Net Foreign Direct Investment Falls for First Time in One and a Half Years

By Kim Jae-kyoung
Staff Reporter

Despite all the slogans and gestures by the government to attract foreign investment, foreigners have turned their backs on Korea as the world's 13th largest economy has become increasingly less friendly to foreign investment.

The view, which has long been denied by ranking government officials, has been backed by the latest report on foreign direct investment (FDI) into Korea.

The volume of net FDI ― FDI inflow minus outflow ― in the first quarter fell to minus $670 million for the first time since the third quarter of 2006, according to the Bank of Korea.

This figure compares with net FDI of $1.58 billion in 2007 and $3.59 billion in 2006.

Despite the government's denial, the view that Korea has become less attractive to foreign investment has been widely shared among global investors.

``Korea has become less friendly to foreign investment in the past five years as it recovered from the financial crisis,'' Andy Xie, an analyst of the Shenzen Development Bank (SDB) in China, who is the former Morgan Stanley chief economist overseeing the Korean economy and financial markets, told The Korea Times.

``Koreans may disagree but this view is widely shared in the international community,'' he added.

``Korea's development model is based on developing indigenous firms to conquer foreign markets, very similar to the Japanese model,'' he added. ``The opening to FDI during and after the crisis was out of necessity. Korea was down and needed the money. When Korea recovered, it reverted.''

Inbound investment had increased sharply since 1998 when the currency crisis hit the nation, with net FDI soaring to $9.33 billion in 1999 and $9.28 billion in 2000 from $5.41 billion in 1998.

However, after recording $9.25 billion in 2004, the net FDI steadily decreased to $6.31 billion in 2005, $3.59 billion in 2006 and $1.58 billion in 2007, turning negative in the first quarter of this year.

The nation's inconsistent and heavy-handed rules have become a major bottleneck, scaring away foreign capital and businesses, according to an analysis by the central bank.

``Excess regulations and complex administrative procedures here have deterred investment inflow over the past few years,'' BOK senior economist Lee Weon-joon said.

``In particular, the entry barrier for foreign businesses is set too high,'' he added. ``The government has introduced a number of projects to attract foreign investment, including `Invest Korea' in 2003, but most of them have turned out to be no more than slogan-oriented projects.''

In the category of startup administrative procedures, Korea ranked 95th out of 131 countries surveyed, according to the 2007-2008 global competitiveness report by the World Economic Forum (WEF).

The nation is also lagging far behind in such categories as control over foreign business ownership and protection of investors, ranking 61st and 53rd, respectively.

``The government always says that it is trying its best to deregulate the market, but they only make a few changes in the micro sectors and leave the big picture unchanged,'' Lee said.

The central bank also cited lack of foreign capital inducements, sluggish domestic investment, an unfavorable business climate and withdrawals of existing investment for the sluggish FDI.

Excess regulations and anti-business sentiment have made the nation one of the least attractive investment destinations among rich countries, far behind its Asian rivals such as Singapore and Hong Kong, as well as developed countries.

The nation ranked 25th out of 82 countries in a survey on business environment conditions conducted by the Economist Intelligence Unit (EIU), far behind Singapore (3rd), Hong Kong (6th), the U.S. (7th) and Taiwan (19th).

The EIU expects chances to be slim that Korea will improve its business environment in the short term.

``I don't think Korea can change in the near future to reverse the poor FDI trend,'' Xie said.

``Korea may be unwilling to make the changes to attract FDI,'' he added. ``Korea may never become a truly open economy. The mere fact that people always talk about foreign versus local means that the economy cannot be truly open.''

The central bank said that for investment promotion, the government needs to relax more regulations.

``Reforming regulations is the most urgent task for Korea to attract more foreign investment,'' Lee said

``If Korea is to become a major FDI destination, it should create a more foreign-friendly business environment by removing red tape and tackling its key competitive disadvantages, such as labor market rigidity,'' he added.

kjk@koreatimes.co.kr