Strange bedfellows: Dynamics of government‐business relations between Chinese local authorities and Taiwanese investors

China poses a theoretical challenge in that corruption and rent‐seeking activities have not hindered foreign direct investment and economic development. Studies in development have documented the problems of rent‐seeking. International capital presumably hesitates to step into a Third‐World country such as China, which cannot protect private property rights with a comprehensive legal framework. However, for the last decade in China export promotion, foreign capital, and industrial development have proceeded simultaneously. This research argues that local officials helped investors overcome the problem of high transaction costs during a period of institutional uncertainty and local informal rules supplied foreigners with effective protection of property rights under corrupt circumstances. By controlling rent‐seeking activities, local officials created a wide variety of ad hoc patronage for private and foreign investments within their administrative domain. In return, local governments received extrabudgetary payments for the official patronage. This article provides an in‐depth case study of the so‐called joint venture between Taiwanese enterprises and Chinese local authorities in the Pearl River Delta, the institutional bases for their collaboration and the dynamics of the relationship under institutional change.