Evaluating the Performance of Culturally Tied FDI

We explore how cultural ties, measured by common language use, affect the quantity and performance of foreign investments originating in culturally related regions. To identify a causal relationship, we employ discontinuous increases in investments from Hong Kong and Macau in Mainland China at the geographic border of the Cantonese linguistic dialect zone. We find that the employment share of Hong Kong and Macau firms in all firms just inside a Mainland Chinese region where the same dialect is spoken as Hong Kong and Macau is around 14 percentage points higher than just outside. Hong Kong and Macau firms located just inside the Cantonese dialect region are approximately 7 percentage points more profitable as measured by return on assets than Hong Kong and Macau firms located just outside the region. We find that cultural ties enhance firm performance mainly by reducing a range of transaction costs