Korea, Republic of
The Republic of Korea (ROK) is an attractive investment destination for foreign investors due to its political stability, public safety, world-class logistics and information and communications technology (ICT) infrastructure, highly-educated and skilled workforce, and dynamic private sector. Following market liberalization measures in the 1990s, foreign portfolio investment has grown steadily, exceeding 30 percent of the Korea Composite Stock Price Index’s (KOSPI) total market capitalization in 2018. The services sector offers new and promising opportunities for the next wave of foreign direct investment (FDI). However, studies conducted by the Korean International Trade Association and others have shown that the ROK underperforms in attracting FDI relative to the size and sophistication of its economy due to its burdensome regulatory environment.
Korea’s FDI shortfall is due in part to its complicated, opaque, and country-unique regulatory framework. The ROK’s manufacturing model is being overtaken by low-cost producers, most notably China, which threatens the country’s ability to maintain competitiveness This is especially critical with the advent of disruptive technologies such as fifth generation (5G) mobile communications that enable smart manufacturing, autonomous vehicles, and the Internet of Things – innovative technologies whose further development will be hampered by restrictive regulations that do not comport with global standards. The ROK government (ROKG) has taken some steps to address this over the last decade. It established the Office of the Foreign Investment Ombudsman to address concerns of foreign investors. It recently created a “regulatory sandbox” program to spur creation of new products in the financial services, energy, and tech sectors. Process improvements such as conducting Regulatory Impact Analyses (RIA) and soliciting substantive feedback from a broad range of stakeholders, including foreign investors, in the development of new regulations are cited by industry observers as additional steps to improve the investment climate.
The revised Korea-U.S. Free Trade Agreement (KORUS) entered into force January 1, 2019, and continues to allow U.S. investors broad access to the ROK market. Currently, all forms of investment are protected under KORUS, including equity, debt, concessions, and intellectual property rights. With a few exceptions, U.S. investors are treated the same as ROK investors (or third-country investors) in the establishment, acquisition, and operation of investments in the ROK. Investors may elect to bring claims against the government for an alleged investment breach under a transparent international arbitration mechanism. The U.S. government continues to work closely with the ROKG to ensure full implementation of KORUS investment provisions, especially in regard to the right to mount an adequate defense in competition proceedings.
Table 1: Key Metrics and Rankings
|TI Corruption Perceptions Index||2018||45 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2018||5 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2018||12 of 126||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, stock positions)||2017||$41,602||http://www.bea.gov/international/factsheet/|
|World Bank GNI per capita||2017||$28,380||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
The ROK government’s approach toward FDI is positive, and senior policymakers realize the value of foreign investment. In a March 28, 2019, meeting with the foreign business community, President Moon Jae-in equated their success “with the Korean economy’s progress.” Foreign investors in the ROK still face numerous hurdles, however, including insufficient regulatory transparency, inconsistent interpretation of regulations, ongoing regulatory revisions that the market cannot anticipate, underdeveloped corporate governance structures, high labor costs, an inflexible labor system, burdensome Korea-unique consumer protection measures, and market domination by large conglomerates, known as chaebol.
The 1998 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 FIPA, in English (http://korea.assembly.go.kr/res/low_03_list.jsp?boardid=1000000037 ).
The Korea Trade Investment Promotion Agency (KOTRA) actively facilitates foreign investment through its Invest Korea office (on the web at http://m.investkorea.org/m/index.do ). For investments exceeding 100 million won (about USD 88,000), KOTRA assists in establishing a domestically-incorporated foreign-invested company. KOTRA and the Ministry of Trade, Industry, and Energy (MOTIE) organize a yearly Foreign Investment Week to attract investment to South Korea. KOTRA also recruits FDI by participating in overseas events such as the March 2019 “South by Southwest Festival” in Austin, Texas, to attract U.S. startups and investors. The ROK’s key official responsible for FDI promotion and retention is the 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 at 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 almost all forms of remunerative activity. The number of industrial sectors open to foreign investors is well above the Organization for Economic Cooperation and Development (OECD) average, according to MOTIE. However, restrictions on foreign ownership remain for 30 industrial sectors, including three that are closed to foreign investment (see below). Under the KORUS FTA, South Korea treats U.S. companies like domestic entities in select sectors, including broadcasting and telecommunications. Relevant ministries must approve investments in conditionally or partially 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 World Trade Organization (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 (no more than 25 percent foreign equity)
- News agency activities (63910)
Restricted Sectors (less than 30 percent foreign equity)
- Publishing of daily newspapers (58121) (Note: Other newspapers with the same industry code 58121 are restricted to less than 50 percent foreign equity)
Restricted Sectors (no more than 30 percent foreign equity)
- Hydroelectric power generation (35112)
- Thermal power generation (35113)
- Solar power generation (35114)
- Other power generation (35119)
Restricted Sectors (no more than 49 percent foreign equity)
- Program distribution (60221)
- Cable networks (60222)
- Satellite and other broadcasting (60229)
- Wired telephone and other telecommunications (61210)
- Mobile telephone and other telecommunications (61220)
- Other telecommunications (61299)
Restricted Sectors (no more than 50 percent foreign equity)
- Farming of beef cattle (01212)
- Transmission/distribution of electricity (35120)
- Wholesale of meat (46313)
- Coastal water passenger transport (50121)
- Coastal water freight transport (50122)
- International air transport (51)
- Domestic air transport (51)
- Small air transport (51)
- Publishing of magazines and periodicals (58122)
Open but Regulated under Relevant Laws
- Growing of cereal crops and other food crops, except rice and barley (01110)
- Other inorganic chemistry production, except fuel for nuclear power generation (20129)
- Other nonferrous metals refining, smelting, and alloying (24219)
- Domestic commercial banking, except special banking area (64121)
- Radioactive waste collection, transportation, and disposal, except radioactive waste management (38240)
Other Investment Policy Reviews
The WTO conducted its seventh Trade Policy Review of the ROK in October 2016. The Review does not contain any explicit policy recommendations. It can be found at https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-DP.aspx?language=E&CatalogueIdList=233680,233681,230967,230984,94925,
Hash=&HasEnglishRecord=True&HasFrenchRecord=True&HasSpanishRecord=True . The ROK has not undergone investment policy reviews or received policy recommendations from the OECD or United Nations Conference on Trade and Development (UNCTAD) within the past three years.
Registering a business remains 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. Although registration can be filed online, there is no centralized online location to complete the 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 UN’s Global Enterprise Registration (GER) rated Smart Biz a low 2.5 on its 10-point evaluation scale and suggested improvements to provide clear and complete instructions for registering a limited liability company. The GER rated the InvestKorea information portal even lower at 2.0/10. The Korea Commission for Corporate Partnership (http://www.winwingrowth.or.kr/ ) and the Ministry of Gender Equality and Family (http://www.mogef.go.kr/)seek to create a better business environment for minorities and women but do not offer any direct support program for those groups. Some local governments provide guaranteed bank loans for women or disabled people, but a lack of data on those programs makes it difficult to measure their impact.
The ROK does not have any restrictions on outward investment. While Korea’s globally competitive firms complete their investment procedures in-house, the ROK has several offices to assist small business and middle-market firms.
- KOTRA has an Outbound Investment Support Office that provides counseling to ROK firms and holds regular investment information sessions.
- The ASEAN-Korea Centre, which is primarily ROKG-funded, provides counseling and matchmaking support to Korean SMEs interested in investing in the Association of Southeast Asian Nations (ASEAN) region.
- The Defense Acquisition Program Administration in 2019 opened an office to advise Korean SME defense firms on exporting unrestricted defense articles.
2. Bilateral Investment Agreements and Taxation Treaties
The ROK has 16 FTAs encompassing trade with 57 countries, including the United States, and 94 bilateral investment treaties (BITs). The most recent FTA was signed with five Central American countries (Panama, Costa Rica, Honduras, El Salvador, and Nicaragua) in February 2018 and takes effect in the first half of 2019. Ongoing FTA negotiations include the Regional Comprehensive Economic Partnership (RCEP) among 16 Asian countries, a ROK-China-Japan trilateral FTA, and bilateral FTAs with Israel and Mercado Comun del Sur (Mercosur). Negotiations are also in progress to expand the ROK-China FTA services and investment chapter, and to enhance existing FTAs with India, Indonesia, and Chile. The ROK has had free trade negotiations with Mexico, which stopped in 2003 when Mexico announced a moratorium on all FTAs. Negotiations resumed in 2008 have been suspended since then. The ROK signed a BIT with Mexico in 2002. In September 2017, the ROK and the EAEU (Eurasian Economic Union – five countries including Russia) agreed to set up a joint working group for FTA consultations but formal negotiations have not yet begun. As of March 2019, the ROK had signed bilateral tax agreements with 93 countries. The ROK National Tax Service has a special unit dedicated to processing Advance Pricing Agreement and Mutual Agreement Procedure requests from North America, Europe, and Australia, as timely processing of these requests has historically been a frequent subject of disputes. The U.S.-ROK bilateral income tax treaty 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://www.mofa.go.kr/www/wpge/m_3834/contents.do and http://investmentpolicyhub.unctad.org/IIA .
In December 2016, a subsidiary of World Fuel Services (WFS) received assessments of approximately USD 10.4 million and a pre-assessment notice for an additional USD 17.6 million from regional tax authorities in Seoul. The assessments were mainly fines and penalties for allegedly failing to issue value-added tax (VAT) invoices and report certain transactions from 2011-2014. WFS disputes that any VAT was due on the transactions at issue, or that its subsidiary should be required to be a local VAT-registered entity. WFS’s appeal through the ROK tax administrative appeal process is ongoing.
3. Legal Regime
Transparency of the Regulatory System
ROK regulatory transparency has improved in recent years, due in part to Korea’s membership in the WTO and negotiated FTAs. However, the foreign business community continues to face a large number of Korea-unique rules and regulations. Approximately 80 percent of regulations are introduced and passed by the National Assembly without a regulatory impact assessment (RIA) due to a loophole that requires only regulations written by ministries to undergo RIAs. While these regulations may have well-intended social aims, such as consumer protection or the promotion of SMEs, they often have unintended consequences for the economy by creating new trade barriers. Laws and regulations are often framed in general terms and are subject to differing interpretations by government officials, who rotate frequently. Regulatory authorities often issue oral or internal guidelines or other legally enforceable dictates that prove burdensome and difficult to follow for foreign firms. Intermittent ROKG deregulation plans intended to eliminate the use of oral guidelines or subject them to the same level of regulatory review as written regulations have not led to concrete changes. Despite KORUS FTA provisions designed to address these issues, they remain persistent and prominent.
The ROK constitution allows both the National Assembly and the executive branch to introduce bills. The legal norm is for regulations to be introduced in the form of an act. Subordinate statutes (presidential decree, ministerial decree, and administrative rules) largely govern matters delegated by acts and relevant enforcement. Ministries are in charge of drafting such subordinate regulations. Acts and their subordinate regulations can all be relevant for foreign businesses. Administrative agencies shape policies and draft bills on matters under their respective jurisdictions. Drafting ministries are required to clearly set policy goals and complete RIAs. When a ministry drafts a regulation, it is required to consult with other relevant ministries before it releases the regulation for public comment. The constitution also allows local governments to exercise self-rule legislative power to draft ordinances and rules within the scope of federal acts and subordinate statutes. The enactment of acts and their subordinate statutes, ranging from the drafting of bills to their promulgation, must follow formal ROK legislative procedures in accordance with the Regulation on Legislative Process enacted by the Ministry of Legislation. Since 2011, all publicly listed companies have been required to follow International Financial Reporting Standards (IFRS, or K-IFRS in South Korea). The Korea Accounting Standards Board facilitates ROK government endorsement and adoption of IFRS and sets accounting standards for companies not subject to IFRS. According to the Administrative Procedures Act, proposed laws and regulations (acts, presidential decrees, or ministerial decrees) must seek public comments at least 40 days prior to their promulgation. Regulations are sometimes promulgated with only the minimum required comment period, and with minimal consultation with industry. Regulatory changes originating from legislation proposed by members of the National Assembly are not subject to public comment periods. As a result, 80 percent of all new regulations are written and passed through the National Assembly without rigorous quality control and solicitation of public comments. The Korean language text of draft acts and regulations accompanied by executive summaries are published online in the Official Gazette and simultaneously posted on the websites of relevant ministries and the National Assembly. This is required under the ROK’s public notification process that includes a 40-day comment period. Foreign firms’ analyses and responses are delayed because of the need to translate complex documentation. The Ministry of Government Legislation reviews whether laws and regulations conform to the constitution and monitors government adherence to the Regulation on Legislative Process. All laws and regulations also undergo review by the Regulatory Reform Committee to minimize government intervention in the economy and to abolish all economic regulations that fall short of international standards or hamper national competitiveness.
In January 2019, Korea introduced a “regulatory sandbox” program intended to reduce the regulatory burden on companies that seek to test innovative ideas, products, and services. The program is managed by MOTIE; the Ministry of Science and ICT; and the Financial Services Commission, depending on the business sector in which a particular proposal falls. The program is open to Korean companies and to any foreign company with a Korean branch office; however, the first round of companies granted exemptions under the program were exclusively domestic firms. Websites and applications are only offered in Korean. Despite its limited nature, the initiative is a welcome effort by regulators to spur innovation.
The ROKG enforces regulations through penalties (either fines or criminal charges) in the case of violations of the law. The government’s enforcement actions can be challenged through an appeal process or administrative litigation. At times the CEOs of local branches can be held legally responsible for all actions of their company and have been arrested and charged for their companies’ crimes.
Business regulation in the ROK often lacks empirical cost-benefit analysis or impact assessment on the basis of scientific and data-driven assessment because regulations are finalized without sufficient stakeholder consultation or passed by the National Assembly without a regulatory impact assessment. When ministries draft regulations, they must submit their RIA to the Regulatory Reform Committee for its determination on whether the regulation restricts rights or imposes excessive duties. These RIAs are usually not publicly available for comment, and comments received by regulators are not made public. The ROK’s public finances and debt obligations are generally quite transparent, and the ROKG has proactively improved in this area in recent years. Some concerns regarding debt related to state-owned enterprises and pseudo-government debt remain, however.
International Regulatory Considerations
Though not part of any regional economic bloc, the ROK has revised various local regulations to implement commitments under international treaties and agreements including FTAs. Treaties duly concluded and promulgated in accordance with the Constitution and the generally recognized rules of international law are accorded the same standing as domestic laws. ROK officials have repeatedly expressed a desire to harmonize standards with global norms by benchmarking the United States and the EU. The U.S., U.K., and Australian governments exchange regulatory reform best practices with the ROKG to encourage ROK regulators to incorporate more regulatory analytics, increase transparency, and improve compliance with international standards. Korea-unique rules and regulations continue to pose difficulties for foreign companies operating in the ROK, however. The ROK is a member of the WTO and notifies the Committee on Technical Barriers to Trade of all draft technical regulations. The ROK is also a signatory to the Trade Facilitation Agreement (TFA). The ROK amended the ministerial decree of the Customs Act in 2015, creating a committee charged with implementation of the TFA. The ROK is a global leader in terms of modernized and streamlined procedures for the transportation and customs clearance of goods. While the Korea Customs Service’s aggressive interpretation of rules of origin and extensive documentation requirements undermined KORUS benefits for U.S. exporters in the past, industry sources report that KCS has largely addressed this issue over the past year, and is now taking a rational approach to enforcing country of origin issues under KORUS.
Legal System and Judicial Independence
The ROK legal system is based on civil law. Subdivisions within the district and high courts govern commercial activities and bankruptcies and enforce property and contractual rights with monetary judgments, usually levied in the domestic currency. The ROK has a written commercial law, and matters regarding contracts are covered by the Civil Act. There are only three specialized courts in the ROK: the patent, family, and administrative courts. In civil cases, courts deal with disputes surrounding the rights of property or legal relations. The ROK court system is independent and not subject to government interference in cases that may affect foreign investors. Efforts are being made to ensure the judicial process is more fair and reliable. Foreign court judgments are not enforceable in the ROK. Rulings by district courts can be appealed to higher courts and the Supreme Court.
Laws and Regulations on Foreign Direct Investment
Laws and regulations enacted within the past year include:
- The Financial Services Commission (FSC) announced a Revised Regulation for Expansion of Cloud Usage in the Financial Sector in July 2018, allowing financial services companies to make use of cloud storage solutions to process personally identifiable information (PII); this change offered limited benefit for many foreign companies, however, as it was accompanied by restrictive data localization, data protection, and reporting obligations.
- A revision to the Value-Added Tax Act passed in December 2018 and taking effect in July 2019 orders the National Tax Service to apply the standard 10 percent VAT tax on revenue earned in the ROK by foreign ICT firms.
- A revision of the Act on Promotion of Information and Communications Network Utilization and Protection took effect in March 2019 and requires global ICT firms with more than one million daily users or annual sales exceeding USD 900 million to designate a “local agent” who can be held responsible in case of a data breach or other consumer protection violation.
- A December 2018 revision to the FIPA mandated that the MOTIE Minister conduct a survey on job creation by foreign investors every three years.
- The Restriction of Special Taxation Act was revised in December 2018 to remove certain tax breaks for foreign investments registered after December 31, 2018. Industry analysts viewed this change as a move to get Korea off of the EU List of Non-cooperative Jurisdictions for Tax Purposes (NJTP). The ROK was added to the NJTP list in December 2017, and de-listed in March 2019.
Key pending/proposed laws and regulations as of April 2019 include:
- The FSC plans to further relax restrictions on cloud computing in the financial sector, but has not announced the scope of reform or an implementation schedule.
- Numerous regulations pertaining to the taxation of foreign ICT companies are currently under consideration and are popularly referred to collectively as “Google Tax” laws. Various ministry officials have publicly recommended waiting for OECD consensus recommendations before implementing a comprehensive digital services tax.
There is no single website for investment-relevant laws and regulations. However, more information is available at the following websites: https://www.better.go.kr/ , https://www.fsc.go.kr/ , and http://motie.go.kr/ .
Competition and Anti-Trust Laws
The Monopoly Regulation and Fair Trade Act (KFTC Act) authorizes the Korea Fair Trade Commission (KFTC) to review and regulate competition-related and consumer safety matters. A number of U.S. firms have raised serious concerns that the KFTC has targeted foreign companies with more aggressive enforcement efforts and that KFTC procedures and practices have inhibited their ability to defend themselves during KFTC investigatory proceedings. The KFTC drafted the first full-scale amendment of the Monopoly Regulation and Fair Trade Act in 38 years and submitted the bill to the National Assembly in December 2018. However the draft amendment act does not address concerns raised by U.S. and other foreign companies regarding procedural fairness and the right to an adequate defense. Due to this omission, the U.S. Trade Representation called for the first-ever consultations under provisions of the KORUS FTA in 2019.
Expropriation and Compensation
The ROK follows generally accepted principles of international law with respect to expropriation. ROK law protects foreign-invested enterprise property from expropriation or requisition. Private property can be expropriated for a public purpose – like developing new cities, building new industrial complexes, or constructing roads – and claimants are afforded due process. Property owners are entitled to prompt compensation at fair market value. There have been many cases of private property expropriation in the ROK for public reasons and these were conducted in a non-discriminatory manner and claimants were compensated at or above fair market value; U.S. Embassy Seoul is not aware of any cases alleging a lack of due process. The ROKG allotted USD 20 billion in its 2019 budget for land expropriation, a 38 percent increase from the previous year.
ICSID Convention and New York Convention
The ROK acceded to the International Centre for Settlement of Investment Disputes (ICSID) in 1967, and the New York Arbitration Convention in 1973. There are no specific domestic laws providing for enforcement; however, South Korean courts have made rulings based on the ROK’s membership in the conventions.
Investor-State Dispute Settlement
The ROK is a member of the International Commercial Arbitration Association and the World Bank’s Multilateral Investment Guarantee Agency. ROK courts may ultimately be called upon to enforce an arbitrated settlement. When drafting contracts, it may be useful to provide for arbitration by a neutral body such as the International Commercial Arbitration Association. U.S. companies should seek local expert legal counsel when drawing up any type of contract with a South Korean entity. The United States has a bilateral Treaty of Friendship, Commerce, and Navigation with the ROK that contains general provisions pertaining to business relations and investment. The KORUS FTA contains strong, enforceable investment provisions that went into force in March 2012. There have been several serious investment disputes involving foreigners in Korea in recent years. In November 2012, U.S.-based Lone Star Funds, a worldwide private equity firm, brought an investor-state dispute lawsuit against the South Korean government with the ICSID in Washington D.C. under the investment chapter of the KORUS FTA, and this case is still pending. The private equity firm blamed the ROK government for sharp declines in stock prices, claiming that it delayed the acquisition of the Korea Exchange Bank without cause. The ICSID was expected to make a ruling in 2017, but the ruling has been repeatedly postponed. Foreign court judgments, with the exception of foreign arbitral rulings that meet certain conditions, are not enforceable in the ROK. There is no history of extrajudicial action against foreign investors. An arbitration panel under the United Nations Commission on International Trade Law (UNCITRAL) made a USD 68 million ruling against the ROKG in June 2018 in an investor-state dispute settlement filed by Entekhab, owned by Iranian investor Mohammad Reza Dayyani. In July 2018, an American individual investor filed an investor-state dispute (ISD) lawsuit against the ROKG, claiming that the government had violated the KORUS FTA in expropriating her land. This case is still pending. Also in July 2018, U.S. activist fund Elliott Associates submitted a notice of arbitration over an ISD pertaining to the KORUS FTA. Elliott Associates claimed they had suffered at least USD 770 million in financial losses due to the merger between Samsung C&T and Cheil Industries, stating the ROKG illicitly intervened by mobilizing the National Pension Service as a large shareholder in the process of approving the merger in 2015. In September 2018, Mason Capital Management, another American investor, filed for arbitration seeking USD 200 million in compensation for losses incurred from the same controversial merger. Both cases pending before the UNCITRAL. In August 2018, Korea’s Higher Court found former President Park Geun-hye guilty of illegally intervening in the Samsung-Cheil merger.
International Commercial Arbitration and Foreign Courts
Although commercial disputes can be adjudicated in a civil court, foreign businesses find this method impractical. Proceedings are conducted in Korean, often without adequate interpretation. ROK law prohibits foreign lawyers who have not passed the Korean Bar Examination from representing clients in South Korean courts. Civil procedures common in the United States, such as pretrial discovery, do not exist in the ROK. 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, and lawsuits often are contemplated only as a last resort, signaling the end of a business relationship. ROK law governs commercial activities and bankruptcies, with the judiciary serving as the means to enforce property and contractual rights, usually through monetary judgments levied in the domestic currency. The ROK has specialized courts, including family courts and administrative courts, as well as courts specifically dealing with patents and other intellectual property rights issues. Commercial disputes may also be taken to the Korean Commercial Arbitration Board (KCAB). The Korean Arbitration Act and its implementing rules outline the following sequential steps in the arbitration process: 1) parties may request the KCAB to act as an informal intermediary to a settlement; 2) if informal arbitration is unsuccessful, either or both parties may request formal arbitration, in which the KCAB appoints a mediator to conduct conciliatory talks for 30 days; and 3) if formal arbitration is unsuccessful, an arbitration panel consisting of one to three arbitrators would be assigned to decide the case. If one party is not resident in the ROK, either may request an arbitrator from a neutral country. If foreign arbitral awards or foreign courts’ rulings meet the requirements of Article 217 of the Civil Procedure Act, then those are enforceable by local courts. The U.S. Embassy is not aware of statistics involving state-owned enterprise investment dispute court rulings. Gale International (GI), a U.S. real estate development company, has had an ongoing investment dispute with Korean conglomerate POSCO since 2015. GI claims it is owed USD 350 million and has filed criminal complaints in a Seoul court against POSCO alleging misappropriation of funds and approving documents with the GI seal without authorization. The case is still pending, and GI has closed its office in the ROK.
The Debtor Rehabilitation and Bankruptcy Act (DRBA) stipulates that bankruptcy is a court-managed liquidation procedure where both domestic and foreign entities are afforded equal treatment. The procedure commences after a filing by a debtor, creditor, or a group of creditors and determination by the court that a company is bankrupt. The court designates a Custodial Committee to take an accounting of the debtor’s assets, claims, and contracts. Creditors may be granted voting rights in the creditors’ group, as identified by the Custodial Committee. Shareholders and contract holders may retain their rights and responsibilities based on shareholdings and contract terms. The World Bank ranked ROK policies and mechanisms to address insolvency 11th among 190 economies in its 2019 Doing Business report. Debtors may be subject to arrest once a bankruptcy petition has been filed, even if the debtor has not been declared bankrupt. Individuals found guilty of negligent or false bankruptcy are subject to criminal penalties. Under the revised DRBA enacted on March 28, 2017, Korea established the Seoul Bankruptcy Court (SBC) with nationwide jurisdiction to hear major bankruptcy or rehabilitation cases and to provide more effective, specialized and consistent guidance in bankruptcy proceedings. Any Korean company with debt equal to or above KRW 50 billion KRW (about USD 44 million) and 300 or more creditors may file for bankruptcy rehabilitation with the SBC. Thirteen local district courts continue to oversee smaller bankruptcy cases in areas outside Seoul.
4. Industrial Policies
The ROK government provides the following general incentives for foreign investors:
- Cash incentives for qualified foreign investments in free trade zones, foreign investment zones, free economic zones, industrial complexes, and similar facilities;
- Tax and cash incentives for the creation and expansion of workplaces for high-tech business plants and research and development 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.
The ROKG does not issue guarantees or jointly finance foreign direct investment projects.
Foreign Trade Zones/Free Ports/Trade Facilitation
The Ministry of Economy and Finance (MOEF) 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 (i.e., Free Economic Zones, Free Investment Zones, and Tariff Free Zones), where favorable tax incentives and other support for investors are available. The ROK aims to attract more foreign investment by promoting its seven 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); 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 . There are also 26 Foreign Investment Zones designated by local governments to accommodate industrial sites for foreign investors. Special considerations for foreign investors vary among these options. In addition, there are 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.
Performance and Data Localization Requirements
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, managed by the courts. 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
Four ROK ministries share primary responsibility for protection and enforcement of intellectual property rights (IPR): the Ministry of Culture, Sports, and Tourism (MCST); the Korea Copyright Protection Agency (KCOPA); the Korean Intellectual Property Office (KIPO); and the Korea Customs Service (KCS). Now a decade removed from exiting the Special 301 Watch List in 2009, the ROK has become a regional leader in terms of legal framework and enforcement for IPR. Enforcement efforts have been primarily focused on online activity in recent years, but some industry sources have reported a loss of momentum in preventing the sale of physical counterfeit goods. No new IP-related laws or amendments were enacted in 2018, and no relevant reforms are expected in the near future.
Industry sources have expressed satisfaction with the ROK legal framework, saying Korea has become a “model Asian nation” for IPR protections. KIPO Special Judicial Police seized 542,505 counterfeit items from 361 persons in 2018, down from 691,630 items seized from 362 persons in 2017. KIPO also suspended 6,181 online transactions in 2018, up from 6,156 cases in 2017; and closed 225 illegal online shopping malls in 2018, up from 191 in 2017. In addition, KIPO provides training to law enforcement officers, educates the public through television and other media, and rewards those who report counterfeit goods. KCS seized USD 470 million of IP-infringing goods in 2018, an increase of 249 percent from 2017. Trademark enforcement accounted for 88 percent of these cases, which were mostly for counterfeit watches, apparel, and other consumer goods. KCS also promotes IPR protection by posting public service announcements on public transportation (trains and subways) and via social media.
Some industry sources have expressed concern about the prosecution of IPR violations in the ROK, stating that light sentences do not correspond to the lucrative nature of infringing activity and do not serve as an effective deterrent. Though MCST Judicial Police recommended 670 IPR cases for legal action to the Supreme Prosecutor’s Office (SPO) in 2018, a 24 percent increase on the previous year, the total number of people indicted by the SPO for Copyright Act violations dropped from 24,309 in 2017 to 18,392 in 2018.
Stakeholders have expressed concern, however, that Korea’s pharmaceutical reimbursement is not conducted in a fair, transparent, and nondiscriminatory manner that recognizes the value of innovation. In March 2018, negotiations to improve and better implement the KORUS FTA concluded with a commitment from Korea to amend its Premium Pricing Policy for Global Innovative New Drugs to ensure non-discriminatory and fair treatment for pharmaceutical products and medical devices, including imported products and devices. Korea’s implementation of this commitment has resulted in amendments that appear to make it so that very few, if any, companies or products will qualify for premium pricing.
The ROK was not listed in the 2019 Special 301 report, nor was it included in the 2018 Notorious Markets List. For additional information about national laws and points of contact at local intellectual property offices, please see World Intellectual Property Organization’s country profiles at http://www.wipo.int/directory/en/ .
6. Financial Sector
Capital Markets and Portfolio Investment
The Korea Exchange (KRX) is comprised of a stock exchange, futures market, and stock market following a 2005 merger of the Korea Stock Exchange, Korea Futures Exchange, and Korean Securities Dealers Automated Quotations (KOSDAQ) stock market. It is tracked by the Korea Composite Stock Price Index (KOSPI) and has an effective regulatory system that encourages portfolio investment. There is sufficient liquidity in the market to enter and exit sizeable positions. In 2018, over 2,000 companies were listed with a combined market capitalization of USD 1.9 trillion. 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 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 were abolished in 1998, and foreign investors owned 35.8 percent of benchmark KOSPI stocks and 11.1 percent of the KOSDAQ as of the end of 2018. Foreign portfolio investment decreased slightly over the past year, reflecting slowing global growth.
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 overall, with a low non-performing loan ratio of 0.97 percent at the end of 2018, dropping 0.22 percent from the prior year. Korean commercial banks held more than USD 2.2 trillion in total assets at the end of 2018. The ROK central bank is the Bank of Korea (BOK). Foreign banks or branches are allowed to establish operations in the country, and are subject to prudential measures and other relevant regulations. The ROK has not lost any correspondent banking relationships in the past three years, nor are any relationships in jeopardy. There are no restrictions on a foreigner’s ability to establish a bank account in Korea.
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 2018, 71.9 percent of spot transactions in the market were between the U.S. dollar and Korean won, while daily transaction (spot and future) was equal to USD 55.5 billion, up 9.6 percent from the previous year. Exchange rates are generally determined by the market. In the past, the U.S. Department of the Treasury has assessed 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 had intervened on net to resist won appreciation. In May 2019, however, the U.S. Treasury assessed that on net in 2018 ROKG authorities intervened to support the Won, making small net sales of foreign exchange. In March 2019, the ROK released a report on its net foreign currency intervention for the second half of 2018, the first in a series of regular reports expected to transition from biannual to quarterly in late 2019. Treasury welcomed the ROK report on its foreign exchange intervention, urged the ROK to continue to limit currency intervention, and observed that Korea now only falls short on one of three monitoring criteria and could be removed from the monitoring list in its next report.
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 MOEF. 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 ROK 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, 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 MOEF 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. KIC’s assets under management stood at USD 134.1 billion at the end of 2017. 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 Sovereign Wealth Funds. The KIC has never invested entrusted money in domestic assets, but did once invest USD 23 million of the Corporation’s own money into a domestic real estate fund in January 2015.
7. State-Owned Enterprises
Many ROK state-owned enterprises (SOEs) continue to exert significant control over segments of the economy. There are 35 remaining SOEs active in the energy, real estate, and infrastructure (railroad, highway construction) sectors. The legal system has traditionally ensured a role for SOEs as sectoral leaders, but in recent years, the ROK has tried to attract more private participation in the real estate and construction sectors in particular. 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 market share data for SOEs. It requires each entity to disclose financial statements, the number of employees, and average compensation figures. The PIMA gives authority to MOEF 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 on this Korean-language website: http://www.alio.go.kr/home.html . The ROK government officially does not give any non-market based advantages to SOEs competing in the domestic market, but U.S. Embassy 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 banks operating in Korea.
Privatization of government-owned assets historically faced protests by labor unions and professional associations and a lack of interested buyers in some sectors. No state-owned enterprises were privatized between 2002 and November 2016. In December 2016, the ROK sold part of its stake in Woori Bank, recouping USD 2.07 billion, and plans to sell its remaining 21.4 percent stake at an undetermined future date. Given the current administration’s pro-labor stance, most analysts do not expect significant movement with regard to privatization in the near future. Foreign investors may participate in privatization programs if 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 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 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 249 ROK companies listed as UNGC members as of April 2018. 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. The ROKG promotes the OECD Guidelines for Multinational Enterprises online, via seminars, and by publishing and distributing promotional materials. To enhance implementation, the ROKG established a National Action Plan overseen by the International Human Rights Division of the Ministry of Justice, established a National Contact Point (NCP), and designated the Korea Commercial Arbitration Board (KCAB) as the NCP Secretariat. The KCAB recently addressed two cases by facilitating discussion of the concerned parties and inviting outside experts on arbitration to settle the issues to the parties’ satisfaction.
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 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, MOTIE 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 2018 ranked the ROK 45 out of 180 countries and territories, and gave it a score of 57 out of 100 (with 100 being the best score). Public concern about government corruption reached an apex between 2016 and 2017, when local press began exposing the link between then-President Park Geun-hye and her friend and adviser Choi Soon-sil. Choi was arrested and sentenced to 20 years in jail on charges of fraud, coercion, and abuse of power and President Park was impeached by 234-56 vote in the National Assembly in December 2016. Following her removal from office, a presidential by-election was held on May 9, 2017, bringing President Moon Jae-in into office. Former President Park was found guilty of multiple counts of abuse of power, bribery, and coercion and sentenced to 24 years in prison on April 6, 2018. Separately, on October 5, 2018, Park’s predecessor, former President Lee Myung-bak was sentenced to 11 months of imprisonment for graft, embezzlement, and abuse of power, including accepting bribes from a major consumer electronics conglomerate in return for a presidential pardon for its chairman. Political corruption at the highest levels of elected office have occurred despite efforts by the ROK legislature to pass and enact anti-corruption laws such as the Act on Prohibition of Illegal Requests and Bribes, also known as 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 attempted to tighten regulations governing the employment of retired government officials, who were seen as having used their insider knowledge and high-level government contacts to help their new employers skirt legal requirements. The sinking, which resulted in the deaths of 304 passengers (mostly school children on a field trip) and crew in April of that year, resulted in widespread criticism of the ferry operator, the regulators who oversaw its operations, and the ROK 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. The Public Service Ethics Commission, between May 2017 and February 2019, approved approximately 85 percent, or 1335, of the requests made by former political appointees and former government officials to accept government affiliated or private sector positions, according to local press. 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 and other personally identifiable information (PII) to make the submission. However, in April 2018, the law was updated to allow would-be filers to report cases through one’s attorney without disclosing PII to the courts. 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 the ROK 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, 42, Saemunan-ro, Jongno-gu, Seoul 110-761
10. Political and Security Environment
The Democratic People’s Republic of Korea (DPRK) and the ROK continue to have a tense relationship despite rapprochement efforts in 2018. The two Koreas still share what is arguably the most heavily-fortified border in the world, with their militaries ready to face off at a moment’s notice. The United States has had a security alliance with the ROK since 1953, with nearly 28,000 U.S. troops currently stationed in the ROK. The presence of U.S. forces have allowed the Korean Peninsula to maintain general peace and stability since 1953 and enabled the ROK to grow into a modern, prosperous democracy boasting one of the largest and most dynamic economies in the world. In addition, both the ROK and U.S. governments are engaging with the DPRK in dialogue in an effort to resolve tensions and to realize the complete denuclearization of North Korea. The two Koreas committed in the April 27, 2018, inter-Korean summit to reduce tensions on the border and to work toward a permanent peace regime on the Korean Peninsula. Likewise, the United States and DPRK agreed in the June 12, 2018, Singapore Summit between President Trump and Chairman Kim to work toward denuclearization and to build a lasting and stable peace regime on the Korean Peninsula. Further progress in inter-Korean relations will, however, depend DPRK’s denuclearization efforts. 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. There have also been large-scale protests in the past directed at U.S. trade actions (e.g. beef imports in 2008). The ROK is a modern democracy with active public political participation, and well organized political demonstrations are common. For example, large-scale rallies were a regular occurrence throughout former President Park Geun-hye’s impeachment in 2016 and 2017. The protests were largely peaceful and orderly, with almost no instances of violence. The presidential by-election and transition that followed Park’s impeachment also proceeded smoothly and without incident.
11. Labor Policies and Practices
Upon taking office in May 2017, President Moon Jae-in declared himself the “Jobs President,” and his administration has introduced a number of employment-related reforms since. According to Statistics Korea (http://kostat.go.kr/portal/eng/index.action ), there were approximately 28 million economically active people in the ROK as of March 2019, with an employment rate (OECD standard) of approximately 60.4 percent. The overall unemployment rate of 4.3 percent in March 2019 was much lower than the unemployment rate of youth ages 15-29, which, at 9.3 percent, is a serious domestic concern. The country has two major national labor federations. As of December 2018, the Federation of Korean Trade Unions (FKTU) had 1,036,236 members, and the Korean Confederation of Trade Unions (KCTU) had 995,861 members. KCTU and FKTU are affiliated with the International Trade Union Confederation. Most of FKTU’s constituent unions maintain affiliations with international union federations.
The minimum wage is reviewed annually. Labor and business set the minimum wage for 2019 at KRW 8,350 (approximately USD 7.35 per hour), a 10.9 percent increase from 2018. The Labor Standards Act was revised in 2018 to reduce maximum working hours to 52 per week. According to Statistics Korea, non-regular workers received 54.5 percent of the wages of regular workers in 2018. Non-regular workers received KRW 1.64 million per month (about USD 1,444) while regular workers received KRW 3.09 million (about USD 2,649).
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 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, ROK 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 ROK 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 16 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 2018, approximately 222,374 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 2017 was 10.7 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/ . 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 two percent of their workforce, encourage companies to reserve three 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 National 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. Labor inspectors from the Ministry of Employment and Labor 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. In June 2018, the ROK President established the “Economic, Social, and Labor Council” that serves as an advisory group on economic and labor issues. The Act on the Protection of Fixed-Term and Part-Time Workers 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 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 2018: https://www.state.gov/reports/2018-country-reports-on-human-rights-practices/republic-of-korea/
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. 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. In the second quarter of 2018, Korean firm ARK Impact Asset Management and OPIC embarked on a joint investment in the Mumbai Slum Redevelopment Project.
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)||2017||KRW 1,730,399||2017||$1,530,750||https://data.worldbank.org/country/korea-rep|
|Foreign Direct Investment||Host Country Statistical Source*||USG or International Statistical Source||USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
|U.S. FDI in partner country ($M USD, stock positions)||2017||$30,325||2017||$41,602||BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data|
|Host country’s FDI in the United States ($M USD, stock positions)||2017||$94,528||2017||$51,770||BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data|
|Total inbound stock of FDI as % host GDP||2017||12.6%||2017||15.4%||UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx|
*ROK Sources: GDP – http://ecos.bok.or.kr/ (as of March 2019); inbound FDI – http://www.motie.go.kr ; (as of January 2018) outbound FDI – http://www.koreaexim.go.kr (as of March 2018)
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||$211,962||100%||Total Outward||$337,425||100%|
|Japan||$47,566||22%||China, P.R. (Mainland)||$77,800||23%|
|United States||$33,973||16%||United States||$77,792||23%|
|Singapore||$15,074||7%||China, P.R. (Hong Kong)||$14,084||4%|
|“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||$420,681||100%||All Countries||$250,248||100%||All Countries||$170,433||100%|
|United States||$184,361||44%||United States||$113,073||45%||United States||$71,288||42%|
|United Kingdom||$26,246||6%||Luxembourg||$17,047||7%||United Kingdom||$13,054||8%|
|France||$18,207||4%||China, P.R. (Mainland)||$13,006||5%||International Organization||$7,415||4%|