Ex-post Performance Implications of Divergence of Managers' Perceptions of 'Distance' From 'Reality' in International Business.
| Verfasser | Azar, Goudarz |
| Posten | RESEARCH ARTICLE |
1 Introduction
'Distance' (i.e. country differences) is the essence of international business (IB) (cf. Williams and Gregoire 2015; Zaheer et al. 2012). Firms engage in IB to find and exploit business opportunities outside the domestic market (Johanson and Vahlne 2009; Lu and Beamish 2001). However, exploiting these opportunities entails costs and risks of doing business in a new foreign market, mainly resulting from barriers created by 'distance' (Ghemawat 2001). Distance may originate not only from geographic separations but also from administrative or political, economic, and cultural differences (Hutzschenreuter et al. 2016). These differences create uncertainty, since the decision-maker sees itself as lacking sufficient market information to accurately predict the challenges facing the firm in the new foreign market environment (Maitland and Sammartino 2015b). The concept of distance typically refers to degrees of dissimilarity between country pairs and is mostly conceptualized using Kogut and Singh's (1988) index (Ambos and Hakanson 2014). Despite its popularity, this approach has been questioned by extant research, meaning that the original underlying assumptions and rationale behind the concept have been largely overlooked (Baack et al. 2015; Shenkar 2001). Therefore, scholars pointed out the need for other (richer) conceptualizations of distance (Ambos and Hakanson 2014; Leung et al. 2005).
Recent research calls for the use of perceptual data in assessing distance, mainly grounded on the argument that managers formulate strategies for responding to the environmental demands based on their perceptions of the firm's (external) environment (Baack et al. 2015; Child 1972; Child et al. 2002; Hambrick and Mason 1984; Harzing 2004; Maitland and Sammartino 2015a). As Devinney et al. (2003, p. 155) assert, "managers need to make choices [...] and this will be influenced by their perceptions of the nature of the pressures and what is the most advantageous for the firm". However, as Harzing (2004, p. 103) argues, most studies in IB research have succeeded in completely removing the managers who make the actual decisions from the equation. In response to this criticism, there have been efforts to incorporate perceptual measures of distance to explain a variety of firms' internationalization decisions, such as foreign market selection (Hakanson and Dow 2012), entry mode choice (Drogendijk and Slangen 2006; Williams and Gregoire 2015), international marketing strategy (Azar and Drogendijk 2014; Evans et al. 2008), and cross-border M&As (Yildiz and Fey 2016). Despite these efforts, little attention has been paid to the effect of divergence of managers' perceptions of distance from reality and the implications thereof for firm performance. Although the initial assumption is that managers accurately perceive their firm environments, previous research has reported errors and biases in managerial perception (Mezias and Starbuck 2003). Research in the field of behavioral decision-making states that individual judgment and decisionmaking are subject to error and bias (Das and Teng 1999; Kahneman et al. 1982; Winter 2003) in which cognitive traits are among the most important explanatory factors (Hambrick and Mason 1984; White et al. 2003). Another stream of research argues that organizational factors such as information processing capabilities and firm structure can also create bias in managerial perceptions of the firm environment (Ocasio 1997; Sutcliffe 1994).
Maitland and Sammartino (2015b) maintain that our knowledge about managers' role in assessing foreign environments is very limited and warrants further research. Ambos and Hakanson (2014) point out that one of the unexplored questions in IB research is related to the link between perceptual and 'objective' measures of country differences and its influence on ex-post firm performance. Accordingly, building on the logics developed by the Uppsala Model of firms' internationalization process (Johanson and Vahlne 1977), the upper echelon theory (Hambrick and Mason 1984) and cognitive research (Kahneman et al. 1982; Mezias and Starbuck 2003; Skinner 1995), we introduce a novel conceptualization of 'distance', i.e. 'distance divergence'. It refers to the degree to which managers' perceptions of distance diverge from 'objective reality', acting on the premise that business success relies on the accuracy of information acquired by managers and on their correct interpretation of this information, i.e. accurate managerial perceptions (Cook and Hunsaker 2001; Gavetti 2012; Gavetti et al. 2012; Mukherji et al. 2013; Obadia 2013; Pillai 2010; Starbuck and Milliken 1988; Sullivan 1994). Using survey data from senior managers of Swedish exporters and corresponding objective data, this study is one of the first attempts to empirically explore the ex-post performance implications of 'distance divergence' when expanding into foreign markets. (1) According to Brouthers (2013), a true understanding of the effect of distance on firm performance requires incorporating both perceived and actual (objective) measures of distance. Our results demonstrate that the larger the divergence of managers' perceptions of cultural differences from 'objective' differences, the lower the performance expressed in companies' sales. Thus, in contrast to previous studies (cf. Kogut and Singh 1988; Nordstrom and Vahlne 1994; Prime et al. 2009), our findings suggest that it is not perhaps 'distance' per se, or exclusively, which determines the firm's performance: the determinant is the degree of accuracy in managers' perceptions of distance.
This study contributes to IB literature by introducing a richer conceptualization of 'distance' and empirically showing the effect of divergence of managers' perceptions of distance from actual environmental characteristics and its implications for firm performance. This knowledge is highly important, since managerial perceptions of the firm's environment do not always coincide with the actual environmental characteristics (Mezias and Starbuck 2003; Starbuck and Mezias 1996; Taras et al. 2009; Yildiz and Fey 2016). They are, for example, influenced by managers' personal characteristics, experience and the context in which the environment is perceived (Starbuck and Milliken 1988). Therefore, formulating strategies based on inaccurate data, namely perception-based-judgments of country differences, may result in erroneous forecasts, missed opportunities, and ultimately increased costs (Orr and Scott 2008; Sousa and Bradley 2006) or business failure (O'Grady and Lane 1996).
In the remainder of this paper, we first review the extant literature on 'distance', its issues and controversies in IB. We then describe our empirical method and test a path model with the Structural Equation Modeling program LISREL. After the analysis of the results, the final section concludes the paper by discussing contributions and implications.
2 'Distance' in International Business
As pointed out by Zaheer et al. (2012, p. 19), "international management is management of distance". The importance of 'distance' in IB is mainly related to the challenges associated with costs of transportation, communication, coordination, integration and monitoring (Hutzschenreuter et al. 2016). Distance in its basic form originates from physical or geographic separation between countries, which entails increased transportation and communication costs in cross-border business (Ghemawat 2001). Distance can also originate from differences in language, education, business practices, industrial development, culture, economic and political factors among countries (Dow and Karunaratna 2006; Evans and Mavondo 2002; Ghemawat 2001; Johanson and Vahlne 1977; Kostova 1999; Xu and Shenkar 2002). There are myriad typologies for distance in the IB literature (cf. Berry et al. 2010). In this study, we adopt the categories proposed by Evans and Mavondo (2002): i.e. cultural and business distance. (2)
Cultural distance is one of the most popular and widely studied concepts in IB research (Caprar et al. 2015; Zaheer et al. 2012). Cultural distance refers to the difference between countries in terms of norms, ideas, values and beliefs (Shenkar 2001). These differences presumably represent a barrier to the international transfer of information, influencing the collection and interpretation costs of critical management information, which increase the liability of foreignness and uncertainty in the new foreign market (Carlson 1974; Hakanson and Dow 2012; Harzing 2004; Ojala 2015; Zaheer 1995). Cultural distance has therefore been used to explain a variety of strategic decisions made in a firm's internationalization process, including, among others, foreign market selection, entry mode choice and international marketing strategy (for a comprehensive review, see for example, Beugelsdijk et al. 2018; Hutzschenreuter et al. 2016; Lopez-Duarte et al. 2016).
Business distance refers to differences between countries in terms of (among others) political environment, economic environment and business practices (Evans and Mavondo 2002; Evans et al. 2008). The political environment can have crucial implications for firm internationalization (Holmes et al. 2013). For example, political instability may lead to frequent and arbitrary changes in economic policy, which in turn can increase uncertainty and discourage entry by foreign firms or lead to companies' withdrawal from the foreign market (Garcia-Canal and Guillen 2008; Henisz 2000). Likewise, the economic environment can affect the attractiveness of foreign markets through its effects on innovation, competition, and general institutional quality, and also impact the mode of entry to the foreign market (Campa and Guillen 1999). Finally, differences in business and management practices (e.g. terms of conditions of employment) in foreign markets can increase the risk of entry into a...
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