SOUTH KOREA: FOREIGN INVESTMENT LIBERALIZATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R001000840002-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: August 19, 2010
• Sequence Number: 2
• Publication Date: September 5, 1984
• Content Type: MEMO

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Central Intelligence Agency
the laws.
Sebul has crafted new measures to liberalize
foreign investment in order to attract advanced
technology from abroad and reduce reliance on
foreign borrowing. The revised rules, which took
effect 1 July, open numerous new areas for foreign
investment and reduce red tape in the approval
process. Foreign investors should find increased
opportunities, particularly in the electronics,
machinery, and transportation industries, the areas
where frictions between Washington and Seoul over
investment issues have been most pronounced. But
the actual impact on investment inflows will depend
heavily on how working-level bureaucrats implement
The Liberalized Foreign Investment Policy
Revisions to the Foreign Capital Inducement Law (FCIL)--
which has governed foreign investment since 1962--eliminate most
barriers to direct foreign investment by:
Washington, D. C.20505
DIRECTORATE OF INTELLIGENCE
5 September 1984
South Korea: Foreign Investment Liberalization
Summary
-- Scrapping a system that listed only certain industries as
open to foreign investment and precluded all others in
This memorandum was prepared byl I Korea Branch,
Northeast Asia Division, Office of East Asian Analysis.
Information available as of 21 August was used in its
preparation. Comments and queries are welcome and may be
directed to the Chief, Korea Branch, Northeast Asia Division,
OEA,
EA M 84-10162
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favor of a negative list system. Now, all industries are
open to foreign investment other than those specifically
proscribed by Seoul.
-- Replacing the requirement for prior approval for
technology transfer with an after-the-fact notification
system.
-- Increasing the overall share of industrial sectors
allowing foreign investment from 44 to 67 percent. 25X1
We believe that the new system of listing only those
industries specifically closed to foreign investment should
clarify heretofore murky guidelines and will permit investment in
attractive, but previously restricted, areas. Seoul is placing a
high priority on attracting investment in high-technology 25X1
sectors, and many formerly restricted areas--such as magnetic
storage media for computers, steam and gas turbines, and
industrial robotics--are now open to foreign investment. This
should help South Korea's climb up the technology ladder and
sustain its export led growth. 25X1
According to US Embassy reporting, jockeying over the final
version of the negative list continued until its release on 27
June. Changes from an earlier draft suggest to us that the
influence of the officials favoring liberalization was strong:
sectors attractive to foreign investors that will benefit from
innovation and technological upgrading were removed from
protection while less attractive sectors with limited
Manufacturing Sector Benefits
In the manufacturing sector--the primary beneficiary of
technology transfers derived from foreign captial inflows--
foreign majority ownership is now allowed in 84 percent of all
industries compared to 15 percent previously, and restrictions on
foreign equity shares that affected 52 percent of manufacturing
industries have been abolished. The number of manufacturing
areas in which foreign investment of any kind is prohibited, is
reduced from 19 to 10 under the new law. In 22 of the 70
industries on the negative list, the actual proscription on
foreign investment is limited to only a few of the many possible
lExamples of the first are animal feeds, cosmetics, small arms,
and drugs, and of the second, the manufacture of wall paper,
retailing of kerosene, and some artistic pursuits.
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products within the standard industrial classification. For
example, while the manufacture of biological products is on the
negative list, only blood products are actually restricted. 25X1
Almost half the industries closed to foreign investment are
in agricultural processing, printing and wood products.
industries. These businesses. are primarily small- and medium- 25X1
sized and their continued protection reflects Seoul's dedication
to this type of industry, as well as the political importance of
the farm sector. 25X1
The emerging automobile and truck manufacturing sectors are
protected from wholly owned foreign competition but are allowed
access to foreign technology and marketing power through joint
ventures. The infant semiconductor and computer industries,
while theoretically free to acquire badly needed foreign capital
and technology, may not be allowed to import high-technology
capital goods and processes when domestically derived substitutes
are available. We believe that this will not be a major
restraint until South Korea's research and development
capabilities improve. The technology-intensive sector receiving
the greatest protection is telecommunication equipment, primarily
optical fibers, which relies on licensing agreements for advanced
technology.
Others remaining closed are publishing, printing, the
distilling of rice wines, and the manufacture of tobacco
products, explosives, and coal briquettes',. No decision has been
made on the production of chemical fertilizers, a major industry
in South Korea.
Bureaucratic Procedures Altered
In attempting to reduce bureaucratic roadblocks, Seoul has
instituted automatic approval procedures f, or investments under $1
million if the venture exports 60 percent or more of its product
and has majority Korean ownership. The foreign equity
restriction is waived if the products are free of import
restrictions and are subject to a basic tariff of 10 percent or
2Based on statistics for recent years we estimate that less than
10 percent of the value of US investments will qualify for
automatic approval due to the large scale nature and
concentration in capital intensive manufacturing of these
investments
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Within the Economic Planning Board (EPB), a division has
been established to coordinate foreign investment activities and
eliminate delays and inconvenience. Authority to approve foreign 25X1
investment continues to rest, however, with the Ministry of
Finance (MOF). 25X1
Implementing the New FCIL
The new rules reflect the conviction of many economic
policymakers in Seoul that foreign investment will bolster long-
term growth by introducing technology crucial for upgrading the
electronics, shipbuilding, and machinery industries in
particular. Planners have also argued that increased foreign
investment will reduce foreign borrowing requirements. Even
though Seoul, maintains a strong credit rating among international
creditors, the global debt problem has reduced its ability to
expand foreign borrowing.
These moves toward liberalization result, in part, from the
growing influence of officials such as Finance Minister Kim Mahn
Je, Deputy Prime Minister and head of the EPB Shin Byong Hyun,
and Presidential Secretary General Kang Kyong Shik. They link
foreign investment liberalization, as part of a broad program, to
efforts to reduce government intervention in the economy and rely
more on market forces. Moreover, they view liberalization of
imports, financial markets, and foreign investment as steps
necessary to help counter growing protectionist sentiments in
South Korea's major trading partners such as Japan and the United
States. Their success in winning the ear of President Chun Doo
Hwan was reflected in the adoption of new import liberalization
measures in early 1984 and in more recent moves to reform the
banking sector.
More conservative officials in the Ministry of Trade and
Industry, as well as much of the business community have op9osed
liberalization, including those moves affecting investment.
Distaste for foreign investment runs deep in the working levels
of the bureaucracy including the EPB and MOF, and career
officials fear their careers will suffer if they appear to favor
foreign interests. Strong nationalistic feelings cause many
South Korean officials to view liberalization as increasing South
Korea's dependency on foreign, particularly US, business
interests.
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The divisiveness of the liberalization issue may carry over
into the management of direct foreign investment. With both the
EPB and MOF assigned an oversight role, time-consuming conflicts
and mixed signals to investors could result unless lines of
responsibility are drawn more clearly in the months ahead.
Outlook for Direct Foreign Investment
We believe that the new FCIL represents a significant
liberalization of foreign capital regulation and should result in
increased foreign equity inflows. Many of the criticisms lodged
against Seoul's handling of foreign capital--in particular
ambiguity associated with the system of listing only industries
approved for investment and restrictions on the share of foreign
ownership--have been addressed by the new regulations. For
instance, removal of foreign equity restrictions should increase
inflows of high technology investments by giving foreign firms
control over their proprietory products and processes. Weak
patent protection and lax Korean attitudes toward contractual and.
licensing agreements have hampered high technology inflows in the
past. The new regulations should increase the placement of
technologically advanced products and processes in industries
such as transport equipment, chemicals, electronics, and
semiconductors, areas in which the United States in particular
excels. General Motors and Daewoo have just announced a $427
million auto-parts and export oriented automobile manufacturing
venture. This will result in a $100 million direct investment by
GM. IBM, meanwhile, is considering a joint venture with Hyundai
to produce the IBM 5550 computer for the Korean domestic market
and, perhaps, for intra-Asian export. The entry of these large
US corporations will improve the technological base and should
enhance the image of South Korea and encourage other companies to
invest.
South Korea will continue to face competition from the other
Asian LDCs trying to attract investment from overseas, an area
South Korea has lagged behind other newly industrialized nations
in Asia (Table 1). The trend since 1980, however, has been more
favorable for South Korea than for Singapore, Taiwan or
Indonesia. This trend is likely to continue as implementation of
new FCIL regulations further improve South Korea's ability to
compete for high-technology investment from abroad.
Although the new law also eliminates the automatic five-year
tax holiday and subsequent three-year 50-percent tax reduction,
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this change should not have a major impact on foreign capital
inflows. Less than one-fifth of foreign investors considered
the tax concessions to have been important in their decision to
locate in Korea, according to an EPB study. Moreover, Seoul
reserves discretion in granting tax concessions and we believe
tax relief will be available to investments in priority areas.
As the 1986 Asian Games and the 1988 Olympics approach,
increased investment in services, tourism and the food and
beverage industries is likely, with Japanese and West European
investors vying with US investment.
We believe a change in the political climate would pose the
greatest threat to Seoul's ability to increase foreign investment
inflows. Signs of political instability could quickly tarnish
South Korea's image among investors even if economic conditions
remained favorable.
4Special tax treatment is reserved for projects that augment
import substitution or export promotion; have a high technology
--- t- -.._ i _-_,. ,.._I- ,. -44--i u ^ ^ ^-4- .
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Million US $
Selected Asian LDCs: Direct Foreign
Invest
ment (Commitment Ba
sis)
1978-83
1978 1
979
1980
1981
1982
1983
South Korea
147.5 1
13.4
141.0
145.3
187.8
267.8
Singapore
359.9 3
87.0
573.7
625.0
545.4
604.0
Taiwan
136.7 1
81.5
243.4
356.3
320.3
N/A
Indonesia)
405.2 3
18.6
346.6
379.0
449.9
246.92
N/A: Not Available
)Arrival basis and excludes investment in hydrocarbons,
banking, and insurance.
2Estimated.
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Appendix A
Industries Closed to Foreign Investment
by Inclusion on the Negative List
Of the 272 sectors now closed to foreign investment 82 have
been designated as closed for the indefinite future. They 25X1
include areas in which foreign investment is not practical or
appropriate jand sectors in which foreign investment is not likely
to be welcome in the near term. 25X1
The remaining 190 sectors are temporarily restricted and may 25X1
be opened to foreign investment in the future or, in
extraordinary circumstance-s, be reviewed on a case-by-case basis
for foreign investment at any time. 25X1
In publicly justifying this broader "restricted" category,
Seoul has characterized the industries included as those which
receive special government assistance (such as subsidies or
support for basic research), generate pollution, depend heavily
on energy and/or imported materials, encourage consumption of
luxury goods, adversely affect the farm and fisheries sectors,
involve simple personal and household services, or are infant
industries for which protection is necessary for the near term.
Seoul has announced that it will update the negative list every
six months with the intention of reducing its size.
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Appendix B
Foreign Investment in South Korea
Direct foreign investment grew from $141 million.during
1980 to $267.8 million in 1983. Approvals of direct foreign
investment in the first half of 1984 totaled $315 million, well
ahead of the annual plan of $280 million. This growth reflects
past liberalization of the FCIL, strong domestic economic health,
and global economic circumstances. In spite of steady growth,
investments during the last decade lagged behind planned levels
each year until 1983. In terms of technology transfer, higher
returns accrue to direct foreign investment than to borrowed
capital. Through 1978, direct foreign-investment--according to a
study by the Korea Exchange Bank--contributed 18 percent of all
new technologies introduced into South Korea.
The United States has been the largest foreign investor in'
South K99rea since 1979 except for 1983 when Japan was the
leader. On a cumulative basis, Japan is the largest investor in
South Korea (49.5 percent) followed by the US (27.7 percent) (see
chart).
Japan and the United States have invested most heavily in
manufacturing. US investors committed 84 percent of their total
funds in this sector. The Japanese have invested the greatest
absolute amount in manufacturing, but relatively less of their
total (57 percent).
Much of Japan's early investment in South Korea involved the
relocation of industrial equipment for manufacturing activities
that were no longer profitable at home. Japanese investors were
initially attracted by South Korea's abundant, cheap labor, but
with the standard of living rising rapidly, South Korea is losing
its comparative advantage in sectors such as textiles and -
electrical devices. We believe, therefore, that Japanese
investment in manufacturing has probably peaked. We anticipate
that future investment will focus on the tourism and food and
beverage sectors and that it will provide little in the way of
technology transfer. Japan sees parallels between South Korea's
economic development and its own and is reluctant to provide
technology that could boomerang, resulting in competition in home
and third-country markets
50ver half of the 1983 total for Japan was concentrated in one
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project (a $94 million expansion of the Lotte Hotel). 25X1
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US capital has been concentrated in chemicals, electronics,
and automobiles. US investors have been motivated by a desire to 25X1
participate in the growth of the domestic Korean market as well
as export to third countries.
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US investors have shown a strong preference for majority
ownership. In 1982 and 1983 87 percent of all US investment was
in projects with 50 percent or greater US ownership. This
compares with 51 percent of direct investment from all other
sources. One reason for this preference for majority ownership
by US firms is to reduce risk by protecting proprietary processes
and technologically advanced products from South Korea's weak
patent and licensing laws. The liberalized investment
environment will open about 380 new industrial categories to
majority control by foreign interests, potentially increasing the
transfer of US technology along with the flow of equity
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DIRECT FOREIGN INVESTMENT IN SOUTH KOREA
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Subject: South Korea: Foreign Investment Liberalization
1 - Mr. Tony Albrecht, State
1 - Ms. Harriet Isom, State
1 - Mr. John Hoog, State
1 --Mr. Jay Taylor, State/INR
1 - Mr. 'Richard Childress, NSC
1 - Mr. Doug Mulholland, Treasury
1 - Mr. William McFadden, Treasury
1 - Mr. Dave Peterson, Commerce
1 - Mr. Scott Goddin, Commerce
1 - Ms. Doral Cooper, USTR
1 DCI/NIC/AG
1 - NI0/EA 7E62
1' = C/NIC (7E62)
1 - DDI (7E44)
1 - Executive Director (7E12)
1 - PDB Staff (7F30)
5 - CPAS/IMC/CB (7G07)
1 - C/PES (7F24)
2 - OCR/ISG (1H19)
1 - C/DDO/EA/_(5E10)
1 DDO/EA/S C19)
1 - OEA/NEA Division
1 - OEA/NEA/Korea
1 - OEA/NEA/Japan
1 - OEA/China Division
1 - OEA/Southeast Asia Division
1 - D/OEA
1 - C/Research/OEA
1 - C/OGI/ECD
1 -
1 -
1 - Au "fur'
DDI/OEA/NEA/Korea Branch
(5 September 1984)
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