Culture and capital flows—Exploring the spatial differentiation of China's OFDI

Using a panel data of China's OFDI over the period of 2003–2013, this study investigates how cultural distance and its dimensions explain China's OFDI spatial differentiation. We find that cultural distance has a curvilinear (U-shaped) relationship with China's OFDI. The growth rates of “liability of foreignness (LOF)” and “advantages of foreignness” (AOF) finally determine whether cultural distance cause conflicts or improve innovation. In addition, we find that how China's OFDI activities are related to the difference of cultural distance hinges on the particular cultural dimension in question. The latter suggests that that the relative weight of cultural dimensions should be considered in the calculation of cultural distance. Overall, this study makes important contributions to both theory and practice. Our findings offer important insights into OFDI activities and provide guidelines for managers about entry strategies.