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Does Cultural Distance Hurt the Performance of Foreign-funded Enterprises in China?

【Authors】
WANG Jinmeng, XU Yuhua & YI Zhigao
【WorkUnit】
WANG Jinmeng, XU Yuhua (Nanjing Audit University, 211815)YI Zhigao (Nanjing Normal University, 210023)
【Abstract】

This paper analyzes the influence of cultural distance on the performance of foreign-funded enterprises from the perspective of the relationship between national culture and enterprise innovation, and discusses the working mechanism for the cultural distance to affect the performance of foreign-funded enterprises. The cultural distance is generally believed to have a negative impact on the performance of multinationals' overseas subsidiaries. After solving the endogenous problems that may arise from cultural differences, this paper uses the foreign-funded enterprises data and finds: (1) The greater the cultural distance, the better the performance of foreign-funded enterprises. It's mainly because the high power distance and collectivism of China have a “reverse resonance” rather than the “similarity attraction” effect on the low power distance and individualism of foreign-funded enterprises, so the cultural distance can promote corporate performance. The working mechanism is that the cultural distance is conducive to enterprise innovation which in turn makes the products more differentiated and competitive in the market, thereby improving corporate performance. (2) The positive impact of cultural distance on performance is moderated by the way of market entry. Compared with sole proprietorships, the performance of joint ventures declines as the cultural distance increases. This study provides a theoretical basis and a realistic reference for both foreign-funded enterprises and Chinese companies seeking global expansion to deal with the pros and cons of cultural distance.

 

JEL:F23, Z13

【KeyWords】
Cultural Distance, Performance of Foreign-funded Enterprise, Innovation, Reverse Resonance