Relevant dimensions and contextual weights of distance in international business decisions: evidence from Spanish and Chinese outward FDI

Abstract

We investigate how distance and different dimensions of distance between countries explain the outward FDI of firms according to distinct home country contexts. We identify three important dimensions of country distance: socio-economic development distance, cultural and historical distance and physical distance. We then empirically explore whether these dimensions receive different weights when explaining the location of FDI depending on its origin by comparing the outward FDI of China and Spain using partial least squares-based structural equations modelling (SEM-PLS). We find that although country distance significantly explains the FDI of both countries, the weights of the three dimensions of distance depend on the home country context. More specifically, we find that all three dimensions of distance explain the direction of Spanish investments, whereas only cultural and historical distance significantly explains Chinese outward FDI. Our research advances the understanding of distance between countries, the dimensions of distance, and how context influences the impact of the dimensions of distance.