Investing in openness: The evolution of FDI strategy in South Korea and Taiwan

Abstract

Much has been written about the decline of developmentalism in East Asia and the neoliberal makeover of states once renowned for ‘strategic industrial policy’. The adoption of more open trade and investment policies following the 1997 crisis, along with substantial financial sector reforms, has led some observers to conclude that the era of the developmental state is over and that of the ‘liberal-regulatory’ state has begun. 1 But while concepts such as ‘regulatory state’ and ‘post-developmental’ state are now the common currency of accounts seeking to conceptualise state transformation in post-crisis Asia, systematic empirical research that goes beyond surface policy shifts to appraise underlying institutional changes – both organisational and ideational – is thin. This paper takes a small step towards filling this gap, focusing on the evolution of foreign investment strategy in South Korea (hereafter Korea) and Taiwan since the financial crisis. 2 In particular, we seek to ascertain what recent reforms say about these states’ hitherto strategic approach to foreign investment issues. It is now widely appreciated that, over several decades, the governments of Korea and Taiwan engineered a set of institutional arrangements that enabled them effectively to guide foreign investment (both inward and outward) towards developmental ends. 3 Over the past decade, however, the emergence of a more complex set of domestic economic imperatives (reflecting the success of these countries’ industrial promotion efforts) and the proliferation of new international rules that proscribe certain domestic regulatory controls have made traditional forms of investment coordination more difficult and less viable. Moreover, upon their accession to the World Trade Organization (WTO) in 1995 and 2001 respectively, as well as in the immediate aftermath of the 1997 financial crisis, Korea and Taiwan declared major financial sector reforms, removing most foreign direct investment (FDI) conditionalities and relaxing capital controls on inbound and outbound flows. So what does this more liberal investment environment mean for these erstwhile developmental states? The fact that substantial policy shifts have occurred in Korea and Taiwan is beyond dispute. As we have argued elsewhere, however, policy changes alone tell us little about a state’s underlying orientation – whether it is motivated by liberal or developmental ambitions. 4 Indeed, if East Asia’s developmental states