This paper seeks to investigate the role of foreign direct investment (FDI) in Korea focusing on productivity spillover effects in manufacturing and implications for the current currency crisis. Estimation results of a random-effects model with instruments using the annual data of six subsectors in manufacturing industries reveal that foreign direct investment had a positive but statistically insignificant effect on the productivity of Korean manufacturing during 1970-1996. The paper also examines whether or not FDI has the role of preventing bail-out loans in a currency crisis. The probit estimation results using cross section data of 90 developing countries show that the incidence of bail-out loans from the IMF during 1994-1997 is negatively associated with FDI stock relative to total GDP. The probit analysis using pooled data of 84 countries in 22 years of 1973-1994 also reveals that FDI inflow relative to total debt is negatively associated with both currency crashes and the IMF rescue loans.

Abstract

I. Introduction

II. Historical Overview of Foreign Direct Investment Policy in Korea

III. Trends of Foreign Direct Investment in Korea

IV. Effect of Foreign Direct Investment in Korea on Productivity

V. The Role of Foreign Direct Investment in a Currency Crisis: Is FDI a safety
net for the Crisis?

VI. Concluding Remarks

References

Appendix Tables