Explaining Organizational Performance Through Psychic Distance

Abstract

In the substantial body of literature on firm internationalization the concept of psychic distance has been identified as a key factor in variations in expansion patterns and organizational performance (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977; Vahlne and Wiedersheim-Paul, 1977; Nordstrom and Vahlne, 1994; Stottinger and Schlegelmilch, 1998). Psychic distance refers to the perceived degree of similarity or difference between the home market and a foreign market. The sequence of foreign expansion described in numerous models of internationalization implies that companies perform best in these foreign markets which are most similar to their domestic market (Bilkley and Tesar, 1977; Johanson and Vahlne, 1977; Cavusgil, 1980; Czinkota, 1982; Nordstrom and Vahlne, 1994). This negative relationship between psychic distance and organizational performance is attributed to the fact that psychically close countries are easier to learn about and understand (Nordstrom and Vahlne, 1994).