Foreigners piqued by capital requirements

Neon signs shine brightly on the streets of Itaewon in Seoul, which has recently seen a boom in international restaurants and shops owned and run by foreign entrepreneurs. Potential foreign businesses are likely to be dissuaded by the plan by the Ministry of Knowledge Economy to increase the minimum capital requirement for foreign investors to 100 million won.

/ Korea Times file

By Cathy Rose A. Garcia

Foreign-owned restaurants and other businesses have been slowly popping up around Seoul in recent years. There have been a growing number of foreign entrepreneurs, who are living and doing business in Korea.

Foreign entrepreneurs typically carry a D-8 corporate investor visa, which is obtained after investing a minimum of 50 million won ($42,000).

But the government’s plan to double the minimum capital requirement for foreign direct investment (FDI) by October is expected to stifle the growth of foreign-owned small and medium enterprises (SME) in Korea.

The Ministry of Knowledge Economy announced last month it revised the Foreign Investment Promotion Act to raise the capital requirement for D-8 corporate investor visa holders to 100 million won ($84,000)

A spokesperson from the Ministry of Knowledge Economy said it was the right time to raise the minimum foreign investment requirement, considering the amount has remained stagnant for nearly 10 years. .

In 1991, the minimum foreign direct investment requirement was 25 million won per person, or a total of 50 million won. In 2001, it was revised to 50 million won per person.

``If you count the cost of doing business, cost of living, rent and price levels in the last 10 years, it is not too farfetched to be revising the capital requirement to 100 million won... The amount (50 million won) seems too small now,’’ the ministry spokesperson told The Korea Times.

However, there have been reports that the Ministry of Justice had requested the Ministry of Knowledge Economy to increase the investment requirement since it was too low. Some foreigners have allegedly taken advantage of this by availing of investor’s visas to enter the country and stay in Korea indefinitely, but not to do business.

But would a 100 percent increase in capital requirement be enough to prevent some foreigners from abusing it? Or would it just simply discourage foreigners from investing into Korea at a time when FDIs are already declining?

The D-8 corporate investor visa is issued to foreigners who start small and medium enterprises in Korea. There are no restrictions on what type of businesses can be started.

A representative from the Seoul Global Business Center, which provides consulting services for foreigners who want to establish businesses, said many foreigners are interested in opening restaurants or food businesses. Other types of businesses they are interested in include online shopping, trading and consulting.

``We have foreigners coming to the center, inquiring about how to start a business, the proper visa status needed, investments and how to register a company. We assist them with various things,’’ the representative said.

Foreigners need have at least 50 million won in foreign currency before they can establish a business in Korea. The funds have to be remitted from overseas to an account in Korea, as proof of it being a foreign direct investment. Once the company is registered and the funds are transferred, the foreigner can obtain a D-8 visa.

However, there has recently been an increase in the applications and issuance of D-8 visas, which raised alarm bells for the Ministry of Justice.

There have been instances of some individuals who do not have the required minimum capital and have resorted to paying so-called ``agents.’’ These agents will forward money from their overseas accounts to the applicants’ accounts. In return for loaning the amounts and helping complete the application, the agents will be paid exorbitant fees by the applicants.

Sean Hayes, a lawyer who co-leads the J&S Law Firm's International Practice Group, said the ministry’s plan to raise the foreign investment requirement will not discourage this small number of foreigners from abusing the D-8 visa.

``The Ministry's solution to the problem will likely never solve the problem ― these agents will simply charge higher fees and find other creative ways to get approval for applicants,’’ Hayes told The Korea Times.

Instead, the plan may further tarnish Korea’s image as an investment destination. ``Raising the capital requirement will lead to negative press and possible a feeling by potential investors that Korea is not a foreign-capital friendly destination. The attitude is already widespread and thus risking an increase in negative sentiment for the sake of not allowing entry of a small number of individuals is obviously an unwarranted risk,’’ Hayes said.

Many of the foreigners who are abusing the system are from less developed nations, so Hayes proposed changes in the immigration process.

``A two-tier approach to visa applicant screening and additional training for immigration officials on how to adequately scrutinize visa applications from countries that are less developed economically than Korea is a better approach. Also, Korea needs a total revamp of its immigration laws to allow needed skilled workers to be more easily employed by employers in need of these workers,’’ Hayes said.

There are already some prospective investors who are being turned off by the increase in capital requirement.

Some have approached the Seoul Global Business Center to ask for assistance in setting up their business in Seoul, but are now thinking of stalling their plans to be able to raise more funds.

``Some only have 50 million won as their maximum money right now. So it is becoming a problem for them to raise 100 million,’’ a representative from the center said.

If obtaining a D-8 corporate investor visa would be a problem, the Ministry of Knowledge Economy spokesperson suggested foreigners who want to do business here can try applying for a D-9 trade management visa or C-2 short-term business visa. The D-9 visa is for overseas traders who do import and export business, while the C-2 visa is issued for self-employed people, consultants for Korean companies and those involved in trading business.

However, it seems the government’s tightening of FDI requirements comes at a time when FDI has continued to decline. In the first half, only $4.33 billion in FDIs have been recorded, a 6.7 percent drop from $4.64 billion during the same period in 2009.

Government officials downplayed any possible effect of the new investment requirement on overall FDIs, since SMEs only make up a miniscule portion.