From Honeymoon to Divorce: Institution Quality and Foreign Investors' Ownership Consolidation in China

19 Pages Posted: 5 Dec 2018

See all articles by Qun Bao

Qun Bao

Nankai University

Yanling Wang

Carleton University

Hongjun Xie

Nankai University

Date Written: January 2019

Abstract

In China, joint ventures (JVs) between foreign investors and Chinese local firms were the most popular form of foreign affiliates before 2001. Over time, with policy space to operate as foreign wholly owned (WOs), many foreign investors in JVs chose to consolidate ownership and turned JVs into their WOs. Here, we examine how institution quality affects foreign investors' JV‐to‐WO ownership consolidation odds. For each province‐year, we construct an institution quality index from the business and judicial quality indicators, and further compute a relative quality index to highlight provincial variations. Using more than 43,000 JVs operating in China's 30 provinces over 1998–2007, we find that increases in institution quality decrease the odds of foreign investors to divorce their Chinese local partners. The odds for foreign investors in JVs to consolidate ownerships are significantly higher if they operate in provinces with relatively weaker institution quality. The odds of foreign investors' JV‐to‐WO decision vary with JVs' local firms being state‐owned enterprises (SOEs) and non‐SOEs, with foreign investors' origins from Hong Kong, Macao, and Taiwan (HMT) and other regions (Foreign), and with foreign investors' initial equity positions. Our results are not driven by foreign direct investment policy shocks, and are robust to alternative measures of institution quality.

JEL Classification: F23, L23

Suggested Citation

Bao, Qun and Wang, Yanling and Xie, Hongjun, From Honeymoon to Divorce: Institution Quality and Foreign Investors' Ownership Consolidation in China (January 2019). Economic Inquiry, Vol. 57, Issue 1, pp. 372-390, 2019. Available at SSRN: https://ssrn.com/abstract=3295882 or http://dx.doi.org/10.1111/ecin.12705

Qun Bao (Contact Author)

Nankai University ( email )

94 Weijin Road
Tianjin, 300071
China

Yanling Wang

Carleton University ( email )

1125 colonel By Drive
Ottawa, Ontario K1S 5B6
Canada
(613) 520-2600x2626 (Phone)

Hongjun Xie

Nankai University

94 Weijin Road
Tianjin, 300071
China

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