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Did Japanese Direct Investment in Korea Suppress Indigenous Industrialization in the 1930s?: Evidence from county-level factory entry patterns

Discussion Papers

No.450

by Yutaka Arimoto and Changmin Lee
March 2014

ABSTRACT

Foreign direct investment (FDI) can deliver both positive and negative spillovers to the local economy. Negative effects such as crowding-out or entry-barrier effects might outweigh the positive ones when the technological gap between foreign and local firms is significant. This paper examines the impact of Japanese direct investment into Korea under colonization in the 1930s on the entry of Korean-owned factories. By using the census of manufacturing factories in Korea, we exploit variations in the share of Japanese factories and their entry rates across counties within the same subsectors. We find that within a subsector, entry rates of Korean factories were higher in counties with higher presence and entry of Japanese factories. Positive correlations are also found between subsectors. The results imply that Japanese direct investment did not suppress the entry of Korean factories and that FDI could exert positive entry spillovers on indigenous firms, even at a very early stage of industrialization.

Keywords: foreign direct investment; entry spillovers; Korean industrialization
JEL classification: F21, F23, M13, N65, O14

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