The aim of this paper is to investigate the value of the well-known construct of psychic distance, developed to explain the internationalization path of firms from developed countries, for the internationalization of Chinese firms.
Our research question is: Does psychic distance and its individual stimuli (differences in language, religion, culture, economic development, political systems, education, and geographic distance) explain Chinese investments abroad?
We test hypotheses on the relation between psychic distance and its stimuli and Chinese outward direct investments with OLS regression analyses.
We find that Chinese OFDI indeed is influenced by an aggregate construct of psychic distance and by certain psychic distance stimuli, but not by all; in particular, similarities or differences with regard to language and culture, the level of industrialization and the level of democracy relate to Chinese firms’ internationalization.
Our findings suggest that psychic distance and its stimuli cannot be ignored as explanatory factors for Chinese outward FDI but that the explanatory value of these constructs depends on the context of the phenomenon under study.
We conclude that it is important to understand how the home country context influences managerial perceptions and thereby patterns of international expansion from different regions.
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Dow and Karunaratna (2006) included an eighth stimulus capturing colonial ties; for obvious reasons this was excluded in the current study.
In the present paper both of the terms China and Mainland China refers to the People´s Republic of China (PRC). In this study the PRC excludes the special autonomous regions of Hong Kong and Macau as the Republic of China Taiwan is referred to as a separate economy.
The definition of FDI in this paper draws upon UNCTAD, hence FDI is an investment involving a long-term relationship and reflecting a lasting interest and control by a firm in an enterprise resident in a foreign country (UNCTAD, 2005). Moreover, it includes three factors; equity capital, reinvested earnings and intra-company loans or debt transactions (UNCTAD 2005).
We followed Suanet and Van de Vijver (2009) and estimated the scores for Paraguay and Bolivia by using the average scores for Uruguay and Colombia. Suanet and Van de Vijver (2009) further propose to use Russia’s scores for Ukraine and Uzbekistan. We have extended this and use scores for Russia also for Byelorus, Kirghizia, Tadzhikistan and Turkmenistan. Scores for Myanmar were retrieved from Rarick and Nickerson (2008), whereas scores for Latvia and Lithuania are from Huettinger (2008). Sri Lanka received the same scores as India, as was proposed by a working paper retrieved from the World Bank (Hazarika, Nahata and Tandon, 2009, retrieved from http://siteresources.worldbank.org/INTFR/Resources/Hazarika_Nahata_Tandon0709.pdf, 23-09-2011). We further entered the average scores of Switzerland and Austria for Liechtenstein, the average scores of Turkey and Greece for Cyprus, and employed Hofstede’s original scores for Hong Kong also for Macau, South Africa’s scores for Lesoto, and India’s scores for Nepal.
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Appendix A: Psychic Distance to China
Appendix A: Psychic Distance to China
We calculated the psychic distance between China and the respective host countries using the Kogut and Singh (1988) formula. We then transformed the resulting scores to a scale from 1 to 100 using the following formula (cf. Martín Martín and Drogendijk,in press): X’j = [[(Xj - minPD)/RPD] 99] + 1, where X’j is the transformed psychic distance value of country j; Xj is the psychic distance score of country j; minPD is the minimum value of psychic distance, and RPD is the range of psychic distance.
|Country||Psychic distance||Country||Psychic distance||Country||Psychic distance|
|DPR Korea||12.23||Cameroon||47.88||Czech Republic||67.36|
|Hong Kong||15.83||Morocco||47.90||Costa Rica||67.54|
|Indonesia||17.29||Qatar||47.98||Trinidad & Tobago||69.80|
|Syrian Arab Republic||30.99||Bangladesh||49.05||Hungary||72.32|
|United Arab Emirates||38.39||Ethiopia||52.45||Greece||82.59|
|Libya||38.73||Papua New Guinea||52.61||Iceland||83.14|
|Nigeria||41.00||Chile||56.45||Republic of Korea||86.80|
|Afghanistan||42.80||Serbia & Montenegro||57.85||Sweden||91.08|
|PDR Laos||44.26||Russian Federation||58.55||Austria||92.01|
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Blomkvist, K., Drogendijk, R. The Impact of Psychic Distance on Chinese Outward Foreign Direct Investments. Manag Int Rev 53, 659–686 (2013). https://doi.org/10.1007/s11575-012-0147-y
- Chinese OFDI
- Psychic distance
- Psychic distance stimuli
- Emerging markets firms