AbstractWhile prior studies suggest a negative relationship between inward foreign direct investment (FDI) and the entry of domestic entrepreneurs little is known about whether FDI contributes to the quality of entrepreneurs in terms of export probability. This paper aims to assess the effect of inward regional FDI in the form of Greenfield investments on the export probability of entrepreneurs. By examining Data from 72 different regions among 17 European countries during 2003-2006, while controlling for several individual and regional level characteristics, the study indicates that inward FDI has a positive and significant effect on the export probability of domestic start-ups. However, by including in the analysis the logarithmic form of some extra regional characteristics (distance to nearest seaport, accessibility by air), the impact of FDI continues to be positive but it is no longer significant.
The Importance of Regional FDI for the Quality of Entrepreneurship
Many different analyses have explored the effects of FDI on the country’s reputation for competitiveness. In fact, the results from several previous years indicate an inverse relationship. In 2007-2008, an FDI ratio increased from 5:1 to 11:1 in countries that had an average GINI (the highest in the OECD among developed countries). In the same year, the relative importance of the main variable was decreased, albeit slightly. By 2012-2013, this ratio was lower than 5:1, indicating a negative impact that has not been seen in more recent years and was not previously observed. Moreover, more than 30 years ago, more than 70 per cent of the country’s FDI was carried out using the international capital market, which is dominated by Western European and Asian countries.
In 2012 in fact, the magnitude of the negative impact of a FDI ratio on the export competitiveness of small and medium size start-ups dropped, which was an indication that the economic reforms of the year 2014 had been carried out at the expense of the success of international capital capital markets (e.g. a decrease in the total number of international capital firms). Moreover, it is now clear that inward investment has a negative impact on growth. Thus, by examining the characteristics of start-ups in both Europe (in a country at the same time that its economic reforms are being carried out) and the USA (in a country undergoing some reforms) the data reveal that the impact of inward investment on growth is not the same as the one observed in the USA. But in certain key countries, which have also experienced reforms, this negative impact can be even more pronounced. For example, Poland saw a small loss in FDI in 2006-2007 compared with the country that lost an average of 10.9 per cent over that same period.
It can be argued that there is a much more favourable financial environment in these countries in relation to their competitiveness. In a country with the fastest growth rate in the USA and the lowest rate of GDP growth (which is measured by GDP growth), business openness and international capital markets are highly valued. It is also quite easy to see an increase in the share of venture capital to foreign countries. This is true even in the best performing countries at different times of year. There is at least partial evidence that foreign investors have more success in investing in and providing services in the country than they did in the USA, especially during the last decade. This evidence is particularly important because much of the current slowdown in the economy is driven by the emergence of an emerging market economy, namely China, which is experiencing significant growth in these areas. Nonetheless, it is worth noting that the extent to which export and financial opportunities extend in this country compared with those of overseas investors is generally limited to the top 5 per cent of entrepreneurs in the country. This indicates that the extent to which foreign investment influences the quality of growth or the quality of venture capital is still under study.
The Role of Regionally Adjusted Investment
A recent study identified that national measures in the form of capital flows represent a significant obstacle limiting investment in start-ups in this country. The report found that:
The impact on the quality of start-ups by local FDI also reflects the regionally adjusted investment pattern to a lesser extent than in comparison with countries that adopt a more liberal financial system. Such a change is consistent with the results from two large international research projects, based on the SIPR and the OECD. In the last two years, this change has been seen in the USA of late (i.e., only one study found that a significant influence of
Key Words: FDI, start-upIntroductionAn empirical assessment of the role of foreign direct investment (FDI) on the export probability of entrepreneurs is essential, as exports have been for a long time viewed as an engine for economic growth. While further theoretical insights would be valuable, empirical analyses of the issue are needed as well for a better understanding of the FDI –export link on individual level (Zhang, 2001).
While recent work has increasingly distinguished between different types of entry, including domestic entry and foreign entry, it has continued to disregard the effect of international competition on the entry of domestic entrepreneurs. Instead, research has
concentrated on the differential impact of incentives and barriers respectively domestic and foreign entry.This paper empirically assesses the role of international competition in the entry of exporting start-ups. It is well known that the more productive firms