psychic distance paradox

8/12/2019 Psychic Distance Paradox

1/26

The Psychic Distance ParadoxAuthor(s): Shawna O'Grady and Henry W. LaneSource: Journal of International Business Studies, Vol. 27, No. 2 (2nd Qtr., 1996), pp. 309-333Published by: Palgrave Macmillan JournalsStable URL: http://www.jstor.org/stable/155287.

Accessed: 04/04/2011 03:05

Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at.http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless

you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you

may use content in the JSTOR archive only for your personal, non-commercial use.

Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at .http://www.jstor.org/action/showPublisher?publisherCode=pal..

Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed

page of such transmission.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of

content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms

of scholarship. For more information about JSTOR, please contact [email protected].

Palgrave Macmillan Journalsis collaborating with JSTOR to digitize, preserve and extend access toJournal of

International Business Studies.

http://www.jstor.org
http://www.jstor.org/action/showPublisher?publisherCode=palhttp://www.jstor.org/stable/155287?origin=JSTOR-pdfhttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/action/showPublisher?publisherCode=palhttp://www.jstor.org/action/showPublisher?publisherCode=palhttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/stable/155287?origin=JSTOR-pdfhttp://www.jstor.org/action/showPublisher?publisherCode=pal


2/26

THEPSYCHICDISTANCEPARADOXShawnaO'Grady*Queen's UniversityHenryW. Lane**The Universityof WesternOntario

Abstract.Companiesendto begintheir internationalizationrocess ncountrieshat are'psychically'lose. Researchers escribe hesequenceof entry that firms follow and the modeof entry they choose. Theysuggestthatpsychically losecountries re moreeasilyunderstoodhandistantones;andoffermorefamiliaroperating nvironments. lthoughnotprescriptive,nunstated onclusionan bedrawninking equence fentryto performance.Evidence romthirty-twoCanadianretail com-paniesshowsthatonlyseven 22%)werefunctioning uccessfullyn theUnited States. The psychicdistanceparadoxis that operations npsychically lose countriesare not necessarily asy to manage,becauseassumptions f similaritycan preventexecutives romlearningaboutcriticaldifferences.Moreover, mpirical vidence rom 271 CEOs con-firmsgreater culturaldifferencesbetweenCanadaand the U.S. thanassumedpreviously.Modifications resuggested o improvehe psychicdistance oncept.

INTRODUCTIONIt has been argued nthe international usiness iterature hatcompaniesbeginthe internationalizationrocessin countriesthat arepsychicallyclose beforeventuring o more distantcountries[Johansonand Vahlne1992].If this de-scription s accurate,henCanadiancompanieswould be expected o beginintheUnited Stateswhich s not onlythe closestbutalso,inmanyways, hemostsimilarcountryto Canada.Indeed,evidence romthe retail ndustry ndicatesthat firmshavefollowedthispattern.The literatureon the internationalization rocess describesthe sequence ofmarketentrythat firms ollow when nternationalizing.hissequencereflectsagradual, learning through experience process. What is not explicit in the*Shawna O'Grady is an Assistant Professor of Management at Queen's University. Shereceived her Ph.D. from the Western Business School, University of Western Ontario. Herresearch interests include international and cross-cultural management.**Henry W Lane is the Donald F. Hunter Professor of International Business at the RichardIvey School of Business (formerly the Western Business School).The authors would like to thank four anonymous reviewers for their insightful comments. The NationalCentre for Management Research and Development at the University of Western Ontario provided financialassistance.Received:November 1994;Revised: June & December 1995; Accepted: December 1995.

309


3/26

310 JOURNAL OF INTERNATIONALBUSINESS STUDIES,SECOND QUARTER1996

literature s why firms follow this pattern.Researchershave suggestedthatenteringcountriesthat are psychicallyclose reducesthe level of uncertaintyfirms ace in the newmarket Johanson ndVahlne1992];and thatpsychicallyclosecountriesare easier orcompanies o learnabout[KogutandSingh 1988].Such explanationsseem logical and implicitlysupportthe conclusionthatbeginningn psychically losecountries hould mprove company'shancesofsuccess n thesemarkets.Although he literatures not prescriptive,n unstatedconclusioncan be drawnfrom it linkingsequenceof entryto performance.There is an implicit assumptionthat psychicallyclose countriesare moresimilar,and that similarity s easierfor firmsto managethan dissimilarity,therebymaking t morelikely hattheywill succeed n similarmarkets.Althoughsequenceof entry s an important onsideration,we believe hatonelimitationof this literatures that it does not addresshow theperceived sychicdistance'betweencountriesaffectsthe decisionmakers'hoiceof entry or theorganization's ltimateperformancen thenewmarket.This researchpresentsevidencedemonstratinghat starting he internationalizationrocessbyenter-ing a countrypsychically lose to home mayresult n poor performance nd,possibly, ailure.We refer to this as the psychicdistanceparadox.Insteadofpsychically lose countriesbeingeasyto enterand to do business n, we arguethat perceived imilarity an cause decisionmakerso fail because heydo notprepare or the differences.The failure ies in the managerialdecisionmakingaspect of the internationalizationprocess,to which internationalbusinessresearchers ave not paid enough attention[Johansonand Vahlne 1992].Inaddition,even in psychicallyclose countriessuch as Canadaand the UnitedStates, there may be significantdifferencesthat can affect the ability ofmanagers o conductbusiness.Whatappearson the surface o be psychicallyclosemay, n reality,be more distantthanexpected.This researchwas exploratory n natureand focusedon the performance fCanadianretailcompanies hat entered he United States.With the Americanretailmarketworth morethan $1.5 trillion,thereis a very powerful ncentivefor Canadianretailers o understandhow to competein this market.Con-sistent with internationalizationheory, domesticallysuccessfulcompaniesentereda country hatis not onlythe closestphysically, utprobablyhemostsimilar country to Canada. However, of the thirty-two Canadian retailcompanies hatentered he United Statesmarket,almost 80% ailedandonlyseven (22%) were continuing to function successfully [Evans, Lane andO'Grady1992].Thehighfailureratesuggests hat theremaybe a paradox,orinherentcontradiction,within internationalizationheory and the psychicdistanceconcept, and that executivescannot alwaysrely upon measuresofpsychicdistancewhenmakingtheir nternationalizationecisions.The purpose of this paper is to use the experienceof Canadianretailersentering he United Statesto analyzethe psychicdistanceconceptin greater


4/26

THE PSYCHICDISTANCEPARADOX 311

detailand to suggestsomepossiblequalificationshatcouldimprove ts use inresearchand practice.First, a summaryof the psychicdistanceconcept ispresented,as wellas the evidence n the literaturepositioningCanadaand theUnited Statesas beingculturally lose.Next, the results romboth clinicalandquestionnairedata show areas in which cultural and business differencesmanifested themselves, as well as empirical evidence of these culturaldifferences.Then, the paradoxinherent in the psychic distanceconcept isexplored,whichexplainshow the perceptionof a countryas havinga smallpsychicdistance romone'sown can leaddecisionmakerso a numberof faultyassumptions, reatingan inabilityto learn about thatcountry.Some recom-mendationsareprovided o helpcompanies earnin these situations.Finally,we explorethe psychic distanceconceptin greaterdepth,and proposesomequalificationso it. The resultsof this studysuggestthat the psychicdistanceconcept is more complex than is generallyrecognized n the literatureandshould be exploredmorefully.

BACKGROUNDThePsychic Distance Conceptand the InternationalizationProcessAlthough the term 'psychic distance' has been used in prior research[Beckermann 956;Linnemann1966],earlystudiesof Nordic multinationalsgenerallyare taken as the startingpoint in discussions and researchon theconcept of psychic distance [Johanson and Vahlne 1977; Johanson andWiedersheim-Paul975;Hornell,Vahlne& Wiedersheim-Paul973]and theinternationalizationprocess [Andersen 1993]. The Swedish researcherspostulated that, when establishing international operations, firms needaccuratemarketknowledge,whichcomes fromdirectexperiencen theforeignmarketand an understanding f its internalrelationships, atherthan moreobjective, actual, generalmarket nformation hat is easily transmittedandlearned without the need for experiencein interpreting t [JohansonandVahlne1977].Psychicdistancewasanimportantvariablenunderstandinghedynamicsof theinternationalizationrocess. t wasdefined nitiallyas factorspreventingor disturbing he flow of informationbetweenpotential or actualsuppliersand customers [Nordstr6mandVahlne1992]. The concept wasintended to increase the understandingof the location patternof Swedishexportsandforeignsubsidiaries, nd to complement xistingexplanations hatreliedon economicconceptsandphysicaldistance.Hornell et al. [1973],citedinNordstromandVahlne 1992], howed hatpsychicdistancehadsubstantialvaluein explaining he patterns.The definition of psychic distance varies greatly within the literature,dependinguponthewayin whichtheconcept s operationalized.Forexample,Vahlneand Wiedersheim-Paul1973],cited in Nordstromand Vahlne [1992],operationalized sychicdistanceusing the following ndicators:


5/26

312 JOURNAL OF INTERNATIONAL BUSINESSSTUDIES, SECOND QUARTER 1996

* level of economicdevelopmentn the importing ountries;* differencenthe level of economicdevelopment etweenSwedenand

the host countries;* levelof education n the importing ountries;* difference n the level of education betweenSweden and the hostcountries;* differencen business anguage ;* differencen cultureand local language;* existenceof previous radingchannelsbetweenSwedenand thehostcountries.

These indicatorswere measuredusing publicly availablestatisticsand datafrom the SwedishExportBoard.Laterstudies[Kogutand Singh1988;Benitoand Gripsrud 1992] relied primarilyon Hofstede's [1980] research andmeasuresof culture o quantify he culturaldistancebetweencountries.Thus,culturaldistancewasused as a synonymandproxyforpsychicdistance.Nordstromand Vahlne [1992]developeda culturaldistance ndexthat usedadjusted Hofstede data. However, they [1992:10]suggested that culturaldistance and psychic distance captured differentbut overlappingpheno-mena, andthatpsychicdistance ncludeda componentof businessdifficulty,as well as culturaldistance.Psychicdistance, n theirview, is comprisedof6culturalsuchas those dimensionsdefinedby Hofstede),structuralsuchaslegal and administrativeystems)and languagedifferences p.10).Basedonthis expandeddefinitionof the concept, theycreateda psychicdistance ndexinwhichthe rankingsvaried n somerespects romthose basedon theadjustedHofstededata. Ourresearch upportsan expandeddefinitionof psychicdis-tanceandsuggests ncludingother business actorssuch as industry tructureandthecompetitive nvironment, s well as culturaldifferences.Psychic Distance: United States - CanadaOn Nordstromand Vahlne'sculturaldistance index, Canada ranked fifth(indexscore= 17.7)in distancefromSweden,and the United States rankedseventh indexscore= 25.9).The overallrangeof the indexscoreswasfrom1.2(Norway)to 78.1 (Japan).On theirpsychicdistance ndex,the United Statesrankedninth in distancefrom Sweden(25.3) and Canadatenth (27.1).Thisindex ranged rom 0.5 (Norway) o 79.2 (Chile).It is no surprise hat Canadaand the United Statesareso close to each otherin both rankingsgiventheirproximityand apparentcultural similarities.From their review of eightcomparative tudiesof attitudesand valuesconducted hrough he 1960sand1970s,Ronenand Shenkar[1985]found that Canadaand the United Stateswere consistently n the same Anglo cluster.In addition,they werevery close


6/26


to each otherin Hofstede's 1980]originalresearch. t is reasonable o assumea substantialdegreeof cultural imilaritybetween he two countries.However,a limitationof the current ndicesusedis thattheymeasureculturalorpsychicdistanceat a veryhighlevelof aggregationhatmayhideimportantvariations.Measuringdistanceat the national level may overlook regionaldifferenceshat existwithincountries; ulturaland structuraldifferenceshatmay exist by industry; and individual differences and experiences.Forexample,a firm that hiresmanagerswith significantexperience n a targetmarket hat is distant fromthe cultureof the firm'shomecountrywould havea much smallerpsychic distance from that market than measurementsatnational evelsof aggregationwould indicate.One contribution f thisresearchis that it investigatesheconceptof psychicdistanceat industryandfirm evels.Implicationsfor the InternationalizationProcessPsychic distance has been viewed as the degreeto which a firmis uncertainabouta foreignmarket[Kogutand Singh 1988],and the internationalizationprocessas a learning process. Recently,Nordstrom and Vahlne [1992:3]up-dated the originaldefinition of psychic distance as factorspreventingordisturbing irmslearningabout and understandinga foreignenvironment .This re-definition mphasizesand affirms heview of internationalization s adynamic,learning process,wherebymanagersmust not simplyaccumulateinformation,but must learn to interpret t correctly n orderto generateanunderstandingof the market and adapt to it. An inabilityto learn aboutimportantdifferences indersadaptationand affectsperformance utcomes.As Benito and Gripsrud [1992:464] explain it, firms are assumed tosuccessively ntermarketsat an increasing culturaldistance'from the homecountry... . Thus, firms are predictedto start their internationalization ymovinginto those marketsthey can most easily understand,enteringmoredistant marketsonly at a laterstage. This viewis confirmedby a wide rangeof Nordic studies,such as Nordstromand Vahlne[1992:4]who statethat thetypical internationalizationprocess tends to be a step-wise entry intograduallymoredistantmarkets ; nd by Johansonand Vahlne [1992:5]whosuggestthatthe reasonfirmsbeginin those markets s because there hey seeopportunities,and therethe perceivedmarketuncertainty s low. Johansonand Wiedersheim-Paul1975]found that the growthof four large Swedishmultinationalswas distinguishedby a series of small, cumulativesteps overtime. The entrymode also followed an incrementalpattern,with an agencyoperationprecedinga sales subsidiary n 75%of the cases. This Uppsalamodelof internationalization Andersen1993]describes he patternof entryof firmsthat have survived n themarket.Van Den Bulcke [1986] found that in a study of forty-one Belgian directinvestments abroad, none was without earlier opverationswhile 61%of


7/26

314 JOURNALOF INTERNATIONAL BUSINESSSTUDIES, SECOND QUARTER1996

subsidiaries adbeen precededby exports-sales ubsidiaries, gain supportingthe notion of movingsequentially o entry modes requiringmore resourcesand greatercompanycommitment. n addition,Luostarinen's1979;citedinLuostarinen nd Welch1990]research evealedhat Finnishcompanies endedto start their internationalizationactivities in those countries that werephysicallyand culturallyclose and that had a short business distance toFinland. Later,these companiesadvancedstepwiseto other countrieswithgreaterandgreaterbusinessdistance.This modelof the internationalizationrocesshas a practical,common-senseappeal to it. However,althoughits face validityis very high, the empiricalsupport or it seemsto be mixed.2There s some support or the conceptthatnational culture and cultural distance have an influence on entry modeselection.Two studieshave inkedcertainnationalcultureswith specificentrymode patterns[Johansonand Vahlne 1977;Puxty 1979],but neitherstudysystematicallyshowed how perceivedcultural differences nfluencedentrychoices.Kogut and Singh [1988]providedthe first large-sample tudy showing thatentry mode choice varied dependingupon the cultural distance betweencountries.Theyfoundthatthegreaterheculturaldistancebetween hecountryof the investing irmand the countryof entry, he morelikely t was thatthefirm wouldchoose a joint venture o reduce ts uncertaintyn thosemarkets.GatignonandAnderson 1988] tate thatsociocultural istance thedifferencebetween he home and hostcultures) ausesuncertaintyorfirms,whichmakesthemshyaway romforeignownershipnvolvement.ntheir argesample tudy,theystrived o discover f the sociocultural istancebetweencountriesaffectedthe amountof controlcorporationshad over theirforeignsubsidiaries.Theirfindings ndicated hatcountryrisk was the most importantvariableaffectingcontrol,andthatthe sociocultural istancevariablewhichwasbasedon RonenandShenkar's1985]cultural lusters)didnot havea largeeffect.Significantly,as multinational ompaniesgainedexperienceabroad, hey tended to opt forwhollyownedsubsidiaries,s predicted.Theinternationalizationiterature rimarily ddresseshechoiceof entrymodefor a marketand thesequence f entry nto successivemarkets.Althoughmodeand sequenceare importantconsiderations,we believe a shortcomingof thisliterature s that it uses an absolute measure of distance, using nationalaverages, nd does not dealwith how the perceivedpsychicdistancebetweencountries affects the decisionmakers'entry choice or the organization'sultimateperformancen the newmarket.Moreattentionneeds to be paid tothe perceptionof similarityand difference,as well as to the decisionmakingprocessregarding ntry and,ultimately,o performance utcomes.This researchpresentsevidence that demonstrates hat startingthe inter-nationalizationprocessby enteringa countrypsychicallyclose to homemay


8/26


result n failure.Werefer o this as thepsychicdistanceparadox.Thesimilarityperceived o exist when enteringpsychicallyclose countriesdoes not neces-sarily reducethe levelof uncertainty aced,nor makeit easier to learn aboutthe country, due to a failure in the managerialdecisionmakingprocess.Whereas he implicitassumptionof the model is that similarity s easier,ourresults show that similaritymay hide unexpectedand unforeseenbarriers osuccessfulentryandperformance.

RESEARCH DESIGNWe designed our study to answer two researchquestions. First, why diddomesticallysuccessful Canadian retailersperform poorly in the U.S., acountrythat is culturallycloser to Canadathan any country in the world?Second,what cultural and business differencesexist betweenthe two coun-tries? Phase 1 involved a literaturereview and clinical study in which theexperiencesof ten Canadian retailersthat expandedinto the United Stateswere documentedand analyzed.The strategicdecisionmakingprocess wasalsoanalyzed n eachof the tencompanies tudied.InPhase2, surveyresearchwas used to comparethe values and attitudesof Chief ExecutiveOfficersofCanadian and American retail companies. Each of these phases will bediscussedbriefly n the followingsection.Phase 1: QualitativeResearchLiteratureReview.First, in order to determinehow culturallysimilar ordifferentCanadaand the United Statesare,the literature omparing he twocultureswasanalyzed.Culture s definedas the sharedattitudesand values ofthe membersof a country.3Thus, culture refersto common, deeply rootedattitudesand values,which exist largely rrespective f individualdifferences.There s a largegeneral iterature n attitudesandvaluesthatprimarily ocusesat the individualevel of analysis.This shows thatculture nfluencesa person'sattitudesandvalues whichhavean effect on his/herbehavior.Much less is known specificallyabout societal attitudesand values, or thedifferencesn nationalculturebetween he UnitedStatesandCanada.In fact,thereareveryfewempirical tudiesavailable omparing heculturalcharacter-istics of the United States and Canada [Hofstede 1980; Rokeach, 1973].Althoughnot empirically ased,a numberof authors i.e., Lipset[1963, 1989])have writtenextensivelycomparing he two countries.However,most of thepublishedwork on Canada-U.S.differences s based on observationand his-toricalanalyses.This literature,which focuses on comparingonly these twocountries, suggeststhat there are a number of culturaldifferences.Table 1outlinesthe keyculturaldimensions oundin this literature.The impact of attitudes and values on executive behavior has receivedattention rompractitionersHarmonandJacobs1985;PetersandWaterman1982] and academics alike [Hambrick 1987; Posner and Munson 1979;


9/26

316 JOURNAL OF INTERNATIONALBUSINESSSTUDIES,SECOND QUARTER1996

TABLECanada-U.S. CulturalDifferences - A Summary of the LiteratureU.S. > C = the U.S. is believed to have a stronger orientation, or a higher score on thisfactor than Canada; if U.S. < C, the opposite is true.Achievement Orientation (U.S. > C)Lipset [1963, 1989], Rokeach [1973], Thorne and Meyer [1987]Level of Aggressiveness (U.S. > C)Lipset [1963, 1989], Rokeach [1973]Level of Optimism (U.S. > C)Lipset [1963], Berton [1982], Thorne and Meyer [1987]Action Orientation (Belief in the Timeliness of Action) (U.S. > C)

Newman [1972]Belief in Hard Work (U.S. > C)Newman [1972]Attitudes toward Authority (government)Negative attitudes toward government, questioning of authority (U.S.) / positiveattitudes toward government, deference to authority (C)Berton [1982], Lipset [1963, 1989]Belief in Competitiveness (U.S. > C)Godfrey [1986], Newman [1972]Risk PropensityPositive attitudes toward risk (U.S.) / hunger for security (C)Lipset [1963, 1989], Berton [1982], Godfrey [1986]Masculinity Dimension (U.S. > C)Hofstede [1980], Rokeach [1973]Uncertainty Avoidance Dimension (U.S. < C)Hofstede [1980], Rokeach [1973]Individualism/Collectivism Dimension (U.S. more individualistic than C)Hofstede [1980), Lipset [1963], Rokeach [1973], Godfrey [1986]Power Distance Dimension (U.S. < C)

Hofstede [1980], Lipset [1963, 1989], Rokeach [1973]Commitment to Winning (U.S. > C)Thorne and Meyer [1987], Lipset [1963, 1989]Mastery over One's Environment (U.S. > C)Newman (1972)Cautiousness (U.S. < C)Lipset [1963, 1989], Berton [1982]Attitudes toward equality(U.S. more egalitarian)Lipset (1963, 1989)(C more egalitarian)Rokeach (1973)

England 1978; Rokeach 1973]. Severalhave pointed out the impact of the topexecutive team's attitudes and values on their strategic choices [Chaganti andSambharya 1987; Dess 1987; O'Reilly and Flatt 1986] by creating beliefstructures that influence their interpretation of information and outcomepreferences[Walshand Fahey 1986; Schwenk 1984].


10/26


The cross-cultural iterature ndicates that the culturein which people areraisedcan affectways of thinkingand behaving.Althoughit does not hinderthe ability to manage within one's own country,where business practicesgenerallyare similar, t can affect the abilityto managein other countries/cultures. Business people seldom reflect on and articulate their values,although they feel uncomfortablewhenthesevalues are violated.Also, theyareoften not awareof the assumptions hatunderlieand guidetheiractions.These assumptionscan also lead to cross-culturalmisinterpretations,uchassubconsciouscultural blinders, lack of culturalself-awareness, rojectedsimilarity,and parochialism[Adler 1991]. As a result of different mentalprogramming,eoplefromvariousculturesoften see situationsdifferently ndhave differentapproachesand solutions to problems.Each tends to believethat his or her way makesthe most senseand is best. Frequently,managersfrom one countryenter anothercountryand assumethat theycan implementpractices n the samewayas at home.A majorcontributionof the cross-culturaliteratures the recognition hat, tomanage effectivelycross-culturally, ne must understand he culture of thepeoplewithwhomthey planto do businessand,correspondingly,eal withtheimplicationsof these differences or managing n that culture.However,onemustbe aware hatone's ownculturecan act as a barrier o accuratelyunder-stand the environment hatone is facing.Thismaybe even more crucialwhendifferences renot obviousor noticed as is the case betweenCanadaand theUnited States.TheCase Studies.A list of Canadianretailersthat had entered the UnitedStates market was developed manually using the Canadian Key BusinessDirectory, he CanadianTradeIndex, and the Directoryof Retail Chains inCanada.Majornews sourceswere also usedto identifyCanadiancompaniesoperating n the United States.A populationof thirty-twoCanadianretailerswas identified rom whicha samplecouldbe drawn.In identifyingpotential researchsites, the following criteriawere developed.First, a companyhad to be profitablen Canada o be consideredas a possiblesite for morein-depthstudy.This criterionwas used so that the resultscouldnot be attributed o poor management kills in Canada. Second, companieshad to have been operating n the United Statesfor a period of at least twoyears,unlessthey had withdrawn romthe marketand could be analyzedasfailures.The two-yearcriterionwas deemednecessary o assess performanceand to avoidcontaminatinghe resultsdueto start-up.Companiesmeeting the above criteria were contacted and ten companiesagreed o in-depthcase studiesof their experiences n the United States.Eightof the ten companieswere unsuccessful.The data were collected via semi-structured nterviewswith CEOs, as well as with other membersof the topexecutive teams, including vice presidents of finance, merchandising,


11/26

318 JOURNAL OF INTERNATIONAL BUSINESS STUDIES,SECOND QUARTER1996

marketing,operations,administration nd real estate.A total of twenty-eightexecutiveswereinterviewedand the averagedurationof each interviewwastwo hours. Interviewswere conducted by two interviewers, ecordedandcontent-analyzed.Themes were identifiedalong with the number of indivi-duals who referred o these themes.The inter-raterreliabilitywas .95. Inaddition,secondary ourcedata, suchas companyminutes,annualreportsandnewspaper lippings,wereused to supplement he interviewdata.The decisionmakingprocesswas measuredby askingexecutives o tracethehistory of the strategicdecision to enter the United States market rompre-entry to post-entry.Included were questions about whether and, if so,

how culturaland other differencesbetweenthe United States and Canadaweretaken into accountin the strategicdecisionmakingprocess.Executiveswere asked about their pre-entry,entry and post-entry perceptions ofAmerican culture and whether their perceptionswere incorporatedintodecisionsmade.Thecompany'sdecisionsrelated o the U.S.venturewere alsorecorded. The interviewswere content-analyzed ndividually,across teamswithin companies,and across companies, o identifyfactors contributing osuccessfuland unsuccessfulperformance.Success was operationalizedbyaggregating he followingmeasures:sales and profits in the U.S. over theperiodof operations; rowth n sales andprofitsovertheperiodof operations;marketshareoverthe period;and the abilityto meet the expectationsof theparentcompany.Companyperformanceell into threecategories: nprofitablewithdrawals;oldingin the U.S. (not profitable, utmayhave ncreased ales,gainedmarketshare,or met the expectationsof the parent);and profitablyoperating n the U.S. Companies n the latter two categorieswereconsideredsuccesses.Unprofitablewithdrawalswere considered ailures(therewere noprofitablewithdrawalsn our sampleof ten).ResultsTherewere two important indings rom Phase 1. First,the executivesagreedthat therewere severalcultural differencesbetween Canadaand the UnitedStatesandthat thesedifferences ffected heirabilityto competeeffectivelynthe United States.The secondand related indingwas that, althoughculturaldifferenceswereperceivedby the executives o be important, hey alone werenot responsibleorthevaryingperformanceevelsof the Canadian ompanies.Rather,t was therecognitionof thosedifferences, riorto entry, hat differen-tiatedperformance.Eachof thesefindingswillbe elaborated n now.Therewas a very highlevelof agreementamongthe executives egardinghecultural differencesbetween the United States and Canada in the retailindustry.The followingcharacteristicswerefound to be moredescriptiveofAmericansthan Canadians:Winning Attitude; Competitiveness;Sense ofMastery;Action Oriented;Belief n Hard Work;Aggressiveness; iskTaking;


12/26


and Individualistic.These perceiveddifferenceswere incorporated nto thequestionnairemeasuring ulturaldifferences n Phase 2 of the study.The Canadianexecutives also concurredthat the cultural differenceswerenoticeable n the behaviorsandbusinesspracticesof Americans. ndeed,therewerefivemajorareasof the retailbusiness n which culturaldifferencesmani-festedthemselves.These five areascan be grouped nto those relating o themarket (consumer differences;regional differences)and the competitiveenvironment(level of competition; employee and managementattitudes,values and behaviors; nd relationships).Someof the moreimportantdiffer-encesare describedbrieflybelow.Market1. ConsumersICustomers.mericanconsumersdemanded o be treatedwithimportancewhenthey shopped.Theydemanded ervice. n the UnitedStates,consumerswouldshop wherethe bargainswere.In Canada, they were morelikelyto shop automatically t a nationalchain.2. RegionalDifferences.Relative o Canada,executivesgenerally oundmuchlargerregionaldifferencesn buyingbehaviorn the United States.Therewereespecially argeEast/Westdifferencesn the United States.Canadawasseen tobe more homogeneouspolitically,economicallyand socially and to have amore commonly accepted value system. Therefore,doing business in theUnited Stateswas found to be much more difficultgiventhis heterogeneity.Doing businessin the United Statesrequiredknowledgeof each individualregion,because he differencesbetween hemcouldbe very large.CompetitiveEnvironment1. Relationships.The executives nterviewed ommented on the difficultyofgainingaccessto suppliers nd thenecessityof buildingrapportandlong termrelationshipsn the United States.2. Employee and Management Attitudes, Values and Behaviors. Americanemployeesweredescribedas possessinga greaterdesire or independence hanCanadianemployees,and to be much less interestedin unions. Americanemployeeswere found to be veryhardworkingand muchmoreconscientiousabout productivity.American employees' strong orientationtoward workcreatedanexpectationhattheywould be rewarded ased on merit.Sincetheyworkedmoreindependently,he typesof reward ystemsweredifferent n theUnitedStates'retail ndustry.Americanmanagerswere also foundto be different rom Canadianmanagersin two major ways. First, the level of professionalismand experience n theretail industrywere found to be higher in the United States. Second, theexecutives ound thatAmericanexecutiveswere expected o live up to higher


13/26

320 JOURNAL OF INTERNATIONALBUSINESS STUDIES, SECONDQUARTER1996

performance tandards.For example,not meetinggoals was more likelytolead to terminationn the UnitedStatesthan in Canada.3. Competition. Americans were found to be much more competitive thanCanadians. Frequentlythe executivesvoiced comments typically used todescribebattle,suchas It wasall out war or Theirarsenalwasimpressive .Not expecting his differencen the levelof competitiveness,Canadiancom-paniesfoundthemselvesat a significantdisadvantage.The clinical studieshighlighted hat one of the most important actorsin thedecisionmaking rocessfor Canadiancompanieswas the accuracyof the topmanagement eam'sperceptionsof the United Statesmarketprior to entry.Thisaspectof theirpre-entry rientationwas the basefromwhichall decisionsregarding ntry nto the UnitedStatesmarketweremade.Theexecutives romthe companies that failed in the United States perceivedthere to be nodifferencebetween he two marketspriorto entry,and baseddecisionssuch asproductmix in the stores, store locationand entrymode on this inaccurateperception.As a result, they found themselvesunprepared or the level ofcompetition and cultural differences they discoveredupon entry, whichaffected heirability o operatesuccessfullyn theirchosen markets.Althoughthey conductedvariousforms of marketresearch, heir lack of experiencenthe U.S. markethindered heirability o interprett. Unfortunately,venaftertheyrecognized he obviousdifferencesn the two cultures, heycontinued oassumethat they could operate n the United States as they had in Canada.Mental models appropriate or the Canadianmarket led top managementteams to make decisions as they would at home- with generallydisastrousoutcomes.Consequently,hey did not adjust to, nor learn about, the UnitedStatesmarketandwere forced o withdraw rom it.On the other hand, the companiesthat weresuccessful n the United Statesrecognizedthat therewere differencesprior to entry and incorporated hisaccurateknowledgeinto their entry decisions.Executiveseither had directexperiencen the U.S. market,or theyhiredAmericanmanagementwho did,ensuring hatdecisionsmadefitwith the market.The aboveanalysisillustrates he psychicdistanceparadox.First, Canadianexecutiveswho erroneously ssumed he United Stateswas similar o Canadabelieved that their strategieswere correct and that organizationsn the twocountriescouldbe managed n thesameway.Second, nsteadof thisperceivedsimilarityncreasing he ease with whichthey learnedabout the market,andreducing he amountof uncertaintyaced,it hindered heirunderstanding ymasking mportantdifferences, ndledto decisions hatwere neffective.In addition,we discoveredhatexecutiveswithdirectexperiencen the UnitedStates made better decisions because they understoodthe true distancebetweenthe Canadianand Americanmarkets.This is consistentwith the


14/26


findings of Johanson and Vahlne [1977]. Some of these executiveswereAmericansworking n Canadawhohadexperiencen thetargetmarkets;omewere Canadians with experience in the United States; and others wereAmericans ivingin the United Stateswho had the requisiteexperience.Thisraisesthepossibilityof a furtherparadoxwithin thepsychicdistanceconcept.If a company'smanagementteam has direct experience(perhapsthroughliving or workingthere) in a market that normallywould be consideredasdistant n the indices, hepsychicdistance o thatmarketmightbe lessthanthedistance o a close market n whichtheyhadno directexperience.There-fore, the paradoxthat a close market can be distant, and that a seeminglydistantmarketcan be close, oughtto be recognized.The abilityto learnin a new market s an importantskill. Manycompaniesencounteredunexpecteddifferences n the United States, yet they did notchangetheir modus operandior theirinitialperceptionsabout the market oreflect he realityof whatthey wereexperiencing, ndtheycontinued o makedecisionsbased on the faulty assumptions.Companieswith executiveswhochallenged heirinitialperceptionsand adjusted hemwereableto altertheirdecisionsto fit withthe situation.The ability,or inability, o learnduringtheentry process affectedthe company'ssubsequentperformance.The differen-tiating factor was what organizational earningtheorists referto as doubleloop learning[Argyrisand Schon 1978]or an abilityto modify underlyingbeliefsandassumptions, ather hansimplychangingbehavior.The implicationof thesefindings s that executivesor researchershould notassume that cultural or psychic distance measured at a national level ofaggregation eflects he truedistancebetweena company n one countryand amarketin another. The resultsfrom Phase 2, which now follow,show howinaccurate uchan assumptioncan be.The interviewsconfirmedthat greaterthan expectedculturaland businessdifferences xistedbetweenconsumersand retailers n the two countries,andthat these influenced the ability of Canadian retailers to enter and adaptsuccessfullyo theUnited States.Althoughrichandinformative,hesefindingswerequalitativeand perceptual n nature.They also came froma small, butimportant, sample. The question still remained whether the differencesexperiencedwererepresentativef the executives n the retailindustry n thetwocountries.Phase 2: SurveyResearchIn Phase 2, survey researchwas utilized to determinewhether or not theculturaldifferencesthat the Canadian retailersexperienced n the UnitedStates could be generalizedbeyond the responsesfrom the interviews.Aquestionnairewas designedusing 125 itemsmeasuring ixteenculturaldiffer-ences that had been suggestedin the literatureand the interviews.These


15/26


16/26


TABLE3Mean Differences between Canadians and AmericansStandardCountry N Mean Deviation Probability

Jackson's PRFScales:AchievementOrientation C 180 6.32 1.45 .001U.S. 91 6.96 1.17Aggression C 180 4.64 1.76 .782U.S. 91 4.70 1.89Jackson's JPI Scales:Risk-Taking C 180 5.50 2.05 .001U.S. 91 6.52 1.79Tolerance C 180 4.71 1.63 .017U.S. 91 5.21 1.62

Lodahl& Kejner'sJob Involvement C 180 3.65 .52 .013U.S. 91 3.82 .50Hofstede's Scales:UncertaintyAvoidance C 180 2.85 .45 .001U.S. 91 2.54 .58Power Distance C 180 2.66 .48 .005

U.S. 91 2.53 .40Individualism C 180 3.16 .42 .001U.S. 91 3.76 .55Masculinity C 180 3.22 .46 .001U.S. 91 3.43 .52Blood'sProtestantWorkEthic:Factor1: Pro-Protestant C 158 -.21 .98 .000WorkEthic U.S. 79 .03 1.01Factor2: Non-Protestant C 158 -.09 1.06 .039WorkEthic U.S. 79 .17 .86

compared.A principalcomponentsanalysiswas usedwith varimaxrotation.From this analysis, the ProtestantWorkEthic Scale items produced a two-factor solution(usinganeigenvalue f 1),with one of thefactorsbeinglabeledPro-ProtestantWork Ethic and the other Non-Protestant Work Ethic,consistentwithBlood'sfindings.The resultscomparing he Canadianand AmericanChief ExecutiveOfficersare presented n Table 3. The literaturesuggeststhat Americansare moreachievement-oriented,ggressive nd risk-takinghanCanadians.The resultssupported ignificantdifferences ortwo of Jackson's cales- achievement ndrisk-taking(p


17/26

324 JOURNAL OF INTERNATIONALBUSINESS STUDIES,SECOND QUARTER 1996

The other Jacksonscalemeasured olerance.Thiswas included o determinewhetherany difference xistedbetweenCanadianandAmericanexecutivesntheir tolerancefor differentpeople,points of view,culture,and so on. Theresults ndicated hat the Americanexecutivesweresignificantlymoretolerantthan the Canadian xecutives p < .02). This could beinterpreted s one of thereasonsCanadianretailcompanies ailed n the UnitedStates they couldnotadjusttheir Canadianpre-entryorientation o whatwas required o competein the United States. When presentedwith a culturallydifferentpeople andmarket,Canadianshad difficultyaccepting hesedifferences. ackson'stemssuggest hat a personwith a highscoreon toleranceacceptsdifferentattitudesandcustoms[Jackson1976].On Hofstede'sfour culturaldimensions,the results indicatedthat the twogroups of executiveswere significantly ifferenton each. Three of thesewereconsistentwith Hofstede's1980studyof fortycultures.As in Hofstede's tudy,the American samplehad a highermean score on items measuringIndivi-dualismand Masculinity,and a lowerscoreon itemsmeasuringUncertaintyAvoidance p < .005).However, he resultsfor the items measuring he PowerDistance dimensionwere not consistentwith Hofstede's findings.WhereasHofstede foundthat Canada had a slightly owerPowerDistance scorethantheUnited States, he reversewastrue(p < .005)in thisstudy.Thus, t appearsthat the Canadian respondentsare more willing to accept power beingdistributed nequallyn institutionsandorganizationshan the Americanres-pondents.AlthoughthisfindingcontradictsHofstede's indings,t is consistentwith a numberof others [Lipset1963, 1989;Rokeach1973]who have com-paredthe two cultures.The consistentviewhasbeenthatAmericansaremoreegalitarianthan Canadians.The present results provide support for thisposition.Severalof the Canadianexecutives nterviewed tatedthat Americanexecu-tiveswork harder meaning hey had higherproductivityevels,were held tohigherperformancetandards, rovidedbetterservice,andspentmore time atwork)than their Canadiancounterparts.The questionnaire esultswere con-sistentwith this, indicating hat the Americanrespondentsweresignificantlymorejob involvedthan the Canadianexecutives p < .013). In addition,theresults ndicated hat the Americanexecutiveshad a significantly igherscorethan the Canadianexecutiveson the Pro-ProtestantEthic factor(p < .001).

DISCUSSIONThePsychic Distance Paradox:Familiarity May Breed CarelessnessThephenomenonwe havereferredo as thepsychicdistanceparadoxseemedto be createdby common,but unexplored,assumptionsor underlyingbeliefsaboutthe United Statesheldby decisionmakersn the Canadianretail com-panies. These mental maps or preconceiveddeas of the United States,and


18/26


whatit would be liketo do businessthere,createdbarriers o learningaboutthisnewmarket.Theyaredescribedbriefly n this section.Similarity.Canadianexecutivesmade the erroneousassumptionthat theUnitedStates sjust likeCanada,onlylarger. Learningbeginswith theabilityto see differences,and this projectedsimilarityinterferedwith executives'abilityto learnabout the markets, he regions,the consumers,and the com-petition. It was often believed that Americans were just like Canadians,sharing a similar language, culture,values, tastes, and business practices.Notably, t was precisely he fact that these two countriesprobablyare moresimilarthan any other two that masked some fundamental differences nvalues and attitudes.Consumersweredifferent; hey were more competitiveand they reacteddifferently han in Canada(eventhe smallconsumers); heindirectcompetitionwas oftenmissed.Theattitudesand values of CEOsfromCanadianand Americanretailcompaniesdiffered ignificantly lso.Proximity.The proximityof the United Statesto Canada contributed o thebelief that because t was close it mustbe easier to do business herethan incountries hat werefurtherawaygeographically.he view was that the UnitedStateswas simplythe southernextensionof Canada,or that it was just likeCanada'sbackyard.Given the assumptionof similarity nd a beliefin Canadathat ties run north and south, regions of the United States that werecontiguous o Canadian egions,n somecases,wereorganized s partof thoseCanadiandistricts.Thisassumption lsomayhavebeenat work nthe commentexpressedby one of theexecutives, Ifwe can sell to a market3000mileswest,there'sno reasonwe can'tsellto a market90 milessouth. TheUnited States sa very complexand competitivecountry.Doing businesstheresuccessfullysnot easy,regardless f the geographic rpsychicproximity o one'sown country.Success. This common myth was the belief that because the retail conceptworked in Canada, and because the companies were important and wellknown n Canada, he retailconceptscouldeasilybe transferredo the UnitedStates,and the importantrelationships asilyestablished here.This could bestatedas successn Canada s a predictorof success n theUnited States andthis belief was evident n a numberof thecases. Someexecutivesbelieved hattheirretailconceptwas so powerful hat it could overcomeany competition,evenwithdisadvantagesuch as secondary ocations.ManyCanadianretailersbelieved hat they could extrapolate rom their ownpast history,culture and experiences n Canada when entering the UnitedStates. Instead, the environmentthey faced was very different, and theirexperiencesromthe past wereno longerprovidinguseful guidelines.The oldrules no longer applied,and what was required o learn the new rules was anattitudeof inquisitivenessand sensitivitythat many did not develop soonenough. Believing oo strongly hat success n Canadapredicted uccess n theUnited Stateswas very costly.


19/26

326 JOURNAL OF INTERNATIONAL BUSINESS STUDIES, SECOND QUARTER 1996

Size and Certainty. This was a modern Canadian variation of the old themes,The streets are paved with gold in the United States or You can make moremoney by mistake in the United States than you can on purpose in Canada.This myth simultaneously conveys a sense of enormous wealth in the UnitedStates and the ease, or certainty,of obtaining one's share of those riches. Afterall, the belief was, it was there for the taking. The size and assumed accessibi-lity of this market were like a soporific, a drug that induces sleep. In the case ofCanadian businesses they induced a sense of satisfaction, leading to careless-ness, and often, failure. Realizing that the United States retail market is largerthan the Canadian market led to dreams of if we could just get one percent,we could make it, and the subsequent assumption that this probably wouldnot be very difficult to do.There is most likely another assumption related to the one about size thatcreates problems - the myth of the American market. In reality, as we sawthroughout the research, there is no such thing as the American market.Rather, there are many regional markets each with their own distinct charac-teristics, and a series of retail industry systems that must be entered.

LEARNING TO OVERCOME BARRIERS POSED BYPSYCHIC DISTANCE

The psychic distance concept calls attention to important cultural andbusiness differences between countries that can create obstacles to successfulmarket entry and adaptation. These obstacles can be overcome throughlearning. Nordstrom and Vahlne [1992] call this process bridging the gap ofpsychic distance. It is evident from our research that assumptions held byCanadian retailers about doing business in the United States marketcontributed to their performance problems there. In order to overcome thesebarriers, t is important to follow an appropriate process in making decisionsregarding entering a new market- the United States or any other country - asexecutives go about completing the activities set forth on their strategicagenda. Some suggestions include the following:

*Treat even psychically close markets as foreign markets. Executivesshould not assume that the Canadian and American markets are thesame, or that companies within each can be managed in the same way.When decisionmakers start with the assumption that they are the same,they are more likely to take the appropriate steps toward entering the newmarket.

*Test assumptions and perceptions prior to entry. The success of adecisionmaking process relies on the accuracy of information and theknowledge of those making the decisions. The most important part of acompany's pre-entry orientation is the perceptions and assumptions ofthe executive team, because they act as a base from which all of the


20/26

THE PSYCHICDISTANCE PARADOX 327

decisionsregarding he ventureare made. If the pre-entryaspectof thedecisionmaking rocess s faulty, he remainder f the process s unlikelyto be effective.The decisionmakers'nitialperceptionsand assumptionsalso affect theirabilityto learnfromexperiencen a new marketand torespond o thisinformation.Strongbeliefsabout thesimilarity f thetwomarketsor the power of a retail conceptcontributed o the difficultyofadjustingwhen faced with conflicting nformation.There comes a timewhen it is necessary o reviseone's basic assumptionsand perceptions,ratherthan continue to alter operatingdecisions in a way that onlysupports he initialposition.

*Correct nterpretations key.An importantobservationof the studywasthat gathering nformationabouta marketdoes not necessarilyead toknowledgeof thatmarketunless it is interpreted orrectly.A numberofthe companiesconductedmarketanalysesand still failed. The failureofthe companies n our studyunderscoreshe differencebetweenobjectivemarket nformation nd the tacit knowledgeor know-how hat is criticalto success.It seemed that the only waysthat Canadiancompanieswereassuredof gatheringheright nformation,andaccuratelynterpretingt,were by havingexecutivesin Canada who had alreadylearnedfrompreviousexperiencen theUnited States,orby havingqualifiedAmericanmanagersas partof the team.The nationalityof the executiveswas notthe key,buttheirhavinghaddirectexperiencen themarketwascritical.The real ndicatorsof psychicdistanceare to be found muchcloserto theground hanresearchers avebeen looking.* Develop the ability to learn. A final recommendation s that those

making he decisions orforeignmarketsmustdevelop heability o learnabout the other countries.Learninghas to do with increasing one'sknowledgeand understanding.Learning s more likely to occur underconditionswhere erroris tolerated, assumptionsare testable,and keyaspectsof informationare not missing.Thus,it is vital to identify andcheck the assumptionsof decisionmakersprior to entry,because theirassumptions often seriously limited the effectivenessof their entrydecisions.Sinceassumptionsare often subjectiveand hardto identify, tis a good idea to use an objective person from outside the decision-makingprocess o helpdecisionmakerso identifythem. It appears hatto gain the capacity necessaryto compete even in close markets,companies should hire managementtalent experienced n the targetmarket.These people should have an understandingof the targetedconsumers,the competition,the competitiveintensity of the suppliersituation,andregionaldifferences, mongother factors.

Only through careful attention to managementdecision processes can thepotentialnegativeconsequences f the psychicdistanceparadoxbe avoided.


21/26

328 JOURNAL OF INTERNATIONAL BUSINESS STUDIES,SECOND QUARTER1996

PROPOSED QUALIFICATIONS TO THE PSYCHICDISTANCE CONCEPTTo improveour understanding f the psychicdistanceconcept and its use ininternationalbusiness research,qualificationsor refinementsare suggestedbelow.Refinementf the Concept.This study supports he ideathat psychicdistanceis a larger,more encompassing,concept than simply cultural difference.Business factors, such as legal and competitiveenvironments,need to beincluded when conceptualizingdistancein the internationalization rocess.Furtherwork s necessaryhat shoulddeterminewhichare the mostimportantfactorsto consider.For example,AmericancompaniesenteringCanadahad anumberof advantagesover their Canadiancounterparts.They had greaterfinancial and managerialresourcesto apply to their internationalizationefforts,and greatersophistication the retailindustry n the United States isestimated to be approximately en years ahead of Canada's).Americanretailersarenotedforbeing excellentnicheandregionalmarketers.They havebenefited rom theirlargehome marketby havinghad greaterexperience ndealing with its diversityand complexity.This experiencemay havehelpedthemaccurately ssess the differencesbetween he United StatesandCanada.Theseare thetypesof issuesthat needto be included n a conceptof businessdifficulty, uch as thatproposedby JohansonandVahlne 1992].There may also be an issue of directionality r symmetry.LargenumbersofCanadianretailershave failed in the United States,but we have found thatAmericanretailershave beenverysuccessful n Canada.Of the twenty-threeAmericanretailerswe identifiedas havingenteredCanada,all twenty-threewere successful.However, he psychicdistancefrom Canadato the UnitedStatesshould be the sameas from the United Statesto Canada.Or should itbe?This situation uggests hat anasymmetrymayexistinthepsychicdistanceconcept, at least when performances taken into consideration.This raisesanotherpotentialparadox hat the distance etween he sametwo countriescouldbe differentdependinguponthe directionone travels.To learnmoreabouttheissueof directionality,utureresearch ffortswouldbeparticularly seful n two areas.First,consideringCanada's mall sizein termsof economicsand populationcomparedto the United States,it would beinterestingto learn whether companies from other small countries havedifficultywhen enteringlargercountries.Agren [1990]found that SwedishMNCs wereconsistently isappointedn theperformancef theirU.S.affiliatesand concluded hatSwedishmanagers avegreatlyunderestimatedhedifficultyof managingin the United States. Similarly,EuropeanMNCs are oftenunpreparedorthe intensityof competitionn theU.S.[Rosenzweig 994].Conversely, erhaps heUnitedStatesrepresents specialcase,andit is simplya difficult market for everyone. Or perhaps the retail industry has


22/26


characteristics that make it unique. Arguably, internationalization theory andthe psychic distance concept should be able to account for special cases.Further work needs to be done to determine if there are special cases and tomap these anomalies.Measurement. Researchers need to exercise care in the way that they quantifypsychic distance. Although several studies show that Canada and the UnitedStates are very similar, company experiences within an industry point outsignificant differencesthat must be recognized. These differencesrelatedirectlyto what Nordstrom and Vahlne referred to as business difficulties. The culturalcomponent of the concept generally utilizes national boundaries, when theremay be substantial variations in regional cultures, or industry cultures (i.e.retail). Moreover, as this study has illustrated, true distance to a market musttake into account the perceptions, understanding and experience of acompany's management team.Clarify Links to Performance. We believe that there is an assumptionunderlying the use of the psychic distance concept that needs to be clarified.The assumption is that similarities are easier to learn about and manage thandissimilarities. A prescription for managers would be that companies shouldfind it easier to begin their internationalization process in countries that arepsychically close or similar to their own. Although this is intuitively appealingit has not, until now, been tested using company performance data. However,there is no evidence that pursuing this strategy will lead to better performancethan if a company entered a more distant country. Indeed, our findings suggestthat perceivedsimilarity can lead to carelessness and failure. We think it wouldbe useful to compare the performance of companies pursuing differentinternationalization sequences in order to make research into theinternationalization process more normative.In particular,it would be useful to analyze the performance of companies fromother countries trying to enter psychically close countries, to learn whetherthey also have difficulty performing. Consistent with the literature on theinternationalization process, Akoorie and Enderwick [1992] found that NewZealand companies attempt to minimize psychic distance in their overseasoperations. Therefore, Australia is the country chosen most for their inter-nationalization efforts. However, moving beyond the internationalizationdecision, to studying the actual performance of New Zealand companies inAustralia would fill an important gap in the literature.Similarly,researchcouldbe extended to studying the performance of Austrian firms in Germany,Belgian firms in France or firms from Finland and Norway in Sweden. Suchstudies would be very valuable for testing how widespread the psychic distanceparadox is, if at all.Limitations of the Study. The survey responses came primarily from centralCanada, where the greatest number of top retail companies are located, and


23/26


the case studies were of companies n central and westernCanada.English/French cultural differenceswere not examined, nor were differencesacrossrespondents rom variousstates often due to the low numberof respondentsin each region. By using a cross-sectional esearchdesign that focuses on twocountriesand one industry,we cannot generalizeour findings o other indus-triesor other combinationsof countrieswithout furtherresearch.Comparingtwo similarcountriesdirectlymay serveto illuminate he differences hat existmore so than when the two are examinedin the context of many othercountriesthat arevery different.However, omparing hemin the context ofthese other countriesmay diminishthe importantand significantdifferencesthat we found.

CONCLUSIONThe intent of this article is to contribute to the development of inter-nationalization heory and the concept of psychic distance, to improveourunderstandingf the internationalizationrocessas not onlya descriptive, uta prescriptive ool. We have proposedsome modifications o the concep-tualizationand measurementof psychic distanceand have suggestedthatindustry ould be a moderating ariablen the internationalizationrocess.The studyof Canadian etailershas allowedus to identifyand explorewhatwebelieveto be an implicit assumption n internationalizationheory, namely,that followinga sequenceof entry startingwith psychically lose countries srelated o improvedperformancen these markets.Theparadoxwas that whatappearedto be similarand familiar turned out to be very differentthanexpected.Althoughthe Canadiancompaniesbegantheir internationalizationprocessby entering he United States as the theorywouldsuggest, t is whenwe look beyond sequenceof entry to performance hat the paradox lies.Insteadof similarculturesbeing easyto enterand to do business n, we arguethat it maybeverydifficult o enter hesemarketsbecausedecisionmakersmaynot be preparedor differences.We founda significantdifferencenvaluesandattitudesbetween wo countriesthaton the surfacedo not appear o havesuch a gap.Ourfindingsndicate hatimportant ulturaland businessdifferences xist that can influencehe successof internationalization ttempts. They also point to the need for furtherresearcho examine he abilityof companies o identifyaccurately, ndbridgethegapcreatedby, psychicdistance.

NOTES1. Psychicdistance s defined n this paper as a firm'sdegreeof uncertaintyabout a foreignmarketresulting rom culturaldifferences nd otherbusinessdifficultieshat presentbarriersto learningaboutthe marketand operating here.2. See Johansonand Vahlne [1992],Benitoand Gripsrud 1992],and Andersen[1993] or adiscussionof this topic andfor a more detailedset of references.


24/26


3. Cultural groupings are often larger or smaller than a country. However, in this study,country is used as the level of analysis exclusively to highlight the differences between theUnited States and Canada.REFERENCES

Adler, Nancy. 1991 (second edition). International dimensions of organizational behavior.Boston, Mass.: Kent Publishing.Agren, Lars. 1990. Swedish direct investment in the U.S. Institute of International Business,Stockholm School of Economics.Akoorie, Michele & Peter Enderwick. 1992. The international operations of New Zealandcompanies. Asia Pacific Journalof Management, 9(1): 51-69.Andersen, Otto. 1993. On the internationalization process of firms: A critical analysis. Journalof International Business Studies, 24(2): 209-31.Argyris, Chris & Donald Schon. 1978. Organizationallearning. A theory of action perspective.Reading, Mass.: Addison-Wesley.Beckermann, W 1956. Distance and the pattern of intra-Europeantrade. Reviewof Economicsand Statistics, 28:31-40.Benito, Gabriel & Geir Gripsrud. 1992. The expansion of foreign direct investment: Discreterational location choices or a cultural learning process? Journal of International BusinessStudies, 23(3): 461-76.Berton, Pierre. 1982. Whywe act like Canadians.Toronto: McClelland and Stewart.Chaganti, Rajeswararao & Rakesh Sambharya. 1987. Strategic orientation and characteristicsof upper management. Strategic ManagementJournal,8: 393-401.Cook, John D., Sue J. Hepworth, Toby D. Wall & Peter B. Warr. 1981. The experienceof work:A compendiumand reviewof 249 measures and their use. London: Academic Press.Dess, Gregory. 1987. Consensus on strategy formulation and organizational performance:Competitors in a fragmented industry. Strategic Management Journal,8: 259-77.Dillman, Don A. 1978. Mail and telephone surveys: The total design method. New York: JohnWiley.England, George W 1978. Managers and their value systems:A five-countrycomparative study.ColumbiaJournalof WorldBusiness, 13: 35-44.Evans, Wendy, Henry Lane & Shawna O'Grady. 1992. Border crossings: Doing business in theUnited States. Scarborough, Ont.: Prentice Hall Canada.Gatignon, Hubert & Erin Anderson. 1988. The multinational corporation's degree of controlover foreign subsidiaries:An empirical test of a transaction cost explanation. Journalof Law,

Economics and Organization,4(2): 305-36.Godfrey, John. 1986. The nation in search of a decent cliche. Financial Post, Winter: 89-91.Hambrick, Donald C. 1987. The top management team: Key to strategic success. CaliforniaManagement Review, Fall: 88-108.Harmon, Frederick & Garry Jacobs. 1985. The vital differences: Unleashing the power ofsustainedcorporatesuccess. New York: AMACOM.Hofstede, Geert. 1980. Culture'sconsequences. International differences in work-related values.Beverly Hills, Calif.: Sage Publications.Hornell, Erik, Jan-ErikVahlne & Finn Wiedersheim-Paul. 1973. Export och utlandsetableringar(Export and foreign establishments). Stockholm: Almquist & Wiksell.


25/26


Jackson, Douglas. 1976. Jacksonpersonality inventory.New York: Research Psychologists Press.. 1984. Personality researchorm manual. London, Ont.: Research Psychologists Press.

Johanson, Jan & Finn Wiedersheim-Paul. 1975. The internationalization of the firm- FourSwedish cases. Journalof Management Studies, 12: 305-22.Johanson, Jan & Jan-ErikVahlne. 1977. The internationalization process of the firm - A modelof knowledge development and increasing foreign market commitments. Journal ofInternational Business Studies, 8: 22-32.

. 1992. Management of internationalization. RP 92/2. Institute of International Business,Stockholm School of Economics.Kogut, Bruce & Harbir Singh. 1988. The effect of national culture on the choice of entry mode.

Journalof International Business Studies, 19(3):411-32.Kogut, Bruce & Udo Zander. 1993. Knowledge of the firm and the evolutionary theory of themultinational corporation. Journal of InternationalBusiness Studies, 24(4): 625-45.Linnemann, Hans. 1966. An econometric study of international trade lows. Amsterdam:North-Holland.Lipset, Seymour Martin. 1963. Thefirst new nation. New York: Basic Books.

- 1989. Continentaldivide. The values and institutions of the United States and Canada.Canadian-American Committee, sponsored by C.D. Howe Institute (Toronto) and theNational Planning Association (Washington).

Luostarinen, Reijo & Lawrence Welch. 1990. Internationalbusinessoperations.Finland: KyrusiOy.

Newman, William. 1972. Cultural assumptions underlying U.S. management concepts, in J.L.Massie & J. Luytjes, Management in an internationalcontext, 327-52. New York: Harper &Row.Nordstrom, Kjall A. & Jan-Erik Vahlne. 1992. Is the globe shrinking? Psychic distance and the

establishment of Swedish sales subsidiaries during the last 100 years. Paper presented at theInternational Trade and Finance Association's Annual Conference, April 22-25, Laredo,Texas.O'Reilly, Charles A., III & S. Flatt 1986. Executive team demography, organizationalinnovation, and firm performance. Manuscript. Berkeley: University of California.Peters, Thomas J. & Robert H. Waterman,Jr. 1982. In search of excellence. New York: Harper& Row.Posner, Barry & J. Michael Munson. 1979. The importance of values in understandingorganizational behavior. Human ResourceManagement, 18: 9-14.Puxty, Anthony G. 1979. Some evidence concerning cultural differentialsin ownership policiesof overseas subsidiaries. ManagementInternationalReview, 19: 39-50.Rokeach, Milton. 1973. The nature of humanvalues. New York:The Free Press.Ronen, Simcha & Oded Shenkar. 1985. Clusteringcountries on attitudinaldimensions:A reviewand synthesis. Academy of Management Review, 10 (3): 435-54.Rosenzweig, Philip. 1994. The new American challenge: Foreign multinationals in the UnitedStates. CaliforniaManagement Review, Spring: 107-23.Schwenk, Charles R. 1984. Cognitive simplification processes in strategic decision making.Strategic ManagementJournal, 5: 111- 28.


26/26


Thorne, Paul & Bill Meyer. 1987. The care and feeding of your American management.International Management,October: 112-14.Van Den Bulcke, Daniel. 1986. Role and structureof Belgian multinationals.In K. Macharzina& WH. Staehle, editors, European approachesto internationalmanagement.New York: DeGruyter.Walsh, JamesP & Liam Fahey. 1986. The role of negotiated belief structuresin strategy making.Journal of Management, 12: 325-38.

psychic distance paradox

Documents