How cultural distance affects the formation of international strategic alliance – an explanation of the transaction costs theory

Purpose - Based on the transaction cost theory, this paper aims to investigate the impact of cultural distance on international strategic alliance formation and its underlying mechanisms. Design/methodology/approach - This paper uses the investment of foreign firms in the Chinese Venture Capital market as an empirical background, Obtaining VC data from Zero2IPO Private Equity, CVsource Investment Database (2001–2015). This paper chooses the Logit regression method, according to Lind’s three-step method to test the inverted U-shaped relationship. Findings - The empirical analysis of foreign venture capital firms invested in China revealed that there is an inverted U-shaped relationship between cultural distance and the possibility of international strategic alliances. This relationship is the result of two opposing mechanisms, which are the need and the feasibility of international strategic alliances. In addition, this study further examined the moderating effects of social embeddedness and social reputation, revealing the boundary effects on the complex relationship between cultural distance and possible international strategic alliance formation. Originality/value - This study focuses on cultural difference, which is a key factor leading to a firm’s transaction costs. Based on the transaction cost theory, this paper investigates the impact of cultural distance on international strategic alliance formation and its underlying mechanisms.