Do FDI Firms Benefit from Related Party Transactions with Foreign Affiliates? Evidence from Korea

Abstract

We extend the existing literature on related party transactions from a domestic to an international dimension and uncover new evidence of resource transfer by FDI firms to their foreign affiliates through overseas related party transactions. Employing uniquely-constructed data of Korean firms during 2005-2010 and correcting for the endogeneity issue, we find non-positive valuation effects of such transactions for the whole sample period. Further analyses of subsamples classified by firm attributes, however, reveal that strong negative valuation effects are associated with related party transactions of FDI firms which are in the high-tech industry and whose foreign affiliates are in the emerging countries during the post-global financial crisis period. These results indicate that following the crisis, FDI firms use related party transactions as a means of transferring their resources in order to support their financially-distressed foreign affiliates in the emerging countries. We find little evidence that FDI firms use related party transactions to withdraw investment returns of their foreign affiliates back to the home country for the benefits of investing firms.