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Cultural distance and foreign direct investment: The moderating effect of vicarious experience

Abstract:

Building on the actions of other enterprises that share some common features, such as the same country of origin, multinational enterprises (MNEs) develop vicarious experience that allow them to identify opportunities, acquire knowledge, gain legitimacy and increase the opportunities of collaboration with other compatriot firms. The present study analyses the moderating effect of vicarious experience on the individual negative influence of six cultural distance dimensions on foreign direct investment (FDI). The results obtained show that the presence of a greater number of companies from the same home country in the host country reduces the negative impact of the cultural distance in the dimensions of power distance, individualism, masculinity, and pragmatism. Vicarious experience even nullifies the negative impact of dimensions of uncertainty avoidance and indulgence. Furthermore, and contrary to earlier studies, the results indicate that both same-sector and different-sector vicarious experiences are relevant for MNEs, without any substitution effect between them.