Killing Five Birds with One Stone: (1) inward foreign direct investment in post-crisis Korea

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Author: Judith Cherry
Date: Spring 2006
From: Pacific Affairs(Vol. 79, Issue 1)
Publisher: The University of British Columbia - Pacific Affairs
Document Type: Article
Length: 8,073 words
Lexile Measure: 2060L

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For the first 35 years of the Republic of Korea's (2) economic development, the government showed a clear preference for foreign capital in the form of loans rather than inward foreign direct investment (IFDI) as a means of financing its development plans. This reluctance to allow a greater degree of foreign participation in the domestic economy stemmed from a desire to control the allocation of financial resources and also reflected public concerns that increased levels of IFDI might lead to foreign domination of the Korean economy. The 1997 crisis led to a fundamental change in Korean attitudes towards inward investment, as a desperate need for capital, advanced technology and know-how prompted a comprehensive reform of FDI policy and promotional systems. However, while many Koreans recognized the contribution made by inward investment to the country's economic recovery and its potential role in promoting sustainable growth, anti-foreign capital sentiment lingered in some areas of society.

The past two decades have seen a remarkable increase in global flows of capital and credit, most notably in the form of foreign direct investment. Although FDI in developed countries has accounted for the lion's share of these transactions, flows to developing countries have also accelerated in recent years. The rising level of inward investment in developing countries reflects, to a significant extent, changes in their perceptions of and attitudes towards IFDI. Whereas, in the 1970s and early 1980s, many potential host countries expressed concerns that inward investment might create monopolies, exploit the local economy and restrict competition in the domestic market, this negative view had changed to a more upbeat assessment by the 1990s, as scholars and practitioners had identified a range of beneficial effects of inward FDI in terms of promoting economic development. (3) Accompanying this more positive view of inward FDI was a growing awareness that host governments would have to create a favourable business environment and offer incentives to multinational corporations (MNCs) in order to enjoy the benefits that inward investment might bring. (4)

This paper analyzes the changes in Korean attitudes towards inward investment before and after the 1997 financial crisis within the context of the debate on the costs and benefits of IFDI and increasing global competition to attract inward investment. The Korean experience sheds light on the forces driving the liberalization and deregulation of inward FDI by countries that had previously restricted and controlled it. It also provides insight into the problems facing governments seeking to attract higher levels of FDI, particularly in terms of the need to change perceptions of and attitudes concerning inward investment as well as reforming systems and structures for the promotion of inward foreign direct investment.

The Theoretical Debate

Proponents of the industrial organization approach to FDI theory, including Dunning (1981, 1988), Hymer (1976) and Kindleberger (1969), have argued that the possession of a firm-specific monopolistic advantage is a necessary precondition for foreign direct investment activity; the source of such an advantage may lie in the possession of superior technology, know-how, information or access to...

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Gale Document Number: GALE|A148905892