Due to Abolition of Tax Benefits
South Korea suffered a 13 percent drop in inbound foreign direct investment (FDI) last year compared to 2018. FDI shrank throughout the first half of last year before recovering to some degree in the second half due to large-scale acquisitions of domestic companies by foreign investors.
One main reason for the decline in FDI was the abolition of the corporate tax breaks given to foreign-invested enterprises. Foreign investors point out that South Korea’s pro-labor management conditions and regulations block investment in the country.
The Ministry of Trade, Industry, and Energy reported on Jan. 6 that inbound FDI totaled US$23.33 billion in 2019. It is the second-largest figure ever after the record high of US$26.9 billion in 2018.
FDI totaled US$3.17 billion in the first quarter and US$6.7 billion in the second quarter, a drop of 35.7 percent and 38.1 percent from a year ago, respectively. But the trend shifted to an upturn in the second half of the year, with FDI reaching US$3.61 billion in the third quarter and US$9.84 billion in the fourth quarter.
Last year, the Korean government abolished the corporate and income tax cuts that had been offered to foreign investors for seven years.
The government cited increased cash support for foreign businesses and large-scale M&As reported in the fourth quarter as reasons for the increase in FDI in the second half of last year. Under the cash support program, a foreign investor gets back a certain amount of his investment in cash. This type of support totaled 50 billion won (US$42.78 million) last year, nearly a 10-fold increase from 6 billion won (US$5.13 million) in 2018. It offset the effects of the abolition of the corporate tax breaks.
In addition, large-scale M&As such as Aramco’s equity investment in Hyundai Oilbank (US$1.2 billion) and global cosmetics company Estee Lauder’s investment in Korean cosmetics company Have & Be Co. (US$1 billion) were made in the fourth quarter.
Foreign-invested enterprises say that there are still many things to be improved in the Korean investment environment. According to a survey conducted by the Korea Trade-Investment Promotion Agency (KOTRA) in November 2019, 24.1 percent of foreign-invested companies cited the labor environment as the most urgent problem. It was followed by regulations (22.3 percent), taxes (12.8 percent), and finance (8.7 percent). And, only 18.8 percent of the respondents said they would expand their investments in Korea in the future, down 2.4 percentage points from 2017. On the other hand, the proportion of companies that disclosed an intention to reduce their investments rose 2.9 percentage points to 11.9 percent.