Psychic distance, psychic distance paradox and behavioral economics: Modeling MNC entry behavior in foreign markets
Hamid Hosseini
Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), 2008, vol. 37, issue 3, 939-948
Abstract:
Assuming that MNCs face a much more complex environment that local enterprizes, the paper begins by discussing what economist Beckerman called psychic distance. After a historical discussion of this concept, I also discuss what O'Gardy and Lane called psychic distance paradox. Then, I argue that these two concepts have a great deal of relevance beyond their original intent of international trade-they are also relevant to FDI and all other formas of international production and exchange. Next, I argue, as I have done in several previous papers, that behavioral economics has a great deal of relevance to FDI and international productive activity; I also argue that behavioral economics can be utilized to describe the concepts of psychic distance and psychic distance paradox. Then, I develop a behavioral economics-based model that can explain the concepts of psychic distance and psychic distance paradox, and their relevance to the modes of entry of MNCs in international markets. In doing so, I argue that FDI and MNC behavior in general need not be explained outside of economics, since, in contrast to neo-classical economics, behavioral economics is capable of capturing the complexities of global markets.
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:soceco:v:37:y:2008:i:3:p:939-948
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