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
Date Written: December 31, 2013
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: Suggested Citation