This chapter presents an analytical framework to interpret the many facets of FDI described in the previous chapter. I call this framework an institutional foundation argument. The institutional foundation argument differs from many of the standard perspectives on FDI in two aspects. First, it focuses on the motivations of and constraints on Chinese firms to account for some of the FDI patterns. Second, it makes the claim that institutional features of the Chinese economy powerfully create and shape these motivations and constraints.

Some of the ideas in the institutional foundation argument are built on a number of prominent themes in the economic literature on FDI. In this chapter, I briefly review these themes. The summary is not meant to be comprehensive but to highlight those insights that will become the critical building blocks in my own explanation of many of the seemingly unusual FDI patterns in China. In the concluding section of this chapter, I raise some potential implications about this way of analyzing FDI in China. Foremost among these implications are the benefits and costs of China's method of attracting FDI. While China's huge FDI inflows are beneficial both to promote growth and to facilitate economic restructuring, it is important to recognize that FDI's disproportionate role is predicated on a number of institutional distortions in the Chinese economy.