Korea, Republic of
The Republic of Korea (ROK) has made tremendous economic gains during the past six decades, transforming from a recipient of foreign assistance to a high-technology manufacturing powerhouse and middle-income donor country. The country experienced real GDP growth of 2.7 percent in 2016, up from 2.6 percent growth in 2015, yet short of the government’s target of 3.1 percent announced in December 2015. Economic growth in 2016 was mainly backed by increased consumer demand and construction investment, in addition to a foreign consumption hike following a fall in the exchange rate. The economy’s growth was constrained in the second half of 2016, however, by uncertainties caused by external and internal factors, including Brexit, the United States election campaign, and a political scandal that led to the impeachment of President Park Geun-hye, causing a contraction of consumption and investment. Exports fell 5.9 percent from 2015 due to slow global growth and reduced demand from the ROK’s top trading partner, China. Growth is expected to remain moderate in coming years due to the ROK’s relatively developed economy, an aging population, and inflexible labor market. Economic growth potential for 2015-2018 is between 3.0 percent and 3.2 percent, according to the Bank of Korea (BOK), although many private-sector assessments are lower. The Constitutional Court on March 10 upheld an impeachment motion against President Park, resulting in her removal from office. A presidential election will be held on May 9, and Prime Minister Hwang Kyo-ahn is serving as acting President in the interim. The election is not expected to directly affect the ROK investment climate.
The U.S.-Korea Free Trade Agreement (KORUS FTA), which entered into force on March 15, 2012, was a major step forward in enhancing the legal framework for U.S. investors in the ROK. All forms of investment are protected under the KORUS FTA, including equity, debt, concessions, and similar contracts, as well as provision of intellectual property rights. With very few exceptions, U.S. investors are treated the same as South Korean investors (or investors of any other country) in the establishment, acquisition, and operation of investments in the ROK. In addition, the equal treatment of domestic and foreign investors is backed by a transparent international arbitration mechanism, under which investors may, at their own initiative, bring claims against the government for an alleged investment breach. Submissions to investor-state arbitration tribunals, as well as their hearings, are to be made public. The U.S. government continues to work closely with the ROK government to ensure full implementation of the KORUS FTA.
Improvement in the consistency of the ROK government’s interpretation, transparency, and timeliness in applying foreign direct investment (FDI) regulations would enhance the ROK’s investment climate. Unclear and opaque regulatory decision-making remained a significant concern, including informal “window guidance.” Sector-specific improvements in regulatory transparency have been made, however. For example, financial sector reforms enacted January 2016 require regulators to provide all guidance in written form, and companies cannot be punished for not following oral guidelines.
The ROK boasts a hard-working, educated workforce and high levels of institutional labor protections. However, foreign investors cited volatility in labor-management relations and increasing labor costs as issues that can hamper FDI. The Park Administration unsuccessfully advocated for reforms to enhance labor market flexibility, while improving the benefits provided to part-time and contract workers.
|TI Corruption Perceptions Index||2016||53 of 175||http://www.transparency.org/
|World Bank’s Doing Business Report “Ease of Doing Business”||2016||5 of 190||doingbusiness.org/rankings|
|Global Innovation Index||2016||11 of 128||https://www.globalinnovationindex.org/
|U.S. FDI in partner country (in USD, stock positions)||2015||$34.6 billion||http://www.bea.gov/
|World Bank GNI per capita||2015||$27,450||http://data.worldbank.org/
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Toward Foreign Direct Investment
The ROK government’s attitude toward FDI is positive, and senior policymakers realize the value of foreign investment. Following the 2008-09 global financial crisis, inbound FDI continued to trend upwards from USD 5.4 billion in 2010 to USD 16.5 billion in 2015, falling to USD 9.76 billion in 2016 due to a sharp decline in global mergers and acquisitions. Foreign investment in the ROK is still at times hindered by insufficient regulatory transparency, including inconsistent and sudden changes in interpretation of regulations, as well as underdeveloped corporate governance, high labor costs, an inflexible labor system, and market domination by large conglomerates, or chaebol.
The Foreign Investment Promotion Act (FIPA) is the basic law pertaining to foreign investment in the ROK. FIPA and related regulations categorize business activities as open, conditionally or partly restricted, or closed to foreign investment.
FIPA features include:
- Simplified procedures, including those for FDI notification and registration;
- Expanded tax incentives for high-technology investments;
- Reduced rental fees and lengthened lease durations for government land (including local government land);
- Increased central government support for local FDI incentives;
- Establishment of “Invest KOREA,” a one-stop investment promotion center within the Korea Trade-Investment Promotion Agency (KOTRA) to assist foreign investors; and
- Establishment of a Foreign Investment Ombudsman to assist foreign investors.
The ROK National Assembly website provides a list of laws pertaining to foreigners (including the FIPA) in English. The site can be accessed here: http://korea.assembly.go.kr/res/low_03_list.jsp?boardid=1000000037
KOTRA actively facilitates foreign investment through its Invest KOREA office. For KOTRA to assist in the establishment of a domestically-incorporated foreign-invested company, the investment must surpass KRW 100 million (USD 85,000). KOTRA and the Ministry of Trade, Industry, and Energy organize a yearly Foreign Investment Week to attract investment to the ROK. In 2016, over 1,000 attendees, including foreign investors and local press, participated in the event.
The ROK prioritizes investment retention, in part through a Foreign Investment Ombudsman. The position is commissioned by the President and heads a grievance resolution body that collects and analyzes information concerning problems foreign firms experience, requests cooperation from and recommends implementation of reforms to relevant administrative agencies, proposes new policies to improve the foreign investment promotion system, and carries out other necessary tasks to assist investor companies. More information on the Ombudsman can be found here: http://ombudsman.kotra.or.kr/eng/index.do .
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreign and domestic private entities can establish and own business enterprises and engage in all forms of remunerative activity. Restrictions on foreign ownership remain for 30 industrial sectors, three of which are entirely closed to foreign investment. The ROK government occasionally reviews the list of restricted sectors for possible changes. According to the Ministry of Trade, Industry, and Energy (MOTIE), the number of industrial sectors open to foreign investors is well above the Organization for Economic Cooperation and Development (OECD) average. The KORUS FTA provides for U.S. companies to be treated as non-foreign entities in selected sectors, including broadcasting and telecommunications. Relevant ministries must approve investments in conditionally or partly restricted sectors. Most applications are processed within five days; cases that require consultation with more than one ministry can take 25 days or longer. The ROK’s procurement processes comply with the WTO Government Procurement Agreement, but some implementation problems remain.
The following is a list of restricted sectors for foreign investment. Figures in parentheses generally denote the Korean Industrial Classification Code, while those for the air transport industries are based on the Civil Aeronautics Laws:
- Nuclear power generation (35111)
- Radio broadcasting (60100)
- Television broadcasting (60210)
Restricted Sectors (partly open, no more than 25 percent foreign equity)
- News agency activities (63910)
Restricted Sectors (partly open, no more than 30 percent foreign equity)
- Hydroelectric power generation (35112)
- Thermal power generation (35113)
- Other power generation (35119)
Restricted Sectors (partly open, less than 30 percent foreign equity)
- Publishing of daily newspapers (58121) (Note: Other newspapers with the same industry code 58121 are partly open, less than 50 percent foreign equity)
Restricted Sectors (partly open, no more than 49 percent foreign equity)
- Satellite and other broadcasting (60229)
- Program distribution (60221)
- Cable networks (60222)
- Wired telephone and other telecommunications (61210)
- Mobile telephone and other telecommunications (61220)
- Satellite telephone and other telecommunications (61230)
- Other telecommunications (61299)
Restricted Sectors (partly open, no more than 50 percent foreign equity)
- Farming of beef cattle (01212)
- Inshore and coastal fishing (03112)
- Transmission/distribution of electricity (35120)
- Wholesale of meat (46312)
- Coastal water passenger transport (50121)
- Coastal water freight transport (50122)
- Publishing of magazines and periodicals (58122)
- International air transport (51)
- Domestic air transport (51)
- Small air transport (51)
Open but Regulated under the Relevant Laws
- Growing of cereal crops and other food crops, except rice and barley (01110)
- Domestic commercial banking, except special banking area (64121)
- Radioactive waste collection, transportation, and disposal, except radioactive waste management (38240)
- Other inorganic chemistry production, except fuel for nuclear power generation (20129)
- Other nonferrous metals refining, smelting, and alloying (24219)
The National Assembly approved an amendment bill to the Foreign Legal Consultant Act (FLCA) on February 4, 2016, that allows foreign law firms to establish joint ventures in the ROK. This revision was made to implement the ROK’s free trade agreement (FTA) market opening commitments with the United States, Australia, and the European Union (EU). The FLCA provides a framework for establishing joint ventures; however, it includes provisions that could restrict the ability of foreign firms to establish joint ventures, such as limiting the foreign party ownership of a joint venture to 49 percent. On December 29, 2016, the National Assembly approved an amendment to the Aviation Business Act to lift foreign investment barriers for air transportation support businesses beginning on March 30, 2017.
The ROK government may review foreign investments that affect national security. The government may restrict investments that disrupt production of military products or equipment, or if the company receiving foreign investment exports items that may later be used for military purposes differing from their originally intended use. The ROK government may also restrict foreign investment in cases where contracts classified as “state secrets” may be disclosed or the investment considerably impedes international efforts to achieve world peace or assure security. Foreigners linked to a country or an organization that may pose a threat to national security will also be subject to limitations on investments in South Korean firms. Related government agencies must ask MOTIE to review the case within 30 days of a foreign investor filing an application for regulatory approval, and MOTIE must make a decision within the following 90 days. If the investment fails the review, the foreign investor must transfer ownership to a South Korean national or corporation within six months of the close of the corporate fiscal year.
Other Investment Policy Reviews
The ROK government has not undergone investment policy reviews or received policy recommendations from multilateral organizations, including the OECD, World Trade Organization (WTO), or United Nations Conference on Trade and Development (UNCTAD), in the past three years.
Registering a business in the ROK can be a complex process that varies according to the type of business being established and requires interaction with KOTRA, court registries, and tax offices. Foreign corporations can enter the market by establishing a local corporation, local branch, or liaison office. The establishment of local corporations by a foreign individual or corporation is regulated by FIPA and the Commercial Act; the latter recognizes five types of companies, of which stock companies with multiple shareholders are the most common. To establish a stock company, 24 required documents are submitted to a court registry office, and an additional nine to a tax office.
There is no single website with which to complete this process. For small- and medium-sized enterprises (SMEs) and micro-enterprises, the online business registration process takes approximately three to four days and is completed through Korean language websites. Registrations can be completed via the Smart Biz website (https://www.startbiz.go.kr ). The website received an assessment of 2.5/10 in the UN’s Global Enterprise Registration listing, indicating improvements could be made to provide clear and complete instructions for registering a limited liability company.
KOTRA has an Outbound Investment Support Office that provides counseling to ROK firms. There are some support measures for SMEs, and the government allotted KRW 5.4 billion (USD 4.6 million) in its 2017 budget for that support. The ROK government does not have any restrictions on outward investment.
2. Bilateral Investment Agreements and Taxation Treaties
The ROK has 15 FTAs encompassing trade with 52 countries, including the United States, and 94 bilateral investment treaties (BITs). An additional FTA with six South American countries was preliminarily signed on March 10 and is pending ratification. More information can be found here: http://english.motie.go.kr/en/if/ftanetwork/ftanetwork.jsp . Ongoing FTA negotiations include the Regional Comprehensive Economic Partnership (RCEP) among 16 Asian countries, a ROK-China-Japan FTA, and a FTA with Israel.
As of September 2016, the ROK had signed bilateral tax agreements with 94 countries. There are many Advance Pricing Agreement (APA) issues. To solve these, the National Tax Service created a new unit on November 2, 2015, to process the increasing number of APA and Mutual Agreement Procedure (MAP) requests in a timelier manner. The APA/MAP unit covers the regions of North America, Europe, and Australia.
The ROK has a bilateral income tax treaty with the United States that entered into force in 1979.
A complete list of countries and economies with which South Korea has concluded bilateral investment protection agreements, such as BITs and FTAs with investment chapters, is available at http://investmentpolicyhub.unctad.org/IIA and the following link: http://www.mofa.go.kr/eng/wpge/m_5437/contents.do .
4. Industrial Policies
The ROK government provides the following general incentives for foreign investors:
- Tax and cash incentives for qualified foreign investments in free trade zones, foreign investment zones, free economic zones, industrial complexes, etc.;
- Tax and cash incentives for the creation and expansion of workplaces for high-tech business plants and research and development (R&D) centers;
- Reduced rent for land and site preparation for foreign investors;
- Grants for establishment of convenience facilities for foreigners;
- Reduced rent for state or public property;
- Preferential financial support for investing in major infrastructure projects; and
- Support from the Seoul Metropolitan government, separate from the central government, for SMEs, high-technology businesses, and the biomedical industry.
Research and Development
Several organizations affiliated with the Small and Medium Business Association (SMBA) support private sector research and development (R&D). The Korea Technology and Information Promotion Agency supports R&D investment, and the Korea Technology Credit Guarantee Fund provides credit guarantees for technology development. The Ministry of Science, ICT, and Future Planning also supports R&D projects. According to the SMBA, foreign companies are eligible to apply for public R&D funds through their South Korean subsidiary.
Foreign Trade Zones/Free Ports/Trade Facilitation
The Ministry of Strategy and Finance (MOSF) administers tax and other incentives to stimulate advanced technology transfer and investment in high-technology services. There are three types of special areas for foreign investment (Free Economic Zones, Free Investment Zones, and Tariff Free Zones), where favorable tax incentives and other support for investors are available. The ROK government announced on December 16, 2015, plans to create 14 “regulation-free zones” (RFZ) outside of Seoul in an effort to develop promising sectors, including bio-health, smart devices, and drones. A bill that would allow the creation of RFZs was submitted to the National Assembly on March 25, 2016. A good source of information on the ROK’s various free trade zones is the government-run “Invest Korea,” the inward investment promotion organization under KOTRA. More information is available here: http://www.investkorea.org . KOTRA also maintains offices in many countries, including the United States.
The ROK aims to attract more foreign investment by promoting its eight Free Economic Zones: Incheon (near Incheon Airport, to be completed in 2022); Busan/Jinhae (in South Gyeongsang Province, to be completed in 2020); Gwangyang Bay (in South Gyeongsang Province, to be completed in 2020); Yellow Sea (in South Chungcheong Province, to be completed in 2020); Daegu/Gyeongbuk (in North Gyeongsang Province, to be completed in 2022); Saemangeum/Gunsan (in North Jeolla Province, to be completed in 2020), East Sea (in Donghae and Gangneung, to be completed in 2024) and Chungbuk (in North Chungcheong Province, to be completed in 2020). Additional information is available at http://www.fez.go.kr/global/en/index.do .
As of April 2017, there are also four foreign-exclusive industrial complexes in Gyeonggi Province designed to provide inexpensive land, with the national and local governments providing assistance for leasing or selling in the sites at discounted rates. In addition, there are 13 Free Trade Zones and seven logistics areas near airports and harbors where companies may pursue their business with government support, but without the usual legal requirements such as approval procedures for exports and imports and customs duties. There are also 25 Foreign Investment Zones designated by local governments to accommodate industrial sites for foreign investors. Special considerations for foreign investors vary among these options.
Performance and Data Localization Requirements
There are no such requirements. Companies should check if candidates of foreign nationality have a valid working permit (VIAS) prior to offering jobs. Anyone who is planning to work during his or her stay in the ROK is required by law to apply for a visa. Work visas can be obtained at the ROK Embassy or Consulate with jurisdiction over the applicant’s place of legal residence. Work visas are usually valid for one year, and issuing work visas takes two to four weeks. Changing a tourist visa to a work visa is not possible within the ROK. This must be done at an embassy or a consulate outside the country.
Sectors such as public administration, national defense, and diplomacy are subject to certain restrictions imposed by the ROK government, but there are no government-imposed conditions or restrictions on investing in the ROK in most sectors. The conditions to invest in the ROK are elaborated in the FIPA. Foreign companies are not required to use domestic content or technology, nor are they required to turn over source codes or provide access for surveillance to ROK authorities. The ROK government, however, is implementing policies to foster the domestic software industry, which sometimes creates obstacles for foreign companies pursuing public procurement projects. The ROK ceased imposing performance requirements on new foreign investment in 1989 and eliminated all pre-existing performance requirements in 1992. There are no performance requirements that force foreign companies to ensure a certain level of local content, local jobs, R&D activity, or domestic shares in the company’s capital.
There are no legal requirements for foreign information technology (IT) providers to turn over source codes and/or provide access to encryption. However, there are security certifications for some IT products. These certifications are referred to as “Common Criteria certification” (CC certification), the standards and assessments for which are established and implemented by the IT Security Certification Center. The source code for IT products might need to be submitted to the IT Security Certification Center during the review process to apply for CC certification. In January 2016, the ROK government announced guidelines stating that the CC certification is a requirement for cloud computing services to be provided to ROK government agencies or public institutions.
There are similar requirements for a data controller to transfer the personal information of end-users to a third party within the ROK. To transfer the personal information of end-users to a third party, a data controller must obtain each end-user’s consent. In addition, regulations prohibit financial companies in the ROK from transferring customers’ personal information and related financial transaction data overseas. As such, this financial transaction data cannot be outsourced to overseas IT vendors, and financial companies in the ROK must store customers’ financial transaction data in the ROK. The Financial Supervisory Service is the authority that regulates financial companies in the ROK.
5. Protection of Property Rights
Property rights and interests are enforced under the Civil Act. Mortgages and liens exist, and the ROK’s recording system is reliable. The Alien Land Acquisition Act (amended in 1998) grants non-resident foreigners and foreign corporations the same rights as Koreans in purchasing and using land. The Real Estate Investment Trust (REIT) Act supports indirect investments in real estate and restructuring of corporations. The REIT Act allows investors to invest funds through an asset management company and in real property such as office buildings, business parks, shopping malls, hotels, and serviced apartments. Property interests are enforced, and there is a reliable system for registering mortgages and liens. As of June 2016, approximately 0.5 percent of land does not have clear title. The courts run the recording system. Legally purchased property cannot revert to other owners, but squatters may have very limited rights in special situations, such as a right to cultivation of unoccupied land.
Intellectual Property Rights
Since its removal from the Special 301 Watch List in 2009, the ROK government has continued to make strides in intellectual property rights (IPR) enforcement. The ROK government’s interest in IPR protection is driven by the ROK’s strong interest in innovation, its growing status as a creator of intellectual property, and its efforts to implement the commitments made under the KORUS FTA. During the past year, the ROK government continued to combat IPR violations through a variety of enforcement activities, including the deletion of millions of illegal files online, enforcement of laws to prevent the further distribution of illegal materials, and blockage of numerous illegal file-sharing online service providers. Industry concerns include the continued government use of unlicensed software, end-user software piracy, and book piracy in universities.
The Copyright Act was amended in 2016 with two noteworthy changes. First, the definition of phonogram was changed to include “sound in digital form” and “sound fixed in media.” Phonogram producers welcomed the widened scope of the definition of phonogram, as it better protected their rights, particularly because more music is being transmitted through digital formats. Second, the Ministry of Culture, Sports, and Tourism (MCST) changed the language from “phonogram produced for sales” to “phonogram published for commercial purposes,” thus broadening the protection of music producers and stakeholders. The KFTC amended its guidelines on unfair exercise of intellectual property rights on March 3, 2016, to better promote free and fair competition in the ROK marketplace by redefining the rights of standard essential patent holders and the conditions necessary to grant licenses.
In 2016, MCST Judicial Police conducted special investigations of 10 streaming websites. As a result of those investigations, MCST recommended five websites to the ROK’s Supreme Prosecutor’s Office (SPO) for possible indictment and prosecution. Those streaming sites contained 479,000 illegal files, which were mostly broadcast content (e.g., dramas and movies). Furthermore, MCST and the Korea Customs Service jointly conducted special enforcement of illegally reproduced popular television characters (online and offline), which netted the seizure of 12,582 items. MCST also recommended to SPO that it indict 57 heavy uploaders of software remote file hosting services, or “webhards.”
MCST deleted 29.1 million illegal online files, a decrease from 117.4 million files in 2015. MCST also destroyed 7.8 million hard copies of music files, videos, publications, games, and cartoons in 2016, a decrease from 14.5 million in 2015. MCST stated the decrease was due to better ROK government-led educational efforts about the illegality of downloading pirated materials. MCST investigated South Korean university campuses and confiscated 21,304 illegally copied books, up 30.4 percent from 16,335 copies seized in 2015. MCST Judicial Police conducted software inspections of 195 companies using special design software such as CAD and Adobe. It discovered 3,024 instances of illegal software usage, about the same number as in 2015. MCST raided 271 companies and found 3,050 instances of illegal software usage, with a piracy rate of 29.6 percent.
MCST also recommended that the Korea Copyright Commission (KCC) block service to 220 illegal sites, 231 illegal bulletin boards, and 313 illegal files (764 blocks), up from 552 blocks in 2015. Most of the sites and files were music and film sites hosted on foreign servers. Because the number of illegal sites whose servers are located abroad is increasing, MCST is working to simplify the procedures and shorten the period for blocking such sites through the KCC from four months to three weeks. As a result of this effort, the frequency of KCC deliberations on blocking services increased from five in 2015 to 18 in 2016.
The total number of people indicted by the SPO for Copyright Act violations was 33,806 in 2016, down 34.9 percent from 51,936 in 2015. In 2016, MCST Judicial Police recommended to the SPO that legal action be taken for 447 IPR cases, down 59 percent from 1,091 cases in 2015.
The Korean Intellectual Property Office (KIPO) also continued its enforcement activities in 2016. KIPO’s Special Judicial Police seized 584,094 counterfeit items from 351 people in 2016, down from the 1,197,662 items seized from 378 people in 2014, and up dramatically from 28,590 items in 2011. In addition, KIPO suspended 5,888 online transactions in 2016, up from 5,673 cases in 2015, and closed 368 illegal online shopping malls in 2016, down from 418 in 2015. KIPO is improving its enforcement coordination with related agencies and local autonomous bodies by jointly issuing corrective recommendations to 1,832 people on 7,134 items. KIPO is also providing training to enforcement officers, including local police, and pro-actively educating the public through television and media and rewarding those who file or report counterfeit goods. The ROK is not listed in the 2016 Special 301 report, nor are Korean markets included in the 2016 Notorious Markets List.
Resources for Rights Holders
The contact at U.S. Embassy Seoul for IPR issues is: SeoulECONTrade@state.gov
Additional local resources are as follows:
The American Chamber of Commerce in Korea
U.S. Embassy Seoul List of Attorneys
For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .
6. Financial Sector
Capital Markets and Portfolio Investment
The ROK has its own stock market and an effective regulatory system that encourages portfolio investment. There is sufficient liquidity in the market to enter and exit sizeable positions. The ROK government uses various incentives, such as tax breaks, to facilitate the free flow of financial resources into the product and factor markets. The ROK government respects International Monetary Fund (IMF) Article VIII, on the general obligations of member states, by refraining from restrictions on payments and transfers for current international transactions. Credit is allocated on market terms. The private sector has access to a variety of credit instruments, but non-resident foreigners are not able to borrow money in South Korean won, although they can issue bonds in local currency.
Foreign portfolio investors enjoy open access to the ROK stock market. Aggregate foreign investment ceilings in the Korean Stock Exchange (KSE) were abolished in 1998, and foreign investors owned 35.1 percent of KSE stocks and 10 percent of the Korean Securities Dealers Automated Quotations (KOSDAQ) as of the end of 2016. In recent years, foreign portfolio investment has fluctuated, influenced by external factors such as the November 2016 U.S. presidential election, the slowing of the Chinese economy, and domestic political turmoil caused by a corruption scandal surrounding impeached President Park Geun-hye.
Money and Banking System
Financial sector reforms are often cited as one reason for the ROK’s rapid rebound from the 2008 global financial crisis. These reforms aimed to increase transparency and investor confidence and generally purge the sector of moral hazard. Since 1998, the ROK government has recapitalized its banks and non-bank financial institutions, closed or merged weak financial institutions, resolved many non-performing assets, introduced internationally-accepted risk assessment methods and accounting standards for banks, forced depositors and investors to assume appropriate levels of risk, and taken steps to help end the policy-directed lending of the past. These reforms addressed the weak supervision and poor lending practices in the South Korean banking system that helped cause and exacerbate the 1997-98 Asian financial crisis.
The ROK banking sector is healthy. Rating agency Standard & Poor’s categorized ROK banks as low risk on June 22, 2016. Hanwha Bank’s total assets were KRW 330 trillion (USD 292 billion) at the end of 2015, for example. The ROK central bank is the Bank of Korea (BOK). Foreign banks or branches are allowed to establish operations in the country. They are subject to prudential measures or other relevant regulations. The ROK has not lost any correspondent banking relationships in the past three years, nor are any relationships in jeopardy.
Foreign Exchange and Remittances
In categories open to investment, foreign exchange banks must be notified in advance of applications for foreign investment. All ROK banks, including branches of foreign banks, are permitted to deal in foreign exchange. 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. Exceptions to the advance notification approval system exist for project categories subject to joint-venture requirements and certain projects in the distribution sector.
According to the Foreign Exchange Transaction Act (FETA), transactions that could harm international peace or public order, such as money laundering and gambling, require additional monitoring or screening. Three specific types of transactions are restricted:
- Non-residents are not permitted to buy won-denominated hedge funds, including forward currency contracts;
- The Financial Services Commission will not permit foreign currency borrowing by “non-viable” domestic firms; and
- The ROK government will monitor and ensure that South Korean firms that have extended credit to foreign borrowers collect their debts. The ROK government has retained the authority to re-impose restrictions in the case of severe economic or financial emergency.
Funds associated with any form of investment can be freely converted into any world currency. However, there might be some cost or technical problems in case of conversion into lesser used currencies, due to the relatively small foreign exchange market in the country. In 2016, 81 percent of spot transactions in the market were between the U.S. dollar and Korean won, while daily transaction (spot + future) was equal to USD 10.5 billion.
Exchange rates are generally determined by the market. The U.S. Treasury Department reports that ROK authorities have intervened on both sides of the currency market, but the sustained rise in their reserves and net forward position indicate that they have intervened on net to resist won appreciation.
The right to remit profits is granted at the time of original investment approval. Banks control the now pro forma approval process for FETA-defined open sectors. For conditionally or partially restricted investments (as defined by the FETA), the relevant ministry must provide approval for both investment and remittance. When foreign investment royalties or other payments are proposed as part of a technology licensing agreement, the agreement and the projected stream of royalties must be approved by either a bank or MOSF. Approval is virtually automatic. An investor wishing to enact a remittance must present an audited financial statement to a bank to substantiate the payment.
The ROK routinely permits the repatriation of funds, but reserves the right to limit capital outflows in exceptional circumstances, such as situations when uncontrolled outflows might harm the balance of payments, cause excessive fluctuations in interest or exchange rates, or threaten the stability of domestic financial markets. To withdraw capital, a stock valuation report issued by a recognized securities company or the South Korean appraisal board also must be presented. Foreign companies seeking to remit funds from investments in restricted sectors must first seek ministerial and bank approval, after demonstrating the legal source of the funds and proving that relevant taxes have been paid. There are no time limitations on remittances.
Sovereign Wealth Funds
The Korea Investment Corporation (KIC), a sovereign wealth fund (SWF), was established in July 2005 under the KIC Act. KIC is wholly government-owned with an independent steering committee that has the authority to undertake core business decisions, composed of six professionals from the private sector, the Chief Executive Officer (CEO) of KIC, and the heads of MOSF and the BOK. KIC is on the Public Institutions Management Act (PIMA) list. KIC is mandated to manage assets entrusted by the ROK government and the BOK and generally adopts a passive role as a portfolio investor. Based on the continued increase in entrusted assets and gains realized on investments, assets under management stood at USD 91.8 billion at the end of 2015, with no domestic investments to date. KIC is required by law to publish an annual report, submit its books to the steering committee for review, and follow all domestic accounting standards and rules. It follows the Santiago Principles and participates in the IMF-hosted International Working Group on SWFs. The KIC has never invested in domestic assets.
7. State-Owned Enterprises
Many ROK state-owned enterprises (SOEs) continue to exert significant control over segments of the economy. There are 30 remaining SOEs active in the energy, real estate, and infrastructure (railroad, highway construction) sectors. The legal system has traditionally sought to give SOEs a leading role in these sectors, but over the past several years, the government has tried to attract more private participation, as well, especially in the real estate and construction sectors. SOEs are generally subject to the same regulations and tax policies as private sector competitors and do not have preferential access to government contracts, resources, and financing. The ROK is party to the WTO Government Procurement Agreement; a list of SOEs subject to WTO government procurement provisions is available in annex three of the ROK’s agreement. The state-owned Korea Land and Housing Corporation is given preferential access to developing state-owned real estate projects, notably housing. The court system functions independently from the government and gives equal treatment to SOEs and private enterprises. The ROK government does not provide official data on SOEs’ market shares. It requires each entity to disclose financial statements, the number of employees, and average compensation figures.
The PIMA gives authority to MOSF to administer control of many SOEs, mainly focusing on administrative and human resource management. However, there is no singular government entity that exercises ownership rights over SOEs. SOEs subject to PIMA are required to report to a line minister; the President or line ministers appoint senior government officials or politically-affiliated individuals as CEOs or directors. SOEs are explicitly obligated to consult with government officials on their budget, compensation, and key management decisions (e.g., pricing policy for energy and public utilities). For other issues, the government officials informally require the SOEs to either consult with them before making decisions or report ex post facto.
Market analysts generally regard SOEs as a part of the government or entities fully guaranteed by the government, with some exceptions: SOEs listed on local security markets, such as the Industrial Bank of Korea and Korea Electric Power Corporation, are regarded as semi-private firms. The ROK adheres to the OECD Guidelines for Multinational Enterprises and reports significant changes in the regulatory framework for SOEs to the OECD. A list of South Korean SOEs is available at the following Korean-language website: http://www.alio.go.kr/home.html .
The ROK government announced that it would not give any non-market based advantages to SOEs competing in the domestic market, but the U.S. Embassy in Seoul has noted that the state-owned Korea Development Bank enjoys lower financing costs because of the government’s guarantee. This does not appear to have a major effect on the U.S. retail banking sector.
ROK government efforts to privatize government-owned assets have been opposed by protests from labor unions and professional associations, as well as by a lack of interested buyers in some sectors. No state-owned enterprises were privatized between 2002 and November 2016. In November 2016, the government decided to sell its 29.7 percent stake in Woori Bank and finalized the deal in December 2016. The government recouped KRW 2.4 trillion (USD 2.07 billion) from this sale and pledged that it will sell the remaining 21.4 percent stake in the future.
Foreign investors are allowed to participate in privatization programs as long as they comply with ownership restrictions stipulated for the 30 industrial sectors indicated in Section 1: Openness To, and Restrictions Upon, Foreign Investment. These programs have a public bidding process that is easy to understand, non-discriminatory, and transparent. The authority in charge or a delegated private lead manager provides the relevant information.
8. Responsible Business Conduct
Awareness of the economic and social value of responsible business conduct and corporate social responsibility (CSR) is growing in the ROK, but is still in a nascent stage. The Korea Corporate Governance Service, founded in 2002 by entities including the Korea Exchange (formerly Korea Stock Exchange) and the Korea Listed Companies Association, encourages companies to voluntarily improve their corporate governance practices. Since 2011, its annual assessments have included reviews of corporate environmental responsibility and CSR, in addition to the issuance of associated guidelines. The United Nations Global Compact (UNGC) Network Korea, established in 2007, actively promotes corporate involvement in the United Nations (UN) Public Private Partnership for Sustainable Development Goals 2016-2030 and guides the values and direction of CSR to be not only about charity, but also about future corporate sustainability. UNGC is focused on human rights, anti-corruption, labor standards, and the environment, with 240 South Korean companies listed as UNGC members as of March 2017. Government-supported subsidies and tax reductions for social enterprises have contributed to an increase in the number of organizations tackling social issues related to unemployment, the environment, and low-income populations. Businesses also promote OECD Guidelines for Multinational Enterprises to enhance awareness of responsible business conduct.
For the promotion of OECD Guidelines for Multinational Enterprises, the ROK government operates websites and holds a wide range of seminars, in addition to publishing and distributing promotional materials. To enhance the implementation of the OECD Guidelines for Multinational Enterprises, the ROK government established a National Contact Point (NCP) in the then-Ministry of Foreign Affairs and Trade in 2000 (now two ministries, Ministry of Foreign Affairs and Ministry of Trade, Industry, and Energy) and designated the Korea Commercial Arbitration Board (KCAB) as the Secretariat of NCP. The International Human Rights Division of the Ministry of Justice oversees the National Action Plan to implement the guidelines. The KCAB recently addressed two cases related to the OECD Guidelines for Multinational Enterprises. It facilitated the discussion of the parties concerned and invited outside experts on arbitration to settle the issues, resulting in a favorable outcome.
The National Human Rights Commission, the Ministry of Employment and Labor (MOEL), the Korea Consumer Agency, and the Ministry of Environment enforce ROK law in the fields of human rights, labor, consumer protection, and environment, respectively, both effectively and fairly. Shareholders are protected by laws such as the Act on an External Audit of Corporations under the jurisdiction of the Financial Services Commission, the Act on Monopoly Regulation and Fair Trade under the jurisdiction of the KFTC, and the Commercial Act under the jurisdiction of the Ministry of Justice. The Commercial Act is currently under revision to better represent minority shareholders and enhance the value of shareholders. Other organizations involved in responsible business conduct include the ROK office of Trade Union Advisory Committee to the OECD, the Korea Human Rights Foundation, and the Korean House for International Society.
The Korea Sustainability Investing Forum (KOSIF) was established in 2007 and is dedicated to promoting and expanding socially responsible investment and CSR. Through regular fora, seminars, and publications, KOSIF provides educational opportunities, conducts research to establish a culture of socially responsible investment in the ROK, and supports relevant legislative processes. It actively engages with National Assembly members and stakeholders to influence decision-making processes.
The ROK does not maintain regulations to prevent conflict minerals from entering supply chains; however, the Ministry of Trade, Industry, and Energy supports companies’ voluntary adherence to OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. ROK companies are often obligated to follow the conflict-free regulations of economies to which they export goods. The Korea International Trade Association and private-sector firms provide consulting services to companies seeking to comply with conflict-free regulations. The ROK is not a member of the Extractive Industries Transparency Initiative, but has a mining industry and has participated in the Kimberly Process since 2012. The ROK government is taking measures to guarantee transparency through the Mining Act, Overseas Resources Development Business Act, other relevant law on taxation, environment, labor, and anti-bribery, and OECD Guidelines for Multinational Enterprises.
In an effort to combat corruption, the ROK has introduced systematic measures to prevent civil servants from inappropriately accumulating wealth and conducting opaque financial transactions. The Public Service Ethics Act, drafted in 1981 and entered into force in 1983, requires high-ranking officials to disclose their assets, including how they were accumulated, and report gifts they receive, thereby making their holdings public. The Act on Anti-Corruption and the Establishment and Operation of the Anti-Corruption and Civil Rights Commission (previously called the Anti-Corruption Act) concerns reporting of corruption allegations, protection of whistleblowers, institutional improvement, and training and public awareness to prevent corruption, as well as establishing national anti-corruption initiatives through the Anti-Corruption and Civil Rights Commission (ACRC). The ROK still faces challenges in effectively implementing anti-corruption laws, however. Transparency International’s Corruption Perception Index in 2015 ranked the ROK 52 out of 176 countries and gave it a score of 53 out of 100 (with 100 being very clean).
Corruption among government officials drew widespread attention throughout 2016. Choi Soon-sil, a longtime friend and close confidante of then-President Park Geun-hye, was arrested and indicted on charges of fraud, coercion, and abuse of power. She was accused of amassing a personal fortune by using her personal ties to Park, and the President’s knowledge of or involvement in Choi’s activities came under investigation. In light of the scandal, lawmakers voted 234-56 to impeach President Park in December 2016, and the Constitutional Court upheld this decision on March 10, 2017.
The ROK legislature passed a comprehensive anti-corruption law known as the Anti-Corruption and Conflicts of Interest Act, or the Kim Young-ran Act, in March 2015. The anti-corruption law came into effect on September 28, 2016, and institutes strict limits on the value of gifts that can be given to public officials, lawmakers, reporters, and private school teachers. It also extends to the spouses of officials. The Act on the Protection of Public Interest Whistleblowers is designed to protect whistleblowers in the private sector and equally extends to reports on foreign bribery, with a reporting center operated by the ACRC.
In 2014, to reduce collusion between government regulators and regulated industries that contributed to the tragic sinking of the Sewol ferry, the ROK government tightened regulations governing the employment of retired government officials. The sinking, which resulted in the deaths of 304 passengers (mostly children on a school trip) and crew in April of that year, resulted in widespread criticism of the ferry operator, the regulators who oversaw its operations, and the South Korean government for its poor disaster response and attempts to downplay government culpability. The government expanded the list of sectors restricted from employing former government officials during a mandated period after retirement, extended the mandated post-retirement period from two to three years, and increased scrutiny of retired officials seeking jobs in fields associated with their former official duties.
Most companies maintain an internal audit function to prevent and detect corruption. Government agencies responsible for combating government corruption include the Board of Audit and Inspection, which monitors government expenditures, and the Public Service Ethics Committee, which monitors civil servants’ financial disclosures and their financial activities. The ACRC focuses on preventing corruption by assessing the transparency of public institutions, protecting and rewarding whistleblowers, training public officials, raising public awareness, and improving policies and systems.
In reporting cases of corruption to government authorities, nongovernment organizations and civil society groups are protected by the Act on the Prevention of Corruption and the Establishment and Management of the Anti-Corruption and Civil Rights Commission, as well as the Protection of Public Interest Reporters Act. Individuals reporting cases of corruption to the ACRC must provide their full name to make the submission. However, their personally identifiable information is protected under the law, and the government cannot release information without the consent of the reporting individual. Violations of these legal protections can result in fines or prison sentences. U.S. firms have not identified corruption as an obstacle to FDI.
The ROK ratified the UN Convention against Corruption in 2008. It is also a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and a member of the Asia-Pacific Economic Cooperation Anti-Corruption and Transparency Working Group.
The Financial Intelligence Unit has cooperated fully with U.S. and UN efforts to shut down sources of terrorist financing. Transparency International has maintained a national chapter in South Korea since 1999.
Resources to Report Corruption
Government agency responsible for combating corruption:
Anti-Corruption and Civil Rights Commission
Government Complex-Sejong, 20, Doum 5-ro
Contact at “watchdog” organization:
Anti-Corruption Network in Korea (aka Transparency International Korea)
#1006 Pierson Building, 89-27 Sinmunro 2-ga, Jongno-gu
10. Political and Security Environment
The Democratic People’s Republic of Korea (DPRK, or North Korea) and the ROK technically remain in a state of war. There is general peace and stability on the Korean Peninsula because of an armistice agreement that has lasted over 60 years. The ROK does not have a history of political violence directed against foreign investors. There have not been reports of politically motivated threats of damage to foreign-invested projects or foreign-related installations of any sort, nor of any incidents that 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.
The ROK is a modern democracy with active public political participation, and political demonstrations are common. Political divisions deepened amid the impeachment of President Park Geun-hye. Large-scale rallies were a regular occurrence throughout the impeachment process. They were largely peaceful and orderly, with almost no instances of violence.
11. Labor Policies and Practices
According to the MOEL, there were approximately 26 million economically active people in the ROK, with an employment rate (OECD standard) of approximately 66.5 percent. The overall unemployment rate of 3.8 percent in January 2017 was much lower than the unemployment rate of youth ages 15-29, which, at over 10 percent, is becoming a domestic concern. The country has two major national labor federations. The Federation of Korean Trade Unions (FKTU) has 2,372 labor unions and 843,442 members, and the Korean Confederation of Trade Unions (KCTU) has 373 labor unions and 636,249 members. KCTU and FKTU are affiliated with the International Trade Union Confederation. Most of FKTU’s constituent unions maintained affiliations with international union federations. There are 3,028 unions with 445,603 workers who do not belong to a nationwide federation.
The minimum wage is reviewed annually. Labor and business set the minimum wage for 2017 at 6,470 won (approximately USD 5.50) per hour, a 7.3 percent increase from the previous year. The Labor Standards Act also provides for a 50 percent higher wage for overtime. Contract and other “non-regular” workers accounted for a substantial portion of the workforce, particularly in labor-intensive sectors such as the automotive and shipbuilding industry, despite many positions being full-time and not temporary in nature. MOEL reported that there were approximately 6.16 million non-regular workers, comprising approximately 32 percent of the total workforce as of July 2016. Korea Statistics reported that in 2011, non-regular workers performed work similar to regular workers but received approximately 56 percent of the wages of regular workers.
For regular, full-time employees, the law provides employment insurance, national medical insurance, industrial accident compensation insurance, and participation in the national pension system through their employers or employer subsidies. Non-regular workers, such as temporary and contracted employees, are not guaranteed the same collection of benefits. With regard to severance pay for regular workers, South Korean law does not distinguish between the firing of an employee versus the laying off of an employee for economic reasons. Employers’ reliance on non-regular workers is partially explained by the costs that may be associated with dismissing regular full-time employees and the savings that may be realized through not having to provide insurance and other benefits.
There are no government policies requiring the hiring of nationals. In 2004, the ROK implemented a “guest worker” program known as the Employment Permit System (EPS) to help protect the rights of foreign workers. The EPS allows employers to legally employ a certain number of foreign workers from 15 countries, including the Philippines, Indonesia, and Vietnam, with which the ROK maintains bilateral labor agreements. In 2015, the ROK increased its annual quota to 55,000 migrant workers. At the end of 2016, approximately 222,000 foreigners were said to be working under the EPS in the manufacturing, construction, agriculture, livestock, service, and fishery industries.
Legally, unions operate with autonomy from the government and employers, although national labor federations, comprised of various industry-specific unions, receive annual government subsidies. The ratio of organized labor to the entire population of wage earners at the end of 2015 was 10.2 percent; this ratio has remained relatively stable over the last 10 years. ROK trade union participation is lower than the latest-available OECD average of 16.7 percent in 2014; more information is available at http://stats.oecd.org/Index.aspx?DataSetCode=UN_DEN .
Labor organizations are permitted in export processing zones (EPZs), but foreign companies operating in EPZs are exempt from some labor regulations. Exemptions include provisions that mandate paid leave, require companies with more than 50 people to recruit persons with disabilities for at least 2 percent of their workforce, encourage companies to reserve 3 percent of their workforce for workers over 55 years of age, and restrict large companies from participating in certain business categories. Foreign companies operating in Free Economic Zones have greater flexibility in employing “non-regular” workers in a wider range of sectors for extended contractual periods. ROK law provides workers with the right to associate freely and allows public servants and private workers to organize unions. The Trade Union and Labor Relations Adjustment Act provides for the right to collective bargaining and collective action and allows workers to exercise these rights in practice.
The Labor Relations Commission is the primary government body responsible for labor dispute resolution. It provides arbitration and mediation services in response to dispute resolution requests submitted by employees, employers, or both parties. MOEL labor inspectors also have certain legal authorities to participate in dispute settlement related to violations of labor rights. The Korea Workers’ Compensation and Welfare Service handles labor disputes resulting from industrial accidents or disasters. There was particularly strong opposition in 2016 against the merit-based wage system, and workers from a wide range of industries, including banking and public transit, participated in a series of consecutive strikes in September 2016. These demonstrations and strikes by labor unions in opposition to the labor reforms did not pose a significant risk to investment interests, however.
The Act for Part-Time and Temporary Workers’ Protection prohibits discrimination against non-regular workers and requires that non-regular workers employed longer than two years be converted to permanent status. The two-year rule went into effect on July 1, 2009. Both the labor and business sectors have complained that the two-year conversion law forced many businesses to limit the contract terms of the non-regular workers to two years and incur additional costs with the entry of new labor every two years. More information can be found in the Department of State’s Report on Human Rights Practices for 2016: https://www.state.gov/j/drl/rls/hrrpt/humanrightsreport/index.htm#section7
A tripartite commission consisting of the FKTU, government, and companies reached consensus on labor reform in September 2015; however, the agreement fell apart on January 19, 2016. A package of associated labor reforms bills submitted by then-President Park Geun-hye’s ruling party in September 2015 was not approved by the National Assembly.
12. OPIC and Other Investment Insurance Programs
U.S. investments in the ROK are eligible for insurance programs sponsored by the U.S. Overseas Private Investment Corporation (OPIC). OPIC has not, however, guaranteed any U.S. investments in the ROK since 1998, when OPIC reinstated coverage it had suspended in 1991 due to concerns about worker rights. Coverage issued prior to 1991 is still in force. There is no OPIC program in the ROK, but Daelim Energy announced on August 10, 2016, that the company had signed a financial agreement with OPIC amounting to approximately USD 100 million to support the Hawa project in Pakistan. This is the first project that Daelim Energy is investing in through the Inter-American Development Bank Infrastructure Fund II. The Hawa project’s purpose is to develop and run a 50-megawatt wind power farm in Sindh, which is in southern Pakistan. It has a total budget of about USD 130 million. The United States and the ROK signed an investment incentive agreement on July 30, 1998. The ROK has been a member of the World Bank’s Multilateral Investment Guarantee Agency since 1987.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
|Host Country Statistical Source*||USG or International Statistical Source||USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
|Host Country Gross Domestic Product (GDP) ($M USD)||2015||$1.37 million||2015||$1.37 million||www.worldbank.org/en/country|
|Foreign Direct Investment||Host Country Statistical Source*||USG or International Statistical Source||USG or International Source of data: BEA; IMF; Eurostat; UNCTAD, Other|
|U.S. FDI in partner country ($M USD, stock positions)||2016||$38,795||2015||$33,034||IMF data available at http://data.imf.org/|
|Host country’s FDI in the United States ($M USD, stock positions)||2016||$128,950||2015||$56,679||IMF data available at http://data.imf.org/CDIS|
|Total inbound stock of FDI as % host GDP||2015||12.26||2015||12.7||http://unctad.org/en/Pages/DIAE/
*Sources: GDP – http://ecos.bok.or.kr/ ; inbound FDI – http://www.motie.go.kr ; outbound FDI – http://www.koreaexim.go.kr
Table 3: Sources and Destination of FDI
|Direct Investment from/in Counterpart Economy Data|
|From Top Five Sources/To Top Five Destinations (US Dollars, Millions)|
|Inward Direct Investment||Outward Direct Investment|
|Total Inward||169,659||100%||Total Outward||271,581||100%|
|United States||33,034||19%||United States||56,679||21%|
|Netherlands||15,428||9%||China, Hong Kong||13,475||5%|
|“0” reflects amounts rounded to +/- USD 500,000.|
Table 4: Sources of Portfolio Investment
|Portfolio Investment Assets|
|Top Five Partners (Millions, US Dollars)|
|Total||Equity Securities||Total Debt Securities|
|All Countries||235,872||100%||All Countries||152,523||100%||All Countries||83,349||100%|
|United States||98,555||42%||United States||68,701||45%||United States||29,854||36%|
|United Kingdom||16,509||7%||Luxembourg||9,491||6%||United Kingdom||7,844||9%|
|China, Mainland||13,955||6%||China, Mainland||9,115||6%||France||6,703||8%|
14. Contact for More Information
Unit Chief, Macroeconomic and Trade Policy, U.S. Embassy Seoul
188 Sejong-daero, Jongno-gu, Seoul, Republic of Korea, 110-710
Tel: +82-2-397-4114 (main switchboard)