up down

Diagnosis of Korea’s Foreign Direct Investment

01 May, 2005 News Center 1,064



In 1997, we had experienced currency crisis, so Korea government took relief-loan from IMF. It was a national difficulty that we had never experienced before. There are the ways of solving this problem, lack of dollars, that is both acquirement of dollars through improvement of export and FDI. Especially FDI is a rising alternative plan for tiding over our financial difficulties not only because we can attract foreign capital without a burden worrying about its redemption and interest, but also on the ground of that it’s accompanying several effectiveness, such as job creations, technology transfer, and etc. As a result, according to their declarations, the amount of FDI was $88billion in 1998, $155billion in 1999, and $156billion in 2000, but there has been a dramatic downward trend since 2000.

In case of developing countries, just as Korea, FDI in the late period of industrialization gives new job opportunities to them as it is concentrated on the labor-integrated industries, as well as, in case of advenced countries, it contributes to the high development of industrial structure as it is concentrated on the capital-integrated part. On this account, both of them are keen to get FDI.

In the situation above, the Ministry of Commerce, Industry and Energy realized the need for professionals with expertise in at tracting foreign capital. But the consensus is that they lack professional people in the field, leading to mistakes and blunders during negotiations. In order to train such professionals, the Ministry of Commerce, Industry and Energy to deliver the Master’s in Foreign Direct Investment program. The Ministry had been considering the FDI program for a long time as a means to train professionals in the foreign investment sector.

Necessity of FDI

FDI is a foreign investment for perpetual profit in the domestic companies, such as participating in management. In case of Korea, FDI took an important role in the process of overcoming the foreign exchange shortage just after 1997, particularly which contributed to the national economy by increasing employment and production. In case of China, they have annually had an inflow of over $400billion of FDI since 1996, and the year 2000, the amount of FDI was over $572billion which was more than American one, so China became the most FDI incoming country in the world. Long time boom days of USA in the 1990s, it was called “the new world”, was affected by FDI that played an important role. In case of Korea, FDI increased dramatically after IMF crisis. but it has decreased rapidly because Korea has weak point about FDI more than our economic scales. In this reason, our country needs to try holding foreign capitals. To develop economic growth needs not only dramatical growth of FDI but also expantion of potential growth through change of general circumstance for attracting foreign capitals.

The reason why FDI decrease

Some reasons why FDI decrease are as follows”

First, general political unrest of domestic and foreign situation give an effect to invest, for example 9.11terror, Iraq war, nuclear weapon in North Korea, retirement of economic deputy premier etc, these affect FDI condition that Foreign investor wonder whether they decide to invest or not in Korea .

Second, there are problems both hostile labor- management relations and insufficient incentives. Labor-management relations in Korea are more hostile than in other countries, showing no signs of improvement in the near future. That undermines flexibility of the labor market and increases labor costs. In addition, labor unions are now even damanding that they be allowed to participate in management(including personnel management). All those issues crease an environment that is far from business-friendly. Moreover, the nation provides much less attractive incentives than its competitors, like Hong Kong, Singapore, and China. and its incentives have failed to satisfy foreign companies’ various needs. The Korean government just focuses on offering tax benefits, while foreign companies complain about the nation’s excessive regulations and foreign exchange control.

Third, Lack of prioritization and High costs make foreign companies hesitate to invest. The government has yet to come up with long-term blueprint to lure foreign capitals, and is just relying on such short-term measures as facilitating restructuring. Of course there exist several organizations designated to promote FDI, but it seems that they are not working closely enough. and the nation’s land prices for industrial parks, higher than those of competitor countries, are also turning international firms away. High logistics costs are also compounding the situation.

Finally, Foreign firms also have difficulty finding good places to do business. Although industrial parks earmarked for foreign companies and “Special Economic Zones” are being established, they are not likely to meet those companies’ needs. and the shrinking FDI is also ascribed to the fact that there is no specialized “industrial cluster” in the nation.

The way to attract foreign investors.

The government needs to recognize the importance of attracting FDI, and make it one of its top national agendas. Attracting foreign companies will surely serve as a new engine for growth to develop the nation into the Business Hup. In addition, all-out efforts should be made to enhance efficiency of the nation’s overall systems designed to attract FDI.

These days, the world economy rapidly change. These accelerated changes certainly present a challenge for entrepreneurs and governments, may also present new opportunities. So government should provide policy support to ensure the continuous inflow of FDI to fuel growth.


By Do-Young KIM (MBA 2005)