National culture and capital structure decisions: Evidence from foreign joint ventures in China

• Published in: Journal of international business studies Vol. 42; no. 4; pp. 477 - 503
• Main Authors: Li, Kai, Griffin, Dale, Yue, Heng, Zhao, Longkai
• Format: Journal Article
• Language: English
• Published: London Palgrave Macmillan 01.05.2011; Palgrave Macmillan UK
• Series: Journal of International Business Studies
• Subjects: Business and Management; Business Strategy/Leadership; Business structures; Capital structure; China; Chinese culture; Corporate debt; Cultural influence; Cultural values; Culture; Debt financing; Debt management; Decision making; Empirical research; Financial leverage; Financial management; Foreign subsidiaries; Individualism; International Business; International finance; Investments; Joint ventures; Long term debt; Management; National culture; Organization; Personal debt; Short term debt; Studies; China; cultural values; long-term debt; capital structure; foreign joint ventures; China; embeddedness
• ISSN: 0047-2506; 1478-6990
• DOI: 10.1057/jibs.2011.7

We investigate the role of firms' country of origin in financial leverage decisions. Foreign joint ventures in China face a common set of country-level formal institutional constraints, but vary in the cultural values they bring from their countries of origin. We hypothesize that national culture enters the joint optimization process, leading to foreign joint ventures' leverage decisions, and that it affects leverage decisions both directly and indirectly. Employing a hierarchical linear model distinguishing firm-level from country-level variables, and a data set covering over 8000 foreign joint ventures in China from 32 different countries and regions in the year 2002, we find that mastery has negative and significant direct effects on foreign joint ventures' leverage and short-term debt decisions, and a positive and significant direct effect on the likelihood of foreign joint ventures having long-term debt. The indirect effects of mastery on leverage decisions sometimes reinforce and sometimes offset the direct effects. Embeddedness has no significant direct effect on foreign joint ventures' leverage decisions, but exerts its influence entirely through indirect effects. Finally, the economic significance analysis of the total effects suggests that national culture has significant explanatory power in the leverage decisions of foreign joint ventures in China.