Nicknamed 'the Bulldozer', president Lee Myung-Bak of South Korea is well known for his ability to push major projects forward. As the former CEO of Hyundai Engineering and Construction, President Lee has brought corporate zest into government efforts to rebuild the South Korean economy. Since his inauguration into office, President Lee’s administration has geared itself towards reinvigorating the foreign investment scene.

FDI trends

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FDI has become increasingly important to South Korea over the past 15 years. As the country's Ministry of Knowledge Economy asserts: “Foreign investment has now become one of the major economic pillars driving the South Korean economy.” However, this has not always been the case. Traditionally, South Korea had relied on foreign borrowing to finance its high-speed development and FDI played a minimal role in comparison. This situation changed abruptly following the Asian financial crisis in 1997. As part of a bailout package from the International Monetary Fund, South Korea agreed to liberalise its economy, including opening its capital and real estate markets to foreign companies. Since then, inbound investments grew steadily. Total FDI from 1998 to 2008 was five times that in the period from 1962 to 1997.

Even though the general FDI trend has been upwards, year-to-year patterns have taken a roller-coaster ride since 1998. Following the dot.com crash and the 9/11 terrorist attacks in the US in 2001, inbound investments suffered and, by 2003, they had fallen to a level below that of 1998. A concerted government campaign to increase FDI aided a resurgence in 2004, but this growth was short-lived as numbers dipped afterwards. It was not until 2008 that the country posted encouraging gains when inbound foreign investments hit $11.7bn, the first increase since 2004. Results were less encouraging amid the global credit crunch in 2009 when FDI fell 1.9%. However, the Ministry of Knowledge Economy expects FDI to pick up in 2010 by 13% to $13bn.

By region, the EU is South Korea’s largest inbound investor. This is followed by Japan and the US. In 2008, greenfield investment composed more than 60% of inbound investments, the remainder being mergers and acquisitions, according to fDi Markets data. In 2009, manufacturing made up 35% of inbound investments, compared with 64% from services. Investments in the latter were concentrated in the financial and insurance sectors. Some industries that the South Korean government is currently targeting for FDI include automotives, semi-conductors, displays, environmental products and services, logistics and photovoltaic power generation.

Strengths in FDI

Government efforts to promote FDI are clearly one of South Korea’s most impressive strengths. Invest Korea was established in 2003 to provide foreign investors and multinational corporations a one-stop services platform. Its team of more than 100 project managers assists investors in pre-investment planning, licence applications, selection of sites and even settling-in support for expatriate families. Invest Korea has a global network of 39 offices, spread over North America, Europe, Asia, and the Middle East, that help to connect local businesses with foreign firms.

As Professor Choong Yong Ahn, who specialises in international studies at Chung-Ang University, points out, the South Korean government takes retaining established investors seriously, as reinvestments accounted for nearly 60% of total investments in recent years. For this purpose, a special team of senior consultants, also known as home doctors, is in place to help foreign investors with post-investment management and to resolve grievances.

In terms of trade policy, South Korea has embarked on a multi-track strategy that embraces multilateral liberalisation at the World Trade Organisation and regional free-trade agreements (FTAs). Already, South Korea has inked agreements with the US, Association of South-east Asian Nations (ASEAN) countries and the EU. In a report by the Korea Institute of International Economic Policy, the South Korea-US FTA is projected to increase the country's real GDP by 2% and exports by 5% in the long term.

South Korea is proud to boast a list of success stories. Scania, a Sweden-based truck producer, has invested in South Korea for three decades and has expressed confidence about doing business in the country. Scania president and managing director Kjell Ortengren says: “South Korea has been a good country for us to invest in, offering a stable environment where regulations don’t change overnight.”

In another illustrious case, GE Healthcare has established its second R&D centre in the Incheon Free Economic Zone and expects to invest about Won50bn ($44m) over the next five years. Karim Karti, president and CEO of GE Healthcare Korea, says: “Without the government’s help, we would not have established this IT R&D centre in Incheon.” To Mr Karti, South Korea’s advances in IT technology and its proximity to huge markets in China and India are major attractions.

Challenges and strategies

Although South Korea has posted significant gains in FDI, barriers remain. From a global perspective, South Korea’s ratio of inbound FDI to GDP remains lower than the global average. Its ratio of 8% in 2006 was below the average of developed economies, which stood at 24%. A report issued by the Korea Capital Market Institute also reported some disappointing news. In a ranking of investment barriers among OECD countries, South Korea ranked sixth. Its FDI restrictiveness index of 0.142 exceeded the Organisation for Economic Co-operation and Development (OECD) average of 0.095. Restrictive regulations remain in the areas of equity acquisition, purchase of land and establishment of branches by foreign companies.

In aim of tackling these issues and under a new policy direction of the Lee administration, Invest Korea has announced a three-step plan to conduct systemic reform, overhaul regulation and cut taxes. To attract FDI, the government has designed a comprehensive incentive package. Companies can qualify for tax relief, cash grants, supply of industrial sites and additional financial support for staff training, and so forth, if they invest beyond a predetermined amount.

South Korea is also seeking to diversify its regional sources of foreign investments. Its reliance on the US and the EU has exposed the country to vulnerabilities in these regions, as the recent financial crisis has shown. In response, South Korea has been targeting investors from China and the Middle East.

Although South Korea is China’s sixth largest foreign investor, Chinese investments in South Korea have been marginal. Vice-minister of commerce, industry and energy, Oh Young-ho, says that Chinese investments in South Korea in 2006 were only $400m, a mere fraction of South Korea’s outbound investments to China. Mr Oh adds, “Increasing investments from China are a necessary foundation for our two countries to establish a partnership.”

South Korea is also eager to attract investments in technological areas. To promote these industries, generous cash grants are available for companies. In recent years, Google has established an engineering lab in South Korea. IBM likewise created an R&D lab for mobile technology. Even Chinese companies have invested in the country. Solargiga Energy Holdings, a Chinese producer of solar-powered batteries, announced its decision in early 2010 to invest $400m over the next five years in the Jeju Science Park.

At the Foreign Investment Forum 2009, South Korea's knowledge economy minister, Choi Kyung-Hwan, summarised three reasons for foreign companies to invest in the country. First, a strong industrial base; second, the potential of its emergent sectors; and third, an expanding market, not only in South Korea, but also throughout Asia, through a network of trade agreements. He said: “As you can see, doing business in Korea makes perfect sense. The conditions are right and the government will do all it can to help you make the most of your business capabilities.”

If indeed South Korea can successfully tap into new regional markets and develop high-end sectors, in which it already holds advantages, then it can expect its FDI performance figures to continue climbing over the next few years.