Cultural Proximity and Local Firms’ catch up with Multinational Enterprises

• We attempt to provide a theoretical foundation for the technology gap hypothesis.
• We emphasize the role of cultural proximity in local firms’ catch-up with MNEs.
• Cultural proximity facilitates local firms’ catch-up with overseas Chinese MNEs.

SummaryIntegrating and extending new growth theory and resource-based views, this paper provides a theoretical foundation for the catch-up hypothesis. It examines the role of technology gap, technological capability, and cultural proximity in local firms’ catch-up with MNEs. Hypotheses are developed and tested with a dynamic model on a large firm-level panel dataset from Chinese manufacturing. The results confirm that catch-up is positively related to technology gap and technological capability. Furthermore, in the presence of cultural proximity, the speed of local Chinese firms’ catch-up with MNEs from Hong Kong, Macau, and Taiwan is not significantly lower than that with other MNEs.