The Dual Nature of FDI: Boosting Local Startups and SMEs While Posing Challenges

Sylvester Gyan, Bright James Nyarkoh and Samuel Yeboah

MPRA Paper from University Library of Munich, Germany

Abstract: This systematic review delves into the multifaceted relationship between Foreign Direct Investment (FDI) and entrepreneurial ecosystems, with a particular focus on the impact of FDI on local startups and Small and Medium-sized Enterprises (SMEs). The study investigates both the positive and negative effects of FDI, shedding light on its role as a double-edged sword in shaping local entrepreneurial landscapes. The positive effects encompass access to vital funding, enhanced resources, market expansion opportunities, the magnetism of skilled talent, and a culture of knowledge sharing. FDI serves as a lifeline, bridging the funding gap that often hampers local startups, and infusing them with the capital essential for growth, innovation, and global market access. Additionally, foreign investors bring valuable resources, advanced technologies, and managerial expertise, augmenting the capabilities of local entrepreneurs. The presence of foreign corporations also facilitates market expansion, enabling local startups to access international markets and leverage established investor networks. Furthermore, FDI acts as a talent magnet, attracting skilled professionals to the region, thereby enriching the local labour pool. Moreover, interaction with foreign investors fosters a culture of knowledge sharing, exposing local entrepreneurs to global best practices and diverse perspectives. However, alongside these positive effects, negative consequences emerge. Increased competition from foreign firms can stifle the growth prospects of local startups. An overreliance on foreign investors for funding and resources can make local startups vulnerable to shifts in investor sentiment. Unequal power dynamics may lead to unequal partnerships, where local startups have limited negotiating leverage. Moreover, the transfer of technology and knowledge raises concerns about the outflow of critical intellectual property. This systematic review critically examines these dynamics, offering valuable insights into the intricacies of FDI's impact on entrepreneurial ecosystems. The findings inform policymakers, entrepreneurs, and investors alike, guiding them in optimizing the benefits of FDI while mitigating its potential pitfalls. By understanding the complex interplay between FDI and local startups, stakeholders can foster a more vibrant and resilient entrepreneurial ecosystem, conducive to innovation, growth, and sustainability.

Keywords: Foreign Direct Investment (FDI); entrepreneurial ecosystems; startups; Small and Medium-sized Enterprises (SMEs); funding; resources; market expansion; talent attraction; knowledge sharing. (search for similar items in EconPapers)
JEL-codes: F21 F23 L26 L33 M13 O16 O33 O38 (search for similar items in EconPapers)
Date: 2023-07-09, Revised 2023-08-05
New Economics Papers: this item is included in nep-cse, nep-ent, nep-int and nep-sbm
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