"Declining Economic Contribution of Chaebol Companies... Efforts Needed to Improve Investment Environment and Economic Diplomacy"

[Asia Economy Reporter Ki-min Lee] Concerns have been raised that the economic contribution of foreign-invested companies and foreign direct investment (FDI) are sharply declining, prompting calls for the government to strengthen efforts to improve the domestic investment environment and economic diplomacy.

On the 8th, the Federation of Korean Industries (FKI) announced these findings based on an analysis of changes in FDI trends since 2011 and the contribution of foreign-invested companies in Korea to the Korean economy, using data from the Ministry of Trade, Industry and Energy’s FDI statistics, the Ministry of Industry and KOTRA’s foreign-invested companies management survey, and the National Tax Service’s tax statistics, ahead of this year’s Foreign Investment Week.

Foreign direct investment showed an increasing trend until 2018 but recorded $23.33 billion (approximately 26.1645 trillion KRW) last year, a 13.3% decrease compared to 2018. Furthermore, as of the cumulative total through September this year, it was $12.85 billion (approximately 14 trillion 400 billion KRW), down 4.7% from the same period last year.

The FKI argued that since last year, investment sentiment among foreign-invested companies has frozen due to the abolition of corporate tax reduction measures for foreign-invested companies, the reduction of working hours and minimum wage increases under the current government, and the contraction of investment demand caused by COVID-19. In addition, it viewed the strengthening of corporate regulations such as the recent introduction of class action lawsuits and expanded punitive damages as causes of investment contraction.

The contribution of foreign-invested companies to the Korean economy, which accounted for about 15% of domestic sales, about 20% of exports, 6% of employment, and about 20% of corporate tax as of 2011, has been on a downward trend since 2017 following the rapid performance decline of the largest foreign-invested company, Korea GM.

The share of foreign-invested companies in total exports peaked at 20.2% in 2013 but fell by 2.3 percentage points to 17.9% from January to July this year. The employment share decreased by 0.7 percentage points from 6.2% in 2011 to 5.5% last year. Additionally, the sales share in the entire country dropped by 2.7 percentage points from 14.7% in 2011 to 12.0% last year, and the corporate tax share fell by 5.8 percentage points from 20.2% in 2011 to 14.4% in 2018.

By country, the contribution of American and Chinese companies to the Korean economy has steadily increased, but the contribution of Japanese foreign-invested companies has sharply declined since 2013.

Last year, foreign direct investment by American companies increased by 188.5% compared to 2011. Active investments are being made in new industries such as the establishment of advanced semiconductor equipment research and development (R&D) centers and anticancer drug development.

Foreign direct investment by Chinese companies also increased by 321.4% in 2018 compared to 2011, and the number of Chinese foreign-invested corporations increased by 51% during the same period.

On the other hand, the contribution of Japanese foreign-invested companies has sharply declined since 2013. As of last year, foreign direct investment by Japanese companies decreased by 68.5% compared to 2012, and the number of Japanese foreign-invested corporations in 2018 decreased by 11.1% compared to 2013.

Kim Bong-man, head of international cooperation at the FKI, said, “As foreign investment projects delayed by COVID-19 are being executed, foreign direct investment in the third quarter of this year recorded the highest ever third-quarter performance of $5.23 billion (5.865 trillion KRW).” He added, “It is very positive that the government amended the Foreign Investment Promotion Act in August this year to recognize reinvestment of undistributed retained earnings by foreign-invested companies as foreign direct investment, and in September expanded cash support for foreign investment in advanced industries, significantly improving the foreign investment environment.”

However, Kim said, “Since the contribution of foreign-invested companies to our economy is declining and foreign direct investment is also on a downward trend, efforts to improve the domestic investment environment must be strengthened so that the increase in foreign direct investment in the third quarter of this year does not remain a temporary phenomenon.” He added, “As global companies in bio-pharmaceuticals and the Green New Deal sectors are reorganizing global value chains (GVC) after COVID-19, policy authorities should carry out full-scale economic diplomacy, including resuming face-to-face investor relations (IR) activities, to ensure these companies choose Korea as their final business hub.”

This content was produced with the assistance of AI translation services.