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A review of psychic distance and their implications on the network relations of SME’s in international business.
This literature review will be based on how psychic distance will have an impact on how
organisations employ global marketing strategies; how cultural and political factors play an important role when an organisation chooses to have foreign business interest. It also provides a critic of the global strategy by citing emergence of triad markets and a research on a suggested business term, which is brought upon as an implication of exporting of global trading.
Psychic distance has in many ways a major impact on how SME’s networking is measured. Through the different articles that I have studied there are many theories which can be applied.
Exporting is one of the most common ways in which SME’s will enter the global market. This is seen as an advantage as to other market strategies because there is low risk. Psychic distance has shown that SME’s have to face challenges such as difference in language, consumer behaviour, cultural standards, legal framework or purchasing power.
Bilkey and Tesar (1977), for example, advise firms to initate exports with culturally close markets, before they enter more psychically distant. (Barbara Stottinger, 1998, p. 357)
Other studies have stated the five main aspects would be:
- language of the country;
- accepted business practices;
- economic environment;
- legal system; and
- communication infrastructure
Also there is the aspect of cultural dimension of psychic distance within SME’s when operationalising the construct. For example taking Hofstede’s (1980) measures uncertainty avoidance and cultural distance to form a composite index of cultural distance. However it is argued that summary character suuch as perosnality, value orientation renders the concept of psychic distance an outhstanding preedictor for exort behaviour. the general nature of geographical diversity that a SME will face would be as mentioned above. (Barbara Stottinger, 1998, p. 357)
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Furthermore analysing the concept of psychic distance with the relationship to export activities with countries. Psychic distance is not based how far geographically the country is but its maps the individually precieved distances between the home and target market which effects
Geographic closeness usually results not only economic relation, but manifest itself also in more cultural and social interactions, which are supposed to reduce pyshic distance. From my reseach it indicated that psychic distance showed no significant effect on export performance also that export distance did not have a siginficant impact on the change of export performance over time. The study of O’Grady and Lane have suggested that business factors, such as legal and compettitve envirpoments, need to be incleded when conceptulisng distance. (Barbara Stottinger, 1998, p. 359)
Importance of psychic realtions
The research has also indicated the higher the level of psychic distnace, the greater the time and effort required to develop successful business realtionships. There are various implementations invovled in relationship marketing startegy in international markets.
My studies indicate that the higher the level of psychic distance, the greater the effort required. If this is the case then this would usggest that the consitiuent varoables of psychic distance should be important factors influenncing the development of SME’s and ther networking relationship marketing startegies.
When SME’s are exporting internationally it is important to consider that the important factors would be commitment as this would be a social bonding, as a degree of mutual personal friendships and liking shared by the buyer and seller. (Tony Conway, 2000, p. 1391)
Buyers and sellers who have a strong personal realtionship are more commited to maintaing the relationship than less socially bonded partners.
Many aspects of relations between customers and suppliers cannot be formalised or based on legal criteria. Instead realtionships have to based on mutaul trust. (Ford, 1984, p.18)
Along with commitment trust is a vital factor, these key elements in a realtionship as they encourage marketers to work at preserving relationship investments, by co-operating with exchange partners.
With exprtong internationally, networking for SMEs there are many complications, once again it has been pointed out that the greater the distance, the harder to achieve and more rescoure intensive will be process of relationship development. (Tony Conway, 2000, p. 1399)
For example when partners will view one anotehr as culturally dissimliar, the feeling of lack of common graound may result in higher degree of percieved behavioural uncertainty. As a consquence the parties may be more likely to place their trust in leagal and written documents. (Morosini 1998 p.140)
The more different the other person’s culture seems, the greater the degree of culture distance. Cultural distance is a potentionally powerful determinat of the way relationships can develop.
Working in an international context, the usccess (or otheriwse) of an research marketing based tsragety is dependant both on the stage of relationship development on the degree of psychic distance that exists.
Exporting through psychic distance
Assumptions of psychic distance is negaticley related with export development and organisational performance. It is argued that businesses whose home country is characterised by a huigh leve of economic development, and developed and concentraed industry structure will perfom well, if not better, in developing marekt because if the distinct opportunity that are available.
From my research studies have chosen me that the operating psychillcally close country does not necessarily lead to superior performance. Therefore networking internationally for SME’s either can be a negative factor or a poistive.
Furher I have taken into account other elments as findings have indicated to me that they did not support a negative realtionship the concluded that psychic distance has very limited explanatory power. However the study has indicated that SMEs seeking to expand into more foreign markets as the the results indicate that they do not need to focus on similar markets only. (Jody Evans, 2000, p.164)
From my findings other articles indicate that the significance of key factors in SMEs and the external relationships they are able to develop support through internationalisation. As above they articles have not really seen psychic distance as a good impact. One of the explanations would point towards the networks in providing assistance and over coming initial resource and competency gaps. Effective functions of the networks depends on the quality of inter-personal relationships that sustain them. (Bilkey,W.J, Tesar, G 1977 p. 93)
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There are a range of factors that may trigger and facilitate SME internationalisation has encouraged the integrative modeling of how they contribute to different internationlisation pathways. The theory of Crick and Spencer also added that subsequent internationalisation sometimes required the development of new networks, and was contingent on a whole host of events, whereas further penetration of existing markets could be facilied by existing networks.
I have decided to explain the significance of exporting through Brazil and how UK SMEs were able to network internationally. SMESs will try and expand their business in order to offer themselves new opportunity for market expansion. However studies show that there is a threat to their existing markets. For example I have taken a greater study in Brazil and from this the big attraction was the gas and oil sectors.
The way in the Brazilians communicated would be a form of personal meeting which provided a business type of relationship as a new entry to their market. From this the company now accounts for 10 percent of their 14 total export sales values. The relationship that they were able to build through there exports was socio-commercial. (Johanson and Vshlne, 1977, p. 23) This helped as having a strong relationship with a Brazilian partner can be quite functional for coping with an uncertain and distant environments.
Studies of Brazilian culture portray it as strongly oriented towards sociability and inter-personal relationships. it also characterised by high levels of conflict avoidance and ambiguity. These features will reinforce the need to conduct business transactions on a basis of personal liking and trust rather than heavily relying on formal and contractual agreements. (Rodrigues and Barros, 2002, p.528). The value of internationlising SMEs of accessing overseas networks is now receiving greater attention.
Networking is a very important factor as the study for the Brazilian market indicated. One of the company did business in Brazil explained that going out their you need to build network of friends and contacts. Although mentioned that the bureaucratic side of things that they still did not really understand. However that is very important to have someone that they could rely on.
However as going to a new country their will always be a challenge as language and is trust are the main keys elements (Article 1, p. 14). This can make it difficult for foreign SMEs to establish contacts with relevant business networks without local help.
Some SMEs have reported that in order to network in Brazil by the various exports -promoting agencies. the quality of local people who can link a UK company into wider networks, and the quality of relationships forged with them, emerge as crucial success factors. (Article 1, p. 15)
Studies have indicated that companies have been unsuccessful, in the oil and gas sector however this was linked to networking. The companies were not able to find reliable employees or agents who they could network through. This indicates that networking is very important and getting it right as well in the process can either make you successful or unsuccessful.
It shows that the companies entering the new foreign market environment are not just technical in nature, Social and culturally-sensitive skills are required. As mentioned above this would apply the theories set above for psychic distance. It shows that there are various factors that will need to be implemented such as how socially different countries are and language, education etc.
Psychic distance whist exporting in Brazil
The size and growth of the foreign markets might have attracted an offset in the minds of business decisions makers and problems posed by psychic distance. This could be the case, for example, with decisions to do business with China, and it might also apply to other larger emerging markets such as Brazil. Firms may therefore opt to engage with large and dynamic economies before approaching other countries that exhibit lower levels of psychic distance. (Article 2, p. 5)
The cultural distance includes differences in language and social norms; administrative distance includes differences in political system, government policies and institutions; and economic distance includes differences in income levels, infrastructure, human and other resources.
From this study the greatest distances tended to be perceived in language, regulations and legal system. The largest gap between psychic and its impact was for the system, followed by geographical distance. The dimension with the mid-point was the differences in languages and the regulations between Brazil and the UK.
From the data to the importance of different dimensions of psychic distance in the internationalization process. Yet many firms decided to expand to Brazil despite perceived differences.
The way that companies were able to over come this issue and the problems they faced was the help of competent and trusted Brazilian agent, distributor or partner. (Article 2, p.16). This will lead to fewer difficulties due to the differences in culture, educational level, logistics, regulations and business ethics and overall will make networking efficient which leads to good performance for exporting.
Further more, the encompasses that determinants of a firm's export behaviour highlights that synthesis is possible at two broad levels (Aaby and Slater, 1989; Ford and Leonidou, 1991):
- The external environment level, that includes factors that the individual exporter can only control to a very limited extent, such as macro-economic, social, physical, cultural, and political aspects, as well as industry characteristics that influence export behaviour and performance; and
- The firm level, also referred to as organizational determinants, that includes those structural and behavioural aspects within the firm that have a potential effect on exporting (Leonidou, 1998a).
Initially highlighting the three categories of internal determinants of export behaviour analysed, namely structural characteristics, managerial characteristics, and managerial attitude and perceptions about export activity, helped explain the three export variables under study:
- export intention;
- propensity; and
First, export intention was positively related to:
- a firm's competitive position in new product development; and
- managerial perception that export is advantageous for their firms, as it may improve both global competitiveness and corporate performance.
Second, export propensity was positively influenced by:
- a firm's experience in geographic market development; and
- manager's foreign language proficiency. (Sonia M. Suárez-Ortega, Francisca R. Álamo-Vera, 2005, p. 258)
Finally, export intensity is positively associated with a firm's experience in geographic market development, and manager's foreign language proficiency and experience abroad, while negatively affected by the importance given by managers to the lack of internal resources acting as a barrier to export.
In sum, these findings could be suggesting that there exist differences in the set of determinants of exporting when export intention, export propensity, or export intensity is the dependent variable under analysis.
The various articles have shown a similar understanding in how SMEs network internally and apply this to the literature review, the different the views clearly show that psychic distance does not really consist in the business world today. However the importance of psychic distance between countries has diminished as a result of the increased interaction brought about through the globalization of markets.
The studies do not support negative relationship they could conclude that psychic distance has very limited explanatory power. However, the study has important implications for firms seeking to expand into foreign markets as the results indicate that they do not need to focus on similar markets only. However it could be argued that psychic distance does not directly influence the exporting behavior for SMEs.
International business: environments and operation; John D. Daniels, Radebaugh and Sullivan, 11th edition
Babara Stottinger, (1998), “Explaining export development through psychic distance: enlightening or elusive” International Marketing Review, Volume 15.
Tony Conway, (2000), “International relationship marketing - The importance of psychic distance” European Journal of Marketing, Volume 34.
Ford, D. (1984), “Buyer/seller relationships in international industrial are all about” European Journal of marketing, Volume 14.
Jody Evans, (2000), “Explaining export development through psychic distance”, International Marketing Review, Volume 17.
Babara Stottinger, (2000), Psychic distance: a concept past its due date? International Marketing Review, Volume 17.
Bilkey, W.J, Tesar, G (1977) “The export behaviuor of smaller Winsconsin manufactruing firms”, Journal of International Business Studies, Volume 8.
Johanson and Vshlne, (1977), “The mechanism of internalisation”, International Marketing Review, Volume 7.
Morosini, P (1994), “Post-cross-border acquisitions: implementing ‘national culture-compatible”, European Management Journal, Volume 12.
Article 1: The Process of SME Inernationalisation: British Firms Entering Brazil.
Article 2: Reviving and Extending the Multi-Dimensional Concept of Psychic Distance: Evidence from Smaller Firms Exporting to Brazil (2006).
Jody Evans, (2000), “Psychic distance and the performance of international retailers - A suggested theoretical framework, International Marketing Review, Volume 17.
Rodrigues S.B and Barros B, (2002) Management in Brazil. In Warner, M (ed) 2nd, The International Encyclopedia of Business and Management. London: Thompson Learning.
Sonia M. Suárez-Ortega, Francisca R. Álamo-Vera, (2005), SMES' internationalization: firms and managerial factors, International Journal of Entrepreneurial Behaviour & Research, Volume 11.