Developing the Cultural Tolerance Index and Examining its Impact on Psychic Distance and Firm Performance

Abstract

When a business pursues international expansion, it encounters a complex diversity of internationalisation factors and host-country aspects relevant to local adaptation, acceptance, and Cultural Tolerance (CT). CT is the concept of a nation accepting new and different values, different from those embedded in its culture through permission, co-existence, appreciation and respect for diversity. International enterprises face the effects of home-host Psychic Distance (PD) which obstructs the flow of information among countries and acts as a barrier on the International Small Medium Enterprise (SME)s’ learning processes (Dikova, 2009). The scope of this research is to identify the moderating role of CT on the effects of PD on SME performance. The primary objective of this research is to conceptualise a model and operationalise a measure of CT and test its impact on SME performance. This is accomplished through the development of a framework of CT by incorporating various dimensions and aspects into a complete CT model (CTM) followed by the construction of a composite index (CTI) encompassing multiple reliable indicators. Through a rigorous conceptual and empirical approach, the country-scores of EU countries are developed and presented into the CT Index (CTI), along with their evolution over years presenting considerable implications of upcoming trends. The CTI is then tested on international SMEs by focusing on a sample of 285 SMEs with 926 Foreign Subsidiaries (Fsubs) across the EU. The findings confirm the significance of CT in cross-cultural examinations through a positive impact on SME performance and a moderating impact on PD. This PhD addresses research gaps overlooking countries’ variation
and openness by introducing, developing and establishing CT as a critical determinant of the host-country environment and a vital concept in IB.