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The Moderating Effects of Host Country Governance and Trade Openness on the Relationship between Cultural Distance and Financial Performance of Foreign Subsidiaries in Latin America

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  • Henrique Correa da Cunha

    (Department of Global Management Studies, Ted Rogers School of Management, Ryerson University, 350 Victoria Street, Toronto, ON M58 2K3, Canada)

  • Nursel Selver Ruzgar

    (Department of Global Management Studies, Ted Rogers School of Management, Ryerson University, 350 Victoria Street, Toronto, ON M58 2K3, Canada)

  • Vikkram Singh

    (Department of Global Management Studies, Ted Rogers School of Management, Ryerson University, 350 Victoria Street, Toronto, ON M58 2K3, Canada)

Abstract

Cultural distance (CD) is an important driver of foreign expansion strategy at the firm level. However, its effects can be more or less significant depending on the contextual characteristics of the host country, such as the quality of formal institutions and the openness to international trade. Therefore, it is argued that strong formal institutions in the host country can effectively reduce the adverse impact of CD. Additionally, due to the more frequent interactions with foreign cultures, countries open to foreign trade can positively accommodate the effects of CD. The study tests these assumptions using data from the Orbis database and the World Bank and finds a reduction in the adverse impact of CD on the financial performance of foreign subsidiary firms with robust formal institutions in the host country. Moreover, the negative effects of CD increase with higher degrees of trade openness. Thus, the results indicate that foreign subsidiary firms operating in host countries that are more open to foreign trade will have to conform to the higher expectations from the local culture.

Suggested Citation

  • Henrique Correa da Cunha & Nursel Selver Ruzgar & Vikkram Singh, 2022. "The Moderating Effects of Host Country Governance and Trade Openness on the Relationship between Cultural Distance and Financial Performance of Foreign Subsidiaries in Latin America," IJFS, MDPI, vol. 10(2), pages 1-17, April.
    • Handle: RePEc:gam:jijfss:v:10:y:2022:i:2:p:26-:d:791241
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