Three essays on the determinants of foreign direct investment - market size and wage, localization, official development assistance: Evidence from Korea

This dissertation consists of three essays. The overall theme is about the determinants of foreign direct investment (FDI) employing Korean data. The first essay is a study on the roles of traditional FDI determinants such as the market size and wage level of the host country based on MNE types. The second essay is the effect of localization-level on MNE activities by MNE types. The third essay is the effect of official development assistance (ODA) on FDI.The first essay examines the effects of the market size and wage level in the host country on MNE activities by MNE types. As the international economic environment has become more competitive over time, the firm's strategies for MNE types have become varied to meet the change, where the strategies are no longer the traditional vertical-type, and horizontal-type MNE. This study examines what factors play key roles in deciding the affiliate's location using Korean firm-level data based on MNE types proxied by affiliate sales pattern. The results of the estimation show that the market size and wage level in the host country are strongly associated with MNE activities according to MNE types. The affiliate production for local sales depends significantly on the market size of the host country, but not on the wage level of the host country. On the other hand, the affiliate activities for export-platform type MNE proxied by the affiliate export sales to third countries are significantly dependent on the host country's wage, but not on the market size of the host country. The affiliate export sales to home or third countries as a proxy for the affiliate activities of vertical/export-platform type MNE depend significantly on the wage in the host country, but not on the market size.The second essay investigates how the localization-level factors affect the MNE activities proxied by the affiliate sales pattern according to the MNE types using Korean firm-level panel data. As expected, the affiliate's local sale as a proxy for a local-market-targeted type MNE is more closely related with localization-level factors rather than the affiliate's export home or to third countries as a proxy for a not local-market-targeted type. The effect of local sales ratio on MNE activities is positive and statistically significant for the local-market-targeted type MNE whilst it is negative and statistically significant for the not local-market-targeted type MNE. The affiliate's parent ownership is strongly negatively related with MNE activities for local-market-targeted type MNE while it shows a weak relationship with MNE activities for not local-market-targeted type MNE. On the other hand, the affiliate's tenure in the host country has a strongly positive relationship in both types. The local procurement ratio does not have a statistically significant relationship with MNE activities although the signs are expectedly positive in both types. It might be possible that the inputs are provided through parent firm's supplier network rather than local supplier network given the quality of the products.The third essay examines the relationship between official development assistance (ODA) and foreign private investment in the recipient countries. While some previous research uses the data of DAC (development assistance committee) member countries in the OECD, this paper employs the data of a non-DAC member country (Korea). The panel data set with 17 years and 150 countries used in this study enables me to employ a variety of methods to investigate the FDI-ODA causal nexus. Results from random-effects and fixed-effects models show that total net ODA of the recipient countries is closely associated with FDI from Korea. In addition, in the donor-recipient country FDI-ODA relationship, FDI from Korea strongly depends on ODA from Korea. On the other hand, the results show that the governance of recipient countries does not affect the role of ODA in attracting FDI.