Navigating geographic and cultural distances in international expansion: The paradoxical roles of firm size, age, and ownership

• Published in: Strategic management journal Vol. 41; no. 5; pp. 921 - 949
• Main Authors: Li, Yu, Zhang, Yan A., Shi, Wei
• Format: Journal Article
• Language: English
• Published: Chichester, UK John Wiley & Sons, Ltd 01.05.2020; Wiley Periodicals Inc
• Subjects: Companies; cultural distance; firm international expansion; foreign direct investment; Foreign investment; geographic distance; location choice; Operating costs; Ownership
• ISSN: 0143-2095; 1097-0266
• DOI: 10.1002/smj.3098

Research Summary While geographic and cultural distances deter firms' international expansion, they do so via different mechanisms, such that firms with advantages in overcoming one‐dimension may face disadvantages in overcoming the other. Larger, older, and state‐owned firms have better access to resources in their home countries than smaller, younger, and non‐state‐owned firms, and thus are less concerned about the high operating costs associated with larger geographic distances. However, they are less adaptable to culturally distant countries and thus are more concerned about larger cultural distances. We propose that firm size, age, and state ownership weaken the deterrent effect of geographic distance while amplifying the deterrent effect of cultural distance. Results using data on Chinese firms' location choices of foreign direct investments in 2001–2013 support our predictions. Managerial Summary A key decision that managers need to make in expanding overseas is the foreign location choice. Although managers generally refrain from expanding to geographically and culturally distant countries, the importance of geographic and cultural distances in their consideration varies across firms, which tend to differ in resource endowment and adaptability. Because larger, older, and state‐owned firms are better positioned to absorb additional operating costs but are less adaptable to foreign countries' local environments than smaller, younger, and non‐state‐owned firms, the deterrent effect of geographic distance (cultural distance) is weaker (stronger) for the former than for the latter. Our findings show that foreign countries that seem to be good fits when considering geographic distance may be misfits when considering cultural distance, and vice versa.