south korea and foreign direct investment

South Korea and Foreign DirectInvestmentThis book examines Korea’s foreign direct investment policy dynamics andpoints out the importance of mutual synergy between multinationalcorporati

“Choong Yong Ahn brilliantly sets out how South Korea transformed itseconomy to one of the world’s most welcoming to foreign direct investment.The World Bank ranks South Korea as number four (ahead of the UnitedStates) for ease of doing business In particular, South Korea’s foreigninvestment aftercare system needs to be widely shared for cross-borderinvestment liberalization and facilitation This is a ‘must read’ forgovernment officials, business, and academics worldwide.”

Carla A Hills, Former U.S Trade Representative and Chair and CEO of

Hills & Company

“The author, a renowned senior economist, lucidly documents South Korea’sentire FDI policy dynamics and institutions from a restrictive to a liberalizedregime, most notably the highly effective foreign investment aftercareOmbudsman system … I strongly recommend this to the internationaleconomic policymakers in emerging economies and students of economicdevelopment.”

Dr Il SaKong, Chairman Emeritus, Institute for Global Economics and

former Minister of Finance, South Korea

“Choong Yong Ahn uses his considerable experience and insights to coveroften neglected aspects of FDI Although late to FDI, Korea’s innovative use

of an Aftercare Ombudsman allowed it to deal with a wide range of vexingissues Ahn was at the center of this, and his book offers a fascinating birds-eye perspective … An important read.”

Danny M Leipziger, Professor of International Business, George Washington University and former Vice President of the World Bank

“Countries around the world seek to attract inwards foreign direct investment(FDI) since such investment typically creates good, high-paying jobs, brings

in foreign knowhow, and facilitates access to foreign export markets While agreat deal has been written on how countries can attract FDI, much less—indeed nothing—has been written on how countries can provide ‘aftercare’for the FDI once it is in place This book, which (inter alia) describes Korea’sAftercare Ombudsman System, is rich in examples and explanations of howand why an FDI Ombudsman really should be part of every nation’s FDI

package I heartedly recommend this book to all scholars as well asgovernment and corporate economists dealing with FDI.”

Richard Baldwin, Professor of International Economics at the Graduate

Institute, Geneva and Founder & Editor-in-Chief of VoxEU.org

“This book based on Korean experiences presents innovatively empiricalaxioms for why business grievances for foreign investors in host economiescontinue to arise and argues for the necessity of an aftercare system to drawreinvestment from foreign investors already in place The author eloquentlysuggests that a successful aftercare service should be connected withgovernment deregulation efforts for a better business climate and pins thisdown explicitly in the investment chapter of free trade deals or internationalinvestment agreements to mitigate rising investor-state disputes….Indispensable.”

Jang Hee Yoo, Member of Korea National Academy of Sciences and Professor Emeritus of Economics at Ewha Woman’s University

“Professor Choong Yong Ahn is really an unsung hero of the Koreaneconomy Much has been written and said about the miracle of the Koreaneconomy, but Professor Ahn was on the front lines constantly battling forreform and liberalization of a very tight regulatory system that was chokingforeign investment opportunities in Korea His efforts as the ForeignInvestment Ombudsman had a remarkable effect on growth in Korea Theaftercare system can be helpful for any country to make opportunitiesavailable to foreign investors.”

Jeffrey Jones, International Lawyer at Kim & Chang and Board Chairman of

American Chamber of Commerce in Korea

“In our first Investment Advisory Series publication back in 2007, UNCTADrecognized the Foreign Investment Ombudsman (FIO) system of Republic ofKorea as a best practice That same year, FIO received a joint UNCTAD-WAIPA Award This book provides an excellent account of the history andcontributions made by the aftercare Ombudsman to improving investmentclimate in Korea The Korean experience is a highly valuable reference toFDI seeking economies and effective measures for cross-border investmentfacilitation.”

James X Zhan, Director, Investment and Enterprise, and Lead, World

Investment Report at UNCTAD

South Korea and Foreign Direct

Investment

This book examines Korea’s foreign direct investment policy dynamics andpoints out the importance of mutual synergy between multinationalcorporations and their host countries in a win–win framework and theincreasing importance of this in a post-pandemic world

A multitude of case studies show many of the business difficulties foreigninvestors in Korea face, and how the Foreign Investment Ombudsman hasintervened to resolve each one The book addresses Korea’s challenges andefforts to become a truly preferred FDI destination through active FDIinducement and effective aftercare services Investigating the ambivalentattitude toward foreign direct investors and foreign migrants in anincreasingly globalizing world, the author also analyses the issue ofxenophobia The book demonstrates empirically that appropriate and timelyaftercare services can serve as not only a robust facilitator for cross-borderinvestment but also a preventer of undesirable friction between foreigninvestors and host economies, before disputes become serious legal matters.Finally, it draws policy implications toward a liberal investment order postCOVID-19

The book will be of interest to policymakers, investors, and researchers onKorean and East Asian economic studies, FDI promotion, and deregulationfor a better business environment

Choong Yong Ahn is a distinguished professor at the Graduate School of

International Studies at Chung-Ang University in South Korea He served asPresident of Korea International Economics Association, President of theKorea Institute for International Economic Policy, Chair of the APEC

Economic Committee, Foreign Investment Ombudsman, Civilian Chair ofKorea’s Presidential Regulatory Committee, and Chairman of the KoreaCommission of Corporate Partnership and has written extensively on EastAsian economic integration and comparative development models.

Routledge Studies on Think Asia

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Policy Dynamics and the Aftercare Ombudsman

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In Memory of

My Mother

2.3 Shift in Korea’s FDI policy and FDI performance Asian financial crisis (1998)

post-2.4 Korea’s drive toward a regional business hub

3.4 Taxation and custom tariffs raise frequent grievances

3.5 Labour relations cause grievances

3.6 Outdated, opaque, and hidden regulations continue to raise grievances

3.7 Incentive provisions contain problems

3.8 Preemptive outreach services for foreign investors

4.2 Global recognition of Korea’s Ombudsman System

4.3 Korea’s challenges toward an FDI-friendly business hub 4.4 Policy implications for Korea’s drive to a frontier high-tech economy

4.5 Policy implications for FDI-seeking economies

4.6 Policy implications for GVC-intensive FDI post-Covid-19 4.7 Conclusion

Notes

References

Index

1.3Trend of world inward FDI

1.4Share of different financing components in world FDI inflows, 1995–2004

1.5Trends of inward FDI by newly entering and existing MNEs in Korea

2.1Essential ingredients for Korea’s initial outward-looking growth model

2.2Multi-layered SMEs in pyramid structure relative LCs in Korea

2.3Wage disparity between LCs and SMEs

2.4Factor contributions to declining potential growth rate

2.5Relative labour productivity of LCs versus SMEs and services versusmanufacturing in Korea compared to OECD average

2.6Yearly number of labour disputes in Korea (2010–2019)

2.7Incentive systems for FDI inducement

2.8The UNCTAD-WAIPA recognition trophy

3.1Organization of FIO at KOTRA

3.2Global value chains in East Asia: the case of Fuji Xerox

4.1Adaptive application of Rugman’s FSA and CSA matrix to Korea

4.2Smile curve of GVC-based semiconductor

1.1 Factors for business difficulties faced by foreign-invested companies

1.2 Grievance resolution cases by category (1999–2020)

1.3 Aftercare service space by activity and timeframe

1.4 Three phases of the IIA reform by UNCTAD

2.1 Economic growth, investment, and savings by source

2.2 Contribution of foreign capital to Korea’s economic growth

2.3 Foreign capital inflows by source to Korea, 1962–1992

2.4 Chaebols’ value-added share of Korea’s GDP

2.5 International comparison of top 30 chaebols’ capital structure of

manufacturing

2.6 International comparison of inbound FDI

2.7 Korea’s FDI trends immediately after pro-FDI-inducement policy

2.8 Total number of foreign investors and total amount of FDI in Koreaover 1962–2021

2.9 Korea’s inward FDI stock and firms by country of origin over 1962–2021

2.10Global cross-border M&A type FDI

2.11Inward FDI to Korea by investment type

2.12Korea’s outbound FDI by region in select years between 1990 and 2006

2.13Foreign shares of aggregate market value of listed stock in select years

2.14Relative shares of top five countries for portfolio investment in 2011and 2021

2.15Contributions of foreign direct investors to Korea’s economy

2.16Korea’s inbound and outbound FDI flows, 2005–2021

2.17Annual growth rate of labour, fixed capital formation, and FDI inflows

2.18Korea’s multi-track FTA as on June 2022

2.19Trilateral container shipments among China, Japan, and Korea

2.20Inbound visitors and flights among China, Japan, and Korea

4.1 Foreign delegations that visited Korea’s OFIO in 2013

4.2 Inward FDI flows by industry

4.3 Korea’s top ten export and import items in 2020

4.4 Korea’s strong and weak points as an FDI destination

1.1UNCTAD focus on “Aftercare Services”

1.2Home doctors in Korea’s aftercare services for foreign-investedcompanies

1.3Typologies of MNEs

2.1Customer testimonials

3.1Legal basis for Foreign Investment Ombudsman System

3.2Author’s brief bio

3.3Development vs environmental conservation

3.4Saemangeum reclaiming project

3.5Korea is a top-tier R&D spender in OECD

3.6Transfer pricing and taxation at arm’s length principle

3.7Korea ranks among the highest globally for healthcare access

3.8Supreme court’s ruling on scope of ordinary wage in December 2013

3.9Parkinson’s law

ADR Alternative Dispute Resolution

AHHM Asian Hospital and Healthcare Management

AMCHAM American Chamber of Commerce

APEC Asia Pacific Economic Cooperation

ASEAN Association of Southeast Asian Nations

BITs Bilateral investment treaties

CIFA The Construction Industry Framework Act

CJK China, Japan and Korea

CMI Chiang Mai Initiative

CPTTP Comprehensive and Progressive Trans-Pacific Partnership

EFTA European Free Trade Area

ESG environment, social, governance

FDI Foreign Direct Investment

FEZ Free Economic Zone

FIO Foreign Investment Ombudsman

FIPA Foreign Investment Promotion Act

FIZ Foreign Investment Zone

FKTU Federation of Korean Trade Unions

FTA Free Trade Agreement

GCC Gulf Council Cooperation

GVCs Global Value Chains

GWP Global Warming Potential

HCI heavy and chemical industrialization

ICSID International Court for State and Investor Dispute Settlements

IIA international investment agreement

IMF International Monetary Fund

IPR Intellectual Property Rights

ISDs investor-state disputes

ISDS investor-state disputes settlement

KAIST Korea Advanced Institute of Science and Technology

KATS Korean Agency for Technology and Standards

KCCI Korea Chamber of Commerce and Industry

KCCP Korea Commission for Corporate Partnership

KCS Korean Custom Service

KCTU Korean Confederation of Trade Unions

KFS Korea Forest Service

KHNP Korea Hydro and Nuclear Power

KIEP Korea Institute for International Economic Policy

KINTEX Korea International Exhibition Centre

KIPO Korea Intellectual Property Office

KOTRA Korea Trade Investment Promotion Agency

KRCEA Korea Review Commission for Elevator Accidents

LCs large conglomerates

LNG Liquefied Natural Gas

M&A Merger and Acquisition

MDMC Mountainous District Management Committee

MFN most-favoured-nation

MICE meeting, incentive for tour, convention, and exhibition

MKE Ministry of Knowledge and Economy

MNC Multinational Company

MNE Multinational enterprise

MOSF Ministry of Strategy and Finance

MOTIE Ministry of Trade, Industry, and Energy

NEMA National Emergency Management Agency

NF3 nitrogen trifluoride gas

NVRQS National Veterinary Research and Quarantine Service

OECD Organisation for Economic Cooperation and Development

OFIO Office of Foreign Investment Ombudsman

OTK Odfjell Terminals Korea

PCNC Presidential Council on National Competitiveness

R&D research and development

RCEP Regional Comprehensive Economic Partnership

RIA regulatory impact assessment

RRC Regulatory Reform Committee

SAPA Severe Accident Corporate Punishment Act

SME small- and medium-sized enterprise

TILF trade and investment liberalization and facilitation

TNE transnational enterprise

UNCTAD United Nations Conference on Trade and Development WHO World Health Organization

WTO World Trade Organization

Jagannath Panda

Series Editor: Routledge Studies on Think Asia [Taylor & Francis]

Drawing from his experience serving as Korea’s Foreign InvestmentOmbudsman (FIO) from 2006 to 2014, this book by Choong Yong Ahnpresents an insider’s perspective on foreign direct investment (FDI) policydynamics of South Korea Invoking learnings from cases that he personallyexecuted, the author provides long-lasting insight into policymaking for FDIseeking economies, international investment agencies as well asacademicians decoding foreign trade and investment Importantly, the authorhighlights how the cases he worked on in Korea—ranging across variousdifferent business areas—are applicable in other countries, culminating in sixaxioms he draws pertaining to grievance occurrences and redressals

This timely addition to FDI literature argues that preemptive resolutions ofgrievances by multinational enterprises (MNEs) will allow mitigation ofpotential cases of investor-state dispute settlement thereby filling a key gapvis-a vis systematic research on the topic As Korea aims to become a high-tech business hub while better promoting cross-border FDI, this bookemerges as a guiding map drawing from the author’s practical knowledge ofdomestic and international investment markets, bringing in facets ofmarketplace psychology, investment patterns as well as profit repatriationnetworks The globalized world order continues to depend on vibrant cross-border investment to ensure resilient supply chains and speedy economicrecovery In this context, this book also recommends that an aftercare service

is pinned down explicitly in the investment chapter of free trade deals or

international investment agreements (IIAs) To such an end, this bookprovides a valuable resource base for investors, policymakers and investmentscholars across South Korea, FDI-searching economies, and internationalinvestment advocacy agencies.

In this book, Korea refers to “South Korea” or the “Republic of Korea”because foreign direct investment (FDI) is related to South Korea, one of themost liberalized economies globally, and North Korea is historically one ofthe most closed economies in the world

During my tenure as Korea’s Foreign Investment Ombudsman (FIO)(2006–2014), I heard complaints from many CEOs of foreign-investedcompanies about how Korea is a tough place to do business However, thetruth is that Korea has been recognized as one of the most successful export-oriented economies to participate in global free trade and investment post-World War II As a result, Korea is now one of the world’s top 10 economies,exhibiting a yearly trade volume exceeding one trillion dollars with apopulation of a little more than 50 million Korean MNEs as foreign investorsare visible everywhere, including the United States, EU, China, SoutheastAsia, and Latin America However, Korea’s inward FDI has not matched thelevel of outbound FDI in terms of quantity as well as quality Why? And whyhave MNEs operating in Korea continuously faced business difficulties? Howhas Korea responded to foreign investors’ negative assessment of Korea’sbusiness environment?

United Nations Conference on Trade and Development (UNCTAD), theWorld Bank, and other international investment advocacy agencies indicatedthat aftercare services for MNEs provided by FDI host economies are crucialfor facilitating cross-border FDI However, little research has been done onwhy MNEs continuously have business grievances in their host economiesand how they have been resolved, the nature of aftercare services forgrievance resolution, and how effective they are to resolve them Korea is arare example of a country providing comprehensive and systematic aftercare

services for its MNEs.

This book details the FDI policy dynamics of Korea, many of the businessdifficulties foreign investors in Korea faced despite a well-established openeconomic system, how the FIO intervened to resolve grievances, and Korea’schallenges toward becoming a regional business hub It also highlights theimportance of mutual synergy between a multinational corporation and itshost country in a win–win framework – and the increasing importance of this

in a post-pandemic world This book was born out of a motivation to sharethe real stories of Korea’s effective aftercare services, emerging from theauthor’s experience as an FIO for multinational foreign direct investors, withpolicymakers of FDI-seeking economies, international FDI advocacyinstitutions, and academics interested in Korea’s economic development andFDI regime Between 2006 and 2014, the author was in charge oftroubleshooting a variety of grievances raised by MNEs in Korea

Korea’s aftercare services are presented in the historical context of FDIpolicy evolution, foreign borrowing for economic development to activelyinduce FDI, and from a positive to negative list with Korea’s consistentlyexport-oriented economic management and industrial deepening process Forsome Koreans, including government officials and labour unions, xenophobiaagainst foreign domination of the Korean economy still lingers, which hasresulted in an unfavourable investment climate Foreign investors in Koreacontinue to face business difficulties with everything from business permits,taxation, customs, labour relations, and complex and opaque regulationsdespite Korea’s full liberalization of exports and outbound foreigninvestment However, Korea aims to become a regional business hub toward

an advanced sustainable high-tech economy The book then addresses thechallenges Korea faces on its quest to becoming a regional FDI-inducedbusiness hub, taking advantage of its strategic geographic location in the era

of Asia-Pacific century

The book’s audience include practitioners of FDI-seeking countries,academics interested in Korea’s FDI policy, and economic development andinternational investment advocacy agencies such as UNCTAD, the WorldAssociation of Investment Promotion Agencies (WAIPA), the InternationalCourt for State and Investor Dispute Settlements (ICSID), and the WorldBank Official delegations of UNCTAD, ICSID, and such FDI-seekingcountries as Brazil, Kazakhstan, Tanzania, Vietnam, etc have witnessed how

aftercare services are provided systematically to multinational companies bythe author.

All the visitors expressed their wish to share Korea’s aftercare systeminternationally to facilitate cross-border FDI liberalization and to deepensupply chains while promoting economic growth, technology transfer, andjob creation Indeed, several countries, including Russia, Kazakhstan, andBrazil, have adopted a system like Korea’s FIO system and emulated manyparts of Korea’s Ombudsman institution Some countries are also usingKorea’s aftercare service function as an immediate reference in their policyformulation for a pro-FDI economy

The author has also been encouraged by the sincere acknowledgements offoreign chambers of commerce and the CEOs of many multinationalcompanies in Korea for the aftercare services they received Korea’sOmbudsman services have been recognized by foreign business chambers inKorea, UNCTAD, and WAIPA as well as foreign governments The EUChamber of Commerce and Government of Japan awarded the author anappreciation plaque and medal, respectively, for his contributions to resolving

a number of grievances faced by foreign investors in their countries

Still, little is known as to why grievances have occurred, how they havebeen resolved, and how Korea’s business climate could be improved throughcomprehensive deregulation For these reasons, stories from the field byKorea’s FIO are worth systematically documenting Especially for Korea,which is now deviating substantially from the previous Moon Jae-ingovernment (May 2017–May 2022), as the new Yoon Suk-yeoladministration (May 2022–May 2027) is implementing pro-growth and pro-investment policies through all-out deregulations, in accordance withcampaign promises This book also aims to provide the Yoon administrationwith empirical policy insights, especially with regard to regulatory reformsand the strategic inducement of high-tech FDI

Practical policy implications can also be drawn from Korea’s experiences

on FDI dynamics and its aftercare system The hope is that these stories andpolicy implications will be widely shared with the policymakers of FDI-seeking governments, international cross-border investment advocacyagencies, and academics for trade and investment liberalization andfacilitation (TILF) In a still unfolding Covid-19 pandemic and post-pandemic era, policy prescriptions will help ensure supply chain resilience

across nations while deepening the trade-investment nexus amid protectionistsentiments globally.

I am indebted to a number of experts and colleagues who helped in theproduction of this book I would like to recognize them in two groups Thefirst includes those who provided me with valuable comments and in-depthdiscussions about the conceptual framework of the book and relevant policyinsights while reviewing early drafts The second group includes those whoresolved a variety of grievances filed by foreign investors in Korea with meand provided factual data on and confirmation of the grievance resolutioncases presented in this book

On the conceptual framework of the book and its relevance to FDI jargonacross countries, I am most grateful to Dr Jagannath Panda, Series Editor for

“Routledge Studies on Think Asia” (Taylor & Francis), and an anonymousreferee for early drafts who shared my view that how and why effectiveaftercare systems for inward foreign investors help greatly facilitate cross-border investment and contribute to a country’s sustainable and technologydevelopment, though highly under-researched, is a unique way to verify thepositive aftercare hypothesis They also agreed that the Korean experienceneeds to be shared with FDI-seeking policy makers, practitioners, academics,and international FDI advocacy agencies Special thanks also go to experts inFDI economics and Drs Lee Keun, Lee Chung Min, Kim Wan-Soon, SaKong

Il, Stephen Costello, Yang Jae-Hoon, and Yoo Jang Hee, who did criticalpeer reviews on early drafts to give me highly insightful comments, critiques,and lengthy discussions to draw policy implications for Korea, FDI-searchingcountries, and international agencies

While serving as Korea’s FIO (2006–2014) at the Korea Trade InvestmentPromotion Agency (KOTRA), I benefited greatly from my staff of “homedoctors”, high-level KOTRA career officers, and senior consultants at Invest

Korea, a sister organization of the Office of the Foreign InvestmentOmbudsman (OFIO) The home doctors include Ahn Myung-hyun, Bae Jae-han, Kim Sang-il, Kim Sung-jin, Oh Dong-hwa, Park Bong-kee, Suh Sung-bong, Sul Byung-min, Yoo Jung-ho, and Yoo Young-yeol; KOTRA careerhigh-level officers include Lee Sang-kwang, Oh Hyuck-jong, Lee Kyu-nam,Kim Byung-sam, Lee Kyu-sun, and Kim You-jung; senior consultants ofInvest Korea include Charles Duerden, Todd Sample, Leslie Benfield, andChang Young, who produced columns about the work of the Ombudsman’s

Office for the Invest Korea Journal, either through interviews with me about

each grievance resolution case or through editing the grievance resolutionstories I wrote I am also grateful to Presidents of KOTRA Hong Ki-wha,Cho Whan-ik, Hong Sung-woo, and the late Oh Young-ho, who supported

me wholeheartedly to carry out my duties Chung Tong-soo, Han Ki-won,and Ahn Hong-chul, Commissioners of Invest Korea, helped me resolvepending grievance issues to attract large-scale projects

In particular, many thanks to Yoo Young-yeol for updates on data, publicdocuments, and additional institutional changes to the Ombudsman Systemafter I left the Ombudsman post, Chang Young, who provided valuableeditorial assistance for early drafts with her expertise on Invest Korea and theOmbudsman System, Priyanka Sarkar for early copyediting and ChangYoung-chae for his help mining data Special thanks also go to SaraswathyNarayan and Narayanan Ramachandran for their meticulous work forcopyediting in the pre-production and Gillian Steadman and DorotheaSchaefter in the production stages, respectively

Special appreciation goes to Dr Kim Jin-hyun, former Science andTechnology Minister, and Chung Duck-koo, currently Chairman of the NorthEast Asia Research Foundation and a former Minister of Commerce, Industryand Energy for valuable discussions on the policy environment of FDI andS&T development in Korea and the historical evolution of Korea’s inwardFDI policy, respectively I would like to thank the East Asia Foundation(EAF) for its financial support and the editorial assistance of Kang Chan-kooand Shin Yoon-hee in the preparation of the final manuscript I would alsolike to extend my appreciation to EAF Chairman and former Minister ofForeign Affairs and Trade, Kim Sung-hwan, Global Asia Editor-in Chief DrMoon Chung-in, and Dr Jay W Khim, Chairman and CEO, Global EnergyCorporation, for their encouragement Special appreciation is also extended

to the Korea Foundation for its support to my ensuing work with JagannathPanda on cross-border FDI facilitation in the context of South Korea’srecently declared Indo-Pacific construct Last but not least, I thank my family– Sun Hye, Jae Chul, Ji Yoon, and Jason Joon Kee for their patience andeditorial help.

Choong Yong Ahn

In Bundang, Sungnam-si, Summer, 2023

1 Introduction and overview

DOI: 10.4324/9781003239741-1

1.1 Introduction

In this book, Korea refers to “South Korea” or “Republic of Korea” becauseFDI is obviously related to South Korea, one of the most liberalizedeconomies globally, and North Korea is historically one of the most closedeconomies in the world “South Korea” is used whenever necessary todifferentiate it from the North Since its modern economic take-off in theearly 1960s, Korea has consistently encouraged complete export freedomwith lucrative incentives and outward FDI1 but strictly constrained FDIinflows, maintaining, at best, a lukewarm attitude toward it until the Asianfinancial crisis (1997/98) This was largely due to an emphasis on theindigenous capacity building of domestic firms and a historically rootedxenophobic mindset against foreign domination of the Korean economy withthe fear that national wealth would be taken out of the country, asexperienced during the Japanese colonial rule (1901–1945)

With the enactment of the Foreign Capital Inducement Act (FCIA) in

1961, Korea embarked on a strong interventionist economic developmentpath and a highly restrictive policy toward foreign investment to keep theeconomy in Korean hands and out of foreign, especially Japanese hands.Then, FDI was viewed as a direct threat to Korea’s sovereignty (Beck 1999:223) During the early government-led development period, the Koreangovernment had had highly restrictive FDI policies

As a series of five-year economic development plans proceeded to realize

a sustained high-growth regime, Korean policymakers started to recognizethe positive impact of FDI on the Korean economy in terms of stabledevelopment financing, technology transfers, and knowledge spillovers andalso faced rising foreign pressure, especially from the United States Inresponse, the liberalization process of inward FDI got underway in 1984,when the FCIA was amended from a positive to a negative list system

Despite sporadic revisions of FDI rules in favour of potential direct investors,the investment process remained complicated and tedious However, afterbeing forced to seek financial help from the International Monetary Fund(IMF) to avoid a moratorium in the wake of the Asian financial crisis (Ahn

2001), Korea turned around and started to proactively induce FDI, evenallowing hostile takeovers by foreign investors through a revision of theMergers & Acquisition Law

Given the near exhaustion of foreign exchange reserves, widespreadunemployment, and an unprecedented economic contraction (–6.7 per cent)

in 1998, inward FDI emerged as a panacea for most economic woes Whileactively seeking FDI, Korea did something no other country had done Itanticipated the problems that could arise from domestic protectionism andforeign control of industries To address these problems before they arose, itintroduced the FIO that provides “aftercare services”2 to MNEs3 operating inKorea whenever they face business difficulties in Korea’s businessenvironment UNCTAD (2007) has also emphasized the importance ofaftercare as a core function in investment promotion and cross-borderinvestment facilitation.4

In this book, FDI inducement and aftercare services are viewed as twosides of the same coin to facilitate cross-border investments Ideal FDIusually involves participating in lasting management interest through owning

10 per cent or more of the voting stock,5 joint ventures (JVs), and embracingthe host economy’s shopping list for the transfer of technology andmanagerial expertise Effective aftercare services for MNCs can helpfacilitate their successful startup and development in a host country or region

to maximize their profit-making motivation and enhance their contributions

to local economic development

Foreign affiliates have objectives ranging from market seeking for globalprofit maximization, resource-seeking, supply chain connectivity, localresearch and development (R&D), etc On the other hand, host economieslook for economic growth, technology transfer, and advanced managerialpractices Therefore, “aftercare” needs to be viewed from the perspective of apositive sum game between MNCs and host economies through continuouslyimproving the business environment of host countries UNCTAD indicatesthat aftercare is relatively new and received only in a few countries This

book provides a host of empirical examples of how aftercare services areactually conducted and why they can produce win-win results between hosteconomies and MNCs (see Box 1.1).

Box 1.1 UNCTAD focus on “Aftercare Services”

UNCTAD published the investment advisory series to provide practical

advice and case studies of best policy practice for attracting and benefitingfrom FDI, in line with national development strategies One of theinvestment series publications dealt with “Aftercare” as a core function ininvestment promotion UNCTAD following Young, S and Hood, N(1994) reviewed a wide range of delivery options for aftercare servicesand the challenges involved This book would be a case study forproactive footing of aftercare services viewed specifically from grievanceresolution for MNCs On the definition of aftercare, see the UNCTAD,

Investment Advisory Series A, Number 1, Aftercare: A Core Function in

Investment Promotion, 2007 pp 1–2, and also see Young, S and Hood, N.

(1994): “Designing development aftercares programs for foreign direct

investors in the European Union,” Transnational Corporations, 3(2), pp.

45–72, UNCTAD

Against this backdrop, why was the aftercare service function of Korea’sFIO for foreign investors recognized as important and a best practice? Whatcontribution has the FIO made to Korea’s economy in deepeningglobalization? How have aftercare functions been conducted? How can Koreause grievance resolution cases to overhaul its regulatory regime and become aregional business hub? What implications can be drawn from Korea’sexperiences for FDI-seeking economies and international FDI advocacyagencies?

Specifically, this book (1) presents an overview of Korea’s FDI policydynamics, especially for inward FDI promotion policies that have evolvedfrom largely foreign loan-based development financing to a proactive FDIinducement policy after the Asian financial crisis, (2) tells real field storiesabout aftercare services rendered by the troubleshooter, the presidentially

appointed FIO, to resolve business difficulties for foreign-invested MNCs inKorea, (3) addresses Korea’s challenges and efforts to become a trulypreferred FDI destination for globally well-known MNCs through active FDIinducement and effective aftercare services, (4) shares Korea’s aftercareservice experiences with FDI-seeking economies, especially developing andtransition economies, and (5) draws important policy implications for aliberalized cross-border investment system not only for Korea but also othercountries and international FDI advocacy agencies Implications are alsodrawn for supply chain resilience amid increasingly inward-lookinginvestment trends and looming protectionist sentiments in the Covid-19 eraand beyond.

The upshot of the book is stories about the FIO being a trustworthytroubleshooter for foreign investors in Korea, why MNCs have raisedcomplaints while doing business in an open and global Korea, and how filedgrievances have been resolved I served as the Ombudsman for threeconsecutive terms (2006–2014), during which time my staff consultants and Iresolved a variety of grievances and difficulties by conducting fieldinteractions between foreign investors, Korean government officials and theiradministrative regulators These efforts contributed greatly to inducingreinvestments from firms already in Korea The experiences suggest thateffective aftercare services for MNCs significantly help facilitate cross-border investments for not only Korea but also many FDI-seeking economiesand need to be better emphasized by international FDI advocacy agencies

At present, UNCTAD is also campaigning hard to reduce the probability

of investor-state disputes (ISDs) through international investment treatyreforms This book attempts to empirically demonstrate that appropriate andtimely aftercare services can serve as not only robust facilitators for cross-border investment but also as preventers of undesirable friction betweenforeign investors and host economies, before disputes become serious legalmatters

The book’s key message is that pre-emptive aftercare services for foreigninvestors are likely to facilitate cross-border investments by inducingreinvestments and helping reduce time-consuming and costly investor-statedisputes settlement (ISDS) between host economies and MNEs by realizingthe traditional Korean saying that “a preemptive single stitch can save nine.”

In recent years, Korea has been carrying out intensive knowledge-sharing

programmes with developing economies on a wide range of its developmentexperiences with relevant policy tools Korea’s FDI-related aftercare servicescould also be widely shared with FDI-seeking economies as a part of Korea’sODA programmes for developing nations They could also be shared withinternational organizations, chambers of commerce, law firms, andmultinational companies directly or indirectly dealing with cross-borderdirect investments Through its knowledge-sharing programmes, Korea canalso renew its determination to pursue regionalism as well as multilateralismand participate in increasingly deepening regional value chains through cross-border investments for sustainable growth.

1.1.1 Negative assessment of inward FDI environment

Korea used to be one of the poorest agrarian economies in the world, being anewly independent nation after World War II in 1945 but suffering from thedevastating Korean War (1950–1953) Since the early 1960s, Korea pursued

an export-oriented development strategy to escape a vicious cycle of poverty

It relied heavily on foreign borrowings rather than FDI to finance the initialcapital formation needed for the late industrialization of its backwardeconomy (Ahn 1998, 1999) As a newly independent nation, Korea feared theloss of national economic sovereignty, which was at the whim of foreigncompanies

With a consistently outward-looking trade and economic policy systemunder a foreign debt financing strategy, Korea was able to emerge as arepresentative of East Asia’s high-performing economies6 in a relativelyshort period of time, which is well noted in the World Bank’s seminal EastAsian Miracle study (1993) However, the Asian financial crisis that erupted

in 1997/98 caused a number of East Asia’s miracle economies to undergo anunprecedented and humiliating economic downfall due to a shortage offoreign exchange reserves to service their heavy foreign borrowings Koreawas one of the last countries to be affected by the Asian financial crisis

During the high growth period until the Asian financial crisis of 1998,Korea had accumulated an unseen amount of short-term foreign debt Toavoid a potential moratorium on its heavy short-term foreign debts during theAsian financial crisis, Korea signed on December 3, 1997, an agreement withthe IMF to seek the largest-ever financial bailout package under stringent

conditionality.7 In compliance with the IMF’s comprehensive reform agendaand to trigger a quick economic recovery without foreign debt financing,Korea made a dramatic shift from foreign loan-based development financing

to a proactive FDI inducement system with lucrative tax and locationincentive initiatives for potential foreign direct investors (Ahn 2001a)

At the outset of the shift to proactive FDI inducement, Koreainstitutionalized an aftercare service function for foreign direct investorsthrough the FIO system, moving closer to becoming a more globalized openeconomy This helped Korea implement TILF measures, which isemphasized in open economic forums like APEC

However, despite the abrupt transition to an active FDI-seeking economydue to unprecedented external financial shocks, Korea’s businessenvironment for foreign firms has not yet met global standards and remainshighly unfavourable to foreign companies in many respects, as identified in

an annual grievance survey conducted by the Office of the FIO Majorreasons include: (a) a lack of labour market flexibility, with strong labourunion activities accompanied by high wages, (b) a lack of transparency andpredictable tax administration, (c) a lack of legal and administrativecoherence, and (d) arbitrary and ad hoc applications of existing and outdatedregulations and invisible barriers to discriminate against foreign investors.According to a 2021 survey of 155 CEOs of globally well-known MNCswith 100 plus employees (Table 1.1), the negative factors have not reallyimproved They identified similar negative factors (the unpredictability of thepolicy environment, excessive regulations, high wages, and labour relations)

as the main culprits of an unfriendly foreign business environment Withinlabour-related difficulties, the forced shortening of work hours was shown to

be the most difficult factor In this regard, Korea lags quite behind Singapore,the Netherlands, and Hong Kong in terms of being a fully liberalizedinternational business environment

Table 1.1 Factors for business difficulties faced by foreign-invested

High tax and quasi-tax 0.5 Strikes and others 12.5

Note: *Newly legislated law to enforce mandatory 52 working hours per week.

Source: MNEs’ CEO Survey on business conditions in Korea, Chosun Ilbo

In addition, perhaps more fundamentally, there exists a still lingeringxenophobic mentality in many government officials and a substantial number

of the general public against foreign direct investors, viewing them as onlyshort-term profit seekers who take national wealth out of the country In thehistorical context, many Koreans still do suffer from foreign-deprivationlegacies stemming from numerous foreign invasions over thousands of years,the traumatic oppression and pain of being plundered for their wealth andproperty, the sense of being pillaged during the colonial annexation to Japan(1910–1945), and the devastating consequences of the Korean War (1950–1953)

Despite Korea’s remarkable socio-economic transformation, some of theold attitudes and thought processes persist Given the rather tragic history ofKorea and constant invasion by its neighbours, Jones (2021), the Chair of theBoard, American Chamber of Commerce in Korea and a residentinternational lawyer, also observed:

It is no wonder that there is a fear of foreign domination and the “victim’s mentality” that colors Korean thinking and

policies Less so today, but certainly, Koreans desired to be

recognized by foreigners and wanted to receive their

accolades At the same time, however, they feared their

domination, and barriers were erected to keep foreigners and foreign capital at a distance.8

Furthermore, Koreans are highly homogeneous in terms of race, culture, andlanguage and tend to treat citizens as temporary foreign workers, even NorthKorean defectors, and migrant Chinese Koreans who went to theNortheastern provinces of China during the Japanese colonial period and laterbecame Chinese citizens as second-class Koreans married to foreigners do

not easily mingle with others in society.

Although a racial identity and homogenous culture is a source of nationalpride, it has also served as a debilitating obstacle toward Koreansintermingling with foreign ideals and cultures (Noland 2005) An earliersurvey of 47 CEOs of foreign companies doing business in Korea conducted

by Kim and Lee (2007: 145) confirmed that “foreign CEOs are feeling thechill wind of xenophobic attitudes toward making a comeback … Thechallenges Korea currently faces are by no means limited to institutional andpolicy reforms but rather entrenched in an anti-globalization mindset stillshared by all sectors of society.” Xenophobia is still visible in many aspects

of Korean society

Despite the pro-inbound FDI policy shift, Korea’s yearly outbound FDIhas been consistently far greater than its inbound FDI Korea’s majorcompanies, including Samsung, Hyundai, SK, and LG, have been very activealmost everywhere in the world to take advantage of huge overseas markets,including former socialist economies, natural resource availability, andcheaper labour costs Koreans are proud of the remarkable performance ofKorean MNEs abroad and the huge profits they repatriate However, Koreanshave a notably lukewarm attitude toward foreign firms when it comes toinbound FDI, which is often viewed as a mechanism for foreign firms to takenational wealth

With about 70 per cent of Korea’s 100,000 sq km of land filled withmountains, rivers, and one of the densest populations in the world (51million), a number of Koreans ask why Korea needs to provide portions ofprecious land to foreign businesses – and with lucrative incentives at that –and why foreign takeovers of Korea’s promising companies need be allowed.Many Koreans and some civic organizations tend to be chauvinistic aboutforeign ownership of free industrial zones and foreigners taking overpotential national hidden champions for reasons beyond security Many claimdomestic companies should receive similar incentives, which are exclusivelydesigned for foreign investors

Many Koreans are also uneasy about local indigenous firms or “nationalfirms” being taken over by foreign companies, especially through hostileMergers and Acquisitions (M&As) for quick profits followed by a departurefrom Korea Some called it the “eat and run practice” of foreign firms Thisattitude contradicts Koreans’ praise for Korea’s successful outbound

domestic firms, which transfer huge profits home from their overseasbusiness operations.

While serving as the Ombudsman, the author realized that many Koreans,especially policymakers and administrators dealing with inward FDI, aredeeply entrenched in this type of nationalistic and xenophobic mindset.Korea’s preference for greenfield (GF) FDI by establishing new productionfacilities over M&A-type FDI through a partial or full transfer of ownership

of existing assets is a clear symptom of this For example, between 1999 and

2006, M&A-type FDI in Korea accounted for 34.5 per cent of total FDIinflow, just half of the global average of 66.1 per cent.9 M&A-type FDIinvolves the ownership transfer of even just-established high-tech start-upsfounded by Koreans to foreign companies

However, M&A-type FDI can generate win-win outcomes between MNEsand host economies Above all, foreign investors waste no time doingbusiness in their host economies once the legal acquisition is completed.They can shorten the time it takes to start a new business and promote marketcompetition Host economies can then learn rather quickly new managerialskills at arm’s length if the investors remain in Korea for a long time

In an increasingly globalizing world, it is a great challenge for Koreans toclose this perception gap on inward FDI, especially M&A type, andrecognize the positive impacts of quality inbound FDI on the job creation,technology transfer, and effective supply chains needed for Korea’scompetitive resilient economy In line with the fourth industrial revolution,Korea also needs to target more digital service and R&D-oriented FDI toupgrade its economic structure for a more competitive economy in the years

to come

For Korea to realize a truly outward-looking liberal economy, it needs toprovide a level-playing field for domestic firms as well as internationalbusinesses with non-discriminatory and national-treatment principles Giventhe rapid economic growth of China in the wake of the emergent AsianCentury, Korea attempts to take advantage of its geo-economic locationbetween huge “ocean economies” and “continental economies” In thiscontext, the book also attempts to provide a broad set of policy implicationsnot only for Korea’s long quest to become an international business-friendlynation but also for emerging economies attempting to induce FDI for