Does outward foreign direct investment improve the performance of domestic firms? Case of Korea

Abstract

In this article, we use firm‐level data in Korea from 2010 to 2019 to analyze whether outward foreign direct investment (OFDI) affects the productivity of domestic firms, known as reverse knowledge spillovers. Using propensity score matching and difference‐in‐difference regressions, we verify that OFDI improves the productivity of parent companies. Considering the characteristics of OFDI and the parent company, these positive effects become greater when (1) parent company's absorptive capacity (technology level) is high, (2) OFDI is in the M&A form, and (3) OFDI is toward developed countries. In addition to these direct effects, we investigate whether OFDI improves the productivity of other domestic firms within and across industries, known as horizontal and vertical spillovers. The results demonstrate strong evidence of positive vertical spillovers but not horizontal spillovers. These evidence provide important policy implications about the specifics of outward direct investment that are beneficial to capital‐exporting countries.