Koreans must overcome lingering xenophobic mentality

An alarming sign in Korea`s inbound foreign direct investment (FDI) is evident from the recent sizable deficit in Korea`s net FDI balance. For the first time since the Bank of Korea started compiling such data in 1980, FDI in Korea posted a net outflow in the first half of 2008. Although a slight definitional difference regarding FDI exists between the central bank and the Ministry of Knowledge Economy, two things should be noted: First, Korea`s inbound FDI has been gradually declining since the $12.8 billion recorded in 2004 (on a notification basis) after peaking at $15.5 billion in 1999. Secondly, outbound FDI by Korean companies has far exceeded inbound FDI coming on an arrival basis; it was $20.4 billion and $7.7 billion, in period, respectively. Although this trend partly reflects the "fire sale" of Korean companies directly following the Asian financial crisis in 1997-98, it has also been influenced by several serious impediments connected to Korea`s new FDI-promotion policy.

It is well-known that Korea adopted a unique FDI policy from the onset of its industrialization drive in the early 1960s. Korea traditionally relied on foreign loans rather than FDI to finance the country`s huge financing requirements during the high growth of the 1970s and 1980s. Following the Japanese colonial era, in which major manufacturing firms in Korea were owned and run by the Japanese, Koreans developed a sense of economic sovereignty. Furthermore, given the hostile relations with North Korea, the Korean government made a strong commitment to develop the country`s defense capabilities - a commitment which included measures to protect sensitive industrial sectors, particularly those related to national defense, from foreign takeover. For some time, the strategy appeared to have worked, in that Korean companies succeeded in accumulating technological prowess through reverse engineering from imported finished and intermediate goods, thanks to the skilled workforce and engineering expertise. Whenever Korean companies wanted to import new technologies, for example, they preferred technology licensing to FDI by multinational corporations.

As a result, Korea created its own global brands including Samsung, Hyundai, and LG, in a less than half a century. Korean entrepreneurs believed in their ability to make key decisions about which industries should be developed and how to compete in the global market by using this nation`s abundant and well-educated labor pool. Today, this strategy is no longer effective, given the widening supply chains and production fragmentation. To the extent that Korea is able to attract multinational companies to create job opportunities, acquire and implement new technologies as well as innovative ways of doing business in the 21st century economy, it will enjoy previously untapped sources of economic growth in the years to come.

Unfortunately, in this age of globalization, some Koreans still have suspicions regarding the remittance of profit by foreign companies which invest either in the portfolio market or make a Greenfield investment in Korea`s manufacturing sector. This negative sentiment has been aggravated by occasional criticism from the international press regarding speculative hedge funds. Unfortunately, this mindset continues, even within some government agencies and, to a certain extent in the private sector, despite Korea`s outward-oriented economic structure and the government`s renewed emphasis on inducing FDI. Many foreign-invested CEOs in Korea express dismay at rapidly rising wages, violent labor strikes, and the complex web of regulations. Some also believe that Koreans still have a deeply imbued xenophobia. Recently, the fact that many Koreans are nationalistic and anti-foreign came to the fore with the protests against U.S. beef imports. Because of the sentiment, the high wages and all the regulatory red tape here, Korea is rapidly losing its appeal as a destination for foreign investment.

Koreans must recognize that, far beyond the geographical implications vis-a-vis Korea, Japan and China, Korea`s competitiveness has been undermined because it is sandwiched between those countries. Last year, Korea recorded its largest-ever bilateral trade deficit with Japan, $29.9 billion, while Korea`s trade surplus with China has diminished rapidly. Recently, Korea`s potential growth rate has also diminished substantially, from 8 percent annually throughout the mid-1990s to around 4 and a half percent recently.

Many Koreans feel that an economic revival is the most important item on the national agenda. This sentiment was so eloquently reflected in the last presidential election, in which Lee Myung-bak, who pledged to return Korea to a more growth-oriented economy under his 7-4-7 campaign pledge, won by a wide margin. Upon his inauguration, Lee created the Presidential Council on National Competitiveness to promote a business-friendly environment by inviting the chairs of the United States, the European Union and Japanese business associations to Korea as committee members. Lee has already established a "hotline" to allow major foreign investors to share their advice and complaints directly with the presidential office. The Council has already implemented a fast-track approval process for authorizing industrial zones, of which Korea is in dire need for both domestic and foreign investors. The Council has also taken steps to minimize existing impediments such as regulations quickly.

Despite Korea`s efforts to induce FDI foreign investors have a variety of grievances involving taxation, labor disputes, the rise in employee wages which outstrip labor productivity, and the country`s complex regulatory regime. The prolonged and much-publicized Lone Star case has already resulted in making potential investors think twice about choosing Korea. Sadly, this one case has done extensive damage to Korea`s business image.

Some business-related difficulties arise due to inconsistency in the interpretation of related laws and regulations on the part of government bureaucrats. Many Korean laws have gray areas which inevitably lead to inconsistent enforcement. Added to this is the anti-foreign attitude that many Koreans apply to foreign investment, particularly in the stock markets. There is also the fact that some government officials consider the complaints of foreign investors to be "irrational and illegal." As much as we praise Korean multinational companies` success stories overseas, Koreans must also come to view foreign investors here as domestic firms, never losing sight of the best international practices which can be learned and applied in a domestic context, in addition to new methods of production.

The news, however, is not all bad. It should be pointed out that Korea`s ongoing multi-track free trade agreement negotiations are a strong indication that Koreans are ready for head-to-head competition in a fully liberalized global economy. Indeed, national competitiveness derives from how efficiently a country can use outsourcing across national borders. In retrospect, Korea has always responded to serious challenges in a unified and impressive manner. With the Lee government determined to make Korea an advanced nation, Koreans need to develop a truly open mind to welcome a global flow of investment. Most importantly, Koreans need to accept as an iron rule of economics that economic benefits are always a two-way street.

By Ahn Choong-yong