Establishment Dynamics and Employment Growth of FDI Service Firms: Evidence from the Republic of Korea

After the global financial crisis in 2008, the economy of the Republic of Korea (henceforth, Korea) experienced a reduction in employment in the service sector. In this paper, we ask whether this is because service firms conducted outward foreign direct investment (FDI). To answer this question, using Korean service firm–establishment matched data sets for 2008–2013, we investigate how FDI service firms differ from non-FDI service firms in terms of their domestic establishment dynamics—exit and entry and net employment growth. We find that FDI service firms were more likely to close their domestic establishments than non-FDI service firms, but that their net employment growth rates did not differ significantly from those of non-FDI service firms. This is because FDI service firms reduced their employment less in continuing establishments than non-FDI service firms. This suggests that Korean FDI service firms specialised their activities in domestic establishments more than non-FDI service firms.