Analysis On The Influence Of Culture On Foreign Direct Investment

Foreign direct investment(FDI)is the process that a foreign investor acquires interest by building new facilities, taking mergers and acquisitions activities, participating in management and other activities in a firm in the host country (Moosa,2002). In recent years, China has been the largest FDI recipient among developing countries, and the second largest in the world (Gao, 2005). There are various factors affect foreign direct investment such as technology, human resource, market size. However, the discussion about the influence of culture on foreign direct investment in the host economy has not received a considerable new attention. According to Shenkar(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, researching the effect of culture on FDI will be of great importance and worthwhile.

The purpose of this paper is to give an empirical analysis to examine and evaluate whether and how culture has an effect on foreign direct investment (FDI) between foreign countries and host countries and gives some suggestions to firms or countries to promote the development of FDI. This paper is organized into five sections. Section2 illustrates some conceptual issues about culture and foreign direct investment, also illustrates the link between culture and FDI in theory. Section 3 makes an empirical analysis of the cultural influence on FDI inflows in China. Section 4 analyses the role of national cultures in the selection of entry modes and distribution of FDI by choosing Shanghai as an investigating object. Finally, the study provides some recommendations to improve the cultural environment so that more effective and efficient FDI are attracted.