The Impact Of Cultural Distance On Trade And Investment

Since the reform and opening up policy,the Chinese economy has achieved great results.China has been among the world's fastest-growing economies,with a GDP growth averaging almost 10% during that period.The Chinese economy has not only maintained rapid and stable growth,it has also promoted the growth of the world economy.One important contribution of China's successful experience was to provide practical proof for a new economic development theory that can better benefit developing countries.In the last 40 years,China has also become one of the major global trading countries and one of the top global investors.Recently,China initiated the “Going Out Strategy” and the “Belt and Road Initiative” respectively in 2000 and 2013,allowing Chinese companies to continue to expand their investment activities around the world.After joining the WTO in 2001,China's international trade status has further improved.Although the economic crisis and trade frictions have caused China's foreign investment and trade to be restricted to a certain extent,China has still established itself as an important economic and trade partner of developing countries.Since the establishment of the Forum on China-Africa Cooperation back in 2000,the cooperation between China and African countries has reached a higher standard.As two key areas of China-Africa economic cooperation,the volume of bilateral trade and investment rapidly increased.However,the economic cooperation between China and African countries has not yet achieved its full potential.The unpropitious global environment and many other issues are causing the economic partnership between China and African countries to face multiple challenges along with the opportunities.The sudden increase of the trade and investment volume has made the economic partnership between China and African countries a hot topic in the literature.Two main topics are generally studied: The first is the impact of Chinese presence on the African continent.The second is the determinants of Chinese trade and investment with African countries.Our study looks at the second topic.We focus on the impact of cultural distance on trade and investment between China and African countries.This topic is very important both from a theoretical and practical point.Theoretically,there is little research on the impact of cultural distance on investment and trade relations between developing countries.Also,although many studies investigate the determinants of the economic relationship between China and Africa,very few investigate the influence of cultural distance.From a practical point,religious conflicts,immigration,protectionism and other cultural-related global issues not only affect international politics,but also affect international trade and investment.There are many reasons to believe that a good understanding of the impact of cultural distance is one of the key factors that will determine the future of the economic relationship between China and African countries.This thesis investigates the relationship between cultural distance,bilateral trade,and foreign direct investment,in order to explain how cultural differences can potentially influence trade and Investment in the specific context of the China-Africa partnership.This study uses empirical tests,case studies,and a survey to verify the impact of cultural distance,and then uses the empirical findings to give policy advices that can help both China and African countries avoid the negative impact of cultural differences and beneficiate from the positive impact.The thesis has four main parts and eight chapters.The first part explains the background of this study,analyzes the history and current situation of China-Africa economic and trade cooperation,and examines the related research on the influence of cultural distance on trade and FDI.The high growth rate of China-Africa trade has made of China the largest trading partner of the African continent.Also,the growth of China's investment in Africa has not only brought benefits to China and Chinese companies,but also promoted the economic development of African countries.However China-Africa trade seems to lack growth,and the structure needs to be further diversified.At the same time,many factors make it difficult to achieve new breakthroughs in the development of China's investment in Africa.Cultural distance is among the important factors affecting China-Africa economic and trade relations.In the literature,we find that cultural distance is one of the determining factors,however it is not among the most important determinants.We also found that overseas Chinese play a key role in reducing the negative impact of cultural distance and promoting the economic and trade activities of China with its partner countries.We found the following areas for improvement in the literature on the impact of cultural distance on trade and FDI: First,the literature on cultural distance mostly focuses on the relationship between developed countries or on the relationship between developed and developing countries.Second,there are only few studies that combine the following two important topics: The influence of cultural distance,and China-Africa economic and trade relations.Third,there is a lack of consensus on the empirical results of the impact of cultural distance,mainly due to differences in the cultural distance variables,the study period,and the countries studied.Fourth,there is a lot of research on the determinants of China foreign investment and trade,but there are few studies on China's foreign direct investment and international trade in specific regions.After reviewing the literature on the impact of cultural distance on trade and investment,there are reasons to believe that the impact of cultural distance on economic and trade relations needs to be studied from a specific perspective in order to make significant policy suggestions.That is why the study focus of this thesis is the impact of cultural distance on China-Africa trade and China's investment in Africa.The second part of this study defines the core concept of this thesis,cultural distance,examines the main theories on the impact of cultural distance on international trade and foreign direct investment,and explains the influence mechanism of cultural distance on bilateral trade and FDI,providing a theoretical basis for the empirical research.Cultural distance refers to the “degree of cultural differences between two countries.” From classical trade theories to new trade theories,there are more and more international trade theories that incorporate cultural or cultural differences(cultural distance)into their framework,including Comparative advantage theory,diversified demand theory,trade complementarity theory,transaction costs theory and production trade-off theory.Concerning the impact of cultural distance on FDI,the transaction cost theory,the Uppsala internationalization model theory,and the OLI theory all support that culture is one of the key factors affecting FDI.The third part of this study verifies the mechanism of the impact of cultural distance on China-Africa trade and China's investment in Africa through the empirical research,study cases,and a survey.According to the literature,this thesis first summarized the following two hypotheses: H1.Cultural distance has a negative impact on China-Africa trade;H2.Cultural distance has no significant impact on China's direct investement to African countries.In order to test the impact of cultural distance on bilateral trade,we used an augmented gravity model and mixed effects models to study bilateral trade data between China and 40 African countries from 1992 to 2016.To test the impact of cultural distance on Chinese FDI in African countries,we employ generalized least squares method with Chinese Outward FDI data in 40 African countries from 2003 to 2015.The results of our empirical study suggest that cultural distance does not have a significant impact on China-Africa total trade.However,cultural distance has a significant positive impact on China's exports to African countries,and a significant negative impact on China's imports from African countries.We also find that cultural distance has a significant negative impact on Chinese investment in Africa.Furthermore,distance in two of the cultural dimensions has a bigger impact on FDI.We conclude that from China-Africa perspective,cultural distance has a bigger impact on FDI than on trade.After discussing the results of the empirical tests,the paper also presents several study cases to verify the impact of cultural distance on trade and China's investment in Africa.The cases confirm that if the influence of cultural distance(institutions,religious beliefs,language,etc.)is neglected,it is likely to cause important losses to Chinese enterprises,and ultimately have a negative impact on China-Africa economic and trade cooperation.In the final part of the third section,we present the results of the survey that we conducted to find out how Chinese companies' managers perceive the cultural distance between China and Africa,and the impact of this cultural distance on trade and FDI.The results of the survey indicate that cultural distance has an impact on Chinese companies' investment in Africa.However,cultural distance is not the main determinant of Chinese enterprises' foreign direct investment.In addition,we learn that several cultural-related factors have a relatively large impact on Chinese companies' investment in Africa,including language,values,and work habits.To sum up,the negative impact of cultural distance on China's foreign direct investment does exist,but only some aspects of cultural distance have a decisive negative impact on foreign direct investment.The fourth part is the policy recommendations section.Based on the conclusions of the empirical study,the study cases and the survey,we move on to give policy recommendations for China-Africa trade and investment cooperation,including recommendations to Chinese and African governments,and recommendations to Chinese companies investing in Africa.As far as the governments are concerned,China's government and African countries governments should support scientific research on the Impact cultural distance,enhance both sides' "soft power",and continue to take practical actions to improve the trade structure,international talent training,laws and regulations,and cultural exchanges between the two sides.Chinese multinationals should give more consideration to the impact of cultural distance,and through localized management,cross-cultural training,and the economization of the cultural industry,in order to better integrate into the local society of African countries and minimize the negative impact of cultural distance.The main contributions of this thesis are the following:First,this thesis contributes to the literature on the relationship between culture and economics by studying simultaneously the impact of cultural distance on trade and FDI,and by providing a comprehensive view of the mechanism of the impact of culture on economic and trade relations.Second,this study offers a unique perspective on the impact of cultural distance,by focusing on relations between China and African countries.Based on the empirical study,the study cases and the survey,this study provides a comprehensive view of the impact of cultural differences on the Sino-African cooperation.Third,the findings and recommendations of this study can help Chinese and African governments,and Chinese companies investing in Africa to understand the significant impact of cultural distance,and enable them to adopt the right solutions to maximize the positive impact of cultural differences,and minimize the negative impact of cultural differences.While our research has reached very important conclusions,there are also a few limitations: First,because the situation in each African country is different,and because each African country's policy toward China is different,the impact of cultural distance may vary from country to country.Secondly,because relevant data on African countries is scarce,and data on cultural distance with Africa is even more scarce,our empirical research lacks persuasiveness.Finally,resource constraints do not allow this study to conduct larger surveys.In view of the limitations of our study,we make the following suggestions for future research: First,future research should focus on the impact of cultural distance on economic and trade cooperation between China and individual African countries.In addition,future studies should use large-scale surveys as the main empirical research method,allowing more Chinese and African stakeholders to express their views on the cultural distance between China and Africa and the impact of that cultural distance.These stakeholders should include diplomats from Chinese embassies in Africa,African employees working in Chinese companies,government officials from African countries,and the African local population.