Korea among toughest markets in FDI: OECD

By Kim Da-ye

Staff reporter

Korea is one of the toughest markets for foreign firms to invest in among the member countries of the Organization for Economic Cooperation and Development (OECD), according to the global body's report.

The 2010 update of the FDI Restrictiveness Index (FDI Index) ranked Korea as the sixth toughest on limiting FDI among the 31 OECD members and 11th among 47 countries including 16 non-OECD nations.

The outcome may come as a big disappointment for President Lee Myung-bak as his administration has vowed to create a more foreign investment-friendly environment since he took office.

Foreign CEOs doing business here said that the government should make more efforts not only to raise Korea's ranking on the index but also to change foreign investors' biased perception toward the Korean market in order to attract more foreign money.

The FDI Index measures the restrictiveness on existing regulations, not the"perception of the investment climate or implementation issues." It says the index is for seeking "how a country's policies toward FDI affect their attractiveness to foreign investors."

Jeffrey Jones, former AMCHAM chairman, explains the real issues that affect foreign investors entering the Korean market.

"The difficulty that comes up all the time is the labor market ― the lack of its flexibility," says Jones who also spoke of dire working conditions for some foreign employees and difficulties in hiring foreign talent.

Jones added that senior government officials encourage foreign businesses to invest in Korea, touting its business-friendly environment. But in reality, he says, regulatory issues including environment taxes and product approval are much tougher to be resolved, costing firms "a lot of effort and time."

The public's general attitude toward business isn't favorable, encouraging the government to create a negative regulatory environment both for domestic and foreign firms.

But Jones and Seoul Financial Forum Vice Chairman James Rooney comment that the restrictiveness on foreign direct investments has improved by far.

"From a regulators' point of view, the Korean government is not very restrictive. The market is actually quite open," says Jones.

Both acknowledge that the main reason foreign firms are concerned about investing in Korea, largely due to a few notorious cases including the one with Lone Star. The U.S. buyout fund has failed to exit from the local market due to the regulator's inconsistent policies and the Korean public's negative sentiment against foreign capital.

Rooney says that Korea shouldn't be too concerned about regulations affecting foreign investors, and therefore the country's global competitiveness. Instead, the nation should focus more on how to do well abroad to become a global player. Rooney says Korea should make herself better known through marketing and PR, developing new sectors such as tourism instead of manufacturing and finance.

"The biggest opportunity is the human factor," said Rooney.

The FDI Index score is the sum of four measures, with one meaning "closed" and zero meaning "open." Korea scored 0.142 which breaks down to 0.139 from equity restrictions, 0.001 from hiring of foreign key personnel and 0.002 on other operational restrictions.

Equity restrictions are measured by the degree of exclusion of foreign participation, restrictions on majority holdings and limits on full foreign ownership. Korea achieved zero on screening or before-investment requirements.

The FDI Index score is also dissected into different sectors. Korea scored 0.5 on telecom, transport and fishing, 0.4 on media and 0.375 on agriculture and forestry. The OECD report says that the addition of new sectors including fishing, media and real estate had an impact on the rankings with "significantly tighter restrictions in these sectors" including Korea, Japan and Australia.