Spreadsheets with something extra

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Accounting and Finance


US companies seeking cheaper labor or extraordinary returns have often seen foreign direct investment as a panacea. However, many of these companies founder on the horns of a control dilemma. While raw economic data such as labor rates prove to be true, productivity and decision-making styles are so different that companies fail to maximize their investment returns. This situation is worsened as companies attempt to impose culturally inappropriate home country controls on their foreign investment. This study examines one of the potential sources of failure, escalation of commitment, which occurs when decision-makers over-commit incremental resources to failing investments without reasonable probability of recovery. This behavior has been widely documented in US domestic literature (see Whyte and Hook, 1997, for a summary). However, there is also some evidence that such behavior is culturally bounded (Chow et al., 1997; Sharp and Salter, 1997; Greer and Stephens, 2001). This study extends previous findings on cross-cultural differences in decision-making among managers by comparing the responses of managers in the USA and Mexico to an escalation of commitment exercise. The cross-cultural validity of two US based theories, agency (adverse selection) and framing (prospect theory), is tested. The results indicate that at base Mexican managers were more risk seeking. However managers from the more individualistic USA were significantly more likely than Mexican managers to escalate in the presence of agency (adverse selection) based incentives. Negative framing among managers was universal in escalating commitment. [PUBLICATION ABSTRACT]

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