Excerpt
Table of Contents
0. Abstract
1. Introduction
2. Most Common Concepts
2.1 Cultural Distance
2.1.1 Cultural Indices and Hofstede’s Cultural Dimensions
2.1.2 Shalom Schwartz’s Framework of Cultural Dimensions
2.1.3 Ghemawat’s Managerial-Based Framework
2.1.4 Cultural Clusters - The Empirical Framework of Ronen and Shenkar
2.2 Institutional Distance
2.3.1 Institutional Distance - A Regulative and Normative Approach
2.3.2 Institutional Distance - A Multidimensional Approach
2.3 Psychic Distance
2.4 Linguistic Distance
3. Critical Review of Common Distance Concepts
3.1 Critical Review of Cultural Distance
3.2 Critical Review of Institutional Distance
3.3 Critical Review of Psychic Distance
3.4 Critical Review of Linguistic Distance
4. Discussion and Limitations
5. Executive Summary
6. List of Literature
List of Abbreviations
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0. Abstract
This paper’s purpose is to give an overview of how distance in management research is measured and to overview the strong critique the corresponding measures have to face. The paper’s investigation brought several findings firstly that frameworks in which distance constructs develop are too wide in their definition and that these frameworks are insufficiently connected to each other what impedes the improvement of the strong criticised but in management research essential constructs. Secondly the paper illustrates the widespread disagreement among researchers and literature. The paper gives suggestions how distance measures could be improved and contributes to a more ‘outside of the box thinking’ by considering the whole distance construct. Furthermore it helps to build unbiased opinions of the thematic by not taking a side or giving suggestions whether on construct is superior towards another.
1. Introduction
Due to rising internationalization of businesses and the circumstance of having business partners, suppliers and clients placed all around the world, companies are fronting challenges like diversities in lifestyles, languages, cultural values and norms, consumer preferences and buying power (Albaum and Tse, 2001; Lu and Beamish, 2001; Penaloza and Gilly 1999; Pornpitakpan, 1999; Sousa and Bradley, 2005). So it is not surprising that these differences or distances became an increasingly important topic in international management research. Distance aspects are important for companies in evaluating and improving their international strategies in nearly every field of business i.e. marketing, management, accounting and finance, especially when it comes to expansions in foreign investments through direct investments, international transactions and joint ventures (Shenkar, 2012). In purpose to be able to identify the extent of difference between countries, that Hymer (1960) called ‘liability of foreignness’, management scholars evolved a broad range of quantitative and qualitative distance measures based on different assumptions and methods. But although the concepts play an important role in international management research and although they are widely used in international business practice to support or to improve companies’ decision-making process, they face strong criticism and contradiction (Gomez-Mejia, L. R. and Palich, L., 1997). The main purpose of this paper is to give a review of some common measures of cultural, institutional, psychic and linguistic distance. Afterwards there will be a critical review of the constructs, following by a discussion addressing eventual merits some constructs have towards others. There will be an outlook where future research could tie up, general advices will be given how to improve the common concepts and finally a small conclusion will summarize the investigated facts. Due to space limitation this paper does not include all common measures and due to complexity of the theme the criticism section will be kept general, discussing the main concepts with a stronger focus on cultural and institutional distance concepts, not going into detail on specific measures.
2. Most Common Concepts
In international business research there are different concepts and methodologies used to measure distance. Cultural distance is probably the most common used concept (Shenkar, 2012) which is why my main focus lies on this construct. The second concept on which this paper focuses is the concept of institutional distance which is often defined as the extent of similarity or dissimilarity between the regulatory, cognitive, and normative institutions of two countries (Kostova, 1997). The third concept the paper reviews is the psychic distance construct that is also widely used in international management and business research. Finally there will be a short review of the linguistic distance construct.
2.1 Cultural Distance
Shenkar (2012) states that the cultural distance construct is one of the concepts that received largest recognition in international business literature and that it has been used in many research areas, from organisational changes and restructuring to foreign extensions and technology transfers (Gomez-Mejia & Palich, 1997). It is an often used paradigm of researchers who study foreign direct investments concerning entry mode and market entry strategies, performance of foreign direct investments (Barkema, Bell and Pennings, 1996 and Kogut and Singh, 1988) or joint ventures performance (Pothukuchi, Fariborz, Jaepil, and Seong, 2002). A broad range of international business scholars base their work on Geert Hofstede’s cultural dimensions while a few others base it on Shalom Schwartz’s work (Drogendijka, Slangen, 2006). First there will be a review of the in management research widely used Kogut and Singh index. The second and third concepts that will be reviewed are the managerial based framework of Ghemawat (2001) and the empirical framework of Ronan and Shenkar (1985).
2.1.1 Cultural Indices and Hofstede’s Cultural Dimensions
The last decades management researchers in particular used broad variations of the cultural values framework of the Netherlands scientist Geert Hofstede to measure cultural distance. His work is probably the most wide-ranging and possibly the most influential in the area of cultural distance up to the present time. (Kirkman, Lowe, Gibson, 2006; Sousa and Bradley, 2006). His main work ‘Culture’s Consequences: International Differences in Work-related Values’ describes how values are influenced by one’s culture and how behaviour is connected to these values. A wide range of researchers used Hofstede’s framework and his formula or variations of it as basis for several studies. Bruce Kogut and Harbir Singh were the first ones who united Hofstede’s dimensions into one single cultural distance index (Agarwal 1994; Brouthers and Brouthers 2001; Grosse and Trevino 1996, Manev and Stevenson 2001; Morosini, Shane and Singh 2001). In turn a number of other studies like the ones of Barkema and Vermeulen (1997), Erramilli and Rao (1993) or Hennart and Larimo (1998) based their estimations of CD between nations on Kogut and Singh’s measure. Furthermore the index of Kogut and Singh is considered to be the in international management literature most broadly adopted measure for distance (Benito and Gripsrud, 1992). Hofstede’s initially work on which the index is based is founded on four dimensions known as power distance index (PDI), uncertainty avoidance index (UAI), individualism vs. collectivism (IDV) and masculinity (MAS) vs. femininity (Hofstede 1983). Later Hofstede added a fifth and sixth dimension to his framework known as long-term orientation vs. short term orientation (LTO) (Hofstede and Bond 1988) and indulgence vs. restraint (IDR) (Hofstede 2010). The power distance index measures to which extent subordinates of companies or organisations accept and expect that power is unequally distributed. High power distance stands for an unequal distribution of power; low power distance stands for equally distributed power. The uncertainty avoidance index measures the extent to which members of a society feel anxiety towards ambiguous or unknown situations. High scores in the UAI stand for high anxiety and avoidance of behaviours which could increase it. The dimension of individualism vs. collectivism represents to which extent individuals of a society are assimilated into groups. The dimension of masculinity vs. femininity represents the cultures’ value preference; masculine cultures’ values are for instance focused on competitiveness, materialism and power, while feminine cultures’ values are focused on quality of life and relationships (Hofstede 1983). The fifth dimension represents a culture’s long or short term orientation. Societies with a long-term orientation attach more importance to the future. They are value oriented towards future rewards. In contrast values of a shortterm oriented society relate to the present and the past, including values like the respect for tradition and the fulfilling of social duties and obligations (Hofstede and Bond 1988, Hofstede, 2011). Kogut and Singh developed a theoretical framework based on two hypotheses to examine how the selection of entry modes (acquisitions, joint ventures and wholly owned greenfield investments) of firms, headquartered outside the US, is influenced by national cultures’ characteristics when entering the United States market. They used a multinomial logit model and tested their hypotheses by analysing 228 US market entries (Kogut and Singh 1988). One of Kogut and Singh’s study’s hypothesis was that a foreign company is more likely to set up a joint venture in the United States if there is a larger extent of cultural distance in norms and values between the company’s homeland and the US (Kogut and Singh 1988). To measure the extent of CD in a single index Kogut and Singh combined the indices of Hofstede’s initial four dimensions, for each country’s deviations, from the United States rank. The deviations were corrected for differences in the variances of each dimension and afterwards arithmetically averaged. The algebraically index is as below:
CDj refers to the cultural distance of the jth country from the United States, ltj is the index for the ith cultural dimension and jth country, u indicates the United States itself and Vt is the index’s variance of the ith dimension (Kogut and Singh, 1988).
Researchers like Evans and Mavondo (2002) or Magnusson et al. (2008) later included Hofstede’s fifth dimension in their studies by using a modified version of the index. Other studies modified Kogut and Singh’s index to base it on the nine dimensions of GLOBE (e.g. House et al. 2004).
Another measure of cultural distance that is based on Hofstede’s four dimensions is a Euclidean distance index (Drogendijka, Slangen, 2006). Vermeulen and Barkema (2001) for instance used this concept in their research of acquistions’ influences on a firm’s future development and expansion. The concept is based on the Kogut and Singh formula and was developed by Morosini, Shane and Singh (1998). Compared to the index of Kogut and Singh it assumes that differences in each of the four dimensions’ scores are different in their importance and it does not presume additivity and linearity. In other words some dimension’s scores differences are weightier than others (Drogendijka, Slangen, 2006). The algebraically index is as below:
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CDj refers to the cultural distance of the jth country to the Netherlands, ltj is the index for the ith cultural dimension and jth country, n indicates the Netherlands itself and Vt is the index’s variance of the ith dimension. Following (Drogendijka, Slangen 2006, Vermeulen Barkema, 2001) this calculation is probably more reliable than the Kogut and Singh index because a square root seems to them more suitable compared to the arithmetic average.
2.1.2 Shalom Schwartz’s Framework of Cultural Dimensions
Beside Geert Hofstede, Shalom Schwartz also developed a framework of cultural dimensions; it is based on seven culture-level value types. Shalom Schwartz created a value survey based on theoretical as well as on empirical research. Schwartz identified an extensive set of 56 individual, across cultures recognized values (Schwartz, 1994, 1999). His survey questioned more than 15000 teachers from 67 countries. His survey claims to cover all value dimensions that explain inter-country cultural variation. Schwartz scanned which values had a nearly equivalent meaning across countries what made it possible to reduce the number of values to 45. Schwartz’s work resulted in a total of seven culture-level value types by the use of smallest-space data analysis for the averaged scores of the value items for each country. These value types can be categorized under three dimensions which are labeled as conservatism vs. autonomy, hierarchy vs. egalitarianism and mastery vs. harmony (Schwartz 1994, 1999). Schwartz’s first dimension: conservatism vs. autonomy refers to relationships between individuals and groups. While autonomy defends the individual’s pursuit of ideas and intellectual directions and affectively positive experience, conservatism stands for the identification with a group and their goals, the wish to inhibit potential disrupting actions and to obtain group traditions. Values describing these categories are for instance creativity (intellectual autonomy), the appreciation of having an exciting and varied life (affective autonomy) on the one hand and the hold on social orders, discipline and the respect of traditions on the other hand. Schwartz’s second dimension: hierarchy vs. egalitarianism refers to the management of interdependences through capable and cooperative activities. The desired way to regulate interdependencies between individuals is based on the socializing of individuals to accept other individuals as morally equal, to neglect selfish interests and to cooperate voluntary. It includes values like equality, social justice, honesty and loyalty. Hierarchy supports in contrast values like authority, social power and wealth. The third dimension: harmony vs. mastery deals with the regulation in the use of resources. Values like the desire for a world in peace, the unity with nature or environmental protection are related to harmony, others like ambition, influence, power or success belong to the category of mastery (Schwartz 1994). Some researchers use Kogut and Singh’s index as well as the Euclidean index to unite Schwartz’s cultural dimensions as an alternative to the use of Hofstede’s four dimensions (Drogendijka, Slangen 2006).
2.1.3 Ghemawat’s Managerial-Based Framework
Pankaj Ghemawat states that besides the cultural, there is an administrative, a geographic and an economic dimension through which distance is expressed between two countries. In his managerial-based framework ‘the CAGE’ he combines these different dimensions (Ghemawat, 2001). Researchers like Malhotra, Sivakumar, Zhu (2009) for instance used Ghemawat’s framework in their research of marketing strategies as empirical provision to the role of distance factors in target market selection of multinational enterprises and their foreign market acquisitions behaviour. Ghemawat separated the single dimensions in characteristics that create distance and in industries or products that are affected by these distances. This paper’s focus only lies in his framework’s cultural dimension. Following Ghemawat (2001) cultural distance can be affected by differences in ethics, languages, religions and social norms or values. When considering products that are affected by cultural distance or affect cultural distance one can see that products, like movies for instance, have a high linguistic content, products like food affect cultural and national individuality of consumers, that product features vary in size and standard in different countries and that products like wine have country-specific associations. Another aspect of his work is that there are more and less sensitive industries regarding CD. Following Gheamat (2001) the meat and meat preparation industries for instance as well as the tobacco industry or industries producing cereals and cereal preparations have a greater sensitivity to distance than vehicle, wood, metal and metalworking industries.
2.1.4 Cultural Clusters - The Empirical Framework of Ronen and Shenkar
There has been a long time of efforts to classify societies in clusters by analysing international-level data (Catell, 1950). Following (Gupta, Hanges, Dorfman, 2002) the maybe most referred and long lasting research findings concerning the clustering of societies are proposed by the empirical work of Simcha Ronen and Oded Shenkar (1985). Ronen and Shenkar (1985) analysed eight previous empirical cluster studies containing the ones of Badaway (1979), Griffeth, Hom, Denisi, Kirchner (1980), Hofstede and others. The previous studies contained variables which were divided into four groups: work goals importance; need deficiency, fulfilment and job satisfaction; managerial and organisational variables; work role and interpersonal orientation with a preference for work goal variables which are proposed to be one of the main links among a cultural milieu and an individual’s job behaviour, following England (1978) and Haire et al. (1966). For the analysis of their collected data from previous research Ronen and Shenkar used the smallest space analysis. The smallest space analysis is a nonmetric; multidimensional scaling technique. They presented the result of their cluster analysis in a map that groups countries according to similarity on work-related variables (Simcha Ronen and Oded Shenkar, 1985).
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Figure 1: A syntesis of country clusters.
Source: Ronen, Simcha and Oded Shenkar (1985), ‘Clustering Countries on attitudinal Dimensions: A Review and Synthesis, ’ Academy of Management Review, 10 (3), pp. 449.
Ronen and Shenkar base the clustering of countries on three main dimensions which are closely related to each other: geography, language and religion and a fourth dimension of technological development. The Nordic and Germanic countries for instance are strongly related to each other, others like Near Eastern countries or Latin European countries have a great distance to each other, Latin American countries are closely linked to Latin European countries. Brazil, Japan, India and Israel are independent countries not belonging to any of the clusters.
There is also a number of other cultural frameworks like the framework of Kluckhohn and Strodtbeck (1961), the framework of Inglehardt and Wenzel (2005), the seven dimensions of Trompenaars (1993) or the framework of Sagiv and Schwartz (2007) which have been adapted or modified, in several studies to measure the amount of difference between cultures (Sousa and Bradley, 2006). Another very important framework used to measure CD is the one of House, Hanges, and Javidan, Dorfman and Gupta (2004) known as the GLOBE (the Global Leadership and Organisational Behavior Effectiveness) model which contains nine dimensions and which is strongly influenced by Hofstede’s research (Li, Duncan and Green, 2010).
2.2 Institutional Distance
Beside the cultural distance, the institutional distance (ID) construct plays an important role in international management research. Institutional distance has effects on abroad market entry strategies, the attractiveness of foreign markets, international subsidiary management and the overall firm performance (Bae and Salomon, 2010). Consequently the concept is used by a broad range of business researchers: Kim and Hwang (1992), Larimo (2003), Chen and Hu (2002), Brouthers and Brougters (2002) and Xu, Pan and Baemish (2004) for instance used it in the research areas of foreign entry mode and ownership structure; Busenitz, Gomez, and Spencer (2000) used the concept in their entrepreneurship research and Kostova (1997) used it in the area of quality management. There are many varieties of institutionalism and therefore numerous ID measures have been developed (Scott 2001). What exactly institutions are and which institutions are used in business studies to measure institutional distance varies by the research topic and the according analysis (Aoki, 2001; Scott, 2001). Bae and Salomon (2010, p.3) state that the ‘... dimensions of institutional distance that have been studied can be broadly categorized as political, regulatory, economic, cultural, and cognitive’ and that they can be categorised as formal: political, regulatory, economic; and informal dimensions: cultural and cognitive. Following Hotho (2004) there are three major concepts of institutionalism in business literature: the new organisational institutionalism, the institutional economics and the comparative historical institutionalism. Due to the higher importance in international business studies and space limitation, the paper’s focus lies in the new organisational institutionalism.
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