FDI Report

Foreign Investment Regains Vitality

 Foreign direct investment regained some its previous vitality in September after a sharp fall in August, the Ministry of Finance and Economy announced October 14. Foreign investment in September amounted to $532 million, up 30.7 percent from $407 million in August. The figure also represented an increase of 22.6 percent from $434 million a year ago. "Foreign investment in Korea began picking up again last month after suffering a setback in August due to seasonal factors and the spread of international financial jitters," said Moon Jae-woo, director of the international investment division at the Ministry of Finance and Economy (MOFE).
 In August, foreign investment fell to $407 million, down 67 percent from $1.23 billion in July. It was the first month-to-month fall this year. In the nine months leading up to September, foreign investment fell 15.4 percent to $4.63 billion from a year earlier. The fall in investment was attributed to poorer investor sentiment following the financial turmoil that hit Korea late last year.
 MOFE said investments through equity purchases of local companies have increased sharply since the beginning of this year. In the first nine months, foreign investment through equity purchases amounted to $1 billion, accounting for 21.7 percent of total investments. This figure surpassed the 10-percent mark for all of last year. In particular, of 92 projects worth more than $10 million filed in the nine-month period, 34 projects were in the form of equity purchases, indicating that foreign investors have been capitalizing on the lifting of restrictions on foreign ownership of local companies. Foreign direct investments include equity purchases by foreigners of local companies on the over-the-counter market and the creation of independent or joint-venture companies.

Economy

K orea's usable foreign-exchange reserves grew 1.6 percent to $44.06 billion by Oct. 15, up from $43.37 billion at the end of September, according to the Bank of Korea (BOK). The rise was attributed to the reimbursement by financial institutions of the central bank's liquidity support. The reserves also increased due to foreign exchange gains from the Japanese yen's recent rise in strength. Financial institutions paid back $450 million in emergency loans to the BOK. The central bank extended a total of $23.29 billion in liquidity support to the institutions last November and December, when the nation was swept up in the Asian-wide financial crisis. Those institutions have so far reimbursed $15.75 billion, helping the BOK to replenish national foreign-currency holdings.
 Usable foreign reserves climbed to $12.36 billion in January, $18.54 billion in February, $24.15 billion in March, $30.76 billion in April, $34.35 billion in May, $37.04 in June, $39.26 billion in July and $41.35 billion in August.

Korea Suffers Largest-Ever Consumption Drop

T he nation experienced a decrease in domestic consumption of 28 percent during the first quarter of this year, the most drastic decline in world economic history. Of all countries undergoing financial crises, Korea has suffering the greatest drop in domestic demand, according to the Daewoo Economic Research Institute.
 In a report, the institute noted the United States registered a 9.6 percent contraction in domestic consumption in 1929 following the worldwide panic and experienced further decreases of 6.4 and 13.4 percent in 1930 and 1931, respectively. The institute said declining domestic consumption has been the major factor in reversing national economic growth.

Firms Perform Poorly in Int'l Comparison

B esides turning in their worst performance ever last year, the nation's enterprises performed particularly poorly in comparison to their foreign counterparts, a recent report has revealed. The combined turnover of the 12 major Korean companies listed among the world's top 500 enterprises reached 367.24 trillion won (approximately $261 billion), according to an analysis conducted by the monthly magazine, "Hyundai Management."
 However, despite their relatively huge volume of sales, net profits recorded by the enterprises amounted to only 1.196 trillion won, down 48.8 percent from a year ago, and representing only 0.2 percent of the net profits of the world's 500 major companies.

F oreign investors wishing to start new businesses will be granted prior approval of their business applications even if the applications fail to meet certain requirements. According to the Foreign Investment Promotion Act, which was passed in the National Assembly Sept. 2, provincial authorities will be barred from rejecting applications even if they do not conform entirely to the legal framework of the jurisdiction in question. Instead, the authorities must request that the applicants supplement the documents within a certain period after granting approval. This prior approval system will apply when investors file package applications for factory construction, business plans, construction licenses, the use of completed structures, and waste water facilities.
 In an effort to relieve foreign investors from the onerous paperwork involved, the government plans to drastically simplify mandatory documentation procedures. The legal grounds for the paperwork simplification were introduced under the Foreign Investment Promotion Act, and details will be reflected in the law's enforcement decrees.

Foreign Firms in Rush to Buy Offices

F alling real estate prices have prompted a growing number of foreign firms to open their own offices. Companies such as Hongkong Shanghai Bank, Volvo Truck Korea, and Fila Korea are in the process of either opening or searching for office space.
 Up until now, the only foreign companies that have maintained their own offices have been the German firms Hoechst Korea and Adidas Korea. Hongkong Shanghai Bank recently bought the first seven levels of the Namdaemun Building in Namdaemun-ro from Samsung Life Insurance.
 Currently renting space in the Kyobo Building in Sejong-ro, the bank will move into its new offices by the beginning of next year. The opening of the real estate market and falling prices are prompting a four- to five-fold increase in foreign ownership of land. Foreign firms are expected to continue buying more factories, apartments and single homes in addition to offices.

Foreign M&As Rise Sharply Amid IMF Retooling

W hile foreign investment in Korea this year is down somewhat on a year- to-year comparison to the end of September, investment through mergers and acquisitions (M&As) has increased significantly. Investment by Americans has dwindled since the International Monetary Fund (IMF) restructuring program began, while Japanese investment has increased sharply. Investment in the manufacturing sector, in particular, has soared steadily.
 Foreign investment reached $4.103 billion as of the end of August this year, down 18.7 percent from the same month last year, according to the Ministry of Commerce, Industry and Energy (MOCIE). However, investment in the form of M&As surged to $930 million, accounting for 22.7 percent of total investment, said MOCIE in data submitted to Rep. Chun Jung-bae of the National Congress for New Politics.
 This M&A investment represents a sharp rise compared with the total of $699 million for all of last year, and which represented 10 percent of foreign investment. Of particular note in this year's statistics is the fact that 31 projects or 37.3 percent of the total of 83 cases involving more than $10 million were made through M&As.

Foreign Ownership Limit in KT to Widen to 33 Pct

T he government plans to widen the foreign ownership limit in state-invested Korea Telecom to 33 percent from the current 20 percent in an effort to speed up the privatization of state corporations. Under the deregulation plan, foreigners will also be allowed to own up to 25 percent of the shares in Korea Tobacco & Ginseng Corp., the lucrative state company which monopolizes the production and sales of cigarettes. Foreigners are currently barred from owning stakes in the company.
 Simultaneously, the limit on individual investment in KT&G will widen to 15 percent from seven percent, while the individual investment limit in Korea Heavy Industries & Construction, or Hanjung, will be abolished completely. These measures are just some of 296 deregulations that a specially-struck committee has decided will take effect next year. The deregulation package calls for alleviating minimum capital requirements with regard to the establishment of financial institutions. Specifically, the current minimum capital requirement of 10 billion won, imposed on the setup of brokerage and futures-dealing companies, will be trimmed to three billion won. That for fund management companies will be slashed from 30 billion won to 10 billion won. Other capital requirement cuts are from five billion won to two billion won for fund brokers; 10 billion won to five billion won for credit information firms ; and one billion won to 500 million won for investment advisory firms.

Land Buys by Foreigners Rise 4-Fold

T he purchase of land by foreigners and foreign companies has been increasing at a rapid pace since the liberalization of the domestic real estate market on June 26, the Ministry of Construction and Transportation said. Foreigners bought up a total of 5.88 million square meters of land worth 730 billion won in the three-month period beginning late June. The quarterly figure is a drastic increase from the previous level of purchases. The number of cases increased 4.1-fold while the size of the land involved rose 4.5-fold.
 By type of investor, Koreans living overseas were involved in 418 purchases worth 93.6 billion won, while foreign individuals picked up 16.2 billion won worth of land through 129 purchases. Joint venture companies were involved in 93 cases totaling 386 billion won, while wholly-owned foreign companies were involved in 40 cases valued at 230.2 billion won. What is even more encouraging is that land purchases during the month of September totaled 210.7 billion won, which represents a 35-percent decrease over August, but a 111-percent increase over July. "It is obvious that the liberalization of the domestic real estate market is making Korean land much more attractive for foreigners, and the trend is expected to continue in the future," one ministry official said.

T he government will strongly push ahead with the privatization program of 11 key state-run corporations as scheduled, said Jin Nyum, chairman of the Planning and Budget Commission (PBC). Mr. Jin said that a team of specialists at each state-run firm has been drawing up concrete strategies concerning the timing and methods for the selling-off of state-run corporations in such a fashion as to shore up their market value since economic conditions for the privatization program are far from ideal. "A little more time is required to complete the details of the sell-off program, but the program is been carried out as originally scheduled. I believe that sales will be realized by the end of this year," Mr. Jin told the Korea Times.
 State-held shares of Korea Heavy Industries and Construction Co. (Hanjung) will be sold off by international auction, Korea General Technology Financing Corp. and National Textbook Co. will be sold by November, and Korea General Chemical Corp. by February, Mr. Jin said. The government now owns a 51 percent stake in Hanjung. The government has contracted with the National Agricultural Cooperative Federation (NACF) for the sale of fertilizer maker Namhae Chemical Corp., a subsidiary of Korea General Chemical Corp., Sept. 30. This is the first firm to have been sold under the privatization program since it was announced July 3. Mr. Jin said that the government is seeking to issue Korea Telecom depository receipts (DRs) overseas and to form a strategic alliance between a leading world telecommunications firm with the state-run telephony company.
 The government plans to sell a 3.1 percent stake in Pohang Iron & Steel Co. (POSCO) and part of the POSCO stake currently owned by the state-run Korea Development Bank (KDB) by the end of this year at the earliest. The government also plans to dispose of its five percent stake in the Korea Electric Power Corp. (KEPCO) by issuing DRs overseas by the end of this year. Seven out of 11 key state-run corporations, including Korea Gas Corp., have already restructured and their subsidiaries are under restructuring as scheduled.
 Mr. Jin said that the government will rewrite the basic law on the management of state-run corporations by the end of this year in order to fully implement restructuring of state corporations.

Top Five Chaebol to Be Disintegrated

T he government plans to force the nation's five largest conglomerates to concentrate on their core businesses and abandon unprofitable areas of activity. On October 16, the Financial Supervisory Commission (FSC) revealed in a seminar a three-stage plan to virtually disintegrate highly-indebted and over-expanded chaebol over the next three years. The government has been headed for a clash with chaebol owners as it seeks to impose more radical restructuring measures on the big-five business groups. The government move was prompted by demands from such international financing agencies as the International Monetary Fund (IMF) that Korea do more in the way of corporate-sector reform.
 Under the first stage of the newly-proposed FSC plan, the government is expected to coerce each chaebol to focus on one to four core businesses and dispose of other nonviable units. The government plans to force the five biggest conglomerates to get rid of their inter-subsidiary debt guarantee payments. It will also prevent chaebol from engaging in unfair intra-group transactions, which serve merely to keep afloat unprofitable affiliates. Chaebol will also be requested to withdraw their investments in other subsidiaries.
 Under the second stage of the reform program, core businesses of the five top chaebol will be separated from their parent conglomerates so that their non-core businesses may be liquidated.
 Furthermore, the chaebol's core businesses will have to transform themselves into strong, and competitive corporations by improving their financial status under the third stage of the restructuring plan. The chaebol businesses will be encouraged to attract foreign capital under joint-venture deals, or by forming strategic alliances with foreign companies designed to improve their international competitiveness.

1st Phase of Seoul's Restructuring Program Completed

T he Seoul government on September 27 declared an end to the first phase of its financial sector restructuring program and renewed its commitment to reviving the economy by pledging all fiscal measures necessary to resolve the looming credit crunch.
 The government says its quicker-than-scheduled provision of fiscal support for ailing financial institutions will help relieve them of obligations to meet the capital adequacy requirement dictated by the International Monetary Fund, thereby enabling banks to be freer to increase their corporate lendings.

E xports are continuing to decline, but the margin of decrease has fallen to 3.4 percent as of September, possibly indicating a move toward recovery, even as imports plummeted by another 36.7 percent, the Ministry of Commerce, Industry and Energy said. In its monthly report of September 30 MOCIE said exports reached $10.9 billion September and imports stood at $7.3 billion for a surplus, on a customs- clearance basis, of $3.6 billion. The September performance brought to $98 billion the total value of outbound shipments for this year, down 1.4 percent from last year. Inbound shipments checked in at $69.1 billion, a reduction of 37.3 percent. The trade performance left a combined trade surplus for the year of $28.9 billion, the highest ever, and a step toward the government goal of $40 billion for this year, trade officials explained.

Mammoth Outlet for Foreigners Opens

A massive sales outlet and trade department exclusively for foreigners opened Sept. 2 at the Keopyung Freya building in downtown Seoul. The shopping mall, located on the first basement level of the building, which is on the premises of Tongdaemun market, provides foreigners with the chance to shop for various unique Korean commodities at reasonable prices, said Seoul Outlet Club director Kim Yong-taek. The mall occupies an area of 13,220 square meters, 6,610 square meters for the outlet itself and another 6,610 square meters for the trade department. Keopyung has arranged cooperative ties with some 200 inbound tourist agencies and 3,000 guides to promote the mall as a major tour destination and provide shuttle bus services linking it with main hotels.

M obile phone service provider LG Telecom has successfully attracted 500 billion won (approximately 230 million pounds) in investment from British Telecommunications (BT). At the Hilton Hotel in downtown Seoul on September 30, Lee Moon-ho, chief executive officer of LG Telecom, and Richard Slogrove, managing director of BT, signed a contract on the strategic partnership which underlined the injection of capital. Both sides agreed that BT will acquire a 23.49 percent stake in LG Telecom for the investment, becoming the second-largest shareholder following the LG Group. The LG company's stake will decline from 33 percent to 26.61 percent, an LG official said.

Dacom Attracts $70 Mil. in Foreign Capital

D acom System Technologies (DST) recently succeeded in attracting $70 million in foreign capital from Price Waterhouse Coopers (PWC), a U.S. consulting firm. With the investment, PWC will take a 25 percent equity stake in DST, and Dacom's share in its overseas and inter-city call operations, will accordingly decrease from 100 to 75 percent. The two companies earlier worked out a stock option system in which the U.S. firm will take 50 percent of the profits earned by DST in the next five years.

T wo investment forums were held in Tokyo and Osaka October 7 and 9 by the Ministry of Commerce, Industry & Energy (MOCIE) in conjunction with President Kim Dae-jung's state visit to Japan. More than 1,300 potential investors crowded the conference rooms where the investment forums were held, and by the end of the proceedings more than $2.7 billion worth of Foreign Direct Investment (FDI) was reported to be in the process of negotiation, and a further $900 was on the verge of conclusion. This amount is more than twice the $400 million of FDI made by Japanese investors in Korea during the first eight months of this year. "Following these two successful i nvestment forums, the process of Japanese investment in Korea is well on the way to being accelerated," said a MOCIE official.