Personal Relations and Divergent Economies: a Case Study of Hong Kong Investment in South China JOSEPHINE SMART zyxwvut and ALAN SMART Introduction Since 1978, direct foreign investment in the People’s Republic of China has expanded dramatically. The largest single source of direct investment is Hong Kong, representing, with the much smaller Portuguese colony of Macao, between 60% and 80% of the total to date (Hua, 1986: 67; Pan, 1987: 91). Hong Kong investment also differs in character from the direct investment practices of enterprises from other capitalist nations. Although many Hong Kong investments are large-scale and negotiated with central authorities (particularly property and infrastructure projects), as with investments from other sources, a large portion of Hong Kong investment follows a different pattern rarely taken by foreign multinationals. This alternative pattern involves the establishment of small-scale enterprises which are negotiated with local authorities, and are often mediated or facilitated by pre- existing social connections in the site of investment. This paper argues that this socially, rather than bureaucratically, mediated form of investment involves distinct relations of production and exchange, which are as yet inadequately understood, and yet which are implicated in a massive social and economic transformation occurring primarily in South China. These socially mediated investments seem to differ distinctively from the foreign investment patterns experienced so far in other socialist nations. Furthermore, it is argued that the common use by Hong Kong entrepreneurs of the socially mediated, local investment form must be understood in the context of their strategies for reducing the conflicts between capitalist relations of production and the Chinese political economy. Although social mediation, and the relations of gift exchange upon which it is based, creates its own set of problems, it seems to play a role in reducing the incompatibilities between capitalist and socialist economic organization, As always, the adoption of rational strategies in itself explains relatively little. What is rational, or to use a less loaded term, what makes sense, is dependent upon the context. Therefore, in order to understand the strategies adopted by Hong Kong entrepreneurs, we must examine the context of their investment in China. This task requires at least a brief sketch of the economy and society of China. In the next section, China will be examined as a social formation containing several distinct sets of relations of production and exchange. This heterogeneity of political economic organization provides the Hong Kong entrepreneur with choices about which sets of production and exchange relations to become involved with, and this choice has significant implications for the organization of production in these foreign-invested Chinese firms.