Abstract
We use a hand-collected dataset of firm-level foreign direct investment in China to examine the impact of home countries' institutional elements on the investment comovement between foreign and domestic firms. We find that foreign firms from countries with well-developed financial markets or a strong rule of law experience less comovement with Chinese domestic firms. Our evidence also suggests a contingency impact between the two channels of home country institutions; the capital markets effect exists only for foreign firms from countries with strong rule of law, whereas the rule-of-law effect holds only for firms from countries with well-developed financial markets. Finally, we show that firms from countries with better institutional quality exhibit greater investment efficiency than firms from countries with weaker institutions.
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