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Recent Trends of and Prospects for Inbound Foreign Direct Investment

Recent Trends of and Prospects for Inbound Foreign Direct Investment

JEON Young-Jae

Feb. 25, 2008

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Inbound foreign direct investments or FDIs (notification basis) into Korea have been declining steadily since 2005. In the first nine months of 2007, FDI inflows (on the basis of reporting to the authorities) amounted to $6.3 billion, leading to the forecasted total sum of only $10 billion for the entirety of 2007. The increase rate of FDI inflows for 2007 is forecast to be -11%, a negative rate for the second consecutive year.

The decline in inbound FDI seems due to structural factors rather than temporary ones. In the wake of the currency crisis in 1997, Korea implemented a policy to attract foreign capital and FDI inflows reached upwards of $15.5 billion in 1999. This quantitative growth was largely driven by the won's steep depreciation and many fire sale opportunities of a large number of companies (stricken by the currency crisis) or their assets. However, the FDI momentum waned after the companies and assets were sold out and the foreign exchange rate stabilized. Why? Besides Korea's lack of attractiveness that could appeal to foreign investors, it is because China, India and other newly emerging economies, which have aggressively ramped up competition to secure foreign capital. In fact, the proportion of FDI inflow to Korea in total FDI worldwide is declining while FDI inflow to developing countries is rising. Industrialized countries also have gained a larger share of total FDI worldwide since 2004.

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