Outward Foreign Direct Investment and Industry Structural Optimization: Analysis and Testing on Data of Republic of Korea

Abstract

This paper uses the data of Korea and analyzes its outward foreign direct investment and its domestic industry structural optimization. The Granger causality test results indicate that Korea’s outward FDI does help explain the changes of the proportion of Korea’s second industry and the tertiary industry, but couldn’t help explain the changes of the proportion of the first industry. The cointegration test results indicate that there are long term equilibrium relationship existing between Korea’s outward investment and its second and tertiary industry respectively. Vector Error Correction estimates indicates that the short term correction will be conducted with a stable speed to draw back any diversion of the cointegration equilibrium. This shows that there is a long term relationship between Korea’s outward FDI and its industrial structural optimization, and there is a correction mechanism functioning well in the process. From the analysis, it is clear that Chinese government should greatly encourage its enterprises’ outward investment and thus optimize the domestic industry.