In recent years, many researchers have tried to determine factors that affect the internationalization process and the success of internationalization. One of the factors that they have determined is psychic distance. Psychic distance is still an obscure concept to some, though. This literature review aims at describing exactly what psychic distance is and how it affects internationalization.
Psychic distance is “the sum of factors preventing the flow of information to and from the market (Johnason and Vahlne, 1977,24) (Dow & Karunaratna, 2006, p. 579). This creates a perceived distance between countries (Hakanson & Ambos, 2010, p. 195) and therefore has an impact on the success of internationalizing.
There are several factors that make up psychic distance. These factors include: culture, language, education level, industrial development, political systems, religion, time zones, geographical distance, World War historical legacy, GDP/capita of the target country, governance systems, information availability, and colonial links.
Culture is the inherited ideas, beliefs, values, and knowledge that are transmitted and reinforced by members of the group (Culture). “Differences in national culture are the most widely acknowledged form of psychic distance stimulus (Johanson and Vahlne, 1977; Boyacigller, 1990; Evans et al., 2000)” (Dow & Karunaratna, 2006, p. 581). A person’s culture influences many things. It influences how they behave, how they communicate information to others, and also how they interpret information from others (Carlson 1974) (Hakanson & Ambos, 2010). Culture affects the flow of information to and from the market because there are larger costs as well as increased risks. A larger cultural distance between two groups leads to higher transaction costs, both real and perceived. The real costs come with the cost of interpreting information between parties. With a greater real cost comes a greater perceived cost, which could be the risk associated with the real costs. (Dow & Karunaratna, 2006, pp. 581-582) Risk is increased because of the chance for misinterpretation (Boyacigller, 1990). The real and perceived costs will affect the manager’s perception of the attractiveness of doing business with a party. Cultural distance influences decisions such as market selection for exporting and direct foreign investment (Johanson and Wiedersheim-Paul 1975) (Davidson, 1980; Kogut and Singh, 1988). (Dow & Karunaratna, 2006). The influences of other cultures are thereby affecting the way in which information is communicated and interpreted to and from others.
Differences in languages play a role in psychic distance. The more similar the languages are to one another, the more efficient the communication (Tushman, 1978). According to Welch et al. (2001), firms tend to gravitate towards their own language groups during initial expansion as a way to mitigate risk (Dow & Karunaratna, 2006, p. 582). Another reason that firms gravitate towards...