Divestment Decisions of Korean Manufacturing Firms in Foreign Markets

Abstract

This paper aims to investigate several influential factors in the decision patterns of Korean manufacturing firms that have divested their foreign subsidiaries. According to empirical results, chaebol-affiliated firms are found to have divested their subsidiaries more frequently than their counterparts. Chaebol firms usually operate a large number of offshore plants, are highly diversified over related markets or products, and have more experience in the foreign market. Therefore, they usually face higher opportunity costs in operating offshore projects, being encouraged to transfer corporate resources to other subsidiaries when one subsidiary shows unsatisfactory performance. Therefore, divestment could be negative from the perspective of a subsidiary, but it could be positive from the perspective of a parent firm as it enhances the flexibility of funds flow. In contrast, non-chaebol firms seem to have less flexibility in transferring corporate resources among overseas subsidiaries since they are more reliant on particular regions or products. And firms with substantial international experience also show a higher propensity of divestment because they tend to easily transfer resources from one country to another. Furthermore, firms with fully owned subsidiaries also show a higher propensity of divestment, which indicates that those operating wholly owned subsidiaries in China had a higher rate of divestment. Lastly, the results demonstrate that Korean firms investing in those countries with higher economic growth or larger domestic markets are less likely to divest their subsidiaries. This implies that their decisions were significantly influenced by the macroeconomic environments of host countries.