The effect of FDI on domestic entrepreneurship: the case of greenfield investment and cross-border M&A activities

Abstract

PurposeThe paper examines the impact of foreign direct investment (FDI), either greenfield investment or cross-border mergers and acquisitions (M&As), on domestic entrepreneurship.Design/methodology/approachThis paper uses a panel dataset of 104 countries over ten years from 2006 to 2015 and multiple econometric techniques to control for potential endogeneity bias.FindingsFDI, both in the form of greenfield investment and cross-border M&As, exerts positive spillover that encourages domestic entrepreneurial activities. While the benefit of greenfield investment in entrepreneurship is more pronounced in countries with higher levels of market capacity and institutional support, that of cross-border M&As is not influenced by these factors. On the other hand, human capital is important in promoting the positive effects of both types of FDI, and unless the level of human capital in the host economies reaches a certain threshold, greenfield investment can adversely affect domestic entrepreneurship.Practical implicationsPolicies toward FDI need to focus on promoting the driving forces behind FDI spillover to counteract the potential negative crowding-out effect of FDI.Originality/valueThe paper contributes to the existing literature investigating the impact of FDI on domestic entrepreneurship by distinguishing between the two FDI modes of entry and taking into account the moderating effects of sociopolitical characteristics of the host economies.