Cross-border business transactions have long been analysed by international business (IB) scholars through the lens of cultural differences. Most studies operationalize cultural differences through the cultural distance index developed by Kogut and Singh (1988). Despite its importance to study international business decisions, the construct of cultural distance has received a great deal of criticism by several scholars (Gibson, Maznevski, & Kirkman, 2006; Shenkar, 2001; Tung & Verbeke, 2010). Scholars have called to improve the precision of models examining the impact of cultural distance by including firm level and contextual contingencies, which hitherto remain less explored (Gibson et al., 2006; Zaheer, Schomaker, & Nachum, 2012). To that end, we introduce cultural experience reserve as an important firm level capability that conditions the effect of cultural differences on firms’ strategic decisions. We utilize the setting of cross-border deal abandonment (Dikova, Sahib, & van Witteloostuijn, 2009) to demonstrate that the impact of cultural distance is not homogenous, but contingent upon a firm’s cultural experience reserve and its industry affiliation.

We propose that experience gained through prior cross-border merger and acquisition (M&A) deals and post-M&A integration in culturally similar countries (i.e. in a same cultural cluster) generate a cultural experience reserve for the focal firm (Luo & Shenkar, 2011). As firms globalize in terms of scale and scope of geographic markets, the extent of cultural differences they face are likely to be different from what we measure based on cultural distance scores between the home and host countries (Luo & Shenkar, 2011; Tung & Verbeke, 2010). While recognition of dynamism in cultural distance and the role of contextual factors has received some attention (Leung, Bhagat, Buchan, Erez, & Gibson, 2005; Shenkar, 2001, 2012), attempts to incorporate such dynamic aspects in empirical studies are in a preliminary stage (Hutzschenreuter & Voll, 2008; Hutzschenreuter, Voll, & Verbeke, 2011).

Organizational learning theory suggests that prior cultural experience manifests in organizational knowledge, both in the sense of stock and process, and hence, it should manifest in a reduced impact of cultural differences (Orlikowski, 2002). However, there has been little scholarly effort to operationalize and examine the impact of foreign experience of firms as an instrumentto close cultural gaps (Shenkar, 2001, 2012). More specifically, the extant literature has not considered the degree of similarity in gaining cultural experience as well as the time between different events through which firms gain cultural experience (Tung, Worm, & Fang, 2008). We develop a dynamic measure of cultural experience reserve for each focal firm based on the quantum of prior, similar experiences of the focal firm and the duration of such cultural experiences. We conceptualize cultural experience reserve of a firm as an idiosyncratic, firm-specific capability that could help to reduce uncertainity in deal negotiations, resolve deadlocks and reduce the risk of deal abandonment in subsequent deals for the focal firm (Very, Lubatkin, Calori, & Veiga, 1997).