Cultural distance in international business and management: from mean-based to variance-based measures

Extant practice in international management is to measure cultural distance as a nation-to-nation comparison of country means on cultural values, thereby ignoring the cultural variation that exists within countries. We argue that these traditional mean-based measures of cultural distance should take within-country cultural variation into account. Therefore, we propose the use of variance-based measures of cultural distance. To illustrate our argument, we examine total US foreign affiliate sales in more than 40 host countries over the 1983-2008 period, complemented with data from the World Values Survey. We analyze the effects of three cultural distance measures: the Kogut and Singh (1988) mean-based index of cultural distance, the Kogut and Singh (1988) index conditioned by host-country cultural variation and a variance-based measure that takes into account both home- and host-country cultural variation. Our findings indicate that, when within-country cultural variation is taken into account, the explanatory power of the Kogut and Singh (1988) index is substantially decreased. In addition, our variance-based measure of cultural distance outperforms the Kogut and Singh (1988) measure in the explanation of foreign US sales. We therefore suggest to move from mean-based to variance-based measures of cultural distance, thereby taking the cultural variation within countries into account.

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