Which of the following strongly affects the cultural distance between two countries?

10.01.2.7 Cultural Distance

Cultural distance is an important concept in understanding diversity, and the way it affects human relationships. Cultural distance can reflect differences in (i) language (e.g., language families, such as the client speaks a tonal language and the clinician an Indo-European language), (ii) family structure (say, monogamous vs. polygamous marriages can create distance), (iii) religions (e.g., animist and Christian religions), (iv) wealth and life style (e.g., the difference between a wealthy jetsetter and a member of a culture of hunters and gatherers), (v) values (e.g., the difference between conservative, very traditional values and self-actualizing, hedonistic values).

20.4.5 Cultural Distance and International Investment

What determines how much firms from one country invest in another country? Cultural distance between countries may deter investment because it increases transaction costs. Lacking information about distant cultures, managers will find it more difficult to make sense of the social environment. They may not recognize the prevailing beliefs and rules, may think they are inappropriate or unnecessary, and may not know how to work within them. Cultural distance hinders the flow of information about firm value, hiring, compensation, training, and other management practices. The uncertainty this breeds between managers from culturally distant countries is likely to discourage investing in one another’s firms.

Dozens of studies have examined how cultural distance affects where investment occurs, international diversification, and the performance of multinational firms. These studies used a composite index of distance based on the four Hofstede dimensions (Kogut and Singh, 1988). A meta-analysis found that this index predicted inconsistently (Tihanyi et al., 2005). A survey of the relevant literature urged researchers to avoid using composite indexes of cultural distance (Kirkman et al., 2006).

Heeding this warning, Siegel et al. (2013) computed separate indexes of cultural distance for each of the three Schwartz cultural dimensions. Country scores were based on the teachers’ data from 55 countries surveyed during the years 1988–2004. Rather than use three dimension scores, we represented cultural profiles by taking one orientation from each dimension (i.e. egalitarianism, harmony, and embeddedness). For every pair of countries we constructed a measure of sheer distance – the square of the difference between the countries’ scores on a cultural orientation.16 We wished to predict the flow of investment between countries. In order to assess whether the flow of investment is greater in one direction or the other, we also constructed a measure of signed distance. This was the algebraic difference between the score for the investing firm’s country of origin minus the score for the host country.

We studied the impact of each type of cultural distance on international flows of direct investment (FDI). FDI includes joint ventures, mergers and acquisitions, and setting up new firms from scratch. Data on FDI both into and out of 55 countries are available from the UN Centre on Transnational Corporations for the years 1970–2004, although the majority of observations take place after 1990. There were 37 614 potential transactions between each country-pair for these years. The distribution of investments was skewed and there were no investments between most pairs of countries for most years. To avoid biasing the econometric results, we followed standard methodological practice in economics and used the natural logarithm of the annual dollar flow of investment + 1 as our dependent variable.

Any factor that reduces the transaction costs of investment between countries might promote FDI. Thus, FDI might be greater between countries that: (i) are geographically closer, (ii) share a common language, (iii) share a common colonizer (e.g. British), (iv) have similar legal systems, (v) have similar levels of corporation taxation, (vi) have similar levels of law enforcement, (vii) have a bilateral tax treaty, (viii) have a bilateral investment treaty, and (ix) have similar levels of political stability. In addition, (x) wealthier countries are more likely to invest in each other because they have more resources to invest and an infrastructure to absorb investments. Siegel et al. (2013) detail the measurement of these variables. We ask: ‘Does cultural distance affect FDI even after taking all of these factors into account?’

To address this question, we regressed our FDI measure on the above variables. We also included cultural distance and signed cultural distance for the three cultural orientations. Columns 1 and 2 of Table 20.4 present the results of the ordinary least-squares (OLS) regression. Not surprisingly, the strongest predictors of FDI were country wealth and geographic closeness. Following them, however, were four of the indexes of cultural distance.

Table 20.4. OLS regression of the natural log of foreign direct investment flow + 1 on predictors (robust standard errors in parentheses).

As expected, pairs of countries invested less in one another the greater the cultural distance on egalitarianism. A one standard deviation increase in egalitarianism distance brought a 16.5% decrease in mutual investment. The finding for signed embeddedness distance indicates that investment flowed more from countries low on cultural embeddedness to those high on this orientation. Rephrased in terms of the cultural dimension, investment flowed more from highly autonomous cultures to those high in embeddedness. Contrary to expectations for cultural distance, the greater the distance on cultural harmony, the greater the FDI. The significant finding for signed harmony distance indicates that investment flowed more from low to high harmony cultures. Rephrased in terms of the cultural dimension, the flow was greater from high mastery cultures to high harmony cultures. I return shortly to the interpretation of these findings.17

Sharing a similar legal system, a common colonizer, and a similar level of law enforcement also increased the flow of investment, but these effects were weaker than those of the cultural orientations. Moreover, having bilateral tax or investment treaties, a common language, similar corporate taxes, or similar political stability levels explained no significant additional variance in investment. Thus, cultural orientations had a substantial role in explaining FDI, one comparable to or greater than many economic and legal factors. Before interpreting the findings for culture, we address the issue of causality with regard to egalitarianism, the cultural orientation of central interest.

Might egalitarianism be an epiphenomenal reflection of contemporary social, economic, or political conditions rather than a causal variable? Egalitarianism, as we have seen, is associated with such conditions. However, by using exogenous – historical or ecological – variables as instruments for egalitarianism, we can capture the time-invariant element of this cultural orientation in the analyses. Siegel et al. (2011, 2013) demonstrated that more than 50% of the variance in national scores on egalitarianism can be explained by the combination of social fractionalization (ethnic or linguistic), dominant religion (Protestant and Catholic), nineteenth-century war experience, and previous communist rule. We therefore conducted an analysis that used these as instrumental variables for egalitarianism. We also controlled for home- and host-country fixed effects, thus allaying concerns about possible influence from unspecified stable factors. Columns 3 and 4 of Table 20.4 present the results of this analysis. They show that the egalitarianism results are highly robust to the use of instruments together with clustered standard errors and to the use of origin-country and host-country fixed effects.

We next interpret the findings for culture. What accounts for the effect of egalitarianism distance? Cultural egalitarianism relates to national policies that concern control of abuses of market and political power. It correlates positively with lower corruption, transparency in financial markets, labor protections for workers, and effective anti-monopoly regulation. It also correlates with greater redistribution of wealth to the weak, the unemployed, and the elderly. Egalitarianism further matters because it affects corporate culture and the everyday business conduct of managers. Managers from less egalitarian (hierarchical) societies tend to believe that status or power differences make it legitimate to apply different rules to different people (Brett, 2001). These correlates of cultural egalitarianism constitute critical contingencies for the effective functioning of firms. Firms adapt to the policies and practices associated with the level of egalitarianism in their own country. The different critical policies and practices in countries distant on egalitarianism likely deter investment by raising anticipated transaction costs.

As noted, investment flowed more from countries low on cultural embeddedness to those high on this orientation. Further analyses reveal that much of this effect is associated with differences in countries’ environmental regulation (Siegel et al., 2013). Cultural embeddedness is the orientation most closely and negatively associated with strictness of environmental regulation. In high embeddedness societies, groups focus more on their own outcomes and less on costs in the wider society or physical environment. Investment tends to flow from countries with strict environmental controls (low embeddedness) to those with lax environmental controls (high embeddedness). Multinational enterprises apparently seek ‘pollution havens’. Adding indexes of environmental regulation to the analyses reduces the effect of signed embeddedness on FDI by 69%. Even after controlling environmental regulation, however, signed embeddedness distance affects FDI, though more weakly. This influence must operate through mechanisms yet to be identified.

For harmony, surprisingly, cultural distance had a positive effect on FDI. The signed harmony effect indicates that the flow of investments was mainly from low harmony (i.e. high mastery) to high harmony countries. Why? High mastery cultures emphasize such entrepreneurial values as daring, success, and ambition. Firms in high mastery countries operate in a cultural atmosphere that encourages assertive action, risk taking, and growth. Firms in high harmony countries function in the opposite atmosphere. Firms in high mastery countries are more active in reaching out to new markets. In choosing where to expand, they find high harmony countries especially attractive. There, they can anticipate less competition for the resources they need and for the market niche they wish to fill.

This reasoning regarding the positive effect of harmony distance on FDI was assessed by adding three indexes of the distance between countries in entrepreneurial activity as controls. All three indexes showed that a societal proclivity towards entrepreneurship relates negatively to cultural harmony. One survey-based index was the difference between countries in the proportion of individuals in the population who report that they are owner-managers of new firms (between 4 and 41 months old) (Minniti et al., 2005). The other two indexes were the distance between countries in the skewness of firm age or of employment size (Alfaro and Charlton, 2006). These two indexes measure the relative difficulty of starting a business in a country, because higher skewness of firm age or employment size means that the country is relatively more dominated economically by older and/or larger firms.

Introduction of one or another of these controls into the regression reduced the size of the effect of signed harmony distance by between 40% and 60%. This supports the interpretation that firms in high mastery countries find high harmony countries especially attractive as targets for expansion where they can anticipate less competition. The fact that signed harmony distance remained significant after inclusion of these controls suggests, however, that other mechanisms through which harmony operates have yet to be found. Finally, although each of the indexes of entrepreneurial activity distance positively influenced FDI flows, their inclusion did not weaken the effect of egalitarianism distance.

In sum, this research on FDI makes a unique contribution to our understanding of international investment. It demonstrates that cultural distance can both deter (egalitarianism) and promote (harmony) investment, depending on the type of cultural value orientation in question. It also shows that differences between countries on particular cultural orientations promote flows of investment in one direction rather than another. With its complex set of cultural effects, this study illustrates especially clearly that cultural value orientations are properties of societies, not of individuals.

1.6 Broader Cultural Issues

The final group of chapters in this volume contains contributions dealing with issues that are obviously deeply entrenched in most cultures—and this is what gives them their anthropological flavor. These chapters show how these issues are interwoven with and can have an effect on economic, sociological, or legal outcomes.

In Chapter 20, Shalom Schwartz proposes a new way to study the distances between the cultures of national groups. Cultural distances are obviously more encompassing than the linguistic distances discussed in Chapter 19. Schwartz introduces new dimensions that he calls ‘cultural value orientations’, and produces distances for eight distinct world cultural regions that reflect the influence of geographic proximity, history, language, and other factors. He examines associations between culture, measured by the value orientations, and a variety of variables of economic significance, including socioeconomic factors, corruption, competitiveness, and democracy. The chapter analyzes how cultural distances affect the flow of investment around the world. Schwartz argues that his approach differs from well-known theories of cultural dimensions11 insofar as it derives constructs from a priori theorizing and tests their fit to empirical data.

The economics of religion is an area that has grown considerably in recent years.12 In Chapter 21, Gani Aldachef and Jean-Philippe Platteau argue in their introduction that there are:

… at least two fundamental reasons of why an economist might be interested in understanding the functioning of religious institutions and their relationship with economic development. The first comes from the role that religion plays in influencing [the highly persistent] cultural norms and beliefs in a society. … Secondly, religion is a principal source of social identification in a pre-industrial society. If identity matters for certain key aspects of economic behavior, such as cooperation and provision of public goods … we need to understand the effects of religious identification and of its intensity on the behavior of individuals.

They first take religion as given and analyze its effects on economic behavior, and next consider that, in some aspects at least, religion may become endogenous since it is often used by politicians to strengthen their power or weaken that of the opposition.

The final chapter examines strategic relationships between traditional norms in custom-driven poor societies and modern statutory law that aims to correct social inequalities embedded in the custom. In Chapter 22, Jean-Philippe Platteau and Zaki Wahhaj discuss these interactions mainly in developing countries in Africa and the Middle East and in India, where customs that victimize at least a fraction of the population, such as different inheritance provisions for men and women, female circumcision, or child marriage, are deeply rooted cultural facts. Platteau and Wahhaj suggest that modern laws are often rejected (‘dead letters’, to use their term) unless they are accompanied by social and political changes. They use some simple game-theoretical and political-economy arguments to show that there are other possibilities besides being just dead letters. If many members of the group appeal to modern law, customs can be displaced. Between dead letter and full displacement, there is a set of intermediate cases in which custom ends up going towards modern law.

17.7 Increasing Returns, Market size effects, and Cultural Dynamics

The previous analysis highlights the importance of social strategic complementarity effects on cultural transmission through the channel cultural consumption externalities and social interactions. As discussed, this provides a channel through which international trade integration leads to cultural homogenization within and across countries. Social strategic complementarities and cultural homogeneity in trade economies also typically hold when there are increasing returns in production and market power (something that seems to be particularly prevalent in cultural industries such as the media, TV, and other movie entertainment industries).

Maystre et al. (2009) provide a simple framework illustrating these issues. They analyze the transmission of a preference for specific differentiated goods whose varieties are produced under monopolistic competition. In this context, the larger the size of the group with a preference for a specific good, the larger the market size and the entry of firms producing differentiated varieties of that good. Increased varieties in turn make it relatively more attractive to acquire and transmit preferences for this good, leading once again to social strategic complementarity in cultural transmission.

Specifically, the theoretical framework has three building blocks. The first block corresponds to a standard economic model à laKrugman (1979) where firms produce differentiated products under monopolistic competition. Assume, for instance, that there are again two cultural types, A and B. Associated to these cultural types are two types of goods and two types of individuals, A and B. At a date t, type i agents represent a share qti of the population, for i = A, B. Agents have the following preferences:

(17.20) UA(xA,xB)=x A;UB(xA,x B)=xB.

Composite goods A and B are differentiated into, respectively, a number NA and NB of varieties {ckA} and {ckB} in a Dixit–Stiglitz way: xA=∫0NA ckA(σ-1)/σd kσ/(σ-1)andxB=∫0NBck B(σ-1)/σdkσ/(σ-1), where σ > 1 is the elasticity of substitution. Each agent supplies one unit of labor in a competitive labor market at a wage rate normalized to w = 1. Given symmetric variety prices pki associated to the same cultural type i = A, B, standard computation yields aggregate demands for the different varieties:

(17.21)DkA=qtAPA(σ-1)pkA-σandDkB=(1-qtA)PB(σ-1)pkB-σ,

where Pi=∫0Nipki1-σdk1/(1-σ ) is the aggregate price index for each composite good i = A, B.

The second building block ties products to culture. Building on a large marketing and consumer research literature, Maystre et al. (2009) assume that individuals are endowed with different clusters of cultural values and that these cultural values can be tied to consumption varieties. Typically, upon entry, firms anchor their product to a cultural type, A or B, and a fixed labor cost F must be paid to start production. Then the production of one unit of product requires one unit of labor. Monopolistic competition prevails on the product market. Entry and exit (and therefore the number of varieties NA and NB that are tied to a particular cultural type) adjust instantaneously within each period t, so that profits are equal to 0. This captures in a stylized way the idea that cultural transmission and evolution of preferences across generations takes more time than market structure adjustment.

Finally, the last block of the framework is a micro-founded model of cultural transmission à laBisin and Verdier (2001) where the dynamics of cultural traits derive from parental socialization efforts driven by the relative importance of the cultural subjective utility costs ΔVA and ΔVB.

As usual, the model is solved in two stages. In a first stage, Maystre et al. (2009) derive the product market equilibrium with free entry for a given distribution of preferences (i.e. for a given qti). This provides the equilibrium number of varieties at each date. As usual in monopolistic competition frameworks, there is a market size effect: a larger fraction of individuals of culture A (respectively, B) implies a larger market size for good A (respectively, B), which in turn promotes entry of type A varieties (respectively, B).

The equilibrium dynamics of qti are then analyzed with the characterization of the utility cost functions ΔVi, for i = A, B. Social strategic complementarity effects are shown to prevail. Indeed, because of the taste for variety embodied in the Dixit–Stiglitz preference structure, it is easy to see that for both cultures i = A, B the cultural intolerance parameter ΔVi is an increasing function of the number of produced varieties Ni associated to that cultural good i (i.e. the cultural good preferred by agents of culture i). Owing to the market size effect, this in turn is an increasing function of the fraction qti of individuals of culture i implying that:

∂ΔVi∂qi>0fori=A,B.

As such, this effect generates a force for cultural homogenization inside the society.

Maystre et al. (2009) then consider trade integration between two identical economies. They assume that there are two idiosyncratic cultural types, A and A*, which are specific to the domestic and the foreign country, and a cultural type, B, which is common to both countries. Correspondingly, the economy has three goods, A, A*, and B. At equilibrium, type A goods are consumed only in the domestic country, type A* goods are consumed only in the foreign country, and type B goods are consumed everywhere.

Again, because of market size effects, the relative number of type B varieties is larger under trade integration than under autarky. Now interestingly, this effect is reinforced by a feedback effect from the cultural dynamics on aggregate demand. Indeed, in each country, a higher value of NB implies a higher relative intolerance ΔVB compared to the idiosyncratic cultural types, A and A*. This in turn induces a shift in cultural transmission: more socialization effort for parents with the common cultural type B, less effort for parents with the idiosyncratic cultural types A or A*. This brings down the steady-state value of the fraction of idiosyncratic types A and A* in the domestic and the foreign country.

As a result, Maystre et al. (2009) conclude that product market integration may lead to a decrease in their bilateral cultural distance, defined as the probability that two randomly picked up individuals in the two different countries do not share the same cultural types.18 The removal of trade barriers increases the incentives of firms to anchor their products to cultural types common to the two countries. This effect triggers a process of cultural homogenization towards the commonly traded good.

The paper also discusses two other interesting observations. (i) The effect of trade on bilateral cultural distance is larger when the traded goods are more differentiated (i.e. smaller values of σ), as product differentiation drives the strength of the feedback effect. (ii) Owing to the existence of the social strategic complementarity effects on cultural transmission and the fact that cultural dynamics may exhibit multiple long-run equilibria, the impact of trade openness on bilateral cultural distance is characterized by path-dependency. A temporary increase in trade openness may have a permanent effect on the distribution of cultural types in the economy.

Internationalisation Strategies

Based on the current international business activities identified by these young executives, a fairly classical pattern of internationalisation based on exporting and low cultural distance emerges. For current outward oriented activities, the majority are oriented to ASEAN or other regions in Asia & the Pacific. Another direction is to Europe. Very few projects are directed to the US and only three are global in nature. The pattern for future activities is similar but there are fewer projects expected. Most of the activities will be focused on ASEAN and the Asia-Pacific. There is not much emphasis on a global orientation.

In the inward direction of internationalisation, for new projects adapted to Thailand, there are much fewer activities, although a similar pattern in terms of an Asian-centric perspective. Only a few projects have originated in Europe and none are from the US.

5.4.4 Independent Variables

Our independent variables are host-country economic performance and distance.

Host-economy performance (HECONOMY) expresses macroeconomic stability and potential economic growth and trade openness. The variables of inflation (INF), exchange rate (RER), and GOVEXP capture macroeconomic stability, whereas gross domestic product (GDP) and TRADE are proxies for the size and potential openness of trade between Brazil and the host country of FDI.

For the distance variables, based on Amal and Tomio (2015a), we used four main variables, as follows.

CD, measured by the index of Kogut and Singh (1988), based on differences in scores for each of Hofstede’s six cultural dimensions—power distance (PDI); individualism versus collectivism (IDV); masculinity versus femininity (MAS); uncertainty avoidance (UAI); long-term orientation (LTO); indulgence versus restraint (Hofstede, 1980)—between the country of origin of FDI and the host country of FDI, according to the following equation:

(5.3)CDj=∑i=16(Iij−Iiu)2Vj /6

This index is calculated by subtracting the scores of the country (Brazil) in each of the six dimensions from the scores of the recipient country of FDI. The square of the resulting difference is then divided by the variance of the scores for each dimension. The resulting values of such differences for each dimension are summed and divided by six. The scores were taken from Hofstede’s updated website (www.geert-hofstede.com).

GD, which also captures the cultural differences between home and host countries, and is measured by the great circle distance between the capital of the country (Brazil) and the capital of each of the host countries of OFDI.

For ID, we used the governance indicators made available annually by the World Bank (databank.worldbank.org). The indicators are based on research by Kaufmann et al. (2009), which covers 212 countries and territories and measures six dimensions of governance: voice and accountability (VA), regulatory quality (RQ), rule of law (RL), political stability of violence/terrorism (OS), government effectiveness (GE), and control of corruption (CC). The authors attributed a score of between −2.5 and +2.5, with higher scores indicating higher levels of quality of governance.

Similar to a previous study (Amal and Tomio, 2015a), we created a composite index based on the deviation along each of the six governance dimensions already mentioned of each host country from Brazil. The deviations were corrected for the differences in the variances of each dimension and then arithmetically averaged. Thus, in algebraic form, like Kogut and Singh (1988), we propose the following index to test the effect of ID on OFDI from Brazil (Amal and Tomio, 2015a):

(5.4)IDj=∑i=16( WGIij−WGIiu)2Vj/6

We also used as an institutional variable the Index of Economic Freedom (EF), published by the Heritage Foundation. This is composed of the indicators of property rights, investment freedom, and financial freedom. EF is based on 10 quantitative and qualitative factors. Each of the 10 EFs within these categories is graded on a scale of 0–100. A country’s overall score is derived by averaging these 10 EFs, with equal weight being given to each. The higher the index, the higher the level of EF in the country.

All the variables and their expected signs are reported in Table 5.16.

Table 5.16. Variables of Host-Country Effects on Brazilian OFDI: Panel Model

Differently from the first model of the home-country perspective, where we estimated the determinants of FDI using time-series analysis and aggregated data, in the following we will use data from a sample of 32 host countries of Brazilian OFDI in Brazil over the period between 2001 and 2013, to test a panel data model of economic and institutional determinants of OFDI.

In order to test the previously discussed hypotheses of determinants of the host-country perspective, we will test the general model in several arrangements.

In the first arrangement, we test the economic performance of the host country. In the second arrangement, we introduce the variables of distance, and in the last arrangement we include the Index of EF. The results are shown in Table 5.17.

Table 5.17. Host-Country Effects: Panel Data Model

Notes: Dependent variable is bilateral OFDI stock. Model I in fixed effect for cross-section and none for period. Models II and III in random effect for cross-section and none for period. Cross-sections: 32 countries. Period: 2001–13.

Before we discuss the results of the estimated models, some preliminary comments can be highlighted. The results show relatively stable behavior of the variables over the three regressions.

Second, the variables inflation and government expenditure (GOVEXP), although they presented a negative correlation with OFDI, were not statistically significant.

Finally, cultural and IDs have not been found to be statistically significant and have registered negative correlations, suggesting that the lower the distance between Brazil and the host country, the higher the OFDI.

The economic performance variables, particularly related to growth and size, have been found to be statistically significant, and to have the highest coefficients. Host-country GDP is positively correlated to OFDI and is statistically significant at 1%. This suggests that Brazilian OFDI is strongly oriented to large markets and those with a high potential for growth, suggesting a more market-seeking approach by MNCs.

Bilateral trade between home and host countries has been found to be negatively correlated and statistically significant at 1%, pointing to a more substitutive relationship with FDI. The results suggest that the investments of Brazilian MNCs are more concentrated in larger economies, with a substitutive relationship between trade and OFDI, which may suggest that in situations where there are some trade barriers, Brazilian firms will be more prompt to follow a strategy of FDI to enter those markets. This result gives some support for the market-seeking hypothesis, suggesting that the investments of Brazilian MNCs are more likely to be oriented to attending to a growing demand in the host markets, as pointed out by other studies (Amal and Tomio, 2015a; Fleury and Fleury, 2011).

The real exchange rate has been found to be negatively correlated to OFDI and statistically significant. The more overvalued is the exchange rate in the home country, the higher the OFDI. This can be explained by the opportunities for foreign firms to acquire foreign assets at relatively lower cost, although the risk of a persistently overvalued currency may reduce the competitiveness of Brazilian exports.

In arrangements 2 and 3, we estimated the effects of different distances on Brazilian OFDI.

Geographical distance (GD) was statistically significant at 1% and has presented a negative correlation with OFDI. Thus, it seems that Brazilian OFDI is sensitive to geographical proximity. The closer the host market, the more likely Brazilian MNCs are to be prompt to invest through FDI. However, the results show that cultural and IDs were not found to be statistically significant.

The Index of EF in the host country has been found to be statistically significant and positively correlated with OFDI. This index is composed of indicators of property rights, investment freedom, and financial freedom. The higher the freedom level in the host country, the higher the likelihood that Brazilian MNCs can commit through OFDI. This variable has recorded the highest coefficient, even higher than that of GDP.

In the next section, we will discuss the implications of these results for the strategies of Brazilian MNCs.

Geographic and Cultural Distance

The third channel that has been emphasized by the literature concerns immigration costs and how they shape the economic calculus of foreign workers when deciding where to settle. We start by looking at the cost of moving abroad – e.g., transportation costs – and we then turn to proxies for other migration costs, e.g., the cultural distance between the source and the destination country's society.

Figure 4 uses data from the UK Department of Transportation to calculate the real price of an average international airfare during the post-1970 period. As we can see, there has been a rapid and sustained decline in the costs of moving from one country to another, on average involving a reduction of 49.7% in the case of business travel, and an even more remarkable decline of 69.1% when it comes to leisure flights.

Measuring the evolution of cultural distance across countries is a much more complex endeavor, but we can consider at least two proxies that provide useful information to that end. First, Figure 5 reports information on the dynamics of communication costs for a group of six European countries. The data, taken from Eurostat, provide a picture of the rapid decline in the cost of international phone calls, both in immigrant destination and source countries.

Our second proxy for the evolution of cultural distance concerns the diffusion of the Internet. The idea is that as a larger share of the population gains access to the World Wide Web, individuals become more exposed to the value systems prevailing in other countries, and are thus better informed concerning the characteristics of possible destinations before relocating there. Figures 6 and 7, comparing the situation in 1995 and 2012, show that, while a clear digital divide continues to persist between the South and the North of the world, the Internet access has grown exponentially in many developing countries. This has led to a dramatic reduction in the uncertainty faced by individuals in their decision. Economic theory suggests that, everything else equal, this will increase migrants' probability to move.

Cultural distance

According to Menipaz and Menipaz (2011), culture is the set of values, symbols, beliefs, languages and norms that guide human behavior within the workplace, region or country. In their work, Stone et al. (2007) highlight that companies must understand the expectations of each employee well, because many cultures and subcultures have different preferences regarding work-scripts and role conceptions. Schneider and Barsoux (1997) argue that cultural difference has become one of the main reasons the same HRM policies are not producing the same effects in different subsidiaries. Hence, we consider a cultural approach that can provide us with a starting point to understand constraints in the international transfer of HRM practices.

Up to now, there has been substantial research on cultural distance. Hofstede’s cultural model (power distance, individualism versus collectivism, uncertainty avoidance, masculinity versus femininity and long-term orientation) is perhaps the most widely cited in the literature on international business. In his work, Hofstede (2004) indicates that both France and China respect authority and accept hierarchy. However, China tends to value long-term relationships, collective activities, change and a culture of masculinity. Whereas France is more characterized by its short-term orientation, individualism, risk avoidance and culture of femininity. Through Hofstede’s research, we can develop an initial understanding of the cultural differences between France and China. But a number of researchers have challenged Hofstede’s theory (Kitayama et al., 2000; Schwartz, 2004; Trompenaars, 1994).

One of the limitations of Hofstede’s model is the breadth of the data, which was drawn only from IBM employees. The second limitation is that Hofstede’s ‘dimensions are not directly accessible to observation but inferable from verbal statements and other behavior’ (Abdellatif et al., 2010). Hence, Schwartz (2004) developed an alternative theory to identify cultural distance, which covers conservatism, intellectual autonomy, affective autonomy, hierarchy, egalitarian commitment, mastery and harmony. In this chapter, we adopt Hofstede’s approach because it still holds value as a general framework to view culture (Kogut and Singh, 1988). However, we keep in mind the limitations of Hofstede’s model.

Cultural influences on trade

There is a widely held view that easily observable impediments, such as transportation costs, do not adequately capture transactions costs in international trade. Trade is also reduced by hidden transaction costs associated with unobserved trade barriers.3 In addition, some studies use international panel data and find that cultural distance or dissimilarity—as proxied by, among other things, the ethnic/linguistic and religious differences across national populations—is a robust determinant of the volume of international trade (see, for example, Rauch and Trindade, 2002; Noland, 2005; Guiso et al., 2006; and Guo, 2009, pp. 77–102).

Since the 1990s, numerous quantitative studies have examined the role that cultural factors play in international trade (e.g., Havrylyshyn and Pritchett, 1991; Foroutan and Pritchett, 1993; Frankel and Wei, 1995; Frankel et al., 1997a; Rauch, 1999). These studies used linguistic links as one or more explanatory variables. The estimated results suggest that countries that are linguistically similar to one another have been more likely to trade with each other in the postwar period. In other words, there is evidence of linguistic barriers to trade. However, linguistic variables have been highly simplified in these studies. Using the cross-sectional data of East Asia, in which linguistic and religious factors are treated as continuous variables, Guo (2007b) finds that religion tends to have more significant influences on intraregional trade than language, but language tends to exert more significant influences on interregional trade than religion.

In this context, the analysis then turns to how cultural variables may affect trade. The emphasis on the role of cultural linkage in economic activities may be traced back to biologic analyses showing that cooperation among animals is influenced by genetic similarity. In general, four aspects of differences in cultural behavior are relevant:

feelings of superiority (and occasionally inferiority) toward people who are perceived as being very different;

fear of and lack of trust in such people;

communication difficulties resulting from differences in language and accepted civil behavior; and

lack of familiarity with the assumptions, motivations, relationships, and social practices of other people (Huntington, 1996, p. 129).

Trade and economic cooperation may also be affected by cultural dissimilarities because it is easier and more efficient for people with the same cultural identity (ethnicity, language, religion, or any other cultural element) to trust and communicate each other than for those with different cultural identities. In this chapter, our particular interest is to test how ethnic differences have influenced China’s interprovincial trade and economic cooperation. Even though language is an effective tool of communication and that religion can provide insights into the characteristics of a culture, we would rather select ethnicity as the explanatory variable. The rationale is that most, if not all, of China’s ethnic groups are identified in terms of either linguistic or religious traditions. Another reason lies in the fact that in China, it is more difficult, if not impossible, to collect interprovincial panel data on linguistic and religious groups than those on ethnic groups.

Chinese traveller behaviour

In any analysis of tourists’ behaviour, historical and cultural backgrounds should be considered especially if tourism is seen as a tool used to create national identities in domestic travel (Palmer, 1998) and to sharpen the perception of cultural differences in overseas destinations (Jameson, 1993; Robinson, 1998, 2001). For Chinese travellers, the ‘cultural distance’ is clearly felt in most encounters between foreigners and Chinese, even Han Chinese and non-Han Chinese (55 Chinese minorities totally).

While analysing Han Chinese leisure tourists’ behaviour, ‘Foreign’ is a useful term and a tool that can be used to measure growing ‘cultural distance’. Areas dominated by visible minorities can be considered as the foreign land within, as a form of asserting the superiority of the Chinese culture (Nyiri, 2005, 2006). For example, visits to theme parks offering replicas of famous international buildings can be considered the domestic version for world modernity.

Interestingly, Hong Kong and Macao are counted in these statistics as favourable outbound travel destinations due to their special position as Special Administrative Regions – half part of the People’s Republic of China, half not. Hong Kong is still perceived as being foreign to Mainland Chinese cities due to differences such as its capitalist economy, cosmopolitan prosperity, colonial history and ‘East-meets-West culture and lifestyle’. Another travelling zone popular with Chinese people is that of the Southeast Asian countries, considered even more ‘foreign’, despite the presence of Chinatowns and large or even dominating Overseas Chinese populations.

At the moment, Japan and Korea are among the hottest destinations in the Chinese market. Due to the popular traditional image of mountains and cherry blossoms, Japanese pop culture is appealing to many youths who want to experience it first-hand. Korea is seeing a similar trend, and is drawing Chinese travellers through its popular television shows, movies and music icons. In fact, some Korean TV shows are so popular in China that special tour routes have been developed around the shooting locales and production centres of these programmes.

Looking at a Chinese version of the map of the world, Europe and Africa are placed to the left and the Americas in the right corner while Australia and New Zealand appear to be the nearest non-Asian countries. Both countries developed strong political and economic relations with China in the 1990s and both offer an attractive combination of ‘western’ culture and a large overseas Chinese community.

With differences in culture comes inevitable conflict in behaviour when accommodating tourists from foreign countries. As an example, when visiting caves in China, coloured lights and emperor-style robes make for photo opportunities deep within grottoes, a wonderful activity for tourists but too boring and educational for the Chinese, who sometimes leave after a few minutes. New Zealanders complain about Chinese tourists’ lack of interest in immersive nature experiences, which are culturally important to them (Becken, 2003). Chinese visitors encounter problems with the western tourism value system of considering visits to attractions as more ‘valuable’ than shopping.

Europe has long been the dream destination of many Chinese because of its long history, diverse cultures, romantic cities, well-known attractions, historic buildings, castles and unique architecture. It is also an attractive shopping destination, with many fashionable shops and world-famous brands. Most importantly, trips to Europe are seen as a good value because of the opportunity to see multiple countries with different cultures on a single trip, often on a single visa. Most do a whirlwind tour of 10–15 days, spending just a single day in each country.

On another point, although Chinese people envisage Europe as being romantic, small enough to allow travel to several countries in a short time and safer than the USA, it offers much less of the visible modernity the Chinese look for. There is a big contrast between ‘high-culture’ tourist activities like visits to museums and cathedrals and ‘low-culture’ activities like shopping. Chinese tourist behaviour in Europe dithers between the largely unsuccessful search for modernity and the falling back onto the ‘minority’ pattern of sampling strange customs of the local tribes.

Due to the lack of ADS approval, the United States remains primarily a business destination, although VFR (visiting friends and relatives)and study trips are also popular. A lot of high-end business groups currently were sent to the United States for exhibitions, conferences, site visits, government tours, cultural exchanges and so on.

The Chinese are drawn to the United States by its ultra-modern cities, advanced technology, well-developed economy and western lifestyle. Within the United States, travellers are generally interested in seeing famous cities such as New York, Washington, Los Angeles and San Francisco. Las Vegas is also on the must-see, but more importantly, it is seen as one of the most technologically advanced cities in the country. Attractions such as the Grand Canyon and theme parks are also of interest, but are really secondary to the primary motivation of visiting.