Discussion Papers

No.872 (Asymmetric) Tariff driven Foreign Direct Investment: Evidence from Korean firm-level data

by Ju Hyun PYUN

October 2022


This study examines the effects of identified industry tariff shocks on firms’ outward foreign direct investment (FDI) into their destinations. Using rich Korean firm-level data for 2010–2018, the study decomposes multinational enterprises’ (MNEs’) FDI flows to examine the number of subsidiaries (extensive margin) and average FDI for individual subsidiaries (intensive margin) in the destination. New evidence of tariff-driven FDI indicates that the tariff reduction shock (significant tariff decreases) lowers the number of existing subsidiaries, but does not significantly influence the average FDI volume for existing subsidiaries. In addition, more productive firms investing in developing countries lower the number of existing subsidiaries more in response to tariff decrease shocks, implying that productive MNEs reallocate resources into selective core subsidiaries when a significant tariff decrease occurs.

Keywords: FDI, Multinational enterprises, Tariff asymmetry, Extensive margin, Intensive margin, Productivity, Korean firm-level data

JEL classification: F13, F14

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