Korea sends mixed signals on FDI policy

The ministry forecasts fresh FDI commitments to Korea will surpass $20 billion by the end of the year.

Ministry officials say the surging FDI inflow shows foreign investors’ confidence in Korea’s economic fundamentals and business potential particularly in next generation industries.

The country’s vast network of free trade also seems to make it a key investment destination in Asia. Korea has signed free trade agreements with 15 countries and economic blocs, including the U.S., EU and China.

Experts say, however, it is far from guaranteed that FDI pledges to Asia’s fourth-largest economy will continue to be on an upward trend in the latter half of the year amid worsening global economic conditions.

According to the U.N. Conference on Trade and Development, the world’s FDI is projected to fall by up to 15 percent this year from the previous year’s $1.76 trillion due mainly to economic uncertainties and a slowdown in resource-exporting countries.

What is more worrisome is the discrepancy between government agencies over the need and ways to attract more foreign investment, experts note.

Trade Ministry officials have vowed to strengthen efforts to increase FDI in the country.

“We will try to induce foreign investors into more diverse areas, including cultural content, health care and bio industries,” said Deputy Trade Minister Cheong Seung-il at a press briefing early this month.

In a move that may dampen investor sentiment, however, the Ministry of Strategy and Finance is working on a tax code revision that is likely to reduce tax breaks given to foreign-invested companies.

Criticism has risen that a wide range of tax benefits for foreign-invested enterprises have done little to help spur the country’s economy in recent years, causing local firms to be subject to reverse discrimination.

Under the system introduced in the 1980s, foreign-invested companies engaged in areas that use high-level technologies and provide industrial support services are exempted from all corporate, income, acquisition and property taxes for the first five years of operations and are given a 50 percent cut in levies for an additional two years if the amount of investment exceeds a certain level.

Critics say this scheme has become out of mode as it remains unadjusted to changes in the country’s industrial conditions.

At a public hearing last month, Ahn Jong-seok, a researcher at the Korea Institute of Public Finance, proposed reworking the system in accordance to the principles of selection and concentration so that tax benefits will be provided to a smaller number of firms that can make more substantial contributions to satisfying the country’s economic needs.

In a wider context, Korea’s tax regime, particularly the enforcement of tax compliance through tax investigations, has been cited by foreign entrepreneurs as part of its unwieldy regulatory system that makes it a difficult place to do business.

Indeed, Korea has been working to overhaul regulations that limit foreign investment. A set of measures announced by the government in May 2015 included simplifying required documentation for foreign investors and temporarily removing limits to the number of foreign employees in a foreign-invested firm.

But Korea’s existing FDI regulations still rank among the most restrictive among the 34 member states of the Organization for Economic Cooperation and Development.

Some critics raise a question about the relevance of being intent on drawing foreign direct investment when the country is left with a growing sum of capital while extending the streak of current account surplus to 52 months.

But many economists dismiss this skepticism as short-sighted, saying the country should continue to strengthen efforts to draw foreign investment in a way to help boost exports, advance industrial structure and increase employment.

Despite the rise in overall FDI pledges to Korea in the first half of the year, those from the U.S. and Japan recorded on-year decreases of 13.7 percent and 28.8 percent, respectively.

Committed FDI in the country’s manufacturing sector soared by 159.6 percent from a year earlier to $2.85 billion in the cited period, while the corresponding figure for its service sector gained by 13.7 percent to $7.24 billion.

Experts note measures need to be taken to facilitate investment particularly from the U.S. and Japan and into the service sector.

They say policymakers should take a consistent, coordinated and longer-term approach to attracting foreign investment, saying policy uncertainties are what unnerves foreign investors most.

By Kim Kyung-ho (khkim@heraldcorp.com)