The Microfoundations of Distance: Insights from Psychology to Expand the Notion of Psychic Distance

Abstract

Many studies have focused on the impact of cultural differences between a host and a home environment on macro outcomes such as firms’ strategies and performance. However little attention has been paid towards the microprocesses underlying this relationship. How those differences translate into the minds of decision makers and then affect the way they perceive distances and thus the decisions they make accordingly remains vastly understudied. We suggest here to consider that cultural differences are an input of psychic distance, and to treat psychic distance as a dynamic, subjective, and cognitive process, occurring at the individual level. This theoretical paper aims at contributing to the literature on distance and internationalization by providing insights from psychology, especially what affects impression formation and biases associated with decision-making. Cultural differences do not impact every decision maker in the same way: depending on their experience or personality, they will process and interpret information from the environment differently, thus affecting the distance they perceive towards a potential investment location. Here we investigate how biases and prisms – specific to each individual - affect psychic distances one hold towards locations; we provide different sets of propositions regarding whether and how come one holds perceptions towards a location or not, how to characterize these perceptions, and whether they can be modified (for instance through learning or framing). We thus contribute to a better understanding of the microprocesses behind the relationship between cultural differences and firm strategy and performance by shedding light on the cognitive mechanisms underlying distance (how distance works in the mind of decision makers?). By considering that cultural differences are an antecedent of psychic distance, we hope to clarify the tension between cultural and psychic distance which has been hindering theoretical development in the IB literature. Finally, we aim at providing more realism to the IB literature by delving into what managers actually experience when making international investment decisions.