Multinational Firms’ Responses to a Host Country Financial Crisis: The Case of Korea

This paper investigates the impact of the 1997 Asian financial crisis on Japanese multinational firms' foreign direct investment (FDI) in Korea. The study uses a comprehensive dataset of Japanese firms' foreign affiliates between 1990 and 2018 and analyzes the effects of the crisis and the subsequent reforms, including the removal of foreign ownership restrictions, on FDI stocks and ownership ratios. The paper employs state-of-the-art difference-in-differences (DiD) techniques, contrasting Japanese affiliates in Korea with their siblings in other developed countries. We find that while the crisis significantly increased the multinational ownership ratio of affiliates in Korea, it did not have a significant impact on FDI stocks. This suggests that the crisis and associated reforms were more likely to influence ownership structures than FDI levels and that policy changes can play a crucial role in mitigating the negative effects of financial crises on FDI. The study also finds that the crisis had the largest impact on majority-owned affiliates in the middle range, implying that minority-owned affiliates and wholly-owned affiliates were less affected by the reforms.