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Cultural differences, MNE learning abilities, and the effect of experience on subsidiary mortality in a dissimilar culture: Evidence from Korean MNEs

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Abstract

In a departure from prior studies presuming a beneficial experience effect in foreign direct investment (FDI), the present paper examines the conditions under which FDI experience may actually harm subsequent subsidiaries. We argue that multinational enterprises (MNEs) may draw erroneous inferences and learn incorrectly from their early expansions when new to a dissimilar culture, because their learning abilities are eroded by cultural differences. We posit that the characteristics of an MNE's international expansion, including scope, pace, rhythm, and entry mode, moderate this negative experience effect by influencing the MNE's learning ability in foreign cultures. Using a data set of FDIs by South Korean MNEs between 1990 and 2006, we find a positive relationship between subsidiary mortality and experience when an MNE has a low level of experience in a dissimilar culture. This relationship is weaker if the MNE's prior FDI has been dispersed across different cultures, is stronger if it expanded internationally at a fast pace, and becomes negative once the MNE has accumulated a high level of experience in the host culture. We conclude that, when expanding into dissimilar cultures, MNEs must establish mechanisms to mitigate incorrect learning and reexamine the correctness of inferences drawn from past experience before applying them.

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Notes

  1. Expanding in a host culture may allow experience to be gained at both the MNE level (e.g., establishing and managing a subsidiary within the host culture) and the subsidiary level (e.g., daily operations in the host culture). Since major decisions for establishing and managing a new subsidiary are usually made at the MNE's headquarters, the experience gained at the headquarters level should be more relevant to the mortality of a subsequent subsidiary. We therefore focus on experience gained at the MNE level.

  2. https://www.cia.gov/library/publications/the-world-factbook/.

  3. All results for the robustness tests are available from the authors on request.

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Acknowledgements

We thank Editors Ulf Andersson and Mary Yoko Brannen for their kind guidance and three anonymous reviewers for their constructive insights. Our appreciation also goes to the 2009 Academy of International Business Annual meeting reviewers and Yonsei University seminar participants for their helpful comments on the paper. This work was supported by the National Research Foundation of Korea, grant-funded by the Korean government (NRF-2012-S1A3A2–2012S1A3A2033412). Sangcheol Song was the recipient.

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Authors and Affiliations

  1. School of Business, Southern Illinois University Edwardsville, Edwardsville, USA

    Yuping Zeng

  2. Fisher College of Business, The Ohio State University, Columbus, USA

    Oded Shenkar

  3. Jindal School of Management, University of Texas at Dallas, Richardson, USA

    Seung-Hyun Lee

  4. Haub School of Business, Saint Joseph's University, Philadelphia, USA

    Sangcheol Song

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  1. Yuping Zeng
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  2. Oded Shenkar
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Correspondence to Yuping Zeng.

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Accepted by Ulf Andersson, Area Editor, 23 September 2012. This paper has been with the authors for two revisions.

Appendices

APPENDIX A

Table A1

Table A1 Host countries and cultural clusters of FDIs located outside South Korea's cultural cluster
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APPENDIX B

Table B1

Table B1 Additional analysis: Subsidiary mortality and host-culture experience in a similar culturea
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APPENDIX C

Table C1

Table C1 Additional analysis: Subsidiary mortality and interaction between host-culture experience and average age of experience in a dissimilar culturea
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Zeng, Y., Shenkar, O., Lee, SH. et al. Cultural differences, MNE learning abilities, and the effect of experience on subsidiary mortality in a dissimilar culture: Evidence from Korean MNEs. J Int Bus Stud 44, 42–65 (2013). https://doi.org/10.1057/jibs.2012.30

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