Developing Local Entrepreneurship Ecosystems by Foreign Investment

Abstract

The importance of foreign direct investment in transition economies has significantly increased over the last several decades. Foreign investors are recognized as important drivers shaping the local entrepreneurial ecosystem. This paper aims to explore investors’ satisfaction with the factors previously identified as important for improving entrepreneurial ecosystems, that is, factors that both positively contribute to the development of local businesses as well as generate further foreign investment flow. Empirically we draw upon small case studies with managers of 38-42 key foreign investor companies in Latvia conducted in 2015, 2016, 2017, and 2018. In the first data collection wave, we identify key challenges that foreign investors face in Latvia. In the following data collection waves, we measure the development in the identified areas of concern and thus the overall entrepreneurial ecosystem of Latvia. Given that Latvia is a transition country in the advanced stage of development, the focus is on issues related to productivity and value added, including the availability of high quality labor force, the efficiency of public sector, and favorable tax regimes as well as challenges posed by unethical and illegal behavior, labor shortages, and elements of uncertainty. Our results suggest that foreign investors see a number of challenges within the all afore-mentioned areas that are important parts of the entrepreneurial ecosystem. Moreover, our findings suggest that progress with regards to the improvement of certain areas such as those mentioned previously from the viewpoint of foreign investors, was relatively slow during the period of 2015-2018. Our key contribution is providing with an in- depth analysis of factors shaping the entrepreneurial ecosystem in an advanced transition economy-from the viewpoint of foreign direct investors. We explore investors’ opinions with regard to the investment climate to summarize investors’ suggestions on how the entrepreneurial ecosystem in Latvia could be further developed. Our findings provide a scope for tailor-made, targeted policy recommendations to achieve these goals.