The purpose of this study is to analyze the inter-industry productivity spillover effect of Foreign Direct Investment by using individual panel data from businesses and examining the feasibility of government policy.
Since 2000, Korea has experienced a rapid decrease in the amount of Foreign Direct Investment (FDI) or Direct Foreign Investment (DFI) inflow. This continued downward trend is not unique to Korea. With the exception of a handful of countries, the size of FDI has continuously declined all over the world. As a result, global competition to attract FDI has intensified. Given this competition to implement policies to induce FDI, it is necessary to research the belief upon which this competition is based – that the positive benefits of FDI on the domestic economy as a whole outweigh the overall costs of various subsidiary measures. Moreover, the proposition that the positive externalities are large enough to call for government intervention should be explored. In general, FDI is known to be advantageous to the targeted country in various ways – it improves the balance of payments, increases production and employment, and raises productivity of the target company as well as that of other companies in the same or related industries. However, since the beneficiaries of productivity spillovers are usually different from the direct stakeholders of the FDI, the productivity spillover effect could be classified as a positive externality of FDI; however, economists have not yet reached an agreement on this issue of productivity spillover.
This study examines the effect of FDI on the productivity of firms in the same industry as well as firms in upstream or downstream industries by using a panel data set of listed manufacturing companies in the Korea Stock Exchange and KOSDAQ, as well as companies subject to external audits in 1991 and 2000. As results indicate, the dummy for foreign direct invested firms had a coefficient that was positive and statistically significant. Thus, it can be concluded that the productivity of firms with FDI is higher than that without any FDI, assuming all other things being equal.
When examining intra-and inter-industry productivity spillovers, the coefficients of intra-industry and downstream industry FDI shared are found to be both positive and significant. The backward productivity spillovers are especially bigger and more significant among all the variables, and are not affected by the model specification or share calculation method employed. The forward productivity spillover, on the other hand, appeared to be unstable depending on the model specification and share calculation method. It can be concluded, therefore, that FDI has a positive productivity spillover effect on firms in the same industry as well as firms in the upstream industry.
The existence of such an external effect provides evidence toward the public good aspects of FDI and thereby can be a rationale for government support for attracting FDI.
외국인직접투자의 산업 간 생산성 파급효과에 대한 연구(Inter-industry productivity spillover effect of foreign direct investment in Korea)
|Series Title; No||정책포럼|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < General|
|Holding||KDI; KDI School|