Determinants of economic growth in Korea

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5.0 Introduction

This chapter is to conclude and summarize the study. It also attempts to give some of the policy implication, strategy and discuss some of the recommendations of this study for further researchers.

5.1 Conclusion

This paper attempts to identify the determinants of economic growth in Korea and to determine whether Foreign Direct Investment (FDI) attribute positively towards economic growth in Korea and long run relationship among the dependent variable (economic growth) and explanatory variable (capital stock, labor, FDI, export and real exchange rate) used the time series data from period 1976 until 2008 and the statistic test is Unit root test, Autoregressive Distributed Lag (ARDL) test and Error Correction Model (ECM).

The finding shows that all explanatory variables are insignificant to influence the economic growth in Korea, except the variable export is significant influence in the long run relationship to determine the economic growth in Korea. Besides this, all these explanatory variables capital stock, labor, FDI, export and real exchange rate have positive relationship with the dependent variable economic growth in Korea. Hence, the variable FDI is attributes positive towards economic growth in Korea.

The FDI play an important role to enhance the Korea economic growth. Yao and Wei (2007) state that the FDI is the mover of production efficiency to reduce the gap among the actual level of production and a steady state production frontier. In addition, FDI being entrenched with advanced technologies and knowledge to shifter the countries production frontier.

5.2 Recommendation and policy implications

In economy Korea, a rising trend of globalization and integration in the world economy which export and FDI inflow have play an important role in the economic growth process. To attractive more investor comes to invest in Korea, few policies necessary to perform by country policy maker. In this study, recommendations and policy implications has been made.

5.2.1 Globalization policy

The empirical result shows that the foreign direct investment is only positively influence to economic growth, but export is significant positively effect to the economic growth in Korea. This implies the policy maker in Korea have managed to use the globalization policy throughout foreign direct investment (FDI), international trade and international movements of labor force is an effort force moving economic growth. Even though Korea has become more incorporated in the world economy over the past decade, it still grades low in terms of import penetration, the stock of inward FDI relative to GDP and foreign workers as a share of the labor force. Several policy reforms would assist Korea make greater use of goods, services, capital and human resources from abroad by:

Reducing barriers to FDI, including foreign ownership restrictions in some sector.

Focusing on attracting FDI by improving the business and living environment rather than through special zone schemes.

Reducing import barriers, particularly in agriculture, through multilateral trade negotiations and WTO consistent regional trade agreements.

iv) Relaxing product market regulations and remarkably in services.

v) Easing controls on and facilitating the inflow of both low and high skilled worker.

Greater openness would result in lower prices for consumers and higher returns for shareholders. It is particularly important to encourage a more open stance in services, which is relatively more closed to international competition and characterized by a low level of productivity relative to manufacturing. Opening up the service sector, including social services, would increase overall efficiency and productivity, making these sectors an engine for growth. Given the links between foreign investment, trade and inflows of foreign workers, it is important to follow a widespread approach that would allow FDI inflows, imports and the number of foreign workers to increase from their current low levels, compared to other OECD countries. To increase the integration of Korea in the world economy, that is:

Table 5.2.1: The integration of Korea in the world economy

Eliminating obstacles to the inflows of foreign investment


Foster a foreign investment friendly environment by providing clear evidence of the gains from such investment.


Develop the M&A market, including cross-border M&A, by relaxing related regulations and easing negative public sentiment, while avoiding steps to protect domestic firms from cross-border M&As.


Further liberalize FDI restrictions, in particular by reducing or removing foreign ownership ceilings in sectors such as telecommunications, transport and electricity.


Reduce product regulation in market, especially in services, to encourage domestic and foreign investment and phase out the regulations on construction in the capital region.


Increase the predictability of the business environment by enhancing the transparency of tax and financial supervisory policies and removing the scope for discretionary interpretation, application and enforcement.


Resolve the issues in the labor market, including labor-management relations, which discourage FDI.


Extend the regulatory reforms introduced in the Free Economic Zones to improve the business and living conditions to other parts of the country and ensure a level playing field between domestic and foreign firms.


Streamline the various zones created to encourage FDI and provide equal treatment of manufacturing and service sectors.


Increase transparency by limiting the scope of special incentives, such as cash grants, for foreign firms.


Avoid preferential fiscal and regulatory treatment, which distorts the location decisions of foreign investors.


Do not allow the emphasis on special zones to distract the authorities from the fundamental objective of improving the business environment, which would promote domestic, as well as international and investment.


Review special zone schemes regularly to ensure that the economic benefits exceed the costs, while minimizing the deadweight and opportunity cost of such zones.

Improving the climate for international trade


Pursue the liberalization of trade barriers through multilateral trade negotiations to further reduce the level of trade restrictions, including tariff and non-tariff barriers.


Further harmonize Korean regulations and standards with international standards to reduce barriers to imports.

Sources: Organization for Economic Co-operation (OECD)

5.2.1 Free Trade Agreement (FTA)

The results also showed that increase in FDI inflows will promote economy growth therefore Korea should encourage more FDI inflow. Another strategy is encourages the more FDI inflows is through Free Trade Agreement (FTA). Under these circumstances, the Government is trying to negotiate multiple FTA to ensure stable export markets by opening markets and to strengthen competitiveness. FTA made between a developed country focuses on free trade of goods or tariffs reduction. Beside this, FTA covers services, government procurements, copyrights, trade relieves, competition policies, investment incentives, as well as lifting of tariffs. Reduced tariffs by trade agreements made among multilateral parties provide a larger coverage of sectors.

FTA be a major trade policy by contributing to improving productivity. Trade and foreign investment would promote economy growth and FTA would help inducement of foreign investment. Enhanced free agreements would lead to free markets of multilateral parties in Korea. Korean government is putting efforts to make free trade agreements in order for Korean corporations to compete with their foreign competitors who are already in free trade agreements in major global markets. The government is making an effort for multilateral trade agreement strategy with a mission to reduce trade deficits by making trade agreements that trade benefits and deficits are respectively anticipated.

To improve the level of economy and productivity, it is important to establish an open market policy. Government is making an effort to have FTA with the existing major markets and developing markets that could bring positive effects on the Korean economy. Korea economy has been developed through establishment of multilateral free trade system under WTO or GATT to the real economy situation and by boosting exports of strategic industries as well. Continuous removal of tariff or non-tariff barriers with the presence of multilateral free trade system has provided Korean enterprises wider markets and is helping them in boosting competitive power by opening the markets. However, higher levels of open market under FTA could lead to further economic diversification and development. Additional openness for goods and services could be costly to local enterprises, but if it is carefully carried out, Korean enterprises and service sectors could strengthen their competitiveness by importing cheaper quality raw materials. FTA agreements with developed countries such as the USA could provide motivation to Korea professionals and systems in competitiveness and transparency to upgrade to international levels. Furthermore, FTA contributes to the social welfare when Korean can purchase goods with lower prices when tariffs are reduced, so that the real income could be increased. FTA provides reliability on development of economy and continuous opening so credit or competitive power could be better evaluated. Korea has been promoting FTA in terms of economic benefits. The Korean government is preparing FTA with various partners at the same time, in order to speed up the progress of entering into the agreements and to reduce opportunity costs of Korean local companies while FTA is spreading over the world.

5.3 Limitation of study

There are several limitations from this study. Firstly is the time series data and variables cannot taken in natural logarithms and logarithms cannot use by the ratio numbers, especially the negative ratio numbers. The result will shows negative long run relationship among dependent and explanatory variables. Secondly is lack of resource to get the current year data from network database. Some data from World Bank and United Nations Conference on Trade and Development (UNCTAD) are no complete. Besides that, only five factors are used in this study where there still can have other determinant such as the transportation can be measured as proxy into the equivalent mileages of railways, highways and waterways per 1000 squared kilometers. This others determinants will influences the FDI inflows in Korea and enhancing the economic growth. On the other hand, adding others countries will be encouraged to see the comparison between the countries. In addition, further study can explore for other newly industrializing countries, sample period, data and method.