FDI and determinants of capital structure

Considering that FDI is one type of equity financing, this paper examines it through the lens of capital structure theories with firm level data from Korea. This paper finds Korean firms follow the pecking order quite straightforwardly when they need outside capital. The dominance of debt was persistent in terms of frequency even when the pecking order seemed reversed in terms of the realized volume. When Korean firms have free cash, they redeem debt first.; This paper finds financing choices may not be the same depending on the firm categories. The financial crisis in 1997 made these latent differences pronounced. Neither pecking order nor trade-off models can give satisfactory explanations for these type-specific financing choices among debt, domestic equity and FDI. This paper suggests listing status and the existence of a certain amount of foreign share can explain the differences in terms of alternative financing sources. This paper also finds that in normal times the pecking order of FDI is lower than that of debt even for firms with existing foreign share.