Following the inauguration of Roh Moo-hyun as President of the Republic of Korea in February 2003, the Korean government has continued with and intensified the efforts made by the previous government to attract inward foreign direct investment (IFDI) to Korea.

The Roh government demonstrated its commitment to boosting Korea's performance in terms of attracting IFDI by re-launching the national investment promotion agency in November 2003. Invest Korea's mission was to create an investor-focused promotional system and provide support and incentives for investment in specific industrial sectors, targeting in particular the cutting edge investment needed to advance Korea's economic goals.

In the immediate post-crisis period, the aim of Korea's inward investment policy had been simply to attract as much foreign capital as possible in order to help stabilize the economy, replenish the nation's depleted foreign exchange reserves and promote reform and restructuring. However, five years on, Korea's situation and requirements had changed, and Korea needed a strategic inward investment promotion policy that would target high-quality forms of FDI capable of generating powerful economic spillover effects.

In practical terms, Invest Korea would provide one-on-one assistance for investors through its project manager system and offer investors access to the services of legal and accounting professionals. Staff would gather information and prepare materials to meet the specific needs of potential investors, including industry overviews, market competition reports, and information on incentives and available plants and industrial sites.

In the medium term, Invest Korea would construct the Invest Korea Plaza in Seoul (which opened in the autumn of 2006), a complex that would provide ¡®incubation services' for newly-arrived foreign-invested firms and offer assistance on a variety of issues including legal and taxation matters, education and housing. Invest Korea would also take action to address negative perceptions about doing business in Korea by, for example, arranging meetings between investors and labour unions to discuss issues of mutual interest, and providing seminars on Korean business culture, traditions and everyday life for foreign residents.

The annual value of inward FDI notifications, which had shown a downward trend between 2000 and 2002, continued to fall during the first year of the Roh administration, declining by almost 30 per cent to the $6.5 billion mark.

However, the following year saw investment flows almost double, with the value of notifications soaring to $12.8 billion. After declining by almost 10 per cent the following year to $11.6 billion, notifications dipped by a further 2.9 per cent in 2006, remaining just above the $11 billion mark. In contrast, the value of actual investments increased by almost 35 per cent to $5.1 billion in 2003, jumped a further 80 per cent to $9.3 billion in 2004 and then edged up to $9.6 billion in 2005, before declining by 2.5 per cent to $4.4 billion in the first six months of 2006.

Despite the decline in investment notifications in 2003, the United Nations Conference on Trade and Development (UNCTAD) gave Korea an improved ranking in terms of its global attractiveness as an investment destination in 2003, moving it up to 21st place from 27th in 2002.

The following year UNCTAD ranked Korea 16th out of 195 nations in terms of the volume of foreign direct investment it attracted during that year. This was the highest position that Korea had achieved since it was first included in the survey in 1991; having been placed in 22nd position in 2000 and then falling back to 31st place in 2001, Korea had moved back up to 29th position in 2002 and 27th the following year. Although investment notifications declined between 2004 and 2006, when looked at over a ten-year period, the trend was more encouraging.

In the nine years following the 1997 financial crisis, the average annual value of notifications was $11.3 billion. After the initial decline in IFDI levels under the new government, annual inflows equaled or exceeded that average amount in 2004 ($12.8 billion), 2005 ($11.6 billion) and 2006 ($11.2 billon).

Furthermore, the gap that has always existed between notifications and actual investment narrowed considerably in this period, falling from $5.3 billion in 2002 to $1.3 billion in 2003. After widening to $3.5 billion in 2004, the discrepancy shrank to $1.9 billion the following year.

Inward foreign direct investment during the first four years of the Roh administration was characterized by a strong preference among investors for the service sectors (especially finance and insurance-related investments) over manufacturing and an increasing tendency for investors to reinvest in or expand their operations, indicating a higher degree of satisfaction with, and confidence in, the Korean investment and business environment.

Another important trend was the emergence of the Europeans as major investors in Korea, accounting for the largest share of FDI notifications in 2003 ($3.1 billion or 47.8 per cent of the total), 2005 $4.9 billion or 42.2 per cent) and 2006 ($5.2 billion or 46.6 per cent). On a cumulative basis during this period, the Europeans took the largest share of inward investment, with notifications valued at $16.4 billion or 39.0 per cent of the total. The cumulative value and shares for the United States and Japan were $10.4 billion (24.6 per cent) and $6.8 billion (16.1 per cent) respectively.

Although there was some concern over the high proportion of small-scale investments (those valued at $10 million or less) among the annual notifications, this could be attributed to the fact that, once the ¡®top tier' multinationals had invested in industries such as automobile parts and electronics, the next phase consisted of small- and medium-sized companies entering the market as suppliers, and typically making smaller-scale investments.

Nevertheless it did seem that Korea was still not achieving its potential in terms of attracting IFDI given its ranking in the global economy and that, despite the best efforts of the government, there were still obstacles to overcome if it wished to induce even higher levels of good-quality IFDI.

In 2006, almost a decade after the financial crisis, foreign investors in Korea still faced a number of problems and challenges in their daily working life. In addition, potential investors were often exposed to negative reporting about the Korean business environment and the exclusionist sentiments that linger in some quarters of Korean society.

Korean and foreign commentators have identified the same barriers to investment: the regulatory framework (including the lack of transparency of regulations and the inconsistency in their interpretation and implementation, particularly in the areas of taxation and foreign exchange); militant tendencies among some unions and the high cost of labour; the challenges posed by the unfamiliar business environment despite attempts at reform after the crisis; anti-foreign capital sentiment; and Korea's weak image among foreigners as a place to live, invest and do business.

The impact of each of the negative factors identified by these observers varies greatly among existing and potential investors; for companies that are well-established in Korea and profitable, the challenges they face on a day-to-day basis may be serious and time-consuming but are viewed by many simply as part of doing business in Korea. However, in terms of promoting inward foreign direct investment, these issues could prove much more significant as they may ultimately deter existing investors from re-investing in or expanding their operations in Korea and may also discourage other corporations looking for a new investment location in Asia.

In the immediate post-crisis period, the Korean government took action to reform and restructure the corporate and financial sectors, and implemented measures to bring the country's economic and business systems, institutions and regulatory framework into line with international best practice.

Perhaps understandably, under the Roh administration more attention has been paid than before to the ¡®softer' side of IFDI promotion. This has been seen in Invest Korea's efforts to address cultural issues and negative perceptions among both Koreans and foreigners, and to improve the living environment for expatriates and their families. Many of the problems now facing foreign investors and the remaining barriers to IFDI appear to be more social, cultural and bureaucratic in nature, rather than purely economy- or business-related.

The Roh Moo-hyun government has achieved notable successes in terms of bringing about a recovery in, and then a stabilization of, FDI inflows. Nevertheless, there is still work to be done if it wishes to attract even more high-quality inward foreign direct investment to Korea.

The challenges ahead include embedding the new systems and practices introduced after the crisis, addressing the problems facing existing foreign investors, identifying and removing the remaining barriers to potential investors, and convincing the Korean people of the many and varied benefits that can derive from higher levels of foreign participation in the domestic economy.

Dr. Judith Cherry MBE
School of East Asian Studies, University of Sheffield