2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2011
Report

Overview

The Republic of Korea (ROK) enjoyed six percent growth in 2010 and its benchmark stock index, the KOSPI, began 2011 at record high-levels. Many credit the ROK’s strong rebound from the global economic crisis to fundamental reforms made in the aftermath of the 1997-98 Asian financial crisis, when Korea made rapid progress in reforming its financial institutions and capital markets, sold its interest in a number of large, high-profile companies to foreign investors, and many Koreans in general began to see more foreign investment as something positive for the nation's development. In addition, the Korean government took steps to strengthen competition policy and enacted measures to enhance foreign investment incentives, and to allow non-Koreans to own land and real property. President Lee Myung-bak has made foreign direct investment an important part of his administration's growth strategy. While there was a dip following the global financial crisis, in-bound flows quickly recovered and rose from USD 11.5 billion in 2009 to USD 12.9 billion in 2010. Inbound investment in the manufacturing sector increased by 75.6 percent from 2009 while the investments into service industries dropped about 18 percent from a year before. Noteworthy improvements in the protection of intellectual property – recognized by the removal of the ROK from the Special 301 Watch List in 2009 – continue to improve the foreign investment climate. The ROK’s role as host of the 2010 G20 served to burnish the ROK's reputation as a favorable destination for foreign investment.

The United States retains the largest single-country share of foreign direct investment (FDI) in Korea, totaling USD 43.8 billion or 25.2 percent of Korea's total stock of FDI since the 1960's. Japan has invested USD 26 billion (14.8 percent of the total) followed by the United Kingdom with USD 10.7 billion (6.2 percent). Overall, the inbound FDI increased 12 percent year on year in 2010, to USD 12.9 billion on a filing basis. The financial, transportation and other service sectors are expected to absorb the majority FDI in Korea in the near future, largely through mergers and acquisitions (M&A), in line with global trends.

After Korean financial markets bottomed out in March 2009, foreign portfolio investment has been resurgent. At the end of 2010, foreign shareholders owned 32.9 percent of Korean Stock Exchange stocks and 10.3 percent of the tech-heavy KOSDAQ Index shares.

The environment for FDI in Korea would benefit from an improvement in the consistency of the ROKG’s interpretation, transparency and timeliness in the application of regulations. These regulatory issues, such as a set of newly introduced capital control measures, can discourage FDI by creating uncertainty for investors and fostering an impression that Korea remains hostile to foreign investment. Although Korea boasts a hard-working, educated and highly productive workforce and high levels of institutional labor protections, foreign investors cite volatility in labor-management relations as an issue that can hamper direct investment. The highest levels of the Korean government remain committed to maintaining a welcoming environment for foreign investors, ensuring a "level playing field" for foreign investors, and reforming labor laws.
The Korea-U.S. (KORUS) Free Trade Agreement (FTA) promises to be a major step to enhance the legal framework for U.S. investors operating in Korea. All forms of investment would be protected under the FTA, including enterprises, debt, concessions and similar contracts, and intellectual property rights. With very few exceptions, U.S. investors will be treated as well as Korean investors (or investors of any other country) in the establishment, acquisition, and operation of investments in Korea. In addition, these protections would be backed by a transparent international arbitration mechanism, under which investors may, at their own initiative, bring claims against a government for an alleged breach of the investment. Submissions to investor-State arbitration tribunals would be made public and hearings would be open to the public.

General Openness to Foreign Investment

The Korean government's attitude toward foreign direct investment is positive and senior policy makers clearly realize the value of FDI. President Lee Myung-bak champions a foreign investment-friendly philosophy and has taken important steps to reverse the former Roh Moo-hyun government's (February 2003-February 2008) ambivalent attitude toward foreign investment. FDI has since rebounded to USD 11.7 billion in 2008, USD 11.5 billion in 2009, and USD 12.9 billion in 2010.

Despite these improvements and attitude changes, however, FDI in Korea is still at times subject to insufficient regulatory transparency, including inconsistent and sudden changes in interpretation of regulations, high labor costs, an inflexible labor system, underdeveloped corporate governance, and lingering economic domination by the country's remaining conglomerates "chaebol".

Korea's Foreign Investment Promotion Act (FIPA) and related regulations categorize business activities as either open, conditionally or partly restricted, or closed to foreign investment. Restrictions remain for 29 industrial sectors, three of which are entirely closed to foreign investment. The Korean government reviews restricted sectors from time to time for possible further openings. According to the Ministry of Knowledge Economy (MKE), the number of industrial sectors open to foreign investors is well above the OECD average.

FIPA features include:

  • Simplified procedures, including those for FDI notification and registration;
  • Expanded tax incentives for high-technology FDI;
  • Reduced rental fees and lengthened lease durations for government land (including local government land);
  • Increased central government support for local FDI incentives;
  • Establishment of “Invest Korea,” a one-stop investment promotion center within the Korea Trade Promotion Corporation to assist foreign investors;
  • Establishment of an Ombudsman office to assist foreign investors.

MKE published a 2009 Consolidated Public Notice, updating new code numbers and titles for business sectors in accordance to the ninth revision of the Korea Standard Industry Code (KSIC). According to the 2009 Notice, the number of KSIC industrial classifications of business sectors increased from 1,121 to 1,145 and by the reclassification, business sectors where foreign investment is restricted increased from 28 to 29.

The following is a current list of Restricted Sectors for Foreign Investment. Figures in parentheses denote the Korean Industrial Classification Code:

Completely Closed

  • Nuclear power generation (35111)
  • Radio broadcasting (60100)
  • Television broadcasting (60210)

Restricted Sectors (partly open not more than 25 percent)

  • News agency activities (63910)

Restricted Sectors (partly open not more than 30 percent)

  • Publishing of newspapers (58121)

Restricted Sectors (partly open less than 30 percent)

  • Hydro electronic power generation (35112)
  • Thermal power generation (35113)
  • Other power generation (35119)

Restricted Sectors (partly open less than 33 percent)

  • Satellite and other broadcasting (60229)

Restricted Sectors (partly open less than 49 percent)

  • Program distribution (60221)
  • Cable networks (60222)
  • Wired telephone and other telecommunications (61210)
  • Mobile telephone and other telecommunications (61220)
  • Satellite telephone and other telecommunications (61230)
  • Other telecommunications (61299)

Restricted Sectors (partly open not more than 50 percent)

  • Farming of beef cattle (01212)
  • Inshore and coastal fishing (03112)
  • Transmission/distribution of electricity (35120)
  • Wholesale of meat ( 46312)
  • Coastal water passenger transport (50121)
  • Coastal water freight transport (50122)
  • Scheduled air transport (51100)
  • Non-scheduled air transport (51200)
  • Publishing of magazines and periodicals (58122)

Open but Regulated under the Relevant Laws

  • Growing of cereal crops and other food crops except rice and barley (01110)
  • Domestic commercial banking except special banking area (64121)
  • Asset management service (64201)

In categories open to investment, foreign exchange banks must be notified in advance of applications for foreign investment. (All Korean banks are permitted to deal in foreign exchange, including branches of foreign banks.) In effect, these notifications are pro-forma, and approval can be processed within three hours. Applications may be denied only on specific grounds, including national security, public order and morals, international security obligations, and health and environmental concerns. Exceptions to the advance notification approval system exist for project categories subject to joint-venture requirements and certain projects in the distribution sector.

Relevant ministries must still approve investments in conditionally or partly restricted sectors. Most applications are processed within five days; cases that require consultation with more than one ministry can take 25 days or longer. Korea changed its procurement law effective in 1997, to comply with its accession to the WTO Government Procurement Agreement. The Government's procurement law no longer favors domestic suppliers over foreigners, but some implementation problems remain.

Restrictions on foreign ownership of public corporations remain, although ownership limit levels have been raised. Currently, foreign ownership is limited for government-controlled utilities. Foreign ownership in Korean telecommunications companies and cable networks is limited to 49 percent. The Korean government intends to privatize many of the remaining state-owned corporations, but this process was slowed by the global financial crisis.

The Ministry of Strategy and Finance (MOSF) administers tax and other incentives to stimulate advanced technology transfer and investment in high-technology services. There are three types of special areas for foreign investment -- Free Economic Zones, Free Investment Zones and Tariff Free Zones -- where favorable tax incentives and other support for investors are available (see Section VI.)

A Korean government initiative to encourage research and development (R&D) in strategic industries -- the New Growth-Driving Forces (NGF) program -- wound down in 2004. In its place the Korean government has increased its R&D budget to local areas from 27 percent to 32 percent to support its 21st Century Frontier R&D Project, designed to raise Korean technology to the level of the G8 countries. Focusing on information technology, biotechnology, nanotechnology and new materials, the Korean government launched development programs in 20 new strategic areas at the end of 2003, at a total cost of USD 3.5 billion. Much Korean government-funded R&D taps the expertise of foreign partners. In January 2009, the government also picked 17 industries as NGF – industries related to the green technology sector, high-tech & fusion sector, and high value-added sector.

From 2004 to September 2010, 24 global companies including Google, Texas Instruments and other U.S. firms opened R&D centers in Seoul. In February 2010, Qualcomm announced it would set up a technology R&D center in the ROK and also invest around USD 4 million in a local digital audio chip maker.

Basic Investment Rights

Conversion and Transfer Policies: The Korean government has substantially removed restrictions on financial transfers into and out of Korea. Prior to 1999, the Foreign Exchange Control Act and associated regulations strictly regulated foreign exchange transactions. The Korean government subsequently liberalized transactions in medium-and long-term overseas borrowings, purchase and sale of local real estate, and trading in over-the-counter (OTC) stocks and bonds.

In 1999, the Foreign Exchange Transaction Act (FETA) fully liberalized all current-account transactions by business firms and banks, and pared down a formerly long list of restricted transactions to five items, most of which cover foreign exchange transactions by individuals. A second-stage liberalization dismantled most of the remaining restrictions in 2001. Only transactions that could harm international peace or public order, such as money laundering and gambling, remain controlled. Three specific types of transactions were not liberalized:

(1) Non-residents are not permitted to buy won-denominated hedge funds, including forward currency contracts;

(2) The Financial Services Commission will not permit foreign currency borrowing by "non-viable" domestic firms; and

(3) The Korean government will monitor and ensure that Korean firms that have extended credit to foreign borrowers collect their debts. The Korean government has retained the authority to re-impose restrictions in the case of severe economic or financial emergency.

Capital account liberalization under the Foreign Exchange Transaction Act (FETA) has also been extensive. All capital-account transactions are permitted unless specifically prohibited. In addition, 72 of the 91 transactions specified by the OECD code of liberalization of capital movements now are permitted. Non-residents may open deposit accounts in domestic currency (won) with maturities of more than one year and may engage in offshore transactions and issue won-denominated securities abroad.

The right to remit profits is granted at the time of original investment approval. Banks control the now pro forma approval process for FETA-defined open sectors. For conditionally or partially restricted investments (as defined by the FETA), approval for both the investment and remittance rests with the relevant ministry.

When foreign investment royalties or other payments are proposed as part of a technology licensing agreement, the agreement and the projected stream of royalties must be approved either by a bank or MOSF. Again, approval is virtually automatic. An investor wishing to enact a remittance must present an audited financial statement to a bank to substantiate the payment. To withdraw capital, a stock valuation report issued by a recognized securities company or the Korean appraisal board also must be presented. Foreign companies seeking to remit funds from investments in restricted sectors must first seek ministerial and bank approval, after demonstrating the legal source of the funds and proving that relevant taxes have been paid.

Expropriation and Compensation: Korea follows generally accepted principles of international law with respect to expropriation. Korean law protects foreign-invested enterprise property from expropriation or requisition. If private property is expropriated, it can only be taken for a public purpose, and only in a non-discriminatory manner. Property owners are entitled to prompt compensation at fair market value. The U.S. Embassy in Seoul is not aware of any cases of uncompensated expropriation of property owned by American citizens.

Dispute Resolution: Serious investment disputes involving foreigners are the exception rather than the rule in Korea. There exists a body of Korean law governing commercial activities and bankruptcies that constitutes the means to enforce property and contractual rights, with monetary judgments usually levied in the domestic currency. Foreign court judgments are not enforceable in Korea.

Although commercial disputes can be adjudicated in a civil court, foreign businesses often feel that this is not a practical means to resolve disputes. Proceedings are conducted in Korean, often without adequate translation. Korean law prohibits foreign lawyers who have not passed the Korean Bar Examination from representing clients in Korean courts. Civil procedures common in the United States, such as pretrial discovery, do not exist in Korea. During litigation of a dispute, foreigners may be barred from leaving the country until a decision is reached. Legal proceedings are expensive and time-consuming and lawsuits often are contemplated only as a last resort, signaling the end of a business relationship.

Commercial disputes may also be taken to the Korean Commercial Arbitration Board (KCAB). The Korean Arbitration Act and its implementing rules outline the following steps in the arbitration process: 1) parties may request the KCAB to act as informal intermediary to a settlement; 2) if unsuccessful, either or both parties may request formal arbitration, in which case the KCAB appoints a mediator to conduct conciliatory talks for 30 days; and 3) if unsuccessful, an arbitration panel consisting of one or three arbitrators is assigned to decide the case. If one party is not resident in Korea, either may request an arbitrator from a neutral country.

When drafting contracts, it may be useful to provide for arbitration by a neutral body such as the International Commercial Arbitration Association (ICAA). U.S. companies should seek local expert legal counsel when drawing up any type of contract with a Korean entity.

Korea is a member of the International Center for the Settlement of Investment Disputes (ICSID). It has also acceded to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). Korea is a member of the International Commercial Arbitration Association and the World Bank's Multilateral Investment Guarantee Agency (MIGA). It is important to keep in mind that Korean courts may ultimately be called upon to enforce an arbitrated settlement.

Performance Requirements and Incentives: South Korea does not maintain any measures notified to the World Trade Organization (WTO) as being inconsistent with (or that are alleged to be inconsistent with) the WTO Agreement on Trade-Related Investment Measures (TRIMs Agreement). Korea ceased imposing performance requirements on new foreign investment in 1989 and eliminated all pre-existing performance requirements in 1992. The ROKG has no requirement that investors purchase from local sources or export a certain percentage of output. There is no ROKG requirement that Korean nationals must own shares in foreign investments or that technology be transferred on certain terms. The Korean government does not impose "offset" requirements on investors to invest in specific manufacturing, R&D or service facilities. There are also no government-imposed conditions on permission to invest.

The Korean government allows the following general incentives for foreign investors:

  • Cash grants for the creation and expansion of workplaces for high-tech business plants and R&D research centers;
  • Reduced rent for land and site preparation for foreign investors;
  • Grants for establishment of convenience facilities for foreigners;
  • Reduced rent for state or public property; and
  • Preferential financial support for investing in major infrastructure projects.

Right to Private Ownership and Establishment: Korea fully recognizes rights of private ownership and has a well-developed body of laws governing the establishment of corporate and other business enterprises. Private entities may freely acquire and dispose of assets; however, the Fair Trade Act may limit cross-ownership of shares in two or more firms if the effect is to restrict competition in a particular industry.

Korea liberalized its property ownership law in 1998. The Alien Land Acquisition Act (as amended) grants even non-resident foreigners and foreign corporations the same rights as Koreans in purchasing and using land. Korea took further steps to liberalize its property ownership laws by implementing the Real Estate Investment Trust (REIT) Act in 2001, which supports sound indirect investments in real estate and restructuring of corporations. The REIT Act allows investors to invest funds through an asset management company, and in real property such as office buildings, business parks, shopping malls, hotels and serviced apartments.

Almost no restrictions remain on foreign ownership of stock in Korean firms. As of 2000, Korean law permits foreign direct investment through mergers and acquisitions with existing domestic firms, including hostile takeovers. Nonetheless, no hostile takeovers have occurred in Korea in part because of the lack of relevant implementation regulations for the Foreign Investment Promotion Act. In addition, the political environment for hostile takeovers remains unfriendly.

Protection of Property Rights (Including Intellectual Property): Korea’s progress on Intellectual Property Rights led to its removal from the Special 301 Watch List in 2009. Korea remained off the Watch List in 2010 and demonstrated continued commitment to strong IPR enforcement. The importance the Korean government places on IPR protection has increased dramatically in recent years as the digitization of Korea’s economy has significantly enhanced the ability to produce and spread unauthorized reproductions of copyrighted material. With Korea’s products and trademarks enjoying global success, Korean creators of intellectual property stand to benefit from improvements in the domestic intellectual property regime. In addition, although significant progress has been made, concerns remain with elevated levels of online piracy, software piracy, book piracy in universities, counterfeiting of consumer products, protection of undisclosed test and other data for pharmaceutical marketing approval, and a lack of coordination between Korean health and IPR authorities to prevent the issuance of marketing approvals for patent infringing products. The KORUS trade agreement includes provisions to address these issues.

The Ministry of Culture, Sports, and Tourism (MCST) amended its Copyright Law in July 2009 to include a “Three Strikes” program, a graduated response regime to confront illegal online file sharing. The provisions are aggressive and strong implementation in 2010 remained one of the year’s most important developments in IPR. Under the amended law, MCST can order online service providers (OSPs) to issue warning letters to users downloading illegal materials or direct users to delete illegal files. In 2010, MCST ordered 40 OSPs to issue 696 warning letters and 5 OSPs to delete files of 43 users. Three warning letters results in a temporary suspension of the user account; three orders to delete files can result in a suspension of certain message boards (that often distribute links to illegal downloading sites). In 2010, MCST ordered 48 OSPs to suspend service for 11 users, but issued no orders to suspend the operation of message or bulletin boards. These actions were the first carried out under the Copyright Act as amended in July 2009.

These MCST orders are issued to OSPs when they do not comply with an earlier “corrective recommendation” issued by the Korea Copyright Commission (KCC). In a notable increase since 2009, KCC’s issuance of corrective recommendations jumped from 35,345 to 85,085.

Separately, under the Information and Telecommunication Network Act, MCST took unprecedented steps to block access to illegal file-sharing sites. MCST issued three separate sets of orders in 2010 to block service to a total of 25 OSPs, most of which were hosted on overseas servers (16 online shopping sites, 7 game servers, and 2 webhard operators). Although many of the sites can migrate to other servers, the action marked an important shift in government efforts to combat piracy. This is the first use of the Telecommunication Act to block access to file-sharing sites, which is usually used to restrict traffic to pornographic or North Korea-related online material.

In the area of software enforcement in 2010, MCST concentrated most its efforts on the corporate sector. MCST raided 1,161 companies for software infringement issues, compared to 809 in 2009. MCST says its inability to tackle both public and private simultaneously is due to staff shortages stemming from a 2008 government reorganization effort. For 2011, MCST and other relevant government agencies have received funding for additional staff that should increase capacity and enable MCST to address software issues across both public and private sectors. In 2011, MCST will hire two more judicial police, bringing the total number to 35. In addition, the KCC, which works in tandem with MCST on a range of issues, will receive nine additional staff that will increase the size of the software enforcement team to 14.

MCST held its second annual 100-day campaign against off-line pirated copyrighted material, known as the “100 Day Seoul Clean Project,” from April until November 2010. MCST plans to make this campaign an annual event. During the 2010 campaign, MCST and Korean law enforcement raided street vendors and stores selling pirated DVDs, CDs, software, and books. According to MCST’s statistics, seizures of pirated material increased to 519,434 illegal items compared with 214,199 in 2009. In addition, MCST investigated Korean university campuses and confiscated 14,661 books, a 24 percent increase from 2009.

MCST also increased the number of IPR-related cases referred to prosecutors in 2010, recommending 539 cases for legal action compared to 312 in 2009. Of the 539 cases, prosecutors secured indictments for 248, the same number as 2009.

The ROKG has demonstrated a renewed commitment to investigating and prosecuting "topsites." Little known to the general public, topsites are computer servers that hold tens of thousands of pirated software, games, music and movie files. ROKG ministries met with music industry stakeholders to discuss investigatory techniques. The ROKG has expressed to US Embassy Seoul its intention to carry out enforcement actions against topsites.

Korean patent law is a “first to file” regime. Although the law is fairly comprehensive and affords protection to most products and technologies, a U.S. company must be registered with the Korean Intellectual Property Office (KIPO) to obtain legal protection. KIPO has amended relevant laws regarding restrictions on patent term extension for certain pharmaceutical, agrochemical, and animal health products that are subject to lengthy clinical trials and domestic testing requirements. An issue of continuing concern, however, has been the lack of coordination between the Korean Food and Drug Administration and KIPO and related issues that have resulted in the granting of marketing approval for unauthorized copies of pharmaceutical products.

Korea’s Trademark Act has been amended to strengthen provisions that prohibit the registration of trademarks without the authorization of foreign trademark holders by allowing examiners to reject any registrations made in "bad faith." Despite this change, the complex legal procedures that U.S. companies must follow to seek cancellation have discouraged U.S. companies from pursuing legal remedies. In particular, problems still arise with respect to "sleeper" trademark registrations filed and registered in Korea without authorization in the late 1980s and early 1990s, when KIPO was still developing a more effective and accurate trademark examination and screening process.

Korean laws on unfair competition and trade secrets provide a basic level of trade secret protection in Korea, but are insufficient in some instances. For example, some U.S. firms, particularly certain manufacturers of chemicals, pet food, cosmetics, and food products, face continuing problems with government regulations requiring submission of very detailed product information, such as formula or blueprints, as part of registration or certification procedures. U.S. firms report that, although the release of business confidential information is forbidden under Korean law, in some instances, government officials do not sufficiently protect this proprietary information, and trade secrets appear to have been made available to Korean competitors or to their trade associations.

Systemic Issues

Labor: According to the Ministry of Employment and Labor (MOEL), there were approximately 25 million economically active persons in ROK with employment rate (OECD standard) of approximately 63 percent as of September 2010. In August 2004, ROK implemented a “guest worker” program known as the Employment Permit System (EPS) to help protect rights of foreign workers, who previously entered ROK as “trainees” and were exposed to most egregious abuses from their employers. Since the mid-1980s, ROK companies began hiring “unskilled” foreign workers to overcome labor shortages in what were termed "3-D'' jobs - the difficult, dirty and dangerous ones that most Koreans shun. The EPS allows employers who cannot hire Korean workers to legally employ a certain number of foreign workers from countries such as the Philippines, Indonesia and Vietnam where ROK maintains bilateral labor agreements. At the year’s end, approximately 220,000 foreigners were said to be working under EPS in manufacturing, construction, agriculture, livestock, service and fishery industries.

The law provides workers with the right to associate freely and allows public servants to organize unions. In January, the labor law was amended to authorize union pluralism starting in July 2011. The ratio of organized labor to the entire population of wage earners in 2009 was approximately 10 percent. The country has two national labor federations, the Korean Confederation of Trade Unions (KCTU) and the Federation of Korean Trade Unions (FKTU), and an estimated 4,886 labor unions. The KCTU and the FKTU affiliated with the International Trade Union Confederation (ITUC). Most of the FKTU's constituent unions maintained affiliations with international union federations.

The law provides for the right to collective bargaining and collective action, and workers exercised these rights in practice. The law also empowers workers to file complaints of unfair labor practices against employers who interfere with union organizing or who discriminate against union members. The National Labor Relations Commission can require employers found guilty of unfair practices to reinstate workers fired for union activities. The law permits public servants to organize trade unions and bargain collectively, although it restricts the public service unions from collective bargaining on topics such as policy-making issues and budgetary matters.

Workers in export processing zones (EPZs) have the rights enjoyed by workers in other sectors, and labor organizations are permitted in the EPZs. However, foreign companies operating in the EPZs are exempt from some labor regulations, including provisions that mandate paid leave, obligate companies with more than 50 persons to recruit persons with disabilities for at least 2 percent of their workforce, encourage companies to reserve 3 percent of their workforce for workers over 55 years of age, and restrict large companies from participating in certain business categories.

The Labor Standards Act prohibits the employment of persons under age 15 without an employment authorization certificate from the MOEL. Because education is compulsory through middle school (approximately age 15), few employment authorization certificates were issued for full-time employment. To obtain employment, children under age 18 must obtain written approval from either parents or guardians. Employers must limit minors' overtime hours and are prohibited from employing minors at night without special permission from the MOEL.

The minimum wage is reviewed annually. This year, labor and business set the minimum wage at 4,110 won (approximately $3.50) per hour, which was a 2.75 percent increase from last year. This increase was in line with 2.75 percent increase in the minimum cost of living. The Labor Standards Act also provides for a 50 percent higher wage for overtime.

The government sets health and safety standards, and Korea Occupational Safety and Health Agency (KOSHA) is responsible for monitoring industry adherence to these standards. KOSHA conducts inspections both proactively according to regulations and reactively in response to complaints. It also provides technical assistance to resolve any deficiencies discovered during inspections. KOSHA reports on its website descriptions of and statistics on work-related injuries and fatalities on a quarterly basis. As of June, there were 48,066 work-related accidents and 1,028 fatalities, which were 6.3 percent increase and 2.9 percent decrease respectively from the same period last year. KOSHA provides training and subsidies to improve work safety and reduce work-related accidents. Its services are extended to the migrant workers as its training modules and materials are available in 10 languages and disseminated to various worksites.

Contract and other "nonregular" workers accounted for a substantial portion of the workforce. MOEL reported that there were approximately 5.7 million nonregular workers, comprising approximately 33 percent of the total workforce as of August 2010. The MOEL reported that in 2009 nonregular workers performed work similar to regular workers but received approximately 84.3 percent of the wages of regular workers.

Korea passed significant legal reforms in late 2006 to expand protections for non-regular workers. The reforms banned discrimination against these workers and required that non-regular workers employed longer than two years be converted to regular workers.

The two-year rule went into effect on July 1, 2009. In addition, Korean courts have ruled in favor of non-regular workers in several cases and directed employers to convert them to permanent status after two-years of employment. Both the labor and business sectors have complained that the two year conversion law forces many businesses to limit the contract terms of the non-regular workers to two-years and incur the sunk cost for entry of new labor every two years.

Corporate Governance and Investment Decision-Making: Investors and financial markets remain wary of corporate governance in Korea despite significant improvements since the 1997-98 Asian financial crisis. Concerns about corporate governance often reduce the price/earnings ratios to levels lower than comparable companies elsewhere. Korean policy makers acknowledge that foreign investors often exact a "Korea Discount" when dealing with Korean companies or in making investment decisions. As the Chairman of the Korean Free Trade Commission (KFTC) stated in 2005, "the main reasons for the Korea Discount are opaque accounting techniques, less respect for minority shareholders, insufficient openness and excessive control by controlling families." Large gaps continue to exist between the ownership and control of a significant number of firms in Korea, with many traditional "chaebol" conglomerates still controlled by their founding families, despite the family's relatively small ownership stakes. Korea's accounting reform plan and Code of Best Practices are admirable efforts, but more can be done in these areas as well. Increasing participation by foreign investors and stockholders, modernizing business-government relations, and infusing professionalism in the corporate culture could go a long way toward improving corporate governance.

Korea's development strategy in the latter part of the 20th century, which transformed the country from one of the poorest nations in the world to a member of the OECD, created a number of structural legacies that increased the country's vulnerability during the 1997-1998 Asian financial crisis. At that time, Korea's generally weak corporate governance framework was compounded by a history of government-directed financing, creating significant "moral hazard" -- that is, the assumption that government would make good all losses and not permit large companies to fail. This allowed large segments of the corporate sector to become excessively leveraged, increasing vulnerability. Korea responded to the financial crisis by implementing a number of corporate reforms that improved accounting transparency, promoted corporate restructuring, and strengthened the nation's insolvency framework. Nonetheless, corporate governance reforms remain incomplete.

Although the Anti-Monopoly and Fair Trade Act has been amended repeatedly – most recently in March 2009 -- the practical impact of Korea's laws and policies regulating monopolistic practices and unfair competition, however, has been limited by the long-standing economic strength of the chaebol. Management control at the Korean chaebol continues to involve complicated webs of cross-shareholdings among chaebol affiliates, and many chaebol still conduct business based on family and personal connections. Chaebol-government relations can also sometimes influence the business-government dialogue, to the detriment of foreign and small and medium-sized enterprises (SME's). Thus, chaebol influence in the Korean economy may sometimes cause practical business problems for foreign investors. SME suppliers, for example, may be reluctant to deal with foreign firms for fear of jeopardizing a prized chaebol relationship. Obtaining access to credit may be complicated by the privileged relationships competing chaebol enjoy with local banks -- although this is mitigated by the fact that regulations limit a bank's exposure to any single chaebol group's companies to 25 percent of capital, and stipulate that 25 percent of all banks' lending, at least, must go to SME's.

There are several large Korean corporations that have transformed themselves into well-managed multinational corporations that have adopted "best practices" in corporate governance consistent with U.S. and international standards. Some of their "best practices" include more frequent board meetings covering real operational issues; boards with more independent board members and fewer or no founding family members; a nominating committee for the board; financial report certifications; and frequent and substantive outside audits.

Foreign ownership is also playing a significant role in promoting corporate governance reform in Korea. Korean firms with significant foreign investment, for example, are generally understood to be more reluctant to participate in government-sponsored bailouts of troubled firms, impacting the evolution of Korean financial markets. As foreign investors now own about 60 percent of the shares in some of Korea's top companies and nearly 33 percent of stock listed on Korea's main stock exchange, the rights of minority and non-Korean stockholders are becoming more clearly expressed.

Under Korea’s 2005 Securities Class Action Act, minority shareholders are able to file class action suits for manipulation of share prices, false disclosure of information, and accounting malpractice. The first class-action suit was filed in April 2009 by 1700 shareholders against Jinsung, a KOSDAQ-listed maker of machine parts, for losses allegedly caused by accounting fraud. The case settled out of court in January 2010 for approximately USD 2.5 million.

The Korean government is currently implementing an accounting reform plan, taken largely from the U.S. Sarbanes-Oxley Act, aimed at making Korean accounting standards consistent with rigorous international standards. The International Financial Reporting Standards (K-IFRS) will become Korea’s Generally Accepted Accounting Principles by 2011. In parallel, a committee of Korean private sector experts has established a Code of Best Practices in response to a tasking by the finance ministry. The voluntary recommendations included in this Code are in line with OECD principles, and the Korea Exchange (KRX) has reinforced the importance of the Code by requiring that companies listed on the Korea Stock Exchange (KSE) provide information to investors about the extent to which they conform to the Code. Following are some of the key recommendations contained in the Code of Best Practices:

  • Easing of ownership thresholds to allow small shareholders greater rights to inspect company books;
  • Having outside or independent directors make up at least half (rather than a quarter) of the board members of listed companies;
  • Establishing a nominating committee to choose board members, with at least half of the committee consisting of outside directors;
  • Ensuring that outside directors are truly independent, with no interests in the company, the management, or the controlling shareholder;
  • Having the board of directors meet at least once every three months; and
  • Requiring that companies have audit committees consisting of at least three directors, of which two-thirds are outside directors.

Transparency of the Regulatory System: The Korean regulatory environment can pose challenges for all firms, both foreign and domestic. Laws and regulations are often framed in general terms and are subject to differing interpretations by government officials, who rotate frequently. This creates frustrations for foreign investors that are looking for certainty in the Korean market. The KORUS FTA includes many provisions designed to address such issues.

The Korean government may restrict investments that disrupt production of military products or equipment, or if the company the foreigner is investing in exports items that may be later used for military purposes differing from their originally intended use. Foreigners linked to a country or an organization that may pose a threat to national security will also be subject to limitations on their investments in Korean firms. Related government agencies must ask MKE to review the case within 30 days of a foreign investor filing an application for regulatory approval, and MKE needs to make a decision within the following 90 days. Older bureaucratic practices designed to influence the decisions of businesses and investors through prescriptive regulations are sometimes still encountered.

According to Korea's Administrative Procedures Act, proposed laws and regulations (Acts, Presidential Decrees or Ministerial Decrees) should be published and public comments solicited for at least 20 days prior to promulgation. Draft bills are often available on the web sites of relevant ministries, without notice that they have been published. The rule-making process often remains non-transparent, particularly for foreigners. Proposed rules are sometimes published with insufficient time to permit public comment and industry adjustment. For example, regulatory changes originating from legislation proposed by members of Korea's National Assembly are not subject to public comment periods. When notifications of proposed rules are made public, they usually appear in the Official Gazette, but not consistently, and only in the Korean language; thus, much of the 20-day comment period can be exhausted translating complex documentation.

President Lee Myung-bak has made regulatory reform one of the key elements of his economic policy, and progress is expected to be gradually achieved. President Lee established and heads the National Competitiveness Committee to identify measures to improve Korea’s competitiveness, including regulatory reform. Likewise, the Prime Minister’s Deregulation Taskforce Team, the Corporate Resolution Center and the standing Regulatory Reform Committee focus on regulatory reform as well.

Capital Markets and Portfolio Investment: Financial sector reforms are often cited as one reason for the ROK’s rapid rebound from the global financial crisis. Financial sector reforms have aimed to increase transparency and investor confidence, and generally purge the sector of moral hazard. Since 1998, the Korean government has recapitalized the banks and non-bank financial institutions; closed or merged weak financial institutions; resolved many non-performing assets; introduced internationally-accepted risk assessment methods and accounting standards for banks; forced depositors and investors to assume appropriate levels of risk; and taken steps to help end the policy-directed lending of the past. These reforms addressed weak supervision and poor lending practices in the Korean banking system that helped cause and exacerbate the 1997-98 Asian financial crisis.

In the course of stabilizing Korea's banking sector during the Asian financial crisis, the Korean government injected public funds, thereby acquiring de facto ownership of many of Korea's commercial banks -- although it publicly committed to refrain from interfering in bank lending and management decisions, except with regard to prudential supervision. In late 2002, the Korean government began its ambitious plan to re-privatize the banks under its control, with the program initially scheduled to end by the first quarter of 2005. Much of this re-privatization has taken place, although the government continues to own the majority of shares in Woori Bank and minority shares in some other banks. Foreign banks are allowed to establish subsidiaries or direct branches. Further relaxation of regulations has widened foreign access to Korea's capital markets and permitted foreign financial firms to engage in non-hostile mergers and acquisitions of local financial institutions. Currently, foreign interests control three of Korea's eight major commercial banks: Citibank Korea (formerly KorAm Bank); Korea Exchange Bank and SC/Korea First Bank. The National Assembly in 2010 amended the Bank Act to: (1) require banks to have outside directors constitute the majority of directors; and (2) forbid majority shareholders and related individuals from being outside directors.

Korea routinely permits the repatriation of funds, but reserves the right to limit capital outflows in exceptional circumstances, such as situations when uncontrolled outflows might harm the balance of payments, cause excessive fluctuations in interest or exchange rates, or threaten the stability of domestic financial markets. The Korean government did not impose such restrictions either during the Asian financial crisis or the global financial crisis, where sharp capital outflows played a major role. But the government recently put a series of capital control measures under the name of “macro-prudential stability policy” - lowering FX forward-position limits for foreign bank branches in June 2010, re-introducing a withholding tax on foreign investors’ government bond purchases in December and imposing a bank levy on non-deposit financing in foreign currency in the second half of 2011.

Foreign portfolio investors now enjoy good access to the ROK stock market. Aggregate foreign investment ceilings in the Korean Stock Exchange (KSE) were abolished in 1998, and foreign investors owned 32.9 percent of KSE stocks and 10.3 percent of the KOSDAQ as of the end of 2010. The market turnover rate was 292 percent of market capitalization in 2010. Retail investors are extremely active in the Korean stock markets. More than 80 percent of KSE and KOSDAQ retail trading is conducted online. Thus, a large majority of retail investors are day traders, implying a constant source of volatility for the markets. The Korean government permits stock purchases on margin, requiring that transactions be settled within three business days.

Portfolio investors have shown less appetite for the smaller, more volatile, technology-rich KOSDAQ. Since the 1999 collapse of the Daewoo Group in 1999, Korea's largest corporate bankruptcy, the country's bond market has been almost moribund, as sellers have far outnumbered buyers. The total assets of Korea's commercial banks as of the end of September 2009 were 1,185.2 trillion won, or about USD 1.03 trillion.

Short-term interest rates, at around 2.8 percent, remain competitively high. Inflation, meanwhile, remained at 2.9 percent throughout 2010. The spread between short-term money (the overnight call rate) and long-term money (the benchmark 3-year corporate bond rate) rose from its 54-plus basis points maximum in 2007 to 153-basis points in 2008 to 318-basis points in 2009. The spread fell down below 150-basis points late 2010. As a countermeasure against financial instability and potential economic recession, the Bank of Korea (BOK) cut its target rate six times by 325-basis points from 5.25 percent in August 2008 to a record-low level of 2.0 percent in February 2009. The central bank raised rate twice by 25-basis point in July and November last year amid potential risks of inflation in the near future.

County Risk Issues

Political Violence: Legally, the Democratic People’s Republic of Korea (also known as North Korea or the DPRK) and the Republic of Korea (ROK) are in a state of war. There is general peace and stability on the Korean peninsula because of an armistice agreement that has lasted for close to 60 years. From time to time incidents involving military and political provocations have attributed to increased tension between the countries. The unprovoked sinking of a ROK naval vessel by the DPRK in March 2010 and the artillery shelling of an island off the northwest coast of the ROK in November 2010 resulted in increased tensions. Military incidents have remained limited to the area surrounding the five geographically isolated Northwest Islands.

Korea does not have a history of political violence directed against foreign investors. The Embassy is unaware of any politically motivated threats of damage to foreign-invested projects or foreign-related installations of any sort, nor of any incidents that might be interpreted as having targeted foreign investments. Labor violence unrelated to the issue of foreign ownership, however, has occurred in foreign-owned facilities in the past.

Corruption: The law provides criminal penalties for official corruption, and the government generally implemented these laws effectively. According to the Transparency International Global Corruption Barometer 2010, only two percent of South Koreans had paid a bribe to receive attention from at least one nine different service providers (in customs, education, the judiciary, land related services, medical services, the police, registry & permit services, tax authorities, and utilities) in the past 12 months. Of the 21 economies surveyed in the Asia Pacific, ROK enjoyed the lowest percentage along with Australia. The average percentage in the population with experience paying bribes for basic public service in the Asia Pacific was 11 percent. ROK signed the United Nations Convention against Corruption on December 10, 2003 and ratified it on March 27, 2008.

The ROK is also a party to the OECD Convention On Combating Bribery of Foreign Public Officials in International Business Transactions since 1999, and a member of the Asia Pacific Economic Cooperation Anti-Corruption and Transparency Experts Task Force (APEC ACT). The law provides criminal penalties for official corruption, and the government generally implemented these laws effectively. By law, public servants above a certain rank must register their assets, including how they were accumulated, thereby making their holdings public.

There are several government agencies responsible for combating government corruption including the Board of Audit and Inspection, which monitors government expenditures and the Public Service Ethics Committee, which monitors the civil servants’ financial disclosures and their financial activities within their tenure and first few years into their retirement. Since February 2008, the Anti-Corruption and Civil Rights Commission manages the public complaints and administrative appeals on corrupt government practices. The Korean government in 2008 also established a Financial Intelligence Unit and has cooperated fully with U.S. and United Nations efforts to identify and shut down sources of terrorist financing. Transparency International has maintained a National Chapter in ROK since 1999.

International Arrangements

Bilateral Investment Agreements: The United States has a bilateral Treaty of Friendship, Commerce, and Navigation with Korea, which contains general provisions pertaining to business relations and investment. During former Korean President Kim Dae-jung's visit to the United States in 1998, President Clinton and President Kim agreed to negotiate a Bilateral Investment Treaty (BIT) between the two nations. However, negotiations in 1998 and 1999 stalled after the two sides could not resolve differences on certain issues. The Korea-U.S. FTA contains strong, enforceable investment provisions that will go into force if the agreement is approved and implemented.

OPIC and Other Investment Insurance Programs: U.S. investments in Korea are eligible for insurance programs sponsored by the U.S. Overseas Private Investment Corporation (OPIC). OPIC has not, however, guaranteed any U.S. investments in Korea since June 1998, when OPIC reinstated coverage it had suspended in 1991 due to concerns about worker rights. Coverage issued prior to 1991 is still in force. Korea has been a member of the World Bank's (IBRD) Multilateral Investment Guarantee Agency (MIGA) since 1987. The Ruby Tuesday franchise used an OPIC loan in 2005 to open its first restaurant in the ROK.

Foreign Trade Zones and Free Economic Zone

Korea aims to attract more foreign investment by promoting its six Free Economic Zones (FEZ): Incheon (near Incheon Airport, to be completed in 2020); Busan/Jinhae (in South Gyeongsan Province, to be completed in 2020); Gwangyang Bay (in South Gyeongsan Province, to be completed in 2020); Yellow Sea (in South Chungcheong Province, to be completed 2025); Daegu/Gyeongbuk (in North Gyeongsan Province, to be completed in 2020); and Saemangeum/Gunsan (in North Jeolla Province, to be completed in 2030). The FEZs differ from other zones designated for foreign investment in their focus on creating a comprehensive living and working environment with biotechnology, aviation, logistics, manufacturing, service and other industrial clusters as well as international schools, recreational facilities, and international hospitals. In 2009, the National Assembly passed the Special Act on Free Economic Zones to increase tax benefits for investment, increase the FEZ infrastructure budget, and streamline the approval process for land development. On December 28, 2010, the government announced a plan to abolish inefficient, underperforming and unfeasible portions of the nation’s free economic zones (FEZs) as part of its efforts to reorganize the specially created districts. By the plan, the Ministry of Knowledge Economy will remove the FEZ status from 90.51 square kilometers (22,366 acres) within the designated districts by February, accounting for 15.9 percent of the total land in the zones. According to the ministry, the six FEZs have attracted just USD 2.73 billion in investments since 2003 - yet the country has spent 85.4 trillion won (USD 74.3 billion) to promote the areas and build infrastructure in them.

There are also six Foreign-exclusive Industrial Complexes in Korea in different parts of the country, designed to provide inexpensive plant sites, with the national and local governments providing assistance for leasing or selling in such sites at discounted rates. In addition, there are four "Free Trade Zones" in Iksan, Gunsan, Daebul and Masan where companies may pursue their business with government support, but without the usual legal requirements such as approval procedures for export and imports and customs duties. There are also seven Foreign Investment Zones designated by local governments to accommodate industrial sites for foreign investors. Special considerations for foreign investors vary among these options.

A good source of information on Korea's various free trade zone schemes is the government-run "Invest Korea," an inward investment promotion organization under the Korea Trade and Investment Promotion Agency (KOTRA). It can be reached at:

Invest Korea, KOTRA Bldg. 300-9
13, Heolleungno, Seocho-gu, Seoul, Republic of Korea
Tel: (82-2) 3460-7545
Fax: (82-2) 3460-7946/7
http://www.investkorea.org

The Korean government also continues to put significant effort into programs to enhance the quality of life in Korea for foreign investors and their families. There are 45 foreign schools in Korea and two big foreign schools in the Incheon FEZ and Jeju will open their doors in September 2011. (More information is available in a government website, “www.isi.go.kr”.) The government more recently launched three-year programs aimed at enhancing the foreign investment climate in Korea. The Korean government has improved the legal framework for those areas by revising the FEZ Act and the Foreign Investment Act to provide cash grants for foreign investments of more than USD 10 million.

Foreign Direct Investment Statistics

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(USD Millions)

Annual Flow

Cumulative Stock

2008

2009

2010

2010

Total Inward FDI

11,711

11,484

12876

173,585

United States

1,328

1,486

1,974

43,783

China

335

160

414

3,086

Japan

1,424

1,934

2,083

25,975

United Kingdom

1,233

1,953

650

10,699

Other

7,391

5,951

7,756

90,042

Total Outward FDI

36,722

30,406

24,790

232,686

United States

6,233

3,910

3,555

39,262

China

4,587

2,624

2,587

43,401

Japan

639

412

275

3,887

United Kingdom

237

1,936

3,270

8,594

Other

25,026

21,524

15,103

137,542

Source: The Export-Import Bank of Korea and Ministry of Knowledge Economy

Note: This data is based on the notification of cases. The 2010 outflow is data reported for the first nine months of the year.

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