Cultural distance in international business and management: From mean-based to variance-based measures

Extant practice in international management is to measure cultural distance as a nation-to-nation comparison of country means on cultural values, thereby ignoring the cultural variation that exists within countries. We argue that these traditional mean-based measures of cultural distance should take within-country cultural variation into account. Therefore, we propose the use of variance-based measures of cultural distance. To illustrate our argument, we examine total US foreign affiliate sales in more than 40 host countries over the 1983–2008 period, complemented with data from the World Values Survey. We analyze the effects of three cultural distance measures: the Kogut and Singh (1988 OpenURL Erasmus University (Master)) mean-based index of cultural distance, the Kogut and Singh (1988 OpenURL Erasmus University (Master)) index conditioned by host-country cultural variation and a variance-based measure that takes into account both home- and host-country cultural variation. Our findings indicate that, when within-country cultural variation is taken into account, the explanatory power of the Kogut and Singh (1988 OpenURL Erasmus University (Master)) index is substantially decreased. In addition, our variance-based measure of cultural distance outperforms the Kogut and Singh (1988 OpenURL Erasmus University (Master)) measure in the explanation of foreign US sales. We therefore suggest to move from mean-based to variance-based measures of cultural distance, thereby taking the cultural variation within countries into account.