Is FDI Good News for Local Entrepreneurs? Evidence from China

Qingqing Chen, Business Economics and Public Policy, The Wharton School

Abstract: In opening their markets, governments in developing countries hope to receive foreign direct investment. In addition to direct wage and employment benefits, they also hope that foreign investment can facilitate the growth of local businesses. Advanced technology, high quality intermediate goods and access to global market, might trickle down to local businesses and help create new business opportunities. On the other hand, opponents to FDI argue that foreign companies might beat local firms in competition for the local market, taking their market shares and crowding them out. In this paper, I will test the effect of FDI on local entrepreneurship using Chinese business registration data. I plan to use the change of FDI policy when China entered WTO as an exogenous shock for identification. I find preliminary evidence suggesting that FDI would encourage firm creation. Although FDI might also crowd out domestic firms, such “negative” effect is comparatively minimal.

Michelle Eckert is Marketing and Communications Coordinator for the Mack Institute, where she works to engage students, researchers, and corporate partners in opportunities for collaboration. Michelle received her B.A. in Art from Valparaiso University in 2007. Her background includes two AmeriCorps terms of service working to teach mathematics, computer literacy, and job readiness skills to out-of-school youth in Philadelphia, focusing particularly on promoting access to post-secondary education.