Foreign Direct Investment in Korea: Recent Developments and Prospects

Abstract

direct investment (FDI) into South Korea (hereinafter Korea). Until its recent economic crisis, Korea was relatively closed to foreign capital inflows in general and to FDI in particular. Korea has largely followed the Japanese economic model of building up national champions through an active industrial policy, directing resources toward selected industries and companies. The most tangible results of that policy are sprawling conglomerates such as Hyundai and Samsung, household names in Korea and many other countries. Although the Korean economy has certainly been open to foreign technology and could not have achieved its remarkable success without it, economic nationalism helped prevent widespread foreign ownership of the means of production. Korea was one of the hardest-hit economies during the Asian financial crisis and had to turn to the IMF for assistance in December 1997. Although the economy has rebounded strongly since the first quarter of 1999, the severe contraction in output and increase in unemployment during the crisis led to debate and soul-searching about the continued appropriateness of the Japanese-style economic model. Furthermore, deep and wide-ranging structural reforms were the quid pro quo for the multibillion dollar rescue package that Korea agreed on with the IMF. One of the key reforms was that Korea should become less hostile and more receptive to FDI. Although the IMF agreement certainly had the effect of accelerating the flow of FDI into Korea, it is important to note that FDI had been rising secularly even before the crisis.