The differential impact of national cultural distance on trade and local production

Lecture with Sjoerd Beugelsdijk (Radboud Universiteit Nijmegen) arranged by Center for Strategic Management and Globalization

ABSTRACT: Trade and local production are two alternative means of serving foreign markets. International economists have studied the relationship between trade and FDI as either being complements or substitutes. IB scholars have shown that firms engaging in international business activity (either through exports or local production) suffer from a liability of foreignness. Moreover, entry mode literature shows that due to increasing cultural distance firms may substitute higher level modes of commitment for lower levels, i.e. local production for exports. I

n this paper we theorize on the relationship between trade, local production and cultural distance. We hypothesize a negative relationship between local production and cultural distance. Regarding the effect of cultural distance on trade, we hypothesize two possible relationships, depending on which effect dominates; the liability of foreignness effect or the substitution effect. Testing our hypotheses using data from the Bureau of Economic Analaysis on U.S. exports and U.S. MNE activity in a sample of 54 host countries between 1983-2003, we find confirmation for the first hypothesis, and support for a substitution effect regarding the second hypothesis.