Psychic Distance and FDI Location Choice: Empirical Examination of Taiwanese Firms in China

Around the world, China fever has replaced China fear. Multi-national enterprises (MNEs) are doing more than just talking about foreign direct investment (FDI) in China. Differences in local thing in their broadest senses, including policy barriers at the borders, nature and geography, and economic differences, contribute to its distinctiveness. Thus, this study reviews, discusses and re-conceptualizes the psychic distance concept through the CAGE distance framework and empirically assesses its validity for three economic regions within China each of which have unique characteristics. The investigation concluded that psychic, administrative, and geographic distances were negatively related to location choice, owing to smaller perceived uncertainty. Thus, numerous Taiwanese have invested in China after considering the complex political situation across the straits. Even if the theoretical psychic distance (using cultural distance as a proxy variable) cannot consistently explain the phenomenon of the location choice in a large country, this investigation identifies the CAGE framework as potentially useful. Moreover, this study uses a cross-sectional survey of 258 Taiwanese firms investing in China across industries and received result to support the hypothesis. Additionally, the influence of psychic distance on location choice reduces with increasing experience of top management.