South Korea Must Provide a Better Business Environment to Attract Foreign Direct Investment

Dr. Hwy-Chang Moon's picture

Foreign direct investment (FDI) in South Korea has grown continuously over the past two years and currently is at historical highs. However, challenges flowing from American President Donald Trump administration’s protectionist trade and reshoring policies and increasing competition from other countries proactively moving to enhance their respective business environments to attract FDI will challenge Korea’s ability to continue to successfully attract FDI. In order to remain an attractive destination for FDI, the Korean government needs to offer a more attractive business environment to foreign investors.

While Korea has been relatively open to international trade, its openness towards inward FDI is far below that of competing countries. The primary problem is the country’s out-of-date FDI policies favoring particular sectors, entry forms, and preferential policies for investments. For instance, its current FDI policies favor the manufacturing sector over the services sector, greenfield investments over mergers and acquisitions (M&As), and offering incentives versus de-regulation to investors. However, given the characteristics of Korea’s current economy, the service sector is an equally if not more important sector than the manufacturing sector. Furthermore, M&A is more popular than greenfield investments (particularly in developed countries) and de-regulation is more market-friendly and effective than incentives. As such, the Korean government should revise its FDI policies to align them more closely to Korea’s current developed and dynamic business environment. The Korean government can even go a step further by establishing an “international-linking” business cluster built around multiple countries (a traditional cluster is built around a city or region in one country). In today’s business world, no single country has all of the comparative advantages, just as no single business has all of the competitive advantages. Korea would greatly benefit from establishing a global platform or business cluster that could link various types of advantages across different firms and countries.