The Effect of Psychic Distance on FDI Location Selection ——Empirical Test on Cross-Country Panel Data

doi:10.3969/j.issn.1005-6378.2019.02.014

Abstract

Abstract: Using transnational data and the multidimensional index system of psychic distance from Dow and Karunaratna, this paper constructs the psychic distance index with time-varying and directionality by modifying the index construction method proposed by Kought and Singh. It then adopts 40 actual FDI(Foreign Direct Investment)data of country parts and the extended investment gravity model to empirically test the impact of psychic distance on FDI location choices. The empirical analysis shows that psychic distance has a significantly negative impact on the FDI location choice. It is suggested that countries should strengthen mutual exchange and understanding in terms of language, religious beliefs, culture, degree of education and degree of industrial development in order to narrow psychic distance and to promote FDI. And thus, it can help to promote world economic growth and globalization.

Key words: psychic distance, foreign direct investment, location selection, gravity model

CLC Number:

F832.48

YANG Da,TIAN Rong-zhi. The Effect of Psychic Distance on FDI Location Selection ——Empirical Test on Cross-Country Panel Data[J]. JOURNAL OF HEBEI UNIVERSITY (Philosophy and Social Science), 2019, 44(2): 94-99.

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