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As the days lead up to President-elect Park Geun-hye’s inauguration, the question on many lips is whether she will be able to keep her campaign promises, especially considering the prolonged global recession and downside risks of the world economy. One surefire way the Park administration could realize their pledges — in particular, promises to create jobs — is to support the aggressive promotion of foreign direct investment (FDI) into Korea. Figures from last year prove that FDI may be the silver lining in an otherwise bleak economic forecast.
The country’s arrived inbound FDI in 2012 was $10.4 billion, which is a 57.8 percent increase from 2011’s $6.6 billion and the highest since 1999. This increase is seen to be the result of increased FDI from countries including Japan, the United States and China. Pledged FDI from Japan soared 98 percent last year, to $4.5 billion, while that from the United States increased by 55 percent, to $3.7 billion. Pledged FDI from China rose 107 percent, to $4 billion. Another factor to which the surge in FDI is attributed is the effectuation of the Korea-EU and Korea-U.S. free trade agreements.
Increased inward FDI has been a major contributor to increasing capital stock, the transfer of knowledge and outsourcing from local SMEs and, of course, to creating jobs. In 2010, international companies in Korea accounted for about 12 percent of the country’s total exports and 308,000 jobs. Considering Korea’s severe unemployment, this contribution is significant. Korea’s youth unemployment rate may officially be 7.5 percent, but take into account those preparing to enter the job market or to take recruitment exams, plus students extending their enrollment to continue their studies, and the number soars to as high as 23 percent.
With Korea’s economic outlook for the year being less than promising, pledged FDI for 2013 is expected to decrease to about $15 billion from $16.26 billion in 2012, with arrived FDI estimated to hit $8 billion. In this climate, it is imperative that the government promote cross-border investment, entrepreneurship and knowledge transfer by creating a level playing field for domestic and foreign firms. It should also be noted that the growing importance of global value chains and the emergence of non-equity modalities of international production are new ways of doing business. And whether it’s to strengthen SMEs or promote open and fair trade and cross-border investment, global best practices should be pursued.
As President-elect Park seeks to make good on welfare pledges including everything from a basic pension for people over 65 to medicare support for four ailments, she will inherit a society suffering from acute income polarization, jobless growth and budget constraints. In fact, according to the Bank of Korea last month, Korea’s growth outlook is predicted to shrink from last year’s 3.2 percent to 2.8 percent. Clearly, the new administration will need a stimulus policy package.
Against a backdrop of global economic uncertainty and financial turmoil, UNCTAD has advised countries worldwide to liberalize and promote foreign direct investment as a means to support economic growth and development. The overall policy trend toward investment liberalization and promotion appears more and more to be targeted at specific industries, in particular some service industries such as tourism, finance, medicare and education. In this context, the new Park administration should look to FDI in not only the manufacturing sector but also the service sector as a major contributor of economic growth, especially when it comes to creating jobs.
Foreign Investment Ombudsman
Distinguished Professor, Chung-Ang University