Personal Networks, Institutional Involvement, and Foreign Direct Investment Flows into China's Interior



Abstract: This article explores the relationship between informal and formal institutions and how their interactions shape the outcome of locational choices for foreign direct investment (FDI) in China's interior. This is an important but neglected aspect of China's economic development. The focus is on why FDI exists in host locations where the investment environment is poor and less competitive. Evidence from Shaanxi province suggests that the intertwined role played by personal networks and institutional involvement is a crucial part of the explanation. Networks are the key: at the individual/personal level, they are in the form of personal networks, and at the institutional/organization level, they take the form of institutional involvement. Moreover, the relationships among FDI, personal networks, and institutional involvement have a hierarchical structure: the larger the foreign parent firms, the more institutional involvement, while the smaller the foreign parent firms, the more personal networks are involved.