The Effects of Inward FDI on the Skill Premium in Korea

Abstract

Foreign firms now account for about 20 percent of total exports and 6 percent of employment in Korea. Given that growing inequality is one of the defining economic trends of the last three decades, there would be a link between inward FDI and growing inequality. It is in particular necessary to examine industries of which characteristics inward FDI tends to most affect relative employment and wage rates for high skill workers. Thereby, various incentives by policymakers to attract inward FDI should be evaluated and carefully implemented with consideration to its effects on the labor market. Based on the evidence from inward FDI and the labor market in Korea, I argue that the increase in FDI inflow affects the labor market only in the case of certain industries, and that one primary characteristic of those industries would be the large volume of initial FDI inflow. I divided the industries into two subgroups, one with a large initial volume of FDI inflow (Group A) and the other with a small initial volume of FDI inflow (Group B). Group A consists of industries such as wholesale/retail, finance/insurance, electricity/electronics, food/accommodation, chemicals, transport machines, machine/equipment, food, and business services. These industries can be characterized by a large volume of initial FDI inflow. For instance, the wholesale/retail industry received USD 340 million, the largest FDI inflow between 1993 and 1995. Meanwhile, the recreation industry in Group B received only USD 5 million, the smallest amount, during the same period.