Korean Firms’ Chinese Sequential Investmentsand Strategic Decision Making

Korean firms are motivated to take advantage of China’s locational advantage, frequently described as cheap labor. Actually, there are two entry models for FDI: single investment and joint venture. Chinese government had provided a tax incentive policy to seek out joint venture opportunities for the purpose of acquiring foreign firms’ advanced technologies and know-how’s. An eye-catching feature amongst Korean firms’ Chinese FDI’s is that FDI’s have been sequentially implemented. Alternatively stated, a few Korean firms have been pursuing follow-up investments subsequent to initial investments. Such sequential investments cause industry hollowing-out effect in Korea. Accordingly, high unemployment rate is an unavoidable social phenomenon. Intuitively, large corporations are more likely to be able to pursue sequential investments as they have larger internal resources compared to small and medium size enterprises. This points out parent’s size effect. However, in fact, Korean firms’ Chinese sequential investments have been rather pursued more actively by small and medium size enterprises. We tackles two main questions. First, under which conditions, Korean firms become to prefer a single investment strategy than formulating joint ventures. Second, how small and medium size enterprises can pursue sequential investments is studied. According to main findings, Korean firms are motivated to implement single FDI’s even when they can collaborate with trustworthy partners as long as adverse selection problem is embedded. This suggests that local information is a prerequisite to joint venture as adverse selection can always occur. Considering the fact that small and medium Korean firms pursue single investments, they need more local information to choose joint ventures. Second, foreign market know-how plays a more important role in a decision making for sequential investment, and thus even small and medium size firms can implement sequential investments although their parents’ supports are smaller than large enterprises.’ Thus, the sustainable growth of Korea’s small and medium firms can be secured through sequential investments by accumulation market experiences in the long-run.