Perceptions Versus National-Level Differences: A Mediating Model of Psychic Distance

Douglas Dow, Lars Håkanson, Björn Ambos

    Research output: Chapter in Book/Report/Conference proceedingBook chapterResearchpeer-review


    Purpose: This chapter bridges the gap between two distinct approaches to the concept of psychic distance – measuring it in terms of people’s perceptions of distance or in terms of exogenous national-level differences. The two approaches are reconciled in a “refined and integrative” definition of the concept, which is tested empirically using a mediating model.
    Methodology: Structural equation modeling is used on a bilateral sample of 25 countries to test whether perceptions of psychic distance mediate the relationships between national-level differences and bilateral trade and investment.
    Findings: By testing for alternative direct paths, the chapter confirms that for the main forms of national-level differences, culture, socioeconomic development, language, and religion, psychic distance fully mediates their relationships with both trade flows and investment patterns. However, for geographic distance, while the relationship is fully mediated for investment, it is only partially mediated for exports. Two asymmetric “distance-bridging” factors are also found to be significant antecedents of psychic distance.
    Originality and implications: This chapter is the first to empirically demonstrate the mediating relationship between exogenous national-level differences and perceptions of psychic distance, and thus, provides new insights into the debate over which measurement approach is more appropriate. Perceptions of psychic distance, even if measured by expert panels rather than the actual decision-makers, fully capture the impact of national-level differences on trade and FDI flows; however, if such measures of perceptions are not available, a simple selection of four national-level differences will still capture 80% of the same effect.
    Original languageEnglish
    Title of host publicationMultinational Enterprises, Markets and Institutional Diversity
    EditorsSarianna Lundan, Alain Verbeke, Rob Van Tulder
    Place of PublicationBingham
    PublisherEmerald Group Publishing
    Publication date2014
    ISBN (Print)9781784414221
    ISBN (Electronic)9781784414214
    Publication statusPublished - 2014
    SeriesProgress in International Business Research


    • Psychic distance
    • Hofstede
    • Market selection
    • Structural Equation Modeling
    • Trade flows
    • FDI

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