ΆΓ  Foreign Investment in Korea Is Win-Win Proposition

Korea Times 2001.1.18

Foreign direct investment (FDI) amounted to $15.690 billion in 2000, surpassing the $15 billion-mark for the second consecutive year after $15.541 billion recorded in 1999.

This sum represents more than double the $7 billion attracted in 1997, the year in which the country's foreign exchange crisis began. Inbound FDI contributed greatly to the country's usable foreign exchange holdings, accounting for 30 percent of the increase in the 1998-1999 period.

As a result, inbound FDI made a huge short-term contribution in helping Korea overcome the crisis. It also played a key role in the corporate restructuring effort as a means of ousting those marginal companies that had lost competitiveness.

As the Korean economy enters a recovery phase, however, there seem to be less interest in and enthusiasm for attracting FDI than before.

In addition, some claim there is a negative aspect to inbound FDI, saying it results in an exodus of national wealth and excessive foreign control of domestic industries. Questions about the necessity of FDI inducement at a time when the country has overcome the foreign exchange crisis are also on the rise.

Such attitudes derive from the perception that promoting inbound FDI is a necessary evil, solely to be resorted to when the economy is in serious difficulties such as the foreign exchange crisis.

However, the promotion of FDI is not only a policy means, but also a policy target that should be encouraged even under normal conditions as a powerful instrument to build a rich and economically resilient country.

The economic effect of FDI is not confined to only inflows of foreign currency. FDI also has a variety of economic effects on the host country, including economic growth, creation of jobs, export increase and technological development. According to the Korea Institute for Industrial Economics and Trade (KIET), an inflow of $100 million in foreign investment into Korea increases production by 400 billion won and creates 1,400 jobs.

In 1998, right after the foreign exchange crisis, production at domestic firms decreased by 2.3 percent, whereas that of foreign-invested firms increased by 9.4 percent. Job cuts by foreign-invested firms during this time of extreme economic emergency also represented a mere half of those by domestic firms.

In short, foreign-invested firms have made a greater contribution to the Korean economy than domestic firms both in terms of production and employment.

A joint venture with a foreign-invested firm results in a positive transfer of advanced technology and the reduction in royalty payments through the introduction of technology. Joint ventures also sharply improve a firm's export competitiveness through the introduction of foreign advanced quality control systems.

A KIET survey of 375 foreign-invested companies revealed they recorded an aggregate trade surplus of $3.5 billion in 1998.

In the wake of the ongoing Korean corporate restructuring process, it is possible to point to other areas of the economy where FDI has had a positive impact. Korean companies that succeeded in attracting foreign capital in the process of restructuring were able to achieve management normalization smoothly through the improvement of their financial structures and the introduction of advanced management skills.

On the other hand, those that delayed the introduction of foreign capital were forced, in many cases, to face continued managerial difficulties or see their corporate values tumble.

Other evidence of the beneficial effect of FDI on the economy of a host country is the fact that competition among countries around the world to attract more foreign investment is intensifying.

No matter whether they are advanced or underdeveloped, all countries are striving to lure more foreign investment. Korea seems to have entered the foreign investment stakes belatedly, considering the size of its economy and the level of its development. Statistics from the United Nations Conference on Trade and Development (UNCTAD) indicate that Korea, as of 1998, had a lower proportion of cumulative inbound FDI in terms of GDP percentage when compared to other countries.

This percentage stood at 9.5 percent in the United States, 23.3 percent in Great Britain, 85.8 percent in Singapore, 67.0 percent in Malaysia, 65.7 percent in Hong Kong and 27.6 percent in China.

By contrast, the figure for Korea was 6.1 percent, less than half the worldwide average of 13.7 percent!

Although foreign investment inflow has surged since the foreign exchange crisis, the necessity of attracting more still exists.

The reasons why Korea should persistently attract more FDI are self- evident. During the time of crisis, stimulating FDI inflow was regarded as the most appropriate response to overcoming the critical shortage of foreign exchange.

It is now time to look at the benefits of attracting FDI from a broader perspective and consider how it may be turned into a win-win proposition between Korean and foreign companies.

Korea's attraction of huge amounts of foreign investment since the foreign exchange crisis is largely ascribable to the government's overall economic policy in regard to the financial and industrial sectors, as well as its foreign investment policy. The government revised the law on foreign investment promotion, strengthened promotion activities and investment incentives by establishing the Korea Investment Service Center (KISC) within KOTRA and began removing obstacles hampering foreign investment on a gradual basis.

It also opened markets and launched its financial restructuring program to enhance transparency, profitability and ultimately competitiveness. The upshot is that Korea has developed a system of investment promotion that ranks among the best in the world. In fact the Korean system has become a global benchmark for post management investor services, in particular, its investment ombudsman.

To make the Korean investment environment even more attractive, however, it is necessary that public attitudes to toward foreign investment and managerial transparency improve. This point was brought home vividly by a survey last year on the domestic business climate for foreign-invested firms conducted by the Office of the Investment Ombudsman.

Some 26.1 percent of respondents cited managerial transparency as the most urgent reform issue for Korean business.

In 1999, foreign-invested firms accounted for 21.2 percent of the total added value produced in the manufacturing industry and 9.7 percent of all employment in Korea. Their combined tax payments constituted 14.8 percent of the total paid by the manufacturing sector. Foreign-invested firms are now entrenched as colleagues and collaborators of the Korean economy.

Government policies and business practices can no longer focus on domestic firms to the exclusion of foreign enterprises.

The sooner government and society recognize this state of affairs, the sooner a true basis for prosperity can be built in Korea. No better way to activate the Korean economy exists than through bilateral cooperation between domestic and foreign-invested firms in the manufacture of parts, technological development and export promotion. There exists a definite role for government to resolve management bottlenecks experienced by foreign-invested firms and to promote cooperation with their domestic counterparts.

To that effect, it is desirable to broaden the scope of the already established Office of the Investment Ombudsman and open an information center-cum-clearing house for parts sourcing.

Opening markets to foreign investment is essential in the current era of globalization, especially for Korea, a member of the Organization for Economic Cooperation and Development (OECD).

Also, the necessity and benefits of attracting further foreign investment is well attested by examples from both at home and abroad. The primary issues to be settled are those connected with helping foreign investors become successful partners with domestic firms and the Korean economy, rather than whether it is necessary that the market be opened to foreign investment and the degree to which it should be promoted.

It is imperative that this course is pursued, since, at the end of the day, the success of foreign-invested firms means the success of the Korean economy.