Cultural Friction in International Joint Ventures: Whose Cultural Distance Affects Market Reactions?

Abstract

This article draws on the cultural friction perspective to study the performance implications of cultural distance (CD) in international joint ventures (IJVs). In particular, I theorize about the cultural carriers, point of contact, exchange, and mitigating mechanisms through which CD affects the interactions and relationships between the different organizations involved in IJVs. I postulate that CD between the focal firm's home country and the partner firm's home country negatively influences the focal firm's abnormal returns, while CD between the focal firm's and the IJV's home countries and CD between the partner firm's and the IJV's home countries exert a positive impact. I further propose that prior IJV experience is an important mitigating mechanism that moderates these relationships, contingent on the level of the prior experience's success. Using data for 709 IJV announcements, I find that CD between focal firm and partner firm and CD between focal firm and IJV significantly influences market reactions to IJVs, while prior experience moderates the effect of CD between the parent firms. This study helps to resolve previously inconclusive findings by documenting that CD's impact fundamentally depends on whose CD is considered and what type of experience a firm possesses.