China and India, two equally principal countries in Asia, launched economic transitions at roughly the same time—around 1980. Yet, each country’s policies toward foreign direct investment (FDI) were distinctive. The existing literature focuses either on global trends or domestic power politics to explain the different FDI policies adopted by China and India. This study finds, however, that such explanations are insufficient to account for the cross-national variation between these two countries, as well as the cross-sector variation within each country, and the changes in each government’s FDI policies over time. Instead, I argue that any consistent explanation of these notable variations must include both external networks and domestic politics.

This study proposes social network theory to explain how different social networks of decision makers influence the policymaking process. Decision makers straddle two opposing social networks: those that include external actors who favor liberal policy change and those that include domestic resistance groups that slow or prevent economic liberalization. In China, economic reform was initiated by strong external networks primarily comprised of diaspora capitalists from Hong Kong, Taiwan, and Southeast Asia. China’s economic liberalization was thus rapid and profound. In India, decision makers’ ties to domestic capitalists dominated policymaking. Because domestic capitalists were resistant to the entry of foreign capital and foreign goods, a slow and narrow pattern of FDI liberalization resulted. These general cross-national patterns are further supported by cross-sector and cross-time comparisons of the liberalization processes of China and India.

Overall, the study emphasizes the heuristic value of the social network perspective in explaining policy issues in both the domestic and international arenas. From a domestic perspective, the theory stresses that decisions are not reached through rational calculations of political interests but by incorporating social variables such as trust, reciprocity, and personal connections. In the context of international relations, an external actor’s influence on another country’s decision making is not solely based on its material power but on these same social variables. Transnational social networks thus are critical to facilitate idea transfers and policy coordination across countries.