The mode of entry for multinational corporations is greatly affected by the language differences between the home and the host country. The existence of a common official language between the two countries is an advantage, while the existence of language differences is a disadvantage for the multinational corporation. It is the language difference that determines whether a multinational corporation will choose to export either directly or indirectly. Further, language differences determine whether a multinational corporation will use licensing, franchising, management contracts or turnkey contracts, joint ventures, wholly owned subsidiaries or even strategic alliances. Where language differences exist, a firm that ventures in a home country has no option but to use the citizens of the home country to market their goods. This paper analyzes the influence of language differences to the mode of entry that a multinational organization adopts as it plans to establish its base in the home country. In doing so, the paper reviews the existing literature and links the existing gaps.

The effectiveness of trade between two countries is greatly increased if there a common language exists between the two countries. A meta-analysis done by Egger and Lassmann (2012) shows that trade between two countries is very effective if the two languages share a common language. According to the study, the industrialized countries are seen to participate in bilateral trade with many other countries because of the existence of a common language between the two countries. This applies more in the case of the western countries because of the spread of English the world over. Eger and Lassmann argue (2012) argue that international firms from the industrialized world have been able to establish firms in other countries, and to engage in direct trading, courtesy of the existence of a common language that links the citizens of these countries.

The effect of language n behavior of the targeted consumers also affects the ode of entry of an international firm (Davis, Desai and Francis 2000). The study of David, Desai and Francis looked at this perspective from an isomorphism perspective. According to their study, multinational institutions feel the pressure to conform to the behaviors and the norms of the local people, and this is greatly affected by their interactions with the local people through language. Therefore, internal parent isomorphism is experienced in the case where the firm practices wholly-owned entry modes in the foreign country. On the other hand, external isomorphism is evident where exporting; joint ventures or licensing agreements are used by the international firm. The work of Eggar and Lassmann (2012) and the work of Davis, Desai and Francis (2000) show a correlation on the positive effect of the existence of a common language between two trade partners. Considering the results of Davis, Desai and Francis, it is deductible that a firm may choose to operate directly where there is an advantage of a common language, whereas it may choose franchising where there are language difficulties between the host and the home countries.

Cost implications are high when an organization is venturing in a country where a language barrier exists between a parent and the host country. According to Feely and Hazing (2003), costs arise in different dimensions when a multinational firm is venturing in a country where they have to learn the official language used in the country. For example, man hours are spent interpreting documents, and money is spent on translators of documents, and this is a daily task that a firm has to spend on. The study agrees with the finding of Egger and Lassmann (2012), who found that costs are reduced, and efficiency increased, in the case where a common language exists between the host and the home country. Also, Feely and Harzing’s findings are in consistency with the propositions of Davis, Desai and Francis (2000); concerning the implications of investing in a country that creates a situation of a language barrier.

Feely and Harzing show that, before a multinational organization decides on the mode of entry, it has to consider the likely uncertainty in the market where its salespersons will not share the same language with the targeted consumers. For example, if a firm decides to sell directly in the home country that has a language barrier, a weakness may be realized in that; the salespersons will be viewed as less able, less likeable, less persuasive, and even less convincing. In such a case, the firm may not realize profits both in the short, as well as, in the long run.

Selling to a country that share a common language is more advantageous for a firm (Feely and Harzing 2003). In considering the psychic distance to their home country (Gainblatt and Keloharju 2001), firms have been found to prefer investing in countries that have low levels of psychic from their home countries. Relating this to language, it is found that language difference is a very vital aspect of psychic distance. If such a possibility does not exist, the firm will consider a second option to be a country where a dominant international language is spoken. If the country is attracted by other factors, like the existence of a ready market, then the international firm may consider entering the market using joint ventures. According to Harzing and Feely (2008), the reason for choosing such a mode is the sharing of risk between the firms that have entered in a joint venture. Therefore, it is highly probable that joint ventures will exist where language differences exists. In this case, the joint venture can work with the language of the firm that has an international language. Consequently, Harzing and Feely (2008) argue that in many instances, the firm whose language is chosen may dominate the joint venture, shortening the life of the relationship. Considering such a disadvantage, the existence of a common language influences international investment to the greatest extent.

In regard to technology knowhow and franchising modes of entry, Harzing, Koster and Magner (2011) argue that personal relationships may be strained through mistrust, suspicion and conflict between the parent firm, and the subsidiaries where language barrier exists. In case the mistrust and conflict heightens, the parent firm is likely to be less strict in the evaluation of the subsidiaries in the foreign country. In other words, the parent firm may use a more formal approach, leading to the hindrance of technology and knowledge transfer. When such a situation arises, the performance is reduced, and eventually, the firm may realize losses.

Foreign direct investment is greatly influenced by language. Goldberg, Heinkel and Levi (2003) show that human dimension, which is determined by language, is one of the major determinants of the size, as well as, the direction of foreign direct investment. They note that where a common language exists between two trading countries, there is an impactful decrease in the costs of production, both in the host country, and the home country. This is brought about by the integration of operations, as opposed to licensing of foreign firms. The implications are lower costs of the factors of production to both the multinational firms and the local firms, since they will be able to deal with environmental and safety regulations, and also avoid quotas. In addition, the firms will be able to deal with volatile labour costs and exchange rates, as well as, enjoy flexible production locations. Going by these, the work of Goldberg, Heinkel and Levi (2003) agree with the works of Harzing and Feely (2008), and Davis, Desai and Francis (2000), that venturing in a country where there is no language barrier is advantageous for a multinational firm.

According to Hutchinson (2002), the commonality of language between countries increases trade between the two countries.

In his work of 2005, Hutchinson studies the effect that linguistic distance has on trade. The English language is used as a reference language. Considering, for example, the immigrants in the United States, their fluency in speaking English is a determining factor in how they can use the language to outsource markets in their mother countries. Hutchinson (2005) disagrees with Hazing and Feely (2008)concerning whether the language in consideration is the first language or a second language. However, while Hutchinson considers the case of immigrants, Hazing and Feely (2008) consider the locals of a host country, whether they native speakers or second-language speakers.

The more the world languages emerge, the more the reduction in international trade. Ku and Zussman (2010) assert that the many languages of the world have been seen to reduce international trade. The authors observe that the mode of entry of a multinational corporation, which in turn affects international trade, is greatly determined by the existence of a common language between the two countries. The (Guo 2004). The study of Ku and Zussman (2010) considered English language, and its effect on international trade. In effect, their study agrees that English-speaking countries are able to effectively carry out trade activities as compared to countries that differ in language. Further, Ku and Zussman show that the proficiency of English in a country increases its trade relations with English-speaking countries like the US.

According to Lopez-Duarte and Vidal-Suarez (2010), language is a major factor that multinational organizations consider when determining the mode of entry. Among other risks are political risk and cultural distance, but the effects of language are far-reaching, since language is intertwined in very many other aspects, especially communicating in business. When a firm is determining the entry mode strategy it is going to use to penetrate a foreign market, it considers the effects of the host country’s formal and the informal environment. Lopez-Duarte and Vidal-Suarez (2010) argue that the greatest component of the informal environment is culture, which is greatly influenced by language. A country can then decide to invest directly, in which case it will reap more benefits, or decide to invest indirectly through joint venture, where it will still have a challenge of the language barrier. The study of Lopez-Duarte and Vidal-Suarez (2010) is very much in agreement with the study of Davis, Desai and Francis (2000), which agrees that the existence of a common language is very beneficial in boosting trade between two countries.

A multinational corporation can be viewed as a multilingual community (Luo and Shenkar 2006). When this issue is considered through this perspective, a multinational organization encounters challenges in choosing the functional language to use in the subsidiary. This arises because the organizational functions have different demands in terms of language. For example, some organization tasks will be better communicated with the language of the home country. Other documents will be well written with the official language of the host country. Still, other functions of the organizations will be better done through the local languages of the host country (De Groot et al. 2004). When all these factors are considered, an overlap in the use of language arises, and this affects organizational performance to a great extent. In regard to this, it is evident that the existence of a common language between two countries is very beneficial for trading activities (Welch, Welch and Marschan-Piekkari 2001).

Melitze (2008) argues that a common language between two countries has a great effect in bilateral trade, but agrees that the means through which the effect occurs has not been documented. Melitze (2008) shows that the effectiveness of trade between two countries exists even if only a little population of the two countries in consideration can speak a common language. For example, Tanzania, a country in Africa, has Kiswahili as the national language. India, on the other hand, has some proportion as speakers of English. The two countries are considered an English pair even though not all the citizens of those countries speak English. Considering the work of Luo and Shenkar (2010), and Melitze (2008), it is evident that a minority pair between two countries that can speak the same language have a great effect on bilateral trade.

Every firm aims at reducing costs, and maximize outputs when it invests in a foreign country. The cost implications in language are a factor to consider while making a decision to invest. According to The effect of language barrier on transaction costs for a multinational organization is again emphasized by Vidal-Suarez and Lopez-Duarte (2013). Their study agrees that a multinational firm receives a lot of pressure in financing operations related to language barrier in a foreign country.

In conclusion, multinational corporations encounter a big challenge when deciding the mode of entry in a foreign country. Even though there are several modes to choose from, language plays a central role in every mode, because communication is very vital for a business to thrive. Direct foreign investment seems one of the best modes of trading for a multinational organization. However, this mode of trade is favourable where there exists a commonality in language between the two countries. Where a language barrier exists, a multinational organization is left with the options of choosing from the indirect modes of trade, including joint ventures, though they are associated with several challenges. It has been found that the indirect modes of entry in relation to language barrier are associated with mistrust, suspicion, and misconceptions. To overcome these challenges, a multinational organization needs to invest greatly, and the transaction costs are increased due to the demands of interpretations and translations. Further, it might prove difficult for the firm to have direct control for the subsidiaries, rendering the later ineffective and eventual loss. A commonality of language between two countries is thus beneficial for bilateral trade.

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