Inward FDI and Host CountryEntrepreneurship: Mechanisms Basedon Entrepreneurial Types

Wang Bo*1, Zhu Hang2

1 Business School, Shantou University, Shantou, China

2 School of Business, Sun Yat-sen University, Guangzhou, China

Abstract: This paper explores the impact of inward foreign direct investment (FDI)on entrepreneurial activity in host countries. It argues that inward FDI affects differenttypes of entrepreneurship in distinct ways, with its impact varying depending on the levelof formal institutional development in the host country. On the one hand, inward FDI’smarket spillover effects increase opportunities for imitative entrepreneurship and reduceentrepreneurial risk. On the other hand, inward FDI has a mixed blessing for innovativeentrepreneurship: it fuels innovation through knowledge spillovers but simultaneouslyintensifies competition, creating uncertainty. Using 268 observations from 59 countriesbetween 2010 and 2018, our empirical evidence reveals a striking dichotomy: inwardFDI fuels imitative entrepreneurship where formal institutions are weak, yet only fostersinnovative entrepreneurship where institutions are robust. Further analysis identifies keyfactors – such as host country R&D investment, intellectual property protection, financialdevelopment, and entrepreneurial support – that influence whether inward FDI caneffectively foster innovative entrepreneurship.

Keywords: Foreign direct investment; imitative entrepreneurship; innovative

JEL Classification Codes: D02, L26

DOI: 10.19602/j.chinaeconomist.2025.03.02