Psychic Distance and FDI: The Case of China

Abstract

The purpose of this paper is to investigate whether and to what extent psychic distance (PD) is considered by scholars as specific determinant of inbound and outbound foreign direct investments (FDI) in China. The finding of this study, which is a systematic literature review show that PD as a variable of FDI determinants seems to be under-investigated. The difficulty in quantifying the variable in international business might be one of the reasons. Nevertheless, the literature does raise awareness on distance issues and its multi-dimensions since it first appeared. Besides, the most applicable indexes elaborated by international business scholars are based on Hofstede's work, whose results are used both in psychology and management studies, pinpointing its interdisciplinary nature. This paper aims to systematize the limited and fragmented literature about non-tangible perceptions of distance between home and host economies this paper contributes in raising awareness . However, as part of a wider European Union project the ultimate results of the paper have not been leaked yet. This study provides useful insights and practical implications for international scholars regarding a more comprehensive review of PD, for managers in terms of raising awareness on PD and of the foreign environment (opportunities and difficulties which they are experiencing in the market context) as well as setting up and strengthening long-term cooperation between Europe and China and finally, policy makers on the issue of trade and investment flows between Europe and China, key barriers which affect companies and which require action at political and institutional level in order to ensure that opportunities are fully exploited

Psychic distance and outward foreign direct investment: the moderating effect of firm heterogeneity

“…However, most studies have focused on the linear relationship between PD and OFDI, and the conclusions obtained in those studies are also inconsistent (Evans et al, 2008). The results of this study confirm the existence of a "PD paradox" (O'Grady and Lane, 1996) and further supplement and enrich existing research on the application of PD in emerging economies (Blomkvist and Drogendijk, 2013;Ellis, 2008;Vaccarini, 2015). Therefore, when multinational firms originating in emerging economies are conducting OFDI, they should weigh the risks and returns from PD and seize investment opportunities.…”

“…As latecomers to the global market, multinational firms originating in emerging economies lack foreign investment experience and are susceptible to political, economic, cultural, and geographical differences between the host and home countries and incomplete rationality in the cognitive model of decisionmakers (Hosseini, 2008). After the difference in distance can be effectively identified and taken advantage of by a firm's managers, the firm is likely to gain considerable competitive advantage in the market (Vaccarini, 2015). However, in a complex and everchanging overseas environment, corporate decision-makers often have a limited ability to process information and analyze problems (Hosseini, 2005).…”

Foreign Direct Investment and the Performance of Indonesian Marketplace E-Commerce Corporation: An Application of Network, Ownership, Location and Internalisation Framework

“…However, foreign companies must struggle to understand the context of the local market (Singh, 2012). Hence, some authors propose the existence of a psychic distance effect, that foreign companies are more likely to invest successfully in a more culturally closer country (Evans, Mavondo, & Bridson, 2008;Fertő & Sass, 2020;Vaccarini, 2015). From the perspective of N-OLI, the theory of psychic distance could be explained as the desire of foreign companies to gain location advantage that they naturally did not have.…”