[Editorial] Attracting FDI

The Korean government is stepping up efforts to attract foreign direct investment in its bid to speed up the economic recovery.

Next week, President Park Geun-hye will attend the World Economic Forum in Davos, Switzerland, where she will introduce her vision of making Korea a creative economy and pitch the nation to CEOs of global corporations.

Last week, Park invited heads of foreign-invested companies operating in Korea to the Blue House to convince them of the benefits of investing in Korea and to listen to what they had to say about doing business in the county.

Following the meeting, the government unveiled a new plan aimed at attracting high-value investment from multinational companies by encouraging them to set up global or regional headquarters and R&D centers in Korea.

One Trade Ministry official likened the headquarters of multinational companies to a military high command. Hosting the headquarters would lead to the creation of many high-quality jobs, large purchasing orders for local products and follow-up investments in production facilities.

To lure global corporations, the government plans to simplify tax procedures for transactions between their headquarters in Seoul and other overseas subsidiaries or parent companies in the home countries.

The scheme also includes pegging the income tax rate for foreign employees at the headquarters of global corporations at 17 percent regardless of the size of their income. The tax rate is far lower than the 38 percent levied on Koreans who earn 150 million won or more a year.

To encourage foreign companies to set up R&D centers, the plan proposes extending the current income tax deductions for foreign engineers working at foreign-invested companies to 2018. It will also offer location subsidies to foreign companies when they lease buildings to establish R&D centers.

These and other incentives in the package are necessary to attract high-value inward investment from multinational companies. But they may not be sufficient. To attract FDI, the government would do well to improve the investment environment in Korea.

This point was brought home by a recent survey conducted by the Korea Chamber of Commerce and Industry. It found that 55 percent of foreign companies in Korea were dissatisfied with the investment environment here.

As reasons for their dissatisfaction, the respondents cited a lack of policy consistency, the volatility of the Korean economy, excessive regulations, unstable industrial relations and anti-business sentiment among the public.

Legislation recently introduced to promote “economic democracy” also left foreign investors with negative perceptions about the business environment here. About half of them said they might reduce investment in Korea should the country continue to pass laws that restrict business activities.

The survey clearly shows what the government should do to bolster FDI in Korea. There is one more thing that the government needs to heed. A recent report by Invest Korea notes that foreign companies tend to set up regional headquarters or research centers in Korea after acquiring about 10 years of business experience here. They first start with a sales subsidiary and gradually upgrade their operations to a production base, an innovation center and finally to a regional headquarters.

This suggests that while it is necessary to attract high-value investment from global companies, it would be wise to encourage promising foreign companies to start small and help them gradually expand their presence.