Does FDI inflow crowd out domestic investment in Korea?

Abstract

This paper provides empirical evidence on the dynamic relationship between inward foreign direct investment (FDI), economic growth and domestic investment in Korea for the period 1985‐1999. By employing a vector autoregression model and the innovations accounting techniques, we explore dynamic interactions between inward FDI, domestic investment and output. We find that FDI has some positive effects on economic growth, but its effects seem to be insignificant. On the other hand, economic growth is found to have statistically significant and highly persistent effects on the future level of FDI. Although FDI is exogenous contemporaneously, we find that FDI shows strong dynamic endogeneity to domestic macroeconomic conditions, which has not been uncovered in previous works. Our finding does not support the view that FDI crowds out domestic investment in Korea.