The Impact of Free Trade Agreements on Foreign Direct Investment: The Case of Korea

28 Pages Posted: 31 Dec 2013 Last revised: 8 Nov 2016

See all articles by Chankwon Bae

Chankwon Bae

Korea Institute for International Economic Policy

Yong Joon Jang

Kyung Hee University - Department of International Trade and Business

Date Written: December 31, 2013

Abstract

This paper aims to empirically identify the effects of FTAs on outward and inward FDIs in Korea. Considering the income differences between Korea and its FTA partners, we hypothesize that FTAs have a positive effect on outward FDI to developing countries and inward FDI from developed countries. An underlying source of the hypothesis is the Knowledge-Capital model, addressing the positive (negative) relationship between trade costs and horizontal (vertical) FDI. We test for the hypothesis using data on Korea’s FTAs and FDI over the period 2000-2010. We find that our empirical results support the hypothesis, and additionally, FTAs in general encourage FDI by creating an FDI-friendly environment.

Keywords: FTA, Horizontal FDI, Vertical FDI, Knowledge-Capital Model

JEL Classification: F15, F21, F23

Suggested Citation

Bae, Chankwon and Jang, Yong Joon, The Impact of Free Trade Agreements on Foreign Direct Investment: The Case of Korea (December 31, 2013). Journal of East Asian Economic Integration vol.17, no.4, (December 2013) 417-445. Available at SSRN: https://ssrn.com/abstract=2373394

Chankwon Bae (Contact Author)

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

Yong Joon Jang

Kyung Hee University - Department of International Trade and Business ( email )

#1 Hoeegi-dong Donedamun-Gu,
Seoul
Korea, Republic of (South Korea)

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