Investment is not only one of the main items that make up final demand but also one of the most important factors that determine future economic growth potential. This paper explores the determinants of private investment in Korea. Its main findings show that firstly, private investment in Korea is determined by demand factors such as GDP and the prospects of future activity (stock prices), by cost factors such as interest rates, exchange rates and capital prices, by the financial availability (domestic credit) and by a crowding-out effect (outward FDI). A rise in demand factors and financial availability stimulates private investment. However, an increase in cost factors and outward FDI decreases private investment. Secondly, the empirical results validate the effectiveness of interest rate policy. This is in converse to most studies on investment behaviour in Korea that have proposed that interest rates have little, if any, effect on investment decisions, with some even discarding it as determinants of investment2.
The statistically significant coefficient of the interest rate shows that a 1% rise in interest rates reduces investment spending in the long run by 0.63%. Thirdly, there was a structural change in firms’ investment behaviour after the crisis, especially the stagnation of investment. In this regard, the Korean government should undertake policy measures to stimulate investment and FDI. To stimulate investment, the government should strengthen its efforts to improve the overall investment environment through a combination of policies involving tax cuts, deregulation, and more organised support for businesses. The weakness in Korea’s key parts and materials manufacturing industry is a reason why production expansion is not leading to investment. In this regard, enhancing technological capability to develop capital goods domestically is crucial. For the purpose of facilitating inward FDI and investment, it is also necessary to attract high-tech component companies from overseas which will allow Korean industries to strengthen their competitiveness and to induce R&D centred FDI for industries representing new growth engines such as biotechnology and alternative energy. To this end, connections between global leading companies’ R&D centres and Korea’s national innovative system should be strengthened as is often the case in advanced countries.
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Appendix
Table A-1
Major Economic Indicators
Notes: 1. yields of corporate bonds(3 yr). 2. nominal interest rate minus inflation. 3. closing rate(average). 4. KOSPI(1980. 1. 4 = 100). 5. % changes are in parentheses.
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Table A-2 FDI Flows1) and DI2)
Table A-3
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Table A-4 Inward FDI1) by Sector
Notes: 1) notification basis.
Table A-5
Inward FDI1) by Origin Country
Notes: 1) notification basis.
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Table A-6
Outward FDI1) by Sector
Table A-7
Outward FDI1) by Destination Country
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Table A-8
Table A-9
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Table A-10
The Results of Unit-root Test
Notes: 1) Augmented Dickey-Fuller test, t-statistic 2) Phillips-Perron test, Z±-statistic
3) *, ** means that the estimates are significant at the 5% and 1% levels,
Table A-11
The Results of Unit-root Test on the Error Terms
Notes: 1) Augmented Dickey-Fuller test, t-statistic 2) Phillips-Perron test, Z
±-statistic
3) *, ** means that the estimates are significant at the 5% and
Chapter 4
INVESTMENT IN MALAYSIA IN THE POST-CRISIS ERA: