Because developing countries typically lack accumulated capital and technological capabilities, development economists have long argued that these resources can be most effectively acquired through foreign direct investment (FDI). South Korea, however, pursued a markedly different strategy. Rather than relying on FDI as a primary source of capital and technology, it fostered the growth of domestic firms and limited the role of foreign investors in key sectors. Our research investigates the mechanisms through which this discrimination against FDI contributed to the emergence of indigenous firms and, ultimately, to South Korea’s industrial transformation.
In particular, we focus on how domestic firms accumulated economic rents during the early stages of industrialization. We argue that government policies deliberately favored local firms over foreign investors, enabling domestic enterprises to capture rents and reinvest them in capability building. This process not only strengthened the competitiveness of Korean firms in export markets but also broadened the government's tax base, creating a mutually reinforcing cycle of industrial growth and fiscal capacity.
Why and How Was FDI Discouraged in Korea?
(Work in Progress)
Because developing countries typically lack accumulated capital and technological capabilities, development economists have long argued that these resources can be most effectively acquired through foreign direct investment (FDI). South Korea, however, pursued a markedly different strategy. Rather than relying on FDI as a primary source of capital and technology, it fostered the growth of domestic firms and limited the role of foreign investors in key sectors. Our research investigates the mechanisms through which this discrimination against FDI contributed to the emergence of indigenous firms and, ultimately, to South Korea’s industrial transformation.
In particular, we focus on how domestic firms accumulated economic rents during the early stages of industrialization. We argue that government policies deliberately favored local firms over foreign investors, enabling domestic enterprises to capture rents and reinvest them in capability building. This process not only strengthened the competitiveness of Korean firms in export markets but also broadened the government's tax base, creating a mutually reinforcing cycle of industrial growth and fiscal capacity.