Learning from Others: the Impact of Vicarious Experience on the Psychic Distance and FDI Relationship

Abstract

This study analyzes the potential moderating effect of vicarious experience on the negative influence of psychic distance stimuli on foreign direct investment. Multinational enterprises can learn from the experience of other firms and benefit from higher opportunities to identify best practices and mistakes, acquire knowledge and develop capabilities, establish interactions and collaborations with suitable partners and gain legitimacy to overcome points of resistance. We analyze a sample of 164 Spanish multinational enterprises and show that a larger number of companies from the same home country in the host country positively moderate the negative influence of a greater psychic distance in the education, industrial development, democracy and social system stimuli. However, this moderating effect does not take place in the case of the language and religion stimuli, highlighting the importance of a fine-grain individual analysis of all distance dimensions, instead of relying on a single aggregated measure. Finally, our results show that total but also same- and different-sector vicarious experience exercise this moderating effect and that, contrary to previous empirical studies, no evidence of a substitution effect is found.