Korea must overcome xenophobic mentality

By Ahn Choong-yong

As the chair of the G-20 summit in 2010, Korea demonstrated it can play a significant role delivering global public goods on a global stage.

Despite Korea’s recent global orientation, the country ranked 33rd among 60 countries surveyed in 2010 for a globalization index issued annually by Ernst & Young and the Economist Intelligence Unit at the Davos Forum. Four Asian economies were among the top ones listed: Hong Kong, followed by Singapore in third, Taiwan at 12th and Malaysia at 27th.

This assessment echoed a survey conducted in 2008 by the Korea Trade-Investment Promotion Agency on the grievances encountered by 281 foreign companies in Korea. When asked about prerequisites for boosting investment in Korea, the largest ratio of respondents, 26.7 percent, answered “a global mindset.”

Recovering from the Asian financial crisis of 13 years ago, Korea made a paradigm shift from a foreign loan preference policy to inducing foreign direct investment (FDI). Nevertheless, there has been a sharp decline in inward FDI following an upsurge during post-crisis years. This decline can be attributed, in part, to the xenophobic mentality of Koreans.

With a history of foreign invasions, Korea has struggled to preserve its national and cultural identity instead of embracing foreign business entities.

Even amid rapid economic growth, the Korean model focused on the indigenous capacity building of local firms and preferred fully-owned Korean businesses. Consequently, joint ventures with foreign firms were the exception rather than the rule.

FDI is generally divided into two categories: green-field investment, in which a parent company starts a new venture by constructing new operational facilities, and investment involving mergers and acquisitions (M&A). In Korea, M&A type FDI accounted for 34.5 percent of the total FDI inflow on average between 1999 and 2006, just half the global average of 66.1 percent.

In 2010, the country saw a 15.4 percent drop in investments involving M&As. FDI inflows in the same year posted a mere $5.3 billion, while FDI outflows amounted to $23.1 billion.

M&A type FDI has various advantages. It facilitates the transfer of advanced technologies and new management skills, shortens the time it takes to start a new business and promotes market competition.

However, green field investments appear more welcomed in Korea due to a salient xenophobic mentality among Koreans toward foreign ownership.

Given this backdrop, the introduction of a poison pill, a defense strategy to deter hostile takeovers, and other legal measures to preserve “national wealth” and protect managerial rights and local technology should be carefully assessed.

It is ironic how the Korean media one day reports a poor inbound FDI performance, and the next day reports that foreign investors are pursuing an "eat-and-run practice," or making windfall profits and exiting the Korean market.

Obviously, xenophobic attitudes toward foreign investors appear to contradict how Koreans praise the way domestic companies transfer profits from their overseas investments to Korea. Authorities are sometimes hesitant about giving foreign firms investment incentives for fear of receiving possible reverse discrimination claims from domestic small- and medium-sized enterprises.

The contradiction is far-reaching. Despite government policies promoting a multicultural society, some foreign brides of Korean men have difficulty settling into Korea because of xenophobia.

The children of those multicultural families cannot intermingle well with their native Korean counterparts in elementary and junior high school classes because of their different complexions and insufficient proficiency in Korean, which is often learned at home with their foreign mothers. Xenophobia must be corrected early in a youth’s education. The Korean press also contributes to this mentality.

It recently reported allegations of tax evasion by foreign companies. Despite calling for thorough investigations, the media has portrayed foreign businesses as vulture funds, neglecting to mention it was investments that helped the Korean economy overcome the Asian financial crisis. When foreign investors encounter a xenophobic mentality, many of them become skeptical about investing in Korea.

In an age of globalization, only countries that actively incorporate a global supply chain and cross-border production fragmentation can become world economic leaders.

In this regard, Koreans must develop a global mindset to view foreign investors as domestic companies and appreciate their contribution to job creation and Korea’s economic development. Overcoming xenophobia and creating a friendly environment for foreign businesses is key to achieving an advanced open economy.