The determinants of foreign divestment in South Korea
| DOI | https://doi.org/10.1108/JCEFTS-03-2022-0018 |
| Published date | 24 November 2022 |
| Date | 24 November 2022 |
| Pages | 119-135 |
| Subject Matter | Economics,International economics |
| Author | Seon Ju Lee,Sung Jin Kang |
The determinants of foreign
divestment in South Korea
Seon Ju Lee and Sung Jin Kang
Department of Economics, Korea University –Seoul Campus,
Seoul, Republic of Korea
Abstract
Purpose –This paper aims to enhance empirical research on foreign divestment and international
relocation by multinational firms are still limited and understudied, although these issues have been a
frequentphenomenon and carry important economic implications.
Design/methodology/approach –The paper investigates the trends of foreign divestment in South
Korea and examines firm- andhost country-level determinants in total, manufactureand service sectors from
2010 to 2019.
Findings –Using probit modelanalysis, the main findings are first, among the firm-level factors, sales revenue
and parent firm dummy are shown as negative and significant determinants of foreign divestment especially in
manufacturing sector. Second, among the country-level factors, gross domestic product growth rate and
regulatory quality that measures perceptions of sound policies that promote private sector development are
shown negative and significant determinants of foreign divestment. On the other hand, relationship between t he
environmental policy stringencyand foreign divestment is shown positive and significant.
Originality/value –The results suggest that these nonfirm-specific characteristics are also important
factors in firmdecision to divest from the host country.
Keywords Foreign divestment, FDI, South Korea, Probit model
Paper type Research paper
Introduction
Numerous literature on the foreign directinvestment (FDI) exist, and although the impact of
FDI is still a debatable issue, there is a general understanding that FDI contributes
positively to economic growth in the host country to some extent (Khaing, 2016;Kang and
Lee, 2021). Thereafter, a number of empirical studies suggest countries to implement FDI
promotion policies to establish investment friendly environment and attract FDI to the
country (Kang and Yoon, 2013;Liang et al., 2021).On the other hand, literatures on foreign
divestment or international relocation by multinational corporations (MNCs) are much less
developed and understudied possibly due to its negative perception and difficulty in data
collection (McDermott, 2010;Brown and Panibratov, 2016). However, these issues are as
important as other investmentstudies and carry important economic implications.
Foreign divestmenthas been a frequent phenomenon occurring in various forms, suchas
business closure, split-up, stock sales, spin-off and liquidation and due to various strategic
and opportunistic reasons.Belderbos and Zou (2006) state average annual divestment rate of
Japanese electronics manufacturing affiliates in nine East Asian countries is 3% during
1995–2003. Borga et al. (2020) find 20% of foreign-owned affiliates of MNCs of organisation for
economic co-operation and development (OECD) and G20 countries are divested between 2007
and 2014. Lim (2020) shows the number of foreign divested firms increased thrice in 2019
JEL classification –C33, F21, O11
Foreign
divestment in
South Korea
119
Journalof Chinese Economic and
ForeignTrade Studies
Vol.16 No. 2, 2023
pp. 119-135
© Emerald Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-03-2022-0018
The current issue and full text archive of this journal is available on Emerald Insight at:
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compared to 2018 in South Korea[1]. However, typology problem arises, in which studies differ
in interpreting and perceiving foreign divestment. This paper definesdivestmentasan
adjustment in the share structure of the foreign invested firmfromaforeigntoadomestic
owner, where the foreign share ratio reduces below 10%. In other words, when the firm has a
foreign share ratio over 10%, it is defined as the foreign invested firm, and when the share ratio
of the foreign invested firm decreases below 10%, it is classified as divestment.
Meanwhile, albeit the literature on foreign divestment is sparse, existing studies on the
determinants of foreign divestments are mostly focused on firm-specific factors without
considering home orhost country-level factors that could also significantlyinfluence foreign
divestment. Moreover, due to data collection issues, most of the empirical studies are
conducted on selected countries or specific industry. Therefore, this paper expands on the
existing literature by examining both firm- and country-level drivers of foreign divestment
in total, manufacture and service sectors of SouthKorea between 2010 and 2019. The paper
provides empirical evidence on the relative importance of nonfirm-specific determinants of
foreign divestmentand embraces practical implications on FDI retention.
The rest of the paper is organized as follows. The paper first thoroughlyinvestigates the
trend of foreign divestment and investmentin South Korea, also covering data and typology
problems. Second, relevant literatureon the determinants of foreign divestment is reviewed.
Then, data collection and empirical model specification is presented. Thereafter, the paper
provides empiricalresults and concludes with possible policy implications.
Foreign divestment trends in South Korea
Commonly referred to as one of the “East Asian Economic Tigers,”South Korea has
experienced remarkable economic growth between the early 1960s and 1990s with
aggressive export-driven policies (Kim, 1991;Nicolas et al.,2013). FDI related policy was
institutionalizedunder the Economic Planning Board since 1961, and FreeTrade Zones were
created in 1970s; however, it was after the financial crisis in 1997when South Korea started
to proactively establishinvestment friendly business environmentand attract FDI (Thurbon
and Weiss, 2006;Nicolas et al.,2013). Figure 1 shows the trends of FDI inflows and outflows
Figure 1.
Trends of FDI
inflows and outflows
in South Korea
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