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The Impact of Cultural Distance on Bilateral Arm’s Length Exports

An International Business Perspective

  • Focused Issue: 50 Years of MIR
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Abstract

  • Prior studies have argued and regularly found that cultural distance is negatively related to bilateral export flows, which are the sum of arm’s length and intra-firm exports. However, these macro-level studies overlook the firm-level insights that arm’s length exports are a substitute for arm’s length affiliate sales, and that firms’ choices between these substitutes are influenced by cultural distance.

  • Moreover, intra-firm exports are a complement to arm’s length affiliate sales and hence likely to respond in the same way to cultural distance as such sales. The inclusion of intra-firm exports in export flows has thus obscured the effect of cultural distance on aggregate arm’s length exports.

  • We overcome these conceptual and methodological deficiencies by examining how cultural distance influences aggregate arm’s length exports, while simultaneously considering its impact on aggregate arm’s length affiliate sales. Drawing on several strands of firm-level international business (IB) research, we argue that while arm’s length affiliate sales are likely to decline with cultural distance, this is not necessarily the case with arm’s length exports, which may in fact increase with cultural distance.

  • Analyzing a panel dataset of US foreign affiliate sales and US exports to unaffiliated parties, we find that cultural distance negatively affects arm’s length affiliate sales but positively affects arm’s length exports. Our study thus shows that the explicit consideration of firm-level entry mode choices helps us better understand and explain macro-level IB activity.

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Notes

  1. A foreign affiliate is defined as a foreign business enterprise that is directly or indirectly owned or controlled by one or more non-resident firms or persons to the extent of more than 50% of the voting securities for an incorporated business enterprise (i.e., subsidiary) or an equivalent interest for an unincorporated business enterprise (i.e., branch) (US Bureau of Economic Analysis2004). In line with prior studies (e.g., Brainard1997; Buckley and Casson1981), we do not consider other ways in which firms may realize arm’s length foreign sales besides exports and foreign affiliates, such as licensing agreements and minority joint ventures.

  2. The fact that cultural distance has a positive effect on arm’s length exports but a negative bivariate correlation with such exports suggests that this correlation contains an omitted-variable bias. As shown in Table 1, cultural distance has a substantial negative correlation with both GDP and GDP per capita (r = − 0.34 and r = − 0.45, respectively), which in turn have substantial positive correlations with arm’s length exports (r = 0.67 and r = 0.32, respectively). While the first pair of correlations indicates that the cultural distance to a host country tends to be high if its GDP and GDP per capita are low, the second pair indicates that if a country’s GDP and GDP per capita are low it receives few arm’s length exports. Jointly these correlations thus cause arm’s length exports to be low if cultural distance is high, and may hence explain the negative bivariate correlation between them. The regression coefficient of cultural distance in the arm’s length export regression is corrected for these interrelationships, and hence reflects the change in arm’s length exports that is directly attributable to cultural distance as such.

  3. For arm’s length affiliate sales, we find that cultural distance has an insignificant effect in the sub-sample of developing countries, and a significantly negative effect in the sub-sample of developed countries. One possible reason why cultural distance has an insignificant effect on arm’s length affiliate sales in developing countries is that the benefits of foreignness may not only accrue to arm’s length exports to developing countries, but also to arm’s length affiliate sales in such countries. These benefits of foreignness may offset the liability of foreignness associated with arm’s length affiliate sales in developing countries, causing the net effect of cultural distance to be insignificant.

  4. We also examined the effects of the binary measures of religious and language differences used by other macro-level studies of export and trade flows (e.g., Rose2004). The effects of these binary measures were in line with those of Dow and Karunaratna’s (2006) cardinal measures.

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Acknowledgements

We thank editors-in-chief Professors Michael Oesterle and Joachim Wolf, two anonymous reviewers, Joe Clougherty, Jorma Larimo, and seminar participants at the Copenhagen Business School, the Nijmegen School of Management, and the Rotterdam School of Management for their valuable comments and suggestions.

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Authors and Affiliations

  1. Department of Strategic Management & Entrepreneurship, RSM Erasmus University, 3000 DR, P.O. Box 1738, Rotterdam, The Netherlands

    Arjen H. L. Slangen

  2. Department of Global Economics & Management, Faculty of Economics and Business, University of Groningen, Groningen, The Netherlands

    Sjoerd Beugelsdijk

  3. CentER and Department of Organization & Strategy, Tilburg University, Tilburg, The Netherlands

    Jean-Francois Hennart

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  1. Arjen H. L. Slangen
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Correspondence to Arjen H. L. Slangen.

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Slangen, A., Beugelsdijk, S. & Hennart, JF. The Impact of Cultural Distance on Bilateral Arm’s Length Exports. Manag Int Rev 51, 875–896 (2011). https://doi.org/10.1007/s11575-011-0103-2

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