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The significance of cultural policy—case study of south korea.

1. Introduction

2. literature review, 3. cultural policies until 1989, 4. changes in cultural policies after 1989, 5. methods of implementing the cultural policies and results, 6. discussion, 7. conclusions, author contributions, institutional review board statement, informed consent statement, data availability statement, conflicts of interest.

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Ścibiorska-Kowalczyk, I.; Cichoń, J. The Significance of Cultural Policy—Case Study of South Korea. Sustainability 2021 , 13 , 13805. https://doi.org/10.3390/su132413805

Ścibiorska-Kowalczyk I, Cichoń J. The Significance of Cultural Policy—Case Study of South Korea. Sustainability . 2021; 13(24):13805. https://doi.org/10.3390/su132413805

Ścibiorska-Kowalczyk, Izabela, and Julia Cichoń. 2021. "The Significance of Cultural Policy—Case Study of South Korea" Sustainability 13, no. 24: 13805. https://doi.org/10.3390/su132413805

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• v.37(42); 2022 Oct 31

Birth Rate Transition in the Republic of Korea: Trends and Prospects

1 Department of Pediatrics, CHA Ilsan Medical Center, CHA University School of Medicine, Goyang, Korea.

Chae Young Kim

2 Department of Pediatrics, Kyung Hee University School of Medicine, Seoul, Korea.

Se-Hyung Son

Chong-woo bae, yong-sung choi, sung-hoon chung.

In Korea, the birth rate is declining at an alarming pace. This study aimed to investigate the changes and trends in the population count, number of births, and birth rate in Korea, in the past and future.

Data regarding the total number of births, crude birth rate, and total fertility rate were collected from the “Statistics Korea Census” of the national statistical portal, census report, and Statistics Korea’s “2020 Population Trend Survey for 1981–2020, provisional results of birth and death statistics.” We used the Organisation for Economic Co-operation and Development 2019 Family Database for the TFR. To develop a better understanding of the data in this study, we classified it according to the modern history of Korea.

The changes and trends in the number of births and fertility rate in Korea, after liberation, were due to the birth control policy that restricted births. In Korea’s low fertility society, which began in the mid-2000s, the fertility rate dropped to below 0.84 in 2020, despite policies to improve the quality of the population. The death toll has reached 300,000, entering an era of population decline.

As we enter the era of population decline, we are in a direction that will cause various socioeconomic problems, from demographic problems to future population decline.

Graphical Abstract

INTRODUCTION

According to the ‘Preliminary Results of Birth and Death Statistics in 2020,’ published by Statistics Korea, there were 272,337 births in 2020. In 2020, the number of births fell below 300,000 for the first time in South Korea. This year, a decline was observed in the values of both crude birth rate (CBR, 5.3) and total fertility rate (TFR, 0.84), as compared with those in the previous year. Meanwhile, Korea recorded 305,100 deaths per year, which was higher than the number of births, making it the first year in which the population growth rate was recorded as negative. 1

In 1983, the TFR decreased to less than 2.1 (population replacement level), which is the fertility rate required to maintain the population. It has continued to fluctuate below 1.3 since 2001 and had further decreased to < 1.0 for the first time in 2018. Korea entered a low fertility society (below 2.1) at a rate of 1.74 in 1984 and entered the lowest-low fertility society (less than 1.3) at a rate of 1.18 in 2002. 2 The average TFR of the World Organization for Economic Co-operation and Development (OECD) countries decreased from 2.84 in 1970 to 1.77 in 1995, with it standing at 1.61 in 2019. In 2019, Korea recorded the lowest TFR among OECD countries (0.92). 3 In the 2000s, the Korean government implemented several measures to overcome the low fertility rate in society by preparing the 1st (2006–2010), 2nd (2011–2015), and 3rd (2016–2020 including revisions for 2019) Plan for Aging Society and Population in Korea. 4 , 5 , 6 , 7 The final goal of the plan for the aging society and population was to achieve a TFR of 1.5 by 2020. Despite these efforts, the policy to overcome a low fertility society has failed. Accordingly, the 4th plan for an aging society and population (2021–2025) was announced, and it is currently in progress by modifying the goals and methods. 8 Changes and trends in the number of births, CBR, and TFR were observed in 1925, and major social and demographic events that caused these changes were analyzed. Further, by comparing the recent birth rates in Korea and the OCED countries, Korea’s standing status was determined. This study aimed to investigate the changes and trends in the population count, number of births, and birth rate in Korea in the past, with the motive of using the findings obtained as the baseline for preparing a plan to overcome the problem of low fertility rates and providing a solution or suggesting a system to tackle the low fertility rates in aging societies.

Classification of periods

There have been several big historical events that could affect the population trends such as the Japanese colonial period, and the Korean War. To develop a better understanding of the data of this study, we classified the data according to these events as follows. ( Table 1 ): 1) 1925–1944 (Japanese colonial period), 2) 1945–the 1950s (the national liberation and Korean War), 3) the 1960s, 1970s, 1980s, and 1990s (period of birth control policy), 4) the 2000s, 2010s, and 2020s (the 1st, 2nd, and 3rd plans for low birth rate and aging society in Korea), and 5) post 2020 (long-term demographic prospects) with forecast values.

Data collection

Data regarding the total population was collected from the “Statistics Korea Census” of the national statistical portal. 2 , 9 , 10 This study obtained data regarding the total number of births, CBR, and TFR for 1925–1980 from the census report, Statistics Korea’s “2020 Population Trend Survey for 1981–2020, provisional results of birth and death statistics,” census of the national statistics portal, and results of the number of population dynamics and the rate of dynamics. 1 , 2 , 11 , 12 For the TFR of the OECD, the 2019 OECD Family Database was utilized. 3

Definition of terms

• • Census: The complete census of Korea is conducted by Statistics Korea every 5 years.
• - Census population: The number of people counted in the Population and Housing Type Survey conducted by Statistics Korea every five years.
• - Resident registration population: The population statistics were prepared based on the resident registration report of the Ministry of Public Administration and Security.
• - Estimated population: The population count is prepared by Statistics Korea by estimating the actual population based on various variables such as birth, death, and population movement, based on the census population.
• • Mid-year population: The average population at the beginning of the year and the end of the year to be the population as of July 1, the mid-point of the year.
• • Total live births: Total number of births per year.
• • CBR: Total Number of Births per 1,000 People = Number of Births in a Specific Year/Mid-Year Population for the Year × 1,000.
• • TFR: The average number of children expected to be born to one woman of childbearing age (ages 15–49) in her lifetime.

Ethics statement

This study was approved by the Institutional Review Board of Kyung Hee University Hospital at Gangdong and the requirement for informed consent was waived (IRB 2021-11-032).

1925–1944 (from 1925 until the national liberation of Korea from Japan in 1945)

The data for this period shows the sum of South and North Korea ( Tables 2 and ​ and3). 3 ). Furthermore, the data included only Koreans, excluding foreigners (i.e., Japanese). In October 1897, King Gojong renamed the country as the Korean Empire. Following this, during the period of Japanese occupation, Korea was annexed to the Japanese Empire via the Korea-Japan Annexation Treaty of August 1910, which continued until Korea’s liberation in August 1945. The data presented was from 1925 onwards. The data for this period is the sum of the data for the two Koreas, as there was no division between the two Koreas before 1945. However, birth registration data for this period was very poor. We chose the method of estimating the CBR and TFR based on the age ratio between the 0–4-year-old population and the 15–49-year-old mothers (child-woman ratio), which was obtained from the national census. 9

CBR = crude birth rate, TFR = total fertility rate.

TFR = total fertility rate.

Its population exceeded 20 million, rising from 19,015,526 in 1925 to 20,256,563 in 1930. In 1944, there were 25,900,142 people. The total number of births exceeded 700,000 during this period, rising from 712,278 in 1925 to 760,602 in 1930.

The CBR was 43.0 in 1925 and 42.9 in 1935, level being in the 40s. The TFR was within the six ranges during this period.

1945–1950s (starting from the national liberation of Korea from Japan to the 1950s)

The data for this period was only for South Korea and did not include North Korea ( Tables 2 and ​ and3). 3 ). This period was further classified into the following two periods.

In 1949, the population was 20,188,641. During the Korean War (June 1950 to July 1953), it was difficult to ascertain the population at the beginning of the war. However, it increased to 20,526,705 in 1952, 21,546,248 in 1953, and 21,502,386 in 1955, as compared with that in 1949. There are no data on the total number of births during the Korean War. The CBR and TFR were 39.7 and 5.02 in 1950 and increased to 44.2 and 5.65 in 1955, respectively.

1960s, 1970s, 1980s, and 1990s

After the Korean War, from 1961 to 1971, the total number of births exceeded 1 million ( Tables 2 and ​ and3). 3 ). Accordingly, in 1961, the government began to develop a family planning project, a policy to suppress population growth, which started in earnest in 1962. Birth control continued in the 1970s and 1980s. The effects of the international oil shock of the late 1970s and the early 1980s also affected the low fertility societies. As such, in 1983, the TFR dropped to 2.06, below 2.1.

Table 2 shows the country’s population at that time. With a population of 24,989,241 in 1960, it rose to 29,159,640 in 1966 and further increased to 31,465,654 in 1970. The population increased further in the following years, with 40,448,486 in 1985 and 43,410,899 in 1990. In 1970, the total number of births was 1,006,645, entering the 1 million mark. Subsequently, a decreasing trend was observed. While the total number of births in a year increased to 700,000s during 1991–1995, it decreased again and hit the 600,000s mark during 1996–2000.

The CBR decreased from 44.2 in 1955 to 38.6 in 1960 to 31.9 in 1970. It further decreased from 24.8 in 1975 to 22.6 in 1980 and from 16.1 in 1985 to 15.7 in 1995, showing a remarkable continuous decrease (64%) from 44.2 to 15.7 in approximately 40 years. The TFR also decreased continuously, with it being 5.0–7.0 in the 1960s, to 3.0–5.0 in the 1970s, to 1.0–3.0 in the 1980s, and 1.0–2.0 in the 1990s. The fall from 6.33 in 1960 to 1.63 in 1995 indicates a remarkable continuous decrease (74%).

2000s, 2010s, and 2020s

After abolishing the birth control policy in 1996, as described above, in 2000, the government prepared the 1st (2006–2010), 2nd (2011–2015), and 3rd (2016–2020) plan for the aging society and population ( Tables 2 , ​ ,3, 3 , and ​ and4). 4 ). These were prepared to help Korean society overcome the low fertility rate. In addition, the government implemented several schemes. Table 2 presents the country’s population at that time. The number increased from 46,136,101 in 2000 to 51,829,136 in 2020, which was a gradual increase. However, the total number of births decreased from 640,089 in 2000 to 272,337 in 2020, and it further decreased to 400,000 during 2005–2015, finally falling below 300,000. Over the past 20 years, there has been a significant decrease in the total number of births (57%), from 640,089 in 2000 to 272,337 in 2020. When comparing the number of births in 1970, when the total number of births was the highest, with those in 2020, they decreased by approximately 73%.

The CBR was 13.5, 9.0, 8.6, and 5.3 in 2000, 2005, 2015, and 2020, respectively, indicating a significant decline. When comparing the CBR of 1960, when CBR was the highest, with that of 2020, the CBR value declined by approximately 88%. The TFR continued to decrease. It was 1.48 in 2000, 1.23 in 2010, and from 2018 onwards, the value was 1.0 or lesser. The TFR was 0.98, 0.92, and 0.84 in 2018, 2019, and 2020, respectively. From 2018 onwards, every woman of childbearing age had one or no child in her lifetime'.

Population forecast for the period post 2020 (2021–2060)

To overcome the low fertility rate, the 4th (2021–2025) plan for an aging society and population is currently being implemented ( Tables 2 and ​ and4). 4 ). Table 2 shows the population projections for Korea from 2021 to 2060. It is forecasted that the population will increase from 51,744,876 in 2021 to 51,199,019 in 2030, following which it will begin to decrease to 50,868,691 in 2035, and in 2060, 40 years from now, it is predicted that the number will further decrease to 42,617,053. The total number of births has been forecasted to increase from 261,000 in 2021 to 305,000 in 2030, and following this, it is expected to gradually decrease, with an estimated number of 181,000 in 2060. The CBR is estimated to increase from 5.0 in 2021 to 4.2 in 2060, and the TFR is estimated to increase from 0.82 in 2021 to 1.21 in 2060.

Comprehensive graph of the trend in the total live births, CBR, and TFR (1925–2020)

The comprehensive graph of the changes in the trends of total live births, CBR, and TFR in Korea for the past 100 years from 1925 to 2020 is shown in Fig. 1 . The total number of births was highest in 1960 at 1,080,535, decreasing to 272,337 in 2020. The CBR also peaked at 44.2 in 1955, decreasing to 5.3 in 2020. The TFR decreased from 6.78 in 1944 to 0.84 in 2020. Thus, there was a continuous and significant decline in the total live births, CBR, and TFR.

Comparison of the TFRs of OECD countries

A comparison of the TFRs of the OECD countries in 2018 is shown in Fig. 2 . The average TFR decreased from 2.79 in 1970 to 1.74 in 1995, with a further decrease to 1.63 in 2018. In 2018, Korea (0.98) had the lowest TFR among the 37 OECD countries. Korea was the only country with a score below 1.0 (Israel has the highest TFR at 3.09, while the average European TFR is 1.53).

Based on the above results, the changes and trends in the population count, birth rate, and number of births in Korea during the past 100 years, from 1925 to 2020, were examined. In this discussion: 1) using the statistics mentioned above, we examine the changes in the history and events of the relevant past that affected the changes in the birth rate, 2) we review the causes and countermeasures of the low fertility society problem, which is currently emerging as a serious demographic, social, and economic problem in Korea, and 3) we determine the meaning of the statistically predicted estimates up to the year 2065. To explain the relationship between the history and events related to the changes in the fertility rate of Korea, this study divided the modern history of Korea into the following periods: 1) the Korean Empire and Japanese colonial period, 2) period of liberation, 3) Korean War and the late 1950s, 4) period of birth control policy (1961–1995), 5) period of population quality improvement policy (1996–2003), and 6) period of the 1st, 2nd, 3rd, and 4th plan for an aging society and population (2005–2025).

Looking at the Korean Empire and Imperial Japan’s forced occupation period, in 1897, Emperor Gojong proclaimed the name of Korea as the Korean Empire, and in 1910, the annexation of Korea to Japan began. Statistical data for this era include the national census, the current state census, and the data of the dynamics survey based on reports of births and deaths, 9 most of which were based on estimates. As is usually the case with the colony’s demographics, the current state census was compiled primarily based on a police census. Compared with the year 1925, the total population increased significantly in the 1940s, which may have been due to the initiation of the food rationing system, and the number of undeclared births that were reported all at once. The TFR during the Japanese colonial period was 6.0–7.0, a period when the infant mortality rate was high; as a result, the population growth was negligible. With World War II breaking out in 1939, Japan’s severe exploitation and forced labor at the end of the Japanese colonial period reduced the number of births in Korea from 600,000 to 500,000. With the liberation of Korea in 1945, the number of births increased from 590,000 in 1946 to 630,000–680,000 in 1947–1950. The TFR in 1950 was 5.05. During the Korean War period and the late 1950s, even during the Korean War of 1950–1953, the number of births decreased slightly to 630,000 in 1950 but remained at 670,000–770,000 during 1951–1953. In 1955, the TFR was 6.33, and the population decreased significantly owing to a sharp increase in the death rate during the war. The period from 1961 to 1995 was the period of birth control policy. In 1961, the Korean Family Planning Association was founded, and the birth control policy began. In 1963, a nationwide movement to promote family planning (birth control) projects began. The slogans of 1961 gave birth to moderation, “let’s raise well, have little, raise well,” and in 1966, the three-child movement was set into motion (3.3.35 principle, let’s have three children before the age of 35). In the process of the TFR, which began in 1962, the population growth suppression policy was strongly pursued (this 5-year economic development plan was the 7th and continued until 1996). At that time, the government distributed free contraceptives to public health centers across the country to suppress childbirth. The vasectomy was also free of charge.

While the TFR decreased from 5.99 in 1961 to 4.62 in 1969, the number of births each year was over one million during 1959–1971, and this period recorded the highest number of births in Korean history. In 1971, the two-childbearing movement was launched, and in the mid-to-late 1970s, the birth control policy overlapped with the international oil shock (1973–1974). During 1977–1979, the TFR ranged from 2.99–2.90, entering the second era, and the number of births during 1976–1978 decreased to 700,000.

Family planning (birth control) was continued in the years 1981–1989. In 1981, the slogan raised was “one well-raised daughter out-envies ten sons,” in 1983, the slogan was “two’s too much.” During 1979–1982, the number of births remained in the mid-to-late 800,000 range. In 1983, it entered the population replacement level, defined as less than TFR 2.1. Since 1984, Korea entered an era of low fertility (TFR 1.76), with the number of births decreasing to 600,000, and the population growth rate being < 1%. In 1989, free contraceptive services were stopped, and family planning (birth control) was somewhat relaxed. In the 1990s, although the era of a low fertility society was not yet in full swing, the government abandoned this policy in 1994, 32 years after the birth control policy was introduced. Following this, Korea witnessed a period of “Population Quality Improvement Policy,” which started in 1996 and ended in 2003. During this period, despite the entry into the era of a low fertility society in 1984, until the early 2000s, the government and other social circles were not aware of the seriousness of the low fertility society, and the policy response was delayed due to the inertia of the long-term population suppression policy.

In the 2000s, the TFR rebounded briefly between the years 2000 and 2001, ranging from 1.48 to 1.31, due to the start of the 2000 millennium boom. In 2002, it entered the era of the lowest-low fertility society (TFR less than 1.3) (January 18, 2002). This was the period when Korea’s seriously low fertility society began in earnest. In 2000, the elderly constituted 7.2% of the total population and entered the phase of being an aging society, a critical problem that is demographically second to that of the low fertility society. In the 2000s, there was an increase in infertility, avoidance of marriage, and avoidance of pregnancy. An increase in the age of pregnancy and giving birth emerged as the major cause of low fertility. In 2004, the government set the issue of the low fertility rate in the aging society on the national agenda, after realizing its seriousness. In 2005, the government enacted the Basic Act on the Low Fertility and Aging Society, launched a related committee, and took full-fledged countermeasures for the low fertility society policy. It began with the 1st plan for a low birth rate and an aging society (2006–2010) announced in 2005. Although the TFR (1.26) and the number of births (490,000) increased temporarily due to the birth boom in 2007, the “Year of the Golden Pig,” it was temporary. Although the 1st plan for the aging society and population was implemented with the goal of improving the TFR from 1.08 in 2005 to 1.61 (OECD average) in 2010, it failed to achieve the goals. Korea’s TFR decreased to 1.15 due to the second global financial crisis that occurred in 2009.

The government implemented the 2nd plan for the aging society and population in 2015 with the goal of restoring the TFR to the OECD average in 2016–2030. However, it failed to achieve the target (TFR was 1.24 in 2015). Since 2013, the TFR has continuously decreased, along with a slowdown in global economic growth. Even worse, the number of births declined below 400,000 (350,000) in 2017, and the TFR went below 1.0 (0.98) in 2018.

In the announcement of 2020, the last year of the 3rd plan for the aging society and population, the target was to increase the TFR from 1.21 in 2014 to 1.50 in 2020, however, it failed to achieve this target (TFR 0.84 in 2020). According to the 2020 statistics, the number of births fell below 300,000 (270,000), following the fall of 400,000 in 2017. Korea entered an era of population decline, recording 300,000 deaths in three years. We reached the age of the population cliff.

The government established the 4th Plan for Aging Society and Population in 2021 to shift the goal of resolving the low fertility society from fertility-oriented policies to policies that improve the quality of life of all generations, emphasizing the integration and solidarity of classes and generations, but it did not present specific TFR target figures for 2025.

The causes analyzed in the 1st and 2nd plans for the aging society and population (2005, 2011), which were announced in 2005 and 2010, include an increase in the age of marriage, avoidance of childbirth, delay in marriage and childbirth due to income and employment instability, difficulty in reconciling work and family, lack of childcare system and infrastructure, increase in the burden of raising children, change in values regarding marriage and children, and changes in traditional values, such as family succession. According to the 4th plan for the aging society and population (2021), the causes of a low fertility society were: increased labor market disparities and precarious employment, intensifying competition for employment, intensifying competition for education, single-to-late marriage factors, rise in housing prices, increase in housing costs, decrease in consumer spending capacity, gender discrimination in the labor market, difficulties in work-family balance, increase in dual-income, care gap in the care infrastructure system due to an increase in the demand for care (a situation in which working parents have no place to leave their children after childbirth), decrease in the marriage rate, change in the conception of marriage and family, and changes in the composition of family, which is rapidly progressing. Ultimately, various factors, such as social and institutional factors of employment, childcare, housing, labor, and care; awareness and practice of marriage, pregnancy, and childbirth; aging of women who give birth; and a decrease in the number of births, are complicated. Finding a solution to this problem has emerged as an important task.

Measures and efforts to overcome the above-mentioned lowest-low fertility society were already drafted in the policy implemented in 2006. However, the results were unsatisfactory. Although the 1st, 2nd, and 3rd rounds witnessed the investment of a high budget and the implementation of several measures, the results were a failure. As a result, the following 4th plan was formulated and is currently being implemented.

The direction of the 4th Plan for Aging Society and Population (2021–2025), which is the most recent one, implies the following: 1) change in the basic perspective (focus on improving the quality of life of ‘individuals,’ balanced approach and practice of investment in family support and social structural innovation); 2) guarantee of enjoyment of individual rights in response to aging in the low fertility society (transition to a society where we work together and care for each other, guarantee basic rights to children, ensure there are comprehensive sexual and reproductive rights, and strengthen the medical support for pregnancy and childbirth along the life cycle); and 3) improvement in the nation and society’s ability to respond to demographic changes (reinforcement of education-training and life-based foundations where everyone’s capabilities can be exercised, innovation towards an integrated society in response to the new normal of demographic change, etc.).

To put the policies into practice, the plan attempts to create a society where: people work together and take care of each other (work-life balance enjoyed by all: realization of a work environment that allows work-parenting, establishment of a work environment that harmonizes with an individual’s life/work-life balance through work style, and facilitation of cultural innovation); there is gender-equal working society (creating a gender-equal workplace, strengthening the relief and prevention of sexual harassment and gender discrimination in employment/improving the quality of jobs in the field of intensive care work for women); there is reinforcement of social responsibility for child care (establishing a dense and high-quality care system, creating an equitable primary care environment for children/improving efficiency through the integrated operation of child care, and improving the efficiency through the integrated operation of child care); there is universal guarantee of children’s basic rights (guaranteeing children’s household income and strengthening livelihood support, ensuring the balanced development and growth of children/strengthening the protection and safety net of children and young people); and there is guarantee of lifetime sexual and reproductive rights (comprehensive protection of sexual and reproductive rights, life-long reproductive health management, and disease prevention or healthy and safe pregnancy and childbirth). However, the target TFR value for 2025, when the fourth round ends, is not specifically presented. Thus, the result is noteworthy.

According to the estimated birth rate and number of births until 2065 published by Statistics Korea, Korea’s population is projected to be 51,821,669 in 2021, with it maintained at 51,926,953 in 2030, then beginning to decrease to 51,629,895 in 2035, and further decreasing to 42,837,900 in 2060, which is 40 years from now. The total number of births is estimated to increase from 290,000 in 2021 to 358,000 in 2030, and then gradually decrease to 214,000 by 2060. As per the CBR estimates, there will be a decrease in CBR from 5.6 in 2021 to 5.0 in 2060. According to TFR estimates, TFR is predicted to increase from 0.86 in 2021 to 1.27 in 2060. In both cases, a significant increase was not expected. Looking at the average TFR of OECD countries, TFR decreased from 2.79 in 1970 to 1.74 in 1995, with it standing at 1.63 in 2018. In 2018, Korea had the lowest TFR among the 37 OECD countries (0.98). Among the OECD countries, 11 countries (including Korea) experienced the lowest-low fertility society phenomenon (TFR 1.3 or less). Except for Korea, all other countries escaped the lowest-low fertility society phenomenon. This is the result of comprehensive fertility promotion policies implemented by OECD countries for a long time to restore the fertility rate. 12 , 13 , 14 Sweden does not have a special fertility policy. It is simply a family and labor policy within the social welfare system. The society operates on the principle that all people who can work, including women, participate in labor to develop the economy and society. France’s fertility policy is mainly national and public childcare facilities for childcare services, and kindergarten is a free education for most children aged 3 to 5 years. The United States does not have a separate fertility incentive program. Rather, they actively support the cause by aiming for a large family. By sharing resources between generations, extended families have a stronger ability, than nuclear families, to overcome crises in a low fertility population and aging society. Large families who live together can help parents raise children and perform household chores. It seems that most OECD countries that overcame low fertility were able to do so because they eventually created an environment where women could work. In Germany, although women’s participation in the labor market is not an important policy target, childcare services are highly developed. Looking at the countries that have made some progress in overcoming the low fertility rate, we can see that marriage, pregnancy, childbirth, and childrearing are things that individuals and families have to go through, but society and the state are putting their highest priority on all policies and are earnestly implementing these policies. To this end, a gender-equal family policy, work-family balance, and acceptance of various family types without discrimination should be implemented. In addition, policy support is needed to create a virtuous cycle structure, such as the influx of excellent immigrants to secure a workforce, the use of the elderly workforce, and support for the stable economic independence of the youth.

Therefore, in conclusion, looking at the changes and trends in the number of births, fertility rate, and birth rate in Korea over the past 100 years, following the liberation, Korea (South Korea) went through a birth control policy period of limiting childbirth due to the increase in the number of births. When it comes to the population quality improvement policy period, Korea’s low fertility society era that started in the mid-2000s, the TFR fell below 0.84 in 2020. Following the population collapse of 400,000 in 2017, with fewer than 300,000 births (270,000), the number of deaths reached 300,000, thereby entering an era of population decline. In other words, we reached the age of the population cliff. Furthermore, OECD countries recorded the lowest fertility rates. As we enter the era of population decline, we are in a serious situation that will give rise to various socio-economic problems, ranging from demographic problems to future population decline. To overcome this, the government has devised various measures. Thus, the authors hope that this data will help provide basic materials for practical applications in related fields, including medical fields, such as neonate perinatal, infant, and neonatal medicine, and help tackle the low fertility rate problem prevailing in Korea.

Disclosure: The authors have no potential conflicts of interest to disclose.

Author Contributions:

• Conceptualization: Bae CW, Chung SH.
• Data curation: Yun J, Kim CY.
• Formal analysis: Yun J, Kim CY, Son SH, Bae CW.
• Investigation: Bae CW, Choi YS, Chung SH.
• Methodology: Bae CW, Choi YS, Chung SH.
• Writing - original draft: Yun J, Kim CY.
• Writing - review & editing: Bae CW, Choi YS, Chung SH.

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• Published: 15 September 2024

The middle-income trap and foreign direct investment: a mixed-methods approach centered on Mexico and South Korea

• Anthony William Donald Anastasi 1  

Humanities and Social Sciences Communications volume  11 , Article number:  1211 ( 2024 ) Cite this article

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While scholars extensively study the middle-income trap, gaps persist, particularly regarding foreign direct investment and its role in transitioning from middle- to high-income status. This mixed-methods research examines the relationship between foreign direct investment inflows and escaping the middle-income trap. Utilizing a comparative case study of the automotive industries in Mexico and South Korea during the 1960s to 2000s, alongside logistic regressions, we consistently observe a negative correlation; higher foreign direct investment inflows are associated with a decreased likelihood of escaping the middle-income trap. This confirms the World-Systems Theory’s view of the relationship between foreign direct investment inflows and the middle-income trap. The implications of this study should induce caution on the part of middle-income countries when accepting foreign direct investment in strategic, high-value-adding industries. This study recommends opting for purchasing foreign technology or for joint ventures that ensure technology transfers. This research addresses a critical gap, offering insights into the nuanced dynamics of foreign direct investment’s effects on the transition from middle to high-income status.

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Introduction.

The World Bank classifies countries into four categories based on their gross domestic product (GDP) per capita level. For the fiscal year 2023, low-income (LI) countries are those that have a GDP per capita under 1086 USD, lower middle-income (MI) countries are those with a GDP per capita between 1086 USD and 4255 USD, upper MI countries’ GDP per capita range is between 4256 USD and 13,205 USD, and any country with a GDP per capita over 13,205 USD is considered high-income (HI) (The World Bank, 2023 ).

101 out of the 114 countries classified as MI in 1960 stayed there until 2008 (The World Bank and Development Research Center of the State Council, the People’s Republic of China, 2013 ). Meaning during that almost 50-year period, merely 13 countries, so-called breakout cases , have been able to graduate to the ranks of HI status. Footnote 1 This phenomenon has been dubbed the middle-income trap (MIT), a term first coined by the World Bank economists, Indermit Gill, Kharas ( 2007 ). According to the term’s originators, scholars have since latched onto the idea of MIT. As of 2015, papers on Google Scholar with the term in their title were at around 300, while papers with the term in its contents exceeded 3000 (Gill & Kharas, 2015 ). One can imagine the number has grown significantly since then. To define the MIT, a country is deemed trapped by remaining at lower MI status for more than 28 years, upper MI status for 14 years, or in MI status in general for longer than 42 years (Felipe et al., 2012 ).

In general terms, MI countries fail to transition to HI status and get trapped because they lack the ability to compete with either LI or HI countries. As MI countries develop and their wages grow, they lose their competitive edge in low-value-adding industries, yet unless they have successfully upgraded their industries to compete in higher-value-adding ones, they lack the ability to compete with HI countries in said industries. Accordingly, the intuitive logic behind understanding MIT as a result of the failure of industrial upgrading is evident (Anastasi, 2024b : p. 48).

Despite the popularity of MIT among scholars, some aspects and avenues of inquiry have yet to be fully investigated. One such aspect is that of foreign direct investment’s (FDI) effect on MI countries’ prospects for transitioning to HI status. As various models of state-led growth started to decline around the 1980s, the rise of global supply chains integrated LI countries and MI countries into the production processes of multinational corporations (MNCs), which chiefly originate from HI countries (Oks & Williams, 2022 ). This process has happened to such a great extent that to produce a single iPhone, various parts are needed from 43 countries on six different continents (Petrova, 2018 ).

FDI is used to set up fully foreign-owned and controlled firms in the host country or, in some cases, create joint ventures in partnership with local firms. As of 2021, the flows of FDI sat at 2.2 trillion USD, or 2.3 percent of global GDP, according to the World Bank ( 2023 ). In the same year, MI countries welcomed 754 billion USD of FDI inflows or 2.1 percent of MI countries’ GDP. MNCs’ and local firms’ interests often diverge, and with the rise of international agreements such as TRIMS (Trade-related Investment Measures), the host country’s state capacity to regulate and influence foreign firms has shrunk considerably. With the substantial amount of inflows, not to mention the stock, of FDI into the MI world and the limited power MI countries’ states have on MNCs’ operations within their borders, a rigorous investigation into its effect on MI countries’ relationship with the MIT is warranted.

While some scholars have theorized the effect FDI has on an MI country’s prospects for transitioning to HI status (Anastasi, 2023 ; Henley, 2018 ; Doner & Schneider, 2016 ; Zeng & Fang, 2014 ), to the best of the author’s knowledge, the number of empirical studies on the relationship is rather small (CM et al., 2024 ; Nguyen-Huu & Pham, 2021 ). The empirical studies, while they do look at the effects of FDI on the transition from MI to HI status, the relationship between MIT and FDI is not their main focus, leaving gaps in the scholarship. This paper, deploying a mixed-methods approach, seeks to fill this gap, first by a comparative case study and then by several logistic regressions.

The literature primarily focusing on FDI and MIT is rather limited. The scholarship on FDI and industrial upgrading as a whole is much more expensive, yet falls outside of the scope of this research, as we are primarily focused on MI countries and the industrial upgrading necessary to make the transition to HI status. Due to this, a brief comparison of the same industry during the same time period, in two different countries with two distinctly different relationships with both FDI and MIT should shine some light on this issue. We will look at how South Korea, a break-out case, was able to build a world-class automotive industry, while Mexico, a victim of MIT, was unable to, with special attention paid to FDI.

The rationale for choosing the automotive industry Footnote 2 is that during the time period of this comparative case study (1960s–2000s), it was considered a late industry, due to its demanding technological prerequisites, representing modernity (Chenery & Taylor, 1968 ). Yet this also implies that the firms and states that possess this technology will guard it fiercely. However, breaking into this industry is not impossible for countries and firms, although it is arduous. This study focuses on the case of South Korea and Mexico within the automotive sector, both having successfully established domestic industries, albeit with marked differences.

The purpose of this comparative case study is to analyze the impact of FDI on industrial upgrading. Acknowledging the imperfect nature of using industrial upgrading as a proxy for avoiding MIT, the study aims to tease out the distinctions in FDI acceptance models and their effects on industrial upgrading.

When constructing this comparative case study two additional variables (besides time) were controlled for: level of development and population size. South Korea and Mexico were around the same level of development in the early 1960s in terms of GDP per capita, which is also around the same time both attempted to use industrial policy to develop an automotive industry (The World Bank, 2024 ). Their population sizes were comparable during this period, however, Mexico’s population size grew much larger in subsequent years (The World Bank, 2024 ). This might be in part due to the fact that developing countries’ population growth is higher than developed countries.

The quantitative section seeks to confirm or deny the results of this study’s comparative case study. An explanation of the data, estimation methods, and model construction methods is given in that section of the paper.

The paper will proceed as follows: the “Literature review” section will provide a literature review of the relationship between FDI and MIT. The following section will qualitatively compare two different models of welcoming FDI by one break-out case, South Korea, and one country stuck in the MIT, Mexico. The next two sections will explore and analyze the data used and the logistic regression models built to test this relationship and discuss their results respectively. The succeeding section covers implications, and the last section serves as a conclusion.

Literature review

Positive relationship between fdi inflows and the mit.

As failure to advance towards HI status is a failure to upgrade domestic industries (Anastasi, 2024b : p. 48), the question of the relationship between MIT and FDI thus turns to does FDI aids or poses a hindrance to the type of industrial upgrading necessary to make the transition to HI status. According to Zeng and Fang’s ( 2014 ) analysis, FDI presents an obstacle. Using World-Systems Theory as a theoretical lens, the pair examines how China’s relationship with MIT might shape up to be. Zeng and Fang argue that world-systems theory does a great deal of explaining MIT since, “during the last two decades of the 20th century there appears to have been less upward mobility than occurred in the 1960s and 1970s, which suggests that ‘globalization’, rather than spreading wealth and facilitating development, may create barriers for nations on the lower rungs of the global economy to move upwards.”

Proponents of world-systems theory argue that the international division of labor serves as the fundamental organizing principle of the global economy. Consequently, peripheral and semi-peripheral countries specialize in the production of ‘periphery-like products,’ while core countries specialize in ‘core-like products.’ These core-like products necessitate “(high levels of) industrialization, advanced technology, and well-developed financial systems” for their production, thereby limiting their creation to only a handful of countries and companies with the requisite capabilities. As a result, core-like products hold a “quasi-monopolized” status, allowing for significant extraction of profits due to the lack of competition. In contrast, periphery-like products have lower production requirements, fostering genuinely competitive markets for them. When exchanges occur between the periphery and semi-periphery and the core, core-like products possess a significantly stronger position relative to periphery-like products, resulting in a flow of surplus value from the developing world to the developed world.

MNCs will utilize FDI in the developing world to capitalize on cheaper inputs, such as labor and land, resulting in narrow profit margins. The true profit-generating activities, such as product development and marketing, are often reserved for their home countries, primarily in the developed world. Zeng and Fang specifically examine China and characterize its development strategy (as of their paper in 2014) as “dependent development” due to China’s reliance on FDI and foreign technology. They argue that China’s substantial inflow of FDI could pose challenges for its transition to HI status. According to them, these challenges can manifest in three ways.

First, the type of economic activities that MNCs use China for are low-profit generating in nature, such as low-end commodity manufacturing. For example, as of 2012, Foxconn, a manufacturer of Apple products operating in China, has a profit margin of 1.5 percent, while Apple’s operating margin is more than 30 percent (Culpan, 2012 ). As of 2020, Apple’s profit margins have risen to over 40 percent, and while Foxconn’s profit margins have increased since 2012, they remain in the low single digits (Ma, 2020 ). In fact, another study looking a Brazil found that despite large inflows of FDI, FDI’s contributions to the Brazilian economy’s growth have been marginal at best, and its contributions to industrial upgrading are virtually unobservable (Arbix & Laplane, 2003 ). This is because FDI went towards purchasing already existing assets for discounted prices, rather than investing in new production capabilities.

Zeng and Fang’s ( 2014 ) second reason is that FDI increases China’s ‘economic vulnerability,’ as MNCs can move production outside of China as their manufacturing wages rise too high. This puts downward pressure on local workers’ wages, suppressing the creation of a vibrant domestic market. Lastly, high levels of FDI in certain sectors, namely high-technology ones, could suppress the emergence of local firms in those sectors.

Anastasi ( 2023 ) contributes to the ongoing theoretical discussion on the relationship between MIT, FDI, and the hierarchical international system. Drawing upon world-systems theory, I have argued that HI countries and their MNCs have incentives to impede the industrial upgrading of MI countries, thereby creating barriers to their progression towards HI status. When MNCs enter developing nations, they often strive to safeguard their technology and prevent knowledge spillovers to local firms. This strategy serves two purposes: firstly, to maintain a quasi-monopolistic hold on these markets by limiting competition, and secondly, to prevent their subsidiary’s input costs from escalating in the developing world.

Similar to the findings of Zeng and Fang ( 2014 ), Anastasi ( 2023 ) underscores the potential negative consequences of FDI in impeding the emergence of domestic national champions. This viewpoint aligns with the arguments put forth by Doner and Schneider ( 2016 ), who contend that the current stock of FDI in MI countries exceeds the levels observed during the corresponding stage of development in previously industrialized nations. While large firms play a crucial role in achieving economies of scale and averting the MIT for MI countries, reliance on MNCs to fulfill this role presents its own set of challenges.

MNCs dominate the manufacturing sectors in MI countries and significantly contribute to their exports of manufactured goods. In some MI countries, such as those in Latin America, MNCs constitute 33 percent to 50 percent of the top 100 firms (Schneider, 2013 ). This situation creates obstacles to the growth of domestic manufacturing firms while generating distinct, opposing incentives for MNCs and local companies.

Local firms have an interest in improving their country’s educational system and elevating the skill level of potential employees. In contrast, MNCs lack the same incentive since they can attract highly talented workers from the local labor pool by offering higher wages. Moreover, the stance on research and development (R&D) spending varies between MNCs and local firms. Local companies generally have an incentive to allocate some of their profits to R&D, as it can lead to long-term profitability, despite the associated risks. Conversely, MNCs tend to avoid R&D investments in host countries, reserving such endeavors primarily for their home nations. In fact, there is evidence that increases in FDI lower R&D spending in MI countries, creating additional barriers to industrial upgrading and transitioning to HI status (Anastasi, 2024a ; Azman-Saini et al., ( 2010 )).

Henley ( 2018 ) explores the historical origins and consequences of dependent industrial development in Southeast Asia, focusing on the impact of ethnic capitalism and FDI. Drawing contrasts with Northeast Asian countries like Korea, the paper contends that Southeast Asian nations, marked by ethnic business specialization, face challenges in pursuing non-dependent industrial development. It delves into the political economy of countries like Malaysia and Indonesia, highlighting the complexities arising from the dominance of ethnic Chinese minorities in the private sector. Henley ( 2018 ) argues that this phenomenon has hindered cohesive national industrialization efforts and led to a reliance on FDI, which has suppressed indigenous technology creation, particularly in the electronics sector.

Following the studies of Anastasi ( 2023 ), Henley ( 2018 ), Doner & Schneider ( 2016 ), and Zeng & Fang ( 2014 ), this paper proposes the following hypothesis:

Hypothesis 1: There is a positive relationship between the level of FDI inflows (relative to GDP) and the likelihood of being trapped in MI status.

Negative relationship between FDI inflows and the MIT

CM et al. ( 2024 ) examine the relationship between innovation (defined as labor productivity, the share of the industrial workforce, the percentage share of the population using the internet, the number of patents, and the number of scientific and technical articles) and economic globalization (defined as trade openness, FDI, high-technology exports, and taxes on international trade) on the transition from MI to HI status. Utilizing Bayesian model averaging (BMA) and the generalized method of moments (GMM), the authors found that FDI was positively correlated with transitioning from MI to HI status in both their BMA and GMM models. They also used Cox regressions in a novel fashion to test different variables’ effects on the speed of transition from MI to HI status. The results showed that the time-dependent covariate FDI increased the transition speed, thus reducing the transition duration.

Tampakoudis et al. ( 2017 ) aim to contribute to the scholarship on FDI and the MIT. However, the authors acknowledge that, at the time of their writing, “there is no empirical evidence regarding the relationship between FDI inflows and the middle-income trap.”

This study does not attempt to fill the gap that the authors identified; instead they “investigate the effects of certain determinants on FDI inflows to middle-income countries, with respect to avoiding the middle-income trap.” The study itself assumes accepting FDI is a precondition for avoiding MIT. They find that openness and GDP growth are positively correlated with FDI inflows, while population growth is negatively correlated.

Nguyen-Huu and Pham ( 2021 ) present interesting results. They test the effect of FDI inflows (among other independent variables) on GDP per capita in MI and LI countries. They find that, in the long run, FDI inflows positively correlate with GDP per capita growth for their full sample and upper MI countries. However, in the short run, for both upper and lower MI countries, FDI inflows negatively correlate with GDP per capita growth. Despite this short-term negative correlation, the long-term positive correlation with GDP per capita growth aligns Nguyen-Huu and Pham ( 2021 ) with other studies that found a negative correlation between FDI inflows and being trapped in the MIT.

Following the studies of CM et al. ( 2024 ), Tampakoudis et al. ( 2017 ), and Nguyen-Huu & Pham ( 2021 ), this paper proposes a second Hypothesis:

Hypothesis 2: There is a negative relationship between the level of FDI inflows (relative to GDP) and the likelihood of being trapped in MI status.

Comparative case study: variations in FDI reception in MI countries

The comparative analysis begins by examining Mexico’s foray into the automotive sector, characterized by the dominance of MNCs. Notably, Mexico’s potential national champion, Automex, faced challenges within this competitive landscape. In contrast, the study delves into South Korea’s experience, where the creation of national champions, epitomized by the success story of Hyundai, played a pivotal role. This exploration seeks to understand how FDI contributed to fostering a competitive domestic automotive industry, thereby influencing industrial upgrading and overall development. The chronological scope spans from the early 1960s to the 2000s, but starting a bit earlier for Mexico, providing a comprehensive backdrop for assessing the impact of various FDI models on development and industrial progress within the same industry.

The Mexican automotive industry

The Mexican automotive industry got its start with the creation of a Ford assembly plant in 1925, yet the plant did not become fully operational until 1932. During this time, most automobiles were still imported and industrial policy for the industry was fractured. Yet foreign and domestic capitalists piled into Mexico’s small automotive market due to the number of highways being built, protective tariffs, and the potential size of the market. Before the Mexican state’s first well-formulated attempt at industrial policy in 1962, 12 assemblers and 29 importers made over 100 different models. Consequently, no firm was able to hit economies of scale, which is thought to be at 100,000 units per year (Doner, 1992 ).

In the year 1960, the Mexican state produced a report, entitled the NAFIN report, on the global automotive industry and steps the state can take to ensure the development of a vibrant domestic industry. The report had a few suggestions including, (i) In order to achieve economies of scale, the state implemented a restriction on the number of assemblers, capping it at four to five. Furthermore, the range of models was also limited, and the lifespan of each model was extended to five years. (ii) Assemblers were required to integrate with local parts and components firms, with the exception of engines. The responsibility for manufacturing parts was exclusively assigned to these local firms. (iii) The standardization of auto parts was introduced, enabling parts and components firms to benefit from economies of scale and supply the same parts to different assemblers. (iv) The concept of “Mexicanization” was promoted, allowing joint ventures between local firms and MNCs, but with local Mexicans in charge of management. This blueprint provided a solid foundation for Mexico’s inaugural attempt at an industrial policy for the automotive industry, offering valuable guidance to the president and his office.

While the industrial policy for the Mexican automotive industry was well crafted, its implementation was less than desired. Despite the report on the automotive industry suggesting that only four firms be allowed to participate in auto assembly, the four largest domestic firms, Footnote 3 the government allowed many more. Two American MNCs, Ford and GM, and one Japanese MNC, Nissan were allowed to operate. By allowing these MNCs entry, the state had a hard time saying no to more domestic firms attempting to enter. This failure to limit firms in a relatively small market ensured that no firms were able to hit economies of scale.

The inclusion of more than the ideal four firms can be blamed on successful lobbying attempts by Ford. Before the report, the three largest automotive firms in Mexico were two MNCs Ford and GM, and one domestic firm, Automex. Simultaneously with the compilation of the NAFIN report, Ford crafted its own report of the Mexican state concerning the automotive industry’s development. Predictably, Ford’s report advocated a significant role for the company (Back, 1990 : p. 278). Adding to this influence, Edgar Molina, Ford’s general manager for its Mexican operations, maintained a close personal friendship with Raúl Saliana Lozano, the head of the Ministry of Industry (SIC). Exploiting this connection, Molina ensured Ford’s approval (Bennett & Sharpe, 1985 : pp. 109, 114). Thomas Mann, the U.S. ambassador to Mexico, supported this effort by conveying to the SIC that excluding U.S. firms from the industry would be viewed as an unfriendly act (Bennett & Sharpe, 1985 : p. 110). The involvement of MNCs complicated the rejection of other Mexican assemblers. Representaciones Delta, with ties to the president, gained approval after the President explicitly communicated to the SIC that they should be allowed to assemble automobiles regardless of the associated costs (Bennett & Sharpe, 1985 : 123). Additionally, Impulsore Mexicana Automotriz and Reo received approval. However, Reo, which assembled Toyotas, went out of business two years later in 1964. Subsequently, the Japanese government pressured the Mexican state to approve Nissan, threatening to halt the import of Mexican cotton if they resisted. Nissan officially entered the Mexican market in 1964, two years beyond the legal deadline (Bennett & Sharpe, 1985 : p. 111).

The failure to limit firms ensured that no firms operating in the Mexican market could hit economies of scale, which naturally benefited MNCs, as they had profitable businesses elsewhere in the world. Footnote 4 This led to the failure of many local assemblers, most notably, Automex, Mexico’s potential national champion. Automex built its business by purchasing complete-knock-down (CKD) kits from Chrysler, an American MNC. Footnote 5 At the time, Automex was Chrysler’s only exposure to the Mexican market, and refused to leave the market to Ford and GM. As Automex was looking as if it would go under, Chrysler worked with Automoex to form a plan to keep Automex afloat. The proposed plan entailed a merger among Automex, VAM, DINA, and FANASA (all three were stated owned at the time), with the distribution of equity and management rights as follows: Automex would retain one-third of both equity and management rights, Chrysler would acquire a third of the equity, and the Mexican state would also be allocated a third of the equity. The two firms approached the Mexican state with this plan and the state set up a committee to study the effects this plan would have. The committee’s report’s findings indicated that the proposed merger plan held the potential to address inefficiencies prevalent in the industry, specifically stemming from numerous firms producing an excess of models at a scale that was too low. Furthermore, the merger plan was anticipated to bolster the utilization of locally sourced parts, offering a potential resolution to Mexico’s balance-of-payment issue.

During this period, Ford grew apprehensive about the potential implications of the proposed merger plan on its position in the Mexican auto market. Specifically, Ford was concerned about disruptions to its supply chain from the United States. The worry centered around the likelihood of increased local content requirements if the merger plan proceeded. This would compel Ford to acquire more locally sourced parts, potentially forcing price hikes or extending model life due to the perceived lower quality and limited scale of Mexican domestic parts and components firms.

In response, Ford, mindful of Campos Salas’s, the head of Mexico’s SIC, efforts to encourage more exports, approached him with an alternative proposal. Capitalizing on concerns about the balance of payments, Ford devised a plan where exports would offset imports. The proposition stipulated that starting in 1972, firms must export an amount equivalent to their imports to maintain basic production quotas. Those exceeding this requirement could see an increase in their production quotas. This approach allowed Ford to prioritize higher exports over increasing locally sourced parts for its Mexican operations.

In the end, the state chose Ford’s plan over Automex’s merger plan. This led to Automex failing and Chrysler acquiring it. Automex’s failure was the last nail in the coffin for Mexico’s attempt at creating a national champion in its automotive industry. Instead, MNCs and FDI grew to dominate the sector. Though the state did not give up on industrial policy for this sector, the goals of the state shifted from trying to create a Mexicanized automotive industry, to one that could alleviate balance-of-payments concerns of the country, as these were the main targets of 1972, 1977, 1983, and 1989 presidential decrees on the automotive industry. Within these goals, the state had some successes. In regards to industrial upgrading, not so much. The industry could assemble automobiles efficiently and even manufacture engines, yet the true high-value-adding parts of the production process never moved into Mexico, as the MNCs saved that for their home countries.

The 1980s brought about a debt crisis in Mexico and most of Latin America entitled the Latin American Debt Crisis . The Mexican state pursued a strategy of liberalization after this (Morton, 2003 ). After 1994, the Mexican automotive sector was heavily deregulated, and decision-making power for the industry moved even further away from Mexico City, and even closer to Detroit (Moreno Brid, 1996 ). According to Chiquiar and Tobal’s ( 2019 ) analysis of Mexico’s engagement in Global Value Chains (GVC), the country’s automotive industry held a 6.3 percent share of the international industry’s GVC in 1994, a figure that significantly rose to 27.2 percent by 2017. Notably, there was a strategic shift from manufacturing capital-intensive parts in 1994 to labor-intensive assembly of automobiles in 2017. The transformation was also reflected in employment dynamics. In 1990, Mexico accounted for seven percent of North American automotive jobs, a percentage that surged to 42 percent by 2017 (King’s College London, 2021 ). However, this influx of jobs was accompanied by a wage squeeze. In 2007, the average wage in the Mexican automotive industry stood at 3.95 USD per hour, which decreased to 3.60 USD in 2013 and further dropped to just 2.30 USD in 2019 (King’s College London, 2021 ). This decline in wages corresponded with a reduction in Mexico’s domestic value added (Blyde, 2014 ), both on the aggregate and for the automotive industry in particular, with domestic value added falling by 50 percent between 2003 and 2016 for the automotive industry (King’s College London, 2021 ).

The involvement of FDI and MNCs in the Mexican automotive industry had a detrimental impact on industrial upgrading. Ford, in particular, vehemently opposed Automex’s success, depriving Mexico of a national champion and diminishing its prospects of advancing toward the higher-value-added segments of automotive production. The neoliberal shift in Mexico resulted in increased production volume within the industry, but a simultaneous decline in value-added components. This shift indicated that, once the state withdrew, MNCs were inclined to exploit Mexico for its relatively cheap labor, reserving the genuinely high-value-adding aspects for their home countries. Consequently, Mexico found itself confined or even downgraded within the division of labor in the automotive industry.

The South Korean automotive industry

South Korea’s automotive industry had its start in 1961 when the newly established interim government led by Park Chung Hee following his military coup in the same year, constructed an automotive assembly plant and passed the Law for the Protection of the Automobile Industry and the Five-Year Plan for the Promotion of the Automobile Industry . Instead of having a foreign firm or a joint venture, a domestic firm, Saenara, was given monopoly rights to assemble automobiles in Korea, and it started importing semi-knock-down (SKD) kits from Nissan to assemble its Bluebird model. For reasons mostly outside of Saenara’s control, the firm went under after assembling just 2,773 automobiles (Yülek et al., 2020 ). South Korea faced a currency crisis and depleted foreign reserves rendered it impossible for Saenara to continue importing SKD kits from Nissan. Consequently, Saenara faced closure and was ultimately acquired by South Korea’s Ministry of Commerce and Industry (MCI) and Hanil Bank, a state-owned bank.

After Parks’s 1963 presidential victory and the creation of the 3rd Republic of Korea, South Korea had its second attempt at industrial policy for the automotive industry. The following year saw the launch of the Promotion Plan for the Automobile Industry and the search for a new monopolist assembly firm. After intense disagreement within the South Korean state, Sinjin emerged victorious after securing the support of President Park himself (Kim & Lee, 2013 ). In 1965, Sinjin took over Saenara and started importing SKD kits and assembling Toyota’s Corona model the following year under a licensing agreement with 21 percent of parts being locally produced (Chang, 1985 ). The local automotive market experienced a surge in demand, but Sinjin maintained low production levels, and reaped significant profits, attracting new players such as Asia Motors and Hyundai Motors (Kim & Lee, 2013 ). Footnote 6 These entrants, arguing that Sinjin’s dependence on Toyota hindered the growth of the domestic parts industry, persuaded the government to allow their entry. Consequently, Asia Motors and Hyundai Motors, importing SKD kits from Fiat and Ford, respectively, entered the market.

Increasing the number of assembly firms by 200 percent made the task of building a vibrant local auto parts and components industry much more difficult. A market as small as South Korea split between three assemblers, would not have enough production of a single model of automobile needed to allow the local auto parts firms to hit economies of scale. Understanding this, Park’s government launched the 1969 Basic Promotion Plan for the Automobile Industry . The plan focused on increasing the number of local parts bought by the three assembly firms and building out local engine manufacturing capability. Yet as part of the 1969 plan, local firms would need to partner with MNCs in order to attain foreign engine manufacturing know-how, breaking with South Korea’s previous strategy of simply purchasing foreign technology.

Sinjin, the current market leader, partnered up with General Motors (GM), an American MNC. President Park figured that this joint venture would ensure US defense commitment to South Korea. GM knowing this took advantage of Sinjin and scored a great deal. Both companies would invest 24 million USD and split the ownership 50/50, yet GM also controlled all of the financing, received 750,000 USD a year in management fees, and received three percent of total sales. This resulted in the creation of GM Korea (GMK). Hyundai, as a new entrant in the automotive industry, saw this plan as an opportunity to score a larger market share and leapfrog Sinjin. Hyundai entered negotiations with its partner Ford, yet the two never reached an agreement, leaving Hyundai completely domestically owned.

The 1969 plan was a disaster, as almost none of the goals were met. This failure of industrial policy was also in the context of an economic and political crisis, which led to a regime change (though not a change of government). After declaring a state of emergency, Park pushed through the Yushin (유신) constitution, creating the Fourth Republic of Korea (4RoK). This essentially got rid of any checks and balances from the judiciary or the legislators, and allowed President Park to rule for life (Im, 2013 ). The idea of ‘ politicians ruling and bureaucrats governing ,’ still held as the fourth republic was just as technocratic as the third, yet the capacity of the South Korean state was increased dramatically (Kim & Lee, 2013 ). This change in state structure also brought about a change in economic priorities, namely a heavy industry and chemicals (HCI) drive.

The 4RoK’s HCI drive introduced a new plan for the automotive industry, and in 1973 the Long-Term Plan for the Promotion of the Automobile Industry was launched. The underpinning of this plan was the creation of a ‘ citizen’s car ,’ a fully domestically designed and made model. Along with requirements for the price, fuel efficiency, restrictions on the number of models, and length of time for which each model could be made, it had the requirement of being made with 95 percent locally sourced parts. The plan was met with mixed reviews from the assemblers. In 1973, GMK was clearly the leader out of the three domestic assemblers, and had no real interest in export promotion, as that could damage GM’s (the MNC) position in the global automobile market. Limiting the number of and extending the production cycle for models, could allow Hyundai and Asia Motors to cut into GMK’s market share, which would run counter to GMK’s interest. Additionally, GMK had little faith in local parts and components firms, as they just purchased these parts from GM’s global network from much more efficient firms, and the local content requirements would put their car at the same level of quality as the other two assemblers (Kim & Lee, 2013 ). Additionally, GMK complained that the investment requirements were too high, and domestic demand and domestic technology were too low (Yülek et al., 2020 ).

Hyundai’s reaction was much different. In fact, due to its loose ties with MNCs and its drive to become a world-class brand, the MCI worked with Hyundai’s management team as they crafted the Long-Term Plan. Asia Motors and GMK did in fact increase the amount of locally sourced parts in their assembled automobiles, yet the models they produced were just previous models from their licensors with minor changes. Hyundai had their sights set on creating their own car, and they did.

In 1974 Hyundai introduced a prototype of its first original model, the Pony. By 1976, the Hyundai Pony was ready for the domestic market, and it was an instant hit. The pony was first introduced with about 85–90 percent of locally sourced parts (Yülek et al., 2020 ). In one year, Hyundai’s market share went from 19 percent to 39 percent. In 1979, it had a majority market share of 51 percent (Hyundai Jadongcha Isipnyeonsa, 1987 ). Hyundai’s success and rising incomes within Korea led to a large increase in auto production.

The development of the Pony was a large task, as the technology levels of Hyundai and the South Korean economy were quite low at the time. Hyundai was able to acquire foreign technology without becoming a pawn of MNCs. They did this through licensing agreements and diversifying where technology came from, Hyundai’s pony was designed by an Italian car maker, a design for an engine from the U.K., and other important parts designed by the Japanese. Also by hiring foreign talent, in 1974 Hyundai hired George Turnbull, an automobile maker executive from the U.K. and he brought with him a team of engineers from the U.K. Lastly, they struck a mutually beneficial deal with Japan’s Mitsubishi. Mitsubishi, lagging behind its Japanese competitors, saw a partnership with Hyundai as an opportunity to leapfrog them (Kim & Lee, 2013 ).

Soon after Hyundai found success in its home market, it turned its sights to overseas markets, namely in the developing world. However, South Korea was dragged into both a political and economic crisis following the 1979 assassination of Park Chung Hee. After a small window of political openness, Chun Doo-hwan took control of power via a coup and immediately set up an interim government. The interim government was keen on consolidation within the automotive industry. In August and September of 1980, GM (the foreign owner of GMK) and Hyundai held six meetings, yet hit a dead-end over the issues of exports and equity ratio. Hyundai wanted GM to control only 20 percent of equity and have no management rights, while GM wanted 50 percent of equity and veto power over management decisions. GM also wanted to incorporate Hyundai into its global network of suppliers, while Hyundai wanted to become an international brand. GM wanted to turn Hyundai into something it fought hard and took risks to make sure it would not become, a mere pond of an MNC.

After Chun Doo-hwan established the Fifth Republic of Korea, the merger plan for the automotive industry was abandoned. Hyundai entered the United States market in 1984 and was able to compete with MNCs in their own backyard. This success was due to Hyundai’s competitiveness and a bit of luck. The United States and Japanese trading relations took a bit of a dive, creating an opening for cheap passenger automobiles, which Hyundai filled. Many developed economies’ automakers started to focus on larger, more expensive vehicles, which allowed Hyundai to excel in the small passenger vehicle market. Additionally, Hyundai strengthened its relationship with Mitsubishi. Hyundai got to access Mitsubishi’s global marketing network and some of Mitsubishi’s superior technology, while Mitsubishi saw this as an opportunity to leap-frog its domestic competitors within the US market by taking a 10 percent stake in Hyundai.

At the same time, Hyundai began investing heavily in R&D in order to start developing its own indigenous technology. Starting from 23.8 billion won in 1982 and by 1987, Hyundai’s R&D spending hit 467 billion won, which accounted for 72 percent of the South Korean automotive industry’s total R&D spending in 1982 and 1987, 50 percent (Yülek et al., 2020 ). Hyundai continues to excel and continues to use more and more of its indigenous technology rather than licensed technology for its automobiles.

The Korean automotive industry took another hit during the 1997 Asian Financial Crisis, yet was able to return to growth. Currently, South Korea’s automotive industry is one of the world’s biggest and most developed. The country is the fifth-largest auto producer in the world and the sixth-largest exporter of automobiles (Yoon, 2023 ).

A comparison of the two

The South Korean and Mexican automotive industries developed on different trajectories, and this is, in part, due to their different models of accepting FDI. South Korea’s industry has developed into one of the world’s largest and most advanced. The Mexican automotive industry did in fact develop into something laudable. Currently, Mexico’s automotive industry is the sixth-largest producer of passenger automobiles in the world, just below South Korea (International Trade Administration, 2023 ). In 2019, Mexico produced 3.8 million units, most of which were exported (Carlier, 202 ). On average, 89 percent of automobiles produced in Mexico are exported to the rest of the world, yet a majority of them are exported to the United States, as 80 percent of all automobiles produced in Mexico are exported there (International Trade Administration, 2023 ). Mexico does not have any national champions, so most of the automotive industry is linked to global supply chains, namely for North America, with ‘ The American Big Three ’ (Ford, GM, and Chrysler), playing a large role. This means that FDI plays a huge role in the Mexican automotive industry, making up 5 billion USD a year on average (Carlier, 2023 ).

Despite this notable success, it has been unable to move up the division of labor in the industry and is stuck to performing relatively low-value-adding economic activities. This is clearly due to the level of FDI and the number of MNCs Mexico allowed to operate within its automotive industry. One of the largest challenges when first developing this industry is that of economies of scale, consequently, large firms, or national champions, are needed to overcome this obstacle. We saw that Hyundai was able to grow into a large firm by purchasing foreign technology and keeping an arm’s length away from MNCs. In Mexico, Ford was able to ensure that Automex, Mexico’s potential national champion, went under. This is due to its superior market power, which came from profits it earned elsewhere in the world, and its ability to co-op industrial policy, again due to its profits it earned elsewhere.

It would be irresponsible to assume that if Mexico never allowed such large amounts of FDI, its automotive industry would have developed much like South Korea’s. However, without Ford, the driving force that brought about Automex’s destruction would not have been present, giving Mexico a greater chance of creating a national champion within its automotive industry. Taking a step back, if this trend of FDI negatively affecting industrial upgrading in MI countries continues, then we should see similar results in the quantitive models.

Data and research design

The data collected for the four models built in this study come from the World Bank’s Databank website. Four breakout cases : South Korea, Uruguay, Greece, and Japan, and four countries that are trapped : Mexico, Turkey, Malaysia, and Brazil were chosen. Footnote 7 The years for this data span from 1970 to 2000. The starting year was chosen due to the availability of data concerns, and the last year was chosen to minimize the years when the breakout cases were at HI status.

Estimation methods

The question of whether a country has or has not advanced toward HI status results in a simple, binary answer; consequentially a logistic regression is best suited for this conundrum. This study employs a cross-sectional approach. Although the data covers multiple years, the MIT outcomes are constant over time for each country, with breakout cases coded as 1 and trapped cases coded as 0 for the entire period. This approach allows us to capture variations between countries and different levels of FDI inflows relative to GDP, enhancing the robustness of our findings regarding the impact of FDI inflows on overcoming the MIT. Descriptions of the variables used can be found in Table 1 , and descriptive statistics and the variable’s Pearson’s correlations can be found in Table 2 .

Model construction

Figure 1 simply shows the levels of FDI%G of the countries that advanced to HI status (1) and those trapped at MI status (0). Figures 2 and 3 are the logistic regression curve and the marginal effects plot, respectively, of a simple logistic regression between MITθ (dependent variable) and FDI%G (independent variable). All figures show a clear negative relationship between acceptance of FDI%G and MITθ, being the advancement to HI status. Model 1 is written as:

Notes: The y -axis is MIT outcomes (0:trapped, 1:not trapped) and the x -axis is foreign direct investment inflows (% of GDP).

Notes: The y -axis is the probability of MIT outcomes and the x -axis is foreign direct investment inflows (% of GDP).

Notes: The y -axis is MIT outcomes and the x -axis is foreign direct investment inflows (% of GDP).

To further test this relationship, three additional models were built. Model 2 adds two additional variables that have been argued to be correlated with development, the ADR and GCF. Footnote 8 Model 2 is written as:

The third model adds E and MVA to simulate the characteristics of the developmental state, which has been credited with enabling the quick, robust development found in East Asia (Haggard, 2018 ). Model 3 is written as:

The fourth model combines all the control variables, which is written as:

The results of the models can be found in Table 3 , and the 95 percent confidence intervals of the odds ratios for each variable in the models can be found in Table 4 .

Robustness test

To test the robustness of these four models, this study deployed four different subsample analysis tests, dividing the data by region (Table 5 ). The initial test mirrored the first model of this study, using only one independent variable (FDI%G), but focused solely on countries in East Asia (South Korea, Japan, and Malaysia). FDI%G continued to show significance in this context.

The second subsample test also used East Asian countries but added ADR and GCF, similar to the second model of this study. FDI%G remained significant; interestingly, ADR, which was significant in Models 2 and 4, appeared nonsignificant in this test. Due to data availability concerns, the third and fourth models of this study were not tested.

The third test replicated Model 1 (and Test 1) but examined only Latin American countries (Mexico, Brazil, and Uruguay). FDI%G was significant, although slightly less so, with a p -value of 0.006. The fourth and final test mirrored Model 2 (and Test 2) but focused on observations from Latin American countries. Similar to Test 3, FDI%G was significant, though less so than in the first two tests (and the four models), with a p -value of 0.003.

Empirical results

Descriptive statistics and pearson’s correlations.

The mean values and standard deviations of key variables are as follows: FDI%G (1.116, 1.501), GCF (25.972, 7.889), ADR (64.283, 15.047), E (21.832, 20.082), and MVA (21.654, 4.945). These indicate moderate variability in FDI%G, significant differences in GCF, a broad range in ADR, considerable disparity in E , and moderate variability in MVA. Pearson’s correlation coefficients show: FDI%G has slight positive correlations with GCF (0.131) and ADR (0.173), moderate positive correlation with E (0.715), and weak correlation with MVA (0.041). GCF has a negative correlation with ADR (−0.452) and positive correlations with E (0.263) and MVA (0.246). ADR has weak negative correlations with E (−0.021) and MVA (−0.151). E has a moderate positive correlation with MVA (0.245). None of the correlation coefficients are considerably high (<0.9), indicating no significant multicollinearity. This suggests that the independent variables are not highly correlated, ensuring more reliable regression analysis results.

The initial model, which considers only FDI%G as a predictor, revealed a significant negative association. The odds ratio (OR) for FDI%G was 0.36 (95% CI: 0.24–0.51), indicating that a one-unit increase in FDI%G is associated with a 64% decrease in the odds of positive MITθ. An OR of 0.36 means that for each one-unit increase in FDI%G, the odds of transitioning to HI status decreased by 64% (since 1–0.36 = 0.64). This is a substantial effect, highlighting that FDI inflows might be counterproductive to achieving economic advancement in the context of MI countries.

The 95% confidence interval for the OR (0.24–0.51) indicates that the true effect of FDI%G on the odds of escaping the MIT is highly unlikely to be greater than 0.51 or less than 0.24. This range suggests robustness in the negative association between FDI%G and positive MITθ, providing strong evidence that higher FDI levels are consistently associated with lower odds of transitioning to HI status. This model’s goodness of fit is reflected in the McFadden R² (0.16) and Nagelkerke R² (0.20).

Expanding the model to include GCF and the ADR introduced new insights. FDI%G remained negatively associated with MITθ, with an odds ratio (OR) of 0.42 (95% CI: 0.27–0.60). This indicates that for each one-unit increase in FDI%G, the odds of transitioning to HI status decrease by 58% (since 1 − 0.42 = 0.58). The consistency of the negative association across models reinforces the robustness of the finding that higher FDI inflows are detrimental to achieving economic advancement.

The ADR also exhibited a significant negative association with MITθ, with an OR of 0.81 (95% CI: 0.76–0.86). This means that for each one-unit increase in the ADR, the odds of transitioning to HI status decreased by 19% (since 1 − 0.81 = 0.19). This suggests that higher ADRs, indicative of a larger proportion of dependents (both young and old) relative to the working-age population, hinder economic progression to HI status. The inclusion of GCF in the model did not yield a significant association with MITθ, implying that variations in gross capital formation do not substantially impact the likelihood of escaping MIT in this context.

The goodness of fit for Model 2, as indicated by the Akaike Information Criterion (AIC) of 142.95 and the Bayesian Information Criterion (BIC) of 157.01, suggests a good balance between model fit and complexity. The lower AIC and BIC values relative to Model 1 indicate improved model performance while maintaining parsimony. The pseudo-R² values for Model 2 (McFadden: 0.60, Nagelkerke: 0.76) show a substantial increase compared to Model 1, reflecting a better explanatory power of the model with the additional predictors. These values suggest that the model explains a significant portion of the variance in the outcome variable, providing a more comprehensive understanding of the factors influencing the transition to HI status.

Incorporating E and MVA alongside FDI%G demonstrated that FDI%G retained a negative association (OR = 0.12, 95% CI: 0.05–0.24). This indicates that for each one-unit increase in FDI%G, the odds of transitioning to HI status decrease by 88% (since 1 − 0.12 = 0.88).

E exhibited a positive association with the odds of transitioning to HI status, with an OR of 1.07 (95% CI: 1.04–1.11). This means that for each one-unit increase in E , the odds of transitioning to HI status increase by 7%. This positive association suggests that higher export levels contribute to economic progression, potentially by fostering greater economic activity and integration into global markets. MVA did not show significance.

The model exhibited a reasonable fit (AIC: 184.86, BIC: 197.76). These criteria suggest that the model balances fit and complexity well, providing a robust framework for understanding the factors influencing the transition to HI status.

The final model included all predictors, and FDI%G continued to exhibit a negative association (OR = 0.22, 95% CI: 0.08–0.45). This suggests that a one-unit increase in FDI%G is associated with a 78% decrease in the odds of moving to HI status (since 1 − 0.22 = 0.78). Notably, the ADR retained its significant associations. The model’s fit was well-balanced, as indicated by the AIC of 118.94 and the BIC of 138.30. These values suggest that the model effectively captures the relationship between the predictors and the outcome without excessive complexity. The relatively high pseudo-R² values (McFadden: 0.55, Nagelkerke: 0.70) further indicate that the model provides a good fit to the data, capturing a substantial proportion of the variability in the likelihood of transitioning to HI status.

The consistent negative correlation between FDI and the likelihood of transitioning to HI status across all models supports the first hypothesis, allowing us to reject the first null hypothesis. Higher levels of FDI appear to hinder a country’s ability to escape the MIT. However, the results seem to counter the second hypothesis, indicating that we cannot reject the second null hypothesis.

The AIC and BIC values offer valuable insights into model fit and complexity. Lower AIC and BIC values across subsequent models suggest improved goodness of fit without an unwarranted increase in complexity. Thus, the selected models strike a balance between explanatory power and parsimony, enhancing the robustness of the findings. These results collectively contribute to a nuanced understanding of the factors influencing MITθ and the role FDI plays in the transition from MI to HI status.

The findings from the qualitative comparative case study, specifically that FDI played a negative role in the formation of Mexico’s automotive industry and hindered its transition from MI to HI status, were confirmed by the results of the multiple logistic regression models. This finding is particularly significant in the context of the global economic landscape, where FDI is often considered a key driver of economic growth (Bénétrix et al., 2023 ).

The results of both the qualitative and quantitative studies have several theoretical implications. First, they run counter to CM et al. ( 2024 ) and Tampakoudis et al. ( 2017 ). Second, they confirm the theoretical studies of Anastasi ( 2023 ), Henley ( 2018 ), Doner & Schneider ( 2016 ), and Zeng & Fang ( 2014 ), validating the claim by Anastasi ( 2023 ), Zeng & Fang ( 2014 ) and World-Systems theorist that the free movement of capital seems to harm developing countries’ prospects of development rather than aid it. Finally, these findings open up new questions, particularly regarding the mechanism by which FDI harms the host countries’ transition from MI to HI status.

As for the exact mechanism by which higher levels of FDI lead to a lower chance of advancing to HI status, future research is needed. However, based on this study’s comparative case study, it seems that FDI prevents the materialization of large domestic firms capable of performing high-value-adding economic activities within the host country. This was evident in the case of the Mexican automotive industry, where MNCs, through both economic (increased competition) and political (successful lobbying to influence industrial policy) fronts, prevented Automex from succeeding. This stands in contrast to South Korea’s model of FDI acceptance, where Hyundai grew into a large firm capable of performing the highest value-adding economic activities within the automotive industry.

Beyond the primary independent variable of this study, FDI%G, there were some interesting findings with the other control variables. GCF was not found to be significant in any model it was included in (Models 2 and 4), nor was it significant in the subsample analysis tests. ADR was significant in Models 2 and 4 but was insignificant in the subsample analysis test focused solely on East Asia. E was significant in Model 3, but once other control variables were added in Model 4, it was not significant. Lastly, MVA was not found to be significant in any model.

Implications

In 2021, according to the World Bank ( 2023 ), MI countries received $754 billion of FDI inflows, which represented 2.1% of their GDP. While this is a substantial amount, the results of this mixed-method study suggest that MI countries should exercise caution in accepting FDI.

It would be unwise for MI countries to completely shut down FDI inflows; instead, they should adopt a more balanced approach to advance towards HI status.

If the primary mechanism by which FDI traps MI countries at MI status is indeed the suppression of large domestic firms capable of performing high-value-adding economic activities, then MI countries should be selective about the FDI they allow or accept FDI in a way that promotes industrial upgrading. China’s automotive industry provides a useful example. Starting in 1994, China crafted an industrial policy for the automotive sector that included MNCs and sought to attract FDI through joint ventures (JVs), where MNCs partnered with local firms. Footnote 9 With state support in negotiating technology transfers, China’s young domestic firms entered the market and moved towards higher-value-adding economic activities (Chin, 2018 ). Today, Chinese automakers are world-class in terms of electric vehicles, showcasing how properly managed FDI can enable industrial upgrading.

However, not every MI country has a market the size of China, which might make MNCs reluctant to transfer technology merely to enter a smaller market. In such cases, MI country governments should strategically decide which sectors to allow FDI. For higher-value-adding industries, whose creation is essential for avoiding the MIT, MI countries should initially aid local firms in purchasing foreign technology and subsequently support the development of indigenous technology, much like the strategy employed by South Korea (Anastasi, 2024b : p. 116).

From a global economic governance perspective, the global trading system and the system of global flows of capital are broken. This harms both developed countries, such as the United States (Klein & Pettis, 2021 ; p. 190) and developing countries alike. The implications of the study imply that capital flows into the MI world, in the form of FDI are harmful to industrial upgrading, economic advancement, and thus making the transition to HI status. As stated above there are some domestic policy implications (such as the use of JVs, being selective as to which sectors of the economy can welcome FDI inflows, and obtaining foreign technology through technology purchases and licensing agreements), although there are some global economic governance implications. MI should attempt to bring their domestic laws in line surrounding FDI inflows in a manner that increases the likelihood of technology transfers (namely in regards to JVs and intellectual property rights) and force a global norm change regarding FDI. This could stop a potential “race-to-the-bottom” in regards to laws governing FDI inflows within the MI world. We have seen something like this in the case of the “Global Minimum Corporate Tax” (GMCT) (Partington, 2021 ), which major countries agreed a few years back. This could serve as a model for a new international structure to govern FDI inflows into the MI world.

While the concept of MIT has received well-deserved attention from scholars during its almost two decades in existence, some large questions about it remain. One of these is the effect FDI has on the transition from MI to HI status. Through a mixed-method approach, this research attempted to fill this gap.

In examining the trajectories of the automotive industries in Mexico and South Korea, this comparative case study reveals nuanced insights into the role of FDI in shaping industrial development. The Mexican automotive industry, heavily reliant on FDI, found itself entwined with MNCs, facing challenges in achieving economies of scale and failing to create national champions. In contrast, South Korea strategically navigated its industrial policy, fostering the emergence of successful domestic players like Hyundai.

The Mexican experience highlights the complexities of managing FDI and underscores the impact of MNCs’ influence on policy decisions. The failure to limit the number of firms and the dominance of MNCs hindered industrial upgrading, leaving Mexico performing relatively low-value-adding economic activities. The shift in industrial policy focus from creating a Mexicanized industry to addressing balance-of-payments concerns marked a significant turning point. Conversely, South Korea’s journey showcases the potential for strategic policy interventions to foster a vibrant domestic industry. The emphasis on a “citizen’s car” with high local content, successful collaborations with MNCs, and Hyundai’s innovative approaches allowed South Korea to become a major global player. The ability to balance domestic priorities with international partnerships contributed to South Korea’s position as one of the world’s largest and most advanced automotive industries.

The comparative analysis underscores the critical importance of policy choices and the nature of FDI acceptance models in determining industrial outcomes. While Mexico achieved success in becoming a major automotive producer, it struggled to move up the division of labor and remained dependent on global supply chains. In contrast, South Korea’s strategic policies facilitated the creation of a robust industry with substantial technological advancements.

The logistic regression models, analyzing the relationship between FDI and a country’s likelihood of advancing to HI status, consistently demonstrated a negative association. Higher levels of FDI appear to hinder a country’s ability to escape the MIT. The inclusion of control variables provided a nuanced understanding of the factors influencing outcomes, emphasizing the delicate interplay between FDI and other economic indicators. While the results of this study run counter to some of the earlier ones (CM et al., 2024 ; Tampakoudis et al., 2017 ), it validated the claim by World-Systems theorists (Anastasi, 2023 ; Zeng & Fang, 2014 ), that the free movement of capital seems to harm developing countries’ prospects of development rather than aid it.

The limitations of this study are that in cases such as the Chinese automotive industry, we have indeed seen FDI inflows lead to industrial upgrading (Chin, 2018 ). While on the aggregate, FDI inflows seem to pose a threat to industrial upgrading thus avoiding the MIT in terms of MI countries, there seem to be cases that do no comfort to the results of this study. Future research should investigate why this is so, to better understand under which conditions can FDI aid development and industrial upgrading in MI countries.

In conclusion, the experiences of Mexico and South Korea in the automotive sector and the logistic regression models point to the fact that states should exercise caution while accepting FDI. States should devise domestic laws governing FDI and MNCs to facilitate technology transfers to local firms or opt to push domestic firms to purchase foreign technology through licensing agreements, avoiding FDI altogether. Careful policy considerations and strategic planning that empower the creation of national champions and indigenous technology development are essential for ensuring long-term success. The findings of this study contribute to the broader discourse on the impact of FDI on industrialization and provide valuable insights for policymakers and scholars alike.

Data availability

The data used in the quantitative part of this study can be found on the World Bank Databank’s website or alternatively can be made available by requesting it from the author. The qualitative data can be found through in-text citations.

These break-cases are; Israel, Japan, Ireland, Spain, Hong Kong, Singapore, Portugal, Taiwan, Mauritius, Equatorial Guinea, South Korea, Greece, and Puerto Rico. The number of HI countries has since changed a bit from the time of the writing of the World Bank’s report. New entries mostly include post-Soviet states, island states, and Chile and Uruguay in South America. Equatorial Guinea and Mauritius, two of the 13 break-out cases, have since declined in terms of GDP per capita and have been downgraded to MI status.

For a comprehensive look at automotive industry building in the developing world, please see Doner (1992).

The ideal four firms would be: Automex, DINA, Promexa, and VAM.

In fact, one study shows that between the years 1966 to 1972, MNCs’ profits were about 16.5% higher than local firms within the Mexican automotive industry (Jenkins, 1997).

Complete-knock-down kits are kits that contain most, if not all, of the necessary parts needed to assemble automobiles. They differ from semi-knock-down kits, as complete-knock-down kits are completely unassembled, while semi-knock-down kits come with some of the parts already assembled to some degree.

Asia Motors was bought out by Kia in 1976, yet will be referred to as Asia Motors for the sake of consistency.

Trapped countries are according to Felipe et al.’s (2012) definition of being trapped in the MIT.

See Lawton ( 2019 ) for the age dependency ratio’s link to economic growth in developing countries and Topcu et al. ( 2020 ) for the link between gross capital formation and economic growth.

This was the 1994 Automotive Industry Policy (AIP), or the 1994版《汽车工业产业政策》. The 1994 AIP details were; (i) local firms could only partner with world-leading automotive MNCs, (ii) the MNCs could not have more than a 49 percent stake in the joint venture, (iii) the MNCs could not be involved in the distribution and sales of the automobiles, as that would be the sole responsibility of the local firm, (iv) at least 40 percent of automotive’s part should be bought locally, and the higher the local content level, the lower the import duties would be for the rest of the imported parts, (v) local firms are allowed to set up joint ventures with multiple MNCs (yet this was there to increase the local firm’s power within their relationship with the MNC), and (vi) the MNC should perform R&D in China.

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Anastasi, A.W.D. The middle-income trap and foreign direct investment: a mixed-methods approach centered on Mexico and South Korea. Humanit Soc Sci Commun 11 , 1211 (2024). https://doi.org/10.1057/s41599-024-03662-6

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DOI : https://doi.org/10.1057/s41599-024-03662-6

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