Abstract

While 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.

Key Words: FDI, start-up

Introduction

An 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