cultural distance assignment

Cultural Distance Assignment IIB

1. What is the formula developed by Kogut and Singh in 1988 in the Journal of International Business Studies (JIBS)? Explain the formula in your own words.

CDj is the cultural distance between the host country (j) and the home country (in this case Germany). It is calculated with a summation of 4 different variables indicating different cultural dimensions. These are uncertainty avoidance, power distance, individualism/collectivism and masculinity/femininity. is the country j’s score on one of the four cultural dimension is the score of the home country (in this case Germany) on this dimension. is the variance of this particular dimension.

Firstly, the distance on each dimension between the host country j and the home country (in this case Germany). Secondly, this number is squared. After squaring minus each variable is divided by the variance of that variable. And finally, all these four variances are added together and divided by 4.
2. What is the difference between mean and variance? Can you explain the example given in the lecture in your own words?
Mean and variance are both about distribution, but mean refers to one measure of the central value for a probability distribution. It is the average of a set of measurements. On the other hand, variance is a measure of how far a set of numbers is spread out. In a statistical probability graph the difference in variance is made visible in the height of the graph. A low variance indicates that the data points are close to the mean. This can be recognized in a normal distribution graph where the curve is either flatter or steeper. A flat curve indicates a high variance as data points are far away from the mean, whereas a steep curve indicates a small variance as the data points are close to the mean.

3. Calculate the distance on each dimension between Germany (our home country) and a specific host country using the Excel program.
Tip: you can use the formula editor in Excel to calculate the distance on e.g. power distance between Germany and Argentina, the first country in the sample. You can copy-paste the formula in the other rows/columns.
Power distance: Argentina – Germany: 49-35 = 14
Uncertainty avoidance: Argentina – Germany: 86-64 = 21
Individualism / collectivism: Argentina – Germany: 46-67 = -21  21
Masculinity / femininity: Argentina – Germany: 56-66 = -10  10
4.The Kogut-Singh index of cultural distance also contains the variance of each dimension. Answer the following questions:
a. In the bottom row of the columns you will find the variance for each culture 
dimension. What dimension has the highest variance?
Individual - collectivism
b. What does a high variance mean?
Tip: to calculate the variance yourself, you can use the formula editor of Excel and search for “variance”.
A high variance means that the date points are very spread out from the mean and from each other
5. Calculate the cultural distance using Kogut and Singh formula while using Germany as the home country. 
Tip: follow the different steps as explained in the main lecture, and first calculate the difference, 
the squared difference, the variance, and the overall cultural distance.
Cultural distance = 0,547 
[(14*14)/507,68 + (21*21)/559,42 + (-21*-21)/621,34 + (-10*-10)/329,58)]/4
6. Which four countries have the lowest cultural distance to Germany?
Switzerland, Italy, South Africa and Luxembourg
7. Which country has the highest cultural distance?
Guatemala
8. What is the average cultural distance between Germany and these 57 other countries?
1,6046894
9. Pick a host country and relate the cultural distance score between Germany and that 
host country to the 7 points of critique raised by Shenkar as discussed in the lecture.
We picked Egypt, which has a cultural distance score of 1,748.
1. The illusion of symmetry: you cannot assume that the cultural distance from Germany and Egypt is similar to the cultural distance from Egypt to Germany. Because of recent conflicts in Egypt it is probably less attractive for other countries, including Germany, to do business or invest in Egypt, whereas for Egypt itself, it is not hard to do business in Germany.
2. The illusion of stability: Cultural distance is measured at a single point in time, but cultures may change over time and therefore, cultural differences may also change over time. Currently the conflict in Egypt is still ongoing which makes cultural difference between Germany and Egypt bigger. However, if this conflict ends, the cultural difference may shrink again.
3. The illusion of linearity: in case a German MNE already had an entity in Egypt and is considering a second one, the obstacle of starting a second entity is lower than it would have with the initial entity introduction. The effect on cultural distance therefore depends on the experience already gained and is not a linear process.
4. The illusion of causality: Kogut and Singh’s formula only focuses on cultural difference, but distance is a multidimensional construct and should be studied not in isolation but together with the other three dimensions of distance, namely; institutional/administrative distance, geographic distance and economic distance. For instance, the cultural difference between Germany and Egypt is 1,748 and the geographic distance between Germany and Egypt is 3208 kilometer. The cultural difference between Germany and Australia is 0,320 (a lot smaller than 1,748) and the geographic distance between these two countries is 14482 kilometers (a lot further than 3208 km).
5. The illusion of discordance: the assumption is that all cultural aspects of the cultural distance between home and host country matter equally, but depending on the country, some dimensions of a culture matter more than others. Take language and religion. Both cultural aspects, but when Germany does business with the Netherlands difference in language would matter a lot more than difference in religion, whereas when Germany does business with Egypt, the religion factor would weigh a lot heavier.
6. The assumption of corporate homogeneity: by using national cultural measures, the CD concept only incorporates variance in the national culture but does not consider possible variances on a corporate level. National culture vs. organizational culture is left out. In Egypt, a company which employs employees of many different nationalities will have less cultural differences with a German company in comparison to a company which only employs Egyptians.
7. The assumption of spatial homogeneity: when examining the cultural differences on the basis of national level scores, possible cultural variances within that same country are left out. In Egypt it would not be correct to look at the country as a whole, since within the country (city versus rural areas) there are different cultures and sentiments based on different takes on for example Muslim religion. This could affect the way different companies do business and therefore reduce or expand the cultural difference between Germany and Egypt.
10. Assess the strengths and weaknesses of the Kogut and Singh measure of cultural distance.

Kogut and Singh have made an effort of creating an overview on the cultural distance between countries. The overview is quite meticulous and based on empirical research, taking four dimensions - created by Hofstede - of cultural distance into account. Although the measure of cultural distance should provide realistic information for organisations that seek new markets, it is not able to do so. The measure should be seen as an indicator of cultural distance rather than an absolute number. Supported by Shenkar’s seven points of critique1, the weaknesses of Kogut and Singh’s theory will be assessed. Supported by Kim and Gray’s article, its strengths will be assessed2.

As Shenkar researched effectively, Kogut and Singh’s measure is quite ambiguous. It creates several illusions of cultural distance. Deriving from these seven points made by Shenkar, the measure cannot be used in practice. The differences between reality and theory are too large. For example, as Shenkar explained in point 5;

“The implicit assumption that differences in cultures produce lack of "fit" and hence an obstacle to transaction is questionable. First, not every cultural gap is critical to performance. As Tallman and Shenkar (1994, p. 108) note, "different aspects of firm culture may be more or less central, more or less difficult to transmit, and more or less critical to operations". Second, cultural differences may be complementary and hence have a positive synergetic effect on investment and performance.’3

Companies are shown one CD number, but the importance of the various dimensions creating this number is different for each company. For example, a company involved in financial derivatives that seeks to create a subsidiary overseas may be less concerned about the individualism/collectivism-dimension than about the uncertainty avoidance-dimension, as these companies are inherently making money of uncertainty.

Thus, the CD number does not suit the function implied by Kogut and Singh. Singh and Kogut create an illusion that this CD number helps companies finding a suitable strategy for expanding abroad. The CD number should provide hard data for finding this strategy. Due to the difference between theory and practice, this number cannot provide practical data.

However, the measure is suitable for other goals. For one, the measure can explain corporate behaviour in new markets. Kim and Gray researched the applicability of the CD measure. They concluded that relationship between the CD measure and corporate behaviour has some plausible consistencies.4 The ownership mode a company takes in a new market is indeed dependent on the cultural distance between the host and home country. Kogut and Singh’s measure is thus accurate, but not practical.

In conclusion, the measure of Kogut and Sing is accurate enough to explain corporate behaviour in hindsight, but cannot be seen as a practical calculation for choosing a business strategy. A company may tend to get confused by the calculation method, as it equally takes all dimensions into account. However, in the end, a company will probably handle appropriately to the new market’s culture. This is shown in Kim and Gray’s research.