Does FDI have a social demonstration effect in developing economies? Evidence based on the presence of women-led local firms

Abstract

We hypothesize that foreign direct investment (FDI) benefits female entrepreneurs in developing economies through a “social demonstration effect,” namely, by exhibiting norms and practices supporting gender equality and promoting women’s role in business. Results based on data from 44,418 firms in 91 developing economies show that, at the country level, increased employment share of foreign invested firms has a positive association with women’s entrepreneurship, namely, it boosts the presence of female leaders in new ventures and small businesses, as foreign firms help break local conventions unfavorable to female entrepreneurs. This positive impact is more evident when women face greater institutional barriers. However, at the industry level, foreign employment share becomes nonsignificant, and it has a negative association with the presence of female entrepreneurs in countries where women face greater barriers. We reason that this is due to occupational competition: The more disadvantaged women are in a country, the greater the advantage foreign firms possess in attracting women to work for foreign firms instead of pursuing their own entrepreneurial opportunities. The practical implication of our study is that governments can reformulate FDI policies with a view to fostering women’s entrepreneurship.