A global economy rewards firms that are willing to take financial risks.  But this begs the question, are some firms more comfortable or prone to risk taking than others, and if so why?

Drawing from across disciplines, such as finance, cultural studies, and organizational behavior, Guanghua School of Management finance and accounting experts, ZHAO Longkai and YUE Heng, along with researchers from the University of British Columbia, provide unique insights into the culture of risk taking. 

In the article, "How Does Culture Influence Corporate Risk Taking," they explain that national culture is a significant influence on a firm's risk taking. In fact, they prove that business decisions made in a global age go much deeper than any balance sheet.

"Standard economic theory suggests that corporate decisions should only be determined by economic considerations. We show that, in reality, intangible factors such as culture, matter in high-stakes corporate decisions," write ZHAO and YUE.

In order to measure the cultural influence and risk, ZHAO and YUE used established cultural dimensions and established indicators of risk to measure the correlation between culture and risk taking.  The study analyzed data spanning from 1997 to 2006 of manufacturing firms across 35 countries. 

Culture was analyzed on the basis of three variables:

• Individualism: an individual's emphasis on individual freedom versus strong group cohesion;

• Uncertainty avoidance: whether individuals demand clear rules or value ambiguity and innovation;

• Harmony: an individual’s  preference for an accepting or an assertive relationship  

Corporate risk taking was measured by two indicators:

• Volatility of corporate earnings, with the more risky firms having greater volatility

• Research and development, with greater R&D expenditure indicating greater risk taking

The study found that firms with the greatest risk-taking were in countries that had individualistic cultures, with low levels of uncertainty avoidance and less prone to harmonious relationships.  What this means is that firms which embrace risk have national cultures that support freedom, room for ambiguity, and assertiveness.  On the other hand, firms that curtail risky behavior demonstrate group cohesion, insistence on clear rules and acceptance of a status quo.

"…Culture influences corporate risk-taking in two ways: first, directly on risk corporate decision-making; and second, indirectly through formation institutional development, which in turn influences risky corporate decision making," ZHAO and YUE write.

As companies expand and work with international partners, they will meet tension at the decision-making level, as well as during the firm’s development. As such, understanding a firm's cultural context is key to succeeding in global business.

Journal Reference: 

Li, Kai, Dale Griffin, Heng Yue and Longkai Zhao (2013) "How does culture influence corporate risk taking." Journal of Corporate Finance. V. 23. p. 1-22. DOI: 10.1016/j.jcorpfin.2013.07.008