Analysis on Investment Sensitivity of Export Firm to Financial Stress in the FX Market: Evidence from South Korea

Purpose – Firm investment plays a pivotal role in driving economic growth. However, sustainable economic growth has been hard to achieve because the investment of export-manufacturing firms in Korea has fallen sharply since the Global Financial Crisis of 2008. This study explored why the investments of export-manufacturing firms has been exceedingly sluggish from the perspective of financial stress in the FX market. Design/Methodology/Approach – This study measured the financial stress index of Korea’s FX market (hereafter referred to as the FSIFX) and examined the relationship between the FSIFX and the investment of export-manufacturing firms by using panel data ranging from 2009 to 2018 covering the manufacturing firms listed in the Korea Exchange (KRX). This study used the Tobin’s Q model of adding a factor of financial instability to test the FSIFX- investment relationship. System GMM (Generalized Method of Moment) methodology was employed for a linear dynamic panel estimation. Findings – The main findings were that the FSIFX negatively affected the current investment of export-manufacturing firms. Moreover, the magnitude of the negative effect tended to expand for the manufacturing firms with high export-to-sales ratios. Research Implications – This study fills the gap in the literature by not only focusing on the effects of financial stress in the FX market on firm investment rather than the construction and causes of it, but also by providing novel results considering heterogeneity by using disaggregated data rather than aggregated data.