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A Tale of Two Provinces: The Institutional Environment and Foreign Ownership in China

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Author Info
Yasheng Huang ()
Wenhua Di ()
Abstract

In this paper, we use a unique dataset covering joint ventures in two provinces of China, Jiangsu and Zhejiang, to test the effect of the institutional environment for domestic private firms on ownership structures of FDI projects. Unlike many studies on this subject, we approach the issue from the perspective of local firms seeking FDI rather than from the perspective of foreign firms seeking to invest in China. Applying the prevailing bargaining framework in studies on ownership structures of FDI projects, we find that a more liberal institutional environment for domestic private firms is associated with less foreign ownership of the joint ventures operating there. Several mechanisms can contribute to this outcome. One is that a more liberal institutional environment may enhance the bargaining power of those domestic firms negotiating with foreign firms to form alliances (the capability effect). The other mechanism is that a more liberal institutional environment may reduce some of the auxiliary benefits associated with FDI—such as greater property rights granted to foreign investors—and thereby attenuate incentive to form alliances with foreign firms (the incentive effect).

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Paper provided by William Davidson Institute at the University of Michigan Stephen M. Ross Business School in its series William Davidson Institute Working Papers Series with number 2004-667.

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Length: 35 pages
Date of creation: 01 Mar 2004
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Handle: RePEc:wdi:papers:2004-667

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Keywords: China; FDI; private sector; institutional environment; joint venture;

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  1. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August. [Downloadable!] (restricted)
  2. Benjamin Gomes-Casseres, 1990. "Firm Ownership Preferences and Host Government Restrictions: An Integrated Approach," Journal of International Business Studies, Palgrave Macmillan Journals, vol. 21(1), pages 1-22, March. [Downloadable!] (restricted)
  3. Kobrin, Stephen J., 1987. "Testing the bargaining hypothesis in the manufacturing sector in developing countries," International Organization, Cambridge University Press, vol. 41(04), pages 609-638, September. [Downloadable!]
  4. Yigang Pan & David K Tse, 1996. "Cooperative Strategies between Foreign Firms in an Overseas Country," Journal of International Business Studies, Palgrave Macmillan Journals, vol. 27(5), pages 929-946, December. [Downloadable!] (restricted)
  5. Park, Albert & Shen, Minggao, 2003. "Joint liability lending and the rise and fall of China's township and village enterprises," Journal of Development Economics, Elsevier, vol. 71(2), pages 497-531, August. [Downloadable!] (restricted)
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  6. Kobrin, Stephen J, 1987. "Testing the Bargaining Hypothesis in the Manufacturing Sector in Developing Countries," International Organization, MIT Press, vol. 41(4), pages 609-38, Autumn.
  7. Shang-Jin Wei, 2000. "How Taxing is Corruption on International Investors?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 1-11, February. [Downloadable!] (restricted)
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  8. Ewe-Ghee Lim, 2001. "Determinants of, and the Relation Between, Foreign Direct Investment and Growth: A Summary of the Recent Literature," IMF Working Papers 01/175, International Monetary Fund. [Downloadable!]
  9. Yigang Pan, 1996. "Influences on Foreign Equity Ownership Level in Joint Ventures in China," Journal of International Business Studies, Palgrave Macmillan Journals, vol. 27(1), pages 1-26, March. [Downloadable!] (restricted)
  10. Svejnar, Jan & Smith, Stephen C, 1984. "The Economics of Joint Ventures in Less Developed Countries," The Quarterly Journal of Economics, MIT Press, vol. 99(1), pages 149-67, February. [Downloadable!] (restricted)
  11. Yingyi Qian, 1999. "The Institutional Foundations of China's Market Transition," Working Papers 99011, Stanford University, Department of Economics. [Downloadable!]
  12. Yigang Pan & Shaomin Li & David K Tse, 1999. "The Impact of Order and Mode of Market Entry on Profitability and Market Share," Journal of International Business Studies, Palgrave Macmillan Journals, vol. 30(1), pages 81-103, March. [Downloadable!] (restricted)
  13. Yigang Pan & David K Tse, 1996. "Cooperative Strategies between Foreign Firms in an Overseas Country," Journal of International Business Studies, Palgrave Macmillan Journals, vol. 27(4), pages 929-946, December. [Downloadable!] (restricted)
  14. Elizabeth Asiedu & Hadi Salehi Esfahani, 2001. "Ownership Structure In Foreign Direct Investment Projects," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 647-662, November. [Downloadable!] (restricted)
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  1. repec:bep:buspol:9:2007:1:1177-1177 is not listed on IDEAS
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