SC6101 Global Business

Cultural Distance in MNE Research: Meaningful or Meaningless?

Dr Finian O’Driscoll
Agranshu Khanna
19231561
25nd January 2020
Contents
Introduction...........................................................................................................................................2
Literature Review..................................................................................................................................2
Strategy & Cultural Distance..............................................................................................................3
Research in Hotels- Customer & Organisation Perspectives..............................................................4
Conclusion.............................................................................................................................................5
References.............................................................................................................................................7
Cultural Distance in MNE Research:
Meaningful or Meaningless?
Introduction
According to Peng [CITATION Pen17 \n \t \l 2057 ] Greet Hofstede, a Dutch professor and a world-
renowned cross-cultural expert, culture is defined as “the collective programming of mind which
distinguishes the members of one group or category of people from another”. Cultural distance is
defined as a function of differences in values and communication styles that are rooted in culture
(demographic or organizational). Distance is created when individuals or groups perceive that their
values and communication styles differ from others. Cultural difference among countries can be
language, religion, social culture and education. Ghemawat [CITATION Ghe07 \n \t \l 2057 ]
explains CAGE framework which includes cultural, administrative, geographical and economic
distance as main factors for multi-national enterprises to enter foreign market. This essay will
discuss role of cultural distance in multi-national enterprises and hospitality industry while
expanding their markets. Organisation and customer perspectives in hospitality will be discussed to
know how it can affect investment, strategic, and management decision. Findings of this study show
MNEs tend to expand their market in countries with smaller degree cultural distance, on the other
hand some MNEs find cultural distance as an opportunity to expand their market share target
countries and globally.

Literature Review
Recent globalisation has promoted use of a common language. English speaking countries contribute
a large share in global outputs. Countries that do not have common language but share a common
foreign language will benefit in trade and investments. In many scenarios English emerges as the
default language for inter-cultural or international communication, hence, is recognised as formal
language, often termed as lingua franca[ CITATION Pen171 \l 2057 ]. Due to the legal advantages and
reduced production costs, multinational companies choose to carry out certain activities in different
countries. Given the cultural differences between countries, overseas investment decisions can be
more successful. However, entry into markets of other countries depends on many variables,
although proper return on equity (ROE) is also critical for making this decision. At the same time,
"political diversity" and "geographical distance" are often closely linked to "cultural distance"
[ CITATION Gém14 \l 2057 ].

The degree of complexity that MNEs face in their international development depends to a large
extent on the cultural distance between new and previously entered countries, as higher cultural
distances mean addressing many external factors at the same time. The creation of a foreign
subsidiary demands the company to "adapt to foreign ethnic cultures", this creates complexity and
difficulties for both individuals and businesses. As much research has shown, culture influences
personal beliefs, perceptions, and behaviours, and also affect company-level features such as
conflict management, answerability, administration and role of leaders[ CITATION Hut08 \l 2057 ].
The order of penetration into different markets is based on the cultural similarity with the ethnicities
of home countries of multinational corporations. Everchanging nature of trade and globalisation
made necessary for MNEs to take cultural distance into consideration while expanding their markets
to other countries. Understanding culture is from employees’ as well as from customers’ perspective
is equally important. Organisations enter foreign markets to make profits. Overcoming cultural
distance is viewed as an opportunity by MNEs. It also appears to increase entry costs, reduce
operating income and hinder the company's ability to shift core competitiveness of their home
countries[ CITATION Pen171 \l 2057 ].

For food & beverage MNEs, Ruth, et al., [CITATION Fil11 \n \t \l 2057 ], explain in their study
importance of cultural distance in international business. The foreign choice of a multinational
company depends, on the situations of the host country, such as political stability, a credible legal
system, some degree of protectionism and so on. Higher Gross Domestic Product (GDP), large urban
population, protectionism and organisations, centralized markets, availability of cheap inputs and
raw materials and participation in large trading nations (e.g. EU). Due to the cultural distance,
companies may face higher risks and costs as they expand beyond their area of origin. The critique
regionalization theory suggests that it is also necessary to explore the expansion of multinational
corporations in different cultural areas, because culturally similar countries may exist outside their
regions [ CITATION Fil11 \l 2057 ].

The idea that multinationals are attracted to countries that speak the same language or have similar
cultures is not new to the literature [ CITATION Beu18 \l 2057 ]. According to this theory, the order
of penetration into different markets is based on the cultural similarity with the ethnicities of
multinational corporations. Some examples of the "cultural distance" between the home country
and the host country provided differ in language, education and business practices. According to the
theory of international production, the more the country and the host country are different in taste,
value, ethics, etc., more difficult it is for multinationals to operate and respond to local
demand[ CITATION Beu18 \l 2057 ].

Interestingly, explained in [ CITATION Hal18 \l 2057 ], when Proctor and Gamble tried to enter the
Italian market with the green "Swiffer Wet Mop", they learned some impressive information about
Italian women and their cleaning habits - owning the cleanest homes in Europe. It is estimated that,
on average, Italian women will spend 21 hours cleaning per week, compared to 4 hours for American
women. The weekly routine involves cleaning the kitchen and bathroom floors at least four times a
week, and ironing clothes and even underwear and linen at regular intervals. This means that they
buy many cleaning products. With this information, Procter & Gamble did not collect data on any
due diligence by performing a focus group. P&G believes that women will be swept under the
carpet. Italian women will love Swiffer wet mops because they reduce the time they spend on
cleaning. However, the product unfortunately failed because the P&G brand management team did
not understand why women preferred cleansing methods.

Findings of Hall, et al., [CITATION Hal18 \n \t \l 2057 ] state , convenience and time saving are not
concerning for Italian women, strong detergents and washing are essential. Women should be
convinced that the fog from the plastic mop is as strong as pouring "elbow grease" into a durable
bucket with hands and pour it into the cleaned floor. Although the value of "fast and convenient"
products is appreciated by American women, Italian women see it as cheating. They do things the
old-fashioned way.

Strategy & Cultural Distance

When conquering new markets, one of the key strategic decisions is to choose between a global
integration strategy and a national response strategy. The latter stated that the strategy itself and its
implementation were mainly developed for the host country, with the former referring to
coordinated intercultural within the subsidiary. Likewise, a distinction must be made between global
branding strategies and local branding strategies [ CITATION Gol15 \l 2057 ]. Theory suggests,
multinationals can choose to concentrate or decentralize their operations and processes when going
abroad. In order to achieve the best results and to consider the long-term consequences, the choice
of entry method must be in accordance with the overall strategy of the company, that is, the
company should try to align the choice of entry with the overall strategy of the company [ CITATION
LiJ10 \l 2057 ].

A good example of this: Wal-Mart's entry into the German retail market: a lack of enough cultural
knowledge and adaptability to local culture hampers economic success, even if a good business
model is established. Wal-Mart relied on its business model but forgot to face local challenges. The
Wal-Mart case highlights the fact that the choice of entry way is usually not given much thought.
This retail example shows us that the company's overall global strategy must be conscious to cultural
distances. Choosing the mode of entry can help reduce or can increase cultural distance, which is a
major challenge for multinationals [ CITATION Tul17 \l 2057 ].

The cultural distinctions between MNEs and country of origin play a crucial role in the selection of
growth strategy. However, the exact significance of this relationship is not found conclusive in the
existing literature. On the one hand, a series of studies suggest that the larger the cultural divide, the
less shares held in the company and the increasing popularity of collaborative alliances in growth
strategies. However, other authors argue, in presence of different cultures, companies want to
expand their ownership and therefore enforce their own management practices[ CITATION Cun13 \l
2057 ]. Measures to avoid uncertainty and cultural distance come from the work of Hosftede (1980).
Findings of Cunill, et al., [CITATION Cun13 \n \t \l 2057 ] suggest, a country that is culturally
different from the home country and host countries possess volatility, companies prefer to share this
risk with local partners because this type of agreement provides the flexibility needed to operate in
this environment.

Previous research has emphasized that retailer internationalization processes are challenging, and
complex compared to the challenges faced by manufacturers. Instead of relying on traditional export
strategies, retailers need to create new stores in new environments, develop new distribution
systems, and emphasize cultural differences in daily interactions with local customers. Because of
these differences, there are some doubts as to whether internationalization theories can even be
applied to the retail industry[ CITATION Pen17 \l 2057 ].

Cultural distance, has now become extensive part of global research at all levels of business,
including branding, strategy & innovation, human resources management, financial accounting and
business management. The idea that cultural values influence the way international investment
decisions are made is not new. Samiee, [CITATION Sam13 \n \t \l 2057 ] investigated foreign
investment decision-making processes and carefully studied the company's international investment
decisions. This culture is recognized in Aharoni (1966) work as an integral part of many such
decisions, where the cultural distance implies the closeness of personal values and beliefs (like the
firm’s home country) with respect to the target investment plan.

Samiee [CITATION Sam13 \n \t \l 2057 ], found that businesses in early foreign investment
decisions prioritize countries where cultures are considered more alike and geographically nearer to
home country. Others have argued that foreign access to markets is easier to manage if there is a
relationship between the target country. It is also believed that cultural distance will have a greater
impact on the early stages of internationalization, because cultural distance can be used as an
alternative means of reducing risk to compensate for limited international business experience of
MNE and play a greater role. In short, cultural distance seems to be an alternative way of reducing
market entry risk. However, although cultural distance has an intuitively appealing effect on the
decision of entry models (for MNEs) to the international market, proven evidences are in favour and
against as well.

Research in Hotels- Customer & Organisation Perspectives

Gémar, [CITATION Gém14 \n \t \l 2057 ] implies, the existence of a cultural distance does not mean
that the hotel chain will not be internationalized in a particular country. Cultural distance will affect
the internationalization of hotels, especially in the choice of entry methods, which has been of great
importance in many studies. The hotel chain selects a method of entry that meets the cultural
requirements of the host country. To reach an agreement, it is mandatory to take cultural distance
into consideration. The main contribution of Gémar, [CITATION Gém14 \n \t \l 2057 ] was to
measure cultural distance with the Gesteland model, not the Hofstede model. Gestland model
concentrate on modes of communication and appearance that is also known as soft skills and
grooming. Being apt to the hospitality industry, it also helps to show that it has nothing to do with
how the company specifically selects the input model, which has been proven in many studies.
When internationalizing hotel companies, it is important to pay attention to some aspects of
Gesteland (especially the first aspect of focusing on transactions) to help negotiation succeed.
However, cultural distance is important when choosing a method of entry, but not necessary when
choosing a country to invest in.

Th study on Hong Kong visitors by, Qian, et al., [CITATION Qia17 \n \t \l 2057 ] explored, the impact
cultural distance can have on visitor profiling & satisfaction, and travel & spending patterns. The
results of the study show that cultural distance has a negative impact on certain travel
characteristics of Hong Kong leisure tourists, including the rate of revisits, the length of their stay
and the amount they spend in Hong Kong. Therefore, the greater the cultural distance between
Hong Kong and the home market, the fewer repeat customers, the less time and money will be
spent. Due to the lack of familiarity with Hong Kong, as the cultural distance grows, the number of
tourists who prefer guided tours is gradually increasing.

This finding shows that Hong Kong can focus on markets with smaller cultural distance remotely as
its market focus, increased promotional efforts, make tourists from these markets comfortable in
Hong Kong. For high cultural distance tourists, Hong Kong can offer guided tours or group tours by
making them feel protected and create a great destination image. Although overall satisfaction is not
high tourists still maintain a high rate of revisit and recommendation[ CITATION Qia17 \l 2057 ].

[ CITATION Mar17 \l 2057 ] Tourists' cultural background influences their behaviour, plans, activities
and interests. Culture relates to the hotel's cultural expressions through its architecture, decoration
and interior style, as well as the entertainment channels and cuisine provided to tourists. Many
studies have examined the relationship between hotel themes and image strategies. A key factor
that influences tourist responses to a hotel’s cultural theme is the cultural distance experienced by
the tourist. Specifically, when a Western tourist visits China and stays in a Chinese or Western
themed hotel. The two cultures are the tourist’s country of origin and the culture of the tourist’s
vacation destination. Cultural distance has an important influence on tourists.

Explanation for selecting culturally similar destinations by Western tourists is the desire to avoid the
cultural shock that tourists can experience when traveling to culturally distant countries for
vacations. Cultural misunderstanding can lead to anxiety and uncertainty, which can lead to
consumer dissatisfaction [ CITATION Mar17 \l 2057 ]. However, by providing tourists with culturally
acclaimed hotel food, decoration and entertainment, hotels can shrink tourists to a "familiarity
bubble", thereby reducing the pressure they feel when exposed to distant cultures. Western tourists
choose low culturally distant countries as holiday destinations is the lack of social interaction in
individualized countries, which may prompt individuals to seek affinity in other culturally similar
societies, which may be easier.

Conclusion
Cultural distance hold both, positive and negative aspects perspective in research and practice. High
cultural distance makes things complex for multinationals in various forms. Cultural distance as a
crucial part of global research at all business levels, marketing, strategy formation, human resources
management (HRM), finance and business management. Higher cultural distances lead to greater
complexity and vis-e-versa. In case of high cultural distance if multinationals have limited resources
& ability to cope with complexity, hence can only resolve a certain amount of issues successfully.
Foreign investment, management, stake holding etc., such decisions can be affected due to cultural
distance as a factor. Some firm see cultural distance as an opportunity to expand their brand, some
may perceive it as another hurdle of draining money into low commitment resources. Results show
that it is not international expansion itself that negatively affects profit margins, growth of culture
distance affects it adversely. In hospitality sector, customer’s preferences can be affected if high
cultural distance is experience by them. It can also spike tension and anxiety among tourists. The
main findings suggest that the choice of cultural distance can solely effect business entry decisions
based on host country factors. These can be in favour or against the policies adhered in home
country. This study contributes to comparing the results of this article with those of other similar
studies in the international hotel industry and other multinational companies.
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