Essays on foreign entry liberalization in korea

Abstract

This dissertation consists of four essays on foreign entry liberalization in Korea. The first chapter discusses whether foreign direct investment (FDI) helps overcome financial crises in Korea and whether it causes different spillover patterns across financial crises. Using panel data on Korean industries and firms from 1981 to 2020, we first confirm that FDI increases during financial crises. In addition, we conduct a firm-level analysis and find that FDI contributes to improving a firm’s productivity and profitability during its periods of financial crises, indicating that FDI helps domestic firms overcome crises. Furthermore, we find that there are spillover effects in the post-crisis period, which depend on the characteristics of the financial crisis. Overall, our study highlights the importance of FDI during financial crises and its spillover effects in a transition economy. The second chapter presents the impact of foreign bank entry on the performance of small and medium-sized enterprises (SMEs) in Korea. Using panel data on Korean firms from 1991 to 2019, we first confirm that foreign banks positively affect the amount of bank loans received by Korean SMEs, indicating that their entry contributes to enhancing SMEs’ credit access. Additionally, the positive influence of foreign bank entry is more pronounced for SMEs with high information asymmetry and strong growth potential. Further, improved credit access from foreign banks is positively associated with SMEs’ long-term performance. Overall, our study highlights the importance of foreign banks for improving both credit access and the performance of domestic SMEs in a transition economy. The third chapter investigates whether foreign equity participation enhances the level of transparency in Korean listed firms’ accounting information. Using panel data on the Korean listed firms during the 1999-2019 period, we find that foreign ownership has a positive effect on the accounting transparency of firms, indicating that foreign investors effectively monitor earnings management activities of a firm and contribute to increasing the quality of accounting information. In addition, this positive impact of foreign equity ownership is more pronounced in non-chaebol firms than in chaebols. We further show that foreign investors reinforce the effect of changes in accounting systems on the transparency of Korean firms. Finally, firms with enhanced transparency by foreign investors perform better in the future. Overall, our study highlights the importance of foreign investors for enhancing accounting transparency in the Korean stock market. The fourth chapter examines whether capital account liberalization is beneficial for inducing foreign investment and positively affects allocative efficiency and economic performance in Korea. Using panel data on Korean industries and firms from 1991 to 2019, we confirm that capital account liberalization is positively associated with foreign investment. This effect is more pronounced for industries with high external financing dependence. Additionally, we conduct a firm-level analysis and find that capital account liberalization improves capital allocative efficiency, indicating that it helps firms with high growth opportunities to make more investment. Furthermore, changes in allocative efficiency attributable to capital account liberalization positively affect firms’ future financial performance. Overall, our study highlights the importance of capital account liberalization in attracting foreign capital, improving allocative efficiency, and enhancing the economic performance of firms in a transition economy.