The Determinants of Startups and the Impact on Foreign Direct Investment (FDI): A Case Study on the Israeli Economy

Gonen, Perry

Abstract

This interdisciplinary study examines the long-term causality relationship between Foreign Direct Investment (FDI) inflows into a country and innovative startups. This study further examines the influence of latent variables related to the founders and co-founders of these startups through Psychological Capital.
Using a vector error correction model (VECM), this study establishes a long-term causality relationship between innovative startups in Israel and FDI inflows into the country. From 1990 to 2019, the number of ongoing innovative startups in Israel increased significantly from 19 to 649, coinciding with a substantial increase in FDI inflows from $151 million to $17.3 billion (BoP, current US $). Furthermore, this study employs Panel Cross-Section analysis using an Autoregressive Distributed Lag (ARDL) cointegration technique across eight countries: Australia, Canada, China, Germany, Sweden, Switzerland, the United Kingdom (UK), and the United States of America. The findings show that innovative startups in these eight countries, similar to Israel, have a long-term causality effect on FDI inflows into their respective economies.
The research further examined the influence of latent variables inherent in founders and co-founders of innovative startups using the Psychological Capital Index. To what extent do the four latent variables - Hope, Efficacy, Resilience, and Optimism-influence people to form Startups? Using a five-point Likert questionnaire sent to thousands of Founders and Co-founders in Israel, the United Kingdom, Germany, and Sweden, their Psychological Capital Index was higher than all three control groups from Israel, the UK, and twenty-eight previous research papers on different population groups.
The outcome of this twin-track research design establishes two critical aspects of the interdependence of macro- and micro-economic impacts on the economies of various nations. This study establishes that innovative startups have a long-term causal effect on FDI inflows into an economy. The second aspect relates to the finding that individuals who establish innovative startups exhibit a higher PsyCap Index than the overall population. The output of this research ought to serve as a favourable indication for governments to enhance support and initiatives aimed at nurturing and strengthening the startup ecosystem within their respective countries.

• Thesis Type: Thesis
• Deposit Date: Feb 27, 2024
• Publicly Available Date: Apr 27, 2024
• Award Date: Mar 26, 2024