Trade, FDI, and FTA: Experience from Korea

Abstract

Purpose Existing studies on the interaction between international trade and FDI have presented conflicting conclusions on whether the relationship is complementary or substitute. Accordingly, this study attempts to answer the question of how Korea’s trade and FDI have interacted with each other. Design/Methodology/Approach This study constructs a panel dataset for the 51 partners (investing) countries with Korea from 2000 to 2020 and analyzes the relationship between trade and FDI using the Pooled OLS, Fixed Effect, Random Effect, and GLS(Generalized Least Square). Findings Analysis results show that trade openness is statistically significant and presents a positive value in all models, indicating that the larger the size of Korea’s imports and exports, the more positive the FDI inflow to Korea. Although FTA is not statistically significant in some models, the Pooled OLS and GLS models show a statistically significant and positive value, suggesting that FTA also positively affects Korean FDI. These analytical results confirm a complementary relationship between Korean trade and FDI and that FTAs also have a positive effect on FDI. However, the effect of an FTA’s moderating role on trade openness is not statistically significant, so it could not be determined. Research Implications It can be said that trade and FDI play a significant role in Korea’s economic growth and development. FDI inflow can create a virtuous cycle of increasing exports and imports again by stimulating domestic investment and increasing employment and production. To sustain this positive interactive relationship, trade and investment policies should be considered in a complementary way rather than independently or exclusively.