An empirical study of the impacts of geographic and cultural distance on Chinese ODI

Abstract

Since the reform and opening-up started in the end of the 1970s, especially after Deng’s southern tour in the early 1990s, China has achieved remarkable success in attracting foreign direct investment (FDI), and become one of the top destinations in the world for FDI since 2003. By 2013, the utilized FDI in China has reached USD118.7 billion from nearly null level. The recent UNCTAD report shows that China became the top destination for inward FDI again in 2014, with an estimated amount of over US$128 billion of FDI received, despite concerns of China\u27s economic slowdown. With China’s rapidly integrating with the global economy, its outward FDI has also picked up rapidly in recent decades, especially since China’s WTO entry in 2001, to make overseas acquisitions to gain technology and market access and international experience. Over the past few decades China has transformed into a major source country of FDI in the world, and become the third largest source of foreign direct investment after the United States and Japan since 2012. In this study we attempt to investigate empirically the impacts of geographic and cultural distance on Chinese outward direct investment (ODI). It is found that Chinese ODI is negatively correlated with both geographic and cultural distance based on the tests using the full sample of all the recipient countries. Furthermore, we investigate the mechanisms through which the impact of cultural and geographic distance is exerted. The results indicate that geographic distance bears significantly negative impacts on ODI in the countries of low geographic distance, while it encourages OFDI into countries with high geographic distance. In addition, cultural distance is found to discourage OFDI through its impact on bilateral trade