The Effects of Barriers in Globalization on the Profitability of Foreign Direct Investment Firms

Abstract

Purpose - We investigate the effects of barriers in globalization on the financial performance of foreign direct investment (FDI) firms with 164,354 firm-year data for the period from 2006 to 2017 using data abstracted from Microdata Integrated Service (MDIS) of the Korean Bureau of Statistics, UNCTAD and other sources. Design/Methodology/Approach - We particularly in this study adopt the theory of the gravity model to try to analyze how economic and non-economic factors affects financial performance. Fixed effects panel regressions are selected as the best fit models over others like random effects regressions and ordinary linear squares regressions, after implementing a model selection process. Findings - First, FDI negatively affects the profitability of firm while exports positively affect the firm’s performance. Second, gravity factors like geographical proximity such as distance show negative effects on the profitability of firms while population does not show any statistically clear effects for both global and non-global firms. Third, non-gravity factors such as tariff rates, exchange rates, per capita GDP have negative effects on the profitability of FDI firms. Fourth, similarity in cultural or language factors shows distinctly consistent effects, with positive effects of Chinese as one of the global languages for firms, and USA and EU member countries as the host of FDIs. Research Implications - Korean FDI firms do not achieve higher financial performance, while firms enhance their profitability through exports. Firms have to decide whether they desire to improve their profitability through exports or take risks through FDIs to overcome other barriers in trade.