Informal Investor Investing and Networks in China:An Exploratory Study

Abstract

The dominant type of finance supplied to SMEs in China continues to be informal sources deriving from private individuals. However, little is known or understood about the informal investment motives and processes nor the consequent investment performance in emerging economies such as China. This study investigates the functioning of informal investments over the period from 1999 to 2010 when more formal private sector institutions improve but remain relatively weak. The distinctive role that networking and personal trust play in the process of investment activities is highlighted, leading to the conclusion that informal investors preferred to minimize their risk exposure through funding short-term loan finance rather than long-term equity investments. The processes, risk behavior, and return expectations associated with the informal investors differed significantly between short-term and long-term investments. The importance of networking in investment activities seems not to diminish as institutions improve in China.