Differences in FDI Determinants by Sector: A Knowledge-capital Model Approach

This paper analyzed the differences in foreign direct investment (FDI) determinants of various sectors using the Knowledge-capital (KC) model framework. Specifically, it compared the differences in the influence of FDI determinants between the manufacturing and service sectors. In the empirical analysis of the Korean outward FDI, the study found that service FDI is likely more demand-seeking than manufacturing FDI. Moreover, service FDI does not tend to be largely affected by trade impediments, caused by the differences in idiosyncratic features between the two sectors. Although past manufacturing FDI is expected to lead current producer service FDI, which facilitates production of manufacturing goods, the Korean manufacturing FDI is not complementarily related to the Korean producer service FDI. Given the rapid growth of the global service sector, the Korean government needs to promote the overseas expansion of service companies through the reinforcement of the overseas expansion support system such as providing sufficient foreign market information, supporting R&D activities for new service development and quality upgrade, and improving the customized financial support system.