During her inauguration speech in February, President Park Geun-hye paid homage to her father’s legacy and his important role in laying the groundwork for Korea’s rapid economic development, which is often described as the Miracle on the Han.
In the midst of ongoing economic uncertainty stemming from the global financial crisis, she pledged to revitalize the Korean economy to enable a second Miracle on the Han. While Park did not provide any specific commentary on the role of the foreign business community in Korea, attracting more inward foreign direct investment could play an integral role in helping to ensure Korea’s long-term economic prosperity.
As an important source of external financing, FDI can help facilitate economic development. Some of the textbook examples of the benefits of FDI include the transfer of technology, the spillover of managerial know-how and job creation. In addition, given its long-term nature, FDI can also help reduce foreign currency volatility, add diversity to the economy, enhance competitiveness, promote innovative partnerships and, over the long run, provide an important source of tax revenue.
In 2012, Korea received approximately $16.3 billion in FDI, representing an all-time high and a 19 percent increase over 2011. These investments originated primarily from developed countries and were spread out across a wide variety of industries. While the positive trend for FDI in Korea is certainly very encouraging, it’s important to note that Korea’s levels of FDI pale in comparison to other countries in the region, particularly China and India. Granted, China and India represent very different investment opportunities compared to Korea, it’s important to understand that the global competition for FDI is fierce and the challenging global economic landscape will continue to hamper capital flows, which will further intensify the competition for FDI.
So what can Korea do to attract FDI in this competitive environment and, more importantly, how can Korea better secure FDI commitments for the long term? Unfortunately, there’s no magic-bullet solution. Korea will really need to take a holistic approach to better align what Korea offers as an investment destination with what investors look for in evaluating an investment opportunity. A few simple rules of thumb from the business world may provide some useful, practical guidance.
― Know your customer: Investors are going to seek the best risk-adjusted return on their investment. But it’s not purely about maximizing profits. It’s about maximizing profit potential after factoring in various risks. It’s important to recognize that market and business risks can manifest in various forms including uncertainty in the regulatory environment or volatility in labor relations. Taking measures to mitigate risks will improve returns which in turn will make Korea a more attractive investment opportunity.
― Know your product: Korea can’t be all things to everyone. Instead, Korea needs to focus on differentiating itself from other countries in the region by highlighting its competitive advantages, which include its unique status as a developed country with a high and sustainable growth rate, high GDP per capita and consumers with high disposable income that are willing to spend, a highly educated workforce with a diligent work ethic, impressive technology infrastructure, etc. Korea should also realize that it is a particularly attractive destination for companies serving as suppliers to major Korean conglomerates. In some cases, Korean conglomerates effectively require their suppliers to have a local presence.
― Know your competitors: Make no mistake, the competition for FDI is global and countries are competing for the same pool of capital. Some countries have very little difficulty attracting FDI by virtue of the size of their market (i.e. China and India). Other countries take a very proactive approach in attracting potential investors by offering a wide variety of incentives and exercising flexibility to provide tailored solutions (i.e. Singapore). It may be worthwhile for Korea to reexamine its current suite of incentives to ensure that they are aligned with Korea’s objectives and assess their competitiveness with those of other countries.
― Provide excellent customer service: The quality of customer service is what keeps people coming back. From the perspective of an investor, customer service could be viewed as the overall ease of doing business. While countries have the sovereign right to establish law and regulations, inconsistent interpretation or enforcement and the lack of coordination between different government agencies can be a major source of frustration. Moreover, sudden changes in policies, rules and regulations may also give rise to uncertainty in implementing future investment plans. Making Korea an easier place to do business will help to attract not only new investors but additional investment from existing investors.
With a little bit of luck and ingenuity, Korea just might be able to achieve a second miracle without the benefit of divine intervention.
Henry An
By Henry An
The writer is a partner at Samil PricewaterhouseCoopers where he serves as inbound leader with oversight responsibility for the firm’s foreign-invested company clients. He also serves as treasurer of the American Chamber of Commerce in Korea. The views expressed in this article are solely those of the author. ― Ed.