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 eleventh installment. -- Ed.


Vestiges of xenophobia and unnecessary regulations hinder South Korea from attracting foreign investment, which plays a key role in the nation’s economic development and job creation, according to the new foreign investment ombudsman.

Despite being an attractive market with global enterprises, tech-savvy consumers, free trade networks and talented personnel, Korea still has lower levels of foreign investment than its rivals relative to the scale of its economy.

The nation’s foreign direct investment in proportion to its gross domestic product stood at 0.8 percent in 2016, putting it in 16th place among the G20 nations, according to a report released this year by the Korea Economic Research Institute. 

Kim Sung-jin, the foreign investment ombudsman of Korea, said in an interview with The Korea Herald, “A xenophobic mentality and too many regulations, among other factors, appear to be hindering foreign investors from actively investing here.

“Such obstacles need to be removed because foreign investment is important to the nation’s economy in terms of capital inflow, job creation and technology relocation. It also strengthens industrial competitiveness through competition.” 

The new ombudsman, who was appointed in August, formerly served as the chief of the Public Procurement Service and as a deputy minister at the Finance Ministry.

The ombudsman system was launched in 1999 under the Foreign Investment Promotion Act to prevent conflicts between foreign investors and governments. The office was established within the Korea Trade-Investment Promotion Agency.

The xenophobic mentality he referred to is a perception that some Koreans have toward foreign companies, perhaps best illustrated by the term “dine and dash” -- that is, the idea that foreign companies invest in domestic companies only to increase their own assets instead of working to improve the domestic company’s value.

For instance, some of the funds that flowed into Korea after the Asian financial crisis generated such criticism.

The company that faced the strongest criticism was the US private equity firm Lone Star Funds, which bought the struggling Korea Exchange Bank in 2003 and resold it in 2007 at a profit of 4.7 trillion won ($4.1 billion).

More recently, the US automaker General Motors faced similar criticism when it decided to close the GM Korea plant in Gunsan due to weak sales. GM Korea is a local unit of GM, which bought the struggling Daewoo Motor Company in 2002 and changed the name to GM Korea.

“You can’t blame them,” Kim said. “The foreign companies … invested in the struggling firms when no Korean firms or organizations could buy them, and didn’t want to, due to the high risks.”

Adhering to this “emotionally charged” view may diminish Korea’s attractiveness compared with more internationalized neighboring countries, such as Hong Kong and Singapore, which only want to ensure that global businesses comply with local laws and respect their institutions, according to Kim.

He also referred to the “Google Tax” issue -- which, although it is not unique to Korea, has been a frequent topic of discussion in recent years among local politicians and academics.

Google Tax refers to anti-tax-avoidance provisions targeting global companies that attempt to limit their taxable presence in high-tax jurisdictions.

There have been growing calls from local critics who believe the nation’s tax laws should be tougher to remove ambiguities in how those laws apply to global enterprises. Some critics go further, denouncing global companies and accusing them of taking advantage of legal loopholes to pay less tax.

“Think of it the other way around. There are many Korean companies doing business overseas. Imagine they face similar criticism in those countries,” Kim said.

Kim added that it was not unusual for any company to try to bring more money into its own nation. And such companies cannot be blamed, he said, as long as they comply with the host nation’s tax laws.

Currently, many Korean conglomerates, including Samsung, LG, SK, Naver and Hyundai, have a presence overseas, generating massive profits in global markets.

Apart from a discriminatory attitude, Kim also pointed to regulations that he said needed to be improved to create a more advanced investment environment.

“Despite the government’s continued efforts, there are still legal obstacles that hinder foreign investors from investing here,” the ombudsman said.

These include duplicative regulations, regulations that do not adequately consider real-world conditions, and regulations that exist only in Korea, he said.

“Foreign companies may feel there are too many regulations when they face rules they haven’t seen in other global markets,” he said.      

“When we raise our rules and regulations to global standards, it will benefit not only global firms but also Korean companies, which can more conveniently run their businesses at home and abroad,” Kim said.

He cited the example of Korea’s outdoor advertising laws, which have gradually been relaxed as a result of requests from global businesses.

In the past, regulations related to outdoor advertising were stricter, forcing companies to limit the size of their advertisements and to use monotonous designs.

After the gradual easing of the laws, both Korean and foreign companies could promote themselves and their products with ads of different sizes and more diverse designs, which also improved the look of the city.

Dealing with regulations, however, is not easy as it often causes conflicts of interest between ministries responsible for safety or the environment and those responsible for industrial development and growth, he said.

“This makes the role of the ombudsman important -- to mediate the conflicts in a balanced way. This is why the ombudsman is appointed by the president,” he said.

Kim said he will meet frequently with high-ranking officials and foreign investors to better resolve their conflicts.

“The success of an ombudsman depends on how much foreign investors trust him and how well they communicate, and on the capacity the ombudsman has to resolve their problems,” he said.

By Shin Ji-hye (shinjh@heraldcorp.com)