The Effect of Cultural Variables
on Chinese Outward Foreign
Direct Investment (OFDI)
Bin Li
2506696
13 June 2016
MSc Business Studies: International Business & Management
University of Groningen
Final Version Master Thesis
Supervisor: Dr. Rian Drogendijk
1 Abstract:
In recent years, a large number of Chinese investors go out of Chinese market and invest in the foreign market. The aim of this paper is to get more insight into cultural dimensions that affect Chinese outward foreign direct investment(OFDI) in the host countries. Unlike the previous studies that focus on the impact of cultural distance on OFDI, this paper will study the influence of specific host country culture on OFDI. The research question of this paper is: Does the national culture of the host country influence the direction of Chinese OFDI? Based on the GLOBE project, the national culture is measured from nine dimensions. In order to test the hypothesis concerning how the culture of host countries affects Chinese OFDI, an
ordinary least square (OLS) regression analysis was conducted. The result reveals that Chinese investors are more likely to invest in societies with high institutional / in-group collectivism, gender egalitarianism, power distance, humane orientation. The finding suggests that the direction of Chinese OFDI will be influenced by the national culture of the host country.
2 Table of Content
1. Introduction
2. Theoretical Background and Research Hypothesis 2.1 Chinese OFDI
2.2 Hofstede’s Theory 2.3 GLOBE Project 2.4 Chinese Culture
2.5 Cultural Variables and FDI 2.5.1 Performance Orientation 2.5.2 Assertiveness 2.5.3 Institutional Collectivism 2.5.4 In-group Collectivism 2.5.5 Gender Egalitarianism 2.5.6 Power Distance 2.5.7 Uncertainty Avoidance 2.5.8 Humane Orientation 2.5.9 Future Orientation 3. Research Methods
3.1 Sample and Data collection 3.2 Variables
3.2.1 Dependent Variables 3.2.2 Independent Variables 3.2.3 Control Variables 3.3 Statistical Analysis and Results 4. Discussion
4.1 Academic Relevance 4.2 Managerial Implications
4.3 Limitations and Suggestions for Future Research 5. Conclusion
3 1. Introduction
Since the implementation of the reform and open policy in 1978, China has been attracting increasing foreign direct investment (FDI) from the rest of the world. The reason why Chinese FDI is growing is that Chinese government provides attractive policy incentives for foreign investors. For example, the Chinese government implemented favorable tax policies, such as preferential corporate income tax rate, customs duties on imported equipment, import Value Added Tax (VAT) to attractforeign investment (Kamal, 2015).However, in the past two decades, a new trend has emerged. Since 1999, China’s outward FDI (OFDI) has increased greatly. There are more Chinese investors going out of Chinese market and investing in foreign markets.In 2011, China was the world’s 6th largest source of FDI (Kamal, 2015). OFDI is important for China for the following reasons. First, it is increasingly necessary for Chinese corporations to internationalize to boost productivity and reduce excessive capacity in several sector (Lv & Spigarelli, 2015). Second, it is necessary for China to diversify its large amount of reserves into higher yielding assets over time (Lv & Spigarelli, 2015). Chinese OFDI is heavily influenced by the Chinese state, and although the Chinese government has implemented more open policies concerning FDI over the years, the main decision-maker concerning the approval of investment projects is still the government at a variety of levels (Buckley et al. 2008).There is no doubt that the expansion of Chinese firms abroad generates remarkable interest, concern, controversy in the host country. On the one hand, a large number of investment can promote the economy of the host country, especially developing countries (He, et al., 2015). According to the report of China’s outward
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Along with increasing growth of Chinese outward FDI, a lot of literature has emerged to reveal the drivers of Chinese OFDI. The most widely accepted theory to explain the
motivations for OFDI derives from Dunning’s four motives’ analysis. According to Dunning, OFDI are based on the following four categories: (1) market-seeking investment aimed at entering new markets (2) resource-seeking investment aimed at reaching natural or human resource in the host country (3) strategic asset-seeking investments based on the set of proprietary resources of firms (4) efficiency-seeking investment aimed at minimizing costs (Dunning, 1993). Several factors are mentioned in a recent survey on FDI determinants, such as market size and characteristics (especially skill endowment), cost factors, transport costs, geographic distance, risk factors and policy variables, should be considered for OFDI decisions (You & Solomon, 2015).
The importance of culture in management, economics, and many other fields of social studies has been growing quickly (Jiang et al., 2010). Measurability of cultural dimensions provides the theoretical and operational framework for the study of national culture. Although some economists are still reluctant to apply culture in their study, the link between culture and economic performance has already been built by some scholars. According to Weil (2009), the national culture will affect the economic growth because there are some potential dimensions within the culture that vary among different nations. Weil puts forward six dimensions of culture that will affect the economic growth: Openness to new ideas, beliefs in the value of hard work, saving for the future, the degree of trust, social capital and social capability (Weil, 2009).
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two countries is associated with a drop in FDI (Navina & Stefan, 2016). National culture influences the infrastructure upon which financial decision-making occurs –including the structure of markets and institutions (Aggarwal & Goodell, 2009); accounting conventions and practices and systems of corporate governance (Bushman et al., 2004). Researchers have tried to capture the country differences in many ways, most remarkably by means of measures of cultural distance (Kogut & Singh, 1998; Drogendijk & Slangen 2006). Those cultural measures are generally based on Hofstede’s dimensions. Hofstede’s extensive study of culture provides a clear articulation of differences across countries in values, beliefs, and work roles (Pinillos & Reyes, 2011). According to Hofstede (1983), cultural differences among countries are comprised of six dimensions: power distance, uncertainty avoidance, individualism-collectivism, masculinity-femininity, long-term orientation, indulgence.
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countries. Second, this paper adds to the previous literature by investigating how different cultural dimensions affect the OFDI of China. Previous literature reveals that FDI activities are influenced by cultural distance. However, it is difficult to reach the consensus whether cultural distance will positively or negatively affect FDI activities. On the one hand, the cultural distance results in cultural diversity and promotes FDI activities by encouraging firms to learn from those of different culture. On the other hand, the cultural distance will
negatively affect FDI activities. The cultural distance results in misunderstanding and
“increased cost of doing business abroad” (Blomkvist & Drogendijk, 2013). According to the theory of gravity model, the cultural distance will negatively affect the trade flow between countries because it is costly to overcome the differences in norms and values between countries (Klasing, 2014). Previous literature reveals that the national cultural values are the important driving force behind individual practices and government policies (Head & Sorensen, 2005). This is why this paper will study whether the specific cultural dimensions, rather than the cultural distance, will affect Chinese OFDI.
This research is organized as follows. First, in the following section, I will first find relevant literature with regard to the drivers of OFDI of China and different cultural dimensions and put forward hypothesizes with regard to how these cultural variables affect OFDI of China. In the third section, I will first introduce the source of data and elaborate on how I am going to analyze the data. In the discussion part, I will present the statistical analysis of the previous part and interpret the results to come up with findings. Finally, in the conclusion part, I will present both the managerial implications of this research and the limitations of current research and raise suggestions for future research.
2. Theoretical Background and Hypotheses 2.1 Chinese OFDI
Since China introduced its “Go Global” policy to promote its foreign investment, China’s OFDI has increased greatly (Buckley et al. 2008). Traditionally, governmental promotion and the dominance of state-owned enterprises (SOEs) were key features of Chinese OFDI
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policy (Child & Rodrigues 2005; Buckley et al. 2007; 2008). More recently, Chinese OFDI has appeared to be less influenced by the state and more private firms have been involved in international investment (Ramasamy, Yeung & Laforet, 2012). The percentage of SOEs in Chinese outbound merger and acquisition (M&A) dropped from 90% in 2010 to 59% in 2014 (KPMG, 2015). In recent years, Chinese financial presence globally has increased
substantially, in terms of loans provided, investments made, and other types of flows. However, Chinese multinationals are still predominantly state-owned enterprise, their investments sometimes also reflect the political objectives and not consistent with the profit-maximizing strategy adopted by private firms.
In 2013, Xi Jinping puts forward a new plan of economic cooperation: The Belt and Road (The Silk Road Economic Belt and the 21st-century Maritime Silk Road). The Belt and Road (B&R) is an ambitious plan because it covers 4.4 billion people in more than 60 countries (Knowler, 2015). The Belt consists of regions that are situated on the former Silk Road, such asCentral Asia, West Asia, the Middle East and Europe. The Road is established to improve the business cooperation with regions, such as Southeast Asia, Middle East, North Africa and Europe through maritime trade routes (Knowler, 2015). The importance of B&R plan can be explained from strategic, political and economic perspectives. From the strategic perspective, this plan can strengthen diplomacy and trade cooperation with neighboring regions, such as Southeast Asia and Central Asia. From the political perspective, this plan can promote the reform and open up in Midwest of China and alleviate regionally unbalanced economic development (Kennedy, 2015). From the economic perspective, this plan can promote the formation of the economic development zone in Europe and Asia and alleviate China’s huge industrial overcapacity (Kennedy, 2015).
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poor in most natural resources, resource-rich areas, such as Africa, West Asia, become important destinations for Chinese investors. Meanwhile, since the overall education level is still relatively low in China, the demand for talents becomes increasingly important for Chinese firms. Efficiency-seeking FDI is regularly created at the firm level since it involves the optimal structure of the MNC with regard to its global network of foreign subsidiaries (Drogendijk & Blomkvist, 2013). Finally, strategic asset–seeking FDI covers both R&D operations and value-added activities of firms in host countries. Chinese firms invest abroad to rapidly overcome their competitive disadvantage with regard to technology and knowledge related to the products and to acquire advanced management skills to tap into the pools of local knowledge.
Even though Dunning’s theory is widely accepted in revealing the motivations of outward foreign direct investment (OFDI), this theory is insufficient in explaining increasing Chinese OFDI. Chinese investors may respond differently to host country factors from other investors at least with regard to institutions. Previous literature reveals that investors generally prefer host countries with good institutions which lower the risk and cost associated with business activities and promotes creativity and productivity (Bedford & Hwang, 2013). However, much Chinese investment is also attracted to countries with rich natural resource but poor institutions. Chinese investors are different from investors of other countries with regard to the following aspects. First, the Chinese companies that invest abroad are predominantly
state-owned. In 2006, 82% of China’s non-financial OFDI was conducted by state-owned
enterprises (Yeung & Liu, 2008). The practices of Chinese state-owned MNEs may pursue political objectives rather than maximize the benefits for the firms. Second, unlike the Western multinationals, Chinese multinationals enjoy the governmental promotion, which may help reduce investment risks and lower costs (Rui & Yip, 2008). The governmental support of Chinese OFDI may diminish the importance of the risks and returns in investment strategy in terms of location (He, et al., 2015). Third, China has a quite different institutional
environment than the major source countries of FDI from the developed world. The ‘guanxi’,
the interpersonal connection between individuals, is important in China where close
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two common forms of interpersonal relationships in China. Interestingly, inviting business partners to a banquet and negotiate business issues during the meal is a common method for Chinese to develop their business. This is different from businessmen in other countries who prefer to negotiate business issues at the conference table. Such difference can be traced back to the Chinese Confucian’s ethics where trust and harmony are essential in building
interpersonal relationships (Koehn, 2001). Therefore, we should take the culture of the host countries into consideration while analyzing the motivations of Chinese OFDI.
2.2 Hofstede’s theory
Hofstede (2011) puts forward six dimensions to differentiating the national cultural diversity. The first dimension is uncertainty avoidance. Uncertainty avoidance refers to the extent to which members of a society strive to avoid uncertainty by the reliance on social norms and bureaucratic practices. The second dimension is power distance. Power distance is the extent to which members of an organization or society expect and agree that power should be equally shared. The third dimension is individualism/collectivism. Individualism addresses ‘the degree to which people prefer to act as individuals rather than as members of groups’ (Hofstede, 2011). On the contrary, collectivism encourages the subordination of individual interests to the collective goods and the maintenance of strong social ties (Lund, Scheer & Kozlenkova, 2013). The fourth dimension is masculinity/femininity. A masculine culture stresses aggressiveness, personal achievement, and materialistic goals while a feminine culture focuses on contemplation, social welfare, and spiritual gains (Head & Sorensen, 2005). The fifth dimension is long-term orientation. People with long-term orientation focus on future-oriented values (Minkov & Hofstede, 2012), such as persistence and thrift, whereas those with shorter-term orientations emphasize the past and the stability of the current
situation, indicated by a respect for traditional roles and fulfillment of social obligations (Taras, Kirkman & Steel, 2010). The last but also newest dimension is indulgence/restraint. In societies with high indulgence, people have the free gratification of the basic need to enjoy their lives. Hofstede’s extensive study of culture provides a clear description of national differences in values, beliefs and work roles.
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of the findings, especially to the societal level (Banai, 1982; Merker, 1982; Schooler, 1983; Sorge, 1983). Bias is also suspected in the samples’ gender (mostly male respondents) (Merker, 1982), middle-class orientation (Kidd, 1982) and occupation (mainly in marketing and servicing) (Banai, 1982; Robinson, 1983). The second problem is that Hofstede’s work is not intended to conduct cultural study initially. Instead, the original purpose of Hofstede’s study is to investigate the work satisfaction among employees (Linda & William, 2008). Since the original purpose does not satisfy the final purpose, the survey was refined and changed a couple of times to make the necessary adjustment. From the perspective of theoretical ground, Hofstede’s theory has been criticized for the construction and labeling of the different culture aspects (Chiang, 2005). Hofstede’s theory is considered to be too narrow and confined to work-related values rather than the national values (Triandis, 1982; Sorge, 1983; Chiang, 2005). This is why Hofstede’s cultural dimensions are regarded only to have empirical implications while lacking theoretical implications. In addition, Hofstede’s works are also challenged with its time relevance. Researchers have questioned whether the scores of cultural dimensions which is based on the data collected between 1966 and 1973 were artifacts in the current study (Baumgartel & Hill, 1982; Warner, 1981). Over 40 years has passed since the publication of Hofstede’s theory, so the culture of nations that are studied would have changed. This is why Hofstede’s theory may be outdated and no longer valid for the present study.
2.3 GLOBE Project
The GLOBE (Global Leadership and Organizational Behavior Effectiveness Research)
project took Hofstede’s original 1980 research findings (Hofstede, 1980). The GLOBE project was led by Robert J. House of the University of Pennsylvania and included 170 “country co-investigators” as well as a 14-member group of coordinators and research associates (Javidan & Dastmalchian, 2009). GLOBE project concerns the extent to which specific leader
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assess nine fundamental dimensions of societal and organizational culture. The third phase of the GLOBE project was developed to study the effectiveness of particular leader behaviors on employees’ attitudes and firm performance (House & Javidan, 2004; House et al., 2010). Similar to Hofstede, GLOBE project measures nine cultural dimensions that not only differentiate one country from another but also provide some new perspective for scholars who study the impact of national cultural diversity. The first dimension is performance
orientation. Performance orientation reflects how much an organization or society encourages
and rewards group members for performance improvement and excellence. The second dimension is assertiveness. Assertiveness refers to how much societies encourage individuals to be tough and competitive. The third dimension is institutional collectivism. Institutional collectivism measures how much societal institutions support and reward collective action and encourage collective distribution of resources. The fourth dimension is in-group collectivism. In-group collectivism reflects how much individuals of a country take pride intheir
membership in groups. The fifth dimension is gender egalitarianism. Gender egalitarianism refers to how much a society minimizes gender role differences. The sixth dimension is power
distance. Power distance, in both the Hofstede and the GLOBE study, measures the inequality
between superiors and subordinates, and it is related to the hierarchy of an organization. The seventh dimension is uncertainty avoidance, the same as Hofstede’s theory. The eighth dimension is humane orientation. Humane orientation reflects how much people in a society consider the needs of other people, especially those of the weak and vulnerable. The last dimension is future orientation. Future orientation measures the degree to which individuals in organizations and societies engage in future-oriented behavior such as planning, investing in the future, and delaying gratification.
The proposition that GLOBE project is more appropriate in this study than Hofstede’s theory is supported by recent scholars. First, the scores of cultural dimensions are based on data that are collected in the 1970s from one company while GLOBE scores are based on data
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GLOBE distinguished between cultural values and practices because of the opinion that national culture should consist of values, beliefs, norms and behavioral patterns of a national group (Leung, Bhagat, Buchan, Erez & Gibson, 2005; Javidan, House, Dorfman, Hanges & De Luquet, 2006). The value represents the responses from participants of different countries concerning what should be the common behaviors. Emphasis on values derives from an anthropological tradition of culture evaluation (Kluckhohn & Strodtbeck, 1961; House et al., 2001). For example, the value of assertiveness is high for China (5.52). Because of a large number of population and limited resource, Chinese are considered highly competitive to be promoted in their career. In addition, because of high power distance in China, supervisors, such as teachers, leaders, are considered quite dominant in their relationships with
subordinates. On the contrary, the practice represents what is or what are the common behaviors people will have in reality. For example, the practice of assertiveness is low for China (3.77). In order to be assertive, people should be confident in expressing their opinions, claims, ideas in the public. However, Chinese people hardly express their ideas even if they disagree because they perceive that it is rude to point out the problems directly in the public. This approach was developed out of the psychological and behavioral tradition of studying culture, which assumes that cultures should be studied as they are interpreted by their members (House et al., 2010).
Although it is more practical to distinguish culture into practice and value, such distinction also suffers from some problems. According to the theory of social desirability developed by social psychologist Cronbach (1946), respondents tend to choose the answers in a survey unconsciously or intentionally to make themselves look good (Jiang, Chen & Liu, 2010). Social desirability can be explained by the intention of self-deception and image management. However, the phenomenon of social desirability will cause a problem in processing the survey data. For example, when comparing the values with the practices of the cultural dimensions of China from the GLOBE project, I find that the values of cultural dimensions don’t provide the consistent result with the practices of cultural variables. As I mention in the previous
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problem but also enable us to measure cultural change through the observation of social behaviors over time (Jiang et al., 2010).
2.4 Chinese Culture
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Table 1. Cultural Index Score by GLOBE Project (House et al., 2004)
Cultural Dimensions (Practice) China World Assertiveness 3.77 4.14 Institutional Collectivism 4.67 4.25 In-group Collectivism 5.86 5.13 Future Orientation 3.68 3.84 Gender Egalitarianism 3.03 3.37 Humane Orientation 4.29 4.09 Performance Orientation 4.37 4.09 Power Distance 5.02 5.16 Uncertainty Avoidance 4.81 4.16
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and physical capital for start-ups (Au & Ho, 2009). Extending from family, interpersonal relationships circles in China include friends, colleagues and partners. In China, there is a strong distinction in interpersonal behavior between in-group and out-group relationships (Lee & Dawes, 2005). The in-group relationship tends to have a high degree of trust because it emphasizes emotional attachment, such as harmony, mutual understanding, long-term relationship (Lee & Dawes, 2005). In contrary, the out-group relationship tends to have a lower level of trust because it pays more attention to benefits and interests.
In addition, China is characterized by low future orientation. Future orientation refers to the degree to which people participate in future-oriented activities, including planning, saving and investing in the future (Jiang et al., 2010). In societies with low future orientation, people pay more attention to gratification and would like to spend money for immediate satisfaction rather than save for the future (Grove, 2005). Traditionally, Chinese prefer delayed
gratification and tend to save money for the future plan. However, in recent years, immediate gratification is widely accepted by Chinese and they are willing to enjoy gratification as soon as possible. According to the data available from the People’s Bank of China, the number of the credit card issued in mainland China is 455 million, an increase of 16.5% compared with the number in 2013 (China Payment System Development Report, 2015). Such difference can be explained by the increasing number of disposable income in recent decades. In 2014, the Chinese Engel’s coefficient (the portion of expenditure spent on food) is 36.2% while the Engel’s coefficient is 54.2% in 1990 (Chinese Statistical Yearbook, 2015).
Moreover, China is characterized by low gender egalitarianism. The low gender
egalitarianism is rooted in Chinese ancient farming civilization where men are considered responsible for working in the field and maintaining external relations of the household while women are regarded responsible for internal household business (Stockman, 1994).
Occupational gender segregation is one characteristic for societies with low gender
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process. Explicit gender discrimination refers to explicit restrictions on women in the hiring process. For some posts, such as construction, engineering, only men are required by the firms because they are considered physically stronger and more appropriate for such jobs. Implicit gender discrimination refers to the preference for male employees without indicating
limitations on hiring female employees. Such gender discrimination is especially pronounced for women under 25 years old. Firms are reluctant to hire women under 25 because they are afraid that once these women get married or pregnant, they will pay more attention to the family and make less contribution to the firms (Kinias & Kim, 2012).
China is also characterized by high humane orientation. In societies with high humane orientation, the sense of social belonging and affiliation is significant (Grove, 2005). Doing business through interpersonal relationships is a fundamental tradition in China. In reality, Chinese people are more likely to form affection-based social circles with close friends or family relatives to help them deal with life crisis rather than garner profit from them (Ma, 2015). As an emerging market that has undergone economic reform and liberation in recent decades, the Chinese market is filled with uncertainty and ambiguity (Wang, Wang & Zheng, 2014). The relatively immature market with a high degree of uncertainty and ambiguity and the lack of institutions and governance mechanism promote the formation of affection-based social circles in Chinese business world (Wang et al., 2014). In addition, in societies with high humane orientation, child labor is forbidden by public sectors (Grove, 2005). According to an International Labor Organization report, child labor refers to children between 5 to 17 under working conditions (Bacolod & Ranjan, 2008). China formulated national regulations to limit child labor and has acquired great achievement in reducing the number of child labor. For example, according to “Compulsory Education Law of People’s Republic of China”, Children should receive nine years of compulsory education (6 years in primary school and 3 years in junior middle school) and the minimum age of labor is 16 years old (He, 2016). In 2005, 95% of children under relevant age groups received education in school, excluding the possibility that they will become full-time workers (He, 2016).
In addition, China is characterized by high performance orientation. In societies with high performance orientation, people tend to value training and development and obtain pleasure from steady improvement and achievement (Grove, 2005; Diehl, Terlutter & Mueller, 2008). Chinese have strong motivation to improve their capabilities by mastering new skills
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from World Bank, new job posts that have been created is around 5 million in China every year (WB). However, according to the statistics from the Ministry of Education (MOE) of the People’s Republic of China, nearly 7.5 million students graduate from school in 2015 (MOE). Since the supply of the work force exceed the demand, Chinese job-seekers have to be
competent enough to compete for the limited number of jobs.
Meanwhile, China is characterized by high power distance culture because the subordinate-superior relationship dominates in Chinese society. In the Chinese business world,
subordinates in the companies are willing to follow office regulation and work guidelines made by the supervisors (Jenner, Hebert, Appell & Baack, 1998). Employees don’t usually challenge their supervisors or senior workers even if they disagree with them because key managers had great power in human resources and employees are so afraid of losing their jobs as there were almost no other ways to get employed (Zhang & Wu, 2014). In addition,
ranking is extremely important in the business relationship and you must keep rank
differences while communicating (Kull & Wacker, 2010). For example, when you are going to receive Chinese partners, it is necessary to greet the guest with the highest position first and then greet the guest with the lower position.
Finally, China is characterized by high uncertainty avoidance. In societies with high uncertainty avoidance, only moderate risk-taking activities will be accepted (Grove, 2005). Research and development (R&D) investment is one indicator to show the extent to which people are willing to take risks. R&D investment involves a high degree of uncertainty because R&D department requires much time and money to test products before they are commercialized (Zhou & Li, 2016). According to the data available from OECD, the average gross domestic spending on R&D (% of GDP) from 2000-2015 in China (1.47) is lower than the world average (1.75). This shows that Chinese firms are less willingness to take risks than firms from other countries.
2.5 Cultural variables and FDI
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relationship and affect the performance of international joint ventures (Barkema & Vermeulen, 1997). Previous works reveal that Chinese investors prefer foreign markets where they will be protected as Overseas Chinese minorities that will help them overcome conflicts with the culture of host countries (Buckley et al., 2007, 2008; Blomkvist & Drogendijk, 2013).
However, some studies also reveal that cultural distance has limited or even positive influence on FDI. For example, Benito and Gripsrud (1992), Morosini et al. (1998), Park and Ungson (1997), Kallunki et al. (2001) and Habib and Zurawicki (2002) find that there is no significant correlation between cultural distance and FDI activities (Tang, 2011). It is also argued that investors in a culturally different country will experience less competition, have better multinational company performance and enjoy risk-adjusted returns (Gomes & Ramaswamy, 1999). In the long run, the cultural distance will enhance knowledge creation through mutual learning and improve adjustment capabilities of the firms (Vermeulen & Barkema, 2001). Therefore, based on the previous literature, it is difficult for us to reach consensus how cultural distance will affect the FDI activities. The problem of the previous literature is that they focus on the cultural distance between the host and home countries while failing to study the impact of specific cultural dimensions of the host countries’ cultures.
It is suggested that when the particular national culture is preferable for the firms, they are more likely to invest in these host countries. According to “Porter’s Diamond” theory, FDI decision making is affected by four aspects: factor endowments (specific factor of production and infrastructure), demand conditions, related or supportive industries and firm strategy (Head & Sorensen, 2005). The host countries will have attractive factor endowments if their dominant national beliefs encourage foreign investors to embrace the principles behind free trade. Since the population’s beliefs also have some impacts on the government policy
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In order to analyze the effect of performance orientation on OFDI, I will first introduce the concept of Performance-Based Culture (PBC). PBC can be described as a culture that rewards individual accomplishments (vs collective membership, family relationships or position) and in which systematic, future-oriented planning is viewed as a keyway to achieve high
performance (Stephan & Uhlander, 2010). PBC should provide a facilitative context for entrepreneurship because such norms encourage and reward individual accomplishments and systematic planning to achieve high future performance (Stephan & Uhlander, 2010). With its emphasis on prediction, efficiency and rewards based on actual individual accomplishments rather than on status, PBC is associated with clear government regulations for start-up and transparent, fair and equal access to resources (Djankov, et al., 2002). In a society of high-performance orientation, employees tend to have better efficiency in terms of their work because the optimal structure of MNEs provide more incentives for employees to work harder. In a high-performance-orientation society, people may intensely pursue the most prominent goals at the cost of the less prominent goals (Jiang et al., 2010). From the perspective of efficiency-seeking, PBC provides more incentive for Chinese firms that will invest in other countries. Therefore, the larger number of FDI will flow to societies with PBC. Based on the above analysis, I assume that:
Hypothesis 1: OFDI activities are positively related to performance orientation in host countries.
2.5.2 Assertive Orientation and OFDI
Assertiveness is the degree to which people are assertive, confrontational, and aggressive in their relationships with others (Jiang et al., 2010). Individuals in societies with high
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unwilling to demonstrate forceful and self-assertive behaviors in public. Such behaviors will be regarded as arrogant and a lack of respect for the peers, and thus will receive negative feedback or even hostile attitudes from counterparts (Ma & Alfred, 2010). Second, it is hard to achieve internal integration among different departments if the degree of assertiveness is high because employees tend to defend their interests, positions and arguments rather than cooperate and compromise for the overall corporate strategies. This will lower the efficiency of employees and make firms difficult to manage. Therefore, Chinese firms are less likely to invest in societies with high assertiveness. Based on the above analysis, I assume that:
Hypothesis 2: OFDI activities are negatively related to assertive orientation in host countries.
2.5.3 Institutional Collectivism/In-group collectivism and OFDI
There is no consensus concerning whether OFDI activities are positively or negatively related to collectivism. Some literature reveals that OFDI activities are negatively related to
collectivism. The positive effect of individualism on OFDI can be explained from following dimensions: innovativeness, risk-aversion, pro-activeness (Morris & Lewis, 1991). A higher degree of innovativeness can be found in individualistic societies where people tend to seek for social differentiation through technological and design innovations (Griffith & Rubera, 2014). In addition, a high degree of risk-aversion orientation can be found in individualistic societies where people are less likely to attend risk-taking activities and focus more on the financial returns of the project (Müller & Rau, 2014). Finally, individualistic societies are characterized by high pro-activeness because people in such societies believe that their financial gains are associated with the effort they devote to the work (Rieger, Wang & Hens, 2015). However, other literature reveals that OFDI activities are positively related to
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efforts of the entire community. Since arguments from both sides can explain how OFDI activities are affected by collectivism, I assume that:
Hypothesis 3a: OFDI activities are positively related to individualism in host countries. Hypothesis 3b: OFDI activities are positively related to institutional/in-group collectivism in host countries.
2.5.4 Gender Egalitarianism and OFDI
Low gender egalitarian cultures are characterized by beliefs in the traditional gendered division of labor, such that men are viewed as breadwinners and women are viewed as caretakers and mothers, whereas in high gender egalitarian cultures there is less adherence to these traditional gender roles and more similarity in women’s and men’s involvement in work and non-work domains (Emrich, Denmark & Den Hartog, 2004; Lyness & Judiesch, 2014). Cultural stances on egalitarianism are largely determined by historical factors dating back a century or more (Tang, 2011). Gender egalitarianism seeks to induce people to recognize one another as moral equals who share basic interests as human beings: people are socialized to internalize a commitment to cooperate and to feel concern for everyone’s welfare (Siegel, Licht & Schwartz, 2013). It stands to reason that organizations in more egalitarian cultures practice greater sharing ofresources (Siegel, Licht & Schwartz, 2013). Resources may be material, such as compensation or benefits; they may be notional, such as information about the firm. In either case, possession of and control over resources make individuals or
organizations more powerful. From the perspective of resource-seeking investment, a society with resource sharing environment is more likely to attract FDI. Based on the above analysis, I can hypothesize:
Hypothesis 4: OFDI activities are positively related to gender egalitarian in host countries. 2.5.5 Power Distance and OFDI
High power distance refers to cultures that believe elevated social ranks inherently should carry superior power. Low power distance cultures may recognize that often “rank has its privileges”, but the population does not believe this is just or right (Head & Sorensen, 2005). The hierarchy/egalitarianism dimension refers to the different means of guaranteeing
individuals' responsible behavior and bringing about cooperative activity in society.
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which is more conducive to organizational learning, flexibility, and empowerment. In contrast, management practices with regard to high power distance, such as centralized decision making, authoritative leadership, and close supervision and monitoring, are deemed to fail in low power distance countries. However, when firms from high power distance cultures invest in the host country with high power distance, higher power distance will lead to greater OFDI. Kirkman and Shapiro (1997) show that employees from high power distance cultures expect managers to supervise and feel uncomfortable when they are given
discretionary decision-making power or when their roles and responsibilities inside an organization are ambiguous. Therefore, when Chinese firms that are characterized by high power distance invest in other countries, they prefer countries with higher power distance. From the perspective of efficiency seeking motives, countries with higher power distance will be more likely to attract FDI. That is:
Hypothesis 5：OFDI activities are positively related to power distance in host countries. 2.5.6 Uncertainty Avoidance and OFDI
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local investors, because of the advantage of greater localized and tacit knowledge in
managing the bureaucratic complexities, may have to incur relatively lower costs (Bhardwaj, Dietz & Beamish, 2007). Therefore, societies with lower uncertainty avoidance will be more attractive for FDI. Based on above analysis, we can assume:
Hypothesis 6: OFDI activities are negatively related to uncertainty avoidance in host countries.
2.5.7 Humane Orientation and OFDI
In order to analyze the effect of humane orientation on OFDI, I will first introduce the concept of Socially-Supportive Culture (SSC). The “SSC” factor is characterized by a high positive loading of humane orientation and a high negative loading of assertiveness (Stephan &
Uhlander, 2010). The reason is that humane orientation reflects opposing descriptive norms of people’s interaction with and treatment of one another (Stephan & Uhlander, 2010). SSC is featured by a high degree of kindness, liberty and tolerance. A society with the high humane orientation encourages individuals to be altruistic, generous, caringand kind to others. The social capital literature provides several explanations for the positive effects of SSC on new venture creation and economic growth including the sharing of information (Adler& Kwon, 2002), a reduced need for monitoring and formal control (Portes, 1998), and reduction in transaction costs due to a heightened tendency to cooperate voluntarily (Fukuyama, 2001). The second aspect is related to the initiative of the employees in host countries. The
embeddedness/autonomy dimension reflects the relationship between the individual and the group. One pole of this dimension, embeddedness, reflects cultures in which individuals identify with the group and share a way of life (Marasi, Cox & Bennett, 2016). In a society with high embeddedness, employees will be more likely to dedicate to their career rather than simply consider their own benefits (Trentin, Forze & Perin, 2015). As a result, the morale and efficiency of employees will also be higher. From the perspective of efficiency seeking
motives, societies with higher humane orientation will be more attractive for FDI.Therefore, I hypothesize that:
Hypothesis 7: OFDI activities are positively related to humane orientation in host countries.
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People with long-term orientation focus on future-oriented values (Minkov & Hofstede, 2012). Those with a long-term orientation exert efforts to keep the relationship attractive to their partners to encourage an enduring commitment (Hofstede, 1983). For instance, societies with a high level of future orientation have a greater propensity to save for the future and a more long-term strategic orientation (Hofstede, 2001; Liu, et al., 2014). Conversely, for people with a short-term orientation, processes are less important than their ownoutcomes from the exchange. Because people with a short-term orientation are willing to stick to traditional roles with respect to decision-making authority (Lund, et al., 2013). Chinese companies always seek for long-term cooperation while looking for business partners.
Chinese investors prefer societies with better future-orientation because it is easier for them to establish trust through long-term cooperation (Anderson & Sutherland, 2015). High level of inter-organizational trust in a society attracts FDI because of following reasons. First, trust leads to “spontaneous sociability” and enables the members of a society to strengthen cooperative relationships (La Porta et al. 1997). Second, trust engenders spontaneous sociability, greater speed in relationship formation, reduced opportunism and lower
monitoring cost (Das, 2014). Therefore, future orientation can promote efficiency, lower costs and attract greater FDI from Chinese investors. Based on the above analysis, I hypothesize that:
Hypothesis 8: OFDI activities are positively related to future orientation in host countries.
3. Research Methods
3.1 Sample and data collection
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have cultural values in GLOBE project are excluded from the sample. In order to increase the number of observation, I decide to use separate Chinese OFDI from 2008-2012 rather than mean Chinese OFDI. This results in the sample size of 295 Chinese OFDI – year observations (59 x 5). In terms of cultural variables in GLOBE project, the scores on these nine dimensions are stable. The argument that culture is stable (Hofstede, 2001) can be explained from the so-called culturalist perspective (Beugelsdijk & Maseland, 2011; Khalil, 2010). The theory of culturalist claims that values differences among societies are mostly derived from history and socioeconomic developments rather than the other way around (Huntington, 1996;
Beugelsdijk, Maseland & Hoorn, 2015). This is why we assume the score of cultural variables in GLOBE project will not change over the period of 2008-2012.
3.2 Variables
3.2.1 Dependent Variables
26 3.2.2 Independent Variables
The GLOBE project was devoted to assessing the nine dimensions of societal and organizational cultures and tests of hypotheses relevant to the relationships among these cultural dimensions and cultural-level implicit theories of leadership (House et al., 2001). The nine dimensions include performance orientation, assertiveness, institutional collectivism, in-group collectivism, gender egalitarianism, power distance, uncertainty avoidance, human orientation and future orientation. One hundred and fifty famous scholars and managers who will represent the major industries of the world from 62 societies are investigated in this long-term cross-cultural leadership studies (House et al., 2001). The countries that are studied in the GLOBE project are listed in table 2. As I mentioned above, I will use the score of the practice, rather than the value, of the cultural dimensions from the GLOBE project because investors will pay more attention to the actual behaviors, instead of perceived behavior, of the individuals in the host countries.
Table 2: GLOBE project: An introduction (House et al., 2001)
3.2.3 Control Variables
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According to Dunning (1993), there are two types of efficiency seeking for FDI. The first type is to make use of the differences in the access and cost of traditional cost endowments
(Dunning, 1993; Moghaddam, Sethi, Weber & Wu, 2014). This type of efficiency seeking is confounded with resource seeking motives. The second type of efficiency seeking is to make use of the economies of scale and scope (Dunning, 1993; Moghaddam et al., 2014). This type of efficiency seeking is confounded with market seeking. Therefore, I will exclude efficiency seeking and only include control variables with regard to the three motives: market seeking, resource seeking and strategic asset seeking. With regard to market seeking, I will use GDP of the host country as one control variable. Based on the market-seeking motivation of FDI, the sign of host countries’ GDP should be positive (Davidson, 1980) because larger markets tend to attract more FDI (Tang, 2011). When the size of the market is increasing, more
opportunities will be available to utilize valuable resources and exploit the economies of scale through FDI. The GDP data are collected from World Bank Development Indicator Statistics. Second, In order to control for resource seeking motives, I will use the ratio of ore and metal exports, forest area over the period of 2008-2012 (Buckley, Clegg, Cross, Liu, Voss & Zheng, 2007; Blomkvist & Drogendijk, 2013). This kind of data is available on World Bank
Development Indicator Statistics. Third, In order to control for strategic asset seeking motives, I will use total annual patent registration in the host country (Buckley et al., 2007; Blomkvist & Drogendijk, 2013). It is expected that Chinese MNEs would direct such asset seeking OFDI towards economies with significant levels of human and intellectual capital and in particular the industrialized countries, to help them to strengthen their competitiveness elsewhere (Dunning et al., 1998; Dunning, 2006; Buckley et al., 2007). This kind of data is available on World Intellectual Property Organization. For all these variables, I will use the natural logarithm following the previous operation of Chinese OFDI.
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countries will also affect Chinese outward FDI. According to the theory of Purchasing Power Parity (PPP), changes in domestic or foreign price level will lead to changes in the exchange rate (Gailliot, 1970). For example, when the inflation rate of the host countries is high, the products in those countries will become less competitive because of their higher price. Consumers will be more likely to purchase products from other countries, there will be the higher demand for foreign goods and currency. Therefore, the exchange rate of those
countries will be undervalued and more Chinese outward FDI will be discouraged because of the cheaper currency of those host countries. The data for inflation rate are available on IMF’s World Economic Outlook. In addition, export and import between China and host countries will also affect Chinese OFDI. Exporting goods and services will help firms explore foreign markets, acquire important information concerning the emerging opportunities in host countries, and improve their international competitiveness. Therefore, I assume that Chinese OFDI will be positively related to export between China and host countries because
increasing exports enable Chinese firms to comprehend emerging markets in foreign
economies, lowering the risks and uncertainties associated with OFDI. Imports to China from host countries also indicate the intensity of trade relations. As I have mentioned in the
previous section, resource-seeking is an important motive for Chinese firms. Chinese firms that seek to acquire resource of raw material will use OFDI as important mechanisms to internalize these important resource (Buckley & Casson, 1976; Buckley et al., 2007).
Therefore, it is suggested that Chinese OFDI will also be positively related to import between China and host countries. The data of import and export are collected from the China
29 3.3 Statistical Analysis and Results
Table 3 presents the correlations between dependent and independent variables based on the GLOBE project. As I have mentioned, this paper focuses on the impact of different cultural variables on Chinese OFDI. I will first test the multicollinearity by analyzing the bivariate correlations among independent variables. Multicollinearity is an indicator between two and more independent variables (Blomkvist & Drogendijk, 2013) and will make regression coefficient far from true (Grapentine, 1997). According to Pallant (2011), multicollinearity will exist if the correlations are above 0.7. As is shown in the table, the correlations among cultural variables, except for uncertainty avoidance, are not very significant. However, I notice that the correlations between uncertainty avoidance and in-group collectivism and future orientation are above 0.7. The result indicates that multicollinearity is not problematic for most cultural variables except for uncertainty avoidance. Since there is a potential problem of multicollinearity, it is necessary to calculate the variance inflation factor (VIF) for both independent and control variables.
Table 4 reports the result of VIF test, including model 1 (only control variables), model 2 (only independent variables) and model 3 (with both control variables and independent variables). From table 4, I find that the VIF values for 3 control variables (including GDP, import, export) and 1 independent variable (uncertainty avoidance) are relatively high. GDP is correlated with export because when a country exports its products to other countries, money will flow into this country and therefore its GDP will increase. Similarly, when a country imports products from other countries, its GDP will decrease because of money outflow. In terms of independent variables, table 3 also presents high correlations between uncertainty avoidance and in-group collectivism and future orientation. Uncertainty avoidance is
associated with a high degree of anxiety for unfamiliar situations. When in-group collectivism within societies is high, it is easier for investors to seek assistance in the host countries. When future orientation within societies is high, people are more likely to attend future-oriented activities which will result in unpredictable results. This is why uncertainty avoidance is negatively correlated with in-group collectivism and positively correlated with the future orientation. However since the cut-off point for VIF values is 10, I conclude that
30
Table 3: Spearman’s correlations between dependent and independent variables
31 Table 4: Collinearity statistics for model 1, 2 and 3
Model 1 Model 2 Model 3 LGDP 4.910 5.962 LORE 1.235 1.302 LPatents 3.016 3.974 LGeographic Distance 1.588 2.909 LInflation 1.140 1.429 LExchange Rate 1.225 1.443 LImport 4.561 6.048 LExport 5.255 7.480 Assertiveness 1.613 1.909 Institutional Collectivism 1.999 2.800 In-group Collectivism 2.483 3.483 Future Orientation 3.386 4.016 Gender Egalitarianism 1.395 1.516 Humane Orientation 1.495 1.783 Performance Orientation 2.342 3.381 Power Distance 1.653 2.308 Uncertainty Avoidance 4.256 5.520
In order to test the hypothesis concerning how the culture of host countries affects Chinese OFDI, an ordinary least square (OLS) regression analysis was conducted. Table 5 presents beta coefficients, F-value and adjusted R2. The adjusted explanatory value for model 1 (with only control variables) and 3 (with both control variables and independent variables) are 50.8% and 57.6% respectively, with F-value of 35.662 (p < 0.001) and 22.503 (p < 0.001)
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Model 1 presents the coefficients of control variables. The result generally confirms the findings of previous studies. Consistent with previous studies, I find that market-seeking motive (in terms of GDP), resource-seeking motive (export of metal and ore) and import of the host countries can affect Chinese OFDI in the expected direction because the coefficients of these variables are positive and statistically significant. However, different from previous studies, I find that asset-seeking motive (with regard to patent registration), export,
geographic distance, inflation, exchange rate and export will not affect Chinese OFDI because the coefficients of these variables are statistically insignificant.
Model 3 presents the coefficients of both independent variables and control variables. The coefficient of variable performance orientation is positive but statistically insignificant. Therefore, hypothesis 1 is not supported. The coefficient of variable assertiveness is positive but statistically insignificant. Therefore, hypothesis 2 is not supported. The coefficients of variable institutional collectivisms and in-group collectivism are positive and statistically significant, confirming hypothesis 3b that Chinese firms are more willing to invest in societies with high institutional collectivism and in-group collectivism. Therefore, hypothesis 3a is not supported. The coefficient of gender egalitarianism is positive and statistically significant, confirming the hypothesis 4 that OFDI activities are positively related to gender
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Table 5: Regression Analysis: Determinants of Chinese OFDI (2008-2012)
34 4. Discussion
Historically, the Chinese public has the concern that economic performance will be affected by cultural backwardness or superiority (Jiang et al., 2010). According to the theory of gravity model, the cultural distance will negatively affect the trade flow between countries because it is costly to overcome the differences in norms and values between countries (Klasing, 2014). However, in this paper, I study the importance of specific cultural dimensions on Chinese outward FDI. It is a relatively new topic which has been overlooked by the previous studies. Different from previous studies, this paper focuses on the impact of specific cultural
dimension, rather than the cultural distance, on Chinese OFDI. Based on cultural dimensions from GLOBE project, some hypotheses are developed concerning the role of different cultural dimensions on Chinese OFDI. As hypothesized, I find the support that Chinese investors are more likely to invest in societies with high institutional / in-group collectivism. The result also reveals the positive impact of gender egalitarianism on Chinese OFDI. As hypothesized, I also find the support that societies with high power distance will be more attractive to Chinese firms. Finally, the result also supports that Chinese firms are more willing to invest in countries with high humane orientation. It is noteworthy that I also control for other determinants of FDI, including market seeking (GDP), resource seeking (ratio of ore and metal export), strategic asset seeking (annual patent registration), exchange rate, inflation rate, import, export of the host countries and geographic distance between China and host country.
4.1 Academic Relevance
The focus of this paper is to study the impact of cultural dimensions of the host countries on Chinese OFDI. I find clear evidence that the decision of Chinese investors is affected by the culture of the host countries. Consistent with the hypothesis, Chinese firms are willing to invest in societies with high institutional / in-group collectivism, high gender egalitarianism, high power distance and high humane orientation. On the contrary, assertiveness, future orientation, performance orientation and uncertainty avoidance of the host countries don’t affect Chinese OFDI. It is noteworthy that apart from power distance, institutional / in-group collectivism, gender egalitarianism, power distance and humane orientation are only
35
Hofstede are different from GLOBE project (some countries are recorded in GLOBE project while not recorded in Hofstede’s theory, such as Egypt, El Salvador, Kazakhstan, etc.). Based on the result of the regression analysis, one question arises for future study: Whether GLOBE project is more appropriate than Hofstede’s cultural dimensions in studying how national culture affects FDI?
4.2 Managerial Implication
In addition to academic relevance, the results also have important managerial implications. According to the Dunning’s theory, the motivations for OFDI include market-seeking,
resource-seeking, strategic asset-seeking and efficiency-seeking (Dunning, 1993). Apart from the market, asset, resource, culture of the host countries is another important factor Chinese firms will consider when they invest in another country. Since the practice (‘as is’) of cultural dimensions is usually inconsistent with the value (‘should be’), evaluating the culture of host countries only from traditional values will result in the misleading result. Therefore, the managers should pay attention to the practice of cultural dimensions in host countries rather than make decisions based on their perceptions of the culture. The result reveals that societies are more attractive for Chinese OFDI with high institutional/in-group collectivism, gender egalitarianism, humane orientation and power distance. Since the significance level of institutional collectivism and power distance are higher than other cultural dimensions, I can conclude with the reservation that cultural attributes, such as institutional collectivism, power distance, may be more important for Chinese investors. Future research can continue to work on the following questions. Whether institutional collectivism and power distance are more important than other cultural dimensions for Chinese investors? Why do Chinese investors pay more attention to institutional collectivism and power distance?
4.3 Limitation and Suggestion for Future Research
As with other researches, this paper also suffers from some limitations. First, although the GLOBE project is more recent and covers more aspects from the perspective of culture, it only records 62 societies, among which some even belong to the same country. For example, Hong Kong and Taiwan, the provinces of China, are included in the GLOBE project.
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and Taiwan should be excluded while former East Germany and former West Germany, the black and the white in South Africa, German speaker and French speaker in Switzerland should be combined as one country respectively. As a result, the number of countries for this study is actually lower than 62. Since the GLOBE project only covers nearly a quarter of the countries all over the world, there is a problem concerning whether the countries recorded in GLOBE project are representative of all societies. In addition, GLOBE project differentiates cultural dimensions into value and practice. Although such differentiation is practical but it also makes this study more complicated because the figure of value and practice is
contradictory in most cultural dimensions. In order to solve this problem, I use practice rather than value to represent the culture of the host countries based on the assumption that investors pay more attention to actual behaviors rather than perceived behaviors. However, since there is no literature proving whether value or practice is preferable, future research can study whether value or practice in the GLOBE project can better represent the national culture and their influence on FDI.
Second, since this study stays at the country-level, within-country differences should be considered. It is preferable to study whether the effect of culture on Chinese OFDI varies among different industries or provinces. However, since OFDI data at regional and industry level are not availablefor current study, I cannot control for regional and industrial
differences with regard to Chinese OFDI. In addition, the cultural variables used in this paper are social aggregates that consist of complex social interaction rather than individual choice (Jiang et al., 2010). It is also necessary to consider the subculture of the host countries. A subculture can be defined as the group of people whose culture is different from the parent culture that it belongs to (Xing, Laurence & Christine, 2014). According to GLOBE project, different ethnicity and language are responsible for subculture within the country. For
example, in South Africa, humane orientation is high for the black while low for the white in practice. Similarly, in Switzerland, German speakers are characterized by high assertiveness while assertiveness for French speakers is low in practice.
Finally, although this paper focuses on cultural dimensions of the host country, future
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outward FDI, it is still possible that the motivations of foreign investment derive from the culture of home countries. In conclusion, future study can continue to work on how the culture of home countries affect outward or inward FDI.
5. Conclusion
The aim of this paper is to get more insight into cultural dimensions that affect Chinese OFDI in the host countries. Although it has been acknowledged that culture is a determining factor for economic growth (Weil, 2009), previous literature fails to include specific cultural dimensions as the explanatory variable for FDI. This paper contributes to the previous literature by using specific cultural dimensions, rather than cultural distance, as OFDI
determinants. Based on GLOBE project, the result reveals that some cultural dimensions, such as institutional/in-group collectivism, gender egalitarianism, humane orientation, power distance, has the positive impact on Chinese OFDI. Based on the result, I also raise one question for future research whether cultural dimensions can also serve as explanatory variables for inward FDI (IFDI). If future research can find out the relationship between cultural dimensions and IFDI, a broader conclusion can be drawn: FDI (consisting of IFDI and OFDI) activities are influenced by some cultural dimensions in both home and host countries.
In order to study the impact of culture on FDI, it is important to know how to measure the cultural dimensions of the host countries. Although both Hofstede and GLOBE project
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