Debunking the FDI myth: Does foreign investment really spur entrepreneurship in Africa?

Abstract

In this study, we challenge the prevailing belief in entrepreneurship financing research that foreign direct investment (FDI) universally fosters entrepreneurial activity. We hypothesize that FDI's impact on new firm creation varies according to a country's level of entrepreneurial development. Using quantile panel regression on data from 25 sub-Saharan African nations between 2010 and 2020, our analysis reveals heterogeneous effects across different levels of entrepreneurial activity. Notably, our findings challenge the assumption that FDI inherently promotes entrepreneurship and fosters new business creation. Instead, we observe that FDI may hinder the establishment of new firms, especially in countries with limited entrepreneurial activities, where it is expected to provide the most support by addressing local capacity gaps. Several policy insights have been proposed and discussed on how FDI can spurs entrepreneurship and new firm creation in the sub-Saharan African region.