When president Park Geun-Hye entered office in February 2013, amid election promises that her administration would improve the lot of South Korea’s working classes, kick-start the country’s floundering economy, and seek diplomatic rapprochement with North Korea, the country’s first female president also had to face the nagging issue of falling inward FDI.
Greenfield projects in South Korea have progressively decreased from 133 projects worth $7bn in 2011, to 109 projects worth $6bn in 2012, according to data from fDi Markets. The number of greenfield FDI projects carried out overseas by South Korean companies has also fallen, from 221 projects in 2011 to 200 in 2012.
With the gap between inward and outward FDI closing against a backdrop of sluggish global economic growth (which the International Monetary Fund expects will not exceed 3% this year), the South Korean government has been working to reduce its external exposure by positioning the country as an international investment gateway into north-east Asia.
Coming to an agreement
As part of its efforts to establish itself as such a gateway, free-trade agreements (FTAs) have become a key pillar of South Korea's strategy to attract more foreign investment. According to the Korea Free Economic Zones (KFEZ) authority, the country has signed FTAs with some 46 countries across the Americas, Europe and Asia.
Park Jaeyung, director of the Policy Planning Office of Free Economic Zones at South Korea's Ministry of Trade, Industry and Energy, says that these FTAs will be significant in boosting FDI from foreign businesses that seek to operate in a relatively low-cost yet highly structured market that has established important tariff exemptions with two-thirds of the world’s markets.
“We want to be a global business hub, and we want foreign companies to see us as a place that is rich in opportunities in research and development, logistics and commercial real estate,” says Mr Park. “Korea is transforming itself into a gateway to the north-east Asia market. Although the country is just 0.1% of the world’s geographical size, the FTAs that South Korea has enable it to cover 61% of the world’s economic territory.”
Ranked eighth globally by the World Bank's Doing Business report for 2013, South Korea prides itself on being a global leader in high-speed internet and advanced mobile technology. As the US-based consultancy firm McKinsey asserts in a report, South Koreans were some of the first adopters of new digital devices, which demonstrates the country’s openness to innovation.
Christoph Heider, the secretary-general of the European Chamber of Commerce in South Korea, believes the government’s active approach to producing regulation that is in step with new products highlights the country’s dynamism.
“South Korea moves very quickly, and you can connect your smartphone or laptop to a hotspot anywhere in places like Seoul,” says Mr Heider. “Europe is not so quick when it comes to uptake. Korean companies move fast and the regulatory environment evolves accordingly.” Additionally, the Bank of Korea reports that between April to June this year, private consumption rose by 0.4%, revealing that domestic demand is also powering opportunities in the retail, financial and consumer goods sectors.
Although foreign companies have mainly invested in software and IT services, as well as the chemicals and electronic components industries, which combined attracted $36bn-worth of FDI between 2003 and 2013, according to fDi Markets, FDI into South Korea's financial services sector grew by 20% in 2012, while FDI into consumer products increased by 300%. This would suggest that the government’s efforts to boost consumer expenditure through supporting wage increases for South Koreans has been a draw for foreign enterprises that wish to tap into the country’s consumer base.
Steven Craig, the managing director of real estate services firm Jones Lang LaSalle’s office in South Korea, believes that commercial real estate is another sector that is set to experience a significant upswing in demand in the country. fDi Markets shows that between 2003 and 2013, South Korea's real estate sector ranked fifth in attracting foreign capital expenditure, as investors spent $4bn on greenfield projects during this period. In Mr Craig’s opinion, most of this investment has been channelled into Seoul, as foreign companies believe the country’s capital city remains a prime location for serving the domestic market, as well as accessing the rest of north-east Asia.
“Demand for [commercial real estate] increased last year, and we think the level of demand for office space will further increase [this year],” says Mr Craig. “One of the factors that should be considered is that South Korea’s capital markets are very strong, and have a lot of liquidity. Several investors are competing to buy into large commercial property investments. The opportunities are large and I am excited about the market.”
Although South Korea’s labour force ranks among the most educated in Asia, a common challenge that foreign investors face is in finding English speakers among the country's workers. Also, the dynamics of large capital inflows and a small domestic market means that businesses find they have little option but to seek opportunities outside of the country. Therefore overseas exports remain critical for South Korea’s future growth.
While China and Japan have also made similar efforts to promote themselves as gateway locations, Simon Hoggett, the marketing manager of Daegu-Gyeongbuk Free Economic Zone Authority, believes that investors will still find that South Korea is the prime location for their operations in north-east Asia. “When foreign companies speak of working in China, once they get there they find that it is actually very saturated, and very hard to do business due to heavy government regulation,” says Mr Hoggett. “Japan is not that much easier to do business in either.”
South Korea markets itself as a cheaper business destination than Japan, while weak regulation – particularly in the area of intellectual property rights – makes China a less attractive value proposition for foreign firms. “The South Korean government has worked to protect foreign companies, who sometimes suffer from other firms encroaching their patents [in other parts of Asia],” says Mr Park. “South Korea’s government established a special force for intellectual property rights in 2008 to look after investors’ patents. The country is changing and the government will continue to work on establishing a foreigner-friendly environment for businesses.”