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The Impact of Psychic Distance on Chinese Outward Foreign Direct Investments

Abstract

  • 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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Notes

  1. 1.

    Dow and Karunaratna (2006) included an eighth stimulus capturing colonial ties; for obvious reasons this was excluded in the current study.

  2. 2.

    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.

  3. 3.

    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).

  4. 4.

    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.

  5. 5.

    Our descriptive analyses are based on the 120 countries for which full data is available at Dow (2011) Psychic distance scales, http://www.mbs.edu/home/dow/research, and on Hofstede (2001, for cultural differences).

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Author information

Correspondence to Rian Drogendijk.

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
Singapore 1.00 Uganda 47.20 Poland 66.19
Taiwan 4.87 Cote d’Ivoir 47.38 Australia 66.83
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
Vietnam 24.58 Fiji 47.98 Estonia 70.00
Brazil 26.91 Sierra Leone 48.70 Latvia 71.33
Syrian Arab Republic 30.99 Bangladesh 49.05 Hungary 72.32
Sudan 31.70 Venezuela 49.20 Malta 73.67
Egypt 32.85 Madagascar 49.46 Japan 74.37
Myanmar 34.10 Uzbekistan 50.05 Israel 75.56
Jordan 35.92 Bahrain 50.40 Ukraine 75.78
Sri Lanka 36.53 Pakistan 50.70 Portugal 76.41
Kenya 37.17 Ecuador 51.03 New Zealand 77.10
Mexico 37.58 South Africa 51.26 Slovakia 79.96
Iran 37.67 Peru 52.04 Italy 82.13
United Arab Emirates 38.39 Ethiopia 52.45 Greece 82.59
Algeria 38.41 Colombia 52.57 Germany 83.00
Libya 38.73 Papua New Guinea 52.61 Iceland 83.14
Ghana 39.42 Mozambique 52.87 United Kingdom 83.60
Zimbabwe 39.65 Wanuatu 53.90 France 84.66
Malaysia 39.94 Turkey 54.08 Belgium 84.82
Iraq 40.29 Lebanon 55.67 Switzerland 85.42
DR Congo 40.30 Solomon 56.22 Ireland 86.69
Nigeria 41.00 Chile 56.45 Republic of Korea 86.80
Oman 41.51 Luxembourg 56.49 Finland 87.50
Yemen Rep 41.89 Nepal 56.80 Spain 88.40
Saudi Arabia 42.60 Suriname 57.69 Lithuania 89.94
Afghanistan 42.80 Serbia & Montenegro 57.85 Sweden 91.08
Kuwait 44.11 Kazakhstan 58.34 Netherlands 91.69
PDR Laos 44.26 Russian Federation 58.55 Austria 92.01
India 44.60 Panama 59.22 United States 92.13
Jamaica 45.42 Romania 61.00 Canada 92.72
Zambia 45.98 Argentina 62.35 Denmark 99.44
Tanzania 46.14 Bulgaria 62.69 Norway 100.00
Philippines 46.22 Uruguay 63.27   
Thailand 46.93 Croatia 65.61   
  1. This table includes only those countries for which full data is available at Dow (2011) Psychic distance scales, http://www.mbs.edu/home/dow/research

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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

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Keywords

  • Chinese OFDI
  • Psychic distance
  • Psychic distance stimuli
  • Internationalization
  • Emerging markets firms