Does relationship psychic distance matter for the learning processes of internationalizing SMEs?

https://doi.org/10.1016/j.ibusrev.2013.08.010Get rights and content

Highlights

  • We examine psychic distance effects on the foreign customer relationships of SMEs.

  • We analyze 314 foreign customer relationships of Swedish SMEs.

  • Psychic distance enhances the knowledge development in foreign customer relationships.

  • Psychic distance is positively related to SMEs foreign market network cooperation.

  • Network cooperation enhances the knowledge development of SMEs and their customers.

Abstract

This study builds on two theoretical assumptions: (1) Because SMEs tend to internationalize fast on a wide global scale, their market selections do not seem to be dictated by distance measures. (2) Business relationships seem to be vital for these firms when acquiring knowledge and developing their ongoing businesses in foreign markets. Based on these assumptions, this study applies Linear Structural Relations (LISREL) analysis to investigate the relationships of 314 Swedish SMEs and their most important foreign customers. In specific, we investigate what potential effects relationship psychic distance has on SMEs’ knowledge transfer in ongoing foreign customer relationships. The results demonstrate, rather counter-intuitively, that relationship psychic distance actually enhances knowledge transfer in the investigated customer relationships.

Introduction

Researchers investigating the internationalization processes of firms have argued that there exists a psychic distance (PD)3 between markets (Hörnell et al., 1973, Nordström, 1991) and that the sequence of internationalization seems to be related to the PD between the home market and foreign countries (Johanson and Vahlne, 1977, Johanson and Wiedersheim-Paul, 1975). Building on this idea, The PD concept has been widely used in IB-literature to explain how firms internationalize in terms of market selectivity and how they develop knowledge about foreign markets (Dikova, 2009, Prime et al., 2009). As a consequence, the current discourse about PD-effects is elaborate and International Business Review is a particularly important forum for this debate (e.g. Dikova, 2009, Dow and Ferencikova, 2010, Ellis, 2007, Pla-Barber, 2001, Prime et al., 2009, Yamin and Sinkovics, 2006). Given that previous studies about the effects of PD generally have focused on the PD between markets, the aim of this study is to focus on PD at the relationship level of Swedish small and medium-sized enterprises (SMEs) and their foreign customers. The rationale for this is that SMEs seem to be inclined toward niche market strategies which give them incentives to make multiple market entries worldwide early on in their development, regardless of PD (Knight et al., 2004, Rovira Nordman and Melén, 2008, Weerawardena et al., 2007). Hence, the nature of these firms’ strategic motivations implies that PD has a relatively modest effect on their market selection whereas it may have a greater impact on their business operations after foreign market entry. In this study we have therefore chosen to focus on the PD-effects that come into play in the period following SMEs’ foreign market selections and foreign market entries. By investigating the potential effects of PD on SMEs’ knowledge transfer in ongoing foreign customer relationships, we can make an incremental contribution to the body of literature that focuses on how resource constrained SMEs use their foreign customer relationships to alleviate business impediments related to internationalization (Jonsson and Lindbergh, 2010, Rovira Nordman and Melén, 2008, Tolstoy, 2012). We, moreover, respond to the recent calls for more research about the “role of interfirm psychic distance in the development and management of cross-border business partnerships” (Katsikeas, Skarmeas, & Bello, 2009: 149) and “the impact of PD on relational phenomena in cross-border dyads” (Obadia, 2012: 2).

The rest of the paper is organized as follows: first, the theoretical building blocks on which the paper's argumentation is built are presented, and hypotheses are proposed. Second, the method and data analysis are presented. Third, Linear Structural Relations (LISREL) analysis is employed to examine a sample of 314 Swedish SMEs that were surveyed about their foreign customer relationships. Finally, the results of this study are presented, followed by a concluding discussion, a discussion about the limitations and suggestions for future research.

Section snippets

PD and the internationalization of SMEs

The term psychic distance was coined by Beckerman (1956) and was later popularized by Johanson and Vahlne (1977). Within the internationalization process theory (see Johanson & Vahlne, 1977), PD is viewed as an underlying factor that determines the geographical pattern of internationalization where firms first establish business in psychologically near markets and expand farther in a gradual manner as more knowledge about international operations is acquired. Even though the concept of PD is

Methodology

Internationalization has been argued to be overt and demonstrable, and thereby manifested in recognizable ways. Evidence of such behavior can thus be operationalized using theoretically deduced measures (Jones & Coviello, 2005). The use of a survey-based method will presumably enhance knowledge of the behavior of international SMEs.

In this study, the survey questions revolved around a specific relationship with a foreign customer that was chosen by the respondent. Respondents were instructed to

Results of the structural model

The structural model (see Table 3) shows nomological validity (χ2 = 10.88, df = 17). The model also shows discriminant validity between constructs. A basic requirement for confirming discriminant validity is that the correlations between latent variables should be significant but not equal to 1, as a value of 1 would suggest unidimensionality (Jöreskog & Sörbom, 1993). The structural model reveals the causal relationships between constructs, and can disclose both direct and indirect effects. As

Concluding discussion

Even though internationalizing SMEs are likely to have limited funds to use for research and development or to speed up their production processes, their flexibility, lack of bureaucracy and motivated employees can often give them an advantage over larger firms. These qualities, moreover, allow for fast decision making which can enable SMEs to develop country-spanning business relationships and quickly launch specialized business solutions in foreign markets (Cui et al., 2005, Knight and

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    We gratefully acknowledge the financial support of the Jan Wallander and Tom Hedelius’ foundation. The authors would also like to thank the guest editors, the two anonymous reviewers, and the participants at the MaSt-seminar series at Stockholm School of Economics for their constructive comments, which helped to improve the manuscript.

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    Tel.: +46 8 736 95 37; fax: +46 8 33 43 22.

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    The authors appear in alphabetical order and have contributed equally to the paper.

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