, entertainment and business are separate in the Netherlands as well as In the USA. Putting it in another way, it is difficult for Chinese businessmen to build connections because their method does not work in foreign countries. It is also difficult for American managers to get used to Chinese business approaches.

Sometimes, cultural differences will bring advantages to company. Manager B1 thinks Chinese are very friendly to foreign businessmen. And they are interested in American cul-ture, and they are willing to do business with American companies. ”They are very friendly every time we visit their manufacturing plants, they invite us to have lunch and dinner to-gether, the meals are always diverse and marvelous.” Manager B3 believes it is necessary to discuss business with Chinese suppliers during the meal, ”A good relationship sometimes comes from a dinner”.

4.5.6 Employee Retention

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cultural differences between the host and home country, they accept this difference, and take it into action.

”We fully respect Dutch employees who refuse to work on weekend or holiday. Also we understand Dutch employees value family above work and give atten-tion to work-life balance, which is the reason we agree to give them flexible work schedule, for example, they can work extra one hour every day, and stay at home for the whole Friday afternoon or Wednesday afternoon with their family.”

Manager B1 says that according to Chinese culture, company will prepare Hongbao (lucky money) to employees in Chinese traditional holiday, and Chinese employees are very happy about this. Manager B2 and B3 both agree that the employee retention is good in the com-pany now. But manager B3 mentions that cultural differences is not the only reason to keep employees, when compared with the salary and company welfare, it becomes less impor-tant. ”I believe that people who decide to stay in this company are more concered about the salary and welfares. A leader’s management has a less important influence.”

5 Discussion

Managers in both companies have high scores of Cross-Cultural Adapatability Inventory, indicating that they have a high CQ to successfully blend into local cultural envioronments. These two companies successfully survived in the foreign country and kept a good growing momentum, which means they overcome the LoF and have a good performance.

Proposition 1a suggests China is different from the Netherlands in Individualism, Mas-culinity, and Long-term Orientation. Mamagers from Company A believe, Chinese people are more collective, and they are told that unity leads to strength. Therefore, they prefer to work together, share information, and fight for their collective goals. Meanwhile, Chinese employees work hard, and they value material success. The interview results support this proposition.

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These cultural differences increase companies’ costs. They need to hire local employees and lawyers. They need to build connection with local actors and deal with mistakes and misunderstandings incurred by cultural differences.

Proposition 2 demonstrate managers who have a higher CQ will gather better informa-tion than managers with a lower CQ. Interview results show that managers with better cross-cultural ability are good at closing the gap with their partners. When managers know which information is crucial, and know the best way to retrieve it, companies will make wise deci-sions. So Proposition 2 is supported in this investigation.

Proposition 3 is related to a company’s performance on network building. Language as an essential part of culture, plays an important role. Managers believe an excellent knowl-edge of local culture help them blend into local community. Once managers and local actors have a good relationship based on mutual trust and respect. Local actors prefer to share in-formation and provide them with better prices. This mutual trust originated from frequent communications is vital for company overcome the LoF. Proposition 3 is also supported.

Proposition 4 discusses about employee retention issue. Managers mention that employ-ees are willing to stay for a longer time if they are satisfied with their working environment. A stable labor force contributes to company’s development. In these interviews, I found that Manager B1 follow Chinese culture to provide employees with holiday gifts, and Manager A1 provide Dutch employees with flexible working schedule. These actions improve their employees’ satisfaction. In this case, managers with a higher CQ can create a better cross-cultural working environment to keep employees stay longer. Proposition 4 is supported. But as Manager B3 mentioned, a company should not simply rely on managers’ CQ to keep its employees, providing them with a good welfare is also important.

With the literature review, I expected that managers’ CQ would have a direct influence on the companies’ financial performance. However, after the interview results, managers express the idea that the influence of managers’ CQ on companies’ financial performance is insignificant compared with companies’ business scope and scale. Companies’ products, reputation, and business scope have more direct influence on financial results.

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companies in this research find it hard to launch the business because they lack resources in local connection. Company A needs time to build up trust with business partners. Company B spends a lot of time and effort on initial paperwork and network building. However, both companies are young and flexible, and they can adjust strategies quickly when issues occur. Regarding industry performance, raw metal trading industry and medical supplies and pharmaceutical trading industry are categorically different. Managers of Company B men-tion that selling pharmaceutical and medical supplies has many restricmen-tions, company needs to finish pharmaceutical registration first. Compared with Company A, it requires more re-sources and time. In this regard, Company B has a higher level of LoF.

As I analyzed in the previous section, Institutional condition plays an major role. Cor-ruption, bribery and social institution have a big influence on company’s performance of overcoming the LoF. When the host country has serious problem with corruption or bribery, the company face more challenges, and feels more pressure in the beginning stage. Thus, managers should fully use their resources to help their companies. In this research, Com-pany A feel less pressure to do business in the Netherlands because the institution of its host country is stronger than that of its home country, while for Company B, it needs more efforts to start the business because their host country has a bad institutional condition.

6 Conclusion & Limitation

6.1 Conclusion

In this paper, I have analyzed the relationship between managers’ CQ and companies’ per-formance on overcoming the LoF. Results of survey and interviews show that managers who have a higher cross-culture adaptability will have more chances to gather better information through the connection with local networks in the host countries. Companies reply on their managers to make strategic decisions, to motivate their employees, and overcome the LoF. Only then firms can successfully survive in the competitive foreign markets. However, I found that managers’ CQ does not directly affect a company’s financial performance. Finan-cial performance is more likely related to the business scale and scope.

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excellent way to improve managers’ CQ level. In this research, the influence of managers’CQ does not directly show on companies’ financial performance which is treated as an appar-ent indicator of company’s performance. Thus, managers’ CQ contributes to companies’ performance on information collection, network building and employee retention.

6.2 Limitations and Future Research

It is important to mention the limitations of this research. First, research about CQ is still focusing on a relatively early phase. In this paper the way to assess manager’s CQ may have limitations in reality. Davis and Finney (2006) mention the four-factor model of CCAI hypothesized to underlie the responses to these items did not fit adequately. Even though the CCAI is widely used around the world, it still has limitations. To evaluate a person’s CQ level, I would suggest follow-up researches using variable kinds of CQ tests. Having a deep analysis about the measurements of CQ is necessary.

Also, the samples I used here are limited. Both firms are small-sized, and they are in different industries. Only two firms can not represent all companies, thus the results can not be generalizable for a larger population. If enormous companies in various industries were involved in this research, the results would be more accurate and presentative. As I have analyzed before, the host and home countries of these two companies are only related to Germanic Europe, Anglo and Confucian Asia culture cluster. Other culture clusters such as Latin America are not analyzed in this article. If the follow-up studies can select more companies from different culture clusters and industries, covering the service industry and the manufacturing industry, the results could be more convincing.

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8 Appendix

Appendix 1: The Theories of Intelligence. Source: Earley and Ang (2003)

Figure 7: Biological Theories of Intelligence

Figure 8: Intelligence at the Mental-functioning Level

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Appendix 2: Some of the interview questions are related or extended from survey ques-tions.

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Does managers’ Cultural Intelligence inﬂuence the company’s performance by overcoming the Liability of Foreignness

Does managers’ Cultural Intelligence influence the

company’s performance by overcoming the Liability of

Contents

1

Introduction

2

Literature Review

3

Methodology

4

Analysis

5

Discussion

6

Conclusion & Limitation

7

Reference

References

8

Appendix