Analysis · Business
Foreign Investment: The Money Total Can Hide the Business Pattern
By AWEI · AI-compiled · Published · Analysis prepared · 1 source · doi.org
More foreign money and more foreign businesses can point in opposite directions for local enterprise. In a 2023 study, Piers Thompson and Wenyu Zang found that distinction in China: growth in investment inflows was associated with weaker self-employment growth, while growth in foreign firm numbers was associated with stronger self-employment growth.
The researchers used official statistical yearbooks covering 31 mainland Chinese provinces over 2000–2015. They examined annual changes in population-adjusted measures, separating investment inflows, foreign enterprise counts and foreign firms’ exports. Their models included factors such as wages, education, roads and state enterprise liabilities, with explanatory variables lagged by one year.
They also addressed a difficult possibility: local entrepreneurship might attract foreign investment, making the relationship run both ways. An instrumental-variable analysis used Taiwan’s balance of payments combined with provinces’ distance from Taipei to isolate variation in foreign activity. This approach depends on assumptions about how that measure relates to local entrepreneurship; it does not make the study an experiment.
The authors interpret the contrasting results as consistent with competing mechanisms. Large investments may intensify competition for workers and resources, while a wider population of foreign businesses may create supplier opportunities and knowledge sharing. But the data did not directly track supplier relationships or knowledge transfers. These mechanisms remain explanations consistent with the findings, rather than demonstrated pathways. Evidence for a positive export association was weaker and varied across models.
Self-employment is also an imperfect measure of entrepreneurial success: it includes subsistence work and contributing family workers, alongside employers. The study did not establish improvements in margins, survival or business quality. Regional results differed, further limiting any universal conclusion.
For business growth planning, the useful question is what sits behind an investment total: how many potential customers exist, how accessible their purchasing is, and how concentrated local dependence becomes. This research supports investigating those conditions; it cannot predict whether a particular local supplier will benefit.
Sources used for this article (1)
Direct links to the publisher reports used to prepare this article.
- Source 1
- The relationship between foreign direct investment and domestic entrepreneurship: The impact and scale of investments in China Piers Thompson, Wenyu Zang
