Determinants of FDI Inflows to South Korea: Impact of Political Factor

Determinants of FDI Inflows to South Korea: Impact of Political Factor

Although the empirical evidence is inconclusive, the extant research on FDI has shown that political factors such as regime types and political stability may affect FDI inflows. However, the existing statistical literature on the determinants of inward FDI to South Korea tends to ignore the role of political variables, while focusing on a variety of economic factors. Empirical analysis of FDI flows that excludes political variables not only fails to reflect existent theory, it can also incorrectly attribute the impact of other variables. This study seeks to improve upon previous work by systematically examining the effects of both economic and political determinants of FDI inflows in South Korea. Using the annual data covering the time period 1970-2018 and vector auto-regression (VAR) method, the estimation results suggest that a set of political variables, the type and durability of the regime and political instability, have a significant impact on inward FDI. I find that democratic institutions, regime durability, market size, and human capital have a positive association with FDI, that political instability and economic growth have a negative correlation with FDI, and that trade openness, inflation, and exchange rate have little systematic bearing on FDI inflows in South Korea.

Although the empirical evidence is inconclusive, the extant research on FDI has shown that political factors such as regime types and political stability may affect FDI inflows. However, the existing statistical literature on the determinants of inward FDI to South Korea tends to ignore the role of political variables, while focusing on a variety of economic factors. Empirical analysis of FDI flows that excludes political variables not only fails to reflect existent theory, it can also incorrectly attribute the impact of other variables. This study seeks to improve upon previous work by systematically examining the effects of both economic and political determinants of FDI inflows in South Korea. Using the annual data covering the time period 1970-2018 and vector auto-regression (VAR) method, the estimation results suggest that a set of political variables, the type and durability of the regime and political instability, have a significant impact on inward FDI. I find that democratic institutions, regime durability, market size, and human capital have a positive association with FDI, that political instability and economic growth have a negative correlation with FDI, and that trade openness, inflation, and exchange rate have little systematic bearing on FDI inflows in South Korea.