The Impact of Free Trade Agreements on Foreign Direct Investment: The Case of Korea

This paper aims to empirically identify the effects of FTAs on outward and inward FDIs in Korea. Considering the income differences between Korea and its FTA partners, we hypothesize that the FTAs have a positive effect on outward FDI to developing countries and inward FDI from developed countries. An underlying source of the hypothesis is the Knowledge-Capital model, addressing the positive (negative) relationship between trade costs and horizontal (vertical) FDI. We test for the hypothesis using data on Korea's FTAs and FDI over the period 2000-2010. We find that our empirical results in general support the hypothesis, and additionally, there exist a promotion effect of FTA led by fostering FDI-friendly economic environment. [PUBLICATION ABSTRACT]