The Importance And Cons Of Strategic Management

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Strategic Management Journal
Strat. Mgmt. J., 29: 1117–1125 (2008)
Published online 14 April 2008 in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/smj.685
Received 6 September 2005; Final revision received 8 January 2008

RESEARCH NOTES AND COMMENTARIES
CULTURAL DISTANCE, INVESTMENT FLOW,
AND CONTROL IN CROSS-BORDER COOPERATION
SEUNG-HYUN LEE1 * ODED SHENKAR,2 and JIATAO LI3
1

School of Management, University of Texas at Dallas, Richardson, Texas, U.S.A.
Fisher College of Business, The Ohio State University, Columbus, Ohio, U.S.A.
3
Department of Management of Organizations, Hong Kong University of Science and
Technology, Clear Water Bay, Hong Kong
2

Previous research analyzing the impact of cultural distance on joint venture negotiations has often confounded firm and environment effects. To decouple these effects, the cross-border cooperation preferences of small and medium-sized Korean firms were studied, considering simultaneously firms involved in inward and outward investment ventures. While cultural distance showed no significant relationship with the degree of control sought over the cooperative ventures, cultural distance was significantly related with a preference for ventures in domestic or foreign markets.
The impact of cultural distance was found to be greater in inward investment than in outward investment. Copyright  2008 John Wiley & Sons, Ltd.

INTRODUCTION
The extensive literature on foreign direct investment (FDI) often emphasizes cultural distance as a key determinant of a firm’s mode of entry into a foreign market, and also of the type of crossborder cooperation, that is, equity or contractual
(e.g., Kim and Hwang, 1992; Kogut and Singh,
1988). Most of the prior work on FDI has discussed multinational enterprises (MNEs) investing in foreign markets, rarely considering that firms not only invest overseas but may also invite foreign partners to join them in a cooperative venture
Keywords: cultural distance; alliance; direction of investment
*Correspondence to: Seung-Hyun Lee, University of Texas at
Dallas, School of Management, Box 830688, SM 43, Richardson, TX 75083-0688, U.S.A. E-mail: lee.1085@utdallas.edu

Copyright  2008 John Wiley & Sons, Ltd.

within their own domestic market. The domestic market is the country in which the focal firm is originally established, and where the cooperation is more easily managed. The country in which the foreign partner is operating will be termed a foreign market for the purposes of this discussion.
Managing in a foreign country is harder for a focal firm because of its lack of familiarity with the foreign environment. Since past studies focused on a firm that was foreign to the market in which the cooperative venture operates, they confounded two types of challenges: the challenge of working in a foreign environment, and the challenge of working with a foreign partner.
The distinction is important, since a local partner can mitigate the problems that a foreign partner would encounter (Erramilli, 1990). Insisting on this distinction may prove useful in settling a

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S.-H. Lee, O. Shenkar, and J. Li

major theoretical debate and resolving the empirical inconsistency over the impact of cultural distance on entry mode decisions (Shenkar, 2001).
In addition to confounding environment problems with partnership problems, previous studies have often made an unsubstantiated assumption that cultural distance is symmetric. They have assumed that the cultural distance from the focal firm to a foreign country is identical to the reverse cultural distance as seen from the partner’s point of view (Shenkar, 2001). The few studies that have looked into foreign investment from the perspective of the local partner, however, suggest that such symmetry is unlikely (e.g., Luo, Shenkar, and
Nyaw, 2001; Shenkar and Li, 1999). This potential asymmetry has received little attention.
The present study was designed to compensate for these shortcomings in the literature by
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