The Effects of FTAs on Intra-Firm Trade of Korean Firms (in Korean)

The spread of Free Trade Agreements (FTAs) has been reshaping global trade environment. Under these changing economic circumstances, Korean firms have been trying to promote their international competitiveness by expanding export, establishing foreign subsidiaries, and strengthening joint investment. This study aims at investigating the effects of FTAs on the role of local subsidiaries of Korean firms that already made inroads into the FTA partner country by analyzing the effects of FTAs on intra-firm trade between Korean firms and their foreign subsidiaries using firm-level data on FDI. The results show that FTAs have been contributing to the expansion of sales of local subsidiaries in both Korea and third countries, although they have not significantly affected the expansion of sales of Korean firms to their foreign subsidiaries. Particularly in the manufacturing industry, FTAs have significant positive effects on the sales in Korea of local subsidiaries in addition to the sales in third countries. After analysing data by ownership, we find that when Korean firms have enough ownership to control their local subsidiaries overseas, FTAs have significant positive effects on the sales of local subsidiaries in both Korea and third countries. The results suggest that from the perspective of intra-firm trade, Korean firms have utilized their existing local subsidiaries as a platform for exports to a third country or a way to import products such as raw materials or intermediary goods after FTAs went into effect. The results also show that an increase in the sales of local subsidiaries in third countries, in particular, can have indirect positive effects on Korean firms through consolidated financial statements.