Hostname: page-component-848d4c4894-pjpqr Total loading time: 0 Render date: 2024-06-17T13:51:43.909Z Has data issue: false hasContentIssue false
  • English
  • Français

Trust, Investment, and Business Contracting

Published online by Cambridge University Press:  12 August 2015

James S. Ang ,
Yingmei Cheng  and
Chaopeng Wu
James S. Ang
Affiliation:
jang@cob.fsu.edu, College of Business, Florida State University, Tallahassee, FL 32306
Yingmei Cheng
Affiliation:
ycheng@cob.fsu.edu, College of Business, Florida State University, Tallahassee, FL 32306
Chaopeng Wu*
Affiliation:
wuchaopeng@xmu.edu.cn, School of Management, Xiamen University, Xiamen, Fujian 361005, China.
*
*Corresponding author: wuchaopeng@xmu.edu.cn
Get access Rights & Permissions [Opens in a new window]

Abstract

How does trust affect business contracting at the firm level? We analyze the case of foreign high-tech companies investing in China, where the risk of expropriation of their intellectual property is high. We find that firms mitigate this type of risk by taking local trustworthiness into account when making investment decisions. Firms prefer to invest in regions where local partners and employees are considered more trustworthy; they are also more likely to establish joint ventures and to make greater research and development investments. We employ instrumental variable regressions and dynamic panel generalized method of moments estimators to alleviate endogeneity concerns and control for time-invariant heterogeneity.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 3 , June 2015 , pp. 569 - 595
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ahern, K.; Daminelli, D.; and Fracassi, C.. “Lost in Translation? The Effect of Cultural Values on Mergers around the World.” Journal of Financial Economics, 115 (2015), 304–329.Google Scholar
Allen, F.; Qian, J.; and Qian, M.. “Law, Finance, and Economic Growth in China.” Journal of Financial Economics, 77 (2005), 57–116.Google Scholar
Amiti, M., and Javorcik, B. S.. “Trade Costs and Location of Foreign Firms in China.” Journal of Development Economics, 85 (2008), 129–149.CrossRefGoogle Scholar
Arellano, M., and Bond, S.. “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations.” Review of Economic Studies, 58 (1991), 277–297.Google Scholar
Asiedu, E., and Esfahani, H. S.. “Ownership Structure in Foreign Direct Investment Projects.” Review of Economics and Statistics, 83 (2001), 647–662.CrossRefGoogle Scholar
Beamish, P. W., and Banks, J. C.. “Equity Joint Ventures and the Theory of the Multinational Enterprise.” Journal of International Business Studies, 18 (1987), 1–16.CrossRefGoogle Scholar
Bottazzi, L.; Da Rin, M.; and Hellmann, T. F.. “The Importance of Trust for Investment: Evidence from Venture Capital.” Available at SSRN: http://ssrn.com/abstract=997934 (2010).CrossRefGoogle Scholar
Brown, S.; Goetzmann, W.; Liang, B.; and Schwarz, C.. “Trust and Delegation.” Journal of Financial Economics, 103 (2012), 221–234.CrossRefGoogle Scholar
Carlin, B. I.; Dorobantu, F.; and Viswanathan, S.. “Public Trust, the Law, and Financial Investment.” Journal of Financial Economics, 92 (2009), 321–341.Google Scholar
Carlin, B. I., and Gervais, S.. “Work Ethic, Employment Contracts, and Firm Value.” Journal of Finance, 64 (2009), 785–821.Google Scholar
Chinese Academy of Social Sciences. Languages Atlas of China. Far East: Longman Group (1987).Google Scholar
Contractor, F. J., and Lorange, P.. Cooperative Strategies in International Business. Lexington, MA: Lexington Books (1988).Google Scholar
Darrough, M. N., and Stoughton, N. M.. “A Bargaining Approach to Profit Sharing in Joint Ventures.” Journal of Business, 62 (1989), 237–270.Google Scholar
Desai, M. A.; Foley, C. F.; and Hines, J. R.. “The Costs of Shared Ownership: Evidence from International Joint Ventures.” Journal of Financial Economics, 73 (2004), 323–374.CrossRefGoogle Scholar
Du, J.; Lu, Y.; and Tao, Z.. “Economic Institutions and FDI Location Choice: Evidence from US Multinationals in China.” Journal of Comparative Economics, 36 (2008), 1–18.Google Scholar
Duarte, J.; Siegel, S.; and Young, L.. “Trust and Credit: The Role of Appearance in Peer-to-Peer Lending.” Review of Financial Studies, 25 (2012), 2455–2484.Google Scholar
Easterly, W., and Levine, R.. “Africa’s Growth Tragedy: Policies and Ethnic Divisions.” Quarterly Journal of Economics, 112 (1997), 1203–1250.Google Scholar
Fan, G., and Wang, X.. “NERI Index of Marketization of China’s Provinces 2000–2001 Report.” Beijing, China: The Economic Science Press (2001).Google Scholar
Fan, G., and Wang, X.. “NERI Index of Marketization of China’s Provinces 2004 Report.” Beijing, China: The Economic Science Press (2004).Google Scholar
Fan, G., and Wang, X.. “NERI Index of Marketization of China’s Provinces 2006 Report.” Beijing, China: The Economic Science Press (2007).Google Scholar
Fan, G., and Wang, X.. “NERI Index of Marketization of China’s Provinces 2009 Report.” Beijing, China: The Economic Science Press (2010).Google Scholar
Fung, K. C.; Iizaka, H.; and Parker, S.. “Determinants of U.S. and Japanese Direct Investment in China.” Journal of Comparative Economics, 30 (2002), 567–578.CrossRefGoogle Scholar
Giannetti, M., and Yafeh, Y.. “Do Cultural Differences between Contracting Parties Matter? Evidence from Syndicated Bank Loans.” Management Science, 58 (2012), 365–383.Google Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “Trusting the Stock Market.” Journal of Finance, 63 (2008), 2557–2600.Google Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “Cultural Biases in Economic Exchange?” Quarterly Journal of Economics, 124 (2009), 1095–1131.Google Scholar
Habib, M., and Mella-Barral, P.. “The Role of Knowhow Acquisition in the Formation and Duration of Joint Ventures.” Review of Financial Studies, 20 (2007), 189–233.Google Scholar
Hall, B. H.; Jaffe, A.; and Trajtenberg, M.. “Market Value and Patent Citations.” RAND Journal of Economics, 36 (2005), 16–38.Google Scholar
Hansen, L. “Large Sample Properties of Generalized Method of Moments Estimators.” Econometrica, 50 (1982), 1029–1054.Google Scholar
Henisz, W. J. “The Institutional Environment for Multinational Investment.” Journal of Law, Economics, and Organization, 16 (2000), 334–364.Google Scholar
International Intellectual Property Alliance. “International Intellectual Property Alliance 2002 Special 301 Report: People’s Republic of China, IIPA Report” (2007).Google Scholar
Ishii, J., and Xuan, Y.. “Acquirer-Target Social Ties and Merger Outcomes.” Journal of Financial Economics, 112 (2014), 344–363.Google Scholar
Israel, C. “Piracy and Counterfeiting in China, Testimony of U.S. Coordinator for International Intellectual Property Enforcement before the U.S.–China Economic and Security Review Commission.” (2006).Google Scholar
Karlan, D. S. “Using Experimental Economics to Measure Social Capital and Predict Financial Decisions.” American Economic Review, 95 (2005), 1688–1699.Google Scholar
Knack, S., and Keefer, P.. “Does Social Capital Have an Economic Payoff? A Cross-Country Investigation.” Quarterly Journal of Economics, 112 (1997), 1251–1228.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Trust in Large Organizations.” American Economic Review, 87 (1997), 333–338.Google Scholar
Leuz, C.; Lins, K. V.; and Warnock, F. E.. “Do Foreigners Invest Less in Poorly Governed Firms?” Review of Financial Studies, 22 (2009), 3245–3285.Google Scholar
Li, K.; Griffin, D.; Yue, H.; and Zhao, L.. “National Culture and Capital Structure Decisions: Evidence from Foreign Joint Ventures in China.” Journal of International Business Studies, 42 (2011), 477–503.Google Scholar
McFadden, D. “Conditional Logit Analysis of Qualitative Choice Behavior.” In Frontiers in Econometrics, Zarembka, P., ed. New York: Academic Press (1974).Google Scholar
Ni, P. China Urban Competitiveness: Theoretical Hypothesis and Empirical Test. Beijing: China Economic Publishing House (2001).Google Scholar
Ni, P. “Annual Report on Urban Competitiveness.” Beijing, China: Social Sciences Academic Press (2002).Google Scholar
Ni, P. “Annual Report on Urban Competitiveness.” Beijing, China: Social Sciences Academic Press (2003).Google Scholar
Ni, P. “Annual Report on Urban Competitiveness.” Beijing, China: Social Sciences Academic Press (2004).Google Scholar
Ni, P. “Annual Report on Urban Competitiveness.” Beijing, China: Social Sciences Academic Press (2005).Google Scholar
Putnam, R. D. Making Democracy Work: Civic Traditions in Modern Italy. Princeton, NJ: Princeton University Press (1993).Google Scholar
Schwartz, S. H. “Beyond Individualism/Collectivism: New Cultural Dimensions of Values.” In Individualism and Collectivism: Theory, Method, and Applications, Kim, U., Triandis, H. C., Kâğitçibaşi, Ç., Choi, S., and Yoon, G., eds. Thousand Oaks, CA: Sage Publications (1994).Google Scholar
Stock, J. H.; Wright, J. H.; and Yogo, M.. “A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments.” Journal of Business & Economics Statistics, 20 (2002), 518–529.CrossRefGoogle Scholar
Stratford, T. “China’s Enforcement of Intellectual Property Rights and the Dangers of the Movement of Counterfeit and Pirated Goods into the United States.” Prepared Statement of Assistant US Trade Representative before the US–China Economic and Security Review Commission (2006).Google Scholar
Wooldridge, J. M. Econometric Analysis of Cross Section and Panel Data. Cambridge, MA: MIT Press (2002).Google Scholar
Yan, Z. Statistics on Modern Economic History of China. Chinese Academy of Sciences, Beijing: Science Press (1955).Google Scholar
Zhang, W., and Ke, R.. “Trust in China: A Cross-Regional Analysis.” Economic Research Journal, 10 (2002), 59–70.Google Scholar
Supplementary material: PDF

Ang supplementary material

Appendix

Download Ang supplementary material(PDF)
PDF 632.2 KB