Cultural Distance Revisited: Towards a

More Rigorous Conceptualizationand

Measurement of Cultural Differences

Oded ShenkarTHE OHIO STATEUNIVERSITY

Cultural distance is a widely usedconstruct in international business,whereit has been applied toforeigninvestment expansion, entry modechoice, and the performance of for-eign invested affiliates, among oth-ers. The present paper presents acritical review of the cultural dis-

ew constructshave gainedbroaderacceptancein theinternationalbusi-

ness literaturethan cultural distance(CD).Presumablymeasuringthe extentto whichdifferentculturesaresimilarordifferent,the constructhasbeenappliedto most business administrationdisci-plines, i.e., management,marketing,fi-nance and accounting.In management,CDhas been used as a key variableinstrategy,management,organizationbe-havior and human resource manage-ment.Theconstructhasbeenappliedtoa multitudeof researchquestions,frominnovationand organizationaltransfor-mationto foreignexpansionand tech-nology transfer (Gomez-Mejia andPalich, 1997) and fromaffiliateperfor-mance to expatriateadjustment(BlackandMendenhall,1991).It is in the areaof foreigndirectinvestment(FDI),how-

tance construct, outlining its hid-den assumptions and challengingits theoretical and methodologicalproperties.A comprehensiveframe-work for the treatment of the con-struct is developed and concretesteps aimed at enhancing rigor aredelineated.

ever,thatthe constructhashadits great-est impact.

To understandthe appealof the CDconstruct,it is usefulto recallthenatureof the phenomenonit is set to capture.Complex,intangibleand subtle,culturehasbeennotoriouslydifficultto concep-tualize and scale (Boyacigiller,Klein-berg, Phillips and Sackmann, 1996).Establishinga measuregaugingthe "dis-tance"betweencultureshasunderstand-ablypresentedanevengreaterchallenge.Byofferinga seeminglysimpleandstan-dardizedmeasureofculturaldifferences,the CDconstructoffereda tangibleandconvenienttool with which to bypassthe complexities and intricacies ofculture,yieldinga quantitativemeasureto be employed in combinationwithother"hard"data(seeKogutandSingh,1988).

Oded Shenkar (Ph.D., Columbia University) is the Ford Motor Company Chair in GlobalBusiness Managementat the Fisher College of Business, The Ohio State University.

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CULTURALDISTANCEREVISITED

The appeal of the CD construct is, un-

fortunately, illusory. It masks serious

problems in conceptualization and mea-

surement, from unsupported hidden as-

sumptions to questionable methodologi-cal properties, undermining the validityof the construct and challenging its the-oretical role and application. Those

problems, their implications and theirremedies are the focus of the present pa-per.

CULTURALDISTANCEIN THEFOREIGNINVESTMENTLITERATURE

For almost three decades, CD and its

proxies have been applied to multipleareas of business, from strategy to orga-nization behavior to accounting and au-

diting, in both domestic and interna-tional contexts. The construct found itsmost loyal following in international

business, where it has been used in suchrealms as foreign direct investment

(FDI), headquarter-subsidiary relations,and expatriate selection and adjustment.By-and-large, FDI represents the most

popular arena for the application of theCD construct, most often in the form ofan index compiled by Kogut and Singh(1988) from Hofstede's (1980) culturaldimensions.

In the FDI literature, CD has had three

primary thrusts. The first thrust has beento explain the foreign market investmentlocation and especially the sequence ofsuch investment by multinational enter-

prises (MNEs). The second, to predictthe choice of mode of entry into foreignmarkets. A third application has been toaccount for the variable success, failureand performance of MNE affiliates in in-ternational markets. A brief review ofeach of those three thrusts follows.

Cultural Distance and theLaunch/Sequence of Foreign

Investment

The first use of CD in the FDI literaturehas been to account for the very decisionof firms to invest in a foreign country. A

theory of familiarity emerged, arguingthat firms were less likely to invest in

culturally distant markets. Yoshino

(1976) and Ozawa (1979) viewed Japan'sCD from Western nations as a constrainton Japanese FDI in the West. In a similarvein, Davidson (1980) attributed the

large US investment in Canada and theUK -well beyond what their market size,

growth, tariffs and proximity wouldhave predicted- to cultural similarity.Dunning (1988), in contrast, argued that

larger CD between home and host mar-kets rather encouraged FDI as a way of

overcoming transactional and marketfailures.

A related and eventually more influ-ential use of the CD construct within the

expansion stream has been to predict the

sequence of multiple foreign entries.This work is closely associated with Jo-hanson and Vahlne (1977), who ob-served that Swedish firms progressivelyexpanded from their home base intocountries with greater "psychic dis-tance". This thesis has later becomeknown as the Uppsala process model, orthe "Scandinavian school" (Johansonand Wiedersheim-Paul, 1975; Luostari-

nen, 1980; Engwall, 1984; Welch and Lu-

ostarinen, 1988; Forgsren, 1989; Axels-son and Johanson, 1992). Support for theScandinavian thesis has been limited

(Thurnbull, 1987; Engwall and Wallen-

stal, 1988). Both Benito and Gripsrud(1992) and Sullivan and Bauerschmidt

(1990) failed to find CD to be a predictorof FDI sequence per the Johanson andVahlne thesis.

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CulturalDistance and EntryMode

The Scandinavian school also pre-dicted an incremental increase in invest-ment commitmentfromexports into FDI.It was not clear whether the two trends-incremental distance and incrementalcommitment- were to occur in tandem,however, a firstof many omissions in thearea.Eventually, the thesis predictingre-

lationship between CD and FDI modehas become synonymous with transac-tion cost theory (Wiliamson, 1985). The

higher the CD,the more control the MNEwas likely to maintain over its foreignoperations (Root, 1987; Davidson and

McFeteridge, 1985; Kim and Hwang,1992). Control was phrased as a choicebetween licensing and FDIbut more of-ten between the wholly owned subsid-iary (WOS)and the partially controlledinternational joint venture (IJV)(Agar-wal, 1994; Cho and Padmanabhan, 1995;Erramilli, 1991; Erramilli and Rao, 1993;

Kogut and Singh, 1988; Larimo, 1993;Padmanabhanand Cho, 1994).

The loosening of control in culturallydistant locations was seen as a way of

reducing uncertainty and informationcosts (Alpander, 1976; Richman andCopen, 1972). As Goodnow and Hansz(1972, p. 46) put it, "degree of controldeclines as the environment becomesless favorable". In predicting entrymode, transaction cost theorists associ-ate higher distance with a higher cost oftransactiondue to informationcosts andthe difficulty of transferringcompeten-cies and skills (Buckley and Casson,1976; Vachani, 1991). In transactioncosts, internalization is imperativewhenmarket agents are likely to take advan-tage of a firm's limited knowledge andwhen future transaction contingenciescould not be specified because of uncer-

tainty or complexity (Williamson, 1975;Beamish and Banks, 1987). In the ab-sence of internalization, it will not bepossible to verify claims by agents andreduce operational uncertainty or re-verse the investment all together (Wil-liamson, 1981).

The underlying though implicit as-sumption in incorporating CD into thetransaction costs argumentis that inter-national operationsarehighly uncertain.Presumably, it will be more difficult to

verify claims by culturally distantagents, since the agentswill make claimsrooted in an unfamiliar environmentwhile buffered from enforcement by anMNE. Roth and O'Donnell (1996) arguethat agency costs increase as a functionof CDbecause complete and accuratein-formation on agents'(subsidiaries') per-formance becomes more difficult andmore costly to obtain,resulting in higherdependence of headquarters upon thesubsidiary.

Gatignon and Anderson (1988) ac-

knowledge that CDdoes not fit very wellwithin the transaction costs argument.Logically, the theory can accommodateopposite predictions of the CD-controlmode relation. A firm may prefer lowcontrol to compensate for its lack ofknowledge in high CDsituations, relyingon a local partner to contribute localknowledge. Or, it may opt for high con-trol, i.e., a WOS, as a way of reducingdependence upon agents whose actionsare poorly understood. Anderson andGatignon(1986) suggestthathigh controlis perhaps more efficient when the en-trant'smethods confer a transaction-spe-cific advantagethat cannot be easily im-itated by other firms. "On occasion, op-eration methods that do not fit localculture will constitute the necessary ad-vantage that enable foreigners to com-pete with locals on their home ground"

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(Anderson and Gatignon, 1986, p. 18).Indeed, from a resource-based perspec-tive (Barney, 1991), the very ability to

bridge CD confers a unique advantage.Empirical results regarding the impact

of CD on entry mode are mixed (Benitoand Grisprud, 1992; Padmanabhan andCho, 1994). Eramilli and Rao (1993)found that low CD resulted in low con-trol, though the relationship was medi-ated by level of experience and asset

specificity. Pan (1996) found that the

larger the CD, the more likely it was for a

foreign partner to have an equal or a

majority stake in their Chinese IJV.Boy-acigiller (1990) found that CD was posi-tively related to control (defined as the

proportion of US nationals in the foreignaffiliate). On the other hand, Kogut and

Singh (1988) and Kim and Hwang (1992)report low control modes at high CD lev-els. Kogut and Singh (1988) found that

greater CD increased the likelihood of

green-field IJVs over both green-fieldWOSs and the acquisition of a control-

ling stake in an existing operation. Whilethe contradictory results can be partiallyattributed to the firms studied (the ser-vice firms examined by Erramilli andRao and Boyacigiller could have lowercontrol costs than the manufacturing en-

terprises researched by Kim and Hwangand Kogut and Singh), this is unlikely to

explain the full spectrum of inconsistentresults.

CulturalDistance and AffiliatePerformance

In this third application, CD has

largely been taken to represent a hin-drance to the performance of the MNEand its affiliates. According to Chang(1995), CD limits the ability of a MNE to

generate rent when entering new do-mains. Empirical results have beenmixed. Li and Guisinger (1991) found

that US affiliates whose foreign partnerscame from culturally dissimilar coun-tries were more likely to fail. Barkema,Shenkar, Vermeulen and Bell (1997)found that firms which have graduallyventured into more culturally distant lo-cations were less likely to have their af-filiates terminated prematurely; control-

ling for experience, IJV longevity de-creased with the CD to the host country.Johnson, Cullen and Sakano (1991) re-

ported that "cultural congruence" be-tween IJV partners had no effect on the

Japanese partner's perceptions of suc-

cess, and Park and Ungson (1997) foundthat a larger CD was actually associatedwith lower rate of JV dissolution.

HIDDENASSUMPTIONSIN THECULTURALDISTANCECONSTRUCT

The inconsistent results obtained forthe three FDI thrusts may be the result ofthe conceptual and/or methodologicalproperties of the CD construct. In this

section, these properties are culled froman extensive review of the literature ap-plying the CD construct to the domain ofFDI and enriched with insights from thebroader literature on culture, FDI, andrelated areas. The properties are pre-sented in the form of hidden assump-tions that largely go unnoticed but arenot supported by either logic or empiri-cal evidence.

The hidden assumptions appear intwo clusters, one emanating from the

conceptual properties of the construct,the other from its methodological prop-erties. Conceptual properties produce il-lusions that are the core of the CD con-struct and undermine its validity withinthe context of FDI theories. Methodolog-ical properties present instrumentationand measurement biases that distort theaccurate measurement of cultural differ-ences; they are most closely associated

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ODEDSHENKAR

with the Kogut and Singh (1988) indexbut address broader measurement issuesas well. While the two sets of propertiesare intertwined, they represent distinctsets of problems that require differentsets of remedies and are hence presentedin separate clusters.

Conceptual PropertiesThe Illusion of Symmetry. "Distance",

by definition, is symmetric: The distancefrom point A to point B is identical to thedistance from point B to point A. CD

symmetry is however difficult to defendin the context of FDI. It suggests an iden-tical role for the home and host cultures,for instance, that a Dutch firm investingin China is faced with the same CD as aChinese firm investing in the Nether-lands. There is no support for such an

assumption. Numerous studies haveshown the importance of investor cul-ture in predicting investment, entrymode and performance (e.g., Pan, 1996;

Kogut and Singh, 1988; Tallman, 1988).Other studies have shown a role for thehost culture. However, there are no stud-ies showing symmetry between the twonor is there a reason to assume one. Onthe contrary, home and host country ef-fects are different in nature, the former

being embedded in the firm while thelatter is in a national environment.

The Illusion of Stability. Measured ata single point in time, CD is implicitlyassumed to be constant. Cultures changeover time, however. The culture mea-sured at market entry time may have

changed by the time performance is mea-sured. Further, a convergence thesis(Webber, 1969) would predict CD nar-

rowing over time as more investors flockinto the market and local employees be-come knowledgeable of MNE manage-ment methods (Richman and Copen,1972). As firms learn more about a mar-

ket, their CD to that market decreases.

Stopford and Wells (1972) found thatwhen a firm had more experience in a

country, it was more likely to choose aWOS that an IJV (see also Dubin, 1975).Hennart (1991) found that experience inthe US has led Japanese firms to lookmore favorably at a WOS than at an IJV.International experience may also leadfirms to prefer acquisition to green-fieldinvestment (Caves and Mehra, 1986), a

preference which is not captured by thecontrol thesis yet significantly influencesthe availability of WOS versus IJV in-vestment.

The Illusion of Linearity. Also embed-ded in the distance metaphor is the as-

sumption of linear impact on invest-ment, entry mode and performance. The

higher the distance between cultures, the

higher the likelihood that (a) investmentwill occur at a later stage in the invest-ment sequence, (b) a less controlling en-

try mode will be chosen, and (c) theworse the performance of foreign affili-ates will be. These are all questionableassumptions. On the contrary, the Scan-dinavian school acknowledges that thetime lag between expansion waves will

vary due to differences in learningcurves. Erramilli (1991) showed that CDand experience interacted to influence

ownership in a nonlinear fashion. David-son (1980) suggested that firms takingtheir first investment steps were more

likely to prefer culturally similar coun-tries than those in an advanced stage ofinternationalization (see also Bilkey,1978). Pan (1997) found that foreignpartners who already held a majority eq-uity stake in a JV were not interested infurther increasing this stake when CDwas large.

Parkhe (1991) points out that CD, likeother "diversity variables", plays a dif-ferent role at the strategic choice and

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operational phases. At the strategicphase, cultural differences may be a ba-sis for synergy while at the operationalphase they may erode the applicabilityof the parent's competencies (see alsoBrown, Rugman and Verbeke, 1989;Chowdury,1992; Gomes-Casseres,1989;Harrigan,1985, 1988; Hergertand Mor-ris, 1988; Lorangeand Roos, 1991). The

expatriate literature suggests that adap-tation to a foreign culture may be U-

shaped (Black and Mendenhall, 1991)and reports that adjustment to a rela-

tively similar culture is often as difficultas adjustmentto a "distant"one becausedifferences are not anticipated (e.g.,Brewster, 1995; O'Grady and Lane,1996).

The Illusion of Causality. Implicit as-

sumption in much of the literatureis thatCD has a causal effect on FDI pattern,sequence and performance.The conno-tation is that culture is the only determi-nant of distance with relevance to FDI.Earlierwork has been tuned to the prob-lem and attemptedto compensate by in-

corporating non-culture variables in abroader "distance" measure. Johansonand Vahlne's (1977) definition of "psy-chic distance" refers to the "sum of fac-tors"affectinginformationto the market.Goodnow and Hansz (1972) treat "geo-cultural distance" as one of a number ofvariables (also including level of devel-

opment, political stability), making a

countrya "hot"or "cold"investment op-portunity. Richman and Copen's (1972)measure of "socio-culturaldistance" in-cludes such variables as the foreign ed-ucation of local executives.

As Boyacigiller (1990, p. 363) offers,"key characteristics of nations such asdominant religion, business language,form of government, economic develop-ment and levels of emigrationto the USindicate a country's cultural distance

from the US". Factors such as language(Buckley and Casson, 1976, 1979) polit-ical instability (Thunnell, 1977), level of

development, market size and sophisti-cation (Davidson and McFetridge,1985)all play a role in establishing "distance".Barkemaet al. (1997), in their study ofthe FDI of Dutch firms, found the effectof CDto be significant for IJVsin devel-

oping countries, but not for IJVsin de-

veloped countries. A similar point ismade by Beamish (1993)vis-a-vis invest-ment in China's transitional economy.Brown, Rugmanand Verbeke (1989) ar-

gue that the combination of economicand cultural factorscreates firm specificassets, which can cause failure.

The Illusion of Discordance. The im-

plicit assumption that differences in cul-tures produce lack of "fit"and hence anobstacle to transaction is questionable.First, not every cultural gap is critical to

performance. As Tallman and Shenkar(1994, p. 108) note, "differentaspects offirmculture may be more or less central,more or less difficult to transmit, andmore or less critical to operations".Sec-ond, culturaldifferencesmaybe comple-mentary and hence have a positivesynergetic effect on investment and per-formance. For instance, as global coop-erationdemandsboth concern forperfor-mance (masculine) and concern forrela-

tionships (feminine), the two may be

mutually supportive (Hofstede, 1989;Haspeslagh and Jemison, 1991). Similarevidence can be found in the FDI(Barkemaand Vermeulen, 1998), mergerand acquisition (e.g. Haspeslagh andJemison, 1991; Morosini, 1998) and IJVsliterature(Shenkarand Zeira, 1992).

Methodological PropertiesThe Assumption of Corporate Homo-

geneity. The CD index used to measurethe construct relies on national culture

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ODEDSHENKAR

measures and implicitly assumes lack ofcorporate culture variance, an assump-tion that lacks support (e.g., Hofstede,Neuijen, Ohavyand Sanders,1990). Lau-rent (1986) proposes that corporatecul-ture can modify the behavior and beliefsassociated with national culture, a prop-osition confirmed by Weber, Shenkarand Raveh (1996) for internationalmerg-ers. Corporateculture alters the dynam-ics of national CDthough not necessarilyin the way of reducing its impact. AsSchneider (1988) notes "nationalculturemay play a strongerrole in the face of astrong corporate culture. The pressuresto conform may create the need to reas-sert autonomy and identity, creating anational mosaic rather than a meltingpot".

The Assumption of Spatial Homoge-neity. Measuring distance from one na-tional culture to another, the CD indexassumes uniformity within the nationalunit. Quite to the contrary,evidence sug-gests that intra-cultural variation ex-plains as much if not more than inter-culturalvariation(Au, 2000). Neitherthespatial location of the firm in the homeor host country nor the actual physicaldistance between the locations, have animpact upon the CDmeasure calculated.This masks actual investment condi-tions, for instance a "border effect"formed across contiguous regions di-vided by a national border (MariottiandPiscitello, 1995). A somewhat similar ar-gument can be made regardingthe vari-able location of industries from the cul-tural milieu, as, for instance, in the caseof "culturalindustries".

The Assumption of Equivalence. TheKogutand Singh (1988) index is a rathersimplistic aggregateof Hofstede's (1980)dimensions and is hence liable to thesame criticism leveled against Hofstede,e.g., non-exhaustiveness, reliance on sin-

gle company data, and the like (e.g.,Schwartz and Bilsky, 1990; Schwartz,1994;Drenth,1983;Goodsteinand Hunt,1981). The index amplifies the problemsassociated with the Hofstede frameworkin two importantways, however.

First, the index has not been updatedto incorporate latter work by Hofstedeand others, for instance, the fifth dimen-sion of Confucian dynamism or LongTerm Orientation (LTO) (Hofstede andBond, 1988). Derived from a Chinese in-strument, this dimension captures afacet that is critical to corporatestrategy.Because of its relationship to Confucian-ism, CD measures involving East-Asiancountries, for instance, those used instudies of Japanese FDI (e.g., Yoshino,1976; Ozawa, 1979; Li and Guisinger,1991), are especially open to challenge.

The second and most important wayin which the Kogut & Singh's measureamplifies the measurementproblems as-sociated with Hofstede is by making aninvalid assumption of equivalence. Hof-stede (1989) offers that some culturalgaps are less disruptive than others, andthatdifferencesin uncertaintyavoidanceare potentially the most problematic forinternational cooperation due to theircorrelates in terms of differential toler-ances towards risk, formalization, andthe like. Kogut and Singh (1988) them-selves examined the role of UncertaintyAvoidance separately from their index.Both Barkemaet al (1997) and Barkemaand Vermeulen (1998) supported Hof-stede's (1989) contention and found thatuncertainty avoidance was more impor-tant than other cultural dimensions inpredicting FDI success. Other studieshave shown individualism to have a spe-cial effect on FDI (e.g., Hamel, Doz andPrahalad, 1989; Shane, 1992; Dicksonand Weaver, 1997). The aggregatemea-sure may hence provide false readings

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regarding meaningful cultural differ-ences.

INTEGRATIONAND CONSTRUCTDEVELOPMENT

The significant conceptual and meth-

odological inadequacies relating to theCD construct carry important implica-tions for theory and research. For exam-

ple, the illusion of symmetry pinpointsdivergent transaction costs and the pros-pect of conflict between partners as eachseeks to minimize its cost of the transac-tion regardless of the cost incurred bythe other party; necessitating conver-

gence of transaction and bargainingmodels. By showing that certain culturalcombinations possess synergetic ratherthan disruptive potential, the illusion ofdiscordance may explain the inconsis-tent results obtained for the transactioncost argument regarding control and per-formance. The illusion of causality mayexplain the inconsistent results obtainedfor CD and FDI sequence. For instance,Benito and Gripsrud (1992) proposedthat their lack of support for the gradualexpansion thesis might have been theresult of similarity in labor costs amongcountries within the same cultural clus-ter. The assumption of spatial homoge-neity may explain obtaining inconsistentresults for the same pair of countries.

In the following pages, an integrativeframework for the treatment of CD con-struct is developed. In a departure fromthe existing metaphor that is focused onwhat sets cultures apart, we also con-sider mechanisms closing CD. Then, we

incorporate a crucial yet missing ele-ment in the current conceptualization of

CD, namely the interface among transact-

ing parties and its accorded friction.Taken together, the two serve to form abasis from which a comprehensive

framework for the treatment of the CDconstruct is launched.

Closing CulturalDistanceA product of the use of a metaphor can

be the framing of one's frame of reference

(Morgan, 1986). In the case of CD, the"distance" metaphor is translated into afocus on what sets cultures apart but noton what might bring them together. Abalanced analysis of the relations be-tween social entities should howeverconsider both opening and closingmechanisms. A number of key mecha-nisms with the potential of closing cul-tural distance follow.

Globalization and Convergence. In-creased communication and interaction

bridge CD by encouraging the conver-

gence of cultural systems (Webber,1969). This implies a trend towardslower CD over time albeit at different

paces across the globe. The World Com-

petitiveness Yearbook (2000) publishesan index of openness to foreign influ-ences showing substantial differencesbetween relatively open countries suchas The Netherlands to closed countriessuch as France and Korea.

Geographical proximity. Often con-fused with CD (as in the case of Canadaas a first foreign investment for East- andMid-West US firms), geographic proxim-ity reduces entry barriers (Buckley and

Casson, 1979; see also Mariotti and Pis-

citello), subject to transportation and in-formation processing requirements. Geo-

graphical proximity lowers the costs of

managerial coordination and control andreduces the cost of monitoring agent'sbehavior. It can also facilitate the per-sonal contact that is necessary for effec-tive transfer of knowledge and other re-sources (Vachani, 1991).

Foreign Experience. The literature ac-

knowledges the importance of foreign

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experience as a CD closing mechanism.It is not always clear however whether itis international experience per se or ex-perience in the host culture and to whatextent the experience of individual man-agerscan substitute for corporateexperi-ence, a point that would be especiallyimportantto smaller firms (see also #ac-culturation).

Acculturation. Acculturation has beendefined (Berry, 1980) as "changes in-duced in systems as a result of the diffu-sion of cultural elements in both direc-tions". Acculturation can generally beassumed to reduce the CD to the hostcountry. It is interesting that in explain-ing one exception to the patternof grad-ual involvement they observed (the es-tablishment of a sale subsidiary in a newmarket),Johansonand Vahlne (1977) ex-plain that the decision-maker in thatcase was partly educated in the othercountry. Nor is acculturation dependentupon actual experience. Black, Menden-hall and Oddou (1991, p. 310) suggestthat "individuals make anticipatory ad-justmentsbeforethey actually encounterthe new situation".Corporationsmay dothe same, in effect closing the CD to acountry even prior to the establishmentof operations there. Another intriguingquestion is whether the reentry syn-drome described by Adler (1981) wouldapply at the corporatelevel.

Cultural Attractiveness. Certain cul-tures are considered attractive to othercultures. A foreign culture's perceivedattributesmay be a majorreason for thepreferences expressed by potential part-ners and host countries (Gould, 1966).From a cognitive perspective (Sack-mann, 1983; Boyacigiller et al., 1996),even when attractiveness is absent, ad-justmentto a relatively similar culture isoften as difficult as adjustmentto a "dis-tant"one. This is explained by the expa-

triateliteraturein that expatriatesdo not

expect differences in relatively similarcultures (e.g., Brewster, 1995; O'Gradyand Lane, 1996).

Staffing.Staffingis not only a means ofcontrol but also a venue through whichgroups and individuals bring their cul-tural properties into a system. Shenkar(1992) discusses the role of employeegroups as mechanisms affecting the na-tional and corporate CD in an IJV.Forinstance, foreignparentexpatriatesbringwith them both the national and corpo-rate culture of the parent while thirdcountry nationals recruited by the for-eign parent will likely bring the parentfirm'scultureinto the venture,but less ofits national culture. The M&Aliteraturemake the point that such senior manag-ers have a major influence on the moti-vation of the other employees and playthe most significant role in shaping andtransmittingcorporateculture signals tothe broader membership (see Weber,Shenkarand Raveh 1996). Bicultural in-dividuals play an especially importantrole in closing the CD between the for-eign and host countries. By virtue oftheir familiaritywith both cultures, suchindividuals bring the two countries to-gether by serving as emissaries and in-terpretersof culturallyembedded signalsand behaviors. The presence of such in-dividuals in a company, especially insenior positions, may hence serve as amechanism closing CD.

Cultural Interaction as FrictionWhile the existence of mechanisms

opening and closing CD can be accom-modated within the "distance" meta-phor, a closer look into the reality of FDIpoints at interaction as the key issue.After all, how different one culture isfrom another has little meaning untilthose cultures are brought into contact

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with one another. Hence, we suggest re-placing the "distance" metaphor withthat of "friction",the term used by Wil-liamson (1975) in his original treaty ontransaction costs theory. By friction, wemean the scale and essence of the inter-face between interacting cultures, andthe "drag"produced by that interfaceforthe operation of those systems.

As an example, let us consider the dif-ference in the cultural interfacebetweenan IJVand an internationalM/A. An IJVis, by definition, an entity separatefromits parentfirms.While the patents main-tain directcontactas well, the bulk of theinteraction is mediated by the IJVwhoseactivities remain compartmentalizedfrom those of the parents. The culturaldifferencesbetween the parentfirmspro-duce friction only to the extent of theirinvolvement with the new entity. Indi-viduals and units in the parent firmswho are not involved with the IJVoper-ations do not produce friction. In con-trast, a mergerbrings togetherthe entireset of operations on both sides, produc-ing, at least on the onset, much greaterfriction. In many M&As,integration is akey goal (see Weber et al., 1996, for asummary). The intense interactionmakes it more dramatic,and the ensuingconflict makes differences salient (Salesand Mirvis, 1984). Weber, et al. (1996)found that the top managersin acquiredfirmshave made anticipatoryadjustmenttowards the acquiring organization. Incontrast, officers of the acquiring firmmay find little reason to do the same.

Obviously, friction varies within theM&Apopulation as well. Where the ac-quiring firm determines goals, strategicchoices and other operations for the ac-quired company, more friction can beinitially expected, but such friction maydecline faster than where each firm re-tains its autonomy. "Modes of accultur-

ation", such as integration,assimilation,separation and deculturation (Naha-vandi and Malekzadeh,1988) will henceinfluence friction levels. For similar rea-sons, friction is also likely to differ be-tween acquisition and green-fieldinvest-ment. In an acquisition, the potentialfriction is greater,because the acquiredfirm has already a corporate culture inplace. Indeed, lower CD was found toincrease the rate of acquisitions overgreen-field investments (Dubin, 1975),while high CD has been suggested as areason why Japaneseinvestors in the USprefer green-field investments and par-tial over complete acquisitions (Hennart,1991). Li and Guisinger (1991), amongothers,reportthat foreignacquisitions ofUS firms tend to fail more than green-field investment, possibly the result ofcultural friction.

The friction among cultural systems isalso the product of strategic objectives,that is, how closely do firms want theother system to be positioned vis-a-vistheir own. The tighter the control to bemaintained, the greater the friction po-tential. Hence, control (and, in exten-sion, entrymode) is not only the productof cultural "distance",it is also a poten-tial trigger of cultural friction. Further,culture itself is a means of control(Schneider, 1988). A strong corporateculture could, in theory, lower the trans-action cost as the subsidiary becomessimilar to the parent, though results byLaurent (1986) suggest that corporateculture actually accentuates nationalculture differences.

RecommendationsWhile the theory development effort

delineated earlier will eventually resultin new CD measures, a number of keysteps can be takennow, as follows. First,the Kogut and Singh (1988) index must

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ODEDSHENKAR

be supplemented by Long Term Orienta-tion (Confucian Dynamism) especiallywhere East-Asian countries are involved.The use of the aggregate index must be

theoretically justified and where appro-priate, substituted by CD measures cal-culated separately for one or more of thefive dimensions as necessitated by theo-retical and domain considerations. Both

aggregate and one-dimensional measuresshould also be drawn from alternativeclassifications, e.g., Schwartz' (1994)with multiple measures employed wher-ever possible.

Second, measures of general cultural

similarity such as Ronen and Shenkar's

(1985, for applications see Barkema et

al., 1997; Park and Ungson, 1997;Vachani, 1991), which do not assume

linearity, additivity and normal distribu-tion should be used in conjunction withother measures. Findings showing rela-

tionship between CD and governance forselect country clusters (e.g., Gatingnonand Anderson, 1988) suggest supple-menting those approaches with mea-sures of cultural diversity such as Go-

mez-Mejia and Palich's (1997) indices ofinter-cluster and intra-cluster diversity.

Third, national level data should be

supplemented by cognitive CD measures

(e.g., Sullivan and Bauerschmidt, 1990).An example can be found in Boyacigiller(1990), where executives were asked torank adjustment difficulties in countrieswhere they had served in the past. Ret-

rospective data should be considered in

deriving such cognitive measures. Evi-dence suggests such data do not becomeless accurate over time periods as long asten years (Finkelstein, 1992; Huber andPower, 1985) and are especially helpfulwhen anchored in dramatic events suchas mergers that tend to make culture andcultural differences more salient. A re-cent example can be found in Veiga, Lu-

batkin, Calori and Very (2000; see also

Veiga, Lubatkin, Calori, Very and Tung,2000). Qualitative, emic data should beadded wherever feasible.

Fourth, control for closing distancemechanisms such as cultural attraction,acculturation and foreign experience,geographical distance (Balabanis, 2000),

language, level of development, homemarket and company size (Erramilli,1996) which have already been found tocorrelate with CD or to mediate or mod-erate its impact on FDI. Control for CD atthe corporate level using the wide reper-toire of corporate culture instrumentswhile remaining aware of both instru-ment design (Geringer, 1998) and inter-action effects (Weber et al., 1996) acrossthe two levels.

Fifth, consider CD not only as an in-

dependent variable predicting FDI gov-ernance, sequence and performance (orother variables as the case may be) butalso as a dependent variable. CD is asmuch the product as the consequence of

entry mode, and FDI sequence and even

performance may have an impact on the

perceived distance. Consider culturealso as a quasi-moderator variable alter-

ing the form if not the strength of the

relationship between environmental and

strategic variables.

Finally, consider cultural differencesas having the potential for both synergyand disruption (Morosini, 1998; Parkhe,1991). This point cannot be overstated asit lies at the intersection of strategic logicand operational challenges that under-line the FDI, expatriate adjustment, au-

diting and other international businessissues. Replacing the "distance" with"friction" as the underlying metaphor forcultural differences is a natural step fromthere. Not merely semantic, this impliesfocusing on the interface between trans-

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CULTURALDISTANCEREVISITED

acting entities rather on the void be-tween them.

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