Deok Ryong Yoon**
(Korea Institute for International Economic Policy)
Contents-
I.
Introduction
II.
Pattern of Korean FDI in Abroad
III.
Korea’s FDI in ASIA
IV.
Characteristics and Prospects of Korea’s FDI in Asia
V.
Summary and Conclusion
JEL codes: F21, F23
Keywords: Outward FDI, Korea, regional investment
* This paper is prepared for ICRIER Workshop on Intra-Asian FDI Flows:Magnitude,
Trends, Prospects and Policy Implications April 25 – 26, 2007 at Casurina Hall, India
Habitat Centre, Lodhi Road New Delhi 3, India.
** Senior research fellow, Korea Institute for International Economic Policy. deyoon@kiep.go.kr.
1

I.
Introduction
Korea has become one of the main providers of FDI in Asia. Korea’s outward FDI exceeded inward FDI in 1990 for the first time. Since then Korea has rapidly expanded
FDI abroad. The rapidly increasing trend of outward FDI reversed abruptly due to the currency crisis in 1997. Enormous negative welfare effect in Korea withdrew Korean investment abroad, while rapid devaluation of Korean currency and falling prices, including wages, attracted inward FDI in Korea. Once Korea recovered from the shock of currency crisis, Korea’s net outward FDI into foreign countries started to increase in
2002 again.
As motives for FDI can be counted as providing a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm, which receives the investment, FDI can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic development.
The representative theoretical arguments on the motive of FDI have been made by market access theory versus factor proportions theory. Empirical analysis has shown different results from country to country. Even for the same country the motive for outward FDI can vary according to the given economic environment.
This paper will attempt to to explain the characteristics of Korea’s outward FDI.
The second chapter will show general patterns of Korea’s FDI abroad. The Third
Chapter will deal with Korea’s FDI in Asia and compares the characteristics with the general figure. The fourth chapter will try to cast a view on future prospects. Then the last chapter will summarize the main results and draw conclusions.
II.
Pattern of Korean FDI in Abroad
1. Recent General Trend
Korean foreign direct investment (FDI) abroad increased throughout the 1990s until the currency crisis broke out in 1997. After the break of the increasing trend,
Korean FDI started to increase again in 2002. Korea's FDI outflow ( notification basis ) in 2006 rose 104.4 percent year-on-year to US$18.46 billion.
The increase was driven mainly by investment in overseas resource development due to high oil prices, global management strategy of Korean companies
2

for better market access. The governmental deregulations on overseas investment by individuals have contributed to the growth of outward FDI. In particular, the recent investment in resource development surged on the back of government assistance such as strengthening resource diplomacy, expanding financial source for resource development and training skilled manpower.
<Figure 1> Korea’s FDI Trend
K o rea's O utw ard FD I Trend
1 2 ,0 0 0 ,0 0 0
1 0 ,0 0 0 ,0 0 0
8 ,0 0 0 ,0 0 0
6 ,0 0 0 ,0 0 0
4 ,0 0 0 ,0 0 0
2 ,0 0 0 ,0 0 0
0
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04 year
6,000
5,000
4,000
3,000
2,000
1,000
0 am o unt pro jects
Source: Korea Export-Import Bank, 2007
2. Korea ’ s FDI by Region
Korea’s outward FDI has increased in all the regions with Asia occuping the major share of the outward investment. Korea’s outstanding net investment in Asia
3

amounted to $32.56 billion by 2006, which accounted for 34 percent of total net outstanding investment. North America followed Asia with $17.88 billion accounting for 19 percent. European countries ranked third with $ 10.27 billion and made up 11 percent. Korea’s FDI in Latin American countries was $4.74 billion, explaining 5 percent of Korea’s total outstanding FDI. Figure 1 shows FDI trends by location. The most remarkable feature is that Korean FDI in Asia has increased rapidly in recent years and mostly due to high investment in China.
<Figure 2: FDI by Region>
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2002
2003
2004
2005
Asia
2006
Europe
Latin America
Middle East
North America
Source: Korea Export-Import Bank, 2007
In 2006, Asia recieved $60.6 billion of Korea’s FDI, North America $21.4 billion, and Europe $21.4 billion. These three regions occupied 87.6 percent of the total investment in 2006. The new observable fact is that the growth rate of Korea’s FDI in the Middle East by 200.4% investing $3.9 billion, Africa by 88.9% with $2.1billion,
Latin America by 71.7 percent with $5.3 billion. New investments in emerging markets are mainly due to the investment for resource development.
3. FDI by Industry
The Korea’s outstanding net amount of FDI by industry shows a dominant
4

position of the manufacturing sector occupying 53 percent with $36.7 billion. The second largest share belongs to wholesale and retail, taking up 20 percent with $13.7 billion. The mining industry comes next, which holds 7.3 percent with $5.1 billion, and other sectors including the service industry represent 19 percent of the total.
This shows that firms in the manufacturing sector have been the driving force behind Korea’s FDI in abroad. Which implies that Korean investment is focused on in ensuring overseas production facilities and securing market for sales. Weak presentation of service sector reflects, however, a low competitiveness of service sector in comparison to other sectors.
<Figure 3> FDI by Industry
($Million)
F D I b y Ind ustry
6000
5000
4000
3000
2000
1000
0 m anufact uring w holesal e& retail real estate construct ion m ining
2003 2004 2005 2006
Korea’s FDI outflow showed increases in almost all industries in 2006, especially construction (331.9%), real estate (228.3%), mining (203.3%) have led the upward trend. The ratio of investment was the biggest in the manufacturing sector with 47.2%, however, it recorded under 50% for the fist time in four years. Wholesale and retail sectors showed decreasing growth rate of 12.0 % in comparison to last year’s
15.2 %. On the contrary, the investment ratio of real estate, construction, mining has soared.
4. FDI by Company Size
5

At the beginning, Korea’s conglomerates, so-called Chaebeols, dominated the outward FDI while the small and medium enterprises (SMEs) focused on the domestic market. By 2006, the total outstanding investment by large enterprises was $48.45 billion, which accounted for 69 % of the total amount of investments. SMEs occupied
27 % with $17.84 billion, and other individual investors for 4 % with $3.2 billion.
However, the project basis distribution is different: 54 % for SMEs, 37 % for other individual investors and 9 % for large enterprises. This implies that large enterprises invested a large amount of money in a few projects, which accounts for the disparity in distribution between amounts and project bases.
<Figure 4> FDI by Company Size
FD I by C o m pany S ize
1 0 0 %
8 0 %
Individuals
6 0 %
4 0 % S M E s
2 0 %
0 %
Large
E nterprises
2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6
Source: Korea Export-Import Bank, 2007
In 2006, the FDI of Korean SMEs abroad amounted to $34.72 billion in 2005 projects, which shows 20.6% of increase in projects and 41.2% growth in amount.
However, the ratio of SMEs in total outward FDI in 2006 has fallen from 37.5% of last year to 32.4%. Investment of SMEs increased in all the industries and especially the investment in manufacturing, construction and real estate has largely expanded.
Investment of individuals reached 2,960 projects with $985 million, which shows a 17.1% increase of projects and 48.1% of monetary amount. Individual investment has increased mainly in construction, wholesale and retail, and real estate.
Regional distribution of individuals was led by Asia, North America and Middle East.
6

III.
Korea’s FDI in ASIA
1. General Trend
Korea’s FDI started to increase since mid-1990s. It has declined again by the currency crisis in 1997. The stagnated Korean investment in Asia began to increase rapidly since 2002. The amount as well as the projects has increased yearly by almost over 50%. <Figure 5> shows this rapid growth.
<Figure 5> Trend of Korea’s FDI in Asia
Trend of Korea's FDI in Asia
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
19
80
19
83
19
86
19
89
19
92
19
95 year
19
98
20
01
20
04
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0 amount projects
Source : Korea Export-Import Bank
<Table 1> shows the list of Asian countries according to Korea’s FDI amount in the country. China dominated the lead position in amount as well as in projects. The net outstanding Korea’s FDI in China was $16.98 billion at the end of 2006. Hong Kong came in second place with $2.99 billion. Then Indonesia, Vietnam and Singapore ranked third, fourth, and fifth by slight differences. Korea’s traditional FDI destinations, Japan and Singapore, receded to 7 th
and 6 th
places. India, Philippines, Thailand and Malaysia are listed as important FDI destinations of Korea, receiving over $1 billion.
7

<Table 1> Major Destination of Korean FDI in Asia
Country Amount($Ths) Project
China
Hong Kong
Indonesia
Vietnam
Singapore
Japan
India
Philippines
Thailand
16,980,814
2,997,721
2,392,445
2,176,377
1,467,553
1,437,438
1,010,566
816,403
815,184
15,909
831
858
1,023
237
1,097
245
827
422
Malaysia 578,564 360
Source: Korea Export-Import Bank
In 2006, the total investment in Asia amounted to $60.6 billion, an increase of
54.1% from 2005. Asia holds 56.5% in the total outstanding FDI investment slightly declined from 60.0% last year. Investment projects counted 3,472, showing 16.1% growth and occupying 67% of all FDI projects.
By country, China led Korea’s FDI investment in Asia with a remarkable gap compared to other countries in this region. However the ratio of China dropped from
67.3% in 2005 to 54.6% in 2006. Hong Kong and Vietnam showed the most remarkable growth in comparison to year 2005 by 12.0% and 9.7% respectively. Korean FDI outflow to Hong Kong reached US$ 7.25 billion in 2006; Kazakhstan, $2.5 billion;
Indonesia, $1.38 billion; and Cambodia, $1.22 billion.
Korean FDI flow increased in all industries in Asia. The manufacturing sector absorbed the greatest portion, followed by construction, service and real estate in the same order. However, growth rate was highest in the communication, real estate, and construction. This shows that the Korea’s FDI diversified the investment field.
Large enterprises led continuously Korea’s FDI outflow in most of the industries. Manufacturing, construction, mining and communication sectors attracted the major proportion of large enterprises’ investment. SMEs increased their investment in manufacturing, construction, and real estate. While individuals raised investments in manufacturing, construction, wholesale and retail, and service.
8

The general trend of Korea’s FDI in Asia shows the following characteristics:
1) Korea’s FDI in Asia continues to increase.
2) The destination is being expanded from China to other Asian countries.
3) Korean companies are diversifing the investment field.
4) Large enterprises still lead the outward FDI.
2. Regional Trend
Asia has accumulated most Korean outward FDI. However the greatest share was focused on China. China surpassed the US and has become the greatest recipient of
Korean FDI in 2002. In 2006, investments in China amounted to $33.1 billion and increased by 25%. Projects have also increased to 2,300 showing the growth rate of
2.7%. Even though investment in China continued to increase rapidly, the growth rate declined. The ratio of Korea’s FDI in China in the total outstanding FDI volume decreased from 40.4% in 2005 to 30.8% in 2006. In projects also, the proportion of FDI in China has decreased from 51.0% to 44.4% in the same period.
By industry, Korean FDI in the Chinese manufacturing sector has shown the largest growth in 2006. FDI in service and real estate expanded largely, too. All the investor groups increased their FDI in China. But large enterprises invested in the manufacturing sector more than services and real estate. Korean SMEs expanded investment in manufacturing and real estate the most. SMEs also favored investment in construction, while individuals invested in wholesale and retail trade more.
ASEAN is gaining importance as Korea’s FDI destination. The proportion of
Korean FDI in ASEAN in total Korea’s outstanding FDI volume has increased from
9.9% in 2005 to 12.6% in 2006. The weight of ASEAN countries in projects has increased as well from 9.7% to 13.7%.
9

<Table 2> FDI by Major Destination in the World
2003 2004
C h in a
(ra tio )
(c h a n g e )
2005 2006 p ro je c ts
1,679 a m o u n t p ro je c ts
1,666 2,142
(59.8)
(21.2)
(41.0)
(62.1)
(56.9)
(27.6) a m o u n t p ro je c ts
2,298 2,240 a m o u n t p ro je c ts
2,647 2,300 a m o u n t
3,310
(38.4)
(37.9)
(51.0)
(4.6)
(40.4)
(15.1)
(44.4)
(2.7)
(30.8)
(25.0)
U S
(ra tio )
(c h a n g e )
A S E A N
(ra tio )
(c h a n g e )
E U
(ra tio )
(c h a n g e ) to ta l
(ra tio )
(c h a n g e )
526
(18.7)
(17.4)
234
(8.3)
(-12.7)
50
(1.8)
(-7.4)
2,809
(100.0)
(12.8)
1,051
(25.9)
(84.8)
545
(13.4)
(55.4)
194
(4.8)
(-78.9)
4,062
(100.0)
(9.9)
828
(22.0)
(57.4)
282
(7.5)
(20.5)
79
(2.1)
(58.0)
3,764
(100.0)
(34.0)
1,339
(22.4)
(27.3)
513
(8.6)
(-5.8)
674
(11.3)
(248.3)
5,989
(100.0)
(47.4)
1,070
(24.4)
(29.2)
424
(9.7)
(50.4)
110
(2.5)
(39.2)
4,389
(100.0)
(16.6)
1,243
(19.0)
(-7.2)
650
(9.9)
(26.6)
556
(8.5)
(-17.5)
6,557
(100.0)
(9.5)
1,257
(24.2)
(17.5)
708
(13.7)
(67.0)
128
(2.5)
(16.4)
5,185
(100.0)
(18.1)
1,754
(16.3)
(41.1)
1,349
(12.6)
(107.7)
1,051
(9.8)
(89.0)
10,731
(100.0)
(63.7)
In 2006, ASEAN has benefited from 708 investment projects totaling $13.49 billion through Korean FDI, showing 67.0% growth of projects and a 107.7% increase in amount. Korea’s FDI flow increased in all the members of ASEAN except Myanmar.
Investment in Vietnam increased by 92.6%. However, the greatest growth was recorded by FDI in Cambodia showing an increase of 295.8%. FDI has increased in all the industries besides wholesale and retail trade. Even though the investment volume was highest in mining and manufacturing, the construction and communication sectors have shown growth of 11 times.
The regional trend shows following aspects:
1) China continues to lead the FDI growth in Asia.
2) Korea prefers China as manufacturing center as well as important market.
3) ASEAN attracts more FDI in communication and infrastructure building.
4) ASEAN is getting more importance for Korean multinationals to secure the access to natural resources.
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IV. Characteristics and Prospects of Korea’s FDI in Asia
1.
Characteristics
1.1.Motives of Korea’s FDI
The Export-Import Bank of Korea (2004) made an analysis on motives of FDI abroad with Korean multinationals using their reports in the form of a notice to the
Korean government. <Table 3> shows the results. The most important objective was to secure or develop local or third-country markets for about 50 percent of total FDI investors. The second important motive was to reduce production costs taking advantage of low wages in the host country. Other motives supported by a fewer number of companies included securing raw materials, acquiring advanced technology, avoiding trade barriers, and developing natural resources.
However, the motive can vary according to the business environment. As the
<Table 3> shows the development of natural resources was the main objective of FDI until 1993. It means that most of the investment was made to get the necessary access to natural resources at that time. Since 1994, securing has become the primary objective and utilizing low costs of labor has become the second most important objective.
With the increasing interest in using low labor cost abroad, SMEs increasingly joined outward FDI. Major proportion of SMEs invested mainly in China and other
Asian countries. It is understandable that the companies trying to reduce production costs using low labor costs invest in the neighboring countries, because the transport costs can be minimized as well. This is especially true if the product is assembled or goods to be used in Korea or in Asia.
1 Therefore, Asian region can be preferred by the multinationals seeking to reduce the production costs.
1
Lee, S.-B. (2006) explains that the most important motive for Korean FDI in the United States and Europe was to secure the local market, weighing in at 65.1 percent and 66.7 percent, respectively. Meanwhile, acquiring advanced technology or management know-how was the second most important reason for Korean OFDI in the United States (21.2 percent) and Europe
(11.6 percent). See Lee, S-B.(2006)
11

12

<Table 3> Motivation of Korean FDI by period (percent)
1968—1993
1994—
1996
Securing or developing local or third-country markets
Utilizing local labor costs
Avoiding trade barriers
Securing raw materials
Acquiring advanced technology or
management know-how
Developing natural resources
28.9
14.7
1.7
3.8
1.1
49.9
Source : The Export-Import Bank of Korea (2004). Lee, S-B. (2006)
50.2
37.2
2.5
4.8
2.6
2.7
1997—
2001
52.4
30.3
2.3
3.9
7.7
3.3
After 2002
47.1
38.5
3.1
4.4
4.1
2.8
The motivation of investment abroad can be different according to the industrial sector. In general, the manufacturing sector has strong interest in cost reduction. Low labor costs and low transport cost can attract FDI. China and other Southeast Asian countries can be a good destination of investment for the Korean multinationals in manufacturing sector producing labor-intensive goods. Industries like textile and clothing industries will be the case. However, technology-intensive industries will invest to secure or create market. It can be applied to the industries, such as the communications industry and the automobile industry. In many cases large enterprises are engaged in capital-(or techno-) intensive products. Therefore large companies undertake FDI projects to secure or develop market in abroad whereas SMES invest to use low labor costs.
2
For the multinationals, FDI can become a way to overcome existing bottlenecks.
If labor is scarce, companies go to the place where labor is abundant. Most recently, rapid increases in energy prices have become one of the most serious problems facing
Korean companies. Korea does not have any oil fields. It drove the outward investment to secure oil-provision. The investment volume to develop natural resources sprung up to the second place following the investment to secure market in 2006. This change implies the following aspects; First, motives of FDI can vary by economic conditions.
Secondly, securing market, cost-reduction, and developing natural resources are the major driving force of Korean FDI. Thirdly, Asian region have favorable condition to attract Korea’s FDI.
2 It is identified by the research of the Korea Export-Import Bank (2004) analyzing 318 Korean
FDI projects of large companies.
13

1.2.Economic Impact of Korea’s FDI
Economic impact of FDI outflow should be the same as the motive of the investment in abroad. However, just a few of them are measurable. The most important motive was securing the market. The impact should be able to observe through the gap between export-arousing effect and import arousing effect. The export-arousing effect is calculated by the ratio of exports to foreign subsidiaries to the net outstanding invested amount while the import arousing effect is calculated by the ratio of import amount from foreign subsidiaries to Korea to the net outstanding investment volume to them. If export-arousing effect is greater than the import-arousing effect, the investment has contributed to the expansion of exports. The figure subtracting import-arousing effect from the export-arousing effect during 1998-2004 was 130 on average. It reached 141 percent in 2004. This shows the clear positive impact on trade-balance through market securing effect of FDI. 3
Another measurable impact of FDI is income effect. Companies invest to reap the profit from it. ROI figures are the most usual indicator for the profitability. The average annual return on investment in the period from 1999 to 2001 was –19.6%.
However, it turned around in 2002 to positive and has increased continuously to reach
13.3%.
FDI strengthens the economic network between Korea and host country. It was explained already by the export-arousing and import-arousing impact indirectly. FDI increases not only the flow of goods between the countries but also the flow of people related to the investment first, and then others as well.
2.
Prospects
In the 1980s, the traditionally capital scarce Korean economy and its industries faced a totally different situation than before. Externally major trade partners, including the U.S. and Western Europe, increased pressure on Korea to open its economy.
Domestically the democratization has liberalized many regulations on labor which eventually caused internal problems such as wage hikes, labor shortages and frequent labor disputes. Additionly, rapid appreciation of Korean won have led Korean firms to invest abroad. This was the economic environment which caused Korean FDI outflow.
3 For the details see Lim and Moon (2001) and Lee, S-B.(2006).
14

Domestically there is not any substantial change. Korean companies still have high wage problems, frequent labor disputes and risk high appreciation of the Korean Won.
These factors imply that Korean companies have strong pressure to invest abroad.
The international environment encourages active FDI as well. First of all, Asia has increased its purchasing power. This fact implies that the Asian market is gaining in importance. The East Asian region has been strongly dependent on external regions because of its low purchasing power. However its dependency on outside economies has decreased rapidly with the increasing income level in the region. The world market and the United States do not have as strong an influence on the East Asian market as they had in the past. (See figure 6). Even though the world’s economic growth of 1 % led to
1 % economic growth in East Asia in the 1970s, the induced economic growth in East
Asia decreased to about 0.2 % in the 1980s. The positive impact of the United States’ economic growth by 1 % on the East Asian economy also declined from 0.8 % to 0.2 %.
<Figure 6> East Asian Economic Dependency on External Economies*
* Each number shows the result of rolling regression using the economic growth of ten years
(by that year) of the East Asian economy without Japan.
Source: Rhee (2004).
Although there are still some industries that depend strongly on the US market, the general trend shows a decreasing dependency of the East Asian real economy on the
US and world markets. To the contrary, East Asia is becoming an export market for the
United States. Moreover, East Asian countries are gaining influence on the US economy
15

as an important source of capital. Asia reveals still the highest economic growth rate, which will strengthen the regional purchasing power furthermore.
All these domestic and international environments are saying that the Korea’s FDI outflow in the Asian region will increase further. Large enterprises and hi-tech industries are joining the investment in Asia. That is probably the sign of increasing
Korean FDI flow into Asia.
V.
Summary and Conclusion
This paper reviews the general picture of Korea’s FDI outflow and tries to define the characteristics of Korea’s FDI in Asia and to make prospects on it. Korea began sending FDI abroad in 1980s. However, the companies engaged in FDI actively in
1990s. Aggressive FDI activities led by Daewoo in the first half of 1990s declined by the currency crisis. After the recovery from the crisis Korea came back and resumed the former level of FDI in 2002. Since then, Korea’s FDI outflow has been increasing.
The FDI after the crisis shows the following characteristics; first, rapidly increasing proportion in Asia; second, expanding SMEs’ investment.
Korea’s FDI in Asia has expanded largely. China has led Korea’s investment flow to Asia until 2006. FDI in ASEAN countries started to grow rapidly thanks to the high oil price and competition to secure natural resources. However, the primary objective of Korean companies’ investment in China and other Asian countries is to utilize low labor cost in this region. Low transport costs may have been an additional factor for Korea’s FDI concentration in Asia.
Korea’s FDI after the crisis has been successful. It has contributed to an increase in exports, improvement of trade balance and income growth of the ‘mother companies.’ The investment network has strengthened also the intra-regional economic activites.
Korea still has strong pressures to invest abroad. Wage hikes, labor disputes, and high pressure of currency appreciation drive the Korean FDI ouflow. Asia will be more a favorable place for Korean investors in the future not only because of low labor costs and transport costs but also because of increasing purchasing power.
Even if the total investment volume of Korea fall far behind of the US, Japan,
Germany and other big investors, Korea will pay more attention to the regional need of capital, because it will lead to a more profitable win-win game structure for both investor and reciepient.
16

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