Regional Characteristics, Industry Agglomeration and Location Choice: Evidence from Japanese Manufacturing Investments in Korea*

• Published date: 01 June 2016
• Author: Seok‐Joon Hwang,Ki‐Dong Lee
• DOI: http://doi.org/10.1111/asej.12087
• Date: 01 June 2016

Regional Characteristics, Industry Agglomeration

and Location Choice: Evidence from Japanese

Manufacturing Investments in Korea*

Ki-Dong Lee and Seok-Joon Hwang

Received 27 August 2013; Accepted 1 July 2016

Using extensive firm-level data for the years 1998–2006, we analyze the regional

location decision of Japanese manufacturing foreign direct investors in Korea by

focusing on the role of agglomeration economies. Our logit estimates indicate that

horizontal agglomeration matters in the location decision, but vertical agglomeration

does not. Strong evidence of country-of-origin effects is found. Japanese foreign

directinvestmentsin high-technologyindustries showa typical‘follow-the-leader’pat-

tern, while those in the in low-technology industries are influenced by regional

endowments. In addition, Japan’s high-technology firms are likely to prefer urban

locations so that they can enjoy the externalities of business services.

Keywords: agglomeration economies, conditional logit, country-of-origin effect,

Japanese foreign direct investment, location decision.

JEL classification codes: F23, R30, R12.

doi: 10.1111/asej.12087

I. Introduction

The world has witnesseda rapid expansion of direct investment across national borders

over recent decades.

1

Major investing countries are, unsurprisingly, the advanced

countries, such as the USA, the EU and Japan. In particular, following the implemen-

tation of the Plaza Accord in 1985, a large number of Japanese manufacturers began to

*Ki-DongLee (corresponding author):Department of InternationalCommerce, KeimyungUniversity,

1095 Dalgubeol-daero, Dalseo-gu, Daegu 42601, Republic of Korea. Email: kdlee@kmu.ac.kr. Seok-

Joon Hwang: School of Economics and Trade, Kyungpook University,80 Daehak-ro, Buk-gu, Daegu

42601, Republic of Korea. Email: sxh219@knu.ac.kr. Earlier versions of th is article were presented

at seminars and conferences including Keimyung University,Jeju University (International Conference

on Korea-Japanese Economy and Management),the University of Hawaii at Manoa, the Bank of Korea

and the Korea-Japan Cooperation Foundation for Industry and Technology.We would like to thank all

discussants and participants at the seminars and conferences. The authors also wish to thank anonymous

referees and Asian Economic Journal editorial board for constructive comments and suggestions. This

work was supported by the National Research Foundationof Korea Grant funded by the Korean Gov-

ernment (NRF-2014-S1A3A2044643).

1 According to Shatz and Venables (2000), FDI has grown much faster (17.6 percent of annual

growthrate for 1985–1997) than either trade(9.2 percent for the equivalentyears) or income (7.2 percent

for the equivalent years) at a global level.

© 2016 East Asian Economic Association and John Wiley & Sons Australia, Ltd

Asian Economic Journal 2016, Vol.30 No. 2, 123–145 123

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invest abroad. This rapid growthof overseas production activities by Japanese multina-

tional firms has triggered interest in the determinants of location decisions.

The empirical literature on the location decision of Japanese foreign direct in-

vestment (FDI) firms is relatively broad. Several published studies have explored

the FDI location decision among developed countries (Woodward, 1992; Hennart

and Park, 1994; Head et al., 1995; Pugel et al., 1996; Mayer and Mucchielli,

1997; Chung and Song, 2004; Head and Mayer, 2004). Recently, China has

received much attention in the academic literature on FDI location choice because

it has become among the largest recipients. (Belderbos and Carree, 2002; Fung

et al., 2002; Cheng and Stough, 2006).

There have been surprisingly few empirical studies analyzing the locational

determinants of inward FDI in Korea (Lee and Hwang, 2014; Hwang, 2014). This

paper uses comprehensive, firm-level data for 1998 to 2006 to examine the

locational determinants of Japanese manufacturing investments in Korea’s

regions, focusing on the importance of different types of agglomeration

economies.

Figure 1 Distribution of inward foreign direct investment by nationality

2 If services are included, the ordering of FDI sources changes.In 2000 to 2007, Japan accounted for

17.6 percent of the total number of inward FDI projects in all industries including services. This was

the third largest share, following China (20.3 percent) and the USA (17.8 percent)

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© 2016 East Asian Economic Association and John Wiley & Sons Australia, Ltd