The Effect Of Cultural Difference On Location Choice Of Chinese Outward Foreign Direct Investment

Since China joined WTO and has more opportunities to participate in the fierceinternational market competition, economic globalization has brought huge space ofdevelopment and challenges for outward foreign direct investment (OFDI) of Chineseenterprises. But many enterprises have failed in the investment activities, the mainreason came from the lack of cultural differences’ understanding, besides capital andtechnology. Investment location is the first decision to be considered before carryingout the OFDI activity considering its cultural effect. Based on the existing research,the paper has made theoretical and empirical analysis of the issue from culturaldifferences perspective.The article first analyzed the present situation of China’s OFDI location and foundthat most Chinese enterprises’s investment prefer Asian area because of the closegeographical distance and similar cultural background, especially Hong Kong. Then,through the research of culture’s economical effect, the paper build a cost-benefitmodel to analyze the impact of cultural differences on the investment location andfound that multinational operation need to face extra cross-cultural transaction costs,thus affecting investment income, and ultimately the choice of investment location.To further elaborate the issue, the paper used panel data from45regions which hasFDI activities with China from2003-2011and built a gravity model based on culturaldifference. The empirical results showed that there was a significant upwardU-shaped nonlinear relationship between cultural differences and OFDI. Finally,suggestions for practice are offered.