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Distance Are Used in International Business and How Each Might Affect Bilateral Foreign Direct Investment (fdi) Flows Between Countries

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Various concepts of distance are used in international business. Define and explain at least five concepts of distance, and discuss how each might affect bilateral foreign direct investment (FDI) flows between countries.


Transnational distances are a key concept in the area of management. In addition, there is also a view that the influence of transnational distance on the decision to enter a particular country, including its way into the market and the mode of entry, are all very important research directions in the field of international business. (Berry, Guillén & Zhou. 2010). A considerable number of companies, ignoring the difficulties of entering new and distinct countries, often place the key error on the attractiveness of foreign markets. In fact, in the work of international trade, estimating the costs and risks of international operations is an essential task, and most of them are obstacles caused by distance.

Foreign direct investment (FDI) refers to the investment which is made by a foreign corporation or an individual in a foreign country by establishing business or by acquiring the investing assets (Deng, 2007). Recent research shows that in foreign direct investment (FDI) decisions made by enterprises, the distance between countries in different aspects is important. This essay explores five different distances geographically, culturally, administratively, economically and demographically and analyses their different impacts on FDI.

Geographical distance

The concept first proposed is the notion of geographic distance to which the word distance is most easily linked. Tobler’s (1970) First Law of Geography: “Everything is related to everything else, but near things are more related than distant things”. Compared with other concepts, the method of judging geographical distance is objective. In most cases, the main meaning of geographical distance lies in the impact on traffic and communications.

In general, the demand for transport and communications technology leads to increased costs if geographical distances are large, resulting in a decrease in FDI. The greater the distance between the two countries, the higher the transportation costs incurred in trade. For processing trade, the principle of processing trade is the division of labour within the product, while the division of labour within the product involves the entry and exit of raw materials and semi-finished products many times. Therefore, compared with the general trade, the impact of processing trade on geographical distance should be more sensitive (Disdier et al.2010).

On the other hand, although the high-tech in today's society provides effective technical support for long-distance communications, a long distance still brings obstacles to the exchange and dissemination of information. Grote and Umber (2006) conducted a study of the U.S. market and found that companies are more time-sensitive about the information available to foreign markets closer together. So U.S. companies can get a higher return from geographically closer investments. This shows the blocking effect of geographical distance on FDI.

Cultural distance

Cultural distance refers to the quantification of cultural differences among different countries and regions and mainly in all aspects of culture such as values, religious beliefs, national traditions, and institutions. White(2008) points out the extent to which cultural distance measures the same or similar standards and values enjoyed by a country and a trading partner country. A smaller cultural distance means that the two countries enjoy the same or similar values, and their high cultural acculturation between each other will increase exchanges between all aspects of the two countries.

Scholars debate the impact of cultural distance on the flow of export trade, so the influence of cultural distance on FDI is worth discussing. As Hofstede (1983) points out, there are significant differences between cultures, with cultural differences increasing trade costs, cultural distances hampering trade, and culturally similar countries favouring more trade and thus FDI produce. Other scholars also through historical deduction and institutional economic analysis, the cultural distance will have a negative impact on export trade flows (Eichengreen & Irwin. 1998; Chang & Lee, 2003). However, other scholars think that the influence of cultural distance on export trade should be positive (Qu & Han, 2010). The reason is that the existence of cultural distance makes products more consumers' choices because consumers are always willing to choose diversified The product. These two paths have opposite effects on the export trade flows. Therefore, it is necessary to carry out more empirical analysis from the empirical point of view of the actual impact of cultural distance on FDI.

Institutional distance

Compared with the cultural distance, the institutional distance reflects the differences in control, regulation and cognition among different countries. Scott (2001) argues that the institutional environment consists of regulatory pillars, normative pillars, and cognitive pillars and that the structures and activities in control, regulation, and cognition endow the social behaviour with stability and practical significance. According to Scott, Kostova (1996) finds that institutional distance is the difference or similarity between countries in their regulatory, normative and cognitive systems.

The impact of institutional differences on FDI is mainly reflected by the fact that the greater the institutional distance, the lower the level of FDI. The trade-off theory of Dunning (2008) points out that the economic systems and environmental conditions in some locales can provide more opportunities to exploit some kind of ownership advantage. The Uppsala(1990) stage's internationalization stage model also points out that the differences among countries have influenced the behaviour of TNCs. Institutional distance mainly affects the choice of multinational corporations for host countries and the strategic preferences of branches, thus affecting the choice of FDI.

A good institutional environment reduces distortions in resource allocation and corruption, reduces transaction costs, and promotes trade as well as FDI. Lack of effective institutional guarantee will make the trade and international trade prone to friction and disputes, thereby reducing the appearance of FDI. To cite one example, as South Korea and North Korea, two countries along the Korean Peninsula, have huge differences in their systems, the international FDI that the capitalist countries South Korea can obtain far outweighs that of North Korea, which is closed only to institutions that accept the investment of socialist countries.



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