[ Economy > Cover Story ]

orea¡¯s premier investment promotion agency (IPA) will be known as Invest Korea from November 17th as part of new measures to make new gains in the international market for foreign direct investment (FDI). At the forefront of Korea¡¯s FDI effort for five years, the rebranding of the Korea Investment Service Center (KISC) as Invest Korea heralds a new, more aggressive and pro-active stance by Korea in attracting global capital flows. Specifically, the ¡°Comprehensive Measures to Attract Foreign Direct Investment¡± announced at a Sept. 2nd cabinet meeting are designed to boost Korea¡¯s range of investment incentives to a level far superior than those of its competitors on annual incremental basis.

  Prime among the measures is the launch of Invest Korea, as the investment promotion arm of the Korea Trade-Investment Promotion Agency (KOTRA), now imbued with a strengthened organizational structure and array of functions as compared to its antecedent, KISC.

  In addition, the already generous benefits offered to foreign investors will be expanded and in fact complemented by a system of cash grants.

  The measures are the conception of the Ministry of Commerce, Industry and Energy (MOCIE), and were arrived in close consultation with key players within government and the foreign business community.

  On the government side, this included lengthy cabinetlevel discussions, and meetings with the Presidential Northeast Asian Business Hub Committee. MOCIE consulted with associated government ministries such as the Ministry of Finance and Economy (MOFE) and the Ministry of Planning and Budget.

  In regard to foreign business, MOCIE solicited the opinions of bodies such as the American Chamber of Commerce in Korea (AMCHAM), the European Union Chamber of Commerce in Korea (EUCCK), the Seoul-Japan Club, and the Canadian Chamber of Commerce.

  Any legal changes required to implement the measures were made in a revision to the Foreign Investment Promotion Act decided upon at the Sept. 2nd meeting.

  Why are these Major Regime Changes being Made Now?
  FDI flows have declined worldwide due to the global economic downturn and a drop in M&A investment. FDI into Korea has been on a downward trend since 2000, one that has been especially precipitous this year due to labor unrest and a weak economy.

  FDI inflows in Korea for the first nine months of 2003 decreased by $2.6 billion, or 36.1 percent from the same period of the previous year.

  By region, inflows from the European Union and Asian countries increased while those from the United States dropped.

  By sector, FDI inflows into the service sector fell more rapidly than into the manufacturing sector, while by type of investment, a significant portion of FDI (83.7 percent) into Korea occurred through purchases of new shares.

  Total FDI inflows in Korea over the past five years amounted to $34.8 billion and contributed enormously to foreign exchange stabilization and gross fixed capital formation. In 2001, FDI accounted for 14.8 percent of sales in manufacturing (86.6 trillion won) and for 8.3 percent of employment (219,000 jobs). Moreover, FDI is accredited with playing a pivotal role in pulling Korea out of the 1997/98 financial crisis.

  There is the perception that FDI will play an important role in developing Korea as the economic hub of Northeast Asia, one of the initiatives of the participatory government of President Roh, Moo-Hyun, as well as fostering the growth industries of the future. However, FDI inflows in Korea are markedly low in comparison with those of Korea¡¯s major rivals For example, in 2001, inward FDI stock in Britain amounted to 40 percent of a of GDP, in France, 23 percent, Canada, 36 percent, and Spain, 68 percent. Meanwhile, Korea¡¯s FDI stock as a share of GDP in 2002 was a mere 9.2 percent.

  What¡¯s New on the Table by Way of Incentives?
  The government, therefore, believes that it is urgent to improve the national investment environment and strengthen incentives in order to encourage foreign investors to view Korea as an attractive market.

  The key features of the measures are as follows. (For a more detailed overview, see the appendix at the end of this article).

Cash Grants
  The central government will refund foreign investors a certain percentage of their investment in any given project, the precise amount to be arrived at through negotiation. Cash grants will be offered for investments in high technology industries of more than $10 million, an investment in high-tech parts and materials industries of more than $10 million, and investments in R&D facilities of more than $5 million, in consideration of the impact such investments will have on the Korean economy through technology transfer and job creation. Cash grants are a universally used method in Europe to attract FDI.

Eased Requirements for Tax Relief
  The government has already relaxed the requirements for the designation of Foreign Investment Zones, in which financial aid and tax breaks are offered to locating foreigninvested companies. As of January 2004, the minimum volume of investment required for relief on corporation tax in Foreign Investment Zones will be reduced from $50 million to $30 million in manufacturing, from $30 million to $20 million in tourism projects, and from $30 million to $10 million in the logistics industry. Meanwhile, the period of corporation tax relief will be reduced from 10 years to seven years, the same as Korea¡¯s major regional rivals. The reduction of the tax holiday period will take effect in 2005, with a one-year grace period.

  Previously, Free Trade Zones, Duty Free Zones and Free Economic Zones each had different tax relief regimes that have since been unified and simplified. In this simplified regime, a foreign company that makes an investment of more than $10 million in manufacturing will be offered corporation tax relief, regardless of whether the company is located in a Free Trade, Duty Free, or Free Economic Zone, and it can also enjoy benefits in terms of tax relief on local taxes and customs duties equivalent to those available in Free Economic Zones.

  The government will also improve the tax situation for individual foreign workers, including foreign engineers, in foreign-invested companies. (See appendix). As of next year, a multinational company¡¯s contributions to a nonprofit educational foundation for the expansion or construction of school buildings, their contributions will be recognized as expenses for which the donors will be entitled to a 50-percent income tax deduction.

  Will the Living Environment Improve?
  The government plans improve the business and living environment for foreign investors by offering financial support on a matching basis from foreign corporates for foreign-exclusive facilities including schools and hospitals. Moreover, national or public properties can now be rented or sold to those who want to operate such facilities, with the added benefit of reduced rentals, installment payments or purchase prices. In addition, by reducing rentals for foreign-invested companies in privately developed industrial complexes, the government, is in effect, allowing foreign companies to have more choice in terms of location.

  What Motivation is there on the Korean Side to Attract Investment?
  Heads of local governments and government-invested organizations will be allowed to reward public servants and employees of Invest Korea or consulting firms in proportion to their accomplishments in attracting foreign investment. This is a particularly significant incentive since it means that foreign consulting firms and investment banks responsible for large-scale FDI projects can receive fees for their investment-attraction efforts commensurate with international levels.

  The government has presented a revision of the Foreign Investment Promotion Act and a revision of the Special Tax Treatment Control Act embodying the above features to the National Assembly. If these revisions receive ascent, they would take effect from January 2004.

  What Systemic Changes are Planned to Enhance the Investment Environment?
  The Korean investment environment has improved greatly but not to the satisfaction of the entire foreign investment community. Aware of these concerns, the government sees enhancement of the investment environment as a priority.

  To sustain improvements in the business and living environments the hub project committee and MOCIE will establish a taskforce consisting of heads of related ministries and foreign-invested companies to set priorities and formulate a series of detailed yearly action plans by the end of 2003. The plans will focus on enhancing labormanagement relations, alleviating tax burdens and deregulating financial and foreign exchange systems.

  This latter move has been prompted by the government¡¯s awareness of the difficulties faced by foreigninvested companies in executing financial and foreign exchange transactions. In order to provide them with easier access to domestic financial institutions, the government has instructed credit guarantee organizations to consider the financial standing of their parent company overseas in rating their credit worthiness. It has also allowed foreign-invested companies that have invested more than $10 million to report their foreign exchange transactions with their headquarters to the bank with which they have an account, instead of reporting to the Bank of Korea.

  What about Labor?
  The government is putting particular focus on preventing and resolving instances of labor unrest, a topic that is now of major concern to foreign investors. The Ministry of Labor, the National Police Agency, and the Public Prosecutors¡¯ Office will dedicate some of their most able officials to pursue this most urgent task. The system will work like this: when a foreign-invested company reports a labor dispute to Invest Korea, it will immediately inform the above government agencies who will respond by sending their dedicated officials to the foreign-invested company experiencing the dispute. Invest Korea will dispatch its labor specialists where they will work out measures to resolve the conflict in conjunction with their government colleagues ¡°on the ground.¡±

  To strengthen its capability in responding to labor unrest, a labor counseling team will be established within Invest Korea, a part of which will be staffed by Ministry of Labor officials. Seminars for CEOs of foreign invested companies will be held to help them better understand Korean labor practices and communicate with their workforces.

  As well as initiatives to build labor harmony, it behooves the government to take appropriate steps to provide a comfortable living environment for foreign corporate personnel and their families.

  What will be Done to Improve the Availability of Foreign Schooling?
  Since good foreign schooling is a vital to attract foreign personnel with families, the government plans to construct a multinational school (refer to artist¡¯s representation) on the site of Sudo Girls¡¯ High School in Yongsan, Seoul. Meanwhile, government is constructing a foreign school in the Jinsa Industrial Park in South Gyeongsang Province in order to provide education for the children of foreign workers in this part of the country. It also plans to increase aid to existing foreign schools to enable them to provide a better range of services.

  Furthermore, on Oct. 7th 2003, the MOCIE formed a askforce charged with devising a 5-year plan to enhance the living environment for foreigners. The first meeting of the taskforce was held with representatives of foreign business organizations including AMCHAM and EUCCK, as well as related government and private institutions. Participants at this first meeting set 50 priorities categorized as to six topics that varied from education to health care and housing to culture and leisure (See table below).

  What¡¯s Being Done to Improve Administrative Services for Investors?
  Perhaps the most visible aspect of the government¡¯s intensified drive to improve the domestic investment environment is the Invest Korea Plaza project. Now under construction in Yeomgok-dong, southern Seoul, and adjacent to the KOTRA Building, the 12,700-square meter plaza will provide a one-stop service to deal with a variety issues faced by foreigners, including educational and housing problems. Under the one-stop service delivery system, foreign executives need contact only a single project manager to access services ranging from investment counseling to applications for approval. A single project manager will provide support at every stage of an investment from business plan consultation to obtaining all necessary approvals.

  In a radical departure from the usual hiring practices within the Korean government, the chief post of Invest Korea will be open to foreigners. Additional industrial experts will be taken on to its staff and more public servants from associated agencies and ministries will be seconded to the agency.

  Also, the government will relaunch the Cyber KISC Internet portal site for foreign investors as Cyber Invest Korea, through which Invest Korea will offer comprehensive investment information by networking with government ministries, local governments and financial institutions. On-line approvals can be granted through the site. Invest Korea will offer services to foreign investors in a systematic way by establishing liaison offices in the Free Economic Zones to be established in Incheon, Busan and Gwangyang.

  In addition to providing a one-stop service to foreign investors through the project management system, Invest Korea will utilize investor-friendly marketing strategies to spur FDI flows into Korea. To this end, KOTRA¡¯s major Korea Trade Centers.some 37 in all.will engage local experts, including lawyers and accountants, and work with local branches of international consulting firms to improve foreign investors¡¯ access to information on investment opportunities in Korea.

  Is the President On Board with this New Approach?
  At the forefront of the national effort to make Korea a more attractive investment destination is President Roh Moo-hyun who has expressed his intention to foreign investors to resolve such issues of concern as the nuclear challenge from North Korea and labor unrest. In this connection, the president has recently met with a number of high profile foreign CEOs, including Craig Barrett of Intel and Meg Whitman of e-Bay. Furthermore he has called upon on public servants responsible for FDI promotion to create a more foreigner-friendly environment.

  By themselves, the Comprehensive Measures to Attract Foreign Direct Investment will not be sufficient to reverse the downward trend in FDI inflows into Korea. This will only be possible by dramatically improving the national investment environment, a matter of which the government is only too well aware. To begin with, as the world¡¯s 12th largest economy, Korea should demonstrate that it is making sincere efforts to enhance transparency in corporate management.

  To do so, the government will identify issues that require social consensus for their resolution, including the establishment of a more cooperative model of labor/management relations as the government¡¯s major priorities. It will also embark upon a dramatic program of reform in all those areas that Korea lags the advanced economies, from management transparency to living environment.

  For the government¡¯s efforts to attract FDI to be successful, Koreans should adopt a more open mindset while officials within government ministries, agencies and local governments should take to heart the spirit of the administration¡¯s intentions and be pro-active in helping foreign business find a true home in Korea.

By Sul Young-Lok(sy10429@mocie.go.kr)
Deputy Director, Foreign Investment Policy Division
Ministry of Commerce, Industry & Energy