South Korean companies’ foreign direct investment (FDI) hit an all-time high of US$14.11 billion in the first quarter of this year with a year-on-year growth of 44.9 percent, the highest since Q1, 2017, the Ministry of Economy and Finance announced on June.
The manufacturing sector’s FDI reached a record high of US$5.79 billion with a year-on-year increase of 140.2 percent to account for 41 percent of the total FDI. This has to do with last year’s sluggish FDI and deteriorating domestic investment and business environments such as labor-management disputes and increasing production costs and tax burdens as well as U.S. trade protectionism and display and semiconductor manufacturers’ relocation to countries such as China.
South Korean companies’ FDI stood at US$4 billion in 2003 but exceeded US$10 billion in 2006 and US$20 billion in 2007. Then, the investment showed a double-digit growth in each of 2016, 2017 and last year. The FDI topped US$40 billion in 2017 and increased to US$49.7 billion in 2018.
The FDI in the United States increased 95.2 percent in one year to US$3.65 billion as, for example, CJ Cheil Jedang acquired Schwan's Company for US$1.68 billion in March this year and SK Innovation decided to build electric vehicle battery manufacturing facilities in Georgia. FDI in China soared 156.1 percent to US$1.69 billion.
In the meantime, South Korean companies are reducing their investment in their home country. The Bank of Korea recently announced that the capital expenditures in the country fell 17.4 percent from a year ago in Q1 this year after last year’s 1.6 percent decline. In a recent survey conducted by the Federation of Korean Industries, 70 percent of South Korean small and medium-sized enterprises answered that they were considering relocating abroad within two years. 50.1 percent of those that said so complained about an increase in production costs and frequent labor-management disputes.
This can lead to a vicious cycle in which a decrease in investment results in less employment and consumption giving rise to an economic recession. The National Assembly Budget Office recently mentioned that FDI’s positive effect on the domestic economy is on the decline. For example, the direct export inducement effect that is calculated by dividing exports to local corporations by the FDI balance fell from 162.9 percent to 117.4 percent from 2013 to 2017. This is because the focus of the FDI has shifted from low labor cost utilization toward M&As and local market penetration, which led to less dependence on domestic production and export.