Distance in International Business

Alain Verbeke, Jonas Puck, Rob van Tulder, Alain Verbeke, Jonas Puck, Rob van Tulder

• Publisher: Emerald Publishing Limited
• Year: 2017
• ISBN:
  9781787438415
• Topic: Business
• Subtopic: International Business
• Index: Business

This research and teaching volume has been composed in honour of Rosalie Tung, a distinguished institution builder, thought leader and educator in the field of international business (IB). The volume addresses Rosalie Tung's main research focus in a career that has already spanned several decades, namely the analysis of distance facing multinational enterprises (MNEs), with a focus on state-of-the-art conceptual and fact-based empirical developments in the realm of cultural and institutional distance elements.
The impact of distance on international business transactions and operations remains ill-understood. How should distance be conceptualized? Which dimensions of distance should be considered? Is distance always a cost, or can it sometimes confer value?
This twelfth volume in the Progress in International Business Research series presents extensive accounts of the contemporary scientific debate on how to assess the impacts of distance, both negative and positive ones, on the conduct of international business.
This volume covers five dimensions related to the concept, cost and value of distance, in International business: •The concept of distance •The cost of cultural and psychic distance •The cost of institutional distance •The value of distance •Alternative lenses for IB research

CHAPTER 1

DISTANCE IN INTERNATIONAL BUSINESS STUDIES: CONCEPT, COST AND VALUE

Alain Verbeke, Rob van Tulder and Jonas Puck

Keywords: Cultural distance, institutional distance, psychic distance, distance value, institutional overlap, cultural compatibility, institutional compatibility

INTRODUCTION

Distance is a central theme in international business (IB) research. A simple search for the word “distance” in the abstracts and titles of papers published in five leading IB journals over the period 1990–2015 illustrates the importance of the topic: overall, 341 papers have addressed the phenomenon, either in their titles or abstracts (International Business Review – IBR: 89, Journal of International Business Studies – JIBS: 99, Journal of International Management – JIM: 44, Journal of World Business – JWB: 59, Management International Review – MIR: 50). In other words, two annual volumes of each of the above journals could be filled solely with papers on the topic of distance. However, our knowledge of distance, in terms of conceptual specification and consequences for IB practice, is incomplete and sometimes ambiguous. In this research volume, we therefore analyze the conceptualization and impacts of distance in IB research, through various complementary lenses, each of these contributing in a substantive fashion to fill present knowledge gaps.

To capture the phenomenon of distance, a large number of constructs has emerged. These constructs include approximations of spatial distance (Ragozzino & Reuer, 2011), psychic distance (Johanson & Vahlne, 1977), regulatory distance (e.g. La Porta, Lopez-de-Silanes, & Shleifer, 2006), institutional distance (Kostova, 1999), and cultural distance (Kogut & Singh, 1988). The IB literature has thereby covered many aspects of distance that firms and managers supposedly do – or should – take into account when making strategic decisions, for example, in the realm of foreign entry mode selection, intra-organizational design, structuring of the interface with external actors, so on. Here, a high-distance context typically increases the complexity of organizational arrangements to govern economic transactions. In recent years, scholars in IB have attempted to unbundle empirically cross-national distance (Berry, Guillén, & Nan, 2010; Dow & Karunaratna, 2006). At the same time, the concept of “compounded distance” was coined, which focuses on the overall, simultaneous impact of all individual distance dimensions on firm-level decision-making (Rugman, Verbeke, & Nguyen, 2011). However, two challenges are associated with current approaches, namely a measurement problem (i.e. related to quantification) and a conceptual problem (i.e. related to underlying assumptions). First, with regard to measurement, the tendency to increase the number of distance measures has led to a large number of constructs, all supposedly being components of overall, cross-national distance between two countries or regions. However, it remains somewhat unclear which dimension matters most in specific circumstances, how to weigh and aggregate these different dimensions in terms of relevance to a particular strategic decision, and how to ascertain that no important dimensions of distance related to such strategic decision have been missed. Second, most existing concepts, while supposedly representing “distance,” have been criticized for not meeting the conditions that hold when assessing the impact of geometric distance (Shenkar, Luo, & Yeheskel, 2008). This, as scholars have argued, has led to “illusions” about distance’s impacts and to challenges when formulating normative implications for multinational companies (Shenkar, 2001; Tung & Verbeke, 2010). In sum, while of strong relevance to IB, there is ample room for further research on the conceptual nature of distance and related empirical work, as shown in Part I of this book.

Most extant research has focused on the costs or negative consequences associated with increasing distance. For example, on the firm level, many scholars have argued that distance creates additional costs of doing business abroad (Hymer, 1960) and a liability of outsidership (Johanson & Vahlne, 2009). On the individual and team level, findings similarly suggest that distance leads to communication challenges and cross-cultural misunderstanding (Hofstede, 2001). There is ample opportunity for further research adopting this perspective, for example, on the “cost” effects of specific dimensions of distance in team- and individual-level research, and on underexplored negative consequences of distance on the firm level. These cost dimensions are explored further in Parts II and III of this volume.

The largely negative perspective on distance prevailing in most IB studies may be valid in many cases. Yet, a sole focus on liabilities and adverse outcomes associated with distance may hinder our understanding of the processes and conditions that help to leverage the “value of diversity” in a wide range of contexts (Rugman & Verbeke, 2001; Verbeke & Yuan, 2016). The “value of diversity” perspective, that is, the notion that distances or differences between interacting parties along specific dimensions can create value, has long been acknowledged in the team-diversity literature. Research in this domain suggests that diversity can improve team creativity (McLeod et al., 1996) and problem solving (Shaw, 1981) because of the broader knowledge base present in more diverse team configurations. Team diversity can also enhance learning (Stahl et al., 2010). At the firm level, the “benefits of diversification” argument is strongly related to the distance concept. The diversification logic implies that investments with uncorrelated returns have a risk-reducing effect on the underlying portfolio (Chkir & Cosset, 2001; Singh, Davidson, & Suchard, 2003). Since distance can be assumed inversely correlated with connectedness, increasing distance within a portfolio arguably has the potential to reduce the risk-related outcomes of this portfolio. However, research on positive consequences, while advocated by many scholars, is scarce, and ultimately it is “net added value” that matters, that is, added value minus added cost (Verbeke & Kenworthy, 2008). There are obvious benefits of distance, related to strategic asset seeking investment, development of strategic capabilities, cross-border knowledge sharing and learning, synergy creation in cross-border mergers and acquisitions, unleashing the creative potential of diverse teams, and promoting sustainable and responsible behavior in multinational enterprises (MNEs). The value of distance is explored in Part IV of this volume.

Advancing the practice of international management research through alternative lenses (meaning alternative to the mainstream) has always been a key goal of the PIBR book series. We have therefore also included papers adopting alternative lenses such as in Part V of this volume.

PART I: THE CONCEPT OF DISTANCE

How exactly distance should be defined, measured, and applied is a key challenge in IB research. Empirical results regarding the impact of cross-border distances on entry mode choice, affiliate performance, and other firm-level decisions are mixed. One possible reason is that some contentious conceptual and /or methodological properties of the distance constructs deployed in empirical work may have undermined these constructs’ validity and effectiveness as research instruments (Shenkar, 2001).

Part I of this volume, covering Chapters 2–5, explores different ways to address this challenge, namely by revisiting the ways to conceptualize and measure distance, taking into account the problems raised by Shenkar (2001). Overall, the chapters included in Part I of this volume highlight the critical issues that have typically been neglected in the extant IB distance research, and they provide recommendations on how to address these issues conceptually and empirically.

Chapter 2, by Dow, identifies research opportunities that would allow addressing some questionable assumptions and practices in distance research. The other three chapters in this part of the book exemplify various attempts to address the issues identified in Chapter 2, conceptually and/or empirically. The following important elements were addressed: the asymmetry effect or direction of distance (Chapters 4 and 5), the illusion of discordance or synergy effect when significant differences are present (Chapters 3 and 4), the illusion of linearity (Chapters 3 and 4), and the assumption of equivalence (Chapter 4). The empirical work included in this part also showcases some new approaches to address some of the above issues, such as the direction of distance (Chapter 5) and the assumption of equivalence (Chapter 4).

Chapter 2 provides a comprehensive review of the history of the distance literature in IB and argues that: “the distance research in international business studies is at a turning point, not in terms of its popularity, nor the quantity of articles published; but rather, in terms of the types of issues that are explored.” Using “a metaphor borrowed from the social psychology literature, Coleman’s Boat,” this chapter explains the key issues involved in this shift and the opportunities for future research.

From his review of the literature, Dow concludes that conceptual work and commentaries have drawn attention to requisite nuances in distance research, for example, on the issue of diversity within a country, the direction of distance or asymmetry of distance, and the measurement of distance at the individual level. However, the quantity of empirical work investigating these issues has been limited. The vast majority of extant, empirical IB studies concerning distance has focused on linking national-level differences with organizational outcomes. With this relationship generally confirmed, the author argues that contemporary distance research needs to shift “from exploring whether distance matters” to understanding “why and how it matters.” In other words, a tipping point (in the author’s words) has been reached.

Dow advocates in favor of more micro-level and multi-level research that would explore the underlying moderating and mediating relationships involved in linking national-level differences with organizational outcomes. One key question is how individuals’ perceptions of distance are formed. Another one is how within-country diversity, ownership structures, conservation values, and managers’ personality directly or indirectly shape individuals’ perceptions of distance. A third question is how such perceptions of distance translate into particular courses of action at the individual level, but also, and especially, at the firm level. IB scholars can contribute to overall strategic management research by pushing the bounds embedded in the last question, for example, as the “headquarters – foreign subsidiary structure of MNEs may present a novel environment for examining issues such as the relative power of stakeholders in the decision making process.”

The author also points out that the empirical research in IB needs to heed Shenkar’s (2001) warnings, irrespective of the level of analysis chosen. In particular, researchers should be aware of the illusions and assumptions in operationalizing distance when using the Kogut and Singh (1988) index and should attempt to address these, namely the illusions of symmetry, linearity, discordance, and stability, as well as assumptions of equivalence, corporate homogeneity, and spatial homogeneity.

The great contribution of this chapter is that it highlights areas of challenges and potential new research for distance in IB, in a systematic fashion, by using a modified multi-level Coleman’s boat metaphor. The challenges and research opportunities described in this chapter are much in line, in substantive terms, with many other chapters in this research volume.

Chapter 3, by Maseland, proposes an alternative metaphor, “institutional overlap,” as sharply contrasting with the traditional distance perspective, to capture the effects of institutional diversity on IB transactions. Institutional overlap is defined as “the presence of institutional structures that are shared between (potential) partners.” By adopting the institutional overlap perspective rather than the dominant institutional distance perspective in IB research, Maseland highlights the opportunities for firms to create commonality, rather than focusing on costs arising from differences. The overlap perspective implies an approach whereby the process of managers “constructing commonality” is critical.

The author then argues that “changing the institutional debate in IB from a distance to an overlap perspective has a number of important implications and advantages.” First, the overlap perspective perceives “MNEs as institutional entrepreneurs, identifying, negotiating and constructing such overlap, thereby linking hitherto separated institutional settings and exploiting opportunities for arbitrage,” much in line with the recombination skills described in Verbeke (2013). Second, “the non-additive nature of overlap highlights the potential for institutional entrepreneur...

Table of contents

• List of Contributors
• Prologue – Voyages of Self-Discovery: A Reflection on Four Decades Of Research On Expatriation And Cross-Cultural Interactions
• Chapter 1 Distance in International Business Studies: Concept, Cost and Value
• Part I The Concept of Distance
• Part II The Cost of Cultural and Psychic Distance
• Part III The Cost of Institutional Distance
• Part IV The Value of Distance
• Part V Alternative Lenses for IB Research