The Role of Social Capital and Cultural Biases in Finance: The Investment Behavior of Foreign High Tech Firms

Abstract

We investigate the role of social capital and cultural biases in investment by foreign high-tech firms in China. We find social capital of provinces in the host country, social capital of the foreign company’s home country, and the cultural difference between the two countries are important factors in foreign direct investment. Provinces in China with a higher level of social capital attract more foreign investment. Foreign firms in provinces of higher social capital are more likely to establish joint ventures with local partners, invest more in research and development (R&D), and hire more R&D personnel. Foreign firms from countries with higher uncertainty avoidance and greater cultural difference from China give more weight to the provincial-level social capital in China. The conclusions do not change under instrumental variable regressions, and the results still hold with the city-level measure of social capital.