Please cite this paper as: Nicolas, F., S. Thomsen and M. Bang (2013), “Lessons from Investment Policy Reform in Korea”, OECD Working Papers on International Investment, 2013/02, OECD Publishing. http://dx.doi.org/10.1787/5k4376zqcpf1-en OECD Working Papers on International Investment 2013/02 Lessons from Investment Policy Reform in Korea Françoise Nicolas, Stephen Thomsen, Mi-Hyun Bang JEL Classification: F21, F23, F53, O24, O53
44
Embed
Policy Reform in Korea Lessons from Investment · 2016-03-29 · Lessons from Investment Policy Reform in Korea Françoise Nicolas, Stephen Thomsen, Mi-Hyun Bang JEL Classification:
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Please cite this paper as:
Nicolas, F., S. Thomsen and M. Bang (2013), “Lessons fromInvestment Policy Reform in Korea”, OECD Working Paperson International Investment, 2013/02, OECD Publishing.http://dx.doi.org/10.1787/5k4376zqcpf1-en
OECD Working Papers on InternationalInvestment 2013/02
OECD WORKING PAPERS ON INTERNATIONAL INVESTMENT The international investment working paper series – including policies and trends and the broader implications of multinational enterprise – is designed to make available to a wide readership selected studies by the OECD Investment Committee, OECD Investment Division staff, or by outside consultants working on OECD Investment Committee projects. The papers are generally available only in their original language English or French with a summary in the other if available. This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Comment on the series is welcome, and should be sent to either [email protected] or the Investment Division, OECD, 2, rue André Pascal, 75775 PARIS CEDEX 16, France.
OECD WORKING PAPERS ON INTERNATIONAL INVESTMENT are published on www.oecd.org/investment/working-papers.htm
MEASURING FDI LIBERALISATION IN KOREA .................................................................................... 8
THE EVOLUTION OF FDI POLICIES ....................................................................................................... 13
Liberalisation of FDI policies .................................................................................................................... 14 FDI policies prior to 1980 ...................................................................................................................... 14 The transition to an open economy: FDI reforms since 1980 ................................................................ 16 The Five-year FDI liberalisation plan (1993–98) ................................................................................... 17 The Asian financial crisis (1997-98): The open door ............................................................................. 18 Special focus: liberalisation of the financial sector ................................................................................ 21
Investment promotion and facilitation ....................................................................................................... 23
REFORMS IN OTHER POLICY AREAS ................................................................................................... 26
Liberalisation of outward direct investment .............................................................................................. 27 Korea‟s policy approach towards outward foreign direct investment .................................................... 28
CONCLUSION: CREATING AN ENABLING ENVIRONMENT FOR REFORM................................... 37
5
EXECUTIVE SUMMARY
Starting from a situation in which FDI was severely restricted, Korea has been the greatest reformer of
its FDI restrictions among OECD members and key emerging economies since 1997. Reforms in Korea
were driven by a mixture of microeconomic considerations (the need to acquire foreign technologies
and to enhance competitiveness) and macroeconomic ones (chronic trade and current account deficits
and the need to fill a domestic savings gap). As in most countries, the government embarked upon
reforms once the status quo was no longer seen as sustainable or sufficient.
Reforms almost always involve the interplay of internal and external factors, and the question of
whether the pressure for reform was primarily internal or external is not germane. Governments
routinely use crises and external pressure to push through unpopular reforms and sometimes lock in
existing reforms through international agreements. If anything, crisis-induced reforms can lack
legitimacy once the crisis has abated. In Korea, reforms clearly accelerated at the time of the crisis,
faced with the acute need to repair balance sheets. But the substantial reforms undertaken in Korea since
the early 1990s cannot be reduced to a simple crisis response. Two Five-Year Liberalisation Plans were
introduced in the early 1990s, together with a Reform Programme to improve the investment
environment. The government at the time also negotiated OECD membership by late 1996 with a
commitment to further reform.
The Korean experience also demonstrates the need to have a critical mass of reform in place before
foreign investors will respond. Many early reforms – such as the shift from a positive to a negative list
of restricted sectors – were hesitant and incomplete, leading to only a modest rise in FDI inflows at the
time. The takeoff in FDI inflows in the mid-1990s is a clear manifestation that this critical mass had
been achieved.
Going beyond the roadmap for reform, successive governments have made sustained efforts to promote
public awareness of the benefits of further openness, including both high-level pronouncements and the
segyehwa or globalisation policy. The Korean government has also made many institutional changes,
such as through the Committee on Foreign Direct Investment and the Investment Ombudsman, to
improve not only the investment climate itself but also the climate for investment policy making. The
segyehwa policy and the Tripartite Commission were designed to foster greater acceptability of the need
for reform.
Reform is not a one-time occurrence but rather a continuous process. While many countries have
reformed significantly over time, as Korea did in the 1990s and beyond, increasing regional and global
economic integration, together with technological change, imply that policies will have to be
continuously adjusted in response to changing circumstances. The most interesting lessons from the
Korean experience do not relate to the crisis in the late 1990s and the government‟s response but rather
to how successive governments have worked to create a suitable enabling environment for reform.
Reforms should be pre-announced, with political support at the highest level, a credible schedule for
implementation and no backtracking
Like many countries in Asia, Korea prepares Five-Year Plans which set out the objectives of
government policy over the next five years. Beginning in the early 1990s, the government set out a
medium-term agenda for reform through its five-year FDI liberalisation plan. According to a Trade
6
Policy Review1 by the WTO just before the crisis, “actual implementation of liberalisation measures
and programmes, usually announced years in advance, has been remarkably consistent, without any
significant delays or reversals”.
Public awareness campaigns about the benefits of openness should be recurring events
As with the government‟s segyehwa strategy, the public needs to be informed about the benefits of
openness. Since this policy ended in the late 1990s, public opposition to foreign investors has grown,
along with the rise in FDI in the Korean economy. Foreign investors can also take upon themselves
part of the responsibility for public information campaigns, but these are likely to be most effective if
the government is also involved.
A forum for public dialogue is an essential component of reforms, helping to improve both the
effectiveness of reforms and the buy-in from local stakeholders.
The Tripartite Commission was created in Korea in 1998 in order to involve all key stakeholders in the
discussion of reform as a way of escaping from the crisis. The Commission was renamed the
Economic and Social Development Commission in 2007, with an even greater role for civil society.
Dialogue should also include foreign investors...
In addition to its role in settling grievances of foreign investors through its Home Doctor system, the
Investor Ombudsman also represents the views of foreign investors within government.
...as well as across ministries and different levels of government
In 1999, the government also established the Committee on Foreign Direct Investment (CFDI) to
review FDI policies and systems on a continual basis. The Committee consists of representatives of
various ministries and agencies, such as the Ministry of Knowledge Economy (MKE) and the Ministry
of Strategy and Finance (MOSF), and heads of relevant local and city governments. It is chaired by the
minister of MKE. The Committee makes major policy decisions on FDI and prepares an annual FDI
Environment Improvement Plan, based on proposals submitted by ministries and local governments,
which are members of the Committee. Conflicts between the central government and local
governments, for example, are to be resolved in this committee (Jeon and Ahn 2001).
Under an amendment to FIPA, the president of KOTRA was designated as an official member of the
CFDI (members were previously limited to ministers and governors).
The 2000 amendment authorises the CFDI to adjust the measures of relevant government agencies for
the improvement of the foreign investment environment. It also obliges MOCIE to report to the CFDI
about steps being taken by such agencies to improve the foreign investment environment.
FDI liberalisation is most effective when embedded in a broader reform agenda
FDI reform was complemented by both trade and regulatory reform, the liberalisation of restrictions
on outward investment and by significant improvements in investment promotion and facilitation,
including the creation of the Investment Ombudsman providing feedback to the whole reform process.
1 WTO (1996), p. 67.
7
Box 1. Presidents of the
Republic of Korea
Rhee Syngman (1948~1960)
Yun Bo-Seon (1960~1962)
Park Chung-Hee (1962~1979)
Choi Kyu-Hah (1979~1980)
Chun Doo-Hwan (1980~1988)
Roh Tae-Woo (1988~1993)
Kim Young-Sam (1993~1998)
Kim Dae-Jung (1998~2002)
Roh Moo-Hyun (2002~2008)
Lee Myung-Bak (2008~2013)
Park Geun-Hye (2013~)
INTRODUCTION
South Korea is one of the greatest economic success stories of the past 50 years. From an impoverished
country after the Korean War, it is now one of the richest economies in Asia. During the same period,
South Korea successfully managed a transition from authoritarian regime to democracy with a popularly
elected president. Direct presidential elections were restored
in 1987, followed by the first civilian president, Kim Young-
Sam, elected in 1993 (Box 1).
Because of its tremendous economic success over decades,
interrupted only by the Asian financial crisis in 1997, Korea
is often taken as a development model for other countries in
Asia and beyond. Unlike in some other countries in the
region, foreign direct investment (FDI) played much less of a
role in the early stages of Korean development. Successive
Korean governments experimented with import substitution,
export promotion and then industrial policies in the form of
the Heavy and Chemical Industry (HCI) Promotion Plan.
Within these strategies, any role for foreign investors was
carefully circumscribed. Foreign investment was welcomed
when it could contribute to exports or technology transfer or
to alleviate balance of payments difficulties. But for long
periods, technology licensing and international borrowing
were preferred means of achieving these objectives.
In spite of this legacy, Korea is now host to USD 133 billion in foreign direct investment, with few
regulatory restrictions on foreign investors. While the stock of FDI remains relatively low in relation to
GDP, partly for historical reasons, FDI inflows have soared since the late 1990s in response to dramatic
reforms of restrictions since the early 1990s. These reforms transformed Korea from the second most
restrictive country for FDI out of all OECD members and major emerging economies based on the
OECD FDI Regulatory Restrictiveness Index to one of the most open in Asia in terms of statutory
restrictions. The improvement in Korea‟s score under the FDI Index was unprecedented since 1997 and
twice as great as the next most reformist country.
The objective of this study is to document the rapid and far-reaching liberalisation of the FDI regime in
Korea and to examine how and why it came about. What were the main obstacles and what were the
main drivers? How did FDI liberalisation relate to other reforms (trade policy reform, regulatory reform,
etc.)? The paper does not ask what more Korea needs to do but rather what lessons can we draw from
the Korean experience about how to achieve rapid and sustainable reforms?
The insights from Korean liberalisation are useful for other countries, particularly non-OECD members
in Asia and elsewhere, which still have high levels of statutory restrictions as measured by the FDI
Index. Many of these countries are eager to attract more investment and recognise that they will need to
reform their investment regime but are unsure how best to proceed. Each country‟s reform path is
unique, and this study will not provide a roadmap for other countries to follow, but it will nevertheless
serve as a useful model for reformers in other countries and provide evidence that successful reform is
accompanied by rising inflows of direct investment.
8
MEASURING FDI LIBERALISATION IN KOREA
Measurement allows for benchmarking of performance over time and across countries. In the context of
this study, it provides a visual estimate of the pace of FDI liberalisation. This can then be correlated
both with the response of investors in terms of FDI inflows and with the stages of reform in terms, not
only of FDI policies, but also of complementary measures in the areas of competition and trade policies
or regulatory reform. The reforms of Korean FDI policies will be measured on the basis of the OECD
FDI Regulatory Restrictiveness Index (Box 2).
From 1997 to 2010, during a period when many countries removed statutory barriers on investment,
Korea managed to remove almost twice as many restrictions as the next more reformist country: China.
In 1997, Korea ranked second after China in terms FDI regulatory restrictiveness but by 2010 it had
moved to tenth place (Figure 1). Based on the OECD FDI Regulatory Restrictiveness Index, Korea‟s
score fell from 0.532 in 1997 to 0.143 in 2010 (Table 1). Reforms were accelerated by the Asian
financial crisis in 1997, but the process was already under-way in the mid-1990s at the time of accession
to the OECD.
Box 2. Calculating the FDI Regulatory Restrictiveness Index
The OECD FDI Regulatory Restrictiveness Index covers 22 sectors, including agriculture, mining,
electricity, manufacturing and main services (transport, construction, distribution, communications, real
estate, financial and professional services).
For each sector, the scoring is based on the following elements:
the level of foreign equity ownership permitted,
the screening and approval procedures applied to inward foreign direct investment;
restrictions on key foreign personnel; and
other restrictions such as on land ownership, corporate organisation (e.g. branching).
Restrictions are evaluated on a 0 (open) to 1 (closed) scale. The overall restrictiveness index is a weighted
average of individual sectoral scores.
The measures taken into account by the Index are limited to statutory regulatory restrictions on FDI,
typically listed in countries‟ lists of reservations under FTAs or, for OECD countries, under the list of
exceptions to national treatment. The Index does not assess actual enforcement. The discriminatory nature
of measures, i.e. when they apply to foreign investors only, is the central criterion for scoring a measure.
For the latest scores and for a discussion of the methodology, see www.oecd.org/investment/index
Korean economic development can be divided into four distinct phases. Until 1962, foreign exchange
was scarce and the Korean economy relied on official development assistance principally from the
United States. The government followed a policy of import substitution, with little economic growth as
a result. The takeoff of the economy began in the 1960s when the government shifted towards an active
policy of export promotion where funds were allocated on the basis of firms‟ export potential.
In June 1973, the government changed direction in its economic policies by launching the Heavy and
Chemical Industry (HCI) Promotion plan. The HCI plan, which continued throughout the 1970s,
directed credit largely through state-controlled banks to these industries. These policies gave rise to the
chaebols (large conglomerates).
The starting point for economic liberalisation was over-investment and excess capacity in targeted
industries, together with wage inflation for workers in those sectors, political turmoil following the
assassination of President Park in 1979, the second oil price shock and subsequent recession both
worldwide and in Korea. The process of FDI liberalisation began – albeit tentatively – in the early 1980s
and accelerated rapidly in the course of the 1990s.
The following discussion divides the liberalisation period into three phases: restrictive policies prior to
1980s; gradual liberalisation, coupled with some investment promotion prior to the Asian financial crisis
in 1997; and rapid liberalisation following the crisis. Individual liberalisation measures over all three
periods are shown in Table 2. This section concludes with a special focus on the liberalisation of the
financial sector over time.
14
Table 2. A Chronology of FDI Liberalisation in South Korea
1960 - Enactment of the Foreign Capital Inducement Promotion Act; 75% foreign equity allowed
1962 - FCIPA amended; tax holidays for foreign firms, equal treatment with national firms
1966 - FCIPA modified to allow 100% foreign ownership and more generous tax concessions
1970 - Establishment of the first Free Export Zone in Masan
1973 - Establishment of the second Free Export Zone in Iri
- Issuance of the General Principles on Foreign Investments with areas open to FDI entitled to various tax
reductions and exemptions but subject to various limitations (minimum investment requirements, export
requirements, etc)
1977 - Minimum investment set at USD 500 000
1979 - More industries opened to FDI, but high-tech and skill-intensive industries favoured
1981 - Opening up of a number of business categories to foreign investment, relaxation of local ownership
requirements for hi-tech, export-oriented, diversifying or non-tax-privileges investment, and reduction of
the minimum investment level from USD 500 000 to USD 100 000.
1983 - New Foreign Capital Inducement Act and shift from a positive to a negative list system
1984 - Relaxation of approval procedures and of restrictions on the repatriation of capital
1985 - Revision of the negative list with substantially increased number of industries open to FDI
1987 - New revision of the negative list; 97% of manufacturing sectors open
1988 - Insurance opened to FDI, advertising and maritime services opened partly
1989 - Abolishment of various performance requirements on new foreign investments (export, local content,
technology transfer) as well as of the limitation on 50% foreign equity participation
1990 - Automatic approval system
1992 - Introduction of the prior notification system.
- Elimination of all pre-existing performance requirements.
1993 - Five-year FDI liberalisation plan expanding the number and range of sectors open to FDI
- Friendly M&As allowed
1995 - Establishment of the Korean Trade and Investment Promotion Corporation
1997 - Liberalisation of FDI in some 129 service activities (e.g. production, collection and distribution of
electricity only partially restricted; wholesale of household goods liberalised)
1998 - New Foreign Investment Promotion Act, establishment of a one-stop service (KISC)
1999 - Opening up of business categories including real estate rental and sales, securities dealing, petrol service
stations, land development, etc.
- Introduction of the ombudsman system (OIO)
- Establishment of the Committee on Foreign Direct Investment
- Liberalisation of hostile M&As
- Liberalisation of land acquisition
- Foreign participation allowed in large public enterprises and key industries
2000 - Amendment of the New FIPA with relaxation of restrictions, increased incentives in the form of tax
breaks and establishment of Foreign Investment Zones (1999), Free Trade Zones and Free Economic
Zones (2003)
2003 - KISC turned into “Invest Korea”
2006 - Definition of foreign investments enlarged to include investments in non-profit institutions
2010 - Latest revision of the FIPA giving more power to the OIO
Liberalisation of FDI policies
FDI policies prior to 1980
Unlike in some other countries in East Asia, FDI did not play a prominent role in the early years of
takeoff of the Korean economy. In the 1950s, FDI was not legally permitted and the Korean economy
relied on official development assistance principally from the United States. The takeoff of the economy
began in the 1960s (Box 3) when the government shifted towards an active policy of export promotion
where funds were allocated on the basis of firms‟ export potential. Some opening towards foreign
investors occurred, but the government favoured both foreign loans and technology licensing over FDI.
15
In keeping with some other countries in Asia at the time, Korea created Free Trade Zones (FTZs)5 after
1970 to attract foreign investment in labour-intensive, high value-added manufacturing activities and
through this to promote foreign exchange earnings through increased exports and employment and
improved technological knowledge among local firms through technological transfer (Warr 1983). In
spite of this partial opening, FDI was still discouraged in those sectors protected by import-substitution
measures (Kim and Hwang 2000). Moreover, foreign investment was restricted or prohibited in services
industries such as banking, hotels, insurance services and real estate, so as to protect the monopoly
interests of local firms (Chung 2007).
During the period of the Third Five-Year Plan (1973-78), the government started to discourage foreign
loans, especially short-term commercial loans, in favour of FDI. The policy was still very selective,
however, with a distinction between “favourable” and “unfavourable” industries for FDI (Stoever 2002).
In 1973, the Economic Planning Board issued General Principles on Foreign Investments to direct
foreign investment to sectors desirable for the Korean economy: “large-scale complex projects
impossible for domestic firms to undertake because of their limited capital, technology, and managerial
skills; export-oriented projects where it is difficult for domestic firms to develop or exploit foreign
markets; and projects which contribute to the development and effective use of domestic resources”
(Kang 1998).
Areas open to FDI were entitled to tax reductions and exemptions but were subject at the same time to
various limitations, according to the type of business involved. Minimum investment requirements, as
well as export requirements, were imposed and many sectors were excluded for foreign investors,
particularly if they resulted in competition with local exporting firms. By contrast, certain strategic
sectors in need of better technology, such as electronics, were not subject to export requirements
although in those sectors divestment was imposed within a given time frame.
Outside the FTZs, the government preferred joint ventures to exclusive foreign ownership, with a
maximum foreign ownership limit set at 50% for most business categories. No more than 50% of
5 In 1970, the government established the first FTZ in Masan (following the Chinese Taipei experience of
Kaohsiung in 1965). This special zone provided an industrial estate where land, utilities, transport facilities,
and even buildings were supplied by the government at highly subsidised rates. The Masan FTZ also
allowed the duty-free entry of goods destined for re-export. A second zone was established in Iri in 1973.
Box 3. The legislative basis for foreign investment in the 1960s
The Foreign Capital Inducement and Promotion Act (FCIPA) was enacted in 1960 to secure an adequate amount
of foreign capital by permitting foreign investment inflows, regardless of amount or type, as long as the purpose
of the investment was deemed appropriate. In general terms, any firm in any sector could qualify if it could
demonstrate to the government that it would increase Korean exports (Graham 2003). Because the initial
provisions were rapidly deemed insufficient, they were complemented in 1962 with the Law for payment
guarantee of foreign borrowing and the Special Law to facilitate capital equipment imports on a long-term
deferred payment basis. These provisions guaranteed the repayment of foreign loans and provided tax and other
incentives to foreign investors and licensors of foreign technology.
All three laws were eventually merged in 1966 into the Foreign Capital Inducement Law, which regulated
inflows of foreign loans, direct investment and technology. It stipulated the requirements, criteria, and procedures
for authorising capital inflows, and also provided for the privileges, tax incentives, and repatriation of capital as
well as remittance of dividends. Priority was given to foreign loans rather than to FDI, which was kept to a
minimum. Over time, as mismanagement of loans was reported, FDI began to be seen as an alternative to private
loans, so long as it did not create friction with local industries.
16
foreign equity was allowed in principle and less than 50% was permitted in simple labour-intensive
sectors (Sakong 1993, p. 115).
During the 1970s, the government faced new problems in attracting long-term foreign capital which
were aggravated by oil crises and the worldwide recession. Faced with these difficulties, the
liberalisation of FDI rules was seen as a way of helping the economy to upgrade technologically and to
restructure industry toward higher value-added and more sophisticated production.6 This reform was
also consistent with the general direction of market liberalisation and the new development strategy
(Sakong 1993).
The transition to an open economy: FDI reforms since 1980
Liberalisation started in the early 1980s, with the opening up of a large number of business categories to
foreign investment (Figure 1). At the same time, the minimum investment level was lowered
significantly from USD 500 000 to USD 100 000. The basic direction of FDI policy changed most
significantly in 1983 when the Public Loan Inducement and Supervision Law and the Foreign Capital
Supervision Law were integrated into the New Foreign Capital Inducement Law, reflecting less stringent
government controls on FDI.
A major feature of the reform was the switch from a positive to a negative list system. Under the
positive list system, FDI was allowed only in those listed sectors, thus giving the Korean government
the ability to direct investment to “priority industries” where foreign capital, technology and general
know-how were deemed necessary (Kim and Wang 1996). Under the negative list system in contrast,
any industry not specified in the list became open to foreign investment. By opening almost the entire
manufacturing sector to FDI, the shift is indicative of a more liberal approach to FDI and of a decline in
government interventionism. Under the new system, applications for FDI fell into one of the following
three categories: i) prohibited industries, such as public utilities, public transport and healthcare, ii)
restricted industries in which FDI is prohibited in principle but for which authorisation may be obtained
from the Ministry of Finance, and iii) liberalised industries not on the negative list. In the restricted
category, FDI had to be in the form of a joint venture with a domestic firm.
Seoul twice revised the negative list system after its initial introduction (first in September 1985 and
again in April 1987) to open more industrial sectors to foreign investors. The result of this sectoral
liberalisation can be seen in Figure 1 which showed the ratio of open sectors to all sectors over time.
The manufacturing sector was the first to open but was followed quickly by services.
Towards the end of the 1980s, Korea faced declining competitiveness of its manufactured exports partly
due to rising production costs. As a result, the government and business elites recognised the need for
technology enhancement in medium-technology industries (Kim and Wang 1996) and the government
took further steps to encourage FDI in high-technology industries (Amsden 1989).
The government also made significant efforts to relax restrictions and simplify administrative
procedures. Existing restrictions on the repatriation of capital were relaxed in 1984 and various
performance requirements imposed on foreign-invested enterprises, such as export, local content, and
technology transfer requirements, were abolished in December 1989. Similarly, the 50% foreign equity
limit was scrapped in most industries, but, according to Chang (2006), foreign majority ownership
remained banned in practice, with some rare exceptions, outside the FTZs.
6 While licensing had proven to be an efficient channel for transferring mature technologies, new
technologies were found to be better transferred through joint ventures or wholly-owned subsidiaries
(Chaponnière 1997).
17
At the same time, administrative procedures for FDI approval were also simplified, through an
automatic approval system under which all projects meeting certain requirements were to be
immediately and automatically approved by the Ministry of Finance7. This system eventually evolved
into the prior notification system whereby FDI in designated categories could be conducted as long as it
met predetermined criteria (Kim and Wang 1996). In 1992, business categories subject to notification
rather than approval were expanded. The notification system was initially applied to projects in
liberalised sectors with less than 50% foreign equity ownership, but it was eventually extended to all
liberalised sectors, regardless of the foreign investor‟s equity share.
The Five-year FDI liberalisation plan (1993–98)
In the early 1990s, FDI liberalisation regained momentum as part of the so-called segyehwa
(globalisation) policy (Box 4).8 The primary objective of the policy was to enhance independent
technological capability.9 In June 1993, the government announced a five-year FDI liberalisation plan to
continue the process of easing inward FDI-related regulations, expand the number and range of sectors
open to FDI, and increase efforts to promote inward FDI. Under the plan, 132 out of 224 restricted
sectors were liberalised. Corporate taxation of foreign invested firms was reduced, regulations on
foreign ownership of land were relaxed and approval procedures were simplified. Japanese investment
was targeted, particularly in auto parts, electric/electronic parts and machinery industries (Harvie and
Lee 2005). The Five-Year Plan was followed by another one starting in 1995 and by a 1994 Reform
Plan for the Improvement in the Foreign Investment Environment.
Box 4. Segyehwa Policy (1994~1998)
First introduced at an APEC summit in late 1994, the segyehwa (translated as “globalising the economy and
internationalising local society by adopting new ways of thinking”10
) policy was an overarching policy framework
of the Kim Young-Sam government to emphasise the importance of deepening Korea‟s integration into the world
economy and to turn around the adverse public sentiment against inward foreign investment. The Segyehwa
Promotion Committee was established as a focal point in early 1995 and announced the Vision and Strategy of
the Segyehwa shortly thereafter which contributed to amending or establishing over 100 laws and regulations.11 The government strongly publicised the Segyehwa policy through massive public campaigns emphasising the need
for Korea to open up to the global economy in order to sustain growth in the long term. The notion of segyehwa
became an overarching theme in all public policies, from reunification and education to the environment and the
economy. This policy direction was in line with the government‟s emphasis on liberalising the FDI regime in order
to ease technology transfer and deepen the industrialisation of the economy. With the launch of the WTO and
Korea‟s accession to the OECD, Korea also needed to follow international standards and thereby adopt new
policies for strengthening fair competition and further liberalising the FDI regime and capital markets.
The actual effects of the segyehwa policy are still debated.12
It nevertheless is likely to have helped to lay the
foundation for changing the direction of the FDI regime from passive liberalisation to active promotion of
liberalisation from the mid-1990s.
7 Approval responsibility was transferred from the EPB to the Ministry of Finance.
8 As encapsulated in the Seventh Five-Year Plan (1992–97).
9 The segyehwa policy coincided with the interests of the chaebol in their own international expansion.
10 Kevin Murphy, “Seoul arrives at a difficult crossroads”, New York Times, 16 September 1996.
11 National Archives
12 East Asia Institute http://www.eai.or.kr/data/bbs/kor_book/2010120313294326.pdf