This paper addresses foreign direct investment (FDI) externalities using capital market
data of Korean stock exchange and examines the effects of FDI in both manufacturing and
service sectors. The empirical findings in this paper are generally consistent with previous
findings based on the traditional productivity measure from Cobb-Douglas production
function: 1) the market value of listed stocks in the manufacturing sector responds to the
Horizontal (intra-industry) effects in a positive way, and 2) the market value of listed stocks
in the manufacturing sector benefits from foreign invested downstream manufacturing
firms, which is often called backward linkages (i.e. supplying manufacturing goods to
foreign invested firms generates positive externalities to domestic manufacturing suppliers.
The new finding of this paper is that the market value of listed stocks in the manufacturing
sector benefits from foreign invested service firms through forward linkages (i.e. service from
foreign invested firms generates positive externalities to domestic manufacturing firms).