Skip to main content

Foreign direct investments and spillover effect on entrepreneurial activities in India: an empirical study

Journal of Global Entrepreneurship Research volume 12, pages 423–439 (2022)Cite this article

Abstract

Purpose

This study investigates the impact of foreign direct investments on the growth of entrepreneurial activities based on indirect linkages established between foreign affiliates and local micro, small and medium enterprises in India. Since foreign direct investment is not allowed in the micro, small and medium enterprise sector, the study uses an indirect linkage approach to determine the magnitude and direction of the association between foreign capital inflows and the rate of change in entrepreneurial activities.

Methodology

For investigation, the researcher used the following variables based on past studies: coefficient of backwards and forward intersectoral linkages, inflows of foreign capital sector-wise, gross domestic products, exports, employment and number of working enterprises registered in the micro, small and medium enterprise sector of India. Data for the present study was derived from the annual report of micro, small and medium enterprises of India, Department of Industrial Policy and Promotion, foreign direct investment fact sheet, Central Statistics Office of India and Asian Development Bank for input–output and supply-use table to estimate the coefficient of forward and backward linkages. Due to limited data availability and irregularity in the maintenance of records of the micro, small and medium enterprise sector, the study’s time frame is limited from 2006 to 2017 (due to the unavailability of data of the micro, small and medium enterprise sector). The coefficient of backward and forward linkages is estimated by the Rasmussen method from the input–output table, and to analyse the data, a simple panel linear model is used. Panel corrected the standard error for robust standard error and the Hausman-Taylor instrument variable to check the robustness of the outcome of the linear model and control the diagnostic issue related to the linear model. The result indicated a positive and significant association between foreign direct investment inflows and the growth of entrepreneurial activities, not allowed in the micro, small and medium enterprise sector; the coefficient of forward linkages positively encouraged entrepreneurship, but backward linkage failed to do the same. This result shows the market-seeking motive of foreign affiliates in India and less dependency on local firms for input supply and manufacture of final products and hence discouraging the entrepreneurial activities in the upward vertical sector and sometimes situation of “crowding-out effects”. This finding will help policymakers to correct the lacuna and develop policy measures to improve the linkage between foreign affiliates and local firms, especially backward linkages.

This is a preview of subscription content, access via your institution.

Access options

Buy single article

Instant access to the full article PDF.

USD 39.95

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Fig. 1
Fig. 2
Fig. 3
Fig. 4

Data availability

Data related to the present study are available at ADB official website (for input–output data to estimate coefficient of backward and forward linkages), annual report of MSME, India, and DIPP, India, and report for FDI inflows in India sector-wise.

References

  • Adewumi, S. (2007). The impact of FDI on growth in developing countries: An African experience. AERC Research Paper 165 African Economic Research Consortium, Nairobi, 9966–778–09–8.

  • Albulescu, C. T., & Tamasila, M. (2014). The impact of FDI on entrepreneurship in European countries. Procedia- Social and Behavioural Sciences, 124, 219–228. https://doi.org/10.1016/j.sbspro.2014.02.480

    Article  Google Scholar 

  • Alfaro et al. (2004). FDI and economic growth: The role of local financial markets, Journal of International Economics 61(2), 353–383.

  • Amoroso, S., & Müller, B. (2018). The short-run effects of knowledge intensive greenfield FDI on new domestic entry. The Journal of Technology Transfer, 43(3), 815–836. https://doi.org/10.1007/s10961-017-9575-y

    Article  Google Scholar 

  • Ayyagari, M., & Kosova, R. (2010). Does FDI facilitate domestic entry? Evidence from the Czech Republic. Review of International Economics, 18, 14–29. https://doi.org/10.2139/ssrn.891781

    Article  Google Scholar 

  • Baltagi, B. H., & Song, S. H. (2006). Unbalanced panel data: A survey. Statistical Papers, 47(4), 493–523. https://doi.org/10.1007/s00362-006-0304-0

    Article  Google Scholar 

  • Buckley, P. J., Clegg, J. & Wang, C. (2010). Is the relationship between inward FDI and spillover effects linear? An empirical examination of the cases of China. Journal of International business Studies, 38(3),192–215. https://doi.org/10.1057/palgrave.jibs.8400274

  • Cheung, K. Y., & Ping, L. (2004). The spillover effect of FDI on China: Evidence from the provincial data. China Economic Review, 15(1), 25–44. https://doi.org/10.1016/S1043-951X(03)00027-0

    Article  Google Scholar 

  • Danakol, S. H., Estrin, S., Reynolds, P., & Weitzel, U. (2013). Foreign direct investment and domestic entrepreneurship: blessing or curse? IZA Discussion papers, No. 7796, Institute of Labor Economics, Bonn. https://hdl.handle.net/10419/90134

  • De Backer, K., & Sleuwaegen, L. (2003). Does foreign direct investment crowd out domestic entrepreneurship? Review of Industrial Organization, 22, 67–84. https://doi.org/10.1023/A:10221803178989

    Article  Google Scholar 

  • Fazalbhoy, S. (2013). FDI in India- Its impact on entrepreneurial ventures in India, Symbiosis Center for Management Studies. http://ssrn.com/abstract=2934774 or https://doi.org/10.2139/ssrn.2934774.

  • Forte, R., & Moura, R. (2013). The effects of foreign direct investment on the host country’s economic growth: theory and empirical evidence. The Singapore Economic Review, 58(03), 1350017. https://doi.org/10.1142/S0217590813500173

  • Fujimori, A., & Sato, T. (2015). Productivity and technology diffusion in India: The spillover effects from foreign direct investment. Journal of Policy Modelling, 37(4), 630–651. https://doi.org/10.1016/j.jpolmod.2015.04.002

    Article  Google Scholar 

  • Goel, R. K. (2018). Foreign direct investment and entrepreneurship: gender differences across international economic freedom and taxation. Small Business Economics, 50(4), 887–897. https://doi.org/10.1007/s11187-017-9914-2

    Article  Google Scholar 

  • Global Entrepreneurship Monitor (2021). Global Entrepreneurship Monitor 2020/21 Global report: Opportunity Amid Disruption. Global Entrepreneurship Research Association, London, UK. ISBN:978-1-9160178-9-4.

  • Ha, T. S., et al. (2021). The impact of greenfield investment on domestic entrepreneurship. Journal of Innovation and Entrepreneurship, 10, 1–16. https://doi.org/10.1186/s13731-021-00164-6

    Article  Google Scholar 

  • He, Q., & Liu, T. K. (2019). The impact of FDI on entrepreneurship in European countries: Mechanism and strength. Journal of Advanced Computational Intelligence and Intelligent Informatics, 23, 649–657. https://doi.org/10.20965/jaciii.2019.p0649

    Article  Google Scholar 

  • Hintosova, A. B. (2021). Inward FDI: Characterization and Evaluation. MDPI, 1(4), 1026–1037. https://doi.org/10.3390/encyclopedia1040078

    Article  Google Scholar 

  • Horisch, J., Kollat, J., & Brieger, S. A. (2017). What influences environmental entrepreneurship? A multilevel analysis of the determinants of entrepreneurs’ environmental orientation. Small Business Economics, 48(1), 47–69. https://doi.org/10.1007/s11187-016-9765-2

    Article  Google Scholar 

  • Javorcik, B. S. (2004). Does foreign direct investment increase the productivity of domestic firms? In search of Spillover through Backward Linkages. American Economic Review, 94, 605–627. https://doi.org/10.1257/0002828041464606

    Article  Google Scholar 

  • Jin, B., Garcia, F., & Salomon, R. (2019). Inward foreign direct investment and local firm innovation: The moderating role of technological capabilities. Journal of International Business Studies, 50(5), 847–855. https://doi.org/10.1057/s41267-018-0177-1

    Article  Google Scholar 

  • Kim, P. H., & Li, M. (2012). Injecting demand through spillovers: Foreign direct investment, domestic socio-political conditions, and host country entrepreneurial activity. Journal of Business Venturing. https://doi.org/10.1016/j.jbusvent.2012.10.04,forthcoming

    Article  Google Scholar 

  • Konings, J. (2001). The effects of foreign direct investment on domestic firms: Evidence from firm panel data in emerging economies. Economics of Transition, 9, 616–633. https://doi.org/10.1111/1468-0351.00091

    Article  Google Scholar 

  • Li, C. & Luo, Y. (2019). Spillover effect of foreign direct investment: Evidence from the west Midlands of England. Economic Issues, 24(1), 1-19.

  • Ministry of Commerce & Industry (2020). Annual report 2019–20. Department Promotion for Industry & Internal Trade, Government of India.

  • Ministry of Micro Small & Medium Enterprises (2020). Annual report 2019–20. Ministry of Micro, Small & Medium Enterprises, Government of India.

  • Nagaraj, R., & Vaibhav, V. (2020). Revising the definition of MSME: Who is likely to benefit from it? The Indian Journal of Labour Economics, 63, 1–19.

    Article  Google Scholar 

  • Nair, T. & Das, K. (2019). Financing the micro and small enterprises in India: Antecedents & emerging challenges. Economic & Political Weekly, 54(3), 37–43.

  • Nguyen, T. H. (2021). Intersectoral linkages and imports of Vietnam: Ab input-output approach. International Journal of Economic Policy Studies, 15(1), 205–231. https://doi.org/10.1007/s42495-021-00057-2

    Article  Google Scholar 

  • Nguyen, T. H., Luu, H. N., & Do, N. H. (2021). The dynamic relationship between greenfield investments, cross-border M&As, domestic investment and economic growth in Vietnam. Economic Change and Restructuring, 54, 1065–1089. https://doi.org/10.1007/s10644-020-09292-7

    Article  Google Scholar 

  • Nxazonke, B., & Wyk, R. B. (2020). The role of foreign direct investment on domestic entrepreneurship in South Africa. Development Southern Africa, 37, 587–600. https://doi.org/10.1080/0376835X.2019.1667751

  • OECD (2002). OECD Annual Report 2002, OECD Publishing, Paris.

  • Rahman, M. A. U., & Inaba, K. (2021). Foreign direct investment and productivity spillovers: A firm level analysis of Bangladesh in comparison with Vietnam. Journal of Economic Structure. https://doi.org/10.1186/s40008-021-00248-2

    Article  Google Scholar 

  • Shen, L., Koveos, P., Zhu, X., Wen, F., & Liao, J. (2020). Outward FDI and entrepreneurship: The case of China. Sustainability, 12(13), 5234. https://doi.org/10.3390/su12135234

  • Simon-Oke, O. O., & Jolaosho, M. O. (2014). Entrepreneurship contribution of foreign direct investment: A reality of unfulfilled vision in Nigeria. International Journal of Development and Sustainability, 3(1), 184–195.

    Google Scholar 

  • Sari, D. W., Khalifa, N. A., & Suyanto, S. (2016). The spillover effect of foreign direct investment on the firm’s productivity performance. Journal of Productivity Analysis, 46(20), 199–233. https://doi.org/10.6007/IJARAFMS/v5-i3/1736

    Article  Google Scholar 

  • Suyanto, S., & Sugiarti, Y. (2019). Backward and forward linkages of productivity effects from foreign direct investments. Advances in Economics, Business and Management Research, 74, 20–23.

    Google Scholar 

  • UNCTAD. (2020). world Investment Report 2020: International Production beyond the Pandemic. United Nation Publications.

    Google Scholar 

  • UNCTAD (2001). World Investment Report: Promoting linkages, UN Publication.

  • UNCTAD (2003). World Investment Report: FDI Policies for Development- National and International Perspectives, UN Publications.

  • Wang, C., Deng, Z., Kafouros, M. I., & Chen, Y. (2012). Reconceptualizing the spillover effect of foreign direct investment: A process dependent approach. International Business Review, 21(3), 452–464. https://doi.org/10.1016/j.ibusrev.2011.05.006

    Article  Google Scholar 

  • Wanjere, M. D., Ogutu, M., Kinoti, M., & Iraki, X. N. (2021). Foreign direct investment and local firm’s performance. European Journal of Business and Management Research, 6(6), 216–222. https://doi.org/10.24018/ejbmr.2021.6.6.1181

    Article  Google Scholar 

  • Zamani, Z., & Tayebi, S. K. (2022). Spillover effects of trade and FDI on economic growth: An implication for sustainable development. Enviroment, Development and Sustainability, 24(3), 3967–3981.

    Article  Google Scholar 

  • Zhao, S. (2022). The impact of foreign direct investment on local entrepreneurship: Blessing or curse? Asia-Pacific Journal of Accounting & Economics. https://doi.org/10.1080/16081625.2022.2092158

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Commerce, Assam University, Silchar, India

    Seema Singha & Soma Roy Dey Choudhury

  2. Department of Commerce, Central University of South Bihar, Gaya, India

    Brajesh Kumar

Authors
  1. Seema Singha
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Soma Roy Dey Choudhury
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Brajesh Kumar
    View author publications

    You can also search for this author in PubMed Google Scholar

Contributions

BK provided the concept and design of the research, SS provided the methodology design, acquisition of data and interpretation of data, and SRDC contributed in drafting the article and revised it critically.

Corresponding author

Correspondence to Seema Singha.

Ethics declarations

Competing interest

The authors declare no competing interests.

Additional information

Publisher’s note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

SRF Seema Singha is the first author.

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Singha, S., Choudhury, S.R.D. & Kumar, B. Foreign direct investments and spillover effect on entrepreneurial activities in India: an empirical study. J Glob Entrepr Res 12, 423–439 (2022). https://doi.org/10.1007/s40497-022-00337-x

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s40497-022-00337-x

Keywords

  • Foreign direct investment (FDI)
  • Entrepreneurship
  • Micro
  • Small and medium enterprises (MSMEs)
  • Spillover
  • Linkage
  • Panel-corrected standard error (PCSE)
  • Hausman-Taylor instrument variable model (HT-IV)

JEL Classification

  • E0
  • E1
  • M2