Korea’s FDI Policy Gets Grade B or Below

We often turn to lessons from the past to help us cope with difficulties in the present. As we struggle through the current economic downturn, it's comforting to remember that "every cloud has a silver lining."

Mark Patton, a partner at the consulting firm GCT Services, has multi-year extensive experience teaching and consulting in Korea.

By Mark Patton

We often turn to lessons from the past to help us cope with difficulties in the present. As we struggle through the current economic downturn, it's comforting to remember that "every cloud has a silver lining."

Pundits like author and entrepreneur Seth Godin are very vocal in saying now is the ideal time to seek new opportunities, try new things, start new enterprises and make the kind of deep and fundamental changes that will lead to success.

Change requires action. The old proverb, "When the going gets tough, the tough get going," reminds us that actions taken in stressful situations are true indications of character. The Korean people have proven time and time again that they are tough enough to meet any challenge. Just as Korea weathered the Asian economic collapse of the late 1990s and successfully dealt with its own credit crunch in 2003 and 2004, it has the ability and fortitude to make the changes necessary to reap the benefits of the forthcoming economic recovery.

One of these is the opportunity to attract more Foreign Direct Investment (FDI) in order to restore Korea's economic health and increase its competitive position in the region. Let's take a look at a "report card" of the key drivers of FDI and see where Korea is doing well and where "the tough" need to "get going" to make changes.

Economic potential: B+

The burdens of a weak won and depressed stock values are a huge opportunity to attract FDI. These two factors will draw FDI once investment money starts to flow again. Challenges in retaining FDI are why this item rates only a B+.

Aging Korea is not a growth market: The dismally low birth rate must be reversed, or Korea must become comfortable with immigration in order to maintain an expanding market. Upward trends in earnings and purchasing power do make up for this weakness, but these trends need to be supported by making sure that consumers continue to be able to spend.

Cost effectiveness: D

The days when Korea could lure investors on the basis of low labor costs are long gone. High salaries are not the only cost burden that investors must bear.

High corporate taxes, customs fees, real estate costs, fuel costs and yearly jumps in social welfare costs make the cost of doing business in Korea extremely unattractive, affecting every organization doing business in Korea, not just those that are foreign-invested.

And freezing increases in social welfare programs, letting market forces work openly in the real estate market and dramatic increases in productivity are the "tough choices" that need to be made to improve this score.

Human resources: C+, Quality of life: B+

Every presentation given to lure investors to Korea lauds the "highly educated workforce." There is no question that Koreans are indeed highly educated. But low productivity measures are a clear indication that this workforce is not being managed to its incredibly high potential. Significant improvements in job analysis and design, recruitment, onboarding, matching talents to job tasks and performance management must take place.

As a major metropolis, Seoul has made huge strides in improving quality of life. Pusan is currently undergoing a massive facelift. Getting an "A" for quality of life requires addressing the high costs of housing and access to quality foreign-language education. And for those who make long-term commitments to the Korean economy, smoother immigration procedures and elimination of discriminatory credit and other practices are a must.

Infrastructure: A+, Business friendliness: C

Nationwide cellphone coverage. Broadband internet access. High-speed rail. Incheon International Airport. Hundreds of kilometers of new limited-access highways. Excellent port facilities. Need anyone say more?

High business taxes, high property transaction taxes and social welfare contributions have cost effects but indicate how friendly the government is to business. Reductions in government control and government-imposed costs will not only show an increased desire for FDI, but also improve the environment for all businesses.

Henry Ford, whose contributions to quality of life for consumers and workers are legendary, had the following to say: "Most people spend more time and energy going around problems than in trying to solve them."

Korea's ability to attract and retain FDI will result directly from how much energy is spent going around problems and how much is spent solving them.

Mark Patton of GCT Services points out that Korea is far above average in economic potential; quality of life and infrastructure, in its readiness to accommodate foreign direct investment.

But the problem lies in the areas of cost effectiveness since foreign investors may not be rewarded as much as they are in other countries.

Another area is human resources that gets, in his estimation, a D, because of low productivity.