Foreign Direct Investment in Korea: A Foreign Perspective

Foreign Direct Investment in Korea: A Foreign Perspective

In contrast to international trade, which expanded rapidly and played the role of engine for economic development in Korea, inward foreign direct investment(FDI) has remained sluggish and failed to contribute significantly to Korean economic growth. Although it is well established that FDI can enrich a host country’s economy in a number of ways, the Korean government restricted and controlled FDI, partic- ularly up to the 1997 financial crisis. As a result, Korea was regarded as the worst place to invest among Asian nations. These restrictions of FDI and unhealthy FDI environments were reflected in the flagging level of FDI in Korea. After 1997, however, the Korean government has under- taken a paradigm shift in FDI policy from “restriction and control” to “promotion and assistance”, and undertaken a series of policy measures and all-out efforts to improve the business environment and attract FDI. As a result, inward FDI in Korea surged over the three-year period 1998-2000. Despite this spurt, the magnitude of FDI in Korea is still small in comparison to other countries, and has been declining sharply since 2001. How then, would the relatively low magnitude of FDI in Korea and a recent sharp decline be explained? What addi- tional measures should Korea undertake to increase FDI inflows to a level comparable internationally? To address these vexing questions from a foreign perspective, a compre- hensive survey was conducted from May to July 2002 of foreign companies that had undertaken FDI and have been operating in Korea. A questionnaire comprising 96 questions was distributed to about 400 foreign companies, and a total of 69 responses were received. According to the survey results, foreign firms undertake FDI in Korea to capitalise on the emerging business opportunities in Korea, and do not consider Korea as a stepping stone to gain market access to other Asian countries. Foreign business people generally have a negative view on the improvements in the Korean business environment in the recent past. Consistent with this, foreign business people point to various types of difficulties in establishing and operating FDI projects in Korea. These difficulties arise not only from excessive, complex and opaque government regulations, the excessive discretionary power of bureaucrats and cronyism and corruption, but also from inept labour relations and high wages, unfair advantages held by domestic firms, inefficient corporate governance of Korean companies, cultural and communication difficulties, Koreans’ prejudice against foreign products, closed Korean society, and poor social amenities for expatriate families. The respondents also consider themselves disadvantaged in a system where Korean firms rely heavily on personal rela- tionships for business operations. They recognise, however, strengths of Korean workers, such as diligence, loyalty toward companies, collaborative team spirit, and willingness to be trained, but point out poor English skills as the weakest aspect ...