The Impact of FDI in Vertically Integrated Sectors on Domestic Investment: Firm level Evidence from South Korea
In order to analyze the effects of FDI on domestic firms' investment, we use a detailed firm level data set from South Korea for the 2006 2014 period. We combine it with the input output tables provided by the Bank of Korea to construct industry level measures of multinational presence in sectors that are horizontally and vertically linked,and estimate dynamic investment equations that are augmented with these foreign presence measures. We find a positive and significant effect of foreign presence in both horizontally and vertically linked industries on domestic firm's investment rate, with larger effects arising from multinational presence in the supplying sectors. Quantitatively, a 2 percentage point increase in the presence of multinational suppliers increases the domestic firms investment rate by 2.29 percentage points. We also find that this effect is larger for small and medium firms, private firms, non exporters and for firms in external finance dependent industries. A similar 2 percentage point increase in the foreign presence in downstream sectors increases the investment rate of domestic suppliers by 0.71 percentage points. This effect is larger if the domestic firm is part of a chaebol, or is in a less external finance dependent industry. The effect of a 2 percentage point increase in horizontal FDI is also positive, but smaller at 0.42