The government is ratcheting up efforts to stimulate investment by domestic and foreign companies to sustain economic growth and strengthen the nation’s weakening growth potential.
In recent months, the economy has lost much of its growth momentum due to a worsening external environment. In the first quarter of the year, the economy expanded 2.8 percent from a year ago, the smallest increase since the 1 percent gain in the first three months of 2009.
Yet the first-quarter performance was much less disappointing than the figures for March. To the dismay of economic officials, all indices, including industrial output, consumption and investment, dropped in March from a month before, indicating that the economy was falling below projections.
The main cause of the poor performance was sluggish exports, the engine of economic expansion for Korea. In March, exports fell 1.4 percent compared to a year ago, the second monthly drop of the year.
In April, things got worse ― exports shrank a further 4.7 percent. The fall in exports for two consecutive months led officials to consider further lowering their already low export growth projection of a mere 7 percent for 2012. Last year, exports jumped 19.6 percent.
Against this backdrop, the government has come up with a package of measures to boost corporate investment. The response is timely, although it faces many constraints. For instance, the government needs to secure cooperation from political parties as some of its measures require legal revisions.
These days, political parties are engrossed in preparing themselves for the December presidential election. They should pause for a moment and make concerted efforts to prevent the economy from falling into a low-growth trap. They should make passage of the investment-stimulating bills the first order of the day when the new Assembly opens.
One measure of the package calls for facilitating foreign direct investment in the Incheon Free Economic Zone. It proposes that prior approval be given to foreign investors’ schemes to build hospitals or resort complexes in the zone before work starts on their projects.
Currently, many foreign investors hesitate to invest as they cannot be sure whether their projects would get approval upon completion. The proposed regulation change, according to officials of the Ministry of Knowledge Economy, would help attract 8 trillion won worth of investment in the FEZ and create some 50,000 jobs.
Another important initiative is about luring overseas-based Korean companies back home. According to a survey conducted by the Korea Chamber of Commerce and Industry, some 13 percent of the Korean companies that have built a manufacturing base abroad are interested in making a U-turn.
Hence the government plans to help these firms relocate their facilities to Korea by providing them with generous tax incentives and other benefits regarding plant sites, manpower supply and export financing.
Similar programs are already in place in other countries, such as the United States and Taiwan. For instance, the U.S. government subsidizes 20 percent of the relocation costs for manufacturing companies that bring jobs back home. President Barack Obama is pushing this program, called “insourcing,” as part of his campaign to revitalize U.S. manufacturing.
The Seoul government also needs to throw its weight behind the U-turn program as the nation has been experiencing a widening gap between outward FDI and inward FDI. Last year, net outflows hit $30.8 billion, up from $21 billion in 2010 and $13.2 billion in 2009.
The surge in FDI outflows has caused concerns about a hollowing-out of the manufacturing sector. These concerns are not unfounded. Between 2001 and 2005, corporate investment aimed at augmenting production facilities in Korea increased 25 percent a year on average. This nosedived to minus 1.4 percent between 2006 and 2010 as companies increasingly chose to build their production bases abroad.
Outbound FDI, however, should not be seen in the negative light. Overseas investment enhances the competitiveness of domestic companies and thus contributes to their expansion. This in turn boosts exports and helps the national economy grow.
Yet excessive growth in outward FDI without a corresponding increase in inward FDI would spell trouble for the Korean economy.
As Korea cannot increase inward investment by foreign corporations overnight, it should seek to bring back overseas-based Korean companies, which is another form of inward FDI. Political parties should also pull their weight by speeding up the legislative process.