Cultural Distance & Learning:

Cultural Distance:

Globalization has impacted the individual’s life and work intensely in the past years. Companies

that have units outside of their home country have to deal with several differences between their

home country and the countries where they have subsidiaries. For example, North-American

multinationals working in Asia found a very different work environment, with several differences

in language, culture, politics system, educational level and industrial developmental level. In

international business, those differences are called psychic distance (coined by Beckerman

(1956) on the basis of his analysis of studies on intra-European trade flows). Psychic distance is

therefore related to the possibility of determining the extent of the differences when expanding a

company’s operations abroad. Although the dimensions of psychic distance are represented by a

sum of the geographic, administrative, cultural and economic distances among countries, cultural

administrative & economic distances are the key psychic distances.

Figure: Dimension of Psychic Distance

Psychic Distance

Administrative Distances

Cultural Distances

Economic Distances

Cultural distance is one of the most complex dimensions, as the analysis of a culture is subjective

and mostly intangible. It includes not only cultural differences, but also structural elements, such

as those arising from administrative, economic, and legal system-related differences, as well as

language differences. Therefore, we can imagine that a company’s international strategy, in terms

of market choice and entry mode implies certain cultural distance.

Dimension of Cultural Distance:

Considering the cultural distance, there are 3 dimensions which are given emphasis by the firms.

Figure: Dimensions of Cultural Distance

The Cultural Distance Effect:

National cultural distance can be defined as the extent to which the shared norms and values in

one country differ from those in another (Chen & Hu, 2002; Hofstede, 2001; Kogut & Singh,

1988). The theoretical reason why the cultural distance to the target country should affect

expanding abroad is that firms located in culturally distant countries have radically different

organizational and managerial practices as well as communication styles, and are hence difficult

to integrate into an MNE’s corporate network after they have been acquired. MNEs are therefore

more likely to enter culturally distant countries through investments; as such investments allow

Language

•Considers the distance between the home language and the language of the other country, as well as the percentage of the population that is able to speak the latter.

Religion

•Considers the distance between mostly followed religion in home country and the dominant religion of the other country, as well as the percentage of the population that follows the latter.

Culture

•Composed of four discrete indicators: power distance, individuality, masculinity, and aversion to uncertainty.

MNEs to introduce their practices from the outset to a carefully selected workforce that fits their

culture. However, cultural distance effect creates very natural biases. Companies usually look for

countries abroad where their experiences in the home market would be most useful, where the

cultural synergy would be maximized. And they can utilize their experiences in dissimilar

cultural countries. It also helps to analyze the possibility of differences in action & predictability

of disadvantages from a competitive standpoint. Japan’s exporting companies generally started

trade with the Southeast Asian countries before moving on to Latin America & Australia.

The International Learning Curve:

The cultural distance path allows gradual accumulation of know-how about how to do business

abroad. And a learning curve means learning through the timeline of doing business to culturally

similar countries & extending its business to a culturally different & competitive country market

when experienced from learning and adapting to the foreign country cultures. Labour efficiency,

standardization, specialization, methods improvements, technology-driven strategies, resource

mix, product redesign, network-building and cost reduction are examples of learning. It

gradually increases the productivity of the managers involved. It also helps to create a common

rationale for choosing countries to enter, analyze foreign environments, gain capabilities,

appropriate strategies & tactics.

In the beginning, even a great potential in a psychically distant market may not be exploited

because of the additional transactional costs like geographic, cultural or economic & so no. Only

an experienced international marketer eyes for the new and important country markets like the

US market. Japanese firms tend to enter Southeast Asian markets following the minimum

cultural distance path first and then, looking for diversification, enter Latin American markets.

As skills and confidence grow, they eye for the US market with its great potential. But before

entering US or European market, they will enter Australian market to make sure they will be able

to sustain penetration in a country with similar characteristics. Finally, only with sufficient

success & learning they will enter the US market.