Korea Must Send Open-Market Signal
By Jane Han
Staff Reporter
Each new data release on the falling inbound foreign direct investment (FDI) triggers a series of news reports and editorials headlining the country's economic trouble. Koreans wonder how long the slump will last, while investors want to know when promised deregulation will materialize.
Addressing these questions often, if not every day, is the head of the state agency responsible for attracting investment, who admits that Korea's investment opportunities are not as attractive as they used to be in the eyes of foreign investors.
``The days following the Asian financial crisis presented a unique opportunity for investors, but we don't see that kind of wave coming again,'' Chung Tong-soo, who heads Invest Korea (IK), the investment promotion arm of KOTRA, said in an interview with The Korea Times, Thursday.
FDI has been freefalling for the third straight year, with net FDI ― FDI inflow minus outflow ― in the first quarter dipping to minus $670 million for the first time in one and a half years, according to the Bank of Korea (BOK). This means investors withdrew more money than they invested.
Compared to the 30 OECD member nations that attracted a record $1.37 trillion in FDI last year, up 31 percent from 2006, Korea's figure dropped more than 50 percent to $1.6 billion.
Among many reasons that contributed to this decline are a lack of investment opportunity, militant labor unions and excessive government regulations, said Chung, who took office in 2006.
``What was previously available as merger & acquisition (M&A) opportunities are no longer here because cash-rich Korean firms now outbid foreign investors,'' he said, stressing that the government's limit on foreigners' bidding due to technology outflow concerns doesn't help.
Chung highlighted the expected closed bidding for Hynix, the world's second largest computer-memory chip maker, and Daewoo Shipbuilding & Marine Engineering (DSME), the world's third-largest shipyard, as some of the latest examples.
``I understand the government's concern, but we need to take a cold look at what this technology represents and also how serious the need is to protect the technology,'' he said.
``If DSME is the only major shipbuilder and Hynix is the only memory-chip maker, I understand, but we have other strong players in the industry.''
He said Korea must start sending a strong signal to the world that it is an open market, not a closed one.
``Even if it's sold, it's not going anywhere. It's mostly going to be run by Koreans,'' said Chung, stressing that foreigners are well aware of Korea's infamous labor unions.
He said, in fact, the militant labor unions, labor laws and soaring wages are the biggest concerns for potential strategic investors who plan long-term investments in Korea.
According to Towers Perrin's 2008 global compensation planning report, South Korea's projected salary increase hovered in the 7-percent range, while that of Japan stood at 3 percent.
``If we continue along the current path, we are definitely not heading toward mutual prosperity,'' said Chung. ``We saw a clear example of what an overly strong labor union can do from the U.S. automobile industry.''
He said, unfortunately, the same situation is seen here, which requires immediate attention and resolution because ``given Toyota's edge and fast-rising Chinese makers, current practices won't sustain further growth.''
Chung said that despite the strong unions, Korea's homegrown conglomerates are seen as having an edge, as they have become significant buyers of parts and components produced by foreign companies operating here.
``Singapore doesn't have homegrown global champions. That's why they focus on attracting multinational firms to invest,'' he said. ``But part of the reason why our FDI efforts aren't successful is because of such strong domestic companies.''
Chung said, ironically, local conglomerates act as inducers of FDI, but also act as limits because they are very strong competitors.
``This market is very tough. Look at Wal-Mart and Carrefour, they couldn't stand the competition,'' he said, adding that family-run companies' various in-house agencies also don't leave room for foreigners to come in.
``Almost all chaebol have their own ad agencies, so global firms only have 10 percent of the market,'' said Chung. ``This isn't good.''
Despite the barriers, the IK chief said the government is in the process of making reforms in batches.
The domestic corporate tax rate is expected to be slashed to 22 percent by the end of this year from 25 percent, and cut down to 20 percent by 2010.
Chung, however, said efforts must be made because Hong Kong and Singapore are already at that level or lower.
``By the time we get to 20 percent, they'll be in their tens,'' he said, expressing hopes that the Lee Myung-bak government will bring the necessary changes.
``FDI takes a lot of time to germinate and become realized,'' he said. ``We're not going to see something right in the next six to 12 months, but we'll see differences at least two years down the road.''