(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000606090007-3
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 5
• Document Creation Date: January 12, 2017
• Document Release Date: April 25, 2011
• Sequence Number: 7
• Publication Date: June 11, 1986
• Content Type: MEMO

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Central Intelligence Agency
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DIRECTORATE OF INTELLIGENCE
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11 JUNE 1986
South Korea: Foreign Investment Liberalization
Summary
The impressive growth of foreign-direct
investment in South Korea reflects the success of a
government liberalization program designed to
attract advanced technology from abroad and reduce
reliance on foreign borrowing. In the two years
since the program began, investment approvals have
doubled, while arrivals of funds have increased two-
and-a-half times; last year foreign equity
investment in South Korea also set new highs of $532
million in approvals and $250 million in arrivals.
In launching the liberalization program, the South
Koreans hoped to increase the flow of investment in
areas they had selected for development, but they
also eased restrictions on sectors of interest to
Washington. Seoul remains disappointed that many
foreign investors are focusing on the hotel and
tourist services sector rather than the
manufacturing sector, but we expect the government
This memorandum was prepared by (Office of East
Asian Analysis. Information avail a as of 11 June 1986 was
used in its preparation. Comments and queries are welcome and
may be directed Chief, Korea Branch, Northeast Asia
Division, OEA,
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to continue to lower barriers to investment at a
measured pace.
Seoul Liberalizes Investment
South Korea's investment liberalization program, which has
progressed steadily since it was unveiled in 1984, is in step
with Seoul's broad effort to open the economy by reducing
government intervention and relying increasingly on market
forces. The program is designed to:
-- Obtain capital and advanced technology to develop South
Korea's knowledge- and technology-intensive industries.
-- Alleviate some of the pressure on the economy caused by
South Korea's $47 billion external debt--95 percent of
cumulative foreign capital inflows to South Korea h
been foreign loans rather than foreign investment.
To accomplish these goals, Seoul has:
Scrapped a system that designated certain industries for
foreign investment and precluded all others, in favor of
a "negative list" that specifies only proscribed
industries.
Increased the overall share of industrial sectors in
which foreign investment is permitted from 44 to 80
percent.
Raised the ceiling for automatic approvals for foreign
investment from $1 million to $3 million.
Replaced the requirement of prior approval for transfer
of foreign technology into South Korea, when part of an
investment package, with an after-the-fact notification
system.
The South Koreans clearly hoped the new program would ease
growing trade frictions with the United States. Among the first
areas opened for foreign investment when the plan took effect on
1 July 1984 were sectors that had been the focus of bilateral
trade problems--the electronics, machinery, and transportation
industries.
The New Plan Gets Results
South Korean policymakers can point to the increased flow of
foreign investment as proof that its "negative list" system is
working. In the last two years, direct foreign investment has
grown to $532 million, a 100 percent increase since 1983, the
year before the new laws took effect. The planners have less
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cause for satisfaction in the direction investment is taking,
however. Rather than focusing on manufacturing industries,
foreign investors--primarily the Japanese--have concentrated on
the hotel and tourist services sector with an eye toward the 1988
Olympics. A single Japanese tourism project ($300 million
investment in the Lotte Hotel), for example, accounted for 56
percent of last year's total investment. Only 30 percent went to
the manufacturing sector--well below its 63 percent share in
1984. 25X1
Approvals of investment from Japan overtook those from the
United States in 1985 for the second time in the past six years,
but US investment is mare closely tailored to Seoul's investment
preferences. Investments in manufacturing industries that were
approved through the end of 1985 accounted for 88 percent of
total cumulative US investments in South Korea, or 43 percent of
total investment in manufacturing from all sources. Major US
investments in new projects in 1985 included General Motors's $25
million stake in the automotive parts industry, which came hard
on the heels of its $150 million investment in a joint venture
with Daewoo to produce automobiles for the US market. US firms
also invested in the chemical and machinery industries. 25X1
US investments in South Korea proved to be profitable for
the companies involved. In contrast to the relatively lackluster
performance of the overall South Korean economy last year (5.1
percent real GNP growth), an unofficial Finance Ministry analysis
indicates firms backed by foreign investors far surpassed purely
domestic businesses in growth, profitability, and dividend
distribution. According to' press reports, the profits of firms
listed on the Seoul Stock Exchange dropped by 21 percent last
year compared with 1984, but US firms, taking advantage of
relaxed foreign exchange rules, were able to increase profit
remittances by nearly 60 percent. Foreign investors earned
greater profits in part because they went after only the most
profitable areas, while the Seoul Stock Exchange includes a broad
range of industries. Foreign firms also carry less debt than the
average South Korean company. 25X1
Outlook for Further Liberalization
The disparity in profits between foreign and domestic firms
has exposed the government to criticism from protectionist
elements within the country. The more radical student and labor
groups oppose on political grounds any inflow of foreign capital,
which they view as fostering dependency on foreign interests.
Anti-American themes in particular have become a growing feature
of their protests. In November 1985, students occupied and
damaged the US Chamber of Commerce office in Seoul to protest the
presence of US businessmen and capital that radicals insisted
were a key prop for the "illegitmate" government of President
Chun Doo Hwan. Moreover, powerful business interests oppose
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Seoul's economic liberalization program and resent havin their
profits reduced by competition from foreign firms. 25X1
Despite such negative commentary, we believe US pressure,
including the 301 process and the linking of continued
Generalized System of Preferences (GSP)-benefits to progress on
economic liberalization, has had a significant impact on South
Korean thinking and that relaxation of protective barriers will
continue. The government's goal is to open 90 percent of South
Korea's business sectors to foreign investment, bringing
approvals to $1 billion by 1988. (Government and other services
considered unsuitable for foreign investment, such as water works
and education, make up the 10 percent that will remain closed.)
Seoul has already opened new sectors it considers attractive to
foreign investors, including the manufacturing of auto parts,
optical fibers, biochemical, and synthetic fibers.
The impending resolution of the intellectual property rights
issue will probably also provide additional incentives for
multinational corporations to invest in South Korea. Foreign
firms have traditionally been reluctant to share advanced
technologies with South Korean business partners in joint
ventures for fear their proprietary processes will be pirated.
Seoul's commitment to preserving the integrity of copyrights and
patents will be seen as a positive development, especially by US
investors.
Although we expect South Korea to make continued progress in
foreign investment liberalization, it will come at a measured
pace
Deputy Prime Minister and head of the Economic Planning
Board Kim Mahn Je, South Korea's top economic
policymaker, and his allies continue to favor economic
liberalization. Nevertheless, the growing influence of
more conservative ministries--including the Ministry of
Trade and Industry, which has traditionally aligned
itself with business interests against liberalization
will probably increase pressure on Seoul to demonstrate
the net gains of direct foreign investment before moving
to open new areas. In fact, interministerial squabbling
has prompted Seoul to consider delaying until October
the liberalization of 35 to 40 new areas scheduled for
July.
We also expect Seoul will go slow on allowing investment
in infant industries or other sensitive sectors, such as
computers and telecommunications equipment. The South
Koreans have repeatedly protected the industries on
which they are staking future growth from direct foreign
competition by restricting--or banning completely--the
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equity share owned by foreigners. Import restrictions
complement rules limitin equity investment in firms 25X1
producing key products.
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