Sauder professors find culture can trump logic when multinationals make decisions in China

Hong Kong city Streets

In a paper published in the Journal of International Business Studies Finance, Sauder professors Kai Li and Dale Griffin show that a multinational company’s home culture tends to shape how it operates in China – something that can ultimately affect its level of profitability in the country.

"Standard finance theories suggest that financing decisions should be determined only by economic considerations such as profit maximization," says Li. 

"However, by looking at a wide range of companies from around the world doing business in China who face a common environment, we were able to link the national origin of a company to specific types of financing decisions."

For their study, "National culture and capital structure decisions: Evidence from foreign joint ventures in China," co-written with colleagues from the Guanghua School of Management at Peking University, the researchers examine a sample including more than 8,000 foreign joint ventures in China from 32 different countries in 2002. 

Focusing on debt financing of non-publicly traded firms, the study shows that when foreign companies enter China, they are often inclined to make choices about financing based on cultural tendencies, rather than solely based on the factors that exist on the ground.

For their study, the authors considered two cultural traits previously identified by social psychologist Shalom H. Schwartz that can be generally ascribed to national cultures – mastery and embeddedness. 

Cultures high in mastery – e.g., South Africa, India and Greece – emphasize the importance of controlling their environment to attain goals, and those low on this trait – e.g., Finland, Chile and Indonesia – emphasize a harmonious fit in the world. 

Cultures high on embeddedness – e.g., Egypt, Indonesia and Malaysia – emphasize the importance of tradition and relationships and those low on embeddedness – e.g., Switzerland, France and Austria – emphasize self-direction and autonomy.

The researchers were able to show that these cultural traits do often guide the way companies from around the world make decisions about debt in China. Further, they were able to demonstrate that, in some cases, these traits have caused the capital structure of some foreign ventures in China to deviate from optimal levels. 

The results support a growing awareness among finance researchers that intangible factors such as culture matter in financial decisions, even when those decisions are made by sophisticated managers who are operating outside of their home countries.