American Political Science Review Vol.104.No.3 investors to make inferences about the quality of labor. ern European and North American investors after the the work ethic,and/or the business culture that exists opening of markets in Eastern Europe.Investment in in a particular destination.A migrant community from Eastern European countries,she writes,was "often India residing in the United States,for example,can based on ethnic ties between sizable and relatively provide U.S.investors with a signal of the work ethic. affluent expatriate communities and their home coun- labor quality.and business culture that exists in India. tries"(p.421).There was an informational advantage These signals enhance the quality of information that as "firms amassed information about investment op- U.S.investors have about India allowing them to make portunities through their business or personal ties" forecasts about their ability to invest in potentially (p.412).This informational advantage can translate profitable assets offered on the Indian market.Kapur into higher than average expected returns if the mi- (2001),in his study of the Indian community residing in grant him-or herself has a higher level of human the United States,explains how the mere presence of capital.In his assessment of the Armenian diaspora, that community enhances investment opportunities in Freinkman(2002)notes that "when compared to the India:"Companies like Yahoo,Hewlett Packard and average economic agent,diaspora businessmen and General Electric have opened R&D centers in India professionals face a lower risk of becoming the first largely because of the confidence engendered by the movers.They benefit from a specific informational ad- presence of many Indians working in their US opera- vantage:common cultural background and established tions.This points to the cognitive effects arising from social links between diaspora and local entrepreneurs the projection of a coherent,appealing,and progressive help them to reduce transaction costs of new entry and identity on the part of the diaspora which signals an building new partnerships"(p.4). image of prosperity and progress to potential investors Connections between migrant communities across and consumers."10 countries may enhance cross-national investment,even Along with the provision of an image of their home when these connections do not provide specific infor country,migrant networks can provide business op- mation about investment opportunities.In reference portunities by decreasing asymmetries of information to the Maghribi traders of the eleventh century,Greif and by reducing transaction costs through formal(e.g., (1989,1993)argues that this trading network was effec- business)or information(e.g.,familial)contacts in their tive because it was able to credibly threaten collective home country.Again,the case of ethnic Turks resid- punishment by all merchants if even one of them de- ing in Germany is illustrative.Turkish migrants living fected.He shows that this coethnic network was able in Germany.Schulte (2008)notes,are more likely to to share information regarding the past actions of ac- invest in their homeland rather than in,say China tors (they could communicate a reputation),something because language and cultural knowledge more than that was essential for the efficient functioning of mar- compensate for what may be marginally lower returns. kets in the absence of formal legal rules.Weidenbaum This informational advantage does not privilege only and Hughes (1996)reach a similar conclusion about individual investors,rather it can work through the the effectiveness of The Bamboo Network,remarking larger network of coethnics.In The Bamboo Network, that "If a business owner violates an agreement,he is Weidenbaum and Hughes (1996)detail the compara- blacklisted.This is far worse than being sued,because tive advantage overseas Chinese have when it comes the entire Chinese networks will refrain from doing to investing in China and argue that it goes well be- business with the guilty party"(p.51). yond commonality of language,knowledge of cultural These informational effects are important because and legal barriers,and preexisting familial connec- they help investors overcome general barriers associ- tions.Wang's study shows how ethnic Chinese residing ated with transactions costs.Migrant communities can abroad provide a"linkage between China and the rest help facilitate cross-national portfolio investment by of the world [in that they]facilitate the understanding reducing barriers to entry-through knowledge of lan- of and access to guanxi networks by other foreign in- guage,institutional rules,and/or regulatory hurdles- vestors.Without the agency of ethnic Chinese,it would that may otherwise prevent a foreign investor from pur- have been much more difficult for foreign companies chasing equities or bonds.Knowledge of on-the-ground to use informal personal networks to complement and conditions is costly (and not necessarily private)and compensate for the weak formal legal institutions in provides investors with the ability to"match"invest- China"11(Wang 2000,p.161). ments with investment opportunities that may exist. Migrant networks provide investors with an infor- This"matching"function of migrant networks has been mational advantage because they are in a position to observed in studies of international trade.where Rauch have information regarding investment opportunities and Trindade(2002)find that migrant generated infor- in their home country.Bandelj(2002)provides some mation helps match buyers with sellers,a function that evidence concerning the investment behavior of West- becomes more important as goods become increasingly heterogeneous.12 It is important to note that the homeland govern- 10 Kapur and McHale (2006)refer to this as"branding"and argue ments are aware of key role that migrants play in that the Indian diaspora has created a brand name by signaling the oprodiityduofoy Guanxi is a close personal connection between individuals.A 12 The role of migrant networks in facilitating bilateral trade has guanxi network,therefore,is one that is based on trust and reputation been studies by Gould(1994)for the United States and by Head and ather than on external monitoring or enforcement. Reis (1998)for Canada 587American Political Science Review Vol. 104, No. 3 investors to make inferences about the quality of labor, the work ethic, and/or the business culture that exists in a particular destination. A migrant community from India residing in the United States, for example, can provide U.S. investors with a signal of the work ethic, labor quality, and business culture that exists in India. These signals enhance the quality of information that U.S. investors have about India allowing them to make forecasts about their ability to invest in potentially profitable assets offered on the Indian market. Kapur (2001), in his study of the Indian community residing in the United States, explains how the mere presence of that community enhances investment opportunities in India: “Companies like Yahoo, Hewlett Packard and General Electric have opened R&D centers in India largely because of the confidence engendered by the presence of many Indians working in their US opera￾tions. This points to the cognitive effects arising from the projection of a coherent, appealing, and progressive identity on the part of the diaspora which signals an image of prosperity and progress to potential investors and consumers.”10 Along with the provision of an image of their home country, migrant networks can provide business op￾portunities by decreasing asymmetries of information and by reducing transaction costs through formal (e.g., business) or information (e.g., familial) contacts in their home country. Again, the case of ethnic Turks resid￾ing in Germany is illustrative. Turkish migrants living in Germany, Schulte (2008) notes, are more likely to invest in their homeland rather than in, say China, because language and cultural knowledge more than compensate for what may be marginally lower returns. This informational advantage does not privilege only individual investors, rather it can work through the larger network of coethnics. In The Bamboo Network, Weidenbaum and Hughes (1996) detail the compara￾tive advantage overseas Chinese have when it comes to investing in China and argue that it goes well be￾yond commonality of language, knowledge of cultural and legal barriers, and preexisting familial connec￾tions. Wang’s study shows how ethnic Chinese residing abroad provide a “linkage between China and the rest of the world [in that they] facilitate the understanding of and access to guanxi networks by other foreign in￾vestors. Without the agency of ethnic Chinese, it would have been much more difficult for foreign companies to use informal personal networks to complement and compensate for the weak formal legal institutions in China”11 (Wang 2000, p. 161). Migrant networks provide investors with an infor￾mational advantage because they are in a position to have information regarding investment opportunities in their home country. Bandelj (2002) provides some evidence concerning the investment behavior of West- 10 Kapur and McHale (2006) refer to this as “branding” and argue that the Indian diaspora has created a brand name by signaling the potential productivity and trustworthiness of their countrymen. 11 Guanxi is a close personal connection between individuals. A guanxi network, therefore, is one that is based on trust and reputation rather than on external monitoring or enforcement. ern European and North American investors after the opening of markets in Eastern Europe. Investment in Eastern European countries, she writes, was “often based on ethnic ties between sizable and relatively affluent expatriate communities and their home coun￾tries” (p. 421). There was an informational advantage as “firms amassed information about investment op￾portunities through their business or personal ties” (p. 412). This informational advantage can translate into higher than average expected returns if the mi￾grant him- or herself has a higher level of human capital. In his assessment of the Armenian diaspora, Freinkman (2002) notes that “when compared to the average economic agent, diaspora businessmen and professionals face a lower risk of becoming the first movers. They benefit from a specific informational ad￾vantage: common cultural background and established social links between diaspora and local entrepreneurs help them to reduce transaction costs of new entry and building new partnerships” (p. 4). Connections between migrant communities across countries may enhance cross-national investment, even when these connections do not provide specific infor￾mation about investment opportunities. In reference to the Maghribi traders of the eleventh century, Greif (1989, 1993) argues that this trading network was effec￾tive because it was able to credibly threaten collective punishment by all merchants if even one of them de￾fected. He shows that this coethnic network was able to share information regarding the past actions of ac￾tors (they could communicate a reputation), something that was essential for the efficient functioning of mar￾kets in the absence of formal legal rules. Weidenbaum and Hughes (1996) reach a similar conclusion about the effectiveness of The Bamboo Network, remarking that “If a business owner violates an agreement, he is blacklisted. This is far worse than being sued, because the entire Chinese networks will refrain from doing business with the guilty party” (p. 51). These informational effects are important because they help investors overcome general barriers associ￾ated with transactions costs. Migrant communities can help facilitate cross-national portfolio investment by reducing barriers to entry—through knowledge of lan￾guage, institutional rules, and/or regulatory hurdles— that may otherwise prevent a foreign investor from pur￾chasing equities or bonds. Knowledge of on-the-ground conditions is costly (and not necessarily private) and provides investors with the ability to “match” invest￾ments with investment opportunities that may exist. This “matching” function of migrant networks has been observed in studies of international trade, where Rauch and Trindade (2002) find that migrant generated infor￾mation helps match buyers with sellers, a function that becomes more important as goods become increasingly heterogeneous.12 It is important to note that the homeland govern￾ments are aware of key role that migrants play in 12 The role of migrant networks in facilitating bilateral trade has been studies by Gould (1994) for the United States and by Head and Reis (1998) for Canada. 587