Inbound foreign direct investment (FDI) has been on the wane and outbound investment has been on the rise. This indicates an uncompetitive corporate environment in the world’s 14th largest economy.
Since peaking at $15.3 billion in 2000, FDI may top less than $10 billion this year. On the other hand, outbound direct investment surged nearly four times to more than $30 billion over the past decade.
Foreign CEOs shun investing here as they are unable to build factories in Seoul and the nearby metropolitan area. In addition, land prices, wages and corporate tax are higher here than neighboring countries such as China and Singapore. Beyond the uncompetitive investment environment, Koreans’ way of thinking is not proactive toward FDI. For example, giving incentives are regarded as privileges.
The OECD ranks Korea the sixth most difficult place for FDI ahead of Iceland, Mexico, New Zealand, Japan and Canada. The regulations are reportedly especially tight in telecommunications, transportation and fisheries. The IMD ranked Korea 50th in the FDI environment and 46th for regulations.
More worrisome than the falling FDI is a mass exodus of local companies. It means the domestic investment environment must completely revamp itself to attract additional FDI and keep local companies from moving out of the country.
The common cause behind the declining FDI and the rising outbound investment is the difficulty in doing business in Korea. Entry barriers and competition-restrictive regulatory practices need to be reviewed so that Korea will be more competitive than Hong Kong and Singapore. Labor market inflexibility is another impediment to inbound investment.
Since the Roh Moo-hyun administration in 2002, Korea has created six free economic zones (FEZ), including the Incheon FEZ. As the government is dragging its feet in easing regulations on foreign schools and hospitals, Korea sees the FEZ without foreign investment. Without schools and hospitals, foreign investors will be reluctant to invest in Korea.
Foreign CEOs complain that a change of heads of local autonomous bodies is a substantial investment risk. Nearly all investment documents signed during the previous local administrations are under review for revision. Foreigners are skeptical about signing documents because these agreements would either be obsolete or subject to change under the new leadership of local governments.
FDI is falling, but foreign portfolio investments in bonds, stocks and other derivative products have been growing. It means portfolio investment generates higher return than FDI. The government is struggling to keep short-term capital from growing. It takes minutes for portfolio funds or hot money to leave Korea. FDI is a promising source of growth for Korea. It is a long-term investment.
Seoul needs to seek ways of boosting FDI. It is important in creating quality jobs and bringing in foreign technology. Creating a social environment that respects foreign CEOs is one of the easiest and most pressing tasks for boosting FDI. Constant cheerleading by leaders, including President Lee Myung-bak, is essential for encouraging FDI.