Foreign Direct Investment
The amount of foreign direct investment (FDI) declared in Korea in the first half of this year has recorded its highest since statistics started being compiled in 1962. Analysis suggests that Korea has emerged as an alternative investment destination to China due to U.S.-China tensions.
The Ministry of Trade, Industry, and Energy announced on July 4 that the declared FDI for the first half of this year increased by 54.2% compared to the same period last year, recording US$17.09 billion. On a quarterly basis, it has been increasing for four consecutive quarters since the third quarter of 2022. The arrival-based FDI increased by 6% from the previous year, reaching US$7.75 billion.
Looking at the FDI in the first half of this year by industry, the manufacturing sector reached US$7.63 billion, an increase of 145.9% compared to the previous year. Investment increases were particularly noticeable in the fields of semiconductors, secondary batteries including electricity and electronics (up by 663%), and chemical engineering (up by 464.1%). Investment in the service sector was US$8.48 billion, up 11% from the previous year.
By region, the investment from the European Union (EU) increased by 144.8% to US$4.26 billion, the highest. This was followed by the United States (US$3.66 billion, up by 24.1%) and Greater China including Taiwan and Singapore (US$3.25 billion, up by 32.8%).
A European chemical company that has its Asia-Pacific headquarters in China is considering relocating it to Korea. This is due to increasing uncertainties as the US-China conflict prolongs and China's policy towards foreign companies becomes tougher.
Vestas, the world’s No. 1 wind turbine company, decided last month to move its Asia-Pacific headquarters from Singapore to Korea and invest US$300 million in building a factory here. A government official said, “There is an awareness among global companies that Singapore is also part of Greater China. As a result of the uncertainty caused by the US-China conflict, Korea, which has a solid manufacturing base, is being highly evaluated as an alternative.”
The record-breaking FDI in the first half of this year is largely due to the China avoidance funds flowing into Korea. Until now, companies have prioritized China, which has a large market and manufacturing base, when investing in Asia.
According to data provider CEIC, the FDI in China from foreign companies, which was US$344.1 billion in 2021, almost halved to US$189.5 billion last year due to the protracted US-China conflict. FDI in Hong Kong also decreased from US$137.2 billion to US$109.6 billion during the same period.
On the other hand, foreign investment is flowing into Korea and Japan. The domestic FDI, which was only US$26.9 billion in 2018, increased to US$29.513 billion in 2021 and recorded US$30.445 billion last year. It is forecast that it might even surpass US$35 billion this year. Japan is also attracting foreign investment. According to data from Japan’s Ministry of Finance, the balance of FDI in Japan based on the first quarter has increased by 37% over the last three years to ¥4,678.6 billion.
Another reason for the increase in domestic FDI is the U.S.’s Inflation Reduction Act (IRA). The IRA is a system that grants subsidies only when a certain proportion of battery materials produced in the United States or a country that has a free trade agreement (FTA) with the United States is used. The countries in Asia that have an FTA with the U.S. are Korea and Singapore. Compared to Singapore, which lacks a manufacturing base, Korea is known to have the world’s top level of manufacturing capability. Therefore, even Chinese companies are flocking to Korea to target the U.S. market. A representative example is a Chinese company investing US$500 million in the first quarter to build a light bulb factory in Saemangeum.