Ethnic Networks in FDI and the Impact of Institutional Development

18 Pages Posted: 28 Dec 2005

See all articles by Sarah Y. Tong

Sarah Y. Tong

National University of Singapore (NUS) - East Asian Institute; National University of Singapore (NUS) - Department of Economics

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.

Suggested Citation

Tong, Sarah Y., Ethnic Networks in FDI and the Impact of Institutional Development. Review of Development Economics, Vol. 9, No. 4, pp. 563-580, November 2005, Available at SSRN: https://ssrn.com/abstract=857767 or http://dx.doi.org/10.1111/j.1467-9361.2005.00294.x

Sarah Y. Tong (Contact Author)

National University of Singapore (NUS) - East Asian Institute ( email )

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