Empirical research into the relationship between intra-industry, intra-firm trade and foreign direct investment : the case of South Korea

This work sets out to empirically test what kind of relationship, if any, exists between three variables which are playing an ever-important role in international trade theory and patterns. These are intra-industry trade (IIT), foreign direct investment (FDI) and intrafirm trade (IFT). The three variables are detailed and examined in the case of South Korean trade and investment patterns with both the United States (US) and the European Union (EU-27) over an 18 year period from 1991 to 2008. The pattern of intra-industry trade is examined using the Grubel and Lloyd index of intraindustry trade and Brülhart ‗A‘ index of marginal intra-industry trade calculated from export and import data at the SITC 5-digit level of disaggregation. A sample population of industries at the 5-digit level are presented; and an empirical analysis of the South Korean US patterns finds a positive relationship between both IIT and MIIT and time. Data on investment between the trading blocs at the industry levels shows increasing values of FDI, particularly post the IMF liberalisation of the Korean investment regime. Empirical analysis on South Korean US data reveals that this relationship is strongest in the „other manufacturing‟, „chemical and allied products‟ and „transport equipment‟ sectors. Export and import data between US parents and their Korean affiliates, and US affiliates of Korean parent companies, is used to examine the pattern of intra-firm trade which is found to also display a positive relationship with time. Hypothesis tests using US-South Korean data reveals that for every one unit increase in the value of FDI in an industry, the level of IIT in that industry increases by 0.6 units. Similarly as the level of FDI in an industry increases by one unit in a particular industry, the level of IFT in that industry increases by 1.285 units.The findings of this study open the door for further theoretical developments in the area of international trade and foreign direct investment analysis, particularly in the current global environment where new patterns of international trade and investment are taking shape.