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Ethnic Networks in FDI and the Impact of Institutional Development

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  • Sarah Y. Tong

Abstract

Ethnic Chinese entrepreneurs are known for their active business networking practices, particularly in Southeast Asia. This paper empirically investigates the role of ethnic Chinese networks in promoting foreign direct investment (FDI). We further evaluate whether the effectiveness of networking activities are affected by the level of economic and institutional development of the source and the host countries. Using a standard gravity model, we find that ethnic Chinese networks are significant in facilitating cross-border investment between countries. The strength of ethnic Chinese networks between country pairs, approximated by the product of the numbers of ethnic Chinese in both countries, is positively correlated with the cumulative amount of their reciprocal FDI. More importantly, this significant relationship is not limited to countries in Southeast Asia, but is applicable to other country pairs included in the study as well, regardless of whether the investment is originated from industrial countries or developing economies. Finally, the analysis finds no evidence that ethnic networks are only effective in countries where economic and legal institutions are under-developed. Ethnic Chinese networks have played a significant role in promoting FDI to countries with a relatively higher bureaucratic quality, much more so than to countries with a lower bureaucratic quality. Copyright Blackwell Publishing Ltd 2005.

Suggested Citation

  • Sarah Y. Tong, 2005. "Ethnic Networks in FDI and the Impact of Institutional Development," Review of Development Economics, Wiley Blackwell, vol. 9(4), pages 563-580, November.
  • Handle: RePEc:bla:rdevec:v:9:y:2005:i:4:p:563-580
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    1. James E. Rauch & Alessandra Casella, 1998. "Overcoming Informational Barriers to International Resource Allocation: Prices and Group Ties," NBER Working Papers 6628, National Bureau of Economic Research, Inc.
    2. Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 72.
    3. World Bank, 2000. "World Development Indicators 2000," World Bank Publications, The World Bank, number 13828, October.
    4. Alan Deardorff, 1998. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Chapters,in: The Regionalization of the World Economy, pages 7-32 National Bureau of Economic Research, Inc.
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