| International business (IB) has long been interested in examining the effect of cross-national distance on foreign direct investment (FDI) (Kogut and Singh, 1988; Xu and Shenkar, 2002). The most prominent research stream on this subject is based on the Uppsala internationalization model (Johanson and Vahlne, 1977), which suggests that because certain potential host countries are perceived as more psychically distant from a foreign investor’s home country, internationalization through FDI in these host countries is likely to be preceded by market entry modes with less commitment such as exporting or sales subsidiaries. Where FDI does occur, it is more likely to take place in host countries with higher cultural proximity to the home country. Supporting this premise, scholars have generally found that the greater the distance (cultural, administrative, geographic, etc.) between home and host countries, the more difficult it is for home country multinational enterprises (MNEs) to operate, and hence the lower the likelihood of FDI (e.g., Dow and Ferencikova, 2010; Flores and Aguilera, 2007; Kogut and Singh, 1988). The Uppsala model has been invaluable in its contribution to our understanding of how cross-national differences weigh on the minds on MNE executives, but it also posits a lasting challenge for MNEs in how to overcome the negative effects of distance. To address this question, prior research tends to rely on traditional firm-specific advantages or institutional theory explanations, suggesting that MNEs can either transfer these organizational or managerial capabilities to local units (Buckley and Casson, 1976; Dunning, 1979, 1980; Hennart, 1982), or mimic the organizational practices of the best performing local firms (DiMaggio and Powell, 1983; Zaheer, 1995). These studies shed unique light on the resources and institutional mechanisms necessary to mitigate the distance effect, but largely neglect the demand side factors that may also help further our understanding. It is this lack of attention to demand-side factors that provides the motivation for our paper. Currently, we know very little about whether demand factors moderate the basic premise of the Uppsala model, and if so, to what extent a host country’s local demand can help to mitigate or aggravate the negative crossnational distance effect on FDI. Thus, in this paper we seek to overcome these shortcomings by examining 1) the direct effect of demand-side factors on FDI and 2) the moderating influence of host country demand on the negative relationship between crossnational distance and FDI. |