International Law

Foreign Investment in Korea Continues to Plummet

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.

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 investment in 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.

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.

Full post as published by Korea Law Blog on May 06, 2008 (boomark / email).