OECD estimated that Korea's potential growth rate, which is currently standing in the high 3 percent range, would fall to 1 percent by 2030 mainly due to low fertility and population aging. Potential growth rate is the possible production or output of an economy that can be achieved by making the best use of the production factors such as labor and capital, without creating inflation. To prevent potential growth rate, or productive capacity from declining, we have to either increase the production factors or improve productivity.

Since 2000, however, the imbalance between inbound and outbound FDI(Foreign Direct Investment) has grown bigger as more Korean companies have extended their businesses abroad, making a dent in Korea's capital stock (accumulated capital). We interviewed Dr. Choong Yong Ahn, the Foreign Investment Ombudsman, who is in charge of inducing reinvestment as well as inbound FDI, about ways to "narrow the gap between inward and outward FDI" and "secure new growth engine". The interview took place at the office of Foreign Investment Ombudsman in KOTRA (Korea Trade-Investment Promotion agency).

"Foreign Investment Ombudsman system is Korea's unique model"

Upon meeting us, Dr. Ahn was very concerned about the domino effect of the global economic downturn, which is characterized by European fiscal crisis, China's declining economic growth rate, and sluggish recovery in the U.S. market. Even our export, a driving force of the Korea's economic activities, fell by 8.8 percent in July from the same period a year ago. Therefore, the growth rate of this year is likely to decrease because of the poor export performance.

- When business activities stagnate, investment, especially inbound investment becomes essential. But we are not familiar with the Foreign Investment Ombudsman system, which is responsible for this.

"Foreign Investment Ombudsman system is Korea's unique model that was established after the Asian foreign exchange crisis in the late 1990's to attract more foreign capital. In October 1999, the resolution body was created to improve Korea's investment environment by addressing grievances raised by the foreign-invested companies and support investment inducement. The Foreign Investment Ombudsman is the head of this body who is commissioned by the President himself (Article 15 of the Foreign Investment Promotion Act").

- We heard the system is being promoted abroad.

"That's right. As the achievements of the system are known to the world, countries like Russia and Brazil have benchmarked and adopted the system, and international organizations including UN are asking us to introduce it."

- You have been the Foreign Investment Ombudsman since 2006. What was the most impressive case so far?

"In 2007, 18 foreign-invested companies in Dongtan area faced eviction after the government announced "Dongtan New city Construction Project". When I visited the site, I found out that most of the companies there were running pollution-free, high-tech industry plants. So I consulted with relevant government ministries to allow them to continue their business. In addition, those plants were burdened with increased maintenance costs because of the rise in land price, as apartment complexes were built in the area. We decided to slash more than 90 percent of the costs on the condition that the companies change their purpose of land use.

- Is Foreign Investment Ombudsman also serving as a coordinator before an ISD (Investor-State Dispute) case breaks out?

"Foreign-invested companies, who have expanded investment continuously, must not be thrown out of their operational site overnight. Such a case can deal a heavy blow to invest predictability in Korea. As new investment and reinvestment account for a half and the other half of the total inbound FDI respectively, it is very important to get rid of any uncertainties in the investment environment. The Foreign Investment Ombudsman is contributing to the preemptive prevention of ISD.

"We cannot guarantee success of FTA without expanded FDI"

- Inbound and outbound FDI imbalance is getting exacerbated.

"Korean enterprises' FDI has doubled after the financial meltdown in 2008 and been on the steady rise since then. On the other hand, foreign-invested companies' FDI in Korea has declined every year since the early 2000s when it reached USD 9 billion (See the graph). Last year, the investment disparity stood at USD 19.2 billion with the outward investment of USD 25.77 billion and inward investment of USD 6.55 billion, which means the domestic capital stock fell by that much."

- That means we have fewer incentives for foreign-invested firms to make investment in Korea. What do you think the reasons are?

"First of all, foreign-invested firms prefer China to Korea because they think Korean domestic market is smaller than that of China. Second, they are complaining about Korea's high wage and strong labor unions. Considering Korea's high technical skills, they can opt for Korean market despite high salary of the workers. But the rigidity in the labor market is the major cause for them to hesitate in making investment decision. The third reason is high land prices."

- Then the solution must be found in the above three reasons.

"Yes. For the second reason, an institutional approach is needed to stem illegal strikes. To address the third reason of high land prices, we are trying to attract foreign enterprises into the local industrial complexes. But there are several disadvantages in running the business in the local area, including difficulties in finding qualified workers and weak infrastructure such as financial service. To refurbish the investment environment fundamentally, we have to polish the existing incentive systems, while improving the predictability, stabilizing labor-management relations, providing proper industrial land and employing tax and tariff scheme that meet the global standard.

- According to the 2010’s statistics, the foreign-invested companies accounted for only 4.2 percent of the total employment. Then, why should we put so much effort in attracting FDI?

 “If we want to see appropriate effects from KORUS FTA and Korea-EU FTA, FDI needs to increase by more than USD 2 to 3 billion annually. The simulated result of the FTA effects by the government was also made under such premises. Without expansion of FDI, we cannot ensure success of FTA.”       

“Supernational investment should be utilized to secure new growth-engine”

- Does FDI have anything to do with building the next-generation driving force, which is frequently mentioned these days?

 “These days, production is not completed in one country, but rather each process is generally conducted by multiple countries. Production processes are globally fragmented like this because global value chain has become more important as a way to increase value-added. Therefore, cross-border investment including FDI should be discussed and promoted in every industry. The same goes for the new growth engine. Medical service, tourism, pharmaceutical industry and education system are the case in point.  

- Do you mean the recent phenomenon where a growing number of foreign patients are seeking for medical help in Korea and foreign research institutions are moving into our land?  

 “Korea’s medical industry needs to be further expanded. Only 60,000 foreign patients came to Korea in 2009, while 1.39 million and 630,000 patients went to Thailand and Singapore from overseas respectively during the same year. It is a huge national loss if we do not make good use of our qualitative medical system. There is clearly room for improvement in tourism industry as well. If we want to attract 20 million tourists by 2020, we need to build commensurate investment infrastructure. For example, tailored tourism service can be provided by combining domestic capital with overseas capital of the foreign tourists. Solvay Group, a leading Belgian chemical company with its realms extended to new renewable energy and photovoltaic power, decided to relocate its global R&D headquarters into Ewha Women’s University. It is a testament of their high expectations on Korean researchers. In addition, clinical trial of the pharmaceutical industry is highly likely to succeed. If we can better tap into these fields, we can build new driving force by increasing capital stock and adding jobs.        

“Northeast Asian Investment Community will be established”

- The trilateral investment treaty among Korea, China and Japan was signed back in May. What kinds of changes are expected in the region?

 “When you see the inbound FDI figure of last year, American companies’ investment went up slightly while that of EU and Japan rose by 30% and 216% respectively. It was partly due to the ripple effects of the mega earthquake that struck the East Japan last year. However, Japan also tends to consider Korea as an optimal place to relocate their high-tech industries. Despite Korea’s high wage, there are advantages such as abundant high-skilled and trained workers, and short distance between Korea and Japan that can shorten production supplying time. The trilateral investment agreement will further enhance these strengths. Korea, China and Japan will rise as a Northeast Asian investment community by setting common production standards.   

- According to the “Korea, China and Japan Cooperation Report (1999∼2012)”, published by the Ministry of Foreign Affairs and Trade, three countries’ trade cooperation has increased significantly. The trilateral trade volume rose by more than 5 times from USD 130 billion in 1999 to USD 690 billion in 2011. In contrast, the trilateral investment is lagging far behind.   

 “The trilateral investment accounts only for 6 percent of the three countries’ overseas investment. It is very small amount, but by the same token, it also indicates that mutual investment among these three countries can expand that much. Northeast Asian investment community is in its beginning stage yet. But if we watch it closely with interest, then its results will be huge. For instance, if we build a marine leisure park off the coast of Yeonpyeong island, co-invested by three countries, it will be of great help to enhance Korean peninsula’ security. Also three nations’ cooperation will be stepped up to overcome the economic crisis by creating more job opportunities.      

- Political season has come back. Political circles are in an uproar over the welfare issue and economic democratization before the presidential race at the end of this year. What do you think about that?

 “Welfare should be our priority given low fertility rate and population aging faced by Korean society. A lot of resources will be required to resolve relevant problems. We have to have a separate discussion on how much will be needed and where to concentrate them. But the important thing is we have not had enough discussion on how to strengthen our fiscal soundness to keep up with increased government’s expenditure. Everybody seems to find ways to spend money when we actually need to improve our fiscal conditions first. To this end, job creation and new growth engine building through FDI expansion should be our top priority. When it comes to economic democratization, problems that can undermine social cooperation must be thoroughly controlled, as the words “corporation” and “cooperation” were derived from the same origin.

Finally, Dr. Ahn emphasized that whoever wins the upcoming presidential election must take the declining potential growth rate of Korean economy seriously. Continued interest in Korea’s unique system of Foreign Investment Ombudsman is also required so that the system can take the lead in inducing more FDIs and creating new growth engines, he added.  

Dr. Ahn is, currently serving as the Foreign Investment Ombudsman (commissioned by the President) and a Distinguished Professor at the Graduate School of International Studies of the Chung-Ang University. He was also the chairman of the Regulatory Reform Committee, president of the Korea Institute for International Economic Policy, president of the Korea International Economic Association, and Chairman of the Board of Choheung Bank. He earned his bachelor's degree from Kyungpook National University, Master’s degree from University of Hawaii, and Ph.D. in Economics from Ohio State University. His book “Modern East Asian Economy (2000)” won the 1st Okita Policy Award bestowed by the National Institute for Research Advancement under the Prime Minister’s Office, Japan. Several of his research papers including ‘Review of Economics and Statics’ and ‘European Economic Review’ were also published in the world-renowned academic journals.  

Dr. Ahn is also very famous for his fluent English among the Korean economists. When asked about the secret, he said his fondness for English goes back to junior-high school years. Reading an English bible grew into his habit after entering the University, which he thinks was the greatest help to improve his English. He was the first member of the Reserve Officers' Training Corps (ROTC), where he was chosen as an interpreter officer thanks to his outstanding English skill. He was also selected for scholarship program of the East Asia Center in the University of Hawaii.  

Today(on August 7, 2012), he received a commendation from the Japanese Ministry of Foreign Affairs for his work in advancing economic cooperation between Korea and Japan.

Interviewed by an editorial writer, Young-rae Cho. choyr@kmib.co.kr

Korean ver.

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