Introducing Cultural Tolerance: Developing a Composite Index and Exploring its Impact

Abstract

This paper introduces the concept of Cultural Tolerance (CT) and indicates its role in examinations of multinational companies. CT is the degree of openness toward different cultures and acceptance of diversity in terms of values, beliefs, and behaviours. We argue that CT is a significant determinant of the host country environment and can moderate the impact that Psychic Distance between home and host countries has on firm performance. We develop a framework of CT by incorporating 13 dimensions across the four level of tolerance and we construct a composite index based on 45 reliable indicators. Following confirmation of the internal consistency of CTI, we then test its impact on multinational companies, by focusing on a sample of 718 SMEs with 2,395 foreign subsidiaries across the EU. Our findings confirm the significance of CT in cross-cultural examinations and indicate that in countries where cultural tolerance is deemed to be low (range of 0 to 0.4), the effect of PD on performance is statistically insignificant. Furthermore, the results show that CT positively moderates the impact of home-host PD on performance.