The performance of active investment positions in foreign markets

| Tatyana Sokolyk, Journal of International Business Studies

It is well known that when investing abroad, investors tend to concentrate their holdings in countries that are geographically close and have similar cultural characteristics and business climates as their home market. But what impact does that have on investment performance?

Using data that covered a timespan of 16 years and included more than 30 countries, the researchers analyzed the impact of cross-national distance between the home country of professional money managers and the foreign target market on investment performance.

What they found is that investors earn higher returns in culturally similar foreign markets when market conditions in these countries are favourable. The results also showed that culture-based patterns in foreign portfolio allocations are associated with an information advantage. The results imply that multinational corporate decisions influenced by culture increase firm value.

The analysis also showed that other cross-national distance dimensions such as geography, business climate and industry were not reliably related to investors’ returns in foreign markets. These findings are of particular interest to leaders of multi-national firms because many high-level decisions rely on cross-national distance considerations.

The team’s findings that global institutional investors can profitably exploit culture distance provides a rational explanation for culture-driven portfolio allocation decisions in foreign markets. The findings also confirm that the culture component of home-market information advantage extends beyond the home country’s border to less distant foreign markets.

Fedenia, M., Skiba, H., & Sokolyk, T. (2022). The performance of active investment positions in foreign markets. Journal of International Business Studies. https://doi.org/10.1057/s41267-022-00548-0