International Journal of Emerging MarketsInternational trajectories of Brazilian companies: Empirical contribution to the debateon the importance of distanceAlvaro Bruno Cyrino Erika Penido Barcellos Betania Tanure

Article information:To cite this document:Alvaro Bruno Cyrino Erika Penido Barcellos Betania Tanure, (2010),"International trajectories of Braziliancompanies", International Journal of Emerging Markets, Vol. 5 Iss 3/4 pp. 358 - 376Permanent link to this document:http://dx.doi.org/10.1108/17468801011058424

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International trajectoriesof Brazilian companies

Empirical contribution to the debateon the importance of distance

Alvaro Bruno CyrinoFundacao Getulio Vargas, Sao Paulo, Brazil

Erika Penido BarcellosFundacao Dom Cabral, Sao Paulo, Brazil, and

Betania TanurePUC Minas, Nova Lima, Brazil

Abstract

Purpose – It has been argued in the international business literature that companies begin theirinternationalization trajectories by entering countries that are geographically and psychically closestto the country in which their home market is located before entering more distant ones. This paperaims to verify whether this assertion is correct for Brazilian companies. If it is correct, the companieswould be expected to begin their international expansion in countries within the Latin America region.Not only is this region closest in geographical distance, but also it is most similar to Brazil in manyother important dimensions.

Design/methodology/approach – This paper is an exploratory and quantitative researchundertaken with a sample of 109 national capital companies selected from the 1,000 largestBrazilian companies in 2001 net revenues.

Findings – Empirical findings indicate that countries in Latin America have been most frequentlychosen by Brazilian companies for their first expansions into international markets. Nevertheless, somecompanies choose divergent trajectories, initially entering markets that are geographically andpsychically more distant. Those companies enjoyed structural features of certain sectors (commodities orglobal sectors), in which the importance of psychic distance is smaller in the face of economic transactions.

Research limitations/implications – An important limitation of this paper is the impossibility totest the hypotheses in specific countries or markets. The authors are forced to analyze the psychicdistance effect among regions, with the risk of not accounting for important intra-regional differences.

Originality/value – The data presented in this paper have clarified some patterns and trajectories ofBrazilian companies in international markets.

Keywords Emerging markets, Globalization, Multinational companies, Brazil

Paper type Research paper

1. IntroductionSince the early 1990s, driven by globalization forces and the country’s economic andinstitutional changes, large Brazilian companies have entered a new stage in theirinternationalization process. In response to the government’s policies and initiatives ofliberalization, privatization and economic stabilization, business firms in Brazilhave adjusted their strategies to become more aggressive in the international arena.

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1746-8809.htm

JEL classification – M16, F23

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International Journal of EmergingMarketsVol. 5 No. 3/4, 2010pp. 358-376q Emerald Group Publishing Limited1746-8809DOI 10.1108/17468801011058424

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Their early activities, which were mainly export-based, have changed to morecommitted forms of foreign investment and a reconfiguration of their value chain to meetincreasing domestic and global competition. As a result, outward foreign directinvestment (OFDI) has reached higher plateaus and introduced new challenges forcompanies that have traditionally developed their business models and practices in aprotected and strongly regulated environment Table I.

Most of the new Brazilian multinationals are in the natural resource sector (steel,iron ore, pulp and paper, cement, and energy), intermediate manufacturing sector(electrical motors or auto parts), aviation or heavy construction. Only a minority of thenew Brazilian multinationals operate in the consumer goods sector (Vale ColumbiaCenter on Sustainable International Investment, 2007). According to a recent ranking,the most Internationalized Brazilian Transnational Corporations using UNCTAD’sinternationalization index are: Gerdau (steel), Sabo (auto parts), Marfrig (processedfood), Vale (mining), and Metalfrio (commercial refrigeration). The subsidiaries of the40 companies that compose the ranking are located primarily in Latin America. Theaverage regionality indexes are 46 percent for Latin America, 17.1 percent for NorthAmerica, 20.6 percent for Europe, 4.6 percent for Africa, 10.7 percent for Asia, and0.4 percent for Oceania (Fundacao Dom Cabral, 2009).

Some small- and medium-sized companies are also becoming moreinternationalized – either induced by powerful customers or as stand-alone globalniche players, usually in fast moving markets. While most internalization trajectoriesof Brazilian companies are strongly influenced by industry factors and rooted in thefirms’ particular histories, there are some noticeable characteristics underlying therecent internationalization efforts of Brazilian companies.

Year IFDI (Flow) OFDI (Flow)

1989 1,129 5231990 989 6251991 1,102 1,0151992 2,061 1371993 1,290 4921994 2,149 6901995 4,405 1,0951996 10,791 24691997 18,992 1,1151998 28,855 2,8541999 28,578 1,6902000 32,779 2,2812001 22,457 22,2572002 16,590 2,4822003 10,143 2492004 18,145 9,8062005 15,066 2,5162006 18,822 28,2022007 34,584 7,0662008 45,060 20,457

Note: Millions of US dollarsSource: Banco Central do Brasil

Table I.Inward and OFDI

(IFDI/OFDI) flows forselected years

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As late entrants, and with relatively limited experience in international operations,Brazilian multinationals are facing entirely new challenges. Doing business andmanaging operations in other countries require a thorough understanding of the habitsand idiosyncrasies of each culture in which the company chooses to operate.

In deciding whether or not to locate some of a company’s activities in a foreigncountry, market and economic considerations play an important role. However, thesimilarities and differences among cultures and institutional environments should betaken into account also, particularly in the mode of entry decisions (Root, 1987).

The concept of psychic distance introduced by Uppsala researchers (Vahlne andWiedersheim-Paul, 1973) has proven to be helpful not only to explain patterns of entrydecisions, but also to increase the likelihood of making successful internationalstrategic decisions.

This paper aims to contribute to the understanding of some characteristics of theBrazilian multinationals international trajectories based on the concept of psychicdistance. In order to achieve this objective, we have developed a multidimensional scaleto measure psychic distance that is based on previous literature on the subject andhave applied it to measure psychic distances of various countries and geographicalregions in relation to Brazil.

The paper is organized in seven sections. Following this brief introduction, Section 2analyzes the main contributions of the concept of psychic distance and the metrics used inthe literature. Section 3 refers to previous studies that sought to evaluate psychic distanceamong different countries, including Brazil. Section 4 develops a multidimensional scaleto measure psychic distance between Brazil and other companies/regions. The researchmethods are discussed in Section 5. In Section 6, empirical data on internationaltrajectories using the psychic distance concept are given. The final section is dedicated tothe discussion of the results, conclusions and limitations of the present research.

2. The concept of psychic distanceLogistic issues related to distance have long dominated foreign trade and internationalbusiness studies. The notion of geographical distance and its impact on costs havebeen important issues to consider when making business decisions in internationalmarkets. The progress of transportation technology, logistics, and communicationshas significantly changed the current setting by reducing distances between countriesand the costs of gaining access to markets. The advent of e-commerce and integratedlogistics has led some experts to proclaim the “death of distance” (Doz et al., 2001),while other scholars argue that this premise is not only incorrect, but also dangerous(Ghemawat, 2001).

Although it is a fact that geographical distance has become less important, thiscannot be said about cultural, institutional, administrative, and economic aspects(Ghemawat, 2007). Instead, their importance has been gaining strength in bothpractical and theoretical terms in international business activities.

Those dimensions mentioned by Ghemawat are included in the notion of psychicdistance. This concept has, in reality, changed significantly in the literature oninternational business. Vahlne and Wiedersheim-Paul (1973) initially defined psychicdistance in terms of factors that hinder the flow of information between suppliers andclients. Later, Nordstrom and Vahlne (1994) conceptualized the term as “[. . .] factorsthat hinder companies’ learning process about an international environment, or make it

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difficult for companies to do so [. . .]” More recently, O’Grady and Lane (1996) definedpsychic distance as:

[. . .] the degree of a company’s uncertainty in regard to an international market, which resultsfrom differences and other business-related difficulties that create barriers for learning aboutthe market and for the establishment of international operations.

It is worth noting that the definitions above express the term “psychic distance”as broader than mere “cultural distance,” considering that it includes not only culturaldifferences, but also structural elements (or business elements), such as those that arisefrom different administrative, economic and legal systems, as well as language andreligious differences. Alternatively, according to Freire and Rocha (2003), some authors(Lee, 1998; Swift, 1999; Gomes and Ramaswamy, 1999) prefer to use the expression“cultural distance” to encompass all of these aspects, because all of these phenomenaare associated with, or included in, the concept of culture.

For this study, we use the term “psychic distance” among countries to indicatesomething that is broader than what is implied by “cultural distance,” according to thedefinition that includes both cultural and business elements in the psychic distanceconcept.

Cultural distance has been a key aspect of literature in international business(Agarwal, 1994; Kogut and Singh, 1988; Li and Guisinger, 1991; O’Grady and Lane,1996; Swift, 1999; Gomes and Ramaswamy, 1999; Lee, 1998).

Most studies on this subject are based on the five dimensions of national culturedefined by Hofstede (1980, 2001) in his pioneering and widely accepted studies on therelationship between work values and natural culture: power distance, uncertaintyavoidance, individualism vs collectiveness, masculinity vs femininity, and long-termorientation vs short-term orientation.

For example, using Hofstede’s first four dimensions, Kogut and Singh (1988)developed a compound index to determine the cultural distance between two countries.Later, a number of studies used the formula developed by Kogut and Singh (1988), or amodified version, as a parameter to measure cultural distance (Agarwal, 1994; Fletcherand Bohn, 1998; Padmanabhan and Cho, 1996).

Although cultural distance has often been the focus of literature on internationalbusiness, the dimension that refers to business practices and attitudes included in thepsychic distance concept has been less explored by researchers (Evans and Mavondo,2002; Ghemawat, 2001).

This dimension appears in the studies of psychic distance conducted by Vahlne andWiedersheim-Paul (1973, 1977), Luostarinen (1980), Klein and Roth (1990), Nordstromand Vahlne (1994), Evans and Mavondo (2002) and Ghemawat (2001).

Vahlne and Wiedersheim-Paul (1973) basically used objective indicators to measurepsychic distance, including levels of economic development and education, differencesin “business language” and the existence of trade channels. In his study of theinternational business operations of Finnish companies, Luostarinen (1980) measuredpsychic distance similarly, using data concerning economic development, language andlevel of education. Another study conducted by Klein and Roth (1990) used, as a startingpoint, a number of factual indicators (language, standard business practices, economicenvironment, legal system, and communication infrastructure), measured by a Likertscale.

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Another analysis of the differences by Ghemawat (2001) suggests that the distancebetween two countries can be manifested in four distinct dimensions. They are:

(1) cultural dimensions (different languages, ethnic groups, religion, and socialrules);

(2) administrative dimensions (lack of colonial ties, lack of shared monetary andpolitical institutions, political hostility, government policies, and institutionalweaknesses);

(3) geographical dimensions (physical isolation, absence of common borders, lackof access by sea or river, size of the country, inadequate transportation andcommunication infrastructures, and climatic differences); and

(4) economic dimensions (differences in consumers’ incomes and costs and qualityof intermediary inputs (natural, financial, and HR), information, knowledge, andinfrastructure).

Dow and Karunaratna (2006) developed and tested potential indicators of psychicdistance. The majority of the indicators, such as the differences between languages,political systems, industrial development and educational level, proved to be statisticallysignificant factors in predicting the flow of trade among countries. This study also notedthat geographical distance is an important factor in predicting the flow of trade betweencountries. However, the most frequently used component when measuring distancesbetween countries, an index comprised of Hofstede’s (1980, 2001) cultural dimensions,proved to be statistically insignificant. The authors also contend that it is inappropriate touse an index that comprises the Hofstede scales as the only indicator of psychic distancebecause the cultural factor is only one component of a much broader set of psychic distancefactors that hinder successful intercultural management (Dow and Karunaratna, 2006).

3. Psychic distance between Brazil and other regionsA number of studies have identified groups of countries that have psychic similarities.Ronen and Shenkar (1985) revised empirical papers and included the results of eightstudies conducted on this subject. Five groups of countries consistently emerged in anumber of research projects that studied beliefs and attitudes about work andmanagement. They were the Anglo-Americans, the Germanics, the Latin European, theLatin American and the Nordic group. Some countries, however, have a low affiliationto any of these groups. They may belong to different clusters within the studies thatwere analyzed and were classified as independent countries by Ronen and Shenkar.Geography, language, religion and level of economic and technological developmentare, according to Ronen and Shenkar (1985), the most important factors whenclassifying countries in their studies.

Brazil was classified as an “independent country” because it was not a part of anygroup in most of the studies mentioned. In some studies, such as that conducted byHofstede (2001), Brazil was included in the group of countries that were classified asLatin European. Other studies, such as those conducted by Leite (1981) and Inglehart(1997), showed that Brazil is closer in culture to Latin American countries. This isexplained in more detail below.

Leite (1981) used a seven-point scale of the Likert type ranging from “very similar” to“very different” to measure the psychic distance between Brazil and 34 other countries.

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In general, no country was considered to be “very similar” to Brazil. The three countriesof the 34 that were seen as being culturally close to Brazil were Portugal, Uruguay, andArgentina. The next closest countries to Brazil, albeit somewhat more distant, were othercountries that have a Latin culture. They were Venezuela, Colombia, Spain, Mexico,Paraguay, Bolivia, Peru, and Chile. Canada and the USA head the list of countries thatwere perceived to be “different.” Syria, Hong Kong, India, Japan, and Kuwait wereperceived to be “very different” from Brazil.

Brazil was also seen as being culturally close to Latin countries in a study onmodernization and post-modernization that was conducted by Inglehart (1997). Theauthor analyzed the values of 43 societies on two dimensions. The first dimensionconcerns orientation by traditional authorities (family or religious institutions) or by arational, secular authority (political institutions), while the second dimension indicateswhether the values concern survival (motivation for economic achievements) orwell-being (concerns about the sense and purpose of life). The results point to theexistence of eight similar groups. These are Catholic Europe, Protestant Europe, formerCommunist countries, South Asia, Confucianist countries, Latin America, andEnglish-speaking countries. Brazil is a member of the Latin American group, togetherwith the other South American countries. The author suggests that, from a globalperspective, Latin American countries have similar value systems.

4. Measuring psychic distanceIn order to analyze the relationship between psychic distance and the selection offoreign markets by Brazilian companies, we developed a multidimensional instrumentto calculate the psychic distances between Brazil and a list of countries studied byHofstede (2001).

This multidimensional instrument was composed of seven dimensions: culture,language, religion, education, administration, economic/industrial development, andgeographical distance.

We used Kogut and Singh’s (1988) composite index to measure cultural distance andan adaptation of Dow and Karunaratna (2006)’s methodology to measure differencesamong languages and religions. In order to guarantee reliable data for most of thecountries of the sample, we adopted indicators defined by the World Economic Forum(WEF, 2006) in the administration and economic/industrial development dimensions,along with democracy indicators defined by Dow and Karunaratna (2006). The educationdimension measured differences between Brazil and the other countries’ indexes of healthand primary education, as well as higher education and training, as defined by the WEF.The administrative dimension measured differences in democracy and institutions, whilethe economic and industrial development dimension included differences in indicators forinfrastructure, macroeconomic stability, goods market efficiency, labor market efficiency,financial market sophistication, technological readiness, business sophistication andinnovation, according to the WEF’s definitions and data.

The countries’ scores for each indicator were calculated as a percentage of thehighest distance in relation to Brazil. Apart from the cultural distance dimension,which was calculated as Kogut and Singh’s (1988) composite index, the dimensionswere given by the average of their indicators (Tables II and III).

The calculation of each region’s psychic distance from Brazil was made usingthe average of the psychic distances from Brazil to the countries in that region.

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This allowed us to adopt a nominal increasing scale of psychic distance from Brazil asfollows: Latin America, Europe, Africa, North America, Middle East, and Oceania, andAsia (Table IV). It is interesting to notice that our measures place Latin America as theclosest region to Brazil in all dimensions, except for cultural and administrativedimensions. The proximity of Europe to Brazil derives mainly from Brazil’s culturalheritage – first from Portugal, its former colonizer, and later by the immigration flowsfrom other European countries, which influenced educational practices andadministrative institutions. Africa is the region that is closest to Brazil in cultureand also relatively similar in economic/industrial development terms.

5. MethodologyThis work was based on a survey of 109 national capital companies selected from the1,000 largest Brazilian companies in 2001 net revenues.

One of the parts of the questionnaire focused on the sequence of entries by Braziliancompanies to international markets (year of entry and chosen market), using open-ended

Dimension Description Data sources

Culture Kogut and Singh’s (1988) composite index Hofstede (2001)Language (Distance between the Portuguese language

and the other country’s language þ incidenceof other country language in Brazil)/2

Dow and Karunaratna (2006)

Religion (Distance between the Roman Catholicreligion and the other country’sreligion þ incidence of the Roman Catholicreligion in the other country þ incidence ofthe other country’s major religion in Brazil)/3

Dow and Karunaratna (2006)

Education (Differences between WEF’s index of healthand primary education for Brazil and theother countries þ differences between WEF’sindex of higher education and training forBrazil and the other countries)/2

WEF (2006)

Administration Average of the following measures: differenceamong WEF’s index of institutions, differenceamong Henisz’s (2000) POLCON measure(average score for 1990-1994), differenceamong Freedom House political rights scale,difference among Freedom House civilliberties scale

WEF (2006), Henisz (2000) andFreedom House (2007)

Economic/industrialdevelopment

Average of the following measures:differences between WEF’s indexes of basicrequirements, infrastructure, macroeconomy,efficiency enhancers, market efficiency,technological readiness, innovation factors,business sophistication, and innovation forBrazil and the other countries

WEF (2006)

Geographical Travel distance between Brazil and the othercountries

www.mapcrow.info

Note: The countries’ scores in each dimension were calculated as a percentage of the highest distancefrom Brazil

Table II.Description of thedimensions and their datasources

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questions to obtain information. The computation of the qualitative answers forced theresearchers to sacrifice the categories’ precision (by country) for the benefit ofrepresentation (by region). Thus, the regions into which the figures were grouped are:Latin America, North America (the USA and Canada), Europe, Africa, Asia, andOceania. (Mexico was included in Latin America, despite the fact that, geographically, itis located in North America).

The sample and the population were compared on several variables (net revenues,number of employees and sectors) to verify that the sample could be considered to berepresentative of the population. For number of employees, the sample and thepopulation showed similar distributions, but for net revenues, the sample contains ahigher percentage of larger companies than found in the population. Using anindependent t-test, the sample was found to be representative of the population for thedimensions of net revenues and number of employees at a 95 percent confidence interval,with data adjusted to correct for skew. However, the sample has a lower percentage ofcompanies from the services sector and a higher percentage of companies from theindustrialized products sector than does the population. (See the Appendix for furtherinformation on the statistical representativeness of the sample).

Dimensions of psychic distancea

CountryCulture

(%)Language

(%)Religion

(%)Education

(%)Administration

(%)

Economic/industrial

development(%)

Geographical(%)

LatinAmerica 19 38 24 11 28 24 18NorthAmerica 45 63 40 59 27 73 41Europe 39 80 44 38 32 51 47Africa 12 82 71 49 48 25 48MiddleEast 10 99 93 20 65 33 60Asia 24 93 85 25 50 49 91Oceania 53 67 47 48 35 58 73

Note: aThe countries’ scores on each dimension were calculated as percentages of the highest distancefrom BrazilSource: Authors’ calculations, according to the descriptions provided in Table I

Table III.Psychic distance fromBrazil by regions and

dimensions

Region Psychic distance from Brazil (%)

Latin America 23.10Europe 47.20Africa 47.80North America 49.80Middle East 54.20Oceania 54.30Asia 59.70

Source: Authors’ calculations, based on data from Tables II and III

Table IV.Psychic distance from

Brazil

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Research hypothesesFor analytical purposes, psychic distance should be understood to be the magnitude ofthe difference between countries in aspects that may hinder or facilitate continuedbusiness relationships between producers and consumers. The dimensions used in thisstudy are in accordance with the empirical studies mentioned in the literature review,which classify psychic distances according to similarity/familiarity/promptness inaccessing zones.

The main goal of this work is to examine the path that Brazilian companies take toenter international markets. This goal can be translated into research hypotheses thatwe identified in the extensive psychic distance literature.

The first hypothesis below concerns the entrance sequence of companies tointernational markets:

H1. The companies’ paths to international markets initially lead to countries thatare the least psychically distant from Brazil.

Based on the idea that the accumulation of knowledge and learning requires time andexperience, the second hypothesis is:

H2. Given the knowledge and learning accumulation required for entry todifferent countries, companies enter markets that are successively moredistant from their home market.

These two first hypotheses are coherent with the finding of Johanson and Vahlne’s(1990) behavioral theories of internationalization, as well as the findings of Shohamand Albaum (1995).

The third hypothesis refers to divergent paths of Brazilian companies. It is believedthat, when companies first entered markets other than those of Latin America, thechoices were in accordance with the industry type or the sector to which they belonged.Consequently:

H3. Companies that entered culturally distant markets enjoyed structural featuresof certain sectors (commodities or global sectors), in which the importance ofpsychic distance is smaller in the face of economic transactions.

Studies concerning distance have not taken into account, at least explicitly, the impactof moderating factors related to the industry structure to which the companies belong.In the commodity sectors (iron and agribusiness), where the companies’ products arestandardized and markets function well, goods are easily negotiated betweencountries, even between those that are culturally distant. Conversely, companies thatbelong to global sectors, including more sophisticated and technologically complexsegments of industrial goods and services, such as aeronautics, naval, biotechnology,software, and others, are structurally linked to international markets in order tosurvive since their conception.

6. Explaining the international trajectories of Brazilian multinationalsIn regard to the companies’ paths, the research findings corroborate H1 and H2. Thus,47 percent of the companies began their international expansion in Latin Americancountries, 21 percent in European countries and 18 percent in North America (the USAand Canada). Only 14 percent of the companies began their international expansion on

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other continents, such as Africa (5 percent), Middle East (3 percent) or Asia (6 percent)(Figure 1).

In view of the magnitude of the distances, most companies’ first foreign marketentry was in Latin America, Europe or North America, which are the first, second, andfourth psychically closest regions, respectively, to Brazil. Only a few of the companiesbegan their internationalization in more distant regions, such as Asia or the MiddleEast. However, although our study reveals that Africa’s psychic distance from Brazil isalmost the same as Europe’s, the percentage of companies that chose African countriesas their first markets is much smaller than the percentage of companies that entered aEuropean country first. This may be explained by the importance of the market size inthe entrance decision.

In general, the paths of Brazilian companies in international markets are coherentwith the gradualist perspective of the behavioral approach of internationalization,which states that companies choose to enter countries that are closer in terms ofpsychic distance in order to accumulate experience in those markets before enteringsuccessively more distant countries. Thus, among those companies that began theirinternational operations in Latin America, 58 percent of them chose Latin America fortheir second entry, and 49 percent for their third market entry (Figure 2).

On average, the companies that expanded to Latin America first entered twoadditional countries in this region before entering other regions. In the case ofcompanies that have not yet expanded beyond Latin America to other regions(35.5 percent), we considered the number of countries that they entered until 2001 (theyear in which the data were collected). The time spent by the companies in the region isalso an indicator of the accumulation of learning and experience. The average timespent in Latin America before expanding to other region is five years. In the case ofcompanies that have yet to expand from Latin America to other continents, weconsidered the length of time from their entrance until 2001.

The findings also corroborate the H2 that, as companies were consolidating theirexperience in closer markets, they were prone to running greater risks, entering

Figure 1.Entrance sequence

of companies surveyedby region

Source: Research data

21%22%

9%

7%

14%

5%7%

14%

7%7%

6% 9% 9%

29%29%

2%

3%2% 4%

4%

0

10

20

30

40

50

60

70

80

90

100

Firstmarket

Secondmarket

Thirdmarket

Fourthmarket

Fifthmarket

Oceania

Asia

Middle East

Africa

Europe

USA and Canada

Latin America

Perc

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countries progressively more distant. The percentage of Asian countries that wereinternational markets of Brazilian countries grew from 5 percent in the first market to29 percent in the fifth market, whereas the percentage of Latin America countries asinternational markets decreased from 47 percent in the first market to 18 percent in thefifth market. After the first entrance, African and Middle East countries also began torepresent a greater percentage of Brazilian companies’ markets.

In the analysis of the period between the companies’ entry to different internationalmarkets, one can observe the expression of the experience effect, which, according tothe theory, can be attributed to learning accumulation and its impact on thedevelopment of competences to operate internationally. Therefore, the time spent fromthe companies’ foundation to their entrance to the first foreign market (an average of28 years and a median of 22 years) is significantly longer than the period between theirentry to the first market and their entry to the second market (an average of four yearsand a median of one year). These numbers decrease even more, to an average of twoyears and a median of one year, between the entrance to the second market and theentrance to the third market, demonstrating that the companies feel more confident andcapable after their first international experience, so that they become bolder in theirinternational activities (Figure 3).

The nature of the learning process is also emphasized when one compares theinternational market entry pattern with the entry mode. The behavioral school ofinternational business points out the incremental style of the internationalizationprocess, which starts with a lower level of commitment (in general, through exports)and moves to a higher level of commitment (for example, production facilities obtainedby mergers and acquisitions or through greenfield). A research study of the entrymodes of Brazilian companies to foreign markets confirms the assumptions of theNordic school (Cyrino and Oliveira Junior, 2003).

Our study also demonstrates that 86 percent of the companies surveyed usedindirect or direct exports to enter international markets. This proportion is virtually thesame for companies that entered Latin America or other regions. In addition, the greatmajority of companies that have established commercial or production subsidiariesabroad are among those companies that first internationalized in Latin America,showing that companies that began with psychically closer markets in order to gain

Figure 2.Market entry sequence ofthe companies surveyedthat first expanded toLatin America, by region

Source: Research data

100%

58%49%

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experience before moving to more committed forms of internationalization haveachieved the latter.

The figures also confirm the H3, since the companies that have diverged from thegradualist pattern and have chosen to enter psychically more distant countries are partof the agribusiness or the commodities industries. Such companies used exports as partof their internationalization strategy, usually dealing directly with local importers ofpsychically more distant countries. In general, the negotiations were done by means ofinstitutions or universal market methods, which reduce the need for interaction andcommunication between producers and consumers. Thus, all of the companies in thesample that entered Asia first (6 percent), for example, are part of the agribusiness orthe commodities sectors.

7. Discussion and conclusionThe findings of this work support the gradualist thesis proposed by the Uppsala school( Johanson and Vahlne, 1992; Shoham and Albaum, 1995) with respect to the entrancepattern of Brazilian companies in international markets. The concept of psychicdistance was strong enough to explain the behavior in international markets of thesurveyed companies, even though the data were not useful to generate a more refinedanalysis of the differences among different countries.

The conclusions of this work are that most Brazilian companies first develop theircompetitive advantages in the domestic market and then, after many years ofaccumulating resources and competence, expand into international markets, usuallythrough exports. Companies first choose to enter similar markets in terms of culture,language, religion, education, and administrative and economic aspects, as well asgeography. In so doing, they reduce the risk of failure in international initiatives. Afterlearning to act within psychically close markets, companies begin to progressivelyexpand to more distant countries, integrating their experience and know-howaccumulated from their international performance. More psychically distant marketsare, in general, the last to be approached and only when past international experiencehas been sufficient to outweigh the risks involved in entering new markets.

The divergent behavior identified refers to companies of commodities andagricultural sectors. Among these segments, specifications, prices and commercial

Figure 3.Period between entrancesto foreign markets by the

companies surveyedSource: Research data

28

4

2

22

1

1

0 5 15 2510 20 30

From domestic market tofirst foreign market

From first to secondforeign market

From second to thirdforeign market

Median (years)

Average (years)

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rules are well disseminated, which facilitate market transactions with or without thehelp of intermediaries. The impact of local features on decisions seems to vary whencompanies increase their activities in international markets via more committed formsof internationalization, with the setting up of commercial subsidiaries or foreign directinvestment.

The importance of psychic distance when selecting markets is emphasized whenone compares the companies’ motivation to internationalize. Our research shows thatthe main motivations for a Brazilian company to internationalize its operations are:

. to obtain economies of scale (in a scale of 1 – strongly disagree to 6 – stronglyagree, 70 percent agree, with a rate of 4-6);

. to explore location advantages (50 percent agree, with a rate of 4-6); and

. to learn in order to develop competences to act in new international markets(52 percent agree, with a rate of 4-6).

Comparing the companies’ stated motivations and their market choices, one canidentify a contradiction. If the goal is to obtain the economies of scale, why do most ofthe companies first expand into Latin American countries, where the market size is somodest in comparison to the USA, Europe, and Japan? Similarly, if Brazilian companieswanted to explore location advantages, why did they internationalize by exporting toLatin America, where countries benefit from similar comparative advantages, such aslow labor costs?

A likely explanation can be found in the smaller psychic distance between Brazil andother Latin America countries. Given the fact that most companies want to learn, itseems likely that they also recognize the challenges of managing the internationalizationprocess. This can favor the entry to more closely similar markets before adventuringthrough more psychically distant regions.

Another fact that corroborates this hypothesis is that some companies tend toconsider neighboring countries as similar, given the geographical proximity and alsosimilarity of language structure – as in the case of Brazil and Argentina. This can leadcompanies to underestimate other important dimensions of the psychic distanceconcept. These companies may experience the “psychic distance paradox” (O’Gradyand Lane, 1996). For example, while operating in South America, they are blinded bythe psychic proximity of those countries to Brazil.

Some Brazilian companies of the cosmetics, agribusiness and industrial sectorswere surprised by their failure in their first experience of international expansion toneighboring Latin American countries. One of the possible explanations for this failureis that Brazilian decision-makers presumed that countries such as Paraguay, Uruguay,and Argentina, close to Brazil in terms of geography and cultural background, could betreated as an extension of the Brazilian market. As a result, cultural differences anddifferent consumer preferences, as well as business practices, were underestimated,hindering the expansion to neighboring countries.

Conversely, many Brazilian companies, such as agribusiness and constructioncompanies, were very successful in expanding to psychically distant markets in theMiddle East. In this case, the effort of adapting products and processes to the countries’reality, clearly identified as different, demonstrated the importance of psychicdifferences between countries in international business.

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This work also raises some unanswered questions that came up in the analysis giventhe sample limitations and the initial focus of the research. Although internationalizationstudies have used the concept of psychic distance as a fundamental variable to explaincompanies’ behavior in their path to internationalization, the effect of moderate factorswas left to a second plan. Thus, the impact of the features of certain industries andsectors, as well as market size, can exceed the impact of psychic distance to facilitate orhinder the internationalization process. Certain “global” segments have consumers witha variety of preferences for, and expectations of, global trademarks. This could stimulatethe access of companies to markets culturally distant, for businesses such as those inluxury, franchising, fast food, agribusiness, and semi-industrialized commoditiessectors. This could also motivate companies to consider features other than psychicdistance in entering international markets (for example, the market economic potential).In this case, the importance of the psychic distance as an explicative factor could bemoderated by these industry factors. Alternatively, sectors with a strong localcharacteristic (restaurants, specialized retailing, and services) would be more sensitiveto institutional and cultural factors – thus potentially making the psychic distanceconstruct a possible explanation.

On the other hand, dynamic sectors that enjoy a high level of technology – such asnaval, aeronautics, and software – compel companies from their inception to accessglobal markets in order to achieve efficient scale of operation (Moen and Servais, 2002;Rennie, 1993). Accordingly, the selection criteria for foreign markets may not includepsychic distance. Hence, the importance of the different variables discussed above willvary, showing that the process is indeed dynamic and multidimensional.

While the data presented in this paper have clarified some patterns and trajectoriesof Brazilian companies in international markets, there are some important limitations.

One limitation of this research was the impossibility to test the hypotheses inspecific countries or markets. We were forced to analyze the psychic distance effectamong regions, with the risk of not accounting for important intra-regional differences.

We also recognize that the population of the 1,000 largest Brazilian companies haveundergone some changes from 2001 on, which presents another limitation of this study.However, since we dealt with the companies’ historical data (sequence of entry inmarkets, modes of entry), which were invariant for the companies surveyed, we foundno strong need to update the research.

Finally, another limitation of this study is the size of the sample and the statisticalgeneralizations regarding the conclusions. While the representativeness of the sampleholds for some dimensions (size, number of employees), it does not hold for others(industries and activities). This seems to be a recurring problem in the field of researchon multinationals from emerging markets, since they are, at this stage in Brazil,exceptions to those in other part of the world.

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Appendix. Analysis of the representativeness of the sampleIn number of employees, the sample and the population showed similar distribution Figure A1.

The comparison of the sample and the population’s annual net revenues shows a higherpercentage of larger companies in the sample than in the population (Figure A2).

Independent sample t-tests were used to compare the population and the sample means inannual net revenues and number of employees. The data for annual net revenues and the numberof employees were adjusted to correct for skewedness. The results confirmed that there were nosignificant differences between the sample and the population at a 95 percent confidence interval

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in the adjusted annual net revenues and the number of employees. Outliers were deleted from thepopulation and from the sample for this analysis Table AI.

The sectoral distributions of firms from the sample and from the population are presentedbelow (Figure A3). The sample analyzed has a lower percentage of companies from the servicesectors and a higher percentage of companies from the industrialized products sector incomparison to the population. This difference can be explained by the fact that 57 percent of theservice companies that make up the population of the 1,000 largest Brazilian companies areelectric energy, communication, and telecommunication, health care and sanitation companiesfrom the different Brazilian states. Those companies are not engaged in foreign activities, andhence were not interested in participating in the survey.

Figure A1.Distribution of the numberof employees – sample vspopulation

Source: Research data

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<499 500-999 1,000-1,999 2,000-2,999 3,000-3,999 >4,000

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Figure A2.Distribution of annual netrevenues (2001) – samplevs population

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About the authorsAlvaro Bruno Cyrino is a Professor and Researcher at Fundacao Getulio Vargas – Brazil. He hasa BSc in Business and Public Administration from the Federal University of the State of Parana –Brazil, a Diplome d’Etudes Approfondies, from the Universite de Technologie de Compiegne –France, and a PhD in Business Administration from the Ecole de Hautes Etudes Commerciales(HEC) – France, with a major in strategy. He has worked in executive positions at universities,public sector, and private companies, including international assignments. As a consultant in thefield of strategic management, he has been working for major Brazilian companies. His currentresearch interests include the field of strategy, with an emphasis on the resource-based view, andthe field international business, where he has concentrated on the internationalization process ofcompanies from emerging markets. Alvaro Bruno Cyrino is the corresponding author and can becontacted at: alvaro.cyrino@fgv.br

Erika Penido Barcellos is a Researcher at Fundacao Dom Cabral – Brazil. She graduated inCivil Engineering at the Federal University of Minas Gerais – Brazil. She has an MBA fromBoston University and is currently a master student in Business Administration at theUniversity of Sao Paulo. From 2002 to 2004 she worked as a project manager, and since 2005, as aresearcher at Fundacao Dom Cabral, where she has focused on studies related to the

Figure A3.Distribution of firms

by sector – samplevs population

Source: Research data

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Industrializedproducts

Services Commerce Agribusiness Others

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Sector

Mean SD Significance ( p-value)

Adjusted net revenues (in million Reais) SQRT (LOG10 (net revenues))Population 2.3047252 0.07608709 0.864Sample 2.3024238 0.12627638Adjusted number of employees SQRT (LOG10 (number of employees))Population 1.7084091 0.18715815 0.706Sample 1.7004648 0.18173503

Note: Independent t-test comparison of the population and sample means in adjusted net revenuesand number of employeesSource: Research data Table AI.

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international management, strategy, innovation, and leadership fields. She is also a consultant tothe Brazilian Ministry of External Relations since 2009 and teaches in postgraduate strategycourses.

Betania Tanure is a Professor at PUC Minas – Brazil and an Invited Professor at Insead, LBS,Trium (NYE, LSE, and HEC) and Fundacao Dom Cabral. She is a Psychologist from PUC Minasand a Doctor in Business Administration from Brunel University – England. She has severalarticles and cases published in Brazil and abroad such as the ones in JIBS and Harvard BusinessReview. She is the author of many books, such as The Brazilian Management Style, Mergers,Acquisitions and Alliances, and Organizational Culture and Brazilian Culture, and is co-author ofThe International Encyclopedia of Business and Management, Strategy and Management (withSumantra Ghoshal (LBS)) and Management of People (with Paul Evans (Insead) and Vlado Pucik(IMD)).

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