Following the effectuation of the Korea-U.S. free trade agreement last month, expectations have been growing for a boost in foreign direct investment in Korea. The FDI tally for the first quarter of the year shows that these expectations were not unfounded.
According to the Ministry of Knowledge Economy, inward FDI hit $2.34 billion in the first three months of the year, the largest amount since the first quarter of 2008. The figure represents a 17 percent increase on year, a sharp acceleration in growth in light of the average 4.6 percent growth for the whole of 2011.
FDI from Japan soared 150 percent, setting an all-time high of $919 million. Investments from the European Union and China also surged 35 percent and 47 percent, respectively.
The jump in Japanese investment can be attributed largely to the Fukushima nuclear disaster a year ago and a strong yen. But Korea’s free trade deal with the United States, on top of that with the EU, must have entered into the decisions of Japanese companies as it gives them wider access to the world’s largest market.
The increase in FDI from the EU is notable, as it comes amid the continuing financial travails in the eurozone. A major factor behind the jump is obviously the Korea-EU free trade deal that went into effect last July. But EU investors were probably also lured by the free trade regime between Korea and the United States.
Buoyed by the upward curve in investment inflows, the Seoul government has renewed efforts to attract FDI. Last week, it organized a meeting in New York to explain Korea’s merits as an investment destination to potential U.S. investors. According to reports, seven U.S. companies pledged to invest a total of $480 million in Korea.
The government plans to hold similar sessions in other major cities of the world to publicize Korea’s enhanced image as an FTA hub.
These efforts are all well and good. Korea needs to get maximum mileage out of its free trade deals with the U.S. and EU. But it should be remembered that FTAs with these countries are only one of the factors that foreign investors will take into account when they decide whether to invest in Korea.
To appeal to foreign investors, the government needs to address other important investor concerns, such as reliability of government policies, incentives for foreign investors, regulations on FDI, labor market flexibility, and the living environment.
The importance of these factors can be illustrated by the difficulty Korea faces in attracting data centers for global IT companies. The nation has several advantages as a data center hub compared with its rivals, such as Hong Kong and Singapore.
For instance, Korea’s network infrastructure is one of the world’s best. Its Internet speed ― the most important qualification ― is more than twice as fast as that of other countries.
In addition, Korea’s electricity rate ― a major cost factor ― is lower than any other country in the region. Korea’s milder weather compared with Hong Kong or Singapore is also an important advantage as it lowers the cost of cooling data centers.
Despite these strengths, Korea is still not a place of choice for data centers among major global IT powerhouses. This is because Hong Kong and Singapore excel Korea in other aspects. They boast an investor-friendly business environment, a predictable regulatory framework, a responsive labor market, generous tax incentives, and the presence of a large number of multinational companies.
This example suggests the need for Korea to make sustained efforts to improve its competitiveness as an investment destination. The FTAs with the U.S. and EU have unquestionably burnished Korea’s image. But unless Korea makes progress in other important areas, the recent jump in FDI inflows may prove short-lived.
In making Korea’s business environment more investor-friendly, political leaders have an important role to play. For instance, lawmakers reversed last year a government plan to lower corporate and personal income tax rates. This decision was hardly conducive to attracting FDI, given that the tax rates in Hong Kong and Singapore are far lower than Korea’s.
Political leaders are well aware that attracting FDI is of vital importance to the Korean economy. But they often forget this and put their partisan interests before long-term national interests. In the Wednesday election, voters should let them realize the consequences of their short-sighted behavior.
