South Korea's "can-do" business attitude and healthy regard for innovation make it a top destination for foreign investment.
South Korea is a dynamic, export-led economy that is actively sending a signal to global corporations that foreign direct investments are welcome there. A series of regulatory reforms implemented in recent years and investments in infrastructure have convinced many corporations to accept the invitation. South Korea has a target of closing 2015 with a record US$20 billion inflow of direct investments. By July, this had already reached US$10.5 billion. It is succeeding in generating interest not only from global groups based in developed economies but also from less traditional investors.
For instance, according to Invest KOREA, a government body, investments from Middle Eastern countries reached US$5.53 billion in the first half of 2015, 40 times more than in the same period last year.
Ease of doing business
Investors are drawn to South Korea by a welcoming business environment and competitive advantages that are well adapted to global economic trends. According to a 2015 World Bank report, South Korea is today the fifth-easiest country in the world for companies to do business. Among G20 countries, South Korea's ranking rose from sixth to second and then to first in 2010, 2013 and 2014, respectively. During the same period, its ranking among OECD member countries rose from twelfth to fourth and then to third.
South Korea's high business-friendly rankings are based on a number of factors, including the country's top digital infrastructure and a skilled workforce honed by decades of investment in a world-class education system. Reforms enacted by the government have created favourable entry and exit conditions for foreign capital, and its capital markets rank among the most developed in the emerging world.
Freedom to invest
"Equity markets are very dynamic in South Korea," says Kyungseok Kim, a White & Case partner in Seoul. "South Korea is also an investment-friendly environment for private equity, and several global funds are investing here."
He notes that there are no significant restrictions to foreign ownership of companies, with the exception of a few regulated sectors such as banking and insurance. And once foreigners acquire a stake in a South Korean company, they have few worries about reaping the fruits of their investments. "If the South Korean unit is profitable and the dividends are clearly declared, sending money back home should not be an issue for international companies," Kim adds.
Once foreigners acquire a stake in a South Korean company, they have few worries about reaping the fruits of their investments
The South Korean government is engaged in a charm offensive around the world to attract ever more investments, and the country's stellar performance in world competition rankings only strengthens the case. Free trade agreements (FTAs) with many countries, including the United States, China, the European Union and India, have helped South Korea's quest to become an Asian business hub. The country has 52 FTAs in place, accounting for 73 percent of the world's GDP, and more are under negotiation with key markets such as Indonesia. As a result of the favorable conditions, some 16,000 foreign investors are already present in the country, according to Invest KOREA.
Innovation and technology
One of the main draws is the remarkable ability shown by South Korean companies to foster innovation in areas such as electronics, superconductors and carmaking. According to the OECD, in 2014 the country ranked first in the world in R&D intensity, at 4.36 percent of its GDP. It also boasted the fifth-highest level of expenditure in R&D. South Korea topped the Bloomberg Global Innovation Index ranking in 2014, scoring particularly highly in patent activity and manufacturing capability.
The World Economic Forum (WEF) reserved particular praise for South Korea's transportation and digital infrastructures in its latest "Enabling Trade" report. Furthermore, South Korea hosts one of the better connected societies in the world, ranking second in the International Telecommunications Union's latest index of Internet access, and its e-government facilities are seen as a model for other countries.
South Korea based companies are among the most active in the world in terms of registering patents, and multinational groups have benefited from the country's culture of innovation and its many FTAs to spread technologies developed in the country to other key markets. One significant example is China, South Korea's main trading partner today.
South Korean authorities are aware, however, that more can be done to make the country even more attractive for investors. According to the WEF, access to finance continues to be an issue for companies, even though the banking system has gone through reforms after it was badly hit by the Asian crisis of the late 1990s.
The political and economic clout of the family-run all-ranging corporations that drove South Korea's export-led development still bothers rivals trying to get into sectors dominated by them. The government has tried to curb their influence, but this is seen by analysts as a particularly tough task. Also, even though South Korea as an exporter is a major winner in the free trade game, it still imposes restrictions on imports in sectors such as agriculture.
All things considered, the key for South Korea to carry on attracting investments is to maintain favourable conditions for companies to pursue innovation and break into new markets—not least because the competitive pressure tends to get fiercer as rivals from up-andcoming economies target their markets.
"Countries like China and Taiwan are catching up pretty quickly in terms of manufacturing similar products at lower prices," Kim says. "South Korean companies need to acquire new technology and expand their product range in order to remain competitive."
To read the full South Korea report, please click here.
To read other articles in this report, please click here.
This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2016 White & Case LLP