Decision to invest abroad: The case of South Korean multinationals

Recent firm-based empirical studies examine whether firms serving foreign markets either through exports or foreign direct investment (FDI) are more efficient than their domestically-oriented counterparts. The purpose of the present paper is to study the link between performance of multinational firms and the choice to participate in foreign investment. In so doing, this paper explicitly differentiates exports and FDI decisions. Using firm-level data for large South Korean manufacturing firms, I provide evidence that the premium for FDI is huge compared to exports, and that good firms undertake FDI. Studying performance across firms, I find that firms that engage in FDI outperform other firms in the future in all possible dimensions; they are larger, pay higher wages, and are also more productive. These results are consistent with the hypothesis that good firms self-select to engage in FDI. I also find clear evidence that past FDI experience has a strong positive effect on the probability of current investment abroad. This implies that the sunk cost involved in FDI plays a role in current decisions to undertake FDI.