[Editorial] Korea’s Capital Outflow Three Times Bigger Than Inflow

For the first half of this year, foreign direct investment in Korea was a mere 3.4 billion dollars. In contrast, direct investments made by Korean companies and individuals in overseas markets amounted to 10.3 billion dollars, three times higher than the FDI in Korea. Since the inauguration of the current administration, this “less in, more out” trend has continued. Last year, net outflows of capital were 7.3 billion dollars and are rising this year. This is because Korea’s investment environment is in poor shape and its attraction as an investment destination is deteriorating.

Large companies do not consider making investments with their accumulated earnings, and companies investing overseas are not willing to invest in the domestic market. Under such circumstances, it is hard to induce foreign companies to invest in Korea. Steve Morgan, former vice president of Hyundai Motors, said, “When I encourage foreign corporations to invest in Korea, then they ask, ‘Why Korea?’” It is not easy for anybody to explain why making investments in Korea is more advantageous than making them in China, India, and Vietnam.

The major stumbling blocks are Korea’s sluggish domestic economy, complex and complicated regulations, and anti-corporate sentiment regardless of whether the investment consists of Korean capital or foreign capital. What’s even worse is that the government has been obsessed with politically motivated policies, such as its balanced development policy, instead of stimulating corporate investment. As a result, capital flight has been accelerated, which in turn has led to lack of job creation and slow economic recovery.

We should learn from Japan’s successful policies, which induced Japanese companies in China and South-East Asian countries to come back to Japan. The Japanese government took a pro-business stance, eliminated administrative regulations, and expanded tax breaks for corporations.

The governor of the Financial Supervisory Committee Yoon Jeung-hyun, who will retire tomorrow after finishing a three-year term, expressed concerns over sluggish corporate investment and pointed out that pro-market policies have been insufficient. He said, “We should think about the failure of the socialistic system, which did not recognize differences.” He added, “It is regrettable we now even have to emphasize the very basic norm that the capitalistic market system should not be shaken.”

Former Vice Finance Minister Chin Dong-soo, who resigned a few days ago, emphasized market based polices, too.

Only with market friendly economic policies can money be circulated and jobs be created. It is frustrating when the government does not know the basic logic of investment, or does know, but ignores it.