Entrepreneurship - the Spark of Prosperity: How Does FDI Influence Local Entrepreneurship in African Countries and How Do Country Characteristics Affect This Relationship?

Amanda Linnea Caroline Guldmann & Cecilie Smedegaard Madsen

Student thesis: Master thesis

Abstract

Recently, several international organisations and scholars have recognised entrepreneurship to have an increasingly crucial role in ensuring economic growth and continuous progress in developing countries. As these economies also depend on foreign direct investment (FDI), it seems highly relevant to study the relationship between these two phenomena in order to uncover the impact that FDI inflows have on entrepreneurship in these countries. This paper endeavours to contribute to this topic by examining how FDI inflows influence entrepreneurship in the African region and how different country characteristics affect this relationship. Thus, the thesis applies an econometric model to 23 African countries that measures the impact on an aggregate regional level as well as on individual country levels. Further, the individual effects are studied in depth by investigating country characteristics from a quantitative and qualitative perspective and thus study the spillover effects that FDI inflows create in these economies. The paper finds that FDI influences entrepreneurship positively on the aggregate level but differently across the 23 African countries. Three of them, Ghana, Mali and Zambia, experience significant effects of FDI, while the remaining 20 countries show no impact. In Ghana, FDI influences entrepreneurship negatively but in Mali and Zambia, FDI has a positive effect. The analysis shows that the combination of different country characteristics affects this relationship immensely, creating different dynamics in each country. The key drivers of the significant effects are conditions such as investment flows and directions, business environment, access and quality of education and employment conditions. Thus, the thesis concludes that FDI inflows have a positive effect on the regional level while the effect is more ambiguous across countries in the African region. As the effect depends highly on individual country characteristics, the paper suggests that it is beneficial for governments and policymakers, who wish to improve the ability to transform FDI inflows into entrepreneurship, to focus on issues such as investments and business reforms, the nation’s absorptive capacity and domestic employment conditions. Finally, the paper concludes that it is beneficial to study this highly complex topic from a qualitative perspective, focusing in each individual country, as this allows the researcher to uncover underlying mechanisms that a quantitative analysis might not capture.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2018
Number of pages140
SupervisorsLarissa Rabbiosi