An Empirical Analysis On Influence Of Cultural Distance On China’s OFDI Location Choice

As a major means in the global financial market to realize capital use and to promote economic exchange, OFDI helps to improve the efficiency of capital use and to accelerate industry reconstruction, and has a beneficial effect on growth of economy and raise of people’s well-being. OFDI also pushes forward the stable development of world economy and regional economic integration. OFDI of China has well developed in recent years. Therefore, OFDI is academically worthy of investigation. There are various factors influencing the distribution of OFDI. In addition to factors such as GDP and GNI per capita according to traditional economic theories, in recent years, soft environment tends to impose its influence in an implicit way as well. As an important component of soft environment, culture plays a significant role in directing OFDI decisions, and attaches OFDI behaviors with cultural features. In spite of the increasing strategic position of and the growing academic interests in culture, however, difficulty of quantitative measurement of culture and its influence restricts relevant studies of economics and culture to less satisfaction.Against the above background, based on distribution of OFDI of China to 46 sample countries, on Hofstede’s Cultural Dimensions Theory, and on Kogut and Singh’s Index, this paper has investigated empirically about:how cultural distance directs OFDI decisions of China, how cultural distance influences the relationship between trade and OFDI, and how specific cultural dimensions influence OFDI decisions. This paper also makes policy suggestions and recommendations based on answers to the above three research questions.This paper observes that first, cultural distance imposes a non-linear influence on OFDI decisions of China. This paper applies Zaheer’s liability of foreignness theory and benefits of cultural distance, and innovatively introduces the idea of elasticity to explain the results of observation.This paper also discovers that second, the relationship between trade and OFDI changes and does not always remain supplementary under different circumstances of cultural distance. The relationship between trade and OFDI can also turn to be negative with cultural distance. To justify the results, different degrees of sensitivity to cultural distance is applied. The more sensitivity of OFDI to cultural distance than trade implies strong policy meanings.To further explore the mechanism of cultural distance influencing OFDI decisions, this paper also finds that third, some cultural dimensions, such as PDI, impose positive influence on OFDI decisions of China, and some cultural dimensions, such as LTO, impose negative influence on OFDI decisions of China. Among all, the individual cultural dimension of power distance index reveals the strongest positive influence on OFDI decisions of China. It indicates that demand for a level playing field and a favorable market environment attracts most attention of Chinese OFDI investors when they make location choices.Findings of this paper are extended to OFDI policy recommendations and endow this paper with policy meanings. In response to the first finding, this paper suggests cultural promotion and introduction policies to reduce the costs of liability of foreignness (Zaheer,1995), and to enhance the benefits of cultural distance. For different host countries with different cultural distances, policy makers should have different focuses on promotion and introduction policies. In response to the second finding, this paper recommends trade policies to boost OFDI to host countries with certain cultural distance, and advises investors not to take changes of trade as the only reference, but to maintain a cautious attitude towards trade and well judge the influence of cultural distance when making OFDI decisions. In response to the third finding, this paper proposes actions to be taken to improve local legitimacy, to model business behaviors, and to enhance a favorable environment for equal competition. This paper also encourages investors to enrich their information concerned with characteristics of host countries’ different cultural dimensions selectively to make optimal choices according to their own circumstances.This paper systematically investigates economic exchange through OFDI and cultural exchange through cultural distance against the background of globalization, and endows the two with significant policy implications to meet the national demand to take the initiative in the world economic competition and soft power competition. Moving from a simplified 2-D analysis of a linear relationship between two factors, to a complex 3-D investigation of a non-linear relationship and of multiple factors, this paper digs deep into the internal mechanism of cultural distance influencing OFDI decisions from various perspectives, moves one step closer to reveal the reality of OFDI and culture, and contributes to the investigation of the complex relationship between economics and culture.