The Effect Of Cultural Distance On OFDI Entry Mode Choice

Entry mode choice has always been a prominent topic in the research and practice area of internationalization.Among factors deciding entry mode choices,Cultural distance triggered lots of debate.Dominant theoretical framework used to explain the effect of cultural distance on entry mode choice like transaction cost theory,resource based view,OLI theory,organization learning theory have produced contradictory conclusion on this issue.This phenomenon is called "Cultural Distance Paradox".Cultural distance is a proxy for uncertainty and risks in international business studies.This article identifies two contradictory mechanisms explaining how cultural distance affect Greenfield-Acquisition mode choice.From the perspective of attention and considering the fact that acquisition can alleviate external risks and greenfield investment can alleviate internal risks,decision-makers' allocation of attention to outside or inside risks decides whether they make a greenfield or acquisition choice.According to three principals of attention based view——organizational attention is dependent on its contextual situation,and how what contextual situation the firm find itself in is dependent on its own structural characteristics,we construct our theoretical model.We propose that whether decision-makers attend more to internal or external risks depends on international strategy the firm implement(internal context)and the dynamism of host country environment(external context),which are both moderated by prospector/defender(organization type).Using outward foreign direct investment data of Chinese MNCs in 2010-2012 and constructing a Logit regression,our study reach following empirical conclusions:(1)if a MNC implements a global strategy,it will prefer greenfield investment when the cultural distance increases.(2)if the market dynamism in host country is high,a MNC will prefer acquisition when the cultural distance increases.(3)if the firm of interest is a prospector,the moderation effect of international strategy will be reduced.(4)if the firm of interest is a prospector,the moderation effect of market dynamism in host country will be enhanced.This study creatively introduced attention based view to explain the mechanism of how cultural distance influences greenfield-acquisition choice,cracking "cultural distance paradox" by deconstructing the decision-making process on a micro level.It is proved that there exists a moderation effect from internal and external context and a moderated moderation from organization type on the relationship between cultural distance and greenfield-acquisition choice.Our research provides some illumination on how to make entry mode choice under cultural distance for Chinese firms lacking international experience.