Foreign business presence and local entrepreneurship development: evidence from China

Does the entry of foreign-invested enterprises (FIEs) enhance host economies’ entrepreneurship? Empirical findings in the literature are far from conclusive because of diverse local conditions. This article investigates the effect of FIEs on local private business creation in China. Using a panel dataset of 31 provinces from 1992 to 2019 and two-way fixed effect models, this study finds that the entry of foreign-invested firms significantly enhances China’s provincial-level entrepreneurship. The effect is robust to various sets of control variables and different measurements of FIEs (either FDI stock or flow). The findings also suggest that the effect of FIEs on local entrepreneurship is lower in the second subperiod (2001–2019) than in the first subperiod (1992–2001). Moreover, the improved legal status of private businesses and better protection of private property, as amended in the Constitution, decrease the role of FIEs in enhancing local entrepreneurship.

Shiyong Zhao