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The Impact of Free Trade Agreements on Foreign Direct Investment: The Case of Korea

Author

Listed:
  • Bae, Chankwon

    (Korea Institute for International Economic Policy)

  • Jang, Yong Joon

    (Kyung Hee University)

Abstract

This paper aims to empirically identify the effects of FTAs on outward and inward FDIs in Korea. Considering the income differences between Korea and its FTA partners, we hypothesize that FTAs have a positive effect on outward FDI to developing countries and inward FDI from developed countries. An underlying source of the hypothesis is the Knowledge-Capital model, addressing the positive (negative) relationship between trade costs and horizontal (vertical) FDI. We test for the hypothesis using data on Korea's FTAs and FDI over the period 2000-2010. We find that our empirical results support the hypothesis, and additionally, FTAs in general encourage FDI by creating an FDI-friendly environment.

Suggested Citation

  • Bae, Chankwon & Jang, Yong Joon, 2013. "The Impact of Free Trade Agreements on Foreign Direct Investment: The Case of Korea," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 17(4), pages 417-444, December.
    • Handle: RePEc:ris:eaerev:0052
    DOI: 10.11644/KIEP.JEAI.2013.17.4.272
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    Cited by:

    1. Narayan, Paresh Kumar & Rath, Badri Narayan & Syarifuddin, Ferry, 2022. "Understanding the role of trade agreements in Indonesia’s FDI," Journal of Asian Economics, Elsevier, vol. 82(C).
    2. Hea-Jung Hyun & Yong Joon Jang, 2015. "Comparative Advantage, Outward Foreign Direct Investment and Average Industry Productivity: Theory and Evidence," Korean Economic Review, Korean Economic Association, vol. 31, pages 327-357.
    3. Malkawi, Bashar H., 2018. "The Contents and Features of Dispute Settlement under US-Jordan FTA: An Appraisal," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 15(2), pages 167-189.
    4. My Duong & Mark J. Holmes & Anna Strutt & Steven Lim, 2019. "Effects of Trade Agreements and Foreign Direct Investment on Trade: Evidence from Vietnam," International Journal of Economics and Financial Issues, Econjournals, vol. 9(3), pages 116-126.

    More about this item

    Keywords

    FTA; Horizontal FDI; Vertical FDI; Knowledge-Capital Model;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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