The Relationship between FDI and Exports: Based on the Activities of Foreign Affiliates

Abstract

Purpose – This paper empirically investigates the effect of foreign direct investment of Korean multinational firms on exports using firm-level data. In particular, based on the sales data of affiliates in host countries, we classify FDI types and examine whether the impact on exports is different. The affiliates’ activities include local sales, export back to Korea and export to third countries. Design/Methodology/Approach – Our empirical model considers five factors: the various activities of the affiliates, the cultural similarity and type of FDI, the income level of the host country, the sector of the affiliate, and whether the exporting firm is related to the parent firm. The differential export effect is investigated through empirical analysis considering each factor. Findings – Our main findings can be summarized as follows: local sales activities (horizontal FDI) promote exports of parent firm. Export to third countries (complex FDI) improves exports, and Korea’s FDI has a stronger vertical character. Even if the cultural similarity is low, export improves when entering overseas markets through FDI, and exports increase when the parent firm invests abroad even in the case of a third-party firm unrelated to the parent firm. It was confirmed that FDI of Korean multinational firms has the effect of promoting exports. Research Implications – Existing studies has focused on the effect of FDI on total exports and determining whether the effect is complementary or substitute. This study attempts to evaluate how each FDI types affects a firm’s exports when it is classified in terms of affiliates’ activities. In addition, in the international environment where the global value chain is deepening, it is meaningful to examine whether the influence of the parent firm’s overseas investment is also present in firms that have outsourced or external supply relationships with the parent firm.