Cultural distance

M.L. Helmrich
S.J. Hager
Concerns: Cultural distance assignment

1. What is the formula developed by Kogut and Singh in 1988 in the Journal of
International Business Studies? Explain the formula in your own words.

1.1 Kogut and Singh developed the thesis that as the cultural distance, that is the
difference in language, religion, race and social norms between countries, increased,
the firm would choose a joint venture over an acquisition and the amount of US FDI
would decrease. The formula they used is:
4
CD j =∑ {( I ij −I iUS )2 /V i }/4
i=1
CDj stands for the distance between a country j and the US. Iij is the score of country j
on the ith dimension. IUS is the score of the US on the same dimension as for Iij . Vi is
the variance of the dimension’s score.

2. Calculate the distance on each dimension between the Netherlands (our home country)
and a specific host country using the Excel program.

2.1 The host country we have chosen is : Portugal

Home-Country:
PDI = 38
UAV= 53
IND = 80
MAS = 14

Host-Country:
PDI = 63
UAV = 104
IND = 27
MAS = 31

Differences:
PDI = 25
UAV = 51
IND = 53
MAS = 17

CD = [(25*25)/503,2+(51*51)/605,5+(53*53)/620,8+(17*17)/324,1]/4 = 2,73
3. The Kogut-Singh index of cultural distance also contains the variance of each
dimension. Answer the following questions:

a. Why do you need to control for the variance of each dimension?

3.a We need to control the variance for each dimension in order to find the
Cultural Distance between the countries. Without variance the formula is
incomplete, therefore it is necessary to know the variance in order to do the
calculations.

b. In the bottom row of the columns you will find the variance for each culture
dimension. What dimension has the highest variance?

3.b The dimension with the highest variance is Individualism/Collectivism with

620,8.

c. What does a high variance mean?

3.c A high variance means that there is a higher mean within the dimension, and
therefore the higher the variance is, the greater is the span of values in this
dimension and therefore there is also the most differences between the
countries in this specific dimension.

4. Calculate the cultural distance using Kogut and Singh formula while using the
Netherlands as the home country.

The following steps have been taken to get the overall Kogut and Singh formula
with the Netherlands as the home country:

1) Differences calculated on each dimension for all the countries,

compared to the Netherlands.
2) Squared all the differences on each of the dimensions.
3) Divided the differences found in step 2 by the overall variance found
in the first four columns.
4) Summed up the values found in the previous step, and divided them
by four to get the average distance (Kogut and Singh) per country
compared to the Netherlands.
5) Summed the Kogut and Singh results per country and divided them
by 58 to get the mean Kogut and Singh result compared to the
Netherlands. The value of this mean is 2,91425762
5. Which four countries have the lowest cultural distance to the Netherlands?
1) Norway CD is 0,10455721
2) Finland CD is 0,25473304
3) Sweden CD is 0,35726833
4) Denmark CD is 0,58794018

6. Which country has the highest cultural distance?

1) Japan CD is 6,28093005

7. What is the average cultural distance between the Netherlands and these 58 other
countries?
Clarification in question 4.5

8. Pick a host country and relate the cultural distance score between the Netherlands and
that host country to the 7 points of critique raised by Shenkar as discussed in the
lecture.

We have chosen China as a host country, which as an overall cultural distance of 4,63
compared to the Netherlands.

1) The illusion of symmetry

As mentioned in the lecture the cultural dimensions theory assumes that both
countries have equal possibilities to exchange. For example it may be more
difficult to establish a business for the Dutch in China, than for the Chinese in the
Netherlands. This is due to external factors which are not included in this model.
2) The Illusion of stability
Especially in the current global environment, cultural dimensions constantly
evolve during time. For example the recent global credit crisis will most probably
have a big influence on the cultural distance between China and the Netherlands,
this could imply that the value of 4,63 maybe is even to low considered the current
conditions.
3) The illusion of linearity
As companies enter a foreign market, the cultural dimensions are assumed to
evolve linear but they are also dependent on the learning curve of the individual
company. For example the availability of skilled managers to cope with
international pressures can be of high influence on the way a company perceives
cultural distance. There are examples of successful Dutch companies who failed in
China due to full inability to cope with the cultural distance.
4) The illusion of causality
While China is geographically more far away than for example Saudi Arabia, it
has a lower cultural distance score. This is an example of the fact that cultural
distance is only measured in a relative scale as if the countries were all next to
each other. Also institutional systems are not included, which imply also a great
difference in cultural distance. For example China has a communistic regime but
the Netherlands has a democratic parliament. Factors like this also have high
influence on cultural distance.
5) The illusion of discordance
 While the various elements in the cultural dimensions have equal contribution in
the model, in practice they might have a differing influence. For example in China
informal communication is valued as much more influencing than in the
Netherlands. In the model these differences are not being taken into account.
6) The assumption of corporate homogeneity
The model assumes a company culture will behave identical to the national culture.
This is most probably not the case as Chinese companies will be much more
aligned with domestic culture than potential entrants with a Dutch origin will be.
7) The assumption of spatial homogeneity
When a company from the Netherlands will enter China, it will make a huge
difference if the company will expand for example to the capital Beijing or to the
west of the country in for example Xining. In Beijing there will probably be a
more international culture than in Xining, which will have large influence on
cultural distance.

9. Assess the strengths and weaknesses of the Kogut and Singh measure of cultural
distance.

The strengths and weaknesses of the Kogut and Singh measure of cultural distance
will become apparent when you actually start applying the formula, it is a theoretically
well-founded method to define cultural differences, but the practical part is difficult to
paint . After some calculations an outcome of numbers shows us how big the cultural
differences are, but not what the cultural differences actually are. So after using this
method, we see that there are differences, and how big these difference are, but we do
not see what specifically these differences are, besides how should we know on the
basis of numbers, what we should change from our home country or adapt from the
host country. Nevertheless this formula offers the advantages that we see the fact that
there are many or less differences between the home country and host country. On
that particular basis these results of cultural differences can determine whether we
should decide to which host country extend our company.