FDI attractiveness: South Korea

Overview

The concept of a political economy is a manifestation of the interconnectedness between politics, law and the economy in the creation of an investment climate. Where they are conducive for investment, more investors are able to come into a country and invest. At the top of the foreign investor’s mind is the need to minimise political, legal and economic risks (Robins and Gilles, 2000). Countries accordingly come up with measures to ensure that their investment environment is as attractive as possible. South Korea has been among the countries whose FDI (Foreign Direct Investment) attractiveness is high. An evaluation of its political economy elements is as below.

Political environment

South Korea is an established democracy having gained its independence from Japan in 1945. It has gone on to be committed to international integration as characterised by its admittance into the G-20 Summit in 2010 and as a non-permanent member of the United Nations Security Council for the period 2013/2014 (The CIA Factbook, 2013). In addition to this South Korea is part of the United Nations Nuclear Summit. In terms of trade, South Korea is a member of the World Trade Organisation and is therefore bound by rules of fair trade established therein (The CIA Factbook, 2013). These international commitments are important indicators to investors who would then expect that the country will enforce rules for the protection of investments as is common in most developed countries.

The system of governance (Democracy) is also very good for the investors. In fully established democracies, the governments play a minimal role in the economy and promote innovation and accumulation of private wealth. The government is established democracies espouse the tenets of market economies which is almost solely led by private practitioners. This is the kind of environment that investors prefer even though it may be impossible to find markets that are truly de-linked from government. For instance, South Korean government spending stands at 15% of total GDP and this could be altered in favour of certain industries depending on government priorities (The CIA Factbook, 2013). The laws on certain attitude of government in certain types of investment are however wanting. For instance, the ease of acquiring industrial land in Korea is inhibited by the government’s lack of transparency.

Nevertheless, South Korea’s attractiveness is enhanced by its commitment to democratic and market economy principles. When compared to emerging economies (such as India, China, Russia, Brazil and South Africa), the political stability and commitment to free enterprise appears to be much higher in South Korea. This makes it a good investment destination.

Economic factors

The South Korean economy has been resilient even in times of global turmoil. It grew at an average of 4% between 2003 and 2007, slumped during the global crisis, but was among the first economies to recover from the crisis recording a GDP growth rate of 6.3% in 2010 (The CIA Factbook, 2013). The country maintains close trade ties with countries such as the USA through Free Trade Area agreements and other form of bilateral contracts. The country’s GDP composition indicates that it has emerged from primary industry and is now heavily reliance on the service industry and the manufacturing sector. The best developed sectors in the manufacturing industries are electronics, telecommunications equipment, ship building, the steel industry, and automobile production.

Agriculture accounts for 2.7% of its GDP while industry and services contribute 39.8% and 57.5% respectively (The CIA Factbook, 2013). These are indicators of an advanced level of development of communication and manufacturing technologies. These are factors that are bound to influence investors who’d want to exploit them for economic gain. Mastery of communications and manufacturing technologies within an industry promote innovativeness and generate a pool of skilful human resources (Barllett, 2008). This is important as it lowers the cost of acquiring technology and getting it adopted into the organisations. Even though the economic growth rate in 2012 was modest at 2%, it is reasonable to expect that the growth rate will improve in coming years. Besides, Korea’s strong international relations and numerous free trade agreements with developed countries such as the USA and Australia open up opportunities for exports. Investors can therefore inject capital in confidence that they will be able to access international markets from the country.

Legal factors

Adherence to the rule of law, eradication of corruption, facilitation of international trade, and protection of intellectual property rights are among the factors that investors investigate when determining which markets to invest in (Hill, 2011). One other legal dimension is the level of restrictiveness of the local laws on FDI. Korea’s level of restrictiveness in FDI laws is relatively low as compared to thriving emerging economies such as China, India and Russia (OECD, 2013). It is however more restrictive than most of the developed countries. Nevertheless, these rules are below the threshold expected of the non-OECD members and this means it falls within the expectations of the international investors.

The laws in intellectual property rights are as enshrined in the WTO. Besides, the existence of Free Trade Area agreements with developed countries makes it imperative that certain levels of enforcement are guaranteed. This is in addition to the existence of internationally accepted laws such as anti-competition laws and others which depend on the nature of the industry in question. However, the ease of starting a business tends to be quite low with South Korea requiring some types of declarations as opposed to countries such as Canada that have made starting a business absolutely easy for investors (The World Bank Group, 2010). In spite of this, in relation to the commitment to the rule of law and the maintenance of a robust regulatory framework, South Korea can be said to be a good investment destination.

Overall attractiveness

There are additional dynamics in the determination of FDI attractiveness that the individual investors may be unable to track. For instance, a country may establish good rules to facilitate investments but the rules are not being implemented. For instance, China has had the most progressive record in terms of constant reforms aimed at creating a market economy but corruption among officials and laziness in the justice system makes such laws difficult to enforce (The World Bank Group, 2010). Even where factors noted are accurately recorded, there tends to be questions on the extent to which they impact the level of risk taken by the international investor. Professional bodies dedicated to determining the FDI attractiveness of countries conduct thorough research in this regard to come up with reports that are all inclusive. South Korea’s attractiveness based on such comprehensive surveys is quite good.

In 2013, South Korea featured in the 21^st position globally in terms of attractiveness to FDI (AT Kearney Research, 2013). Government records agreed with this improved performance when it was noted that FDI into South Korea has been on a steady rise with the 2012 figures being over 50% above the 2011 figures. This is a strong performance that is expected to lead to better FDI attractiveness for South Korea.  

Conclusion

Legal, economic and political elements of the business environment play a critical role in the attractiveness of a country to foreign investments. South Korea can be said to be a strong democracy that is well founded in the rule of law and commitment to facilitating private enterprise. It is also advanced in manufacturing and telecommunication technologies. This is in addition to its impressive economic performance. It is therefore a good investment destination for foreign investors.

References

AT Kearney Research, 2013. Foreign Direct Investment Confidence Index. (Online) Available at: http://www.atkearney.com/research-studies/foreign-direct-investment-confidence-index (Accessed 22 October 2013)

Barllett, C., 2008. Transitional management: text, cases, and reading in cross border management. Boston: McGrawHill

Hill, C., 2011. International Business: Competing in the Global Marketplace. 8^th Ed. New York.  McGraw-Hill Irwin

OECD, 2013. FDI regulatory restrictiveness index. (Online) Available at: http://www.oecd.org/investment/fdiindex.htm (Accessed 22 October 2013)

Robins, J. and Gilles, G.L., 2000. Global Business Strategy. Boston: Thomson Learning

The CIA Factbook, 2013. East and South East Asia: Korea, South. (Online) Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/ks.html (Accessed 22 October 2013)

The World Bank Group, 2010. Investing Across Borders 2010. (Online) Available from: http://iab.worldbank.org/~/media/FPDKM/IAB/Documents/IAB-report.pdf (Accessed 22 October 2013)