A Tale of Two Provinces:The Institutional Environment and Foreign Ownership in China Huang Yasheng and Di Wenhuab MIT Sloan School of Management School of Economic,Political and Policy Sciences,University of Texas at Dallas ABSTRACT In this paper,we use a unique dataset covering the joint ventures in Jiangsu and Zhejiang,two provinces of China,to test the effect of the institutional environment for domestic private firms on the ownership structures of FDI projects.Applying the prevailing bargaining framework in studying the ownership structures of FDI projects from the perspective of local firms seeking FDI,we find that the legal and financial constraints imposed on the more efficient domestic firms (i.e.private firms)to benefit the less efficient ones(i.e.TVEs)may have forced private firms to seek legal protection and financial resources in some ways-including forming alliances with foreign firms.Strong FDI preferences and/or weak capabilities may cause the private entreprises to make more equity concessions to foreign firms with whom they are to establish joint ventures.The more liberal the institutional environment for domestic private firms,the smaller the share of foreign investment in the joint ventures. 1 We thank the anonymous reviewer from China Finance Review for comments on an earlier version of this paper. Yasheng Huang 50 Memorial Drive,E52-562,Cambridge,MA,02142.Tel:+1 617253 9768;fax:+1617253 2660.Email addresses:yshuang @mit edu:wenhua.di@utdallas.edu 11 A Tale of Two Provinces: The Institutional Environment and Foreign Ownership in China1 Huang Yashenga* and Di Wenhua b a MIT Sloan School of Management b School of Economic, Political and Policy Sciences, University of Texas at Dallas ABSTRACT In this paper, we use a unique dataset covering the joint ventures in Jiangsu and Zhejiang, two provinces of China, to test the effect of the institutional environment for domestic private firms on the ownership structures of FDI projects. Applying the prevailing bargaining framework in studying the ownership structures of FDI projects from the perspective of local firms seeking FDI, we find that the legal and financial constraints imposed on the more efficient domestic firms (i.e. private firms) to benefit the less efficient ones (i.e. TVEs) may have forced private firms to seek legal protection and financial resources in some ways—including forming alliances with foreign firms. Strong FDI preferences and/or weak capabilities may cause the private entreprises to make more equity concessions to foreign firms with whom they are to establish joint ventures. The more liberal the institutional environment for domestic private firms, the smaller the share of foreign investment in the joint ventures. 1 We thank the anonymous reviewer from China Finance Review for comments on an earlier version of this paper. * Yasheng Huang: 50 Memorial Drive, E52-562, Cambridge, MA, 02142. Tel: +1 617 253 9768; fax: +1617 253 2660. Email addresses: yshuang@mit.edu; wenhua.di@utdallas.edu