Cultural distance can be a key factor in how firms enter a foreign market and the type of investment they make, as research has shown. But what about when firms in the host country seek foreign involvement in their projects at home? Does cultural distance affect their decisions, too?

Jiatao Li of HKUST and co-authors Seung-Hyun Lee and Oded Shenkar consider this situation by comparing inward and outward investment involving Korean firms. They find that while cultural distance with foreign partners does not significantly affect the preferred degree of control for the Korean firms, it does affect their preference for domestically-based ventures over foreign ones.

"A fundamental difference between outward and inward investment is that the former involves dealing with both a foreign environment and a foreign partner, while the latter is limited to adapting to a foreign partner. Cooperating with an inward investor allows the local firm to benefit from established legitimacy and institutional support," they say.

Comfort in their own environment leads firms to opt for arrangements that give them more control, although this is one area where cultural distance can have an impact. A culturally distant partner will prefer to allow the local firm to manage in its own way, rather than try to manage itself in unfamiliar territory, while a culturally close partner will feel more comfortable and have fewer qualms about increasing its ownership.

"The impact of cultural distance is greater in inward investment than outward. Firms welcoming inward investment commit fewer resources because of their unfamiliarity with the partner firm's culture," the authors say.

The findings are based on 386 small- and medium-sized firms who sought cooperative relationships with foreign partners. The extent of control is defined by the type of arrangement made. High control situations involve equity joint ventures for outward investment, and inward distributorship for inward investment. Low control situations are export distributorship for outward investment, and equity joint venture for inward.

In addition to looking at the impact of cultural distance on control in foreign partnerships, the authors also investigate such factors as the presence of chaebols (Korean conglomerates) in an industry, and advertising intensity. Chaebols are associated with less control by Korean firms in ventures with foreign partners, perhaps reflecting the weaker position of smaller firms in these situations. Advertising, however, is associated with a higher degree of control.

"It's possible that the benefits of advertising investment can only be appropriated in a particular location and can't readily be transferred. Firms that invest more in advertising might thus have more incentive to better use this capability in cooperative ventures by insisting on having more control," the authors say.

Overall, the results support the idea that cultural distance has asymmetrical effects on inward and outward investment, and this makes a difference in firms' investment preferences. The authors caution, though, that their study may have limitations.

"The results may be Korea-specific and there could be different findings in other countries. For example, given that Korea is a country with high uncertainty avoidance and high power distance, firms there might be more likely to seek less uncertain partnership choices. Firms from nations characterized by low uncertainty avoidance and low power distance may find it more valuable to seek opportunities abroad," they say.