This study examines productivity spillover-effect of foreign-invested firms through empirical analyses using panel data on Korean manufacturing firms. Amid diverse views concerning the productivity spillover-effect of foreign-invested firms, this study reviews not only the spillover effect foreign-investment firms have had on productivity within an industry or region, but also examines the influence of a firm's lead in technological advancement, the country of origin of FDI, and company size has on the productivity spillover-effect.

The findings of this study can be summarized as follows. First, the spillover effect in productivity within an industry is found to be positive and statistically significant. In industries with a high proportion of foreign investment, a bulk of the productivity spillover-effect comes from technology transfers. Second, improvements in productivity is seen to be positive and statistically significant in firms that have a high foreign equity participation. This suggests that the productivity of foreign-invested firms improves as a result of an increase in foreign equity participation in a company. Third, the coefficient representing the spillover effect within a region is not statistically significant, and in depending on the model the coefficient is at times negative, indicating that productivity improvement to the region may be minor. Fourth, productivity improvement is found to be greater in firms where foreign investors are the majority shareholders. This is because as foreign equity participation in a firm increases, more technology is transferred to the domestic firm, enhancing the productivity spillover-effect. Fifth, improved productivity arising from direct investment from an investor of U.S. nationality was found to be positive and statistically significant, while that from an investor of Japanese nationality showed negative and statistically not significant. This indicates that U.S. investors have a greater influence in improving productivity in Korean industries and regions compared to their Japanese counterparts. Sixth, the productivity spillover-effect is greater, the larger the size of the firm. 

The Korean government enhanced greatly national policy on foreign investment after the financial crisis. However, for policy improvement to result in actual growth in foreign investment, not only the policy environment, but also other surrounding business and institutional environments have to become foreign-investor friendly. Moreover, such external conditions should ensure that increased foreign investment leads to effective technology transfers. We also address the implications of these findings in relation to our empirical analysis, and further seek to identify ways to maximize such productivity spillover-effects.  

Above all, in addition to continuously inducing foreign investment, what is of critical importance is putting in place measures that facilitate technology transfers. Making efforts to understand changes in other countries' foreign investment policies while improving Korea's laws and regulations relating to foreign investment is extremely important in promoting foreign investment. The Foreign Investment Promotion Act adopted after recent economic crisis, offers various incentives for foreign investment. Such incentives encouraging investors to invest in Korea are expected to contribute to bringing more foreign capital into Korea. Nonetheless, to compete with other countries that have recently seen great increases in foreign investment, further measures such as lowering corporate income tax, exempting income tax for expatriates, and making training allowance paid to foreigners non-taxable should be considered.  

However, widely differing foreign investment incentives by region may actually deteriorate the spillover-effect on productivity. For example, provincial governments compete to promote foreign investment by offering exemptions on provincial tax, reducing rent, or providing subsidies. Although, competitively offering such excessive incentives may help increase the volume of foreign investment, it may actually adversely affect technology transfers. Taking this into account, it may be better to limit incentives from provincial governments at a relatively low level in the whole incentive package Korea has to offer foreign investors.   

A foreign investor having greater equity in a firm facilitates technology transfers. Increasing equity in a firm with the objective of taking over management can be translated into the owner acquiring exclusive possession of profit, thereby encouraging technology transfers. We note, however, that increasingly more foreign-invested firms are trying to enter the domestic market by taking over management. Considering that technology transfers are more effective in foreign-invested firms that cater to Korea's domestic consumption, the negative bias toward foreign firms that compete in the domestic market should be overcome if the aim is to stimulate technology transfers by attracting foreign firms into Korea.

Lastly, incentives to attract foreign firms in high-tech industries must be strengthened. Countries that have seen recent improvements in foreign investment all show, at different degrees, a tendency of trying to attract high-tech industries. In industries where the level of technology is significantly behind, the payoff of technology transfer from bringing in U.S. direct investment is enormous. Reversing the long held belief that Japanese companies are more active in offering technology transfers, the evidence that U.S. firms are actually more willing toward direct investment and technology transfers raises many new implications. Korea's policy and programs on foreign direct investment have improved greatly in recent years, but regulations that are often challenged by U.S. or European firms need to be addressed in a positive and constructive manner.