Familiar Strangers: The Role of Diaspora Networks in Foreign Investment and Long-run Development

Abstract

This paper characterizes the dominant role of diasporas in bringing in pioneering investment during the early stages of market formation, and examines whether they generate positive spillovers on subsequent local industrial development. Using a unique administrative dataset on the universe of foreign firms in China, we document that following China’s opening up in 1979, initial foreign direct investment was largely driven by the Chinese diaspora, while massive non-diaspora foreign investment did not materialize until the late 1990s. Leveraging the staggered opening up of Chinese prefectures during 1981-96 and the variation in geographic distribution of surnames as an identification strategy, we show that diaspora firms tended to venture into newly opened prefectures which are more likely to be the ancestral origins of their legal representatives. Moreover, diaspora firms were more likely to be pioneering firms and the entry of diaspora firms stimulated subsequent entry of both non-diaspora foreign and domestic private enterprises.

Keywords: Diaspora Network, Market Formation, Foreign Investment, FDI Spillover, Long-run Development

JEL Classification: F21, F22, F23, O19