A social capital approach to inter-cultural differences evidence from a global tour operator

The cross-border transfer of firm-specific advantages is considered a significant element of success in Multinational Enterprises (MNEs) (Vernon, 1966; Hymer, 1976). In the literature in multinational firms these advantages are usually geographically dispersed in countries where the different unities of a MNE are able to perform specific value creating activities (Dunning, 1005; Tsai, 2000; Florida, 1997). At the same time, the liability of foreignness, conceptualized as the costs of doing business abroad that result in a competitive disadvantage for a MNE subunit, has been the fundamental assumption driving theories of multinational firms. Independently from its source, the liability of foreignness implies that foreign firms will have lower profitability than local firms, all else being equal and perhaps even a lower probability of survival (Zaheer, 1995). Despite a great deal of research that has indicated the potential determinants of liability of foreignness – such as unfamiliarity with the local business conditions or local authorities’ discrimination against foreign companies (Petersen, Pedersen, 2002) - to the best of our knowledge no study has systematically examined the impact of cultural diversity on the MNE’s liability of foreignness. It is quite surprising since the effectiveness of cross-border transfer of firm specific advantage has a great deal of complexity because it usually involves dissimilar cultural contexts (Bhagat et al., 2002). Really, cross-border knowledge transfer among MNEs involves two or more units in at least two countries and thus cultural differences play a significant role in determining the efficacy of such global transactions (Rugmna, Verbeke, 2001; Clark, 1990). In this chapter we examine to what extent cultural differences at a level both of intra-organizational multinational network (inside dispersed subsidiaries) and inter-organizational multinational network (among subsidiary network and the external local network where the subsidiary is located) are associated with liability of foreignness. Given that cultural differences are embedded inside dispersed networks of a multinational firm, this study builds upon a social capital approach (Lin et al., 2001; Nahapiet, Ghoshal, 1998). We propose a conceptual framework where the different dimensions of social capital asset – social interaction, trust and shared vision (Yli-Renko et al., 2001) – by mitigating the inter and intra organizational cultural differences improve the exchange and combination of resources and knowledge in different subsidiaries of a Multinational Firm localized in dissimilar cultural contexts. It in turn reduce the liability of foreignness.