The Korean Economic Review
FDI Externalities and the Response of the Korean Stock Market
Sung Jin Kang (Korea University), Hongshik Lee (Korea University) and Joonhyung Lee (University of Memphis)Year 2013Vol. 29No. 1
Abstract
This paper addresses foreign direct investment (FDI) externalities using capital marketdata of Korean stock exchange and examines the effects of FDI in both manufacturing andservice sectors. The empirical findings in this paper are generally consistent with previousfindings based on the traditional productivity measure from Cobb-Douglas productionfunction: 1) the market value of listed stocks in the manufacturing sector responds to theHorizontal (intra-industry) effects in a positive way, and 2) the market value of listed stocksin the manufacturing sector benefits from foreign invested downstream manufacturingfirms, which is often called backward linkages (i.e. supplying manufacturing goods toforeign invested firms generates positive externalities to domestic manufacturing suppliers.The new finding of this paper is that the market value of listed stocks in the manufacturingsector benefits from foreign invested service firms through forward linkages (i.e. service fromforeign invested firms generates positive externalities to domestic manufacturing firms).