Korea’s FDI at all-time low

Do foreigners view Korea as unsuitable ground for investment?In what has been noted as an alarming trend, direct investment foreign investment in Korea has hit an all time low. The Net FDI in Korea, showed a drop of US$9.25 billion in 2004 from previous years and the consecutive three years till 2007 have also shown a steady decline. In fact in 2007 the net figures for foreign investment totalled a drastic $1.58 billion.

In 2008, the amount of FDI that left Korea in the first three months was $670 million, higher than figures that came in. Plenty of foreign companies withdrew their investment from Korea. This is an unhealthy trend for the Korean market in the investment market. Some of this could be attributed to excessive government regulations, labour unions problems, high living costs and lack of proper education for children.

According to the Organization for Economic Cooperation and Development, Korea is the only country in the 30 member nations of the OECD where FDI shrink has been noticeably low for the past three years.

Other countries in this region like, Malaysia, Indonesia, India, Brazil, and China or Vietnam, have not shown such alarming figures in foreign investment. Vietnam’s FDI rise was more than eight times, from $2.1 billion to $17.9 billion. India saw a rise from $2.6 billion to $15.7 billion.

It is alarming to see that not only are new investors not investing in the country, but alarmingly those who have already invested in this country have not shown any positive growth or reinvestment.

The past few years have seen many a foreign businesses withdrawing their investments from Korea. Companies like Nokia transferred some of its facilities in South Gyeongsang Province, Masan to China and India. Motorola is another company that has also moved its plant in Icheon, to China. Yet another big name in this trend is that of Philips, which withdrew its investments from a joint venture with LG in Korea.  Following the trend, Wal-Mart and Carrefour have ended their business transactions with the country.

The trend has given rise to alarming trends of economic slowdown and rising unemployment in Korea. The youth and the workforce are those who are directly affected.

Financial Blueprint for Korea

Korea must overcome the language barrier in order to become a financial powerhouse like Luxembourg or Hong Kong, Lee Young-tak, president of the Institute for Global Economics, said.

Lee, who served as a vice minister at the Ministry of Education, emphasized the importance of foreign languages for the financial industry. He said a friendly atmosphere should be created for foreign nationals. “It’s something that should be accomplished on a long-term perspective,” he said in an interview with The Korea Times. Lee gave some tips regarding how Korea could rise to become a financial powerhouse.

“Korea must resolve the problems of an unfriendly atmosphere for foreigners and the language barrier. People’s foreign language skills are essential for the country to become a financial powerhouse,” he said, pointing out that people from Luxemburg are multilingual and those in Hong Kong speak good English.

Financial Hub Plan Viable

Lee said the government’s plan to develop the country into the Asian financial hub hasn’t made much of a notable achievement so far. “Indeed, there is a pessimistic outlook on the financial hub plan,” Lee said, citing a Korea Development Institute (KDI) survey in which only 44 percent of experts in the financial industry had a positive outlook on the plan.

Nevertheless, Lee was positive. He said Korea could have a competitive edge in the financial industry, and achieve the goal sooner than expected.

The biggest hurdle lies in manpower, according to Lee. Korea lacks financial experts both in terms of quantity and quality. He pointed out that Korea ranked 45th in terms of competitiveness of financial professionals, far behind Hong Kong at 11th and Singapore at 15th. It ranked even lower than China at 39th. “Despite continuous deregulation by the government, it doesn’t seem to have had that much of a positive effect on market players yet,” Lee said.

The former KRX CEO, however, saw potential in the capital market and manpower.

“Following the Capital Market Consolidation Act, financial firms will now be able to develop new financial products more aggressively.”

Lee also cited the IT infrastructure as one of the best in the world. Combined with this, Koreans’ adventurous characteristics made the KOSPI200 option transaction see remarkable growth, and the KOSPI200 futures transaction, become the world’s fifth largest. According to Lee, such new financial products will add to Korea’s growth potential.

Lee cited abundant capital on the buy side as a boosting factor of the capital market. “The National Pension, for example, amounts to 257 trillion won as of March 2008, almost doubling from 117 trillion won in 2003. The foreign exchange reserves also topped $260 billion, a huge increase from $155.4 billion in 2003,” Lee said. He added that investment funds also expanded to 291 trillion won from a mere 145 trillion won five years ago.

He expected manpower to improve, as many high-qualified people who have been educated overseas are returning to Korea. “The people’s dedication to education have definitely helped the country,” Lee said.

Deregulation Is Key to Success

Lee said deregulation should be at the center of the financial hub plan. “Korea needs thorough financial deregulation that is comparable to the Big Bang of the United Kingdom.”

He acknowledged a series of deregulation measures implemented by the government, but pointed out that regulations, either official or unofficial, are still increasing costs for the market.

Lee said the President Lee Myung-bak administration should focus on tax cuts and deregulation.
“The new administration took the right direction when it chose the financial industry as the core of its economic growth strategy,” Lee said. “To enhance the competitiveness of the industry, it should focus on tax strategy and deregulation.” He pointed out that global financial powerhouses are cutting taxes and deregulating in a bid to lure global capital.

Find Niche Market

Lee said Korea has reached a stage in economic development in which high growth is unachievable through manufacturing only. “The financial industry should work as the other wheel paring with that of manufacturing.” He said cutting edge financial technologies and cost cuts in financing could enhance the competitiveness of other sectors.

He pointed out that the ratio of financial assets to the world gross domestic production (GDP) tripled to 316 percent in 2005 up from 109 percent in 1980. “The financial industry has become a key engine for changes and innovation in the global economy,” Lee said.

“This is based on knowledge and information, and high value added. It is also an eco-friendly future industry.” He said the industry, whose productivity is limitless, is incomparable to any other industry in terms of job creation or domestic income creation.

He advised that Korea should work on the global niche markets. “Other countries are building up a competitive edge in the financial industry, focusing on the niche market.” He cited Luxembourg and Hong Kong as models for Korea.

Despite being small countries like Korea, they have successfully transformed themselves into international financial hubs through specialization and a niche market strategy. “Luxembourg specialized in euro bonds, establishing itself as a regional financial hub in Western Europe. It is now at the center of euro bonds and investment funds. Hong Kong turned into a global financial center by specializing as a monetary intermediary.” He said Hong Kong was very lucky as Japan was strengthening regulation and China was growing explosively.

Capital Market Consolidation Act

He said the Capital Market Consolidation Act would be a big step forward toward deregulation.

Lee was positive about the financial industry policies implemented by the former President Roh Moo-hyun administration. “The Capital Market Consolidation Act, modeled after the financial `Big Bang’ in the United Kingdom, set up the basis for the development of the financial industry.” He expected the act to be a catalyst for the development of the financial industry.

“However, there should have been concrete policy implementations and support. It hasn’t brought about notable accomplishments yet,” he said. Lee added that the financial industry needs a very concrete policy plan, deregulation, and extensive infrastructure, ranging from insurance, law and accounting to medical and education services.

He expected there to be heated competition in the market following the implementation of the act, adding that Korea needs global-scale investment banks most of all.

“Financial players should become bigger, and the easiest way to achieve this is through merger and acquisitions (M&A) between financial businesses.” He said, however, that there still seems to be negative views and systematic limitations regarding M&As in Korea.