Foreign Direct Investment by the Republic of Korea in the People's Republic of China

By Shin, Mannsoo; Mirza, Hafiz et al. | Asian Development Review, July 1, 2009 | Go to article overview

Foreign Direct Investment by the Republic of Korea in the People's Republic of China


Shin, Mannsoo, Mirza, Hafiz, Kim, Kyu-Nam, Asian Development Review


The main purpose of this paper is to investigate the patterns and performance of outward foreign direct investment from the Republic of Korea to the People's Republic of China using five performance measures of the subsidiaries and four explanatory variables. The explanatory variables have close correlations with the export to sales ratio, the local management ratio, and the local procurement ratio (three performance measures selected to reflect subsidiaries' contribution to the host country). However, no clear relationship was found between explanatory variables and financial performance measures such as operating profit on sales and net profit on sales. In terms of strength of the relationship, the number of years a subsidiary has been in operation was found to have a consistently positive and significant relationship with the export to sales ratios in the three manufacturing industries examined. In light of the major findings, an important aspect is that since the characteristics of subsidiaries may affect performance in different (sometimes opposite) ways, policymakers should establish and implement foreign direct investment policies in a differentiated and targeted manner.

I. INTRODUCTION

This paper discusses the patterns and performance of outward foreign direct investment (FDI) by the Republic of Korea (henceforth Korea) in the People's Republic of China (PRC). It also analyzes the FDI strategies of Korean multinational corporations (MNCs) in the PRC. The findings presented are highlighted by comparing major host country groups. The discussion on the performance of subsidiaries in the PRC focuses on three manufacturing industries: electronics, automobiles, and garments and textiles.

The paper has two main objectives. The first is to analyze and understand the recent characteristics and patterns of Korean outward FDI. The second is to examine the relationship between Korean outward FDI and its performance in the PRC. Specifically, it attempts to empirically analyze the operational performance of manufacturing subsidiaries. It is hoped that the results will provide insights on the characteristics of Korean outward FDI, as well as shed some light on the internationalization and performance of MNCs from developing economies in general.

There has been a growing interest in the rise of multinationals from the South, including Korea. These new multinationals- especially those based in Asian economies- are now significant international players (Business Week 2006). They are participating in industries ranging from the labor-intensive, such as garments and textiles, to those that are capital- and knowledge-intensive, such as electronics, automobiles, shipbuilding, aircraft manufacturing, software programming, telecommunications, and pharmaceuticals (UNCTAD 2006, 2007, 2008). Some of those newly emerging MNCs are direct competitors to American, European, and Japanese MNCs. Their home economies have diversified from a few fast-growing export-oriented ones such as Hong Kong, China; Korea; Taipei,China; and Singapore to newly emerging Brazil, Russia, India, and PRC. This trend has been observed since the 1970s by many scholars including Lecraw (1977), WeUs (1983), and LaIl (1983), but accelerated after 1990 (UNCTAD 2006). Agtmael (2007) has also argued that, accounting for about 10 percent of Fortune magazine's top 500 global MNCs, these newly emerging MNCs are widely recognized as leaders in their industry on a global basis, and even benchmarked against the biggest and best in the world. Some new MNCs are more profitable than their counterparts in the United States (US), Europe, and Japan and, at least initially, have weathered the recent financial and economic crisis better (UNCTAD 2009).

Due to the above developments, the distinction between MNCs from developing and developed countries has blurred. Some MNCs from developing countries such as Samsung Electronics (Korea), Tata Group (India), Infosys Technologies (India), Lenovo Group (PRC), Embraer (Brazil), Cemex (Mexico), Gazprom (Russia), Orascom Telecom (Egypt), and Techtronic Industries (Hong Kong, China) are already playing a significant role in the field of international business. …

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