On Korea’s FDI targeting
The Korean economy ranks 11th in the world with its nominal GDP of $ 1.5 trillion. Its per capita nominal GDP is approximately $29,000 as of 2016. However, the economic situation back in the early 1960s was entirely different. Korea was one of the poorest countries with its meager per capita GDP being less than $90. The Korean people suffered from absolute poverty.
The Korean economy began to take off when it adopted the five-year economic development planning strategy. Korea went through six rounds of five-year plans from 1962-91. During this period the annual average growth rate was 7.5 percent in real terms. Afterward, the stringent planning strategy was officially dropped.
The world economy of today is a lot different than it was 40 to 50 years ago. Global economic interdependencies have become extremely strengthened. The volatilities of commodity prices and exchange rates are unpredictably great. Future uncertainties and market risks are hard to control. Under these circumstances, policy makers tend to resort to setting up medium-term targets for macro-economic indicators such as employment, inflation, the interest rate, and money supply.
These days almost every country places a high priority on foreign direct investment (FDI). People strongly believe that attracting FDI is the short cut to high growth and employment. They offer various attractive incentives to potential foreign investors and set FDI targets to promote FDIs. The number of countries using two indicators, Notification-based FDI (NBF) and Arrival-based FDI (ABF) is increasing.
NBF refers to the amount of investment that the foreign investor plans to bring to the host country. They notify the relevant ministry of their investment in advance. For Korea, the relevant ministry is the Ministry of Trade, Industry, and Energy (MOTIE). ABF refers to the actual amount of investment the foreign investor has brought in. At end of the year, the two indicators are seldom identical.
Nevertheless, these two indicators are critically important. The MOTIE carefully monitors the two indicators, the notified amount and actual amount. When they notice that the gap between the two sud- denly starts increasing, they take proper actions.
Usually the actual amount tends to fall short of the notified amount for many reasons. First of all, the investors do not bring in all of the money at the beginning. Typically, they go through different stages of investment: acquiring their business office and residence, making contracts for purchasing the land, constructing factories and acquiring equipment. These are the expected hurdles for foreign-invested companies to go through and they take care of them step by step. So this is not a problem.
But the real problem is that foreign investors often run into unanticipated problems which cannot be resolved within a short period. They encounter the difficulties in financing their investment in the home country. Also if they figure that their future market will not be promising, then they have to cut their investment plan.
Nevertheless, some critics deplore that the MOTIE is deeply entrenched in the attainment of the notification-based FDI. They point to international organizations such as the UNCTAD publishing the FDI statistics on the basis of arrivals. They argue that the notification-based FDI indicator be dropped because it distorts the true situation. However, this argument has little foundation.
They have failed to understand that the objective of focusing on the NBF in Korea is much different than that of publishing the ABF by the UNCTAD. The Korean government needs to know ABF in advance for policy purposes. The government has to secure the upper ceiling of the budget to implement policy measures supporting the foreign investors.
Most importantly, with the information of FDI target on the notification basis, it can project the effects of FDI on growth, exports, and employment in advance. In contrast, the UNCTAD’s main objective is to provide information of net inflows of FDI for member countries. This information is useful for comparing FDIs by country.
From the viewpoint of an individual country, its government should carefully monitor the two indicators and analyze the gap all the time to make FDI policy successful. It is not the matter of selecting one indicator over the other.