Regional heterogeneity and location choice of FDI in Korea via agglomeration and linkage relationships

Using the extensive micro data for 1998-2005, we analyze the role of agglomeration effects in terms of both horizontal and vertical aspects in the location decision of inward foreign direct investment (FDI) in Korea. The nested logit estimates support the follow-the-leader hypothesis. The network among FDI firms, backward linkage relationship with local upstream firms, and business service agglomeration are the main determinants of FDI location. Our estimation results suggest the possibility of a circular causality between the attractive force of backward agglomeration and the knowledge spillover of FDI, which brings in the geographical concentration of economic activities within a region. In addition, we find quite different location patterns between high- and low-tech industry groups. Reflecting the characteristics of the industry, whereas the centripetal force of foreign agglomeration increases gradually in the high-tech industry, it decreases gradually with the size of agglomeration in the low-tech industry. Furthermore, while regional gap of the labor cost matters in the location decision of low-tech firms, the regional quality of labor matters for the high-tech firms.