Psychic Distance, Innovation, and Firm Performance

Abstract

Previous research suggests that internationalization improves a firm's ability to innovate, but the effect of internationalizing into specific target markets or destinations on the innovation ability of firms has not been fully investigated. This study examined whether the psychic distance between target market and home market affects firms' propensity to innovate. The starting assumption was that perception of a high degree of differences and subsequent environmental uncertainty when expanding into psychically distant markets triggers strategies for interacting and integrating with the market environment. These include producing and adopting innovations to processes and products and to organizational strategy, structure, and administrative procedures to cope with the new environment and overcome uncertainties. These innovations and the associated competitive advantages can improve firm performance. Hypotheses regarding the relationships between psychic distance, innovation, and firm performance were tested here by structural equation modeling using data from 186 export ventures into 23 international markets by Swedish companies. The results indicate that the link between psychic distance and firm performance is mediated by innovation.

Keywords

Psychic distance; Innovation; Internationalization; Firm performance; Uncertainty

Published in

Management International Review
2014, volume: 54, number: 5, pages: 581-613
Publisher: SPRINGER HEIDELBERG

SLU Authors

• Azar, Goudarz

  • Department of Economics, Swedish University of Agricultural Sciences
    

UKÄ Subject classification

Business Administration

Publication identifier

• DOI: https://doi.org/10.1007/s11575-014-0219-2

Permanent link to this page (URI)

https://res.slu.se/id/publ/66173