Inward FDI can make a positive contribution to the host country by supplying advanced technology, product and process innovations (Dunning, 1994). The entry of foreign firms might stimulate domestic enterprises to protect their market shares and profits, which leads to severe competition (Dunning, 1994; Blomstrom and Kokko, 1997; OECD, 2002; Hill, 2009). Increased competition may force local enterprises to use resources more efficiently, to develop product and process innovations and to promote technological upgrading, etc (OECD, 2002; Hill, 2009). Therefore, the productivity of local enterprises can be improved by imitating the more advanced technology brought by inward FDI, by exploiting existing technology and resources more efficiently or by seeking for more advanced technology (Blomstrom and Kokko, 1997, Saggi, 2000). Furthermore, inward FDI may create forward and backward linkages as foreign firms transfer technology to local suppliers of intermediate goods and customers (Blomstrom and Kokko, 1997; Saggi, 2000; OECD, 2002). However,the potential drawback is that foreign firms might out-compete local enterprises and drive local enterprises out of business (Blomstrom and Kokko, 1997; Hill, 2009). What also needs taking into account is that foreign firms may choose to locate their businesses based on the domestic enterprises and overall economic conditions present locally.
There is some literature examining the relationship between inward FDI and domestic entrepreneurship (Backer and Sleuwaegen, 2003; Javorcik, 2004; Haskel et al., 2007; Barbosa and Eiriz, 2009; Kim and Li, 2014). Equally, foreign firms might be motivated to locate in areas due to the local enterprise economy. However, there are no studies on the causal relationship in China.
Using secondary data from China Statistical Yearbook, the study would use statistical and econometric analysis to establish the causal links between inward FDI and domestic entrepreneurship in China.
Barbosa, N. and Eiriz, V. (2009) “The role of inward foreign direct investment on entrepreneurship”, International Entrepreneurship and Management Journal, Vol. 5 No. 3, pp. 319-339.
Blomstrom, M. and A. Kokko (1997) How foreign investment affects host countries, Policy Research Working Paper 1745, Washington D C, The World Bank.
De Backer, K. and Sleuwaegen, L. (2003) “Does foreign investment crowd out domestic entrepreneurship?” Review of Industrial Organization, Vol 22 No.1, pp. 67-84.
Dunning, J. H. (1994) “Re-evaluating the benefits of foreign direct investment”, Transnational Corporations, Vol 3 No.1, pp. 23-52.
Haskel, J. E. Pereira, S. C. and Slaughter, M. J. (2007) “Does inward foreign direct investment boost the productivity of domestic firms?”, Review of Economics and Statistics, Vol. 89 No. 3, pp. 482-496.
Hill, C. W. L. (2009) International business: competing in the global market place, London, McGraw-Hill. Javorcik, B. S. (2004) “Does foreign direct investment increase the productivity of domestic firms? In search of spillovers through backward linkages”, American Economic Review, Vol. 94 No. 3, pp. 605-627.
Kim, P. H. and Li, M. (2014) “Injecting demand through spillovers: foreign direct investment, domestic socio-political conditions, and host-country entrepreneurial activity”, Journal of Business Venturing, Vol. 29 No. 2, pp. 210-231.
OECD (2002) Foreign direct investment for development: maximising benefits, minimising costs. Paris, Organisation for Economic Co-operation and Development. http://www.oecd.org/dataoecd/47/51/1959815.pdf
Saggi, K. (2000) Trade, foreign direct investment, and international technology transfer: a survey, Policy Research Working Paper 2349, Washington D C, The World Bank.
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