Abstract
This study examines whether capital account liberalization is beneficial for inducing foreign investment and positively affects allocative efficiency and economic performance in Korea. Using panel data on Korean industries and firms from 1991 to 2019, we confirm that capital account liberalization is positively associated with foreign investment. This effect is more pronounced for industries with high external financing dependence. Additionally, we conduct a firm-level analysis and find that capital account liberalization improves capital allocative efficiency, indicating that it helps firms with high growth opportunities to make more investment. Furthermore, changes in allocative efficiency attributable to capital account liberalization positively affect firms’ future financial performance. Overall, our study highlights the importance of capital account liberalization in attracting foreign capital, improving allocative efficiency, and enhancing the economic performance of firms in a transition economy.
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