Competition of Multinationals from Different Cultural Backgrounds: Does Familiarity Breed Contempt?

This paper considers competition between two multinationals (U, J) who compete in a third market (K). The multinationals have similar cost structures, but differ in that J comes from a country that is "culturally similar" to K, and hence produces products that match more closely the preferences of K residents.  This similarity gives J an advantage in K’s market and, if only one firm may enter, J can earn higher profits.  However, we show: (i)K may benefit more from the entry of the dissimilar firm (U), and (ii)in a strategic competition between the two firms, the cultural similarity may be a strategic disadvantage.