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The psychic distance paradox.
by Shawna O'Grady , Henry W. Lane INTRODUCTION It has been argued in the international business literature that companies begin the internationalization process in countries that are psychically close before venturing to more distant countries [Johanson and Vahlne 1992]. If this description is accurate, then Canadian companies would be expected to begin in the United States which is not only the closest but also, in many ways, the most similar country to Canada. Indeed, evidence from the retail industry indicates that firms have followed this pattern. The literature on the internationalization process describes the sequence of market entry that firms follow when internationalizing. This sequence reflects a gradual, learning through experience process. What is not explicit in the literature is why firms follow this pattern. Researchers have suggested that entering countries that are psychically close reduces the level of uncertainty firms face in the new market [Johanson and Vahlne 1992]; and that psychically close countries are easier for companies to learn about [Kogut and Singh 1988]. Such explanations seem logical and implicitly support the conclusion that beginning in psychically close countries should improve a company's chances of success in these markets. Although the literature is not prescriptive, an unstated conclusion can be drawn from it linking sequence of entry to performance. There is an implicit assumption that psychically close countries are more similar, and that similarity is easier for firms to manage than dissimilarity, thereby making it more likely that they will succeed in similar markets. 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(1) between countries affects the decisionmakers' choice of entry or the organization's ultimate performance in the new market. This research presents evidence demonstrating that starting the internationalization process by entering a country psychically close to home may result in poor performance and, possibly, failure. 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 decisionmakers to fail because they do not prepare for the differences. The failure lies in the managerial decisionmaking aspect of the internationalization process, to which international business researchers have not paid enough attention [Johanson and Vahlne 1992]. In addition, even in psychically close countries such as Canada and the United States, there may be significant differences that can affect the ability of managers to conduct business. What appears on the surface to be psychically close may, in reality, be more distant than expected. This research was exploratory in nature and focused on the performance of Canadian retail companies that entered the United States. With the American retail market worth more than $1.5 trillion, there is a very powerful incentive for Canadian retailers to understand how to compete in this market. Consistent with internationalization theory, domestically successful companies entered a country that is not only the closest physically, but probably the most similar country to Canada. However, of the thirty-two Canadian retail companies that entered the United States market, almost 80% failed and only seven (22%) were continuing to function successfully [Evans, Lane and O'Grady 1992]. The high failure rate suggests that there may be a paradox, or inherent contradiction, within internationalization theory and the psychic distance concept, and that executives cannot always rely upon measures of psychic distance when making their internationalization decisions. The purpose of this paper is to use the experience of Canadian retailers entering the United States to analyze the psychic distance concept in greater detail and to suggest some possible qualifications that could improve its use in research and practice. First, a summary of the psychic distance concept is presented, as well as the evidence in the literature positioning Canada and the United States as being culturally close. Next, the results from both clinical and questionnaire data show areas in which cultural and business differences manifested themselves, as well as empirical evidence of these cultural differences. Then, the paradox inherent in the psychic distance concept is explored, which explains how the perception of a country as having a small psychic distance from one's own can lead decisionmakers to a number of faulty assumptions, creating an inability to learn about that country. Some recommendations are provided to help companies learn in these situations. Finally, we explore the psychic distance concept in greater depth, and propose some qualifications to it. The results of this study suggest that the ... |
