According to the Korean Ministry of Strategy and Finance on Nov. 14, Korea’s overseas direct investment (ODI) totaled US$15.31 billion from the first quarter to the second quarter of 2023. The amount was 22.9 percent lower than US$19.84 billion a year ago. The decline was the largest in 14 years since a drop of 31.6 percent in the second quarter of 2009. This is the third consecutive quarterly decline since the fourth quarter of last year. This is the first time except for 2008, the year of the global financial crisis and 2020, the year of the COVID-19 pandemic.
This is attributable largely to Korean investors’ exit from China. By country, Korea’s ODI in China totaled US$570 million, down 53.3 percent from a year earlier. This is a contrast to a 14.2 percent decrease in Korea’s ODI in the United States, which hit US$6.21 billion, and a 0.2 percent increase in Korea’s ODI in Vietnam, as Korea invested US$860 million in the Southeast Asian country. Korea’s ODI in China also plunged by 89.2 percent in the first quarter.
The problem is that Korea failed to attract money from Korean investors who cut their overseas investment. For one thing, a few Korean companies have done a u-turn and come back from overseas. According to the Ministry of Trade, Industry and Energy, the number of new overseas subsidiaries of Korean companies stood at 2,317 in 2020, 2,238 in 2021, and 2,456 in 2022. During the same period, the number of u-turn companies reached 23 in 2020, 26 in 2021, and 24 in 2022, which is about one percent. This was due to returns of some Korean companies that left the Chinese market due to COVID-19 rather than improved investment conditions in Korea, analysts say.
The United States, which has implemented re-shoring (bringing manufacturing companies back to the United States) since the presidency of Barack Obama, has used the Chips Act and the Inflation Reduction Act (IRA) to attract companies back to the United States and offer huge incentives to such returning companies. The number of u-turn companies climbed from 340 in 2014 to 1,844 in 2021 in the United States.
Korean companies have been slow in returning to Korea because labor costs remain higher in Korea than in overseas production bases and corporate tax and labor relations conditions are less attractive. Among 64 countries, Korea ranked 14th in economic performance but 53rd in business condition, according to the IMD’s 2023 World Competitiveness Ranking.
Some experts point out that an improvement should be made in the Act on Supporting Korean Companies’ Return from Overseas Countries (also known as the Returning Company Support Act), which helps Korean companies return to Korea from overseas countries. They say that it is not enough to extend the corporate tax and income tax reduction periods to seven years and expand subsidies for returns and incentives for job creation as far as encouraging Korean companies to return is concerned.