Trade and Foreign Direct Investment Patterns in the Republic of Korea in the Aftermath of the 1997 Asian Financial Crisis

This chapter shows that the Republic of Korea has experienced significant change in both trade and foreign direct Investment (FDI) flows since the 1997 Asian financial crisis. The analysis indicates that a rapid increase in exports at the onset of the crisis helped to improve foreign reserves of the Republic of Korea and also helped the economy to recover from severe recession. Despite the crisis, the importance of the Chinese market has steadily increased to the point where it is the most important export market for the Republic of Korea, largely at the expense of the Association of Southeast Asian Nations (ASEAN) market. The crisis also had a significant impact on FDI inflows, both in terms of source country and host industry. FDI increased sharply following the crisis, and this rapid increase was largely due to higher United States and European Union investment in the service sector, which is consistent with the wealth effect hypothesis on FDI flows. Meanwhile, Japanese FDI decreased, resulting in a decline in FDI in the manufacturing sector. However, the expected spillover effects of FDI are debatable, due to largely to a shape increase in mergers and acquisitions, and FDI dried up in technology-intensive manufacturing industry. In contrast, the Republic of Korea's outward direct investment seemed to be little influenced by the financial crisis, although a further study of the implications of the crisis for the Republic of Korea's outward direct investment in developing countries, including the traditionally popular Asian region, also needs to be investigated further.