Foreign Direct Investment in State Owned Enterprises

Abstract

We analyze determinants of foreign direct investment (FDI) in non-competitive industries. We develop a micro-level FDI determination model that allows for nonzero mark-up, and estimate it using the administrative FDI recipient records and annual financial statement data for Korean state owned enterprises (SOE). Using SOEs as our research objects can rule out the endogeneities of mark-up, firm ownership structure and the associated vertical or horizontal incentive FDI. This yields a consistent estimation of the effect of mark-up and other productivity-related factors on FDI. From the empirical analysis, we find that FDI is more likely to flow into firms with large-scale physical capital and output, and a positive mark-up, and the effect is the inverse of the number of workers in the firms, which implies that FDI might not cause productivity spillover effect in non-competitive industries.