Does ethnicity pay?

About this book

"One of the most important and one of the most heavily studied ethnic networks in the world is overseas Chinese. However, almost all of the analysis on the economic dimensions of the overseas Chinese network has been about the effects of ethnic ties on the aggregate volume of trade or the effects of ethnic ties on foreign direct investment (FDI) at the country level. In this paper, we add to the large and important collection of literature on the subject by studying the profitability of foreign direct investments made by overseas Chinese in China. Our paper takes advantage of a large dataset-over 50,000 firms over a period of eight years-that is comprised of two types of foreign firms with investments in China-those owned by ethnic Chinese and those owned by non-ethnic Chinese. Against common perceptions, we find that ethnically Chinese firms in China do not outperform non-ethnically Chinese firms by a set of conventional profitability measures. We also find that the performance of ethnically Chinese firms deteriorates over time. One hypothesis explaining this result is that ethnically Chinese firms tend to under-invest in those firm attributes that may enhance long-term performance, such as human capital and technology (proxied by intangible assets in our paper). Indeed we do find evidence that ethnically Chinese firms invest far less in intangible assets and human capital as compared with non-ethnically Chinese firms of similar size, age, and other characteristics. In addition, within strata of matched firms based on their intangible assets and human capital, ethnically Chinese firms no longer display significant dynamic disadvantage relative to non-ethnic firms after controlling for other firm characteristics and fixed effects"--National Bureau of Economic Research web site.