Does Social Capital Matter in the Location Decision of Foreign Direct Investment? Evidence from Korea

Abstract

Social capital refers to the stock of social relationships such as network, norms, and trust that facilitate both coordination and cooperation. Utilizing an extensive firm-level data set for 2006–10, this paper investigates the importance of social capital in conjunction with the conventional location factors that are known to influence the location decisions of multinational firms within Korea. Our nested logit estimates show that the “Trust and Norms” component of social capital has a stronger influence on locational decisions than does the “Social Network” component. That is, regions in Korea characterized by a high level of “Trust and Norms” attract more knowledge-based foreign direct investment (FDI) firms than those with lower levels of trust and norms. In addition, positive agglomeration externalities are more powerful in regions with a higher level of trust and norms. Another important result of our analysis is the discovery that the regions with high unemployment levels and union activities are less attractive to foreign investors. On the basis of the results we conclude that measures that strengthen the trust and norms component of social capital should be fostered along with traditional cost-saving policies, which are used to attract FDI in Korea.