Investing with Strangers: Do Business with Whom You Can Trust
51 Pages Posted: 17 Mar 2012
Date Written: March 8, 2012
Abstract
We investigate the impact of social capital on three facets of foreign high-tech companies’ investment in China: where to invest, which ownership structure to implement, and how much to invest in R&D. We find local social capital in China is an important factor in these investment decisions. Provinces characterized by a higher level of social capital attract more foreign investments in the high-tech industry. The likelihood of foreign firms establishing joint ventures with local partners increases with the level of social capital. Furthermore, foreign firms conduct more R&D investment and hire more R&D personnel in provinces with higher social capital. We also find evidence of learning from experience as foreign high-tech firms located in high social capital provinces increase their R&D investment over time, while those in low social capital provinces do not. The conclusions do not change under instrumental variable regressions and panel GMM regressions, and the results still hold with the city-level measure of social capital.
Keywords: social capital, joint ventures, foreign investment, R&D
JEL Classification: F21
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