Whereas domestic enterprises are increasing investment overseas every year, foreign investment in Korea is falling.
To avoid a net investment outflow, it has been pointed out that Korea should improve the domestic investment environments and increase its attractiveness to foreign investors.
On April 1, the Ministry of Strategy and Finance (MOSF) revealed in a report titled 'The Characteristics of Pure Foreign Direct Investment (FDI) Outflow and Implications' that since 2000, OFDI (Outward FDI) increased 24% on an annual average, but IFDI (Inward FDI) stood at an annual average growth rate of only 3%.
Pure outflow is the difference between OFDI and IFDI. A surplus in pure outflow means that the capital invested abroad is greater than that invested in Korea. In general, the more developed an economy, the greater the pure outflow. Since the 1990s, pure FDI outflow has been posting surpluses on the whole in Korea, and recently, the surplus scale has been growing sharply.
The report projected, "With domestic enterprises' overseas investments continuing to expand OFDI growth in the future, the growth of pure FDI will continue as well.' However, it analyzed that "the continued FDI outflow is not always undesirable because it may have greater positive effects, like enhancing the competitiveness of domestic industries, than negative impacts, such as cavitation of domestic industries, etc."
To achieve an expansion-oriented FDI balance, the report also suggested that reinforced efforts be made to expand total FDI by concentrating on IFDI. It pointed out that Korea needs to improve problems associated with a high-cost economic structure, labor-management relations, residential conditions, various restrictions, etc. - factors that serve as obstacles to IFDI - on a continued basis and raise the nation's level of investment attractiveness.
In particular, the report diagnosed that Korea could emerge as an 'Investment Black Hole,' absorbing most of the investment in the Asian sphere due to China's steep wage hikes and fears of lower growth in the Chinese economy.
The report also cited the fact that Korea's attractiveness to foreign investors has increased owing to the expansion of the nation's economic territory in the wake of the Korea-EU FTA and Korea-U.S. FTA.
The report added that there is a need to expand M&A-related FDI actively through M&A of technical and sales networks in advanced countries as well as boosting 'greenfield' FDI, for domestic enterprises to build production bases abroad and establish sales networks.
For those industries lacking comparative advantages and having the potential for pure FDI inflow, in particular, the report emphasized that it is necessary to encourage OFDI rather than domestic support, but to promote IFDI for new growth engine and service industries, including parts & materials, bio and alternative energy.