Inward foreign direct investment (IFDI) is widely regarded as an essential driver of local economic development, particularly through its potential to stimulate entrepreneurial activity. Existing research has examined the effects of IFDI extensively, but much of this work has focused on established firms, analysing outcomes such as survival, productivity, and innovation. Only more recently have scholars turned their attention to entrepreneurship and new venture creation. However, most of these studies rely on country-level data and consequently report mixed and sometimes contradictory findings, limiting our understanding of how IFDI shapes entrepreneurial entry.

This limitation is especially problematic in the context of large emerging economies, where substantial variation exists within national borders. Countries such as China and India display pronounced regional and industrial heterogeneity, with sharp differences in institutional quality, market development, and competitive intensity. National averages, therefore, risk masking important local dynamics. These characteristics point to a clear gap in the literature and underline the need for more fine-grained, subnational analyses that can capture how IFDI interacts with local contexts to influence new venture creation.

Addressing this gap, a recent study by an international research team led by Assistant Professor Lingli Luo of Zhejiang University investigates how IFDI shapes patterns of new venture creation at the industry–regional level in China. The team, which includes scholars from Waseda University and the Chinese University of Hong Kong, adopts a more nuanced approach that moves beyond aggregate national effects. Their study, published in the Journal of Business Venturing, explores the multiple channels through which IFDI affects entrepreneurial entry across different industries and regions.

The study draws on learning and competition theories to argue that IFDI within a given industry and region has a nonlinear, inverted U-shaped effect on new venture creation. At low to moderate levels, IFDI encourages entrepreneurship by offering learning opportunities, such as exposure to advanced technologies and managerial practices. As IFDI intensifies, however, competitive pressures increase, raising entry barriers and discouraging prospective entrepreneurs. This dual influence helps reconcile previously inconsistent findings in the literature.

Beyond these within-boundary effects, the research also identifies positive spillovers across regional and industrial boundaries. IFDI in the same industry in neighbouring regions promotes new venture creation through imitation-based learning, while IFDI in related sectors within the same region fosters adaptation-based learning. Significantly, these effects are strengthened in regions with supportive institutional environments, particularly those characterised by a well-developed non-state economy.

Empirically, the study analyses comprehensive firm-level data from the China National Enterprise Credit Information Publicity System covering the period from 2013 to 2023. The results strongly support the proposed theoretical arguments. Overall, the findings offer clear policy implications, suggesting that local governments should calibrate IFDI inflows carefully. By maintaining moderate levels of foreign investment and strengthening local institutions, policymakers can maximise learning benefits while avoiding excessive competitive pressures that may hinder entrepreneurial entry.

More information: Lingli Luo et al, Beyond direct impact: Exploring inward FDI’s multifaceted effects on new venture creation, Journal of Business Venturing. DOI: 10.1016/j.jbusvent.2025.106562

Journal information: Journal of Business Venturing Provided by Waseda University