Overseas direct investments reached a record high in the second quarter, according to the latest government data.
Investments made abroad by South Korean companies rose to $15.01 billion in the April-June period, the highest since 1981 when the government began to compile related data.
The figure surpassed the first-quarter ODI, which hit a 38-year-high of $14.1 billion.
Overseas investments are not necessarily bad. If they are made to acquire foreign businesses that possess advanced technologies or to build factories or sales subsidiaries for economies of scale, they can help expand the growth potential of the Korean economy.
The problem is that the recent ODI surge appears to be capital flight.
In contrast, domestic investments in plants and equipment continued to shrink. Facility investments grew 16 percent in 2017, but contracted 17.4 percent year-on-year in the first quarter and 7.8 percent in the second.
Foreign direct investment in Korea plunged 37.3 percent to $9.87 billion in the first half. Korean companies’ ODI exceeded $29 billion in the first half. The investment inflow is about a third of the outflow.
More concerning is that small and medium-sized companies, which account for 87 percent of the nation’s total employment, joined the investment outflow. Their ODI exceeded $10 billion last year for the first time ever and swelled 65 percent in the first half of this year from a year earlier.
The reason why companies accelerate overseas investments can be pinned down to Korea’s unfavorable business environment.
Korea has raised corporate taxes while other major economies have reduced them competitively to boost corporate activities. Owners of medium-sized companies are relocating their businesses abroad or selling them off to avoid predatory inheritance taxes.
The financial authorities seek to make it easier for the government to intervene in business activities, including managerial rights, through equity investments by the National Pension Service.
The kind of bold deregulation necessary to promote new industries has made little progress. The government, mindful of its supporters, including labor unions, sits by idly and talks about telemedicine services and the sharing economy.
More problematic is the government’s excessive push for labor-friendly policies.
Militant labor unions essentially walk over the government. The administration under President Moon Jae-in sides with unions and puts pressure on companies through investigations by the prosecution, police, National Tax Service and Fair Trade Commission.
Remarks and policies revealing sentiment against large companies are common. In July last year, the floor leader of the ruling party said, “Samsung has become a global corporation by wringing out its suppliers.” The Ministry of Employment and Labor has also demanded companies hire their contractors’ employees directly.
The administration effectively overlooked violence at rallies staged by the Korean Confederation of Trade Unions, the more militant of the nation’s two union umbrella groups. Further, it raised the minimum wage 29 percent in two years and required companies to observe a 52-hour workweek rigidly, sharply increasing the burden on employers.
Apparently concerned with the deteriorating economic conditions, 12 ruling party lawmakers visited the Federation of Korean Industries last week to discuss ways to boost investments and employment.
Their visit was unusual, considering they had earlier condemned the chaebol lobby as an accomplice to corruption involving former President Park Geun-hye and called for its dissolution.
“The Moon administration is not on the side of the unions of large corporations, nor on the side of the Korean Confederation of Trade Unions,” Rep. Lee Won-wook said in the meeting.
On the following day, however, with the backlash from labor groups, he said he would apologize if his remarks had by any chance misled them. This shows the true colors of the ruling camp.
Who would make investments in this business-unfriendly atmosphere? External uncertainties such as the global economic slowdown and the US-China trade war pale in comparison to the domestic risks.
The current trend of firms avoiding investments is a serious problem that could shake the foundations of the national economy. The government must stop being biased toward labor unions and push for pro-market, pro-company policies. There is no other way to improve the sluggish economy.