The Ministry of Strategy and Finance announced on Jan. 27 that South Korean manufacturers’ overseas direct investment totaled US$12.45 billion for the first three quarters of 2018 whereas the annual total had been US$7.89 billion in 2017. An increasing number of Korean manufacturers are leaving their home country in order to deal with trade protectionism amid a deteriorating local business environment.
The local manufacturing sector’s dependence on overseas production rose from 12.8 percent to 19.2 percent from 2000 to 2015. The sector is currently showing a decrease in capital expenditure with the increasing overseas direct investment leading to a decline in domestic investment, which is likely to result in less and less job creation opportunities.
The volume of intermediary trade is expanding, too. South Korea’s net exports based on intermediary trade totaled US$12.65 billion from January to November last year. For reference, the volume was second-largest in 2017 with an annual total of US$12.73 billion. The increase in intermediary trade means more overseas factory construction and less job creation in South Korea.
Meanwhile, foreign investment in South Korea is relatively small in view of the size of the country’s economy. As of 2017, foreign direct investment (FDI) in South Korea was US$17 billion, only 1.1 percent of its nominal GDP. The global average was 1.8 percent that year.
An increase in FDI has a positive effect on employment. In 2015, foreign companies investing in South Korea had 558,420 South Korean employees, accounting for 5.8 percent of the country’s total employment. The Korea Economic Research Institute recently said that FDI led to 50,000 new jobs in the country in 2017, when the local manufacturing sector’s total employment was 4,566,000.
Nonetheless, South Korea’s entry barriers are still high when it comes to FDI. According to the OECD, South Korea recorded an average FDI regulation index of 0.135 from 2015 to 2017, when the OECD average was 0.066. During the same period, the figures were 0.089, 0.052, and 0.023 for the United States, Japan and Germany, respectively.