The Republic of Korea (ROK) has made tremendous economic gains during the past four decades, transforming itself from a recipient of foreign assistance to a high-technology manufacturing powerhouse and middle-income donor country. South Korea experienced real GDP growth of 2.6 percent in 2015, decreasing from 2014 growth of 3.3 percent and falling short of the ROK government’s 2015 real GDP growth target of 3 percent as announced in December 2014. Economic growth in 2015 was constrained by a fall in tourism and domestic consumption largely due to an outbreak of Middle East respiratory syndrome (MERS) in May and a broader 7.9 percent fall in exports from 2014 due to a slow global economic recovery, low oil prices, and reduced demand from the ROK’s top trading partner, China. Growth is expected to remain moderate in coming years, due to the ROK’s relatively developed economy, an aging population, and inflexible labor markets. Economic growth potential for the 2015-2018 period is between 3 percent and 3.2 percent, according to the Bank of Korea, although many private-sector assessments are lower.
Nonetheless, the ROK has weathered global economic uncertainty and continued to remain a generally favorable destination for foreign investment. Following the 1997-98 Asian financial crisis, South Korea made significant progress in reforming its financial institutions and capital markets. In addition, the ROK government took steps to strengthen its competitiveness, enacting measures to boost foreign investment incentives and allow non-Koreans to own land and real property. With these changes, most South Koreans recognize foreign investment and free trade as positive for the nation’s development, despite continuing protectionist sentiment among certain elements of society. The highest levels of the ROK government remained committed to ensuring a level playing field for foreign investors. However, many foreign – and domestic – firms continued to express concern with what is seen as an overly burdensome regulatory environment. Many regulations are unique to South Korea and are not consistent with global standards. The regulations are prescriptive and generally allow only activities that are explicitly authorized, thereby constricting the development of innovative business models. Foreign investors were also concerned about small but significant interest groups that pressure the ROK government to protect the South Korean market from what is perceived as foreign domination. President Park Geun-hye publicly acknowledged that the regulatory environment is seen as an obstacle to investment and initiated efforts to deregulate five sectors: education, healthcare, finance, tourism, and information and communication technology (ICT). Additional measures were announced by the Park administration in February 2016 to remove in select regions regulations that discourage investment in priority sectors, including "sharing economy" services related to housing and transportation. Park has asserted that deregulation is one of her primary economic goals, and administration officials have allowed some participation of foreign business associations in the deregulation process. While foreign and domestic industry remained receptive to Park’s deregulation drive, it also remained cautious about committing additional investments in the ROK.
The Korea-U.S. (KORUS) Free Trade Agreement (FTA), which entered into force on March 15, 2012, was a major step forward in enhancing the legal framework for U.S. investors in South Korea. All forms of investment are protected under the FTA, including equity, debt, concessions, and similar contracts, as well as provision of intellectual property rights. With very few exceptions, U.S. investors are treated the same as South Korean investors (or investors of any other country) in the establishment, acquisition, and operation of investments in South Korea. In addition, this equal treatment of domestic and foreign investors is backed by a transparent international arbitration mechanism, under which investors may, at their own initiative, bring claims against the government for an alleged investment breach. Submissions to investor-state arbitration tribunals as well as their hearings will be made public. The U.S. government continues to work closely with the ROK government to ensure full implementation of the KORUS FTA.
Improvement in the consistency of the ROK government’s interpretation, transparency, and timeliness in the application of foreign direct investment (FDI) regulations would enhance South Korea’s investment climate. Unclear and opaque regulatory decision-making remained a significant concern, including informal “window guidance.” This can discourage FDI by creating uncertainty for investors and fostering an impression that the ROK remains hostile to foreign investment. Sector-specific improvements in regulatory transparency have been made: January 2016 financial sector reforms require regulators to provide all guidance in written form, and companies cannot be punished for not following oral guidelines.
Regarding labor, South Korea boasts a hard-working, educated workforce and high levels of institutional labor protections. However, foreign investors cited volatility in labor-management relations and increasing labor costs as issues that can hamper FDI. The Park administration has advocated for reforms to bring greater flexibility to the labor market while improving the benefits provided to part-time and contract workers. The National Assembly, however, has not approved associated bills submitted by the government in September 2015.
Investment Trends
In 2015 the Ministry of Trade, Industry, and Energy (MOTIE) reported that inbound FDI to South Korea rose to a record high USD 15.9 billion, up 32 percent from 2014. Foreign investment in the service sector - mostly from the United States and China - led the increase, while FDI inflows to manufacturing industries fell by 0.7 percent from 2014. South Korea experienced net portfolio outflows of USD 2.9 billion in 2015, as investors reallocated capital in anticipation of a rise in the U.S. interest rate and its impact on emerging markets. Foreign investment in South Korean bonds was USD 396 million in 2015, as the return on ROK sovereign debt and other securities remained competitive in an environment of low interest rates in advanced economies. The ROK’s sovereign debt rating stood higher than that of Japan and Taiwan, but below the United States’ rating, according to Moody’s and Fitch credit ratings. The high ranking reflected the ROK’s strong fiscal fundamentals, increasing current account surplus, and record-high net international investment position, in addition to its ability to withstand domestic risks and external shocks, including elevated tensions between North and South Korea in early 2016 due to North Korean nuclear and missile testing.
U.S. FDI in South Korea, according to MOTIE, came to USD 27.9 billion as of December 2015, or 16.5 percent of South Korea’s stock of FDI since the 1960s, and comparable to Japanese investment totaling 29.5 billion, or 17.5 percent of South Korea’s stock of FDI for the same time period. Investments from the United States in 2015 increased 25 percent (USD 5.47 billion) over the previous year, whereas investments from Japan decreased over 43 percent. Japan recorded USD 1.2 billion of FDI into South Korea in 2015, much reduced from the USD 2.1 billion it recorded in 2014, as the yen depreciated significantly against the South Korean won under Japan’s continued policy of quantitative easing. The finance, insurance, logistics, and business service sectors are expected to absorb the majority of FDI in South Korea in the near future, largely through mergers and acquisitions.
