ΆΓ Step in the right direction

Korea Herald 2001. 4. 18

On the whole, the Korean government has reason to be proud. It's made a lot of progress towards improving the investment regime in Korea since the debilitating financial crisis of 1997.

By the end of 2000, foreign direct investment (FDI) inflows reached their highest level ever of US$15.69 billion. The lifting of various investment barriers such as the 1998 revision of the Foreigner's Land Acquisition Act and capital market reforms eliminating or raising ceilings on foreign equity ownership and on foreign investment in the government, corporate, and special bond markets have all been well received by foreign investors.

This positive mood is reflected in the recently published 2001 National Trade Estimate (NTE) report. It acknowledged the recent efforts by Seoul to improve the investment climate but also cautioned that the progress achieved could be undermined if additional changes are not made to enhance labor-market flexibility, intellectual property rights, transparency in the regulatory environment, and structural reform, and market opening.

For example, the USTR said the limited opening of Korea's automobile and steel markets and continued state intervention in the economy were obstacles hindering further FDI inflows into Korea. Perhaps more damaging than the 8 percent tariff rate applied to auto imports and the burdensome motor vehicle standards and certification procedures is the negative perception that many Koreans harbor against foreign cars. According to a survey conducted last month, attitudes toward imported cars have worsened even though the Korean government is no longer directly involved in anti-import campaigns. The report did note that the Korean government is trying to reverse this, sponsoring the first-ever Korea Import Motor Show in Seoul last year. Lingering prejudice only dissuades foreign automobile companies from doing business in Korea, thus inhibiting FDI and depriving the domestic auto market of the ability to upgrade through access to foreign autos and management know-how.

In the steel market, the USTR urged Korea to promote increased international competition and to eliminate government intervention in the financial sector. This includes the complete privatization of POSCO, in which the Korean Government holds a 4.1 percent stake, and finalization of the sale of Hanbo Steel and to have it operated without Korean Government direction or support.

The USTR noted Korea Development Bank's (KDB) purchase of about $400 million worth of bonds issued by ailing Hyundai Electronics Industries, which continues to suffer from liquidity shortages, as an example of the questionable progress of reform efforts. Continued government support, in the form of subsidies only serves to undermine foreigner as well as domestic consumer confidence in the Korean economy and the drive towards a market-oriented economy, thereby inhibiting FDI. Such interventionist practices are also inconsistent with the fair trade principles of the World Trade Organization (WTO) of which Korea is a member.

Regarding the USTR paper, the Ministry of Foreign Affairs and Trade was quick to point out that the USTR did not raise any new complaints against the Korean government while holding that some of the issues appeared to stem from a lack of understanding of Korea on the part of the U.S.

What these concerns demonstrate is that economic restructuring is by no means complete. More important than the superficial changes made to laws and regulations is the lingering protectionist sentiment stemming from the lack of an international mindset among the Korean people. For example, a survey released in February 2001 conducted by an international marketing firm revealed that attitudes toward imported cars have worsened since 1999. According to the survey, the main factor driving down import car sales in Korea is social pressure and the negative public image of foreign cars in Korea. This only hampers Korea's transition to a market-based economy where Korean firms are adversely sheltered from competition at the international level. Korea must overcome its perception of being a "Hermit Kingdom" if it wishes to attract the best foreign-invested firms laden with capital, cutting-edge high-technology and management know-how skills.

What strategy should the government pursue to ensure a robust economy and high FDI levels? Based on last year's FDI figures, reinvestment from existing foreign investors totaled US$9.38 billion, over four times 1999's level, and comprising about 60 percent of total FDI for the year 2000. This indicates the greater significance of aftercare service compared to the initial setup services provided to foreign investors. Thus, the Office of the Investment Ombudsman (OIO), which caters to the needs of existing foreign investors, is definitely a determinant of FDI into Korea.

An important part of what the OIO does is simply addressing the daily concerns of the families of foreign investors. This can range from providing adequate educational facilities, hospitals, affordable rental housing, and grocery markets packed with foreign foods. Paying attention to these details is an essential ingredient to successfully completing the economic restructuring process so that foreign investors can feel confident in doing business in Korea. Such quality of life issues are just as important as objective criteria such as geographical location, size of domestic market, quality of industrial base and infrastructure, and the quality of and educational level of human capital.

What the USTR report demonstrates is that Korea must not only strive toward conforming to international standards in the corporate, financial, and public sectors but this effort must be coupled with a change in mindset reflecting liberal international norms. This fundamental shift in thinking is a necessary element upon which the success of the economic restructuring process hinges. While addressing the needs of the foreign investor, the broader role of the OIO is to act as a catalyst spurring on Korea's integration into the global economy by facilitating the entry of foreign-invested companies and educating the Korean people on the benefits of FDI.