Given its infrastructure, economy and location, it would seem that there is every reason to invest with confidence in South Korea. The country boasts the world’s 11th largest economy and is the 12th largest trading nation, and in terms of productivity growth over the past decade, it ranked second in Asia with an annual average increase of 3.9%. More than 97% of the labour force are university graduates or hold a vocational training degree, while the international experience of the country’s senior managers ranks fifth among Asian countries.

Korea is virtually an insatiable market, with 48 million consumers who have a huge and growing appetite for goods and who are ‘early adopters’, making the country an ideal test-bed for new information technology applications and marketing strategies. Korea’s 68% mobile phone penetration rate is one of the world’s highest, and the country was the first to introduce commercial WiBro, s-DMB and t-DMB services.

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As a logistics centre, Korea’s location looks unbeatable. It is located centrally in north-east Asia, a region with a population of 1.5 billion, and a combined GDP of $7460bn that accounts for 22% of world GDP. As such, Korea serves as a gateway to the adjacent, massive markets of Japan and China. Major north-east Asian cities such as Tokyo, Beijing, Osaka, Shanghai and Hong Kong are located within a three-hour flight of the Korean capital, Seoul.

The country’s state-of-the-art infrastructure, such as its world-class airports and three seaports (designated free economic zones – FEZs), enables foreign businesses to operate smoothly and provides strong overseas logistical links. The high-speed KTX rail service, only the fifth such service in the world, offers connections to anywhere in the country in a matter of hours.

The country is home to corporate giants, many of which rank as world-leading industries that act as powerful draws to foreign investors. Korea is the world’s sixth largest automobile producer and ranks first in DRAM semiconductor manufacturing, shipbuilding and LCD production. Korean mobile phone makers Samsung Electronics, LG Electronics and Pantech are among the world’s largest in their respective fields, and many major Korean companies have joined the Fortune 500 list. About 264 corporates – 53% of the companies listed in the Fortune Global 500 – have invested in Korea, as have all of the world’s top 20 multinationals.

The ratio of net profit to sales among foreign firms present in the Korean market is far higher than that of domestic companies. However, Korean subsidiaries of foreign investor companies tend to be among their more profitable, if not their most profitable, units.

Pros and cons of investment

A long list of superlatives and accolades would indicate that Korea is the ideal place to invest, particularly in export sectors such as electronics and the automotive industry. But the country suffers from a perception that it is insular and mistrusts foreigners. In a survey of foreign investors, 50% of the participants expressed concern about the country’s contradictory attitude towards foreign capital. There were also some worries about a political environment that is regarded as unpredictable and can at times be taken as discouraging towards outside investment.

As a case in point, investors highlight the case of private equity provider Lone Star, which had become the main target for anti-foreign sentiment. The manner in which the South Korean authorities are seen to have dealt with Lone Star has given rise to a widespread impression that legal obligations are not necessarily enforceable in South Korea, and some disbelief at the notion of South Korea having changed its policies towards foreign investment in a retrospective manner.

The South Korean authorities’ role in scuttling Lone Star’s efforts to sell Korea Exchange Bank (KEB) to Kookmin Bank, the country’s largest lender, has tainted its free-enterprise image. Lone Star has been in a legal dispute with the South Korean government over whether the US private equity fund was involved in understating KEB’s value at about the time that it bought it so that it could pay less than it was worth.

Lessons from the neighbours

Within a regional context, many would claim that South Korea has much to learn from neighbouring financial centres. China is regarded more reliant on and thereby more committed to foreign investment. Japan, which in the past confronted similar issues to those that now face Korea, has adopted a welcoming attitude towards foreign capital. Yet despite the occasional hiccup, most investors in Korea agree that the pros still outweigh the cons.

One major attraction for investing is the array of incentives offered by the Korean government, some of the most generous in the Organisation for Economic Co-operation and Development.

Financial incentives include reductions and exemptions of corporate, local and income taxes, plus cash grants for investment in high-tech industries judged to have a significant impact on the economy. In addition, the FEZs of Incheon, Gwangyang and Busan/Jinhae are committed to creating a world-class business and living environment.

Encouraging trends

Investors are encouraged by trends such as Korea’s major push last year to attract more FDI, which had suffered due to concerns about North Korea’s nuclear test last October. Liberalisation continues apace in South Korea and the government policy is aimed at providing incentives to investors that set up research and development centres, headquarters of transnational companies or component parts industries that create quality jobs and have forward and backward linkages for domestic industry.

The government’s efforts, highlighted by the country’s three new FEZs, are in no small measure spurred by the need to recapture foreign investment that is now headed for China.