Employment effects of trade expansion and foreign direct investment: The case of Korean manufacturing industry

Employment Effects of Trade Expansion and Foreign Direct Investment: 203

Employment Effects of Trade Expansion

and Foreign Direct Investment: The Case

of Korean Manufacturing Industry*

Tran Nhuan Kien**

1

Abstract

Trade and foreign direct investment outflows in Korea have

increased significantly during the last two decades. In this paper,

we study whether trade expansion and foreign direct investment

outflows played any role in shaping the Korean manufacturing

employment structure during 1991-2006 period. We find evidence

that foreign direct investment outflows corresponds positively to

home country’s employment. In terms of trade expansion, the role

of exports and imports in employment generation has been changed

in that exports have been no longer a source a job creation while

import intensity displaced domestic jobs in recent years.

Keywords: Trade, Employment, FDI, Cobb-Douglas Production

Function, Korea

* This paper was written while the author was a Korea Foundation Fellow. The author

would like to thank the Korea Foundation for its financial support. Any errors that remain

are the author’s sole responsibility.

** Vice Dean, Faculty of Graduate Studies, Thai Nguyen University of Economics and

Business Administration, Vietnam; Senior Researcher, IIAS, Sogang University, Korea

Email: [email protected]

204 Tran Nhuan Kien

I. Introduction

Globalization is considered one of the most prominent features of

the 21st-century. As barriers to trade and investment continue to fade

away, there have been an increasing number of firms investing abroad

and deepening trade relations with foreign partners. The proliferation of

globalization has sparked debates among economists and policymakers

on the effects of globalization on domestic factors such as economic

growth, poverty, inequality, and employment. With respect to labor

market, evidence on the effect of openness to trade and foreign direct

investment (FDI) on employment is mixed across countries (Hoekman

and Winters, 2005; Masso etc., 2007).

Previous studies presented so far illustrates that there are no unified

conclusion on the effect of trade on employment. In a survey study,

Hoekman and Winters (2005) conclude that there are mixed evidences

on the impacts of trade on sectoral employment in developed countries,

but overall the net employment effects of trade are negligible. Using a

dynamic panel data model, both Kien and Heo (2009) and Fu and

Balasubramanyam (2005) find a positive impact of export intensity on

employment in Vietnam and China, respectively. However, imports did

not affect negatively Vietnam’s employment. In the case of Australia,

Gaston (1998) shows empirically a strong effect of exports on

employment while a negative impact of imports on employment is

found. Greenaway, Hine and Wright (1999) investigate the effects of

trade on employment in the United Kingdom using a dynamic panel

data and conclude that trade expansion, both in terms of imports and