Navigating geographic and cultural distances in international expansion: The paradoxical roles of firm size, age, and ownership

Abstract

Research Summary While geographic and cultural distances deter firms' international expansion, they do so via different mechanisms, such that firms with advantages in overcoming one‐dimension may face disadvantages in overcoming the other. Larger, older, and state‐owned firms have better access to resources in their home countries than smaller, younger, and non‐state‐owned firms, and thus are less concerned about the high operating costs associated with larger geographic distances. However, they are less adaptable to culturally distant countries and thus are more concerned about larger cultural distances. We propose that firm size, age, and state ownership weaken the deterrent effect of geographic distance while amplifying the deterrent effect of cultural distance. Results using data on Chinese firms' location choices of foreign direct investments in 2001–2013 support our predictions. Managerial Summary A key decision that managers need to make in expanding overseas is the foreign location choice. Although managers generally refrain from expanding to geographically and culturally distant countries, the importance of geographic and cultural distances in their consideration varies across firms, which tend to differ in resource endowment and adaptability. Because larger, older, and state‐owned firms are better positioned to absorb additional operating costs but are less adaptable to foreign countries' local environments than smaller, younger, and non‐state‐owned firms, the deterrent effect of geographic distance (cultural distance) is weaker (stronger) for the former than for the latter. Our findings show that foreign countries that seem to be good fits when considering geographic distance may be misfits when considering cultural distance, and vice versa.

Do Chinese firms benefit from government ownership following cross-border acquisitions?

“…In contrast, larger cultural distance indicates more barriers rooted in informal rules which may be overcome with substantive government support from agencies located in the host countries. It should be pointed out that extant literature shows negative direct effects of cultural distance on FDI location choice of Chinese firms (e.g., Kang & Jiang, 2012;Li, Zhang, & Shi, 2019). This study suggests that culturally distant locations are likely the right circumstances for Chinese firms to leverage the government support despite the expected challenges arising from unfamiliarity with informal rules.…”

Post-entry growth in scope and scale among Chinese multinational enterprises: a structural embeddedness explanation

“…Second, based on the same reasoning, we controlled for firms' age and firms' size, which are closely related to the internationalization growth (Prashantham et al ., 2020). Third, we controlled for firms' overseas annual sales in the previous three years and internationalization experience, both of which reflect enterprises' international development status (Li et al ., 2020). Finally, the industry, as well as the type of international business, can be expected to affect firms' global expansion process (Sharma and Kesner, 1996).…”

Cultural distance and customer orientation strategy of Chinese service MNEs under the belt and road initiative

“…The Uppsala model advocates that the impact of cultural differences will gradually decrease as organisations acquire professional knowledge on the international stage (Hakanson and Ambos, 2010). So, we can see that cultural distance hinders international expansion, enterprises are unlikely to expand to countries with a higher level of cultural distance since they need to change their organisational practices to adapt to the culture of host country (Li et al, 2020). On the contrary, many studies have found that there is a positive correlation between cultural distance and performance.…”