Is Home-Host Cultural Distance a Risk? Evidence from Outward Foreign Direct Investment by Chinese Enterprises

Hang Su,Yao Fu

doi:10.32479/ijefi.12611

Abstract

Cultural distance is always regarded as a “risk” in the decision making of enterprises involved in the outward foreign direct investment (OFDI), however, investment is a powerful driver of productivity growth and increased innovation capacity of enterprises in both countries. Is cultural distance a “risk” ? Using Hofstede's indicators and the Kogut and Singh index (1988), this paper calculates the cultural distance based on six cultural dimensions and further examines the effect of cultural distance on the outward foreign direct investment by Chinese enterprises and its mediating effects on the role of other factors influencing the decisions of multinationals. The results indicate that there is a nonlinear effect of cultural distance and the mediating effect of cultural distance is negative.

Highlights

Cultural distance between countries has a role to play in the outward foreign direct investment as it can reflect the difference in the behavior, values, and mindsets of society members, which is significant in the enterprises because it means different operation modes and working habits of employees
To examine the mediating effects of cultural distance on the role of other factors influencing the decisions of multinationals, this paper introduces interaction (RESCDit) between outward foreign direct investment (OFDI) (OFDIit) and natural resource (RESit) on the basis of formula (2), and interaction (TECCDit) between OFDI (OFDIit) and technology and innovation capacity (TECit) on the basis of formula (2): ln OFDIit = β0 + β1 ln CDit + β2 ln CDit2 +β3 ln RESCDit + γ Xit + αi + λt + εit (3)
The results presented in columns (1), (2), and (3) indicate that the cultural distance between the host and the home country has a positive effect on the outward foreign direct investment, which implies that the effect of cultural distance is nonlinear in the framework of

Summary

INTRODUCTION

Cultural distance between countries has a role to play in the outward foreign direct investment as it can reflect the difference in the behavior, values, and mindsets of society members, which is significant in the enterprises because it means different operation modes and working habits of employees This helps to avoid the homogenization of corporate cultures in home and host countries and can contribute to innovation, for differences in beliefs and values promote learning and innovation (Barney, 1991; Vermeulen and Barkema, 2001). The research results on the role of cultural distance are a mixed one, as cultural distance can play a negative role when it is regarded as a risk of the host country It is more complicated when other factors influencing the decisions of multinationals are taken into account.

LITERATURE REVIEW

DATA AND METHODOLOGY

RESULTS AND DISCUSSION

CONCLUSION