Abstract
Using a comprehensive sample of all FDI firms in China, we explore the question whether ethnicity enhances operating performance. While there has been a sizable theoretical literature studying ethnicity and foreign investments, the prediction of the impact of ethnicity on firm profitability is far from clear. We demonstrate empirically that ethnic firms do not command an operational advantage over non-ethnic firms in the overall sample. Further tests suggest that while ethnic firms command an operational advantage over nonethnic firms initially, such advantage declines over time. We then explore what might have caused the decline of the ethnic advantage, and our results suggest that lack of investment in intangible and human capital by ethnic firms is driving the pattern we observe. Overall, our results suggest that ethnicity does not pay or that ethnicity does not confer a permanent operating advantage on a firm.
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