Inward Foreign Direct Investment and Domestic Entrepreneurship in Host Countries

Abstract

Built on the recent development of localization theory of knowledge spillovers and the social space, this study investigates whether and to what extent inward FDI stimulates the creation of new firms in a host country region when both are co-located in the proximate sectoral and/or geographic spaces. Using a full population of 1,278 inward FDI projects and 44,434 newly created small and young firms across 234 sub-national regions of Korea in 2000 – 2004, this study finds that intra-sectoral effects of inward FDI on prospective entrepreneurs’ founding activities are stronger than inter-sectoral effects in the host country region, and that both intra- and inter-sectoral effects become strengthened by intra-spatial effects, i.e., when both inward FDI and newly created firms are co-located in the same region. In addition, it shows that the effects of inward FDI on indigenous entrepreneurship are maximized through double-intra effects where both are co-located in the proximate high-tech sectors and within the same geographic region.