Psychic distance refers to the sum of factors that prevent the flow of information to and from the host market, preventing the firm from collecting, analysing and correctly interpreting valuable data, and understanding the differences with the home country.
It represents an obstacle to many firms when investing abroad due to their perception of uncertainty and lack of knowledge of the host market. However, as demonstrated in a recent article, vicarious experience, which consists here of learning from other companies that have previously invested in the same geographic segment, can help investors avoid a number of pitfalls or mistakes, thus implementing better strategies.
Information was collected from a sample of Spanish multinational enterprises, providing some empirical evidence supporting the assertion that the more firms from the same home country in the host market, the lower the negative impact of psychic distance, and the easier it is to enter the market. Yet, there are two exceptions to this, pertaining to language and religion. As for the former, as a highly culturally embedded and context-specific factor, vicarious experience is not enough to deal with the frictions and misunderstandings caused by differences in language. Regarding the latter, this is the only case in which larger differences in this dimension increase foreign direct investments, signaling potential opportunities for arbitrage and complementarity. Contrary to previous research, this study shows that experience obtained from other companies is helpful irrespective of the business sector involved.
As a practical implication of these findings, managers should be aware of the potential challenges and opportunities offered by the presence of a large number of compatriot firms in the host market: potential knowledge sharing, best practice advice, collaboration on joint projects, or ways to legitimize an international strategy...
As such advantages can mitigate, to a certain extent, the impact of psychic distance, managers and policy-makers should promote the dissemination of information, for instance through business associations or specific events, hence creating opportunities for multinational companies to share experiences and knowledge in order to overcome common problems and achieve similar goals.
Jiménez A., de la Fuente D. (2016). Learning from others: the impact of vicarious experience on the relationship between psychic distance and FDI. Management International Review, 56(5), 633-664.