The Role of Outward FDI in Creating Korean Global Factories.

VerfasserBuckley, Peter J.
PostenRESEARCH ARTICLE - Foreign direct investment

1 Introduction

This paper applies the concept of the "global factory" to the development of emerging economies, and seeks to understand how the global factory approach can explain the relationship between FDI motivation, sectoral upgrading, and industrial development. By examining the strategic processes of firms, we can achieve a finer grained analysis of aggregate flows of trade and investment. The example of South Korea is particularly interesting here, as is the relatively long time frame we study. During the study period, South Korea transformed itself from an emerging economy characterized by a number of relatively low-tech production activities into an export-intensive economy that leads the field in a number of high-tech products. We argue that the country's FDI decisions have been central to its success. When these are viewed through the lens of the global factory, we gain an understanding of how Korea forged its way to industrial development in a way that many other countries are striving to emulate.

This paper proposes and tests three steps whereby the Korean global factories were created and developed (Buckley & Strange, 2015; Buckley, 201 la). These steps are: (1) Korean firms seek large foreign markets for goods where they possess competitive advantages, (2) the firms relocate the low value-added stages of production at scale to low cost locations via efficiency-seeking FDI, and (3) high value-added technology is obtained by insourcing high value content goods. The combination of these processes provides a springboard for the internationalization and upgrading of Korean MNEs.

We test our hypotheses using a novel combination of data sources for Korean outward FDI and international trade data; these enable FDI motives to be captured on a large scale from 1981 to 2014. We identify the (changing) FDI motives for three of Korea's key industrial sectors that, taken together, reflect the changes in the country's industrial profile. This extension to the global factory approach enables us to develop the theoretical framework with reference to an emerging economy, and formulate a schematic-stages approach to how global factories develop from emerging economies. The established literature on the industrialization of developing or emerging economies traditionally takes one of two perspectives. The first, as expounded for example by Haraguchi et al. (2019), focusses on issues such as institutions and resource endowments. While the second, see for example Dunning et al. (2001) explores the links between inward FDI, outward FDI and development. We argue that that global factory approach extends this understanding by allowing for the endogenous creation of value chains that allow for existing firms to reallocate resources to becoming more technologically advanced. The (endogenous) process involves upgrading both on the supply and demand sides by moving from subcontractor to principal and from commodities to branded goods".

Korea offers an interesting case study because Korean FDI has evolved; it started out as typical of emerging economies (i.e., seeking markets for high volume outputs) before moving onto technology sourcing, and finally, it became a hybrid form that is efficiency-seeking in established markets and market-seeking in high-tech goods. The existing literature on Korean FDI focuses either on how Korea's outward FDI patterns have evolved over time (Driffield et al., 2021) or on how inward and outward FDI have contributed to Korean development (Kim et al., 2018). We argue however that the global factory model, which encompasses developments in trade patterns, outward FDI, and management control, provides a more nuanced understanding of how Korea's FDI and trade patterns have developed.

In this, we follow Gereffi (2001) and Pananond (2015) who argue that the global factory approach adds significantly to the understanding of Korea's FDI and its firms' location decisions. However, we take this further in suggesting that the global factory concept can explain how FDI penetration of foreign markets, including those of the advanced countries, plays a domestic role in upgrading via technological advances and their international impact (Buckley & Tian, 2017; Buckley, 2011b). In addition, we argue that the approach provides a conceptual structure that, by focusing on the governance of the totality of operations, integrates the relationships between FDI motivation, locations, and the unit values of goods that are traded (as well as trade volume) in the development of Korean global factories. Thus, we seek to extend the existing analysis, which accords newly internationalized firms an essentially passive role within global production systems. We identify when such firms have linked trade and FDI decisions to create new value chains and develop technology, in which they could legitimately be described as having an actively strategic role. Korea offers an interesting test case, having effectively "emerged" during the period of our data. While Korean firms start as emerging economy firms, their FDI patterns, over time, evolve into those more commonly seen in western MNEs.

The dataset used in this paper provides detailed coverage of FDI location choices for specified motives and combines this with an analysis of the unit value of goods to illustrate the relative price gaps between Korea and its partner countries. This indicates how the technological development disparities between Korea and other countries vary over time. Thus, we can show how Korean trade and investment occurs in a widening set of industrial products as the country progresses through the stages of economic development (Buckley & Strange, 2011; Buckley, 2009b, 2010, 2011b). We discuss these data in more detail below, but our analysis is based on three sectors; electronics, textiles, and steel/metal. In terms of the development of Korea and its FDI, these offer an interesting contrast and, more importantly, are representative of Korea's industrial changes. This data combination is, to the best of our knowledge, novel. It also offers insights into the evolution of the Korean economy.

The remainder of the paper is structured as follows. In Sect. 2, we develop the analysis of the global factory in the context of linking this to FDI motivations. In Sect. 3, we review the literature from which we develop our hypotheses. Section 4 presents the research methods. Section 5 discusses the results, and Sect. 6 concludes.

2 The Concept of the Global Factory

The global factory structure of modern, networked MNEs is a response to economic, political, technical, and managerial changes in the global economy (Buckley & Ghauri, 2004). Global factories differ from "traditional" integrated MNEs in their network structure and also in their governance, which allows a strategic mix of routine standardized activities that may be internal, quasi internal, and external. Knowledge sourcing from affiliates is combined with the externalization of routine standardized activities to maximize efficiency, flexibility, and responsiveness. Marketing in global factories is combined with information collection and action coordinated by knowledge transferred throughout the networked system. The lead firm acts as coordinator, allowing a diversity of structures throughout the global factory and this diversity becomes a competitive advantage through strategic relationships that develop over time (Buckley & Strange, 2011, 2015).

This is facilitated by a managerial system that "fine-slices" the "stages" of the operation, making two critical decisions for each stage. These are: (1) where the activity is optimally located and (2) how the operation is controlled and integrated into the global factory, which may be by the market (an outsourcing contract) or by management fiat (internally retained and controlled). The governance of the global factory and its strategic decisions on both trade and direct investment have profound implications for the global economy and for the development of sub-units such as nations, clusters of economic activity, innovation, and public policy (including fiscal policies and taxation revenues) (Buckley & Strange, 2011; Buckley, 2009b, 2010, 2011b). In an interpretation of the global factories literature, Verbeke and Kano (2015) argue that the global factory concept is crucial to understanding the changes in the global economy, and in particular, to how emerging and transition economies develop. They see the global factory approach as consistent with internalization theory since it offers insight into the configuration of value chains and inter- and intra-firm linkages. However, the empirical research has to date been carried out at firm/country levels, which may be affected by the subjective viewpoint of the researcher. A good quality dataset can significantly mitigate such research bias and provide insight into the how a specific FDI motive drives FDI location choice. In addition, the FDI determinants impacting FDI location choice by motivation can be more effectively explored.

A key feature of the global economic reorganization presented in the conceptual model of the global factory is the progressive outsourcing by lead firms in the developed countries of their peripheral, frequently low-value, productive functions to low-cost countries and regions, while retaining control of the core nodes of value creation in their home countries. Despite spatially diverse production systems and the fragmented ownership of different productive functions, these lead firms have continued to dictate the terms and conditions of other firms' participation in GVCs via different types of governance that act upon "at-distance" participants (Buckley, 2009a). Korean headquartered firms thus orchestrate global factories that exploit these opportunities both domestically and internationally.

Thus, we develop a conceptual global factory framework through which we anchor the...

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