Do production structures affect the relationship between foreign investment and entrepreneurship?

Purpose

This paper aims to suggest that foreign investment spurs entrepreneurial activity (i.e. new business formation) through various crowding-in mechanisms. Previous research also highlights the importance of production structures in developing a country’s absorptive capacity. Thus, the authors examined the extent to which sophisticated production structures can promote the crowding-in (positive) effects of foreign investment on new business formation.

Design/methodology/approach

This study uses an annual-level unbalanced panel dataset of 94 countries from 2006 to 2020. The authors use system Generalized Method of Moments estimator, which can control for endogeneity and simultaneity issues. Additionally, they split their sample data set to examine the effects on coastal and landlocked countries (which are economically at a disadvantage).

Findings

Using the economic complexity and economic diversification index as their measure of production structure, the authors find evidence that foreign investment is associated with greater entrepreneurial activities, and this effect is greater when production structures are more sophisticated. However, this complementary effect is not observed in the subsample of landlocked economies, which face impediments to global trade and other structural challenges.

Research limitations/implications

The results imply that policymakers can promote new business formation by developing a country’s production structure in tandem with foreign investment in knowledge intensive sectors.

Originality/value

The authors empirically establish that production structures can promote the crowding-in effects of foreign direct investment on entrepreneurial activities using two measures of production structures, namely, economic complexity and economic diversification.