Cultural Diversity and the Performance of Multinational Firms
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Leslie E. Palich** Baylor University
Abstract.We test the hypothesisthat culturallyrelated international will havea positiveimpacton firmperformanceand that diversification the oppositewill be true for culturallyunrelatedglobalization.Cultural diversityfor Fortune500 firmswas used to predictperformanceovera ten-yearperiod(1985-1994), controllingfor severalorganizationaland industrycharacteristics. Regressiontestsusingnineindicatorsof cultural diversityrevealedno significantculturaleffects. Alternate interpretationsare offered. CULTURALDIVERSITYAND FIRM PERFORMANCE The international business literature suggests several reasons why global diversificationand firm performance should be positively related. First, markets are not perfectly integrated, thus involvementin more than one nationalmarketservesto balanceout regionalmacroeconomictrendsthat are less than perfectlycorrelated.As a result, MNEs should experiencegreater market performance since investors recognize and reward performance stability[Shaked1986].Relatedly,greaterspreadacrossinternationalmarkets reducesthe risk profileof the corporation'soverallportfolioof businessunits, which in turn should have a salutaryeffect on corporateperformance[Caves 1982; Rugman 1979]. Second, internationaldiversificationmay yield cost advantagesby allowingthe firm to expand in its domain of distinctivecompetence and boost production economies without resorting to product diversification [Buhner 1987; Hirsch 1976]. This also allows cross-subsidization between markets [Ohmae 1989a,b]. Third, market imperfection
*Professor Luis R. Gomez-Mejia is a Dean's Council of 100 Distinguished Scholar at Arizona State University.He receivedhis doctoraldegreefrom the Universityof Minnesota. **Leslie E. Palich is an Associate Professor of Managementat the Hankamer School of Business at Baylor University. He holds a Ph.D. in management from Arizona State University. The authors wisk to thank de Ministry of Spain (SAB95-0129 DGICYT) and the project SEC96-0637 of CICYT (Spain) for partial funding of this research, as well as the Hankamer Sabbatical Committee of the Hankamer School of Business at Baylor University for its support of this work. Received: May 1995; Revised: October 1996 & February 1997; Accepted: March 1997. 309
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JOURNAL OF INTERNATIONALBUSINESS STUDIES, SECOND QUARTER 1997
theory suggests that multinationals can exploit their home monopoly advantage(e.g., intangible,firm-specificassets such as technologyand brand name recognition)by increasingtheir internationalpresence [Palich 1994]. Finally,internationaldiversificationcan boost marketpowerby allowingthe firmto arbitragetax regimes[Agmonand Lessard1977;Lessard1979],obtain more accurateenvironmentalinformation[Vernon1979],and raisebarriersto entry [Palepu1985]. The hypothesisthat internationaldiversificationand firmperformanceshould be positively related has been tes
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