The impact of interpersonal trust and power distance on the flow of foreign direct investment.doc
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1、THE IMPACT OF INTERPERSONAL TRUST AND POWER DISTANCE ON THE FLOW OF FOREIGN DIRECT INVESTMENTStephanie Thomason, Florida Atlantic UniversityThis paper empirically tests the influence of power distance and interpersonal trust on the flow of FDI over five years across 33 countries. Findings suggest th
2、at the inward flow of FDI is significantly negatively related to the level of power distance in a country, while the outward flow of FDI is moderately related to countrys level of power distance. The flow of FDI is not related to a countrys level of interpersonal trust, however, although power dista
3、nce and interpersonal trust were found to be significantly inversely related. IntroductionForeign direct investments can be the economic lifeblood of a country as such investments increase the employment, capital, and trade balance within a country. FDI has typically been favored within free market
4、economies and heavily restricted in economies which were state-planned, Communist, pragmatic Nationalists, or under religious Authoritarianism. Since the fall of Communism in Eastern Europe, however, FDI has become increasingly recognized as an important contributor to the economic well-being of nat
5、ions. For this reason, many governments encourage FDI through special policies and incentives. Many factors have contributed to the recent increase in FDI, including increased globalization, free trade agreements, and privatization. Additionally, many variables impact the likelihood that a country w
6、ill be the inward recipient of foreign direct investment, or would be the outward source of foreign direct investment. These variables could extend beyond the traditional economic variables used to explain FDI. Understanding both the traditional and cultural variables which influence inward and outw
7、ard FDI could therefore be important to both a government and its people, who ultimately gain or lose from changes in FDI.This paper proposes that the inward and outward flow of FDI varies by a countrys level of power distance and interpersonal trust. Greater levels of power distance could decrease
8、the inward and outward flow of FDI, while lesser levels could increase the flow of FDI. Furthermore, greater levels of interpersonal trust could increase levels of overall trust, which could increase the inward and outward flow of FDI. Literature Review The extant literature on FDI has consistently
9、found that levels of FDI can be explained by economic factors, including country size, consumer purchasing power, open economy, the network of economies, (Habib and Zurawicki, 2002) macroeconomic stability, the privatization method, government barriers, natural resource endowments, trade liberalizat
10、ion, the level of economic reforms (Gabibaldi et. al., 2001), corruption (Habib and Zurawicki, 2002; Husted, 1999) and industry clusters (Mariotti and Piscetello, 1995). Some authors have linked national culture or cultural distance with different aspects of FDI (Chui, Lloyd, and Kwok, 2002; Kogut a
11、nd Singh, 1998, Mezias et. al., 2002). Others have linked trust to economic variables (Chiles and McMackin, 1996. Knack and Kiefer, 1997) market incompleteness (Luo, 2002), balanced asset specificity (Young-Ybarra and Wiersema, 1999) and modes of FDI (Shane, 1994, Curral and Inkpen, 2002). Few have
12、linked latent variables, such as trust or power distance directly to the inward and outward flow of foreign direct investment. Linking these cultural variables to FDI could add to current knowledge of the underlying influences impacting the inward and outward flow of FDI. Researchers and analysts co
13、mmonly refer to FDI flows and stocks when compiling data on multinational corporations. FDI flows reflect the sum that foreign companies invest in affiliates over a certain time period, of which the affiliates may spend to acquire current and fixed assets. FDI stock refers to the overall investment
14、position under the control of foreign investors and is used as an approximation of international production and value adding activities. This research focuses on the flow of FDI, as this represents investments on a year-to-year basis rather than the cumulative position of a company. Gabibaldi and hi
15、s colleagues (2001) found that foreign direct investment in transition economies can be explained by economic fundamentals, including variables reflecting macroeconomic stability, the level of economic reforms, natural resource endowments, the privatization method, direct barriers to inward direct i
16、nvestment, trade liberalization, and a measure of government red tape that reflects obstacles to investment and entrepreneurship and is closely related to corruption. Habib and Zurawicki (2002) also found that economic variables, such as consumer purchasing power, country size, open economy, and net
17、work of economies positively affect FDI, while corruption negatively impacts FDI.Luo (2002) notes that uncertainty in an emerging foreign market affects the trust-performance link and variables such as local parent ownership type (state vs. non-state-owned) and alliance location (open region vs. non
18、-open region) influence trust building. Das and Teng (2001) note that strategic alliances are adopted over greenfield investments to control the uncertainties and risks in the environment. By pooling the risks involved, companies can reduce the uncertainties involved in entering a new market (Das an
19、d Teng 2001, Brouthers, 2002). Kogut and Singh (1988) used an aggregated measure of Hofstedes (1980) national culture dimensions to create a measure of cultural distance. The index they used measured the distance between countries, correcting for differences in the variances of each of the dimension
20、s. The authors found that cultural distance leads to more joint ventures relative to greenfield investments and acquisitions, and determined that cultural distance between societies increases transaction costs and reduces the tendency to select some markets for foreign direct investment. Benito and
21、Gripsrud (1992) in contrast, found that FDIs located in countries that are culturally distant tend to be greenfield investments to a larger extent than for FDIs in culturally closer countries. The direction of the effect of cultural distance on the choice between licensing and foreign direct investm
22、ent has not been established with any degree of confidence (Shane 1994). Different business entry modes are impacted by cultural distance and interpersonal trust. Park et. al. (2002) found that different business entry modes have the potential to significantly influence the degree of commitment and
23、interpersonal trust of managers due to the degree of identification, or lack thereof, of the managers with the organizational parents.Cultural Influences on FDI In 1980, Hofstede created a cultural framework which has arguably spurred the most research in cross-cultural relations and which forms a b
24、asis from which many authors have built. Using cross-cultural business surveys of 53 countries from an IBM database, Hofstede developed four dimensions of cultural values that together describe national culture: individualism/collectivism (the relationship between the individual and the collectivity
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