Foreign direct investment (FDI) in South Korea dropped sharply in the first three months of this year from the previous year, reaching a 7-year low. Amid a downturn in exports and investment in plant and equipment, FDI fell for three quarters in a row.
South Korea received US$3.17 billion (3.62 trillion won) worth of new FDI commitments in the January-March period, down 35.7 percent from the same period a year ago, according to the “Q1 FDI Trend” report released by the Ministry of Trade, Industry and Energy (MOTIE) on April 11. The figure fell to its lowest in seven years on a quarterly basis after US$2.35 billion (2.68 trillion won) in the first quarter of 2012. It also showed a minus growth for the third consecutive quarter, including minus 13.6 percent in the third quarter of last year and minus 17.8 percent in the fourth quarter.
As the corporate tax and income tax exemption benefit for foreign investors ended at the end of last year after having been in place for seven years, investors which initially planned to make an investment in the first and second quarter of this year moved up their investment schedule to the second half of last year, contributing to the sharp fall in the FDI in the first quarter of this year.
By region, the direct investment pledged by the European Union (EU) investors, which had the highest percentage, dropped by 47.3 percent on year in the January-March period to US$990 million (1.13 trillion won). The EU's share in the total FDI also plunged from 38 percent in the first quarter of last year to 31 percent in the first quarter of this year.
In addition to the EU, FDI from major countries, such as Japan, China and the United States, decreased considerably. In short, South Korea became unattractive to foreign investors. The investment pledges from Japan fell by 31 percent to US$250 million (285.13 billion won) and the actual investment 35.4 percent to US$210 million (239.51 billion won). Some experts on Korea-Japanrelations said, “The worsening relationship between South Korea and Japan affected investment pledges in a way.”
New FDI committed by the United States plunged by 78.7 percent on year to US$160 million (182.48 billion won) while the actual investment from the country fell by 92.3 percent to US$70 million (79.84 billion won). This is largely due to the prolonged trade dispute between the United States and China and the continuous gap in interest rates between the United States and South Korea, according to MOTIE. The direct investment pledged from China decreasedby 88 percent to US$130 million (148.27 billion won) and the actual amount 45.5 percent to US$10 million (11.41 billion won) during the cited period.
By type, FDI in the manufacturing industry recorded at US$1.21 billion (1.38 trillion won), down 21.5 percent from a year ago, and that in service industry also dropped by 42.5 percent to US$1.92 billion (2.19 trillion won).
Greenfield investment, which has a great job creation effect due to the establishment of new firms, declined by 39.1 percent to US$2.16 billion (2.46 trillion won) in the quarter, while the merger and acquisition investment slipped by 26.8 percent to US$1.01 billion (1.15 trillion won).