SOUTH KOREA: FOREIGN INVESTMENT




FDI in Figures

Global foreign direct investment (FDI) flows in the first half of 2021 reached an estimated USD 852 billion, showing stronger than expected rebound momentum, with an increase of 78% of the partial-year growth rate on the previous year according to UNCTAD’s Investment Trends Monitor released on October 2021. The global FDI outlook for the full year 2021 has also improved from earlier projections. The current momentum and the growth of international project finance are likely to bring FDI flows back beyond pre-pandemic levels. Nevertheless, the duration of the health crisis and the pace of vaccinations, especially in developing countries, as well as the speed of implementation of infrastructure investment stimulus, remain important factors of uncertainty. Other important risk factors, including labour and supply chain bottlenecks, energy prices and inflationary pressures, will also affect final year results. (UNCTAD, October 2021). Covid’s impact on developing markets and shifting investment from China are major trends that will impact foreign investment in 2022.


According to UNCTAD's 2021 World Investment Report, FDI to the Republic of Korea declined by 4% to USD 9.2 billion in 2020 from USD 9.6 billion in 2019. FDI stocks increased to USD 265 billion, up from USD 135 billion in 2010. Although the country was among the first to contain the pandemic and economic growth remained strong, a sharp decline in cross-border M&As caused the drop in FDI.In 2020, M&A fell from USD 3.8 billion in 2019 to - USD 1.9 billion, driven by large disinvestments. Despite the overall decline, FDI inflows continued to be robust in some sectors, particularly in sectors related to artificial intelligence (AI), big data, cloud computing, as well as electric cars and biotechnology. Inflows of FDI pledged to these industries grew by 9.3% to USD 8.4 billion. According to data from OECD, Japan, the US, the Netherlands and the UK hold most of FDI stock. Investments have been mainly oriented towards manufacturing, finance and insurance, trade, hospitality, real estate, information and communication, and transportation.


South Korea's appeal in terms of foreign direct investment is the result of the country's rapid economic development and the country’s specialisation in new information and communication technologies. However, the lack of general transparency in regulations remains a major concern for foreign investors. The World Bank esteems that the Republic of Korea is a country with a highly developed business environment as testified by its 5th position in ranking of the last 2020 Doing Business report.


The latest United Nation Asia-Pacific Trade and Investment Trends Report provides additional information on FDI in South Korea in Asia-Pacific in 2021 and 2022.




Form of Company Preferred By Foreign Investors:

Limited Company

Form of Establishment Preferred By Foreign Investors:

Greenfield investment (for manufacturing, this differs from other investments in new facilities, because it not only includes factory establishment but sales facilities as well).

Main Foreign Companies:

Consult the successful stories of FDI on Invest Korea.

Sources of Statistics:

Statistics from Invest Korea

Ministry of Commerce, Industry and Energy (MOCIE)

Korea National Statistical Office



What to consider if you invest in South Korea



Strong Points


South Korea's strong points include:

Highly skilled workforce thanks to an efficient education system

Advanced R&D capabilities

Dominant position in high-end electronics

High quality infrastructure

Solid banking sector

Strong international financial position (currency reserves and low external debt)

Growth of investment in Asia

Brand savvy consumers willing to spend on quality products

High level of disposable household income

Strong shipping and air cargo infrastructure



Weak Points


South Korea's weak points include:

Regulatory frameworks can be restrictive and opaque

Dominance of big industrial groups (chaebols)

Cost of manpower is comparatively high

Ageing population

Frequent contract negotiations throughout a business relationship are common

Property (leased or owned) is expensive

Unique industry standards

Dependence to raw materials imports

Household indebtedness and high unemployment rate among young people

Regional tensions with North Korea and competition from China (steel, shipbuilding, electronics)



Government Measures to Motivate or Restrict FDI


The Foreign Investment Promotion Act was enacted to support and facilitate efforts to attract foreign investment. Most of FDI incentives offered by the Korean government are provided via:

Tax support (corporate tax and income tax reduction, acquisition tax and property tax reduction, exception from custom duties):

Cash grant (land purchase expense, lease expense, employment/education/training subsidy)

Industrial Site Support (location support, subsidy for difference of sale price, rent reduced-subsidized)

Nevertheless, some restrictions and interdictions exist in public administration, education, national defence, energy, media sectors.

For more information, visit the Invest Korea website.

The South Korean government significantly increased cash incentives for foreign companies to encourage more investment at home. In 2021, FDI flows to South Korea recorded a historical high of USD 29.51 billion.


Protection of Foreign Investment

Bilateral Investment Conventions Signed By South Korea:

Korea is a signatory to many conventions - a full list can be found at UNCTAD.

International Controversies Registered By UNCTAD:

The ISDS Navigator contains information about known international arbitration cases initiated by investors against States pursuant to international investment agreements. The Republic of Korea is involved in 7 cases as Home State of claimant and in 7 cases as Respondent State.

Organizations Offering Their Assistance in Case of Disagreement:

ICCWBO , International Court of Arbitration, International Chamber of Commerce

ICSID , International Center for Settlement of Investment Disputes

Member of the Multilateral Investment Guarantee Agency:

Korea is a member of MIGA.




Procedures Relative to Foreign Investment


Freedom of Establishment:

Guaranteed

Acquisition of Holdings:

Possible

Obligation to Declare:

A foreign investment must be reported under the Foreign Investment Promotion Act (FIPA) or the Foreign Exchange Transaction Act. A fast registration process is available for foreign direct investment (FDI) under the FIPA. To apply, an FDI needs to:


invest at least KRW 100 million;

acquire at least 10% of voting shares of a Korean company, or own shares of a Korean company and dispatch or appoint an executive officer to or at such Korean company.

Competent Organisation For the Declaration:

Invest Korea

Requests For Specific Authorisations:

Most sectors of the economy are open to foreign investment, with the exception of a few key sectors, for example: telecommunications, broadcasting, publishing, banking, naval, aviation, agriculture, natural resources. In these sectors foreign ownership is limited to a percentage ceiling, or subject to regulatory approval for reasons of national security, protection of critical technologies, and so on.


Office Real Estate and Land Ownership

Possible Temporary Solutions:

There are several temporary solutions: Office in the president's private house, Office in the business centers, office rent in the privileged foreign investment area, etc.

Invest Korea Plaza (IKP) offers furnished office space and cutting edge conference facilities to foreign investors.


The Possibility of Buying Land and Industrial and Commercial Buildings:

Ownership or occupation of real estate by foreigners is not restricted unless it threatens national security or public order. However, a foreign investor must obtain permission from the competent government authorities to purchase land located within an area of military facilities, a cultural property protection zone, an environmental conservation zone or a wildlife conservation zone.

Click here for Info on Foreigner's Land Acquisition Act.


Risk of Expropriation:

Under the ROK law, the ownership of a foreign-invested enterprise is protected against expropriation or requisition. When private property is expropriated, it may only be taken for a public purpose and only in a non-discriminatory manner, and claimants are protected by a fair trial. Property owners are legally entitled to prompt compensation at fair market value. There are many cases of expropriation in the ROK, mainly for public reasons.



Investment Aid


Forms of Aid


Most of FDI incentives offered by the Korean government are provided via:

Tax support (corporate tax and income tax reduction, acquisition tax and property tax reduction, exception from custom duties)

Cash grant (land purchase expense, lease expense, employment/education/training subsidy)

Industrial Site Support (location support, subsidy for difference of sale price, rent reduced-subsidized)


Privileged Domains:

Industry support service, high-tech industry business, R&D service, manufacturing, tourist service, welfare facilities, etc.


Privileged Geographical Zones:

Industrial complex located close to a port or an airport, making it convenient for businesses within to engage in foreign trade, international airport area, distribution complex or cargo terminals, etc.

Korean Free Economic Zones (KFEZs) aim to strengthen national competition for business and promote balanced regional development by enhancing living conditions and business environments for foreigners in South Korea. The KFEZs offer great incentives such as tax benefit, business support, deregulation, administration support and one-stop services for your successful business.


Free-trade zones:

There are seven Free Economic Zones: Incheon FEZ, Busan-Jinhae FEZ, Gwangyang Bay Area FEZ, Yellow Sea FEZ, Daegu-Gyeongbuk FEZ, East Coast FEZ and Chungbuk FEZ.

For more information, click here.


Public aid and funding organisations:

Ministry of Commerce, Industry and Energy (MOCIE), local governments.

Investment Opportunities


The Key Sectors of the National Economy:

Shipbuilding, semiconductors, automobile and automobile components, electronics (TV, mobile phone, etc), cosmetics, education services, defence industry, tv and music production (strong imports of Korean culture), textile.

High Potential Sectors

Aerospace, biotechnology, display, environmental industry, IT industry, logistics, nano-industry, cyber-security, new and renewable energy sources, R&D, real estate development, semiconductors, Smart Production, tourism, chemical, venture industry.

Privatization Programmes

Among the latest privatisations in South Korea are the state-owned banks such as the Korea Development Bank and Woori Bank, partially sold in December 2016. However, the government is currently at a standstill in an attempt to fully privatise Woori Financial Holdings because of the low price of its shares due to the increasing market volatility triggered by the COVID-19 pandemic. The privatisation of shipping company HMM is also scheduled for 2022.

Tenders, Projects and Public Procurement

Public Procurement Service, Tenders

Asian Development Bank, Procurement Plans in Asia

DgMarket, Tenders Worldwide


Sectors Where Investment Opportunities Are Fewer


Monopolistic SectorsSome sectors are totally closed to FDI:

Nuclear energy

Broadcasting (TV and radio)

Other sectors have restrictions on FDI (from 25% to 49%)


Water and thermal energy

Newspaper publication

Telecommunication services

Finally, in numerous sectors, FDI cannot exceed 50%. The government has the right to approve FDI in the domain of defence.


Finding Assistance For Further Information

Investment Aid Agency

Invest Korea

Korea Trade Investment Promotion Agency (KOTRA)

Other Useful Resources

Korean Free Economic Zones

Doing Business Guides

Doing business in South Korea (Thomson Reuters Practical Law)

Exporting to Korea (Export.gov)


Reference: Link This article is from and credited to santandertrade.com

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