International treaties and foreign direct investment: an empirical analysis of effects of bilateral investment treaties on South Korea's FDI

Abstract

South Korea has been proactive in concluding bilateral investment treaties to promote both inward and outward investment. While South Korea had concluded 95 BITs as of 2017, there have been very few empirical works on whether BITs have positive effects on South Korea’s FDI flows. This paper aims to empirically examine the effects of BITs between South Korea and treaty partners on South Korea’s outward FDI into them. The results show that BITs—either signed or entered in force—between South Korea and host countries have positive and statistically significant effects on Korea’s direct investment into these countries. Moreover, it turns out that South Korea FDI flows into developing countries are positively affected by BITs which is statistically significant while those into developed countries are not. This paper positively contributes to existing literature by deepening understanding of the effects of international investment treaties.

Keywords:

• Bilateral investment treaty
• BIT
• international investment agreements
• foreign direct investment
• FDI
• South Korea

Disclosure statement

No potential conflict of interest was reported by the authors.

Table

Notes

1 UNCTAD, World Investment Reports, http://unctad.org/en/pages/DIAE/World%20Investment%20Report/WIR-Series.aspx

2 UNCATD, Investment Policy Hub, International Investment Agreements Navigator, http://investmentpolicyhub.unctad.org/IIA

3 UNCATD, Investment Policy Hub, International Investment Agreements Navigator, http://investmentpolicyhub.unctad.org/IIA

4 The trilateral BIT among China, Japan, and South Korea is not included in this calculation.

5 12,475 USD is the threshold for World Bank’s classification by income for high income group, usually taken as developed countries.

6 This paper mainly utilizes UNCTAD data while this Figure 3 uses data collected from the Export-Import Bank which includes a longer period for Korea's ODI flows.

7 The six indicators are Voice and Accountability; Political Stability and Absence of Violence; Government Effectiveness; Regulatory Quality; Rule of Law; and Control of Corruption.

8 GDP is often considered as another proxy variable for market size, instead of population size. These two proxies are substitutable for each other, indicating similar results in analysis (Neumayer and Spess 2005).

9 As we do not incorporate instrumental variables in the model, we cannot try direct tests for endogeneity. Instead, we use the fixed effect estimation to get rid of endogeneity which comes from time invariant unobservables although we cannot address the endogeneity problem from time variant unobservables.

10 For instance, heteroscedasticity tests show most of our models violate homoscedasticity assumption. Therefore, we report the robust standard errors as in previous studies (Neumayer and Spess 2005; Büthe and Milner 2009). Also, tests for AR(1) serial correlation turns out that most of our models do not show significant serial correlations. The Phillips-Perron (PP) unit root tests show that most variables including the dependent variable are stationary.

Additional information

Funding

This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF-2018S1A3A2075117). It was also supported by the Ministry of Foreign Affairs of the Republic of Korea at an early stage.

Notes on contributors

Heon Joo Jung

Heon Joo Jung is Associate Professor in the Department of Public Administration at Yonsei University, South Korea. His research interests include international political economy; development cooperation, and Korean politics. He has recently published articles in Journal of International Development, Pacific Review, African and Asian Studies, Asian Survey, Pacific Focus, Korea Observer among others.

Eun Mi Kim

Eun Mi Kim is a Ph.D. student in the Department of Public Administration at Yonsei University, South Korea. Her research interests relate to international migration, migration policy in South Korea, and international development cooperation.