Influence of Culture or Political System on FDI in China

IMPACT OF CULTURE ON FOREIGN DIRECT INVESTMENTS IN THE CHINESE REGION (2016-2021)
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May 9, 2022
Introduction
Understanding the relationship between cultural differences and the world economic market is essential for any business. This is particularly the case with international businesses that need to interact and deal with foreign investors, clients, and any other stakeholders regularly. Accordingly, one of the aspects of a state’s economy that is directly affected by the international relations of a company is Foreign Direct Investments (FDI). FDIs are generally defined as “a category of cross-border investment in which an investor resident establishes a lasting interest in and a significant degree of influence over an enterprise resident in another economy” (OECD.Org, n.d.). In other words, these are investments that outside organizations have over domestic organizations or states to establish networks or gain ground within the local economy. In this proposal, the author would like to focus on how FDIs can be measured based on the variations in cultural differences based on Hofstede’s cultural insights. The author believes that understanding the relationship between culture and investment decisions is essential for any business leader.
Literature Review
Foreign Direct Investments is one of the metrics used to determine the financial health of both the organization and the economy of the country. This is in line with studies showing that high FDIs contribute to the growth of a country’s Gross Domestic Product (GDP), especially in resource-rich countries (Caycedo, 2018). Accordingly, the primary benefit of FDIs is for firms that require the necessary capital to expand their services and meet increasing client demands (ResearchFDI, 2021). The additional cash flow and surplus also stimulate the immediate (and overall) economy by creating more employment, thereby increasing purchases for well-settled companies.
However, despite the benefits of FDIs, studies note several disadvantages and risks of the same. For one, high FDIs in resource-rich countries could lead to the depletion of the country’s natural resources (Caycedo, 2018). Additionally, it can also lead to the exploitation or domination of the company by the foreign investor, especially in cases when equity agreements are not well-settled.
Nonetheless, while these risks and benefits are important considerations for everyone, understanding the factors that drive FDI should come first. In one study conducted by Brouthers and Brouthers (2001), the authors noted that “bigger cultural distance and a high aversion to risk between two countries will increase the FDI cost and the relationship cost between them.” This suggests that countries that have more cultural differences would have higher FDI costs since companies could become more risk-averse in their decisions. Accordingly, this is still supported by recent studies that show that cultural characteristics directly and significantly affect investment decisions abroad, such as the similarity i...