2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report

The Republic of Korea (ROK) experienced 3.6 percent growth in 2011 and its financial markets reflected concerns about global economic instability beginning in early August 2011. Despite market jitters and slowing growth, the ROK has so far weathered the global economic uncertainty and continues to remain a generally favorable destination for foreign investment. In the aftermath of the 1997-98 Asian Financial Crisis, Korea made significant progress in reforming its financial institutions and capital markets. 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. With these changes, most Koreans recognize foreign investment as positive for the nation's development, despite continuing protectionist sentiment among certain elements of society. 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.

Capital inflows quickly recovered following the 2008-09 global financial crisis and rose from USD 11.5 billion in 2009 to USD 13.1 billion in 2010. Inbound foreign direct investment (FDI) rose to USD 13.7 billion in 2011, up 4.6 percent from 2010. Foreign investment in service industries increased 15.4 percent in 2011, but FDI in the manufacturing sector decreased 15.1 percent on the year. Noteworthy improvements in the protection of intellectual property also contributed to a more positive foreign investment climate. The ROK’s role as host of the 2010 G20 also served to burnish the ROK's reputation as a favorable destination for foreign investment.

The United States retains the largest single-country share of FDI in Korea, totaling USD 46.2 billion or 24.6 percent of Korea's total stock of FDI since the 1960's. Japan has invested USD 28.3 billion (15.1 percent of the total) followed by the Netherlands with USD 21 billion (11.2 percent). EU member countries combined have invested USD 64.7 billion or 34.6 percent of the total. The EU contributed the largest share of FDI in 2011, at USD 5.03 billion. The United States recorded USD 2.37 billion of FDI in 2011, while Japan contributed USD 2.28 billion. The IT, financial, logistics, and other service sectors are expected to absorb the majority of FDI in Korea in the near future, largely through mergers and acquisitions (M&A), in line with global trends.

In recent years, foreign portfolio investment has surged. At the end of 2011, foreign shareholders owned 32.9 percent of Korean Stock Exchange stocks and 7.9 percent of the tech-heavy KOSDAQ Index shares.

Improvement in the consistency of the ROKG’s interpretation, transparency, and timeliness in the application of FDI regulations would enhance the investor climate in Korea. Unclear or opaque regulatory decision-making remained a significant concern among foreign investors and can discourage FDI by creating uncertainty for investors and fostering an impression that Korea remains hostile to foreign investment. Investors were also concerned about small but significant interest groups that pressure the government to protect the Korean market from what it perceives as foreign domination. On the labor side, although Korea boasts a hard-working, educated, and highly productive workforce and high levels of institutional labor protections, foreign investors cited volatility in labor-management relations as an issue that can hamper direct investment.

The U.S.-Korea (KORUS) Free Trade Agreement (FTA) entered into effect March 15, 2012, and promises to be a major step forward in enhancing the legal framework for U.S. investors operating in Korea. All forms of investment are protected under the FTA, including enterprises, debt, concessions, and similar contracts, and intellectual property rights. With very few exceptions, U.S. investors will now 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 are backed by a transparent international arbitration mechanism, under which investors may, at their own initiative, bring claims against the government for an alleged breach of the investment. Submissions to investor-State arbitration tribunals are public and hearings would also 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. FDI has since rebounded to USD 11.7 billion in 2008, USD 11.5 billion in 2009, USD 13.1 billion in 2010, and despite the global economic downturn this year, USD 13.7 billion in 2011.

Despite these improvements, FDI in Korea is still at times subject to insufficient regulatory transparency, including inconsistent and sudden changes in interpretation of regulations, underdeveloped corporate governance, high labor costs, an inflexible labor system, and lingering economic domination by large Korean conglomerates, or "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 27 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 2011 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)

· Hydro electronic power generation (35112)

· Thermal power generation (35113)

· Other power generation (35119)

Restricted Sectors (partly open less than 30 percent)

· Publishing of newspapers (58121)

Restricted Sectors (partly open less than 49 percent)

· Satellite and other broadcasting (60229)

· 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)

· 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)

· Radioactive waste collection, transportation, and disposal except radioactive waste management (38240)

· Other inorganic chemistry production except fuel for nuclear power generation (20129)

· Other nonferrous metals refining, smelting, and alloying (24219)

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.)

Measure Year Index/Ranking

Transparency International Corruption Index 2011 5.4 /43

2010 5.4 /39

Heritage Foundation Economic Freedom Index 2011 69.9/31

2010 69.8/31

World Bank Doing Business Index 2011 NA/8

2010 NA/15

Basic Investment Rights

Conversion and Transfer Policies: The 1999 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: The ROK 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. U.S. Embassy 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 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 has remained off the Watch List 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. As the Korea-US Free Trade Agreement was ratified in November 2011, remaining concerns can be addressed on online piracy, software piracy, book piracy in universities, counterfeiting of consumer products, and protection of undisclosed test and other data for pharmaceutical marketing approval.

In 2011, Korea Communications Commission (KCC) passed the Telecommunications Business Act and its presidential decree requiring registration of webhards and P2P with the KCC to address technical challenges related to online copyright enforcement.

The Copyright Law was also amended in June and November 2011 to conform to commitments under the Korea-EU and KORUS FTAs. Subordinate regulations including Presidential and Ministerial Decrees were also amended to implement the Act in 2011. The amendment of the Copyright Act resolved a year and a half of negotiations with rights-holders and results in the extension (from 20 years) to 50 years of copyright protection for works produced between July 1, 1988 and June 30, 1994.


The following are the key changes incorporated into the Copyright amendments in 2011:

· With the exception of works produced between Jul 1, 1988 and June 30, 1994 (see above), copyright protection for all other works has been extended from 50 years to 70 years.

· Clarified the liability of online service providers.

· Banned the use of certain technologies that circumvent protection measures.

· Delineated the protection of temporary copies.

· Introduced the “Fair Use of Copyright Works.”

· Established exclusive publishing rights.

· Banned counterfeit labels.

· Banned the visual recording of cinematographic works at theaters.

· Banned the transmission of broadcasting signals without appropriate legal authority.

· Introduced a system to allow statutory compensation that permits a victim of copyright infringement to choose between compensation for actual damages or statutory damages up to W10 million per work or W50 million.

Under a “Three Strikes” program, MCST can order online service providers (OSPs) to issue warning letters to users illegally downloading materials and require such users to delete illegal files. In 2011, MCST warned 15 OSPs through the issuance of 620 separate warning letters and ordered 15 OSPs to delete files from 220 separate users. Three warning letters results in a temporary suspension of the user account; MCST ordered 4 OSPs to suspend the accounts of 17 users in 2011.

These MCST warning letters and 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 in 2009 to 85,085 in 2010 and to 107,724 in 2011.

Separately, under the Information and Telecommunication Network Act, MCST took unprecedented steps to block access to illegal file-sharing sites. MCST requested Korea Communications Commission to block service to a total of 237 OSPs in 2011, up from 25 OSPs in 2010. Most of the sites were hosted on overseas servers (176 music and film sites, 53 game servers, 5 smart phone webs and 3 book publishing sites). Although many of the sites can migrate to other servers, the action marked an important shift in government efforts to combat piracy. MCST made use of the Telecommunications Act to block access to such illegal file-sharing sites; in the past, the Telecommunications Act has solely been used to restrict traffic to pornographic or North Korea-related online material.

Through the Copyright Protection Center, the MCST deleted 86.3 million illegal online files in 2011 up from 34.4 million files in 2010 and collected and scrapped 269,409 offline items in 2011 compared with 794,308 items in 2010.

MCST held its 4th annual 100-day campaign against off-line pirated copyrighted material, known as the “100 Day Clean Seoul Project,” from April until August, 2011. MCST plans to make this campaign an annual event. During the 2011 campaign, MCST and Korean law enforcement raided street vendors and stores selling pirated DVDs, CDs, software, and books. According to MCST’s statistics, authorities seized 79,909 pirated items. In addition, MCST investigated Korean university campuses and confiscated 13,212 illegally copied books.

MCST also imposed fines on 99 OSPs of W1.034 billion in 2011, up from 89 companies of W752 million in 2010) for not taking technical measures to block the illegal copying of materials.

Other IPR related Laws (Patent Act, Trademark Act, Utility Model Act, Design Protection Act and Unfair Competition Prevention and Trade Secret Protection Act) were amended in 2011 to reflect the U.S.-Korea Free Trade Agreement.

Labor

According to the Ministry of Employment and Labor (MOEL), there were approximately 25 million economically active persons in ROK. The employment rate (OECD standard) of the ROK was approximately 64 percent and the unemployment rate was 3.1 in 2011. In August 2004, ROK implemented a “guest worker” program known as the Employment Permit System (EPS) to help protect rights of foreign workers, who had 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 jobs 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 end of September 2011, approximately 490,000 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 2011 was approximately 10 percent. The country has three national labor federations as the Korea Labor Unions Confederation (KLUC) launched as the third nation-wide network on November 29, 2011. The Korean Confederation of Trade Unions (KCTU) has 2813 labor unions and about 740,000 members and the Federation of Korean Trade Unions (FKTU) has 553 labor unions and 590,000 members. 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 smallest and youngest KLUC has only 70 unions and about 30,000 members, but multiple unions and workers looking for not-militant and not-political trade union would join this group.

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.

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 4,580 won (approximately $4.13) per hour, which was a 6 percent increase from last year. This increase was in line with 3.9 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 September 2011, there were 69,066 work-related accidents and 1,582 fatalities, which were 4.2 percent decrease and 0.6 percent decrease respectively from the same period previous 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 5.77 million nonregular workers, comprising approximately 33.8 percent of the total workforce as of August 2011. The MOEL reported that in 2011 non-regular workers performed work similar to regular workers but received approximately 87.4 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.

The 2010 revision of Trade Union and Labor Relations Adjustment Act (TULRA) entered into force in July, 2011. The revision restricts the numbers of full-time labor union officials and bans employers from paying wages to such officials. The TULRA revision also allowed the formation of new unions, and as a result, 601 new trade unions were formed in 2011.

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. Large gaps continue to exist between the ownership and control of a significant number of firms in Korea, with many "chaebol" (large Korean conglomerates) still controlled by their founding families, despite the family's relatively small ownership stakes. 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.

Although the Anti-Monopoly and Fair Trade Act has been amended repeatedly – most recently in November 2011 -- 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.

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. However, in large part due to rather stringent and complex procedural requirements, only one class-action suit has been filed since the law came into effect.

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) were adopted and implemented during the first quarter of 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. Regulations are sometimes promulgated with only minimal consultation with industry and with only the minimally required comment period. 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.

The World Economic Forum (WEF) 2011 report ranked Korea 24th overall among 142 nations surveyed. The WEF report stressed a need for greater policymaking transparency, ranking Korea 128th in this area.

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. 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 Forex 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 from August 1, 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 7.9 percent of the KOSDAQ (Korean Securities Dealers Automated Quotations) as of the end of 2011. The market turnover rate was 254 percent of market capitalization in 2011. 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 2011 were 1,370 trillion won, or about USD 1.24 trillion.

Short-term interest rates, between 3 and 4 percent, remain comparatively high. Inflation, meanwhile, remained at 4.0 percent throughout 2011. 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 224-basis points in 2008 to 383-basis points in 2009. The spread fell down below 132-basis points in 2011. 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 the rate twice by 25-basis points in July and November 2010 and three times in January, March, and June 2011 amid potential risks of inflation in the near future. Once the central bank noticed the global financial instability in the second half of last year, it had frozen the rate at 3.25 percent even under the high pressure of inflation to maintain national growth potential.

Competition from State Owned Enterprises

Many Korean SOEs continue to exert significant control over certain segments of the economy. By the end of 2002, major SOEs including Korea Telecom (KT), Pohang Iron and Steel Corporation (POSCO), Korea Tobacco and Ginseng Corporation (KT&G), Korea Heavy Industries and Construction Corporation were fully privatized. No SOEs have been privatized since 2002. Today, there are 37 remaining SOEs in Korea.

Former President Roh and current President Lee called off most plans to restructure SOEs for political (conflict with labor unions) and economic (concern about the impact the privatizations would have on the economy in the midst of the global financial crisis) reasons. SOEs thus remain active in the energy, real estate, and infrastructure (railroad, highway construction) sectors. The law has traditionally sought to give SOEs a leading role in these sectors, but over the past several years, the government has increasingly tried to attract more private participation as well, especially in the real estate and construction sectors.

The Public Institutions Management Act gives authority to the Ministry of Strategy and Finance to administer control of these firms, mainly focusing on administrative and human resource management.

SOEs on the PIMA list are required to report to a line minister while the others not on the list report to their independent board of directors. Under the law, the President or line ministers will appoint senior government officials or politically-affiliated individuals as CEOs or directors for those state owned companies. SOEs are explicitly obligated to consult with government officials on their budget, compensation, and key management decisions (i.e. pricing policy for energy and public utilities). For other issues, the government officials informally require the SOEs to consult with them before making decision or report to them afterward.

The Korean government does not provide any official data on SOE market share. The ROKG requires each entity to disclose financial statements, the number of employees, and average compensation figures.

Korea Investment Corporation (KIC) is a sovereign wealth fund established in July 2005 under the KIC Act. KIC is wholly government owned company with an independent steering committee decide that has been delegated the authority to undertake core business decisions. The KIC is on the PIMA list. Korea has no asset management bureau. The KIC is mandated to manage assets entrusted by the Government and the Bank of Korea. Based on the continued increase in entrusted assets and gains realized on investments, assets under management stood at USD 42.9 billion at the end of 2011.

The KIC has no role in the local economy as it has only engaged in overseas investments to date. It is required by law to publish an annual report and to submit its books to the steering committee for review. The KIC is also required to follow all domestic accounting standards and rules. The KIC is reportedly fulfilling these legal obligations.

Corporate Social Responsibility in Korea

Corporate Social Responsibility awareness is growing in Korea, but is still in a nascent stage. Since 2006, the number of South Korean companies publishing CSR reports has increased rapidly. Most Korean companies, however, do not. For those that do report, environmental impact appears to be a primary focus. Korean CSR reflects the continued impact of traditional notions of corporate CSR as charity.

Although there is little to no pressure on foreign firms to engage in CSR efforts, many are becoming more involved in CSR activities.

County Risk Issues

Political Violence: The Democratic People’s Republic of Korea (also known as North Korea or the DPRK) and the Republic of Korea (ROK) technically remain 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. The leadership transition in the DPRK following the death of Kim Jong-Il may be a potential factor to create more geo-political risk near and medium-term in this region.

The ROK 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

Free Trade Agreement: The KORUS FTA, as mentioned earlier, entered into effect March 15, 2012, and it contains strong, enforceable investment provisions.

Bilateral Investment Agreements: The Korea-U.S. FTA supersedes the United States’ bilateral Treaty of Friendship, Commerce, and Navigation with Korea.

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 removed the FEZ status from 90.51 square kilometers (22,366 acres) within the designated districts in 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) 3460-7532
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 52 foreign schools in Korea and one big college (SUNY Korea) in the Incheon FEZ will open its doors in 2012. (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

(USD Millions) FDI Annual Flow and Cumulative Stock

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

2009

2010

2011

Stock

Total Inward FDI

11,484

13,071

13,669

187,254

United States

1,486

1,974

2,372

46,155

EU

5,297

3,196

5,032

64,697

Japan

1,934

2,083

2,284

28,258

China

160

414

651

3,736

Others

2,607

5,404

3,330

44,408

Total Outward FDI

29,973

33,060

36,266

276,950

United States

3,941

5,050

14,032

54,833

EU

2,637

3,928

4,352

49,184

Japan

5,140

7,452

1,521

27,469

China

416

344

210

4,168

Others

17,839

16,286

16,151

141,296

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