A Tale of Two Provinces:The Institutional Environment and Foreign Ownership in China 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. JEL classification:F21;F23;C21;O53 Key words:China,FDI,private sector,institutional environment,joint venture 22 A Tale of Two Provinces: The Institutional Environment and Foreign Ownership in China 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. JEL classification: F21; F23; C21; O53 Key words: China, FDI, private sector, institutional environment, joint venture