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Country Commercial Guides for FY 2000: Korea
Report prepared by U.S. Embassy Seoul, released July 1999
Note* |
CHAPTER VII. INVESTMENT CLIMATE STATEMENTA host of laws, regulations, unwritten ministerial guidance and changing policies have made for a challenging business environment in Korea. However, in an effort to reverse Korea's reputation as a difficult environment for foreign investment and to further President Kim Dae-Jung's goal to "liberalize" the Korean economy, the government has announced a series of economic reforms designed to remove unnecessary regulations and give more scope for decision making to the private sector. Due to the financial crisis and the need to attract foreign investment to restore Korea to an economic growth path, the government has made major efforts to simplify and deregulate investment procedures to improve the investment climate. Much remains to be done, however, to create a trading regime conducive to foreign investment.
Openness To Foreign Investment
The reform of Korea's regulatory regime for foreign direct investment is the object of considerable government effort, and announcements regarding changes to the legal and regulatory environment, as well as the government's policy, appear frequently. The former governing law related to foreign investment -- the 1966 Foreign Capital Inducement Act (FCIA) -- was replaced in 1998 by the Foreign Investment Promotion Act (FIPA), which went into effect on November 17, 1998. The FIPA's primary purpose is to improve the climate for foreign investment by changing or repealing regulations which hindered foreign investment, as well as provide additional tax and other incentives.
Like the FCIA, the FIPA and related regulations continue to categorize business activities as either open, conditionally or partially restricted, or completely closed to foreign investment. However, the number of sectors which still have restrictions has been considerably reduced, most recently in January, 1999 when an additional 10 industrial sectors were opened to foreign investment. Restrictions remain on only 21 industrial sectors, seven of which are entirely closed to foreign investment. This contrasts with the 120 categories which had restrictions in 1996. However, there are plans to further reduce the number of covered sectors at some point in the future. This might be done in the context of a U.S.-Korea Bilateral Investment Treaty (BIT), negotiations for which began in July, 1998.
The major points of the FIPA are as follows:
- Simplified procedures, including for FDI notification and registration;
- Expansion of tax incentives for high technology sector FDI;
- Reduction of rental fees and expansion of lease duration for land leased from the government (including local governments);
- Increase in central government support of local government FDI incentives;
- Introduction of one-stop service, including an automatic authorization system;
- Establishment of an Investment Promotion Center (IPC) within the Korea Trade;
- Promotion Corporation to assist foreign investors in dealing with the bureaucracy;
- Establishment of an ombudsman office within the IPC to handle problems faced by foreign investorsIn categories open to investment, applications for foreign investment must still be notified in advance to designated foreign exchange banks, including branches of authorized foreign banks. In effect, these notifications are pro-forma, and approval can be processed within three hours. Applications may be denied only on specific grounds, including national security, public order and morals, international security obligations, and health and environmental concerns; it is rare for these grounds to be invoked. Exceptions to the advance notification-approval system exist for certain categories of projects which are subject to joint venture requirements and certain projects in the distribution sector.
Investments not qualifying for application under the above notification procedures (i.e., conditionally or partially restricted projects, as classified under the FIPA) must still be approved by the relevant ministry or ministries. Most applications submitted under approval procedures are processed within five days; cases which require consultation with other ministries can take up to 25 days or longer. Large foreign investments are no longer referred to the Fair Trade Commission for review, and the prior review of environmentally sensitive projects is no longer conducted by the Ministry of Environment.
The Korean government's procurement law no longer favors domestic over foreign suppliers. This law was changed on January 1, 1997, to bring Korea into compliance with the WTO's Code on Government Procurement. In addition, under the proposed bilateral investment treaty, U.S. investors would be treated as favorably as Korean nationals from the "pre-establishment" stage of investment. Problems with implementation of Korea's changed law still remain and the United States has brought one case regarding airport procurement to the WTO for resolution.
As of this year Korean law permits direct investment through merger with, or acquisition of, an existing domestic firm, including "hostile" mergers. Though a few restrictions on foreign ownership of local shares still exist, nearly all them have been lifted. One restriction that has not been removed is that on foreign ownership of public corporations, which consists of a limit on the percentage of stock allowed to be purchased, though these limits have increased in a number of cases.
The Ministry of Finance and Economy administers a program of tax and other incentives to stimulate advanced technology transfer and investment in high technology services. Effective December 5, 1998, foreign investments in 533 categories of high technology, including services, were identified for an increased range of tax reductions and other incentives. In addition, the scope of incentives was broadened to include the waiver of certain taxes, including corporate taxes on profits and dividends for the first seven years the foreign-invested project realizes profits, and a 50 percent reduction thereafter for three years.
The Korean government has a number of programs to encourage research and development (R&D) by private sector organizations. Of these, the most prominent is the Highly Advanced National (HAN) project, under which the government seeks to raise Korea's R&D capability to OECD levels by the year 2001. The program provides funding for projects carried out by Korean institutes in partnership with foreign research bodies aimed at developing new technology in a number of specified fields. Funding under these government R&D programs is also available to foreign-owned firms.
The Korean public attitude towards foreign investment has become more favorable and senior levels of the government from the President down continue to stress the importance of foreign investment for Korea's future. There are no significant non-governmental groups which oppose foreign investment. In fact, the media is generally supportive, and this has greatly influenced the change in public opinion. A number of consumer groups and some in the media continued to raise misplaced concerns about "luxury" imports, arguing that this kind of consumption harms social stability and damages the economy. These types of groups have not opposed foreign investment per se, nor do they represent a serious obstacle overall to foreign investment flows.
Right to Private Ownership and Establishment
Korea fully recognizes rights of private ownership and has a well-developed body of laws governing the establishment of corporate and other business enterprises. With certain exceptions, private entities may acquire and dispose of interests in business enterprises in Korea. As mentioned previously, Korean law now permits direct investment through merger, with or acquisition of, an existing domestic firm. The government also allows "hostile" mergers and, as of April 1, 1998, the restriction prohibiting cross-ownership between companies was repealed. Though a few restrictions on foreign ownership of local shares still exist, nearly all of them have been lifted. It should be noted, however, that the Fair Trade Act restricts cross ownership of shares in two or more firms if the effect is to restrict competition in a particular industry.
Until last year foreign access to real estate was strictly controlled through the Alien Land Acquisition Act. In order to attract foreign capital and investment, however, the act has been amended. According to a law which went into effect June 26, 1998, previous restrictions on foreign purchase of real estate have been lifted. The new law allows foreigners, regardless of visa status, the same treatment as Koreans in buying and using land. This change applies to corporations as well.
Protection of Physical and Intellectual Property Rights
Korea has made significant efforts to strengthen its intellectual property rights (IPR) laws and enforcement, although there have been inconsistencies with respect to court interpretation and rulings on the law. Downgraded from "priority watch list" in 1997, Korea has since been listed on the Special 301 "watch list."
Pursuant to its obligations under the WTO Agreement on Trade- Related Aspects of Intellectual Property Rights (TRIPS), Korea passed four acts (patent, utility model, design and trademark) in December 1995, and implemented new copyright, computer software and customs laws in 1996. In 1997, the trademark law was amended to afford protection to three- dimensional trademarks (registered in Korea only). On March 1, 1998, the revised trademark law became effective and the new patent court was established. Korea is implementing developed- country IPR standards in many areas, but still claims developing country status with respect to its TRIPS obligations overall. The U. S. Government has made it clear to the Korean Government in the negotiations on the Bilateral Investment Treaty (BIT) that the issues raised with respect to Korea's TRIPS consistency must be resolved before the BIT can be signed.
Korean patent law is fairly comprehensive, offering protection to most products and technologies. In July 1997, the Patent Act and Utility Model Act were amended to streamline the examination and appellate process and to boost monetary penalties for cases of patent infringement from 20 million won to 50 million won. U. S. industry believes that deficiencies remain in the interpretation of claims and in the treatment of dominant and subservient patents. Additionally, Korea's recognition of international ownership of foreign patents has been inconsistent, and approved patents of foreign patent holders have been vulnerable to infringement.
The Korean Industrial Property Organization (KIPO) took the lead in amending Korean laws to address U. S. concerns about restrictions on patent term extension for certain pharmaceutical, agrochemical and animal health products, which are subject to lengthy clinical trials and domestic testing requirements. In the past, pharmaceuticals' patent term protection for the clinical trial period was lost if that period took less than two years. In the fall of 1998, the National Assembly passed legislation amending these restrictive provisions.
Although a law permitting patent extension was adopted on January 1, 1999, Korea still has failed to provide full retroactive protection to existing copyrighted works as required under the TRIPS Agreement. The copyright law only provides protection for cartoon characters that possess artistry and creativity. The trademark law does not protect some famous U. S. cartoon characters because they have not been registered as trademarks with KIPO. Korean courts, in recent decisions, have consequently declined to extend protection to those cartoon characters and certain textile designs.
There has been some improvement over the past several years on the removal of pirated and counterfeit goods from the Korean market. Through administrative guidance, Korea curtailed the copying and selling of certain U. S. copyrighted works created before 1987. Korea also established "special enforcement periods," during which significant resources are devoted to raids, prosecution and other copyright enforcement activities. The High Prosecutor's Office reported that from January to October 1998, 17,369 IPR infringement cases were reported (up 3.4 percent from 1997), and 1,334 individuals were arrested (up 32 percent from 1997). Police and prosecutors continue to make "special" IPR raids. U. S. businesses and industry groups have reported that software piracy by large Korean corporate end-users remains a significant problem. Piracy for home use and by educational institutions reportedly continues to be a problem as well, and U. S. firms report that they still have difficulties bringing law enforcement action against "small- scale" infringers.
Although Korean laws on unfair competition and trade secrets provide some trade-secret protection in Korea, they remain deficient. For example, U. S. firms, particularly some manufacturers of chemicals and candy, face continuing problems with government regulations requiring submission of very detailed product information (i. e., formulae or blueprints) as part of registration or certification procedures. U. S. firms report that although the release of business confidential information is forbidden by Korean law, submitted information has not been given sufficient protection by government officials and, in some cases, has been made available to Korean competitors or to their trade associations.
The U. S. pharmaceutical industry continues to be concerned about a lack of coordination between health and safety and IPR officials, allowing products that infringe existing patents to be approved for marketing. The U. S. Government will continue to press the Korean Government on IPR protection for pharmaceuticals until U. S. concerns are fully and satisfactorily addressed.
Korea has taken steps to reduce the number of cases in which Korean companies register trademarks similar to U. S.- owned marks. But cases of unauthorized registration -- so- called "sleepers" are still a problem. "Sleepers" are marks filed and registered by Koreans without authorization in the late 1980s and early 1990s, when KIPO was still developing a more effective and accurate trademark examination and screening process. A new trademark law, which became effective March 1, 1998, contains provisions for prohibiting the registration of trademarks without the authorization of foreign trademark holders by allowing examiners to reject registrations made in "bad faith."
Until 1998, trade dress had been only partially protected under both the prevention of unfair competition law and the design law. The design law grants protection only after registration is completed. However, the amended trademark law now allows the registration of three- dimensional marks and trade dress.
Korea has long been a source of exports of infringing goods. Because textile designs are not fully protected, some Korean companies pirate U. S.- copyrighted textile designs and export them to third countries, competing with genuine U. S.- produced goods. The U. S. Government continues to urge Korean Government officials to increase their efforts toward stopping exports and imports of counterfeit goods to and from third countries.
Recent amendments to the Design Act became effective on March 1, 1998. Under the new amendments, KIPO made industrial designs more competitive by extending the duration of the design right and simplifying the design application procedures. A new design registration system was introduced to enable applications for certain goods to be registered without examination.
Taxation Issues Affecting U.S. Business
There is a tax treaty in force between the United States and Korea. Negotiations have begun between the two nations on a revised treaty.
The major tax issues identified by the American Chamber of Commerce in Korea as affecting U.S. companies are as follows: the effect of sudden currency fluctuations on thin capitalization rules, donation expense rules, limitations on the recognition of goodwill in an asset transfer, tax implications of corporate reorganizations, limitations on advertising expense deductions, differential VAT treatment of business vs. asset transfers, VAT reporting requirements, tax treatment of corporate other income and tax exemptions to encourage foreign investment.
Performance Requirements/Incentives
Korea ceased imposing performance requirements on new foreign investment in July 1989 and eliminated all preexisting performance requirements in December 1992.
Transparency of the Regulatory System
The Korean regulatory environment is difficult for domestic firms to work through and poses an even greater challenge to foreign firms. Laws and regulations are framed in general terms and are subject to differing bureaucratic interpretations depending on government officials who rotate positions often. Basic concepts of administrative procedure are not well developed. The regulatory process is not transparent and frequent informal discussions with the bureaucracy are necessary. Mid-level bureaucrats rely on unpublished ministerial guidelines and unwritten administrative advice for direction. Proposed rules are often not published prior to promulgation, or are published with insufficient time to permit public comment and industry adjustment. After promulgation, rules can be applied retroactively and arbitrarily. While Korea has an administrative procedures law, the rule making process continues to be opaque and non-transparent, particularly for foreigners.
President Kim Dae-Jung has made deregulation one of the cornerstones of his economic policy. To date this has taken a back seat to more critical economic and financial system restructuring, though the government has made a major effort to cut back on the number of regulations in force. The regulatory picture is mixed depending on the ministry or agency. Some have made unprecedented outreach efforts to the foreign business community and complaints about regulatory impediments vary by business sector.
Laws exist regulating monopolistic practices and unfair competition, but their practical effect is limited by the long-standing economic dominance of a few large business conglomerates, referred to locally as the "chaebol." Most recently -- April 1, 1998 -- the government amended the Anti-Monopoly and Fair Trade Act, which has been repeatedly changed to address the issue of unwieldy chaebol growth. In this latest revision the government repealed the prohibition of cross ownership but, instead, it instituted a new restriction on intra-group payment guarantees. Therefore, no new intra-group payment guarantees will be allowed for the 30 largest chaebol starting from April 1, 1998. All existing intra-group payment guarantees are scheduled to be eliminated by March 31, 2001.
Chaebol domination of the Korean economy causes some practical business problems for foreign investors. Small- and medium-sized suppliers, for example, may be reluctant to deal with foreign firms for fear of jeopardizing a prized chaebol relationship. Distribution channels may be blocked by chaebol competitors who own or dominate distribution channels. Obtaining access to credit may be complicated by the privileged relationships competing chaebols enjoy with local banks.
Corruption
The nature of Korea's historic style of governance - lack of transparency in the formation of laws and regulations, inadequate institutional "checks and balances," and a societal structure heavily based on personal relationships - has provided ample opportunities for corruption and influence peddling.
The Kim Young-Sam Administration (1993-1998) resolved to break with this tradition and began a momentous reform process with the requirement that all bank accounts be made "real name" by the end of 1993. This basic change had a profound impact in an economy wherein illegal wealth traditionally was hidden through the use of multiple bank accounts established using fictitious names. (The government has backtracked on this reform somewhat, however, by allowing the issuing and purchase of bearer bonds to mobilize domestic resources to address the financial crisis.)
These changes are profound and likely irreversible. Yet, the original conditions which contributed to corruption - principally the lack of transparency in government actions and the close relationship between the government, the banks, and the chaebols - have yet to be fully rectified. Important steps forward have been taken, including the first public hearings held by ministries to solicit popular views on proposed changes in regulations and laws, but much remains to be done. The current administration is fully committed to a more open and transparent system of government.
Giving or accepting a bribe to a Korean official is a criminal act. The penalties for the crime range from probation to life imprisonment, depending on the amount involved. Bribing a foreign official is not a crime under Korean law, but anti-bribery legislation has been approved, bringing Korea into compliance with the OECD initiative against bribery. The Supreme Prosecutor in each province is responsible for ferreting out corruption. Many business leaders and officials - including ministers and now presidents - have been found guilty of corruption in recent years, yet few have paid heavy fines or served much time in prison.
Labor
Korea has a highly educated and hard-working labor force. Although labor-management relations can be contentious, they have improved in the past several years with wages having increased more than two and a half times over 1987 levels. Between 1987 and 1989, labor disputes numbered in the thousands. This declined steadily to just 80 cases in 1995. Yet, recently due to the economic crisis and the consequential wage cuts and layoffs, labor disputes are once again on the increase, and labor relations remain highly confrontational. Labor groups are quick to escalate disputes and often resort to work slowdowns, abuse of leave, and disruption of business by holding rallies, wearing casual clothes, or displaying protest signs in the work environment. These tactics fall outside the scope of Korea's labor law and usually do not lead to confrontations with authorities. Sit-in strikes are common, and workers have on occasion occupied company offices or factories.
While Korean companies have had more major labor disputes, employees at foreign-invested firms tend to make greater demands on management. Workers at foreign-owned firms perceive, most often incorrectly, that job stability and career prospects are relatively less attractive than at Korean firms, and as a result, labor is increasingly concerned about reductions in force and issues such as severance pay. Although actions by striking employees may be illegal, unless violence occurs, police are reluctant to enforce the law and arrest unionists. At times labor portrays the dispute as an issue of nationalism. For some companies such as banks, whose activities are considered to be essential public services, the government has the right to order binding arbitration to solve labor disputes.
In December 1991, following its admission to the United Nations, Korea joined the International Labor Organization (ILO). It still has not ratified, however, the basic ILO conventions on Workers Rights (Convention no. 87 on the freedom of association, Convention no. 98 on the right to organize and collective bargaining, and Convention no. 151 on public service employees' right to organize). A number of international and domestic labor groups have filed complaints against the Korean government with the ILO's Committee on Freedom of Association. This committee issued a report critical of Korean labor laws and practices. In this report it recommended that Korea amend its trade union law to allow workers to form plural trade unions of their choice without restriction, to allow public servants and teachers the right to organize trade unions and engage in collective bargaining, to repeal the ban on third-party intervention in the settlement of labor disputes, and to facilitate the release of a number of imprisoned trade unionists. It should be noted, however, that many trade unionists were imprisoned for acts of violence and destruction of property and not for their affiliations with the unions.
In 1997 Korea amended its labor laws to permit more than one national labor federation. At this time the government also repealed the ban on intervention by "third parties" in labor disputes.
Efficient Capital Markets and Portfolio Investment
Many forms of capital inflows and outflows were traditionally restricted or prohibited as a matter of law or policy in Korea. The government also exercised tight control over its domestic credit markets, often with the goal of channeling financing to priority sectors. In some instances, banks were carrying non-performing policy loans on their books for years. Credit ceilings on loans to the ten largest business conglomerates are now in effect, and banks are required to channel a specified percentage of their loans to small- and medium-sized businesses.
In June 1993 the Korean government announced a five-year financial sector reform program. The government proposed loosening foreign exchange and capital controls, eliminating government credit schemes, and continuing the deregulation of interest rates. Implementation of the program was largely expected towards the end of the five-year period, although the timetable for implementation of some measures was advanced. Controls on interest rates for all loans as well as time deposits with maturities of over six months were removed. In December 1995 the Korean government announced the relaxation of restrictions in a number of other areas, including securities, offshore borrowing, imports on deferred payment and the holding and use of foreign exchange. The growing inefficiencies of domestic financial services sectors, plus pressure from Korean firms who wished to invest overseas or borrow in international capital markets, led to additional review of deregulation and reform options by earlier governments. Korea's bid to join the OECD by end-1996 spurred further reforms to bring Korean practice into line with basic OECD standards regarding capital movements, particularly in the areas of foreign purchases of Korean corporate bonds and in long-term borrowing abroad by Korean firms. Progress in financial sector liberalization was evident, but limited, until the economic crisis, in the aftermath of which change has been substantial.
In the area of portfolio investment, Korea's stock market is almost completely unrestricted now. The aggregate foreign investment ceilings on the Korean stock exchange were abolished on May 25, 1998 in the hopes of increasing the purchases by foreign stock investors. In addition, Korean law now permits direct investment through merger with or acquisition of an existing domestic firm. The government also allows "hostile" mergers and, as of April 1, 1998, the restriction prohibiting cross-ownership between companies was repealed.
Another area of the Korean economy that was liberalized this year was property law. The amended form of the Alien Land Acquisition Act allows even non-resident foreigners the same right as Koreans in purchasing and using land. Portfolio investment in real estate is now allowed as well.
The government permits stock purchases on margin, requiring that transactions be settled within three business days.
As a final note on capital movements, Korea routinely permits the repatriation of funds. It reserves the right, however, to limit capital outflows in exceptional circumstances, such as situations which may harm its international balance of payments, cause excessive fluctuations in interest or exchange rates, or threaten the stability of its domestic financial markets. However, such restrictions were not imposed even during the height of the financial crisis in late 1997.
Weak supervision and poor lending practices in the Korean banking system, particularly over the past few years, were major reasons for the crisis in 1997. The government, working closely with the IMF and the World Bank, has initiated a major restructuring of the financial system to strengthen it and make it more transparent and in-line with international standards. This process is ongoing.
The total assets (excluding acceptances and guarantees) of Korea's nationwide commercial banks as of the end of 1998 was 360 trillion won, or about $300 billion.
Conversion and Transfer Policies
Korea has removed to a substantial extent the past restrictions on financial transfers in and out of Korea. In the past, foreign exchange transactions were strictly regulated by the Foreign Exchange Control Act and its associated regulations. Even before this act was replaced, the government moved to liberalize transactions in such areas as medium and long term overseas borrowings, purchase and sale of local real estate and dealings in over the counter stocks and bonds.
On April 1, 1999, the Foreign Exchange Transaction Act (FETA) came into effect, replacing the Foreign Exchange Control Act. This act divides liberalization into two steps, the first taking effect with the new law and the second taking effect at the end of 2000. The first stage includes full liberalization of all current account transactions by business firms and banks. The former very lengthy negative list has been pared down to five items, most of which affect foreign exchange transactions by individuals, including such transactions as overseas travel expenses.
The capital account liberalization under the new law has been even more extensive; all capital account transactions were liberalized unless specifically prohibited. 72 of the 91 transactions specified by the OECD code of liberalization of capital movements have now been liberalized. These changes include allowing non-residents to open domestic won deposit accounts with maturities of more than one year. In addition, offshore transactions in won currency were liberalized, allowing non-residents to issues won denominated securities abroad.
For the second stage of FETA's liberalization measures, all remaining restrictions will be dismantled as of January 1, 2001, except for those that could harm international peace and public order such as money laundering and gambling. Included in this liberalization are the five remaining restrictions on individuals' transactions. The government also retains the authority to reimpose restrictions in the case of severe economic or financial emergency.
In addition to the above improvements by Korea's investment regime, the U.S. Overseas Private Investment Corporation determined in June, 1998 that Korea is again eligible for OPIC programs.
Continuing with Korea's conversion and transfer policy, the right to remit profits is obtained at the time the original investment approval is sought. In the case of open sectors (as defined by the FETA) this approval process has been delegated to the foreign exchange banks and is considered pro forma. In the case of investments which are either conditionally or partially restricted (as defined by the FETA), approval for both the investment and remittances rests with the relevant ministry.
When royalties or other payments over an extended period of time associated with a foreign investment in Korea are proposed as part of a technology licensing agreement, both the agreement and the projected stream of royalties must be approved by either a foreign exchange bank or the Ministry of Finance and Economy. Again, approval is virtually automatic.
When an investor wishes to effect a remittance, he/she must present an audited financial statement to the foreign exchange bank to substantiate the payment. To withdraw capital, a stock valuation report issued by a recognized securities company or the Korea appraisal board must also be presented.
Foreign companies seeking to remit funds which are not related to a FETA-type investment must work through authorized foreign exchange banks after obtaining government approval. Approval is given when a legal source of the funds is demonstrated and proof is shown that relevant taxes have been paid. There also exist limits on the amount of funds any traveler -- either foreign or domestic -- may take out of the country per trip.
Conversion of the national currency, the won, into foreign currencies for certain international transactions such as the import of goods and services is possible with the approval of an authorized foreign exchange bank. The external value of the won is the responsibility of the Bank of Korea, which allows it to float against a basket of hard currencies. Daily fluctuation limits have been completely removed, and the Bank of Korea has committed itself under the IMF program to intervening only to smooth out currency market movements, rather than to attempt to set the exchange rate. As a reference price, the Bank of Korea uses the previous day's weighted average of won-dollar interbank transactions.
Expropriation and Compensation
Korea follows generally accepted principles of international law with respect to expropriation. The law protects all foreign-invested enterprise property from expropriation or requisition. If private property is expropriated, it can only be taken for a public purpose and then in a non-discriminatory manner. Property owners are entitled to prompt compensation at fair market value. The Embassy is not aware of any cases of uncompensated expropriation of property against American citizens.
Dispute Settlement
Serious investment disputes involving foreigners are the exception rather than the rule in Korea, except in cases involving intellectual property rights. There exists a body of Korean law governing commercial activities and bankruptcies which constitutes a means to enforce property and contractual rights, with monetary judgments usually made in the domestic currency. The judgments of foreign courts are not enforceable in Korea.
Although commercial disputes can be adjudicated in a civil court, foreign businesses often feel that this is not a practical means to resolve disputes. For example, proceedings are conducted in the Korean language, often without adequate translation. With the rarest of exception, foreign lawyers, (i.e., who have not passed the Korean Bar), are prohibited by Korean law from representing clients in Korean courts. Civil procedures common in the United States, such as pretrial discovery, do not exist in Korea. During litigation of a dispute, foreigners may be barred from leaving the country until a decision is reached. Legal proceedings are expensive and time-consuming. A lawsuit is often considered a last resort, signaling the end of a business relationship.
Commercial disputes may also be taken to the Korean Commercial Arbitration Board (KCAB). The Korean Arbitration Act and its implementing rules outline the following steps in the arbitration process: (1) parties may request the KCAB to act as informal intermediary to a settlement; (2) if unsuccessful, either or both parties may request formal arbitration, in which case the KCAB appoints a mediator to conduct conciliatory talks for 30 days; and, (3) if unsuccessful, an arbitration panel consisting of one or three arbitrators is assigned to decide the case. If one party is a not resident in Korea, either may request an arbitrator from a neutral country.
Lastly, one more option may become available to resolve problems between U.S. and domestic firms. U.S. investors may be given the right to refer investment disputes with Korea to binding international arbitration, under a proposed U.S.-Korea bilateral investment treaty.
In any case, when drafting contracts, it may be a good idea to provide for arbitration by a neutral body such as the International Commercial Arbitration Association (ICAA). U.S. companies should seek local expert legal counsel when drawing up any type of contract with a Korean entity.
Korea is a member of the International Center for the Settlement of Investment Disputes (ICSID). It has also acceded to the New York Convention (formally called the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards). Korea is a member of the International Commercial Arbitration Association and the World Bank's Multilateral Investment Guarantee Agency (MIGA). It is important to keep in mind that Korean courts may ultimately be called upon to enforce an arbitrated settlement.
Political Violence (as it may affect investments)
Korea does not have a history of political violence directed against foreign direct investment. The Embassy is unaware of any politically motivated threats of damage to foreign projects and/or installations of any sort nor of any incidents which might be interpreted as having targeted foreign investments. Labor violence unrelated to the issue of foreign ownership, however, has occurred in foreign-owned facilities in the past.
Tensions on the Korean peninsula have remained relatively high due to the threat from North Korean conventional military forces. In a U.S.-DPRK agreement signed in Geneva in October 1994, North Korea agreed to freeze and eventually dismantle its nuclear weapons program. It did so in return for improved relations with the United States and a program to provide substitute energy in the form of heavy fuel oil and the construction of light water reactors, which are less subject to use for weapons development. It is hoped that this program, in conjunction with improved inter-Korean relations, will ease the DPRK's international isolation and reduce tensions on the peninsula.
Bilateral Investment Agreements
The United States has a bilateral Treaty of Friendship, Commerce, and Navigation with Korea, which contains general provisions pertaining to business relations and investment. During President Kim's visit to the United States in June of 1998, President Clinton and President Kim agreed to negotiate a bilateral investment treaty between the two nations. If such a treaty is realized, regulations dealing with foreign investment will be further liberalized. An example of changes proposed in the U.S. model text includes giving foreigners the right to transfer funds into and out of Korea without delay at the current, market rate of exchange.
OPIC and Other Investment Insurance Programs
Since a 1991 determination under the Workers Rights provisions (Section 23la) of the Foreign Assistance Act, the Overseas Private Investment Corporation (OPIC) has refrained from writing policies under its insurance programs for companies making new investments in Korea. Coverage issued prior to this determination is still in force. In June of 1998, however, OPIC announced that Korea will again be eligible for OPIC programs in response to recent steps taken to protect workers' rights. Yet, even without OPIC coverage, this factor has not been regarded as a serious obstacle to U.S. investors, since OPIC has never had to cover claims in Korea for expropriation, political risk or currency inconvertibility.
Korea has been a member of the IBRD's Multilateral Investment Guarantee Agency (MIGA) since November 1987.
Capital Outflow Policy
Since liberalization began in 1986, Korean foreign direct investment abroad has been growing at an average annual rate of over 35 percent. At the end of 1995, Korea's investment abroad totaled $10.2 billion, much of which represented recent investment in China and Southeast Asia in such labor intensive industries as footwear and component assembly. In recent years outward investment in capital and technology intensive industries such as autos has also increased markedly. Southeast Asia has replaced the United States and Canada as the largest recipient of new Korean investment. Since the establishment of formal diplomatic relations in 1992, Korean investors have been particularly active in China's northern provinces, where sizable ethnic Korean populations reside. Since the start of the economic crisis in December 1997, however, outward investment has nearly ground to a halt. In fact, chaebols and banks have sold off quite a bit of overseas investment since then.
In early 1996, the government announced changes designed to ease control on overseas portfolio investments, as well as to make it easier for foreigners to purchase Korean securities. As of April 1, 1996, Korean corporate investors and individuals can purchase certain foreign securities (stocks, bonds, commercial paper and certificates of deposit) without limits; institutional investors have been able to buy these foreign securities since 1995. During late 1997 and early 1998, in the context of Korea's IMF program a variety of rules governing foreign ownership of Korean domestic securities and Korean ownership of foreign securities were liberalized in the hopes of attracting foreign investment and capital.
Major Local and Third Country Competitors in Specific Sectors
The dominant position of Korean conglomerates -- the chaebol -- in the domestic economy represents a significant problem for foreign competitors. The chaebol purchase from "family" suppliers whenever possible. The government seeks to weaken chaebol dominance, but the effectiveness of their measures remains to be seen.
Despite Korea's position as an exporting center, the domestic capital goods industry is not able to meet demands for high-end manufacturing and electrical equipment, process controls, and customized machine tools. Japan is the United States' main competitor as a capital goods supplier. In aircraft and parts manufacturing, the U.S. competes with Airbus and its suppliers in the Korean market. Large-scale power generation, both nuclear and thermal, is a U.S. success story in Korea, despite strong Canadian and European competition. Korea Telecom has a history of favoring domestic suppliers, but, thanks to bilateral telecommunications agreements, the United States has made in-roads into the equipment market, particularly with recently established private telecom operators.
A variety of barriers to the import of automobiles has limited both U.S. and European exporters to a minuscule share of the booming domestic market. On October 1, 1997 the U.S., therefore, designated Korea as a "Priority Foreign Country Practice," which resulted in the initiation of an investigation under section 301 of the U.S. Trade Act on October 20, 1997 and a call for bilateral consultations to provide fair market access for foreign autos in Korea. The import of Japanese autos, however, was specifically prohibited, but the ban was removed in the summer of 1999. The rapidly growing pharmaceutical market is dominated by domestic firms, and government regulations greatly complicate the importation and distribution of foreign products. The domestic chemical and petrochemical industries have also expanded their capacity in recent years, pushing foreigners increasingly into niche, specialty markets.
The country with the greatest foreign investment in Korea -- as of end of 1998 -- is the United States, with $11.3 billion invested, or about 33.6 percent of Korea's total stock of foreign direct investment. The second largest group is European-based - $10 billion, or 29.7 percent of the total invested; the leading countries are the Netherlands, Germany, France, and Ireland. Japan comes in third with $6.3 billion, or 18.9 percent. The ranking of these investors is measured through monitoring applications for transfers and are booked at their nominal value; retained and/or reinvested earnings are not included in this calculation.
Foreign Direct Investment Statistics
Foreign Direct Investment Flows - Into and Out of Korea -------------------------------------------------------
(in US$ millions) --------Flow--------
1996 1997 1998 Total Inflow 3,203 6,971 8,852 33,492 - United States 876 3,190 2,975 11,255 - Japan 255 266 504 6,337 - Europe 1,058 2,409 2,968 9,962 - Others 1,014 1,106 2,405 5,938 Total Outflow 4,233 3,216 3,722 20,260 - North America 1,587 738 903 5,757 - Asia 1,625 1,497 1,408 8,852 - Europe 662 456 1,001 3,492 - Others 359 525 410 2,159Source: Ministry of Finance & EconomyForeign Direct Investment Statistics
The following is a partial list of major U.S. investors in Korea.
U.S. Investor------------------------------------Products---------------- Procter & Gamble Far East, Inc. Household products, sanitary paper products E.I. Dupont de Nemours & Co. Photomasks for semiconductors, engineering plastics, titanium dioxide, paints Ford Motor Company Autos and auto parts Caltex (Overseas) Ltd. Petroleum refining Bank of America NT Banking Citigroup Financial Services Carrier Corp. Air conditioners H.J. Heinz Co. Foods & feeds General Motors Corp. Auto parts Caltex Petroleum Corp. Petroleum refining Dupont Laboratories, Inc. Photomasks for semiconductorsHost Industry Contact Information for Investment-Related InquiresThe Korea Investment Service Center (KISC) is a one-stop shop for foreign investment in Korea, which was opened in Seoul in May of 1998 by the Korea Trade and Investment Promotion Agency (KOTRA). This office provides Korean government publications on foreign investment as well as a consulting service for foreigners, made up of an investment consulting team, an administrative support team, and a project support team. Most importantly, with the passage of the Foreign Investment Promotion Law, KISC will be able to handle up to 70 percent of all civil procedures related to the foreign investment process. For more information, please contact:
Korea Investment Service Center
#904, 9th Floor
Korea World Trade Center
159 Samsung-Dong, Kangnam-Gu, Seoul, 135-729, Korea
Tel: (82-2) 551-7378(-80)/7392(-93); Fax: (82-2) 551-7381
E-Mail: iksc@unitel.co.kr
Website: http://www.kotra.or.kr
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[end of document] Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title17, United States Code.
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