How psychic distance and opportunity perceptions affect entrepreneurial firm internationalization

• Published date: 01 March 2019
• DOI: http://doi.org/10.1002/cjas.1482
• Date: 01 March 2019
• Author: Sanjay Bhowmick

How psychic distance and opportunity

perceptions affect entrepreneurial firm

internationalization

Sanjay Bhowmick*

Newcastle Business School, Northumbria University

Abstract

Psychic distance, now established as an individual percep-

tual construct, is so far a partial explanation of internation-

alization processes of entrepreneurial f‌irms. Opportunity in

foreign markets, although considered important, has hith-

erto been an assumption rather than explored as an explan-

atory factor in internationalization theories. Through

qualitative data from technology entrepreneurs from New

Zealand this study considers opportunity, like psychic dis-

tance, as an individual perceptual construct and posits that

a combination of opportunity and psychic distance percep-

tions better explains entrepreneurial internationalization

action/intention decisions. The explicit combination pro-

posed is “opportunity-distance quotient”and signif‌ies a

shift from psychic distance obstacles based explanations to

an opportunity-psychic distance interaction based explora-

tion of entrepreneurial internationalization. Limitations of

the study and further research are discussed. Copyright ©

2018 ASAC. Published by John Wiley & Sons, Ltd.

Keywords: Psychic distance, Opportunity, Internationaliza-

tion, Opportunity-distance quotient (ODQ), International

entrepreneurship, Cultural distance

Résumé

La distance psychique qui est généralement perçue

comme comme une construction perceptuelle individuelle

est, jusqu’à présent, considérée comme une explication

partielle des processus d’internationalisation des f‌irmes

entrepreneuriales. De même, les possibilités offertes sur

les marchés étrangers, bien que jugées importantes, ont

jusqu’ici été considérées uniquement comme une hypothèse

et non comme un facteur explicati f des théories de

l’internationalisation. Grâce à des données qualitatives

provenant d’entrepreneurs en technologie de Nouvelle-

Zélande, l’auteur de la présente étude examine les

opportunités, par exemple la distance psychique, sous l’angle

de la construction perceptuelle individuelle et postule qu’une

combinaison d’opportunités et de perceptions de la distance

psychique explique mieux les décisions d’action/intention

d’internationalisation entrepreneuriale. La combinaison

explicite proposée est le "quotient opportunité-distance"

et implique que l’on passe des explications basées sur les

obstacles de la distance psychique à une exploration

de l’internationalisation entrepreneuriale basée sur

l’interaction opportunité-distance psychique. Dans la con-

clusion, l’auteur se penche sur les limites de son étude et pro-

pose des pistes pour des recherches futures. Copyright ©

2018 ASAC. Published by John Wiley & Sons, Ltd.

Mots-clés: distance psychique, opportunité,

internationalisation, quotient opportunité-distance (QOD),

entrepreneuriat international, distance culturelle

Introduction

In an increasingly globalized world, the internationali-

zation of f‌irms has been attracting attention in strategy,

marketing and entrepreneurship research over the last few

decades. Psychic distance understood as the apprehension

regarding foreign markets, explained gradual internationali-

zation of f‌irms (Johanson & Vahlne, 1977; Madsen &

Servais, 1997; Conway & Swift, 2000). This stages concep-

tion was also metaphorized as “rings in the water”foreign

expansion (Bilkey & Tesar, 1977). The understanding of

psychic distance with respect to foreign markets has often

been linked to Hofstede’s research on cross country cultural

*Please address correspondence to: Sanjay Bhowmick, Newcastle

Business School, Northumbria University, Newcastle-upon-Tyne NE1

8ST, United Kingdom. Phone: +44 191 227 4408, Email: sanjay.

bhowmick@northumbria.ac.uk

Canadian Journal of Administrative Sciences

Revue canadienne des sciences de l’administration

36:97–112 (2019)

Published online 30 March 2018 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/CJAS.1482

Can J Adm Sci

36(1), 97–112 (2019)Copyright © 2018 ASAC. Published by John Wiley & Sons, Ltd. 97

differences that managers perceive (Hofstede, 1980). How-

ever, although its parsimonious nature has kept the psychic

distance concept current in f‌irm internationalization litera-

ture, there has been contrary evidence (Holzmuller &

Kasper, 1990) and criticism regarding the insuff‌icient ex-

planatory power of psychic distance (Stottinger &

Schlegelmilch, 1998, 2000). More recently, psychic distance

has been argued as an individual level construct rather than a

country level construct (Sousa & Bradley, 2006), and as be-

ing perceptual rather than an exogenous construct (Prime

et al., 2009). Further, the importance of the role of opportu-

nity perceived in foreign markets, earlier assumed rather as a

backdrop in internationalization research, has been

highlighted in recent international entrepreneurship literature

(Oviatt & McDougall, 2005b; Zahra, 2005; Zahra et al.,

2005). Following the literature on entrepreneurial opportu-

nity recognition, entrepreneurial cognition, and international

entrepreneurship (Johanson & Vahlne, 1993; Baron, 1998;

Shane, 2000; Acedo & Florin, 2006; Johanson & Vahlne,

2009; Kirzner, 2009) opportunity is considered a perception

specif‌ic to the individual internationalizing entrepreneur in

this paper. It proposes that opportunity perception needs to

be explicitly considered along with psychic distance percep-

tion to understand internationalization decisions of entrepre-

neurs. With qualitative data from entrepreneurs engaged in

foreign markets it builds a new construct that combines the

effects of psychic distance perception and opportunity per-

ception to propose a better explanation of entrepreneurial in-

ternationalization decisions.

The paper brief‌ly reviews the concept of psychic dis-

tance in the extant internationalization literature, including

its use of and subsequent demarcation from Hofstede’s

(1980) concept of cultural distance between countries. It

then outlines the opportunity perspective in entrepreneurship

and international entrepreneurship literature. It examines in-

depth qualitative data from six internationalizing technology

entrepreneurs from New Zealand with respect to four differ-

ent foreign markets: Australia, the closest foreign market for

NZ entrepreneurs; the newly emerged eastern market of

China; and the traditional high-technology western markets

of the US and the UK. The qualitative data are analysed

and their quantif‌ication (Chi, 1997) leads to a combination

of psychic distance perception and opportunity perception

levels that better explains entrepreneurial internationaliza-

tion and is presented as the opportunity-distance quotient

construct. Further questions that arise from the proposed

perspective and future research possibilities as well as limi-

tations of the study are discussed.

Literature Review

Psychic Distance in Internationalization Literature

The process or stages models of f‌irm internationalization

were based on the elegant logic of incremental learning

through advantage cycles —that is, a new advantage

emerging from exploiting an old one —and foreign expan-

sion through the establishment chain where a f‌irm’s commit-

ment from a position of no initial exports rises incrementally

to setting up a production base in a foreign market (Johanson

& Vahlne, 1993). These arguments have the concept of psy-

chic distance at their core. However, while some studies re-

ported a greater tendency of internationalizing f‌irms to

gradually increase commitment to set up wholly owned sub-

sidiaries, that is, to a fuller control of foreign market pres-

ence (Johanson & Vahlne, 1977; Davidson, 1980;

Gatignon & Anderson, 1988), a contrary propensity was also

observed with f‌irms starting with full control of foreign mar-

ket operations and subsequently sharing control as opera-

tions get established (Daniels et al., 1976). Furthermore,

Erramilli (1991) observed service sector f‌irms’foreign mar-

ket commitment following a U-curve over time, and

O’Grady and Lane (1996) highlighted a ‘psychic distance

paradox’where Canadian f‌irms, entering the US, were sur-

prised to f‌ind obstacles greater than they anticipated. Such

contrary results have not been reconciled. In related studies,

scholars have posited that applying the Hofstede (1980)

‘cultural distance’surrogate for psychic distance estimates,

as in studies like Kogut and Singh (1988), was f‌lawed

(Dow, 2000; Dow & Larimo, 2008). Little agreement on

the subject has emerged (Stottinger & Schlegelmilch,

2000; Dow & Karunaratna, 2006; Brewer, 2007). Other con-

ceptions were proposed as playing a role in the internation-

alization process, such as networks, where an

internationalizing f‌irm accessed resources and capabilities

it did not possess through relationships and “insidership”,

that is, by belonging to a network and arguably overcoming

psychic distance concerns (Chetty & Holm, 2000; Johanson

& Vahlne, 2003, 2009; Ojala, 2009) providing an added di-

mension to the understanding of psychic distance beyond the

experiential learning of foreign markets.

Sousa and Bradley’s (2005, 2006) study of the impact

of culture on internationalization decisions clarif‌ied the dif-

ference between psychic distance and cultural distance. As

they and Stottinger & Schlegelmilch (2000) argued, psychic

distance as an exogenous construction and developed psy-

chic distance indices based on factual indicators such as pub-

licly available statistics on economic development,

dimensions external to the entrepreneur or the f‌irm (Clark

& Pugh, 2001; Dow & Karunaratna, 2006; Brewer, 2007),

were inadequate. They argued that psychic distance was an

individual level construct and different from the Hofstede

country level cultural distance construct, and therefore must

vary across individuals; it is less prone to what Shenkar

(2001) calls the “illusion of symmetry”in international busi-

ness distance research. Prime et al. (2009) have further clar-

if‌ied the individual and perceptual nature of psychic

distance. These developments also led to the suggestion that

“a more qualitative approach to psychic distance may repre-

sent a way forward”(Stottinger & Schlegelmilch, 1998:

368). Several qualitative studies followed, some with

OPPORTUNITY AND PSYCHIC DISTANCE PERCEPTIONS IN ENTREPRENEURIAL FIRM INTERNATIONALIZATION BHOWMICK

Can J Adm Sci

36(1), 97–112 (2019)Copyright © 2018 ASAC. Published by John Wiley & Sons, Ltd. 98