American Political Science Review Vol.104.No.3 August 2010 doi:10.1017/S0003055410000201 Familiarity Breeds Investment: Diaspora Networks and International Investment DAVID LEBLANG University of Virginia That explains cross-national patterns of international portfolio and foreign direct investment (FDI)?While existing explanations focus on the credibility of a policy maker's commitment,we emphasize the role of diaspora networks.We hypothesize that diaspora networks-connections between migrants residing in investing countries and their home country-influence global investment by reducing transaction and information costs.This hypothesis is tested using dyadic cross-sectional data for both portfolio and FDI.The findings indicate that even after controlling for a multitude of factors, disapora networks have both a substantively significant effect and a statistically significant effect on cross-border investment. igration is an increasingly important facet and Prskawetz 1998).There is growing evidence that of the global political economy.Like flows emigres do benefit their homeland:return migration of commodities and capital,flows of labor constitutes a flow of knowledge of skills.and remit- have increased dramatically in recent years.The United tances provide enormous flows of capital. Nations'(UN's)Population Division put the share of In this article,we add another layer to the liter- the world's population residing outside their nation of ature on global migration by arguing that diaspora birth at almost 200 million people-or approximately networks-cultural and/or familial linkages between 3%of the world's population-in 2007.That number migrant communities in the investing country and the continues to grow:the Organisation for Economic Co- migrant's country of origin-play a pivotal role in operation and Development (OECD;2006)estimates the global allocation of capital.We provide some of that the number of legal immigrants entering OECD the first quantitative evidence that diaspora networks countries stands at about 3 million annually.Just as act as a conduit for both portfolio and foreign di- with flows of commodities and capital,scholars have rect investment (FDI)across country pairs.A focus devoted enormous energies to the exploration of the on diasporas-an explicitly cross-border phenomena- consequences of immigration.We know that migration also provides a fresh perspective on the factors influ- is associated with a rise in support for extreme right encing international investment.The existing literature wing parties and that it has mixed effects on social on investment is primarily monadic,emphasizing the spending and on wages in the destination country (e.g., importance of credible commitments and institutional Borjas 1999;Borjas,Freeman,and Katz 1996;Knigge quality in the countries that seek global capital(e.g., 1998). Alfaro,Kelemli-Ozcan,and Volosovych 2006;Buthe Less is known,however,about the consequences of and Milner 2008:Jensen 2003). migration for the migrant's country of origin.Some We do not question the importance of credible com- scholars argue that migration results in a"brain drain," mitments.However,focusing on institutional design whereby educated and skilled members of a country only gets us part of the way toward understanding pat- leave in search of better wages.Others argue that this terns of international investment.Because diasporas brain drain is offset because the prospect of leaving provide connections between home and host countries. provides an incentive for those left behind to invest these networks facilitate cross-border investment in in their own human capital(e.g.,Stark,Helmenstein, numerous ways.Broadly speaking,migrant networks foster a greater degree of familiarity between home and host countries than may occur in their absence.Just as David Leblang is J.Wilson Newman Professor of Governance. Department of Politics,University of Virginia,P.O.Box 400787, migrants may have a taste for commodities produced Charlottesville,VA 22904 (leblang@virginia.edu). in their home country,they may also have a preference This article originally circulated under the title "Diaspora Bonds for home country investments-leading them to invest and Cross-Border Capital."I am grateful to Zane Kelly and Jessica money in their country of origin.Diaspora networks Teets for outstanding research assistance.Lee Alston,Ben Ansell, Andy Baker.Bernd Beber.William Bernhard.David Brown,Tim can also help decrease asymmetries of information Buithe,Steve Chan,Rafaela Dancygier,Jennifer Fitzgerald,John that,from the perspective of the theory of portfolio Freeman,Daniel Gingerich,Jude Hays,Nathan Jensen,Joseph investment.can result in a less than optimal portfo- Jupille,Moonhawk Kim.Robert McKnown.Sonal Pandya.Tom lio.The reduction in information asymmetries works Pepinsky,Andy Rose,Idean Salehyan,Kathryn Sikkink.David Singer,Andy Sobel,Enrico Spolaore,Michael Tomz,Romain through two channels.First,migrant communities in Wacziarg,and Jennifer Wolak provided helpful comments and/or destination countries can provide investors with infor- generously shared their data.I am also grateful to Roger,Keith,Pete, mation about their homeland-information regarding and John for helping me get through extensive revisions.Replication the tastes of consumers in their country of origin- materials are available at http://journals.cambridge.org/psr2010008 that can influence the decision of investors to invest The research was funded in part by a developmental grant from the National Institute of Child Health and Human Development there.Second,diaspora networks can have an indirect (NICHD)-funded University of Colorado Population Center(grant effect on investment because they may have knowl- R1HD51146). edge about investment opportunities,information 584American Political Science Review Vol. 104, No. 3 August 2010 doi:10.1017/S0003055410000201 Familiarity Breeds Investment: Diaspora Networks and International Investment DAVID LEBLANG University of Virginia What explains cross-national patterns of international portfolio and foreign direct investment (FDI)? While existing explanations focus on the credibility of a policy maker’s commitment, we emphasize the role of diaspora networks. We hypothesize that diaspora networks—connections between migrants residing in investing countries and their home country—influence global investment by reducing transaction and information costs. This hypothesis is tested using dyadic cross-sectional data for both portfolio and FDI. The findings indicate that even after controlling for a multitude of factors, disapora networks have both a substantively significant effect and a statistically significant effect on cross-border investment. Migration is an increasingly important facet of the global political economy. Like flows of commodities and capital, flows of labor have increased dramatically in recent years. The United Nations’ (UN’s) Population Division put the share of the world’s population residing outside their nation of birth at almost 200 million people—or approximately 3% of the world’s population—in 2007. That number continues to grow: the Organisation for Economic Co￾operation and Development (OECD; 2006) estimates that the number of legal immigrants entering OECD countries stands at about 3 million annually. Just as with flows of commodities and capital, scholars have devoted enormous energies to the exploration of the consequences of immigration. We know that migration is associated with a rise in support for extreme right wing parties and that it has mixed effects on social spending and on wages in the destination country (e.g., Borjas 1999; Borjas, Freeman, and Katz 1996; Knigge 1998). Less is known, however, about the consequences of migration for the migrant’s country of origin. Some scholars argue that migration results in a “brain drain,” whereby educated and skilled members of a country leave in search of better wages. Others argue that this brain drain is offset because the prospect of leaving provides an incentive for those left behind to invest in their own human capital (e.g., Stark, Helmenstein, David Leblang is J. Wilson Newman Professor of Governance, Department of Politics, University of Virginia, P.O. Box 400787, Charlottesville, VA 22904 (leblang@virginia.edu). This article originally circulated under the title “Diaspora Bonds and Cross-Border Capital.” I am grateful to Zane Kelly and Jessica Teets for outstanding research assistance. Lee Alston, Ben Ansell, Andy Baker, Bernd Beber, William Bernhard, David Brown, Tim Buthe, Steve Chan, Rafaela Dancygier, Jennifer Fitzgerald, John ¨ Freeman, Daniel Gingerich, Jude Hays, Nathan Jensen, Joseph Jupille, Moonhawk Kim, Robert McKnown, Sonal Pandya, Tom Pepinsky, Andy Rose, Idean Salehyan, Kathryn Sikkink, David Singer, Andy Sobel, Enrico Spolaore, Michael Tomz, Romain Wacziarg, and Jennifer Wolak provided helpful comments and/or generously shared their data. I am also grateful to Roger, Keith, Pete, and John for helping me get through extensive revisions. Replication materials are available at http://journals.cambridge.org/psr2010008. The research was funded in part by a developmental grant from the National Institute of Child Health and Human Development (NICHD)–funded University of Colorado Population Center (grant R1 HD51146). and Prskawetz 1998). There is growing evidence that emigr ´ es do benefit their homeland: return migration ´ constitutes a flow of knowledge of skills, and remit￾tances provide enormous flows of capital. In this article, we add another layer to the liter￾ature on global migration by arguing that diaspora networks—cultural and/or familial linkages between migrant communities in the investing country and the migrant’s country of origin—play a pivotal role in the global allocation of capital. We provide some of the first quantitative evidence that diaspora networks act as a conduit for both portfolio and foreign di￾rect investment (FDI) across country pairs. A focus on diasporas—an explicitly cross-border phenomena— also provides a fresh perspective on the factors influ￾encing international investment. The existing literature on investment is primarily monadic, emphasizing the importance of credible commitments and institutional quality in the countries that seek global capital (e.g., Alfaro, Kelemli-Ozcan, and Volosovych 2006; Buthe ¨ and Milner 2008; Jensen 2003). We do not question the importance of credible com￾mitments. However, focusing on institutional design only gets us part of the way toward understanding pat￾terns of international investment. Because diasporas provide connections between home and host countries, these networks facilitate cross-border investment in numerous ways. Broadly speaking, migrant networks foster a greater degree of familiarity between home and host countries than may occur in their absence. Just as migrants may have a taste for commodities produced in their home country, they may also have a preference for home country investments—leading them to invest money in their country of origin. Diaspora networks can also help decrease asymmetries of information that, from the perspective of the theory of portfolio investment, can result in a less than optimal portfo￾lio. The reduction in information asymmetries works through two channels. First, migrant communities in destination countries can provide investors with infor￾mation about their homeland—information regarding the tastes of consumers in their country of origin— that can influence the decision of investors to invest there. Second, diaspora networks can have an indirect effect on investment because they may have knowl￾edge about investment opportunities, information 584