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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:
[email protected], College of Business, Florida State University, Tallahassee, FL 32306
Yingmei Cheng
Affiliation:
[email protected], College of Business, Florida State University, Tallahassee, FL 32306
Chaopeng Wu*
Affiliation:
[email protected], School of Management, Xiamen University, Xiamen, Fujian 361005, China.
*
*Corresponding author: [email protected]
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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 

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