South Korea, with a population of about 48 million, a per capita GDP of $19,000 and a GDP ranking in the global top 10, is arguably a highly attractive proposition for companies looking to expand into or throughout Asia.

In terms of geographic location, the country is perfectly placed to access the lucrative Chinese, Japanese and south-east Asian markets with two well-positioned harbours, Busan and Incheon, serving both sides of the Korean peninsula. Its real estate, technology and telecom infrastructure is among the best in the world. In addition, a technology-savvy and wealthy population makes it a market that is difficult for most multinationals to ignore.

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Drawing on its technical superiority, geographic position and advanced infrastructure, South Korea is attempting to position itself as a major regional hub.

Foreign sweeteners

To take best advantage of its assets, the South Korean government is constantly looking at and amending the regulatory environment and introducing new ways to attract foreign investors. Tax benefits are being used heavily, especially for the technology and business support service areas.

Recent incentives include tax exemptions, increased from eight to 10 years, with a 100% reduction in corporate and income taxes for seven years and a 50% reduction for a further three years. To encourage investment in other sectors, free economic zones have also been planned offering a full range of incentives, including more flexible labour laws and tariff-free imports.

Local powers

In addition to these national incentives, more power has been given to local governments to implement appropriate packages for particular investments. The Seoul Metropolitan Government (SMG) has targeted the financial sector as one that needs further investment.

At the beginning of the year, the SMG streamlined its mechanism for attracting foreign investment by creating the Foreign Investment Division, which will focus on the provision of efficient support services for foreign companies and revision of regulations.

“There was recognition that, for example, the banking industry needed upgrading and major global brands needed to be attracted,” explains Trevor Bull, general manager of American International Assurance Korea, part of the AIG group.

This push to attract global banking brands has resulted in some important mergers and acquisitions. Citibank, HSBC and Standard Chartered have all entered the market this year. The deregulation of the banking sector has also allowed foreign banks to sell life assurance, therefore gaining wider distribution and market share.

Domestic backlash

However, Mr Bull emphasises that it is a delicate “balancing act” because there is still some concern that foreign companies may gain too much market share, squeezing out Korean competitors. But, he adds: “The presence of international banks is needed to encourage domestic companies to invest in their services and become more competitive while gaining from foreign expertise.”

In an effort to enhance the financial sector further, the SMG has developed plans for the Seoul International Finance Centre. In an agreement with AIG, which led a consortium of companies to raise $900m to finance the project, SMG has leased the land to the group for 5% of the property’s public market price every year.

End of an era

This kind of targeted sector approach is apparently necessary to ensure that South Korea remains a competitive location for foreign investment because the move away from a manufacturing-based economy has created some problems. Traditionally considered a low-cost location, Korea can no longer compete with countries such as China and Taiwan on price; therefore it has to focus on its strengths in technology and its skilled, educated workforce.

However, the latter is consistently cited as the area in which foreign investors encounter the most obstacles, often creating very public disputes between companies and vocal union demonstrations and strikes.

Although, according to Mr Bull, only a small percentage of the workforce is unionised, labour laws in the country are rigid. Companies are limited in the ability to hire and dismiss workers, which in turn limits efficiency and gives little protection to management.

As a result, 50% of employees are employed on a temporary contract basis, raising concerns about the quality and loyalty of workers. The government has addressed the problems by encouraging productive relations between labour and management. It is also, according to a report by PricewaterhouseCoopers, planning to adopt a five-day working week in the government and financial sectors in a an attempt to create new jobs, raise labour productivity and improve the general standard of living.

Mr Bull views the labour law situation as a “unique” challenge when doing business in South Korea, but one that can nonetheless be overcome.

“Investors can learn to manage the unions, particularly as it is important that companies look to Korea as a long-term investment. There are now guidelines in place to help companies to negotiate and learn about the regulations that affect them,” he says.

Adjusting to the business culture is also something with which the SMG is aiming to help foreign companies as part of its efforts to create a good investment environment. There are regular consultations with the foreign community through, for example, the Foreign Investment Advisory Council (FIAC), a body composed of major foreign chambers of commerce, country representatives and senior professionals.

User friendly

In addition to encouraging professional dialogue, the SMG has concentrated on making the capital city a more hospitable environment by offering more services in English and launching initiatives like the Seoul Help Centre for Foreigners.

However, while efforts such as these are being carried out by local government, there are still some discrepancies between central government aims and actual implementation, says Mr Bull. Bureaucratic constraints still present some obstacles to fulfiling the vision of Korea as a north Asian hub.

“This and the labour market issues are a legacy for a country that is still a maturing democracy but has grown remarkably in the past 30 years. It is important that these visions exist so continuous growth is achieved,” says Mr Bull.