Governance quality, foreign direct investment, and entrepreneurship in emerging markets

Abstract

Purpose: The purpose of this paper is to thoroughly investigate the interplay between institutions, foreign direct investment (FDI) and entrepreneurship in the context of emerging markets (EMs). Design/methodology/approach: The authors argue that the impact of FDI on entrepreneurial activity depends on different natures of capital flow and entrepreneurial motivation and relates to the quality of institutional environment. First, the roles of inward and outward FDI are examined in connection with the new firm creation by opportunity- and necessity-motivated entrepreneurs. Second, the integrated influences of (inward/outward) FDI and governance quality (GQ) on (opportunity/necessity) entrepreneurship are tested. This nexus of relationships is analyzed through segmented regressions using the GEM data of 39 EMs over the 2004–2015 period. Findings: It is evidenced that the quality of governance infrastructure affects the relationship between FDI and entrepreneurship: in emerging countries with low GQ, opportunity entrepreneurship is stimulated by inward FDI and diminished by outward FDI; and in emerging countries with high GQ, necessity entrepreneurship is discouraged by inward FDI and promoted by outward FDI. Practical implications: This research has implications for the institutional context-based execution of public policy in emerging economies. As the entrepreneurial effects of inward and outward FDI are pronounced differently under the two types of entrepreneurship and the two extremes of GQ, public policy makers who recognize the catalytic role of FDI in domestic business development should take the distinct institutional context of their country into consideration. Originality/value: The paper contributes to the extant literature on international entrepreneurship in emerging economies by making a breakdown on the roles played by different types of FDI in the entrepreneurial activity, analyzing the mediating effects of GQ on the relationship between inward/outward FDI and entrepreneurship, and interpreting the capital and institutional determinants of entrepreneurship in terms of entrepreneurial motivations by opportunity and necessity.