Ex-post Performance Implications of Divergence of Managers’ Perceptions of ‘Distance’ From ‘Reality’ in International Business

Abstract

Despite much research on “distance”, little attention has been paid to the effect of divergence of managers’ perceptions of distance from reality (i.e. distance divergence) and its implications for firm performance. This knowledge is highly important since managerial perceptions of the firm’s environment do not always coincide with the actual environmental characteristics. Consequently, strategies based on inaccurate data may result in erroneous forecasts, missed opportunities and business failure. Using survey data from senior managers of Swedish exporters and corresponding objective data, this study is a first attempt to explore the ex-post performance implications of “distance divergence” when expanding into foreign markets. Our results demonstrate that the larger the divergence between managers’ perceptions of cultural distance and corresponding “objective” distance, the lower the performance expressed in companies’ sales. However, over/underestimation of cultural distance does not have differential effects on firm performance.