Impacts of Foreign Direct Investment on the Most Centralized Country: Evidence from Gaeseong Industrial Complex in North Korea

Abstract

Foreign direct investment (FDI) may influence host countries, not only their economy but also their institutions such as political and economic systems. This study comprehensively explores these diverse impacts of FDI in the most centralized economy in the world, North Korea, by focusing on the Gaeseong Industrial Complex (GIC). The GIC is a special economic zone for FDI, especially from South Korea. Based on the thorough analysis of literature and data on the GIC, this study found a significant impact of FDI on North Korean economy, but limited impact on institutional reforms and military détente. Furthermore, this study attributes the limited FDI impact to characteristics of the GIC, type of FDI in the GIC, and the political system of North Korea. By observing several FDI effects on North Korea, this study provides a holistic view of FDI effects on a centralized economy and the implications for better understanding of FDI. © 2015 Wiley Periodicals, Inc.