Along with the growth of Koreas outward FDI, the concern for its effect on trade and domestic economic activities, such as investment and employment has also grown. In particular, concerns are growing over the so-called hollowing-out effect and substitution effect. Hollowing-out and substitution effects imply that greater outward FDI crowds out domestic activities, especially employment, and that outward FDI may substitute home exports.

Using recent dataset of Korean firms, I find that firm FDI has a positive effect on trade and domestic economic activities that include domestic investment and production, and employment.

When dividing firms on the basis of their size, I find that small and medium-sized firms experience the negative effects of FDI on their employment, while most domestic economic activities are positively associated with firms FDI.
Taking into account that most of Korean FDI related restrictions are lifted and that firms make their own FDI decisions, we need to turn our attention to the ex-post FDI activities, especially on the effects of FDI spillovers on the connectivity between internal firm factors.