The Influence Of Psychic Distance On Foreign Direct Investment Flows

In this day and age, Foreign Direct Investment (FDI) as an important element ofthe economic globalization has been made a significant contribution to the globaleconomic growth. In order to confront with the growing fierce internationalcompetition, countries in the world should make efforts to develop the FDI for adominative place in the economic globalization. By2009, China is the biggestdeveloping country in absorbing FDI inflows and output of FDI outflows, whichindicates the strategy of China "Bringing in" and "Going global” has made gratifyingachievements. However, with the rapid growth of the total FDI, FDI distributeextremely uneven in different regions and countries.From the perspective of psychic distance, this paper not only attempts to explainthe international direct investment flows, and find the relationship between psychicdistance and international direct investment, and then help our government betterutilize the psychic distance to attract more foreign direct investment, but also attemptsto help Chinese enterprises through psychic distance better understanding of hostmarket environment and improve our internationalized management abilities toparticipate in the international market for the core competitiveness.Based on FDI theory and psychic distance theory, this paper has established a anindex for the operationalization of psychic distance in China, measured the psychicdistance between China and the world’s major powers, and proved there is a negativecorrelation between the psychic distance and FDI flows. Most scholars focus on thepsychic distance of western developed countries, while ignoring the developingcountries. Therefore, it is a great innovation point in this paper for taking China as theconcern, which is the largest developing country in the world. Another greatinnovation point is that this paper demonstrated the relationship between psychicdistance and FDI flows through measuring the psychic distance between China andthe world’s major powers and some other empirical research methods.In conclusion, this study can give some advices to governments on how toimprove psychic distance to enhance the ability of output and absorbing FDI. It alsoshows that there is a negative correlation between psychic distance and FDI flows,namely the closer the psychic distance between China and the home country, the morethe multinationals to China for foreign direct investment, and vice versa. The closerthe psychic distance between China and the host country, the more outward foreigndirect investment flow from China to the host country, and vice versa.