Cultural Influences on Foreign Direct Investment
The current business competitive environment has influenced companies to cross national
borders to explore foreign markets and investing in them. The decision about in which country
the company should invest is not easy. Many factors can influence this decision, and culture is
one of factors that international business scholars have incorporated in their researches.
Foreign Direct Investment (FDI) is a key element in understanding Globalization. Countries
more susceptible to this kind of investment have higher chances of attaining economic
development, so much so that being the recipient of FDI is one of the indicators in this type of
analysis. Therefore, it is necessary to understand what will influence FDI to happen. Research
on the subject has focused more on the economic, geographical and political-administrative
aspects. More subjective factors, such as cultural ones, have been increasingly used when
dealing with an influence of cultural values especially on two types of decision: (1) making a
direct investment abroad (Du, Lu & Tao, 2012; Feils & Rahman, 2011; Makino & Tsang, 2011;
Malhotra, Sivakumar & Zhu, 2009; Rothaermel, Kotha & Steensma, 2006; Thomas & Grosse,
2001), and (2) choosing a host country (Berry, Guillén & Zhou, 2010; Dow & Ferencikova, 2010;
Delios & Henisz, 2003a, 2003b). But these researches tend to investigate more objectives
proxies of culture, such as language, or individual countries, analyzing how organizations in a
country are influenced by more subjective aspects of culture in deciding where to invest. This
paper addresses both at the same time. This is important because include in the models at the
same time different countries together with objective and subjective measures of culture. It
increases the robustness of the model and deepens the possible interpretations of the results
because separate the cultural distance in the cultural dimensions proposed by Hofstede.
When discussing culture, we must discuss Hofstede work, which is the most cited book
“Culture consequences” in the field (Beugelsdijk, Kostova & Roth, 2017). Since the publication
of this book (Hofstede, 1980), it has garnered attention of International Business (IB)
researchers. Some of scholars address a key methodological challenge faced by research using
it (Sivakumar & Nakata, 2001; Kirkman, Lowe & Gibson, 2006, 2017). One work of those,
Kirkman et al. (2006) was chosen as Decade Award paper by Journal of International Business
Studies. That means Hofstede’s work still is important when the issue is culture.
Culture is an embracing concept as well as an important social element, since it arises from
the interaction among people, who develop principles and values that are externalized through
practices. In this research, the original work developed by Hofstede on cultural values in
different countries was used, despite its limitations. It has defined four dimensions of cultural
values that are present in all nations, because they represent answers to universal problems
and that present slow change through time. These dimensions are (1) Power Distance; (2)
Individualism or collectivism; (3) Masculinity or Femininity and (4) Uncertainty Avoidance.
This article deals with the influence of cultural distances on Foreign Direct Investment
(FDI), specifically it aims to examine whether cultural values (power distance, individualism or
collectivism, masculinity or femininity, uncertainty avoidance) affects bilateral FDI, that is, FDI
Stock.
In International Business literature cultural distance construct is widely accepted, however
its greatest impact is in FDI studies (Shenkar, 2001, 2012), which discuss (1) initial and
subsequent FDI (Du et al., 2012), (2) modes and timing of entry (López-Duarte, Vidal-Suárez &
González-Diaz, 2015; Du et al., 2012), and (3) performance of subsidiaries.
The paper presents three main contributions. First, it contributes methodologically by
using Social Network Analysis in studying decision in FDI. Assuming that FDI is an economic
relationship and using network as a metaphor, this paper innovates in comparing similarities in
culture and others measures to understand whether subjective dimensions of culture
influences FDI using Multiple Regression Quadratic Assignment Procedure (MRQAP). This
technique presents itself as appropriate for the dyads’ analysis when the objective is to analyze
the similarity in quantitatively measured behavior, in this case, similarity of cultural dimensions
and its influence in FDI.
Second, in disaggregating cultural distance in the dimensions proposed by Hofstede, it
corroborates the hypothesis that culture distances have an impact in FDI stating that countries
that have more similar Power Distance measures will have more FDI Stock in each other, even
when controlling for similarities in Language usually used as proxy for culture. It means that
even when two countries share the same language, a subjective characteristic of culture, such
as Power Distance, influences de decision of investing abroad. Third, not only cultural distance
is important, but cultural characteristics influence directly the decision of investment abroad.
Host countries of FDI with High Uncertainty Avoidance received less FDI than Host Countries
without High Uncertainty Avoidance. It seems that host countries were the cultural dimension
uncertainty avoidance is high tend to make it more difficult to foreign countries to invest in it,
even when they are cultural similar. This find reinforce the importance of understanding culture
to better explain FDI decision.
