Strategic Foreign Investments of South Korean Multinationals

Using unpublished data on foreign affiliates of South Korea for 2000-2004, we examine two possible motivations of foreign direct investment (FDI): factor proportion (vertical-FDI) or market access (horizontal-FDI). First of all, we find clear evidence of vertical FDI, which is considered an important part of the overall picture of South Korean FDI. Affiliate sales destined for exporting to the parent firm negatively correlate with the host-country’s economic size and skillintensity. Second, consistent with the existing literature, we also find evidence for market-seeking behavior or horizontal FDI. The standard view of horizontal FDI is that it originates towards affiliate sales exclusively for the host-country market. Affiliate local sales are higher in countries that have larger markets suggesting that local sales are more attractive in larger markets, which is consistent with a market-seeking FDI. The findings in this paper indicate that South Korean FDI in low-income countries is related to the factor proportions hypothesis, which explains that one of the motives of FDI is to exploit the cheap labor of these countries, while that in high-income countries is related to horizontal FDI, which is a market seeking activity.