East Asian Economic Review

Korea Institute for International Economic Policy (대외경제정책연구원)
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The Impact of Free Trade Agreements on Foreign Direct Investment: The Case of Korea

  • Bae, Chankwon (Korea Institute for International Economic Policy) ;
  • Jang, Yong Joon (Department of International Business and Trade, Kyung Hee University)
  • Received : 2013.11.13
  • Accepted : 2013.12.26
  • Published : 2013.12.31
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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.

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