Foreign Investment in Korea Continues to Plummet
by Brendon Carr
The Korea Times has a must-read article describing how foreign investors have had enough of Korean double-talk on foreign-investment friendliness and are withdrawing their investments from Korea. Net FDI—that is, the amount of incoming foreign direct investment as against foreign investments cashed out and withdrawn from Korea—has fallen steadily from almost $10 billion in 2004, to negative $670 million for the first quarter of 2008.
Asia’s most widely-quoted economist Andy Xie offers the following insight why:
“Korea has become less friendly to foreign investment in the past five years as it recovered from the financial crisis,” Andy Xie, an analyst of the Shenzen Development Bank (SDB) in China, who is the former Morgan Stanley chief economist overseeing the Korean economy and financial markets, told The Korea Times.
“Koreans may disagree but this view is widely shared in the international community,” he added.
“Korea’s development model is based on developing indigenous firms to conquer foreign markets, very similar to the Japanese model,” he added. “The opening to FDI during and after the crisis was out of necessity. Korea was down and needed the money. When Korea recovered, it reverted.”
This is the Lone Star Effect in action. Lone Star bought, at the government’s urging, a failing Korean bank and rescued the bank. But nobody told Korea that Lone Star would be doing it for a profit! Profit by a foreign investor is a difficult pill to swallow.
The [Bank of Korea] said that for investment promotion, the government needs to relax more regulations.
“Reforming regulations is the most urgent task for Korea to attract more foreign investment,” [BOK senior economist Lee Won-joon] said.
“If Korea is to become a major FDI destination, it should create a more foreign-friendly business environment by removing red tape and tackling its key competitive disadvantages, such as labor market rigidity,” he added.
Well, sure. But these are the exact same prescriptions which have been bandied about for the 11 years I’ve been working here as a lawyer, and if anything, in the labor aspect things have gotten worse. Labor-market rigidity will never be addressed, not until the economy has completely melted down. It’s like the third rail of Korean politics.
And i don’t think mere deregulation will be enough to draw new foreign investments. A real social change will be necessary. I’m reversing the order in the story, but I think Andy Xie nails it:
“I don’t think Korea can change in the near future to reverse the poor FDI trend,’’ Xie said.
“Korea may be unwilling to make the changes to attract FDI,” he added. “Korea may never become a truly open economy. The mere fact that people always talk about foreign versus local means that the economy cannot be truly open.”
As a signal of which direction things are going, the government apparently plans to renegotiate its just-concluded “deal” on re-opening the Korean market to US beef. Still optimistic that Congress will approve the KORUS Free Trade Agreement?
Now, the Lone Star case was a little bit special in that it involved purchase of Korea Exchange Bank, a large commercial bank occupying one of the commanding heights of the Korean economy—and a sector which is highly unionized. Korean trade unions are nests of Marxist xenophobes, which made the Lone Star KEB investment sure to attract all the worst responses this country can muster.
And Korea responds differently to foreign investment when it comes with “meddling” in management. Foreign portfolio investors generally have a great time of things, so long as they’re willing to sit down and shut up. When a foreign investor takes a 5% stake in a listed company, for example, the investor must publicly declare whether or not the investor intends to interfere with management.
But the government and legal system are supposed to moderate such instincts, not exacerbate and validate them. That’s the reason why foreign investors have lost interest in Korea. Most of them do just fine. But all of them fear having a target painted on their back by a reckless government, and then finding the courts more eager to appease public feeling than uphold the rule of law. L’affaire Lone Star has done considerable damage to foreign confidence in this country, and it will take many years for people to forget.
Thanks, Roh Moo Hyun!
To be honest, though, the damage done by Roh’s 386 gang of crypto-Communists is not the only factor. As BOK economist Lee Won-joon noted, and Pres. Lee Myung-bak echoed in his earliest public statements as President-elect and President, the general attitude of the government and its employees toward doing their jobs is appalling. Government in Korea is a severe cramp on productivity, and urgent deregulation is a necessity to reverse not just the foreign investment decline, but the flight of Korean corporations to better investment destinations. There is simply too much hassle on investors of all nationalities. Fix that, and one day the foreign investors might come back.
UPDATE 5/7: Over at the Marmot’s Hole, a California-based Korean-American asset manager banker posting under the name “WangKon936” offers up some counter-points—Warren Buffett says good things about Korea and invests his money here (hmm), and some website recommends Korea as a contrarian play because, as the article notes, the government is so “anti-business, which has scared investors off”.
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I am here in Korea on a SOFA Visa (not a GI though) and have an American based Technical English translation business that I have used to do business in Brasil, Costa Rico, Philipines, Indonesia and China.
The S Koreans do not want to give me an amendment to my SOFA Visa to allow me to also make money with my Technical English translation services. I can almost understand due to the nature of a SOFA Visa. (but not really) I got around this issue in another way (legally) but doing business is still a real challenge in S Korea (compared to experiences with the other countries mentioned)Mind you, none of the other countries were the proverbial “walk in the park” either, but nothing compared to S Korea.
I, obviously, wasn’t looking to do much FDI, but even the simplest of business transactions and discussions couldn’t get past either someone needing kick-backs that exceeded the money to be made or someone else so dumbfounded by a “normal” business proposal that they thought I was the one trying to rip them off.
This IS NOT the place to be doing business right now.
But that’s just my experience.
Wow...excellent but depressing post, Brendon. My opinion: the unfriendliness to foreign investment and to a free, profit-driven business environment stems from the shortcuts that Korea took in its quest to “develop” as quickly as possible.
For example, the rationale for existence the government-aided chaebol was to “help the country” rather than foster a free market. When the biggest businesses are pillars of society that “can’t fail” rather than simply economic agents that strive to produce/serve customers efficiently, there is far less incentive for these chaebol to be good at allocating capital.
In addition, the existence of a few large companies means their suppliers have very little negotiating leveraged, are only “allowed” to maintain a certain profit margin, and thus are very unlikely to be sources of innovation.
And of course, issues like labor rigidity and an extremely unproductive service industry seem not to bother Korean consumers; it’s like they don’t realize that this translates into higher prices for them. I think Uncle Brendon has another good point here: limited English proficiency prevents Koreans from realizing “hey, we’re being ripped off.”
And ff course, there are many other factors ranging from the business environment to the media to public opinion to the judges and politicians.
If anyone else wants to posit ideas about the roots Korea’s investor-unfriendly environment...please do!
Hi, Brendon
I think one of the important criteria on whether the new government has a sincere will to change the situation for the better is to reduce the number of government workforce to ensure smaller but more efficient government. In my experience both direct and indirect, most of government officials are becoming stumbling blocks rather than making things happen for most of mundane business in Korea. Maybe it is the case with foreign investors, too. If the government succeeds to cut itself down by one third, that will be a good signal to local and foreign employers. But I doubt it will happen.