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The role of inward foreign direct investment on entrepreneurship

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Abstract

This paper investigates whether foreign firms had a positive impact on entrepreneurial activity measured by the net creation of firms. Using firm-level panel data for the Portuguese manufacturing and service industries over the period 1986 to 2000, we test whether the impact of foreign firms on firms’ entry depends on the number and size of previous foreign entrants. Overall, the results cast some doubts on the influence of foreign firms in assisting entrepreneurial activity. The impact of a first foreign investment is, in general, positive but the marginal impact of additional investments appears to be negative.

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Notes

  1. Throughout the paper the term “inward foreign direct investment” means investments made by foreign investors, through expansion or relocation of their business within the Portuguese territory.

  2. See, for instance, UNCTAD (2001) for an overview and several country studies.

  3. In the case of East Asian developing countries, Mirza (2000) found that the efforts of foreign MNCs foster the development of local companies, which ultimately evolve to MNCs.

  4. The Herfindahl index—HHI—is a measure of market concentration that varies between zero—minimum concentration, maximum competition—and one—maximum concentration, i.e. monopoly, minimum competition.

  5. Unfortunately, data on the market share of each firm is not available. Acknowledging this limitation, we argue that, in measuring industry concentration, firm’s employment share should serve as an acceptable proxy for market share given the well-documented correlation among alternative measures of firm size (e.g., sales, total assets, and employment). Moreover, as the Herfindahl index—HHI—uses information for all firms in the same industry, differences between market shares and employment shares at firm level should impact marginally on the index.

  6. The 10% threshold is the one usually used by statistical agencies to distinguish foreign direct investment from portfolio investment, as this is the threshold that normally grants the right to designate one board member and, hence, some influence on management. However, it should be noted that a 10% share on firm’s equity does not grant control over decision-making. To investigate whether the role of FDI in fostering entrepreneurship differs between minority and majority-owned subsidiaries, we used the 50% threshold to redefine what constitutes a foreign firm and re-estimate our empirical model. See “Discussion of results” section for discussion on those results.

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Authors and Affiliations

  1. School of Economics and Management, University of Minho, Gualtar, 4710-057, Braga, Portugal

    Natália Barbosa & Vasco Eiriz

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  1. Natália Barbosa
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  2. Vasco Eiriz
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Correspondence to Vasco Eiriz.

Appendix

Appendix

Table 7

Table 7 Empirical variables: acronyms, description, and measurement
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Barbosa, N., Eiriz, V. The role of inward foreign direct investment on entrepreneurship. Int Entrep Manag J 5, 319–339 (2009). https://doi.org/10.1007/s11365-007-0050-3

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