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Foreign direct investment - a market overview and discussion of opportunities

The Asian financial crisis of the late 1990s has in the long term had positive effects on the Korean economy, particularly from the point of view of foreign investors, argue Timothy O'Brien and Edward Kim of Coudert Brothers. The government made various legal reforms to encourage direct investment from overseas, some of which are explained here.

Korea's economy appears to have rebounded from the dark days of the Asian financial crisis. As a result of prudent fiscal measures and an increase in exports, the Korean economy appears to be making progress towards returning to pre-1997 levels of GNP per capita. Korea has prepaid the US$58 billion that it borrowed from the International Monetary Fund and its forex reserves are now at arguably excessive levels. Korea's credit rating has improved as well, sparking interests from Wall Street investment banks.

The story was different in 1997. The combination of an international currency crisis and a huge foreign exchange deficit exposed weaknesses. The accumulated excesses of the chaebol conglomerates, bloated by the ambition and bad judgment of their owners (and their bankers), brought Korea down. The Won plummeted, national income dropped 35 per cent, unemployment soared, and Korea registered negative growth for the first time since 1980 forcing it to negotiate with the IMF.

The financial crisis permeated Korean life bringing about changes in the legal and cultural climate for foreign investment. Beginning in 1998, Korea's government made radical legal reforms to encourage foreign investment. With the exception of areas involving national security, health, culture or the environment, the new laws opened Korea's economy to foreign participation. Laws that restricted foreigners from establishing or acquiring businesses, purchasing publicly traded shares and other securities, establishing funds, buying land and so forth, were amended or abolished. Today, these activities are allowed with no prior government approvals and minimal reporting obligations. Despite this progress, however, Korea faces a number of issues, including:

• Restructuring - Large-scale restructuring deals are complex and challenging, as the ragged experience with the disposition of Daewoo and Hynix, among others, amply demonstrates.
  
  
• Financial industry - There are challenges ahead in changing loan practices from policy driven to loans based on professional credit analysis and the privatization of state-owned banks.
  
  
• Corporate transparency - The deliberative and decision-making roles of the board of directors in Korean companies, as well as protections for minority shareholders, remain embryonic. It is still a challenge for foreign investors to get reliable information during due diligence.
  
  
• Labour - Korea's labor market remains rigid, and employers have great difficulties in rationalizing existing workforces. Radical unionists can appeal to an undercurrent of nationalism and hostility to foreign ownership.
  
  
• Legal system and environment - The legal market remains totally closed to foreign participation.

Nonetheless, foreign investors have responded positively to Korea's progress so far. Investment levels are quadruple those during the pre-IMF years. In the financial industry, foreign equity is heavily involved in the largest banks and in certain cases foreign shareholders play significant or controlling roles. Foreign insurers have also been active and Korea has become a substantial market for industrial products and increasingly for consumer products and services. Foreign manufacturers have also made significant acquisitions in the domestic market. Thus, Korea's prospects for the future are encouraging. Foreigners can look forward to interesting opportunities to participate in the continuing restructuring process, and legal scholars and historians will have a fascinating case study in the liberalization of barriers to entry and modernization of a legal system.

Timothy J O'Brien, Partner, Hong Kong Email: obrient@coudert.com
Edward Kim, Associate, Los Angeles Email: kime@coudert.com

This article first appeared in the Coudert Brothers Asia Pacific Law in Focus newsletter in August 2002.

Copyright © 2002 Coudert Brothers

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