New foreign direct investment pledged to South Korea recorded a sharp on-year drop in the first quarter of this year. The country received FDI commitments worth $3.17 billion during the January-March period, down 35.7 percent from a year earlier, according to data released last week by the Ministry of Trade, Industry and Energy.
Actual investments made by foreign companies over the same period decreased 15.9 percent on-year to $2.62 billion.
As officials at the ministry note, there is a list of reasons not to worry too much.
First, Korea is not exceptional in this area -- there has been an overall decline in foreign direct investment worldwide in recent years. Data from the UN Conference on Trade and Development showed that global FDI contracted 19 percent on-year to $1.2 trillion in 2018, the lowest figure since 2009 when the world economy was going through the Great Recession.
The fall in FDI commitments to Korea in the first quarter of the year was also partly attributable to the high base effect caused by a steep rise during the same period of 2018.
In addition, some foreign companies adjusted their investment plans to take advantage of tax breaks that expired at the end of last year, resulting in a decline in investment figures for this year.
The amount of FDI pledged to the country in the first quarter is roughly on par with the quarterly average for the last decade, $3.26 billion. In terms of actual investment, the latest tally is 16.4 percent higher than the $2.25 billion average.
Announcing the latest data, the Ministry of Trade, Industry and Energy vowed to make every effort to increase this year’s foreign direct investment so that it tops the $20 billion mark for the fifth year in a row.
It may be hard to achieve that goal, given the unfavorable external and internal environment.
Global FDI is expected to continue on a downward path amid the slowdown in the world economy, and local business conditions have worsened partly due to the ill-conceived policies implemented by President Moon Jae-in’s government over the past two years.
Still, the country should go the extra mile to attract more foreign investment to help reinvigorate its slowing economy.
It is necessary to take note of recent changes in foreign direct investment trends here.
Data show that foreign investment in new industries has continued to increase over the past few years, while traditional manufacturing sectors have drawn less investment.
Tech startups in areas such as e-commerce, next-generation telecommunications systems and rechargeable batteries have received large amounts of foreign investment.
This trend is expected to help bolster innovation-led growth, another policy initiative advocated by the Moon administration.
Economists advise the administration to focus on that initiative while scrapping its income-led growth policy, which has come under criticism for having aggravated economic conditions by increasing the burden on companies and driving mostly low-wage workers out of their jobs.
Government officials promise additional efforts to attract foreign investment that can fuel innovative growth.
But just increasing traditional incentives, such as financial support and tax breaks, is a limited approach to attracting investment and may not bring significant benefits to the economy.
A more coherent and sophisticated support system should be established to meet the diverse needs of foreign investors.
Government agencies and business associations should join hands to hold sessions abroad to explain specific investment opportunities in Korea.
It is also necessary to ensure that foreign investors receive more benefits if they employ more workers, transfer technology and bring in capital goods.
In the long term, industrial policies need to be attuned to policies to attract foreign investment.
Regulatory and labor reforms should also be accelerated to encourage foreign firms to increase their investment in the country.
Despite its repeated pledges to pursue deregulation, the Moon administration has dragged its feet on lifting regulatory barriers in the face of resistance from interest groups. It has also undone measures taken by the previous administration to make the labor market more flexible, replacing them with a series of labor-friendly initiatives.
Deregulation and a less rigid labor market are also needed to encourage local companies to increase investment amid sluggish demand. Investment by major Korean business groups decreased 3.1 percent last year from a year earlier, according to recent data from the corporate tracker CEO Score.