The Moderating Effects of Host Country Governance and Trade Openness on the Relationship between Cultural Distance and Financial Performance of Foreign Subsidiaries in Latin America

Henrique Correa da Cunha, Nursel Selver Ruzgar and Vik Singh
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Henrique Correa da Cunha: Department of Global Management Studies, Ted Rogers School of Management, Ryerson University, 350 Victoria Street, Toronto, ON M58 2K3, Canada
Nursel Selver Ruzgar: Department of Global Management Studies, Ted Rogers School of Management, Ryerson University, 350 Victoria Street, Toronto, ON M58 2K3, Canada

IJFS, 2022, vol. 10, issue 2, 1-17

Abstract: Cultural distance (CD) is an important driver of foreign expansion strategy at the firm level. However, its effects can be more or less significant depending on the contextual characteristics of the host country, such as the quality of formal institutions and the openness to international trade. Therefore, it is argued that strong formal institutions in the host country can effectively reduce the adverse impact of CD. Additionally, due to the more frequent interactions with foreign cultures, countries open to foreign trade can positively accommodate the effects of CD. The study tests these assumptions using data from the Orbis database and the World Bank and finds a reduction in the adverse impact of CD on the financial performance of foreign subsidiary firms with robust formal institutions in the host country. Moreover, the negative effects of CD increase with higher degrees of trade openness. Thus, the results indicate that foreign subsidiary firms operating in host countries that are more open to foreign trade will have to conform to the higher expectations from the local culture.

Keywords: cultural distance; formal institutions; host country governance; trade openness; Latin America; foreign subsidiary firms; financial performance (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2022
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