Some 20 years ago, Shenkar (2001) criticized several of the underlying assumptions of the cultural distance (CD) construct. Despite this, researchers continue to use the same metric which fails to address many of the underlying problems. As a result, CD studies seem to generate results which are often contradictory. Rather than rejecting the distance metaphor, the main objective of this study is to provide a more in-depth measure of CD that addresses the assumptions of linearity, symmetry, equivalence, and discordance. We propose that, while the size of the cultural distance between home and host countries may be relevant for some dimensions, it is incomplete, as it does not account for the distinct characteristics of the cultural dimensions, the direction toward countries with different profiles and the contextual settings of the study. We test our hypotheses on a sample from the Orbis database consisting of foreign subsidiary firms from Latin America, other emerging markets from outside the region, and from developed countries operating in 10 of the largest economies in Latin America. Our dataset includes 4226 firm-year observations and a combination of 168 home and host countries. Latin America provides a suitable context for this study, not only because of the diversity of firms from different contexts operating in the region, but also because the region allows us to investigate the influence of home country history and tradition on firms’ ability to conduct business in different cultural contexts. Our assessment of CD shows in a precise manner that size together with direction might be adequate for describing the effects of some dimensions of CD on firm performance, while for other dimensions, it is clearly a matter of country profile. By combining our metric with different national culture frameworks, future studies would be able to complement and strengthen our findings and conclusions.

Cultural distance (CD) is an important driver of foreign expansion strategy at the firm level. However, its effects can be more or less significant depending on the contextual characteristics of the host country, such as the quality of formal institutions and the openness to international trade. Therefore, it is argued that strong formal institutions in the host country can effectively reduce the adverse impact of CD. Additionally, due to the more frequent interactions with foreign cultures, countries open to foreign trade can positively accommodate the effects of CD. The study tests these assumptions using data from the Orbis database and the World Bank and finds a reduction in the adverse impact of CD on the financial performance of foreign subsidiary firms with robust formal institutions in the host country. Moreover, the negative effects of CD increase with higher degrees of trade openness. Thus, the results indicate that foreign subsidiary firms operating in host countries that are more open to foreign trade will have to conform to the higher expectations from the local culture.

Given that home country factors play a major role in the internationalization of emerging market firms, there is an ever-growing debate on how they influence the intensity of outward foreign direct investment (OFDI) from these regions. This study investigates how home country factors affect the OFDI intensity in Latin America and Caribbean (LAC) countries. We use the entropy weight method, which uses the Technique for Order of Preference by Similarity to Ideal Solution (TOPSIS) method and a balanced panel data consisting of 19 countries from 2007 to 2016. The results show a positive association between macroeconomic performance, formal institutions, infrastructure, technology and the OFDI intensity. Furthermore, we find that robust formal institutions, along with the quality of infrastructure and technology, positively moderate the relationship between macroeconomic performance and the OFDI intensity. These findings show that the internationalization of LAC firms is highly dependent on the contextual conditions in their markets.

PurposeThis study investigates how the degree of internationalization (DOI) affects the financial performance of emerging market companies by making the distinction between export intensity and multinationality (i.e. foreign direct investment). The authors argue that the different DOI-performance patterns in the literature relate to different internationalization approaches, which are moderated in distinct ways by formal institutions in the home country.Design/methodology/approachBased on data of Brazilian firms in several industries and with different internationalization patterns including 100 exporting firms and 30 multinational companies with varying degrees of multinationality over a period of five consecutive years, the authors test their hypotheses using an unbalanced panel data with 346 firm-year observations. In order to test how the quality of formal institutions moderate the DOI-performance relationships, the authors estimate the changes in the slope of the regression line by adding and subtracting one standard deviation to the Worldwide Governance Indicators (WGI) variables.FindingsA positive and linear association between export intensity-performance (EI-P) highlights the location specific comparative advantages of exporting Brazilian firms, while the multinationality-performance (M-P) relationship points to a horizontal S-shape pattern which conforms to the theoretical assumptions of the three-stage internationalization process. Formal institutions moderate positively the EI-P relationship, but moderate negatively each of the three stages of the M-P relationship.Research limitations/implicationsThe findings from this study provide critical insights that contribute to the ongoing debate on how formal institutions in the home country affect the DOI-performance relationship of emerging market companies (EMCs). However, the authors consider that it has limitations as they focused exclusively on formal institutions captured by governance institutions in the Brazilian context.Practical implicationsThis study provides relevant insights to managers and policy makers. Findings reveal that strong formal institutions in the home country make it easier (cheaper) for EMCs to invest abroad, and, at the same time, increase the efficiency of exporting firms and positively influence financial performance. Moreover, results show that during downturns in their domestic markets, multinational EMCs outperform domestic firms. In that sense, while policy makers can promote the internationalization and competitiveness of EMCs by implementing more supportive formal institutions, managers should consider a proactive approach and invest abroad when conditions in the home country are favorable.Originality/valueBy making the distinction between export intensity and multinationality this study contributes to the literature on the DOI-performance of EMCs providing a more nuanced view on how formal institutions in the home country moderate the EI-P and M-P relationships in different ways.

By focusing on the tacit and explicit characteristics of informal and formal institutional distances, this study investigates the competitive advantage of foreign subsidiary firms from developed countries and emerging markets operating in Latin America. Following recent research on distances in international management, this study measured the size and direction of distances and computed formal institutional distances based on the world governance indicators from the World Bank, whereas informal institutional distances are calculated using the four original dimensions of Hofstede. Considering that culture is tacit, whereas formal institutions are explicit, it is argued that these differences affect the ability to convert experience dealing with cultural and formal institutional conditions in the home country into firm specific advantages (FSAs) in a foreign host country. These assumptions are tested quantitatively using data from the Orbis database, a sample that includes over 4200 firm-year observations covering 10 of the largest economies in Latin America. In a departure from previous studies investigating the implications of FID direction, it is shown that the effects in specific directions are different for foreign subsidiaries from developed countries and from emerging markets. The results reveal that emerging market firms are at an advantage when operating in less developed host countries, whereas foreign subsidiaries from developed countries can adjust more positively when operating in host countries with strong formal institutions. On the other hand, the effects of the different CD dimensions depend on the direction towards host countries with specific cultural profiles. These findings indicate that foreign subsidiaries from emerging markets have a clear advantage in dealing with institutional voids in Latin America (i.e., FID towards less developed host countries), whereas the effects of CD are the same for all firms. This suggests that the cultural profile of the host country is what really matters.