By Jeffrey I. Kim

 
Aesop’s Fables have been widely used for the teaching of ethics and scruples to children all around the world for over 2,000 years. Korean children grow up reading famous folk tales and fables including Aesop’s Fable of “The Fox and the Crane.” These fables are fictitious but useful in life and true to nature.

In order to explain the economic fruits of FDI, I would like to tell readers a fictitious business story in the Korean context. During the period of the Joseon Kingdom, there lived two merchants in a small village. They were selling a traditional alcoholic beverage called makgeolli which is made by fermenting rice.

In order to expand their sales volume, the two sellers decided to set up their tables at a rest area near the top of a hill from where people could have a scenic view of two villages. They expected that travelers would drink makgeolli to quench their thirst while climbing the hill from each village.

On the first day of their business on the hill, however, no people were seen until midday. One seller came up with a brilliant idea. He offered to buy a drink of makgeolli from his rival to start off the day’s business on the condition that his rival should reciprocate. But the problem was that they kept on drinking each other’s makgeolli until sunset. Consequently their transactions record went high but no one earned money and both became severely drunk.

This hypothetical episode applies to the macroeconomic workings of today’s world. A country’s economic growth is unthinkable without trading with other countries. Focusing on domestic consumption only cannot bring about new employment or sustained GDP growth.

For inter-country comparisons either GDP or GNP is often quoted. GDP is a measure of the money value of all final goods and services produced in a year by residents as well as nonresidents working in the domestic economy. GDP does not include net factor income earned from abroad whereas GNP does. There are three ways to measure the GDP of a nation: the money value of all final goods and services; the money value of all incomes _ wages, rents, interest and profits; and the money value of all expenditures _ household consumption (C), private firm investment (I), government spending (G) and net exports (X-M). Of these three, the third one is the most familiar to students of economics.

Although C, I, G, and X-M are all important components of GDP, focusing on a particular component or two for policy purposes requires special judgment. Each component has different qualities and different policy implications. For example, if the domestic market is saturated, sellers should explore overseas markets. If household consumption and private investment are weak, government spending is required to sustain GDP. If private investment is hopeless, then stimulation of household consumption is desirable. However, this cannot be pursued on a longer-term basis because it would miss out on promising investment opportunities.

As for private firms’ investments, some secrets are hidden. Domestic private firms spend money on purchasing equipment and facilities, building factories and advancing technologies. These activities are far better than household consumption of perishable goods from the standpoint of long-term growth. Firms’ investments can enlarge their production capacity and enhance growth potential.

On top of this, information on FDI is also hidden in the component of private investment. FDI with new and better technology contributes to increasing GDP for the current year as well as future GDP. When domestic firms’ investments are weak, the government can make more efforts to induce FDI.

In Korea’s case, FDI has made significant contributions to trade expansion and labor employment. During the period of 2012-14, foreign-invested companies accounted for about 20% of Korea’s total exports and hired nearly 10% of the total employees in the manufacturing sector. Also the value added by the foreign-invested companies constituted around 15% of Korea’s total value added in the manufacturing sector. With all this, the economic fruits of FDI in Korea are the envy of people the world over.

Link : http://www.koreatimes.co.kr/www/news/opinon/2016/08/198_212477.html