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Direct Investment

Outward direct investment

Until 1981, Korea’s outward investments amounted only to a total of 57 million dollars because the government restricted capital outflows. From 1986, however, the government began to change its policy, switching to the liberalization of capital outflows. Following further liberalization measures in this area since 1994, overseas direct investment has grown rapidly. The upward trend was briefly halted in 1998 due to the Asian financial crisis.

The number of foreign subsidiaries established by Korean firms increased as the economy began to recover in 2000. The size of investments has increased dramatically since 2005, reaching 22 billion dollars in 2008. Korean multinational enterprises have been the main drivers of overseas investments, including cross-border M&As. Figure 4-6 shows the trend of Korean outward investment from 1981 to 2008.


Figure 4-6. Korean outward direct investment (1981-2008)


Most of the overseas investments by Korean multinationals have been in Asia, with nearly half going to China (47 percent). The investment share for China, however, is declining due to rising investments in Hong Kong and Vietnam since 2005. Table 4-10 shows that Asia has attracted 56 billion dollars, which represents 48 percent of total investments from Korea between 1968 and 2008, compared with 23 percent for North America and 15 percent for Europe. Since 2005, however, investments in Asia have been declining at the expense of growing investments in North America and Latin America.


Table 4-10. Korea’s outward direct investment by region


The share of outward investment by Korean multinationals in agriculture, forestry and fishing industries has fallen continuously and stood at a mere 0.4 percent of total overseas investments in 2008, whereas investment in the mining sector increased from 0.2 percent in 1981 to 16 percent in 2008, reflecting the increased interest in securing foreign sources of raw materials. Overseas investments were biggest in the manufacturing sector until 2006, followed by services. But this situation has been reversed since 2007 when the overseas investment share for services exceeded 50 percent. Table 4-11 shows the distribution of overseas investments of Korean multinationals by sector.


Table 4-11. Korea’s outward direct investment by sector


The economic impact of overseas investments by Korea has been analyzed in a number of studies. Hongshik Lee (2010) found that the activities of foreign affiliates can boost exports. Sung-Hoon Lim and Hwy-Chang Moon (2001) found that when Korean multinationals in industries suffering low productivity invest in developing countries, the outward investment can positively affect intra-firm trade. As for the relationship between capital outflow and domestic investment, Hyunjeong Kim (2008) showed that there is no evidence of a “crowding-out effect” on domestic capital formation by overseas investments. Investments abroad can actually be complementary to domestic investment and this effect becomes more significant for investments in high-tech industries in developing countries. As for employment, Debaere et al. (2010) found that the impact of overseas investment can differ depending on destination; increasing employment at headquarters operations in Korea can decrease investment in developing countries, while there was no significant effect on investment in developed countries. Overall, there seems to be no evidence of a “hollowing-out effect” by overseas investment on the domestic economy and the effect can vary depending on model specifications.

Source : SaKong, Il and Koh, Youngsun, 2010. The Korean Economy Six Decades of Growth and Development. Seoul: Korea Development Institute.

References


· Lee, Hongshik, “The Destination of Outward FDI and the Performance of South Korean Multinationals,” Emerging Markets Finance and Trade, Vol. 46, No. 3, 2010, pp.59-66.
· Lim, Sung-Hoon and Hwy-Chang Moon, “Effects of Outward Foreign Direct Investment on Home Country Exports: The Case of Korean Firms,”Multinational Business Review, Vol. 9, No. 1, 2001, pp.42-49.
· Kim, Hyunjeong, “The Relationship between Outward Direct Investment and Domestic Capital,” Policy Analysis, Vol. 14, No. 1, Bank of Korea, 2008, pp.1-41.
· Debaere, Peter Marcel, Hongshik Lee and Joonhyung Lee, “It Matters Where You Go: Outward Foreign Direct Investment and Multinational Employment Growth at Home,”Journal of Development Economics, Vol. 91, No. 2, 2010, pp.301-309.

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