This paper studies globalization motives and behaviors of Korean manufacturing industries by analyzing the influences and patterns of foreign direct investment (hereafter FDI) of Korean manufacturing firms. There have been many studies of the U.S. (Woodward and Rolf, 1993, and Loree and Guisinger, 1995 to name a few), European, or Japanese FDI (Heitger and Stehn, 1990, Mann, 1993, Thomsen, 1993, and Park, 1997). However, Korea being a new player in FDI, few studies have been done on Korean FDI.

FDI here is defined as the flow of capital from a foreign country to a host country to establish production or service facilities and to conduct business activities. Therefore, FDI is different from a portfolio investment whose main purpose is to earn dividends and capital gains with no significant control over ownership. FDI is also distinguished from reinvestment activities of firms.

In the next section, an overview of Korean FDI by region and sector is presented. Section 3 describes patterns of Korean FDI into advanced countries and less advanced countries and examines the factors inducing Korean FDI to a host country. The last section evaluates the overall performance of Korean FDI and draws some lessons from Korean experience.

Korean FDI of $4.2 billion in 1996 amounts to only 1.3% of world total FDI of $332 billion in the same year. However, Korean FDI draws our attention because of the rate at which it expands; it increased about 4.4 times from $.96 billion in 1990 to $4.2 billion in 1996 while world total FDI increased only about 1.4 times from $234 billion to $332 billion during the same period.

Table 1 shows the historical trend of Korean FDI from 1968 to 1997. Even though there was a decline in Korean FDI in the early 1990s, Korean FDI has increased substantially since 1993. This was mainly due to deregulation policy and liberalization of investment abroad by Korean government. Korean FDI, which began with the forest development investment to Indonesia by Korea South Development Co. in 1968, can be classified into four stages or periods according to characteristics and motives of investment.

During the first period - 1968 through 1981 - Korean FDI amounted to about $173 million with the trade sector as leader, followed by forestry, construction, and manufacturing. In this period the average size per project was very small, about $550,000 and $455,000 respectively, on the basis of total and net investment.

The second stage from 1982 to 1987 was mainly for natural resource seeking. Thanks to the policy of the Korean government, which had recognized the importance of securing resources after the second oil crisis in 1979, Korean FDI increased rapidly since 1982. The average annual investment surpassed $100 million for the six years from 1982 to 1987, and the total investment of $965 million during the second stage was 5.6 times as much as the total investment of $173 million up to 1981. The average amount per project reached at $2.9 million in this second stage. Particularly, the amount per project in 1987 amounted to $4.5 million, which was attributable to heavy investment by the mining sector whose share in FDI was 52%.

The third stage from 1988 to 1993 can be called "growth stage," which was an important period in Korean FDI. Korean companies encouraged by the Korean government began to accelerate the overseas investment because, since the middle of the 1980s, the Korean currency, Won, had been appreciating, labor costs in Korea had jumped, and trade pressures and frictions in the world had been on the rise. In this period, labor-intensive companies, which lost their competitiveness in the domestic and world markets, could not avoid moving their production bases to foreign countries which had low wages or rents. At the same time, the large conglomerate companies which had led the Korean export pushed the pedal to direct overseas investment in order to secure their markets in advanced countries. This period is characterized by a combination of cost-reducing investment and market-penetrating investment.

During the 1988-1993 period, there were a total of 2400 projects investments in the amount of $5.3 billion. This was an increase of more than 4 times the FDI of the second period. Since the latter half of the 1980s, Korean FDI in the manufacturing sector has risen most significantly, and it amounted to above $1 billion every year since 1991. The investment in this period shot up about 600 percent from 1988 to 1993. However, the average investment per project declined continuously from $2.84 million in 1990 to $1.56 million in 1994 in spite of continuous increase in the number of projects and the total FDI amount. This was because small investments to Southeast Asia and China increased drastically from 302 projects in 1990 to 1627 projects in 1994.

1994 was a turning point in Korean FDI history because the Korean government changed its FDI policy from a system requiring government approval for most of FDI to a system allowing free investment abroad except for a few listed sectors. This change was made in response to changing world situations, that is, increasing globalization of the world and intensifying regional blocs. So, the fourth period began from 1994. Following the change in the Korean government’s FDI policy, Korean FDI increased rapidly, reaching $3.58 billion in 1994 and $8.49 billion in the two year period of 1994-1995. FDI alone in this two year period almost matched the total FDI up to 1993. Korean FDI from 1994 to 1996 accounts for 60 percent of the total investment up to the end of 1996.

Table 2 shows Korean FDI from 1968 to 1997 by region. Until 1980, Southeast Asia, North America, and Africa were the major regions invested, but after 1981 the importance of Africa as either a resource site or production site has diminished. On the other hand, Oceania has emerged as a new major region invested up to 1984.

Geographically, Korean FDI in Southeast Asia, except for 1988 when $1.6 million liquidation was recorded, has usually been the highest in the 1990s with its share in Korea’s total FDI of 51.5% in 1997. Particularly, investment in this region showed an explosive rise since 1994 due to heavy investment to China. North America used to be the most invested region in the 1980s. However North America yielded the lead to Southeast Asia since 1992.

Europe has remained the third highest recipient of Korean FDI with a continuous rise since 1988. Korean FDI in Europe surpassed that in North America in 1994 just for one year. Korean FDI in Middle East, which peaked at the amount of $75.4 million, and 47.6% share of total in 1986, reached a considerable amount in the middle of the 1980s thanks to the resource-seeking investment in mining and crude oil, but since the late 1980s it decreased rapidly.

Table 3 shows Korean FDI from 1968 to 1997 by industry. Up to 1980, trade, manufacturing, construction and forestry with a share of 20% or so respectively dominated Korean FDI outflows. Investment in mining rose explosively from 1982 to 1987 and once again in 1996 and 1997 in order to secure domestically-scant resources from Canada, Australia, and others. Korean FDI in the manufacturing sector has increased continuously over time from 20 percent of total FDI in 1983 to 48 percent in 1996. The manufacturing sector has maintained the top since 1986. Korean FDI in trade has ranked the second with a continuous rise since 1988. Korean FDI in forestry was active up to 1980 and has been inactive since then. The greater part of investment in fishery was made for the five year period from 1988 through 1992 and since then has gone through liquidation.

Even though Korean firms invested in over 100 countries, FDI exceeding $100 million in outstanding amount are limited to 28 countries and investment in these 28 countries accounts for 90 percent of total FDI. Furthermore, the share of two counties, USA and China, amounted to about 50 percent of total FDI with the peak of 60.3% in 1996. During the 1990s, investment to advanced countries - the U.S., U.K., Hong Kong, Japan, Canada - has increased until 1996, but decreased in 1997, while that to many developing and less developed countries shows the opposite. Korean FDI to Indonesia amounted to about 30% respectively of total in mining and forestry sectors, and that to China reached over 30.2% and 35% respectively of total in manufacturing and construction.

The share of FDI to these 28 countries out of total FDI amounts to 90 percent on the whole, but varies very much with industries. For example, the weights in mining, forestry, and fishery are much less(74.9%, 40.2%, and 45.4%, respectively) than the overall average of 90% while those in trade, transportation and storage, and manufacturing are a little more (95.4%, 92.2%, and 91.3% respectively) than the average. This indicates that the investment for resource-seeking is more diversified than that for market-seeking or cost-reducing.

Early Korean FDI has been typically small investments while more recent investments tend to be of large scale. Investments of larger size (over $10 million) have been made to Europe, Middle East, Latin America, and Africa, while investments of all size have been done relatively equally to Southeast Asia, North America, and Oceania. 76 percent of Korean FDI is in the form of majority ownership. The equity participation rate of 100% accounts for 49% of Korean FDI, and the rate between 50% and 99% accounts for 29% of Korean FDI.

A country’s FDI is influenced by internal driving forces (the question of "why invest abroad") and external inducing factors (the question of "where to invest"). This paper will briefly describe internal driving forces and then mainly focus on external inducing factors.

Korean FDI to the U.S. and Europe tends to be in technology-intensive sectors where Korean firms attempt to internalize transaction and information costs by globalizing its production. Therefore, the main motive for Korean investment into the advanced countries is to seek technology and market for their products. On the other hand, Korean FDI to Southeast Asia (including China) tends to be in labor-intensive sectors where Korean firms are losing their comparative advantages at home. The main motive for Korean FDI into this region is to seek low-cost resources, mainly cheaper labor. A similar finding was reported by Lee (1994).

Our study will be limited to Korean FDI in manufacturing sectors because decisions on FDI in manufacturing sectors are mainly made on the merit of FDI while decisions on FDI in non-manufacturing sectors, particularly in trade, can be influenced by other considerations such as complementarity to Korean exports.

To analyze the question of "where to invest," i.e., the attractiveness of a host country for international production, a model used by Park (1997) is presented below. The FDI function can be derived from the profit maximization theory of a firm. Following Nickell (1978) and Mann (1993), a typical firm maximizes profits choosing the optimal price and quantity.

p = P(Q) Q(K,L) - c(r,w) Q(K,L),

where r (capital rental) and w (wage rate) are unit costs of K and L respectively. This function also determines the optimal capital stock and labor input. By assuming that FDI reflects the change from an initial capital stock (K₀) to the optimal capital stock, the profit maximizing investment function (FDI in this case) can be derived from the differentiation of the profit function.

DFI = g {m + (1-f) K₀ l/e w + f/e K₀ r},

where m is exogenous changes in demand, f = dQ K/dK Q indicates the economies of scale, and e = dQ P/dP Q is the price elasticity of demand. Exchange rate fluctuations can affect DFI through their influence on the price elasticity of demand and economies of scale. This simplified DFI function can be expanded to include other effects such as tax effect and market integration effect to reflect the more complex reality.

The following expanded regression model is constructed for empirical analysis.

FDI = f ( PPPGNP, W, R, EX, ED, T, D1, D2, LAN),

where FDI is the dollar values of direct investment flows in manufacturing sectors to each country (in $ million), PPPGNP ($ billion) measures the market size or economies of scale, R is the real rate of interest, obtained by the nominal lending rate minus inflation rate, W is the average wage rate, EX measures the changes in the exchange rate, T is the weighted mean tariff rate on manufactured products.

To accurately measure real market size, PPPGNP, which is GNP expressed in purchasing power parity (PPP), is used for this study. W is measured by a proxy variable, per capita GNP($) expressed in PPP. ED is the gross enrollment ratio in secondary education. D1 is a dummy variable representing the EC market, D2 is a dummy variable representing the NAFTA market, and LAN is a dummy variable representing English-speaking countries including former English-speaking colonies.

Korean FDI figures are available for more than 100 countries from the Export-Import Bank of Korea. However, our sample size is limited to 72 due to missing values on some independent variables. Data on GNP, EX, R and W are obtained from World Development Indicators 1998 CD-ROM.

This model is estimated with Korean FDI data over the period of 1994-1997, the period of the most active Korean FDI. Since DFI flows into individual countries vary drastically from year to year, the cumulative DFI flows for the period of 1994-1997 are used in this study. For the independent variables, either their averages or mid-point year (1996) figures are used.

Some studies have used a conditional logit model to determine the location selection. However, by limiting the variance of FDI to that of a dichotomous variable, this approach does not explain how large FDI flows are going to each country. Therefore, we apply the OLS regression with the dollar values of FDI for the dependent variable.

The regression equations explaining the variation in Korean FDI across countries are presented in Table 4 for three different sets of data, - world, advanced countries, and less advanced countries. For the world data set, two variables, PPPGNP and W (measured by PPP per capita GNP), are statistically significant at the one percent or five percent levels, while other two variables, EX and T, are significant at the 10 percent level. The remaining variables - D1, D2, ED, LAN and R - turn out to be statistically insignificant. All significant variables have expected signs. Larger market size and higher tariff rate have a positive effect on Korean FDI to the host country, while higher wage rate and more volatile exchange rate discourage Korean FDI flows into the host country.

The insignificance of R is expected with globalization of financial markets and the high degree of mobility of financial capital in recent years. The negative sign and the insignificance of D1, and D2 indicate that Korean FDI has not necessarily aimed at breaking through the two major economic blocs. This finding is in contrast to Japanese FDI (See Park, 1997). The variable ED, though insignificant, has an expected positive sign; the higher the level of education of the host country, the more Korean FDI. Since lower coefficient of determination (R²) is expected because of the nature of cross-sectional data, adjusted R² of .685 is indicative of a good fit of the model.

Three variables, D1, D2 and LAN, are deleted for the regressions on the two subsets of the data because of their disappointing results from the regression on the whole data set. For the data set of advanced countries, the variable W is no longer significant, while the variable T (tariff) changes from the significance at the 10 percent level to the significance at the one percent level. This finding implies that Korean FDI into the advanced countries are mainly marketing-seeking and technology-seeking FDI so that the tariff rate matters, but the wage rate does not. The significance of PPPGNP indicates that Korean firms consider the size of market as an important factor in determining their investment abroad into advanced countries. Loree and Guisinger (1995) also obtained no significance of the wage rate for the U.S. overall FDI.

For the data set of less advanced countries, the variable W stands out as a significant variable, and the significance of variable T diminishes. The variable ED changes from an insignificant coefficient to a significant one. Korean FDI into less advanced countries is mainly to take advantage of lower labor costs, not to secure local markets. Since the motive for such FDI is not for local market creation and expansion, tariff rates do not play an important role in determining Korean FDI into less advanced countries. Two distinctive patterns of Korean FDI can be derived from the regression results; low-cost resource-seeking FDI flow into less advanced countries and marketing-seeking and technology-seeking FDI flows into advanced countries including the U.S. and Europe. Therefore, it may not be desirable to use a pooled data of both advanced countries and less advanced countries in explaining Korean FDI behaviors.

Korean FDI behavior has gone through four different stages; from the learning stage with small investments in the 1970s, to natural resource-seeking investment in the early and mid 1980s, to the growth stage in the late 19980s and the early 1990s, to the maturity stage of the mid and late 1990s. The last two stages are characterized by a combination of cost-reducing investment and market-seeking investment. During the 1970s Korean FDI was very limited in its number and size due to Korea’s relatively week economy and its trade deficit problem. As the Korean economy grew stronger and gained international competitiveness in the 1980s, its trade balance changed from deficits to surpluses, promoting FDI outflows.

The U.S., Southeast Asia and Europe have been the major regions for both Japanese FDI and Korean FDI. However, geographical focus and investment behavior of the two countries are somewhat different. Japanese FDI in the U.S. has always been the highest while Europe remained the second highest until 1994 when Japanese FDI in Southeast Asia surpassed that in Europe. On the other hand, Southeast Asia has ranked the first for Korean FDI since 1992, followed by the U.S. and Europe. Japanese firms’ main focus in FDI has been on market-seeking to deal with a resurgence of regional economic integration such as EU and NAFTA while Korean FDI was made mainly for resource-seeking to offset higher domestic production costs resulted from the appreciation of Korean Won. Korean firms are more aggressive in expanding into new and untested markets than their counterparts in Japan. This is evidenced by the scantiness of Japanese FDI and the abundance of Korean FDI in Eastern Europe.

Export-Import Bank of Korea. (1999). Overseas Investment Information System (website).

Heitger, B. and Stehn, J. (1990). Japanese Direct Investments in the EC - Response to the Internal Market 1992? Journal of Common Market Studies, 29: 1-15.

Korea Federation of Bank. (1998). Overseas Direct Investment Statistics Yearbook. Seoul: Korea Federation of Bank

Lee, K. (1994). Structural Adjustment and Outward Direct Foreign Investment in Korea. Seoul Journal of Economics, 7: 179-208.

Loree, David W. and Guisinger Stephen E. (1995). Policy and Non-Policy Determinants of U.S. Equity Foreign Direct Investment. Journal of International Business Studies, 26: 281-299.

Mann, Catherine L. (1993). Determinants of Japanese Direct Investment in U.S. Manufacturing Industries. The Quarterly Journal of Economics, 12: 523-541.

Nickell, Stephen. (1978). The Investment Decisions of Firms. Cambridge: Cambridge University Press.

Park, Kang H. (1997). Foreign Direct Investment of Japanese Manufacturing Industries. Proceedings of the American Society of Business and Behavioral Sciences, 1-9.

Thomsen, Stephen. (1993). Japanese Direct Investment in European Community: The Product Cycle Revisited. The World Economy, 16:301-315.

Woodward, Douglas P. and Rolfe, Robert J. (1993). The Location of Export-Oriented Foreign Direct Investment in the Caribbean Basin. Journal of International Business Studies, 24: 121-144.

World Bank. (1998). World Development Indicators. CD-ROM

Table 2: Korean Net FDI Outflow by Year/Region(US $1,000)
Year	Southeast Asia			Middle East			North America			Latin America			Europe			Africa			Oceania			Total
	amount	Ratio		amount	ratio		amount	ratio		amount	ratio		amount	ratio		amount	ratio		amount	ratio		amount	ratio
68-80	40043	31.5		21068	16.6		31043	24.4		4411	3.5		4891	3.9		23988	18.9		1556	1.2		127000	100.0
81	4739	21.6		-1151	-5.2		4182	19.1		568	2.6		1438	6.6		901	4.1		11248	51.3		21925	100.0
82	6419	6.6		6104	6.3		41838	42.9		1061	1.1		1442	1.5		-907	-0.9		41621	42.7		97578	100.0
83	24697	24.1		545	0.5		48334	47.1		312	0.3		12558	12.2		416	0.4		15729	15.3		102591	100.0
84	9851	20.4		6691	13.9		18836	39.1		739	1.5		944	2.0		546	1.1		10578	22.0		48184	100.0
85	16920	26.5		6292	9.9		4100	6.4		2799	4.4		38643	60.6		-4769	-7.5		-234	-0.4		63752	100.0
86	-1596	-1.0		75381	47.6		77309	48.8		2645	1.7		5451	3.4		-279	-0.2		-626	-0.4		158286	100.0
87	128735	40.2		68370	21.4		164827	51.5		3677	1.1		-42206	-13.2		-8315	-2.6		5008	1.6		320096	100.0
88	40115	25.7		-7563	-4.8		90477	57.9		14016	9.0		15200	9.7		1152	0.7		2796	1.8		156194	100.0
89	127788	32.6		-47240	-12.0		202359	51.6		55347	14.1		18362	4.7		8292	2.1		27477	7.0		392384	100.0
90	292735	36.0		-72412	-8.9		416800	51.3		66455	8.2		59347	7.3		24142	3.0		25645	3.2		812713	100.0
91	423000	41.2		1558	0.2		442764	43.1		39759	3.9		88605	8.6		15933	1.6		15283	1.5		1026902	100.0
92	502164	45.7		12237	1.1		364626	33.2		30025	2.7		143356	13.1		27667	2.5		17634	1.6		1097709	100.0
93	452228	44.5		19176	1.9		278441	27.4		26518	2.6		181189	17.8		28659	2.8		30274	3.0		1016485	100.0
94	999785	49.3		-15626	-0.8		508904	25.1		20206	1.0		388610	19.2		111103	5.5		16079	0.8		2029062	100.0
95	1516733	55.0		29300	1.1		449414	16.3		64970	2.4		629123	22.8		37618	1.4		29246	1.1		2756405	100.0
96	1490436	41.8		24041	0.7		1188673	33.3		232590	6.5		561354	15.7		7563	0.2		62938	1.8		3567596	100.0
97	1360811	51.5		68616	2.6		422929	16.0		254034	9.6		373333	14.1		87612	3.3		74762	2.8		2642098	100.0
Total	7435603	45.2		195387	1.2		4755856	28.9		820132	5.0		2481640	15.1		361322	2.2		387014	2.4		16436959	100.0
Source : Overseas Investment Information System, The Export-Import Bank of Korea.