Foreign direct investment and the SME sector

Abstract

Purpose– Although foreign direct investment and entrepreneurship are potential routes to recovery (Girma and Wakelin, 2001; Lyonet al., 2002), existing literature is divided on the relationship between the two. The purpose of this paper is to examine the influence of foreign investment on the local SME sector after the 2008 financial crisis.Design/methodology/approach– Local authority district data from Great Britain is used to examine the influence of foreign firm employment on the size of the local SME sector as a proportion of all firms, and foreign firm influence on firm births in the locality. In order to control for local geographical, infrastructural and economic conditions regression analysis is used to examine the relationship between foreign business employment and indigenous business activities.Findings– The potential for technological spillovers and spinout activities appears to dominate with firm birth rates higher where there is greater foreign firm employment. However, there is also evidence of crowding out in relation to the existing SME sector, which is found to be reduced in size where foreign influence through employment is greater.Research limitations/implications– The results here indicating a complementarity relationship between foreign influence on employment and firm births is important for policy makers looking to revive struggling local economies. However, the relevant support needs to be in place to maximise the benefit from the supply of new entrepreneurs generated.Originality/value– Unlike many other studies the relationship between the SME sector, firm births and foreign influence is considered at a local level and where economic conditions are more uncertain and economic recovery is less taken for granted. A better understanding of the relationship allows more appropriate policy to be developed in order to aid local economies to recover.