Does distance matter in foreign direct investment sub-national location choice? Evidence from China

Yibo Bi (), Zhiyi Ren () and Kun Bao
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Yibo Bi: Renmin University of China
Zhiyi Ren: University of Nottingham

Frontiers of Business Research in China, 2020, vol. 14, issue 1, 1-19

Abstract: Abstract Multinational enterprises (MNEs) make investment decisions according to the distance factors at a sub-national level. This paper made estimates using the gravity model with provincial foreign direct investment (FDI) data from 2000 to 2012 and employed three concepts of distance. Our empirical results indicate that geographic distance and cultural distance have significant negative effects on FDI flow, whereas economic distance has a significant positive effect. It suggests that FDI prefers to locate in regions that are geographically and culturally close but economically distant from the home country, which further implies that FDI in China is dominated by vertical FDI. Our findings suggest that Chinese provincial governments should place emphasis on attracting FDI from culturally close countries and provide institutional support to encourage and promote horizontal FDI.

Keywords: Multinational enterprises (MNEs); Horizontal FDI; Vertical FDI; Gravity model; Sub-national level; Geographic distance; Cultural distance; Economic distance; China (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1186/s11782-020-00080-8

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