Psychic distance and environment: Impact on increased resource commitment

Abstract

Purpose – The purpose of this study is to provide a theoretical driven model, explaining the interaction between psychic distance and environment on increased (subsequent) resource commitment decisions made by firms in their internationalization process. Increasingly, contrary to the Uppsala internationalization process (IP) model, firms are engaging in direct investment, rather than exporting as an initial step into overseas markets. Yet, it remains unclear how psychic distance affects firms engaged in increased resource commitment, especially in the initial phase of their international expansion when uncertainty is higher. Design/methodology/approach – Building theory by integrating two key theories of internationalisation (IP model and eclectic paradigm), the paper explains increased resource commitment. Comparing firm types, the study also fills the research gap of recognising multinational enterprises (MNEs) as heterogeneous in their internationalization experience. Psychic distance and environment are analysed across three groups of firms (born-global, recent and older entrants) to observe the moderating effects of firm experience and related uncertainty. A model and propositions of the relationships between psychic distance and environment, providing an increased commitment perspective, are presented. Findings – There are mixed responses to the three groups of firms for psychic distance factors (political, geographic, social, information and commercial and economic development); and environmental factors (near-market effects and sunk costs). Surprisingly born-global and recent entrants are less affected by psychic distance, and more influenced by external factors, but for different reasons, in making early increased resource commitment decisions in the host market, than are older entrants. Practical implications – Firms need to consider the strategic objectives of the parent company, psychic distance, local environment and international experience when engaging in increase resource commitment in host economies.