1.Introduction Since 1979,foreign-invested enterprises(FIEs)-firms funded by FDI-have become a sizable player in Chinese economy.FIEs are making China a manufacturing base in Asia.They can be found in virtually every part of China and in every economic sector.FIEs have established dominant positions in a number of Chinese industries.The foreign trade activities of FIEs account for a significant share of China's overall trade.By 2002,they have accounted for over 50 percent of China's exports. A number of studies analyzing the determinants of the ownership structures of FIEs in China have been done by Pan(1996),Pan and Tse(1006),Pan et al.(1999)and others.Most of these studies approach the question from the perspective of the foreign-invested firms.They emphasize those variables in the regression specifications that are prominently featured in the theoretical and empirical studies of multinational corporations(MNCs),such as industrial characteristics,firm-specific assets,and technologies.The basic building block in on the studies of the determinants of equity structures of FDI firms is the industrial organization(IO) conceptualization.The starting point is that foreign firms will incur additional costs while domestic firms will not.The costs include the intrinsic difficulties of managing cross-border operations,and those of gathering information and developing expertise in relation to foreign markets and the political,social,and legal environments.To offset these extra costs,a foreign firm must have internal and ownership-specific advantages-such as R&D capabilities-over its domestic rivals.2 2 The pioneering work in this field of study is Hymer(1976).For a good summary of this large body of literature, see Caves(1996) 33 1. Introduction Since 1979, foreign-invested enterprises (FIEs)—firms funded by FDI—have become a sizable player in Chinese economy. FIEs are making China a manufacturing base in Asia. They can be found in virtually every part of China and in every economic sector. FIEs have established dominant positions in a number of Chinese industries. The foreign trade activities of FIEs account for a significant share of China's overall trade. By 2002, they have accounted for over 50 percent of China’s exports. A number of studies analyzing the determinants of the ownership structures of FIEs in China have been done by Pan (1996), Pan and Tse (1006), Pan et al. (1999) and others. Most of these studies approach the question from the perspective of the foreign-invested firms. They emphasize those variables in the regression specifications that are prominently featured in the theoretical and empirical studies of multinational corporations (MNCs), such as industrial characteristics, firm-specific assets, and technologies. The basic building block in on the studies of the determinants of equity structures of FDI firms is the industrial organization (IO) conceptualization. The starting point is that foreign firms will incur additional costs while domestic firms will not. The costs include the intrinsic difficulties of managing cross-border operations, and those of gathering information and developing expertise in relation to foreign markets and the political, social, and legal environments. To offset these extra costs, a foreign firm must have internal and ownership-specific advantages—such as R&D capabilities—over its domestic rivals.2 2 The pioneering work in this field of study is Hymer (1976). For a good summary of this large body of literature, see Caves (1996)