Injecting demand through spillovers: Foreign direct investment, domestic socio-political conditions, and host-country entrepreneurial activity

This study examines how foreign direct investment (FDI) spurs entrepreneurial activity in host countries. We also investigate why this relationship varies across countries because of domestic socio-political conditions. The findings from our panel analyses of 104 countries from 2000 to 2009 are consistent with our predictions that foreign direct investment positively relates to business creation and this positive effect is strongest in countries with poor institutional support, weak political stability, and low general human capital. Our work provides new insights into how cross-border investments and domestic socio-political conditions jointly influence entrepreneurial activity, especially in emerging and developing economies.

► We study why foreign direct investment (FDI) may spur host-country entrepreneurial activity.
► FDI can generate new entrepreneurial opportunities through positive spillover effects.
► The positive effect of FDI on entrepreneurial activity is strongest in regions with weak institutions and low human capital.
► Our panel analyses of 104 countries from 2000 to 2009 support our predictions.