"Capital Outflow Abroad Deepens 'Investment Inversion'... Net FDI Ratio -1.7% Over the Past 5 Years"

Korea Economic Research Institute, Comparative Analysis of Key Indicators Among Five Major Countries Over the Past 5 Years

[Asia Economy Reporter Jeong Hyunjin] A claim has emerged that South Korea needs to enhance its competitiveness in attracting foreign direct investment (FDI) as the phenomenon of 'investment reversal,' where the outflow of funds due to domestic investors investing overseas exceeds the inflow of funds from foreign direct investment into the country, is intensifying.

On the 15th, the Korea Economic Research Institute under the Federation of Korean Industries compared and analyzed FDI and ODI indicators of South Korea and the major five countries (G5) over the past five years (2015?2019). The results showed that South Korea's net FDI ratio averaged -1.7% during this period, significantly lower than the G5 average of -0.3%. The net FDI ratio is calculated by subtracting ODI from FDI and then dividing by the gross domestic product (GDP).

The Korea Economic Research Institute analyzed, "Considering the economic scale, this means that South Korea had excessively more domestic investors' overseas direct investment than foreign investors' domestic direct investment compared to the G5."

Data provided by Korea Economic Research Institute

South Korea's net FDI ratio showed an average growth rate of -0.9% from 2005 to 2009, then declined to -1.5% from 2010 to 2014, and further to -1.7% from 2015 to 2019, indicating a deepening investment reversal phenomenon. In contrast, the G5 showed a gradual improvement in net FDI ratio during the same periods, from -1.1% to -0.7%, and then to -0.3%.

In particular, to evaluate the quality of investment, a comparison and analysis of greenfield investment indicators revealed that South Korea's greenfield FDI decreased by 16.8% in 2015?2019 compared to the previous five years, while greenfield ODI increased by 6.9%. Greenfield investment refers to investments that establish or expand production facilities such as factories, classified as investments with high economic contributions like job creation. During the same period, the G5's greenfield FDI increased by 31.6%, and greenfield ODI decreased by 2.5%.

The Korea Economic Research Institute pointed out, "Production facility investments coming into South Korea from abroad have decreased, while investments flowing out overseas have increased," adding, "The qualitative deterioration of FDI and ODI raises concerns about domestic employment decline."

The Korea Economic Research Institute evaluated that South Korea's competitiveness in attracting FDI is lower compared to major countries. According to this year's AT Kearney FDI Confidence Index, South Korea ranked 21st among 25 major countries in FDI attraction competitiveness. When analyzing competitiveness between South Korea and G5 countries by separately categorizing five highly important components of the FDI Confidence Index, South Korea showed comparative advantages or similar levels in infrastructure competitiveness and innovation capability, but comparative disadvantages in tax competitiveness, regulatory competitiveness, and market openness, indicating areas needing improvement.

Regarding taxation, South Korea's average effective corporate tax rate over the past three years was 27.3%, higher than the G5 average of 22.6%. The proportion of corporate tax in total tax revenue was also more than twice as high at 15.7%, compared to the G5 average of 6.9%. For regulatory levels, citing the Regulatory Environment Index published last year by Cornell University, the Korea Economic Research Institute analyzed that South Korea's regulatory competitiveness scored 68.2, below the G5 average of 88.2. The OECD's FDI Regulatory Restrictiveness Index also showed South Korea's FDI regulatory intensity at 0.135, nearly three times higher than the G5 average of 0.05.

The Korea Economic Research Institute viewed South Korea's lower market openness compared to major advanced countries as a factor reducing the attractiveness of FDI investment. According to data released this year by the Heritage Foundation, South Korea's market openness scored 66.3, below the G5 average of 76.8, and the Financial Freedom Index, which indicates how freely capital moves through financial markets, was 60.0 for South Korea, lower than the G5 average of 72.0.

Choo Kwang-ho, Director of Economic Policy at the Korea Economic Research Institute, argued, "We must expand FDI through enhancing tax and regulatory competitiveness to use it as a momentum for the economy, such as creating quality jobs and improving productivity."

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