The purpose of this study is to suggest ways to improve the current system for Foreign Direct Investments (FDI).
There has been a large amount of discussion regarding the economic significance of FDI, which has greatly increased in recent years. Concerns about FDI point out worsened conditions of domestic production as factors that encourage FDI, weaken domestic infrastructure and decrease export and employment. However, such a concern comes from a lack of comprehension on the general factors and effects of FDI. In this context, this study aims to point out the logical flaws of the FDI-related concerns through an analysis of its factors, effects, and current problems, thus suggesting alternatives for improvement.
Korea’s FDI first began in 1968 and has greatly increased since 1993 with the government’s deregulation on foreign investment. At the end of 1996, foreign investment recorded $13.757 billion as its standard of change. This study analyzed the relationship between FDI and trade for 1995~96, based on a number of criteria including: industry; importance according to target country; a comparison of production scale and GDP; and concentration ratio. As a result, FDI, import and export turned out to have a positive relationship, and FDI and export showed a positive correlation in all cases.
As there are concerns that increased FDI in sectors with high exports can weaken the domestic infrastructure, this study has addressed the issue by conducting a systematic analysis on the structural changes of Korea’s import, export, and FDI, and deducing the factors of FDI. For example, many Korean companies entering foreign markets are mistakenly seen as evading the local market, but the fact that they’re actually utilizing and strengthening their unique company assets or competitive advantages through FDI is being overlooked.
Another concern points out that FDI decreases exports and employment. To address the issue, this study has proved the fact that there is no evidence of FDI replacing exports through a theoretical and positive analysis of the effects of FDI. Quantitative analysis results show FDI and export to have a positive relation. The fact that FDI may replace exports in the near future must not be simply ruled out, but putting a limit on FDI can actually exacerbate conditions for export and employment. This is because putting a limit on FDI is only putting off the expected unemployment, which can bring worsened problems in the future.
Based on these analyses, this study has suggested alternatives for improving FDI, which can be summarized into abolishing of the current regulation and rearranging the support system. In addition, the study has identified potential problems and alternatives regarding Korea’s FDI in the future, including the transfer of R&D abroad and structural changes on domestic production. To address this issue, there is a need to promote the advancement of the domestic industrial structure through FDI, by establishing local and international R&D network, focusing on technology, and manpower development.
해외직접투자의 요인 및 효과분석(An analysis of factors and effects of Foreign Direct Investment)
|Series Title; No||연구보고서 / 97-03|
|Subject Country||South Korea(Asia and Pacific)|
|Subject||Economy < Direct Investment|
|Holding||KDI; KDI School|