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

• Date: 01 May 2020
• Published date: 01 May 2020
• Author: Wei Shi,Yu Li,Yan A. Zhang
• DOI: http://doi.org/10.1002/smj.3098

RESEARCH ARTICLE

Navigating geographic and cultural distances in

international expansion: The paradoxical roles

of firm size, age, and ownership

Yu Li

1

| Yan A. Zhang

2

| Wei Shi

3

1

Business School, University of International Business and Economics, Beijing, China

2

Jones Graduate School of Business, Rice University, Houston, Texas

3

Miami Business School, University of Miami, Coral Gables, Florida

Correspondence

Yan A. Zhang, Jones Graduate School of

Business, Rice University, Houston, Texas

77005-1892.

Email: yanzh@rice.edu

Funding information

National Natural Science Foundation of

China, Grant/Award Number: Project

Number: 71672037; Fundamental

Research Funds for the Central

Universities, Grant/Award Number:

TS4-5

Abstract

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 dis-

advantages 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 geo-

graphic distances. However, they are less adaptable to

culturally distant countries and thus are more con-

cerned about larger cultural distances. We propose that

firm size, age, and state ownership weaken the deter-

rent 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 loca-

tion 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

Received: 6 October 2017 Revised: 16 September 2019 Accepted: 21 September 2019 Published on: 10 November 2019

DOI: 10.1002/smj.3098

Strat. Mgmt. J. 2020;41:921–949. wileyonlinelibrary.com/journal/smj ©2019 John Wiley & Sons, Ltd. 921

adaptability. Because larger, older, and state-owned

firms are better positioned to absorb additional operat-

ing 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 consid-

ering geographic distance may be misfits when consid-

ering cultural distance, and vice versa.

KEYWORDS

cultural distance, firm international expansion, foreign direct

investment, geographic distance, location choice

1|INTRODUCTION

International expansion represents an important strategy for firms to achieve growth. How-

ever, the extent to which firms can benefit from international expansion largely depends

upon whether they can choose proper locations for their foreign operations (Dunning, 1977,

1981). Consistent with this view, previous studies find that location choices of foreign direct

investments (FDIs) have important performance consequences (Buckley et al., 2007;

Hernandez, 2014) and therefore attract significant managerial attention (Buckley,

Devinney, & Louviere, 2007, p. 1070). Prior research on this topic has paid special attention

totheroleofdistancebetweenhomeandhostcountries, and provided substantial empirical

evidence that both geographic distance and cultural distance deter international expansion

(Boeh & Beamish, 2012; Chetty, 1999; Clark & Pugh, 2001; Ojala & Tyrväinen, 2007;

Ragozzino, 2009; Tihanyi, Griffith, & Russell, 2005). Ghemawat (2001) calls this effect “the

law of distance,”and argues that distance continues to dampen international business

activities.

While it is well understood that geographic distance and cultural distance deter interna-

tional expansion, existing research has not explored the possibility that firms with advantages

in dealing with one-dimension of distance may have disadvantages in addressing the other

dimension. Geographic distance and cultural distance discourage firms' international expansion

for different reasons. Firms are less likely to expand to geographically distant countries because

a large geographic distance between home and host countries can give rise to high spatial costs

such as transportation costs (Ghemawat, 2001; Zaheer, 1995; Zaheer & Mosakowski, 1997) as

well as high operating costs due to firms' unfamiliarity with the host countries (Ragozzino,

2009). Firms are also less likely to expand to culturally distant countries because a large cultural

distance between home and host countries increases the need for the firms to change their orga-

nizational practices in order to adapt to the host cultures (Tihanyi et al., 2005). In short,

geographic distance deters international expansion primarily by increasing the costs of cross-

border operations whereas cultural distance discourages international expansion mainly by

amplifying the challenges of local adaptation.

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