Two essays on the effect of foreign investment on firm growth and R&D intensity

Abstract

According to the Foreign Investment Promotion Act of South Korea, foreign investment can be divided into direct investment (FDI) and indirect investment (FII). Despite the significant disparities in objectivity and behavior between FII and FDI, however, relatively little attention has been focused on comparing FII and FDI with respect to their effects on local firms. This study, for the first time, presents a comparison of the effects of FDI and FII on local firm growth rates and R&D intensity, drawing on Korean manufacturing firm-level data between 2000 and 2004. Chapter 1 examines the relationship between foreign investment and firm growth. The findings of chapter 1 can be summarized as follows: in the post-IMF financial crisis periods, (i) FDI inflows are “rather” negatively related to local firm growth rates, (ii) however, local firms with high technological competence (i..e., large accumulated knowledge) readily experience growth in productivity, even if MNEs do not take pains to transmit technology. (iii) FII per se has nothing to do with firm growth, since foreign indirect investors are not concerned with the long-term growth rate but short-term profit; (iv) Both FDI and FII are negatively related to the chaebol-affiliated firms’ growth rates by impeding the independent decision-making of chaebols. (v) In concentrated industries, FDI shows a negative relation to local firm growth rates; (vi) The effect of FDI on the inter- and intra-spillovers varies with industrial appropriability and technological opportunity. Chapter 2 explores the effects of FDI and FII on local firm R&D intensity. The findings, which can be drawn from the empirical test, are as follows: in the post-IMF financial crisis periods, (i) both FDI and FII are positively related to local firm R&D intensity; (ii) the active monitoring of FII protects the controlling families of chaebol-affiliated firms from moral hazard (or “tunneling”) and, consequently, increases the chaebol-affiliated...