An alarm bell has rung regarding South Korea's efforts to attract foreign direct investment (FDI), which continued to drop for the third consecutive year in 2007. The total sum of foreign direct investment reached $9.2 billion on a net basis in 2004. But it fell to $6.3 billion in 2005, $3.5 billion in 2006 and just $1.5 billion last year.
According to the Organization for Economic Cooperation and Development (OECD), South Korea's FDI ranking nose-dived to 29th in 2007 down from 16th in 2004. What's more disappointing is that the country has become the only OECD member whose efforts to induce more FDI were dealt a severe setback three years in a row.
The situation is now being aggravated on the back of a global economic slowdown followed by skyrocketing oil prices and higher inflation. In the first three months of this year, foreign businesses cashed out $670 million of direct investment in the country. This means that multinational firms were withdrawing their investments from the country rather than making new investments.
Only South Korea is left out in the cold as far as FDI is concerned. The so-called BRICs countries ― Brazil, Russia, India and China ― and states of the Association of Southeast Asian Nations (ASEAN) all showed an increase in their FDI figures during the 2004-07 period. Vietnam enjoyed an eightfold rise to $17.9 billion in FDI, while India's FDI climbed six times to $15.7 billion.
We have to acknowledge that the country has become less and less attractive to foreign investors due to complex regulations, bureaucratic red tape, higher land prices, surging costs of living, and frequent labor disputes. There are growing concerns that South Korea might soon be blacklisted as a destination for direct investment.
Foreign firms are increasingly favoring rapidly growing economies, including China and India, because they offer better business opportunities and greater investment returns. Finnish handset maker Nokia relocated their production lines in the southeastern port city of Masan to China and India. Motorola, a global leader in mobile communications, also followed suit, moving its factory in Icheon, southeast Seoul, to China.
Phillips Electronics of the Netherlands disposed of its investment in a panel display joint venture with LG Electronics, while Wal-Mart and Carrefour sold off their discount stores and left the country. Such departures are not confined to foreign businesses. Many South Korean firms, including Samsung Electronics and Hyundai Motor, are expanding their direct investment abroad and relocating their assembly lines to foreign countries in search of cheap labor and lucrative markets.
It is regrettable that local companies have growing difficulties in maintaining their factories and business operations due to soaring costs. It is no secret that South Korea has become an expensive place to live as well as do business. Government officials have been long on words but short on action to provide foreign investors with more incentives. They should stop shouting empty slogans. The Lee Myung-bak administration needs to make sincere efforts to create a better environment conducive to business operations, especially for multinational investors.