Cultural distance refers to the differences between a company's home country culture and the cultures of countries where it operates subsidiaries. These differences can include language, religion, norms and values. Companies expanding abroad face psychic distance due to these cultural administrative, economic and geographic distances. Cultural distance is particularly complex to analyze due to its subjective and intangible nature. Companies tend to first expand to culturally similar countries to gradually accumulate international experience and learning before entering more culturally distant markets. This allows them to build skills and confidence over time through a cultural distance learning curve.

1. Cultural Distance & Learning:
Cultural Distance:
Globalization has impacted the individual’s life and work intensely in the past years. Companies
that have units outside of their home country have to deal with several differences between their
home country and the countries where they have subsidiaries. For example, North-American
multinationals working in Asia found a very different work environment, with several differences
in language, culture, politics system, educational level and industrial developmental level. In
international business, those differences are called psychic distance (coined by Beckerman
(1956) on the basis of his analysis of studies on intra-European trade flows). Psychic distance is
therefore related to the possibility of determining the extent of the differences when expanding a
company’s operations abroad. Although the dimensions of psychic distance are represented by a
sum of the geographic, administrative, cultural and economic distances among countries, cultural
administrative & economic distances are the key psychic distances.
Administrati
ve Distances
Psychic
Distance
Economic Cultural
Distances Distances
Figure: Dimension of Psychic Distance

2. Cultural distance is one of the most complex dimensions, as the analysis of a culture is subjective
and mostly intangible. It includes not only cultural differences, but also structural elements, such
as those arising from administrative, economic, and legal system-related differences, as well as
language differences. Therefore, we can imagine that a company’s international strategy, in terms
of market choice and entry mode implies certain cultural distance.
Dimension of Cultural Distance:
Considering the cultural distance, there are 3 dimensions which are given emphasis by the firms.
Language
•Considers the distance between the home language and the
language of the other country, as well as the percentage of the
population that is able to speak the latter.
Religion
•Considers the distance between mostly followed religion in
home country and the dominant religion of the other country, as
well as the percentage of the population that follows the latter.
Culture
•Composed of four discrete indicators: power distance,
individuality, masculinity, and aversion to uncertainty.
Figure: Dimensions of Cultural Distance
The Cultural Distance Effect:
National cultural distance can be defined as the extent to which the shared norms and values in
one country differ from those in another (Chen & Hu, 2002; Hofstede, 2001; Kogut & Singh,
1988). The theoretical reason why the cultural distance to the target country should affect
expanding abroad is that firms located in culturally distant countries have radically different
organizational and managerial practices as well as communication styles, and are hence difficult
to integrate into an MNE’s corporate network after they have been acquired. MNEs are therefore
more likely to enter culturally distant countries through investments; as such investments allow

3. MNEs to introduce their practices from the outset to a carefully selected workforce that fits their
culture. However, cultural distance effect creates very natural biases. Companies usually look for
countries abroad where their experiences in the home market would be most useful, where the
cultural synergy would be maximized. And they can utilize their experiences in dissimilar
cultural countries. It also helps to analyze the possibility of differences in action & predictability
of disadvantages from a competitive standpoint. Japan’s exporting companies generally started
trade with the Southeast Asian countries before moving on to Latin America & Australia.
The International Learning Curve:
The cultural distance path allows gradual accumulation of know-how about how to do business
abroad. And a learning curve means learning through the timeline of doing business to culturally
similar countries & extending its business to a culturally different & competitive country market
when experienced from learning and adapting to the foreign country cultures. Labour efficiency,
standardization, specialization, methods improvements, technology-driven strategies, resource
mix, product redesign, network-building and cost reduction are examples of learning. It
gradually increases the productivity of the managers involved. It also helps to create a common
rationale for choosing countries to enter, analyze foreign environments, gain capabilities,
appropriate strategies & tactics.
In the beginning, even a great potential in a psychically distant market may not be exploited
because of the additional transactional costs like geographic, cultural or economic & so no. Only
an experienced international marketer eyes for the new and important country markets like the
US market. Japanese firms tend to enter Southeast Asian markets following the minimum
cultural distance path first and then, looking for diversification, enter Latin American markets.
As skills and confidence grow, they eye for the US market with its great potential. But before
entering US or European market, they will enter Australian market to make sure they will be able
to sustain penetration in a country with similar characteristics. Finally, only with sufficient
success & learning they will enter the US market.