Nothing to fear: FDI is Korea's ally in the global market

KOREA Herald 2000/04/19

    Korea's millenium resolutions contained some lofty goals - spur knowledge-based growth, social equity, transparency and globalization - the diligent pursuit of which will also lead to balanced and stable growth for Korea.

    With the recent elections, there has been much controversy surrounding the role of Foreign Direct Investment (FDI) in these objectives. More accurately, I think, the elections represent the uphill battle Koreans face in shifting their own protectionist mentalities to one that accepts the indisputable benefits of FDI over the hypothetical costs to national identity.

    This debate threatens to bring about a repeat of history. At the initial period of Korea's modern economic growth in the 1960s, Korea encouraged the inflow of foreign capital to make up for the shortage of domestic savings and foreign reserves. The Korean government preferred, however, foreign borrowing, which brought foreign resources under its control, as opposed to emphasizing FDI. Being deeply rooted in Korea's history of Japanese colonization, the general fear of foreign domination of Korean industries was too widespread for the government to accommodate foreign management.

    Another negative factor was the relative cost structure of capital. In times of inflation and exorbitantly high domestic interest rates, cheaper borrowing from accessible offshore markets was much more attractive to Korean businessmen than foreign equity capital, especially during the boom times of the late 1980s.

    In retrospect, we see how these conservative practices led to the financial crisis in 1997. In addition, collusion between the government and business sector brought about misallocation of resources for unprofitable activities and rigidity in the economic system and corporate structure that prevented Korea from conforming to the demands of the dynamic international business arena.

    Even though the foreign currency liquidity situation had been gradually improving with the imposition of high interest rates, belt-tightening policies and restructuring programs during the IMF bailout, other factors like negative economic growth and a tight domestic capital market brought about corporate bankruptcies, massive lay-offs, and declining consumption, investment and domestic demand. It was then that President Kim Dae-jung decided to curb these effects and root out the maladies entrenched in Korea's economic history with one shot - FDI - also known as the "killing five birds with one stone" policy.

    FDI has many benefits. First, it brings in long-term foreign capital without requiring principal or interest payments while expanding national wealth, unlike portfolio investments, which are volatile and risky. Short-term borrowing also creates the burden of high interest rates. In 1999, total FDI constituted 62 percent of the nation's foreign exchange reserves.

    Second: FDI also creates jobs, triggering rising consumption, greater production and a continuous cycle for reinforcing national wealth as new companies are set up, and the competitiveness of existing companies is improved. In fact, according to an analysis by KIET, the Korea Institute for Economics and Technology, 1,890 new jobs are created for every $100 million in investment. During the financial crisis, foreign companies filled many of the gaps left behind by bankrupt Korean firms.

    Third: Foreign companies' introducing new management techniques and training Korean workers have a positive spin-off effect on Korean firms in the industry. Motorola is good example of how through partnerships with SMEs and higher foreign ownership ratios, a foreign company can help Korea advance its technology and market share in the global market. Nearly one-third of the world's cellular phones are now produced in Korea.

    Fourth: FDI produces healthy competition and promotes transparency in the Korean economy. This helps Korean companies recover credibility from overseas investors by improving their industrial structures, introducing new management approaches, and obtaining state-of-the-art technology. In particular, as foreigners are appointed executives in a company, this increases the company's ability to monitor and ensure transparency of business transactions.

    Fifth: FDI promotes exports. In light of the important roles FDI plays in economic development, UNCTAD reports countries that do not attract FDI are in danger of becoming marginalized, and it is crucial for developing countries not attracting FDI to create a hospitable environment while maximizing the benefits for themselves.

    Competition from emerging economies like China, globalization and setting the foundation for an innovation-based society pose the biggest challenges for Korea. Considering its high interest rates, property values and wage levels, Korea must capitalize on its other strengths - a strategic location, educated human resources and strong technological base - improve the investment environment, and provide aggressive incentives when presenting foreign investors with quality choices and service in addressing their investment needs.

    The writer is the Ombudsman of the OIO. Please call (02) 551-4219 for assistance in resolving a problem your business is experiencing in Korea. - Ed.