[OUTLOOK]Not all foreign investment helpsAccording to a report about his recent visit to Uzbekistan, President Roh Moo-hyun declared there, “Foreign capital investment is helpful for economic growth.”
President Roh said this as though the controversies over the usefulness of foreign capital investment had been resolved, but that is not the case. I don’t know who gave the president this notion, but at least in academic circles, no conclusion has been reached that foreign capital investment is beneficial to economic growth.
Many researchers have committed themselves to studying this question for decades, and their conclusion, if any, has been that the effect of foreign capital investment varies from country to country, and from industry to industry.
A look at countries that successfully achieved economic growth after World War II illustrates this point. Some of them, including Japan, Finland and South Korea, imposed strict restrictions on investment by foreigners, but others, including Singapore and the Republic of Ireland, actively sought foreign investment.
Some countries could not achieve economic success despite active efforts to lure foreign investment. For example, Latin American countries accepted much more foreign investment, proportionally, than Korea did, and imposed far fewer restrictions on foreign companies.
But their economic performance lags far behind Korea’s. In particular, the annual average growth rate of their per capita income from 1990 to 2004, when they were staking the fates of their nations on attracting foreign investment, was 1 percent ― a third of what it had been during the 1960s and 1970s, when they placed more restrictions on investment by foreigners.
Countries that developed successful foreign investment policies have one thing in common: They took a strategic approach.
Japan, Finland and South Korea thoroughly excluded foreign businesses from investing in domestic industries that they thought were necessary and could be viable on their own. But in industries in which the governments thought the transfer of technology and acquisition of foreign capital were indispensable, they attracted foreign businesses, recognizing full ownership and providing subsidies. Countries whose aggressive pursuit of foreign capital led to economic growth, such as Singapore and Ireland, did not simply allow any country that brought in money to invest. Rather, they induced foreign capital based on a strategic plan for national development.
In the 1960s and 1970s, Ireland did pursue an open-door policy, in which foreigners could invest in whatever industry they liked. But that policy attracted only low value-added industries, which relied on low-wage workers, and its benefits gradually diminished.
But since the 1980s, the Irish government has designated electronics, the pharmaceutical industry and software as its strategic industries, and has shifted its policy in the direction of focusing on supporting research and development and employee education and training. Since this policy change, Ireland has achieved such brilliant economic progress that it has been called “the emerald tiger.”
Singapore also targeted certain strategic industries, and made foreign companies want to come to the country of their own accord by drastically investing in the human resources and social overhead capital those industries required. Though it depends largely on foreign investment, Singapore operates certain key industries, including communications, shipbuilding and airlines, as state-run corporations.
Since the foreign exchange crisis of 1997, a policy of indiscriminately pursuing foreign investment, one that welcomes all foreigners bearing capital, has taken root in our country. Such a policy may have been necessary right after the crisis, when our country was indeed in dire need of foreign capital.
But now Korea has $20 billion in foreign exchange reserves, and is concerned about where to spend the money. We no longer need an ask-no-questions approach to foreign investment.
What should be kept in mind above all is that, as can be seen in the cases mentioned above (including that of our own country in the past), attracting foreign investment without a clear, long-term strategy is of little benefit to economic development.
If it is judged necessary for long-term national development, the government should be willing to sell even basic industries to foreign companies. But if foreign investment is found to be harmful to the economy in the long term, then the government should have the guts to restrict or prohibit it, regardless of criticism it might hear from foreign businessmen and journalists.
Thanks to our foreign currency holdings, the fourth largest in the world, a report from the Bank of Korea or a remark by its governor can make the international financial markets fluctuate. Why, then, should we behave like an underdeveloped country that can barely survive without foreign investment?
* The writer is a professor of economics at the University of Cambridge in England. Translation by the JoongAng Daily staff.
by Chang Ha-joon