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The double-edged sword of cultural distance
in international acquisitions
Taco H Reus
1
and
Bruce T Lamont
2
1
Rotterdam School of Management, Erasmus
University, Rotterdam, The Netherlands;
2
Department of Management, The Florida State
University, Tallahassee, USA
Correspondence:
TH Reus, Rotterdam School of
Management, Erasmus University,
Burgemeester Oudlaan 50, 3062 PA
Rotterdam, The Netherlands.
Tel: þ31 10 408 8937;
Fax: þ31 10 408 9012;
E-mail: treus@rsm.nl
Received: 9 March 2006
Revised: 18 November 2008
Accepted: 21 November 2008
Online publication date: 14 May 2009
Abstract
This study aims to bring together seemingly contradicting arguments in
the literature about the role of cultural distance in international acquisitions.
We offer a model that postulates that cultural distance relates negatively to
international acquisition performance because it taxes integration capabilities
during international acquisitions, but that cultural distance also elevates the
positive association of integration capabilities and international acquisition
performance because it provides more learning opportunities that can only be
exploited with strong integration capabilities. Empirical tests with a sample of
international acquisitions by 118 US multinational companies provide support
for the proposed model. On one hand, we find that cultural distance impedes
understandability of key capabilities that need to be transferred, and constrains
communication between acquirers and their acquired units, bringing about a
negative indirect effect on acquisition performance. On the other hand, we find
that cultural distance enriches acquisitions by enhancing the positive effects of
understandability and communication on acquisition performance. Acquirers
that can overcome the impeding effects of cultural distance on understanding
key capabilities and effective communication appear to reap significant
performance gains. Our study provides initial support for a double-edged
sword effect of cultural differences on acquisition performance, and illustrates
the importance of integration capabilities.
Journal of International Business Studies (2009), 40, 1298–1316.
doi:10.1057/jibs.2009.25
Keywords: cultural distance; international acquisitions; capabilities and capability
development
INTRODUCTION
The alluring size of the world economic market, and continuing
improvement of communication and transportation technologies,
set the stage for progressively more international empire building by
corporate executives (e.g., Bartlett & Ghoshal, 1991; Buckley &
Casson, 1976; Kogut & Zander, 1993). In the late 1990s it became
clear that multinational enterprises (MNEs) increasingly use
mergers and acquisitions as an important vehicle to achieve this
international expansion. ‘‘Globalization’’ became the main driver
for the last merger wave of the 20th century. In 1998 worldwide
acquisition activity doubled compared with the previous year,
reached $3.3 trillion in 1999, and peaked at almost $3.5 trillion in
2000. After several years of lower worldwide acquisition numbers,
activity soared again to a record high of $4.5 trillion in 2007,
of which a record-breaking 47% involved cross-border deals
Journal of International Business Studies 40, 1298–1316
&
2009 Academy of International Business All rights reserved 0047-2506
www.jibs.net
(Platt, 2008). The recent global financial crisis may
further fuel international acquisition activity, as
many Western MNEs will be restructuring, and may
become top acquisition targets not only for other
Western MNEs but also for emerging-market MNEs
(Ferraro & Ignotavicz, 2008; Kawasaki & Nihen,
2008). Nevertheless, the effective management of
international acquisitions appears to be extremely
difficult for MNEs. For example, the consulting
firm, KPMG, revealed that a meager 17% of a sample
of such acquisitions accomplish pre-acquisition
performance expectations (Kelly, Cook, & Spitzer,
1999). More recent reports remain pessimistic
about the success potential of these types of deals
(e.g., Moeller & Schlingemann, 2005).
Anecdotal accounts and consulting reports com-
monly point to the role of cultural differences
between countries to explain complications in
international acquisition management. For example,
KPMG’s report indicated that over one third
of the interviewed executives attributed acquisition
failure to cultural differences (Kelly et al., 1999).
Similarly, empirical research on international
acquisitions emphasizes the role of cultural
distance, or the degree to which cultural values of
an acquirer’s country are different from those of
the acquired unit’s country (Kogut & Singh, 1988).
However, empirical evidence about a possible role
for cultural distance in explaining variance in
international acquisition performance is far from
conclusive (Stahl & Voigt, 2005). The findings
range from support for a negative effect (Datta &
Puia, 1995) to support for a positive effect of cultural
distance on international acquisition performance
(Morosini, Shane, & Singh, 1998).
Similarly, authors have offered seemingly contra-
dictory arguments to explain the relationship
between cultural distance and international acqui-
sition performance. A negative view stresses that
cultural distance taxes the implementation of
acquisitions and their success. Much of the popular
press and some empirical research (Datta & Puia,
1995) emphasize integration challenges posed by
acquiring target firms in distant cultures. This view
predicts a negative association between cultural
distance and acquisition performance. In contrast,
a positive view associates cultural distance with
benefits of exposure and access to diverse routines
and repertoires embedded in unique cultures that
were not previously available to the acquirer.
Several authors (e.g., Morosini et al., 1998) argue,
therefore, that because of learning opportunities,
and access to routines specialized to a local context,
cultural distance between an acquirer and its
target should be positively associated with post-
acquisition performance.
Although the negative and positive views of
cultural distance are both dominant perspectives,
empirical support for either view is surprisingly
weak. Several studies do not support either a
positive or a negative effect (e.g., Barkema, Bell, &
Pennings, 1996; Markides & Ittner, 1994), and a
recent meta-analysis of studies found that the
mean effect size of the relationship approaches
zero (Stahl & Voigt, 2008). Moreover, studies tend
to use these explanations in isolation, and hardly
ever examine both viewpoints simultaneously. As a
result, current research is not able to unite these
viewpoints of cultural distance. The current study
builds on this prior research, with the intention of
providing insight into the seemingly contradictory
effects of the role of cultural distance in interna-
tional acquisitions. Our theorizing holds that the
effects of cultural distance on acquisition perfor-
mance are not direct, and that one might reason-
ably expect the positive and negative indirect
effects of cultural distance to negate each other in
the aggregate.
In order to better understand the relationship
between cultural distance and acquisition perfor-
mance we believe it is important to better specify
the role of integration capabilities, which refer to
organizational practices specific to managing the
post-acquisition integration process (Zollo & Singh,
2004). Both negative and positive viewpoints
explicitly or implicitly stress the role of integration
capabilities. The negative view emphasizes the
impeding effect of cultural distance on the develop-
ment of integration capabilities. Although interna-
tional acquirers may differ in their integration
capabilities for a myriad of reasons (cf. Calori,
Lubatkin, & Very, 1994; Johanson & Vahlne, 1977;
Markides & Ittner, 1994), in general, cultural
distance of a particular target is likely to place
unique strains on acquirers and their integration
capabilities. That is, the negative effect of cultural
distance on acquisition performance are likely to be
mediated by its impeding effects on integration
capabilities.
On the other hand, making acquisitions in
culturally distant countries is associated with an
enriching effect on the application or use of existing
integration capabilities. This enriching argument
builds on the view of learning from enhanced
cultural diversity adopted by Morosini and his
colleagues (1998). But we offer an important
Double-edged sword of cultural distance Taco H Reus and Bruce T Lamont
1299
Journal of International Business Studies
provision to this argument. As Ghoshal, (1987: 432)
mentioned:
The mere existence of diversity, however, does not enhance
learning. It only creates the potential for learning. To
exploit this potential, the organization must consider
learning as an explicit objective, and must create mechan-
isms and systems for such learning to take place.
Therefore, cultural distance is not simply linearly
positively associated with acquisition performance.
Rather, the positive association depends on
mechanisms to realize learning and resource com-
binations. In the context of international acquisi-
tions, we contend that integration capabilities are
the mechanisms through which learning becomes
possible. With integration capabilities in place,
cultural distance becomes valuable because these
capabilities can be used to tap into the diversity and
local specialization from which international
acquirers can learn. Cultural distance, therefore,
can enrich acquisition performance by making
integration capabilities more valuable.
Thus our aim with this research is to take logical
steps toward clarifying the mixed findings about
the effects of cultural distance on acquisition
performance. The negative and positive effects of
cultural distance are necessarily intertwined as
determinants of acquisition performance. By con-
sidering integration capabilities, we posit that
cultural distance may be best viewed as a double-
edged sword for acquisition performance. Acquisi-
tion integration is never easy; and cultural differ-
ences between the partners are likely to impede the
development of integration capabilities. That is,
cultural distance negatively affects acquisition
performance through its effects on integration
capabilities. However, cultural distance can also
enrich acquisition performance, owing to the
heightened potential diversity between the part-
ners, increasing the benefits in the use of existing
or previously developed integration capabilities.
Figure 1 depicts this conceptual model.
The contributions of this study lie in: (1) our
theoretical clarification of how cultural distance
simultaneously has both negative and positive
indirect effects on international acquisition perfor-
mance; and (2) our extension of the process view,
by examining important integration capabilities in
the context of international acquisitions. We first
briefly discuss the literature on integration capabil-
ities. Subsequently, building on these theoretical
underpinnings, we further develop hypotheses
about the impeding and enriching effects of
cultural distance on international acquisition
performance through its effects on the development
and application of integration capabilities. We
subsequently discuss the tests of these hypotheses
with a sample of 118 international acquisitions.
ACQUISITION INTEGRATION CAPABILITIES
The disturbing conclusion that is frequently drawn
from research on mergers and acquisitions in
general is that these deals do not provide acquiring
firms with real benefits. Collectively, reviews of
finance and strategy research found that share-
holder value of acquiring firms generally deterio-
rates following merger announcements and in
subsequent years (Agrawal, Jaffe, & Mandelker,
1992; King, Dalton, Daily, & Covin, 2004). Conse-
quently, many researchers in strategy have been
fixated to better understand key factors that can
explain acquisition performance. Early strategy
research has emphasized contingencies that could
explain variance in the success of newly combined
firms, such as relatedness (Lubatkin, 1983), relative
size (Bergh, 1995; Bruton, Oviatt, & White, 1994),
and prior acquisition experience (Hayward, 2002).
However, reviews and meta-analyses of this work
indicate that such key contingencies do not explain
much variance in acquisition performance, and
that other important factors remain to be identified
(Datta, Pinches, & Narayanan, 1992; King et al.,
2004; Lubatkin, 1987).
One response to the lack of support for con-
tingencies is an increasing emphasis on the role of
integration capabilities. This research builds on
Kitching’s (1967) work, which conjured up an
acquisition integration process where the ‘‘man-
agers of change’’ are key to success. Mergers and
acquisitions are considered major organizational
−+
INTEGRATION CAPABILITIES
Understandability
Communication
Key employee retention
International acquisition
performance
Cultural
distance
+
Impeding
effects
Enriching
effects
Figure 1 The double-edged sword of cultural distance in
international acquisitions.
Double-edged sword of cultural distance Taco H Reus and Bruce T Lamont
1300
Journal of International Business Studies
transformations that need to be carefully managed.
More generally, this research stream argues that
integration capabilities need to be in place during
acquisition implementation to ensure that poten-
tial synergies are realized. What has become known
as the ‘‘process view’’ of acquisition research has
emphasized several integration capabilities (e.g.,
Haspeslagh & Jemison, 1991; Jemison & Sitkin,
1986). To make our task more tractable, we focus on
three integration capabilities: understandability,
communication, and key employee retention. We
chose these three integration capabilities as they
have been emphasized in prior research on acquisi-
tion integration, are likely to be exacerbated by
cultural differences between the acquirer and
acquired unit, and should be particularly critical
to performance of international acquisitions.
Understandability, here, refers to the extent to
which employees from the combining firms can
codify and learn the practices and routines under-
lying the potential resource advantages during the
integration process (cf. Zander & Kogut, 1995; Zollo
& Singh, 2004). While acquisitions form an impor-
tant mechanism to access new resources and
capabilities, the possession of these capabilities
does not guarantee that the acquirer can exploit
them (Marcus & Nichols, 1999). Transforming
resources and capabilities into valuable ends
requires that they be well understood. Zander and
Kogut (1995) found that codifiability and teach-
ability are important dimensions of the extent to
which capabilities can be understood. In line with
this finding, we conceptualize understandability as
the extent to which practices and routines under-
lying potential resource advantages can be codified
by, and taught to, organization members during the
integration process (cf. Zander & Kogut, 1995; Zollo
& Singh, 2004). Understanding important knowl-
edge eases its transfer and combination with the
acquirer’s larger pool of knowledge (Contractor,
2000). Relatedly, Zollo and Singh (2004) find that
acquisition performance is positively related to the
extent to which an acquirer has codified knowledge
about an acquired unit.
Communication refers to the extent to which
organization members from the acquirer and the
acquired unit correspond through various media
across former firm boundaries during acquisition
integration (e.g., Larsson & Finkelstein, 1999; Ranft
& Lord, 2002). Many authors have highlighted the
role of communication through rich media during
acquisition integration, and its effect on acquisition
success (Bastien, 1987; Bresman, Birkinshaw, & Nobel,
1999; Kitching, 1967; Ranft & Lord, 2002; Schwei-
ger & DeNisi, 1991). Post-acquisition integration
can be viewed as the amalgamation of resources
and capabilities rooted in two distinct workforces.
Only when the two workforces develop rich com-
munication channels across former firm boundaries
can resource synergies be explored and exploited.
Communication is important, even when knowl-
edge is relatively understandable such as in the
form of codified knowledge, because the acquisi-
tion context itself is often characterized by intense
volatility (Ranft & Lord, 2002).
In addition, communication influences acquisi-
tion performance because it allows for the devel-
opment of trust and commitment in the newly
combined firm. For example, building on
psychology research, Schweiger and DeNisi (1991)
show how communication can reduce negative
employee-level attitudes about the acquisition
and increase firm-level success, both in the short
term and in the longer term. Communication
provides employees with necessary information to
justify inescapable changes following the acquisi-
tion. Moreover, communication influences per-
ceived fairness of the acquisition integration
process because it provides employees with the
opportunity to voice their viewpoints on the
acquisition and associated changes to their work
situations (Ellis, Reus, & Lamont, 2009).
The third integration capability, key employee
retention, refers to the extent to which the acquirer,
during the integration process, retains organization
members from the acquired unit who are crucial to
potential resource advantages (e.g., Ranft & Lord,
2002). Several qualitative studies have emphasized
the importance of retaining top management to
secure post-acquisition stability and successful
acquisition integration (Jemison & Sitkin, 1986;
Kitching, 1967). Empirical studies have also found
support for this positive effect on acquisition
performance (Bergh, 2001; Cannella & Hambrick,
1993), and the importance of retention for the
transfer of critical knowledge-based resources
(Ranft & Lord, 2002).
THE TWO EDGES OF CULTURAL DISTANCE
During the integration of foreign acquired units,
management has an added complexity in the
form of cultural distance. Hofstede (2001) defined
culture as ‘‘the collective programming of the mind
which distinguishes the members of one category
of people from another.’’ While cultures are
not coerced upon people, the term ‘‘collective
Double-edged sword of cultural distance Taco H Reus and Bruce T Lamont
1301
Journal of International Business Studies
programming’’ connotes a process through which a
group of people are conditioned by the same
language, history, religion, education, and life
experiences to share norms and values. People of
different cultures will encounter similar problems
but view them from different angles. Consequently,
people from different countries differ from each
other based on the collective programming that
occurs in each country. Clearly within-country
differences exist (Lenartowicz & Roth, 1999), but
studies on national cultures, documented by, for
example, Hofstede (2001) and the GLOBE project
(House, Hanges, Javidan, Dorfman, & Gupta, 2004),
indicate that between-country differences are
significant, and influence the manner in which
people act and interact with each other.
One Edge of the Sword: Cultural Distance as
Source of Impediment
The unique characteristics of cultures complicate
building and exploiting resources in distant cul-
tures (Luo, 2002). We argue that this complication
originates from cultural distance as a source of
impediment to the development of integration
capabilities. Cultural distance impedes understand-
ability because multinational companies are more
likely to lack insight of the local culture and
business practices in culturally distant markets
from which the local knowledge originates (e.g.,
Luo, 2002; Zaheer, 1995). Understandability of
culturally disparate knowledge is particularly com-
plicated because it is established through path
dependencies rooted in a social context (Kogut &
Zander, 1992). The unfamiliarity of the cultures in
which knowledge is embedded complicates under-
standing of its functional attributes and benefits.
This context also makes it more difficult to explain
or teach how the knowledge can be used. In
support of this argument, Simonin (1999) found
that cultural distance increases the ambiguity that
strategic alliance partners experience about the
knowledge they wish to transfer. Understanding
knowledge throughout an organization is facili-
tated, and perhaps even fostered, by a shared set
of values and norms and a common approach to
business because these facilitate identification
and interpretation of knowledge (Dhanaraj, Lyles,
Steensma, & Tihanyi, 2004). During the integration
of distant acquired units, however, such shared
business norms and values are less likely to exist
and more difficult to develop.
In addition, cultural distance affects the extent to
which acquisition partners communicate during
acquisition integration. Several studies report that
national culture has an important influence on
how people interact with others. For example,
Hofstede (2001) explained that in cultures that are
characterized by large power distance, centraliza-
tion of communication is popular, whereas in small
power distance cultures decentralization is popular.
Research on cross-cultural communication found
that mothers from collectivistic cultures tend to
encourage listening and empathy in their children,
whereas mothers from individualistic cultures tend
to teach self-expression (Singelis & Brown, 1995).
These differences are likely to lead to very distinct
communication styles and expectations from com-
munication. Consequently, cultural distance makes
it more difficult for workforces to come together,
interact, and share ideas, and, as a result, impedes
communication. Even when language differences
are not present, or are overcome through training
and education, organization members are likely
to prefer, and have greater opportunities for,
communicating with other members from similar
cultures rather than with members from distant
cultures (Lane, Greenberg, & Berdrow, 2004).
Accordingly, cultural distance, through its imped-
ing effect on communication, negatively affects
international acquisition performance.
Cultural distance may also influence the extent to
which acquirers can retain key employees. Cultural
differences are likely to lead to more polarized ‘‘us
versus them’’ viewpoints between different cultural
groups (Huntington, 1993). Similarly, cultural dis-
tance is likely to restrain the extent to which
organization members develop strong relationships
(Luo, 2001). This becomes particularly important
in an international acquisition context where
people from different cultures have to work
together closely. The differences in national cul-
tures between merging groups can lead to consider-
able clashes about what is considered appropriate
behavior, increasing the likelihood of conflict and
mistrust among acquisition partners (Cartwright &
Cooper, 1992; Datta & Puia, 1995). Because of the
potential for elevated ‘‘us versus them’’ perceptions,
acquired employees may perceive a particular
threat to their status in the newly combined firm
(Krug & Hegarty, 1997). Moreover, acquired
employees will be less willing to adjust to, or accept
practices of, acquirers that show very different
values and norms. Consequently, during culturally
distant acquisition integration, key acquired
employees may be less motivated to work for the
new foreign parent.
Double-edged sword of cultural distance Taco H Reus and Bruce T Lamont
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Journal of International Business Studies
In sum, we expect that cultural distance will
impede integration capabilities, and that a negative
effect of cultural distance on performance signifi-
cantly drops when integration capabilities (the
mediators) are included in the equation.
Hypothesis 1: Cultural distance is negatively
related to international acquisition performance
through the mediating effects of (a) understand-
ability, (b) communication between acquisition
partners, and (c) key employee retention.
The Other Edge of the Sword: Cultural Distance
as Source of Enrichment
An alternative view of cultural distance emphasizes
its potential for enriching newly combining firms
with unique capabilities. Making acquisitions in
distant cultures provides firms with the potential
to learn from unique routines and repertoires
rooted in distinct national cultures (Barney, 1988;
Ghoshal, 1987; Morosini et al., 1998). Others have
noted that, in culturally diverse organizations,
managers are likely to consider more viewpoints,
options, or solutions to critical business pro-
blems, and therefore can enhance their compre-
hensiveness in decision-making (Gomez-Mejia &
Palich, 1997). Moreover, this increased diversity
associated with cultural distance can lead to new
and more unique ways of doing business, and to
greater exploration of new resources and capabil-
ities. In a context of domestic firms, Cox (1991)
argued that cultural heterogeneity in companies
encourages creativity and innovative behaviors
among organization members, and more successful
marketing to different customer types. Similarly,
cultural differences may break rigidities in acquir-
ing firms, and help them to develop new and richer
knowledge resources (Barkema & Vermeulen,
1998).
Cultural distance can therefore provide more
learning opportunities, but this enhanced ‘‘combi-
nation potential’’ (Larsson & Finkelstein, 1999)
does not automatically translate into synergistic
benefits. Rather, we argue that the enriching effects
of cultural distance occur by making integration
capabilities more valuable. When cultural distance
is small, integration capabilities can still reap
benefits from realizing synergies, but the associa-
tion between integration capabilities and acquisi-
tion performance will strengthen with greater
cultural distance because there is more combina-
tion potential to be realized. Learning from
increased cultural diversity requires creating
mechanisms and systems for learning to take place
(Ghoshal, 1987). In culturally distant acquisitions,
integration capabilities can allow combining firms
to learn more from cultural differences and reap
more benefits from cultural diversity or heteroge-
neity. Different viewpoints, routines and practices
rooted in distinct cultures can be identified, and
incorporated in plans to realize synergies.
Hypothesis 1 emphasized the role of cultural
distance as antecedent of integration capabilities,
but it is important to note that other factors
influence these integration capabilities as well
(Calori et al., 1994; Nahavandi & Malekzadeh,
1988). Integration capabilities of the type germane
to our theorizing may be developed from an array
of experiences such as those from prior acquisi-
tions, international alliance partners, other modes
of internationalization, and prior competitive
experiences in the country of the target. Therefore,
acquirers facing the same level of cultural distance in
a target may possess different levels of integration
capabilities for varied reasons. For example, some
acquirers, more than others, will be able to develop
understandability regardless of the cultural distance
associated with the acquisitions. Firms with con-
siderable acquisition experience may have more
experience with managing unique characteristics
of international acquisitions (Markides & Ittner,
1994), and be better able to codify and learn the
practices and routines underlying the potential
resource advantages during the integration process
(cf. Zollo & Singh, 2004). Understandability can
be beneficial in culturally nearby acquisitions.
However, the elevated combination potential
associated with cultural distance (Larsson &
Finkelstein, 1999) means that when employees
from combining firms can codify and learn the
practices and routines underlying the potential
resource advantages associated with culturally
distant acquisitions the elevated potential can
translate into elevated synergetic benefits. Therefore,
understandability in combination with cultural
distance can enrich newly combining firms with
routines and practices from distinct cultures more
than those acquisitions that are not characterized by
cultural distance.
Similarly, acquirers differ in their ability to foster
communication among organization members
across former firm boundaries regardless of the
cultural distance (Bresman et al., 1999). While
communication is important in culturally nearby
acquisitions, the benefits increase for culturally
distant acquisitions. Through communication
Double-edged sword of cultural distance Taco H Reus and Bruce T Lamont
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Journal of International Business Studies
organization members can convey critical informa-
tion about the capabilities rooted in distinct
cultures, and provide, or ask for, clarification and
explanation about these capabilities. Moreover,
communication functions as an important driver
of trust between groups (Citera & Rentsch, 1999),
and therefore can function as an important
source of ‘‘common glue’’ or shared identity that
is critical for the transfer of uniquely held capabil-
ities during post-acquisition integration (Morosini,
2005). When these capabilities are rooted in distant
cultures, rich communication allows for greater
cross-cultural learning, and the enhanced potential
can translate into enhanced synergetic benefits.
Moreover, instrumental for learning across
former firm boundaries are the key employees
who hold valuable knowledge, or who are asso-
ciated with the development, advancement, and
functioning of valuable resources and capabilities
of the acquired unit (Ranft & Lord, 2002). Key
employees are also critical for bringing in more
diverse viewpoints in decision-making processes,
broadening the way firms can develop products and
services, and approaching different customer
groups (Gomez-Mejia & Palich, 1997). Accordingly,
when acquirers can sustain key employee retention,
increased combination potential associated with
cultural distance can translate into realized syner-
gies. With greater cultural distance retained key
employees will have greater opportunities to realize
learning and combine more diverse viewpoints.
Cultural distance, then, enhances the effect of key
employee retention on acquisition performance.
In sum, cultural distance enriches the role of
integration capabilities in acquisition performance.
Hypothesis 2: Cultural distance moderates the
relationships between (a) understandability, (b)
communication, and (c) key employee retention,
and acquisition performance such that with
larger cultural distance the relationships become
stronger.
METHODS
We identified international acquisitions through
the Mergers and Acquisitions Database of the
Securities Data Corporation. This study examined
international acquisitions that were completed
during the 3-year period from 1998 through 2000
because this period forms the peak of the last
merger wave in the 20th century, which saw a
particular rise in international acquisition activity.
The sample included those deals in which the
acquirer bought a 100% equity stake in the
acquired company. All acquisitions made by
US firms in foreign countries formed the target
population of this study because throughout the
1990s the US ranked among the countries with
the highest international acquisition activity
(UNCTAD, 2000). Moreover, by holding the buyers’
country constant we were able to control for
possible home-country effects, avoided the need
for questionnaire translations, and were able to
collect comparable archival information about
acquiring firms. The time frame was selected
because it was characterized by intense inter-
national acquisition activity, it restrained the
occurrence of retrospective bias by respondents,
and it allowed for at least a 2-year time lag between
completing the deal and administering the survey
(in 2003). In cases where acquirers made more
than one acquisition in the 3-year period, only the
most recent acquisition was included in the
analyses. The total population consisted of 623 US
acquirers after deleting all companies that, follow-
ing the acquisition, went private, were acquired
themselves, went bankrupt, did not have sufficient
information about the acquisition, or divested the
acquired firm. Moreover, since our model concerns
relationships between workforces, all acquisitions
were removed that were purely assets driven. An
additional 119 firms were removed because the
executives indicated that their firm had a ‘‘no’’
policy for research participation or were otherwise
incapable of participation.
To test the hypotheses, archival data on cultural
differences and firm characteristics were comple-
mented by primary data collected through a survey.
This survey was completed by high-level executives
from the acquirers closely involved in the formula-
tion and implementation of the acquisitions. While
the questionnaire relied heavily on prior research,
pre-tests were conducted with five colleagues
involved in mergers and acquisitions research,
and through in-depth interviews with eight execu-
tives with substantial international acquisition
experience. After some modifications, top execu-
tives from our population of acquirers were con-
tacted by phone or e-mail to inquire about their
willingness to participate in the project.
The response rate among executives of the MNEs
was 24% (121 respondents). Because of missing data
from two respondents and because one respondent
showed extreme responding, the total sample
consisted of data on 118 acquisitions. Of the
respondents, 44 were presidents, chief executive
Double-edged sword of cultural distance Taco H Reus and Bruce T Lamont
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Journal of International Business Studies
officers, chief financial officers, chief technology
officers, or chief administration officers, 47 were
(senior or executive) vice presidents, controllers or
corporate secretaries, 28 were directors, assistant
treasurers or senior and general managers, and 2
did not reveal their positions. The sample consists
of 32 acquisitions in Canada, 66 in Europe, 10 in
Asia, 1 in Africa, 6 in Australia, and 8
in Mexico and South America. The 26 countries in
which the US acquirers of the sample made
acquisitions mirror the acquisition activity of the
full population of acquirers, although Canada is
slightly over-represented (26% vs 16%).
Preliminary analysis of the data indicated that
respondents and non-respondents did not differ
much in terms of the acquired firm’s countries.
Moreover, acquisitions by respondents had a trans-
action value of $251 million and acquisitions
by non-respondents had an average value of $218
million, which is not statistically different
(t¼0.406, p¼0.685). Further, since late respondents
can be assumed to be similar to non-respondents
(Schwab, 1999), no significant t-test differen-
ces, between early and late respondents, for all
variables indicated that non-response bias did not
threaten the validity of the findings. In addition,
while retrospective bias can influence survey
data (March & Sutton, 1997), we assume that the
recent acquisition event, as a major organizational
(and personal) change for key respondents, func-
tioned as an important trigger for recollection,
and would probably limit the possibility of retro-
spective bias.
Measurement of Variables
International acquisition performance. Considering
that the size of a number of acquisitions may be too
small to visibly affect overall performance of the
acquiring firms, accounting indicators available
from secondary sources were inappropriate to
measure acquisition performance. Key informants
from acquiring firms are better able to assess the
performance of acquisitions (e.g., Capron, 1999;
Datta, 1991). Four performance appraisal items
were used to elicit responses: profitability, market
share, sales volume, and new product development.
The weight of each performance measure was
determined by asking the respondents to rate its
importance. In addition, to capture success factors
that might not have been captured in the previous
subjective measure, the survey included one item
to measure ‘‘overall acquisition success’’ (response
choices ranged from 1, not successful, to 5, very
successful). This item correlated strongly with the
first subjective measure (r¼0.78), and the two
measures loaded on a single factor explaining 89%
of the variance in the measures. We used the factor
scores of the two performance measures to
determine acquisition performance.
To assess the potential for common method bias
that arises from using the survey instrument for
both integration capabilities and acquisition
performance, for a subsample of acquisitions
that were publicly announced in the Wall Street
Journal (n¼34), performance was measured by
estimating changes in shareholder value follow-
ing acquisition announcement through the use
of event study methodology (e.g., Chatterjee,
Lubatkin, Schweiger, & Weber, 1992). Cumulative
abnormal returns of the international acquisition
were determined using the formula
CARi;t¼Ri;tðaiþbiRm;tÞð1Þ
where CAR
it
is cumulative abnormal returns; R
i,t
is
thecumulativereturnonstockifor the day of the
transaction and the day before the transaction (to
include leakage of information prior to the acquisi-
tion); R
m,t
is the return on the market portfolio for
day t;anda
i
and b
i
are the estimates from an
ordinary least-squares market model estimated for
stock i, using 200 daily return observations from the
240th day to the 40th day prior to acquisition
announcement. These market return data were
gathered from the Center for Research in Securities
Pricing. The correlation between the CAR and the
subjective measure was positive (r¼0.23). Further-
more, after controlling for social desirability bias (see
below), the correlation was significant (r¼0.35). The
subjective measure of international acquisition
performance was considered suitable for analyses.
Cultural distance. Measurement of cultural distance
was done through an adaptation of Kogut & Singh’s
(1988) cultural distance index. Rather than using
Hofstede’s (2001) dimensions and country culture
scores, we used more current data from the GLOBE
project (House et al., 2004). Whereas culture is
deeply rooted in the values and norms of people
within a country, and therefore will not change
easily, most of Hofstede’s data come from the 1970s
and represent a single company. In contrast, the
GLOBE project was done in the 1990s, and contains
a larger number of companies. The project also
identified a large number of cultural dimen-
sions (nine in total). The GLOBE project asked
Double-edged sword of cultural distance Taco H Reus and Bruce T Lamont
1305
Journal of International Business Studies
respondents in 61 societies to gauge practices that
assessed cultural qualities ‘‘as they are,’’ and values
that assessed cultural qualities ‘‘as they should be.’’
Since as-is differences are likely to surface more
readily than as-should-be differences, we used the
practices scores to assess the degree of cultural
distance. Thus the formula to measure cultural
distance is
CDj¼X
9
i¼1
ðIij IiuÞ2.Vi
9ð2Þ
where I
ij
is the index of the ith cultural practices
dimension and jth country, I
iu
is the index of
the ith cultural practices dimension of the US, V
t
is
the variance of index of the ith cultural practices
dimension, and CD
j
is the cultural distance of the
jth country from the US.
For the countries that are represented in our
study, this measure correlates highly with Kogut &
Singh’s (1988) original measure (r¼0.74, po0.01).
To provide a further indication of the validity of
this measure we included one item in the ques-
tionnaire that asked the executives to determine
the cultural differences between the target country
and the US. The correlation of the subjective
measure with the GLOBE measure (r¼0.33;
po0.01) was stronger than with the Kogut and
Singh measure (r¼0.21; po0.05).
Understandability. Zander and Kogut (1995)
explained that two dimensions, ‘‘codifiability’’ and
‘‘teachability,’’ best assess the degree to which
knowledge can be understood. While Zander and
Kogut (1995) emphasize these dimensions as
characteristics of knowledge, they also reflect the
ability of knowledge senders to explain the
knowledge, and knowledge recipients to
understand the knowledge. We included four
items in the questionnaire addressing codifia-
bility and teachability of the knowledge (local
market knowledge, managerial capabilities, R&D
capabilities, product and process design expertise,
and distribution expertise) that was most important
to transfer from and to the acquired firm. The
items addressed whether organization members
from the acquirer and the acquired firm perceived
that
(1) extensive documentation about the capability
was easy to obtain;
(2) training personnel to contribute to the capabil-
ity was simple;
(3) a useful manual describing the capability could
be written; and
(4) the capability could be learned from observa-
tion.
The five-point Likert scales for these items ranged
from 1 (strongly disagree) to 5 (strongly agree).
Cronbach’s alpha was 0.67, indicating moderate
internal consistency. Deletion of any one item did
not increase this value. All four items loaded on a
single factor (eigenvalue¼2.02) that explained 50%
of the variance.
Communication. Building on Daft and Lengel’s
(1986) theory of media richness, several authors
have developed a measure to determine the extent
to which organization members engage through
different network ties in communication with
varying degrees of richness (e.g., Whitfield, Lamont,
& Sambamurthy, 1996). We adjusted this measure
to comprise six items that asked the respondent
to rate the extent to which organization mem-
bers communicated across former firm boundaries
through media such as written memos, reports, e-
mail, phone conversations, meetings, and social
events. All items used a five-point Likert-type scale
ranging from 1 (hardly ever) to 5 (very frequently).
The extent to which combining firms engaged in
communication was determined by using the
formula
Ca¼X
6
t¼1
CtWt
6ð3Þ
where C
t
is the extent to which employees from
both firms interact through medium t,W
t
is the
weight assigned to medium t, and C
a
is the extent
to which the combining firms engage in rich
communication.
Key employee retention. Key employee retention
was assessed in the area of top management
and middle management, as well as employees
in the areas of research and development,
manufacturing and operations, marketing, sales
and distribution, and finance, legal and other
staff. We first asked respondents the extent to
which employees in these six categories were
retained. Cronbach’s alpha was 0.78, indicating
that there was consistency in retention across
the different categories. In order to determine the
retention of key employees, we then assessed the
importance of retaining employees from each
category. Accordingly, the following formula was
Double-edged sword of cultural distance Taco H Reus and Bruce T Lamont
1306
Journal of International Business Studies
used to determine an acquisition’s key employee
retention:
KERa¼X
6
g¼1
RgWg
6ð4Þ
where R
g
is the percentage of employees of
group gwho are retained after the acquisition,
W
g
is the importance of retaining employees from
type g(e.g., top management team members, key
employees in marketing), and KER
a
is the key
employee retention of the ath acquisition.
Control variables. A potential bias of self-report
data is the tendency of respondents to present
themselves in a socially desirable manner (Schwab,
1999). While questionnaire studies are dominant
in the field of international business, potential
social desirability bias of respondents is scarcely
mentioned, let alone measured. In other academic
areas where self-report measures are frequently
used, such as psychology, research on social
desirability bias is extensive. This research stream
has produced a number of scales to measure social
desirability of respondents (e.g., Paulhus, 1991).
Based on this research we included two items
aimed to gauge a key informant’s self-deception in
which a statement was made that was socially
desirable but practically impossible (‘‘All acquired
employees were positive about the acquisition
announcement’’), and a key informant’s other-
deception by asking respondents about the extent
to which they engage in desirable but statisti-
cally infrequent behavior (‘‘Management of the
acquiring and acquired firms never disagree’’). The
items have a five-point Likert scale (1¼strongly
disagree; 5¼strongly agree). Social desirability bias
was examined by assessing the correlation between
the subjective and objective performance measures.
Considering that the relationship between the two
measures became much stronger, and became
significant, after controlling for social desirability
(from r¼0.23 to r¼0.35), we can infer that this
bias may influence the results, and should be
controlled.
Several other variables could influence the
hypothesized relationships, and therefore were
included in the analysis. Five characteristics of the
acquirer were included as control variables. First,
to control for industry differences between
acquirers, a dummy variable was used with a value
of 1 for service industries and 0 for manufacturing
industries. Second, the degree of internationalization
of the acquirer prior to the acquisition was
included, since this can affect the extent to which
firms can deal with cultural differences in subse-
quent expansions (Johanson & Vahlne, 1977).
Sullivan (1994) compared nine operationalizations
of the degree of internationalization. We used the
percentage of foreign sales of total sales, since this
was one of the variables that loaded most highly
on the factor ‘‘degree of internationalization’’ in
Sullivan’s study. Third, acquirers that have host
country experience might be better able to under-
stand local idiosyncrasies. Therefore we estimated
prior country experience of the acquirer with a
dummy variable that had a value of 1 for those
acquirers that had sales in the host country prior
to the acquisition, and a value of 0 for acquirers
that did not have sales in the host country prior to
the acquisition. Fourth, building on learning
theories, researchers contend that experienced
acquirers know better which targets to select,
and understand better the complexities of acquisi-
tion implementation. Consistent with previous
research, the amount of prior acquisition experience
was measured by the total number of acquisitions
with a transaction value greater than $1 million
in the 4-year period prior to the focal acquisition
(e.g., Bruton et al., 1994). Fifth, past firm perfor-
mance may be an indicator of current acquisition
performance. While previous research on the
influence of past performance has not provided
clear evidence (Ramaswamy, 1997), we controlled
for prior acquirer performance with a measure of the
2-year industry-adjusted average return on assets
prior to the acquisition.
In addition, we included four acquisition char-
acteristics as control variables. First, the business
relatedness hypothesis contends that synergistic
benefits should be enhanced in related acquisitions
because many capabilities may be industry-specific
and require industry know-how. The abundant
number of empirical tests of the business related-
ness hypothesis, however, shows no clear support
(King et al., 2004). To determine whether relatedness
has an effect on international acquisition perfor-
mance, this variable was included using Haleblian
and Finkelstein’s (1999) operationalization. Second,
some authors have argued that relative size (i.e., the
size of the target firm compared with the size of
the acquiring firm) influences acquisition success.
To control for potential effects, relative size mea-
sured through a single questionnaire item (Capron,
Dussauge, & Mitchell, 1998) was included in the
analysis. Third, prior research has emphasized
autonomy provision to the acquired firm, which
Double-edged sword of cultural distance Taco H Reus and Bruce T Lamont
1307
Journal of International Business Studies
refers to the extent to which the acquired firm
retains control over key decisions following the
acquisition (e.g., Haspeslagh & Jemison, 1991).
Slangen (2006) showed that when acquirers intend
to provide autonomy to the acquired unit, cultural
distance relates positively with international acqui-
sition performance. Accordingly, autonomy provi-
sion was assessed through a survey item that asked
the extent to which the acquired firm, rather than
the parent firm, made decisions about setting key
performance goals and competitive strategies.
Finally, economic, financial, and political condi-
tions are likely to vary year by year. This was
particularly true for the end of our sample period.
For example, the year 2000 saw the climax of the
dot-com bubble, major industry consolidations in
telecommunications, and a new president in the
US. Moreover, cross-border acquisition activity rose
steadily over the years, with dramatic increases in
2000 (Hansen, 2001). Therefore, in order to control
for time effects we included a dummy variable
distinguishing acquisitions announced earlier
(1998, 1999 coded 0) and later (2000 coded 1) in
our time period.
RESULTS
Tests of Hypotheses
Table 1 presents the summary statistics of all
variables and their correlations. Considering that
we have both mediating (Hypothesis 1) and
moderating tests (Hypothesis 2), we use a combina-
tion of multiple mediation analysis, and moderated
regression analysis (cf. Poppo, Zhou, & Sungmin,
2008). To facilitate interpretation of the results,
variables were centered around their means (Aiken
& West, 1991).
Hypothesis 1 suggested that understandability,
communication, and key employee retention serve
as mediators between cultural distance and inter-
national acquisition performance. Simple media-
tion of a mediator is often tested through the causal
steps approach recommended by Baron and Kenny
(1986), and the Sobel test to determine whether
a mediating effect is significant (MacKinnon,
Lockwood, Hoffman, West, & Sheets, 2002; Sobel,
1982). A disadvantage of testing the simple media-
tion of each mediator is that it does not determine
the overall effect of all mediators, and that it
does not allow for the examination of a specific
mediator, controlling for the presence of the other
mediators. In response to these weaknesses, Preach-
er and Hayes (2008) have written an SPSS macro for
Table 1 Means, standard deviations, and correlations
a
Mean Std dev. 1234567891011121314
1. Acquisition performance 0.00 1.00
2. Cultural distance 0.81 0.61 0.161
3. Understandability 2.59 0.75 0.242 0.136
4. Communication 3.59 0.82 0.200 0.163 0.066
5. Key employee retention 3.37 0.90 0.442 0.109 0.023 0.151
6. Social desirability 2.87 0.82 0.202 0.013 0.246 0.215 0.246
7. Industry dummy 0.36 0.48 0.014 0.073 0.106 0.116 0.072 0.011
8. Degree of internationalization 0.22 0.19 0.051 0.018 0.057 0.075 0.016 0.139 0.196
9. Prior country experience 0.57 0.50 0.196 0.044 0.075 0.030 0.089 0.110 0.182 0.238
10. Prior acquisition experience 4.45 6.81 0.113 0.050 0.099 0.001 0.085 0.011 0.173 0.021 0.090
11. Prior acquirer performance 0.24 0.59 0.029 0.124 0.064 0.136 0.130 0.090 0.122 0.012 0.065 0.051
12. Relatedness 7.64 8.02 0.076 0.029 0.051 0.095 0.031 0.034 0.177 0.117 0.040 0.090 0.086
13. Relative size 5.19 2.12 0.035 0.028 0.151 0.112 0.052 0.104 0.066 0.146 0.095 0.195 0.203 0.031
14. Autonomy provision 1.91 0.98 0.182 0.048 0.030 0.205 0.275 0.029 0.173 0.206 0.054 0.123 0.157 0.110 0.040
15. Year dummy (2000) 0.42 0.50 0.054 0.031 0.095 0.187 0.146 0.184 0.136 0.241 0.055 0.026 0.001 0.097 0.155 0.120
a
Correlations greater than |0.18| are significant at po0.05, and greater than |0.24| are significant at po0.01.
Double-edged sword of cultural distance Taco H Reus and Bruce T Lamont
1308
Journal of International Business Studies
an extension of the Sobel test with bootstrapping
that allows for the examination of multiple media-
tion. Bootstrapping is a nonparametric re-sampling
procedure that allows for non-normal sample
distributions. Preacher and Hayes (2004, 2008)
recommend bootstrapping, particularly when sam-
ple sizes are low, because assumptions of normality
can often not be met for indirect effects. Bootstrap
results for indirect effects are provided with con-
fidence intervals that indicate whether an indirect
effect is significant if zero falls outside the range of
the confidence intervals.
Table 2 presents the regression results of acquisi-
tion performance regressed on cultural distance,
understandability, communication, key employee
retention, and the control variables. As Model 2 in
Table 2 shows, after including all control variables,
cultural distance is negatively associated with
international acquisition performance (Model 2:
b¼0.175, po0.05), explaining significant addi-
tional variance compared with the base model
(hierarchical F¼2.941, po0.05), and meeting the
causal steps condition that the independent
variable explains significant variance in the depen-
dent variable. Model 3 in Table 2 shows that
understandability (Model 3: b¼0.229, po0.01),
communication (Model 3: b¼0.212, po0.05), and
key employee retention (Model 3: b¼0.411,
po0.01) are all significantly associated with inter-
national acquisition performance, meeting the
causal steps condition that the mediators be
associated with the dependent variable. Moreover,
Model 3 in Table 2 shows that the absolute size of
cultural distance as an explanatory variable for
international acquisition performance becomes
insignificant after inclusion of the mediators (Mod-
el 3: b¼0.062, p40.10), meeting the causal steps
condition that the association between indepen-
dent and dependent variables weakens after includ-
ing the mediators.
Table 3 reports the results using Preacher and
Hayes’ (2008) multiple mediation SPSS macro.
While these results provide information about the
association between the mediators and the depen-
dent variables consistent with the results reported
in Table 2, they also provide information about the
association between the independent variable
and each mediator, controlling for the other
mediators. These results confirm an association
between cultural distance and understandability
Table 2 Regression results for international acquisition performance
a
Model 1 Model 2 Model 3 Model 4
Constant 0.032 (0.097) 0.024 (0.096) 0.024 (0.086) 0.024 (0.086)
Social desirability 0.182 (0.102)
w
0.183 (0.101)
w
0.019 (0.099) 0.031 (0.096)
Industry dummy 0.100 (0.105) 0.112 (0.104) 0.068 (0.095) 0.078 (0.093)
Degree of internationalization 0.038 (0.105) 0.032 (0.104) 0.008 (0.093) 0.017 (0.094)
Prior country experience 0.147 (0.100) 0.166 (0.099)
w
0.121 (0.089) 0.129 (0.086)
Prior acquisition experience 0.187 (0.115)
w
0.186 (0.114)
w
0.186 (0.102)* 0.192 (0.100)*
Prior acquirer performance 0.035 (0.099) 0.061 (0.099) 0.031 (0.091) 0.086 (0.090)
Relatedness 0.116 (0.098) 0.117 (0.097) 0.105 (0.086) 0.092 (0.084)
Relative size 0.116 (0.106) 0.128 (0.105) 0.009 (0.097) 0.006 (0.095)
Autonomy provision 0.205 (0.111)* 0.192 (0.110)* 0.071 (0.108) 0.069 (0.107)
Year dummy (2000) 0.128 (0.104) 0.126 (0.103) 0.004 (0.096) 0.033 (0.093)
Cultural distance 0.175 (0.101)* 0.062 (0.094) 0.059 (0.099)
Understandability 0.229 (0.090)** 0.250 (0.087)**
Communication 0.212 (0.107)* 0.194 (0.104)*
Key employee retention 0.411 (0.104)** 0.453 (0.101)**
Cultural distance Understandability 0.146 (0.088)*
Cultural distance Communication 0.216 (0.086)**
Cultural distance Key employee retention 0.036 (0.109)
R
2
0.144 0.171 0.364 0.429
F1.547
w
1.709* 3.605** 3.750**
DR
2
0.027 0.193 0.064
DF2.994* 8.919** 3.178*
a
Unstandardized coefficients are reported, with standard errors in brackets. The changes in R
2
in Models 2–4 are in comparison with the value of R
2
in
the model to their left.
w
po0.10; *po0.05; **po0.01.
Double-edged sword of cultural distance Taco H Reus and Bruce T Lamont
1309
Journal of International Business Studies
(Table 3: b¼0.183, po0.05). The bootstrap results
for understandability do not contain zero in the
confidence interval (CI
95
:0.117, 0.004), provid-
ing support that the indirect effect is significantly
different from zero. Thus, the results provide
support for Hypothesis 1a that cultural distance is
negatively associated with acquisition performance
through the mediating effect of understandability.
Hypothesis 1b predicted that communication will
mediate the relationship between cultural distance
and international acquisition performance. As
reported in Table 3, the multiple mediation results
show a significant estimate between cultural dis-
tance and communication (b¼0.179, po0.05),
and confirms a significant indirect effect through
communication (CI
95
:0.093, 0.003), consistent
with Hypothesis 1b. Hypothesis 1c predicted that
the relationship between cultural distance and
international acquisition performance will also be
mediated by key employee retention. Table 3 shows
that this prediction does not hold after controlling
for the effects of the other mediators. The estimate
of key employee retention becomes insignificant
(Table 4: b¼0.082, p40.10), and the confidence
interval does contain zero (CI
95
:0.133, 0.014).
Hypothesis 1c cannot be confirmed.
To examine the moderating effect of cultural
distance on understandability (Hypothesis 2a),
communication (Hypothesis 2b), and key emp-
loyee retention (Hypothesis 2c), we entered the
interaction terms into the hierarchical regression
analysis. Model 4 in Table 2 shows these results.
The interaction term for cultural distance and
key employee retention was insignificant, rejecting
Hypothesis 2c. The hierarchical regression analysis
showed that the interaction terms of cultural
distance with both understandability and commu-
nication are positive and significant (Model 4:
respectively b¼0.146, po0.05 and b¼0.216,
po0.01). The hierarchical F-test confirmed that
Model 4 showed significantly stronger explanatory
power than Model 3, excluding these interaction
terms (hierarchical F¼3.178, po0.05). The expla-
natory power also increased significantly when
these two interaction terms were added separately.
Thus, the results confirm the importance of the
interaction terms in relation to international
acquisition performance.
To get a clearer view of the nature of the
interactions we also plotted these two interaction
terms using the steps suggested by Aiken and West
(1991), in which cultural distance is treated as a
moderator variable affecting understandability on
acquisition performance (Figure 2a), and commu-
nication on acquisition performance (Figure 2b).
Confirming the hypothesized moderating effects,
the slopes of regression lines in both graphs vary
significantly as the Z-values increase from low
(mean minus one standard deviation) to high
(mean plus one standard deviation). Simple slopes
analyses (Aiken & West, 1991; Preacher, Curran, &
Bauer, 2006) further indicate that understandability
has a stronger positive association with acquisition
performance when cultural distance is large
(b¼0.397, po0.001) than when it is small (b¼0.250,
po0.01). Similarly, communication has a stronger
association with acquisition performance when
cultural distance is large (b¼0.410, po0.001) than
when it is small (b¼0.194, po0.05). These results
support Hypotheses 2a and 2b, and are consistent
with the proposed model depicted in Figure 1.
To further examine the role of cultural distance in
acquisitions we plotted the effect of cultural dis-
tance on acquisition performance for low vs high
Table 3 Regression results for multiple mediation
a
Cultural distance
to mediators
Mediators to acquisition
performance
Bootstrap results
CI Lower/Upper
Understandability 0.183 (0.106)* 0.229 (0.090)** 0.117 0.004
Communication 0.179 (0.092)* 0.212 (0.107)* 0.093 0.003
Key employee retention 0.082 (0.088) 0.411 (0.104)** 0.133 0.014
Total indirect effect 0.210 0.044
Model estimates for DV
R
2
0.365
F3.605**
a
Unstandardized coefficients are reported, with standard errors in brackets. Bootstrap results are provided for the lower and upper bounds of 95%
confidence intervals.
*po0.05; ** po0.01.
Double-edged sword of cultural distance Taco H Reus and Bruce T Lamont
1310
Journal of International Business Studies
levels of understandability (Figure 3a) and for low
vs high levels of communication (Figure 3b).
While we did not hypothesize a direct effect of
cultural distance on acquisition performance,
these figures provide further information about a
collective effect of cultural distance, and when it
may be negatively and positively associated with
acquisition performance. Simple slopes analyses
indicate that cultural distance has a negative
association with acquisition performance for low
levels of understandability (b¼0.232, po0.10), and
communication (b¼0.372, po0.05), while cultural
distance has a positive association with acquisition
performance when acquisition partners show high
levels of understandability (b¼0.351, po0.05), and
communication (b¼0.491, po0.05). The dotted
lines in Figures 3a and 3b can be viewed as cases
where there are only impeding effects from cultural
distance due to low integration capabilities. In the
context, performance suffers with greater cultural
distance. The solid lines reflect situations where
acquirers were able to develop integration capabil-
ities. Then performance increases with more cultural
distance between acquirers and targets.
Of the control variables, social desirability,
prior acquisition experience, and autonomy provi-
sion were positively associated with acquisition
performance. Further analyses indicated that
social desirability was also positively associated
with understandability and key employee reten-
tion. Moreover, prior acquirer performance posi-
tively affected communication between acquisition
partners, while relative size and autonomy provi-
sion were negatively associated with communica-
tion. In contrast, autonomy provision was
positively associated with key employee retention.
The year dummies were examined separately
because they resulted in multicollinearity when
entered together. The results with year dummy
for 2000 are presented in Table 2, and these
regression models were repeated for 1998 and
1999, which replicated the results for the hypo-
thesized relationships. However, acquisitions made
in 1998 showed less communication, while acquisi-
tions made in 2000 showed more communication
and key employee retention.
DISCUSSION
Despite many anecdotal statements highlighting
the relevance of cultural differences in interna-
tional acquisitions, empirical evidence shows
mixed support for its role. Against this background,
our study set out to consolidate and reconcile the
seemingly conflicting arguments about the role of
cultural distance in international acquisitions.
Although the impeding effects and enriching
effects of cultural distance have been stressed in
prior literature, they have commonly been treated
separately. We argue that this prior treatment is
incomplete, because the impeding and enriching
effects are necessarily intertwined in explaining
acquisition performance. Our results confirm a
more interdependent perspective that views
cultural distance as a mixed blessing, because
while it may increase the potential for learning
when integration capabilities are in place, it also
impedes the development of these integration
capabilities.
Our study informs international acquisition
research by examining the effects of integration
capabilities. Previous research commonly has tested
0.6
0.5
0.4
0.3
0.2
0.1
Mean
−0.1
−0.2
−0.3
−0.4
0.6
0.5
0.4
0.3
0.2
0.1
Mean
−0.1
−0.2
−0.3
−0.4
Cultural distance
Low understandability
High understandability
Low communication
High communication
Low
Cultural distance
Acquisition performance
High Low High
Figure 3 Interaction plot for the moderating effect of (a)
understandability, (b) communication on the relation between
cultural distance and acquisition performance.
Understandability
Low cultural distance
High cultural distance
Acquisition performance
Low cultural distance
High cultural distance
Low
Communication
1.0
0.8
0.6
0.4
0.2
Mean
−0.4
−0.6
−0.8
−1.0
−0.2
1.0
0.8
0.6
0.4
0.2
Mean
−0.4
−0.6
−0.8
−1.0
−0.2
High Low High
Figure 2 Interaction plot for the moderating effect of cultural
distance on the relation between acquisition performance and
(a) understandability, (b) communication.
Double-edged sword of cultural distance Taco H Reus and Bruce T Lamont
1311
Journal of International Business Studies
a direct relationship between cultural distance and
acquisition performance (e.g., Datta & Puia, 1995;
Morosini et al., 1998). In contrast, our findings
indicate that the ‘‘process view’’ of acquisitions
(e.g., Haspeslagh & Jemison, 1991; Pablo, 1994),
which emphasizes the role of integration
capabilities, is relevant in understanding interna-
tional acquisition performance. The findings
indicate that international acquisition performance
is in large part a function of the development
and application of understandability, communica-
tion, and key employee retention during acquisi-
tion integration.
Our theoretical framework suggests that there is
no direct effect of cultural distance on acquisition
performance. The results confirm that there is no
simple answer to the question whether acquirers
will face poor or strong performance in distant
cultures. Our answer to this question is that the
effect of cultural distance depends on developing
understandability, and fostering rich communica-
tion. As such, our answer is a typical contingency
answer. However, a complicating factor in the role
of cultural distance is that it also makes it more
difficult to develop the context that fosters these
integration capabilities.
The framework further implies that the overall
near-zero relationship between cultural distance
and acquisition performance in large samples of
acquisitions (Stahl & Voigt, 2008) arises because
large enough samples are likely to show a large
variance in integration capabilities among
acquirers. While we observe a negative relationship
between cultural distance and acquisition perfor-
mance, this relationship becomes insignificant
after considering integration capabilities. The posi-
tive effect that Morosini and his colleagues (1998)
found in their sample of 52 international acquisi-
tions may be caused by an over-representation of
acquirers with high levels of integration capabil-
ities. Indeed, in their field-based interviews they
found that executives emphasized that a ‘‘strong
effort was made to ensure a high level of commu-
nications between the two firms, with objectives
and progress being communicated at all levels’’
(152). In larger samples, the variance of acquirers’
ability to develop and apply their integration
capabilities will be greater, and since the effect of
cultural distance is a function of integration
capabilities, the true relationship will approach
zero in samples that capture equal numbers of
acquirers with low and high levels of integration
capabilities.
Our framework also places recent findings in new
light. Noting the difficulties that firms face in
integrating culturally distant units, Slangen (2006)
argues that a positive effect of cultural distance
comes to fruition only when acquirers do not
attempt to integrate acquired units too tightly.
Slangen (2006) concludes that acquirers better
keep acquired units in distant cultures to some
degree autonomous. In a similar line of reasoning,
Stahl and Voigt (2008) imply that more unrelated
acquisitions may show less cross-cultural conflict
because of the lower levels of operational integration
generally expected from these acquisitions. How-
ever, while risks associated with cultural differences
may be avoided when combining firms remain
largely independent, our results suggest that such
independence will probably also limit the cross-
cultural learning that firms can achieve with
acquisitions when they possess strong integration
capabilities. The benefits of cultural distance are not
likely to be realized simply by letting the acquired
unit be only loosely integrated into the acquirer
during acquisition implementation. Rather, our
findings suggest an important role for strong
integration capabilities.
While key employee retention had a strong
positive effect on acquisition performance, the
predicted effects of cultural distance on this vari-
able were not supported. Cultural distance did not
reduce key employee retention, nor did cultural
distance significantly enhance the effect of key
employee retention on acquisition performance.
One possible reason for this finding is that acquisi-
tions in general are such emotional events for
acquired employees that any type of acquisition
complicates key employee retention. Indeed,
accounts of stress and distrust during implementa-
tion of domestic acquisitions are plentiful. More-
over, we explored retention among key employees
of various functional categories. Future research
may examine other characteristics of employees
that are retained, such as variance in their people-
related skills. It could be that the enriching effect of
cultural distance on key employee retention is a
matter of retained skill sets that we did not capture
in our analysis.
Limitations and Suggestions for Future Research
The findings of this study should be viewed in
light of several limitations of the research design.
The model that is tested in this study is only a first
representation of the theoretical model that we
have introduced in the earlier sections of this
Double-edged sword of cultural distance Taco H Reus and Bruce T Lamont
1312
Journal of International Business Studies
article. Our study provides initial support for a
double-edged sword effect of cultural differences on
acquisition performance, and begins to illustrate
the importance of integration capabilities. How-
ever, future research can provide a fuller theoretical
model.
The distribution of the sample we examined
reflects that of the population of international
acquisitions by US acquirers. While a sample of US
acquirers made it possible to control for country
characteristics, and provided a richer understand-
ing of specific integration capabilities of these
types of acquisitions, generalization of the results
to international acquisitions by firms from other
countries remains an empirical question for future
research. Differences in findings between Morosini
et al.’s (1998) study of mostly European acquirers
and the current study may be rooted in sample
differences. Therefore future research can examine
whether European acquirers differ significantly
from US acquirers regarding the extent to which
acquirers are able to develop and apply integration
capabilities. Work by Calori et al. (1994) would
suggest that this is probable, and deserves further
documentation.
The emerging markets also form a growing base
for a rather new group of acquirers. The global
financial crisis of 2008 seems not only to have
influenced the speed with which Western MNEs
need to restructure, it also provides a playground
for MNEs from emerging markets who are aggres-
sively targeting Western companies. A recent KPMG
study reports that emerging-market acquirers, par-
ticularly from India, Russia, and South Korea, are
increasingly looking for targets in the US, the UK,
and Germany (Kawasaki & Nihen, 2008). Clearly,
cultural differences play a role for these acquirers in
acquisition integration processes. Whether or how
these acquirers develop integration capabilities to
bring about the enriching effects predicted by the
model put forth in this article are important
questions for future research.
Our sample is limited by constraints that may be
relevant to most studies on cultural distance. While
the cultural distance from the US to other countries
may vary systematically, other characteristics of
the US’s relations with these countries may vary
systematically as well. The results of cultural
distance found in our study may be partially driven
by these unobserved dimensions of heterogeneity
in the US’s relations with other countries. Some
of these possible unobserved dimensions may be
related to institutional differences in local legal
and employment characteristics. For example,
executives from our sample mentioned that ‘‘the
tax planning and employment laws associated with
acquiring foreign operations are also very complex.’’
and that it is important to ‘‘understand the labor
issues within the specific market and how the
government views industrial relations issues.’’
Another executive, more bluntly, mentioned that
‘‘the union environment and labor regulations
(the most pro-union environment that I have ever
been exposed to) alone would be reason not to do it
again.’’ An important future research route, there-
fore, is to partial out other institutional differences
from cultural differences (Kostova, 1999), and
examine their independent effects on integration
capabilities.
The study pursued responses from executives who
were, prior to the acquisition, mostly employed at
the acquiring firm. While this provided the oppor-
tunity to investigate the acquisition from the
perspective of the parent firm, it limited the
opportunity to assess integration capabilities as
experienced by acquired employees. And, although
we took great care in the execution of our survey,
one can never know the extent to which typical
survey response biases may or may not have
affected our results. Future research can more
closely examine the role of cultural distance in
international acquisitions from the perspective of
the acquiring and acquired firms’ employees
(cf. Lee, Shenkar, & Li, 2008), using multiple data
sources. Such a design could corroborate our
findings and better address other factors that
influence the extent to which acquirers are able
to foster an atmosphere that facilitates under-
standability, communication, and key employee
retention.
While the current study identified cultural
distance as an important antecedent of integration
capabilities, it is in understanding the other ante-
cedents of integration capabilities that important
strides are likely in future research, as it was this set
of capabilities that appear to underlie the ability
to reap gains from international acquisitions.
Managers are likely to interpret the idiosyncratic
challenges of uncertainty and equivocality that
characterize their international acquisitions and
will attempt to make investments to develop the
necessary capabilities (Reus, Ranft, Lamont, &
Adams, 2009). One important route for future
research, therefore, is to examine how acquirers
can develop the key capabilities to improve acquisi-
tion integration studied in this paper and overcome
Double-edged sword of cultural distance Taco H Reus and Bruce T Lamont
1313
Journal of International Business Studies
the impediments brought upon international
acquirers by cultural distance. For example, under-
standing knowledge in distant cultures, and devel-
oping communication ties that span distant
cultures, may require hiring acquisition managers
who have considerable cultural intelligence, or
investing in cross-cultural training for organization
members (Early & Mosakowski, 2004). Alterna-
tively, the multiculturalism of the acquirer
(Nahavandi & Malekzadeh, 1988), which may be a
learned product of past experience (Markides &
Ittner, 1994) and level of internationalization
(Johanson & Vahlne, 1977) may be important
determinants of capabilities to integrate culturally
distant firms effectively. Future research opportu-
nities appear numerous.
Recent theorizing taking a cultural ‘‘friction’’
perspective (Shenkar, Luo, & Yeheskel, 2008) calls
for a more in-depth examination of cultural
encounters, focusing on actors that do not only
differ in cultural heritage but also possess divergent
resources and interests, and hold asymmetric power
and hierarchical positions. While the friction
perspective highlights aspects of conflict that
impede cooperation among actors (Shenkar et al.,
2008), the integration capabilities view put forth in
this article stresses that divergent opinions and
ways of doing business can also have enriching
effects on cultural encounters. Closer examination
of both impeding effects and enriching effects in
cultural encounters seems warranted. To this end, a
dimensional focus on similarities or differences
between cultures may also be overly simplistic,
without regard for nominal properties of host and
home cultures (Shenkar, 2001). Future research can
examine how acquirers from, or in, particular
cultures develop integration capabilities, regardless
of whether the host culture is similar or not.
In conclusion, although several issues warrant
further investigation, the present study takes
significant steps towards understanding the role
of cultural distance in international acquisitions.
Our findings suggest that cultural distance is a
double-edged sword with costs and benefits. In a
business environment that is increasingly global,
this more comprehensive view of the role of culture
is essential. Research on the role of cultural distance
in international acquisitions will not only increase
appreciation of its impact on international acquisi-
tions, but can also enrich our overall understanding
of the sources of sustained competitiveness of MNEs.
ACKNOWLEDGEMENTS
We are grateful for the guidance provided by Yadong
Luo, for the many suggestions from the two
anonymous reviewers, and for input from Andac
Arikan, Jim Combs, Kimberly Gleason, Tim Holcomb,
Michelle Kacmar, David Ketchen, Gary Knight, and
Arjen Slangen.
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ABOUT THE AUTHORS
Taco H. Reus (treus@rsm.nl) is Assistant Professor
at the Business-Society Management Department of
the Rotterdam School of Management, Erasmus
University, in his home country, the Netherlands.
He received his PhD in strategic management from
the Florida State University. His research focuses on
organizational capabilities, particularly in the con-
text of post-merger integration of international
acquisitions.
Bruce T. Lamont (blamont@fsu.edu) is the
DeSantis Professor of Business Administration
and Associate Dean of Graduate Programs at
the Florida State University, in his home country,
the USA. He received his PhD from the University
of North Carolina at Chapel Hill. His research is in
the effective management of large-scale strategic
change, strategic leadership, and curious applications
of organization theory.
Accepted by Yadong Luo, Consulting Editor, 21 November 2008. This paper has been with the authors for three revisions.
Double-edged sword of cultural distance Taco H Reus and Bruce T Lamont
1316
Journal of International Business Studies
