Is the Vertical FDI Model of Korea Sustainable?

Abstract

The aim of this thesis is to analyze the changing relationship between Korean outbound FDI and the intermediate exports over time. The earlier studies regarding the impact of FDI on the home country‟s exports have been determining if it is a substitute or a complement. Recent Korean studies generally confirmed the positive relation between FDI outflow and trade, characterizing Korean outbound FDI as 'vertical FDI'. However, these previous studies have not considered the fact that this effect cannot be fixed, and a transition from 'vertical FDI' to 'horizontal FDI' could appear if the circumstance changes. To complement this limitation, this paper examines whether the transition from 'vertical FDI' to 'horizontal FDI' happened or not in the Korean manufacturing sector over previous decade. First, how the correlation between 'Korean outbound FDI' and 'Korean intermediate exports' changes from 2001 to 2010 is analyzed.Afterward, how the factors like 'the host country market condition' and 'the investor's condition' affect the trend of this linkage is also examined. The 'least square model' analysis, using panel data from 40 countries and 14 manufacturing industries, show that the vertical specialization and the complementary impact of the outbound FDI have been intensified in the Korean manufacturing sector as a whole. However, in the industry-wise analysis, 11 among 14 industries have experienced the transition from 'vertical FDI' to 'horizontal FDI' while the FDI of 3 industries, taking 40% of the total outbound FDI on average, have displayed an opposite trend. As for the investor's size, the correlation between the outbound FDI of big investors and Korean intermediate exports has been weakened while the opposite has been seen in the small investors' cases. This empirical result implies that the transition from 'vertical FD' to 'horizontal FDI' generally happens in the analysis of industry dimension, and that it is also possible to sustain 'vertical FDI' depending on 'the success of effort to secure the comparative advantage in the high value stages' and 'the drastic increase of world demand for that industry's products'. Furthermore, it can be said that if this vertical FDI takes a majority portion in the whole FDI composition, it can make the whole outbound FDI trend in country level vertically specialized.