The Impact of the Global Financial Crisis on Investment in Finland and South Korea

Abstract

This paper examines the effects of the Global Financial Crisis (GFC) on investment activity in Finland and South Korea. We employed an Accelerator model to assess whether investment developments in both countries were excessively hit by the GFC. We then used structural vector auto regressions to identify the main drivers behind investment developments in both countries. First, we found that Finnish investment and output sharply declined following the crisis, while South Korea’s experience was considerably milder. The results show that the main drivers that initially depressed investment following the crisis were foreign demand and financial factors. In addition, negative domestic supply factors continued to depress investment in Finland in the years that followed, while negative foreign demand and financial factors continued to put downward pressure on investment in South Korea.