Hongshik Lee

In Search of Optimised Regional Trade Agreements and Applications to East Asia

We quantitatively analyse the trade effects of enhanced trade facilitation with extended gravity equations. Our findings confirm that RTAs comprised of countries equipped with better trade facilitation are more likely to be trade-creating, less likely to be trade-diverting, and are thus more likely to lead the world economy toward global free trade. We also find that (i) the traditional gains from shallow integration through eliminating tariff barriers will be greater for South-South RTAs in East Asia such as an ASEAN-China RTA, provided that the tariff-reducing schedule is strictly fulfilled, (ii) the gains from deeper integration through enhancing trade facilitation will be greater for North-North RTAs in East Asia such as a Japan-Korea RTA, and (iii) the gains from a combined trade liberalisation strategy through tariff reductions and enhanced trade facilitation will be greater for North-South RTAs in East Asia such as a China-Korea and an ASEAN+3 RTA.

Foreign Direct Investment and De-Industrialisation

The purpose of this study is to discuss the various issues regarding de-industrialisation and to systematically analyse the causes of this phenomenon. In addition, the effect of the recent increase in foreign direct investment on de-industrialisation will be analysed. Unlike extant studies, this study employs a more reliable method of estimation, known as the generalised method of moments system, for establishing the importance of foreign direct investment (FDI) with regard to de-industrialisation. For a general assessment of the different factors of de-industrialisation, including FDI, this study classifies the causes of de-industrialisation in OECD countries into external and internal factors. As a result, the analysis has proved that not only internal and external factors are major factors of de-industrialisation, FDI inflow and outflow are also major factors.

How FTAs Affect Income Levels of Member Countries

The purpose of this paper is to analyse whether FTAs cause the income levels of member economies to converge or diverge. Although existing studies predict the possibility of convergence among FTA members to a certain degree, they fail to provide definitive evidence. By using the concept of accelerating convergence, this study aims to estimate the pure convergence effects of FTAs, separate from the conventional notion of income convergence, so-called b-convergence. The neoclassical model of economic growth has been extended to incorporate varying steady states for an open-economy framework. Applying the system GMM method to a dynamic panel of data consisting of major FTAs comprising the European Union, NAFTA, Mercosur and AFTA, and encompassing the cases of launching an FTA, expanding membership or deepening FTA integration we find considerable evidence for the income convergence effect of FTAs.

Trade Structure, FTAs, and Economic Growth

What is the relationship between trade and economic growth? Does trade positively affect economic growth? Owing to the ambiguity of this relationship, the empirical relationship has remained open (Rodriguez and Rodrik, 2001; Baldwin, 2003). This paper introduces “trade structure” variables, borrowed from the paper of Lederman and Maloney (2003), and applies them to the relationship. A dynamic panel estimation for the data of 66 countries during 1991–2004 is used to verify the validity and robustness of the relationship. Trade structure variables show strong evidence of positive effects on growth. Free-trade agreements/areas (FTAs) also enhance economic growth. East Asia shows a different relationship between trade and growth than the world and reflects a weaker role of FTAs in its growth.

The Destination of Outward FDI and the Performance of South Korean Multinationals

This paper examines how the destination of outward foreign direct investment (FDI) affects South Korean multinational parent firms. We categorize host countries into those that are developed and those that are less developed. We find that destination matters for employment and capital intensity. FDI into less developed countries is negatively associated with a firms employment and positively associated with its capital intensity. However, FDI into developed countries does not seem to matter: the parent firms activities do not change significantly after FDI has been made. These results may indicate that Korean FDI into less developed countries is a relocation of production lines to overseas affiliates and FDI into developed countries is done to extend markets.

Foreign Direct Investment, Technology Diffusion, and Host Country Productivity Growth

The principal objective of this paper is to ascertain whether foreign direct investment (FDI) has statistically significant effects on host countries’ economic performance, such as total factor productivity. Such effects are often referred to as FDI externalities or spillover effects. This paper attempts to evaluate whether these spillover effects depend on the sending countries’ income levels. Our empirical analysis shows that FDI exerts positive impacts on less developed countries. Further, we determine that the impacts of FDI from developed countries are more prevalent. So-called North–South effects were confirmed; however, we do not detect South–South effects. We also investigated the other channel, imports, and demonstrate its significant impacts on total factor productivity.

Decision to Invest Abroad: The Case of South Korean Multinationals

Recent firm-based empirical studies examine whether firms serving foreign markets either through exports or foreign direct investment (FDI) are more efficient than their domestically-oriented counterparts. The purpose of the present paper is to study the link between performance of multinational firms and the choice to participate in foreign investment. In so doing, this paper explicitly differentiates exports and FDI decisions. Using firm-level data for large South Korean manufacturing firms, I provide evidence that the premium for FDI is huge compared to exports, and that good firms undertake FDI. Studying performance across firms, I find that firms that engage in FDI outperform other firms in the future in all possible dimensions; they are larger, pay higher wages, and are also more productive. These results are consistent with the hypothesis that good firms self-select to engage in FDI. I also find clear evidence that past FDI experience has a strong positive effect on the probability of current investment abroad. This implies that the sunk cost involved in FDI plays a role in current decisions to undertake FDI.

How and where to offshore: a productivity comparison at the firm level

Using recent survey data on South Korean firms’ strategies for sourcing intermediate goods from abroad, we investigate whether there exists a productivity premium of offshoring by considering organizational forms (insourcing versus outsourcing) and the income level of offshored countries (North versus South) altogether. Thus, we consider the following four offshoring types: outsourcing from South, insourcing from South, outsourcing from North and insourcing from North. Unlike previous studies, we give particular attention to the comparison between outsourcing from North and insourcing from South and find that firms outsourcing from North are more productive than firms sourcing from their own affiliates in South. We offer three critical conditions to incorporate our empirical findings into the standard firm heterogeneity model: the fixed cost is higher for insourcing than for outsourcing and is higher in North than in South, the headquarters receive a larger share of the final revenue through insourcing than through outsourcing, and sourcing from North guarantees better profitability (or a bigger share) in the market for the headquarters than sourcing from South. Thus, this article contributes to the literature by identifying a new productivity order.

Linkage impact of foreign direct investment on labor productivity in Korea

1. Overview Chalongphob Sussangkarn, Yung Chul Park and Sung Jin Kang 2. The Development of Foreign Direct Investment and Its Impact on Firms Productivity, Employment and Exports in Indonesia C.M. Firdausy and S.D. Negara 3. Foreign Direct Investment and Spillovers in Malaysia Tham Siew Yean, Liew Chei Siang and Marziah Mokhtar 4. Linkages and Spillovers in Philippines Manufacturing R.M. Aldaba and F.T. Aldaba 5. Inward and Outward FDI and the Restructuring of the Singapore Economy Chia Siow Yue 6. The Impact of Foreign Direct Investment on Productivity, Employment and Export Performance of Thai Firms C. Anuchitworawong 7. A Study on FDIs Role in Chinas Economic Growth and Development since Chinas Reform and Opening-Up Jianping Zhang, Dawei Li, Zijia Chen, Xiaoyi Li, Dan Wang and Yan Li 8. Inward and Outward FDI of Japan Y. Todo 9. The Linkage Impact of Foreign Direct Investment on Labor Productivity in Korea S.J. Kang and H.S. Lee 10. A Study of FDI in Vietnam Tuan Bui, Huong Lan Pham and Ha Thi Tran

International Investment Location Decisions: The Case of Korean firms into China

Recent literature maintains there are at least two explanations for the motivations of FDI, one involving trade barriers (horizontal-FDI) and the other factor proportions hypothesis (vertical-FDI). The first view is that multinationals act in order to overcome trade barrier, and the second view is that multinationals arise to take advantage of international factor price differences. The purpose of this paper is to study the motivations of Korean foreign direct investment in China. Using the panel data on Korean FDI in China for the years 1988~2002, we examined the geographic determinants of direct investment in China from Korean firms. In doing so, we investigated, on the one hand, to what extent multinational activity is consistent with the factor proportions theory, i.e., to what extent multinational activity is related to cheap factor supplies. On the other hand, we study the market access motivation for multinational activity. Our econometric results suggest that factor proportions hypothesis is indeed the dominant influence on investor calculations for the early period of Korean FDI in China. Since end of 1990s, however, market-seeking FDI pattern is more common than FDI motivated by factor price differentials. We also find that the hypothesis that good-quality infrastructure is conducive to attracting FDI is not supported for Korean firms. Evidence supports the claim that regions with high degree of reform, which implement preferential treatments to foreign investors, still have advantage over other regions in attracting FDI. In sum, the findings in this paper indicate that Korean FDI for the early period of KorRecent literature maintains there are at least two explanations for the motivations of FDI, one involving trade barriers (horizontal-FDI) and the other factor proportions hypothesis (vertical-FDI). The first view is that multinationals act in order to overcome trade barrier, and the second view is that multinationals arise to take advantage of international factor price differences. The purpose of this paper is to study the motivations of Korean foreign direct investment in China. Using the panel data on Korean FDI in China for the years 1988~2002, we examined the geographic determinants of direct investment in China from Korean firms. In doing so, we investigated, on the one hand, to what extent multinational activity is consistent with the factor proportions theory, i.e., to what extent multinational activity is related to cheap factor supplies. On the other hand, we study the market access motivation for multinational activity. Our econometric results suggest that factor proportions hypothesis is indeed the dominant influence on investor calculations for the early period of Korean FDI in China. Since end of 1990s, however, market-seeking FDI pattern is more common than FDI motivated by factor price differentials. We also find that the hypothesis that good-quality infrastructure is conducive to attracting FDI is not supported for Korean firms. Evidence supports the claim that regions with high degree of reform, which implement preferential treatments to foreign investors, still have advantage over other regions in attracting FDI. In sum, the findings in this paper indicate that Korean FDI for the early period of Korean FDI in China is consistent with motives related to the factor proportions hypothesis, which explains that one of the determinants of FDI is to exploit the cheap labor of this country. On the other hand, recently motives related to horizontal FDI are more common.