Legal Traditions and Foreign Ownership Modes: Evidence from China

Using census data gathered in 2001, the present paper examines how legal traditions influence foreign investors’ choice of ownership modes in China. The study finds that, first, investors from economies sharing the same legal origin with China tend to select ownership modes with a relatively high level of foreign control. That is, such foreign direct investment (FDI) firms are more likely to be wholly owned enterprises or joint ventures with relatively large foreign shares. Second, similarities in legal enforcement between China and the home economies correlate positively with high foreign control. Third, the effects of legal traditions on ownership modes are relatively weak for new entrants compared to their forerunners, probably owing to the continuous improvement in China's business and law institutions.