A process-based explanation of the psychic distance paradox: evidence from global virtual teams.

Author:Magnusson, Peter
Position:RESEARCH ARTICLE - Report

Abstract Previous research has found evidence of a counter-intuitive positive relationship between psychic distance and performance, which has been labeled the "psychic distance paradox". However, there is a dearth of literature explaining the causal mechanisms that elucidates such a positive relationship. Studying the effect of team-level psychic distance on the performance of global virtual teams, we build on the input-process-outcome framework of team research, which allows the integration of process variables to provide new insights into the underlying coherences of the psychic distance paradox. These variables include the team members' expectation of challenges as well as the level of team effort toward the task. The team members' motivational cultural intelligence is introduced to the model as a moderating factor. The data support the hypothesized causal path. The findings start unveiling the psychic distance paradox through the integration of the literatures on psychic distance and global virtual teams.

Keywords Psychic distance * Psychic distance paradox * Global virtual teams * Team performance

1 Introduction

Psychic distance represents one of the central, yet highly controversial, concepts in international business research (Blomkvist and Drogendijk 2013). Originally employed to explain international trade preferences beyond the influence of geographic distance, it represented the perceptual evaluation of whether a country feels "nearer" than others (Beckerman 1956). Later, Uppsala scholars adopted psychic distance as one of the focal elements in their internationalization model of the firm and defined it as the "factors preventing or disturbing the flow of information between firm and market" (Johanson and Wiedersheim-Paul 1975, p. 308). In their view, psychically close countries are expected to be similar so that few national differences and low uncertainty in regard to the foreign market promote successful internationalization.

Following this perspective, psychic distance has predominantly been viewed as having a "negative" impact on international business activitiy. For example, firms are less likely to enter markets that are psychically distant (e.g., Blomkvist and Drogendijk 2013; Johanson and Vahlne 1977) and high psychic distance leads managers to adopt low cost/low control entry modes (Hennart and Larimo 1998). Further, psychic distance has a negative effect on trust and satisfaction in international channels of distribution (Obadia 2013).

Hakanson and Ambos summarize this research by stating that "the general assumption in most of these studies is that the more different a foreign environment is as compared to that of a firm's (or an individual's) country of origin, the more difficult it will be to collect, analyze and correctly interpret information about it, and the higher are therefore the uncertainties and difficulties--both expected and actual--of doing business there" (2010, p. 195).

However, a contrary perspective has also emerged in the literature. Studies have shown that psychic distance may, at least sometimes, be positively related to performance. For example, O'Grady and Lane (1996) found that Canadian retailers perceived the US market to be psychically very similar, yet their failure rates turned out astoundingly high. This finding led the authors to coin the term 'psychic distance paradox'. Larger-scale empirical findings supporting a positive relationship between psychic distance and performance have emerged in studies by Evans and Mavondo (2002) and Evans et al. (2008) examining Australian retailers, as well as by Sousa et al. (2010) in their study of Spanish manufacturers.

Hence, it appears that the effect of psychic distance may not always be negative. To explain the positive relationship between psychic distance and performance, Evans and Mavondo (2002) suggest that when psychic distance is large, firms will perceive greater uncertainty and "as a means of reducing this uncertainty, firms will undertake more extensive research and planning" (2002, p. 518). In contrast, psychically close markets can lead to an overestimation of similarities (O'Grady and Lane 1996; Pedersen and Petersen 2004). In effect, the argument is that firms will 'try harder' in psychically distant markets whereas psychic closeness breads complacency.

This logical chain sounds like a reasonable explanation of the mechanism that underlies the psychic distance paradox. However, as best as we know, empirical evidence to substantiate such an explanation is non-existent. Zaheer et al. (2012) reach a similar conclusion and call for more fine-grained distance research that includes the examination of the underlying processes linking distance with performance. Answering their call, we take a fresh look at the relationship between psychic distance and performance by studying global virtual teams and introducing potential process variables that might affect the relationship.

Focusing on teams allows us to build on the input-process-outcomes (IPO) framework of team performance (Hackman and Morris 1975), which facilitates the inclusion of moderating and mediating process factors. It has been argued that an understanding of team performance as a teamwork process allows the exploration of theoretical linkages on an interpersonal level (Dionne et al. 2004). Therefore, it appears valuable to study the relationship between psychic distance and performance in the context of project-based global virtual teams (GVTs), which permits longitudinal tracking and the consideration of potential process factors.

Research to date on global team effectiveness has explored team diversity and its effect on performance extensively (see meta-analysis by Stahl et al. 2010), yet it has largely focused on objective diversity attributes, such as country affiliation and demographic characteristics. We suggest expanding the GVT literature by introducing a subjective diversity measure that is borrowed from the distance literature of international business research. By introducing a perceptual measure of diversity, we hope to gain a valid predictor for interpersonal processes impacting team performance.

Integrating the psychic distance literature with the literature on team diversity and performance, we seek to contribute to both fields. We develop a model based on the IPO framework, which is the dominant conceptual approach to the study of group performance (Hackman and Morris 1975). Specifically, we develop a causal path model in which we introduce the expected level of challenges and the level of effort as mediators to the relationship between team-level psychic distance and team performance. We also consider the moderating effect of the team members' motivational cultural intelligence (CQ) and thus advance the literature on global teams by shifting the focus from objective diversity measures to a team-level measure of perceived diversity. Our contribution to the distance literature is a first attempt at explaining the psychic distance paradox and one of the first ventures to study psychic distance at the team level. The findings have significant implications on our understanding of psychic distance and its consequences as well as for managers in the management of global teams and other related international business activities.

We proceed by providing a brief background on psychic distance, diversity in teams, as well as global team research. We then develop our mediated process framework and explain our hypotheses. The empirical context is a large sample of global teams in a higher education setting. This has two advantages. First, it allows for a longitudinal examination of psychic distance effects and second, it provides a homogeneous context to examine team performance, processes, and behaviors driving team performance, often a challenge in prior global team research. We conclude by discussing the implications of our research, note some limitations, and provide suggestions for future research.

2 Literature Review

2.1 Defining Psychic Distance

The first reference to psychic distance is often attributed to Beckerman's (1956) classic article examining intra-European trade. Beckerman (1956) concluded that in addition to geographic distance, psychic distance is also expected to affect trade flows. He suggests that trade will be more common with partners that have been personally contacted and cultivated and such personal relationships are easier to develop with partners that are psychically closer.

Following the introduction by Beckerman (1956), the concept appears to have been largely dormant until reintroduced by the Uppsala School in its internationalization research. Vahlne and Wiedersheim-Paul (1973) define psychic distance in terms of factors that prevent or disturb the flow of information between suppliers and buyers. This suggests an individual and perceptual component to psychic distance. However, the Uppsala internationalization studies relied on longitudinal examinations of internationalization processes, sometimes spanning more than 100 years (e.g., Johanson and Wiedersheim-Paul 1975). This forced the creation of objective psychic distance measurements that did not incorporate individual perceptions and differences based on context and time. Subsequently, measurements of psychic distance based on country-level indicators of cultural values or institutional ratings became commonplace (e.g., Eriksson et al. 2000; Blomkvist and Drogendijk 2013; Sheriff et al. 2010), often using Kogut and Singh's (1988) formula to transfer Hofstede's (1980) cultural value scores into a cultural distance index.

Evans and Mavondo (2002) reasserted psychic distance's roots as a construct that captures managers' perception of differences. They argue that psychic distance is not the simple presence of external environmental factors, but rather "it is the mind's processing, in terms of perception, of cultural and business differences that...

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