On the Symmetry and Discordance of Cultural Distance in Cross-borderM&As: A Two-Country Study
H. Emre YILDIZ
Stockholm School of Economics
Box 6501, 11383 Stockholm, Sweden
Tel. +(46-8)-736-9514
Carl F. FEY
Nottingham University Business School China
199 Taikang East Rd., Ningbo 315100, China
Tel. +(86)-574-8818-0071
September 2013
Note 1: This article is a draft. Please do not cite without written permission of the authors.
Note 2: The authors would like to acknowledge the kind help of Wang Zhongming, Adis Murtic and Karin Wiström with data collection.
Note 3: The authors thankfully acknowledge financial support from the Jan Wallander, Tom Hedelius, and Tore Browaldh Foundation.
On the Symmetry and Discordance of Cultural Distance in Cross-border M&As: A Two-Country Study
ABSTRACT
Cultural distance occupies a central role in international business studies. Notwithstanding its prevalence as a key explanatory factor for a myriad of questions studied in the field, the concept of cultural distance entails several entrenched assumptions that have not been put to sufficient systematic scrutiny. Situated within the specific context of cross-border mergers and acquisitions, we address this gap and investigate assumptions of symmetry and discordance. We collected data through decision simulations with professionals in Sweden (n=154) and China (n=222)by replicating the same vignette design in both countries. Our findings reveal that distance perceptions are asymmetric and create contrasting attitudes among Swedish and Chinese respondents. The study shows that distance perceptions from Sweden to China, as perceived by Swedish respondents, is shorter compared to the distance from China to Sweden, as perceived by Chinese respondents. We also detect mixed empirical evidence regarding discordance assumption, which suggests that perceptions and reactions towards a foreign acquirer at different ends of a given country pairing do not necessarily mirror each other. Specifically, the results from Swedish participants suggest that cultural differences are an impediment to the success of post-merger integration. However, this is not the case for Chinese respondents, which casts doubt on the discordance of national cultural distance.Findings reported in this study pinpoint important theoretical implications regarding cultural distance, which could contribute not only to cross-border M&A literature but also to general IB research concerned with cross-cultural phenomena.
INTRODUCTION
Understanding the effects of cultural, institutional, and political differences characterize much of the field we call international business (IB). Thus, the need for investigating the effects and implications of these differences defines one of field’s main raison d'être and has been fueling the academic motivation of many IB scholars. As unerringly pointed out by Zaheer et al. (2012), international management is essentially management of distance and research in this field has been primarily concerned with the coordination of firms’ activities dispersed across geographies. Accordingly, the extent of cultural differences and their implications have received significcant scholarly attention from diverse disciplines such as management, organization, marketing and strategy (for thorough review of relevant literature, see Kirkman et al., 2006).
Despite the perpetual increase in the number of empirical studies, it is intriguing to observe that the lack of empirical consensus on role of culture and cultural differences in myriad of IB phenomena persists. Management of cross-border mergers and acquisitions (M&As) is no exception to this. Review articles (e.g., Schoenberg, 2000; Stahl and Voigt, 2005) have come to the conclusion that the relationship between cultural differences among merging organizations[1]and the success of M&As is vaguely understood. In response, scholars looked for alternative ways for unraveling the role of culture and its net effects in M&As. Inter alia, this included (a) disentangling different levels (i.e., national vs. organizational) of cultural differences and separately examining their effects on post-acquisition integration outcomes (e.g., Sarala, 2010; Stahl and Voigt, 2008), (b) identifying possible moderators of the relationship between cultural difference and integration outcomes, e.g., acquisition experience (e.g., Dikova and Sahib, 2012), extent of operational integration (e.g., Slangen, 2006) or partner attractiveness (e.g., Very et al., 1997), and (c) adopting a more nuanced and fine-tuned approach by considering both positive and negative consequences of cultural differences between merging organizations (e.g., Reus and Lamont, 2009; Vaara et al., 2012).
Individually and collectively, these endeavors have significantly furthered our understanding of the effect of culture differences in M&As. In this paper, we wish to extend this stream of literature. To that end, we will problematize the assumptions upon and mechanisms with which cultural differences are theorized to have a bearing on individuals’ perceptions and likely responses in M&As. In this vein, we will question the plausibility of two underlying assumptions behind the measurement and use of cultural differences between merging organizations. Particularly, we will build on the shrewd theoretical treatise of Shenkar (2001) and scrutinize the assumptions of symmetry and discordance and examine the conditions under which cultural distance could yield asymmetrical and/or positive effects on the perceptions and possible responses of individuals in M&As. Indeed, most studies assume that cultural distance is symmetric (e.g., that people in China perceive Sweden to be as culturally distant as people in Sweden perceive China to be). In this paper we question if this is the case and investigate this empirically. If cultural distance is not symmetric, perhaps this is one reason for some of the inconsistent findings of the effect of cultural distance. Thus, despite this study’s setting in the M&A context and specific focus, our study’s findings likely have implications beyond this context. Accordingly, we argue that the lack of systematic attention paid to the tenability of the above assumptions could be the main culprit behind the lack of empirical consensus on the net effects of cultural differences and distance.
Obviously, we are not the first to put these assumptions under systematic examination in the IB literature. Theoretical and empirical studies on expatriate deployment (Brock et al., 2008), expatriate adjustment (Selmer et al., 2007), mutual and bilateral managerial perceptions (Chapman et al., 2008; Muratbekova-Touron, 2011), headquarter-subsidiary relationships (Drogendijk and Holm, 2012) and mode of entry choice (Parente et al., 2007) scrutinize the assumptions apropos symmetric effects and directional equivalence of cultural distance. Conceptual arguments and empirical results of these studies lend support to the argument that symmetry assumption of cultural distance concept could be illusionary and misleading. To the best of our knowledge, however, no previous study explicitly tested the asymmetry and discordance assumptionswithin the context of cross-border M&As, and their implications for organizational commitment and knowledge transfer in the post-acquisition stage and there is a need for more systematic and rigorous tests of the symmetry of cultural distance in general considering the importance of this concept for international business theory. Considering the effect of cultural distance in knowledge transfer (Björkman et al., 2007) and organizational commitment (Kirkman and Shapiro, 2001), as well as the role of organizational commitment and knowledge transfer in post-acquisition success (Birkinshaw et al., 2000; Bresman et al., 1999), we identify this as an important gap in the literature.
With this study, we intend to address the aforementioned gap and contribute to the specific branch of M&A literature focusing on sociocultural dynamics of post-merger integration, along with the emerging stream of research aiming at a more nuanced view of cultural distance concept. In this regard, the first research question we aim to answer in this study is whether or not cultural distance has the same effect on acquired unit employees’ perceptions and potential behaviors, regardless of the route through which this distance is measured. In other words, ceteris paribus, can we observe similar pattern of perceptions and reactions among employees who work in Country A and whose company is acquired by a firm from Country B, compared to employees who work in Country B and whose company is acquired by a firm from Country A?
While the first research question is aimed to put the symmetry assumption to empirical test, we also intend to scrutinize the discordance assumption inherent in the cultural distance hypothesis. Thus, the second research question of this paper is whether and whencultural differences lead to negative and positive reactions from acquired unit employees. Some of the studies we cited above have already addressed the ‘double-edged sword’ nature of cultural distance in international acquisitions (c.f., Reus and Lamont, 2009). Nonetheless, as we shall discuss later, the majority of these studies have anchored their arguments in different conceptual footholds. As a result, opposing effects and competing hypotheses regarding cultural distance are built on totally different (and rather incommensurable) theoretical bases, which points to the need for a more coherent and theoretically calibrated approach to the matter. To address this, we will borrow theoretical frameworks from social psychology and formulate our arguments regarding the negative and positive effects of cultural differences on different integration dynamics in M&As accordingly.
To answer the aforementioned questions we collected individual-level data in Sweden and China. Using an under-utilized research design (i.e., policy-capturing), we presented Swedish (Chinese) respondents with a series of acquisition scenarios, in which their firm is acquired by a Chinese (Swedish) firm. Following that, we asked respondents to express their willingness to use knowledge sent by the Chinese (Swedish) acquirer as well as their possible commitment to the merged organization. Our results confirmed that cultural distance has asymmetric effects on Swedish and Chinese respondents’ perceptions and likely behaviors in the context of M&As. In particular, perceived cultural differences between Sweden and China had more negative effects on Swedish respondents’ willingness to learn and commit to a Chinese acquirer compared to Chinese respondents. Furthermore, our analyses provides mixed results regarding the discordance assumption.On the one hand, compared to a domestic acquirer, Chinese respondents displayed more favorable and positive perceptions towards a foreign (Swedish) acquirer. On the other hand, our results based on Swedish respondents, who had more favorable attitudes towards a domestic acquirer vis-à-vis a foreign (Chinese) acquirer, were in line with discordance assumption
The organization of the paper is as follows. In the next section we shall provide a critical reviewof earlier literature. This will be followed by the description of our research design. Next, we will present our results and interpret them in relation to the extant findings from earlier literature. We will end the paper with some concluding remarks and suggestions for future research.
LITERATURE REVIEW
Culture in Previous M&A Literature: A Critical Reading
The “cultural distance” hypothesis implies that cross-cultural contact and intercultural relations gets more problematic and difficult to manage when there are large cultural differences between organizations, groups and individuals (Hofstede, 1980). Measured by the differences between countries in terms of in values, norms, business practices, political, regulative disparities etc., cultural distance has been extensively used as a key explanatory variable to understand different phenomena by IB scholars (see Tung and Verbeke, 2010).Within the specific context of M&As, cultural differences have traditionally been considered a source of problem for synergy creation for they are argued to increase misunderstandings, animosity, and unease between the members of the merging organizations (e.g., Larsson and Finkelstein, 1999). Complications arising out of cultural differences are especially pronounced for cross-border M&As where the cultures of merging organizations are likely to differ on both national and organizational levels (Barkema et al., 1996). These theoretical arguments, along with somewhat limited empirical evidence, stand to reason for a negative effect of cultural distance on the creation of value, the achievement of sociocultural integration, the emergence of trust and the transfer of capabilities between merging organizations in cross-border M&As (Stahl and Voigt, 2005).
However, cumulative empirical results on the net effects of cultural differences in cross-border M&As are far from being in accord. Positive, negative and non-significant effects of cultural differences have been reported in different empirical studies (Schoenberg, 2000). These inconsistent findings have left the influence of cultural differences between acquirers and acquired firms on post-acquisition integration outcomes as an issue yet to be resolved. Motivated by this, more recent studies started to adopt a contingency approach by identifying potential moderators and mediators. For example, Slangen (2006) examined the moderating role of integration level in the cultural distance – acquisition performance relationship. His results reveal that national cultural differences are detrimental to acquisition performance only if the acquired unit is tightly integrated into the acquirer, whereas the effects of cultural differences were found to be positive in the case of loose integration. Dikova and Sahib (2012) theoretically argued and empirically showed that a higher degrees of cultural distance is a problem for inexperienced acquirers whereas firms with extensive acquisition experience are able to extract positive value by taking over culturally distant target firms. Focusing on the role of acquirer’s multiculturalism (i.e., tolerance and encouragement for cultural diversity), Reus (2012) reported the counter-intuitive finding that acquirers are unable to account for and manage emotional well-being of acquired unit members in culturally distant contexts even if they have a high degree of multiculturalism. Focusing on a specific and key integration outcome (i.e., trust), Stahl et al. (2006) detected an interaction effect between cultural distance and mode of takeover. In particular, they showed that acquired unit members’ trust towards a culturally distant acquirer would be lower in case of a hostile mode of takeover.
With the ambition to reconcile earlier empirical inconsistencies, yet another stream of research sees the solution in a more fine-grained approach to the level at which cultural differences are theorized to have a bearing on integration outcomes. For instance, Sarala (2010) showed that the organizational cultural differences increase the extent of post-acquisition conflict whereas cultural differences at the national-level were found to have insignificant effect on post-acquisition conflict. Using the same dataset but instead focusing on the effectiveness of knowledge transfer, Sarala and Vaara (2010) also found that national cultural differences provide opportunities for successful knowledge transfer whereas organizational cultural differences were not a significant factor in knowledge transfer. As a follow-up on this, Vaara et al. (2012) further found that there is a negative relationship between the degree of social conflict and the effectiveness of knowledge transfer. Differentiating between both level of culture and measures of post-acquisition performance, the meta-analyses of Stahl and Voigt (2008) revealed that differences in national and organizational cultures have a negative effect on sociocultural integration (i.e., shared identity, positive attitudes, and trust). On the other hand, neither national nor organizational cultural differences seemed to have a meaningful effect on synergy realization (i.e., accounting based performance) or shareholder value (i.e., abnormal stock market returns).
While the theoretical rationale behind differentiating between national and organizational cultural differences has an intuitive appeal, we argue that trying to reconcile extant empirical inconsistencies by recognizing the issue as a typical “level-of-analysis problem” could be ineffective. This is especially the case if the ambition is to understand the drivers of sociocultural integration by adopting a micro-level focus on the perceptions, feelings, attitudes and possible behaviors of individuals in acquisitions. That is, as far as the issue of post-acquisition integration is considered at the individual-level of analysis and from a socio-cognitive vantage point, explicit differentiation between national and organizational cultures and differences stemming therefrom would be an unavailing attempt. However, an individual’s membership in a nationality or an organization (or to any other collective affiliation for that matter) could be more or less relevant when s/he is deriving his/her self-concept and making self-other comparisons accordingly. As argued by Regnér and Zander (2011), being large and complex organizations, multinational corporations embrace various subgroups with different identity frames. Therefore, it is an open empirical question whether members of merging organizations derive a larger or smaller portion of their self-image and concept from their nationality (e.g., being German), or from their organizational membership (e.g., being a member of Daimler organization) or from their profession (e.g., being an engineer). Hence, there is no reason to expect, a priori, national and organizational cultures to have differing effects on “us vs. them” type of thinking and the ensuing process of sociocultural integration unless one can (a) observe varying degrees of salience and relevance of these two bases of identity frames, (b) theoretically establish a link between primary variables of interest and the unique attributes of a specific context which is expected to make a difference in the salience and relevance of different identity frames. Alas, those studies identifying the remedy as a more precise approach to the “level of culture” fail to offer solid theoretical and analytical ground regarding either of these conditions. As a result, their conclusions suffer from the same empirical inconsistency (e.g., national cultural differences have no effect on social conflict in Sarala ( 2010), whereas for the very same dataset with Finnish acquirers, these differences are found to have a negative effect on social conflict and positive effect on knowledge transfer in Vaara et al. (2012)) they attempt to puzzle out in the first place.
In addition to differentiating between the different levels of culture, recent studies have also made notable attempts at understanding the positive and negative consequences of cultural differences with the aim of deciphering the net effects of cultural differences in the context of cross-border M&As. For example, Reus and Lamont (2009) portrayed cultural distance as a ‘double-edged sword’ in international acquisitions due to its impeding effects (i.e., different communication styles and amplified perceptions of ‘us vs. them’) along with its enriching effects (i.e., additional potential and opportunities for learning and knowledge combination due to cultural diversity). These arguments were preceded by an earlier study by Morosini et al. (1998) who found a positive effect of national cultural distance due to acquirers’ ability to extract rent-yielding routines and repertoires that would otherwise be unavailable in targets coming from culturally similar contexts. Björkman et al. (2007) also put forth a similar logic and took a step further by hypothesizing a non-linear relationship between cultural differences and value creating potential of cross-border M&As in which a low to moderate degree of cultural distance provides additional learning opportunities whereas at higher degrees of cultural distance exploiting these opportunities becomes problematic.