Psychic Distance, at Each of Term Paper

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Such agreements can effect retail internationalization positively, as inter-state agreements can facilitate internationalization into participating countries (Dupuis and Prime, 1996); however, firms must still consider state and local political stability, policy and legislative issues (Evans and Mavondo). Political stability is particularly important for international retailers; further, differences in regulation can have substantial consequences for achieving economies of scale and scope (Evans and Mavondo).

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While trust and the political and legal environment were shown to be of critical importance for successful cross-cultural investment outcomes, it would seem reasonable to assert that these elements are less important than the mutual perception of commitment on the part of the companies involved. Trust, for example, can be balanced by existing legal alternatives that can provide remedies of a last resort, and the adverse effects of the legal and political climate of a country can be minimized through various strategies as well. Absent a sense of commitment on the respective companies' part, though, it will be unlikely that either will devote the resources needed today to ensure the continued success of their cross-cultural operations in the future.

Recommendations.

In sum, the psychic distance concept focuses on significant cultural and business differences between countries that can introduce constraints to successful market entry and adaptation once established; however, such constraints can be overcome through learning in a process Nordstrom and Vahlne (1994) termed "bridging the gap of psychic distance" (p. 3). Some recommendations provided by O'Grady and Lane for these purposes are as follows:

Treat even psychically close markets as foreign markets. Executives should not assume that the different markets are the same, or that companies within each can be managed in the same way. When decision-makers start with the assumption that they are the same, they are more likely to take the appropriate steps toward entering the new market.

Test assumptions and perceptions prior to entry. The success of a decision-making process relies on the accuracy of information and the knowledge of those making the decisions. The most important part of a company's pre-entry orientation is the perceptions and assumptions of the executive team, because they act as a base from which all of the decisions regarding the venture are made. If the pre-entry aspect of the decision-making process is faulty, the remainder of the process is unlikely to be effective.

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The decision-makers' initial perceptions and assumptions also affect their ability to learn from experience in a new market and to respond to this information. Strong beliefs about the similarity of the two markets or the power of a retail concept contributed to the difficulty of adjusting when faced with conflicting information. There comes a time when it is necessary to revise one's basic assumptions and perceptions, rather than continue to alter operating decisions in a way that only supports the initial position.

Correct interpretation is key. In the Age of Information, the research process can be likened to drinking from a fire hose. Simply gathering information about a market does not necessarily lead to knowledge of that market unless it is interpreted correctly. A number of the companies conducted market analyses and still failed. The failure of such companies highlights the difference between objective market information and the tacit knowledge or know-how that is critical to success. The real indicators of psychic distance are to be found much closer to the ground than researchers have been looking.

Develop the ability to learn. A final recommendation is that those making the decisions for foreign markets must develop the ability to learn about the other countries. Learning has to do with increasing one's knowledge and understanding. Learning is more likely to occur under conditions where error is tolerated, assumptions are testable, and key aspects of information are not missing. Thus, it is vital to identify and check the assumptions of decision-makers prior to entry, because their assumptions often seriously limited the effectiveness of their entry decisions. Because assumptions are frequently highly subjective and hard to identify, it is a good idea to use an objective person from outside the decision-making process to help decision-makers to identify them. It appears that to gain the capacity necessary to compete even in "close" markets, companies should hire management talent experienced in the target market; these individuals should have an understanding of the targeted consumers, the competition, the competitive intensity of the supplier situation, and regional differences, among other factors (O'Grady and Lane)......

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