The Dynamic Relationships between Foreign Direct Investment and Trade by Regional Groups: The Evidence from Korea

This paper investigates the dynamic relationships between FDI and trade by regional groups. Despite many studies regarding FDI, there are few researches to compare the relationships between outward FDI and export with that between inward FDI and import in one country. In this paper, we draw the effects of outward FDI on exports by 5 regional groups – Asia, America, Europe, Oceania and Africa – and inward FDI on imports by 3 regional groups – Asia, America and Europe – in Korea through the time series data analyses. First, we identify the cointegration relations between outward FDI and exports in all groups. On the other hand, there are no cointegration relations between inward FDI and imports in any regional groups. This means that there are the long run equilibrium relations between outward FDI and exports in Korea. Second, the forecast impacts of outward FDI on exports are permanent and positive significantly. Third, the forecast effects of variation of outward FDI toward the region with the high level of active trade on the change of exports can be greater than that with the low level of trade. Fourth, inward FDI and import is complementary overall in the short run although there are no cointegration relations between the two in all regional groups. Thus, we suggest that outward FDI and export is dynamically complementary in the long and short run while inward FDI and import don’t have the long run stable equilibrium relations, but complementary relationships in the short run in Korea.