The Effects of An Empirical Analysis of the FDI on the Service Industry in Korea: A Granger Causality Test

Hong, MI-Young

The current study examines the economic effect of FDI (Foreign Direct Investment) on the domestic economy in terms of the GDP (Gross Domestic Product) growth rate and employment rate, respectively. The inflow of FDI is believed to induce growth in the domestic economy in light of GDP and Employment. However, the growth in the domestic economy may attract the FDI inflow. Thus it is necessary to conduct the Granger causality test among the variables under consideration to determine the direction of flow. As we classify the sample in such sectors as the manufacturing industry, service industry (including the tourism industry), the industry-wise effect turns out to differently greatly among them. Contrary to the common belief, according to the Granger causality test, FDI neither causes growth of GDP, nor the increment of employment rate, in the manufacturing sector. In contrast, FDI leads to increase of GDP growth rate and the employment rate within the service sector. The growth of the service industry rather attracts the inflow of FDI not vice versa, this is particularly most pronounced with the impulse-response test. In conclusion, domestic investment is required to attract FDI inflow, with this sustainable growth can be achieved.

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