Korea’s Horizontal and Vertical Intra-Industry Trade and FDI in Trade with East Asian Countries

Abstract

This paper examines Korea's intra-industry trade (IIT) by disentangling vertical from horizontal IIT, and analyzes the determinants of both IIT types in trade with East Asian countries during the period of 1991-2005. Korea's IIT with East Asian countries has increased rapidly, especially its high quality IIT, which has increased faster than horizontal IIT and low quality IIT, implying that Korea's product quality has improved over time. Korea's high quality IIT is larger in trade with developing countries, but its low quality IIT is larger in trade with Japan. The regression results show that the income differences between countries have a negative effect on horizontal IIT, and that Korea's high quality IIT becomes larger when Korea's income is higher than the income of partner countries. This supports the theory of IIT. Foreign direct investment (FDI) inflow has had a positive effect on increases in IIT, but the effects of FDI outflow are not certain. This suggests a policy implication that FDI inflow has a more positive effect on IIT than FDI outflow.