The Psychic Distance Paradox

Abstract

Companies tend to begin their internationalization process in countries that are 'psychically' close. Researchers describe the sequence of entry that firms follow and the mode of entry they choose. They suggest that psychically close countries are more easily understood than distant ones; and offer more familiar operating environments. Although not prescriptive, an unstated conclusion can be drawn linking sequence of entry to performance. Evidence from thirty-two Canadian retail companies shows that only seven (22%) were functioning successfully in the United States. The psychic distance paradox is that operations in psychically close countries are not necessarily easy to manage, because assumptions of similarity can prevent executives from learning about critical differences. Moreover, empirical evidence from 271 CEOs confirms greater cultural differences between Canada and the U.S. than assumed previously. Modifications are suggested to improve the psychic distance concept.

Whose Culture Matters? Near-Market Knowledge and Its Impact on Foreign Market Entry Timing

“…Since both sets of factors play some role, it is not surprising that small cultural distances do not always lead to strong performance (Mitchell et al 1994;O'Grady and Lane 1996).…”

An overview of Hofstede-inspired country-level culture research in international business since 2006

“…Psychic distance is referred to as factors preventing or disturbing the flow of information between potential and actual suppliers and customers (Johanson & Vahlne, 1977, p. 24), and is frequently used to explain expansion patterns of internationalizing firms. Psychic distance is generally understood to be determined by both individual level and country-level characteristics, including differences in language, political regimes, geographic distance and also cultural distance (Dow & Karunaratna, 2006;O'Grady & Lane, 1996). Unlike cultural distance which is based on a comparison of 'objective' sets of values that people in different countries hold, psychic distance is in essence perceptual.…”

Global Idea Sourcing - an Empirical Investigation into the Mechanisms Behind the Usage of Foreign Business Sources for Innovation

“…A number of studies have shown that they actually complicate the flow of innovation knowledge across borders (Maurseth and Verspagen, 2002;Tellis et al, 2003;Yeniyurt and Townsend, 2003). Still, as O'Grady and Lane (1996) show, these distance measures are highly subjective since they can be overcome through organisational configurations, e.g., employees from abroad or with foreign experience in critical positions, and can therefore provide additional points of access. These individuals, frequently called "gatekeepers", (Cohen and Levinthal, 1990) are rather narrowly defined here as being especially able in accessing knowledge across borders by reducing the communication gap and mismatches in "cognitive orientation" (Daghfous, 2004).…”