Chinese FDI and psychic distance perceptions on regulations in the German renewable energy sector

Abstract

Countries vary in dimensions such as culture, language, business practices, policy-making, regulations, etc. Research shows that distances between countries concerning these dimensions affect foreign direct investment (FDI) flows. The higher the distances, the higher the difficulties for businesses, as managers’ decision-making is based on their perception of those distances.This paper analyzes the perception of distances between China and Germany by surveying Chinese managers who invested in Germany in the renewable energy (RE) sector, using Child et al.’s (2009) measure of psychic distance (PD) as a guide. The RE sector is young and highly dynamic, and the dimensions of PD are constantly changing. Mismatches in the perception of PD ex ante and ex post the decision to engage in FDI may lead to possible FDI failure.We use a five-company multiple case study to analyze if Chinese managers perceive distances in various dimensions, particularly regulation-based, and if there is a mismatch of perceptions between the pre-market and post-market entry period to investigate if managers’ perceptions change over time.Our findings lead to recommendations for practitioners and international business scholars, and policy making in the RE sector, by showing that operationalizing the PD construct should be complemented by dynamic analysis.