Foreign Direst Investment and Indigenous Entrepreneurship: Evidence from Wales and Ireland

Abstract

Foreign direct investment (FDI) plays an important role in the economic development strategies of several countries. FDI inflows bring in the latest technology, create employment and lead to tradable goods. FDI not only enables the transfer of intangibles to another country but also makes knowledge spillovers possible and therefore may play a major role in indigenous entrepreneurship. These knowledge spillovers can lead to the establishment of new indigenous enterprises in the host country leading to further economic development (Young, Hood & Peters, 1994).

However, not all types of FDI have the same potential for knowledge spillovers. The potential for knowledge spillovers is related to the type of FDI and the level of human capital in the host country. FDI in high technology industries is more likely to generate knowledge-intensive spillovers (Buckley, Newbould & Thurwell, 1988). High levels of human capital (formal education, on-the-job training including industry, management and business development experience) make it easier for entrepreneurs to start high value-added firms. Individuals working in MNEs obtain higher levels of training and development than in local firms (Chen, 1983; UNCTAD, 1994) and wish to obtain the best returns for these skills. Individuals may feel unable to realize appropriate returns in the existing firm or may believe that the bureaucratic MNE does not value this knowledge, and seize the opportunity to create a new entity (Acs & Varga, 2004).

While several studies examine the relationship between formal education and FDI (OECD, 2002), and other studies are concerned with the relationship between human capital and entrepreneurship (Bates, 1990), very few studies explore the relationship between FDI, human capital and entrepreneurship.

Using a combination of case studies and Global Entrepreneurship Monitor (GEM) population surveys in four regions, we explore how the link between FDI spillovers and indigenous entrepreneurial activity varies by human capital and cultural context in Ireland and Wales.