The impact of home–host cultural distance on foreign affiliate sales: The moderating role of cultural variation within host countries

Research on how multinational firms deal with home–host cultural differences argues that cultural differences are minimized and assumes that foreign cultures are homogenous. In this paper we relax the cultural homogeneity assumption. In the presence of cultural variation in host countries the minimization of cultural differences leads existing mean-based indices of cultural differences to overestimate the actual cultural differences these firms have to deal with. We test this argument in a 25-year panel analysis of total US multinationalsʹ foreign sales in 54 host countries. At the sample average of cultural variation, the use of mean cultural difference indices yields a 74% overestimate of the actual cultural difference effect. This suggests that home–host cultural differences are a substantially smaller barrier to multinational sales than hitherto assumed. The assumption of cultural homogeneity leads to conclusions in which a too large role is attributed to cultural differences.