Reduction of Regulatory Restrictiveness in Services Sectors and Its Impact on FDI Inflows

The reduction of regulatory restrictiveness in services sectors in Korea using recent free trade agreements in effect and its impact on FDI inflows are investigated. The research outcomes provide three main findings as follows. First, FDI inflows of Korea closely follow the trend of global FDI flows. FDI inflows to Korea from developed economies have appeared dominant; FDI inflows from the U.S., Japan and European economies account for the major share. The increase of FDI inflows from China is significant. Moreover, the FDI inflow shares of capital-intensive industries such as electronic, chemical, and machinery in manufacturing and financial, distribution, and business in services are also large. The fact that FDI inflows in services have become two times larger than those in manufacturing since early 2000's is noteworthy. In the meantime, while FDI flows in forms of M&A in most developed economies, M&As as a form of FDI are still less prevalent in Korea. Second, Korea's services trade restrictiveness indices provided by the OECD are updated and recalculated reflecting the FTAs recently put in force. Further liberalization through recent FTAs in force is identified in legal, accounting and telecommunications services. Third, the impact of services liberalization on FDI inflows in Korea is analyzed. As suggested in theoretical predictions, further services liberalization through FTAs plays a positive role in FDI inflows in Korea. Such outcomes are derived not only in services sectors but in manufacturing sectors as well.