Cultural Distance Theory

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Cultural distance is an important dimension need to be taken into consideration. It refers to the similarity or difference between two countries. Since culture differences should be carefully taken into account when considering enter into a new market, the culture distance between home country and target country would largely influence the entry model decision. Geert Hofstede’s six-dimension framework is regarded as the most influential national culture comparison tool. Professor Geert Hofstede analysed a large database of employee value scores collected within IBM between 1967 and 1973. The data covered more than 70 countries, from which Hofstede first used the 40 countries with the largest groups of respondents and afterwards extended the…show more content…
Transaction Cost Theory provides implicit link between cultural distance and market entry. Since high cultural distance is associated with higher transaction costs, therefore it is more likely to lead a high-control market entry model (Hennart & Larimo, 1998; Brouthers & Brouthers, 2001; Luo, 2001; Shenkar, 2001). In contrast, high cultural distance raises the information costs and the difficulty of transferring competencies and skills (Shenkar, 2001). It also increases the level of uncertainty and complexity when entering the new market. Hennart & Larimo (1998) propose that limited information about local conditions may push a company to choose a low-control entry model, whereas it will adopt high-control acquisition when it is confident to operate alone in that country. Moreover, high cultural distance would increase the costs related to collaborative agreements. “TCE suggests that wholly owned subsidiaries are preferred when the costs of searching, negotiating and enforcing a cooperative agreement are greater than the costs of direct control” (Brouthers & Brouthers, 2001, p.179). On the other hand, joint ventures would help to decrease the cultural gap by distributing some tasks to local partners, and learning local market and expertise (Hennart & Larimo, 1998). Therefore, based on literature review, following hypothesis is…show more content…
Therefore, multinational companies with high labor costs are more likely to enter countries with totally different economic conditions. For instance, companies in developed countries usually enter China or Southeast Asia countries for much lower labor costs. Barney (1991) and Ghemawat (2001) propose that rich countries, participated in more cross border deals. On the other side, companies which rely on economies of scale, scope and standardization tend to enter countries that are similar to their home countries, because they need to replicate the operations and business model to gain competitive advantage. Based on Transaction Cost Theory, a greater economic distance between the home country and the target country may result in higher transaction costs. Therefore, the adaptation could be more easily realized in countries that are similiar to each other, since they have similar market structure and competition
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