Market Access or Efficient Production: Why Did South Korean Outward Direct Investment Persist After the Crisis?
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Market Access or Efficient Production: Why Did South Korean Outward Direct Investment Persist After the Crisis? Matthew S. Winters Department of Political Science, Columbia University, 420 West 118th Street, New York, NY 10027, USA. E-mail: [email protected]
After the 1997–1998 Asian Financial Crisis, South Korean outward direct investment (ODI) remained at approximately the same level as before the crisis. What explains this remarkable persistence of outward investment, concurrent with a seven-point drop in GDP? After considering contemporary theories of foreign direct investment, this article posits that there are multiple explanations, which are contingent on the size of the firm involved in ODI. For the largest South Korean conglomerates — the five biggest chaebo˘l — foreign investment was a way of opening markets to compensate for declining sales at home, whereas other firms used foreign investment to take advantage of production efficiencies made possible by the financial crisis’s impact in other countries. In relation to South Korea, China represented an investment destination that could absorb both types of investment. The empirical evidence is suggestive, but not conclusive. Asian Business & Management (2007) 6, 265–284. doi:10.1057/palgrave.abm.9200224 Keywords: Asian Financial Crisis; South Korea; foreign direct investment; market access
Introduction In the wake of the 1997–1998 Asian Financial Crisis, a United Nations Conference on Trade and Development (UNCTAD) report said ‘All in all, FDI outflows from developing Asia in general, and from the five most affected countries in particular, can be expected to remain at low levels’. With regard to South Korea, it continued: ‘Korean firms expect to invest less in virtually every one of their major investment destinations and y reductions in FDI are likely to be particularly large in the four other crisis economies’ (United Nations Conference on Trade and Development, 1998: 42–44). Given the economic devastation caused by the Asian Financial Crisis, this prediction was not very surprising. The surprise is that South Korean firms did not adhere to their own Received 4 August 2005; revised 4 April 2006; accepted 3 May 2006
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claims in the UNCTAD report, but rather continued to invest in foreign enterprises at a steady rate in the period following the crisis. Given that an economic slump in the domestic economy is a reliable reason to expect that a country’s outgoing investment flows will decline, this paper explores why South Korea experienced instead a remarkably continuous post-crisis trend in outward direct investment (ODI). On 2 July 1997, after several months of defending its currency peg by spending billions of dollars, Thailand decided to let the baht float on international currency markets; it lost 15 per cent of its value on that day alone. Nine days later, as investors lost confidence in other Asian economies, the currency crisis hit the Philippines and Indonesia. A few days later, Malays
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