While previous research has delved into the relationship between political uncertainty and the aggregate cross-border flows of capital, there remains a notable gap in our understanding of how political uncertainty affects firm ownership structure within foreign direct investment (FDI) projects, specifically concerning the intensive margin. In this study, we commence by introducing a stylized model, wherein a risk-averse foreign investor teaming up with a local producer is concerned about the political risk associated with the provision of public goods by the local government. Our analysis demonstrates that the foreign investor, acting as a residual claimant, allocates a greater proportion of revenues to the local partner when local policy conditions are more uncertain. This strategic decision indirectly locks in local government commitment to the international joint venture, thereby mitigating the negative influence of political uncertainty. Subsequently, we test our theoretical framework by employing a unique dataset that encompasses city-level political turnovers and firm-level incentive structures in the context of China. The results unveil robust evidence substantiating that uncertainty arising from local political turnover significantly affects the revenue-sharing agreements between foreign investors and their local partners within the international joint production.

We use administrative registration records with information on the owners of all Chinese firms to document the importance of “connected” investors, defined as state-owned firms or private owners with equity ties with state-owned firms, in the businesses of private owners. We document a hierarchy of private owners: the largest private owners have direct investments from state-owned firms, the next largest private owners have equity investments from private owners that themselves have equity ties with state owners, and the smallest private owners do not have any ties with state owners. The network of connected private owners has expanded over the last two decades. The share of registered capital of connected private owners increased by almost 20 percentage points between 2000 and 2019, driven by two trends. First, state owned firms have increased their investments in joint ventures with private owners. Second, private owners with equity ties to state owners also increasingly invest in joint ventures with other (smaller) private owners. The expansion in the “span” of connected owners from these investments with private owners may have increased aggregate output of the private sector by 4.2% a year between 2000 and 2019.

We investigate how social capital in both the home and host countries affects foreign direct investment in high tech firms. Difference in the social capital (trustworthiness) among provinces of the host country, China, is shown to matter in foreign companies’ choice of location, ownership type, and investment in R&D. We find that the provinces in China characterized by high levels of social capital attract more foreign investment. We also find that the likelihood of foreign investors establishing joint ventures with local partners increases with the level of social capital prevailing in that area. Foreign high tech firms conduct more R&D investment and hire more R&D personnel in high-social-capital provinces. Moreover, foreign-owned firms located in high-socialcapital areas keep improving their intensity of R&D investments over time. By contrast, in lowsocial- capital areas, foreign high tech firms do not improve and actually diminish their R&D intensity over time. We further show that the social capital in the country of origin (the home country) of a foreign company also affects its investment decisions in China. Cultural difference between the home country and the host country magnifies the foreign company’s weighing of the regional social capital difference in the host country; foreign companies from higher uncertainty avoidance home country prefer to invest in regions with higher social capital in the host country; on the other hand, kinship decreases the need to deal with strangers, and thus reduces the reliance on the provincial social capital.

Financing of and investing in R&D are prone to risks of appropriation by competitors, information asymmetry, and agency problems. Although legal protection of intellectual property (IP) rights at the national level is necessary to encourage investing in R&D, we show that the effective enforcement at the local level is critical. We focus on the impact of provincial level IP rights enforcement on the financing of and investing in R&D, using a unique and rich database of high technology firms. These firms are located in twenty-eight provinces/districts throughout China. The enforcement of IP rights differs at the provincial level, although the firms are under the same set of national and international laws. To identify the causal effect of provincial level IP rights enforcement on firm behavior, we use several approaches to deal with the issues of endogeneity, reverse causality, and simultaneity. Controlling for provincial institutional factors such as economic development, banking system development, legal system performance, and local government corruption, we find that the enforcement of IP rights positively affects firms’ ability to acquire new external debt (including formal and informal financing) and external equity. Firms in provinces with better enforcement of IP rights invest more funding in R&D, generate more innovation patents, and produce more sales from new products. We also find better enforcement of IP rights encourages financing of and investment in R&D in foreign and ethnic joint ventures. The results confirm that enforcement of IP rights matters even in China. Our paper provides firm level evidence that financing of and investing in R&D are the channels that link enforcement of IP rights and economic growth.

We investigate the role of managers’ country of origin in leverage decisions using data on foreign joint ventures in China. By focusing on foreign joint ventures in a single country, we are able to hold constant the financing environment, eliminate the effects of formal institutions in the foreign managers’ home country, and consequently reveal the effects of informal institutions such as national culture on corporate finance decisions. Using cultural values of embeddedness, mastery, and uncertainty avoidance to explain country of origin effects, we find that national culture has significant explanatory power in the financial leverage decisions of foreign joint ventures in China. Country-level variation is evident in capital structure and appears to work through choices of firm characteristics, industry affiliation, ownership structure, and region of investment.

Financing of and investing in R&D are prone to risks of appropriation by competitors, information asymmetry, and agency problems. Although legal protection of intellectual property (IP) rights at the national level is necessary to encourage investing in R&D, we show that the effective enforcement at the local level is also critical. We concentrate on the impact of IP rights enforcement at the provincial level on the financing of and investing in R&D, using a unique and rich sample of high technology firms. These firms are located in twenty-eight provinces/districts throughout China. The enforcement of IP rights differs at the provincial level, although the firms are under the same set of national and international laws. Controlling for provincial institutional factors such as economic development, banking system development, legal system performance, and local government corruption, we find that the enforcement of IP rights positively affects firms’ ability to acquire new external debt (including formal and informal financing) and external equity. The firms in provinces with better enforcement of IP rights invest more in R&D, generate more patents, and produce more sales from new products. We also find better enforcement of IP rights helps mitigate the problem of appropriation by local partners in foreign and ethnic joint ventures. Our evidence confirms that enforcement of IP rights matters even in China. Furthermore, our results support that the enforcement of IP rights affects the growth in the economy via the channels of financing of and investing in R&D.

We investigate the role of managers' country of origin in leverage decisions using data on foreign joint ventures in China. By focusing on foreign joint ventures in a single country, we are able to hold constant the financing environment, eliminate the effects of formal institutions in the foreign managers' home country, and consequently reveal the effects of informal institutions such as national culture on corporate finance decisions. Using cultural values of embeddedness, mastery, and uncertainty avoidance to explain country of origin effects, we find that national culture has significant explanatory power in the financial leverage decisions of foreign joint ventures in China. Country-level variation is evident in capital structure and appears to work through choices of firm characteristics, industry affiliation, ownership structure, and region of investment.

Financing of and investing in R&D are prone to risks of appropriation by competitors, information asymmetry, and agency problems. Although legal protection of intellectual property (IP) rights at the national level is necessary to encourage investing in R&D, we show that the effective enforcement at the local level is also critical. We concentrate on the impact of provincial level IP rights enforcement on the financing of and investing in R&D, using a unique and rich sample of high technology firms. These firms are located in twenty-eight provinces/districts throughout China. The enforcement of IP rights differs at the provincial level, although the firms are under the same set of national and international laws. Controlling for provincial institutional factors such as economic development, banking system development, legal system performance, and local government corruption, we find that the enforcement of IP rights positively affects firms' ability to acquire new external debt (including formal and informal financing) and external equity. The firms in provinces with better enforcement of IP rights invest more funding in R&D, generate more patents, and produce more sales from new products. We also find better enforcement of IP rights helps mitigate the problem of appropriation by local partners in foreign and ethnic joint ventures. To deal with the problems of reverse causality and omitted common variables, we adopt the instrumental variable method and the approach used by Rajan and Zingales (1998), and the impact of IP rights enforcement is robust to different specifications. Our evidence confirms that enforcement of IP rights matters even in China. Furthermore, our results support that the enforcement of IP rights affects the growth in the economy via the channels of financing of and investing in R&D.