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摘 要

在经济全球化、世界政治格局多元化的今天，国际间的经济贸易交流越来越频繁，国际投资的流向、数量和方式均有了一定的变化。为此，如何更多的吸引外资和更好的利用外资成为当今世界各国十分关注的问题。自改革开放以来，外商在中国的直接投资规模迅速的增长。对FDI影响因素的研究近年来引起广大学者的普遍关注。众多学者在研究这一问题时，大多高度重视的是GDP、投资政策、劳动力和自然资源等等因素的作用，而对于文化因素对本国吸引外商直接投资的影响研究较少。

本文首先界定了文化、文化差异以及国际直接投资的概念，然后从四个文化维度分析了文化因素如何影响外商对华直接投资，最后对政府与企业给出了相关建议。

关键词：外商对华直接投资；文化；影响

Table of Contents

Acknowledgements…………………………………………..…………....….....i

Abstract ................................….…...……………………………………….......ii

摘要.........................................……...………………………………………......iii

Table of Content………………………………………………………………..iv

Chapter One Introduction 1

1.1 Background of the Study 1

1.2 Significance and Purpose of the Study 1

Chapter II Literature Review 3

2.1 What is Culture 3

2.2 Definition of Foreign Direct Investment 3

2.3 Geert Hofstede's Cultural Dimension Theory 4

2.4 Literature Review 4

Chapter III Influence of Cultural Factors on FDI in China 6

3.1 Cultural Dimensions 6

3.2 Influence of Culture on Investment Amount of FDI in China 8

3.2.1 Power Distance 11

3.2.2 Individualism versus Collectivism 11

3.2.3 Masculinity versus Femininity 11

3.2.4 Uncertainty Avoidance Index 11

3.3 Influence of Culture on the Location Selection of FDI in China 12

Chapter IV Policy Recommendations 16

4.1 Taking advantage of Chinese Traditional Cultural Inclusiveness 16

4.2 Creating Innovative Cultural Environment 16

4.3 Developing Corporate Culture 17

References 19

Chapter One Introduction

1.1 Background of the Study

Foreign direct investment (FDI) has been widely recognized as a crucial factor in Chinese industrial development process. Since the adoption of the reform and opening-up policy, the investment environment has undergone great changes--a boom of inward foreign direct investment. China’s needs for capital, raw materials, high technology, and modern management skills have opened a range of opportunities for foreign investors.

Meanwhile, China's rapid socio-economic development and the continuous improvement of its investment environment have made China the first choice for multinational corporations and the biggest attraction for foreign direct investment.

To make a direct investment in China, foreign investors would take some factors into consideration. Daniels and Radebaugh (2012) identify six external factors to be considered when a strategic decision is to be made to expand a firm’s business into the global arena, namely, ‘political, legal, cultural, economic, historical and geographic’ factors. Besides, cultural factors also can not be ignored. Because people in different countries or regions have great differences in values, religious beliefs, and customs. These differences build a cultural barrier in the process of international direct investment and hinder the smooth development of FDI activities. Spain's "burning shoes"^[1] and other events show that cultural factors have become prominent, and its impact on multinational companies has become greater.

1.2 Significance and Purpose of the Study

In recent years, China has become the largest FDI recipient among developing countries, and the second largest in the world. There are various factors that affect foreign direct investment such as technology, economic policy, human resource, market size and so on. However, the discussion about the influence of culture on foreign direct investment in the host economy has not received considerable attention. According to Shankar (2001), cultural distance is a major source of behavioral uncertainty in host countries, and leads to transaction costs that are closely related to foreign investors' preference and their market entry strategies. Therefore, pinpointing cultural influences on FDI is of great importance and value.

This paper analyzes how cultural factors influence foreign direct investment in China. It discusses concrete influences of direct investment and gives relevant suggestions to the government and enterprises in the end. It is hoped that this paper can pave the way for further research in this field. This study also aims to provide valuable suggestions and scientific basis for our country to make better use of foreign capital in order to promote the development of our economy.

Chapter II Literature Review

2.1 What is Culture

“Culture” is one of the mostly-used, and the most ambiguous concept in our life. The definition of "culture" is puzzling. In 1952, two American anthropologists, A.L-Kroeber and Kluckhoh, listed 164 definitions of culture that had been proposed from 1871 to 1951. Obviously, it is difficult to define a culture. However, if we want to analyze the cultural issues in foreign direct investment, we cannot fail to have a clear definition of culture. In other words, before analyzing the impact of culture on foreign direct investment, it is necessary to define the concept of culture in order to determine what the culture we need to analyze is.

According to Hofstede (2001), culture is a common mental process among people in the same environment, not as a personal trait, but as a psychological process common to many people with the same education and life experience. People from different groups, countries and regions have different psychological processes because they are taught differently, live in different societies and get different jobs, and thus have different ways of thinking. Culture can be divided into the surface, middle and core layers. The external things which can be perceived belong to the surface level, while the norms gradually developed in society belong to the middle level, and the implicit beliefs are the core layers. These three aspects are interrelated and are indispensable. Contemporary sociologists believe that culture mainly includes six major elements: beliefs, values, norms and sanctions, symbols, technologies, and languages.

Cultural differences can be divided into four dimensions: power distance, uncertainty avoidance index, individualism versus collectivism, masculinity versus femininity.

2.2 Definition of Foreign Direct Investment

An investor of a country invests in an enterprise outside its home country to achieve a lasting benefit, and to exercise effective influence and control over the operation and management of the Foreign Enterprise. The International Monetary Fund has recommended that a 10% stake in a foreign company be used as the minimum standard for international direct investment. Given that the business management authority of an enterprise is usually influenced by the proportion of equity, some countries use other evidence rather than equity ratios to determine the effective impact on the operation and management of foreign enterprises. China's FDI statistics show that foreign companies and economic organizations or individuals use foreign exchange, physical goods, and intangible asset in foreign countries and in Hong Kong, Macau and Taiwan to control the operating custody of enterprises outside the country as the core of economic activities.

2.3 Geert Hofstede’s Cultural Dimension Theory

In order to measure the cultural differences, Geert Hofstede started a large-scale investigation of cultural values within the IBM organization in 56 countries in 1970. His survey study has provided us with an insight into other countries and cultures, especially with respect to effective interactions between people. After more than 1.000 interviews and a variety of angles, the model of the Hofstede Cultural Dimensions emerged. Initially, the study only involved the analysis of the four dimensions, including power distance, uncertainty avoidance index, individualism versus collectivism, masculinity versus femininity; later two additional dimensions: long-term versus short-term, indulgence versus restraint were added to the his cultural dimensions theory. Since then, the theory has become an important reference in the field of cross-cultural research. Its core views have been verified through several hundred studies in 76 countries and regions, and a cultural model of six dimensions has been established.

2.4 Literature Review

Globerman and Shapiro (2003) emphasized the important impact of cultural differences on direct investment. They believed that when foreign investors adopt the FDI model to enter the international market, foreign investors would also face problems such as cross-border personnel exchanges and hiring employees from the host country, in addition to risks in capital, technology, and lack of management skills. The disparate cultural background may also make employees confused, nervous or even hostile, resulting in serious cultural conflicts that eventually lead to blocked or failed investment activities.

Head and Sorensen (2005) divided a country's attraction of FDI into two categories: Greenfield investment and Mamp;A investment, and separately discussed the different influences of different cultural characteristics on Greenfield investment and Mamp;A investment from the four dimensions of individualism, uncertainty avoidance, power distance, and masculinity. They believed that high power distance, low uncertainty avoidance, collectivism, and masculinity are conducive to Greenfield investment, while low power distance, low uncertainty avoidance, individualism, and masculinity strongly promote Mamp;A investment.

Bhardwaj etc. (2007) used uncertainty and trust to represent the cultural characteristics of the host country, empirically examing the impact of cultural characteristics on FDI. Its is found that uncertainty avoidance suppressed significantly the inflows of host country’s FDI, but the effect of trust on FDI inflows is not significant.

Guiso etc. (2009) used statistical data from 15 OECD countries and characterized the cultural characteristics of the investing country with the degree of trust, and found that the higher the investor’s trust in the host country, the greater the FDI flow to the host country.

Lu Xianjie and Zhu Yujie (2005) established a mathematical model by using statistical regression and concluded that under the established conditions of the host country’s investment environment, a stable exchange rate system and import and export trade between home country and China can promote foreign direct investment in China，but the cultural differences between the home country and China have a strong obstruction to FDI.

Sun Yanlin and Hu Song (2004) pointed out that the similarity of culture makes Hong Kong, Taiwan, and Singapore the main country or region for attracting FDI in China.

Ding Huixia and others (2007) used the data of foreign direct investment in China from 1985 to 2003 to test empirically through gravitational models and found that the Chinese cultural factors have played an important role in promoting direct investment in China.

Wang Jun (2007) took China's foreign-funded enterprises as samples and conducted an empirical study by establishing a Logit model. The results showed that the greater the cultural distance is, the more the enterprises take the form of joint ventures. In contrast, the greater the psychological distance is, the more direct investment chooses sole proprietorship.

Chapter III Influence of Cultural Factors on Foreign Direct Investment in China

3.1 Cultural Dimensions

Before we analyze how culture affects foreign direct investment in China, we need to quantify cultural differences. The standard of measurement of the cultural difference is based on the four dimensions proposed by Hofstede (2001) in his theoretical framework of cultural values, including power distance (PDI), uncertainty avoidance (UAI), individualism and Collectivism (IDV), Masculinity versus femininity (MAS). Each country has a score between 1 and 100 in each dimension to quantify their differences. The scores of China in these four dimensions are:

The power distance is 80, which means that China is a country with a relatively large power distance and it can tolerate higher inequity of distribution of rights. Asian countries have relatively high power distances, while Europe and the United States have relatively low power distances.

The uncertainty avoidance index is 40. It shows that Chinese are not willing to take risks and tend to avoid the uncertainty. In this dimension, Japan gets 92 points, ranking the 7^th while South Korea gets 85 points, ranking the 16^th. Both of the scores are higher than China’s index, that is to say, they are more likely to accept changes and new things. The scores of Occident on this dimension are either high or low, and it fully demonstrates the differences in countries.

The individualism versus collectivism index is 20. It shows that China is more inclined to collectivism than individual power and personal achievement. More emphasis is placed on collectivism in Asian countries, with lower scores, while the European countries tend to be more individualistic with higher scores. For example, the United States scores 91 points, ranking the first, while the scores of Singapore, Korea and Japan are 20, 18 and 46 respectively, which indicates that people in these countries are more concerned about the interests of their community rather than themselves.

The masculinity index is 66, and the lower the score is, the more feminism. It shows that people are more modest, gentle and educated. The highest score owner in this dimension is Japan, 95 points, while South Korea's score is 39. In Europe, a few countries have lower scores on masculinity, such as Sweden which gets only 5 points and Norway with 8 points.

Most scholars, when measuring the cultural difference variable, do not use the four-dimension scores directly for regression analysis, but use the comprehensive indicators calculated by Kogut and Singh (1988). Su Baicheng (2011) calculated the comprehensive indicators of cultural differences between various countries based on their four-dimension scores, and the formulas of Kogut and Singh, as shown in Table 3-1 below:

Table 3-1 Four-Dimensional Scale of World 20 Cultures

Note: Data Sources：Geert Hofstede’s official page https://geerthofstede.com/landing-page/

3.2 Influence of Culture on the Investment Amount of FDI in China

From Figure 3.1, we can see that since the reform and opening up, the actual usage of foreign direct investment in China has increased significantly, and it has maintained a good growth momentum. In this chapter we analyze the influence of culture on the amount of FDI.

Figure 3.1 Foreign Direct Investment in China, 1994-2012

Table 3-2 Cultural Differences between China and other 30 Countries

Note: Data Sources: Su Baicheng, “The Empirical Analysis of the Impact of Cultural Differences on Foreign Direct Investment in China” (page 21).

Table 3-3 Direct Investment in China by 20 Countries(regions) in 2016

According to the indicators of cultural differences in Table 3-1 and Table 3-2, and the direct investment in China by different countries in Table 3-3, the relationship between the four cultural dimensions and investment amount of foreign investors in China's direct investment will be clarified in the following paragraphs.

3.2.1 Power Distance

Investors with large power distances tend to reduce their direct investment in China. Countries with high power distances are more likely to go to countries with lower power distances when engaging in direct foreign investment, because host countries with lower power distances are more conducive to the investment country’s decision-making advantage of centralization. China is a country with high power distance which uses the centralized decision-making methods, so investors with higher rights distances may reduce direct investment in China in order to avoid conflicts in decision-making methods.

3.2.2 Individualism versus Collectivism

High individualism can promote foreign direct investment in China. Because foreign investors need to cooperate with domestic enterprises and make some sacrifices to ensure the smooth development of direct investment activities. Therefore, the countries that emphasize individualism are more inclined to invest in countries where collectivism prevails. China is a country with high collectivism and low individualism. High-individual-investment countries form a complementary culture will identity with China, then the cooperation between two sides may be easier to reach. Therefore, the higher the individualism, the greater the possibility of direct investment in China.

3.2.3 Masculinity versus Femininity

The higher the masculinity scores, the greater the scale of direct investment in China is. The display of masculinity is closely linked with the pursuit of aggressiveness, personal achievement and material interests. Therefore, in a high masculine country, corporate decision makers will increase the expansion of foreign investment in order to achieve their life goals, so they are more likely to invest in large-scale international businesses.

3.2.4 Uncertainty Avoidance Index

The higher the degree of uncertainty avoidance for investing countries, the fewer the direct investment in China. Because uncertainty avoidance reflects national perception of risk, countries with high uncertainty avoidance tend to show a high degree of aversion to risk, and foreign direct investment is an activity full of uncertainties. As a result, countries with high uncertainty avoidance will be cautious in foreign investment decisions, and the scale of outward investment may be much smaller.

Take the EU’s direct investment in China as an example. Over the years, there has been no major improvement in the scale of direct investment by EU countries in China. The reasons are diverse, but the cautious attitude of EU countries in terms of risk has taken a great proportion of all reasons. Before investing directly in the host country, they usually choose to conduct a series of detailed investigation and analysis of investment environment, covering political, economic, legal, and cultural aspects, and they will never make any capital contribution until they get a conclusion that the investment project is profitable.

3.3 Influence of Culture on the Location Selection of FDI in China

In this section, we choose two typical investment locations, Shanghai and Guangdong, to observe the influence of culture on the location choice of foreign direct investment. Guangdong as a gathering place for overseas Chinese investment and Shanghai as an investment place for large international capital, are perfect examples when we analyze the impact of cultural factors on the location selection of foreign direct investment in China.

From the structure of direct investment sources in Guangdong and Shanghai in Table 3-4, we could know that the foreign direct investments in Guangdong and Shanghai are ranking in front, as Hong Kong, Japan, and Singapore. From 1989 to 2016, foreign direct investments in Guangdong mainly came from Hong Kong. In comparison, foreign direct investments in Shanghai were relatively decentralized. The top 14 investors together account for 71.82% of the total (only 8.54% more than Hong Kong's investment in Guangdong). In 2016, the proportion of Hong Kong investment in Guangdong was 46.93%, which was 1.5 times that of Hong Kong in Shanghai.

Table 3-4 Investment Ratio of Major Investment Countries in Guangdong and Shanghai

Note: Sources: Guangdong Statistical Yearbook 2016 and Shanghai Statistical Yearbook 2016.

In fact, foreign industrial investment in Guangdong is mainly labor-intensive industries such as small and medium-sized manufacturing, contained textiles, clothing, toys, and small appliances. In contrast, Shanghai's industrial investment have two main characteristics: one is gathering of large multinational corporations, a majority of technology-intensive manufacturing and financial services is another characteristic (Li Xinchun, 2009).

The statistics on the absorption of foreign direct investments in Shanghai's service industry (calculated by contractual funds) show that Shanghai's service industry has absorbed foreign capital during the period from 1990 to 1999 mainly in the construction of real estate and public facilities, which accounted for 96% of the total service industry. From 2000 to 2003, however, the situation has undergone major changes. Although real estate and public facilities were still the focus of foreign investments, accounting for 77.2%, the investments in the financial and insurance industry ranked second accounting for 10.2%, and the business and catering industries accounted for 8.9%. By the end of 2016, Shanghai had approved 44547 foreign-invested enterprises, absorbing $114.355 billion foreign capital. Among them, there were 22,806 manufacturing projects and contracted foreign investments of $63.472 billion, with a proportion of 55.42% of the total contracted foreign investment; real estate projects of 1,005, and contractual foreign investments of $19.109, making up 16.68%. In 2016, Shanghai introduced 1,386 commercial projects throughout the year, with contracted foreign investments of $1.711 billion, with an increase of 41.8% over the previous year.

Shanghai has developed into an international financial and trade center, and the industrial structure further presents a distribution pattern dominated by service economy. This is undoubtedly an important factor conducive to the investment of large multinational corporations.

Differences in investment between Guangdong and Shanghai are not only due to factors such as national policies, but also due to the following reasons: Firstly, when the cultural differences between the investment country (region) and the host country (region) are small and there is more cultural consensus, they are more likely to invest in countries (regions) with similar cultures. In other words, investors commonly seek places where the culture is similar or easily accepted as the preferred investment places. Hong Kong, Taiwan and Guangdong are not only geographically adjacent to each other, but also Hong Kong and Guangdong are linguistically connected (Cantonese). Many investors have a series of social relations such as consanguinity, kinship, and geography. This cultural similarity has become a tool for overseas Chinese to enter Guangdong, which can greatly reduce transaction costs and avoid market risks. For Shanghai, Shanghai has been a financial, commercial, and industrial center since the beginning of the last century and it has been deeply affected by Western culture. It is a place for international cultural exchange and integration. It could be said that Shanghai is a multicultural place. The Shanghai business culture is the closest one to the foreign business culture among all regions of China and it has become an important cultural foundation for foreign investment. In addition, due to the local cultural traits of Guangdong and Shanghai, most of the shifts to Guangdong are small and medium-sized manufacturing industries from Hong Kong, Macao and Taiwan. For these industries, the flexible and informal social network plays a pretty prominent role, and does not require high-quality human resources and processing industry infrastructure. On the contrary, modern manufacturing, financial services and high-tech industries place high demands on talents, industry foundations, and government support. Shanghai is undoubtedly the best investment place to meet these demands.

Chapter IV Policy Recommendations

4.1 Taking Advantage of Chinese Traditional Cultural Inclusiveness

Chinese culture is profound and has a long history. Compatibility is the core of Chinese culture so that our traditional culture has been unbroken for 5,000 years. Our predecessors were the first to understand the role of compatibility, to constantly embrace the foreign culture, and to constantly innovate on the basis of integration.

As economic globalization develops in depth, the culture also moves across the globe. Cultures interact, communicate, permeate and mingle with each other. it can be said that we have entered into a multicultural society. In order to make good use of foreign capital and promote the long-term development of China's economy and build a harmonious society, we must carry forward the cultural advantages that are compatible with the Chinese culture and strive to absorb the positive and advanced cultural factors in foreign culture, inheriting and developing the heritage of human civilization. Foreign investment is an economic activity carried out in heterogeneous cultural environment, which inevitably leads to cultural conflicts. To solve the cultural conflicts, we should fully develop the advantages of cultural compatibility and have a comprehensive understanding of the excellent culture of China and foreign countries, taking its essence, discarding its dross to make it compatible with the characteristics of the times, modern civilization to realize the transformation of national culture modernization consciously.

4.2 Creating Innovative Cultural Environment

Reviewing Chinese traditional culture from the perspective of globalization and modernization, we can find that there are some limitations. These limitations restrict the process of China’s modernization, define the promotion of international competitiveness, and affect the introduction of foreign investments in China. Therefore, we must innovate the cultural environment while inheriting the excellent Chinese culture and reform the limitations of it. Innovation is the soul of culture. Improving the ability of independent innovation is the key to attracting more foreign capital. Through innovation can adapt Chinese traditional culture to the needs of modern society. This kind of innovation is the refining of Chinese culture and remedy for the lack of traditional culture. Firstly, according to the requirements of modern Chinese development and its globalization background, we should extract a modern form that represents the Chinese culture so that it is effectively disseminated and promoted. Secondly, although Chinese culture has cultural connotations, forms, and values, it also has some limitations, such as insufficient attention to individual values, inadequate development of instrumental rationality, and the inability to accommodate the needs of social development. Consequently, we need to make up for it through innovation. Thirdly, we should use modern high-tech methods to achieve innovation in the contents and methods of cultural products, cultivate new cultural formats, and improve or expand the speed and coverage of cultural information. We should not only to innovate in the new cultural formats that focus on digitization and networking, but also need to transform and upgrade traditional culture by modern science and technology in the traditional cultural industries, and to achieve many aspects of innovation on content, form, management and marketing and so on.

4.3 Developing Corporate Culture

First of all, we should develop corporate culture. For the enterprises with domestic and foreign joint ventures, we cannot impose our own moral values and habits on our foreign partners. While respecting others, we can learn from each other and work hard to create a subculture that is suitable for innovation and development.

Secondly, cross-cultural training for cultural differences between Chinese and foreign employees should be done. Only by having an in-depth understanding of heterogeneous cultures and being able to think from other cultures’ perspectives can we really moderate the cultural conflicts. This is based on further understanding of the cultural environment.

Thirdly, when negotiating with foreign business, we should fully consider whether the other party understands China and adapts to Chinese customs. We should respect the habits of foreign businessmen, establish a good corporate image. What’s more, we should rationally introduce our national culture on the basis of respecting the habits of foreign businessmen, so that the other party will have a stronger interest in our culture and bring more opportunities for cooperation.

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