Plunging Foreign Investment to Bottom-Out in 5 Years

Foreign investment in Korea has rapidly decreased this year. In addition to various adverse factors such as contracted domestic demand, rising crude oil prices in the international market, and a deteriorated trade balance, more wrinkles to the economy have been seen.

According to a foreign investment report in the 1st Quarter released by the Ministry of Industry and Resources on April 4, inbound foreign investment dropped to $1,108 million on the report basis showing a 48.4% decrease from $2,149 million in the same period of last year.

This performance was the smallest in 5 years since $572 million in the 1st Quarter of 1998 right after the foreign exchange crisis. After the low of 63.7% for three months (Oct. to Dec. of last year), two consecutive quarters in the past have also displayed the downturn.

Lee Byung-ho, commissioner at the Ministry, analyzed, “The results are caused by the bleak investment climate attributed to the Iraq war, retreating world businesses and the recent NK nuclear standoff.”

The decreasing trend from U.S. investment was outstanding among others at 71.7% as compared to the same period of last year. Accordingly, the share of U.S. investment decreased to 32.1% from 58.5% (a 26.4% decline), while investment from European Union countries was $355 million, showing a 24.0% decrease. On the contrary, Japan raised its amount to $160 million or 6.1% as a result of concentrating on investment in parts and material industries in the areas of machinery, chemicals, and electronics.

Ha Byung-gi, senior fellow at the Korea Institute of Economy and Trade, pointed out as follows: “As far as the unstable factors in the external sector are sustained, it is desirable to reduce adverse domestic factors and refrain from measures weighing on domestic enterprises for a while.”

The above Ministry expects the investment environment to improve with the end of the Iraq War.

Furthermore, stimulus measures will be sought for foreign investment such as cash subsidy arrangements, and returning a part of investment amounts in cash through the revision of foreign investment promotion laws.

Ja-Ryong Koo bonhong@donga.com