Psychic distance, at each of the stages of the process of cross-Cultural business relationship development
The Relative Importance of the Various Elements of Psychic Distance at Each Stages of Cross-Cultural Business Relationship Development
According to Rao (2001), “The latest decade has presented an increasing amount of research on the internationalization of firms. One prominent representative of this development is the Uppsala internationalization model, which sees the internationalization of the firm as a process in which the firm gradually increases its international involvement and engagement” (p. 108). From a psychic distance perspective, this model is particularly useful because it emphasizes that objective knowledge (which can be taught) and experimental learning (which can be gained through empirical observations and test marketing) suggests that market commitment and expansion takes place in a sequential fashion. In this regard, Rao notes, “The model sets out to explain two patterns in the internationalization process of the firm: (a) the firm engages in a specific country as a development of the establishment chains; and, (b) the firm enters new markets with successively greater psychic distance, that is, start internationalization by going to the markets most easily understood by them” (p. 108). The developmental phases that occur during expansion into foreign markets reported in many models of internationalization also suggest that companies perform best in foreign markets that are most similar to their domestic market (Johanson and Vahlne, 1977; Nordstrom and Vahlne, 1994). In this regard, Evans and Mavondo (2002) cite research by Nordstrom and Vahlne (1994) that determined the perceived negative relationship between psychic distance and organizational performance is attributed to the fact that psychically close countries are easier to learn about and understand. In spite of the widespread acknowledgement concerning a negative relationship between psychic distance and organizational performance, though, the existing body of knowledge remains nebulous in this regard (Evans and Mavondo, 2002).
In fact, the studies to date have shown mixed results concerning the relationship between psychic distance and organizational performance, and some studies have even found evidence suggesting a “psychic distance paradox,” wherein the perception of differences between the home and foreign markets actually enhances performance (Evans and Mavondo, 2002). According to O’Grady and Lane (1996), “Although sequence of entry is an important consideration, we believe that one limitation of this literature is that it does not address how the perceived psychic distance between countries affects the decision-makers’ choice of entry or the organization’s ultimate performance in the new market” (p. 309). Much like the so-called “resource curse” that has plagued developing nations, the psychic distance paradox suggests that a high level of perceived congruence between a home country and a foreign country targeted for expansion might lead to unexpected adverse consequences. In this regard, O’Grady and Lane emphasize that, “There is research evidence demonstrating that starting the internationalization process by entering a country psychically close to home may result in poor performance and, possibly, failure” (p. 309). The false sense of security that can result from such perceived cross-cultural congruences is the essence of the psychic distance paradox: “We refer to this as the psychic distance paradox. Instead of psychically close countries being easy to enter and to do business in, we argue that perceived similarity can cause decision-makers to fail because they do not prepare for the differences. The failure lies in the managerial decision-making aspect of the internationalization process, to which international business researchers have not paid enough attention” (O’Grady and Lane, p. 309).
The definition of psychic distance has changed in significant ways since its introduction a half century ago in Beckerman’s (1956) analysis of international trade. Vahlne and Wiedersheim-Paul (1973) defined psychic distance in terms of those factors that serve to constrain or disrupt the flow of information between suppliers and customers. Likewise, Nordstrom and Vahlne (1994) later redefined psychic distance as being those “factors preventing or disturbing firm’s learning about and understanding a foreign environment” (p. 42). By contrast, O’Grady and Lane (1996) suggest that psychic distance is the.”.. 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 there” (p. 310).
Stages of Process of Business Relationship Development.
Cultural risk can be caused by the psychic distance between the country of the technology transferor and the country of the recipient firm (Hofstede 1980). According to Conway and Swift, a number of authorities have advanced various relationship models to illustrate how business relationships develop between companies in different countries with various levels of development in place. Citing research by Levitt (1983) and Dwyer et al. (1987), these authors describe five stages in the development of a business relationship:
Awareness;
Exploration;
Expansion;
Commitment; and,
Dissolution (Conway and Swift, p. 1392).
By contrast, the relationship marketing model developed by Hallen and Wiedesheim-Paul (1984) provides the following types and elements of psychic distance:
Pre-contact,
Initial interaction;
Development and maturation stages of relationships; and,
The break-off stage.
According to Conway and Swift, Figure 1 below illustrates the model’s pre-contact, initial interaction, development and maturation stages of relationships; however, the “break-off'” stage.”.. has been omitted as being symptomatic of a failed relationship” (p. 1405).
Figure 1. Psychic distance and implications for international relationship marketing development.
Source: Conway and Swift, p. 1406.
In sum, Conway and Swift describe the various maturation phases that companies typically experience as their progress along this continuum, but emphasize above all that the relative importance of each of these variables tends to change based on the companies’ respective experiences and perceived levels of commitment, trust and so forth, and these issues are discussed further below.
Types and Elements of Psychic Distance.
Just as there are different definitions of psychic distance, there are also different types and elements involved. As Evans and Mavondo note, besides the fundamental cultural differences involved, “Differences between the home and foreign market regarding the legal and political environment, economic environment, market structure, business practices and language are essential elements of psychic distance” (p. 515). During the pendency of such cross-cultural business relationships, Conway and Swift cite Scanzoni’s (1979) three stages of involvement that characterize the manner in which the domestic company seeks to expand its operations in foreign countries:
Exploration;
Expansion; and,
Commitment.
According to Conway and Swift, “Once exploration has taken place, the degree of interdependence is increased during the expansion stage; the commitment stage is where individualist concerns merge with collective interest” (p. 1392). These stages of the business relationship development will naturally include a fundamental trust element as well (Conway and Swift).
The various types and elements of psychic distance are examined below as to their relative importance in the development of cross-cultural business relationships, followed by a series of recommendations on how best to apply the psychic distance concept to improve the likelihood of success.
Analysis and Evaluation of Relative Importance of Each Element.
Table 1.
Element
Description
Trust
Trust is the precondition for increased commitment. In economic exchanges, there is the expectation that parties will make a good faith effort to behave in accordance with any commitments, be honest in negotiations and not take advantage of the other even when the opportunity is available. The influence of trust on the development of relationships is considerable, especially at the later stages of relationship development (Conway and Swift, p. 1394).
Commitment
Of central importance in developing relationships is the level of commitment a partner feels towards that relationship. Indeed, Wilson identifies commitment as.”.. The most common dependent variable used in buyer-seller relationship studies” (1995, p. 337). Commitment can be viewed as an intention to continue a course of action or activity (Hocutt, 1998) or the desire to maintain a relationship: this is often indicated by an ongoing ‘investment’ into activities which are expected to maintain the relationship (Blois, 1998). Rusbult (1983) believes that commitment is stronger when levels of satisfaction are high (Gladstein, 1984; Kelley and Davis, 1994), when the quality of alternatives is perceived to be poor, and when investment size is large. Commitment is also likely to be influenced by social bonding (‘…the degree of mutual personal friendships and liking shared by the buyer and seller’ (Wilson, 1995, p. 339) (cited in Conway and Swift). Likewise, buyers and sellers that have a strong personal relationship are more committed to maintaining the relationship than less socially bonded partners (Wilson and Mummalaneni, 1986). Social bonding would seem to be closely connected to the concept of ‘closeness.’ A relationship is ‘close’ when it is characterized by high interdependence over a period of time. Closeness influences the size of the investment in the relationship which in turn influences commitment (Hocutt, 1998). The development and maintenance of a relationship requires the investment of time, energy, emotion and money. Finally, Anderson and Weitz (1989) found evidence to suggest that the greater the level of investment made by a manufacturer in a relationship, the greater the increase in that manufacturer’s commitment to its relationship with its distributor.
Legal and political environment
The inter-state political environment refers to combinations of nations that form unifying agreements for the purposes of regulating trade, such as the EU and NAFTA. Such agreements can effect retail internationalization positively, as inter-state agreements can facilitate internationalization into participating countries (Dupuis and Prime, 1996); however, firms must still consider state and local political stability, policy and legislative issues (Evans and Mavondo). Political stability is particularly important for international retailers; further, differences in regulation can have substantial consequences for achieving economies of scale and scope (Evans and Mavondo).
Sources: As indicated.
While trust and the political and legal environment were shown to be of critical importance for successful cross-cultural investment outcomes, it would seem reasonable to assert that these elements are less important than the mutual perception of commitment on the part of the companies involved. Trust, for example, can be balanced by existing legal alternatives that can provide remedies of a last resort, and the adverse effects of the legal and political climate of a country can be minimized through various strategies as well. Absent a sense of commitment on the respective companies’ part, though, it will be unlikely that either will devote the resources needed today to ensure the continued success of their cross-cultural operations in the future.
Recommendations.
In sum, the psychic distance concept focuses on significant cultural and business differences between countries that can introduce constraints to successful market entry and adaptation once established; however, such constraints can be overcome through learning in a process Nordstrom and Vahlne (1994) termed “bridging the gap of psychic distance” (p. 3). Some recommendations provided by O’Grady and Lane for these purposes are as follows:
Treat even psychically close markets as foreign markets. Executives should not assume that the different markets are the same, or that companies within each can be managed in the same way. When decision-makers start with the assumption that they are the same, they are more likely to take the appropriate steps toward entering the new market.
Test assumptions and perceptions prior to entry. The success of a decision-making process relies on the accuracy of information and the knowledge of those making the decisions. The most important part of a company’s pre-entry orientation is the perceptions and assumptions of the executive team, because they act as a base from which all of the decisions regarding the venture are made. If the pre-entry aspect of the decision-making process is faulty, the remainder of the process is unlikely to be effective. The decision-makers’ initial perceptions and assumptions also affect their ability to learn from experience in a new market and to respond to this information. Strong beliefs about the similarity of the two markets or the power of a retail concept contributed to the difficulty of adjusting when faced with conflicting information. There comes a time when it is necessary to revise one’s basic assumptions and perceptions, rather than continue to alter operating decisions in a way that only supports the initial position.
Correct interpretation is key. In the Age of Information, the research process can be likened to drinking from a fire hose. Simply gathering information about a market does not necessarily lead to knowledge of that market unless it is interpreted correctly. A number of the companies conducted market analyses and still failed. The failure of such companies highlights the difference between objective market information and the tacit knowledge or know-how that is critical to success. The real indicators of psychic distance are to be found much closer to the ground than researchers have been looking.
Develop the ability to learn. A final recommendation is that those making the decisions for foreign markets must develop the ability to learn about the other countries. Learning has to do with increasing one’s knowledge and understanding. Learning is more likely to occur under conditions where error is tolerated, assumptions are testable, and key aspects of information are not missing. Thus, it is vital to identify and check the assumptions of decision-makers prior to entry, because their assumptions often seriously limited the effectiveness of their entry decisions. Because assumptions are frequently highly subjective and hard to identify, it is a good idea to use an objective person from outside the decision-making process to help decision-makers to identify them. It appears that to gain the capacity necessary to compete even in “close” markets, companies should hire management talent experienced in the target market; these individuals should have an understanding of the targeted consumers, the competition, the competitive intensity of the supplier situation, and regional differences, among other factors (O’Grady and Lane).
References
Anderson, J.C. And Weitz, B.A. 1989. Determinants of continuity in conventional industrial channel dyads. Marketing Science 8(4): 310-323 in Conway and Swift at 1394.
Beckerman, W. 1956. Distance and the Pattern of Intra-European Trade. Review of Economics and Statistics 28: 31-40 in Evans and Mavondo at 515.
Blois, K.J. 1998. Don’t all firms have relationships? Journal of Business & Industrial
Marketing 13(3): 256-270 in Conway and Swift at 1394.
Conway, Tony and Jonathan S. Swift. 2000. International relationship marketing: The importance of psychic distance. European Journal of Marketing 11/12: 1391-1413.
Dupuis, Marc and Nathalie Prime. 996. Business Distance and Global Retailing: A Model of Analysis of Key Success/Failure Factors. International Journal of Retail & Distribution Management 24(1): 30-38 in Evans and Mavondo at 516.
Dwyer, E.P., Schurr, P.H. And Oh, S. 1987. Developing buyer-seller relationships. Journal of Marketing 51(2): 11-27.
Evans, Jody and Felix T. Mavondo. 2002. Psychic Distance and Organizational Performance: An Empirical Examination of International Retailing Operations. Journal of International Business Studies 33(3): 515.
Gladstein, D.L. 1984, December. Groups in context: a model of task group effectiveness. Administrative Science Quarterly 29: 499-517 in Conway and Swift at 1394.
Hocutt, M.A. 1998. Relationship dissolution model: antecedents of relationship commitment and the likelihood of dissolving a relationship. International Journal of Service Industry
Management 9(2): 189-200 in Conway and Swift at 1392.
Johanson, Jan. & Jan-Erik Vahlne. 1977. The Internationalization Process of the Firm — a Model of Knowledge Development and Increasing Foreign Market Commitments. Journal of International Business Studies, 8(1): 22-32 in Evans and Mavondo at 516.
Kelley, S.W. And Davis, M.A. 1994. Antecedents to customer expectations for service recovery. Journal of the Academy of Marketing Science 22: 52-61 in Conway and Swift at 1394.
Levitt, T. 1983. After the sale is over. Harvard Business Review 61(5): 87-93 in Conway and Swift at 1392.
Nordstrom, Kjell & Jan-Erik Vahlne. 1994. Is the Globe Shrinking? Psychic Distance and the Establishment of Swedish Sales Subsidiaries During the Last 100 Years. In M. Landeck, editor, International Trade: Regional and Global Issues. United States: St. Martin’s Press.
O’Grady, Shawna and Henry W. Lane. 1996. The Psychic Distance Paradox. Journal of International Business Studies, 27(2): 309-311.
Rao, C.P. 2001. Globalization and Its Managerial Implications. Westport, CT: Quorum Books.
Rusbult, C.E. 1983, July. A longitudinal test of the investment model: the development (and deterioration) of satisfaction and commitment in heterosexual involvements. Journal of Personality and Social Psychology 45: 101-17 in Conway and Swift at 1394
Scanzoni, J. 1979. Social exchange and behavioural independence. In Conway and Swift at 1392.
Vahlne, Jan-Erik & Finn Wiedersheim-Paul. 1973. Economic Distance: Model and Empirical Investigation. In E. Hornell, J-E. Vahlne & F. WiedersheimPaul. Export and Foreign Establishments. Department of Business Administration, University of Uppsala.
Wilson, D.T. 1995. An integrated model of buyer-seller relationships. Journal of the Academy of Marketing Science 23(4): 335-345.
Wilson, D.T. And Mummalaneni, V. 1986. Bonding and commitment in supplier relationship: a preliminary conceptualization. Industrial Marketing and Purchasing 1(3): 44-58 in Conway and Swift at 1394.
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