Foreign Investment Shies Away From Korea : Commerce: Spiraling labor costs, high land prices and red tape are cited as reasons why the nation has begun to lose its business advantage.
Last year, Izumi Electric Co., a Japanese maker of factory automation parts, began scouting around Asia for a place to set up an assembly shop. The company looked at South Korea, where it had been doing business for 15 years, but ultimately chose Taiwan.
The reasons for rejection: Seoul’s spiraling labor costs, high land prices and impossible red tape, said Dennis Kim, Izumi’s Korean-American attorney who shuttles between Seoul and Silicon Valley.
“Everyone wants to come in to Korea to tap this growing market, but there is a reluctance among many companies to set up shop here,” Kim said. “The cost of doing business here is simply too high.”
Kim’s plaint is a growing refrain in Korea. Foreign investment is dropping off precipitously in this once-roaring economic dragon. Once a mecca for labor-intensive manufacturers offering low wages, disciplined workers and virtually no unions, South Korea has lost some of those business advantages in favor of greater material affluence and democratic freedoms. After President Roh Tae Woo was elected in 1987, unions were legalized, labor disputes increased, wages and land prices spiraled.
As a result of the worsening business climate and the worldwide economic slowdown, new investment in South Korea has dipped from $1.28 billion in 1988 to $688 million by the end of October, 1992, according to the Ministry of Finance. The most conspicuous drop came in Japanese investment, which has plunged from $696 million in 1988 to $138 million as of October. Korea’s second-largest foreign investor, the United States, also marked its lowest level of new investment in at least five years, with $261 million earmarked as of October.
“Most of us buy and sell, but we don’t invest here,” one American businessman said. “How can you make money here? It’s ridiculous.”
South Korean policy makers find their nation caught in an economic nether world: too mature to compete with China, Thailand, Indonesia and other nations that now fill the niche for low-cost labor, but not yet technologically capable of competing with Japan and the United States for advanced products with high added value.
Although South Korea is still expected to register an economic growth rate this year of 6.8%--three times higher than Japan’s--that is half the rate of the booming 1980s. Along with dwindling exports and a trade deficit, the relatively lackluster performance has made South Koreans fear that they are sinking fast in the turbulent seas of international competition.
One lifeboat: new foreign investment. Kim Young Sam, who was elected president on Dec. 18 on a campaign to revive the limping economy, is expected to further accelerate measures to lure foreign investment, especially technology. He has said he would re-emphasize strengthening economic ties with traditional allies such as the United States, as opposed to Roh’s focus on building diplomatic ties with socialist neighbors.
“Compared to the total economy, foreign investment is negligible, but we emphasize it because this country needs high-tech to compete with Japan and the United States,” said Kang Suk In, the Ministry of Finance’s director of the foreign investment policy division.
Aiming to rekindle dwindling foreign interest, the government has launched a “foreign investment acceleration plan.” The major points:
* Offshore financing will be allowed for the first time, beginning in January, 1993. Foreign investors are now required to obtain financing from South Korean banks, whose annual interest rates are running twice as high as international rates, at about 12%. The policy, protection against inflation and competition, has been a major gripe of foreigners.
* Insurance companies were given the right to buy land as of December, 1992; investors in high-tech service areas, such as software and research and development, will be given the go-ahead beginning next year. Foreigners are not generally allowed to buy land except to operate a few businesses, such as banks, hotels and manufacturing services.
* Retail distributors, such as convenience stores, will get a break with plans to relax restrictions beginning in mid-1993. Distributors are now limited to 10 stores nationwide, each no bigger than 1,000 square meters; that will be liberalized to 20 shops at 3,000 square meters apiece.
* Investment procedures will be simplified beginning in March, 1993. Investments are now subject to the approval of several government ministries; that will change to mere notification. Although Kang said the time saved will be only 10 days from the 30 days now, attorney Kim said that bureaucratic snarls delay approvals for years.
When Kim himself tried to set up a Korean franchise of a U.S. hospital cleaning firm, it took two years to gain government approval--something that would have taken one day and a $20 business license in the United States, he said.
The government is also aiming to address another perennial complaint: difficulty in finding suitable factory sites. Spiraling land prices, which tripled during the 1980s, is one problem; so is the shortage of land near metropolitan areas zoned for industry.
Kim Jin Ouk, an investment attorney in Seoul, recalled one foreign tire manufacturer that simply abandoned plans to build a factory here a few years ago because it couldn’t find any place to put it. The government, however, is preparing a 330,000-square-meter industrial site in Asan Bay, three hours from Seoul.
And the government is pressuring Korean businesses to hold down wages, which jumped from a monthly $230 in 1980 to $690 in 1989, government figures show. Increases have averaged 18% a year since 1986, but the government this year asked 1,400 firms to keep increases below 5%.
Despite the problems, investment attorneys say there are still plenty of opportunities in Seoul. Services that cater to the increasingly well-heeled Korean populace, ranging from insurance to law firms to stock brokerages, will find a growing market, they say.
