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From a Distance:
Essays on the Concept of Psychic Distance
in International Management
DISSERTATION
of the University of St. Gallen,
School of Management,
Economics, Law, Social Sciences
and International Affairs
to obtain the title of
Doctor of Philosophy in Management
submitted by
Anja Schuster
from
Germany
Approved on the application of
Prof. Björn Ambos, PhD
and
Prof. Dr. Douglas Dow
Dissertation no. 4244
D-Druck Spescha, St. Gallen 2014
The University of St. Gallen, School of Management, Economics, Law, Social
Sciences and International Affairs hereby consents to the printing of the present
dissertation, without hereby expressing any opinion on the views herein expressed.
St. Gallen, October 21, 2013
The President:
Prof. Dr. Thomas Bieger
I
Table of Contents
A. Summary - Zusammenfassung...............................................................................II
B. Article I .....................................................................................................................1
Magnusson, P., Schuster, A. & Taras, V. (third review round). A Process-Based
Explanation of the Psychic Distance Paradox: Evidence from Global Virtual Teams.
Management International Review.
C. Article II .................................................................................................................37
Schuster, A. & Ambos, B. (in preparation for submission). I Feel Close to You, Don´t
You? Antecedents of Psychic Distance Asymmetry. Journal of International Business
Studies.
An earlier version of this article is published as:
Schuster, A. & Ambos, B. 2013. I Feel Close To You, Don´t You? Antecedents of
Psychic Distance Asymmetry. In Leslie A. Tombs (ed.), Proceedings of the Seventy-
Third Annual Meeting of the Academy of Management, ISSN 1543-8643.
D. Article III.................................................................................................................72
Schuster, A. (in preparation for submission). A Theory-Based User´s Guide to Psychic
Distance.
E. Curriculum Vitae .................................................................................................112
II
Summary
Psychic distance constitutes a fascinating concept which is central to research in
international management. It expresses the extent to which we feel close or similar to
foreign nations and their people, it measures how different we are from other countries
or how different we perceive us to be (Sousa & Bradley, 2006; Håkanson & Ambos,
2010). Psychic distance hinders us to collaborate, communicate or trade with
foreigners as we would with compatriots. It is an ambiguous notion that has featured
the literature for a long time and attracted increasing attention in recent years (Dow &
Karunaratna, 2006; Nebus & Chai, 2013). Despite the great amount of interest it has
sparked so far, the concept still possesses great untapped potential.
In my dissertation, I attend to several of the most pressing issues related to psychic
distance and therefore contribute to its advancement. Paper one starts unveiling the so-
called psychic distance paradox. The paradox refers to the fact that against the general
expectation of psychic distance to discount performance, empirical research has found
positive performance effects (O´Grady & Lane, 1996). We provide an explanation of
the paradox by studying psychic distance´s performance effect on the team level which
allows us to integrate moderating process variables. The second paper seeks to
understand the causes of psychic distance asymmetry, an upcoming aspect of distance
research. Psychic distance has mainly been viewed as unidimensional concept to date
but empirical evidence of asymmetries highlights the need for bilateral
conceptualizations that allow for directional effects. Our paper identifies the influence
of cognitive processes on the formation of distance perceptions and reveals national-
level factors that contribute to distance asymmetry. The third paper is a conceptual
piece intended to function as a user´s guide to psychic distance. It addresses the
question of fit between definitions, measures and the theoretical rationale underlying
psychic distance application. As the literature lacks a comprehensive consolidation of
theoretical and empirical aspects in psychic distance research, the paper enables future
studies to approach the concept in a structured and well-conceived manner that will
advance the quality of psychic distance research.
The bottom line of my dissertation is that psychic distance constitutes a great concept
that requires further attention in order to unlock its potential explanatory powers. To
do so, it is necessary to think outside the box and I encourage further cross-
disciplinary efforts that will enrich psychic distance research in international
management.
III
Zusammenfassung
Das Konzept der psychischen Distanz ist von zentraler Bedeutung für die International
Management Forschung. Es beschreibt, wie nah oder ähnlich wir uns fremden
Nationen und deren Bewohnern fühlen oder auch wie stark wir uns von ihnen
unterscheiden, ob in realen oder nur subjektiv wahrgenommenen Unterschieden
(Sousa & Bradley, 2006; Håkanson & Ambos, 2010). Psychische Distanz bewirkt,
dass wir uns schwerer tun, mit Menschen aus fremden Ländern zu kommunizieren,
zusammenzuarbeiten oder zu verhandeln. Das etwas unscharfe Konzept, das in der
International Management Forschung schon seit langem verwendet wird, besitzt
großes ungenutztes Potential und zieht in letzter Zeit verstärkt Interesse auf sich (Dow
& Karunaratna, 2006; Nebus & Chai, 2013).
In meiner Dissertation widme ich mich einigen bisher wenig beachteten Aspekten der
psychischen Distanz. Meine Erkenntnisse sollen unser Verständnis des Konzeptes
verbessern und zukünftige Forschungsarbeit bereichern. Der erste Artikel behandelt
das sogenannte Paradox der psychischen Distanz. Das Paradox bezieht sich auf die
positive Performancewirkung psychischer Distanz, die entgegen der Erwartung der
Forschungsliteratur in empirischen Studien belegt werden konnte (O´Grady & Lane,
1996). Durch die Integration von Prozessvariablen zeigen wir, wie psychische Distanz
zum Erfolg eines Teams beitragen kann. Der zweite Artikel untersucht, warum
psychische Distanzen zwischen zwei Ländern asymmetrisch sein können. Er
unterstreicht die Notwendigkeit, psychische Distanz als zweiseitiges Konzept zu
verstehen um mögliche Richtungseffekte zu erkennen. Wir identifizieren das
Zusammenspiel von objektive Faktoren auf Länderebene und kognitiver Prozesse auf
individueller Ebene, das zu Wahrnehmungsunterschieden bezüglich der psychischen
Distanz führen kann. Der dritte Artikel ist eine konzeptionelle Arbeit, welche
Definitionen, Operationalisierung und theoretische Grundlagen der psychischen
Distanz aufzeigt und zusammenführt. Da es in der Literatur kaum einen umfassenden
Überblick über konkrete Arbeiten zum Konzept gibt, stellt der Artikel eine
theoriebasierte Diskussion zur Anwendung des Konzepts in verschiedenen
Forschungskontexten dar. Er soll somit eine gut durchdachte und theoriebasierte
Anwendung des Konzepts erleichtern und damit zur Forschungsqualität im
International Management Bereich beitragen.
1
Article 1
Magnusson, P., Schuster, A. & Taras, V. (third review round). A Process-Based
Explanation of the Psychic Distance Paradox: Evidence from Global Virtual Teams.
Management International Review.
2
A Process-Based Explanation
of the Psychic Distance Paradox:
Evidence from Global Virtual Teams
Magnusson, Peter (1)
Schuster, Anja (2)
Taras, Vasyl (3)
(1) Peter Magnusson is Assistant Professor of International Marketing, Florida
International University, USA ([email protected])
(2) Anja Schuster is Doctoral Candidate at the Institute of Management, University
of St. Gallen, Switzerland ([email protected])
(3) Vasyl Taras is Assistant Professor of International Business, University of
North Carolina at Greensboro, USA ([email protected])
3
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 our hypothesized causal path. Our findings start unveiling the
psychic distance paradox through the integration of the literatures on psychic distance
and global virtual teams.
4
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).
Håkanson 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.
5
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 that link distance with performance.
Answering their call, we take a fresh look at the relationship of 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 inter-personal 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
6
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 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 behaviours 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.
Literature Review
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.
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,
7
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, Majkgard, & Sharma, 2000; Blomkvist and Drogendijk, 2013; Sheriff,
Brewer, and Liesch, 2010), often using Kogut and Singh’s (1988) formula to transfer
Hofstede’s (1988) 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 forms the
basis of psychic distance” (Evans and Mavondo, 2002, p. 516). Sousa and Bradley
(2006, p. 51) also follow this perspective and define psychic distance as the
“individual’s perception of the differences between the home country and the foreign
country,” which we adopt.
This view places the focus on the decision-maker rather than the overall firm as the
reference point (Sousa and Bradley 2006). This is also consistent with Vahlne and
Wiedersheim-Paul (1973) whose definition of psychic distance focused on the
information flow between multiple parties. As managerial decision-making often
occurs on the team-level, our extension is a logical next step. We view team-level
psychic distance as the aggregate of the subjective distances between countries as
perceived by the members of the team. In line with previous work, we expect
“distances” between the home and foreign country to result from the perceptions of
national differences in various aspects such as business practices or the cultural,
political, geographic, and/or economic environments (Child et al. 2009; Ghemawat
2001; Håkanson and Ambos 2010).
Performance Effects of Psychic Distance
Over the years, empirical findings on internationalization decisions have been
relatively consistent indicating that firms are more likely to enter and compete in
psychically similar markets (e.g. Blomkvist and Drogendijk 2013; Dow 2000).
Recently, Håkanson and Dow (2012) examined almost 50 years (1962-2008) of
international trade history and found that although the effect of psychic distance has
8
slowly been decreasing, there is still a significant negative relationship between
psychic distance and international trade.
The effect of psychic distance on performance has also been examined extensively, but
evidence has been much more inconsistent and conflicting. Initial theoretical
arguments tended to favor a negative relationship. Following the Uppsala tradition,
psychic distance is considered to constitute a cost to international business as it hinders
effective information transfer across national boundaries and increases uncertainty
(Johanson and Vahlne 1977; Johanson and Wiedersheim-Paul 1975). In psychically
close countries, on the contrary, markets can be expected to function in a similar way
as the home market, reducing costs for the foreign company as it is able to leverage
home country competencies more easily (Gomes and Ramaswamy 1999).
There are empirical findings supporting such arguments. Negative effects of perceived
differences were found in regard to knowledge transfer performance within
multinational companies (Pedersen et al. 2003), the development of trust and
performance in international exchange relationships (Katsikeas et al. 2009), and an
increased uncertainty related to subsidiary performance judgments by headquarters
(Grewal et al. 2008). Significant negative effects of psychic distance on firm
performance were also supported in a meta-analysis by Magnusson et al. (2008), but
the authors argue that such findings are often subject to a methodological caveat. Most
studies examining psychic distance and firm performance gather data retrospectively,
so that the causality can be challenged. Thus, one must ask whether psychic distance
leads to poor performance or poor performance leads to greater psychic distance
perceptions.
In contrast, an emerging number of studies support a positive effect of psychic
distance on performance outcomes. O’Grady and Lane’s (1996) study of Canadian
retailers found a surprising lack of success in presumably culturally similar the U.S.
market, a phenomenon O’Grady and Lane dubbed “psychic distance paradox.”
Subsequently, several larger empirical studies have found evidence that firms may
obtain better performance in distant markets (e.g. Evans and Mavondo 2002; Evans et
al. 2008; Hang and Godley 2009; Morosini et al. 1998; Sousa et al. 2010).
Explanations for these seemingly counter-intuitive findings are speculative. O’Grady
and Lane (1996) suggest that psychic closeness leads to complacency. In countries
perceived as similar, managers may become careless and underestimate slight, but
important, differences between the markets. In contrast, if markets are perceived as
very different, managers will also perceive a high degree of uncertainty. To reduce this
9
uncertainty, managers are expected to conduct more extensive market research, be
very careful, plan obsessively, and take multiple measures to ensure success (Evans
and Mavondo 2002; Evans et al. 2008). Morosini et al. (1998) found that international
acquisitions in distant markets outperform acquisitions in similar markets. They
explain this finding by suggesting that acquisitions in distant markets may provide
access to resources and processes that create new complimentary synergies, rather
than, perhaps, less useful overlapping resources provided by a psychically similar
partner. Thus, a growing body of literature has emerged suggesting a possibility that
greater psychic distance may constitute an advantage.
Diversity in Global Virtual Teams
Modern organizations have become dependent on teams that are geographically
distributed and asynchronous (Maynard et al. 2012). GVTs can be defined as “a group
of people who work interdependently with a shared purpose across space, time and
organization boundaries using technology” (Lipnack and Stamps 2000, p. 18). They
are characterized by their members’ distribution across geographic distances, time
zones, as well as institutions. GVTs provide several advantages to the organization,
such as the availability of the most skilled individuals regardless of location and the
possibility of a 24-hour work day, through a global relay by passing tasks from one
time zone to the next.
However, due to their specific nature, GVTs face additional challenges. One source of
difficulty is the dispersion of team members. Non-collocated teams need to pool
resources virtually to ensure succesful collaboration, using technology rather than
face-to-face communication. The reduction of communication to the virtual level is
limiting in several ways, including delayed feedback, reduced conflict identification,
and misunderstandings due to disrupted communication patterns (Hinds and
Mortensen 2005; Maznevski et al. 2006 ). Additional challenges may result from the
increased diversity of linguistic, cultural, and national backgrounds of the GVT
members (Maznevski and Chudoba 2000; Montoya-Weiss et al. 2001).
One aspect of team diversity which has received abundant attention in the literature is
the effect of cultural diversity on team processes and performance. Stahl et al.’s (2010)
meta-analysis identified 102 studies that have examined the effects of cultural
diversity on team processes or outcomes. Their findings suggest that cultural diversity
can entail costs in the form of increased conflict and reduced social integration, but
also benefits, such as higher team-member satisfaction and greater creativity.
10
Cultural diversity has normally been operationalized using variety or diversity indices
calculated using a count of nationalities represented on a team or dispersion of cultural
values of the team members (e.g. Dahlin et al. 2005). This approach, however, does
not account for the perceptions of the team members about their cultural differences.
The few studies that have incorporated perceptions of differences have focused on
constructs such as personal values, personalities, and commitment to the project (e.g.
Harrison et al. 2002).
Wilson and colleagues (2012) pointed out the limitations of the preoccupation with
objective measures of diversity in GVT performance research and called for the
incorporation of perceptual measures to better capture the perceived differences
between team members and the resulting reactions, behaviors, and team outcomes.
Such perceptions might not necessarily be aligned with objective differences but can
be more suitable to capture team- and individual-level processes that result from those
perceptions (Edwards and Wilson 2004).
Conceptual Development
Our literature review reveals the need for a better understanding of the psychic
distance paradox as well as for the effect of perceived differences on team
performance. We draw on the IPO framework by Hackman and Morris (1975) to
integrate both aspects into our model. The framework provides a basic structure for the
research on team performance, postulating a causal chain of team inputs, processes and
outcomes. Input factors commonly studied encompass the team starting conditions,
team size, task type, technology used and the team’s level of knowledge, skills, and
abilities. Team processes are concerned with how teams achieve their goals and refer
to the interaction among group members (Devine 2002). Jackson et al. (2003) further
tease apart the process variables into 1) affective reactions by the team members,
which capture the teams’ emotional response to diversity and 2) team behaviors, which
capture the teams’ behavioral response. Team outcomes commonly encompass
specific performance indicators such as decision quality, speed of decisions, and team
effectiveness (Jarvenpaa et al. 1988).
Our model focuses on the diversity of the team, measured as the perception of psychic
distance among team members. Consistent with Jackson et al.’s (2003) causal model,
we incorporate the team’s expectation of challenges as an affective reaction and the
displayed effort level as the team’s behavioral response. Figure 1 illustrates our
11
conceptual framework. We expect psychic distance to lead to an increase of expected
challenges. In response, the teams that expect a high degree of challenges will respond
with an increased effort, which in turn will enhance team performance. The impact of
“expected challenges” on “team-level effort” is moderated by the team’s motivational
cultural intelligence.
Figure 1: Conceptual Framework
Psychic Distance and Expectations of Challenges
Trying to enhance our understanding of team-level processes, we propose a clear
distinction between psychic distance as the team members’ perception of differences
between the participating countries and the team members’ expectations of challenges
in working together.
The attraction-similarity paradigm postulates that interpersonal liking and attraction
are facilitated between individuals featuring similar attributes (Byrne 1971). More
homogeneous groups should, therefore, benefit from the promotive conditions of their
team. Diverse teams lack this advantage, however, and face greater challenges.
Findings by Triandis (1960) indicate that members of culturally dissimilar groups face
greater challenges than members of culturally homogeneous groups. Likewise, racially
heterogenous groups show a higher level of process-related problems in their
collaboration (Hoffman and Maier 1961). Research further shows that people who are
similar on certain sociodemographic dimensions expect to share knowledge as well as
cultural tastes, which in turn facilitates communication and improves coordination
effort (Mark 1998).
A similar conclusion emerges from the literatures on social identity and social
categorization. Social identity theory suggests that individuals feel a need to evaluate
themselves against others in order to establish a personal identity and build up self-
Inputs
H1: + H4: +
OutcomesProcesses H3: +
H2: +
Psychic Distance
Team Effort
Expectation of Challenges
TeamPerformance
MotivationalCultural Intelligence
12
esteem (Tajfel and Turner 1986). Individuals also define themselves as member of
vairous social groups which they use as comparison basis. Such social groups are
based on shared characteristics such as gender, nationality or occupation (Turner 1985)
and can be divided in a person’s in- and out-groups depending on his or her
membership status. This social categorization process promotes stereotyping as it leads
to an increased perception of homogeneity of out-groups (Mackie and Smith 1998).
The expectations approach to diversity suggests that stereotypes lead to inferences
regarding underlying attributes of out-group members such as values and beliefs and
consecutively bias behavior (McGrath et al. 1995). Both arguments describe cognitive
processes that strongly support a positive relationship between psychic distance and
the team members’ expectations of challenges in working together.
Hypothesis 1: In GVTs, team-level psychic distance is positively related to
expectations of challenges.
Expectations of Challenges and Level of Effort
If psychic distance prompts people to expect substantial collaboration challenges, the
question arises as to how people respond to these challenges. We posit that teams will
respond to a perception of greater challenges with an added effort. Evans and
Mavondo (2002) suggest that, at the firm level, managers perceive psychically distant
markets as very challenging. Trying to ensure success, firms devote more time to
research and planning. Similarly, Pedersen and Petersen (2004) conclude that
managers spend more time anticipating challenges in psychically distant markets and
they find that in markets perceived as similar, managers often experience a shock
effect due to unanticipated differences.
Child et al’s (2009) findings also support this argument. They discover that the
majority of UK firms attempt to cope with high psychic distance to the Brazilian
market through “bridging” mechanisms. These bridging mechanisms include the
investment of time, resources, and effort to develop solutions that minimize the
negative effects of uncertainty. This includes developing trust-based relationships with
local counterparts (Child et al. 2009).
In response to greater expectation of challenges, we also expect GVTs to respond with
greater effort, research, and planning. This argument rests on the assumption that the
team has a desire to do well. Managers of firms entering foreign markets have a desire
13
to do well based on job security, promotion opportunities, and other rewards. Members
of GVTs are under similar pressures to accomplish the organizations’ objectives.
Research has shown that motivation reflects an intention to act. However, it does not
influence outcomes directly but its impact is mediated by the level of effort that is
extended toward the task (Meyer et al. 2004). Work in GVTs is usually done in a
professional or academic setting over a certain amount of time with high task
interdependency and often with cross-functional team members. We expect those
external factors to motivate team members to invest the required effort in order to
achieve the common goal. As a consequence, we propose that members of a GVT that
expect to meet a higher level of challenges in their prospective team work, increase
their invested effort so as to ensure succesful achievement.
Hypothesis 2: In GVTs, expectations of challenges are positively related to
team-level effort.
The Moderating Effect of Motivational Cultural Intelligence
Motivation in GVTs is likely affected by the characteristics of the team, task, and other
external factors. Nevertheless, expectation of challenges may also affect motivation
and, consequently, effort (Gruenfeld et al. 1996). We suggest that in the context of
national diversity or perceived psychic distance, the team’s motivational cultural
intelligence (CQ) might moderate the impact of expected challenges on team effort.
CQ has been defined as an “individual’s capability to function and manage effectively
in culturally diverse settings” (Ang et al. 2007, p. 336). It has been conceptualized and
empirically validated as a four-dimensional construct consisting of 1) motivational, 2)
behavioral, 3) cognitive, and 4) meta-cognitive dimensions (Ang et al. 2007; Earley
and Ang 2003). Motivational CQ is particularly relevant in the context of motivation
in GVTs as it represents a dynamic motivational construct that influences group
processes and outcomes and can be defined as “the capability to direct attention and
energy toward learning about and functioning in situations characterized by cultural
differences” (Ang et al. 2007, p. 338). In effect, high motivational CQ captures the
team members’ intrinsic motivation and self-efficacy in dealing with different cultures.
Further, teams with high motivational CQ genuinely enjoy interacting with people
from different cultures, which suggests a greater interest and commitment toward
understanding the other team members, their perspectives, and their needs. Unlike the
contextual factors that favor the translation from expected challenges to increased
14
commitment such as team type or task type, motivational CQ represents an internal
team factor positively moderating the relationship.
Teams high on motivational CQ are expected to be more open and display a tendency
to persist (Earley and Ang 2003), suggesting that they will better adapt to the inherent
challenges of a GVT. The novel cultural experience is expected to motivate teams,
enable them to use their cultural knowledge and strategies, and trigger attention and
effort (Templer et al. 2006)
Accordingly, teams with a high degree of motivational CQ should have a particular
interest in dealing with challenges related to cultural differences. Thus, we expect that
teams high on motivational CQ will respond to greater challenges by an even stronger
commitment and effort to overcome these challenges, which leads us to the following
prediction.
Hypothesis 3: In GVTs, the relationship between expectations of challenges and
team-level effort is positively moderated by motivational cultural intelligence.
Team Effort and Team Performance
Whereas there may be a difference between working hard and working smart (Blau
1993), and it might be possible that one team member decides to complete the whole
task and do so in an outstanding fashion with very limited involvement of all other
team members, intuition presents a strong argument for a positive relationship between
team effort and team performance (DeShon et al. 2004). Anyone who has ever
engaged in a team sport can also probably attest that trying hard often compensates for
inferior talent.
Related research supports such a contention. In the team environment, Hinds and
Mortensen (2005) found that virtual teams had significantly reduced task and
interpersonal conflict with a high spontaneous communication effort. Ocker and
Fjermestad (2000) showed that high performing virtual teams significantly out-
communicated low performers. Moreover, effort was found to be positively related
with task performance in open-source software communities (Ke and Zhang 2009).
Beyond the team environment, the relationship between effort and performance has
also received considerable attention in the sales literature. Effort, defined as the
number of calls and contacts with clients, has often been found to be positively related
to sales performance (Brown and Peterson 1994).
15
Hackman and Wageman (2005) list three processes they consider relevant for team
performance, namely (1) the level of effort expended towards the task, (2) the
appropriateness of task strategies and (3) relevant skills and knowledge of the team
members. As we specifically model the effects of psychic distance on the level of
expected challenges which we expect to increase the level of effort, we focus on the
first process only. Accordingly, we suggest that GVTs that put in a higher effort will
be rewarded with better performance.
Hypothesis 4: In GVTs, team-level effort is positively related to team
performance.
Method
Sample
Past research on psychic distance has encountered some difficult challenges. First,
even if the firm is the unit of analysis, it is arguably the board or top management team
that makes the decisions related to internationalization. Second, to avoid hindsight
sensemaking by managerial decision-makers, a valid study design requires the
collection of ex-ante psychic distance and ex-post performance data. This is very
difficult to achieve in an organizational setting as data collection might take several
years. A longitudinal study of GVTs may help overcome some of these inherent
challenges. However, research on GVTs faces its own challenges due to the difficulties
in gathering valid and reliable data from a significant number of teams.
The research context for the present study is a large multi-country global collaboration
project. A total of 1,006 graduate and undergraduate students studying in 20 different
countries participated in the project in 2011. In most cases, the project was a required
part of an International Business course (the project typically accounted for about 20-
30% of the students’ grade), but some variation among participating universities
existed. Each participant was randomly assigned to one of 145 teams, with an average
of 6.9 students per team (maximum of 8). Typically, each team member was from a
different university to create truly global teams. Many participating students, naturally,
were foreign exchange students. Thus, a team could potentially include a participant
from a Swiss university and a US university, yet both of these participants might be
foreign exchange students from Sweden. As shown in Table 1, 67 different
16
nationalities participated in the project. The average age was 23.73 (SD = 6.24) and
51% were males.
Table 1 Sample Characteristics: Number of students per country Albania 1 Hungary 2 Russia 5 Algeria 2 Iceland 1 Saudi Arabia 1 Australia 1 India* 23 Serbia 1 Austria* 7 Indonesia* 129 Singapore 5 Bangladesh 5 Iran 3 Slovakia* 12 Belarus 1 Italy 6 Spain* 19 Brazil 6 Japan* 8 Sri Lanka 1 Cambodia 1 Korea (South)* 32 Sweden 4 Canada 1 Kosovo* 11 Taiwan 2 Colombia* 44 Kyrgyzstan 1 Tanzania 1 Costa Rica 1 Latvia 1 Thailand 1 Denmark 1 Lebanon 1 Tonga Islands 1 DR Congo 1 Lithuania* 55 Turkey 3 Ecuador* 46 Mexico* 4 Turkmenistan 1 Egypt 2 Moldova 6 UAE* 17 El Salvador 1 Montenegro 1 UK 2 Finland 4 Nepal 1 Ukraine 2 France* 20 New Zealand* 26 USA* 223 Georgia 2 Nigeria 3 Uzbekistan 1 Germany* 15 Philippines 1 Venezuela 1 Ghana* 64 Poland* 30 Vietnam 1 Greece 1 Portugal 3
Hong Kong 1 Romania* 126
* participating university
The project task and environment were designed to resemble the corporate world as
closely as possible. Over an eight-week period, each team was responsible for
developing a plan for a new international market entry for a multinational corporation.
The students were randomly assigned to teams, just like corporate employees generally
have no choice as to whom they work with. The teams were given significant
autonomy in terms of extent and type of communication methods, but all teams were
introduced to and encouraged to use free collaboration tools, such as email, voice and
video conferencing tools (e.g. Skype), document and collaboration platforms (e.g.
Google Docs and Dropbox), and social media (e.g. Facebook and Google+), similar to
what is commonly used in a corporate environment.
17
Furthermore, although there was a relatively high level of standardization of project
expectations for all participants, some natural variation also occurred. Some professors
(managers) emphasized different parts and others required additional components (e.g.
journal or oral presentation). This resembles a corporate environment in that GVT
participants often have somewhat competing objectives/pressures from different
superiors. In sum, the challenges the students experienced due to different levels of
language skills, geographic and time zone differences, cultural differences, and
varying levels of technical skills were similar to those typically encountered in a
corporate GVT environment.
Variables
Team progress was measured continuously and data were gathered from the
participants at multiple times throughout the project. Once each participant had been
assigned to a team, all participants completed a pre-project survey in which psychic
distance perceptions were sampled. Some psychic distance researchers have advocated
for the use of multi-item and multi-dimension scales of psychic distance to capture
many potential facets. For example, Evans et al. (2008) rely on 52 items to capture 10
different psychic distance dimensions. While potentially valuable, such an approach
would be impractical in a team context. Hence, we adapt methods by researchers who
have adopted a more holistic approach to psychic distance measurement. Dow (2000)
and Håkanson and Ambos (2010) measure psychic distance based on a single-item
perceived distance. Following this more holistic approach, we measure psychic
distance with two items. On a five-point scale, ranging from very similar (1) to very
different (5), participants were asked to rate the 1) degree of perceived differences and
2) degree of perceived difficulty of working together among the national cultures
represented on the team. An averaged team-level psychic distance for each indicator
was created by combining the scores of all team members.
Expectations of challenges were also drawn from the pre-project survey and consisted
of three items. Leaning on the definition of GVTs and their key defining elements of
diversity in culture and geography, the use of non-rich communication modes and a
temporary type of group (Kristof et al. 1995), on a five-point scale, ranging from no
problem (1) to big problem (5), each participant was asked to rate the expected
challenge based on 1) differences in languages, 2) differences in skills with online
communication tools, and 3) differences in opinions and ability to reach a consensus.
We created a team-level expectation of challenges scales by by combining the scores
of all team members.
18
Motivational cultural intelligence was measured in a pre-project survey with a five-
item scale adapted from Ang et al. (2007). The scale includes items like, “I enjoy
working with people from cultures that are unfamiliar to me” and is measured on a
five-point scale, ranging from definitely no (1) to definitely yes (5). An averaged
team-level motivational CQ score was created by combining the scores of all team
members.
At the conclusion of the project, all participants completed a post-project survey. As a
proxy for each team’s effort, we measured the frequency and intensity of team
communications. Although many teams used a variety of communication tools, email
usage was, by far, the most commonly used tool and thus provided the most consistent
measurement. We asked four items to capture this construct. Two items asked Likert-
style questions in regards to the use of emails and email attachments anchored by
never (1), only a few times during the project (2), weekly (3), several times per week
(4) and every day (5). Two other items asked the participants to quantify how many
emails each student sent and received during the course of the project.
Finally, team performance was operationalized based on the quality of the team report
as evaluated by at least four independent experts (business professors). The experts
evaluated each report on a five-point scale ranging from poor (1) to excellent (5) in
terms of clarity of presentation, attention to detail, formatting quality, and grammar
and writing style. Scores from each faculty grading the reports were averaged for each
dimension. The inter-rater reliability ranged from 0.71 to 0.82 depending on the
evaluation dimension.
Additionally, we include four control variables that capture more objective forms of
team diversity. First, we include a measure of country diversity, based on the diversity
index offered by Van Der Zee et al. (2004). It takes into account not only the number
of countries represented on the team, but also how it relates to the team size and how
evenly the team members are distributed among the countries. Second, we control for
geographic diversity by measuring the average distance in kilometers separating each
team member. Age diversity was measured based on the standard deviation of each
team members’ age and gender diversity is based on the standard deviation of the
participant’s gender. A team of four men and four women would have maximum
diversity (0.5) and a team of only females (males) would have zero gender diversity
(Harrison and Klein 2007). By incorporating multiple objective diversity measures, we
measure the effects of the teams’ perceived differences beyond any objective diversity.
Common Methods Bias
19
The measurement scales for this research are drawn from four separate sources.
Psychic distance perceptions, expectations of challenges, and motivational CQ are
drawn from the pre-project survey. Team effort is drawn from the post-project survey.
Team performance is evaluated separately by independent instructors rating each
team’s report quality. Finally, the objective diversity control measures are created as
indices based on the objective (e.g. country citizenship, demographics) diversity of the
team members. The use of different sources to measure predictor, mediator, and
criterion variables suggest that this research study is not subject to common methods
bias.
Validity and Reliability
We rely on SmartPLS (Ringle et al. 2005) to analyze the data. The use of Partial Least
Squares (PLS) is primarily guided by PLS’s ability to evaluate latent constructs for
relatively small samples (145 teams) and its efficiency in handling interaction effects
of latent constructs. PLS calculates the interaction variables by creating all possible
products from the two sets of indicators. These product indicators are used to reflect
the latent interaction variables (Chin et al. 1996). PLS models are analyzed and
interpreted in two stages (Barclay et al. 1995), which is consistent with the
recommendation in the literature for analyzing structural equations: first evaluate the
measurement model, and then evaluate the structural model.
To evaluate the validity and reliability of each construct, we examine the factor
loadings, composite reliability, and average variance extracted, which are presented in
Table 2 with all measurement items. Factor loadings exceeding 0.70 indicate that the
variance between the construct and its indicators is greater than the error (Fornell and
Larcker 1981). The factor loadings for all items, except one of the expectations items
(0.66) exceed this threshold.
20
Table 2 Measurement Scales with Item Loadings, CR, and AVE
Loadings
Psychic Distance (Pre-project survey; CR = 0.84, AVE = 0.73)
1. Based on your knowledge about cultures and values around the world,
please rate the degree of difference among the national cultures of the
following countries. (1 = very similar; 5 = very different)
0.88
2. Based on your knowledge of the working styles, cultural, linguistic,
economic and political differences, rate the expected degree of
ease/difficulty of people from the following countries would experience
when working together. (1 = very similar; 5 = very different)
0.83
Expectations of Challenges (Pre-project survey; CR = 0.77, AVE = 0.53)
1. Please rate how much you expect differences in opinions and an
inability to reach consensus to be a barrier to effective collaboration on
your team. (1 = No problem : 5 = Big problem)
0.66
2. Please rate how you expect differences in skills with online
communication tools to be a barrier to effective collaboration on your
team. (1 = No problem : 5 = Big problem)
0.75
3. Please rate how much you expect different languages to be a barrier to
effective collaboration on your team. (1 = No problem : 5 = Big
problem)
0.77
Motivational Cultural Intelligence (Pre-project survey; CR = 0.82, AVE
= 0.54; 1 = Definitely No; 5 = Definitely Yes)
1. I enjoy interacting with people from different cultures. 0.83
2. I am confident that I can socialize with locals in a culture that is
unfamiliar to me. 0.70
3. I enjoy working with people from cultures that are unfamiliar to me. 0.84
4. I am confident that I can get accustomed to the working conditions in a
different culture. 0.53
5. I am sure I can deal with the stresses of working with people from other
cultures. (omitted)
Team-Level Effort (Post-project survey; CR = 0.95, AVE = 0.82)
1. How many emails did you send to your teammates? (0-100) 0.89
2. How many emails did you receive from your teammates? (0-100) 0.90
21
3. How frequently did you use email as a communication tool? (1 = never;
5 = frequently) 0.95
4. How frequently did you use email attachments as a communication
tool? (1 = never; 5 = frequently) 0.87
Team Performance (Independently evaluated by at least 4 professors; CR
= 0.93, AVE = 0.77)
1. Clarity of presentation (1 = poor; 5 = excellent) 0.89
2. Attention to detail (1 = poor; 5 = excellent) 0.85
3. Formatting quality, readability, visual appeal (1 = poor; 5 = excellent) 0.90
4. Grammar and writing style (1 = poor; 5 = excellent) 0.86
Reliable constructs are expected to have a composite reliability that exceeds 0.70
(Anderson and Gerbing 1988). All constructs in this study exceed this threshold.
Convergent validity is assessed by examining the average variance extracted (AVE).
This measures the proportion of variance that is explained by the indicators compared
to the proportion due to measurement errors. Fornell and Larcker (1981) recommend
that AVE should exceed 0.50 and all constructs in this study exceed this threshold.
Finally, discriminant validity was evident in that no confidence interval for the phi
correlations between pairs of variables contained 1.0 (e.g. Anderson and Gerbing
1988), and all squared phi correlations were less than the respective variance extracted
estimates for all pairs of constructs (e.g. Fornell and Larcker 1981).
To add further confidence that all constructs are discriminant, we also subjected the
data to an exploratory factor analysis in SPSS. Using Eigenvalues (>1) as the cutoff,
the factor analysis divided the data into the five expected constructs and with a total
explained variance of 69%. In contrast, a forced one-factor solution explained only
22% of variance. In sum, the analysis of the measurement model satisfies common
validity and reliability criteria, and we conclude the data is appropriate for further
structural analysis. Construct correlations are presented in Table 3.
22
Table 3 Construct Correlations, AVE on Diagonal
1 2 3 4 5 6 7 8 9
1 Performance 0.93
2 Psychic Distance 0.17* 0.73
3 Team-Level
Effort 0.19* 0.11 0.82
4 Expectation of
Challenges 0.04 0.31* 0.20* 0.53
5 Motivational CQ 0.10 0.19* 0.15* 0.30* 0.54
6 Age Diversity 0.10 0.07 0.29* 0.17* 0.10 --
7 Country
Diversity -
0.17* -0.03
-0.23*
0.00 -0.12 -0.14 --
8 Gender Diversity 0.12 0.12 0.08 0.13 0.13 0.02 0.07 --
9 Geographic
Diversity 0.13 0.15* 0.17* -0.06 0.04 0.20*
-0.35*
-0.04 --
* p < 0.05
Results
To test the hypothesized mediated model, we run the structural model in three steps
and the results are presented in Table 4. To assess the significance level of the path
coefficients, we use the bootstrapping procedure with 500 bootstrap samples and 145
cases. Initially, we examine the effects of the four control variables on team
performance (Model 1). Country diversity has a negative effect (β = -0.15, p < 0.05)
and gender diversity has a positive effect (β = 0.13, p < 0.10). Age diversity and
geographic diversity are not significantly related with team performance. In Model 2,
we add psychic distance to the model. Consistent with the psychic distance paradox,
there is a positive relationship between psychic distance and team performance (β =
0.20, p < 0.01). Given the significant positive relationship between psychic distance
and performance, we can proceed to examine whether the mediating process variables
help us explain this finding.
In Model 3, we examine the mediated path model. In support of Hypothesis 1, psychic
distance is positively related to expectations of challenges (β = 0.31, p < 0.01).
Expectations of challenges is positively related to team-level effort (β = 0.15, p <
0.05), as predicted by Hypothesis 2, and team-level effort is positively related to team
performance (β = 0.15, p < 0.05), in support of Hypothesis 4. Further, the direct effect
23
of psychic distance on team performance has decreased and is now only marginally
significant (β = 0.13, p < 0.10). An examination of the total effect (direct effect +
mediated effect) finds a significant effect total effect of psychic distance on team
performance (β = 0.16, p < 0.05). When the process variables are added to the model,
the effect of the control variable objective country diversity index only has a
marginally significant effect on performance (β = -0.13, p < 0.10). Further, age
diversity has a significant positive relationship with expectation of challenges (β =
0.19, p < 0.05) and positively related to effort (β = 0.22, p < 0.01). Gender diversity is
not related to any of the endogenous variables and geographic diversity is negatively
related to expectation of challenges (β = -0.15, p < 0.05).
Finally, in Model 4, we examine the moderating effect of motivational CQ. Consistent
with our prediction in H3, motivational CQ positively moderates the relationship
between expectations of challenges and effort (β = 0.30, p < 0.01). In sum, the
mediated process model proposed in this study is supported and helps explain the
positive relationship between psychic distance and performance.
24
Ta
ble
4 P
LS
Res
ults
: E
xpli
cati
ng t
he C
ausa
l C
hain
bet
wee
n P
sych
ic D
ista
nce
and
Tea
m P
erfo
rman
ce
Mod
el 1
M
odel
2
Mod
el 3
M
odel
4
Co
ntr
ol
Lin
ks
β
t-V
alu
e β
t-
Va
lue
β
t-V
alu
e β
t-
Va
lue
A
ge D
iver
sity
� E
xpec
tati
on o
f C
hall
enge
s
0.
19
2.36
* 0.
18
2.46
*
Age
Div
ersi
ty �
Eff
ort
0.22
3.
63**
0.
19
3.21
Age
Div
ersi
ty �
Tea
m P
erfo
rman
ce
0.06
0.
86
0.05
0.
75
0.06
0.
51
0.06
0.
52
C
ount
ry D
iver
sity
� E
xpec
tati
on o
f C
hall
enge
s
-0
.07
0.61
-0
.06
0.63
Cou
ntry
Div
ersi
ty �
Eff
ort
-0.1
6 2.
53**
0.
17
2.64
**
C
ount
ry D
iver
sity
� T
eam
Per
form
ance
-0
.15
2.13
* -0
.16
2.04
* -0
.13
1.61
† -0
.14
1.71
†
Gen
der
Div
ersi
ty �
Exp
ecta
tion
of
Cha
llen
ges
0.09
1.
37
0.09
1.
45
G
ende
r D
iver
sity
� E
ffor
t
0.
09
1.03
0.
06
0.73
Gen
der
Div
ersi
ty �
Tea
m P
erfo
rman
ce
0.13
1.
68†
0.11
1.
13
0.11
1.
36
0.11
1.
35
G
eogr
aphi
c D
iver
sity
� E
xpec
tati
on o
f C
hall
enge
s
-0
.15
2.26
* -0
.15
2.12
Geo
grap
hic
Div
ersi
ty �
Eff
ort
0.09
1.
19
0.08
1.
21
G
eogr
aphi
c D
iver
sity
� T
eam
Per
form
ance
0.
07
0.92
0.
04
0.55
0.
07
0.85
0.
06
0.89
Cul
tura
l In
tell
igen
ce (
CQ
) �
Eff
ort
0.13
1.
30
Hy
po
thes
ized
Eff
ects
P
sych
ic D
ista
nce �
Tea
m P
erfo
rman
ce
0.20
3.
44**
* 0.
13
1.87
† 0.
13
1.91
†
Psy
chic
Dis
tanc
e �
Exp
ecta
tion
of
Cha
llen
ges
0.31
4.
29**
0.
31
4.46
**
E
xpec
tati
on o
f C
hall
enge
s �
Eff
ort
0.15
2.
11*
0.11
1.
65†
E
ffor
t �
Tea
m P
erfo
rman
ce
0.15
2.
26*
0.14
2.
28*
Inte
ract
ion
Eff
ects
C
Q*E
xpec
tati
ons
of C
hall
enge
s �
Eff
ort
0.30
5.
91**
† p
< .1
0, *
p <
.05,
**
p <
.01
25
Discussion
Contrary to the dominant view of psychic distance as a barrier to collaboration across
borders (e.g. Johanson and Vahlne 1977; Obadia 2013), some previous studies have
found empirical evidence for a positive link between perceived psychic distance and
performance (e.g. Evans and Mavondo 2002; O’Grady and Lane 1996). To understand
these seemingly paradoxical findings and in response to calls for a more fine-grained
analysis of the underlying processes involved in distance effects (Zaheer et al. 2012),
we transfer the issue to the team level, which enables us to introduce process factors
such as motivational CQ and effort level.
The data support our model linking team-level psychic distance to the challenges
expected by team members in regard to the upcoming task, the level of effort that they
display toward the assignment, and how well they perform as a team. The relationship
between expected challenges and the level of effort is positively moderated by the
motivational CQ of the team members. In other words, the present study tests the
effects of psychic distance at the team level and finds that (1) consistent with the
psychic distance paradox, psychic distance indeed has a positive effect on
performance; (2) the effect of psychic distance on performance is mediated by effort
so that an increase in psychic distance increases effort which in turn improves
performance; and (3) motivational CQ moderates the relationship so that the effect of
psychic distance on performance is stronger under the high CQ condition.
The present study is one of the first to offer and test a theoretical model explaining the
positive link between psychic distance and performance by incorporating process
factors. Prior research (e.g. Evans and Mavondo 2002; O’Grady and Lane 1996;
Pedersen and Petersen 2004) had speculated that psychic distance may prompt firms to
do more research, use more caution, and plan more, i.e. try harder, but empirical
evidence substantiating such arguments has been missing. We show that perceived
differences among team members can have a positive effect on performance when it
leads to greater effort.
Our process-based approach helps to start unveiling the psychic distance paradox. It
appears that the conventional consideration of psychic distance as a barrier to cross-
national cooperation and impairment to international performance might be
insufficient to explain performance effects. The study findings show that psychic
distance triggers behavioral responses such as an increase of effort that can offset the
difficulties in cooperation otherwise expected. With this, our results substantiate
26
earlier speculations regarding the roots of the psychic distance paradox.
Internationalization research might benefit from the inclusion of such processes factors
as we can expect similar processes to occur in top management teams responsible for
the internationalization process of a company. Despite the difference that top managers
react according to their perception of distance toward a foreign environment (rather
than within the team) their psychic distance should increase their expectations of
challenges and increase the level of effort they invest into the firm internationalization.
Previous research on the psychic distance-performance relationship might have studied
the phenomenon superficially, looking at the general relationship and neglecting
process factors and potential mediators and mediators. The present study attempted to
look deeper and explore the mediating effect of effort and the moderating effect of
cultural intelligence in the relationship between psychic distance and performance.
While we cannot claim that effort and cultural intelligence are the only mediators and
moderators at play, our findings are the first step toward understanding of the internal
mechanism of the psychic distance paradox.
Beyond an improved theoretical understanding of the processes underlying the psychic
distance paradox, this study also represents one of the first attempts to incorporate
psychic distance into the GVT literature. Considerable research has examined
antecedents to GVT success. Team diversity, often in the form of country affiliation,
demographic characteristics, or personality differences, have been examined
extensively and generated significant insights into how team diversity affects team
performance (e.g. meta-analysis by Stahl et al. 2010). However, examination of team
members’ perception of differences has been surprisingly absent from the literature.
Thus, the findings of this study also provide insights for managers of global teams.
Managerial Implications
Handling team diversity represents a major managerial challenge in today’s working
environment. An increasing amount of work is accomplished in teams, comprising
team members with different national and cultural backgrounds, and often across
various geographic locations. Whereas diversity can be a powerful source of
innovation as diverse backgrounds representing different knowledge sources minimize
groupthink, diversity also involves divergent tendencies that can impede team work.
Our findings have significant implications for managers responsible for selecting,
training, and overseeing global teams.
First, we must acknowledge that national diversity has a moderate negative effect on
performance of GVTs. This serves as a reminder that collaborating effectively across
27
cultures is challenging and fraught with obstacles. However, the findings in regards to
psychic distance encourage the use of internationally diverse teams and identify
parameters that enable members of such teams to achieve superior performance.
Second, it is helpful to understand that the perception of cross-national differences
among team members and the resulting increase of expected challenges is not a
negative thing per se. Psychic distance might help avoid unexpected negative surprises
in the process and keep up motivation and effort level. As the data support a positive
impact of psychic distance on performance, we can infer that team members who
perceive a low level of distance run the risk of underestimating the difficulties of
working in that cross-national team. This can prove especially relevant if two nations
are perceived as “similar enough,” as the false sense of similarity may reduce alertness
to pitfalls of cross-cultural collaboration ultimately hurting performance.
The findings also reveal the positive moderating effect of motivational CQ. Although
CQ is a relatively recent development (Earley and Ang 2003), it has quickly garnered
significant interest in the expatriate management literature. Our findings suggest that it
may also be a valuable and important metric for selection of participants on global
teams. Although, to some extent, motivational CQ may be an innate trait, positive
exposure to different cultures through, for example, travels and culinary experiences
may foster a greater appetite for increased global interaction. Earley and Mosakowski
(2004) provide a multi-step framework for enhancing your CQ. It begins with a
rigorous assessment of the individual’s strengths and weaknesses in terms of CQ and
then provides a variety of suggestions for how to improve your CQ.
These findings are particularly important in the context of cross-cultural training or
pre-expatriation briefing. Particularly in cases when based on the external attributes
cultures appear similar, attention should be devoted to informing the trainees of
cultural differences that may not be readily apparent, particularly those at the levels of
values and beliefs. Then again, the differences and challenges should not appear
impregnable as team motivation needs to be ensured. Exercises and activities that
contrast the cultures and point out where the differences may like would be
particularly beneficial, especially if coupled with prompts to put in more effort in
preparing for and managing cross-cultural interactions. Likewise, training programs
designed to improve cultural intelligence in general, and motivational CQ in particular
would further contribute to improving performance in cross-cultural context.
28
Limitations and Future Research
Like most research, the present study is not without limitations. However, many of
these limitations present also present opportunities for future research. First, the
present study deveoted considerable effort to designing a task and team environment
resembling a corporate environment to obtain findings that are valid and generalizable
beyond the academic settings. Further, business school students are the managerial
decision-makers of tomorrow and gaining access to a sufficiently large sample of
corporate teams is very challenging. Nonetheless, the study participants worked for
course credit and a replication of the findings in a corporate environment would
certainly be valuable and necessary to confirm generalizability of the findings
presented here to the business workplace settings.
The findings from this study may also be confined to the specific task and temporal
context. The team assignment required a fair degree of creativity, demanded a high
level of coordination, and interdependent task execution. Routine tasks might not have
the same motivational effect on the team members and thus not increase the effort
level and subsequent performance as much as the task in this study. Thus, future
research may examine the proposed psychic distance paradox framework in varying
task environments.
Furthermore, the team interaction phase in the present study lasted about eight weeks.
While this is a considerable length of time, in an organizational setting this would
arguably represent a rather short-term assignment. Future research would be well
served to examine psychic distance effects on team performance for teams working on
longer (and shorter) projects.
Consistent with many previous psychic distance researchers (e.g. Håkanson and
Ambos 2010), we adopted a holistic summary perspective to measure psychic
distance. However, other researchers (e.g. Child et al. 2009; Dow and Karunaratna
2006) have examined multiple dimensions of psychic distance and found differential
effects on performance. Hence, future research may want to extend this study by
examining whether different psychic distance dimensions have differential effects on
the process variables included in this study.
As noted earlier, the psychic distance paradox process as laid out in this paper rests on
the assumption that teams are motivated to do well. External pressures (need to do
well to pass the class) make such an assumption reasonable. One could, however,
imagine that teams with limited motivation (internal or external) may respond by
withdrawing from the task. Therefore, future research could potentially gain further
29
insights by varying extrinsic motivation (in different natural settings or
experimentally) or by measuring the teams intrinsic motivation to do well to examine
how different levels of motivation affect the process framework in this study.
Finally, another area of psychic distance research that may require additional attention
is the fit between managers’ perceived differences and actual differences between
markets or teams. The psychic distance paradox rests on the assumption that managers
often underestimate differences (e.g. O’Grady and Lane 1996; Pedersen and Petersen
2004). Underestimating differences leads to complacency, which causes failure.
However, it would presumably also be possible for managers to overestimate
differences, which may also lead to discounted performance. As argued by Evans and
Mavondo (2002), both under- and overestimation of differences lead to suboptimal
performance. Either too little effort has been put into the market entry or too many
resources have been wasted. The findings of this study suggest that a greater
perception of differences leads to greater effort and performance, but future research
may also want to explore the upper boundaries of this relationship. In effect, at what
point does increased effort have diminishing or even negative returns?
Future research opportunities abound, but we conclude that our study starts unveiling
the underlying mechanism of the psychic distance paradox as it provides the first
known longitudinal empirical evidence of how psychic distance may be positively
related to performance. Further, the introduction of psychic distance as a subjective
measure helps to understand interpersonal processes within a team and thus extends
the literature on psychic distance as well as on diversity in GVTs.
30
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37
Article 2
Schuster, A. & Ambos, B. (in preparation for submission). I Feel Close to You, Don´t
You? Antecedents of Psychic Distance Asymmetry. Journal of International Business
Studies.
An earlier version of this article is published as:
Schuster, A. & Ambos, B. 2013. I Feel Close To You, Don´t You? Antecedents of
Psychic Distance Asymmetry. In Leslie A. Tombs (ed.), Proceedings of the Seventy-
Third Annual Meeting of the Academy of Management, ISSN 1543-8643.
38
I Feel Close to You, Don´t You?
Antecedents of Psychic Distance Asymmetry
Schuster, Anja (1)
Ambos, Björn (2)
(1) Anja Schuster is Doctoral Candidate at the Institute of Management, University
of St. Gallen, Switzerland ([email protected])
(2) Björn Ambos is Professor of Strategic Management at the Institute of
Management, University of St. Gallen, Switzerland ([email protected])
39
Abstract
Empirical evidence of asymmetric psychic distances challenges its common unilateral
conceptualization and suggests the consideration of directional effects. This paper
investigates the origins of psychic distance asymmetry in order to advance our
understanding of the concept and enable future distance research. Building on insights
from psychology, we study cognitive processes influencing the formation of distance
perceptions. We suggest that social comparison motives and mere-exposure effects
affect the perceptions of distance towards foreign countries. Our analysis demonstrates
the influence of migrants, media spillover, a nation´s relative economic status and
relative governance quality on the perception of distance towards foreign countries.
The paper provides a first explanation of psychic distance asymmetries, revealing the
interplay of national factors and cognitive processes in the creation of distance
perceptions.
40
Introduction
Research in international management has long embraced concepts of distance as a
central resource. The range of distance concepts available in the literature, such as
cultural, institutional and psychic distance, illustrates the variety of cross-national
aspects that influence international operations. Their field of application covers a vast
number of research areas including the internationalization process of the firm,
international performance, knowledge management, expatriate management as well as
neighboring disciplines like marketing (Berry, Guillén & Zhou, 2010).
Despite their popularity, inconsistent research findings have led authors to question the
usefulness of distance concepts (Stöttinger & Schlegelmilch, 2000). Shenkar´s (2001)
prominent critique on the established conceptualization of cultural distance broke
ground for increasing research attention to underlying assumptions and theoretical
foundations of distance concepts. In recent years, commentators have provided several
conceptual contributions discussing the shortcomings of existent distance
conceptualizations and calling for improvement (Berry, Guillén & Zhou, 2010; Tung
& Verbeke, 2010; Zaheer, Schomaker & Nachum, 2012). The underlying tenor of their
claims is the need for well-conceived distance concepts that capture aspects germane
to the research question studied. Efforts to accommodate their requests are scarce yet
(Shenkar, 2012).
The concept of psychic distance has especially stimulated debate in the literature to
date. Starting off from a more objective understanding and definition as “the sum of
factors preventing the flow of information from and to the market” (Johanson &
Vahlne, 1977:24), authors increasingly shifted towards more subjective
conceptualizations and definitions such as “the individual’s perception of the
differences between the home country and the foreign country” (Sousa & Bradley,
2005:44). The literature now distinguishes between objective psychic distance stimuli
and subjective perceived psychic distance (Dow & Karunaratna, 2006).
A central point of debate still relates to Shenkar´s (2001) criticism related to the
“illusion of symmetry” underlying most psychic distance measures. Subjective psychic
distances are commonly operationalized as unilateral concepts in research studies,
dismissing the fact that they measure perceptions which might be relative to the point
of view. Recently, Håkanson and Ambos (2010) were able to provide large-scale
evidence for psychic distance asymmetry in bilateral data collected from respondents
in 25 countries on 300 country pairs. Asymmetries in perception might entail
directional effects that distance research has mostly missed out so far. First studies
41
incorporating directional effects of cultural distance (Selmer, Chiu & Shenkar, 2007)
substantiate the inadequacy of unilateral measures and stress the importance to address
the issue of distance asymmetry and potential consequences.
As a first step in that direction, our paper seeks to understand the reasons for psychic
distance asymmetry. We find that many factors which have been shown to drive
distance perceptions such as geographic distance can hardly explain the perception
gaps witnessed. In light of the fact that the most common operationalization of psychic
distance relates to the concept of perceived proximity and similarity between two
countries, we borrow insights from psychology literature to develop our hypotheses.
We focus on two cognitive processes that might influence the formation of distances.
One refers to the mere-exposure effect (Zajonc, 1968), a psychological principle
describing that we perceive familiar things as more likeable and similar to ourselves.
The psychic distance towards a foreign country might hence depend on the level of
exposure that a respondent has had to that country in the past. The second process
builds on social identity and social comparison theory (Festinger, 1954). We suggest
that a respondent´s nationality represents a membership to a social group and that the
request to provide a similarity judgment conjures a social comparison situation in
which the respondent compares the home country with the stimulus country. Research
provides evidence for the influence of assimilation and contrast effects which depend
on the comparison direction as well as motivation (Wheeler & Miyake, 1992).
Drawing on those theories, we hope to develop a closer understanding of the psychic
distance formation process that helps us understand differences in distance perceptions
and the reasons for psychic distance asymmetry.
Our paper is structured as follows. We review the literature on psychic distance,
discuss its definitions, conceptualizations and measurement approaches as well as the
inconsistent research findings the concept has yielded so far. We then introduce
distance asymmetry and acknowledge work that has addressed the issue. Building on
findings from psychological research, we develop our hypotheses and test them with
the empirical psychic distance data published in Håkanson & Ambos (2010). Our
results support most of our anticipations and provide empirical support for the
influence of cognitive processes on psychic distance formation. The paper concludes
with a discussion of the findings, implications as well as limitations and future
research avenues.
42
Conceptual Background and Hypotheses
The Psychic Distance Concept
The psychic distance concept originates from the literature on international trade
where it was mentioned as a barrier to trade but no concise definition provided
(Beckerman, 1956). Using psychic distance as a central construct to their
internationalization process model, the Uppsala scholars paved the way for the
concept´s popularity in the international business literature (Johanson & Vahlne, 1977;
Johanson & Wiedersheim-Paul, 1975). The process model describes the stepwise
internationalization of a firm which is restricted by the firm´s learning capacity and
uncertainty related to the foreign environment. Firms prefer to enter psychically close
countries first which they expect to be similar to their home country so that a relatively
small amount of learning and adaption to the new environment becomes necessary.
The strategy allows companies to minimize the perceived risk related to
internationalization and facilitates learning in a new environment before more distant
markets are entered or the commitment in the foreign market is increased. In the
model, psychic distance thus functions as a key predictor of the managerial decisions
regarding international market selection and entry mode choice.
Psychic distance attracted increasing attention in the field and authors developed a
number of definitions and measurement approaches. Among others, psychic distance
has been defined as barrier to learning and understanding about a foreign environment
(Nordström & Vahlne, 1994), uncertainty related to a foreign market (O´Grady &
Lane, 1996) and the “perception and understanding of cultural and business
differences” (Evans, Treadgold & Mavondo, 2000: 377). Whereas some authors
explicitly understand it as a measure of similarity between two countries (Sim & Ali,
1998), others define it as a knowledge gap (Petersen, Pedersen & Lyles, 2008) , the
barriers to information flow (Håkanson & Ambos, 2010) or as the perception of
differences between two markets (Sousa & Bradley, 2006; Sousa & Lages, 2011).
Often, authors remain somewhat imprecise about their exact understanding of psychic
distance and their operationalization chosen.
Besides the multitude of definitions, the correct measurement approach is also subject
to debate (Dow & Karunaratna, 2006; Prime, Obadia & Vida, 2009). Measurement
approaches to psychic distance can be divided into objective and subjective measures.
Objective approaches include the use of cultural distance as some authors made no
distinction between the two concepts (Eriksson, Majkard & Sharma, 2000; Peng, Hill
& Wang, 2000; Trabold, 2002). The practice could be owed to the convenient
43
availability of the cultural distance index data (Kogut & Singh, 1988). The index bases
on Hofstede´s cultural dimensions (1980) and generates a single number representing
the cultural distance between two countries. Scholars predominantly agree on the
distinctiveness of cultural and psychic distance, criticising the use of the cultural
distance index for psychic distance measurement (Nordström & Vahlne, 1994; Sousa
& Bradley, 2006).
Alternative objective measures include the use of geographic regions (Plá-Barber,
2001; Ronen & Shenkar, 1985) as well as formative indices such as the one
constructed by Brewer (2007) which combines indicators of inter-country relations
such as commercial, political, social, historic or geographic ties. Subjective
operationalizations commonly rely on the use of Likert scales to capture respondents´
distance perceptions. Items usually cover a range of potential distance-creating factors
such as differences in language, business practices, political system, level of economic
development, per capita income, lifestyles or traditions (Evans & Mavondo 2002;
Sousa & Bradley, 2006; Sousa & Lages, 2011). Further self-reported measures include
the use of concentric circles (Dichtl, Koeglmayr & Müller, 1990), free magnitude
scaling (Stöttinger & Schlegelmilch, 1998) or the use of independent panels (Dow,
2000; Nordström & Vahlne, 1994). Most of the subjective operationalizations ask
respondents to indicate the perceived similarity or proximity towards a foreign country
as a single-item measure or on multiple aspects (Håkanson & Ambos, 2010; Klein &
Roth, 1990; Sousa & Lages, 2011).
Asymmetry in Distance Research
As distance research evolves, authors increasingly recognize the possibility of
asymmetric perceived distances and the consequent inadequacy of unilateral measures.
While respondents in country A might perceive a rather high similarity with people in
country B, respondents in country B could think differently. Such perception gaps
have not been accounted for in psychic distance research so far and would allow for
the study of directional effects. Among the first contributions of this sort, Selmer, Chiu
and Shenkar (2007) provide empirical evidence for the asymmetric impact of cultural
distance on expatriate adjustment. Whereas the 38 German expatriates in their
exploratory study sample adjusted relatively well to the US host environment, their 25
American counterparts reported greater difficulties adjusting to the German culture.
Further evidence for the asymmetric effect of cultural distance was found for
expatriate deployment within the MNC (Brock, Shenkar, Shoham, & Siscovick, 2008).
The study found that the posting of an expatriate in a foreign subsidiary is more likely
44
if the host country ranks higher in power distance than the home country. Grounding
their reasoning in transaction cost and agency theory, the authors conclude that control
preferences within an MNC seem to be related to relative cultural variables and call
into question the symmetry assumption behind unidirectional cultural distance
measures. As the literature hasn´t yet taken note of psychic distance asymmetry as
much as of asymmetry in cultural distance, we argue that this advancement is
necessary and overdue. Several authors have pointed towards the potential existence of
asymmetries in psychic distances (Brewer, 2007; Ellis, 2008; Luostarinen, 1979;
O´Grady & Lane, 1996) but until today, empirical evidence or theoretical explanations
have been scarce. After the small-scale and less-known studies by Dichtl and
colleagues (Dichtl, Koeglmayr & Müller, 1990), Håkanson and Ambos (2010) were
the first to provide large-scale empirical evidence for psychic distance asymmetry.
We use their published data on 300 country pairs to calculate and illustrate psychic
distance asymmetries and present our results in Table 1.
45
Ta
ble
1:
Psy
chic
Dis
tan
ce A
sym
met
ries
, A
sym
met
ry =
Psy
chic
Dis
tanc
e H
OM
E –
Psy
chic
Dis
tanc
e S
TIM
UL
US),
D
ata
sour
ce:
Håk
anso
n &
Am
bos,
201
0 H
OM
E c
ou
ntr
y
ST
IMU
LU
S
cou
ntr
y
Austria
Belgium
Switzer-land
Germany
Denmark
Spain
France
Great Britain
Italy
Nether-lands
Norway
Poland
Russia
Sweden
Turkey
Argen-tina
Mexico
Brazil
China
India
Japan
Korea
Australia
USA
Canada
Aus
tria
0
Bel
gium
5
0
Sw
itze
rlan
d 1
-5
0
G
erm
any
-1
-6
-3
0
Den
mar
k -2
0
0 -1
0
Spa
in
-7
-12
-4
-6
-6
0
Fra
nce
-2
-1
-2
2 3
4 0
Gre
at B
rita
in
-1
-6
-5
-5
-7
0 1
0
Ital
y -6
-1
-1
1
2 4
2 0
0
N
ethe
rlan
ds
-5
-1
-2
1 -1
6
4 3
2 0
N
orw
ay
-4
0 2
-1
0 13
0
8 -1
4
0
P
olan
d 8
8 16
15
16
23
14
18
10
15
10
0
R
ussi
a 21
19
24
27
23
25
26
25
20
24
22
10
0
Sw
eden
-6
0
-1
-2
-4
8 -2
7
1 0
-1
-7
-16
0
Tur
key
9 0
10
23
8 30
24
10
21
6
7 11
-5
2
0
A
rgen
tina
7
18
8 4
9 3
2 18
11
4
-1
-2
4 7
-1
0
Mex
ico
15
15
13
13
15
9 16
24
17
9
6 4
7 6
7 0
0
B
razi
l 11
19
13
10
13
16
13
22
21
5
-1
-7
-3
2 -2
0
1 0
C
hina
27
18
28
39
27
23
42
39
32
28
27
26
15
21
0
5 -9
7
0
In
dia
15
12
24
26
22
29
25
24
27
19
13
13
14
13
17
17
5 16
5
0
Japa
n 22
22
18
39
17
38
37
34
40
25
22
10
9
15
6 6
8 15
-4
8
0
K
orea
23
22
31
39
25
29
42
43
35
34
19
18
16
21
27
12
6
10
4 7
7 0
A
ustr
alia
-3
8
-1
-8
-18
2 -2
10
17
-9
-1
8 -2
3 0
-14
2 -9
-1
1 -1
0 -1
3 -1
6 -1
5 -2
2 0
US
A
-4
-7
-13
-12
-26
-5
-11
0 3
-23
-27
-29
-16
-22
-30
-21
-3
-21
-35
-33
-31
-46
-24
0
Can
ada
0 5
0 -9
-5
3
-7
7 4
-5
-10
-16
-12
-6
-11
-15
-17
-18
-29
-29
-30
-46
-17
4 0
46
Psychic distance was operationalized subjectively and respondents asked to indicated
their perceived distance on a 100pt scale. The values in the matrix represent the
difference between respondents from country A, judging the distance towards country
B and the perceptions from respondents in country B, asked to indicate the perceived
distance towards country A. High values thus indicate great asymmetry. Table 1
reveals fairly low asymmetries for European country pairs as well as for European and
North-American countries. Higher asymmetries especially appear between Asian and
European countries. Here, the matrix shows mainly positive values, indicating that the
European respondents tend to perceive higher distances towards the Asian countries
than vice versa.
Research on the causes of psychic distance asymmetry is limited yet a tentative
discussion is provided by Håkanson and Ambos (2010). Using their large data set, they
find that nations with highly developed economies are averagely perceived as closer
than less developed economies. The same relationship seems to hold for the national
governance systems. A parallel stream of research focuses on individual-level
processes of psychic distance formation and examines antecedents of asymmetry at the
level of the individual (Baack, Dow & Parente, 2011; Parente, Baack & Almeida,
2008). The authors base their work on insights from psychology and focus on potential
biases during the creation of perceptions such as the assimilation and contrast effect in
information processing. Unlike their focus on individual-level influence factors of
psychic distance, we are interested in the differences in national-level psychic
distances. If psychic distance is measured subjectively, this implies the aggregation of
individual distance perceptions to a national mean. We hence try to understand the
reasons why for example, country A averagely perceives a higher distance to country
B than vice versa.
The theoretical rationale of psychic distance has been linked to the homophily
principle maintaining that people tend to favor others who they perceive to be similar
to themselves (McPherson, Smith-Lovin & Cook, 2001). While early
conceptualizations understand psychic distance as a cognitive concept primarily
related to the amount of knowledge and information on a foreign environment
(Hörnell, Vahlne & Wiedersheim-Paul, 1973), recent research views it as concepts
with cognitive as well as affective elements (Håkanson & Ambos, 2010). The
increasingly prevalent understanding of psychic distance as a perception suggests
drawing on psychology literature.
47
Exposure Effects
Research on the formation of individual judgements and perceptions shows that these
can be affected by a wide range of non-rational factors such as unconscious internal
processes (Scott, 1958), group influences (Sherif, 1935) or persuasive communication
(Hovland, 1951). Studying cognitive representations about nations, Forgas and
O´Discoll (1984: 201) argue that “we do not see the world in an objective, rational and
unbiased manner, but according to our values, interests and the norms of our culture”.
The reliance on distance perceptions in international business research might therefore
require closer attention to the factors involved in the distance formation process.
The mental distance approach provides an explanation for the link between perceived
distance/proximity and perceived similarity between two nations. It holds that abstract
concepts are mentally represented by points in space and that similar concepts are
stored close together. As a result, the perceived closeness or distance between two
nations is a good index of their similarity (Shepard, 1962). Most subjective
operationalizations of psychic distance rely on this principle as they understand it to
represent the perceived dissimilarity between two nations (Håkanson & Ambos, 2010;
Sim & Ali, 1998; Sousa & Bradley, 2006). The use of similarity judgments suggests
turning towards the psychology literature which has intensively addressed perceptions
of similarity.
Similarity perceptions are closely linked with affection and perceptions of familiarity.
Experiments show that people rate familiar others as more likeable and more similar to
themselves than non-familiar ones (Moreland & Zajonc, 1982). This relationship is
based on the mere-exposure effect describing how repeated exposure to an unfamiliar
stimulus increases not only familiarity and similarity but also positive affections
towards it (Zajonc, 1968). The effect is commonly explained with the two-factor
theory. It holds that repeated exposure to a stimulus leads to an increase in perceptual
fluency, the ease with which the stimulus is processed. In turn, perceptual fluency
enhances positive affections such as liking (Jacoby & Dallas, 1981). Image research
has referred to the mere-exposure effect, arguing that the mere exposure to information
is central to an individual´s perception of image (Gatewood, Gowan & Lautenschlager,
1993). Research on intergroup attitude formation also indicates that greater contact and
familiarity with members of other groups enhances the liking for those groups
(Pettigrew & Tropp, 2006).
If psychic distance is operationalized as perceived dissimilarity, the mere-exposure
effect predicts that the level of exposure to a foreign country should affect the
perceived distance towards it. Our focus on asymmetry of national-level psychic
48
distance warrants the neglect of potential individual factors such as experiences and
personal relationships. As research shows that group contacts trigger mere-exposure
effects, we suggest the level of migrants from a foreign country within the home
country to influence the perceived distance towards the foreign country. Following the
arguments above, we expect that a higher level of migrants from country B in country
A increases the exposure to country B, leading to higher perceived familiarity and
similarity therefore lowering the perceived distance. There is empirical evidence for an
inflection point in this relationship though (Bornstein, 1989), suggesting a U-curved
relationship.
H1: The level of migrants from a foreign country in the home country exhibits a
U-curved relationship with the psychic distance perceived towards the foreign country.
A second prominent source of exposure is the media from a foreign country. The
communication literature refers to the notion of “foreign nation visibility” which
describes the level of media coverage a country receives and the flow of international
news it effects (Jones, Van Aelst & Vliegenthart, 2013). As nations are not expected to
manage this visibility proactively, we borrow the term “media spillover” from the
marketing communication literature where it is used to describe the transmission of
advertising messages to a customer segment that was not intentionally targeted such as
across national borders (Palich & Gomez-Mejia, 1999).
According to the mere-exposure effect, the level of media can be expected to expose
people in country A to information on country B hence driving similarity and reducing
perceived distance. Insights from communication research suggest a nonlinear
relationship though. Evidence for the declining marginal effect of advertising on
behaviour change suggest that there might be an inflection point in the relationship
between exposure and similarity perception and liking (Vakratsas et al., 2004). We
hence expect a U-shaped association between media spillovers from a foreign country
and the psychic distance towards it.
H2: The level of media spillover from a foreign country into the home country
exhibits a U-curved relationship with psychic distance towards the foreign country.
49
Social Comparison Effects
A second stream of research on similarity judgments is the literature on social
comparisons. It builds on the theory of social comparison processes proposed by
Festinger (1954) maintaining that individuals feel the need to evaluate their abilities
and opinions in order to develop an appraisal of themselves and their environment. If
no objective criteria are available for evaluation, they use the comparison with others
as a source of knowledge about themselves and their capabilities. The evaluation of
personal abilities and opinions thus represents some kind of individual-level
identification process. Social identity theory (SIT) introduces the membership to a
social group as an additional basis of comparison. The affiliation to such a group can
be premised on attributes like gender, nationality, religion as well as profession or
leisure preferences. The groups sharing an individual´s characteristic represent his or
her in-groups which are then compared to relevant out-groups (Tajfel, 1978; Tajfel &
Turner, 1979). An individual´s home country was found a relevant social group that is
used as a basis for comparison processes (Stets & Burke, 2000).
Depending on the relative position of the groups in regard to a certain attribute, the
resulting comparison direction is either up- or downward. Upward comparisons with
better-off targets were found to lower self-esteem and decrease subjective well-being,
especially when the target is perceived as similar to the respondent (Morse & Gergen,
1970; Wheeler & Miyake, 1992). In such situations, similarity can prompt individuals
to inflate the perceived difference to the target so that the comparison situation
becomes less relevant and the negative outcome is softened (Brandstätter, 1998;
Sanders, 1982). However, upward comparisons were also found to cause positive
outcomes if assimilation rather than contrast effects occur (Brewer & Weber, 1994;
Brown, Novick, Lord & Richards, 1992; Collins, 1996). Here, the upward comparison
results in an increase of perceived similarity with the better-off target which
simultaneously decreases the difference on the comparison attribute (Lockwood &
Kunda, 1997; Tesser, 1988). This argumentation builds on the “basking in reflected
glory” phenomenon that describes the aspirational association with a successful other
(Cialdini et al., 1976). In social comparison situations, assimilation thus results from
the optimistic expectation to obtain the same status as the better-off target (Wheeler,
1966). Less has been written on the consequences of downward social comparisons
but again, there is evidence for contrast as well as assimilation processes (Blanton,
2001; Wheeler & Miyake, 1992).
The arguments above suggest that psychic distance measured as perceived similarity
could depend on social comparison processes. The request to judge the similarity
50
between home and target country is very likely to activate the concept “nation” as a
social group. Depending on the comparison direction and motivation, assimilation or
contrast effects would influence the resulting similarity judgement of the individual.
The comparison dimensions need to be relevant for identity formation (Mullen, Brown
& Smith, 1992) but other than that, the literature remains somewhat vague in regard to
the selection of attributes (Wood, 1989). Locke (2003) suggests that individual-level
characteristics are used as comparison dimensions if they are perceived as having a
commonly shared basis for evaluation such as physical appearance, academic standing
and wealth. He claims that most people prefer to look good, have good grades and
possess a lot of money and therefore use such attributes as comparison bases. The
dimensions for comparison should hence be relevant and desirable. Strong effects on
similarity judgments have been demonstrated for physical and vocal attractiveness.
Empirical studies show that respondents indicate higher similarity towards target
persons that are perceived as attractive (Marks & Miller, 1982) and similar arguments
have been made on the group level for group performance or success (Zander &
Havelin, 1960).
In line with these arguments, we suggest to use the concept of country attractiveness as
it integrates national attributes that are relevant and desirable. Country attractiveness
can encompasses a range of national aspects such as market size, market growth,
economic activity, political stability, development of the capital market, tax system,
investor protection and corporate governance, human and social environment, inflation
and trade balance (Groh, von Liechtenstein & Lieser, 2010). Liander and colleagues
(Liander, Terpstra, Yoshino & Sherbini, 1967) build their country preference index on
two sets of criteria, the economic development and internal stability and cohesion of a
nation which we use as basis for our hypotheses.
The level of economic development in a country plays a central role in the formation
of psychic distance towards it (Evans & Mavondo, 2002; Kobrin, 1976). Dow and
Karunaratna (2006) provide a theoretical rationale as they argue that the level of
economic development substantially influences the nature of employment available in
the economy as well as the communication patterns that dominate the business
environment. Differences in the economic development thus lead to an increase in
uncertainty and transaction costs which in turn affect psychic distance. What is more,
the level of economic development heavily shapes the structure of a society as it
influences a range of institutional, socio-economic and demographic factors
(Håkanson & Ambos, 2010).
51
The vital role of a nation´s economic development occupies suggests it to function as
comparison attribute. We expect that a nation´s economic status reflects the country´s
economic influence and thus constitutes a relevant, salient and desirable characteristic.
Respondents would compare the economic status of their home country with the one
of the target country and if they are not perceived as similar, will perform an up- or
downward comparison.
We define situations of relative low economic status as incidents in which the home
country possesses a weaker economic status than the target country. The comparison
direction is thus upwards and yields a negative outcome for the respondent. The
predictions of social comparison theory regarding the resulting assimilation or contrast
effect are somewhat ambiguous (Blanton, 2001). Assimilation effects are promoted if
the social comparison is motivated by self-enhancement motives (Gibbons & Buunk,
1999) and if the respondent believes that the same status as the target could be
obtained (Lockwood & Kunda, 1997). Both criteria should be met in distance
judgment situations and we expect an assimilation effect to increase perceived
similarity with the target country for respondents that perform an upward comparison,
resulting in the perception of low distances.
For situations of high relative economic status, the respondent compares downwards.
Following the argumentation above, we expect it to result in a contrast effect,
increasing dissimilarity and hence psychic distance perceptions. The resulting
relationship between relative economic status and psychic distance towards the target
country, should thus result in a curvilinear relation with a positive basic trend and a
rather flat middle part.
H3: Relative economic status of the home country will exhibit an S-shaped
(cubic) relationship with psychic distance towards the target country.
The second aspect of country attractiveness that we decide to study is related to the
nations’ political systems. Dow and Karunaratna (2006) argue that psychic distance
can be affected by national differences in the political system in at least two ways. For
one, a foreign company faces higher communication costs and uncertainty in dealing
with the host country´s government due to the unfamiliarity of the system.
Additionally, foreign companies suffer a disadvantage in regard to the anticipation of
potential governmental interventions, e.g. regarding the enforcement of contracts or
the monitoring of anti-competitive behaviour. The argument is thus that differences in
52
the political system breed uncertainty for foreign managers and raise perceived
psychic distance towards the other country.
We recognize the political system as one of the distinctive features of a nation and the
relevance of political and institutional conditions to foreign companies (Kostova &
Zaheer, 1999). Research has shown that a nation´s governance quality can function as
a signal regarding reliability and security of an unknown business environment.
Findings from research on foreign direct investment, for instance, demonstrate that
high corruption levels deter foreign investors (Habib & Zurawicki, 2002). Hence, it
seems reasonable to infer that high governance quality constitutes a relevant, desirable
and salient national characteristic. As such, we expect the level of governance quality
to function as comparison attribute and influence the perception of distance. Rather
than the differences in the political conditions per se, it is the relative governance
quality between two countries that we expect to impact the social comparison
outcome.
Our argumentation regarding the comparison directions and resulting assimilation and
contrast effects parallels the discussion for relative economic status. Respondents will
relate their home country´s governance quality with the quality of the target country´s
governance and if they are not perceived as similar, conduct an up- or downward
comparison. If we define situations of relative low governance quality as incidents in
which the home country is perceived to possess inferior political conditions than the
target, we expect to witness an assimilation effect in the similarity judgment. Again
paralleling the discussion above, we expect some sort of inflection in the relation
between relative governance quality and psychic distance towards the target country,
resulting in a curvilinear relationship.
H4: Relative governance quality of the home country will exhibit an S-shaped
(cubic) relationship with psychic distance towards the target country.
We illustrate the hypothesized exposure and social comparison effects on perceived
psychic distance in Figure 1.
53
Figure 1: Hypothesized Effects on Psychic Distance
Methods
Setting and Data Collection
We take advantage of the large psychic distance dataset published by Håkanson and
Ambos (2010) to measure our dependent variable. The dataset contains perceived
distances aggregated to a national mean, collected from respondents in the 25
countries towards the respective 24 other nations. The sample includes the 25 largest
countries in terms of GDP in 2001: Argentina, Australia, Austria, Belgium, Brazil,
Canada, China, Denmark, France, Germany, India, Italy, Japan, Mexico, Netherlands,
Norway, Poland, Russia, South Korea, Spain, Sweden, Switzerland, Turkey, United
Kingdom and the USA. The data was collected between fall 2003 and spring 2008
when collaborators directed questionnaires towards executive MBA students and
alumni of the participating partner universities. The choice of respondents was made in
order to target a sample with a background similar to managers involved in
international business decisions.
low high
PsychicDistance
Social comparison effect
Exposure effect
medium
54
Measures
The questionnaire defined psychic distance as the “sum of factors (cultural or language
differences, geographic distance, etc.) that affect the flow and interpretation of
information to and from a foreign country” (Håkanson & Ambos, 2010: 201).
Following precedent authors (Dow, 2000; Ellis, 2007), respondents were asked to use
a 100pt scale to indicate the extent to which they perceived the other countries to be
close or far away, setting the distance to one´s home country at 0 and the most distant
country to 100. After the completion of the task, respondents were presented their
resulting country ranking in ascending order to allow for corrections when necessary.
To measure the level of migrants from a foreign country, we use data on the stocks of
foreign born population in the respective countries which is available from the
Organization for Economic Co-Operation and Development Statistics Section (OECD,
2006). Following research on international news flows (Kim & Barnett, 1996), we
measure the level of media spillovers with the annual value of newspapers, journals
and periodicals imported from a foreign country into the home country. This data is
reported in US$ and made available under commodity no. 4902 through the United
Nations Commodity Trade Statistics (United Nations, 2006).
To measure the relative economic status of a nation, we use data on the countries’
annual gross domestic products in US$, averaged over the years 2003 to 2007 (The
World Bank Group, 2008). The relative status is then calculated by subtracting the
foreign country´s average value from the home country´s average value. The resulting
value range covers negative as well as positive values. Negative values indicate
situations in which the foreign country generates a higher GDP than the home country
whereas the positive values illustrate the reverse situation. Relative governance quality
is operationalized using the ‘Worldwide Governance Indicators’ published by the
World Bank Group (2011). The six indicators are measured on a scale from -2.5
(weak) to 2.5 (strong) and reflect a nation´s governance quality in the following
categories: ‘voice and accountability’, ‘political stability’, ‘absence of
violence/terrorism’, ‘government effectiveness’, ‘regulatory quality’ as well as ‘rule of
law’ (Kaufmann, Kraay & Mastruzzi, 2010) We computed a national average over the
six indicators and the years 2003 to 2007. Again, the country values were set in
relation by subtracting the target country´s governance quality from the home
country´s governance quality. The resulting value range spans from -5.0 to 5.0.
To avoid misspecification, a number of controls were incorporated. Pair-wise country
distance measures (in kilometers) are sourced from the Paris based Centre d’études
55
prospectives et d’informations internationals. Distance measures are available as the
great circle distances between countries’ major cities (in most cases the capitals) and
as a weighted average between major population centers (CEPII, 2007). The results
reported below are based on the former. In the regression analyses, both gave near
identical results. We further controlled for cultural differences, using the cultural
distance index created by Kogut and Singh (1988). It calculates the average of the
differences in Hofstede´s (1980) country scores, adjusted by the variance of the
corresponding dimension. As scores are available for four as well as five dimensions
(ITIM, 2013), we incorporated both. In the regression analyses, both gave near
identical results. Further distance controls included encompass education distance,
religion distance and language distance using research data publicly available through
a research homepage (Dow, 2013).
Hypotheses Testing
We employ a three-step (hierarchical) multiple regression as this approach allows us to
test for curvilinear relationships. In a first step, only the control variables are entered
into the equation. The linear, quadratic, and cubic terms are added to the control
variables in steps two to four. We z-transform the predictor variables in order to
minimize the threat of multicollinearity in equations where we include the squared and
cubic terms of the predictor variables (Aiken & West, 1991). Next, we test for
collinearity among variables by calculating the variance influence factors (VIF) for
each of the regression coefficients. The values range from a low 1.002 to a high of
10.562. All values expect of one are well below the recommended cut-off figure of 10,
hence do not appear high enough to justify concern for multicollinearity (Neter,
Wasserman & Kutner, 1985). A coefficient variance decomposition analysis with
condition indices (cf. Hair et al., 1998) confirmed that multicollinearity was not a
serious problem. The means, standard deviations and intercorrelations for all variables
in the analysis are reported in Table 2. As per Table 2, the independent variables were
standardized with mean = 0 and standard deviation = 1. Inspection of the correlations
among the variables reveals no or weak correlations among themselves.
56
Table 2: Descriptive statistics and intercorrelations1)
Variables Mean Standard Deviation
1. Geographic Distance
(log) 8.36 1.10
2. Cultural Distance (4) 1.93 1.36
3. Cultural Distance (5) 1.19 1.35
4. Education Distance 0.66 .52
5. Religion Distance -.28 1.08
6. Language Distance -.09 .94
7. Migrants 0 1
8. Media Spillover .00 1.08
9. Relative Economic
Status -.017 1.06
10. Relative Governance
Quality -.019 .99
11. Psychic Distance 48.51 21.00
*) Correlation is significant at 0.05 level (2-tailed), 1) n=501
1 2 3 4 5 6 7 8 9 10 11
1.
2. .008
3. -.023 .465*
4. -.027 -.082* .041
5. .009 .010 .122* .147*
6. .018 .034 .048 .098* .230*
7. .012 .005 -.041 -.089* -.029 -0.23
8. -.241* -.065 -.025 .082* -.060 -.059 .037
9. .005 .037 .014 -.070* -.035 -.052 .237* -.124
10. .004 -.005 .170* -.002 -.055 -.028 .097* .018 .078*
11. .729* .047 .002 -.059 .050 .046 -.051 -.250* .101* .203*
57
The results of the hierarchical regression analyses are presented in Table 3. The first
model contains the control variables only. Among those, geographic distance shows a
significant positive effect on psychic distance (t=23.743, p<0.001). This finding is not
surprising as geographic distance has proven to be a strong linear predictor of psychic
distance in previous research (Håkanson & Ambos, 2010). As geographic distance is
arguably independent of the direction travelled, it precludes an influence on
asymmetry. While religion distance is somewhat significant in the linear model
(t=1.980, p<0.05), none of the other control variables is significantly related to psychic
distance in any of the models.
58
Ta
ble
3:
Hie
rarc
hic
al
Mu
ltip
le R
egre
ssio
n R
esu
lts
C
on
tro
ls-o
nly
mod
el
Lin
ear
effe
ct m
od
el
Qu
ad
rati
c ef
fect
mod
el
Cu
bic
eff
ect
mod
el
b
t-
valu
e
b
t-va
lue
b
t-va
lue
b
t-va
lue
Geo
grap
hic
Dis
tanc
e (l
og)
.727
***
23.7
43
.712
***
24.1
98
.665
***
22.7
90
.661
***
22.9
54
Cul
tura
l D
ista
nce
5 (4
)
-.00
4 (.
038)
-.
115
(1.1
05)
-.06
0 (.
059)
-1
.802
(1
.806
) -.
047
(.02
5)
-1.5
32
(.83
1)
-.05
4 (.
031)
-1
.791
(1.
035)
Edu
cati
on D
ista
nce
-.04
5 -1
.445
-.
042
-1.4
19
-.04
1 -1
.531
-.
029
-1.0
68
Rel
igio
n D
ista
nce
.045
1.
403
.059
* 1.
980
.035
1.
261
.050
1.
820
Lan
guag
e D
ista
nce
.026
.8
26
.030
1.
024
.019
.7
15
.023
.8
55
Mig
rant
s
-.
105*
**
-3.5
50
-.07
7 -.
905
-.05
6 -.
666
Med
ia S
pill
over
-.
056
-1.8
57
-.19
1*
-2.5
92
-.21
9**
-3.0
09
Rel
. eco
nom
ic s
tatu
s
.0
98**
3.
284
.101
***
3.62
0 -.
168*
-2
.230
R
el. g
over
nanc
e qu
alit
y
.2
18**
* 7.
408
.222
***
8.23
6 .1
53**
2.
640
Mig
rant
s2
-.00
5 -.
058
-.02
7 -.
333
Med
ia S
pill
over
2
.171
* 2.
414
.200
**
2.84
1 R
el. e
cono
mic
sta
tus2
-.
088*
* -3
.073
-.
086*
* -3
.063
R
el. g
over
nanc
e qu
alit
y2
.230
***
8.45
1 .2
31**
* 8.
600
Rel
. ec
onom
ic s
tatu
s3
.290
***
3.85
5 R
el.
gove
rnance
qu
ali
ty3
0.71
1.
227
R2
.5
38
.6
02
.6
70
.6
81
Adj
uste
d R
2
.532
.594
.660
.671
∆
R2
.0
64
.0
68
.0
11
Sta
ndar
d er
ror
14
.365
13.3
91
12
.246
12.0
58
F-v
alue
95.8
80**
*
74.0
46**
*
70.3
87**
*
64.5
94**
*
59
Standardized regression coefficients, t-values in parenthesis, two-tailed test. Variables
were entered in the following sequence: Control variables, linear main effects,
quadratic main effects, cubic main effects, as recommended (Cohen & Cohen, 1983).
*p<0.05; **p<0.01; ***p<0.001
60
Our first two hypotheses predicted exposure effects on psychic distance in a U-curved
relationship. In order to show a significant U-shaped association between a predictor
variable and psychic distance, two necessary and sufficient criteria must be satisfied:
(1) the linear main effect of the predictor variable must be negatively associated with
the level of psychic distance; and (2) the squared-term of the predictor variable must
be positive and significantly associated with the level of psychic distance. The first
hypothesis described the impact of the level of migrant from country B in country A
and the resulting psychic distance towards country B. We expected a U-curved
relationship but as can be noted from Table 3, the data does not support our
hypothesis. We find a strong linear negative effect from the level of migrants on
psychic distance. Regarding hypothesis two, the level of media spillover has a non-
significant effect on psychic distance in the linear effect model. In the quadratic effect
model though, the linear effect becomes significantly negative (t=-2.258, p<0.05) and
the squared-term significantly positive (t=2.052, p<0.05), supporting the hypothesized
U-curved relationship.
The third hypothesis described the relationship between relative economic status and
psychic distance. It is recommended to use the coefficients from the full model for
plotting the curve (Cohen & Cohen, 1983) and we find strong support for our
prediction. While the overall trend is positive, the sign changes between the linear,
quadratic and cubic terms indicate a non-linear relationship describing an S-shaped
function. Hypothesis four predicted an S-shaped relationship also for relative
governance quality and psychic distance. The full model shows that the linear,
quadratic as well as the cubic term are positive and significant. The data does not
support our hypothesis but indicates a strong linear positive relation between relative
governance quality and psychic distance. Overall, the inclusion of the quadratic terms
increases the R2 of the model by 6.8% over the linear effect model (F=70.387,
p<0.001) and the inclusion of the cubic terms increases the R2 of the model by an
additional 1.1% (F=64.594, p<0.001). Overall, the model explains 67.1% of the
variance in psychic distance.
Discussion and Conclusion
Our study set out to investigate the antecedents of psychic distance asymmetry.
Focusing on psychic distance operationalized as the perception of proximity/similarity,
we draw on psychological research to formulate our hypotheses. We find mixed
support for the hypotheses related to the impact of the mere-exposure effect which we
61
expect from the level of migrants from a foreign country and the level of media
spillover. The data shows a strong negative linear relationship between the level of
migrants and the psychic distance that is averagely perceived towards a foreign
country. Other than expected, we find no inflection point in the relationship. It seems
that more migrants from a foreign country within a respective home country lower the
perceived distance toward the foreign country without any reactance effects.
Regarding the level of media spillover, our hypothesis predicting a U-curved
relationship with psychic distance is confirmed. Distance perceptions decrease with
the level of media spillover up to a certain inflection point after which the sign of the
relationship flips. The exposure to a foreign country through media spillover seems to
promote perceived similarity up to a certain threshold point.
Our hypotheses concerning the influence of social comparisons also receive mixed
support. The data supports the S-curved relationship between relative economic status
and psychic distance. For low levels of economic status, respondents compare upwards
and their comparison implicates assimilation effects, lowering levels of psychic
distance. The relationship flattens for country pairs that do not differ much in their
economic status. Higher levels of relative economic status again imply a downward
comparison and yield greater perceived distances, supporting our hypothesized
relationship. For governance quality, the sign of the relationship with psychic distance
is positive in all models and hence does not support an S-curved relationship.
One explanation for the different effects of relative economic status and relative
governance quality on psychic distance might be that the comparisons based on the
economic status of a country might have a more competitive character than for
governance quality. A strong economic status could be even more desirable than a
stable political environment and thus function as the more influential comparison
basis, driving assimilation and contrast effects. Summarizing our findings, we find
support for the influence of cognitive processes on the perceived distances depending
on national-level parameters. As these national parameters vary with the point of view,
psychic distance asymmetries constitute the consequent cross-national perception
gaps.
Our paper makes several contributions to the literature. We are among the first in
distance research to theorize and empirically test the influence of cognitive processes
on the formation of psychic distance. Rather than studying individual-level factors
such as experience, we focus on national-level influences that play a role in the
formation process. Despite the mixed results, our findings emphasize the crucial role
of the measurement choice in distance research. Potential influences such as cognitive
62
processes might have been neglected in previous research. Also, our study highlights
the need to understand psychic distance as a bilateral construct and to acknowledge
this fact when operationalizing it in empirical research. As bilateral data collection
might not always be possible, authors should at any rate show awareness and discuss
the limitations of unilateral psychic distance data.
Implications
Our findings emphasize the bilateral nature of perceived distances and the possibility
of directional effects. While earlier studies have provided empirical evidence for the
existence of asymmetries, our findings shed light on the reasons for perception gaps in
regard to distance. Future research will benefit from our findings if they prompt more
thought regarding the empirical application of psychic distance. Research quality
could improve if directional effects are explicitly incorporated or measurement choices
well-conceived. Our findings show the influence of cognitive processes and factors
that have not featured the distance literature so far. The literature provides a range of
measurement options that differ in their underlying assumptions and implications. The
optimal operationalization of psychic distance thus depends on the purpose and
research context. A good measurement choice, such as the use of bilateral data, could
however unlock huge potential and improve cross-national research.
Our findings could be interesting to decision-makers in the management of country
images. Country image is relevant for a row of stakeholders such as foreign investors,
exporters or tourists. Knowledge on the relevance of exposure effects indicates that it
could be beneficial to advertise one´s country in a foreign market in order to increase
exposure and liking. Moreover, the mental positioning of a country can be managed
actively. Insights into the process of social comparison allow decision-makers to
emphasize particular country attributes that would be beneficial for social comparison,
depending on the relative position of the target market.
Limitations
Our study is limited in several regards. For one, our sample size is restricted to the 25
biggest countries in terms of GDP. A broader range of countries with more variance in
regard to economic strength might yield different findings. Also, our findings are
limited to psychic distance operationalized as similarity judgment and not transferable
to alternative measures such as objective psychic distance indices (Brewer, 2007) or
multidimensional scales (Sousa & Lages, 2011). The study further assumes social
comparison processes to be independent of cultural context. Our arguments build on
the idea that cognitive processes are independent of nationality or culture and hence
63
generalisable. There might be limits to this assumption though as first evidence hints at culture having an influence on cognitive processes (Nisbett & Miyamoto, 2005). Cultural background might also bias our results if culture has an influence on the response style (Hui & Triandis, 1989). Focusing on social comparison processes and the mere-exposure effect, we cannot preclude the influence of alternative cognitive processes during the formation of distance judgements. Information on a foreign environment could, for example, be ambiguous or inconsistent so that it gets distorted in an attempt to reduce cognitive dissonance (Goethals, 1986). Another factor beyond the scope of this study is the control of media content. The nature of information made available on a foreign country might impact the influence on similarity perceptions. Positive media content might thereby strengthen perceptions of similarity whereas negative content might trigger a contrast effect. Also, it is beyond the scope of our study to control for type of migrants or other forms of exposure to a foreign country that might influence the individual perception.
64
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Article 3
Schuster, A. (in preparation for submission). A Theory-Based User´s Guide To
Psychic Distance.
73
A Theory-Based User’s Guide To Psychic Distance
Schuster, Anja (1)
(1) Anja Schuster is Doctoral Candidate at the Institute of Management, University
of St. Gallen, Switzerland ([email protected])
74
Abstract
Distance concepts are central to international management but being criticized for their
weak theoretical foundation. Often, conceptual developments are available but remain
unregarded and incoherent with empirical research. Especially the concept of psychic
distance has attracted a great amount of research attention in the past, yet lacks a
strong theoretical rationale. In view of the multitude of definitions and measurement
approaches available in the literature, we suggest viewing it as an “envelope concept”
(Tung & Verbeke, 2010) allowing a multi-pronged approach to its theoretical
foundation and empirical application. The paper provides a comprehensive overview
on definitions and measurement approaches and discusses the concept´s role according
to two exemplary theoretical approaches. It intends to improve quality of future
distance research by sharpening the focus on the fit between theory and empirical
research. Ultimately, the paper intends to constitute a decision guideline for the well-
conceived, theory-based application of psychic distance in future research.
75
Introduction
Concepts of distance play a central role in international management research. Authors
in the field use them to capture a broad range of cross-national differences such as
cultural or institutional distance, transferring the term from geographic distance, the
most obvious form of separation. Distance concepts help to understand all kinds of
questions in international management research such as foreign market selection, entry
mode choice, international knowledge management, expatriate adjustment and
international performance (Berry, Guillén & Zhou, 2010). Their relevance to the field
is put in a nutshell by Zaheer and colleagues who claim that “international
management is management of distance” (Zaheer, Schomaker & Nachum, 2012: 19).
The concept of psychic distance ranks among the more controversial ones. It dates
back to the 1950s (Beckerman, 1956; Linnemann, 1966) but to this day scholars do not
agree on a definition or measurement approach. Psychic distance gained popularity in
international management research with its central role in the Uppsala
internationalization model where it was defined as “the sum of factors preventing the
flow of information from and to the market” (Johanson & Vahlne, 1977:24). Debate
long concerned the objective or subjective conceptualization of psychic distance until
Dow and Karunaratna (2006) suggested the distinction between objective psychic
distance stimuli and subjectively perceived psychic distance. Whilst this distinction is
well accepted in the literature today, less thought has been directed towards the
theoretical rationale underlying the application of alternative psychic distance
conceptualizations in empirical research.
Besides the conceptual confusion, distance research has been producing a great deal of
inconsistent study findings (Shenkar, 2001; Stöttinger & Schlegelmilch, 1998), leading
authors to criticize the weak theoretical foundation of distance studies. In order to
produce valid research results, they maintain that conceptualizations and measures of
distance need to fit a study´s theoretical motivation as well as its research context
(Shenkar, 2012; Zaheer et al., 2012). While the literature provides authors with a wide
choice of definitions and measures of psychic distance, we find that little effort has
been expended towards their theoretical rationale or the research contexts they are
applied to.
Commentators have even challenged the empirical usefulness of psychic distance and
criticised its application as a summary construct which compromises explanatory
power (Evans & Mavondo, 2002; Stöttinger & Schlegelmilch, 1998). In a bid to
76
improve the quality of cross-cultural research, Tung and Verbeke advocate the use of
cultural distance as an “envelope concept” and argue for “its precise content to be
determined ex ante in empirical studies, as a function of the research question to be
answered (...) which of these measures are most appropriate in light of the research
question and context at hand” (2010: 1272). With regard to the complexity and
disorientation prevalent in the psychic distance literature, we appreciate this envelope
idea and encourage its adoption. A multi-pronged understanding and
operationalization of psychic distance would allow researchers to exhaust the
concept´s potential while taking account of the underlying theoretical rationale as well
as the research context.
For psychic distance to benefit the research community, scholars need to be able to
attain valid research results with a reasonable data collection effort. We suggest that
for this reason, the study´s theoretical rationale, psychic distance definition and
measure need to be aligned and data collection efforts reasonable. Researchers should
have the option to use existing psychic distance data or collect new data with time and
cost expenses appropriate to the research project. The operationalizations and
definitions should be worked out from a theoretical approach underlying the study in
order to meaningfully contribute to the research question at hand. A central issue to
this difficulty is the level of analysis. Research interest in international management
mainly focuses on firm level issues with exceptions on the national or individual level
(Peng, 2004). Firm-level psychic distance data is hardly available though as data
sources are either national statistics or individual respondents whose answers can be
aggregated to the national mean. Researchers hence face a trade-off between data
collection effort and accuracy.
The purpose of our paper is to address the points above by drawing up a theory-based
user manual for the meaningful application of psychic distance. To achieve this, we
review the psychic distance literature and provide an overview on the definitions and
operationalizations available. We also indicate potential data sources for future use.
Further, we review and discuss two of the theories that have mainly informed psychic
distance research in the past, transaction cost theory and the Uppsala
internationalization model. We combine our critical in-depth review of the roles that
psychic distance plays within those theories with our revision of definitions and
operationalization to show up ways of how to meaningfully apply the concept.
Our paper is not intended to be a normative guide. Its purpose is rather to function as
decision support to the researcher by providing an overview on the theoretical
77
approaches to psychic distance, definitions and measurement approaches. It cuts down
the extensive literature searches that would otherwise be necessary for an informed
choice. The review should facilitate work with the psychic distance concept in
international management research and thus contribute to an improved research
quality. The present paper is organized as follows. It (1) provides an overview on
definitions and operationalizations of psychic distance, (2) reviews transaction cost
theory as well as the Uppsala internationalization model, (3) identifies and discusses
the role of psychic distance according to those theories and (4) discusses the
implications of our review and highlights future research avenues.
Psychic distance: “A concept past its due date?”
There must be few other concepts in international business research that know more
definitions and operationalizations than psychic distance. While the great deal of
attention might have contributed to a deeper understanding of the concept (Evans &
Mavondo, 2002) it has also fostered increasing disorientation in the field. The
inconclusive research findings led authors to question its empirical usefulness and
suggest that the concept might even be “past its due date” (Stöttinger & Schlegelmilch,
1998:367).
In an attempt to think outside of the box, we broaden our literature search and find the
work on psychic distance by the British psychologist Edward Bullough (1977).
Completely different to the understanding of psychic distance in international
management research, he views it as an aesthetic attitude which is central to the
experience of art, beauty and aesthetics. In his “detachment theory of art” he argues for
the necessity to insert distance between oneself and one´s affections towards an
experience such as a stage performance in order to allow things to be appreciated
objectively and be elevated into an aesthetic experience. The example shows that it is
not only a concept´s label that should matter but rather the way it works. Before we
discuss psychic distance´s role according to transaction cost theory and the Uppsala
internationalization model, we provide a review on its definitions and measurement
approaches to facilitate subsequent discussion.
Definitional Approaches
Definitions of psychic distance are numerous and vary in their focal element. We
group the definitions according to their central focus and find three categories which
we present in Table 1.
78
Table 1: Definitions* of Psychic Distance *Italics added.
(1) Definitions referring to information flow and - interpretation
Vahlne &
Wiedersheim-Paul
(1973) as cited in
Evans, Treadgold,
& Mavondo
(2000: 376)
„factors preventing or disturbing the flow of information
between potential and actual suppliers and customers”
Johanson &
Wiedersheim-Paul
(1975:308)
"factors preventing or disturbing the flow of information
between firm and market. Examples of such factors are
differences in language, culture, political systems, level of
education, level of industrial development etc."
Johanson & Vahlne
(1977:24)
“the sum of factors preventing the flow of information from
and to the market. Examples are differences in language,
education, business practices, culture and industrial
development”
Nordström &
Vahlne (1994: 42)
"factors preventing or disturbing firms learning about and
understanding a foreign environment"
Clark & Pugh
(2001:286)
"factors preventing or disturbing the flow of information
between the firm and target nations, including linguistic,
institutional, cultural and political factors"
Håkanson & Ambos
(2010:201)
“sum of factors (cultural or language differences, geographical
distance, etc.) that affect the flow and interpretation of
information to and from a foreign country.”
(2) Definitions referring to perceived cross-national differences or difficulties
Hallén &
Wiedersheim-Paul
(1984: 17)
„difference in perceptions between buyer and seller regarding
either needs or offers”
Swift (1999: 182) "a consequence of a number of inter-related factors, of which,
perception is a major determinant"
Evans, Treadgold &
Mavondo
(2000: 376)
"the mind's processing, in terms of perception and
understanding, of cultural and business differences which
forms the basis of psychic distance."
79
"distance between the home market and a foreign market
resulting from the perception and understanding of cultural and
business differences. Such business differences may include the
legal and political environment, economic environment,
business practices, language and industry or market sector
structure"
Sousa & Bradley
(2005:44)
“it is the individual’s perception of the differences between the
home country and the foreign country that shapes the psychic
distance concept"
Prime, Obadia &
Vida (2009:196)
“Perceived PD is an internal unobservable phenomenon
resulting from the firm´s perceived cultural issues, and
problems in the business environment and practices. Psychic
distance makes it difficult or problematic for a firm to
understand a market and operate there”
Smith, Dowling &
Rose (2011:133)
“perception a business person has of the level of difficulty they
would encounter in a foreign market if they were to undertake
business operations in that market.”
Håkanson & Dow
(2012: 763)
“the perceived ease or difficulty of obtaining and interpreting
information about demand and supply conditions in foreign
markets”
3) Definitions referring to cognitive and affective aspects
Beckerman
(1956: 38)
"a special problem is posed by the existence of "psychic"
distance (…) purchases of raw material (…) will depend partly
on the extent to which foreign sources have been personally
contacted and cultivated (…) more likely to have contacts with
Swiss suppliers, since Switzerland will be "nearer" to him in a
psychic evaluation (fewer language difficulties, and so on)"
Dichtl, Leibold ,
Koeglmayer &
Müller (1984:124)
“managers (...) witness foreign markets in greater-than-average
degree as strange or odd in nature”
Holzmüller &
Kasper (1990: 222)
“Psychic distance as an above-average indicator of foreign
orientation (...) varying degree of personal (subjective)
familiarity with individual countries”
O´Grady & Lane
(1996: 330)
“a firm’s degree of uncertainty about a foreign market resulting
from cultural differences and other business difficulties that
present barriers to learning about the market and operating
80
there.”
Nebus & Chai
(2013: X)
“We replace the conventional definition of distance with the
cognitive dimensions of managerial awareness, perceptions,
and understanding.”
“the degree of a manager's knowledge about content and
context”
The first group of definitions understand psychic distance as an objective concept. It
includes some of the most cited psychic distance definitions, many dating back to the
Uppsala scholars, for example the one by Johanson and Wiedersheim-Paul who
describe it as the “factors preventing or disturbing the flow of information between
firm and market” (1975:308). As noted in Table 1, the early definitions originate from
Uppsala scholars who employed the concept in the internationalization model of the
firm. Their definitions gave direction to subsequent authors in their focus on the idea
that cross-national information flow is impaired by psychic distance factors. Examples
provided include differences in language, culture, political system, the level of
education and industrial development as well as in the institutional and political
environment (Clark & Pugh, 2001; Johanson &Wiedersheim-Paul, 1975; Johanson &
Vahlne, 1977).
Some of the definitions in this group extend their domain to the aspect of information
usage by referring to psychic distance as the factors that impede not only knowledge
flow but also the interpretation of information, understanding and learning (Håkanson
& Ambos, 2010; Nordström & Vahlne, 1994). Authors in this category unanimously
refer to differences on the country level as the interfering factors. They vary in regard
to the originators and receivers of information flow though. Table 1 shows that
definitions pertain to information flow between various players at the firm- and the
country level such as companies, markets, suppliers and customers. While most
authors provide examples of barrier factors, neither of them claims to offer a complete
list. Critics on the definitions in this category miss a detailed explanation of how the
national differences translate into difficulties in information flow such as Prime and
colleagues (Prime, Obadia & Vida, 2009: 189) who argue that the definitions are “not
supported by an explicit theoretical basis”. They further maintain that the impact of
national differences on information exchange across borders is merely presumed and
that theoretical rationales for their effect are barely provided.
81
Authors in the second group define psychic distance as an individual´s perception of
national differences and the expected difficulties arising from those. The notion of
perceived distances has become more popular in recent years. Authors have turned to
an etymological analysis of psychic distance to substantiate their understanding of
psychic distance as a subjective concept (Håkanson & Ambos, 2010; Sousa & Bradley,
2005). They find that the term “psychic” is derived from the Greek word “psychikos”
for mind or soul (Simpson & Weiner, 1989) and point to the level of the individual as
the right level of analysis.
Focusing on perceptions, the authors acknowledge that psychic distance is formed at
the level of the individual rather than on the national one (Brewer, 2007; Petersen &
Pedersen, 1996; Sousa & Bradley 2008). The objective cross-national differences that
form the basis of the perceptual measurement are similar to the factors mentioned in
the first category and include country characteristics such as legal regulations or
people characteristics like consumer preferences (Sousa & Lages, 2011). Again, some
authors extend the concept to complement the aspect of perception with the notion of
understanding, highlighting the individual as the relevant level of analysis (e.g. Evans
& Bridson, 2005; Evans, Treadgold & Mavondo, 2000). Brewer (2007) sees no
theoretical justification for this focus on country differences as he claims they do not
lead to problems by default. He suggests that cross-national interaction can be affected
by many more factors than just country differences and challenges the rationale
underlying psychic distance definitions based on perceptions alone.
The third set of definitions also pertains to the level of the individual. Rather than
focussing on the perception of national differences though, authors in this category
refer to various psychological aspects such as cognitive and affective concepts.
Beckerman (1956) who is deemed the originator of the psychic distance concept
understands psychic distance as the perceived nearness of a foreign country and
discusses its influence on international trade preferences. He uses the inverse of
distance, the perceived closeness or nearness to a foreign nation to outline psychic
distance. Further authors in this category define psychic distance as the perceived
strangeness and oddness of a foreign country (Dichtl, Leibold, Koeglmayer & Mülller,
1984), the perceived familiarity with it (Holzmüller & Kasper, 1990; Meyer 2001) or
the level of uncertainty about a foreign market (O´Grady & Lane, 1996). The
identification of psychic distance with the level of uncertainty is challenged by Smith,
Dowling and Rose (2011) though who rather understand psychic distance as the
perceived level of difficulty to undertake business in a foreign market. They strongly
argue against the definition as uncertainty and claim that it is possible for a manager to
82
perceive high distance towards a target market and expect a high level of difficulty but
still be rather certain in his expectations because of prior personal experiences in the
market. Very recent definitions even leave aside the dyadic country model and define
psychic distance as a cognitive construct comprising the three dimensions awareness,
perception and understanding of a foreign environment (Nebus & Chai, 2013).
Our review of psychic distance definitions highlights the fundamental distinction
between the understanding of psychic distance as an objective or subjective concept.
As both approaches arguably have their right to exist, recent contributions
acknowledge the legitimacy of both. Pioneering this idea, Dow and Karunaratna
(2006) split the concept into objective psychic distance stimuli (PDS) and subjective
perceived psychic distance (PPD), conceptualizing the objective national-level factors
as antecedents to the distance that is perceived at the individual level.
Measurement Approaches
Building on Dow and Karunaratna´s (2006) distinction, we feel that a general
understanding of psychic distance as a latent concept might be helpful for our
discussion of psychic distance operationalizations (Prime, Obadia & Vida, 2009). As
latent concepts are not directly observable, the social sciences have developed a two-
tiered measurement approach, including a formative and a reflective measurement
specification. We provide an overview on the measurement approaches to psychic
distance in combination with this approach in Figure 1. Formative indicators include
observable variables that are assumed to cause the latent variable, in our case the
psychic distance stimuli. Effect indicators are also observable but are themselves
induced by the latent variable such as the perceptual distance data that can be collected
from individuals (Diamantopoulos & Winklhofer, 2001). As the choice between
formative and a reflective measurement specification should depend on the causal
priority between the latent variable and its indicators (Bollen, 1989), both
measurement approaches to psychic distance are generally justified.
83
Figure 1: Conceptual Approach to Psychic Distance Measurement
Our literature review reveals over 20 different measurement approaches which we
cluster into five groups and present in Table 2. The categorization follows previous
classification efforts (Nebus & Chai, 2013; Sousa & Lages, 2011). We distinguish
between (0) measures based on cultural dimensions, (1) unidimensional, objective
measures, (2) multidimensional, objective measures, (3) unidimensional, subjective
and (4) multidimensional, subjective approaches. Whereas categories null, one and
two follow a formative measurement approach, the latter two comprise reflective
measures. The list is not intended to be exhaustive but to provide an overview on the
alternative measures as well as potential data sources or an indication of the necessary
data collection effort.
Subjective measures
Cat. 3 : uni-dimensionalCat. 4 : multi-dimensional
reflective
indicators
formative
indicators
PsychicDistance
X1
X2
X3
Y1
Y3
latent construct
Objective measures
Cat. 0 : cultural dimensionsCat. 1 : uni-dimensionalCat. 2 : multi-dimensional
Y1
Y2
84
T
ab
le 2
: M
easu
rem
ent
Ap
pro
ach
es t
o P
sych
ic D
ista
nce
Ca
t.
Au
tho
r(s)
L
ab
el
Lev
el
Psy
chic
Dis
tan
ce M
easu
re
Da
ta S
ou
rce
an
d A
va
ila
bil
ity
Ca
teg
ory
0 –
Cu
ltu
ral
Dis
tan
ce M
easu
res
0 K
ogut
&
Sin
gh
(198
8)
Cul
tura
l di
stan
ce
inde
x na
tion
al
Cul
tura
l di
stan
ce i
ndex
is
base
d on
the
cul
tura
l di
men
sion
s es
tabl
ishe
d by
Hof
sted
e (2
001)
: po
wer
di
stan
ce, u
ncer
tain
ty a
void
ance
, m
ascu
lini
ty/f
emin
init
y, i
ndiv
idua
lism
/ co
llec
tivi
sm,
long
ter
m v
s. s
hort
-ter
m o
rien
tati
on.
Cul
tura
l di
men
sion
s da
ta i
s av
aila
ble
for
93 c
ount
ries
via
w
ww
.gee
rt-h
ofst
ede.
com
0
Moe
n
&
Ser
vais
(2
002)
Reg
iona
l cl
uste
r na
tion
al
Inde
x nu
mbe
r (1
to
4) f
or c
ount
ries
/clu
ster
s, d
epen
ding
on
the
ir c
ultu
ral
dist
ance
(H
ofst
ede´
s di
men
sion
s) t
o th
e ho
me
coun
try.
Cul
tura
l di
men
sion
s da
ta i
s av
aila
ble
for
93 c
ount
ries
(se
e ab
ove)
Ca
teg
ory
1 –
Un
idim
ensi
on
al,
Ob
ject
ive
Mea
sure
s
1
Ron
en &
S
henk
ar
(198
5) a
nd
Pen
g, H
ill
& W
ang
(200
0)
Psy
chic
di
stan
ce
clus
ters
na
tion
al
Eig
ht p
sych
ic z
ones
/clu
ster
s (A
nglo
, Ara
b, F
ar E
ast,
G
erm
anic
, Lat
in A
mer
ica,
Lat
in E
urop
e, N
ear
Eas
t an
d N
ordi
c) a
nd o
ne i
ndep
ende
nt c
lust
er (
Bra
zil,
Ind
ia,
Isra
el a
nd J
apan
). L
ater
add
itio
n of
tw
o ne
w c
lust
ers
(Sub
-Sah
aran
Afr
ica,
exc
ept
Sou
th A
fric
a an
d E
aste
rn
Eur
ope)
.
Clu
ster
ing
base
d on
und
erly
ing
dim
ensi
ons:
wor
k go
als,
nee
ds a
nd j
ob a
ttit
ude
but
also
dis
ting
uish
able
on
: ge
ogra
phy,
lan
guag
e an
d re
ligi
on. P
sych
ic/c
ultu
ral
dist
ance
exp
ecte
d hi
gher
bet
wee
n th
an w
ithi
n co
untr
y gr
oups
.
Cou
ntry
clu
ster
s av
aila
ble
from
R
onen
& S
henk
ar (
1985
).
85
1 M
eyer
(2
001)
D
umm
y na
tion
al
Cou
ntry
dum
my.
The
mea
sure
ass
umes
tha
t fa
mil
iari
ty
and
pers
onal
con
tact
s de
crea
se t
he p
sych
ic d
ista
nce
for
Ger
man
fir
ms
tow
ards
Eas
tern
Eur
ope
rath
er t
han
for
Bri
tish
one
s.
1 P
lá-B
arbe
r (2
001)
R
egio
ns
nati
onal
Cat
egor
ical
var
iabl
e in
dica
ting
the
foc
us r
egio
n of
the
fi
rms
stud
ied:
EU
, Lat
in A
mer
ica
or R
est
of t
he W
orld
.
Ca
teg
ory
2 –
Mu
ltid
imen
sio
na
l, O
bje
ctiv
e M
easu
res
2 N
ords
tröm
&
Vah
lne
(199
4)
MR
fi
rm
The
Mea
n E
stab
lish
men
t R
ank
as a
pro
xy f
or t
he
attr
acti
vene
ss o
f a
fore
ign
host
cou
ntry
, mea
sure
d by
th
e in
tern
atio
nali
zati
on a
ctiv
ity
of a
fir
m.
2
Dow
&
Kar
unar
atn
a (2
006)
an
d
Dow
&
Fer
enci
kov
a (2
010)
Psy
chic
di
stan
ce
inde
x na
tion
al
For
mat
ive
inde
x of
obj
ecti
ve c
ount
ry d
iffe
renc
es i
n 1.
la
ngua
ge
2.
reli
gion
3.
in
dust
rial
dev
elop
men
t 4.
ed
ucat
ion
5.
de
gree
of
dem
ocra
cy
Dis
tanc
e da
ta a
vail
able
for
120
co
untr
ies
(14,
280
pai
rs)
via
rese
arch
ho
mep
age:
http
s://
site
s.go
ogle
.co
m/s
ite/
ddow
rese
arch
/hom
e/sc
ale
s/la
ngua
ges
2 B
rew
er
(200
7)
Psy
chic
di
stan
ce
inde
x na
tion
al
For
mat
ive
inde
x co
nsis
ting
of
seve
n pr
imar
y el
emen
ts
1. c
omm
erci
al t
ies
2. p
olit
ical
tie
s 3.
his
tori
c ti
es
4. g
eogr
aphi
c ti
es
5. s
ocia
l ti
es
6. in
form
atio
n ti
es
7. d
evel
opm
ent
Ele
men
ts a
re m
easu
red
wit
h 15
ind
icat
ors
(e.g
. tw
o-
Inde
x an
d ra
nkin
g av
aila
ble
in
Bre
wer
(20
07)
for
the
psyc
hic
dist
ance
bet
wee
n A
ustr
alia
and
25
for
eign
cou
ntri
es.
86
way
tra
de, t
rade
agr
eem
ents
, col
onia
l re
lati
onsh
ip, t
he
leve
l of
dev
elop
men
t in
for
eign
cou
ntry
).
Ca
teg
ory
3 –
Un
idim
ensi
on
al,
Su
bje
ctiv
e M
easu
res
3
Dic
htl
et
al. (
1984
)
and
D
icht
l,
Koe
glm
aye
r &
Mül
ler
(199
0)
Con
cent
ric
circ
les
ind.
Con
cent
ric
circ
les
wit
h th
e ho
me
coun
try
repr
esen
ting
th
e ce
ntre
. Res
pond
ents
pos
itio
n th
e fo
reig
n co
untr
ies
acco
rdin
g to
the
per
ceiv
ed d
ista
nce
of t
he s
tim
ulus
co
untr
y fr
om t
he h
ome
coun
try.
The
sum
of
dist
ance
s is
the
mea
sure
of
perc
eive
d di
stan
ce t
o fo
reig
n m
arke
ts
(ove
rall
mea
sure
)
Cou
ntry
pai
r da
ta a
vail
able
in
Stö
ttin
ger
& S
chle
gelm
ilch
(1
998)
for
Jap
an (
n=66
), F
inla
nd
(n=
65)
and
Ger
man
y (n
=10
4) t
o ca
. 10
fore
ign
coun
trie
s.
3
Stö
ttin
ger
&
Sch
lege
lmi
lch
(199
8)
Fre
e m
agni
tude
sc
ales
in
d.
A s
cale
wit
hout
ref
eren
ce s
tim
ulus
or
resp
onse
ca
tego
ries
to
capt
ure
the
indi
vidu
al r
elat
iona
l ju
dgm
ent.
S
ubse
quen
t tr
ansl
atio
n of
jud
gmen
t sp
ectr
um i
nto
the
dist
ance
bet
wee
n th
e po
int
of l
ongi
tude
O (
Gre
enw
ich)
an
d 18
0 (d
ate
line
). 1
6,70
0 ki
lom
etre
s re
sult
ing
in a
sc
ale
from
0 t
o 16
.7(1
7).
Dat
a re
port
ed p
riva
te s
ecto
r m
anuf
actu
ring
fir
ms
in t
he U
S
tow
ards
13
fore
ign
coun
trie
s.
Goo
d ov
ervi
ew c
ompa
riso
n w
ith
Hol
zmül
ler/
Kas
per
data
and
D
icht
l et
al.
dat
a.
3 N
ords
tröm
(1
991)
10
0pt
scal
e in
d.
Inde
x va
lue
on a
sca
le f
rom
0 t
o100
, wit
h th
e lo
wes
t va
lue
for
the
coun
try
perc
eive
d as
clo
sest
and
the
hi
ghes
t va
lue
for
the
one
perc
eive
d th
e m
ost
rem
ote.
Sur
vey
wit
h 11
8 S
wed
ish
man
ager
s. D
ata
avai
labl
e fr
om
Sw
eden
to
22 c
ount
ries
.
3 D
ow
(200
0)
10pt
sca
le
ind.
Sin
gle
item
sca
le a
dmin
iste
red
to a
n ex
pert
pan
el (
e.g.
tr
ade
com
mis
sion
ers)
. Des
crip
tion
of
psyc
hic
dist
ance
ad
apte
d fr
om C
arls
on's
(19
74),
Joh
anso
n &
W
iede
rshe
im-P
aul´
s (1
975)
, and
Joh
anso
n &
Vah
lne
(197
7).
Dat
a av
aila
ble
from
Aus
tral
ia (
8 A
ustr
alia
n tr
ade
com
mis
sion
ers)
to
war
ds 2
5 fo
reig
n co
untr
ies.
3 E
llis
(2
007,
10
0pt
scal
e in
d.
A 1
00pt
sca
le w
ith
the
hom
e co
untr
y an
chor
ed a
t on
e.
Bas
ed o
n ap
proa
ches
by
Dow
(20
00)
and
Nor
dstr
öm
Dat
a av
aila
ble
from
Hon
g K
ong
(n=
54)
and
mai
nlan
d C
hina
87
2008
)
(199
1), p
sych
ic d
ista
nce
defi
niti
on t
aken
fro
m
Joha
nson
and
Wie
ders
heim
-Pau
l (1
975)
and
O’G
rady
an
d L
ane
(199
6)
(n=
14)
to 2
2 fo
reig
n co
untr
ies
in
Ell
is (
2007
). D
ata
from
Chi
na t
o 55
cou
ntri
es a
vail
able
in
Ell
is
(200
8).
3 H
åkan
son
& A
mbo
s
(201
0)
100p
t sc
ale
ind.
A 1
00-p
t sc
ale
capt
urin
g th
e co
gnit
ive
perc
epti
on o
f co
untr
y di
stan
ces.
Res
pond
ents
ind
icat
e ho
w c
lose
or
far
away
the
y pe
rcei
ve t
he f
orei
gn c
ount
ries
to
be. T
he
dist
ance
to
the
hom
e co
untr
y is
set
to
0. M
easu
rem
ent
appr
oach
bui
lds
on N
ords
tröm
(19
91),
Dow
(20
00)
and
Ell
is (
2007
).
Dat
a av
aila
ble
on t
he 2
5 la
rges
t co
untr
ies
in t
erm
s of
GD
P (
300
coun
try
pair
s), 1
414
resp
onde
nts.
Ca
teg
ory
4 –
Mu
ltid
imen
sio
na
l, S
ub
ject
ive
Mea
sure
s
4 K
lein
&
Rot
h (1
990)
Com
posi
te
inde
x in
d.
Com
posi
te i
ndex
mea
suri
ng t
he p
erce
ived
dis
tanc
e on
a
7pt
Lik
ert
scal
e fr
om “
very
sim
ilar
” to
“ve
ry
diff
eren
t” o
n th
e fi
ve i
tem
s:
1.
lang
uage
of
the
coun
try
2.
acce
pted
bus
ines
s pr
acti
ces
3.
econ
omic
env
iron
men
t
4.
lega
l sy
stem
5.
co
mm
unic
atio
ns i
nfra
stru
ctur
e B
ased
on
defi
niti
on b
y Jo
hans
on &
Vah
lne
(197
7).
Rel
iabi
lity
= 0
.92
Dat
a no
t av
aila
ble.
Col
lect
ed f
rom
477
Can
adia
n m
anuf
actu
rers
tow
ards
the
ir
mos
t im
port
ant
expo
rt m
arke
t.
4 S
im &
Ali
(1
998)
C
ompo
site
in
dex
ind.
Com
posi
te i
ndex
mea
suri
ng t
he d
egre
e of
sim
ilar
ity
usin
g a
5pt
Lik
ert
scal
e (C
ronb
ach
alph
a =
0.9
2) o
n it
ems
rela
ting
to:
1.
cu
ltur
al a
ttit
udes
(7
item
s),
2.
busi
ness
pra
ctic
es (
8 it
ems)
and
3.
ea
se o
f co
mm
unic
atio
n (8
ite
ms)
Dat
a no
t av
aila
ble.
Col
lect
ed f
rom
59
IJV
in
Ban
glad
esh
on P
D b
etw
een
join
t ve
ntur
e pa
rtie
s.
88
4 E
vans
&
Mav
ondo
(2
002)
Com
posi
te
inde
x in
d.
Com
posi
te i
ndex
cal
cula
ted
(CF
A)
as a
com
bina
tion
of
cult
ural
dis
tanc
e (5
Hof
sted
e di
men
sion
s) a
nd b
usin
ess
dist
ance
(le
gal/
poli
tica
l is
sues
, mar
ket
stru
ctur
e,
econ
omic
env
iron
men
t, b
usin
ess
prac
tice
s, l
angu
age)
. R
espo
nden
ts i
ndic
ate
the
degr
ee t
o w
hich
for
eign
m
arke
t is
per
ceiv
ed a
s si
mil
ar o
r di
ffer
ent
to h
ome
mar
ket
on a
7pt
Lik
ert
scal
e fr
om (
1) “
tota
lly
the
sam
e”
to (
7) “
tota
lly
diff
eren
t”. D
ista
nces
col
lect
ed f
or o
ne
psyc
hica
lly
clos
e an
d on
e di
stan
t co
untr
y (s
elf
nom
inat
ed).
C
ronb
ach
alph
a >
0.7
Dat
a no
t av
aila
ble.
Que
stio
nnai
res
to 1
02 n
on-f
ood
reta
iler
s (s
enio
r ex
ecut
ives
) th
at
oper
ated
sto
res
in a
t le
ast
thre
e fo
reig
n co
untr
ies,
maj
orit
y ba
sed
in U
K, U
S a
nd G
erm
any.
4
Chi
ld,
Rod
rigu
es
& F
ryna
s
(200
9)
Com
posi
te
inde
x in
d.
Com
posi
te i
ndex
mea
suri
ng t
he p
erce
ived
dif
fere
nce
usin
g a
5pt
Lik
ert
scal
e th
e 12
ite
ms
(Cro
nbac
h al
pha=
0.
76)
incl
ude
1.
cu
ltur
e ,
2.
leve
l of
tec
hnic
al d
evel
opm
ent
3.
leve
l of
eco
nom
ic d
evel
opm
ent
4.
logi
stic
s in
fras
truc
ture
5.
po
liti
cal
syst
em
6.
lega
l sy
stem
7.
bu
sine
ss p
ract
ices
,8. b
usin
ess
ethi
cs
Dat
a co
llec
ted
for
UK
(ho
me)
-B
razi
l (f
orei
gn c
ount
ry)
dyad
fr
om U
K r
espo
nden
ts (
n=32
).
4
Sou
sa &
B
radl
ey
(200
5) a
nd
Sou
sa &
L
ages
(2
011)
Psy
chic
di
stan
ce
scal
e in
d.
Mul
ti-d
imen
sion
al c
onst
ruct
, ite
ms
are
mea
sure
d on
5p
t L
iker
t sc
ales
ran
ging
fro
m “
very
sim
ilar
” to
“ve
ry
diff
eren
t” a
nd i
nclu
de
a) c
ount
ry c
hara
cter
isti
cs d
ista
nce
(Cro
nbac
h al
pha=
0.86
):
1.
leve
l of
eco
nom
ic a
nd i
ndus
tria
l de
velo
pmen
t
Dat
a no
t av
aila
ble.
Sam
ple
of 3
01 P
ortu
gues
e ex
port
ing
firm
s, d
ista
nce
mea
sure
d to
war
ds a
fir
m’s
mos
t im
port
ant
fore
ign
mar
ket.
89
2.
com
mun
icat
ions
inf
rast
ruct
ure
3.
m
arke
ting
inf
rast
ruct
ure
4.
tech
nica
l re
quir
emen
ts
5.
mar
ket
com
peti
tive
ness
6.
le
gal
regu
lati
ons
b) p
eopl
e ch
arac
teri
stic
s di
stan
ce (
Cro
nbac
h al
pha=
0.87
):
1.
per
capi
ta i
ncom
e 2.
pu
rcha
sing
pow
er o
f cu
stom
ers
3.
life
styl
es
4.
cons
umer
pre
fere
nces
5.
le
vel
of l
iter
acy
and
educ
atio
n
6.
lang
uage
7.
cu
ltur
al v
alue
s, b
elie
fs, a
ttit
udes
, tra
diti
ons
4a
O´G
rady
&
Lan
e
(199
6)
Att
itud
e/
valu
e or
ient
atio
n in
d.
Dif
fere
nces
in
atti
tude
/val
ue o
rien
tati
on, c
aptu
red
by
125
item
s re
ferr
ing
to t
he f
ollo
win
g in
stru
men
ts:
1. H
ofst
ede´
s cu
ltur
al d
imen
sion
s 2.
Jac
kson
s´s
Per
sona
lity
Res
earc
h F
orm
(a
chie
vem
ent
and
aggr
essi
on)
3.
Per
sona
lity
Ind
ex (
risk
-tak
ing,
tol
eran
ce)
4.
Lod
ahl
& K
ejne
r´s
job
invo
lvem
ent
5. B
lood
´s p
rote
stan
t w
ork
ethi
c.
4a
Ben
nett
(1
997)
Per
ceiv
ed
expo
rt
barr
iers
in
d.
Per
ceiv
ed e
xpor
t ba
rrie
rs (
1 =
ver
y m
inor
pro
blem
, 5
=ve
ry m
ajor
pro
blem
)”, p
rinc
ipal
com
pone
nts
anal
ysis
re
veal
s th
e fo
llow
ing
PD
fac
tors
: a)
nee
d to
obt
ain
fore
ign
repr
esen
tati
on,
b) la
ck o
f kn
owle
dge
of f
orei
gn m
arke
ts, c
usto
mer
bu
ying
hab
its
and
busi
ness
met
hods
, c)
lang
uage
iss
ues
and
Dat
a no
t av
aila
ble.
Sam
ple
incl
udes
UK
exp
orti
ng
busi
ness
es.
Dat
a no
t in
reg
ard
to c
erta
in
fore
ign
coun
try
but
in g
ener
al.
90
d) n
eed
to r
esea
rch
fore
ign
mar
kets
. Cro
nbac
h al
pha
= 0
.82
4a
Pet
erse
n,
Ped
erse
n &
Lyl
es
(200
8)
Lac
k of
kn
owle
dge
ind.
Per
ceiv
ed l
ack
of k
now
ledg
e, m
easu
red
by t
wo
stan
d-al
one
item
s on
a 7
pt L
iker
t sc
ale:
1.
inst
itut
iona
l kn
owle
dge
(new
ness
of
the
fore
ign
coun
try
in g
ener
al)
2. b
usin
ess
know
ledg
e
(new
ness
of
cust
omer
(s)
in t
he f
orei
gn m
arke
t)
Dat
a no
t av
aila
ble.
Col
lect
ed f
rom
369
exe
cuti
ves
(199
fro
m D
enm
ark
and
170
from
Sw
eden
)
4a
Neb
us &
C
hai
(2
013)
Cog
niti
ve
map
s in
d.
Set
of
mat
rice
s or
a c
ogni
tive
map
con
sist
ing
of a
set
of
node
s, v
alue
of
the
node
s an
d th
e w
eigh
t of
the
arr
ows
conn
ecti
ng t
he n
odes
. Und
erst
andi
ng o
f ps
ychi
c di
stan
ce a
s a
cogn
itiv
e ph
enom
enon
wit
h th
e th
ree
dim
ensi
ons:
man
ager
ial
awar
enes
s, p
erce
ptio
n an
d un
ders
tand
ing.
Dat
a no
t av
aila
ble.
Dat
a ne
eds
to b
e co
llec
ted
in
case
-spe
cifi
c in
-dep
th i
nter
view
s w
ith
the
deci
sion
mak
er
91
We label the first group of measures “Category 0” as it contains measures of cultural
rather than psychic distance. Although the field generally understands both concepts to
be conceptually different (O´Grady & Lane, 1996; Sousa & Bradley, 2006), authors
regularly treat psychic and cultural distance as mutually interchangeable concepts.
They resort to the cultural distance index developed by Kogut and Singh (1988) which
builds on Hofstede´s (2001) cultural dimensions data that is publicly available for 93
countries. The good data availability might be the reason for the persistent popularity
of this approach which is being criticized not only for its use as psychic distance
measure but also for shortcomings of the index itself (Shenkar, 2001; 2012).
Turning towards the psychic distance specific measures, we cluster objective
unidimensional measures in category one. Here, authors use country dummies (Meyer,
2001), geographic regions or regional clusters to operationalize psychic distance
(Peng, Hill & Wang, 2000; Plá-Barber, 2001; Ronen & Shenkar, 1985). Authors
relying on country dummies and geographic regions usually provide little explanation
of their measurement choice but seem to assume geographic and psychic distances to
be positively correlated. The approach proposed by Ronen and Shenkar (1985) splits
the world into nine country clusters that build on similarities on attitudinal dimensions.
Although the authors do not explicitly refer to psychic distance, their clusters have
been occasionally used as a psychic distance measure (Hashai & Almor, 2004;
Sullivan, 1994; Trabold, 2002). The “mean establishment rank” is an alternative
unidimensional approach. It captures the attractiveness of a foreign country by
measuring a company´s sequence and intensity of foreign market entry (Nordström &
Vahlne, 1994). The unidimensional measures have been used in the vast majority of
empirical research despite an increasing number of authors supporting a
multidimensional interpretation of the psychic distance construct (Dow &
Ferencikova, 2010).
Category two contains objective multidimensional measures. They capture national-
level aspects effecting psychic distance and feature a stronger formative character than
the measures in category one as they capture a broader range of effect indicators.
Apart from early approaches by Uppsala scholars, such measurement approaches are
rather scarce and to our knowledge only available from Dow and Karunaratna (2006)
as well as Brewer (2007). Dow and Karunaratna (2006) develop a formative index
which captures country differences including differences in languages, religions,
industrial development, level of education and political systems. They publicly provide
their distance data for future use on a research homepage (Dow, 2013). Brewer (2007)
develops an alternative formative psychic distance index which builds on seven
92
primary elements such as the commercial and political ties between two countries. He
tests his index in an Australian setting and provides distance data towards 25 foreign
countries. He justifies the use of a formative index “because it builds on the items that
are directly responsible for the ease of information flows between a country and a
firm” (Brewer, 2007:48). In this measurement category, psychic distance is understood
as a national-level construct arising from country differences. Problems seem to occur
if the concept is not applied at the national but at the individual level. Objective
measures are being criticised for their disrespect of the subjective character of psychic
distance and the disregard of individual level biases in decision making (Dow &
Larimo, 2009; Prime, Obadia & Vida, 2009). As many research questions studied with
the help of psychic distance are managerial decisions of some sort, authors in the field
increasingly turn towards subjective measures following the insight that “companies
do not make decisions, individuals do” (Harzing, 2003: 2014).
Measurement approaches in the next categories answer such claims and operationalize
psychic distance as a subjective concept. Our third group includes unidimensional
approaches, capturing perceived distances on a single scale. One of the first
measurement approaches developed is the use of concentric circles that reveal
managers' cognitive maps and base on gestalt-psychological and cognition-
psychological approaches. The home country is positioned in the centre of several
concentric circles and the respondent is required to position the foreign countries on
the circles representing the perceived distance between the countries (Holzmüller &
Kasper, 1990). Other approaches include the free magnitude scaling (Stöttinger &
Schlegelmilch, 1998) and the use of scales on which the respondents indicate the
perceived distance towards foreign countries (Dow, 2000; Ellis, 2007, 2008; Håkanson
& Ambos, 2010; Nordström, 1991). If the sample is representative and sizable enough,
it can be argued that the aggregation to a higher level is justified so that firm- or
national level psychic distance scores can be obtained. They have further been
criticized for not fully operationalizing the construct as they would not take into
account all the factors contributing to psychic distance such as business practices,
political and legal systems or industry structure (Evans, Treadgold & Mavondo, 2000;
Sousa & Lages, 2011).
Category four is a logical consequence of this critique as it encompasses subjective
measures of perceived distance on multiple dimensions. These composite indices ask
respondents to indicate their perceived level of difference or similarity on a five- or
seven-point Likert scale on items that relate back to the national differences discussed
in category one. An example is the composite index proposed by Evans and Mavondo
93
(2002) which is made up from five factors for business and cultural distance each.
Sousa and Lages (2011) propose a similar approach, including six elements of country
characteristics distance and seven elements measuring people characteristics distance.
We create a subcategory for those measures that do not refer to national differences
but that capture alternative subjective multidimensional responses. These include the
approach by Petersen and colleagues who measure the perceived lack of institutional
and business knowledge on a foreign country (Petersen, Pedersen & Lyles, 2008), the
use of perceived export barriers (Bennett, 1997) and the measure of differences in
attitude and value orientation that are captured with the help of various scales such as
personality indices and job involvement (O´Grady & Lane, 1996).
Our review of measurement approaches reveals that they roughly correspond to the
psychic distance definitions available. There is a generally accepted distinction
between psychic distance on an objective, national-level and psychic distance as a
subjective perceptual concept. The measurement choice represents a trade-off to the
researcher as measurement accuracy usually involves a great data collection effort. We
will now discuss two theories that have been used in connection with psychic distance
in order to guide future theorizing in distance research as well as support definition
and measurement choices.
Theoretical Approaches to Psychic Distance
Authors criticise that a large amount of attention is directed towards the definitions
and measures of distance whereas little effort is extended towards a better
understanding of how distance actually works. They claim that the effect of distance is
often implicitly assumed but actually lacks a sound theoretical rationale (Tung &
Verbeke, 2010; Zaheer et al., 2012). We suggest that a sound theoretical foundation
will improve research quality if definition and measurement of psychic distance are
aligned to form a coherent overall picture.
According to Whetten (1989) a complete theory consists of four elements,
encompassing the factors included in the theory (what?), their relationships (how?),
the causal explanation and assumptions underlying these relationships (why?) as well
as the limitations of the propositions generated (who, where, when?). It appears that
distance scholars have mainly focused on the first two elements, discussing distance
concepts and their effect on dependent variables such as entry mode choice or foreign
market selection. Zaheer and colleagues claim though that “most distance constructs
94
(...) pay insufficient attention to the mechanisms through which distance operates”
(Zaheer et al., 2012:18). Theory development effort seems necessary especially
regarding the causal explanations, assumptions and limitations. A detailed
consideration of the processes to which distance is applied to as an explanatory factor
would allow a better-conceived theoretical rationale and a thorough understanding of
the way distance operates (Evans, Treadgold & Mavondo, 2000; Stöttinger &
Schlegelmilch, 1998). This brings out that theory development needs to be context-
specific in order to provide a detailed apprehension and grounded explanation of the
relationships studied.
To better understand the way psychic distance works, we review two of the theories
that have regularly been used in conjunction with psychic distance. These are
transaction cost theory (Williamson 1975; 1985) and the Uppsala internationalization
model (Johanson & Vahlne, 1977; Johanson & Wiedersheim-Paul, 1975). The
intention behind our review is the identification of the concept´s role and a better
understanding of the theoretical rationale underlying the hypothesized relationships.
An understanding of distance concepts as an “envelope” or “umbrella” supports this
approach (Nebus & Chai, 2013; Tung & Verbeke, 2010). The idea of psychic distance
as an envelope concept allows the choice of definitions and measures according to
research question, research context and theoretical rationale. Rather than following a
“one size fits all” approach, the envelope idea facilitates research with the concept as it
allows the employment of alternative conceptualizations. It permits the specification of
definition and operationalization so that it captures those aspects germane to the
process that psychic distance is applied to as an explanatory variable.
For a detailed review of theoretical rationales for the psychic distance effect, we
adhere to the firm´s internationalization process entailing the decisions on entry mode
and foreign market selection, two of the main fields of application of psychic distance.
Two theories that have been used extensively to study these aspects of firm
internationalization are transaction cost theory (Dunning, 1981; Rugman, 1981;
Williamson, 1975, 1985) and the Uppsala internationalization model (Johanson &
Vahlne, 1977; Johanson & Wiedersheim-Paul, 1975; Luostarinen, 1979). We review
both theories to better understand the role they ascribe to psychic distance and to
derive well-grounded suggestions for the selection of definition and measurement.
Transaction Cost Theory
Transaction cost theory is widely used in organizational research and constitutes a
central approach to the study of firm internationalization, i.e. entry mode choice
95
(Brouthers, 2002; Buckley & Casson, 1976; Rugman & Verbeke, 2003). It dates back
to Coase´s (1937) work on the nature of the firm and was advanced by a series of
authors including Williamson (1975, 1985), Hymer (1960), and Hennart (1982, 1988).
The theory implies that firms rely on the realization of economic exchanges which
involve transaction costs. The firm determines the governance mode of such
exchanges which is either performed externally on the market or integrated within the
boundaries of the firm. The basic premise of the theory holds that this choice follows a
transaction cost minimizing rationale (Williamson, 1975, 1985).
Transaction costs vary for different reasons. On the market, limitations of human
behaviour such as bounded rationality and opportunism create market imperfections
which in turn lead to information asymmetry and uncertainty. As a consequence, the
terms of external economic transactions need to be stipulated and their compliance
controlled, effecting costs for negotiation, monitoring and enforcement of contracts
(Williamson, 1975). For a discussion of psychic distance in a transaction cost-based
approach, we review the theory’s central assumptions in more depth.
Williamson (1975, 1985) who primarily advanced Coase´s original work, builds on the
interplay between several key assumptions regarding human behavior and
transactional dimensions. Human behavior is guided by bounded rationality and
opportunism whereas asset specificity and uncertainty constitute the central
transactional dimensions. The concept of bounded rationality (Simon, 1957) departs
from the rational choice theory which is the dominant approach to decision-making in
neoclassical economics. Rather than expecting fully informed decisions, the idea of
bounded rationality submits that human decision-making is subject to various
constraints, i.e. limited information availability, cognitive limitations of the individual
and time constraints. As a result, the rationally bounded decision-maker seeks to find
the most satisfying rather than the optimal solution. The second key assumption on
human behavior is the risk of opportunistic actions. Opportunism can be understood as
“self-interest seeking with guile. This includes but is scarcely limited to more blatant
forms, such as lying, stealing, and cheating (…) More generally, opportunism refers to
the incomplete or distorted disclosure of information, especially to calculated efforts to
mislead, distort, disguise, obfuscate, or otherwise confuse" (Williamson, 1985: 47).
Without the risk of opportunistic actions, cooperation could be expected to govern
market transactions with no costs for safeguarding.
The central transactional dimensions relate to asset specificity and uncertainty
regarding environmental as well as behavioral factors. The level of asset specificity
96
indicates whether the assets involved in the transaction could be used alternatively by
the firm and includes physical as well as human assets. The more specific the asset to a
transaction, the higher the risk of misuse and opportunism (Williamson, 1985), which
makes it necessary to use high control governance mode, i.e. integration. Asset
specificity may be understood as a proxy for potential market failure and combined
with uncertainty, generally encourage the use of high control modes (Klein & Roth,
1990). In the case of human asset specificity, the possession of specialized knowledge
grants agents a special position. Under the assumption of opportunistic behavior, they
cannot be trusted to act according to the wishes of the principals and might behave
opportunistically so that a market solution implies high monitoring and enforcement
costs. Environmental uncertainty refers to the unpredictability of environmental
circumstances whereas behavioral uncertainty relates to the challenge of ex-post
performance evaluation i.e. the review whether agreements are met (Klein & Roth,
1990). Generally, three sources of transaction costs relating to the transactional
dimensions are distinguished. Asset specificity is understood to drive safeguarding
costs, environmental uncertainty increases the costs for adaptation including
communication, negotiating and coordination costs whereas behavioural uncertainty
increases the costs for performance evaluation including costs for e.g. screening,
selecting and measuring performance of exchange partners (Rindfleisch & Heide,
1997).
International management research has extensively used transaction cost theory to
study firm internationalization, especially entry mode choice (Anderson & Gatignon,
1986; Brouthers, 2002; Meyer, 2001). The entry mode decision is a choice between
alternative governance modes ranging from contract-based entry modes such as
exporting, franchising and licensing to ownership-based modes such as joint ventures
and wholly owned subsidiaries (Zhao, Luo & Suh, 2004). It hence represents a trade-
off between the level of resources a firm commits to its international operations and
the level of control it exercises over these. It can generally be expected that companies
select the entry mode with the highest risk-adjusted return (Andersen & Gatignon,
1986). This implies that an uncertain foreign environment should prompt firms to use
low commitment/control modes in order to reduce information costs and uncertainty
(Alpander, 1976).
The distance literature has assigned psychic distance both the role of a transaction cost
driver and as a general proxy to certain kinds of transaction costs. Authors refer to
psychic distance as a proxy for information acquisition costs (Ellis, 2000) or more
specifically for “information related transaction costs; costs of the search, negotiations
97
and information exchange preceding cross-border transactions” (Håkanson & Dow,
2012: 763). Others identify psychic distance as the costs related to the training of local
staff and the adaptation of management processes to the local environment (Meyer,
2001) as well as the costs related to the monitoring of employees and the evaluation of
inputs and results (Erramilli & Rao, 1993). Psychic distance thus seems to induce
additional transaction costs mainly through increased environmental and behavioural
uncertainty.
The “liability of foreignness” concept is closely related to an understanding of psychic
distance as a cost. Defined by Zaheer (1995: 343) as the costs “a firm operating in a
market overseas incurs that a local firm would not incur”, the liability of foreignness
includes firm-specific costs that arise from the unfamiliarity with the foreign
environment as well as costs related to the host country environment, such as the lack
of legitimacy of the foreign company. The aspect strongly relates to a facet of
transaction cost logic that Williamson (1975) calls “information impactedness”. It
occurs if one or more parties have knowledge on relevant circumstances but cannot
share it costless with others. This condition is detrimental to foreign companies as they
face an extra effort to obtain the necessary information. As psychic distance can be
expected to drive this disadvantage, it directly increases the information acquisition
costs of foreign firms in a host country.
Attempts at an explicit interpretation of psychic distance in transaction cost theory are
rather scarce. Klein and Roth (1990) argue that the psychic distance effect is based on
the lack of knowledge on the foreign environment which entails uncertainty and thus
increases information transfer costs. Accordingly, companies choose to avoid the costs
that would be necessary for an internalization of the exchange and opt for market-
based transactions such as the reliance on foreign intermediaries. This relationship has
been supported in a row of studies confirming the tendency of firms to reduce the
degree of commitment and control with increasing psychic distance or socio-cultural
differences (Anderson & Gatignon, 1986; Goodnow & Hansz, 1972).
Dow and Karunaratna (2006) focus their attention to the national-level drivers of
psychic distance such as language differences, differences in industrial development
and political system. Their argumentation highlights the impact of each psychic
distance stimuli on cross-national interaction and concludes that transactions across
borders imply a cost in the form of a loss in communication and interaction efficiency.
They also emphasize that managers might base their decisions on perceived
transaction costs rather than the real transaction costs which need not necessarily
98
correspond to each other. Authors have also pointed out that interaction difficulties
hinder the establishment of trustful relationships between parties. In a transaction cost-
based understanding, psychic distance hence not only increases costs because of
interaction difficulties, it also favours opportunistic behaviour due to the lack of
trusting relationships which in turn increases safeguarding costs (Bello & Gilliland,
1997; Skarmeas, Katsikeas, Spyropoulou & Salehi-Sangari, 2008).
Studies on the role of psychic distance in entry mode choice generally support the
argument outlined above. Greater psychic distances tend to lower the preference for
internal modes (Gatignon &Anderson 1988; Kogut & Singh, 1988; Plá-Barber, 2001).
Klein and Roth (1990) investigate the contingency effect of asset specificity on the
relationship between psychic distance and the degree of forward integration. Their
findings show that under the condition of low asset specificity, larger perceived
distances function as a negative incentive to use high control modes. Put differently, if
it is unlikely that assets will be misused opportunistically then psychic distance
promotes the use of low control/low commitment modes. In her study of international
alliances, Mayrhofer (2004) points out that psychic distance influences the degree of
perceived uncertainty related to external but also internal transactions.
Concluding the discussion of the role of psychic distance in a transaction cost
approach, the general idea is that psychic distance represents or drives transaction
costs of international exchanges. In terms of Rindfleisch and Heide´s (1997)
subdivision into safeguarding, adaptation and performance evaluation costs, authors
have primarily used psychic distance to capture the latter two. The arguments
supporting a relationship between those costs and entry mode choice build on several
key assumptions.
Following a transaction cost rationale, the study of entry modes should conceptualize
psychic distance as a driver or proxy of transaction costs. A psychically distant country
might represent a highly uncertain environment to an internationalizing firm,
increasing the adaptation costs necessary to communicate, negotiate and control the
economic exchanges with the foreign market. It might also drive behavioural
uncertainty, inducing costs for performance evaluation. Due to its effect on real or
perceived transaction costs contingent on a foreign country, psychic distance indirectly
influences the entry mode choice. We can conclude that the application of psychic
distance with a transaction cost-based rationale is justifiable if psychic distance is
associated with an increase in transaction costs resulting from asset specificity,
environmental or behavioural uncertainty. An increase in the form of adaptation costs
99
might result from e.g. differences in the legal systems that present a form of
environmental uncertainty and that make it necessary for foreign companies to obtain
relevant information on the system and adapt business practices accordingly. If
psychic distance is understood to hinder the development of trusting relationships and
lead to an increased need to safeguard assets, psychic distance can also represent
transaction costs in the form of safeguarding costs.
What measurement approach is now suitable to capture psychic distance as a
transaction cost? Unidimensional objective measures such as country dummies or
clusters seem too general for the purpose as they do not specify the costs that psychic
distance would entail. The fact that a transaction is cross-national in nature might
suggest an increase of costs but hardly provides a justified explanation.
Multidimensional objective measures however are well suited to capture psychic
distance as transaction costs if an argument can be made for the impact of country
differences on the interaction effectiveness. The literature already provides examples
for such reasoning (Dow & Karunaratna, 2006). The application of unidimensional
subjective measures such as the use of a single scale might be justified if a theoretical
argument can be made for the effect on transaction costs. The use of concentric circles
(Dichtl et al., 1984) or a single-item scale (Håkanson & Ambos, 2010) captures the
perceived distance, closeness or similarity that the respondent perceives towards a
foreign country. For a sound theoretical argument, insights from psychology could
provide distance research with the needed coherences. For example, closeness and
trust might be closely linked and play a central role in connection with safeguarding or
screening costs. Similarly, multidimensional subjective approaches could be suitable
to measure psychic distance as a cost if the underlying dimensions can be theoretically
argued to increase transaction costs.
Uppsala Internationalization Model
The Uppsala internationalization model is considered the starting point of psychic
distance´s dissemination in international management research. It was developed by
Swedish researchers at the University of Uppsala and remains one of the fundamental
theoretical approaches to the international expansion of the firm (Hörnell, Vahlne &
Wiedersheim-Paul, 1973; Johanson &Wiedersheim-Paul, 1975; Johanson & Vahlne,
1977). Its theoretical foundation combines aspects of the behavioural theory of the
firm such as information incompleteness (Cyert & March, 1963), Penrose´s work
(1966) on the growth of the firm including the notion of organizational learning as
well as Aharoni´s (1966) work on foreign investment decisions.
100
The model describes the internationalization of a firm as an incremental process. The
decision to enter a foreign market entails changes in the firm´s external and internal
conditions which imply an increase of uncertainty. In order to reduce this uncertainty,
the company´s managers need to gain personal experience in the foreign market, learn
about the new environment and generate experiential knowledge (Johanson & Vahlne,
1977). The stepwise adjustment process is thus a consequence of the uncertainty
restricting the firm´s international expansion as well as the firm´s limited learning
capacity (Hörnell, Vahlne & Wiedersheim-Paul, 1973).
Uppsala scholars understand the internationalization process as shaped by the interplay
of state and change aspects. State aspects include the level of knowledge that a firm
possesses on a foreign market as well as its level of commitment to this market
expressed by the specificity and amount of resources deployed. Change aspects
comprise the consequences of the firm´s current activities and the forward-looking
commitment decisions to the market. Current activities impact the internationalization
process as they generate experiences and consequences that influence future activities.
Commitment decisions are guided by economic and an uncertainty effects. Whereas
the former refers to the benefits of the internationalization such as economies of scale,
the latter accounts for the decision-maker´s perceived market uncertainty (Johanson &
Vahlne, 1977).
Commentators on the internationalization model describe it as an establishment chain
model in regard to the choice of entry mode forms and as a process model regarding
the selection of foreign markets (Johanson & Wiedersheim-Paul, 1975). The concept
of psychic distance has mainly been associated with the latter, predicting the time
order in which foreign markets are selected for entry. Psychically close countries are
expected to be similar to the company´s home country, involving little unknown
conditions and reducing the learning effort related to the internationalization step
(Johanson & Vahlne, 1977). Gathering from this logic as well as the psychic distance
definitions provided in Table 1, the general Uppsala-based understanding generally
views psychic distance as barrier to information flow.
The original Uppsala model understands psychic distance to function on the
organizational level. It is the company that acquires knowledge on a host market which
can be held by individuals but also recorded in manuals, databases and other artefacts
(Johanson & Vahlne, 1977). Psychic distance is explicitly viewed as a dynamic factor
that decreases with the level of organizational experience and learning in a foreign
market (Johanson & Vahlne, 1977; 1990). Johanson and Vahlne partly revise the
101
original model and emphasize the importance of networks and personal relationships
to the internationalization process of a company. They highlight psychic distance´s
detrimental role in the establishment of interpersonal relationships which rely on the
process of trust building and therefore shift the focus from the firm- to the individual
level with consequences for the role implications of psychic distance (Johanson &
Vahlne, 2009; Johanson & Vahlne, 2003; Sousa & Bradley, 2006).
We conclude that according to the Uppsala internationalization model, psychic
distance increases the cross-national learning necessary to manage in a foreign
environment which is the requirement for foreign market entry, the development of
confidence but also for interpersonal relationships. The measurement of psychic
distance in accordance with the Uppsala internationalization model might allow for
different approaches. Again, we argue that the use of unidimensional objective
measures such as country dummies or geographic regions is too superficial to allow
for a sound theoretical argument. Multidimensional objective approaches seem to be
better suited to capture psychic distance if the theoretical argument can be made that
they hinder or increase learning. An obvious factor here might be language differences
but also differences in business practices or level of education could be argued to have
an impact.
Paralleling our discussion on transaction cost theory, we suggest that unidimensional
subjective measures need a strong and explicit theoretical argument. Respondents are
asked to indicate their perceived distance towards a foreign country as a judgment of
closeness or similarity. Implicitly, such approaches anticipate the homophily principle
to guide our interaction with foreign nations which maintains that we prefer others
who are similar to ourselves (McPherson, Smith-Lovin & Cook, 2001). Psychic
distance thus measures the dissimilarity with others, indirectly indicating managerial
preferences. Tung and Verbeke (2010) point towards a potential alternative
mechanism though. They refer to the inverse resonance hypothesis maintaining that
negative stereotypes are often held about closer and more similar countries rather than
those markedly different to oneself. A reduction of psychic distance to the measure of
country similarity needs to consider the existence of such conflicting theoretical
rationales.
Another problem with unidimensional subjective measures is the risk that the process
of distance formation itself is influenced by psychological processes. There is first
evidence for the influence of assimilation and contrast biases on psychic distance
judgments. Interviews with managerial decision-makers involved in international
102
business showed that the perceived familiarity with the sender of information
translates into a feeling of similarity, effecting an assimilation bias thus reducing
psychic distance (Parente, Baack & Almeida, 2007).
Most of the multidimensional subjective measures available in the literature avoid
such problems. Usually, respondents indicate their distance perceptions in regard to
several objective national differences such as political system or economic
development. Theoretical arguments are hence necessary for the connection between
perceived distance and the influence on learning. Most of the measurement approaches
presented should match an Uppsala-based understanding of psychic distance´s role if
there is a theoretical argument for the impact on learning and relationship building.
Discussion
This article set out to provide a theory-based review of the psychic distance literature
to enable future research to a well-conceived application of the concept. Previous
contributions have called for better theoretical grounding and a more meaningful use
of distance concepts in international management research (Zaheer et al., 2012). We
adopt Tung and Verbeke´s (2010) understanding of distance as an envelope concept
and argue that the choice of definition and operationalization should be contingent on
a study´s theoretical rationale as well as its research context.
We review the psychic distance literature for alternative definitions and measures and
subsequently discuss the concept´s role in transaction cost theory as well as the
Uppsala internationalization model. Exploring the role of psychic distance according
to these theories, we develop a deeper understanding of the concept and suggest
measurement approaches that are compatible with the theoretical arguments. Our
review is deeply rooted in the psychic distance literature and yet provides new
insights. Discussing the theories referring to the internationalization process with the
decisions on foreign market selection and entry mode choice, we intend to set an
example how future distance research can ensure meaningful application of psychic
distance.
The application of psychic distance in a transaction cost-based approach suggests an
understanding of psychic distance as driver or proxy of the costs associated with an
international transaction. These can occur in the form of safeguarding, adaption or
performance evaluation costs. Combining the theoretical approach with the empirical
measurement approaches of psychic distance, we conclude that the use of
103
unidimensional objective approaches seems not appropriate whereas multidimensional
objective as well as subjective operationalizations can be adequate.
An Uppsala-based approach to psychic distance focuses more on the aspect of learning
and the barrier that psychic distance constitutes to information flow in that regard. In
respect to the measurement approach, our argumentation parallels the one for
transaction cost theory. Our main objective is to create awareness for the need to base
the measurement choice on theoretical considerations to ensure meaningful research.
Our discussion reveals the critical role of the level of analysis. For one, there is debate
whether psychic distance itself constitutes an individual-, firm- or national-level
concept. Consequently, authors have used it to study aspects of international
management on all levels. Besides, psychic distance data sources are limited and
researchers need to decide between the use of national statistics or subjective
perceptual data. They need to carefully determine the level on which they understand
psychic distance to function and the level of the research problem under study. The
measurement decision will be guided by an aspiration towards representativeness and
adequacy of the sample (Yang, Wang & Su, 2006) but confined by data collection
costs. Our review facilitates the meaningful application of psychic distance, not only
by providing an overview on definitions, measures and theoretical approaches but also
on source of psychic distance data in the literature.
We are aware that the choice and discussion of two theoretical approaches is
somewhat arbitrary and incomplete. Nevertheless, our purpose was not a terminal
review of potential theories informing psychic distance research but a first attempt to
induce theory-building. Our paper is meant to encourage authors to reflect on their
research question and the role of psychic distance as an explanatory factor rather than
treating it as a general panacea that accounts for cross-national differences in general.
Future research should extend our effort to additional theories and further empirical
research phenomena.
104
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Curriculum Vitae
Anja Schuster
Born October 12, 1983 in Filderstadt, Germany
Education
08/2010 –09/2013 University of St. Gallen, Switzerland and WU Vienna, Austria
Doctoral Studies in Strategic Management (Dr. oec.)
10/2004 – 03/2010 University of Mannheim, Germany
Undergraduate and Graduate Studies in Business Administration
Majors: International Management, Marketing & Psychology
02/2008 – 11/2008 Macquarie University, Sydney, Australia
Master of International Business
06/2003 Johannes-Kepler-Gymnasium, Leonberg, Germany
Higher education entrance qualification
Professional Experience
08/2012 –10/2013 Institute of Management, University of St. Gallen, Switzerland
Teaching and Research Associate
08/2010 – 07/2012 Institute for International Business, WU Vienna, Austria
Teaching and Research Associate
Awards and Grants
2012 Excellent Teaching Award, WU Vienna
2011 Innovative Teaching Award, WU Vienna
Merit Scholarship Grant, WU Vienna
Outstanding academic achievement in the Ph.D. program
Postgraduate Training Grant, WU Vienna
Promotion of participation in the competitive Ph.D.
workshop series “NORD-IB” (Nordic Research School of
International Business)