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Latin American Business Review

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Psychic Distance versus Market Size inInternational Business: Study of BrazilianExporters

Luis Antonio Dib, Leonardo Sertã Rezende & Octavio Figueiredo

To cite this article: Luis Antonio Dib, Leonardo Sertã Rezende & Octavio Figueiredo (2016)Psychic Distance versus Market Size in International Business: Study of Brazilian Exporters,Latin American Business Review, 17:1, 73-93, DOI: 10.1080/10978526.2016.1142376

To link to this article: http://dx.doi.org/10.1080/10978526.2016.1142376

Published online: 26 Apr 2016.

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LATIN AMERICAN BUSINESS REVIEW 2016, VOL. 17, NO. 1, 73–93 http://dx.doi.org/10.1080/10978526.2016.1142376

Psychic Distance versus Market Size in International Business: Study of Brazilian Exporters Luis Antonio Dib, Leonardo Sertã Rezende, and Octavio Figueiredo

The COPPEAD Graduate School of Business, Federal University of Rio de Janeiro, Rio de Janeiro, Brazil

ABSTRACT International Business (IB) theories encompass economic approaches, where firms use objective criteria to select foreign markets, and behavioral approaches, where firms use psychic distance. This study proposes new objective criteria to measure psychic distance and adopts multiple linear regressions with a foreign-trade econometric model adapted to address psychic distance and market size and their relationships with Brazilian exports over 10 years. Psychic distance showed a close relationship to exports from smaller firms, while the market size of the destination country was always significant. This brought original empirical evidence to the validity of IB theories as well as to the exports behavior of firms from emerging economies.

ARTICLE HISTORY Received 11 December 2015 Revised 19 December 2015 Accepted 29 December 2015

KEYWORDS Exports behavior; firm size; internationalization; market selection; psychic distance

RESUMEN Las teorías sobre Negocios Internacionales (NI) emplean abordajes económicos, en los cuales las empresas utilizan criterios objetivos para seleccionar mercados extranjeros y enfoques comportamen-tales basados en una distancia psíquica. Proponiendo nuevos criterios para medir la distancia psíquica, este estudio adaptó múltiples regresiones lineares con un modelo econométrico de comercio internacional ajustado para tratar la distancia psíquica, el tamaño del mercado y sus relaciones con las exportaciones brasileñas a lo largo de diez años. La distancia psíquica presentó una relación estrecha con las exportaciones de las empresas más pequeñas, mientras que el tamaño del mercado del país de destino siempre fue significativo. Esto ofrece pruebas empíricas originales cuanto a la validez de las teorías de NI y al comportamiento de las exportaciones de las empresas de economías emergentes.

RESUMO As teorias de Negocios Internacionais (NI) abrangem abordagens economicas, nas quais as empresas empregam criterios objetivos para a selecao de mercados externos, e abordagens comportamen-tais, onde é empregado o conceito de distancia psiquica. O presente estudo propoe novos criterios objetivos para a afericao da distancia psiquica, apos adotar regressoes lineares multiplas com um modelo economico de comercio internacional adaptado para tratar a distancia psiquica, o tamanho do mercado e suas relacoes com as exportacoes brasileiras ao longo de dez anos. A distancia psiquica apresentou relacao significativa com as exportacoes das empresas menores, enquanto o tamanho do mercado do pais de destino tenha sido sempre significativo. Isso ofereceu evidencias empiricas originais quanto a validade das teorias de NI e ao comportamento das exportacoes de empresas de economias emergentes.

CONTACT Luis Antonio Dib dib@coppead.ufrj.br The COPPEAD Graduate School of Business, Federal University of Rio de Janeiro, R. Pascoal Lemme, 355, Rio de Janeiro, RJ, CEP 21941-918, Brazil.

© 2016 Taylor & Francis

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Introduction

The literature on International Business (IB) offers two main, competing approaches to the internationalization process of firms. One such theoretical view suggests an economic focus in which the firms use objective criteria to select foreign markets. The other explores the topic from a behavioral view-point, in which companies are gradually internationalized, considering the knowledge gained and the perception of risks associated with the psychic distance between their domestic and foreign markets.

In this study, we aim to verify how such theories apply to the exports of Brazilian companies. The Brazilian economy still has a low ratio of exports to Gross Domestic Product (GDP), and the foreign investment of Brazilian companies is relatively low and concentrated. Latin America tends to be cho-sen as a first destination of internationalization (Cyrino, Barcellos, & Tanure, 2010). This trend of concentrating investments abroad in proximate countries finds support in the behavioral theories on firm internationalization, such as the Uppsala Model, which describes the selection of markets for international operations based on a logic inversely related to the psychic distance between the country of origin and the foreign market (Johanson & Vahlne, 1977). Therefore, the larger the psychic distance, the smaller the propensity of expor-ters to seek such markets, which would require a larger amount of resources and corporate knowledge in international markets to reduce the perception of risk involved in the process (Nuwagaba, Ntayi, & Ngoma, 2013). This logic would be adequate for smaller companies, which are hampered by insufficient resources, including funds, and this aspect interferes in the firm’s capacity to identify or seize opportunities in the international market. Given the per-ceived risk, smaller firms prefer to internationalize to psychically closer coun-tries (Ojala & Tyrvainen, 2009). On the other hand, the growing share of trade between Brazil and countries such as China (with increasing economic power and geographically and psychically distant from Brazil) indicates that economic criteria could also be relevant in selecting international markets. In accordance with Malhotra, Sivakumar, and Zhu (2009), for highly attractive markets, psychic distance may not be the key factor in the decision. Exporters would accept the market entry risk since, when transactions involve possibilities of considerable gains, the rising marginal costs relating to overcoming the psychic distance may not be relevant in preferring to invest in a certain country (Ellis, 2008).

The purpose of the study presented in this article was to examine the dif-ferences in the selection of international markets from the standpoint of four categories of firms (according to company size—“very small,” “small,” “medium,” and “large”) in relation to the psychic distance of these markets from Brazil and the size of the foreign market (GDP). In other words, the aim was to verify whether the psychic distance and market potential have

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a close relationship with the export volume of Brazilian export companies across 10 years, according to firm size. To undertake the study using a quan-titative approach, data related to export companies in Brazil from 2002 to 2011 were selected as a base; additionally, original objective criteria to measure psychic distance were formulated. The method adopted was the multiple linear regression by ordinary least squares (OLS) based on the equation of the Inter-national Trade Gravity Model. The results indicate that psychic distance shows a close relationship only to exports from smaller firms (“very small,” “small,” and “medium”) while the market size of the destination country is significant for the export volume of the Brazilian companies, regardless of size.

Theoretical framework

Several theories on international production and the internationalization of the firm have been developed in recent decades. They concentrate their analyses on different perspectives: some theories stress the organization of production, investment flow, and international exchanges; others stress the company’s behavior to expand its operations to the international market (Rocha & Freitas, 2005). They can, therefore, be classified in two main (and competing) approaches: (1) based on economic criteria—studies with an emphasis on economic dimensions of the internationalization process, which assume individual decisions are driven by the quest to maximize economic returns; and (2) based on behavioral criteria—studies that have an organiza-tional focus, which assume that the firm’s knowledge acquisition process can reduce the risks perceived in the decision to internationalize.

The psychic distance concept

The term “psychic distance” was first used by Beckerman (1956) in his sugges-tion that a behavioral factor—associated with how relationships between buyers and suppliers were established and maintained—was involved. He believed that in addition to objective criteria, such as geographical distance and means of transportation used, buyers would undertake a psychic assess-ment of their distance from their suppliers, considering the restrictions of understanding and language. Linnemann (1966) extended the concept by including risk perceptions, information flaws, and cultural barriers. Later, Sousa and Bradley (2006) were to define psychic distance as the individual perception of the differences between the country of origin and the foreign country.

Studies by Uppsala School on the internationalization of Swedish compa-nies paved the way for the term psychic distance to become widespread in the literature. When the researchers proposed a behavioral model to explain this movement of companies abroad, they used the concept as one of the main

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factors to explain the phenomenon (Figueiredo, Rocha, & Silva, 2009). One of the definitions advanced by the School’s theorists was that of Johanson and Wiedersheim-Paul (1975), who considered psychic distance as the sum of the factors that prevent or disturb the flow of information between company and markets. Hallén and Wiedersheim-Paul (1993) stated that this could occur at national (cultural affinity), organizational (by establishing trust), and individual (from individual experience) levels. Nordstrom and Vahlne (1994) added “learning” as a key aspect of psychic distance, which in their opinion was formed by factors that made it harder for companies to learn about the foreign environment.

O’Grady and Lane (1996) added the “business distance” dimension when they defined the concept as the level of organization’s uncertainty related to the foreign market that arises from cultural differences and other business problems that become barriers to understanding the market and its operation. According to Evans, Treadgold, and Mavondo (2000), this uncertainty was the fruit of individual perceptions; that is, a mental process of understanding the differences in culture and business. Psychic distance would therefore be the distance between the domestic market and a foreign market resulting from the perception of such cultural and business differences. In these terms, the concept of cultural distance is close to psychic distance, and might be regarded as partly separate and partly interchangeable (Figueiredo et al., 2009). Nordstrom and Vahlne (1994) claimed that the cultural distance would be included in the idea of psychic distance, which, in the opinion of O’Grady and Lane (1996), also included such factors as industrial structure and a competitive business environment.

Moreover, Evans and colleagues (2000), in an attempt to reach a broader definition of psychic distance, noted that the differences between the coun-tries of origin and destination include language, political organization, trade practices, legal system, and market infrastructure. In order to summarize the varying views in the literature, Figueiredo (2009) proposed a conceptual model with four dimensions for the psychic distance construct: .� Physical distance (includes geographical distance and climate differences); .� Cultural distance (includes values, language and creed); .� Macro-environment distance (includes the economy, the social, political,

and legal systems, communication, education, and so on); and .� Business distance (includes business practices and environment).

Zhu and Yang (2008) believed that the composition of psychic distance in such dimensions makes it a variable for measuring the degree of similarity between different countries. This level of similarity and dissimilarity between markets is precisely what defines psychic distance, according to Stöttinger and Schlegelmilch (1998), and influences the attractiveness of each country as an export destination. The premise of this idea is that exporters are less inclined to create or maintain trade relations with countries they perceive as not

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similar (that is, psychically distant), while closer cultural proximity may encourage them to enter certain markets. This influence of psychic distance in decisions on internationalization can change over time, as the company gains international experience (Johanson & Vahlne, 1990).

Measuring psychic distance

Although it has been widely studied in international business literature, few efforts to measure psychic distance have endured (Dow, 2000). The discussion mostly concerns the use of subjective or objective measurement criteria. Early studies in the field of international trade, such as Linnemann (1966), used geographical distance as a proxy for psychic distance; Vahlne and Wiedersheim-Paul (1977) then operationalized the concept using official stat-istical indicators and data related to Swedish export companies. Stöttinger and Schlegelmilch (1998) proposed a model of cognitive mapping to measure psychic distance from the viewpoint of the main decision-maker involved in the process because, in their view, it was inappropriate to measure psychic distance based on objective measures. Moreover, they suggested that the con-cept expresses the distance individually perceived by the subject between the domestic and foreign markets. Dow and Karunaratna (2006) concluded that the ideal way to measure psychic distance would be by using individual perceptions of the decision-makers at the time of occurrence. However, this approach has limitations, because it is seldom possible to assess such percep-tions immediately prior to making a decision, since this would restrict the research to a complex series of longitudinal studies. Therefore, one solution is the use of cognitive maps, which is basically a tool to measure ex-post facto perceptions—perceptions after the decision has been made. This raises the problem of identifying whether the perceptions influenced the decision or the experience after the decision influenced new perceptions. A solution proposed by Dow and Karunaratna (2006) for this problem was to separate the concept of psychic distance into constructs: stimuli of psychic distance (i.e., macro-level factors, such as language, culture and creed) and perceived psychic distance (i.e., the perception of the decision-maker as a function of these stimuli, moderated by his or her sensitivity, experiences, educational level, and personality, which influence his or her choices of foreign markets). An advantage measuring actual perceptions instead of the factors guiding such perceptions is that actual perceptions are more stable, accessible, and easy to measure, thus reducing the subjectivity of the responses.

Another issue concerning the measurement of psychic distance is related to the level at which the phenomenon should be evaluated. Hallén and Wiedersheim-Paul (1993) believed that different levels of approach exist and that the distance can be measured from an individual, organizational, or national perspective. A number of researchers suggested it would be

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appropriate to use a comprehensive national measurement for psychic distance, assuming cultural homogeneity within a country or region (Kogut & Singh, 1988). O’Grady and Lane (1996) stated such an assumption would not be consistent, since many countries have populations that include different ethnic groups, with different cultural values. Therefore, it would not be possible to assume that factors such as language, education level, and ethnic context are the same throughout the nation’s territory (Shenkar, 2001). Nevertheless, such problems may be overcome by adapting the unit of analysis to the research instrument. If the objective is to assess a firm’s behavior, for example, the psychic distance stimuli need to be measured according to that company’s decision-makers. On the other hand, if the research includes the aggregate behavior of a population of firms, then an average measure of stimulus of psychic distance would be more suitable (Dow & Karunaratna, 2006).

Reid (1986) maintained that perception of psychic distance is the result of a single holistic judgment of distance between two countries rather than a combination of a series of factors. Stöttinger and Schlegelmilch (1998) adopted a summary construct to measure the concept, arguing that its measurement was based on principles of cognitive mapping, which assumed that individuals built subjective maps of space and distance not necessarily corresponding to reality. Kogut and Singh (1988) also used a single indicator for psychic distance, based on a compound index of Hofstede’s (1980) cultural dimensions. However, studies conducted by Dow (2000) indicated that the Hofstede scales, when used separately, have little predictive validity when compared to more comprehensive measurement of psychic distance. Evans and colleagues (2000) queried the belief that a single item could satisfactorily capture the perceptions on psychic distance, since such perceptions do not include all of the factors, which, combined, form such perceptions. Such factors include competitive environment, legal, and other business indicators. Dow and Karunaratna (2006) explored the topic by identifying eight factors recognized in literature as the main underlying forms of psychic distance stimuli: culture, language, level of education, industrial development, political system, creed, time zone, and colonial ties.

Selecting markets for internationalization

The selection of international markets is a major decision in the internationa-lization strategy of the firm and a key success factor for small exporters and large multinationals alike (Papadopoulos, Chen, & Thomas, 2002). Although various studies in the literature on international marketing consider such a decision as a rational response to market conditions using objective criteria and undertaking market research (Root, 1994), there is ample evidence that this systematic approach is seldom used in practice (Johanson & Vahlne, 1992). Some studies indicate that market entry decisions are generally ad hoc,

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taken for “nonrational” reasons, and that they challenge the logic of optimiz-ing resources (Ellis, 2000). Among other reasons, it may be said that the lim-ited rationality of senior management in the context of taking such decisions makes it impossible to carry out an optimized decision-making process, considering their cognitive inability to process all available information (Bazerman & Moore, 2008). Hence, one of the most popular research topics in the field of corporate internationalization addresses the relationship between psychic distance and the pattern of international expansion (Nordstrom & Vahlne, 1994). More specifically, the impact of psychic distance on the perceived risk level of a foreign market could influence the choice of the company’s selection of international markets (Quer, Claver, & Rienda, 2007).

Psychically closer countries are perceived to be less risky than countries far-ther afield (Alexander, Rhodes, & Myers, 2007) and consequently receive more resources during the internationalization process (Forsgren & Hagström, 2007). Physical and psychological proximity to a certain country, therefore, plays a leading role in a company’s international activities (Hollensen, 2007). Thus, the degree of similarity between the country of origin and of destination influences the perception of attractiveness of a foreign market (Lado, Martinez-Ros, & Valenzuela, 2004). In a study on selecting international markets, Malhotra and colleagues (2009) concluded that most companies from developing countries would rather export to culturally closer countries. Moreover, companies from such countries tend to choose destina-tions with relatively similar culture, administrative structure, and economic conditions. Gripsrud (1990) also observed this behavior, noting that export activities tend to start in psychologically closer countries; and so did Stöttinger and Schlegelmilch (2000), who justified the study on psychic distance by assuming senior management would seldom seek or establish trade relations with countries perceived as different. Hollensen (2007) believed exporters feel uncomfortable when faced with challenges in psychically more distant markets, which may explain their preference for nearby countries. When they have alternatives for internationalization, they assess the risks involved in each choice before taking any decision (Nuwagaba et al., 2013).

As described by the Uppsala model, internationalization occurs gradually, with companies entering countries with successively greater psychic distances. At first, they enter closer markets and then, having acquired experiential knowledge, enter more distant markets (Johanson & Vahlne, 1990). However, Malhotra and associates (2009) pointed out that in some highly attractive markets, psychic distance might not be the decisive factor in the decision making. Considering two markets of the same size, it is reasonable to assume that the firm will choose the one psychically closer. However, markets are seldom the same size and the attraction of large economies may occasionally compensate the pitfalls involved in distance (Gripsrud, 1990). Accordingly, factors other than psychic distance, such as market size, firm behavior

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in seeking opportunities, and decisions made by the management during the pro-cess may influence the choice of exports destination (Ojala & Tyrvainen, 2009).

Traditional economic streams in literature on international business suggest that senior management is first attracted by the potential of large markets, comparing their benefits with costs (of overcoming psychic distance) associated with their entering the country. The choice of foreign countries would, therefore, be guided mainly by market opportunities (Ellis, 2008). These opportunities are summed up by the size of a country’s economy, which is consistently related to the direction and value of both exports and direct foreign investments (Johanson & Wiedersheim-Paul, 1975). Ellis (2008) stressed that psychic distance researchers had, in earlier work, ignored this aspect; thus, he endeavored to understand the relationship between the two concepts. He said that entrepreneurial behavior, guided by the search for opportunities in countries with larger economies, would lead to international expansion. However, senior managers would not immediately perceive oppor-tunities in far-off or dissimilar places, thereby highlighting the role of psychic distance when defining the uncertainties that separate firms and markets.

Disregarding these uncertainties associated with internationalization, senior management would prefer to look to larger rather than smaller markets. But, when encountering insecurity in dealing with foreign cultures, such companies could change from larger to other smaller and more familiar markets, especially in situations involving entry modes with less risk, such as exporting. Thus, Ellis (2008) stated that psychic distance has a moderating effect on the market size-entry sequence relationship, and is not directly the main conductor of internationalization.

Differences in firm internationalization according to size

Different empirical studies have shown that the beneficial effects of inter-national expansion are not equally accessible to large and small firms (Bijmolt & Zwart, 1994). Specifically, the inability of smaller firms to influence prices (due to the lack of market power) the dependence of a relatively small cus-tomer-base and limited relationship with regulatory agencies make the foreign environment more uncertain for these firms (Kilantaridis & Levanti, 2000). This uncertainty derives from the perceived risk involved in decisions on internationalization, involving financial, social, psychological, time, physical, and productive dimensions. The perceived risk can also results from the fear of losing a financial sum when investing in a certain market, a fear which may increase according to the level of resources the company provides for this enterprise (Stone & Grønhaug, 1993). In an export decision, these available funds and capital reduce the perceived risk (Forlani, Parthasarathy, & Keaveney, 2008). Larger companies are able, therefore, to allocate more resources and thus be less risk-sensitive, and thus increase their competitive edge in this market

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(Lado et al., 2004). On the other hand, smaller firms are restricted by not having enough financial resources, which interferes in the firm’s capacity to identify opportunities in the international market and seize opportunities previously identified (Wyer & Smallbone, 1999). Small scale also inhibits investments in logistics, marketing, knowledge and development of the market and adminis-trative procedures, making it difficult to diversify risks and build managerial capacity, which, in turn, raises relevant problems of competitiveness (Castelar, 2002).

Thus, company size is related to the perceived risk and level of resources it is willing to commit (Forsgren & Hagström, 2007). The larger the firm, the higher the willingness to absorb the risks associated with internationalization (Javalgi, Griffith, & White, 2003). Another factor affecting the perception of risk involved in international expansion is psychic distance (Quer et al., 2007). Larger firms can more easily overcome the challenges of psychic dis-tance, since their size mitigates the perceived risk (Blomstermo, Sharma, & Sallis, 2006). The study by Nuwagaba and colleagues (2013) illustrates this relationship when it points to the smaller number of exports from Ugandan firms to countries such as China and India, for example, suggesting that Ugandan export organizations, lacking major resources, are not committed to those markets due to a higher level of perceived risk. According to Javalgi and associates (2003), small scale would lead smaller firms to look to develop-ing countries, where they could compete better for opportunities, while larger firms would be interested in developed countries. For small firms, especially the so-called born globals, factors other than psychic distance may influence the decision on export destination (Dib, Rocha, & Silva, 2010). Even without the large resource base associated with larger companies, they can compensate their operations using lower levels of essential skills in a more segmented international strategy.

Data and conceptual model

The annual exports were evaluated for very small, small, medium, and large Brazilian firms, and for the destination countries of these flows. The data cov-ered the period from 2002 to 2011, that is, the decade when Brazil significantly increased its direct investment overseas compared to the previous decades. Export was selected for this study as the company’s entry mode into the foreign market since it represents the first stage in the internationalization process. This option increased the number of companies analyzed and mini-mized biases related to companies that have already been through this stage (thereby reducing their perception of risk deriving from psychic factors in the process). The study endeavored to answer two key questions: 1. Does psychic distance have a different impact on the internationalization

process of large and small companies?

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2. Is the size of the foreign market relevant for the companies’ exports, related to company size? Four hypotheses were formulated regarding the relationships between

psychic distance, company size and exports to target markets: The psychic distance of the foreign market for Brazil relates negatively to

the export volume of

H1: very small Brazilian firms

H2: small Brazilian firms

H3: medium Brazilian firms

H4: large Brazilian firms

A further four hypotheses were formulated relating company size, exports and size of the foreign markets:

The size of the foreign market is positively related to the volume of exports of —

H5: very small Brazilian firms

H6: small Brazilian firms

H7: medium Brazilian firms

H8: large Brazilian firms

The conceptual model adopted in this study was the Gravity Model in International Trade, acting as a basis for analyzing the destinations of Brazilian exports between 2002 and 2011, the variable “distance” being repre-sented by the definition of psychic distance coined by the Uppsala School. One of the most popular empirical models used to study and quantify the dynamics of international trade flows is the gravity model, mainly due to its high explanatory power and simple application (Piermartini & Teh, 2005). An econometric trade model whose name derives from the similarity with the Isaac Newton Universal Law of Gravity, the model seeks to analyze the influence of income and distance in trade flows between countries. The Newton model states that the force of attraction between two bodies is directly proportional to the mass of each body and inversely proportional to the square of the distance between them. This relation, first applied to foreign trade by Tinbergen (1962) and Poyhonen (1963), predicts that the trade flow between two countries is based on the distance between them and the inter-action from the size of their economies. In this case, the force of attraction is measured by trade between countries, the GDP becomes a proxy for the size of the markets, and the physical distance represents the resistance to trade flow, which increases the farther buyers are from sellers. Linnemann (1966) added the sizes of the populations of the countries to indicate the role of

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the economy of scale in the transactions. Further refinements were introduced in the basic formulation to improve its explanatory power, such as variables relating to the area of the countries and dummies indicating similarity of lan-guage and existence of borders between the nations. The notion of distance became a broader dimension of resistance to trade, including transportation and communication costs, tariff barriers, and cultural differences. Some of the main applications of the model with these new variables in the area of international trade are the studies on the border effect and integration of regional economic blocs, which attempt to explain the relevance of physical proximity and adherence to a certain bloc for variation in the trade flow between countries.

The research was based on the methodology used by Cyrino and colleagues (2010) to analyze the relationship between psychic distance and the selection of international markets by Brazilian companies, based on a construct formed by the combination of a set of factors. In this study, the authors developed a multidimensional instrument to measure the psychic distance between Brazil and a list of countries studied by Hofstede (1980) and updated in 2001. The instrument comprised seven factors: culture, language, creed, education, admin-istration, economic and industrial development, and geographic distance. Based on the measurement of each psychic distance dimension, the totals of the coun-tries for each indicator were calculated as a percentage of the greatest difference in relation to Brazil. To establish a general measurement—herein called Psychic Distance Index (PDI), which would combine all these factors—the average of each total was calculated according to the methodology used by Cyrino and col-leagues (2010). Last, each country selected was given a general indicator of psy-chic distance in relation to Brazil. The operationalization of each dimension of the psychic distance construct and the data sources are presented in Figure 1.

Data on Brazilian exports between 2002 and 2011 were obtained on the website of the Foreign Trade Information Analyses System (ALICEWeb), developed and updated by the Foreign Trade Secretariat (SECEX) of the Ministry of Development, Industry and Foreign Trade of Brazil. Data posted on the ALICEWeb site was obtained from the Integrated Foreign Trade System, where all Brazilian imports and exports are registered. According to size, firms are classified as very small, small, medium, and large, taking into account number of employees, value exported over a given period distributed by business/activity (industry and trade/services), in compliance with the parameters adopted by the Mercosur Southern Cone Common Market, as stipulated in the Mercosur-GMC Resolutions Nos. 90/93 and 59/98, with the adjustments made by the Secretariat of the Foreign Trade Planning and Development Department (DEPLA/SECEX).

The study in question was based on secondary data concerning the geo-graphic destinations of Brazilian exports, by company size, between 2002 and 2011. The secondary data used in this study may result in some limitations.

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Moreover, the manner in which the data are deployed in the ALICEWeb system bias the approach with respect to the research method. Gross data on Brazilian exports between 2002 and 2011, by country of destination, and

Figure 1. Psychic distance construct dimensions and data sources. Source: Adapted from Cyrino et al. (2010).

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size of enterprise, include no information on the type of industry in which these firms operate, nor any indication on how exports are made, that is, direct (the enterprise handles the whole process) or indirect (the enterprise uses trad-ing companies or other intermediaries). Further, this database encompasses all export companies in Brazil, without specifying whether they are subsidiaries of multinationals operating in the country. In general, this may influence the des-tination of the exports made by these firms, because commercial transactions may give priority to their markets of origin. Finally, although objective measurements have been used over the past few years to measure the physical distance construct, international business researchers have not reached consensus regarding its acceptance. Despite these limitations, the general belief is that they do not disqualify the main results obtained, such as the outcome of the research carried out.

Countries included in the study were chosen using two selection criteria: (1) countries with a constant export flow from Brazil between 2002 and 2011; (2) countries with information on the cultural distance dimensions studied by Hofstede, in order to allow the formulation of the psychic distance construct for each country. Sixty-three countries were chosen for the study, representing 84% of the total exports of very small companies throughout that period, 86% of small companies, 88% of medium, and 90% of large compa-nies. The GDP data of countries listed in this study were obtained from the World Economic Outlook Report of the International Monetary Fund, cover-ing the period 2002 through 2011, converted at constant prices to US dollars.

The ratio between the export destinations of very small, small, medium, and large Brazilian firms was analyzed using the Multiple Regression method, together with the psychic distance of these countries, the foreign market size, and the export volume. As the most widely used econometric estimation system, the OLS method was used to the find the best way to fit the data. The study was grounded on a cross-section of data on Brazilian exports between 2002 and 2011 as well as the size of exporting firms. This choice allowed the investigation of variations noted between volumes exported to each country, minimizing the possible discrepancies that could appear when if the analysis covered only one year.

This study is based on the model used by Dow and Karunaratna (2006) in their research, which aimed to assess the impact psychic distance had, among the 38 countries selected, on trade between 1993 and 1998, supported by the gravity models of traditional trade, such as Rauch (1999). The significant difference found lies in the substitution of the “geographical distance” variable and the variables related to the stimulus developed by the authors of the Psychic Distance Indicator, drawn up in accordance with the methodology used by Cyrino and colleagues (2010). This indicator substitutes the “dis-tance” variable originally present in the gravity model. Dow and Karunaratna (2006) also added the following dummy variables to enhance the original

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model: free trade agreements (FTA), which specify the countries belonging to the same trade bloc as that of the country of origin, and the “adjacent,” which pinpoints the countries that have a border with the territory of the country of origin. According to these authors, the existence of the variables may have a positive influence on the export volumes toward the country in question. In this model, the FTA variable was substituted by the Mercosur Southern Cone Market (a bloc Brazil belongs to), and the adjacent variable was substi-tuted by Border. The final regression specified by the model is described as:

1n Exportij ¼ b0 þ b11n½ðPIB�i � PIBjÞ þ b2 ln IDPj

þ b3Mercþ b4Front þ eij

Whereas lnExportij represents the natural logarithm of the Brazilian export revenues (i) to country j; b0 is the constant of the model; ln(PIBi*PIBj) is the natural logarithm of the product resulting from adding the Brazilian GDP (i) from 2002 through 2011 and the sum of the GDP of country j for 2002 to 2012, being a proxy for the market size of that country; lnIDPj repre-sents the natural logarithm of the Psychic Distance Indicator between country j and Brazil; Merc is a dummy variable showing if the country is a member of Mercosur; Front is a dummy variable showing if the country has a border with Brazil; and eij corresponds to the model error term. In accordance to the specification of the equation, the GDP, Mercosur and Border variables are expected to show a positive sign, while the Psychic Distance Indicator variable corresponds to a negative sign. The equation was applied to each company size included in the study: very small, small, medium, and large firms (63 countries) as well as the model efficiency tests that included the four situa-tions studied. gretl (Gnu Regression, Econometrics and Time-series Library) version 1.9.9 software was used to operationalize the regression models.

Results

Several multicollinearity, heteroscedasticity, and residuals distribution tests were used to check the basic assumptions of the OLS model. The Variance Inflation Factor (VIF) test was conducted to verify the probable multicolli-nearity of the equations. The test is conducted by VIF(j) ¼ 1/(1-R(j)^2), whereas R(j) is the multiple correlation coefficient between variable j and the other independent variable. Values higher than 10 would reveal the presence of a collinearity problem that was not noted during the research, as the variable values were; lnPIBxPIBBRASIL ¼ 1151; Mercosur ¼ 1622; Front ¼ 1892, and lnPDI ¼ 1463.

The White Test was conducted to check the presence of heteroscedasticity in the model in order to calculate the original equation squared residuals by regression against the original variables, their high squared values, and the regressor cross-products, allowing no linearity (Gujarati, 2006). Grounded

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on this test, none of the variations of the model tested rejected the null hypothesis “without heteroscedasticity” at the 5% statistical significance, nor was any heteroscedasticity detected.

Although the OLS method draws no assumptions on the probable distribution of the error terms (which is enough, provided the purpose of the analysis is merely the actual estimation of the regression model parameters), it should be assumed that the residuals follow the normal distribution, with a zero average and a constant variance σ2 (Gujarati, 2006). In all model variations, the null hypothesis that residuals are normally distributed was not rejected by the Kolmogorov Smirnov test at the 5% statistical significance, revealing that the error distribution was normal.

By measuring each one of the psychic distance dimensions (culture, Language, Religion, Education, Management, economics and industrial devel-opment, and geographical distance) as well as by creating a general psychic distance indicator for Brazil (PDI), the ranking of the 63 countries covered in this study could be prepared using this criterion. Further, it was also noted that countries in Latin America and Portugal are psychically closer to Brazil, while Asian and Scandinavian countries show the greatest distance. Figure 2 presents the ranking of fifteen countries selected as an example.

Based on different models, four regressions were carried out to check the research hypothesis, one for each size of the firms under study. The very small firms model rejected the F test with F ¼ 18.53191 and p-value ¼ 7.38e-10, confirming the general significance of the regression line. The adjusted R2

of that model is 0.53, as seen in Table 1. The PDI variable was significant when considering a 1% statistical significance, with p-value ¼ 0.00186, supporting the H1 hypothesis that the foreign market psychic distance for Brazil is negatively related with the export volume of Brazilian very small firms. The indicative PIBxPIBBrasil variable shows that the country’s market also revealed a significant 1% level with a p-value < 0.00001, support-ing the H5 hypothesis that the size of the foreign market is positively related to the export volume of Brazilian very small firms. The Border dummy

Figure 2. Ranking of 15 countries selected in accordance with the Psychic Distance Indicators. Source: Prepared by the authors.

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variable shows that if the country under analysis has a border with Brazil, the same was extensive at a 10% level, while the Mercosur dummy variable disclosing whether the market belongs to the same trade bloc as Brazil was not significant for the model.

The regression model used for small exporting firms presented similar results to those shown by very small companies, as illustrated in Table 2. Test F confirmed the importance of regression. The PDI variable was also signifi-cant, supported by hypothesis H2 stating that the psychic distance of the foreign market for Brazil is negatively related to the export volume of small Brazilian firms. The variable PIBxPIBBrasil was equally significant and positive, backing the hypothesis H4 that the size of the foreign market is positively related to the export volume of small Brazilian firms. The Border dummy variable was significantly related to the Mercosur dummy, and showed it had no importance in this regression.

As shown in Table 3, the regression model used for medium sized export companies presented similar results. The F Test confirmed the regression importance. The PDI variable was significant, and supported hypothesis H3 that the foreign market psychic distance for Brazil is negatively related to the exports volume of Brazilian average firms. The PIBxPIBBrasil variable was significant, supporting hypothesis H7 that the foreign market is positively related with the export volume of Brazilian average firms. Neither the Border dummy variable nor the Mercosur dummy were significant in this regression.

As shown in Table 4, a regression was carried out to analyze the ratio between exports of large Brazilian firms between 2002 and 2011 as well as

Table 1. Regression model results for very small firms. Coefficient Standard Error t-ratio p-value

Const � 25.3493 5.74249 � 4.4143 0.00004 *** ln_PIB_x_PIBBrasil 0.684418 0.0955071 7.1661 <0.00001 *** Mercosur 1.50291 0.960873 1.5641 0.12323 Front 1.18551 0.673162 1.7611 0.08349 * ln_PDI � 1.65265 0.50662 � 3.2621 0.00186 *** R2 0.561031 Adjusted R2 0.530757 F(4, 58) 18.53191 P-value(F) 7.38e-10

Statistical significance: *(0.05 < p < 0.1)/**(0.01 < p < 0.05)/***(p < 0.01).

Table 2. Regression model results for small firms. Coefficient Standard Error t-ratio p-value

Const � 24.8252 5.72536 � 4.3360 0.00006 *** ln_PIB_x_PIBBrasil 0.713095 0.0952223 7.4887 <0.00001 *** Mercosur 1.40613 0.958008 1.4678 0.14757 Front 1.18691 0.671155 1.7685 0.08224 * ln_PDI � 1.35377 0.505109 � 2.6802 0.00956 *** R2 0.560225 Adjusted R2 0.529896 F(4, 58) 18.47141 P-value (F)P-value(F) 7.77e-10

Statistical significance: *(0.05 < p < 0.1)/**(0.01 < p < 0.05)/***(p < 0.01).

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the psychic distance of foreign markets and their market size. Test F confirmed the importance of the regression. In this case, the PDI variable was not significant for the model, nor did it support hypothesis H4 that the foreign market psychic distance for Brazil is negatively related to the exports volume of large Brazilian firms. The PIBxPIBBrasil variable was significant, and backed hypothesis H8 that the size of the foreign market is positively related to the exports volume of large Brazilian firms. Neither the Border dummy variable nor the Mercosur dummy were significant.

Thus, among the formulated research hypotheses, only H4 was not supported by the econometric model used, while the foreign market psychic distance for Brazil was not significant for the export volume of large firms. However, from the viewpoint of the theoretical benchmark used in this study, this result was expected.

Conclusion

Although the subject of the relationship between selecting foreign markets, psychic distance, and economic decision-making criteria has become popular in recent decades in the international business literature, few studies have used a quantitative approach to back statistically their conclusions. The study summarized herein was based on a foreign-trade econometric model adapted specifically to addressing psychic distance and market size and their relationships with Brazilian exports, thus contributing to enriching the discussion in this field and bringing new inputs to future studies. The results of this study contribute to new academic and management discussions

Table 4. Regression model results for large firms. Coefficient Standard error t-ratio p-value

Const � 21.27 5.10546 � 4.1661 0.00010 *** ln_PIB_x_PIBBrasil 0.738327 0.0849123 8.6952 <0.00001 *** Mercosur 1.10045 0.854281 1.2882 0.20281 Front 0.898804 0.598487 1.5018 0.13858 ln_PDI � 0.72294 0.45042 � 1.6050 0.11392 R2 0.596779 Adjusted R2 0.568971 F(4, 58) 21.46044 P-value(F) 6.66e-11

Statistical significance: *(0.05 < p < 0.1)/**(0.01 < p < 0.05)/***(p < 0.01).

Table 3. Regression model results for medium-sized firms. Coefficient Standard error t-ratio p-value

Const � 22.5077 5.37955 � 4.1839 0.00010 *** ln_PIB_x_PIBBrasil 0.70276 0.0894708 7.8546 <0.00001 *** Mercosur 1.20114 0.900144 1.3344 0.18729 Front 1.17958 0.630617 1.8705 0.06646 * ln_PDI � 1.21343 0.474601 � 2.5567 0.01321 ** R2 0.574962 Adjusted R2 0.545649 F(4, 58) 19.61461 P-valor(F) 2.96e-10

Statistical significance: *(0.05 < p < 0.1)/**(0.01 < p < 0.05)/***(p < 0.01).

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on corporate internationalization and seek to encourage the development of public policies to further a more consistent foreign inclusion of national companies. With a clearer understanding of small and large export firms, it becomes possible to encourage these firms, which already operate internationally, to look for new markets to increase the export coefficient of Brazilian companies: since they already have export experience, the diversifi-cation of their operations elsewhere in the world tends to be more successful than companies that have never exported (Castelar, 2002).

The assessment of export destinations of very small, small, medium, and large Brazilian firms in the period 2002 to 2011 has helped prove the presence of precepts defended by both behavioral and economic approaches in the corporate internationalization process. First, psychic distance, as proposed by Evans and colleagues (2000) has proven to be negatively related to the export volume according to the selected foreign market. However, based on the model used in this study, psychic distance has not proven to be statistically significant for large company exports, confirming that the larger the firm the more willing it is to undertake internationalization-related risks (Javalgi et al., 2003). Indeed, large firms, with knowledge and experience of a certain market, perceive such risks as smaller (Forlani et al., 2008). It was also found in the four econometric models used that all company sizes had a positive and significant relationship between exports and the market potential of the destination country. The selection of international destinations would there-fore also be explained by the opportunities offered by the market potential and size, which would attract export company managers in that direction.

Recommendations for future research include (1) a study seeking to define relevance ranking between the factors that explain the choice of export destinations, which would enrich the understanding of the selection of markets according to company size; and (2) quantitative research relating psychic distance with entry modes other than exports (i.e., a way of checking how the differences in the relationship between the level of commitment to the market and psychic distance occur in practice).

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