The determinants of foreign direct investment: An empirical examination

Abstract

This paper examined the link between Korea's FDI inflows from the United States and locational, financial, and macroeconomic variables using firm-level data of FDI transactions which were completed during the period from January 1980 to February 2001. Korea's FDI inflows from the United States were found to have significant associations with real exchange rates, relative wealth, relative wage costs, and expected exchange rate changes and interest rate differentials. The extent and direction of the links, however, have varied according to different FDI regimes during the last 20 years in Korea. Industry-specific factors also played a role in determining Korea's FDI inflows. The expected financial variables, both in terms of expected exchange rate changes and expected interest rate changes, were shown to have played a significant role in determining the FDI activities of U.S. investors in Korea throughout the whole period. The 1997 currency/financial crises in Korea were found to have brought notable changes in the relationship between FDI inflows and their contributing factors in Korea. A role reversal of forward-looking volatility in determining Korea's FDI inflows from a deterrent during the pre-1997 crisis period to an accelerator during the post-crisis period is consistent with the recent increase in short-term, often speculative, merger and acquisition activities in Korea.