FDI Outflow, Gravity Theory, and Pollution Haven Hypothesis: Evidence from Korea Manufacturing Industry

Abstract

This paper examines the major factors of Foreign Direct Investment outflow in Korea's manufacturing industry by incorporating the gravity theory and the pollution haven hypothesis (PHH). The main purposes of this paper are to: (i) compare the marginal effects of the factors obtained from the several panel data models. In particular, the panel quantile regression model is considered to explain the heterogeneous behavior of the FDI outflow; (ii) compare the major factors between the pollution intensive manufacturing industry and the non-pollution intensive manufacturing industry, and (iii) examine whether different levels of FDI outflow from a host country are differently related to FDI outflow reasons relating to both the gravity theory and PHH: Using annual panel data for the period of 2002-2012, we find that the determinants of FDI outflow differ based on the level of FDI outflows. Classical panel data analysis showed no different FDI outflow factors between the pollution and non-pollution industries, yet the panel quantile regression model showed different FDI outflow factors for the pollution and non-pollution industries. These findings provide meaningful options for policy makers and business practitioners to consider to further refine their plans to help the related stakeholders.