Boosting domestic investment

Local corporate capital is rushing out of the country while foreign direct investment remains more or less flat. At this rate, all the efforts to increase jobs will be in vain. According to the Korea Chamber of Commerce and Industry, capital investment rose 4 percent annually on average over the last decade while local companies’ investments overseas increased more than 17 percent. The latter totalled 26.1 trillion won ($23.6 billion) last year, accounting for over a quarter of total domestic investments of 107.3 trillion won. Bank of Korea data shows a similar trend. Korean companies invested $23.6 billion abroad last year while foreign direct investment here amounted to only $5 billion in the same period.

Local companies are moving their capital and industrial facilities overseas in search of tax incentives and cheaper property and labour. This is inevitable in a globalized economic environment. They can save production costs by manufacturing in the export markets and capitalizing on the labour and distribution network there.

But the pace of the capital and industrial flight is too fast for the size of our economy. Korea has long benefited from a net capital inflow. The trend was reversed for the first time in 2005 and the net outflow over the last eight years exceeded 111 trillion won. Industrial data shows that a 1 billion won capital investment creates 12 jobs a year. If that’s the case, we’ve lost 1.3 million jobs over the last eight years because local firms went elsewhere to invest.

Capital investment in our economy has contracted on year for the last consecutive three quarters while verseas investment is on the rise. This is another ominous sign that the economy may not be able to pull out of the slowdown any time soon. If companies prefer to go abroad with their investments and manufacturing, any new government campaigns to boost jobs here will have little effect.

The solution has long existed. If the government cannot dissuade local companies from investing overseas, it must endeavor to attract more foreign investment. Korcham recommends deregulation, removal of discriminative practices, and more incentives for local companies to continue investment here.

The government must induce local companies to invest more in their home turf by effectively resolving the myriad regulations, militant labor unions and aggressive anti-investment activities that abound here. The country’s future depends on corporate investment. Look at the United States and Japan. Thanks to government efforts, American and Japanese firms are finally returning home, helping to reinvigorate their sluggish economies.