From a Distance: Essays on the Concept of Psychic Distance in
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From a Distance: Essays on the Concept of Psychic Distance in
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 SeventyThird 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 socalled 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 nationallevel 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 crossdisciplinary 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 teamlevel 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 projectbased 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 countrylevel 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 Motivational Cultural Intelligence Inputs Psychic Distance Processes H1: + Expectation of Challenges H3: + H2: + Outcomes Team Effort H4: + Team Performance 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- 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 outcommunicated 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 2030% 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 Algeria 2 Iceland 1 Saudi Arabia Australia 1 India* 23 Serbia Austria* 7 Indonesia* 129 Singapore Bangladesh 5 Iran 3 Slovakia* Belarus 1 Italy 6 Spain* Brazil 6 Japan* 8 Sri Lanka Cambodia 1 Korea (South)* 32 Sweden Canada 1 Kosovo* 11 Taiwan Colombia* 44 Kyrgyzstan 1 Tanzania Costa Rica 1 Latvia 1 Thailand Denmark 1 Lebanon 1 Tonga Islands DR Congo 1 Lithuania* 55 Turkey Ecuador* 46 Mexico* 4 Turkmenistan Egypt 2 Moldova 6 UAE* El Salvador 1 Montenegro 1 UK Finland 4 Nepal 1 Ukraine France* 20 New Zealand* 26 USA* Georgia 2 Nigeria 3 Uzbekistan Germany* 15 Philippines 1 Venezuela Ghana* 64 Poland* 30 Vietnam Greece 1 Portugal 3 Hong Kong 1 Romania* 126 * participating university 5 1 1 5 12 19 1 4 2 1 1 1 3 1 17 2 2 223 1 1 1 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 fiveitem 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 Likertstyle 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) 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) 0.88 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) 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) 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) 0.66 0.75 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. 2. I am confident that I can socialize with locals in a culture that is unfamiliar to me. 3. I enjoy working with people from cultures that are unfamiliar to me. 4. I am confident that I can get accustomed to the working conditions in a different culture. 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) 2. How many emails did you receive from your teammates? (0-100) 0.83 0.70 0.84 0.53 0.89 0.90 21 3. How frequently did you use email as a communication tool? (1 = never; 5 = frequently) 4. How frequently did you use email attachments as a communication tool? (1 = never; 5 = frequently) 0.95 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) 2. Attention to detail (1 = poor; 5 = excellent) 0.89 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 1 2 3 4 5 6 7 8 9 Performance 0.93 Psychic Distance 0.17* Team-Level 0.19* Effort Expectation of 0.04 Challenges Motivational CQ 0.10 Age Diversity 0.10 Country 0.17* Diversity Gender Diversity Geographic Diversity 2 3 4 5 6 7 8 9 0.73 0.11 0.82 0.31* 0.20* 0.53 0.19* 0.07 0.15* 0.29* 0.30* 0.17* 0.54 0.10 -- -0.03 0.23* 0.00 -0.12 -0.14 -- 0.12 0.12 0.08 0.13 0.13 0.02 0.07 -- 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. Interaction Effects CQ*Expectations of Challenges † p < .10, * p < .05, ** p < .01 Effort Hypothesized Effects Psychic Distance Team Performance Psychic Distance Expectation of Challenges Expectation of Challenges Effort Effort Team Performance 0.20 3.44*** Control Links β t-Value β t-Value Age Diversity Expectation of Challenges Age Diversity Effort Age Diversity Team Performance 0.06 0.86 0.05 0.75 Country Diversity Expectation of Challenges Country Diversity Effort Country Diversity Team Performance -0.15 2.13* -0.16 2.04* Gender Diversity Expectation of Challenges Gender Diversity Effort Gender Diversity Team Performance 0.13 1.68† 0.11 1.13 Geographic Diversity Expectation of Challenges Geographic Diversity Effort Geographic Diversity Team Performance 0.07 0.92 0.04 0.55 Cultural Intelligence (CQ) Effort 0.13 0.31 0.15 0.15 β 0.19 0.22 0.06 -0.07 -0.16 -0.13 0.09 0.09 0.11 -0.15 0.09 0.07 Model 4 1.87† 4.29** 2.11* 2.26* 0.30 0.13 0.31 0.11 0.14 5.91** 1.91† 4.46** 1.65† 2.28* t-Value β t-Value 2.36* 0.18 2.46* 3.63** 0.19 3.21 0.51 0.06 0.52 0.61 -0.06 0.63 2.53** 0.17 2.64** 1.61† -0.14 1.71† 1.37 0.09 1.45 1.03 0.06 0.73 1.36 0.11 1.35 2.26* -0.15 2.12 1.19 0.08 1.21 0.85 0.06 0.89 0.13 1.30 Table 4 PLS Results: Explicating the Causal Chain between Psychic Distance and Team Performance Model 1 Model 2 Model 3 24 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 crossnational 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? 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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. Austria Belgium Switzerland Germany Denmark Spain France Great Britain Italy Netherlands Norway Poland Russia Sweden Turkey Argentina Mexico Brazil China India Japan Korea Australia USA Canada STIMULUS country HOME country Austria 0 5 1 -1 -2 -7 -2 -1 -6 -5 -4 8 21 -6 9 7 15 11 27 15 22 23 -3 -4 0 Belgium 0 -5 -6 0 -12 -1 -6 -1 -1 0 8 19 0 0 18 15 19 18 12 22 22 8 -7 5 Switzerland 0 -3 0 -4 -2 -5 -1 -2 2 16 24 -1 10 8 13 13 28 24 18 31 -1 -13 0 Germany 0 -1 -6 2 -5 1 1 -1 15 27 -2 23 4 13 10 39 26 39 39 -8 -12 -9 Denmark 0 -6 3 -7 2 -1 0 16 23 -4 8 9 15 13 27 22 17 25 -18 -26 -5 Spain 0 4 0 4 6 13 23 25 8 30 3 9 16 23 29 38 29 2 -5 3 France 0 1 2 4 0 14 26 -2 24 2 16 13 42 25 37 42 -2 -11 -7 Great Britain 0 0 3 8 18 25 7 10 18 24 22 39 24 34 43 10 0 7 Italy 0 2 -1 10 20 1 21 11 17 21 32 27 40 35 17 3 4 Netherlands 0 4 15 24 0 6 4 9 5 28 19 25 34 -9 -23 -5 Norway 0 10 22 -1 7 -1 6 -1 27 13 22 19 -18 -27 -10 Poland 0 10 -7 11 -2 4 -7 26 13 10 18 -23 -29 -16 Russia 0 -16 -5 4 7 -3 15 14 9 16 0 -16 -12 Sweden 0 2 7 6 2 21 13 15 21 -14 -22 -6 Turkey 0 -1 7 -2 0 17 6 27 2 -30 -11 Argentina 0 0 0 5 17 6 12 -9 -21 -15 Mexico 0 1 -9 5 8 6 -11 -3 -17 Brazil 0 7 16 15 10 -10 -21 -18 0 5 -4 4 -13 -35 -29 China Table 1: Psychic Distance Asymmetries, Asymmetry = Psychic Distance HOME – Psychic Distance STIMULUS), Data source: Håkanson & Ambos, 2010 0 8 7 -16 -33 -29 India Japan 0 7 -15 -31 -30 Korea 0 -22 -46 -46 Australia 0 -24 -17 USA 0 4 45 0 Canada 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 Psychic Distance Social comparison effect Exposure effect low medium high 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. 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) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Variables Geographic Distance (log) Cultural Distance (4) Cultural Distance (5) Education Distance Religion Distance Language Distance Migrants Media Spillover Relative Economic Status Relative Governance Quality Psychic Distance Mean Standard Deviation 8.36 1.10 1.93 1.19 0.66 -.28 -.09 0 .00 1.36 1.35 .52 1.08 .94 1 1.08 -.017 1.06 -.019 .99 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 3 4 5 6 7 8 9 10 .008 -.023 -.027 .009 .018 .012 -.241* .005 .004 .729* .465* -.082* .010 .034 .005 -.065 .037 -.005 .047 .041 .122* .048 -.041 -.025 .014 .170* .002 .147* .098* -.089* .082* -.070* -.002 -.059 .230* -.029 -.060 -.035 -.055 .050 -0.23 -.059 -.052 -.028 .046 .037 .237* .097* -.051 -.124 .018 -.250* .078* .101* .203* 11 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. Education Distance Religion Distance Language Distance Migrants Media Spillover Rel. economic status Rel. governance quality Migrants2 Media Spillover2 Rel. economic status2 Rel. governance quality2 Rel. economic status3 Rel. governance quality3 R2 Adjusted R2 ∆ R2 Standard error F-value Geographic Distance (log) Cultural Distance 5 (4) -.045 .045 .026 -.004 (.038) .727*** b 14.365 95.880*** .538 .532 -.115 (1.105) -1.445 1.403 .826 23.743 t-value Controls-only model Table 3: Hierarchical Multiple Regression Results -.042 .059* .030 -.105*** -.056 .098** .218*** -.060 (.059) .712*** b .602 .594 .064 13.391 74.046*** -1.802 (1.806) -1.419 1.980 1.024 -3.550 -1.857 3.284 7.408 24.198 t-value Linear effect model -.041 .035 .019 -.077 -.191* .101*** .222*** -.005 .171* -.088** .230*** -.047 (.025) .665*** b .670 .660 .068 12.246 70.387*** -1.532 (.831) -1.531 1.261 .715 -.905 -2.592 3.620 8.236 -.058 2.414 -3.073 8.451 22.790 t-value Quadratic effect model -.054 (.031) -.029 .050 .023 -.056 -.219** -.168* .153** -.027 .200** -.086** .231*** .290*** 0.71 .661*** b -1.068 1.820 .855 -.666 -3.009 -2.230 2.640 -.333 2.841 -3.063 8.600 3.855 1.227 .681 .671 .011 12.058 64.594*** -1.791 (1.035) 22.954 t-value Cubic effect model 58 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 nonsignificant 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. 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(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 wellconceived, 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 twotiered 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 Y1 Y1 X1 X2 Psychic Distance X3 formative indicators Y2 Y3 latent construct reflective indicators Objective measures Subjective measures Cat. 0 : cultural dimensions Cat. 1 : uni-dimensional Cat. 2 : multi-dimensional Cat. 3 : uni-dimensional Cat. 4 : multi-dimensional 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. Author(s) Label Level Cultural distance index national Cultural distance index is based on the cultural dimensions established by Hofstede (2001): power distance, uncertainty avoidance, masculinity/femininity, individualism/ collectivism, long term vs. short-term orientation. Psychic Distance Measure Moen Index number (1 to 4) for countries/clusters, depending & Regional on their cultural distance (Hofstede´s dimensions) to 0 national Servais cluster the home country. (2002) Category 1 – Unidimensional, Objective Measures Eight psychic zones/clusters (Anglo, Arab, Far East, Germanic, Latin America, Latin Europe, Near East and Nordic) and one independent cluster (Brazil, India, Ronen & Israel and Japan). Later addition of two new clusters Shenkar (Sub-Saharan Africa, except South Africa and Eastern (1985) and Psychic Europe). 1 Peng, Hill distance national & Wang clusters Clustering based on underlying dimensions: work (2000) goals, needs and job attitude but also distinguishable on: geography, language and religion. Psychic/cultural distance expected higher between than within country groups. 0 Kogut & Singh (1988) Category 0 – Cultural Distance Measures Cat. Table 2: Measurement Approaches to Psychic Distance Country clusters available from Ronen & Shenkar (1985). Cultural dimensions data is available for 93 countries (see above) Cultural dimensions data is available for 93 countries via www.geert-hofstede.com Data Source and Availability 84 Regions Plá-Barber (2001) 1 national national Categorical variable indicating the focus region of the firms studied: EU, Latin America or Rest of the World. Category 2 – Multidimensional, Objective Measures The Mean Establishment Rank as a proxy for the Nordström attractiveness of a foreign host country, measured by 2 & Vahlne MR firm the internationalization activity of a firm. (1994) Dow & Formative index of objective country differences in Karunaratn 1. language a (2006) Psychic 2. religion 2 and distance national 3. industrial development Dow & index 4. education Ferencikov 5. degree of democracy a (2010) Formative index consisting of seven primary elements 1. commercial ties 2. political ties Psychic 3. historic ties Brewer 2 distance national 4. geographic ties (2007) index 5. social ties 6. information ties 7. development Elements are measured with 15 indicators (e.g. two- Dummy Meyer (2001) 1 Country dummy. The measure assumes that familiarity and personal contacts decrease the psychic distance for German firms towards Eastern Europe rather than for British ones. Index and ranking available in Brewer (2007) for the psychic distance between Australia and 25 foreign countries. Distance data available for 120 countries (14, 280 pairs) via research homepage:https://sites.google.co m/site/ddowresearch/home/scale s/languages 85 10pt scale 100pt scale Dow (2000) Ellis (2007, 3 3 3 100pt scale Nordström (1991) ind. ind. ind. Survey with 118 Swedish managers. Data available from Sweden to 22 countries. Data available from Australia (8 Australian trade commissioners) towards 25 foreign countries. Data available from Hong Kong (n=54) and mainland China Single item scale administered to an expert panel (e.g. trade commissioners). Description of psychic distance adapted from Carlson's (1974), Johanson & Wiedersheim-Paul´s (1975), and Johanson & Vahlne (1977). A 100pt scale with the home country anchored at one. Based on approaches by Dow (2000) and Nordström Data reported private sector manufacturing firms in the US towards 13 foreign countries. Good overview comparison with Holzmüller/Kasper data and Dichtl et al. data. Country pair data available in Stöttinger & Schlegelmilch (1998) for Japan (n=66), Finland (n=65) and Germany (n=104) to ca. 10 foreign countries. Index value on a scale from 0 to100, with the lowest value for the country perceived as closest and the highest value for the one perceived the most remote. Category 3 – Unidimensional, Subjective Measures Dichtl et Concentric circles with the home country representing al. (1984) the centre. Respondents position the foreign countries and according to the perceived distance of the stimulus Concentric 3 Dichtl, ind. country from the home country. The sum of distances circles Koeglmaye is the measure of perceived distance to foreign markets r & Müller (overall measure) (1990) A scale without reference stimulus or response categories to capture the individual relational Stöttinger judgment. Free & Subsequent translation of judgment spectrum into the 3 magnitude ind. Schlegelmi distance between the point of longitude O (Greenwich) scales lch (1998) and 180 (date line). 16,700 kilometres resulting in a scale from 0 to 16.7(17). way trade, trade agreements, colonial relationship, the level of development in foreign country). 86 100pt scale ind. Data available on the 25 largest countries in terms of GDP (300 country pairs), 1414 respondents. A 100-pt scale capturing the cognitive perception of country distances. Respondents indicate how close or far away they perceive the foreign countries to be. The distance to the home country is set to 0. Measurement approach builds on Nordström (1991), Dow (2000) and Ellis (2007). 4 Sim & Ali (1998) Composite index ind. Composite index measuring the degree of similarity using a 5pt Likert scale (Cronbach alpha = 0.92) on items relating to: 1. cultural attitudes (7 items), 2. business practices (8 items) and 3. ease of communication (8 items) Collected from 59 IJV in Bangladesh on PD between joint venture parties. Data not available. Collected from 477 Canadian manufacturers towards their most important export market. Data not available. (n=14) to 22 foreign countries in Ellis (2007). Data from China to 55 countries available in Ellis (2008). (1991), psychic distance definition taken from Johanson and Wiedersheim-Paul (1975) and O’Grady and Lane (1996) Category 4 – Multidimensional, Subjective Measures Composite index measuring the perceived distance on a 7pt Likert scale from “very similar” to “very different” on the five items: 1. language of the country Klein & 2. accepted business practices Composite 4 Roth ind. 3. economic environment index (1990) 4. legal system 5. communications infrastructure Based on definition by Johanson & Vahlne (1977). Reliability = 0.92 3 Håkanson & Ambos (2010) 2008) 87 Composite index Composite index Psychic distance scale Evans & Mavondo (2002) Child, Rodrigues & Frynas (2009) Sousa & Bradley (2005) and Sousa & Lages (2011) 4 4 4 ind. ind. ind. Multi-dimensional construct, items are measured on 5pt Likert scales ranging from “very similar” to “very different” and include a) country characteristics distance (Cronbach alpha=0.86): 1. level of economic and industrial development Composite index measuring the perceived difference using a 5pt Likert scale the 12 items (Cronbach alpha= 0.76) include 1. culture , 2. level of technical development 3. level of economic development 4. logistics infrastructure 5. political system 6. legal system 7. business practices ,8. business ethics Respondents indicate the degree to which foreign market is perceived as similar or different to home market on a 7pt Likert scale from (1) “totally the same” to (7) “totally different”. Distances collected for one psychically close and one distant country (self nominated). Cronbach alpha > 0.7 Composite index calculated (CFA) as a combination of cultural distance (5 Hofstede dimensions) and business distance (legal/political issues, market structure, economic environment, business practices, language). Sample of 301 Portuguese exporting firms, distance measured towards a firm’s most important foreign market. Data not available. Data collected for UK (home)Brazil (foreign country) dyad from UK respondents (n=32). Questionnaires to 102 non-food retailers (senior executives) that operated stores in at least three foreign countries, majority based in UK, US and Germany. Data not available. 88 ind. Perceived export barriers 4a Bennett (1997) ind. O´Grady & Attitude/ Lane value (1996) orientation 4a Perceived export barriers (1 = very minor problem, 5 =very major problem)”, principal components analysis reveals the following PD factors: a) need to obtain foreign representation, b) lack of knowledge of foreign markets, customer buying habits and business methods, c) language issues and Differences in attitude/value orientation, captured by 125 items referring to the following instruments: 1. Hofstede´s cultural dimensions 2. Jacksons´s Personality Research Form (achievement and aggression) 3. Personality Index (risk-taking, tolerance) 4. Lodahl & Kejner´s job involvement 5. Blood´s protestant work ethic. 2. communications infrastructure 3. marketing infrastructure 4. technical requirements 5. market competitiveness 6. legal regulations b) people characteristics distance (Cronbach alpha=0.87): 1. per capita income 2. purchasing power of customers 3. lifestyles 4. consumer preferences 5. level of literacy and education 6. language 7. cultural values, beliefs, attitudes, traditions Data not in regard to certain foreign country but in general. Data not available. Sample includes UK exporting businesses. 89 Lack of knowledge Cognitive maps Petersen, Pedersen & Lyles (2008) Nebus & Chai (2013) 4a 4a ind. ind. Set of matrices or a cognitive map consisting of a set of nodes, value of the nodes and the weight of the arrows connecting the nodes. Understanding of psychic distance as a cognitive phenomenon with the three dimensions: managerial awareness, perception and understanding. Perceived lack of knowledge, measured by two standalone items on a 7pt Likert scale: 1. institutional knowledge (newness of the foreign country in general) 2. business knowledge (newness of customer(s) in the foreign market) d) need to research foreign markets. Cronbach alpha = 0.82 Data needs to be collected in case-specific in-depth interviews with the decision maker Data not available. Collected from 369 executives (199 from Denmark and 170 from Sweden) Data not available. 90 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 nationallevel 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 cognitionpsychological 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 contextspecific 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 tradeoff 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 marketbased 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 costbased 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. 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Journal of International Business Studies, 35(6): 524–544. 112 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)