Why is Korea becoming less foreign biz-friendly?

2014-02-16 10:05

Why is Korea becoming less foreign biz-friendly?

By Lee Hyo-sik
President Park Geun-hye has been making the sales pitch that Korea is a good place for doing business, whenever she visits foreign countries. At home, the President holds meetings with CEOs of non-Korean companies operating here and visiting heads of multinational firms, asking them to expand investments and hire more workers in Asia’s fourth-largest economy.
However, her endeavors, while aimed at helping revive the sagging domestic economy, will not likely bear fruit unless Korea drastically improves its business environment for foreign corporations.
A growing number of non-Korean companies here have expressed concerns over the nation’s deteriorating business conditions over the past few years, citing rising labor costs and increasing policy uncertainty, among others.
As a testament to this, foreign direct investment (FDI) in Korea plunged last year, with Japan, Singapore, Germany and Britain sharply slashing their presence here.
Experts say Korea must take radical steps if it wants foreign companies to invest here rather than its rivals such as Hong Kong, Singapore and Taiwan, suggesting that it needs to create a more predictable business environment in terms of taxation and legal framework.
They also say the country needs to ease its labor market rigidity, deal sternly with unlawful labor activities, and improve schools and other social infrastructures.
Anti-foreign biz environment
According to a recent survey of 201 foreign CEOs in Korea, conducted by the Korea Chamber of Commerce and Industry (KCCI), 55.2 percent said Korea is not a good place for business. Nearly 33 percent also said the nation has become a less attractive investment destination over the past three years, while only 19.8 percent said it has become more appealing.
They cited the lack of policy consistency as the biggest culprit behind Korea’s worsening business environment, followed by the sagging domestic economy, excessive regulations, militant labor unions, anti-business sentiment and insufficient social infrastructures.
Only 13.9 percent said they will increase investments in the country this year over 2013, while 29.4 percent said they plan to spend less.
The survey also found that heads of foreign companies are increasingly concerned about an array of legislations pushed by both ruling and opposition parties, which are largely designed to hike wages, reduce working hours and strengthen penalties on polluters.
“Foreign companies here are extremely careful about what they say because they fear that they may suffer a disadvantage if they tell the truth. In this regard, our recent anonymous survey of non-Korean CEOs accurately describes the reality they face,” KCCI executive director Chun Su-bong said. “Their biggest complaint is that government policies, such as tax codes and regulations, change abruptly in Korea. They want to know what to expect and what things will be like in the future.”
Chun said it is critical for Korea to maintain policy consistency, regardless of whoever is in charge at Cheong Wa Dae, stressing that the nation needs to create a stable business environment.
“Foreign companies are concerned about a number of legislations over the past year, which they say are anti-business. Their concerns range from the rising minimum wage to the reduction of working hours, which will significantly increase labor costs,” the executive director said. “Non-Korean businesses are also worried about the law that financially penalizes companies for mismanaging chemical substances.”
To create a more foreign business-friendly environment, Korea needs to boost policy coherence, ease regulations, make the labor market more flexible and offer greater incentives for foreign companies.
Ahn Choong-yong, foreign investment ombudsman at the Korea Trade-Investment Promotion Agency, echoed Chun’s views, saying the nation should ensure a more predictable business environment especially in terms of taxation and legal framework.
“Militant labor unions and their unlawful activities have been aggravating Korea’s overall environment for foreign businesses. In addition, rising wages and frequent changes in investment and tax policies have been major culprits,” Ahn said, stressing that the country needs to work harder to make things easier for non-Korean companies to come and do business.

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Falling inbound FDI
An indicator of Korea’s deteriorating business environment is in the sharp fall of inbound FDI in Korea in 2013 from a year earlier.
According to the Ministry of Trade, Industry and Energy, FDI reached only $9.68 billion last year, down 9.4 percent from $10.69 billion in 2012.
Greenfield-type foreign investments, including the construction of plants, dropped to $5.64 billion from $7.22 billion during the one-year period, while mergers and acquisitions rose to $4.04 billion from $3.47 billion.
This means that inbound investments created fewer jobs as foreign companies and investors focused more on acquiring local firms, rather than on building plants and hiring workers.
Inbound FDI from Japan plunged to $2.87 billion in 2013 from $3.83 billion in the previous year, while investments from Singapore also dropped sharply from $987 million to $440 million during the same period.
“Korea was unable to draw as much foreign investment as it hoped last year because of the strong won, which made it more expensive for non-Korean firms and investors to build plants or acquire local entities here,” said Wee Seung-bok, deputy director at the ministry’s foreign investment division. “In particular, investments from Japan plummeted from 2012 to 2013 because of the weakening yen and growing tension between Korea and Japan.”
In 2012, Japanese companies rushed to establish presence in Korea because it is relatively safe from natural disasters compared to Japan, which suffered a 9.0-magnititude earthquake and a massive tsunami in March 2011. The strong yen, sluggish consumer spending and other unfavorable business conditions at the time also fueled Japan Inc.’s investment fever in Korea.
However, the tide has reversed as Korea has become a less attractive investment destination for Japanese corporations. The weakening yen and other favorable domestic business conditions, fueled by “Abenomics,” Prime Minister Shinzo Abe’s expansionary fiscal and monetary policies, have encouraged many Japanese companies to build plants and hire workers at home.
Additionally, the deteriorating bilateral diplomatic relations between Korea and Japan has further discouraged Japanese businesses from investing in Asia’s fourth-largest economy. However, Korea will attract more investments from outside this year over 2013, Wee projected, citing a series of legislations and government policies aimed at creating a more business-friendly atmosphere.
“Even though Korea grapples with downside risks, such as the U.S. Federal Reserve’s reduction of its bond-buying program and the weakening yen, things will improve for Korea in 2014,” the deputy director said. “With the improving global economy and the government’s active sales diplomacy for foreign investments, inbound FDI will likely surpass last year’s amount. The government will organize more investor relations sessions in Japan and other countries that invested less in 2013. We also plan to encourage Chinese companies and investors to pour more money into Korea.”
Matthew Circosta, an economist at Moody’s Analytics, supported Wee’s projections, saying he expects capital inflows to return to Korea when investors focus on the country’s positive fundamentals.
“The Federal Reserve’s tapering remains an external downside risk should it result in sustained volatility in global financial markets. The chance of this occurring appears low, however, as the U.S. central bank will try to avoid unsettling markets,” Circosta said. “Korea has a stable political system, low inflation, high foreign reserves, and low external debt, which makes investing in Korean assets attractive. Inbound foreign direct investment should recover in 2014 as global growth gains traction.”
However, Choi Nam-suk, a chief economist at the Korea Economic Research Institute, said Korea has to make fundamental changes if it wants to become one of the world’s most favored investment destinations like Singapore and Hong Kong.
Multinational companies tend to reduce investments when their expected return in the host country drops. I think there are two factors behind the fall in Korea’s inbound FDI. First, foreign firms cut their investments in Korea because their operating costs here increased rapidly in 2013,” Choi said. “The so-called economic democratization and its implications on labor market rigidity, higher wages and rising production costs make them reluctant to increase their investments in Korea. They have found alternative investment opportunities in other countries such as Hong Kong, which provide a more business-friendly environment.”
e then said domestic demand in Korea stagnated in 2013, and potential growth in consumption remains bleak in 2014. “Foreign companies decide to reduce their FDI in Korea by taking the supply and demand sides of the Korean economy into account. Their analyses may show that the expected return on their Korean operations may not be large enough to offset increasing operation costs and lower sales in the relatively small Korean market.”
The economist suggested that Asia’s fourth-largest economy make itself more business-friendly by reducing foreign firms’ investment costs through deregulation, lower taxes, regulatory transparency and flexible labor market.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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