Monday, June 30, 2008

Public Sentiment Affects Foreign Investment

I responded to an editorial in the Korean Herald, entitled "Lone Star Verdict". The article claimed that a Korean court's recent acquittal of a U.S. investment group accused of devaluing a Korean bank, demonstrated Korea's commitment to foreign direct investment into Korea. I took issue with their last statement which stated that, "Public sentiment in a country should matter little as long as there is reliable law enforcement." If only "should" dictated economic policy.

June 30, 2008

Dear Editors,

This letter is in response to the editorial in the June 27, 2008 edition of this newspaper, entitled “Lone Star Verdict.” I disagree with the assertion made at the end of the editorial that, “Public sentiment in a country should matter little as long as there is reliable law enforcement.” This statement was made to contend that foreign investors will continue to invest in Korea as long as it is profitable. While it is certain that the bottom line reigns in matters of business, there are factors that influence investment in foreign markets, one of which is public sentiment.

While the acquittal of Lone Star by the courts is a step in the right direction, (although the sale of a multi-billion dollar losing credit card operation 3 years before accused as being undervalued never should have gone to court (and there remains another criminal case)) foreign investment groups continue to pull out or avoid investing in Korea. As reported in the Korea Times June 24, 2008 edition (Foreign Funds Leave Korea), Lone Star, the Carlyle Group, CVC Capital Partners, Affinity, Newbridge, and others are all avoiding investing billions of dollars in Korea. One of the reasons cited for these pull-outs is anti-foreign sentiment. In a 2007 Forbes article (Stuck in Limbo, 2007, 12, 24), 40% of London's Institute of Directors said they would not invest in Korea because of “anti-foreign sentiment.” Anti-foreign sentiment discourages foreign investment and negatively impacts the economy for several reasons- inability to recruit foreign talent, influence of regulatory policy, and negative reciprocity towards Korean outbound investment.

It is interesting that in the same issue the editors of the Korean Herald conclude that, “Public sentiment should matter little...”, on page 6, there is an article (Financial Sector Still Far From Globalized) which cites “many financial experts” as advocating for an increase in “human capital” through a “drastic change (of) the mindset of both policymakers and the public.” As reported in a recent article in Asian Perspective, “A survey undertaken on June 2006 by the National Assembly Budget Office shows that nearly 63 percent of 330 civil servants interviewed who were working for the three Free Economic Zone authorities felt that the government has failed so far in luring top-notch high-tech firms from abroad (Asian Perspective, Korea's FDI-Led Economic Liberalism: A critical view, Kim, Lee, Vol. 32 2008). In the same article, 85% of foreign Korean-based businessmen viewed “Korea's strong nationalism as the most challenging constraint to the success of Korea's globalization drive.” To compete with the superior salaries, benefits, and security of positions in business elsewhere a receptive climate should at the very least be considered a factor in recruitment and retention of talent.

As the editors in the Korean Herald's “Lone Star Verdict” point out, “The financial regulator's position is adding to speculation that it is deliberately stalling its decision on the KEB sale in consideration of the unfavorable public opinion against the foreign sale.” Consider that in 2006, when both Hyundai and Lone Star were being investigated for illegal business practices (embezzlement and falsifying documents respectively) and offered up apologies and social donations employees from Korea Exchange Bank were shouting, “Let's destroy foreign venture funds.” At that time the head of the Fair Trade Commission, Kwon Oh Seong, described the Lone Star donation as, “a slight to the South Korean people.” (NY Times, 2006, Feb, 20). This was from the head of the Fair Trade Commission before Lone Star even went to trial. In fact as recently as last month, Finance Vice-Minister Choi Joon-Kyung told the Korea Herald (2008, 5), “A friendly investor should walk hand in hand with the Korean economy for win-win results, but private equities are not such investors.” In the Korea Herald Feb. 15, 2006 the Minister of Finance and Economy described the media, general public, and national assembly as being too nationalistic when dealing with foreign capital.

For another recent example of how public sentiment has influenced government policy, look at the protests of American beef. Whatever one's stance on the issue, international trade treaties were broken two times in this instance when Seoul delayed the importation of the beef twice. Would a person put their money in a bank that did not honor their contractual obligations two times?

As Korea also looks to invest abroad, it should consider the impact of how their treatment of foreign direct investment is reciprocated in their investments abroad. The U.S.-Korea FTA agreement is expected to create 300,000 jobs in Korea and encourage foreign direct investment in the Korean economy through new business opportunities and protections for investors. In addition, the FTA is expected to raise Korean exports to the U.S. by 15% (remarks from American Ambassador Alexander Vershbow Feb. 2008). However, U.S. democrats are questioning the financial wisdom of free trade with a country with such disparate trade flow. In addition, as has been the case with the American beef blockages, even if free trade agreements are secured there is considerable doubt that the agreements will be fully implemented.

If common civility in itself is not reason enough to encourage foreign hospitality, there is now a clear economic incentive to do so. In assemblyman Sohn Hak Kyu's own words supporting the protests regarding American beef importation, “Public perception is no less important than rational judgment.” To say that, “Public sentiment in a country should matter little,” as the Korean Herald editors have is unrealistic and irrelevant. Foreign investment capital is reading Korea's public opinion and is choosing to invest elsewhere.



Bupyeong, Incheon June 30, 2008


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