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A Study on Constructing the Competitiveness Index for Korean Foreign Affiliates

Author Cho Jaehan, Kang Jeeyon, Shin Kwanho Date 2016.12.27 Page
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Foreign direct investment (FDI) and trade have been increasing rapidly around the world since the 1980s. Meanwhile, the unstoppable march of international trade has been accompanied by the expansion of global value chains (GVCs), enabling companies to coordinate their production processes more efficiently with cross-border operations. And multinational corporations (MNCs) have been leading this expansion of production networks worldwide. Korean MNCs, too, have been aggressively investing in and trading with operations abroad. 

 

The expansion of GVCs increases the overall volume of trade worldwide by increasing the demand for intra-firm trade between parent companies and their offshore operations. Overseas subsidiaries are tied to their parent companies through the trade of intermediary materials. However, recent studies have shown that overseas subsidiaries and parent companies are also becoming increasingly linked through various forms of intangible assets, including human resources. Changes in the competitiveness of overseas subsidiaries therefore significantly affects the competitiveness of their parent companies and, by extension, the strengths of the economies in which their parent companies are located.  

 

Despite the growing significance of overseas subsidiaries, a system for effectively and consistently monitoring their competitiveness has not yet been established. This is mainly due to the difficulty of acquiring statistics and data necessary for the development of such a system as well as the difficulty of identifying the diverse elements of competitiveness measurement that need to be controlled. In response to this problem, we discuss and analyze the empirical aspects of developing a system capable of monitoring the competitiveness of overseas subsidiaries.  

 

We survey the established literature and analyze the available empirical data to identify the trends and patterns of the expansion of production networks worldwide, and then discuss the need for the development of an index with which to measure and monitor the competitiveness of overseas subsidiaries. To this end, we use Korea Exim Bank’s data on the overseas subsidiaries of Korean companies to identify the current status of such subsidiaries. We also survey the existing literature on the FDI decision theory and GVC expansion, and draw implications for the development of an index of competitiveness. We then apply our index to Korean companies’ overseas subsidiaries in China and assess its utility.