[Editorial] Downturn in FDI

The Ministry of Trade, Industry and Energy has announced that foreign direct investment pledged to the nation in the first half of the year reached $8 billion, up 12.5 percent on-year and a record high for the January-June period.

The ministry played up the data, saying that FDI pledges to Korea increased despite unfavorable factors. Yet the actual amount of FDI that arrived here in the first half was tallied at $4.4 billion, down 9.3 percent from a year ago.

This suggests that the sharp increase in inbound FDI that Korea enjoyed in 2011 and 2012 might not continue into this year.

Korea witnessed a 21.5 percent jump in FDI in 2011, thanks largely to the effectuation of the free trade agreement with the European Union.

Last year, FDI soared by 62 percent, topping the $10 billion mark for the first time since 2000. The surge was attributed to the FTA with the United States and a sovereign credit rating upgrade.

This year, no such big jump is expected. In fact FDI flows into Korea are forecast to decline despite the increase in pledges in the first half.

The ministry notes that the first-half FDI figure, though smaller than a year ago, still represents an increase of more than 30 percent from the average of the past five years.

But this is hardly comforting, especially in light of the bulging gap between inbound and outbound FDI.

In 2007, Korea’s outbound FDI was 2.4 times larger than its inbound FDI. The gap increased to 2.8 times in 2010 and 2011. Last year, it expanded to 3.3 times as Korean companies’ overseas direct investment totaled $33 billion.

Some analysts described the massive outbound FDI as an exodus of Korean companies, which was prompted by the worsening business environment.

Yet the increase in outbound FDI should not be seen in a negative light as it reflects Korean firms’ efforts to remain competitive in overseas markets.

The problem with outbound FDI, however, is that it reduces corporate investment at home. According to a Bank of Korea study, a 1 percent increase in outbound FDI causes a 0.08 percent drop in domestic facility investment.

Overseas investment by Korean firms also has a negative effect on domestic employment as overseas production is a substitute for exports. As exports fall, so does employment at home.

All this highlights the need to improve the investment climate in Korea, either for foreign investors or for local companies.

To increase inbound FDI, the government should first ease the rule requiring the holding company of a business group to own 100 percent of its great-grandson or third-tier subsidiaries.

If the rule is eased, SK Global Chemical and GS-Caltex would be able to attract a combined 1.1 trillion won from their overseas partners and launch joint ventures that would generate 30,000 jobs directly and indirectly.

The government recently submitted a bill to soften the rule, but opposition lawmakers put it on hold on the grounds that it would facilitate chaebol expansion.

The lawmakers’ decision is lamentable. It is a case of cutting off the nose to spite the face.

The government also needs to remove or simplify regulations impeding corporate investment. This would slow, if not halt, the corporate exodus.