A Study on the Impact of Cultural Distance on Foreign Investment Performance: Comparing Independent Firms and Subsidiaries Using Hofstede's Cultural Dimensions

Abstract

This study examines the impact of Hofstede's cultural distance on the performance of 295 Korean manufacturing SMEs in foreign countries, categorizing them into subsidiaries and independent firms. The results show that the performance of subsidiaries is higher than that of independent firms when cultural distance is not taken into account. However, when the cultural distances between home and host countries is considered, subsidiaries are more negatively affected by cultural distances than independent firms in terms of overall cultural distance and power distance (PDI), individualism (IDV), and masculinity (MAS). This finding suggests that the flexibility in responding and adjusting independent firms to local cultures with operational autonomy positively contributes to the mitigation of liability of foreignness incurred by cultural distances, and thus provides practical implications for internationalizing firms in seeking efficient strategies to cope with liabilities of internationalization.