Does Population Ageing Affect FDI Flows in South Korea?

The South Korean government has implemented FDI-oriented policies to encourage foreign companies to invest in South Korea. Recently, South Korea has been experiencing the problem of population ageing. The neoclassical theory predicts that population ageing would be associated with a decline in net FDI inflows, which would nullify the efforts of the South Korean government to attract foreign investment. The dynamic relation between population ageing and FDI flows for South Korea has been underexplored. We estimate a non-linear model and test the hypothesis derived from the neoclassical theory that population ageing reduces net FDI flows (% of GDP) in South Korea while controlling for capital stock per worker, human capital per person, population growth, labor productivity, trade balance (% of GDP), trade openness, real exchange rate, inflation rate, government spending (% of GDP), and domestic investment (% of GDP). The autoregressive distributed lag (ARDL) bounds testing approach to cointegration analysis is applied. The results provide evidence of non-linearity between population ageing and net FDI flows (% of GDP). Support for the neoclassical hypothesis is established in the short-run but not in the long-run. It would be necessary to periodically revise the inbound FDI-oriented policies that aim to promote sustainable economic growth in South Korea