An investigation of Confucius Institute’s effects on China’s OFDI via cultural difference and institutional quality
| Pages | 241-263 |
| DOI | https://doi.org/10.1108/JABS-10-2016-0145 |
| Published date | 24 January 2020 |
| Date | 24 January 2020 |
| Author | Chensheng Xu,Feng Yao,Fan Zhang,Yonghong Wang |
| Subject Matter | Strategy,International business |
An investigation of Confucius Institute’s
effects on China’s OFDI via cultural
difference and institutional quality
Chensheng Xu, Feng Yao, Fan Zhang and Yonghong Wang
Abstract
Purpose –This study aims to investigatethe influence of the Confucius Institute (CI) on outwardforeign
direct investment (OFDI) by China and its potential interaction with cultural difference and institutional
qualityin host countries.
Design/methodology/approach –In the empirical study, the gravity model is adopted as the
benchmark to investigate the effectsof CI on China’s OFDI using the ordinary least squares or Poisson
Pseudo Maximum Likelihood estimators. Panel data on China’s OFDI from 2004 to 2015 are used.
Cultural difference and institutional quality are included explicitly as control variables to examine the
effectsof CI on China’sOFDI.
Findings –CI has a significant positive effect on China’s OFDI,and this effect depends on the cultural
difference and institutional quality of the host country. The impact of CI on China’s OFDI is more
prominentin host countries with a smaller cultural differenceor lower institutional quality.
Originality/value –CI is a comprehensiveplatform for foreign culturalexchange and signifies the rebirth
of Confucianismin China. The present study shows that CI can stimulatethe growth of China’s OFDI, with
implications for other Asian countries influenced by Confucianism. Based on the results of the study,
strategies for ‘‘Going Global’’ and encouraging economic growth based on cultural exchange and the
recognitionof host country heterogeneitiesare proposed.
Keywords Outward foreign direct investment, Institutional quality, Confucius institute,
Foreign cultural exchange, Heterogeneous effect, Culture difference
Paper type Research paper
Introduction
Confucianism, which is based on the teachings of the Chinese philosopher Confucius
(551-479 BCE), is one of the oldest systems of ideologies and philosophical beliefs and has
been the dominant philosophical system in China for more than 2000years. With a
particular emphasis on the importance of the family and social harmony, the core of
Confucianism is humanistic andprescribes the importance of family sacrifice, a strong work
ethic, investing in human capital throughhigher education and, in general, a high regard for
education and teachers. Specifically, Confucian ethic, focusing on the importance of social
relationships, harmony and collective values and interests, stands in contrast to the focusin
the West on the individual (Baumann et al. (2016)). Confucianism strongly influences culture
and all aspects of life in China and countriesin the East Asian cultural sphere.
Confucianism re-enters the public space in China in the post-reform era, assignified by the
formation of Confucius Institute (CI). To promote the appreciation of Chinese language and
comprehension of Chinese culturalheritages, Hanban, a subordinate branch of the Chinese
Ministry of Education, established CI as a public institute in 2004. CI acts in asimilar fashion
as Germany’s Goethe Institute, UK’s British Council and France’s Alliances Frances. With
Chensheng Xu is based at
the School of Economics
and Trade, Guangdong
University of Foreign
Studies, Guangzhou,
China. Feng Yao is based
at the Department of
Economics, West Virginia
University, Morgantown,
West Virginia, USA; China
Center for Special
Economic Zone Research,
Shenzhen University,
Shenzhen, China and
School of Economics and
Trade, Guangdong
University of Foreign
Studies, Guangzhou,
China. Fan Zhang is based
at Business Management
Program, Ripon College,
Ripon, Wisconsin, USA,
and Department of
Economics, West Virginia
University, Morgantown,
West Virginia, USA.
Yonghong Wang is based
at the School of Economics
and Trade, Guangdong
University of Foreign
Studies, Guangzhou,
China.
JEL classification –F10, F21
Received 31 October 2016
Revised 25 April 2017
17 July 2017
Accepted 31 July 2017
This study is supported by
Natural Science Foundation of
Guangdong Province, China
(Project Number:
2016A030313687).
DOI 10.1108/JABS-10-2016-0145 VOL. 14 NO. 3 2020, pp. 241-263, ©Emerald Publishing Limited, ISSN 1558-7894 jJOURNAL OF ASIA BUSINESS STUDIES jPAGE 241
the dramatic increase in the number of CIs and their registered students, the CI program
has become a powerbase for cultural exchanges and language promotions between China
and host countries. In 2006, there were 122 CIs and Confucius Classrooms[1] across 46
countries, with 13,000 registered students (Hanban (2007)). Eight years later, in 2014, 475
CIs and 851 Confucius Classrooms were operating in 127 countries, with more than
1,110,000 registered students, an increase of 30.6 per cent over 2013 student registrations
(Hanban, 2015). Based on the principles of CI of “Increasing the understanding of Chinese
culture and language worldwide, developing international friendship, promoting global
cultural diversity and facilitating business activities”[2], important impacts of CI on China’s
business conducts are expected.
This paper specifically investigates the impact of CI on one of China’s business
conducts –China’s Outward Foreign Direct Investment (OFDI). Because “Going Global”
was proposed as a national strategy, the dramatic increase in China’s OFDI has amazed
the world. In 2002, China’s OFDI was only $2.7bn, but after 10years of rapid growth,
China’s OFDI reached $107.8bn in 2013, making China the third largest OFDI investor
(MOFCOM, 2014). With this rapid increase in investment scale, China’s OFDI has
encountered various types of risks that threaten the properties of investors and even the
safety of employees working in host countries. Among these risks, those associated with
cultural difference and institutional quality present special challenges to the implementation
of “Going Global” and are the focus of the presentstudy.
The quality of the institutional environment in the host country contributes critically to
transaction costs and is a key determinant of the safety of overseas investment. Moreover,
OFDI is a transnational production input, and investors face potential cultural conflicts that
profoundly impact OFDI. Thus, to implement “Going Global” as a national strategy, it is
especially important for the home country, in this case China, and Chinese multinational
entities to actively participate in programs that reduce transaction costs arising from
institution quality and culturaldifference.
Despite extensive discussionof the determining factors of China’s OFDI, most studies focus
only on the investment environments in thehost countries. The home country’s (i.e. China’s)
activities directed at promoting cross-cultural administration, their potential positive impact
and the subtle impacts of Confucianism have not been investigated. Consequently, the
effects of cultural exchange throughCI on OFDI have largely been ignored. This paper uses
panel data of China’s OFDI to address this gap by investigatingthe effects of CI on China’s
OFDI. Positive effects of CI on China’s OFDI are observed, but the impact of Confucianism
goes beyond what is being captured simply by the number of CI. Being influenced by
Confucianism in all aspect of life, China’s OFDI decision makers exhibit their peculiarities in
investment overseas. This study argues that the potential interaction impacts of CI with
cultural difference and institutional quality should be included because the effectiveness of
the transmission mechanism of CI or, more deeply, Confucianism, depends on the cultural
difference and institutionalquality of the host countries. Qualitative differences in the effects
of CI on China’s OFDI are observed when host countries are grouped according to their
characteristics, such as cultural difference from the home country, and institutional quality.
This study argues that CI can reduce the transaction costs arising from liabilities of
foreignness and psychic distance, bridging the gap created by information asymmetry.
Moreover, China’s OFDI decision makers, who are influenced by Confucianism in their
culture, prefer to invest in a fashion thatmaintains harmony and social relationship, and thus
the impact of CI on China’s OFDI is manifestedin countries with smaller culture difference or
a relatively low level of institutional quality. The conclusions of this study provide an
empirical understanding of the behavior of China’s OFDI, and a practical reference for
multinational entities who expect benefits by implementing cultural exchange through
“Going Global”.
PAGE 242 jJOURNAL OF ASIA BUSINESS STUDIES jVOL. 14 NO. 3 2020
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