How Do Managers’ Deviant Perceptions of “Cultural Distance” Relate to the Performance of International SMEs?

Abstract

Our study explores the performance implications of deviations in managers’ perceptions of “cultural distance” – one of the most important concepts in International Business research – when expanding into foreign markets. Despite much research on “cultural distance,” few researchers have paid attention to the effect of deviations in managers’ perceptions of cultural distance on firm performance. This is important since managers formulate strategies for responding to the environment based on their perceptions of the firm’s environment. These perceptions, however, do not always coincide with actual environmental characteristics. Therefore, formulating strategies based on inaccurate data may result in erroneous forecasts, missed opportunities and, ultimately, business failure. We explore this empirically by comparing managers’ perceptions of cultural distance to export markets of Swedish SMEs to cultural distance measures based on secondary data and relate deviations of perceptions to the performance of these SMEs. Our results show that the larger the deviations of managers’ perceptions of cultural differences from “actual differences” as expressed in Hofstede scores on cultural dimensions, the lower the performance expressed in firms’ sales. The implications of the study are discussed.