Korea needs to change the quality of its foreign direct investment policies, with capital inflow expected to drop in 2008, a study said.

According to the Samsung Economic Research Institute, FDI into Korea has been on a declining trend since 2005, and it estimates an 11 percent drop in 2007 from a year before.

The report on Korea's 2008 FDI outlook and policy issues released yesterday underscores the country's shortcomings in attracting enough FDI to help boost the economy, thereby reinforcing the need for more foreign investments.

Foreign direct investment fell by nearly a third in the first six months of 2007, the Ministry of Commerce, Industry and Energy said in July last year. The figure dropped 32 percent to $3.4 billion between Jan. 1 and June 30, 2007 from the same period a year ago. The number of investments rose 5.5 percent.

Noting that the conditions for attracting more investment are not improving in the short term, the Commerce Ministry at the time said it believed free-trade agreements would help attract foreign investors. Korea and the United States signed a landmark trade deal in June last year.

The Samsung report noted that inflow of foreign capital had exceeded $15.5 billion in 1999, thanks to an emergence of bargain M&A deals in the aftermath of the 1998 Asian currency crisis. Inflows of FDI have since slowed.

The private think tank criticized Korea's shortfall in offering enough incentives to attract multinational corporations, while competition intensified with emerging markets like China and India.

Of Korea's gross fixed capital formation, FDI made up 1.9 percent. Globally, FDI accounted for 12.6 percent, for advanced countries 11.8 percent, 13.8 percent for developing countries, 12.9 percent for Asia, 8 percent for China, and 6.8 percent for the United States. Korea's FDI rate globally has been steadily declining since 2004, when the country accounted for 1.2 percent of the global market's total FDIs, sliding to 0.7 percent in 2005, and 0.6 percent in 2006, the Samsung report said.

The reasons it cited for the country's lackluster performance were the manufacturing sector's relatively weak record in attracting FDIs, and Korea's negative perception of mergers and acquisitions. Some others were a decline in M&A-style investments due to regulations, a fall in large-scale investment opportunities, and a decrease in investment capital by existing multinational corporations.

In 2008, the think tank warned that turning around the downward-investment trend will be a challenge, with uncertainties coming from the U.S. subprime mortgage crisis. But it had some optimism about the domestic economy on whole, noting the expectations of an improvement and a boost in investor sentiment with a new market-friendly president-elect who has promised to adopt policies that will invigorate FDIs.

The Samsung report cited limitations in expanding FDI volume, even with softened regulations and incentives, while criticizing the fact that Korea has not yet been able to successfully absorb foreign companies, due its issues of high wages, high land prices, limited market size, and borderline technologies.

The think tank said that multinational firms prefer investing in countries with non-discriminatory regulations than those that have adopted selective investment-inducement measures. It thus stressed the need for Korea to prioritize improving the quality of its policies, as opposed to expanding FDI volume, and to adopt strategies to fit current investment sentiment.

Source: Korea Herald (January 02, 2008)