Abstract
The prior literature suggests that both geographic distance and cultural distance between countries deter foreign direct investment (FDI) between them. We propose that influence of geographic and cultural distances on FDI location choices may hinge on the level of the investing firms establishment in their home countries. More specifically, we propose the level of home country establishment may paradoxically influence the effects of geographic distance and cultural distance on FDI location choices in which it weakens the effect of geographic distance but amplifies the effect of cultural distance. Based upon a large sample of Chinese MNEs in 2001-2013, our findings strongly support these predictions. Using firm size, firm age, and state ownership as the proxies for the level of firm establishment in home country, we find that the negative effect of geographic distance on FDI location choice is weaker for larger firms, for older firms and for SOEs, whereas the negative effect of cultural distance on FDI location choice is stronger for larger firms, for older firms and for SOEs.
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