Learning about Foreign Markets: Are Entrant Firms Exposed to a “Shock Effect”?

Abstract

This study addresses how managers’ perceived familiarity with local markets develops during a period of entry or expansion. The authors derive different predictions of how foreign-market familiarity changes during periods of entry from the internationalization process literature. They then subject the predictions to an empirical examination, using a data set that covers foreign business operations as reported by managers of international firms from small, open economies (Denmark, Sweden, and New Zealand). In addition to addressing these predictions, the empirical study gives insight into the incidence and character of “shock effects” in foreign-market entries. The effects are evident in managers’ inclination to underestimate differences between the home and host countries in terms of business environments. The data support the supposition that, in general, managers of entrant firms experience these shock effects. For example, the authors find the lowest level of market familiarity among managers of entrant firms that are in the eighth year after entry or initiation of foreign-market expansion. The company data indicate that, in general, managers of entrant firms experience shock effects in relation to entry into adjacent but not into distant countries. Thus, the hypothesis of the psychic-distance paradox that the authors put forward is supported. Entrant firms also experience shock effects with respect to the acquisition of tacit rather than explicit knowledge; furthermore, the data suggest that shock effects befall producers of customized products but not producers of standardized products.