Trade Effects of Korea’s FDI in Asian Countries

Abstract

This paper focuses on the effect of Korea’s outward FDI on trade flows in Asian countries. Using cross-country time series data for the period 1992-2016, we analyze by panel estimation the trade effects of Korea’s outward FDI. Particularly, we investigate whether outward FDI and trade flows are complements or substitutes. Major empirical findings are as follows. First, outward FDI to Asian countries plays a positive role in increasing Korea’s trade flows, supporting the hypothesis that outward FDI and home country trade are complements. Our finding indicates that outward FDI to Asian countries may help promote Korea’s export and import flows. This results are consistent to the vertical FDI model in which home country exports intermediate goods to host country and imports finished goods from host country. Second, upon estimating the influence of GDP on trade flows, we find that there is a positive relationship between GDP and trade flows, implying that Korea’s trade flows with Asian countries increase as market size get larger. Finally, our study offers some policy implications: 1) The governments should continue to support outward FDI to Asian countries. 2) It would be pertinent to build virtuous relationship of outward FDI and exports for sustainable growth of korea’s exports.