The Role of Innovation in the Relation Between Psychic Distance and Organizational Performance

Previous research suggests that the perceptions of a high degree of differences and subsequent uncertainty when expanding into psychically distant markets triggers strategies for innovation adoption. This study examined the model on the mediating effect of innovation on psychic distance and organizational performance. The research framework was based on the strong belief that organizations tend to innovate when there was a high perceived environmental uncertainty caused by internationalization or business expansion in foreign markets. The psychic distance such as power distance and political environment varies in different markets, creating difficulty when managing them, thus, affecting organizational performance. Based on resource-based view theory, the internal resource such as innovation is suggested to associate with organizational performance. The hypotheses of the relationships between psychic distance, innovation, and organizational performance were tested using the Statistical Package for Social Science (SPSS) software. The data was collected from fourteen subsidiaries (n = 279) managed by an Asian regional headquarter/hub. The results show that the adoption of both organizational and technological innovation mediates the relationship between psychic distance and organizational performance. The results provide some meaningful insights to the organizations on the benefits or drawback in making the decision during internationalization process including global and regional strategy.