1/8/2014
Implications of psychic
distance on the entry
mode of a clothing
company
Case study of H&M in China
Semester Project 1
Group 5
Autumn Semester 2013-2014
Aalborg University
Title page
Education:
Aalborg University – MSc International Business Economics
Subject:
Business Research Methods & Theory of Science
Supervisor:
Susan Vonsild
Group No.:
5
Delivery date: 1/8/2014
Pages: 58
Words: 14.701
Acknowledgement
This project was made possible with the supervision of Susan Vonsild, to whom we would like to
express our thanks and gratitude. She has offered a great deal of inspiration in each of the steps of
the process of making this project as well as provided constructive criticism and valuable feedback at
every meeting. Susan was of particular help during the early stages of the project, namely the
formulation of the research problem, the research questions, and the delimitation. Last but not
least, Susan has also provided a moral support and encouragement that motivated us to finish the
project despite the unexpected time-crunching obstacles.
Casper Sabinus We Steglich-Petersen
Charles Meurice
Jan Koman
Mette Bruun Madsen
Nan Zhang
1
Executive summary
The relationship between psychic distance of a host country and the choice of entry mode by an
international company has been subject to several previous studies. Researchers Dow and Larimo
(2007, 2008) have implied that companies tend to use low-control entry modes for psychically
distant countries and high-control entry modes for psychically close countries. In this project a
Swedish clothing retailer (H&M) has been chosen and analysed with regards to its choice of entry
mode in one psychically close country and one psychically distant country. Seven factors were
considered in the assessment of the psychic distance: culture, language, religion, education,
industrial development, degree of democracy, and political ideologies. Chosen country with
measured low psychic distance was Denmark, and chosen country with measured high psychic
distance was China. The analysis has shown that H&M used one type of entry mode in both
countries. This shows that psychic distance is not an important factor in deciding which entry mode
should be selected, at least in the case of H&M retail stores. There might be a number of other
relevant reasons that dictate the selection of entry mode for the internationalization of H&M. To
find out the exact reason, further (primary) research needs to be conducted by interviewing the
management of H&M directly.
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Table of Content
1.
Introduction .................................................................................................................................... 6
1.1.
Problem formulation............................................................................................................... 7
1.1.1.
Key words ........................................................................................................................ 7
1.1.2.
Research questions ......................................................................................................... 7
1.1.3.
Facts about H&M ............................................................................................................ 7
1.1.4.
Delimitation .................................................................................................................. 10
2.
Limitations..................................................................................................................................... 11
3.
Methodology................................................................................................................................. 12
3.1.
Definition of a paradigm ....................................................................................................... 12
3.2.
Dimensions in social science ................................................................................................. 12
3.2.1.
Ontology........................................................................................................................ 13
3.2.2.
Epistemology ................................................................................................................. 13
3.2.3.
Human Nature............................................................................................................... 13
3.2.4.
Methodology ................................................................................................................. 13
3.3.
3.3.1.
FISI classification ........................................................................................................... 14
3.3.2.
Burrell and Morgan’s view on social science ................................................................ 15
3.3.3.
Arbnor&Bjerke’s classification ...................................................................................... 16
3.4.
4.
Typology of paradigmatic classifications .............................................................................. 14
Our choice of paradigm ........................................................................................................ 19
3.4.1.
Choice of paradigm from the FISI and RRIF model ....................................................... 19
3.4.2.
Choice of paradigm according to Arbnor & Bjerke ....................................................... 20
3.5.
Research approach................................................................................................................ 21
3.6.
Research methods ................................................................................................................ 23
3.7.
Research design .................................................................................................................... 23
Theoretical part............................................................................................................................. 27
4.1.
Psychic distance .................................................................................................................... 27
4.1.1.
4.2.
Indicators of psychic distance ....................................................................................... 28
Entry modes .......................................................................................................................... 34
4.2.1.
Export ............................................................................................................................ 34
4.2.2.
Licencing........................................................................................................................ 35
4.2.3.
Franchising .................................................................................................................... 35
4.2.4.
Joint venture ................................................................................................................. 36
4.2.5.
Wholly owned subsidiary .............................................................................................. 36
4.2.6.
Turnkey project ............................................................................................................. 37
3
5.
Analysis ......................................................................................................................................... 37
5.1.
Previous studies on the choice of entry mode in relation to psychic distance .................... 37
5.2.
The entry mode(s) of H&M ................................................................................................... 39
5.3.
Psychic distance between the home country and the host country .................................... 40
5.2.1 Hofstede’s cultural dimensions............................................................................................ 40
5.2.2. Language ............................................................................................................................. 43
5.2.3. Religion................................................................................................................................ 45
5.2.4. Education ............................................................................................................................ 46
5.2.5. Industrial development ....................................................................................................... 47
5.2.6. Degree of democracy .......................................................................................................... 48
5.2.7. Political ideologies .............................................................................................................. 50
5.2.8. Summary of psychic distance analysis ................................................................................ 50
6.
Discussion...................................................................................................................................... 53
6.1.
The importance of psychic distance ..................................................................................... 53
6.2.
Possible reasons for an entry mode choice .......................................................................... 53
7.
Conclusion ..................................................................................................................................... 54
8.
Bibliography .................................................................................................................................. 55
Table of Figures
Figure 1: Number of stores by continent
Figure 2: Table of H&M's type of brand
Figure 3: Value chain
Figure 4: Subjective versus objective social science
Figure 5: RRIF
Figure 6: Theory of science and Methodology:
Figure 7: Explanatory and understanding knowledge
Figure 8: The functionalist paradigm
Figure 9: Arbnor and Bjerke's six paradigms
Figure 10: Deductive approach
Figure 11: Choice of research design
Figure 12: Research design
Figure 13: Hofstedes cultural dimensions
Figure 14: Classification of education levels
Figure 15: Democracy index
Figure 16: Degree of democracy
Figure 17: Political ideologies
Figure 18: Cultural difference between Sweden and Denmark
Figure 19: Cultural difference between Sweden and China
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Figure 20: Cultural difference between Sweden, Denmark and China
Figure 21: Language difference
Figure 22: Religion in Sweden, Denmark and China
Figure 23: Degree of education in China, Denmark and Sweden
Figure 24: Tertiary graduates
Figure 25: CIP index
Figure 26: Degree of democracy in Denmark, Sweden and China
Figure 27: Overall score of democracy index
Figure 28: Political ideologies in Sweden, Denmark and China
Figure 29: comparison in psychic distance
5
1. Introduction
In the past three decades, the world trade has expanded from US$ 200 billion to more than US$ 7,5
trillion, where direct international investments has grown to US$ 6,6 trillion (Czinkota et. al. 2009, p.
19). The globalization of the world is continuing to develop, and more companies around the world
become international players.
The term psychic distance was determined by Beckerman in 1956, but draw attention from the
world in 1975 when it was published by Johanson and Wiedersheim-Paul in ensemble with their
study of the internationalization process (Dow & Larimo 2008, p. 3).
We see the term internationalization as a critical point at the present time, for any company that
wants to expand to the rest of the world. Because nowadays all companies are eager to make profits
abroad must adapt to the desires of consumers who are not necessarily the same as in their country
of origin. In this project we will detail what are the modifications for a company wishing to establish
themselves in foreign countries.
This project will focus on internalization of a company in the clothing industry, with attestation on
the correlation between psychic distance and internationalization, more precisely entry modes.
To illustrate the issues in this particular case, the clothing company Hennes & Mauritz (H&M) is the
brand that we decided to focus on.
The clothing sector is always in motion and is constantly changing. This was the reason that this
particular industry was interesting and got to our attention. The clothing sector is constantly moving
because fashion changes all the time! A natural reason for changes in the products is the affection of
the weather, which force the clothing companies to adjust their production and design to the
different seasons. Fashion is not the same in all countries, changes seasonally and is not the same
from one year to another. Different companies must adapt to the desires of consumers if they want
to stay competitive.
The Swedish company, H&M, is chosen because we find it interesting to research if the Swedish and
Danish cultures are similar like we predict, and then see how the differences are when using a
developing country with a psychic difference different from the one between Sweden and Denmark,
to make brighter view of the consequences of choices.
6
To sum up, the project is a discussion about the internationalization process of the international
retailer H&M to identify what the implications of psychic distance means to the firm.
1.1.
Problem formulation
What are the implications of psychic distance on the choice of entry modes of a clothing
company to a foreign market?
In our research of this particular problem we will focus on H&M and their entry into the Chinese
market in the retail sector. Because of the limits of primary data and limited secondary data we are
only using H&M as an illustration. Because of these limitations we will move our research from a
micro level research to a meso level, and we will therefore focus more on the retail industry and only
use facts from H&M where it is appropriate.
1.1.1. Key words
Psychic distance, entry modes, clothing company
1.1.2. Research questions
1) How can psychic distance be measured?
2) According to the existing studies, what entry modes serve best to reduce the adverse effects
of psychic distance?
3) What is the importance of psychic distance on the choice of entry mode of a clothing
company?
1.1.3. Facts about H&M
In 1940, Erling Persson went to look for inspiration in the United States. He returned with a novel
idea: selling women's fashion and quality at unbeatable prices.
According to the data published on the official website, in 1947, Erling Persson opened the first store
Hennes ("hers" in Swedish) because only women’s clothes were sold there at that time. He opened a
store in the city of Västerås, Sweden.
In 1968, the acquisition of stores Mauritz Widforss, a hunting and gun store in Stockholm, marks the
beginning of the chain Henne-s & Mauritzfor men and women. The symbol H&M is short for "och
Hennes Mauritz," which means: "For hers and Mauritz." In the 1970s, a children and youth
department is born.
7
In 1990, Stefan Persson, the son of Erling, became CEO and Chairman of the Board of Directors in
1998. In 1992, H & M opened its first store in Belgium. On 25 February 1998, H & M opened its first
store in France, rue de Rivoli in Paris. There are today 178 H & M stores open in France. France is
fourth in the number of stores behind Germany (393) United States (287) and the United Kingdom
(223). China is fifth with 152 stores, followed by Spain (146) or the Netherlands (121). Norway and
Denmark, two small states by population, are respectively 101 and 76 stores. We can explain this
phenomenon by the proximity of Sweden with both countries.
Finally, the company seeks to expand into new markets. In September 2013, there were 112 stores
in Poland, 152 in China, 26 in Romania, 18 in Turkey, or 10 in Bulgaria. Stores have recently opened
in Latvia, Malaysia, Thailand, Estonia and Lithuania. In addition, the company is located in Mexico
since October 2012, and in Chile in May 2013 (its first shop in South America) and intends to
implement soon in Indonesia and Australia. The company also has nine stores on the African
continent.
In September 2013, H & M has grown considerably and has 2,839 outlets in 53 countries and has
over 100,000 employees
Figure 1: Number of stores by continent
Number of stores by continent
Middle East
3%
Africa
0%
Oceania
0%
Asian
9% Americas
12%
Europe (+
Russia)
76%
Source: Own processing with inspiration from hm.com
As a successful firm, H & M always tries to focus on its own business concept, that is, "to provide
people with fashion and quality at the best price "(Facts about H&M, 2007). Regarding fashion, the
company has its own design and purchase department that creates collections. About the quality of
the product, H & M pays much attention to the quality control and also try to make its products have
minimal impact on the environment and good control of working conditions in supplier factories.
8
Regarding the best price, it is simply obtained by having some intermediaries, buying in large
quantities, with a large depth knowledge of design, fashion and textiles, buy the right products in the
right market, being cost-conscious at every stage, and having an effective distribution.
H&M does not have its own factories. It cooperates with around 700 independent suppliers, mainly
in Asia and Europe.
Moreover, when talking about a clothing company, one must first be aware of the different types of
companies with regards to clothing and apparel. Since this project deals with H&M, it is important to
know the category. Gereffi & Frederick (2010) developed a table that distinguishes the different
brand types in the clothing industry. This is presented in Figure 2.
Figure 2: Table of H&M's type of brand
Lead Firm Type
Retailers: Mass
Merchants
Type of Brand
Description
Private Label:
the retailer owns
or licences the
final product
brand, but in
almost all cases,
the retailer does
not own
manufacturing.
Department/discount
stores that carry
private label,
exclusive, or licenced
brands that are only
available in the
retailers’ stores in
addition to other
brands.
Retailer develops
proprietary label
brands that
commonly include
the stores’ name.
Firm owns the brand
name, but not
manufacturing,
“manufacturers
without factories.”
Products are sold at a
variety of retail
outlets.
Firm owns brand
name and
manufacturing;
typically coordinate
supply of
intermediate inputs
(CMT) to their
production networks
often in countries
with reciprocal trade
Retailers:
Specialty
Apparel
Brand Marketer
Brand
Manufacturer
National Brand:
the
manufacturer is
also the brand
owner and goods
are distributed
through multiple
retail outlets.
Examples
U.S.
Walmart, Target,
Sears, Macy’s, JC
Penney, Kohl’s
&Dillard’s
EU-27
Asda (Walmart),
Tesco, C&A,
Marks &Spencer
Gap, Limited
Brands,
American Eagle,
Abercrombie &
Fitch
Nike, Levi’s, Polo,
Liz Claiborne
H&M, Benetton,
Mango, New
Look, NEXT
Ben Sherman,
Hugo Boss,
Diesal, Gucci
VF, Hanesbrands, Inditex (Zara)
Fruit of the
Loom, Gildan
9
agreements.
Source: Own processing with inspiration from Gereffi & Fredericks, 2010)
As can be seen in the table above, H&M belongs to specialty clothing retailer, with its characteristic
being highlighted in the table.
1.1.4. Delimitation
As outlined in Chapter 1.1.1., the key concepts dealt with in this project are psychic distance, entry
modes and clothing company. Since the understanding of these concepts may differ among
individuals, this section serves to establish to how they are interpreted in this particular paper.
1.1.4.1. Psychic Distance
The term ‘psychic distance’ in the business context dates back 1956 where it was first coined by
Beckerman (Dow and Larimo 2008, p. 3). It was later popularized by Johanson and Vahlne (1977) in
their empirical studies of Nordic multinationals (Child et al. 2002, p. 36). In our project we have
decided to embrace their definition of the psychic distance, which is “the sum of factors preventing
the flow of information to and from the market. Examples are differences in language, education,
business practices, culture, and industrial development” (Johanson & Vahlne 1977, cited in Dow
&Larimo 2008, p. 4). The indicators and means of measuring the psychic distance are further
explained in Chapter 4.
1.1.4.2. Entry modes
Entry modes refer to the different ways a company can establish a presence in a foreign market,
namely through licensing, franchising, joint venture, wholly owned subsidiaries and turnkey projects.
The various possible entry modes are further described in section 3.1. Entry Modes. One of the
factors influencing the choice of entry mode is the aforementioned psychic distance, which is where
our focus is at in this project.
1.1.4.3. A clothing company
A clothing company is a broad term. In relation to the global value chain of the industry, this term
can include any and all parts of the chain. The apparel global value chain is presented in Figure 3
below. This value chain has been presented by Asian International Economists Network (AIEN) on 5
July 2013.
Figure 3: Value chain
Raw
Material
supply
Provision of
Components
Production
Networks
Export
Channels
Marketing
Networks
10
Source: Own processing with inspiration from AIEN
First two parts of the global value chain are concerned with assembly of materials and components
that include natural and synthetic fibers, yarns and fabrics. Production network is represented by
garment factories. Export channels include lead global firms who work as trade intermediaries.
Finally, marketing networks are concerned with functioning of the companies on the retail level.
(AIEN, 2013)
When looking into the entry modes of H&M, it is important to delimitate what part of the value
chain we are focusing on, given that just like other companies, H&M takes part in all parts of the
global value chain, regardless of the fact that some of the activities are performed directly by H&M
and others through outsourcing.
When talking about entry modes, we are focusing on the retail level, which is the very last part of
the value chain presented above. Therefore we are analysing how H&M retailers enter foreign
markets.
2. Limitations
This project being a school assignment, it is greatly limited by a strict deadline. Conducting primary
research would have to include an interview with H&M. In terms of tasks, this would mean waiting
for a response from the management, scheduling a meeting, preparation for the interview, and
analysing the qualitative data obtained. All of that would precede an actual drafting of the project,
which also takes certain time. These tasks altogether would be too time-consuming for us to be able
to be finished with the project within the required time frame. Furthermore, should the interview
have to be put off for whatever reason just before the scheduled time, we would end up completely
devoid of information and data.
To prevent these potential issues, we have decided to conduct a secondary research. Whilst the
secondary research provides certain advantages, such as the ease and low cost of access, it also
comes with a number of limitations, which are important to be aware of. Firstly, it is sometimes
difficult to accurately assess the quality of the existing research in terms of validity and reliability.
Therefore we are basing our choice of literature on certain topic only on the perceived credibility of
the authors. Secondly, the existing information sometimes does not fit a researcher’s needs
perfectly. Therefore we are forced to work with literature where information provided is only similar
to our needs. Finally, the information out there might be incomplete or outdated.
11
3. Methodology
3.1.
Definition of a paradigm
“Paradigm is a matrix of beliefs and perceptions” (Kinash, p. 1). This concept dates back to Kuhn
(1970), according to whom “every field of research is characterized by a set of common
understandings of what kind of phenomenon is being studied” (Kuada 2011, p. 42). Furthermore,
Bryman and Bell’s description of a paradigm is “a cluster of beliefs and dictates which for scientists in
a particular discipline influence what should be studied, how research should be done and how
results should be interpreted” (Bryman 1988; cited in Bryman & Bell 2011, p. 24). To conclude from
the information above, different views and understandings lead to different interpretations of a
certain research topic, which then should produce different approaches to research when
addressing the research questions. It is therefore essential to explain the paradigm under which one
operates, and to apply appropriate theories that belong under the chosen paradigm.
3.2.
Dimensions in social science
Figure 4 underneath shows differ between the subjective and objective approach to ontology,
epistemology, human nature and methodology. All the terms included in the figure will be explained
below.
Figure 4: Subjective versus objective social science
Source: Kuada 2012
12
3.2.1. Ontology
Ontologyrefers to the reality. Is the reality a part of the individual consciousness or is it an external
factor to the conscious. In other words you can differ between if you believe that there is an external
social world that affects the individual person, or if it is the individual person who affects and creates
the real world. (Kuada 2012, p. 58-59)
As Figure 4 indicates, ontology differs between nominalism and realism. Nominalism is the part of
the ontology that assumes that the world consists of concepts and labels which make an individual
structure the reality. On the other hand, realism assumes that the social world is real, and exists
external to the individual. Furthermore the structure in this world is not able to change. (Burrell and
Morgan 2005, p. 4)
3.2.2. Epistemology
Epistemology relates to how knowledge can be acquired and how the truth can be found. Some say
that the truth can be found as an external observer in a specific social world. Others believe that the
researcher has to be a part of the internal world, to be able to see the truth about a subject. (Kuada
2012, p. 59)
Epistemology is divided in to a positivism and anti-positivism approach. The positivism approach are
based on testing and developing hypotheses. Through the hypotheses positivism tries to explain and
predict the truth, by searching for patterns and relationships between the information. Antipositivism disagrees that you can find the truth and understand it by an observing behavior. Social
science cannot create true objective knowledge of any kind. (Burrell and Morgan 2005, p. 5)
3.2.3. Human Nature
Human nature is if we are products of the environment or if the environment is created by the
individual people. (Kuada 2012, p. 59)
Human nature consists of voluntarism and determinism. Determinism states that people are being
determined by the environment and the situation we are in. It is therefore the society that creates
who we are. Voluntarism sees the human being as an independent person with own free will, and
that the person is autonomous. (Burrell and Morgan 2005, p. 6)
3.2.4. Methodology
Methodology refers to the choice of specific methods the researcher use to obtain knowledge.
(Kuada 2012, p. 59)
13
The methodology differs between ideographic and nomothetic. Ideographic focus on detailed
observations of the society. Meanwhile nomothetic methodology is build up by hypotheses, surveys
and more standardized research tools, which often gives a more monotone result. (Burrell and
Morgan 2005, p. 6)
3.3.
Typology of paradigmatic classifications
3.3.1. FISI classification
3.3.1.1. Functionalism
Functionalism is a theoretical foundation developed by Emile Durkheim in sociology field. In
functionalist perspective, societies can be viewed as a holistic system composed of various elements,
that is, institutions. These institutions play their own role and operate their function in order to
promote solidarity and stability of the society. Under this framework, institutions exist and evolve
independent of each other and follow causal relationship. The integration within those components
cannot always be perfect without fiction, however, functionalists emphases society can be keep in a
dynamic balance in the long run (Van, 1963). In business economics, scientists with the
functionalistic perspective view organizations as rational entities that adapt to the environment to
maximize efficiency (Kuada 2011, p. 46).
3.3.1.2. Interpretivism
Interpretivism is on the opposite side of positivism. Interpretivism regards reality as relative in
ontological level and emphasizes context and situation in which reality exists in epistemological
level. Not as positivist approaches in order to find cause-and-effect relationship, an interpretivist
focuses on understanding how researcher define situation and interpreting how they convey
meaning (Bryman & Bell, 2007).
3.3.1.3. Structuralism
Structuralism is an analytical tool which is widely used in social and cultural studies. This theory
indicates three key components: 1) look at a system as whole rather than individual part, 2)
transformation in this system and 3) transformation usually endogen inside the system (Piaget,
1970). Structuralists’ emphasis is on classification of components of a system.
3.3.1.4. Interactionism
Interactionism is known as “symbolic interactionism” in sociology. It provides a theoretical
perspective that social development derived from individual interactions. It emphasis participation
of individual in micro-level. There are three postulates under interactionism framework. The first
14
assumption is that human beings behave on the basis of the meaning they create themselves. The
second is meaning created through countless interactions within individuals. The last is the meaning
can be modified and changed as individual’s daily life. Interactionism is a subjective way to analyze
social phenomena (Blumer, 1986).
3.3.2. Burrell and Morgan’s view on social science
Burrell and Morgan work with two dimensions as you see in the figure, the subjective versus
objective dimension. The assumptions if the society, the regulation versus radical change dimension.
Under the two dimensions, four different sets of paradigms are positioned as illustrated in the
figure. The first is radical humanist paradigm, which is subjective and of radical change. The second
paradigm is radical structuralist, which is objective and of radical change. The third is the interpretive
paradigm and is subjective and of regulation. The last paradigm is the functionalist, which is
objective and of regulation.
Figure 5: RRIF
Source: Burrell and Morgan 2005
3.3.2.1. The Functionalist Paradigm
The primary paradigm for organizational study is the functionalist paradigm. This paradigm
approaches most general sociological concerns by being realistic, positivistic, deterministic and
nomothetic which is characteristic of Burrell and Morgan’s objective approach. (Burrell and Morgan
2005, p. 25-26)
15
3.3.2.2. The Interpretive Paradigm
The interpretive paradigm is opposite to the functionalist paradigm a subject approach. This
research is characterized by an independent mind (Kuada 2012, p. 82). The information and data
that are collected are often qualitative, through experiencing. The result of the research is therefore
build on and individual explanation of a sustain problem. (Burrell and Morgan 2005, p. 28-31)
3.3.2.3. The Radical Humanist Paradigm
This paradigm believes that the world is build up by social constructions. In this research you look for
changes in processes to get the right result. The research is also build on the interactions between
individuals and is therefore not build on the single individual. (Kuada 2012, p. 83). Like the
interpretive paradigm the researchers is still using a subject approach.
3.3.2.4. The Radical Structuralist Paradigm
The last of the four paradigms is the radical structuralist paradigm, which like the functionalist
paradigm has an objective approach. This research is often based on conflicts within the society and
have an impact on the political and economic sector (Kuada 2012, p. 83). The result in this research
is often based on a discussion between theory and their relationship. (Burrell and Morgan 2005, p.
34)
3.3.3. Arbnor&Bjerke’s classification
According to Arbnor and Bjerke the business research methods consist of two main areas, theory of
science and methodology as seen in the figure beneath. The theory of science will help to establish
how to use the knowledge we already possess, to understand the reality. The methodology is the
way the researchers want to approach the project and how the information and literature will be
managed.
Figure 6: Theory of science and Methodology:
16
Source: Own processing with inspiration from Arbnor & Bjerke 2009, p. 15
The above figure shows that it is the ultimate presumptions that form the basis of the paradigm and
method that will be used in a research. The ultimate presumptions can be referred to the root
assumptions. In our case we assume that there already are challenges in entering a new market.
Furthermore the ultimate presumptions are also how the researchers see the world, if it for example
consists of many individual elements, or if we see it as a total.
Based on the presumptions the researcher can differ between the paradigms and see a logic to
follow a paradigm through the research. Arbnor and Bjerke differ between two main paradigms: the
explanatory knowledge and the understanding knowledge.
The explanatory paradigm is characterized by an objective approach to the given information. The
researchers seek to come up with an objective solution, from an explanatory and descriptive
behavior. On the contrary the researchers in the understanding paradigm have a subjective
approach to the research problem and the information that is collected. This means that individual is
the central part and because people are different the results will be different depending on the
researchers. Moreover the basic assumptions of this paradigm are that reality is created from social
constructions between different individuals.
Figure 7: Explanatory and understanding knowledge
Source: Own processing with inspiration from Arbnor & Bjerke 2009, p. 51
Figure 7 shows the relation between the two main paradigms and the methodological approach the
researchers use to get the result. Arbnor and Bjerke work with three methodological views
17
depending on the ultimate presumptions and how the researchers think and behave. The three
views are the analytical view, the systems view and the actor view.
3.3.3.1. The analytical view
The analytic vision is based on that the reality consists of facts, where everything can be measured
and weighed. When the facts are added together, you get a total. At the same time the researchers
are always working to find more facts in order to improve and clarify the results so far. Furthermore
the research is often based on statistics and studies with many observations, to get as close to the
truth as possible. At the same time this research is characterized by exploring already existing
knowledge. In the analytic view a particular problem is being researched through facts and the
examiner has an objective relation to the problem until the result is achieved. (Arbnor & Bjerke,
2009, p. 36-38)
3.3.3.2. The systems view
At the system view you see objective on the reality, while it is important to explain and understand
the given information in an overall perspective. All elements are linked together as a total and if one
factor changes, it will have an impact the total outcome of the system. The system view thereby
creates a synergy which may be negative or positive. Therefore you always have to see everything as
a whole. The information to apply through this method is often the primary data, from observations
and interviews, as they are complementary with secondary information. (Arbnor & Bjerke, 2009,
pages 39-41)
3.3.3.3. The actor view
The actor view emphasizes dialogue. Before the research, you have built up a picture of what the
reality is, also called a thesis. After the dialogue, where the researchers has obtained more
knowledge about the subject, there will be created new believes about the reality, which is called
synthesis. Unlike the other views, this view allows the researcher to look subjectively on the given
information. This should be taken into account, because the personal attitudes can influence the
outcome, and therefore the studies vary, depending on who the examiner is. (Arbnor & Bjerke,
2009, pages 41-45)
If you connected the three methodological views with science theory, you will be able to connect the
analytic view and system view together with the functionalist explanatory paradigm. While the
actors view refers to the understanding paradigm.
18
3.4.
Our choice of paradigm
Previous chapters made it obvious that not only are there different paradigms under which a
researcher can operate, but there are also different classifications of paradigms, which makes
choosing a paradigm for our research more complex. Therefore we will first go through each of the
three views on paradigms, choosing the appropriate paradigm from each classification. This will yield
three paradigms, one from each classification.
3.4.1. Choice of paradigm from the FISI and RRIF model
Both the FISI and RRIF classifications of paradigms include functionalism, which is a paradigm under
which we have chosen to approach our research. In functionalistic view “organizations make
adaptive structural changes to their environment that render them more fit with their situations and
thereby maintain effectiveness” (Kuada 2011, p. 46).
The goal of our research is to find out the implications that psychic distance has on a clothing
company in its choice of entry modes on a retail level. We are investigating if a company is making
an adaptive change (the choice of entry mode) to the environment (represented in this case by
psychic distance). In other words, what is the relation between these two variables:
Variable 1:
Psychic distance of the host country in relation to the home country
Variable 2:
The entry mode of a clothing company on retail level
Functionalistic paradigm embraces the objectivistic perspective in research, therefore according to
Figure 4 in Chapter 3.2., it is realistic, positivistic, deterministic and nomothetic. Figure 8 below
explains where our assumptions belong in terms of these four dimensions.
Figure 8: The functionalist paradigm
We are…
Because…
…realistic.
…psychic distance is composed of certain aspects
(culture, language, education…). We view these
aspects as parts of country’s environment and
they exist beyond the level of individual
inhabitants.
…positivistic.
…we have a literature-based hypothesis that
psychic distance has an impact on the choice of
entry mode to a foreign market. We are using a
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case study to test this hypothesis. Regardless of
whether or not our hypothesis will be confirmed,
we will consider the result as the objective truth
that can be applied to similar companies in
similar situations.
…deterministic.
…we believe that people born into an
environment of a country will automatically
become a part of that environment. For
example, people born in China are bound to
become part of the Chinese culture, language,
education etc.
…nomothetic.
…by having a hypothesis and using a
standardized research tools (document study),
our methodology is nomothetic.
3.4.2. Choice of paradigm according to Arbnor & Bjerke
To determine which paradigm and method this project would be based on, if Arbnor and Bjerkes
approach is taken in to account, we use the following figure.
Figure 9: Arbnor and Bjerke's six paradigms
Source: www.emeraldinsight.com
20
The above figure is based on figure 7 from the description of Arbnor and Bjerke. This model includes
six paradigms underlying the Explanatory and the Understanding knowledge. We have limited us
completely from the actors view, because we do not have the foundation to involve our own
opinions to affect the outcome of the collected data. Our research does not consist of statistics and
quantitative data, and therefore we cannot entirely use the analytic approach to solve this particular
problem. Our research will primarily be based on a combination between the system and the
analytic view. We do not look at H&M in a completely system, because we have chosen to work with
a specific area in H&M’s entry in to China, and we do not include their external surroundings.
According to the FISI and RRIF classifications, we see the project with a functionalist approach. In
Arbnor and Bjerke’s classification we see the reality as mutually dependent of fields of information,
number 3 of the six paradigms. We understand that every field of information we have collected has
a relation to each other, and we are sure that more fields of information leads to a better answer to
the stated problem. This also means that we mostly look at the project whit a system view, and
approach the problem formulation this way.
You can argue that our methodology approach has some similar statements as the analytic
approach. We look at two variables, where the psychic distance is the cause and the choice of entry
mode is the effect. But because of the lack of quantitative data will not be using the analytic view in
this project. The project is build up by secondary qualitative data. We have a clear mind about the
definition of psychic distance and that we cannot only look at one of the dimensions in psychic
distance to get the right result. Thus our methodology approach is to follow the systematic view. If
we exclude some of the dimensions in psychic distance it will lose its value. If we take all elements
into account it will create a synergy, which will give us a better ability to answer our research
questions.
3.5.
Research approach
This project is based on the term psychic distance and how psychic distance and entry modes
interact. Before starting researching the area for data, we chose to use psychic distance as our main
issue together with the theory about psychic distance. Based on these actions we our project will
follow a deductive approach (Bryman & Bell 2011, p. 11). To illustrate the deductive approach the
following figure has been made.
21
Figure 10: Deductive approach
Theory
Hypothesis
Data collection
Fidings
Hypotheses
confirmed or rejected
Revision of theory
Source: Own processing with inspiration from Bryman & Bell 2011, p. 11
As the above figure indicates, the deductive approach is based on a chosen theory, as mentioned
above the psychic distance and the theory about entry modes.
Based on these theories and the knowledge about the particular subject, the further research will be
based on some kind of hypothesis (Bryman & Bell 2011, p. 11). The hypothesis will often be linked to
the root assumption within the project group. Our problem formulation is as follows:
What are the implications of psychic distance on the choice of entry modes of a clothing company to
a foreign market?
Based on this problem formulation we have already assumed that the psychic distance can generate
implications on a clothing company’s entry in a foreign country. Our hypothesis will therefore be to
find out if the psychic distance actually generates implications or if the hypotheses can be rejected.
After the data collection and the findings the group are able to confirm or reject the hypotheses, and
valuate and revise the chosen theory.
When using a deductive approach in a project the researchers must have in mind that the analysis
and findings can give new theoretical ideas, and if these theories are implemented in to the project,
this part will be with an inductive approach. Furthermore these findings and the new theories can
22
impact the hypothesis and force the group to reject the hypotheses and create a new. (Bryman &
Bell 2011, p. 12)
3.6.
Research methods
Inside the research methods theory there exist two broad types of data collection, qualitative
methods and quantitative methods (Kuada 2012, p. 91)
The qualitative method is defined by Strauss and Corbin (1998) as “any type of research that
produces findings not arrived at by statistical procedures or other means of quantification” (Kuada
2012, p. 93).
A qualitative data collection are usually data collected through focus groups, observations,
qualitative interviews or documentary analysis (Kuada 2012, p. 95). In these types of research it is
hard to remain objective. The researchers decides the main focus, and can easily affect the outcome
of the data. (Kuada 2012, p. 100)
Quantitative methods can be a data collection method where you often seek to test a specific
hypothesis of find numerical answers to the research questions (Kuada 2012, p. 103)
The data in the quantitative method is often collected by questionnaires through mail or surveys or
by standardized or non standardized interviews. This method makes it easy to stay objective because
you formulate and test hypotheses, which limits the researcher to impact the outcome. The
difficulty in this method is that the researcher need ensure that the collected data is reliable enough
to make a generalization. (Kuada 2012, p. 115)
This project will be based on secondary data, collected through a qualitative approach. The majority
of data consists of secondary articles about psychic distance, already known theory about entry
modes and information about H&M from their annual reports, their homepage and relevant articles.
This form of data collection is specified as a documentary analysis. To stay as objective as possible,
we have to make sure that our literature review covers all aspects of the term psychic distance, and
we have therefore taken in to account that we tend to seek data that agree with our own thoughts.
3.7.
Research design
“Research design refers to the logical structure of the inquiry. It articulates what data is required,
from whom, and how it is going to answer the research question” (Jalil 2013, p. 6). Jalil (2013)
further argues that there are various classifications of research designs. We have decided to with
classification according to Bryman & Bell (2011), which lists the following research designs:
23
1) Experimental design
2) Cross-sectional design
3) Longitudinal design
4) Case study design
5) Comparative design
In Figure 11 below we will now proceed to briefly describe each design, explain which one we have
selected and why, and why the others have been rejected.
Figure 11: Choice of research design
Type of research design
Brief description
Experimental
A manipulation of independent
variable to assess its influence
on the dependent variable.
Cross-sectional
Collection of data from more
than one case, at single point of
time. The data must be
quantifiable. The goal is to
detect patterns and
relationship between variables.
Longitudinal
Analysis of change in
order/nature of observations
over time.
Case study
An in-depth study of a single
organization, single location, a
single person, or a single event.
Selected or de-selected and
why
Rejected. If we were to do
experimental design, we would
have to control H&M and make
it enter various countries to see
changes in entry modes.
Rejected. While we are trying
to verify the relationship
between psychic distance and
choice of entry modes and we
do meet some of these
requirements in our research,
the elements of cross-sectional
research are also part
comparative design, which we
have selected. Thus we deselected cross-sectional design.
Furthermore, our data is hardly
quantifiable, nor carried out at
one point of time.
Rejected.We are not interested
in the time aspect, neither are
we making observations. We
rely solely on secondary data
collected at one single point of
time.
Rejected. Even though our
research includes a document
review of a single company, the
focus of our research is not the
24
Comparative
The aim with this research
design is to understand certain
phenomena by comparing
them in various different
situation.
company itself, but the topics
of psychic distance and entry
modes. The illustration of a
company case is merely a tool
to analyse relationship
between those two variables.
Selected.We are trying to
compare entry modes of H&M
in different countries that vary
in psychic distance.
Source: Own processing
Figure 12 below further describes the thinking process and a step-by-step approach we used in our
research to answer our research questions.
25
Figure 12: Research design structure
Literature
review
Choosing
countries
Analysing
psychic distance
•Reviewing the existing literature that deals with the relationship between the psychic
distance and entry modes to see what entry modes the theory suggests for various
levels of psychic distance.
•After the theory in psychic distance and entry mode selection is reviewed, we choose
two countries, one which we deem as psychically close to H&M's home country
Sweden, and one which we deem psychically distant.
•We will measure the psychic distance of the two chosen countries. Our goal is to have
one psychically close country and one psychically distant country. If this requirement is
met, we move onto the next step. If both countries have similar/equal psychic
distance, we have to choose another country, to have the desired variety in psychic
distance for the comparison of entry modes.
•Here we find out what entry mode was used by H&M in the chosen countries.
Case study
Comparison
with theory
Conclusion
•We compare what we found out about H&M's entry mode selection in the psychically
close and psychically distant country and compare it with the theory that we reviewed.
•Based on the consistency or inconsistency of our finidings with the theoretical
implications, we asses the importance of psychic distance on entry mode selection. If
our findings are consistent with the recent theory, then we can assume that H&M finds
psychic distance as a decisive factor in choosing an entry mode. If our findings are
inconsistent with the theory, we conclude that there are other and more important
factors that decide the choice of entry mode.
Source: Own processing
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4. Theoretical part
This chapter will contain a brief description of the theories used in this project. This project will
include an analysis and discussion in the link between psychic distance, which include Hofstede’s
cultural dimensions, and entry mode. These elements will be the contents of this chapter as well.
We see a strong relationship between the term psychic distance and Hofstede’s cultural dimensions,
which we have confirmed through our literature review on psychic distance. Furthermore we find it
interesting to determine if there is a correlation between psychic distance and the choice of entry in
to a new market, which is the argument for the choice of these theories.
4.1.
Psychic distance
Psychic distance is “the sum of factors preventing the flow of information to and from the market.
Examples are differences in language, education, business practices, culture, and industrial
development” (Johanson & Vahlne 1977, cited in Dow & Larimo 2008, p. 4).
Dow & Larimo in their papers, ‘Entry Mode Choice: Testing New Approaches to Measuring Psychic
Distance and International Experience’ (2007), and ‘Psychic Distance, International Experience and
Establishment Mode’ (2008) propose a number of factors according to which one can evaluate host
country’s psychic distance in relation to a company’s home country. These factors are:
1) Culture
2) Language
3) Religion
4) Education
5) Industrial development
6) Degree of democracy
7) Political ideologies
In chapter 4.1.1. below we describe and understand these factors in greater detail. We will not
describe language and religion in greater detail because we find those terms pretty self-explanatory
in the context of foreign countries.
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4.1.1. Indicators of psychic distance
4.1.1.1. Culture
Hofstede’s cultural dimensions theory has been widely used in cross-cultural communication and
international management fields. It was developed by Geert Hofstede. It provides a framework for
analyzing differences and characteristics within cultures in a quantitative way. Based on crosscultural survey study since 1965, the theory has identified and developed systematic differences
between cultures in six dimensions, namely, power distance index, individualism vs. collectivism,
uncertainty avoidance index, masculinity vs. femininity, long-term orientation and indulgence vs.
restraint. See Figure X below.
Figure 13: Hofstedes cultural dimensions
Power
distance
Individualsm
vs.
Collectivism
Indulgence
vs. Restraint
Cultural
differences
Long-term
orientation
Uncertainty
avoidance
Masculinity
vs. Femininity
Source: Own processing with inspiration from Hofstede 1983
Power distance is “the extent to which the less powerful members of organizations and institutions
(like the family) accept and expect that power is distributed unequally”. Cultural that has low power
distance index tends to build more consultative and interdependent relationship between
subordinate and superior in a company (Hofstede, 1983).
Individualism is “the degree to which individuals are integrated into groups”. In typical individualistic
society, it puts more emphasis on individuals rather than group and relationship between individuals
is loose. On the other side, Collectivism inclines to build strong cohesive groups (Hofstede, 1983).
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Uncertainty avoidance index indicates “a society's tolerance for uncertainty and ambiguity”. Cultures
hacing high uncertainty avoidance tend to minimize changes of situation. On the opposite side,
members in a low uncertainty acceptance culture feel more comfortable when encounter changes
and uncertainty (Hofstede, 1983).
Masculinity versus femininity refers to “the distribution of emotional roles between the genders”. In
a masculine culture, members tend to be competitive and assertive and exists a value gap between
men and women. While in a femininity cultural, men and women pursue same values, like modesty
(Hofstede, 1983).
Long-term orientation is the fifth dimension added in 1991 based on Michael Bond’s research. Longterm oriented culture has characteristics like saving, persistence and adapting to changing
circumstances. It stresses future rewards rather than present (Hofstede, 1993).
Indulgence versus Restraint, measures the attitude of society members towards natural human
drivers. In country labeled restraint, members tend to suppress their needs of enjoying life
(Hofstede, 2011).
4.1.1.2. Education
Education is another element of psychic distance. Since this concept is a term general enough to be
susceptible to individual interpretation, we feel the obligation to elaborate on this in a greater detail
and show how is it that we understand and analyse education in the context of this paper.
The way education in practice works may differ among countries, however in order to be able to
compare two different countries in the world, we have to embrace a universal system of
classification of education. For this purpose, we have chosen the International Standard
Classification of Education (ISCED), proposed by United Nations Educational, Scientific and Cultural
Organization (UNESCO). We have chosen this method of classifying education because of the
international way it classifies levels of education, and the rich database that includes a vast number
of countries and different ratios of various types and levels of education completed by people in
their respective countries. The classification of the various education levels are summarized in Figure
14 below.
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Figure 14: Classification of education levels
Primary
Lower
secondary
Upper
secondary
Postsecondary
1st stage
of tertiary
2nd stage
of tertiary
Preprimary
Source: Own processing with inspiration from
http://www.fernunihagen.de/FTB/telemate/database/isced.htm
4.1.1.3. Industrial development
Another aspect included in the psychic distance according to Dow & Larimo (2007, 2008) is industrial
development. Since industrial development was not further described in their paper, we have
decided to use the Competitive Industrial Performance Report 2012/2013 from United Nations
Industrial Development Organization (UNIDO). The unit used by UNIDO to measure industrial
performance is the competitive industrial performance (CIP) index. This index measures “the ability
of countries to produce and export manufactured goods competitively” (IDR 2002/2003, cited in
UNIDO 2013). We therefore assume that countries with higher CIP index have higher industrial
development. On their website, UNIDO provides rich and up-to-date database of CIP indices of
countries, which proves to be very useful for our research.
4.1.1.4. Degree of democracy
In our project we have decided to evaluate degree of democracy in countries based on the
Economist Intelligence Unit’s (EIU) Index of Democracy from their Democracy index report from
2010 called ‘Democracy in retreat’. The democracy index is based on five elements: pluralism; civil
liberties; the functioning of the government; political participation; and political culture. See Figure
15 below.
30
Figure 15: Democracy index
Pluralism
Civil liberties
Democracy
index
Functioning of the government
Political participation
Political culture
Figure 1 – Own processing (source: EIU 2010)
Pluralism is “a society where multiple people, groups or entities share political power”
(yourdictionary.com). This political philosophy embraces the idea that the decision-making on
governing issues should not be done by one political group, but also many non-governmental groups
should be involved. “The existence of diverse and competing interests is the basis for a democratic
equilibrium, and is crucial for the obtaining goals by individuals” (wikipedia.org). Therefore the level
of pluralism is positively associated with the level of democracy in a country. In the Democracy index
report 2010 by EIU, the degree of pluralism is scaled from 0 to 10.
Civil liberties are defined as “rights or freedoms given to the people…, allowing the individual to be
free to speak, think, assemble, organize, worship, or petition without government (or even private)
interference or restraints” (thefreedictionary.com). Like the pluralism, civil rights are positively
associated with the level of democracy and are measured on a scale from 0 to 10 in the EIU’s report.
We found the term “functioning of the government” to be too vague for us to find a proper
definition. Based on the information available from the Democracy index 2010 report, we assume
that EIU scales this concept from 0 to 10 based on “transparency” and “efficiency” of a country’s
government, however these terms are not further explained in the report in connection with the
31
functioning of the government. However, despite the ambiguity of this concept, it is clear from the
report that higher score indicates higher tendency of a country towards democracy.
Two views are presented on the definition of political participation, one by Verba et al. (1995) and
another by Huntington & Nelson (1976). Both views define political participation as “…activities that
are addressed towards (influencing) the state” (Caramani 2. ed., cited in Oxford University Press).
However, according to Verba et al. this includes only voluntary participation and legal activities,
whereas according to Huntington & Nelson any kind of participation and activities are included.
Nevertheless, for the purpose of this project, we find it safe to assume that higher political
participation spells higher degree of democracy. Political participation is measured on a scale from 0
to 10 in the Democracy index report.
Finally, the last part comprising the democracy index is the political culture. Three types of political
culture have been identified by the research of Almond & Verba (1963):
1) participant, in which citizens understand and take part in politics and voluntary associations
2) subject, in which citizens largely obey but participate little
3) parochial, in which citizens have neither knowledge of nor interest in politics
(Almond & Verba 1963, cited in Britannica.com)
We understand this as a continuum that represents a degree to which citizens demonstrate
understanding, interest and involvement in political affairs. Just like all the other elements of
democracy index, EIU scales political culture from 0 to 10, with 10 being the most democratic.
Based on the overall score of democracy index based on the five aspects described above, EIU
identifies 4 regime types, from the most democratic to the least democratic: full democracies;
flawed democracies; hybrid regimes; authoritarian regimes. Observe Figure 16 below.
32
Figure 16: Degree of democracy
Regime types
Full
democracies
Flawed
democracies
High degree of democracy
Hybrid
regimes
Authoritarian
regimes
Low degree of democracy
Source: Own processing with inspiration from EIU 2010
4.1.1.5. Political ideologies
Political ideologies are concerned with two things: 1) How society should be organized, and 2) what
is the best way to achieve this. (Wikipedia.org) Depending on two dimensions, different political
ideologies exist. We will not go in great detail since there are too many to fit in the scope of this
project. What is important for the purpose of this project is to see whether there are different
political ideologies among the researched countries or not. Figure 17 below lists the best-known
ones, in an alphabetical order, to give the reader an idea of how many political ideologies there are.
33
Figure 17: Political ideologies
Anarchism
Communism
Conservatism
Environmentalism
Feminism
Liberalism
Nationalism
Religious fundamentalism
Socialism
Source: Own processing with inspiration from Wikipedia.org
4.2.
Entry modes
In the following part the project will explain different types of entry modes, during an
internationalization process. This will help the reader to fully understand the theories while reading
parts like the analysis where the theories will be included.
The Foreign Entry Modes theory contains 5 different ways or models to how a company can
integrate itself in a new market. These will be explained one by one below.
4.2.1. Export
Export agreements can consist of two forms, either with a direct or an indirect involvement. If a
company exports their products with an indirect involvement, they do not have any relationship
with customers or firms. This means that the firm only interacts with an intermediary, an example
could be that H&M only produces clothes and sell it through other retailers so they don’t have direct
contact to the consumer.
34
If a firm has a direct involvement in their export agreements, they have the chance to connect with
the buyer and make a relationship. This way the exporter have the opportunity to influence the
buyer in the direction as desired. (Czinkota et. al. 2009, p. 222-223)
Export is the entry mode with the lowest opportunity for control, which give the purchaser full
control over the product.
4.2.2. Licencing
An international licensing agreement, is an agreement with allows foreign firms to manufacture a
proprietor’s product for a fixed term in a specific market. This means that a person can buy the
rights to sell a certain brand or product at the new market.
When making a licensing agreement, the original owner of the license has to stand by with all
necessary information rights or resources. This may include trademarks, patents, managerial skills,
technology and others that can make it possible for the licensee to manufacture and sell a product
whit is similar to the one product that the licensor operates with.
This could for example be information about clothing style and next year’s collection or the recipe
for a special drink.
The main advantages for this deal will be the opportunity of reaching new markets without spending
a lot of resources for market research and the licensee will normally have a big know-how at the
new market with will make the opportunity of a bigger expansion more realistic.
But this loose handed control will obvious give a few disadvantages. The lack of resource risk will
also give a huge lack in income from this market, because it will belong to the licensee. Furthermore
there will be a lack of control in quality, which can give a bad rumor for partnerships in the further.
(Czinkota et. al. 2009, p. 228-229)
4.2.3. Franchising
Franchising is pretty similar to licensing. The definition to the franchising can be defined as: “A
system in which semi-independent business owners pay fees and royalties to a parent company in
return for the right to become identified with its trademark, to sell its products or services, and often
to use its business format and system”. A smaller explanation to this would be that a Franchisee pays
the owner of another company to use the name or brand to give themselves an advantage.
A great example of the franchising structure would be McDonalds which is build up with this
structure, where private partners open their own McDonalds restaurant and pays the company a
certain amount for the opportunity of opening the restaurant.
The franchisor will often offer a broader package of rights and resources than a licensor will. This will
35
often contain equipment, managerial systems, operation manual, initial trainings and all the support
that will be necessary for the franchisee to run the business in the same way as the franchisor
The franchising method will often be used for long term cooperation.
The advantages for using the Franchising method would be much like the licensing. Again there will
be a low political risk as well as a low resource cost. Furthermore this method allows simultaneous
expansion into different parts of the world.
One of the biggest disadvantages that could occur by using franchising will be the risk of being
competitor with your own franchisee if, in the case of McDonalds, another restaurant opens in the
same neighborhood and therefore steals costumers from each other. Furthermore, the risk of a
franchisee ruining the brand with low quality or bad leadership will be there all the time. (Czinkota
et. al. 2009, p. 230-231)
4.2.4. Joint venture
The method of joint venture is a well know strategy. The Strategy consists in a partnership of two or
more already existing companies. This partnership contains risk- and award sharing which is good in
the start of a new company because of the often huge cost this process.
Furthermore, the Joint venture gives advantages about the technology sharing and knowhow,
depending on the former companies.
The Key issues with a joint venture ownership are the control, length of agreement and culture
differences. These Issues, among others, can often create big discussions and maybe end out in a
deal breaker at last. (Czinkota et. al. 2009, p. 234-235)
4.2.5. Wholly owned subsidiary
Within wholly owned subsidiaries, also known as WOS, are there two main strategies. The first one is
called Greenfield Investment. The Greenfield Investment is the establishment of a new wholly
owned subsidiary. This strategy is often potentially costly, but gives the owner a full control of the
firm and will often have a return higher than average.
The other strategy is called Acquisition. This has become one of the more popular market entries
due to the greater market power. Acquisition is about buying your competitors and then gain market
share and knowledge from your new company.
Acquisition has a lower risk that the Greenfield Investment because of the outcome of an Acquisition
can be estimated a lot easier and accurately, but there are some other disadvantages in the process
of Acquisition strategy.
First of all the integrating of two organizations will often be difficult due to there often will be
36
different cultures in the organizations.
Second the Acquisition strategy some companies will significantly increase their debt with later on
can end in a bankruptcy.
The last of the most common and great disadvantages of Acquisition is that there can be too much
diversification, with may cause problems. This may necessary not be a large diversification, but a
little too much can have negative effect on the firm in long term performance. Often it will come on
to the management. (Czinkota et. al. 2009, p. 237-238)
4.2.6. Turnkey project
This Method is often used by industrial companies that specialize in complex production
technologies.
A Turnkey Project is a method where companies hire contractors to design and construct facilities in
the country where they wish to operate. After the construction is done the contractor will also be in
charge of educate personnel for the production or daily work.
The major advantage for this strategy is the possibility to establish a plant and earn profits in a
foreign country without direct investments and lack of expertise. This is also known as Outsourcing.
(Czinkota et. al. 2009, p. 234)
5. Analysis
5.1.
Previous studies on the choice of entry mode in relation to psychic distance
As it was already mentioned, psychic distance can be defined in different ways. Researchers have
tested the correlation between psychic distance and the choice of entry in the internationalization
process. The theoretic result of the correlation between the two variables, is based on the research
of Douglas Dow and Jorma Larimo, Entry Mode Choice: Testing New Approaches to Measuring
Psychic Distance and International Experience from December 2007.
This article has relation to other previous studies, which has different views on the term psychic
distance. An example is the study by Kogut and Singh’s (1988) has only defined psychic distance
based on Hofstede’s four cultural dimensions, and does not include all our criteria in the term
psychic distance (Dow & Larimo 2007, p. 4). According to Dow and Larimo we would only capture
one quarter of the potential impact of psychic distance if we have chosen to define it as Hofstede’s
cultural dimensions and not taken the further variables in to account (Dow & Larimo 2007, p. 19)
This article is chosen because it tries to sum up the previous studies, and research the correlation
37
between all relevant variables in psychic distance and the choice of entry mode. We find it a reliable
source because the research is completed by two professors in respectively business strategy and
international marketing. Furthermore they have used previous studies, and they seem to agree with
the conclusions from other previous studies in the area which back the conclusion up.
The study by Dow and Larimo is to try to confirm or reject the following two hypotheses:
H1. The cultural distance between countries will be negatively associated with a high
control entry mode (i.e. entry via a wholly-owned subsidiary).(Dow &Larimo 2007, p.6)
H2. Other dimensions of psychic distance, specifically differences in a) language, b)
religion, c) industrial development, d) education and e) political systems, will also be
negatively associated with a high control entry mode (i.e. entry via a wholly-owned
subsidiary). (Dow &Larimo 2007, p.7)
Hypothesis number 1:
The test of Hofstede’s cultural dimensions shows that there is a correlation between the cultural
distance and a high control entry mode. You should just take into account that if you withhold the
education factor. The cultural dimensions become more statistically significant. (Dow & Larimo 2007,
p. 17)
Hypothesis number 2:
The study shows that differences in religion, industrial development, education and degree of
democracy are all highly correlated with the probability that a firm will enter a country with a low
control entry mode, such as franchise. This result only applies when you take the variables into
account individually. It should be noted that it is important that all variables are included in to the
research. If you take a single variable out of the equation, the results will be different. An example is
as mentioned that if they separate the education dimension, they see a higher significance among
the other variables, but because that the variable is statistical significant it has to be included.
Otherwise they would exclude a dimension that has an effect on the choice of entry. (Dow & Larimo
2007, p. 17)
So if our research should be compared to the results in this particular article, it is important that we
also look at the variables as a total.
38
The difference in language is tested together with the cultural dimensions, and it shows that
difference in language has the same effect on the entry mode as the four other variables. (Dow &
Larimo 2007, p. 17)
The conclusion on this test is that both hypotheses 1 and 2 are statistically significant, and can
thereby be confirmed. The only dimension that could not be directly confirmed to have a relation to
the choice of entry is the political dimension, but is still included in the results. (Dow & Larimo 2007,
p. 17) This means that if there is a high psychic distance firms will tend to enter a country with a low
control entry mode, for example export, joint venture or franchise agreements.
In addition to the test of the interaction between psychic distance and the choice of entry mode, this
article tests if a company with a high level of internationally experience is more likely to choose a
high control entry mode. The article focuses on topics in general experience with
internationalization and a cultural-specific experience, which is how to operate in markets with
different languages, religion, culture and institutions. Furthermore the article distinguishes between
countries that look a lot like the home country according to the psychic distance and countries that
differ a lot from the home country.
The conclusion of this topic is that a general international experience cannot be directly correlated
with a choice of entry, which means that it has a little or no impact on the selected entry mode.
However, the most important experience appears to be the cultural-specific experience. The only
experience that has a significant impact on the selection of entry mode is the experience in country
similar to the host country. That means that experience in dissimilar countries does not have a
correlation with the entry mode selection. (Dow & Larimo 2007, p. 18-19)
5.2.
The entry mode(s) of H&M
From the findings of the master thesis made by Li & Frydrychowska (2008) as well as the official
website of H&M, its strategy is to enter foreign markets through wholly owned subsidiary. Looking
through the policy and laws in different countries and regions there can be a huge difference in the
possibility of entry modes. This is an important factor when companies try to enter a new foreign
market. In the position of H&M, they have integrated themselves on several foreign markets, which
have given them the knowledge and experience of the process. When they in 2006 entered the
Middle Eastern market, they had to make a change in their strategy, because of the rules the
government has set up for this kind of integration. So instead of following their existing strategy of
using the wholly owned subsidiaries, H&M had to find another way into this market, with resulted in
a partnership with the already existing player, Alshaya. (Li & Frydrychowska, p. 35-36)
39
According to the H&M annual report of 2012, H&M has ever used only two different entry modes.
This has been the case since the opening of their first foreign store in Norway and the same in
Denmark. As Earlier mentioned, H&M used franchising in the Middle Eastern region because of some
policies. In all the other markets H&M have been entered, they have used wholly owned subsidiaries
as the entry mode. This gives the opportunity to maintain full control over all of their stores all over
the world. This entry modes was also used in 1967 when H&M entered Denmark. (Li &
Frydrychowska, page 35-36)
5.3.
Psychic distance between the home country and the host country
In our project we are trying to find out whether or not there is a relationship between psychic
distance and the choice of entry mode. We have chosen a comparative research design that studies
phenomena by looking at it in different situations, which in this case means countries with different
psychic distance. Therefore our chosen host countries have to vary in psychic distance in relation to
H&M’s home country, which is Sweden. We assume that Denmark is psychically close country and
China is a psychically distant country. This section will measure the psychic distance of those two
countries in relation to Sweden based on the seven elements of psychic distance listed and
explained in Chapter 4.
5.2.1 Hofstede’s cultural dimensions
To determine the cultural differences between Denmark and China, Hofstede’s cultural dimensions
are used.
Figure 18 illustrates the differences between Sweden and Denmark. Denmark has a lower power
distance than Sweden, but both countries are in the lower end. This means that in Denmark you do
not lead for example an employee, you coach, and both countries are determined by trying to give
their citizens equal rights.
40
Figure 18: Cultural difference between Sweden and Denmark
Sweden
71
Denmark
78
74
70
46
31
29
18
23
16
20
5
Power distance Individualism
Masculinity /
Femininity
Uncertainty
avoidance
Long term
orientation
Indulgence
versus
Restraint
Source: Own processing with inspiration from http://geert-hofstede.com/countries.html
The difference in individualism between the two countries are very low, only 3 points. A score on 71
and 74 tells that both countries have an individualistic society. Individuals are expected to provide
for themselves and their family, and in a firm you measure the individual performance.
Sweden is a very feminine country where Denmark is a bit more masculine, but is still defined as a
feminine country. A feminine country is defined by making sure that all are included, and in the work
place you favour flexibility.
The uncertainty avoidance is relatively low in both countries which means that people are adapting
to new situations and don’t fear the possibility of something new.
The last dimension is long term orientation. Denmark is here more long term orientated than
Sweden, but still in the classification as short term orientation culture. Both countries respect
traditions and don’t have a great intention to save. This dimension is where you see a little
difference in the culture between the two countries.
Both countries have relatively high score in indulgence vs. restrain dimension, which means people
have strong gratification towards enjoying life and they don’t need to suppress their basic human
needs.
41
Figure 19: Cultural difference between Sweden and China
Sweden
China
118
80
78
71
66
31
29 30
20
24
20
5
Power distance
Individualism
Masculinity /
Femininity
Uncertainty
avoidance
Long term
orientation
Indulgence versus
Restraint
Source: Own processing with inspiration from http://geert-hofstede.com/countries.html
The figure above is to illustrate the cultural distance between Sweden and China. The first dimension
is the power distance. In contrast to Sweden, china has a high power distance. This means that
inequalities are accepted and there is no defence against the abuse of power.
China score low on the individual level where Sweden is an individual country. This indicates that
China has a collectivist culture where people act in groups and do not feel comfortable outside the
group.
Where Sweden is one of the most feminine countries, China has a masculine society. The Chinese
people are ready to sacrifice their family and prioritise their work to get ahead.
The dimension where a high cultural distance is not present is the uncertainty avoidance. At this
point China has a lower distance than Denmark and is almost equal to Sweden.
China is a long term orientated country and has a high variation from Sweden. The key words are
persistence and perseverance and the people are likely to save and related to long term projects and
commitments.
There exists huge difference in attitude towards indulgence vs. restrain between these two countries.
Chinese tend to restrain their natural human drivers and they are not encouraged to enjoy life
indulgently. On the opposite, Swedish do not need to suppress their needs for having fun.
42
Figure 20: Cultural difference between Sweden, Denmark and China
Sweden
Denmark
China
118
80
78
71 74
66
70
46
31
18
29
20
16
23
30
24
20
5
Power distance
Individualism
Masculinity /
Femininity
Uncertainty
avoidance
Long term
orientation
Indulgence
versus Restraint
Source: Own processing with inspiration from http://geert-hofstede.com/countries.html
Figure 20 shows that the three countries vary in the cultural distance according to which dimension
you look at. When looking from an overall perspective, Hofstede’s cultural dimensions shows that
Denmark is a country with a relative low cultural distance from Sweden. In contrast China can be
characterized as a country with a high cultural distance from Sweden, with the exception of
uncertainty avoidance.
5.2.2. Language
Both the Swedish language and the Danish language belong to the North Germanic languages, which
is “on the same branch of the Indo-European family tree…” (About.com). Swedish and Danish
languages even belong to the same sub-group called into the East-Scandinavian languages, as
opposed to West-Scandinavian languages which include Norwegian and Icelandic. Therefore it can
be said that those two languages are very similar. Moreover, our empirical experience shows that in
numerous cases Danish people can understand Swedish (if they speak slowly).
Given the fact that there are many versions of Chinese, we have chosen the Mandarin Chinese for
our analysis. The various Chinese languages belong under the Sino-Tibetan language group
(About.com). It is therefore a different language group than the one that Swedish and Danish belong
to. Furthermore, Chinese writing uses completely different writing signs, which adds to its “distance”
from the Scandinavian (and European in general) forms of writing.
To conclude, Danish and Swedish languages are relatively similar to each other while the Mandarin
Chinese is different from those two both in terms of language group and writing symbols. For better
43
visualisation of the closeness in languages between Swedish and Danish and the distance between
Swedish and Chinese, see Figure 21 below.
Figure 21: Language difference
Source: Own processing with inspiration from About.com
44
5.2.3. Religion
In order to find the different religion majorities/minorities within the countries that we research, we
used the website of The Association of Religion Data Archives (ARDA). According to their words,
ARDA “strives to democratize access to the best data on religion” (ARDA). Furthermore “data
included in the ARDA are submitted by the foremost religion scholars and research centres in the
world” (ARDA). We therefore assume that this source for the data on religion is complete and
credible enough. Graphs in Figure 22 below are taken straight from the website, representing the
distribution of religion in Sweden, Denmark, and China.
Figure 22: Religion in Sweden, Denmark and China
45
Source: Own processing with inspiration from thearda.com
It can be observed on the graphs that in Sweden and Denmark the overwhelming majority of people
are Christian. Furthermore in both countries Agnostic group is the second biggest. There is
difference in the ratio of Atheists and Muslims in the two countries. The Buddhists and other
religions appear to be negligible in significance.
In the case of China, there is not one dominant religion. Majority are Agnostic and Chinese
Universalists. Christians, that represent majority in Denmark and Sweden, are 4th in place in terms of
percentage.
To conclude, Sweden and Denmark have similar distribution of religions, whilst China is significantly
different.
5.2.4. Education
To compare education in the countries, we decided to compare the percentage of people that
completed certain levels of education. For classification of education we used the ISCED created by
UNESCO.
Our original intention was to compare the percentage of people who completed primary, secondary,
and tertiary education. However, the database of UNESCO was incomplete which would result in
inconsistency when comparing the different levels of education among different countries. The only
complete data for all three countries is the total number of graduates in all tertiary-level
programmes for years 2004-2010, as shown in Figure 23. Therefore we decided to base our measure
of education on that.
46
Figure 23: Degree of education in China, Denmark and Sweden
Country/Year 2004
2005
2006
2007
2008
2009
2010
China
3,977,882
5,004,102
5,622,795
5,872,815
7,071,047
7,716,957 7,863,663
Denmark
46,726
49,704
47,539
50,849
49,754
53,721
54,271
Sweden
59,359
57,611
62,774
60,243
60,434
59,320
61,217
Source: Own processing with inspiration from UNESCO
It is important to note that the numbers provided represent the total count of people who
graduated from tertiary education only in that respective year. Our aim is to get an up-to-date
percentage of people with a degree from tertiary education. Therefore the first step was to find the
total population in the countries in years 2004-2010.As a source we used the official website of
World Bank, worldbank.org. Based on that we calculated how many percent of people graduated
from a tertiary education programme. Finally, for the sake of easier comparison we made an average
of the percentage to get an idea of how many percent of people are tertiary graduates in the chosen
countries. This comparison is shown graphically in Figure 24 below.
Figure 24: Tertiary graduates
Tertiary graduates
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
Sweden
Denmark
China
Source: Own processing
This is a case similar to the industrial development, where hardly any similarities can be established.
Therefore our conclusion is that all three countries are different from each other in terms of
education.
5.2.5. Industrial development
Figure 25 below shows a graph that compares the Competitive Industrial Performance indices in
Sweden, Denmark, and China. These indices are taken from the UNIDO report 2012/2013, where the
CIP index measurements are from year 2010.
47
Figure 25: CIP index
CIP index
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
Sweden
Denmark
China
Source: Own processing with inspiration from UNIDO 2013
Unlike in the previous cases where similarities were found between Sweden and Denmark and
significant differences were found between Sweden and China, this does not seem to be the case of
competitive industrial performance which we have chosen to represent industrial development. In
fact, in this case Sweden seems to be closer to China than to Denmark in terms of industrial
development. However it is difficult to say in this case whether we can deem Sweden and China to
be similar/the same and Denmark to be significantly different. Therefore we say all three countries
different from each other.
5.2.6. Degree of democracy
As it was already mentioned previously in the theoretical part of this paper, we use the Democracy
Index 2010 report from Economist Intelligence Unit as the measure of degree of democracy. The
democracy index is based on 5 factors (pluralism, functioning of government, political participation,
political culture, civil liberties) that are explained in greater detail in Chapter 4.1.1.4. These factors
are numerically measured on a scale from 0 to 10. Figure 26 provides a numerical overview of the
individual scores as well the overall score of Sweden, Denmark, and China.
48
Figure 26: Degree of democracy in Denmark, Sweden and China
Pluralism
Functioning Political
of
participation
government
Denmark 10
9.64
8.89
Sweden
9.85
9.64
8.89
China
0
5
3.89
Source: Own processing with inspiration from EIU 2010
Political
culture
Civil
liberties
9.38
9.38
5.63
9.71
10
1.18
Comparing the 5 factors to the overall score, it is obviously shown that the Sweden and Denmark
have a steady score in all 5 factors, giving a final overall score close to all the factors. The only factor
which makes a significant difference for one country is the Pluralism of china, which is 0 and Civil
Liberties with score 1.18. This score brings down China significantly, but still gives us an overview of
the truth.
For better comparison between the countries, the overall score is represented as a graph in Figure
27 below.
Figure 27: Overall score of democracy index
Overall Score of democracy index
10
9
8
7
6
5
Overall Score
4
3
2
1
0
Denmark
Sweden
China
Source: Own processing
Looking at the table, it is easily to see the huge difference between the Scandinavian countries and
China. Therefore from the perspective with regards to degree of democracy, we can say that Sweden
and Denmark are close while both of them are distant from China.
49
5.2.7. Political ideologies
In this subchapter we tried to categorize the dominant political parties in Sweden, Denmark and
China according to the different mainstream political ideologies that are presented in Chapter
4.1.1.5.in this paper. Our source for finding out the ruling political parties in the countries was
Wikipedia.org, since we already used it as our source for listing the different political ideologies. Our
findings are presented in Figure 28.
Figure 28: Political ideologies in Sweden, Denmark and China
Country
Sweden
Denmark
Ruling political parties
Alliance (Moderate party,
Liberal people’s party, Centre
party, Christian Democrats)
Social democrats, Social liberal
party, Socialist’s people party
Dominating political ideology
LIBERALISM
China
Communist party of China
Source: Own processing with inspiration from EIU 2010 and
SOCIALISM
COMMUNISM
http://en.wikipedia.org/wiki/List_of_ruling_political_parties_by_country
This is another case where it is hard to establish closeness in terms of political ideologies, since all
three of them are different.
5.2.8. Summary of psychic distance analysis
Differences and similarities between Sweden, Denmark, and China have been assessed from five
different perspectives that make up the psychic distance according to Dow & Larimo (2007, 2008).
The overall summary of these findings are presented in Figure 15. The figure presents comparison of
H&M’s home country (Sweden) to chosen host countries (Denmark, China) in terms of psychic
distance factors. Green rectangles mean that there similarities or even identical traits between the
countries. Orange rectangles mean that those aspects of psychic distance did not present any
similarities among the three countries, therefore it cannot be said whether the host country is
psychically close or distant to Sweden. Red rectangles represent significant differences. That being
said, the conclusions we made are following:
50
1) Sweden and Denmark are highly similar/identical in terms of culture, language, religion, and
degree of democracy. At the same time, China is significantly different in terms of those four
aspects of psychic distance.
2) All three countries are different from each other in terms of education, Industrial
development, and political ideologies.
3) Relative to Sweden, Denmark can be deemed as psychically close country and China can be
deemed as psychically distant country.
51
Figure 29: comparison in psychic distance
Culture
Language
Religion
Sweden - Denmark
Education
Industrial
development
Degree of
democracy
Political idologies
Culture
Language
Religion
Sweden - China
Education
Industrial
development
Degree of
democracy
Political ideologies
Source: Own processing
52
6. Discussion
6.1.
The importance of psychic distance
The study of Dow & Larimo (2008) showed that companies entering foreign countries with high
psychic distance (based on the five variables that were also analysed in this paper) tend to use lowcontrol entry modes, such as export, joint venture, or franchising. The question however is whether
this correlation also means causality. It might be the case that although the statistical data suggest
the positive association between the low-control entry modes and psychic distance, psychic distance
itself might not be an essential factor on which a company would base its decision as to which entry
mode should be chosen.
In our analysis of psychic distance we used the same variables of psychic distance that Dow & Larimo
(2007, 2008) proposed. Since their study did not explicitly explain each variable, we have come up
with our own interpretation, using various databases and measures from sources that we consider
credible. From our analysis we have come to the conclusion that Denmark is psychically close to
Sweden, and China is psychically distant from Sweden. Therefore we have achieved the desired
variety in psychic distance.
The logical implication based on the study of Dow & Larimo (2008) would suggest that H&M should
have used a low-control entry mode in China and a high-control entry mode in Denmark. However
our research has revealed that H&M prefers to use wholly-owned subsidiary as a mean of entering a
foreign market. The only exception is the use of franchise in the Middle East. That however was due
to certain political barriers which are not part of our interpretation of psychic distance. We assume
that if the company was allowed to enter via a wholly-owned subsidiary, it would do so, given the
fact that it is the only type of entry mode it has used everywhere else in the world. This form of
entry mode selection, where only one way of entering a new market is also referred to as “the naive
rule” (Hollensen 1998, cited in Gustavsson & Lundgren 2006, p. 11). From this we conclude that
psychic distance does not play a significant role for H&M in choosing the type of entry mode.
6.2.
Possible reasons for an entry mode choice
If psychic distance is not an important factor, then what is? There might be number of reasons.
Before H&M move in to a new market they always make an assessment of the potential in this
particular market. This assessment includes factors as demographic structure, purchasing power,
economic growth, infrastructure, political risk, human rights and environmental sustainability.
(H&M.com) An analysis in these areas will help minimizing the risks concerning a wholly owned
subsidiary.
53
The motive behind H&M’s choice to mainly use wholly owned subsidiaries can be related to the
management capability together with their financial exposure, as well as the control they want to
have in their international operations. (Management study guide) A non controlling entry mode is
usually used by companies that seek to maximize profit, and don’t have a specific brand to maintain.
In contrast a firm that is known for their brand will try to maintain control so their image won’t be
damaged. (Management study guide)
According to Interbrand, H&M is number 21 on the list of the best global brand worldwide
(Interbrand.com 2013). To obtain this brand H&M has to have control and is therefore causing the
choice of entry mode. H&M has set up some strict commitments both to the environment but also
internal in the organization. They have a code of conduct that has to be followed strictly, which they
can’t ensure unless they have full control. Furthermore they seek to be fully ethically correct when it
comes to customers, colleagues or business partners. (H&M.com) This can also be related to the
choice of entry mode, because if they gave up their control they would not be able to influence
which employees that are working in the stores and their behavior towards the customers and each
other.
The issue is, as it was already established in the Chapter 2, that our research was limited by a strict
and relatively short time scope, thus we had to rely on (free) secondary data. Therefore we could
only get as far as to test the importance of psychic distance on entry mode selection and propose
other potential reasons. To be able to find out the exact reason why H&M tends to use only one type
of entry mode, one would have to conduct a primary research by interviewing the management of
H&M.
7. Conclusion
With regards to the trend of increasing internationalization in the world, companies eventually enter
countries referred to as being more psychically distant. Clothing companies like H&M are no
exception. However, is psychic distance really that important in relation to the entry mode selection
in all cases? Our research compared the entry mode of H&M retail stores in Denmark which was an
example of psychically close country, and China which was an example of psychically distant country.
In our research we assessed psychic distance based on the studies of Dow & Larimo (2007, 2008),
which defined psychic distance as being a mix of culture, language, religion, education, industrial
development, degree of democracy, and political ideologies. Each of the five factors is equally
important and therefore the more factors are significantly different between the host and the home
country, the more psychically distant the host country is.
54
In their study, Dow & Larimo (2008) confirmed their hypothesis that the degree of control is
negatively correlated with the psychic distance. Therefore companies entering foreign markets that
are psychically distant often use lower control entry modes, such as franchising, joint venture or
exporting.
Despite the findings of Dow & Larimo, our research has shown that H&M retail stores use whollyowned subsidiary as a mean of entry, even in psychically distant countries such as China. The
implication therefore is that psychic distance might not play an essential role in the entry mode
selection. Therefore the correlation found by Dow & Larimo does not imply causality, at least in the
case of H&M. In order to grasp the key factor on which H&M bases its entry mode selection, primary
research needs to be conducted by directly contacting the management of H&M.
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