the influence of cultural affinity for the boost

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The influence of cultural affinity for theThe influence of cultural affinity for theboost of Brazilian investment in Portugalboost of Brazilian investment in Portugal

Cristiano CechellaCristiano Cechella

50º ERSA CONGRESS 201050º ERSA CONGRESS 2010

Jönköping , Sweden, 18-25/08/2010



I ntroductionI ntroductionFortune 1000 companies enquiring about ³the biggest barrier in doing businessFortune 1000 companies enquiring about ³the biggest barrier in doing businessin the world market´, cultural differences ranked at the top of the list (2007);in the world market´, cultural differences ranked at the top of the list (2007);

Culture and economy have been treated as independent areas of researchCulture and economy have been treated as independent areas of research; ;

Since the late twentieth century, however, there have been argumentsSince the late twentieth century, however, there have been argumentsrespecting an increasingly close relationship between economy and culture;respecting an increasingly close relationship between economy and culture;

The failure to recognize these differences was the most common cause of The failure to recognize these differences was the most common cause of failure for crossfailure for cross- -national enterprisesnational enterprises; ;

This article seeks to measure the influence of factors such as history, languageThis article seeks to measure the influence of factors such as history, languageand culture in foreign direct investment (FD I ) of Brazilian companies inand culture in foreign direct investment (FD I ) of Brazilian companies inPortugal, two countries with deep cultural affinity.Portugal, two countries with deep cultural affinity.



SummarySummary

11-- L usoL uso -- brazilianbrazilian economic relations after 1990 seconomic relations after 1990 s;;

22-- A multidimensional analysis of the FDI theory;A multidimensional analysis of the FDI theory;

33-- A Stepwise Model of Brazilian Foreign Investment inA Stepwise Model of Brazilian Foreign Investment inPortugal;Portugal;

44-- Final RemarksFinal Remarks



11-- L usoL uso -- brazilian economic relations afterbrazilian economic relations after1990 s1990 s;;

The increase of economic cooperation between Portugal and Brazil has alwaysThe increase of economic cooperation between Portugal and Brazil has always been object of discourses evoking the historical and cultural ties; been object of discourses evoking the historical and cultural ties;

I t reflected a genuine aspiration, but without the business content, which hasI t reflected a genuine aspiration, but without the business content, which has been, since ancient times, a key force for the commerce intensification been, since ancient times, a key force for the commerce intensification between countries; between countries;

The bilateralThe bilateral comercecomerce ( Imports + exports), increased from 292.78 million(Imports + exports), increased from 292.78 millioneuroseuros in 1989 to 1.70 billionin 1989 to 1.70 billion euroseuros in 2008,in 2008, six timessix times . And bilateral. And bilateralinvestment has grown from 67, 26 million to 1765.50 million gross in the sameinvestment has grown from 67, 26 million to 1765.50 million gross in the same

period, period, more than 26 timesmore than 26 times ..



Push factors to Brazilian companies investment inPush factors to Brazilian companies investment inPortugalPortugal

The size of domestic market: with a GDP per capita of U.S. $ 21,404.00 inThe size of domestic market: with a GDP per capita of U.S. $ 21,404.00 in2009 ( IM F), Portugal is a relevant market for many Brazilian companies and2009 ( IM F), Portugal is a relevant market for many Brazilian companies andvarious economic sectors;various economic sectors;

According to FD I inflows, since 1990s, the European Union, Portugal hasAccording to FD I inflows, since 1990s, the European Union, Portugal has become, for Brazil, the gateway to a powerful market; become, for Brazil, the gateway to a powerful market;

The cultural connexion from the European immigration to Brazil in theThe cultural connexion from the European immigration to Brazil in thenineteenth century and their traditional trade relationsnineteenth century and their traditional trade relations; ;

A common language and cultural relations intense simplify the understandingA common language and cultural relations intense simplify the understandingof business environment, one of the biggest challenges for investment abroad;of business environment, one of the biggest challenges for investment abroad;



Push factors to Brazilian companies investment inPush factors to Brazilian companies investment inPortugalPortugal

Economic and political stability of two countries;Economic and political stability of two countries;

Globalization: The increasing importance for some companies to integrate intoGlobalization: The increasing importance for some companies to integrate into

global networksglobal networks; ;

The geographic position between two countries is an essential aspect inThe geographic position between two countries is an essential aspect inmeasuring the potential of trade and investment. Brazil, in the context of Southmeasuring the potential of trade and investment. Brazil, in the context of SouthAmerica, and Portugal in the European Union, are part of different continentalAmerica, and Portugal in the European Union, are part of different continentalareas and, therefore, can take the advantage of these strategic points.areas and, therefore, can take the advantage of these strategic points.



22-- A multidimensional analysis of the FDIA multidimensional analysis of the FDI

The early attempts to explain why foreign direct investment exists emerged inThe early attempts to explain why foreign direct investment exists emerged inthe 1960s, just as flows of FD I began to increase in volumethe 1960s, just as flows of FD I began to increase in volume; ;

Before this time, FD I was modelled as a part of neoclassical capital theory, butBefore this time, FD I was modelled as a part of neoclassical capital theory, butas Dunning (1981) notes there are two main problems :as Dunning (1981) notes there are two main problems :-- FD I is more than just the transfer of capital, since just as importantly itFDI is more than just the transfer of capital, since just as importantly itinvolves the transfer of technology, organisational and management skillsinvolves the transfer of technology, organisational and management skills; ;-- the resources are transferred within the firm rather than between twothe resources are transferred within the firm rather than between two

independent parties in the marketplace, as is the case with capitalindependent parties in the marketplace, as is the case with capital. .

.. For the purpose of this article, we¶ll atempt a two FD I theories: Dunning¶sFor the purpose of this article, we¶ll atempt a two FD I theories: Dunning¶s(1977) eclectic theory and The Upsala or Scandinavian School of firms.(1977) eclectic theory and The Upsala or Scandinavian School of firms.



The Ecletict theoryThe Ecletict theory

The eclectic paradigm of FD I states that a firm will directly invest in a foreignThe eclectic paradigm of FD I states that a firm will directly invest in a foreigncountry only if it fulfils three conditions. These are necessary rather thancountry only if it fulfils three conditions. These are necessary rather thansufficient conditions.sufficient conditions.

-- First, the firm must possess an ownershipFirst, the firm must possess an ownership- -specific asset, which gives it anspecific asset, which gives it anadvantage over other firms and which are exclusive to the firm.advantage over other firms and which are exclusive to the firm.

-- Second, it must internalise these assets within the firm rather than throughSecond, it must internalise these assets within the firm rather than throughcontracting or licensing.contracting or licensing.-- Third, there must be an advantage in settingThird, there must be an advantage in setting- -up production in a particular up production in a particular

foreign country rather than relying on exports.foreign country rather than relying on exports.

-- Different types of ownership (O), locational (L) and internalisation ( I) factorsDifferent types of ownership (O), locational (L) and internalisation ( I) factors

are given in Table 2.1 (collectively known as OLI)are given in Table 2.1 (collectively known as OL

I)::



The Uppsala or Scandinavian School The Uppsala or Scandinavian School

Is a dynamic model involving a time sequence that develops in a logical andIs a dynamic model involving a time sequence that develops in a logical andlinear pattern, and in which elements in one stage form the input for the nextlinear pattern, and in which elements in one stage form the input for the nextstage. The work of the Scandinavian School starts with empirical research intostage. The work of the Scandinavian School starts with empirical research intothe internationalization process of Swedish manufacturing firms (Johanson andthe internationalization process of Swedish manufacturing firms (Johanson andWiedersheimWiedersheim--Paul, 1975)Paul, 1975);;

This gradual stages approach is strongly linked to uncertainty and to theThis gradual stages approach is strongly linked to uncertainty and to therelevance of nonrelevance of non- -transmittable experiential knowledge;transmittable experiential knowledge;

The involvement in any single foreign country will proceed cautiously and inThe involvement in any single foreign country will proceed cautiously and inaccordance with the following stages in the establishment chain:accordance with the following stages in the establishment chain:

� exports via agents;� exports via agents;� setting up of sales subsidiaries;� setting up of sales subsidiaries;� setting up of production subsidiaries.� setting up of production subsidiaries.



The Uppsala or Scandinavian School The Uppsala or Scandinavian School

The Scandinavian School starts with the observation of empirical regularitiesThe Scandinavian School starts with the observation of empirical regularitiesand then goes on to develop a general model to explain internationalizationand then goes on to develop a general model to explain internationalization

patterns and their regularities. The authors put forward the idea that patterns and their regularities. The authors put forward the idea thatinternationalization develops in stages which are of the following two types:internationalization develops in stages which are of the following two types:

11 -- Stages in the establishment chain: a dynamic and linear sequence leadsStages in the establishment chain: a dynamic and linear sequence leadsfrom exports via agents to sales subsidiaries and later to productionfrom exports via agents to sales subsidiaries and later to productionsubsidiaries. A related linear pattern can algo be detected in terms of amountsubsidiaries. A related linear pattern can algo be detected in terms of amountof resources committed at each stage in the establishment chain with moreof resources committed at each stage in the establishment chain with moreadvanced stages in the internationalization process requiring larger advanced stages in the internationalization process requiring larger commitment of resources.commitment of resources.

22 -- Stages in the geographical spread of internationalization from oneStages in the geographical spread of internationalization from one

country to many: this follows a linear pattern related to psychic distancecountry to many: this follows a linear pattern related to psychic distance between the home and foreign countries. between the home and foreign countries.



33-- A Stepwise Model of Brazilian Foreign DirectA Stepwise Model of Brazilian Foreign Direct

Investment in PortugalInvestment in Portugal

Portugal is a preferred location for Brazilian companies because:Portugal is a preferred location for Brazilian companies because:-- The number of Brazilian companies installed, the second favorite in termsThe number of Brazilian companies installed, the second favorite in terms

of geographical location, shortly after Argentina;of geographical location, shortly after Argentina;-- Brazil's position among the 10 largest foreign investors in Portugal in theBrazil's position among the 10 largest foreign investors in Portugal in the

early 2000s, ahead of several countries traditionally overseas investors;early 2000s, ahead of several countries traditionally overseas investors;

-- There are recognized brazilian companies in various sectors of the economyThere are recognized brazilian companies in various sectors of the economyare also relevant points to our subject of study.are also relevant points to our subject of study.

.. This model seeks to show, through a factor analysis and regression, the factor This model seeks to show, through a factor analysis and regression, the factor that contributed to the evaluation perception of profitability success of that contributed to the evaluation perception of profitability success of

brazilian firms in Portugal, and the influence of cultural affinity as a factor in brazilian firms in Portugal, and the influence of cultural affinity as a factor inthe decision to invest in Portuguese market.the decision to invest in Portuguese market.



The Stepwise ModelThe Stepwise Model

To explain the profitability, the factor analysis detected the first two principalTo explain the profitability, the factor analysis detected the first two principalcomponents of the factors related to the assets, the first two main componentscomponents of the factors related to the assets, the first two main componentsof factors related to internalization, the three main factors related to locationof factors related to internalization, the three main factors related to locationand, finally, two variables that attempt to measure the influence of culturaland, finally, two variables that attempt to measure the influence of culturalaffinity between Brazil and Portugal complete the list of independent modelaffinity between Brazil and Portugal complete the list of independent model

variables;variables;

The first arises in the context of the Eclectic theory factors of location, and theThe first arises in the context of the Eclectic theory factors of location, and thesecond is a single question asking whether the language, culture and historysecond is a single question asking whether the language, culture and historyinfluenced Brazilian companies decisioninfluenced Brazilian companies decision- -making to invest in Portugal;making to invest in Portugal;

The stepwise regression is particularly appropriate when there are significantThe stepwise regression is particularly appropriate when there are significantcorrelations between independent variables.correlations between independent variables.



Model resultsModel results

We estimate a new model not including the constant in the regression line. TheWe estimate a new model not including the constant in the regression line. Theregression analysis stopped at the fourth step and explained 94% profitabilityregression analysis stopped at the fourth step and explained 94% profitabilityvariance;variance;

The variables that contribute significantly to explain the variance valuation of The variables that contribute significantly to explain the variance valuation of the company based on profitability are: q21 (cultural influence, in annex), B =the company based on profitability are: q21 (cultural influence, in annex), B =0.924, t (15) = 4.402, p = 0,001, Q29_25 (cultural affinity), the first principal0.924, t (15) = 4.402, p = 0,001, Q29_25 (cultural affinity), the first principalcomponent of factors related to assets FAC1_27 (technological innovativecomponent of factors related to assets FAC1_27 (technological innovativecapability, reputation and brand image, human potential and managementcapability, reputation and brand image, human potential and managementcompany), and the first principal component of the factors related to thecompany), and the first principal component of the factors related to theinternalization FAC1_28 (high cost of transportation and communication,internalization FAC1_28 (high cost of transportation and communication,tariff barriers and Portuguese market used as export platform).tariff barriers and Portuguese market used as export platform).



Profitability model without constantProfitability model without constant -- coefficientscoefficients



Final remarksFinal remarksSince the late twentieth century, however, there have been arguments respecting anSince the late twentieth century, however, there have been arguments respecting anincreasingly close relationship between economy and culture.increasingly close relationship between economy and culture. The failure to recognizeThe failure to recognizethese differences was the most common cause of failure for crossthese differences was the most common cause of failure for cross --nationalnationalenterprises. Members of different culturesenterprises. Members of different cultures express different values and prioritiesexpress different values and prioritieswhen they make and implement decisions. These valueswhen they make and implement decisions. These values inÀuenceinÀuence work relationships,work relationships,whether between superior and subordinate, peers, international joint venture partners,whether between superior and subordinate, peers, international joint venture partners,managers in headmanagers in head- -quarters and subsidiaries, and others.quarters and subsidiaries, and others.

In relation toIn relation to brazilianbrazilian firms investments in Portugal, we confirm the strongfirms investments in Portugal, we confirm the stronginfluence of the cultural affinity to explain the variance in profitability toinfluence of the cultural affinity to explain the variance in profitability to Stepwise Stepwisemethod method , according to the theories of FDI examined, according to the theories of FDI examined , studied firstly by the Uppsala, studied firstly by the UppsalaSchool. The eclectic paradigm complement the model, followed by the first principalSchool. The eclectic paradigm complement the model, followed by the first principalcomponent of factors related to assets (related to monopolistic advantage), and the firstcomponent of factors related to assets (related to monopolistic advantage), and the first

principal component of the factors related to internalization. Not only in the case of the principal component of the factors related to internalization. Not only in the case of thePortuguese language, which is still emerging, but also of English, Spanish, amongPortuguese language, which is still emerging, but also of English, Spanish, amongothers, are evidence that a common language, even that does not guarantee the successothers, are evidence that a common language, even that does not guarantee the successof the investment, is a facilitator of business in several strategic issues.of the investment, is a facilitator of business in several strategic issues.



Thank you !

the influence of cultural affinity for the boost

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