Anticipation or Risk Aversion?: The Effects of the EU Enlargement on Korean Trade and FDI Activities in Central and Eastern Europe

By Jun, Jong-Kun; Hyun, Jae Hoon | Journal of East European Management Studies, October 1, 2014 | Go to article overview

Anticipation or Risk Aversion?: The Effects of the EU Enlargement on Korean Trade and FDI Activities in Central and Eastern Europe


Jun, Jong-Kun, Hyun, Jae Hoon, Journal of East European Management Studies


(ProQuest: ... denotes formulae omitted.)

1. Introduction

The development of regionalism in Europe has posed threats as well as opportunities for firms from foreign countries. They have been required to tune their strategies in order to access the European markets and sustain trade flows, and in many cases, have been compelled to produce locally in the substitution of trade (Hirsh/Almor 1995). In particular, the trade and investment environment in Europe has been transformed dramatically since 2004, when the 6 CEECs (Central and Eastern European countries) joined the EU. Political impetus provoked rapid development of the business environment in various dimensions, such as liberalized trade regime, extensive privatization and improved legal and regulatory framework as well as opportunities to test the applicability of existing theories in international business and management (Meyer and Peng, 2005; Alguacil et al, 2008). The expected impact of enlargement does not come at the expense of external countries and is mutually beneficial for insiders and third countries alike and the sustainable development of foreign firms in Europe has been proposed to be dependent on the strategic alignment of external firms (Barrell/ Holland 2000; Pelkman/Casey 2003).

This study evaluates the transition of FDI and the export of Korean firms to newly joined member states in search of the effects of the enlargement of the EU in 2004 on the business activities of firms from external countries. Since the 1990s, Korean FDI headed towards developing countries for labor-intensive sectors, and the automobile and electronics sectors targeted U.S. and European countries to evade tariff and non-tariff barriers (Sachwald 2001). In particular, FDI flows to developed countries are unlikely to be explained by cost dimensions or firm-specific advantages (Freund/Simeon 2000). This study focuses on this aspect, and considers regional economic integration as a significant factor that accelerates complementarities between FDI and trade. Previous studies related to this subject have focused principally on the mutual FDI flows between and among regions, and only few studies have been conducted regarding the effects of enlargement on trade and investment, particularly from external countries (Pelkmans/Casey 2003).

By examining the various dimensions of trade and inward FDI properties before and after the enlargement from Korean companies, we hope to address how firms from external countries recognized and reacted to the enlargement of the EU. The objective of this study is embodied in the following research questions. First, how have trade and investment flows have changed before and after the enlargement and did the enlargement contribute as an effective variable to those changes? Did it show different patterns of capital flows between the 15 member states of CEECs and the EU? Second, has trade been substituted by FDI inflows or do they have complementary relations? Last but not least, what are the specific properties of Korean FDI before and after the enlargement by number, amount, time of FDI and the size of investing firms? An elaborate analysis, as a component of this research endeavor, may provide a thorough understanding of how regional integration and territorial enlargement would affect the strategic decisions of different types of firms from outside of an integrated region.

This study employs investment data compiled between 2000 and 2007 in order to assess any significant transitions in trade and FDI inflows prior to and after the enlargement event. In particular, the patterns and transition of Korean trade and FDI are compared among different groups of Korean firms divided by the their size in order to identify the particular character of Korean FDIs and how the enlargement is interpreted and responds differently according to the conditions of different groups of firms. The scope of this study extends to the unilateral trade and FDI flows from Korea to certain CEECs and major western European countries. …

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