Abstract
We investigate the roles of inward FDI and education in explaining country levels of entrepreneurship. It is widely recognised that inward FDI may have positive but also negative spillover effects on entrepreneurial activity. We argue that both types of spillovers (positive and negative) may be reinforced by high education levels of the labour force. Using a database across 75 countries between 2001 and 2015, we estimate a 2SLS model that tests for this moderating role of education. We find support for a negative interaction effect of FDI and macro-level education on the rate of entrepreneurial activity, suggesting that in countries with highly educated labour forces, inward FDI leads to more jobs in the wage sector rather than a higher number of entrepreneurs. Policy implications are discussed.
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Notes
We also considered using the World Bank Doing Business Index which measures the general ease of doing business in that country, taking factors into account such as property rights, costs of resolving disputes, and efficiency of regulations, and the time and cost of starting a business in the formal sector. However, it has a high correlation with the Control of Corruption measure (0.79), which raises issues of multicollinearity; therefore, we include only Control of Corruption in our model.
We performed endogeneity tests for FDI and FDI*Education, in particular we used Durbin-Wu-Hausman tests. For both models (3) and (4) in Table 5, we reject the null hypothesis that they are exogenous variables, the p values of the Durbin-Wu-Hausman test statistics are 0.0002 (Table 5, model 3; 1 degree of freedom) and 0.0008 (Table 5, model 4; 2 degrees of freedom), respectively.
Note that the positive coefficient for MCTR should be interpreted in coherence with the interaction term MCTR * Education. In particular, for the sample average of education (26.19; see Table 3), the impact of MCTR is clearly negative (as expected) for both first stage equations (e.g. 4.645–0.445*26.19 = − 7.0).
The turning point can be computed from model (4) estimates as 3.552/0.080 = 44.4. The value of 44.3 is computed using more decimals for the relevant coefficients.
Note that GEM includes entrepreneurs in both the formal and informal sectors of the economy.
Specifically, FDI may not have positive spillover effects in low-income countries as a minimum level of development (in terms of institutions and physical and financial infrastructure) must exist for positive spillovers to be absorbed by the local economy (Doytch and Epperson 2012).
We did so because of the low number of observations for lower income countries, i.e. 24, which may be too low for (reliably) estimating the coefficient of the interaction term Inward FDI * Lower Income.
With ‘on average’ we mean the impact of FDI evaluated in the sample mean of Education (see Table 5, model 4).
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Appendices
Appendix 1 First stage regression results for 2SLS regressions
Appendix 2 Robustness test
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Berrill, J., O’Hagan-Luff, M. & van Stel, A. The moderating role of education in the relationship between FDI and entrepreneurial activity. Small Bus Econ 54, 1041–1059 (2020). https://doi.org/10.1007/s11187-018-0121-6
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DOI: https://doi.org/10.1007/s11187-018-0121-6