Included or Excluded? When Foreign Direct Investment Meets the Confucian Clan in China

The study aims to explore the role of informal cultural institutions, specifically Confucian clans, in shaping international capital flows. Using data from China’s 2005 National Economic Census, we examine the hypothesis that Confucian clans serve as a cultural connection facilitating foreign direct investment (FDI). Considering Zhu Xi’s historical significance in promoting clan culture, we adopt the shortest distance from the firm’s prefecture to Zhu Xi Academies as an instrumental variable for causal inference. Empirical results show that enterprises in areas with historically strong clan cultures attract significantly more FDI. Further analysis finds that regions with strong clan cultures significantly attract more FDI from Taiwan, Hong Kong, and Macao in China while limiting FDI from other countries. This pattern is attributed to the exclusive transnational networks fostered by clan culture, which enhance kinship-based trust and create favorable business environments. Our findings suggest that policymakers need to incorporate cultural factors when framing international investment strategies.