Host country cultural profile and the performance of foreign subsidiaries in Latin America

Abstract

While cultural distance (CD) is a popular construct in international business (IB), most studies confound the distance and country profile effects. There is an ever-growing debate on measurement issues and distinguishing the effect of doing business in countries with different cultural profiles. While the vast majority of studies focus on the implications of CD, the objective of this study is to investigate how the cultural profile in the host country affects the financial performance of foreign subsidiaries in Latin America. We employ a quantitative approach with panel data, including over 4200 firm-year observations of the same foreign subsidiary firms in the 10 largest economies in Latin America. We measure cultural profile of the host country using the four original dimensions of Hofstede's framework. Then, we estimate the effects on the financial performance of foreign subsidiary firms using the original scale and by splitting the scale (e.g. degree of masculinity vs degree of femininity) to compare the effects of the opposite poles of the cultural dimensions. The findings reveal that certain cultural characteristics in the host country profile (e.g., individualism and femininity) positively impact performance. In contrast, other cultural traits have a negative (masculinity and collectivism) or no significant impact (uncertainty avoidance). Also, the firms can adjust positively to high and low power distance scores in the host country. This study offers novel insights into the implications of national culture for financial performance by showing that the host country's cultural profile significantly impacts foreign subsidiary firms’ performance.