The Korea Herald is publishing a series of features and interviews on South Korea’s business environment for foreign companies and investors. This is the first installment. -- Ed.
Amid the steady growth of foreign direct investment in Korea in the past decade, foreign companies doing business here say the market and consumers are attractive, but the ambiguous regulations are a headache.
Foreign direct investment in Korea has nearly doubled over a decade from $11.7 billion in 2008 to $22.8 billion last year, according to data from the Trade Ministry.
The key factor driving investment here is the market itself, according to a survey of 3,410 foreign companies released last week by the Korea Trade-Investment Promotion Agency.
According to the survey, 40 percent said the biggest factor behind coming here was joining local market competition, while 15 percent cited the growth potential of the market.
Other factors included Korea’s global network through trade deals (10 percent), the innovative environment for technology and research and development (7 percent), high-quality manpower (4 percent), productivity efficiency (4 percent) and incentives on foreign investment (3 percent).
“Korea can be an attractive market to foreign firms due to the presence of global firms including Samsung and LG. Foreign companies appear to want to be close to these large Korean firms to sell their products and partner with them,” said Kim Yong-chae, chief of the Trade Ministry’s investment attraction division.
Many global firms, including Google, Apple, Microsoft, Facebook, Qualcomm, BMW and Mercedes-Benz are supplying their products to or are making business partnerships with Korean firms, including Samsung, LG, SK and Hyundai.
“We view the Korean market as important and want to expand business here as we make steady profits by supplying products to Korean firms here,” said a senior official from a European manufacturer that has supplied its products to Samsung Electronics.
Many other foreign companies are carrying out similar business activities here with Korean firms leading global industries in the areas of mobile devices, appliances, chips, displays, bio fields and the arts.
But, that does not mean the foreign companies will continue to expand their businesses here.
“It will depend on how long Korean companies can maintain their leadership. We move only for profits,” the official said.
Some of the global firms here said they would retain their volume of investment and personnel in Korea this year while increasing that volume in China.
Apart from the presence of large firms, foreign companies find Korean consumers attractive as a test bed before launching new products to the global market, according to multiple officials from multinational firms in diverse areas, including information technology, automobiles and fashion.
“Korean consumers are very picky. But, once we satisfy them, it is way easier to satisfy other consumers,” said an official from a European automaker whose headquarters view Korea as a strategic nation.
When Jeff Immelt, former CEO of General Electric, came to Korea in 2016, he said Korea may not be as big as China, but it is an advanced market and he wanted to use it as a test bed.
Fashion and cosmetic firms also tap the Korean market before launching new products across Asia. British luxury fashion brand Burberry opened Burberry Beauty Box to sell its fashion items in Korea as the first Asian nation. The fashion firm reportedly chose Korea as its cosmetics market is big and consumers are fashion-conscious.
Despite the presence of global firms and attractive consumers, not all foreign companies retain or expand their businesses here.
According to the Korea Economic Research Institute, foreign direct investment -- both coming and going -- in proportion to gross domestic product in Korea is very small compared to that of other nations.
The institute said Korea’s FDI in proportion to GDP ranked No. 152 out of 237 in 2016, based on the latest data from the United Nations Conference on Trade and Development’s World Investment Reports. The FDI data the institute used was net investment by subtracting foreign companies pulling out of Korea from foreign companies coming to Korea.
“The biggest challenges foreign companies face here seem to be Korea’s many ambiguous regulations,” said Yoo Jeong-joo, chief of the Korea Economic Research Institute’s corporate policy team.
As for why the nation has more regulations than others, he said Korean industries have grown under strong government leadership in the past decades and the government still wants to retain its power by having licensing authorities.
“But, the private market has now grown to be too big to control,” Yoo said.
According to the KOTRA survey, foreign companies’ biggest concerns about making investments in Korea were business environment (33 percent), followed by government regulations and transparency (23 percent). Others were labor-management relations (15 percent), wage level (13 percent) and political stability (13 percent).
Songdo International Business District in Incheon
The largest portion of respondents who pointed to the business environment said the government should ease regulations to see improvement.
Korea’s regulatory challenges were also noted in a report released by the World Economic Forum last year. Regarding national competitiveness in terms of the burden on companies posed by government regulations, Korea ranked No. 105 of 138.
“Korea has a lot of regulations and guidelines that only exist in Korea, compared to its rival nations, including China, Japan, Hong Kong or Singapore. We need to continue to explain to the headquarters why we have to do extra things to sell products in Korea,” said an official from a US-based manufacturer that has done business here for more than a decade.
Korea currently takes a positive list approach in regulations, by prohibiting everything except for the things allowed. Local experts say Korea needs to change this in order to adopt new technologies and industries.
“Korea’s positive list approach should be changed into a negative one at least for next-generation industries to boost more innovative products and services,” said Song Jae-yong, a professor of Seoul National University’s business college.
By Shin Ji-hye (email@example.com