Foreign Direct Investment Key to Economy

Korea is one of the top Asian economies vying to attract foreign direct investment, seeing it as key to further globalization and industrialization. Seoul is its commercial and administrative center that accommodates a wide range of foreign businesses. / Korea Times

By Cho Hwan-eik
President and CEO of KOTRA

In the midst of the current global economic turmoil, the importance of foreign direct investment (FDI) to the Korean economy must be reiterated. Benefits include raising the competitiveness of Korean companies to a global scale and introducing more innovative managerial practices.

Despite these and other contributions, however, Korea's stock of FDI compared to GDP in 2007 ― 12.3 percent according to the 2008 World Investment Report published by the United Nations Conference on Trade and Development ― pales in comparison to the average of 27.2 percent in advanced countries.

Considering that global cross-border investment flows reached an estimated $1.4 trillion in 2008, a 21-percent drop from the previous year, Korea must work much harder to attract this vital form of capital, particularly in light of greater competition among neighboring countries and regions for what will be fewer planned investment projects due to the lingering economic malaise.

Driving this point home is the prediction by the World Association of Investment Promotion Agencies that global inbound FDI levels will drop 12 to 15 percent in 2009.

I firmly believe, however, that Korea possesses the wherewithal to weather the current storm and rebound more strongly than before for several reasons. First and foremost is that the country has found itself in the face of economic challenges before ― during the foreign currency crisis of the late 1990s ― and recovered much more rapidly than expected, thanks in great part to a sharp increase in FDI.

I should point out that the interest shown by foreign multinationals in Korea's investment environment and the opportunities within have continued throughout the past decade, illustrated by the fact that in 1997, there were only 2,274 foreign-invested companies in Korea.

By January of this year, that number has jumped over seven times to 16,310 foreign enterprises operating successfully in the Korean market. Perhaps even more impressive is that this number includes 245 of the companies listed on the Fortune Global 500 in 2008, attracting many of the world's best performing companies, attributable to the fact that Korea is a profitable place to do business.

A recent KOTRA survey found that among the 36 cases where foreign companies repatriated over $100 million from Korea between 1998 and 2008, the average profit ratio was over three times the initial investment.

Certain to prove helpful to Korea's quick return to economic stability will be the policy additions and revisions that President Lee Myung-bak is implementing as part of a three-year plan to make Korea more business friendly. Among these is a reduction in the corporate income tax rate to 22 percent by the end of this year, and to 20 percent by 2010.

Other measures will come in the form of a broader range of incentives tailored to investors' individual needs, including cash grants to defray costs associated with investment projects, enhanced intellectual property rights protections, labor-management relations support and improved international education, healthcare and housing options for foreign nationals who choose to live and invest in Korea.

The Capital Markets Consolidation Act, which recently went into effect, is also expected to greatly enhance the competitiveness of the domestic capital market by allowing financial institutions to provide a wider range of products, encouraging innovation and thus more investment opportunities.

Of course, it is necessary for a country to put into place both the policies and the infrastructure that can not only sustain existing foreign investment, but also continue to attract new investment. However, it remains a must to identify, nurture and promote investment opportunities that potential foreign investors and those already here will find attractive.

To illustrate a pertinent example, existing investors are of paramount importance to the country's economy and its perception as an appealing investment destination, as over 50 percent of all FDI in 2008 was made by such companies.

Since the start of the crisis, the value of the Korean won has fallen by nearly one third, and as a result, many Korean assets can now be seen as relative bargains for foreign investors.

At the onset of the crisis, several foreign and domestic companies placed their real estate holdings on the market in order to free up liquidity, presenting investors with a rare opportunity to enter Seoul's highly competitive market for prime office space while simultaneously taking advantage of the undervalued won.

Also in this vein is that prior to the economic downturn, share prices in many Korean companies were rated as being undervalued.

For foreign investors considering a full or partial acquisition of a Korean company, the present affords the additional promise of capitalizing on rising stock values when the economy turns around.

FDI in the form of mergers and acquisitions increased in 2008 by 78 percent over 2007 results, and is also expected to rise substantially in 2009 and 2010. In addition to a planned sell-off of government-owned banks, other large-scale firms whose level of risk has declined under state receivership are expected to be sold in the near future.

Although previously under-promoted, Korea's small- and medium-sized enterprises, many of which have a proven domestic track record in a variety of industries as successful vendors to Korea-based global powerhouses, are promising targets of foreign investment, such as Samsung, LG, and Hyundai Motor Company.

It must also be noted that since the first crisis 11 years ago, the financial structures of Korean firms in general have improved to the point where they now possess one of the lowest debt ratios in the world.

Potential investors can add to these factors the opportunities to be suppliers to Korea's world-leading industries, which hold a solid position both in advanced and developing markets. In terms of production, for example, Korea has the top market share in the shipbuilding and display sectors, and is second globally in mobile phones, third overall in semiconductors, and fifth in the world in the automotive, steel and petrochemical industries.

The country's varied manufacturing portfolio, backed by world-class IT infrastructure and further complemented by well-educated human resources who are becoming more globalized, make Korea an ideal test-bed for innovative products and technologies of global multinationals.

Furthermore, although the Korean economy is heavily weighted toward exports and thus may appear as more susceptible to being influenced by the state of the global economy, the wide variety of globally competitive industrial sectors in Korea acts as a buffer from economic uncertainty.

Experts are predicting that the global economy will begin to regain its footing toward the start of 2010, once the effects of government-led recovery initiatives implemented by the world's major economies start to take effect.

Boding well for Korea is sentiment from the managing director of the International Monetary Fund, Dominique Strauss-Kahn, that due to the dynamic nature of Asian economies and their plentiful fiscal resources and strong fundamentals, Asia could enjoy a rapid economic turnaround, pegging economic growth in the region at more than 5 percent in 2010.

In light of her sound industrial base and drive to become more business friendly, I fully believe that Korea can be at the forefront of this growth, with foreign investment playing a significant and conspicuous role.

Standing ready to assist foreign investors by offering comprehensive investment-related services throughout the entire investment process is Invest KOREA, Korea's national investment promotion agency under the umbrella of KOTRA and its global network of 39 Korea Business Centers located in areas strategically important to targeted sources of investment.

Invest KOREA's Project Managers help foreign investors with selecting the appropriate site for investment, facilitating meetings with relevant government officials, consulting on which incentives are available for investment and finding Korean business partners.

Invest Korea Plaza, a business incubation center solely for foreign investors, offers office space and on-site investment support from officials from government agencies like the Korea Immigration Service and the Korea Customs Service.

Appointed by the president of Korea and located at Invest KOREA, the Foreign Investment Ombudsman is mandated to resolve grievances that foreign investors may have in the course of doing business in Korea.

In closing, I would like to emphasize that despite the global downturn, Korea presents attractive investment opportunities backed by the full support of the government, which is well aware of which areas are in need of improvement and taking direct action to address and improve them.

For companies looking to get a head start on the competition when the economy turns around, it's difficult to imagine there being a better time than the present to find out what makes Korea's environment for investment so profitable. In this light, I urge foreign companies looking to establish a base of operations in Asia to place Korea at the top of their list of consideration.