Psychic Distance and FDI: The Case of China

  • Katiuscia VaccariniEmail author
  • Francesca Spigarelli
  • Ernesto Tavoletti
  • Christoph Lattemann


This chapter seeks to investigate whether and to what extent Psychic Distance (PD) is considered by scholars as a specific determinant of inbound and outbound foreign direct investments (FDIs) in China. The key finding of the study is that psychic distance as a determinant influencing FDI seems to be under-investigated. This chapter also aims to systematize the limited and fragmented literature about non-tangible perceptions of “distance” between home and host economies and contributes to raising awareness on the concept of psychic distance. It provides useful insights and practical implications for various interest groups such as international business scholars (a more comprehensive review and systematization of the concept of psychic distance), managers (awareness raising on psychic distance, opportunities and challenges in the IB scenario, and setting up and strengthening long-term cooperation between Europe and China), and policy makers (investment flows between Europe and China and key barriers which affect companies and require action politically and institutionally to ensure that opportunities are fully exploited by companies).


PD Psychic distance Cultural distance Determinant FDI China Managers’ perceptions International business Uppsala OLI OLMA LLL Hofstede Cross Cultural Cross-country Cross border Psychic distance dimensions Geographical distance Level of education Level of economic development Level of technological development Political system Legal system Regulations Accepted business practices Business ethics 


  1. Al-Huda, N., & Karim, A. (2012). Factors affecting foreign direct investment in Malaysia’s manufacturing sector: An analysis across states. The Singapore Economic Review, 57(4), 1–14.Google Scholar
  2. Ambos, B., & Håkanson, L. (2014). The concept of distance in international management research. Journal of International Management, 20(1), 1–7.CrossRefGoogle Scholar
  3. Amighini, A. A., Rabellotti, R., & Sanfilippo, M. (2013). Do Chinese state-owned and private enterprises differ in their internationalization strategies? China Economic Review, 27, 312–325.CrossRefGoogle Scholar
  4. Anderson, G., & Ge, Y. (2004). Do economic reforms accelerate urban growth? The case of China. Urban Studies, 41(11), 2197–2210.CrossRefGoogle Scholar
  5. Athukorala, P. C., & Waglé, S. (2011). Foreign direct investment in Southeast Asia: Is Malaysia falling behind? ASEAN Economic Bulletin, 28(2), 115–133.CrossRefGoogle Scholar
  6. Aulakh, P. S. (2007). Emerging multinationals from developing economies: Motivations, paths and performance. Journal of International Management, 13(3), 235–402.CrossRefGoogle Scholar
  7. Bartels, F. L., Napolitano, F., & Tissi, N. E. (2014). FDI in Sub-Saharan Africa: A longitudinal perspective on location-specific factors (2003–2010). International Business Review, 23, 516–529.CrossRefGoogle Scholar
  8. Beckerman, W. (1956). Distance and the pattern of intra-European trade. The Review of Economics and Statistics, 38(31), 31–40.CrossRefGoogle Scholar
  9. Brewer, P., & Venaik, S. (2011). Individualism–collectivism in Hofstede and GLOBE. Journal of International Business Studies, 42(3), 436–445.Google Scholar
  10. Brouthers, K. D., Brouthers, L. E., & Werner, S. (1996a). Dunning’s eclectic paradigm theory and the small firm: The impact of ownership and local advantages on the choice of entry modes in the computer software industry. International Business Review, 5(4), 337–394.CrossRefGoogle Scholar
  11. Brouthers, K. D., Brouthers, L. E., & Werner, S. (1996b). Is Dunning’s eclectic framework descriptive or normative? Journal of International Business Studies, 30(4), 831–844.CrossRefGoogle Scholar
  12. Brouthers, L. E., Brouthers, K. D., & Werner, S. (1999). Is Dunning’s eclectic framework descriptive or normative? Journal of International Business Studies, 30(4), 831–844.CrossRefGoogle Scholar
  13. Buckley, P. J., Cross, A. R., & Horn, S. A. (2012). Japanese foreign direct investment in India: An institutional theory approach. Business History, 54(5), 657–688.CrossRefGoogle Scholar
  14. Buckley, P.J., & Casson, M.C. (1976). The future of the multinational enterprise. London: Homes & Meier.Google Scholar
  15. Chakrabarti, A. (2001). The determinants of foreign direct investments: Sensitivity analyses of cross-country regressions. Kyklos, 54(1), 89–114.CrossRefGoogle Scholar
  16. Chantasasawat, B., Fung, K. C., Iizaka, H., & Siu, A. (2004). The giant sucking sound: Is China diverting foreign direct investment from other Asian economies? Asian Economic Papers, 3(3), 122–140.CrossRefGoogle Scholar
  17. Chantasasawat, B., Fung, K. C., Iizaka, H., & Siu, A. (2010). FDI flows to Latin America, East and Southeast Asia, and China: Substitute or complements? Review of Development Economics, 14(3), 533–546.CrossRefGoogle Scholar
  18. Chen, H., & Chen, T.-J. (1998). Network linkages and location choice in foreign direct investment. Journal of International Business Studies, 29(3), 445–467.CrossRefGoogle Scholar
  19. Chen, C. C., Chen, X.-P., & Huang, S. (2013). Chinese guanxi: An integrative review and new directions for future research. Management and Organization Review, 9(1), 167–207.CrossRefGoogle Scholar
  20. Chen, T.-J., Chen, H., & Ku, Y.-H. (2004). Foreign direct investment and local linkages. Journal of International Business Studies, 35, 320–333.CrossRefGoogle Scholar
  21. Cheng, Y.-M. (2006). Determinants of FDI mode choice: Acquisition, brownfield, and greenfield entry in foreign markets. Canadian Journal of Administrative Sciences Review, 23(3), 202–220.CrossRefGoogle Scholar
  22. Cheng, L. K., & Kwan, Y. K. (2000). What are the determinants of the location of foreign direct investment? The Chinese experience. Journal of International Economics, 51, 379–400.CrossRefGoogle Scholar
  23. Child, J., Rodrigues, S. B., & Frynas, J. G. (2009). Psychic distance, its impact and coping modes: Interpretations of SMEs decision-makers. Management International Review, 49(2), 199–224.CrossRefGoogle Scholar
  24. Coase, R. H. (1937). The nature of the firm. Economica. New Series, 4(16), 386–405.Google Scholar
  25. Coughlin, C. C., & Segev, E. (2000). Foreign direct investment in China: A spatial econometric study. The World Economy, 3(1), 1–23.CrossRefGoogle Scholar
  26. Cushman, D. O. (1985). Real exchange rate risk, expectations and the level of direct investment. Review of Economics and Statistics, 67(2), 297–308.CrossRefGoogle Scholar
  27. Dow, D., & Karunaratna, A. (2006). Developing a multidimensional instrument to measure psychic distance stimuli. Journal of International Business Studies, 37(5), 578–602.CrossRefGoogle Scholar
  28. Drogendijk, R., & Slangen, A. (2006). Hofstede, Schwartz, or managerial perceptions? The effects of different cultural distance measures on establishment mode choices by multinational enterprises. International Business Review, 15, 361–380.CrossRefGoogle Scholar
  29. Dunning, J. H. (1980). Toward an eclectic theory of international production: Some empirical tests. Journal of International Business Studies, 11(1), 9–31.CrossRefGoogle Scholar
  30. Dunning, J. H. (1993). Multinational enterprises and the global economy. Harlow: Addison-Wesley.Google Scholar
  31. Dunning, J. H. (2000). The eclectic paradigm as an envelope for economic and business theories of MNE activity. International Business Review, 9, 163–190.CrossRefGoogle Scholar
  32. Dunning, J. H. (2009). Location and the multinational enterprise: John Dunning’s thoughts on receiving the journal of international business studies 2008 decade award. Journal of International Business Studies, 40, 20–34.CrossRefGoogle Scholar
  33. Dunning, J. H., & Bansal, S. (1997). The cultural sensitivity of the eclectic paradigm. Multinational Business Review, 5(1), 1–16.Google Scholar
  34. Dunning, J. H., Pak, Y. S., & Beldona, S. (2007). Foreign ownership strategies of UK and US international franchisors: An exploratory application of Dunning’s envelope paradigm. International Business Review, 16, 531–548.CrossRefGoogle Scholar
  35. Evans, J., Treadgold, A., & Mavondo, F. (2000). Explaining export development through psychic distance. International Marketing Review, 17(2), 164–169.Google Scholar
  36. Ferreira, M. P., Pinto, C. F., Serra, F. A. R., & Gaspar, L. F. (2011). John Dunning’s influence in international business/strategy research: A bibliometric study in the strategic management journal. Journal of Strategic Management Education, 7(2), 77–99.Google Scholar
  37. Forsgren, M. (2002). The concept of learning in the Uppsala internationalization process model: A critical review. International Business Review, 11,(3) 257–277.CrossRefGoogle Scholar
  38. Fung, K. C., Garcia-Herrero, A., Iizaka, H., & Siu, A. (2005). Hard or soft? Institutional reforms and infrastructure spending as determinants of foreign direct investment in China. The Japanese Economic Review, 56(4), 408–416.CrossRefGoogle Scholar
  39. Ghemawat, P. (2001). Distance still matters. Harvard Business Review, 79(8), 137–147.Google Scholar
  40. Gomez-Mejia, L., & Polick, L. (1997). Cultural diversity and the performance of multinational firms. Journal of International Business Studies, 28(2), 309–335.CrossRefGoogle Scholar
  41. Grosse, R., & Trevino, L. J. (1996). Foreign direct investment in the United States: An analysis by country of origin. Journal of International Business Studies, 27(1), 139–155.CrossRefGoogle Scholar
  42. Gruber, W. H., & Vernon, R. (1970). The technology factor in a world trade matrix. In R. Vernon (Ed.), The Technology Factor in International Trade (pp. 233–272). New York: Columbia University Press for National Bureau of Economic Research.Google Scholar
  43. Guisinger, S. (2001). From OLI to OLMA: Incorporating higher levels of environmental and structural complexity into the eclectic paradigm. International Journal of the Economics of Business, 8(2), 257–272.CrossRefGoogle Scholar
  44. Hashim, F. (2012). Outward internationalization and FDI: Motives for Malaysian MNEs moving into China. Review of Business and Finance Studies, 3(2), 89–102.Google Scholar
  45. Heiner, R. (1985). Origins of predictive behavior: Further modeling applications. American Economics Review, 75(2), 391–396.Google Scholar
  46. Hennart, J. F. (1982). A theory of multinational enterprise. Ann Arbor: University of Michigan.Google Scholar
  47. Hennart, J. F., & Larimo, J. (1998). The impact of culture on the strategy of multinational enterprises: Does national origin affect ownership decisions? Journal of International Business Studies, 29, 515–538.CrossRefGoogle Scholar
  48. Henderson, J. K. (2005). Language diversity in international management teams. International Studies of Management and Organization, 35(1), 66–82.Google Scholar
  49. Hofstede, G. (1980). Culture’s consequences: International differences in work-related values. Beverly Hills, CA: Sage.Google Scholar
  50. Hong, J. (2007). Firm-specific effects on location decisions of foreign direct investment in China’s logistics industry. Regional Studies, 41(5), 673–683.CrossRefGoogle Scholar
  51. Hong, M., & Chen, L. S. (2001). Quantitative and dynamic analysis of the OLI variables determining FDI in China. Review of Urban & Regional Development Studies, 13(2), 163–172.CrossRefGoogle Scholar
  52. Hosseini, H. (2005). An economic theory of FDI: A behavioural economics and historical approach. The Journal of Socio-Economics, 34, 528–541.CrossRefGoogle Scholar
  53. Hymer, S. H. (1960). The international operation of national firms: A study of direct investment. M.I.T Ph.D. dissertation, Published by M.I.T. Press in 1976.Google Scholar
  54. Iwasaki, I., & Suganuma, K. (2005). Regional distribution of foreign direct investment in Russia. Post-Communist Economies, 17(2), 153–172.CrossRefGoogle Scholar
  55. Jalali, S., & Wohlin, C. (2012). Systematic literature studies: Database searches vs. Backward snowballing. In International Conference on Empirical Software Engineering and Measurement, ESEM’12, September 19–20, 2012, Lund, Sweden. Accessed Apr 2017.
  56. Jajri, I. (2009). Foreign direct investment and economic growth: Cointegration techniques. The IUP Journal of Managerial Economics, 3(4), 7–18.Google Scholar
  57. Jiang, F. (2006). The determinants of the effectiveness of foreign direct investment in China: An empirical study of joint and sole ventures. International Journal of Management, 23(4), 891–908.Google Scholar
  58. Johanson, J., & Vahlne, E. (1977). The internationalization process of the firm: A model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8, 23–32.CrossRefGoogle Scholar
  59. Johanson, J., & Vahlne, E. (2009). The Uppsala internationalization process model revisited: From liability of foreignness to liability of outsidership. Journal of International Business Studies, 40(9), 1411–1431.CrossRefGoogle Scholar
  60. Johanson, J., & Wiedersheim‐Paul, F. (1975). The internationalization of the firm—four Swedish cases. Journal of Management Studies, 12(3), 305–323.Google Scholar
  61. Kogut, B., & Singh, H. (1988). The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19, 411–432.CrossRefGoogle Scholar
  62. Kostova, T. (1999). Transnational transfer of strategic organizational practices: A contextual perspective. Academy of Management Review, 24(2), 308–324.Google Scholar
  63. Langhammer, R. J. (1991). Towards regional entities in Asia-Pacific. ASEAN Economic Bulletin, 7(3), 277–289.CrossRefGoogle Scholar
  64. Leamer, E. E. (1974). The commodity composition of international trade in manufactures: An empirical analysis. Oxford Economic Papers, 26(3), 350–374.CrossRefGoogle Scholar
  65. Lenartowicz, T., & Roth, K. (1999). A framework for culture assessment. Journal of International Business Studies, 30(4), 781–798.CrossRefGoogle Scholar
  66. Li, X., Hou, K., & Chan, M. W. L. (2008). An empirical study of foreign direct investment location in Eastern China. The Chinese Economy, 41(6), 75–98.CrossRefGoogle Scholar
  67. Liao, H., Liu, X., & Wang, C. (2012). Knowledge spillovers, absorptive capacity and total factor productivity in China’s manufacturing firms. International Review of Applied Economics, 26(4), 533–547.CrossRefGoogle Scholar
  68. Linnemann, H. (1966). An econometric study of international trade flows. Amsterdam: North-Holland Publishing.Google Scholar
  69. Luiz, J. M., & Ruplal, M. (2013). Foreign direct investment, institutional voids, and the internationalization of mining companies into Africa. Emerging Markets Finance and Trade, 49(4), 113–129.CrossRefGoogle Scholar
  70. Luo, Y., & Shenkar, O. (2011). Toward a perspective of cultural friction in international business. Journal of International Management, 17(1), 1–14.CrossRefGoogle Scholar
  71. Ma, Z., Yang, R., & Zhang, Y. (2008). Australia’s direct investment in China: Trends and determinants. Economic Papers, 27(1), 70–86.CrossRefGoogle Scholar
  72. Markusen, J. (1995). The boundaries of multinational enterprises and the theory of international trade. The Journal of Economic Perspectives, 9(2), 169–191.CrossRefGoogle Scholar
  73. Mathews, J. A. (2006). Dragon multinationals: New players in 21st century globalization. Asia Pacific Journal of Management, 23(5), 5–27.CrossRefGoogle Scholar
  74. McDougall, P., & Oviatt, B. (2005). Defining international entrepreneurship and modeling the speed of internationalization. Entrepreneurship Theory and Practice, 29(5), 537–554.CrossRefGoogle Scholar
  75. North, D. C. (2005). Understanding the process of economic change. Princeton: Princeton University Press.CrossRefGoogle Scholar
  76. O’Grady, S., & Lane, H. (1996). The psychic distance paradox. Journal of International Business Studies, 27(2), 309–333.CrossRefGoogle Scholar
  77. Parmentola, A. (2011). The internationalization strategy of new Chinese multinationals: Determinants and evolution. International Journal of Management, 28(1), 369–386.Google Scholar
  78. Ramasamy, B. (2003). FDI and uncertainty: The Malaysian case. Journal of the Asia Pacific Economy, 8(1), 85–101.CrossRefGoogle Scholar
  79. Roth, K., & O’Donnell, S. O. (1996). Foreign subsidiary compensation: An agency theory perspective. Academy of Management Journal, 39(3), 678–703.CrossRefGoogle Scholar
  80. Rottig, D., & Reus, T. H. (2009). Institutional distance, organizational legitimacy, and the performance of foreign acquisitions in the united states. In Academy of Management Annual Meeting Proceedings (pp. 1–6). Chicago: Academy of Management Proceedings. Google Scholar
  81. Samuelson, P. (1948). International trade and the equalization of factor prices. Economic Journal, 58, 163–184.CrossRefGoogle Scholar
  82. Sanfilippo, M. (2010). Chinese FDI to Africa: What is the nexus with foreign economic cooperation? African Development Review, 22(1), 599–614.CrossRefGoogle Scholar
  83. Scott, W. R. (1995). Institutions and organizations. Thousand Oaks, CA: Sage.Google Scholar
  84. Shenkar, O. (2001). Cultural distance revisited: Towards a more rigorous conceptualization and measurement of cultural differences. Journal of International Business Studies, 32(4), 519–535.CrossRefGoogle Scholar
  85. Spigarelli, F. (2009). Le multinazionali dei paesi emergenti: Gli investimenti cinesi in Italia (MNEs from emerging countries: Chinese investment in Italy. With English summary). Economia Politica e Industriale, 36(2), 131–159.Google Scholar
  86. Spigarelli, F. (2010). Chinese investments in Italy: Is the wave arriving? International Journal of Asian Business and Information Management, 1(1), 54–76.CrossRefGoogle Scholar
  87. Stoian, C., & Filippaios, F. (2008). Dunning’s eclectic paradigm: A holistic, yet context specific framework for analyzing the determinants of outward FDI evidence from international Greek investments. International Business Review, 17, 349–367.CrossRefGoogle Scholar
  88. Stöttinger, B., & Schlegelmilch, B. B. (2000). Psychic distance: A concept past its due date? International Marketing Review, 17(2), 169–173.CrossRefGoogle Scholar
  89. Tse, D. K., Pan, Y., & Au, K. Y. (1997). How MNCs choose entry modes and form alliances: The China experience. Journal of International Business Studies, 28(4), 779–805.CrossRefGoogle Scholar
  90. UNCTAD. (2014, January 28). Global investment trends monitor, No. 15, New York: United Nations.Google Scholar
  91. Vernon, R. (1966). International investment and international trade in the product cycle. Quarterly Journal of Economics, 80, 190–207.CrossRefGoogle Scholar
  92. Villaverde, J., & Maza, A. (2012). Chinese per capita income distribution, 1992–2007: A regional perspective. Asian Economic Journal, 26(4), 313–331.CrossRefGoogle Scholar
  93. Vintila, D. (2010). Foreign direct investment theories: An overview of the main FDI theories. European Journal of Interdisciplinary Studies, 2(2), 104–110.Google Scholar
  94. Walters, P. G. P. (1996). International market information infusion: Data acquisition behavior in Norwegian Exporters. International Journal of Information Management, 16(6), 437–444.CrossRefGoogle Scholar
  95. Wei, W., & Alon, I. (2010). Chinese outward direct investment: A study on macroeconomic determinants. International Journal and Emerging Markets, 2(4), 352–369.CrossRefGoogle Scholar
  96. Xiaojuan, J., Yingxin, W., & Laike, Y. (2004). A study of the gradual shift of foreign investment. The Chinese Economy, 37(5), 19–36.Google Scholar
  97. Xu, D., & Shenkar, O. (2002). Institutional distance and the multinational enterprise. Academy of Management Review, 27(4), 608–618.Google Scholar
  98. Zaheer, S. (1995). Overcoming the liability of foreignness. Academy of Management Journal, 38(2), 341–363.Google Scholar
  99. Zhang, K. H. (2000). Why is U.S. direct investment in China so small? Contemporary Economic Policy, 18(1), 82–94.CrossRefGoogle Scholar
  100. Zhang, K. H. (2001a). China’s inward FDI boom and the greater Chinese economy. The Chinese Economy, 34(1), 74–88.CrossRefGoogle Scholar
  101. Zhang, K. H. (2001b). What attracts foreign multinational corporations to China? Contemporary Economic Policy, 19(3), 336–346.CrossRefGoogle Scholar
  102. Zhao, S. X. B., & Zhang, L. (2007). Foreign direct investment and the formation of global city regions in China. Regional Studies, 14(7), 979–994.CrossRefGoogle Scholar
  103. Zheng, P. (2011). The determinants of disparities in inward FDI flows to the three macro-regions of China. Post-Communist Economies, 23(2), 257–270.CrossRefGoogle Scholar
  104. Zihui, M., Ruilong, Y., & Zhang, Y. (2008). Australia’s direct investment in China: Trends and determinants. Economic Papers, 27, 70–86.Google Scholar

Copyright information

© The Author(s) 2017

Authors and Affiliations

  • Katiuscia Vaccarini
    • 1
    Email author
  • Francesca Spigarelli
    • 2
  • Ernesto Tavoletti
    • 3
  • Christoph Lattemann
    • 4
  1. 1.Free University of Bozen-BolzanoBolzanoItaly
  2. 2.University of MacerataMacerataItaly
  3. 3.University of MacerataMacerataItaly
  4. 4.Jacobs UniversityBremenGermany

Personalised recommendations