Familiar Strangers : Lineage Connection and Diaspora Direct Investments in China

This paper studies the importance of international lineage network in facilitating the entry of foreign firms in developing countries where immature market environment deters foreign investments. We build a unique dataset on the universe of diaspora foreign firms in China that are controlled by overseas Chinese whose surnames are used to infer their lineage group. To identify the causal effects of lineage connection, we implement a Triple Difference-in-Difference (DID) design exploiting variations from both the staggered prefecture opening during the Reform Era (1981-1996) and the differential surname distributions across prefectures, which allows us to control for unobserved factors at various levels. We find that, following the prefecture opening, lineage connection facilitates the entry of diaspora firms, through information sharing and contract enforcement. Our findings are robust to various robustness checks and we find no such effects with China's accession to WTO as placebo because market institutions have been improved then. We also find that the lineage-driven diaspora firm entries during early development stages functioned as industrial seeds since they have large long-term positive spillover effects on non-diaspora firm entries and investments