A couple helps themselves to an array of buffet dishes at the Ashoka Indian restaurant in Seoul's cosmopolitan Itaewon district. A child is thrilled as she courses along a water slide at the Lotte World theme park on the other side of the city. A young woman shopping in Seoul's Apkujong fashion district tries on and eventually buys a jacket bearing the "Givy" label, while later in the day, a weary traveller is ushered into his suite at the luxury Hyatt Regency hotel, puts down his bags, and kicks off his shoes.

Such are typical examples of Japanese investment in Korea: discrete, niche-oriented, and often middle-ranking in scale. If the political leadership of Korea and Japan achieve their objectives, however, the nature of Japanese investment will change radically, with tremendous implications for the economies of both countries.

Geographically and culturally close, relations between the two Northeast Asian neighbors have been clouded by Japan's 35-year colonization of Korea which did not end until the Japanese defeat in 1945. Difficulties in bilateral relations were compounded by the absence of an official apology from Japan for its period of strict rule, during which the official language of Korea, even of instruction, was Japanese. Enmity, as a result, extended into Korea's public and private spheres with adverse consequences for Japanese investment at a variety of levels. A case in point: the marketing of all forms of Japanese popular culture was prohibited in Korea.

The financial crisis which hit Korea in December of 1997 presented the incoming administration of President Kim Dae-jung with a vastly changed set of priorities from the one which preceeded it: the need to boost foreign direct investment as the only means to restore economic health. President Kim's state visit to Japan in October 1998 signalled a official change in attitudes to Japan, involving as it did an official apology for Japan's colonial rule by Japanese premier Keizo Obuchi, and their signing of an accord in which the two countries pledged to work for their mutual economic recovery.

Significantly, President Kim called upon Japanese business to invest more in Korea and announced the end of the 53-year ban on Japanese popular culture. Meanwhile, two fora held in Osaka and Tokyo and organized by the Korea Trade-Investment Promotion Agency (KOTRA) in conjunction with the visit drew a total of 1,300 business people and generated discussion on projects worth $2.7 billion.

Strategic Alliance

As agreed between President Kim and Premier Obuchi, the Korean Minister of Commerce Industry and Energy (MOCIE) met with his counterpart in the Japanese Ministry of Industry Trade and Investment (MITI) for a two-day conference late in November together with other members of the cabinets of Japan and Korea at the southern Japanese city of Kagoshima. Their goal: to examine ways of forming a strategic alliance to aid the recovery of both economies and cooperate closely on trade and investment. MOCIE minister Park used the event to expressly call for Japanese business to invest in Korean conglomerates, or chaebol, to help effect the "Big Deal," the name given to Korea's process of industrial restructuring.

This meeting to discuss cooperation at a macro level was followed Dec.1st by a micro-level meeting in Kyoto between members of the Federation of Korean Industries (FKI), the lobbying arm of the chaebol, and those of their opposite numbers in corporate Japan, members of the Japanese Federation of Economic Organizations, who have an interest in taking part in the Big Deal.

This round of unprecedented activity was capped Dec. 5th by a meeting in Seoul of the Japanese-Korean Investment Promotion Committee. This high-level grouping comprised again, the respective trade ministers of the two countries, together with representatives of the Korea Development Bank, the Hyundai Group, KOTRA, its Japanese counterpart JETRO, and the Tokyo-Mitsubishi Bank. Also in attendance was Shi-Ichi Kimura, General Manager of Mitsui & Co. Korea, and the president of the Seoul-Japan Club, the organization which represents the interests of Japanese business in Korea.

While there was general agreement the president's state visit had served to improve the business climate for Japanese business, the meeting served to point out the challenges facing further investment from Japan and the future direction it may take.

"There are difficulties for Japanese companies to increase their investment for three reasons," said Mr. Kimura. "Firstly, Japan and Korea are industrial equals and compete with each other in many industries such as petrochemicals, shipbuilding, iron and steel, and semiconductors; secondly, from a geographical point of view, European and American companies may look upon investment in Korea as a strategic entry into the Asian market, but for Japan, this is nonsense." The third reason concerned the "ill feeling" which Koreans harbored against Japan, although Mr. Kimura believed this was "fading gradually because of President Kim's state visit."

Utilizing Excess Capacity

Nonetheless, Mr. Kimura saw opportunity for Japanese business in the current state of overcapacity in Korean industry coupled with Korea's newly-liberalized investment environment. "All production capacity is in over-supply," he said, "so Japanese business may be able to utilize this unused capacity by investment. It is possible." He noted too recently-liberalized Korean legislation concerning real estate is prompting Japanese investors to study the local market very closely. "Since Japan and Korea are so close, investment in real estate will increase," said Mr. Kimura.

Kenji Shiino, General Manager of the Seoul branch of Namura Research Institute, a consulting agency which advises the public and private sector in Japan and counts among its Korean clients the chaebol, points to the radically changed nature of Japanese investment. "In the 1970s, many Japanese companies such as Matsushita, Sony, and Sanyo were involved in the Korean market either as investors or through technology licensing agreements," he said. "Many big companies left in the 1980s as labor problems erupted accompanied by a very rapid increase in wage rates."

Previously low-cost Korea lost out to other countries in Asia. Regional politics played a part as Toyota was forced to close down its knockdown plant in Korea as the price of continuing to build in China. The only major Japanese manufacturer in Korea is Sony, based in Masan. Meanwhile, Japanese investment in Korea has accounted in recent years for just one percent of Japan's total outbound capital movements.

Investment by the Japanese trading houses tends to be in the form of minority shareholdings. Mitsui, for example, owns 10 percent of Honam Petrochemicals, (an additional 58 percent being owned by the Japanese-financed Lotte Group) and owns small stakes in the Saehan and Kolon textile companies. For the last 15 years, Mitsubishi has been a shareholder in Hyundai Motor. While large-scale manufacturing concerns are presently holding back from the Korean market, Mr. Shiino sees Japanese investment advancing, if on an already established, front.

Further Integration

"Recently, Japanese investment has increased in a very short time. The service sector is starting to think about investment," he said. "Small- sized firms such as travel agencies and tour operators have an interest in investing in Korea." He cited pollution control company Ebara as a company likely to expand its investment in Korea, while the Kumon chain of educational institutes specializing in a Japanese method of studying and teaching "has succeeded in Korea since there are very few companies in this field."

At the same time, cash-strapped Korean companies in joint ventures with Japanese investors are selling out to their partners, a move now possible under Korea's vastly relaxed merger and acquisition laws. Prime examples include Fuji Xerox's purchase of the 50 percent stake of partner Dong Hwa Co. in their joint venture, Xerox Korea, and NSK ball-bearing giant's buy-out of partner Hanwha Bearing Division. In fact, as a result of these developments, Japanese investment in the period from January to November 1998, totaled $483 million, an increase of some 94 percent over the same period in 1997.

For the future, the Japanese government, committed to a policy of encouraging overseas investment as a means of redressing its country's trade imbalances sees corporate capital shifts taking place within a context of a possible free trade area with Korea and economic realignments within Japan. "Because of Japan and Korea's closeness in distance, their similarity in culture and economic scale, during the 21st century there is the chance to integrate further," said one Japanese government observer. "Auto production in Japan is moving from the mid part and north of the country to Kyushu Island in the south but the new sites can't get parts locally. A Korean auto parts maker, say in Pusan, might be able to supply them since the distance [to central Japan] is the same." With such linkages, "the southern part of Korea and the southern part of Japan can form a single economic zone." In spite of the unfortunate history of Korea and Japan, new economic realities and a need to compete globally are positioned to make these closest of neighbors, the closest of partners.

by Charles Duerden

Foreign Direct Investment (FDI) in December established a monthly record by amounting to $1.943 billion over 159 individual cases, outweighing the previous record set in April 1997 of $1.565 billion. The results bring total FDI for 1998 to an historic high of $8.852 billion over 1,398 cases. This marks a 35 percent increase in investment value and a 27 increases in cases over 1997, when inbound capital established a then record of $6.971 billion over 1,055 cases. Nineteen ninety-eight is now the sixth year in succession, beginning in 1993, that FDI has increased.

December's figures not only also represented a huge gain of 41 percent on those of the month before, November's FDI totaling $1.378 billion. They are also an incredible 87 percent increase on a 12-month comparison, since FDI in December 1997 equaled $1.037 billion. The record monthly amount of almost $2 billion registered in December means too that FDI has steadily increased over the previous eight months since May.

Mergers and acquisitions formed a large component of inbound capital during 1998. Some 232 cases involving $1.241 billion were made in the form of purchases of outstanding stock, or 14 percent of all foreign investment made in 1998. Including the18 cases equaling $3.461 billion involving the foreign takeover of a factory or other set of facilities, inbound investment in the form of M&A amounted to 53.1 percent of the total reported FDI for the whole of 1998.

By region FDI from the U.S.A. fell on a year-to-year comparison by 6.7 percent to $2,889 million, that from the European Union rose 25.3 percent to $2.976 million, while the inflow of capital from Japan surged 89.1 percent to $503 million.

FDI into Korea's manufacturing sector was far more robust in 1998 than in 1997, amounting to $5.735 billion over 575 cases, or 64.8 percent of the total, a significant advance on the 33.7 percent of the year before.

Major FDIs in December, all involving initiatives by American corporations, included the $600 million takeover of electrical and electronics company Amkor Korea Ltd. by C.I.L. Ltd.; Fairchild Semiconductor Corp.'s $455 million buyout of Samsung's Power Device division; and the $244 million investment by integrated gas and electricity company Enron International Korea in a gas joint venture with SK, to be known as SK Enron Co. Ltd. Market watchers credit the surge in inbound capital to a recovery in international confidence in the Korean economy and liberalization of the investment environment represented by the passage Nov. 17th of the Foreign Investment Promotion Act.

Q.

What benefits and forms of support are to be given to foreign direct investment?

A. Once an investment is acknowledged as a bona fide foreign direct investment, it will have the following benefits:

• A guarantee of overseas remittance (Article 3, Clause 1 of the Act)

  - Overseas remittance of the dividends and proceeds from sales generated from stocks and equities of a foreign investor, according to the details of permission or notification at the time of remittance, is guaranteed.

• Receive the same treatment as domestic investors (Article 3, Clause 2).

  - Foreign investors and their companies invested in Korea are to be treated on equal terms as domestic investors and their companies, except where the law provides otherwise.

  - Foreign investors are to be given more favorable treatment than their Korean counterparts on matters regarding tax reduction or exemption and their choice of company location.

• Receive favored treatment regarding customs clearance

  - Once the specifications of imported capital goods are confirmed by a president of a foreign exchange bank, customs clearance on favorable terms will be offered to the investor, as the confirmation will be considered as an import license under the Foreign Trade Act (Article 29, Clause 2 of the Act).

  - Goods imported as the object of contribution by a foreign investor will be exempted from the application of the import diversification laws.

  - Used capital goods imported as the object of contribution by a foreign investor will be introduced with the Specifications of Goods Imported confirmed by the chief of a foreign exchange bank.

• Receive favored treatment on spot contributions (Article 30, Clause 3)

  - Procedures stated in commercial law will be reduced, regarding the "Completed Spot Contribution Confirmation," which the Customs Administration Minister issues to confirm the fulfillment of spot contribution, to an "Inspector's Report" written under the Voluntary Matters Proceedings Act.

• Foreign investment not pursuant to the regulations in the Foreign Investment Promotion Act is not to be approved, and will be excluded as subject to the foreign investment protection scheme which guarantees overseas remittance of the principal sum of capital or dividends.

Q.

What are the basic requirements of foreign investment in terms of its amount and ownership in domestic enterprises to be officially acknowledged as such?

A. The amount of foreign investment must be more than 50 million Korean won per case (more than 25 million won per person if the number of foreign investors is two or more).

• As a rule, the foreign component of investment in a domestic enterprise must be more than 10 percent of its total equity, but less than 10 percent is possibly admissible when it is clearly indicated in the joint venture contract that the foreign investor exercises substantial influence over the company administration.

Q.

What types of contribution are acknowledged as foreign investment?

A. The contributions which may be acknowledged as foreign investment are as follows:

• Cash. (Contribution in cash must be remitted to Korea first, then withdrawn as Korean won from a foreign exchange bank)
• Capital goods (including used goods) or raw material (only that amount required for an initial trial operation)
• Stocks obtained under the Law on Foreign Investment and Introduction of Foreign Capital, or dividends
• Industrial rights and other corresponding rights concerning skills and their use
• Remaining assets generated from the liquidation of a branch office of a foreign enterprise in Korea
• A foreign loan, or other borrowed funds, lent on a term of more than five years to the foreign-invested company by its parent company overseas and/or the company capitally affiliated with the parent company concerned

Q.

Within what period are such contributions due?

A. The period during which payment of such contributions are due are as follows:

• According to the Foreign Investment Promotion Act, in the case of foreign investment by capital goods eligible for tax reduction or exemption, the payment due should be fulfilled within three years from the day of investment notification.
• Except in above-mentioned case, there will be no time limit on the payment due.

Q.

Under the Act, is investment considered bona fide foreign investment even though the capital invested in Korea is through a shell company registered in a tax haven with a view to tax avoidance?

A. There is no restriction on a foreign company investing in Korea through a so-called shell, and thereby establishing a foreign-invested company.

Q.

What procedure is involved in direct investment by acquisition of new stocks?

A. Direct investment by acquisition of new stocks means (1) an investment whereby one, individually or jointly, establishes a new corporation, or (2) whereby one participates in the capital increase of a domestic company, including a foreign-invested one. In such cases, the procedure is as follows:

• A foreign investor submits, personally or through an agent, the Notification of Foreign Investment to the head office of a domestic bank or any of its branches, or to KOTRA (including its local branches and branches abroad), and receives a "Notified" document at once.
• Afterwards, the investor receives a Certificate of Foreign Currency Purchase for the introduction of foreign capital.
• The investor then makes a registration of incorporation in the Trade Registry Office of the district court concerned, by committing the incorporation to a law agent, or by requesting such support from the Investment Support Center.
• A Foreign Invested Company Registration is then made in the registration office within 30 days of the date when the payment of contributions due has been completed
• Finally, the foreign investor should apply for business registration in the competent revenue office within 20 days of the business being in effect, and make notification of incorporation within 30 days of incorporation registration.

Q.

What procedures are involved when an investor introduces capital goods as a spot contribution, in order to obtain a VAT deduction?

A. An investor should complete a business registration prior to the introduction of capital goods or incorporation registration. A certified business registration card can be obtained at the Investment Support Center.

Q.

What must an investor do to establish a factory?

A. To establish a factory, one needs to obtain authorizations, notifications and registrations according to each law which pertains to factory establishment in Korea. To make this rather complicated procedure simple, KISC is ready to proceed by proxy for the convenience of foreign investors.