Foreign direct investment and business start-up in developing countries: The role of financial market development

This paper investigates whether financial market development has an impact on the relationship between foreign direct investment (FDI) and business start-up, which is a salient feature of entrepreneurship. In a panel of 92 developing countries, the paper finds that the ability of FDI to crowd-in business start-ups significantly depends on financial market development in the host economy. Based on the results, there is a threshold level of financial market development above which FDI crowds-in new businesses. Improving financial conditions in developing countries where they are unfavorable is therefore an important precondition for facilitating the positive externalities from FDI inflows which stimulate entrepreneurship. The results also support the policy propositions that a good regulatory environment and higher growth in income per capita are important for enhancing entrepreneurship.