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Foreign direct investment via M&A and domestic entrepreneurship: blessing or curse?

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Abstract

There are conflicting predictions in the literature about the relationship between FDI and entrepreneurship. This paper explores how foreign direct investment (FDI) inflows, measured by lagged cross-border mergers and acquisitions (M&A), affect entrepreneurial entry in the host economy. We have constructed a micro-panel of more than two thousand individuals in each of seventy countries, 2000–2009, linked to FDI by matching sectors. We find the relationship between FDI inflows and domestic entrepreneurship to be negative across all economies. This negative effect is much more pronounced in developed than developing economies and is also identified within industries, notably in manufacturing. Policies to encourage FDI via M&A need to consider how to counteract the prevailing adverse effect on domestic entrepreneurship.

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Notes

  1. Positive spillover effects can occur through the local dissemination of innovations (Barrios et al. 2005; Ayyagari and Kosová 2010), demonstration effects (Barry et al. 2003), labor mobility (Fosfuri et al. 2001), enhanced export performance (Greenaway et al. 2004) and economic restructuring (Caves 1974; Kokko et al. 1996).

  2. See Aitken and Harrison (1999), Kathuria (2000) and Barrios et al. (2005). Negative spillovers can derive from, for example, reduced market competition through entry-deterrence (Dixit 1980) or crowding out (Caves 1996).

  3. The Thomson SDC Platinum database is extensively used in M&A research (see, Deutsch et al. 2007; Finkelstein and Haleblian 2002).

  4. The 10 % threshold level is the one set by international institutions such as the OECD, IMF and UNCTAD.

  5. We also experimented with gross fixed capital formation and market capitalization of listed companies to normalize FDI, but due to multicollinearity problems, we opted for GDP.

  6. The cutoff points used to generate the remaining dummy variables are shown in supplement Table 6 in the online appendix.

  7. Nearly 85 %. Information retrieved on April, 18 2012 from http://www.worldvaluessurvey.org/wvs/articles/folder_published/article_base_46.

  8. See, Alfaro et al. (2004), Durham (2004) and Lensink and Morrissey (2006). The generalized method of moments (GMM) in differences is also a commonly used estimator to deal with the endogeneity of FDI (Carkovic and Levine 2005). However, in a (highly) unbalanced panel like ours, GMM drops too many observations.

  9. Estimation results that are not reported are available from the authors upon request.

  10. This value is calculated by multiplying the FDI variable coefficient with its standard deviation, which is 0.01877 × 0.808 = 0.015.

  11. These are 3.18 and 6.12, respectively.

  12. As we do not have data on inter-industry linkages for all countries in the sample, we cannot analyze the effects of non-horizontal FDI inflows on domestic entrepreneurship.

  13. The impact of the control variables is also in line with the analysis of the aggregate data.

  14. We follow the definition of The World Bank (WB) in our categorization. If a country’s classification changes over the sample period (applies to Argentina, Chile, Croatia, Latvia, Malaysia, Mexico, Poland, Russia, Uruguay and Venezuela), we use the most recent WB categorization for the whole period.

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Acknowledgments

The authors acknowledge helpful comments from two anonymous referees, as well as Niels Bosma, Jolanda Hessels, Klaus Meyer, Wim Naude, Erik Stam and participants in a seminar at the National Academies in Washington, the German Institute for Economic Research in Washington (DIWDC), the Maastricht School of Management, Utrecht University School of Economics and session participants at the 2013 European Economic Association Meetings in Gothenburg, at the 2013 Babson College Entrepreneurship Research Conference in Lyon and at the workshop on ‘Institutions and the Allocation of Entrepreneurship’ in Utrecht. Any remaining errors are their own. We also gratefully acknowledge financial support from the Dutch Ministry for Economic Affairs.

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Authors and Affiliations

  1. Utrecht School of Economics, Utrecht University, Kriekenpitplein 21-22, 3584 EC, Utrecht, The Netherlands

    Seçil Hülya Danakol & Utz Weitzel

  2. Department of Management, London School of Economics, Houghton Street, London, WC2A 2AE, UK

    Saul Estrin

  3. Economics and Strategy Group, Aston University, Aston Triangle, Birmingham, B4 7ET, UK

    Paul Reynolds

  4. Institute for Management Research, Radboud University, Thomas van Aquinostraat 5, 6525 GD, Nijmegen, The Netherlands

    Utz Weitzel

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Danakol, S.H., Estrin, S., Reynolds, P. et al. Foreign direct investment via M&A and domestic entrepreneurship: blessing or curse?. Small Bus Econ 48, 599–612 (2017). https://doi.org/10.1007/s11187-016-9792-z

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