The Impact of Psychic Distance on Chinese Outward Foreign Direct Investments

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.