This is an issue that has actually long pertained to policymakers in the big industrial nations, who have worried about possible an adverse effects of external FDI upon the nation"s balance the payments and also employment of its work-related force. Thus, a number of empirical studies have been published about this worry for these countries, yet not for developing or recently industrializing countries.
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In recent years, however, relative costs of job in Taiwan and Korea have actually risen and, in response, Taiwanese and also Korean firms have attempted to relocate up the "production ladder" into an ext capital extensive (including human-capital intensive) operations and also have moved details of their production activities overseas. Thus, the effect of FDI on trade has additionally become a worry of policy makers in Taiwan and Korea. Because that this reason, in this document we investigate this partnership empirically for Taiwan and also South Korea. We start with a general conversation of this relationship and a testimonial of previously published researches of the relationship for developed nations.
In principle, one of two people relationship between FDI and exports-complementarity or substitutability-could hold. FDI takes ar when investors, normally multinational firms, based in one nation (the "home" nation) establish operations under their managerial regulate in some other nation (the "host" nation). Often, the motivation is to develop locally in the host country products that had previously been exported native the home nation, and to the level that this happens, FDI and home country exports room substitutes. But the home country operations the a multinational firm have the right to be vertically attached with host country operations, such that rise in the activity in the latter generates increased demand for intermediate products (including resources goods) indigenous the former. Also, marketing and also distribution capabilities developed by FDI might allow the home nation operations come export final goods and also services to client that would not be got to in the lack of FDI. To the degree that either of these happens, home nation FDI and also exports will be complements.
Because the worth of intermediate assets is a ingredient of the value added to the last goods, it might be said that FDI and also exports must be net substitutes in some long run sense. If exports of last goods native home nation are displaced by local production, there will be a net loss of violin value also if the gross loss is offset in part by violin of capital and also intermediate goods. This is true in a trivial sense since the worth of last goods have to be greater than or same to the worth of every inputs provided to create those goods. However, this heat of discussion supposes that host country demand for a particular an excellent will always be fulfilled by exports from the residence country, which can not be the case. Alters in the relative expense of production can imply that, through the passage of time, home country exports will certainly be displaced by regional production regardless of of whether the displacement is done by multinational that company shifting production from the home to the host nation or by neighborhood firms operating completely within the hold nation.
Indeed, with the i of time, the relationship in between FDI and also exports could an extremely well change. Suppose, because that example, that the host country were to come to be over time relatively much more efficient in the production of a specific class of last goods and the home country were to come to be relatively more efficient in the production of intermediate products used to produce these final goods. If multinational firms were to hold dedicated skills allowing the present of inner economies associated with vertically linking the manufacturing of the two sets the goods, the relationship between extr FDI and exports by this firms could become increasingly complementary even if at part earlier suggest in background an early FDI offered to displace home country exports.
More complex relationships in between FDI and also international trade have been noted. Urata (1995) has examined the expansion of the electronic devices industry in eastern Asia, and also finds that direct investment and also trade in electronic devices goods have actually grown hand-in-hand in the region. The electronics industry global has been significant by rapid all at once growth and by fast rates of new product development and expense reduction. Urata thus finds that exterior FDI by Japanese this firm in the eastern Asian region has been pushed both by expansion of host nation demand and also by complex patterns the shifting family member costs. These cause firms come seek new production sites and to create complicated patterns of cross hauling the both final goods and intermediate products. He note that, as these Japanese MNEs have over time placed brand-new direct investments in nations where they were previously lacking (for example China), this firms have not quit nor also curtailed manufacturing in countries with older-vintage FDI.
A more reason for complementarity in between international profession and activity of multinational firms is discover by Brainard (1995a, 1998). She notes that multinational firms generally hold intellectual property benefits (e.g., technologies and also trademarks) that might permit larger industry shares and hence boost both trade and also investment in industries where this firms operate. Brainard hypothesizes that the re-publishing of profession in complete sales by a firm to a certain market will be negatively influenced by deliver costs and also trade barriers, yet positively impacted by invest barriers and firm-level scale economies. Using US commerce Department data for US direct investment abroad and also foreign direct investment in the joined States, she finds that trade and FDI barriers and scale economies are durable explanatory variables, when transportation costs are not. In a associated work, Brainard mirrors that relative element proportions space not robust explanators of multinational firm task (Brainard 1995b).
Whether FDI and also exports space net substitutes or network complements therefore is indeterminate on the basis of ethics and, as a valuable matter, the worry becomes one empirical one. Many studies of this relationship in fact tend to show that the partnership is complementary, that much more FDI is connected with more, rather than less, exports.
In both the united States and also in the united Kingdom during the late 1960s, for example, there was official concern over the effects of outside FDI top top the as whole balance of payment on a existing account basis. Central to this issue was the concern of the impact of exterior FDI on trade flows. In response, two research studies of these impacts were lugged out under official auspices (Reddaway et al. 1967 and also Hufbauer and Adler 1968).
Using somewhat various methodologies and coverage, both studies arrived at roughly comparable conclusions: If future cash flows room not discounted, the all at once long term effects of external FDI on the balance the payments space positive. That the results of financial operation alone are positive must not be a surprised to anyone. This is because a for sure undertakes an invest undertaking of any type of sort top top the expectation that the investment will yield a positive return for the firm"s shareholders, and ultimately the return need to be reflect in dividend payments by the parent organization to those shareholders. Thus, to the extent that the shareholder of the firm room nationals the the residence country, the return accruing come the international affiliates the a for sure must at some point accrue come home country nationals funded with the parental organization.
However, both studies additionally indicated that external FDI often tended to stimulate exports (mostly of funding goods and also intermediate goods) without stimulating imports in equal magnitude.
Later research studies yielded outcomes generally consistent with this findings. Bergsten, Horst, and Moran (1978), for example, found that the development of us affiliates abroad had actually a substantially positive impact on the growth of exports of the united state parent firms. Lipsey and Weiss (1981) additionally found that US outward FDI was associated with boosted US exports, even after regulating for other effects (firm size, expenditure on R&D and also marketing, etc.) but that the manufacturing of united state affiliates overseas substituted because that exports to the host nation of third countries. In a later study, the exact same authors (Lipsey and also Weiss 1984) analyzed unpublished US business Department data in ~ the level that the separation, personal, instance firm come examine foreign production and US exports in 14 industries in the production sector. Castle reported hopeful and far-reaching relationships in 11 of this industries.
Similar relations have actually been uncovered for the affect of offshore production of Swedish-owned firms upon the exports manufactured goods of the residence country, Sweden (Blomström, Lipsey, and Kulchyck 1988). Sweden is an progressed industrial economic climate located in close proximity come other advanced economies, and also most of Sweden"s straight investment is situated either in other places in west Europe or in phibìc America. Blomström et al. Found that boosts in the production of affiliates of swedish firms space positively associated to rises in exports because that the seven commercial categories studied. Also, they confirmed that there was no propensity for this positive relationship to adjust as the international production grew.
Pearce (1990), following an approach similar to that of Blomström et al., examined the exports and foreign manufacturing of 458 of the world"s largest commercial MNEs for the year 1982. His findings room that boosts in international production are normally positively connected to boosts in exports. This was found to be specifically true for intrafirm (as opposed to interfirm) exports, underscoring the importance of vertical relationships among the various worldwide affiliates that this sample that MNE"s.
Buigues and also Jacquemin (1996) examine the worry of complementarity versus substitution between FDI and exports v respect to both US and Japanese direct investment in the europe Union. The basic assumption is that if share of the total exports from each of these countries going come the EU is positively concerned the re-publishing of FDI going come the EU after regulating for three extr variables, the relationship is complementary. The three added variables are: intra-EC nontariff trade barriers rate of expansion of final demand, and the EC"s sectoral specialization, every one of which room assumed to be positively concerned FDI. Buigues and also Jacquemin"s sample is pooled cross sectionally throughout seven markets (six because that the joined States) and also ten years. They uncover the relationship in between FDI and also exports to it is in complementary for both the unified States and Japan.
Industry Canada (1994) discovered that FDI native Canada is connected both with rises of Canada"s exports and imports. The very same finding is reported through respect to foreign direct investment in Canada. The result are aggregate and (apparently) based on time collection analysis. Estimates are make of the elasticities of exports and also imports v respect come Canada"s external investment and also the last are greater than the former. These approximated elasticities the trade v respect to invest stocks (see industry Canada 1994, Table 7) space not, however, regulated for the influence of determinants such as financial activity, to compare costs, or other variables the could impact the outcomes.
Graham (1998), using methodology similar to the reported later on in this paper, discovered that complementary relationship exist in between outward FDI and exports and outward FDI and also imports for the unified States and also for Japan.
Thus, every these research studies involving developed countries have actually concluded the the relationship between FDI and exports is complementary. Together is explained in the following section, the outcomes of our empirical investigate for two newly established countries suggest to a regular result, but with some twists.
The Empirical Methodology
The current studies top top FDI/trade relationship suffer two shortcomings. One is that they just examine this relationship for developed countries. This partnership for the newly established nations stays to it is in examined. 2nd is that most of the researches cited above could be criticized because that ignoring the feasible effects of simultaneous decision of FDI and exports which can be causing a spurious correlation in between these two and hence bring about an erroneous interpretation of complementarity.2 This would be the situation if both FDI and also exports to be responding to a common, unspecified causal element. For example, expect that income or size of market alone established both straight investment abroad and exports-that is, both exporters and also direct investors put their energies right into developing big markets and/or those v high every capita incomes however ignored small and/or low per capita revenue markets.3 Then just to present that large share of exports was associated with markets where the share of direct investment was also large would no be sufficient to display that exports and direct investment overseas were complementary. They might still it is in substitutes when the impacts of sector size to be taken into account.4 Likewise, aspects of simultaneously determination could distort outcomes of studies based on differences across industries.
Thus, the effort is do in the results reported here to manage for these factors when assessing the relationships between FDI and also trade because that Taiwan and South Korea. In particular, us remove factors that can simultaneously recognize exports, imports, and also FDI and then research the residual relationship between the first two and also the lattermost of these variables v the source of the simultaneity bias removed. Special, a gravity version was used very first to estimate the effects of 3 variables reputed to be really important components of both FDI and also exports. The three variables favored were (1) every capita income in every host nation market (for i m sorry GDP per capita was used), (2) complete size of this market (for i beg your pardon total populace was used), and also (3) distance from the host to the residence country.5 The version was used to test factors of FDI and exports because that two home countries, Taiwan and also South Korea. The "distance" indigenous the home nation to the host country was indigenous the house countries" capitals, i.e., Taipei and Seoul, to the host country capital. The heaviness specification was multiplicative, i.e., the assumed connection was
where y is the logarithm of the dependent change (FDI or exports), the xi are the three independent variables, and also Î is one error term (assumed, together usual, to be log-normally dispersed with average 1). The expected indicators of ß1 and also ß2 are positive (both home country exports and FDI would certainly be intended to positive attributes of every capita income and market size). The expected authorize of ß3 is an adverse for exports (the further the sector is indigenous the residence nation, the greater transport costs, and also hence the less likely the firms would export from the house nation) however indeterminate for straight investment. Because that example, if direct investment to be to it is in a substitute for exports, climate arguably the substitution would be most likely in those sectors for i beg your pardon transactions costs associated with exports to be high, and the expected sign of ß3 would certainly be positive; however one can envisage scenarios where straight investment would happen in geographically proximate industries see, e.g., Graham 1995). The residuals from every of the two estimations (exports and also FDI together a function of the 3 variables) were climate regressed top top one another. The presumption was the if the heaviness models have actually succeeded in removing simultaneity bias, then any kind of correlation of the residuals would certainly reflect some other causal relationship between FDI and also exports-such as that because of sourcing substitution or to complementarities in manufacturing or distribution and also marketing. A optimistic correlation coefficient would indicate complementarity and also a negative coefficient substitutability. Also performed were comparable two phase analyses between imports and direct investment abroad.
Results because that Taiwan
For Taiwan, the sample contained 54 individual countries that were destinations that both Taiwan"s exports and its direct investment. These fifty-four nations accounted in 1994 for almost the whole stock of Taiwan"s straight investment abroad and most that its manufactured products exports. Different analyses were performed using (1) the data for all countries with and without adjusting for language linkage, advance status (OECD), and also geographical ar (Asia); and also (2) the data for all countries except mainland China (which, for factors to it is in explained, might act together a distortion "outlier" in the sample) with and also without adjusting because that language linkage, development status (OECD), and also geographical ar (Asia).
Summary results of the gravity analyses are given in Table 1 below. As have the right to be seen, missing the fake variables, together an explanator of FDI, only sector size (population) shows up significant. As components of exports and also imports, however, all three explanatory variables appear significant. When using dummy variables come take into account language, advance status, and geographical location, per capita earnings becomes positively and significantly regarded Taiwan"s exterior FDI. Also, return distance proceeds to be insignificant statistically, it continues to have negative sign, i.e., the farther away the host country is indigenous Taiwan, the less likely Taiwan is going come invest there.
The language fake does not appear to be important as a determinant of direct investment. This could be because of the fact that Chinese is rarely talked in the people other 보다 mainland China and also Hong Kong. By contrast, the OECD fake is negatively and also significantly concerned FDI and Asia fake is positively and significantly regarded FDI. This an outcome seems to show that in regards to the circulation of geographical location, Taiwan"s FDI is focused in non-OECD eastern countries.
As components of exports and imports, every explanatory variables are of the expected sign and significant except for two dummy variables, language and OECD, both the which room not significant. In comparison to FDI, distance is a far-ranging determinant of both exports and imports the Taiwan. This exports and imports room not, however, affected by even if it is the destination nation is a occurred economy or not. Similar to FDI, language go not appear to be a determinant of either exports or imports.
Table 2 presents the 2nd stage regressions. As have the right to be seen, the relationship in between the staying unexplained variation in Taiwan"s outward direct investment in the manufacturing sector and the continuing to be unexplained sport in Taiwan"s exports of manufactured products for regressions with and also without dummy variables is positive and far-reaching at 99 percent far-reaching level. This relationship suggests a strong complementary relationship in between Taiwan FDI and also exports.
The outcomes of 2nd stage regressions the the relationship in between Taiwan"s outward straight investment in the manufacturing sector and also Taiwan"s imports that manufactured items are additionally indicated in Table 2. The coefficients, return positive, room not statistically far-reaching for this regressions, either through or without fake variables. Therefore, the complementary relationship in between FDI and imports appears weak if certainly there is one at all.
Given Taiwan"s recent large outward investment tasks in Mainland China, one may wonder even if it is the results presented over could be biased because China the China"s outlier condition in the sample. This condition arises due to the fact that China has actually a huge populace with a really low per capita income and is nearby geographically come Taiwan. To examine whether the outlier features of China prejudice our results, we repeat the regressions dropping China from the sample. The gravity design regression outcomes are gift in Table 3. As have the right to be seen, the results perform not adjust much at all, other than for the dimension of some coefficients and also t-statistics. Indeed, the complementary relationship in between Taiwan"s FDI and also exports i do not care slightly an ext significant, as the coefficients and also t-statistics in Table 4 indicate.
These results may also lead one to wonder whether the solid complementary relationship in between outward FDI and also exports, as uncovered above, is distinctive to Taiwan. Come answer this question, in next section, we existing econometric results for south Korea, a freshly industrialized country which likewise has proficient a rapid exterior FDI in recent years.
Results for south Korea
Gravity version results for southern Korea are presented in Table 5. Without adjusting for advance status (OECD) and geographical place (Asia) of organize nations6, south Korea"s outside FDI is positively and also statistically regarded per capita income level (unlike the situation for Taiwan) and also market size. Back the coefficient the the distance variable is positive-the opposite of the result for Taiwan-it is no significant. Comparable to Taiwan, southern Korea exports and imports space all substantially correlated through income, market size, and also distance, the coefficients of every one of these variables being of the supposed sign.
However, after ~ adjusting for advancement status and also geographical location, FDI equation currently is just marginally considerably correlated with per capita income and market dimension (the coefficients are far-reaching at only the 12 percent level). And, surprisingly, the coefficient top top the distance variable now becomes far-reaching (and continues to be positive). Return the coefficient that the Asia dummy is still statistically significant, the coefficient that the OECD fake is not significant, yet it is of optimistic sign. This finding seems to suggest that although the FDI do by south Korea carriers are mostly in Asia, their FDI location decisions do not hinge heavily on host nation market size and also per capita income. But, even though Asia continues to be the dominant region for korean FDI, compared to firms from Taiwan, south Korea suppliers have likewise made reasonably a big number of invest in OECD countries.
As because that exports and also imports, the results for southern Korea space quite similar to those because that Taiwan. Every coefficients of explanatory variables are of the expected sign and all are far-reaching except for the of the OECD dummy, which indicates that the advance status that a country is not vital factor in determining exports and also imports to and from Korea.
Table 6 presents the second stage regressions. Together indicated, the relationship in between the continuing to be unexplained sports in southern Korea"s outward straight investment in the production sector and also in southern Korea"s exports the manufactured goods for regressions with and also without dummy variables is positive and also also far-ranging at 99 percent significant level. The relationship hence is strongly complementary. However, The outcomes of the 2nd stage regressions the the relationship between South Korea"s FDI and also its imports do not yield clear results. Back this relationship shows up to be complementary and also statistically far-reaching for the residuals indigenous the very first stage regressions perform without fake variables, the is no longer significant once dummy variables are used in this very first stage analysis. We are not totally sure exactly how to analyze this last result but, offered that the 2nd specification (with fake variables) is an ext complete 보다 the first, we are inclined come conclude the FDI and imports because that Korea, as for Taiwan, perform not show up to be substantially related.
Conclusions and Policy Implications
The empirical proof presented in the previous section is generally continual with that of previously studies on developed countries" FDI pattern reviewed in the introduction. The proof tends to support that, together is the case for the developed countries, Taiwan"s outward straight investment and Taiwan"s exports in manufacturing are complements and not substitutes. This exact same complementarity appears in the South korean data. However, because that both countries, outward straight investment walk not show up to be substantially related to imports.
These results have some vital policy implications. To the extent that straight investment and also exports undoubtedly are complements, this result is not supportive of the insurance claim that straight investment overseas is connected with loss of work or deindustrialization in these newly industrialized countries. This conclusion is continuous with those reported for the established nations.
More importantly, however, the complementarity between FDI and also exports says that outward straight investment from neither nation is linked with "hollowing out" or "deindustrialization", as has actually been claimed. Rather the the contrary would show up to it is in true: the as straight investment abroad expands, the affiliates of Taiwanese and also Korean multinationals produced by this investment acquire huge appetites for goods created in the residence economies, and also thus that development abroad is connected with increased, quite than decreased, fiddle possibilities.
It is, however, likewise true that, even though the outcomes pertaining come FDI and also imports room not signficant statistically, these outcomes are continuous with the concept that development of calculation is associated weakly with raised imports that manufactured products into the home economies. But are these expanded imports linked with project loss or deindustrialization?
This last worry cannot be answered top top the basis of the evidence provided here. A reasonable (but, ~ above the basis of the evidence here, untestable) hypothesis would certainly be the the imports connected with multinational task embody a greater percentage that unskilled or semiskilled labor, and a reduced percentage of greater skilled labor, than carry out the connected exports. If this hypothesis is correct, the implication would certainly be that development of multinational activity does put wage or unemployment pressure on low professional labor in the home countries however creates additional demand for high professional labor. This consequently would cause the salaries of the latter course of employees to rise family member to the former, and thus it is not out the the question that multinational activity has added to the farming disparities in income circulation in home countries. However, this possibility is conjectural and is not the only feasible interpretation that the empirical outcomes presented here. Together is so often the case, the would appear that an ext research is essential to test these propositions.
Table 1: Gravity model Results (Mainland China Included, 1994)
Note: superscripts a,b,c show 1, 5, 10 percent statistical significance level. Numbers in parenthesis room t-statistics.
Table 2: Regressions that Residuals on Residuals of gravity Equations (Mainland China Included)
|Taiwan FDI ~ above Taiwan Exports||Coefficient|
|Regression there is no Dummy||1.81(5.99)a|
|Regression through Dummy||1.47(4.82)a|
|Taiwan FDI and Taiwan Imports|
|Regression without Dummy||.42(1.44)|
|Regression with Dummy||.10(.36)|
Note: superscripts a, b, c show 1, 5, 10 percent statistical significance level. Numbers in parenthesis room t-statistics.
Table 3: Gravity model Results (Mainland China Excluded, 1994)
Note: superscripts a,b,c suggest 1, 5, 10 percent statistical meaning level. Number in parenthesis space t-statistics.
Table 4: Regressions the Residuals on Residuals of gravity Equations (Mainland China Excluded)
|Taiwan FDI on Taiwan Exports||Coefficient|
|Regression without Dummy||1.84(6.25)a|
|Regression through Dummy||1.61(5.18)|
|Taiwan FDI and also Taiwan Imports|
|Regression there is no Dummy||.56(1.87)c|
|Regression v Dummy||.13(.47)|
Note: superscripts a, b, c indicate 1, 5, 10 percent statistical significance level. Numbers in parenthesis room t-statistics.
Table 5: Gravity version Results for southern Korea (1993)
Note: superscripts a,b,c show 1, 5, 10 percent statistical significance level. Number in parenthesis space t-statistics.
Table 6: Regressions of Residuals on Residuals of gravity Equationsfor southern Korea
|Taiwan FDI top top Taiwan Exports||Coefficient|
|Regression there is no Dummy||1.25(5.45)a|
|Regression through Dummy||1.09(3.89)a|
|Taiwan FDI and also Taiwan Imports|
|Regression without Dummy||.59(2.31)b|
|Regression v Dummy||.36(1.60)|
Note: superscripts a, b, c suggest 1, 5, 10 percent statistical definition level. Numbers in parenthesis room t-statistics.
1978 Bergsten, C. Fred, thomas Horst, and Theodore H. Moran, American Multinationals and also American interests (Washington, DC: Brookings Institution).
1988 Blomström, M., R. E. Lipsey, and K. Kulchyck, "US and Swedish direct Investment and also Exports", in Robert E. Baldwin, editor, Trade plan Issues and Empirical evaluation (Chicago: university of Chicago Press, for the national Bureau of financial Research).
1995a Brainard, S. Lael, an Empirical assessment of the Proximity-Concentration Tradeoff in between Multinational Sales and also Trade", nationwide Bureau of financial Research Working record No. 4580.
1995b , "An Empirical evaluate of the factor Proportions Explanation of Multinational Sales", national Bureau of economic Research Working file No. 4583.
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1994 Buigues, Pierre, and also Alexis Jacquemin, "Foreign direct Investment and also Exports come the europe Community", in note Mason and Dennis Encarnation, editors, Does ownership Matter: Japanese Multinationals in Europe (Oxford and new York: The Oxford college Press).
1995 Graham, Edward M., "Canadian direct Investment Abroad and also the Canadian Economy: some Theoretical and Empirical Considerations", in Steven Globerman, editor, Canadian-Based Multinationals (Calgary: university of Calgary press for market Canada).
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1968 Hufbauer, Gary C., and also F. M. Adler, Overseas production Investment and the Balance of Payments, us Treasury department Tax policy Research study No. 1, (Washington, DC, US federal government Printing Office.
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1990 Pearce, R. D., "Overseas Production and Exporting Performance: Some more Investigations", college of Reading conversation Papers in international Investment and Business Studies, No. 135.
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1995 Urata, Shujiro, "Emerging patterns of Production and also Foreign trade in Electronics assets in eastern Asia: An check of a function Played by Foreign straight Investment", record presented to the conference "Competing manufacturing Networks in Asia: Host nation Perspectives", Asia Foundation, mountain Francisco, California, April 27-28.
1. The introduction of this paper is based on Graham 1998. Results for Taiwan and Korea space entirely new and execute not show up in this previously article.
2. The significant exceptions room Brainard (1995a, 1998), which room not efforts directly to check the complementarity/substitutability issue.
3. Brainard 1995a in reality shows that high earnings levels in countries are connected with both raised multinational sales and increased trade.
4. That is, in any kind of market, boost in FDI can at the margin alleviate home country exports.
5. In later regression, we likewise use dummy variables such as language, OECD (whether a country belongs come OECD), and Asia (whether a nation belongs to Asia).
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6. Since no other country uses the korean Language various other than North and South Korea, and in addition, south Korea has actually not invested straight in north Korea yet, us drop the language dummy in the southern Korea regression.