Psychic distance, its business impact and modes of coping: a study of British and Indian partner SMEs.
| Verfasser | Puthusserry, Pushyarag N. |
| Posten | RESEARCH ARTICLE - Small and medium sized companies |
Abstract This paper reports one of the first investigations to analyze inter-partner perceptions of psychic distance between two countries. Its empirical focus is British and Indian SMEs engaged in business with each other. It examines different dimensions of psychic distance, their impact and modes of coping with them. Potential firm-level and individual influences are also taken into account. The paper aims to transcend some of the conceptual and methodological limitations of previous research on the subject and to identify the theoretical and practical implications that arise. A 'mirror' approach is applied, accessing both partners' perceptions. These are assessed through a 'mixed' method combining quantitative measurement with qualitative interpretations. Psychic distance dimensions are found to vary in their impact on doing business with the other country, and there is also variation according to the firm's sector. There is considerable asymmetry in British and Indian partners' perceptions of psychic distance but the degree of difference between their psychic distance evaluations lacks predictive power. Culturally embedded psychic distance dimensions tend to have less impact and to be easier to cope with than institutionally embedded dimensions. Four categories of coping are identified. The principal theoretical implication of this study is that a contingency perspective needs to be adopted in the field of 'distance' research, taking account of factors such as a firm's sector, and that this will require a more complex analytical framework that hitherto.
Keywords Psychic distance * Impact of psychic distance * Coping modes * Distance asymmetry * India * SMEs * UK
1 Introduction
The nature and role of psychic distance in the internationalisation of firms has been widely discussed (e.g. Child et al. 2002; Dow 2000; Johanson and Vahlne 1977; Johanson and Wiedersheim-Paul 1975; Nordstrom and Vahlne 1994; O'Grady and Lane 1996; Strttinger and Schlegelmilch 1998, 2000). Psychic distance concerns the perceived difference between a home-country business environment and a foreign one. Its relevance stems from the expectation that a greater psychic distance generates uncertainties which may discourage a firm's entry to the foreign market and/or make it more difficult to conduct business there.
Despite the attention it has attracted, the conceptualization and measurement of psychic distance have been problematic (Child et al. 2009; Dow and Karunaratna 2006; Prime et al. 2009). This paper aims to transcend some of the limitations of previous research on the subject in a new empirical study, and to identify the theoretical and practical implications that arise. The study compares inter-partner perceptions of psychic distance, employing a multidimensional approach to the construct, using a combination of qualitative and quantitative methods. It examines whether psychic distance is perceived symmetrically between business partners from different countries. It also explores the impact of psychic distance and ways of coping with it.
The following section reviews conceptual and theoretical issues arising from previous research on psychic distance. These issues serve as a point of reference for the study to be reported. The scope and method of the research are then described, before presenting findings and discussing their interpretation. A conclusion summarizes the study's theoretical contributions, limitations, directions for future research and implications for practice.
2 Issues Arising From Previous Studies
The study of Nordic multinationals is widely considered to be the starting point of psychic-distance studies in international business (e.g. Johanson and Vahlne 1977; Johanson and Wiedersheim-Paul 1975), although Beckerman (1956) was the first to use the term psychic distance when analyzing trade flows between countries. Johanson and Wiedersheim-Paul defined psychic distance as 'the sum of factors preventing or disturbing the flow of information between the organization and the foreign market' (1975, p. 308). They adopted a multidimensional view of psychic distance, including differences in language, culture, political systems, level of education, and level of industrial development. The Uppsala internationalization model of Johanson and Vahlne (1977) postulated that firms select international markets based on 'psychic proximity' and added difference in business practices to the list. Nordstrom and Vahlne (1994) developed the perspective further by emphasizing learning and understanding rather than merely accessing information about the foreign market. O' Grady and Lane (1996) redefined the concept again by incorporating the uncertainty that arises from the difficulties of learning about a new market. Johanson and Vahlne (2009) revisited the Uppsala model and now placed greater emphasis on how the network relationships of firms' key actors help them identify and exploit opportunities rather than on the challenge of overcoming uncertainties associated with psychic distance.
Early studies identified multiple dimensions of psychic distance. However, following Kogut and Singh's (1988) development of a national cultural distance index to measure the cultural distance between countries, many researchers used this index as an indicator of psychic distance (e.g. Benito and Gripsrud 1992; Engwall and Wallenstal 1988; Lee 1998). This operationalizes psychic distance through a single indicator and appears to avoid the problem that some of its dimensions are difficult to measure. Nevertheless, there is today a consensus that cultural distance cannot be considered as a proxy for psychic distance as a whole and that its measurement through only one component is insufficient to capture the complexities and details of the concept (Dow 2000; Hakanson and Ambos 2010; Zaheer et al. 2012). Recently researchers have returned to a multidimensional perspective on psychic distance (Child et al. 2009; Dow and Karunaratna 2006; Dow and Larimo 2011; Evans and Mavondo 2002; Sousa and Bradley 2006). The Kogut and Singh measure also assesses cultural distance at the national level in contrast to the view that psychic distance concerns an individual's perceptions about the differences between home and a foreign country (Sousa and Bradley 2006; 2008).
Multidimensional assessment adds specificity about the various ways in which societies differ and permits investigation of their possible separate effects (Zaheer et al. 2012). A multidimensional perspective on psychic distance also raises several theoretical issues that have so far received little investigation. Assuming that psychic distance matters, one issue is whether some dimensions of psychic-distance have a greater impact on doing business in the focal country than others. Thus institutional differences might be expected to create more problems than, say, cultural ones because the former are administered rules of the game that require penetration into a foreign bureaucratic system whereas the latter manifest more in terms of personal behaviour (Redding 2008). The study by Child et al. (2009) on British SMEs exporting to Brazil revealed that discrete dimensions of psychic distance (assessed through British perceptions) have different impacts on doing business with Brazil.
Some studies have assessed psychic distance in terms of objective differences between countries (e.g. Dow and Karunaratna 2006), while others have explored its perceptual aspect (e.g. Chetty and Campbell-Hunt 2004; Child et al. 2002; Child et al. 2009; Lee 1998; Prime et al. 2009; St6ttinger and Schlegelmilch 1998). It has been argued that the 'psychic' component of the concept draws attention to its essential subjectivity (Evans et ai. 2000; Child et al. 2002; Prime et al. 2009). This supports the view that psychic distance should be assessed in terms of the perceptions held by those who decide on the internationalization of firms. The correspondence assumed here between such decision makers and their firms is reasonably valid for SMEs. A perceptual approach also speaks for the quantitative methodology normally used to be complemented by qualitative data that assist the interpretation of numerical scores. It has been suggested that perceptions of distance may be shaped both by decision makers' characteristics such as educational level and international business experience, and by firm characteristics such as size, location and industry (Dow 2009; Zaheer et al. 2012).
There has not to date been much investigation into how firms cope with the possible implications of psychic distance. Child et al. (2002) identified ways in which some Hong Kong internationalizing firms were 'bridging' psychic distance. They concluded that this reduces the transaction costs of international business as well as the uncertainty and other problems associated with psychic distance. 'Strategic bridging' involves the selection of overseas locations where it is easier to manage trade and investment. Operational bridging' can take place through the personal network of the decision-maker and through local partners having good contacts with the host country bureaucracy. Dikova (2009) observed that local partners provide critically important market-specific knowledge for managers, which is another key strategic bridging factor. This helps managers implement practices which reduce psychic distance between home and target countries (Ojala 2008). Bridging can provide access to social capital provided by a local partner relevant to penetrating local markets, understanding local regulations, or recruiting skills. Such social capital should reduce the liability of newness and foreignness and thus help the firm overcome the impact of psychic distance (Arenius 2005). Child et al. (2009) identified 'avoidance' as another mode of coping. This refers to a situation where firms avert transaction costs by transferring problems to other members of their...
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