Which sectoral FDI flows crowd in domestic entrepreneurship
This study examines the impact of several sector and industry level FDI inflows mining, manufacturing, total services, and financial services on domestic entrepreneurship, which is measured as the density of newly registered firms. We use a unique dataset of sectoral FDI coupled with data from the World Bank Doing Business Indicators for a panel of up to 96 countries and the period 2004 2012. Our model controls for fixed capital formation, quality of institutions, as well as several cost of doing business indicators: the cost of starting a business, tax rates, and export costs. We use a dynamic panel estimator that allows us to exploit the time varying characteristics of the data and to control for omitted variable biases and endogeneity issues in the data. We find that although services and mining FDI are related to crowding in of domestic entrepreneurship, manufacturing FDI is associated with a crowding out effect.