Familiar strangers: The role of diaspora networks in foreign investment and long-run development
Journal of International Economics · 2026 · Fanghao Chen、Ruichi Xiong、XIAOBO ZHANG
Abstract
This paper shows that diaspora networks played a pivotal role in directing early foreign investment to Chinese locations with weaker institutions and in catalyzing long-run industrial development. Using an administrative dataset of all foreign firms in China, we document that the post-1979 surge in foreign entry was led by diaspora firms whose legal representatives were overseas Chinese; large non-diaspora inflows arrived mainly in the late 1990s. Leveraging the staggered rolling-out of opening-up policies across prefectures during 1981-96 and employing the variation in the geographic distribution of surnames as an identification strategy, we find that diaspora firms preferentially entered prefectures likely to be their legal representatives’ ancestral origins. This pattern is stronger in contract-intensive industries and disappears around China’s WTO accession. Early diaspora entry had sizable long-run multiplier effects, attracting later non-diaspora FDI and fostering the development of industrial clusters and parks.