This study investigates the effect of psychic distance (PD) on outward foreign direct investment (OFDI) by multinational firms originating in emerging economies and the moderating effect of firm heterogeneity on this relationship.
An empirical analysis based on a negative binomial regression model is conducted using OFDI data from 2008 to 2017 on companies listed on the Shanghai and Shenzhen Stock Exchanges in China, an emerging economy.
The results suggest a U-shaped relationship between PD and OFDI by firms in emerging economies. Both executive foreign experience and state ownership negatively moderate the U-shaped relationship between PD and OFDI.
Emerging economies should encourage and guide multinational firms in engaging in OFDI and emphasize the advantages and disadvantages of PD for multinational firms. Additionally, non-sate-owned firms should recruit those who have a foreign education to provide support for OFDI by firms in emerging economies. Multinational firms should determine investment locations by consulting with executives with foreign experience to improve their ability to engage in OFDI.
This study combines macro and micro perspectives and integrates PD and firm heterogeneity into the same model with a sample of multinational firms originating in China. The findings support the existence of a PD paradox, which helps to enriching the theory on foreign direct investment.
