Can Local Firms in Developing Countries Grow into Multinationals?: The Korean Case
Conventional development theory views foreign direct investment (FDI) as a key mechanism through which developing countries acquire capital, technology, and managerial expertise from advanced economies. South Korea presents a striking exception. Rather than relying on foreign multinational corporations, it fostered the growth of domestic firms and eventually produced multinational enterprises of its own.
This experience poses an important development puzzle: How did Korean firms acquire the comparative advantages required for overseas investment despite limited reliance on inward FDI? Our research explores the conditions under which firms in developing and middle-income countries can emerge as multinational enterprises and examines the role of government policies in supporting this transformation. By focusing on the determinants of outward FDI, we seek to better understand an alternative pathway to industrial upgrading and global competitiveness.
Technology Sourcing versus Comparative Advantage: Evidence from South Korea's Outward Foreign Direct Investment
Summary
Do the motives for foreign direct investment (FDI) vary according to the level of development of the host country? This paper examines this question using South Korea’s outward FDI, a particularly useful case because Korea occupies an intermediate position in the global technological hierarchy. While Korea is widely regarded as a developed economy in terms of income and infrastructure, it continues to exhibit characteristics of a middle-income economy in technological competitiveness, as reflected in its persistent deficit in the technology balance of payments.
Traditional FDI theories suggest that investments in developed countries are primarily driven by market-access motives, whereas investments in developing countries are motivated by the exploitation of comparative advantages. Much of the existing empirical literature has analyzed these motives within the framework of the knowledge-capital model. However, most studies focus on FDI originating from advanced economies and therefore mainly explain investment flows from technologically advanced countries to less advanced countries. As a result, they provide limited insight into FDI undertaken by firms from countries that have not yet reached the technological frontier.
For firms from such countries, investment in technologically advanced economies may serve a different purpose: acquiring knowledge and technological capabilities through technology sourcing. Due to data limitations, however, empirical evidence on this type of investment remains scarce.
Using an industry-country panel consisting of 22 Korean manufacturing industries and 25 host countries over the period 2012–2016, this study compares the determinants of Korean outward FDI in developed and developing countries. The results reveal substantial differences across host-country groups. In developing countries, affiliate sales increase in industry-country pairs consistent with Korea’s comparative advantage, supporting the traditional comparative-advantage motive. In developed countries, however, affiliate sales increase in industry-country pairs that are inconsistent with conventional comparative-advantage predictions.
Specifically, Korean firms tend to expand affiliate sales in developed countries when the host country is relatively abundant in skilled labor compared with the skill intensity of the parent industry. This pattern is difficult to reconcile with traditional comparative-advantage explanations but is consistent with a technology-sourcing motive, whereby firms invest in advanced economies to access and absorb technological knowledge from local firms.
This study contributes to the literature in two ways. First, it exploits Korea’s unique intermediate position in the global technology hierarchy to provide a systematic comparison of FDI motives across developed and developing host countries within a single-country framework. Second, it links investment patterns that contradict traditional comparative-advantage predictions to technology-sourcing behavior, thereby offering new evidence on the role of technological capability acquisition in outward FDI. (forthcoming, 2026)
Can Local Firms in Developing Countries Grow into Multinationals?: The Korean Case
Conventional development theory views foreign direct investment (FDI) as a key mechanism through which developing countries acquire capital, technology, and managerial expertise from advanced economies. South Korea presents a striking exception. Rather than relying on foreign multinational corporations, it fostered the growth of domestic firms and eventually produced multinational enterprises of its own.
This experience poses an important development puzzle: How did Korean firms acquire the comparative advantages required for overseas investment despite limited reliance on inward FDI? Our research explores the conditions under which firms in developing and middle-income countries can emerge as multinational enterprises and examines the role of government policies in supporting this transformation. By focusing on the determinants of outward FDI, we seek to better understand an alternative pathway to industrial upgrading and global competitiveness.
Technology Sourcing versus Comparative Advantage: Evidence from South Korea's Outward Foreign Direct Investment
Summary
Do the motives for foreign direct investment (FDI) vary according to the level of development of the host country? This paper examines this question using South Korea’s outward FDI, a particularly useful case because Korea occupies an intermediate position in the global technological hierarchy. While Korea is widely regarded as a developed economy in terms of income and infrastructure, it continues to exhibit characteristics of a middle-income economy in technological competitiveness, as reflected in its persistent deficit in the technology balance of payments.
Traditional FDI theories suggest that investments in developed countries are primarily driven by market-access motives, whereas investments in developing countries are motivated by the exploitation of comparative advantages. Much of the existing empirical literature has analyzed these motives within the framework of the knowledge-capital model. However, most studies focus on FDI originating from advanced economies and therefore mainly explain investment flows from technologically advanced countries to less advanced countries. As a result, they provide limited insight into FDI undertaken by firms from countries that have not yet reached the technological frontier.
For firms from such countries, investment in technologically advanced economies may serve a different purpose: acquiring knowledge and technological capabilities through technology sourcing. Due to data limitations, however, empirical evidence on this type of investment remains scarce.
Using an industry-country panel consisting of 22 Korean manufacturing industries and 25 host countries over the period 2012–2016, this study compares the determinants of Korean outward FDI in developed and developing countries. The results reveal substantial differences across host-country groups. In developing countries, affiliate sales increase in industry-country pairs consistent with Korea’s comparative advantage, supporting the traditional comparative-advantage motive. In developed countries, however, affiliate sales increase in industry-country pairs that are inconsistent with conventional comparative-advantage predictions.
Specifically, Korean firms tend to expand affiliate sales in developed countries when the host country is relatively abundant in skilled labor compared with the skill intensity of the parent industry. This pattern is difficult to reconcile with traditional comparative-advantage explanations but is consistent with a technology-sourcing motive, whereby firms invest in advanced economies to access and absorb technological knowledge from local firms.
This study contributes to the literature in two ways. First, it exploits Korea’s unique intermediate position in the global technology hierarchy to provide a systematic comparison of FDI motives across developed and developing host countries within a single-country framework. Second, it links investment patterns that contradict traditional comparative-advantage predictions to technology-sourcing behavior, thereby offering new evidence on the role of technological capability acquisition in outward FDI. (forthcoming, 2026)