A facsimile machine starts into life in an office in downtown Seoul. Kim, who runs a medium-size firm, is all smiles as he picks up the newly-arrived faxed document. An American investor has decided to invest $10 million in Kim's company. It's a great moment for Kim and his company, capping a six-month ofttimes desperate endeavor to attract foreign investment. The company, a manufacturer of electronic goods, had been a stable firm, recognized for its technological prowess. However, it experienced worsening financial difficulties to the extent of being pushed to the brink of bankruptcy after Korea entered the International Monetary Fund's (IMF) restructuring program in late 1997. "Many companies, though viable in terms of technology and personnel, are in dire straits because they are in a severe financial crunch, albeit temporary in nature. Now is the time for companies in this situation to go all-out to attract foreign investment,'' said Kim.

Foreign investment has become a term very familiar to most Koreans. They are becoming aware that foreign enterprises doing business in Korea contribute more to the national economy than do Korean companies operating overseas. Debt-burdened, over-extended Korean corporations themselves recognize the need for foreign investment as the only means to restructure corporately and achieve management reform. Their efforts seemed doomed to failure, though, under previous institutions. The introduction of a new paradigm has been recognized as essential to successfully promote foreign investment.

The Korean government under the leadership of President Kim Dae-jung declared it was committed to attracting foreign investment with the twin goals of overcoming the financial crisis and securing the basis for growth from a long-term perspective. The scope for foreign investment was further opened in crucial areas such as capital, foreign exchange and securities transactions. Some 98.9 percent of all business categories are now open to foreign participation. In particular, the implementation of the landmark Foreign Investment Promotion Act Nov. 17th has paved the way for foreign investors to significantly expand their activities in Korea. The Korean government formulated the new act after collecting the opinions of interested parties including foreign investors and conducting public hearings. The act represents a new paradigm in national foreign investment policy. Under the new act the emphasis of policy has switched from "regulation and management'' to "promotion and assistance,'' said an official of the Ministry of Finance and Economy.

The principle of the new act is the accordance of equal treatment to foreign and domestic companies. It provides for the extension of leases on, and subsidies for the use of, central and provincial government-owned property, introduction of one-stop service, designation of Foreign Investment Zones (see box) and the striking of a foreign investment committee. It also simplifies and streamlines existing complicated administrative procedures and promotes the implementation of a transparent, consistent and integrated system regarding foreign investment.

In the past, foreign investors had to submit six to seven documents solely for the purposes of registration. They are now required to present only one. An automatic approval system has been introduced under which foreign investors can automatically obtain permits within a certain period. Although they were require previously to obtain numerous licenses to set up a plant, now they now have the benefit of a simplified and convenient permit system as part of the newly-instituted one-stop service.

The service is delivered by the Korea Investment Service Center (KISC) set up under the aegis of the Korea Trade-Investment Promotion Agency (KOTRA) as the unified channel for the promotion of foreign investment. Overall, the number of restrictions has almost been halved.

KISC's one-stop service covers the gamut of investor needs from investment inquiries, license and permit acquisition, to post-investment affairs. The center is staffed with lawyers, and accountants specialized in the area of foreign investment, together with officials seconded from related government authorities. Foreigners wanting to invest in Korea can do so without ever having to visit the country. They may now engage one of the 38 overseas branches of KISC, lodged in specific Korea Trade Centers, to act as their proxy. The Korean government, having learned from its failure to attract an almost $3 billion investment from Dow Corning as a result of administrative restrictions, is determined such occurrences will not be repeated the future.

One of the most significant innovations in this respect has been the granting of a certain level of autonomy to provincial governments to enable them to attract foreign investment by their own volition. The government has devolved the right to negotiate with foreign investors to the provinces. The "friendly'' competition among them so prompted is intended to help them invigorate their economies through foreign investment inducement.

Each provincial government has been empowered, within certain parameters, to levy taxes in their Foreign Investment Zones, and decide the leasing period of factory sites and provincial property. "The role of the central government is now to enhance the overall business climate for foreign corporations while the scope of the provincial governments is to provide various investment incentives and take a pro-active stance toward foreign investment,'' said You Jong-keun, governor of Cholla-pukto province.

Foreign investment has been on the upswing since August of last year. Inbound foreign investment recorded a high for 1998 in November with a total of $1.38 billion over 117 projects, reflecting the positive response among the foreign investment community to the provisions and benefits of the newly-implemented Foreign Investment Promotion Act. "The number of investment inquiries surged remarkably since the new act came into effect. Foreign investors appear to have been anticipating a new package of incentives with the passage of the act,'' said a KOTRA official responsible for investment inquiries at KISC.

The Korean government has set a target of inducing $15 billion in foreign investment in 1999. It has also unveiled a comprehensive plan to increase the ratio of foreign investment in gross domestic product (GDP), which stood at only 2.6 percent in 1996, to 13 percent by 2003. The world's average presently stands at 10.6 percent. To this end, the government has struck a sub-committee of the Foreign Investment Committee comprising investment-related ranking officials which is dedicated to the general supervision of investment promotion activities and the fostering of positive overseas public relations. The committee is also responsible for promoting investment through the Asia Pacific Economic Cooperation FDI Mart, scheduled to be held in Seoul, June 1966. The FDI Mart has its origins in a proposal made by President Kim Dae-jung and subsequently adopted at the APEC summit in November 1998.

The government is also plans to install a state-of-the-art foreign investment information system within the Korea Trade-Investment Promotion Agency by May 1999 to help potential foreign investors find information, make inquiries and engage in transactions with domestic businesses through the medium of cyber space.

The implementation of the Foreign Investment Promotion Act has provided Korea with an institution essential to successful foreign ivestment inducement. Many critics assert it will take long time, involving a process of trial and error, for the new act to take firm root in letter and spirit throughout the bureaucracy and the business establishment. What is important is the fact that the government's commitment to provide a welcoming environment for foreign investment has begun to earn wide public support.

It is now a matter of urgency for the nation as a whole to maximize the opportunities presented by this new institution to ensure the success of the ongoing corporate restructuring drive and thereby fully restore Korea to economic health.

by Woo-Che Suh

Main Points of the Foreign Investment Promotion Act

The Korean government abolished the hitherto "Law on Foreign Investment and Foreign Capital Inducement'' and replaced it with the Foreign Investment Promotion Act as of Nov. 17th 1998. Under the new law, more than 50 percent of extant restrictions were dismantled or relaxed. Of paramount importance is that the policy paradigm of "restriction and control'' has been abandoned in favor of one characterized by "promotion and assistance.'' Following are the salient features of the new act.

Expanded Tax Incentives

Thus far, foreign companies investing in high technology could be totally exempted from income and corporate taxes for five years following the commencement of business operations, and obtain a 50 percent reduction on the same taxes for a further three years. Under the new act, the 100 percent exemption period is extended to seven years.

In addition, the number of business categories eligible for the tax advantages has been extended from 265 to 446, including 70 which are technology service-based.

Exemption in regard to local taxes covers registration, acquisition, property and land taxes. Also, the exemption period has been extended to a maximum of 15 years. Should investors change the nature of their businesses during the period of tax exemption, they are nonetheless eligible to receive continued tax incentives for the remainder of the period should the new projects meet the relevant exemption criteria.

Assistance in Leasing State and Provincially-Owned Assets

The period over which central government and provincially-owned assets may be leased has been extended from 20 to 50 years. Since such leases may be renewed for periods of up to 50 years, foreign corporations are at liberty to lease the assets so offered for up to 100 years. Enterprises in Foreign Investment Zones or industrial complexes for foreign-invested corporations will be eligible for reductions of 100 percent in leasing fees should their investment involve state-of-the-art technology and amount to more than $1million. Those making an investment of more than $10 million and designated as eligible for tax incentives by the Foreign Investment Committee will receive a 75 percent cut in leasing fees. Provincial governments are empowered to devise their own incentives regarding leasing.

Provincial Government Assistance for Foreign Investment

The central government will extend assistance to provincial governments for the promotion of foreign investment. Local bodies can obtain financial assistance for the formation of Foreign Investment Zones and the leasing of assets such as land, in particular, to foreign companies. Assistance will be extended in accordance with the provincial governments' efforts and performance in attracting foreign investment.

The Establishment of Foreign Investment Zones

At the discretion of a provincial governor following a specific request by a foreign investor, a certain area may be designated a Foreign Investment Zone. In such zones, locating eligible foreign enterprises will be able to take advantage of the tax advantages offered high-tech companies, and be exempted from certain trading regulations. To be eligible, a foreign-invested enterprise must make an FDI in excess of $100 million; be a manufacturing operation more than 50 percent foreign-owned and creating 1,000 new jobs; or, a manufacturing operation making an FDI of over $50 million and creating 500 new jobs.

Firms wanting to locate in the existing 35 National Industrial Complexes are eligible to receive the same incentives should they make an investment of more than $30 million and create more than 300 jobs.

Likewise, the same incentives will be extended to foreign investors making investments of more than $30 million in tourist, hotel and international conference facilities, or investing more than $50 million in nine especially-designated tourist areas such as Cheju Island. Incentives will be in place in regard to the tourist areas until at least 2002.

Foreign Investment Committee

The act also stipulates the striking of a Foreign Investment Committee to be composed of related ministers, governors and mayors, headed by the Minister of Finance and Economy with the aim of administering investment-related policies promptly and transparently. The committee will be the final arbiter of whether an investment permit will be issued in the case of certain projects submitted by provincial governments or related organizations for approval. The main task of the committee will concern central government assistance to provincial bodies and the designation of Foreign Investment Zones.

Closing Remarks at a KOTRA luncheon meeting for the foreign chambers of commerce in Korea, December 1998

Delivered by Ms. Joan Baron, the President of the Canadian Chamber of Commerce in Korea, and the Representative Director for ISM-BC International Korea

The Korea Investment Service Center in KOTRA has emerged over the last seven months as a valuable aid to foreign multinational companies looking to invest in Korea.

Since 1997 the world has wrestled with economic turmoil and massive restructuring. Of all countries in Asia, Korea has shown the most determination to make a climate favorable to foreign investors.

The recent economic gains, - stock market recoveries, a stabilized won, improved ratings by Moody's Investors Service, and historically low interest rates - will all serve to increase the interest and confidence of foreign investors.

The measures taken by KISC with respect to proxy services and the Ombudsman Team help to make investors more comfortable, and to speed the time it takes to conclude a deal.

On a smaller scale, measures such as extending a stay in Korea without having to leave the country, and even minor changes such as the recent improvements to the fingerprint requirements are welcome.

For foreign residents coming to stay here in Korea for several years, the same tax benefits that are extended to their companies would help to attract the kind of management expertise that is needed in the difficult task of restructuring.

A stronger role for the Securities Exchange Commission, now part of the Financial Supervisory Commission to enhance protection of minority shareholders rights would also be welcome.

In general, foreign investors in Korea want the same things that every investor wants, no matter their nationality, - low taxes, simplified regulations, good pension and severance pay policies - in other words a social infrastructure to help workers.

Foreign investors also want excellent arbitration laws, commercial law and processes conducive to conducting business. The state of Delaware in the United States built an excellent climate for investors and corporations, and Korea may want to investigate some of their legislation and business practises.

I am confident that Korea, led by KOTRA and KISC will leave no stone unturned in their efforts to build the best investment climate in the world.

Speaking on behalf of the foreign chambers of commerce, we will all do our best to promote investment in Korea and to work with KOTRA and KISC to help potential investors to enjoy profitable ventures here.

Thank you.