Foreign Investors Are a Progressive Force

September 22, 2005

Foreign investment in South Korea has never been high. For decades, the government pursued policies that successfully impeded foreign investment. Even when foreign firms managed to invest in South Korea, they were typically relegated to minority stake joint ventures with Korean partners. These policies were in part an understandable response to the country’s colonial history and fears that if the economy were opened widely to foreign investors, the country’s assets would be bought up wholesale by Japanese investors.

But this is not the whole story. The state-led development strategy required that firms be responsive to government dictates. The bureaucrats rightly feared that foreigners would be less pliable than their domestic counterparts and thus required exclusionary laws and regulations to marginalize foreigners. The model was successful during the catch-up phase when the path ahead was clear but began to falter and ultimately failed as the economy approached the world technological frontier, which required more far-sighted and agile decision-making from financiers, corporate managers, and government officials. Yet this approach appears to have inculcated in Koreans attitudes toward inward foreign investment that could pose a real risk to the country’s economic future.

Nearly a decade after the financial crisis, the Korean economy seemingly has not escaped the clutches of a model formulated two generations ago under very different circumstances. Instead of coming to resemble ever more closely the other rich industrial economies of the Organization for Economic Cooperation and Development (OECD), Korea faces dwindling inward foreign investment. Why?

There are obvious reasons that have to do with Korean labor markets and other institutional characteristics. Problems in the labor market both discourage foreigners from investing in Korea and encourage Korean firms to establish operations elsewhere. The Korean legal system makes foreign executives criminally liable for a much broader range of behavior than elsewhere. Tax provisions further discourage expatriate managers to locate in Korea.

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Marcus Noland Senior Research Staff

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