The Effects of Inward Foreign Direct Investment on Gross Domestic Product and Innovation-Driven Entrepreneurship: A Conceptual and Empirical Approach

Abstract

One of the most significant economic developments of the 20th century is the acceleration of free capital flows due to market globalization. International capital flows can be broken down into three distinct segments: foreign direct investments, cross-border portfolio investments, and loans. Foreign direct investment refers to investments made by real or legal persons from one country into another. Inward FDI provides benefits such as increasing production capacity, creating jobs, transferring intellectual capital, and spreading global business knowledge by facilitating capital inflows to the host country. Inward FDI flows indicate how much investment an economy attracts over a specific period. In the literature, while the periodic positive effect of the flow on gross domestic product is determined, its relationship with entrepreneurship and innovation varies. The fact that inward FDI flows are statistically significant with GDP is beneficial in the short run, but in the long run, the endogenous resources in sustainable development show their meaning with their impact on entrepreneurship and innovation; the contribution of foreign investors to innovation by transferring their intellectual capital to the locality as planned by the investor is discussed. To conceptualize this network of relationships, our study examines the connections among inward FDI flows, GDP, entrepreneurship, and innovation using structural equation modeling based on five years of data from 43 countries. Inward FDI flow data is obtained from the Organisation for Economic Co-operation and Development, GDP data is sourced from the World Bank, entrepreneurship data comes from the Global Entrepreneurship and Development Institute, and innovation data is acquired from the World Intellectual Property Organization.