Foreign direct investment in a changing political environment: Finnish investment decisions in South Korea

The dissertation in the field of economic geography by Kristiina Korhonen, Lic.Sc. (Econ.), ”Foreign direct investment in a changing political environment: Finnish investment decisions in South Korea” will be publicly examined at the Helsinki School of Economics on Monday, December 19th, 2005. The public examination starts at 12:00 in the Stora Enso Hall of the Chydenia Building. The opponent is Professor Sam-Ock Park, PhD (Seoul National University), and the custos is Professor Jarmo Eronen, PhD (Helsinki School of Economics).

This dissertation contributes to an understanding of foreign direct investment (FDI) in a changing political environment. Although the theoretical framework for the study is the geography of enterprise approach, it has been augmented with theories from the fields of strategic management, international business, and political economy. The research problem of the study asks how transnational corporations (TNCs) perceive and react to the changes in the political environment of the host country.

The literature has basically studied the spatial aspects of FDI separately from the growth and performance of firms, while the present study aims to combine them. Korhonen has modified the strategy-performance model to identify the relevant factors with an impact on the investment decisions and performance of the TNCs, including the location conditions in the host country. The results show that firms interpret the location conditions into a special set of location factors, which are crucial from their strategy perspective.

The study asks whether the political environment of the firm in the host country has a special role among the other parts of the firm’s environment (natural, economic, demographic, cultural, and technological), because of the host government’s capacity to intervene in FDI. Korhonen argues that firms may not need to bargain alone with the host government, but may lobby for help from their home government. Therefore, the present study adds the concept of ‘authority services’ to the list of a TNC’s bargaining techniques.

The model was empirically applied to the case of Finnish investment in South Korea (hereafter Korea). The Korean government liberalised its investment policy in 1998. Thus, the present study compares Finnish investment in Korea during the restricted (1984-1997) and liberal (1998-2002) regimes. The empirical results show that the change in the political environment of Korea had a clear impact on Finnish investment in Korea. However, the change cannot be totally separated from the other simultaneous changes, the most influential which was the technological advancement of the Korean society. The results indicate that repeat investments had been undertaken regardless of the investment policy liberalisation, but that the acquisitions had not taken place without this change. In a changing political environment, the authority services provided by the Finnish government were important to Finnish investors.

Korhonen suggests that the impact of the environment change on the firm’s investment decision-making can be successfully studied with the modified strategy-performance model, regardless of the host country. However, any further evidence on the particular role of the political environment over the other parts of the firm’s general macro-environment was not found. Each firm emphasised different variables of the external environment, reflecting the fact that firms perceive the same host country differently according to their strategies. This justifies the use of concepts of location conditions and location factors.