The impact of psychic distance on Chinese outward foreign direct investments.

Author:Blomkvist, Katarina
Position:RESEARCH ARTICLE - 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.

Keywords: Chinese OFDI * Psychic distance * Psychic distance stimuli * Internationalization Emerging markets firms


Following Deng Xiaoping's tour of South China in 1992 and the introduction of the "Go Global" policy in 1999, Chinese outward FDI (OFDI) has experienced a significant increase, reaching a staggering US$ 55.9 billion in 2008, and highlighting China's growing role as an investing country. Particularly, since 2005 there has been a striking positive trend of Chinese OFDI, and today China is the main foreign investor in countries like Australia and South Africa (Scissors 2010; Evenett 2009). The main part of Chinese OFDIs is located in neighbouring countries in Asia (Child and Rodrigues 2005; Voss 2011), with China's Special Administrative Region, Hong Kong, as the foremost recipient of Chinese OFDI (Gugler and Fetscherin 2010). Explicit patterns of specific investments have been found, indicating that Chinese MNCs follow a regionalization strategy rather than a global one (Rugman and Doh 2008).

Indeed, there has been an increased interest among scholars, business practitioners and policy makers alike to understand this development, and several studies have been performed to describe trends and explain Chinese OFDI (Buckley et al. 2007; 2008; Deng 2004; Morck et al. 2008; Sauvant 2005; Voss 201 l). However, despite the heaps of studies on the phenomenon, the role of psychic distance has largely remained unexplored. Although previous research has tested the explanatory power of established theories and explanations for outward FDI by Chinese companies (for example Child and Rodrigues 2005) and mentions the potential role of psychic distance for the internationalization of Chinese firms (e.g., Voss 201 l), no proper test of the psychic distance thesis that predicts firms' preferences for investments in relatively similar countries to the home country has been undertaken. This means that while the role of psychic distance is widely acknowledged as an explanatory factor for the internationalization of MNCs from developed countries (Johanson and Vahlne 1977; Barkema et al. 1996; Dow and Larimo 2009), the explanatory value of this factor for understanding OFDI from developing countries is still unknown. Moreover, this lack of knowledge of how psychic distance and cultural differences influence Chinese OFDI stands in contrast with public debates and policy deliberations in many countries around the world that are trying to attract Chinese OFDI.

The aim of this paper is to investigate the traditional role of psychic distance as an explanatory factor for the internationalization path of MNCs from developed countries and see to what extent it can explain the internationalization of Chinese MNCs. In particular, we test to what extent psychic distance in terms of differences in language, religion, culture, economic development, political systems, education, and geographic distance explains the investment behaviour of Chinese companies. The present study draws upon previous research, suggesting that there is a close link between investment destination and the perceived psychic distance of managers between the home and host country (Johanson and Wiedersheim-Paul 1975; Johanson and Vahlne 1977; Dow 2000; Child et al. 2002, Brewer 2007; Ellis 2008). In doing so, this paper highlights three important issues currently discussed in the IB domain regarding China and other developing countries as rapid emerging investment economies. First, this paper contributes by empirically testing the influence of psychic distance on Chinese OFDI. Second, we build on the work of Dow and Karanuratna 2006 to develop an index of psychic distance. Based on seven psychic distance stimuli, we develop an aggregate psychic distance measure, but we also test the individual effects of the stimuli, allowing us to explore whether certain stimuli to the overall psychic distance construct are more important than others in identifying the underlying drivers of Chinese OFDI. Finally, the paper contributes by testing if psychic distance is a universal concept that is relevant when looking at OFDI from different settings and institutional environments or if it is an out-dated concept from an earlier epoch when MNCs from developed countries internationalized.

The paper is organized as follows. First, Chinese OFDI is discussed, emphasizing its development and determinants discussed and investigated in previous literature. Thereafter, the concept of psychic distance and its influence on OFDI flows from developing countries are highlighted, and we develop hypotheses on the ability of psychic distance stimuli to explain Chinese OFDI patterns. For our empirical study, we use the 2009 statistical bulletin of Chinese OFDI 2003-2009, published by China's Ministry of Commerce (MOFCOM), the National Bureau of Statistics of the People's Republic of China and the State Administration for Foreign Exchange (SAFE, one of the main agencies concerned with the investment approval process in China). We find that Chinese OFDI indeed is influenced 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 seem to relate to Chinese firms' internationalization.

Chinese OFDI

Since China introduced its "Go Global" policy promoting overseas investment, China's OFDI has burgeoned significantly. OFDI became permissible in 1979 during the "Open Door" policies, and it has increased thereafter (Buckley et al. 2008). The literature distinguishes several stages in the development of Chinese OFDI (see Table I for an overview). Initially OFDI was permitted on a very limited scale: For example, foreign investment was restricted to some appointed champions within certain industries, all of which were state-owned companies (SOEs). But this changed around 1992, after Deng Xiaoping's journey to the South and subsequently in 1999 when the government instigated the Go Global policy (Child and Rodrigues 2005; Buckley et al. 2007; 2008; Voss 201 l). One of the main aims of the "Go Global" initiative in 1999, officially announced in the 10th Five-Year Plan in 2001, was to make Chinese firms competitive on a global level. Today, administrative controls are reduced to a high extent and also the numbers of non-SOEs actively investing abroad have gone up (Buckley et al. 2007, 2008; Voss 2011).

Chinese OFDI has been studied from various perspectives since the mid 1990s. A number of researchers have focused on the regulatory framework and the influence of the Chinese government on overseas investment by Chinese firms (Zhan 1995; Wang 2002; Buckley et al. 2008). Previous research has shown that the institutional setting of a country has a profound effect on its FDI operations (Buckley and Casson 1976). Chinese OFDI is heavily influenced by the Chinese state, and although China's policies regarding FDI have become more open over the years, the main decision-taker concerning the approval of investment projects is still the government at a variety of levels (Buckley et al. 2008).

Accordingly, the development and increase of Chinese OFDI cannot be understood without reference to the Chinese Government and its policies (Gugler and Fetscherin 2010).

A string of research has emphasized the role of natural resources as a main driver for Chinese OFDI, leading to recent upsurges of investments in resource-rich areas like Africa (Evener 2009; Morck et al. 2008). Since China is comparably poor in most natural resources, the strategic need for securing supplies of natural resources is essential, hence a large part of China's OFDI are towards countries rich in natural resources such as Africa, Central Asia, Australia, Russia and Canada. Further, several researchers have suggested that firms from China and other developing countries invest in developed markets to make up for resource and knowledge deficiencies (Peng and Wang 2000; Rui and Yip 2008). In other words, Chinese OFDI in Europe and North America can be explained from a resource-exploration rationale (Al-Laham and Amburgey 2005). Accordingly, Chinese firms behave as latecomers performing strategic asset-seeking FDI, trying to close the gap between them and leading companies in their respective industries to become globally competitive. By acquiring European firms, Chinese firms get access to potential capabilities and sources of new knowledge (Gugler and Brunner 2007). On the other hand, research has also shown that firms from developing countries...

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