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Investment Climate Statement

Executive Summary

The Republic of Korea (ROK) has made tremendous economic gains during the past four decades, transforming itself from a recipient of foreign assistance to a high-technology manufacturing powerhouse and middle-income donor country. South Korea experienced real GDP growth of 2.6 percent in 2015, decreasing from 2014 growth of 3.3 percent and falling short of the ROK government’s 2015 real GDP growth target of 3 percent as announced in December 2014. Economic growth in 2015 was constrained by a fall in tourism and domestic consumption largely due to an outbreak of Middle East respiratory syndrome (MERS) in May and a broader 7.9 percent fall in exports from 2014 due to a slow global economic recovery, low oil prices, and reduced demand from the ROK’s top trading partner, China. Growth is expected to remain moderate in coming years, due to the ROK’s relatively developed economy, an aging population, and inflexible labor markets. Economic growth potential for the 2015-2018 period is between 3 percent and 3.2 percent, according to the Bank of Korea, although many private-sector assessments are lower.

Nonetheless, the ROK has weathered global economic uncertainty and continued to remain a generally favorable destination for foreign investment. Following the 1997-98 Asian financial crisis, South Korea made significant progress in reforming its financial institutions and capital markets. In addition, the ROK government took steps to strengthen its competitiveness, enacting measures to boost foreign investment incentives and allow non-Koreans to own land and real property. With these changes, most South Koreans recognize foreign investment and free trade as positive for the nation’s development, despite continuing protectionist sentiment among certain elements of society. The highest levels of the ROK government remained committed to ensuring a level playing field for foreign investors. However, many foreign – and domestic – firms continued to express concern with what is seen as an overly burdensome regulatory environment. Many regulations are unique to South Korea and are not consistent with global standards. The regulations are prescriptive and generally allow only activities that are explicitly authorized, thereby constricting the development of innovative business models. Foreign investors were also concerned about small but significant interest groups that pressure the ROK government to protect the South Korean market from what is perceived as foreign domination. President Park Geun-hye publicly acknowledged that the regulatory environment is seen as an obstacle to investment and initiated efforts to deregulate five sectors: education, healthcare, finance, tourism, and information and communication technology (ICT). Additional measures were announced by the Park administration in February 2016 to remove in select regions regulations that discourage investment in priority sectors, including "sharing economy" services related to housing and transportation. Park has asserted that deregulation is one of her primary economic goals, and administration officials have allowed some participation of foreign business associations in the deregulation process. While foreign and domestic industry remained receptive to Park’s deregulation drive, it also remained cautious about committing additional investments in the ROK.

The Korea-U.S. (KORUS) Free Trade Agreement (FTA), which entered into force on March 15, 2012, was a major step forward in enhancing the legal framework for U.S. investors in South Korea. All forms of investment are protected under the FTA, including equity, debt, concessions, and similar contracts, as well as provision of intellectual property rights. With very few exceptions, U.S. investors are treated the same as South Korean investors (or investors of any other country) in the establishment, acquisition, and operation of investments in South Korea. In addition, this equal treatment of domestic and foreign investors is backed by a transparent international arbitration mechanism, under which investors may, at their own initiative, bring claims against the government for an alleged investment breach. Submissions to investor-state arbitration tribunals as well as their hearings will be made public. The U.S. government continues to work closely with the ROK government to ensure full implementation of the KORUS FTA.

Improvement in the consistency of the ROK government’s interpretation, transparency, and timeliness in the application of foreign direct investment (FDI) regulations would enhance South Korea’s investment climate. Unclear and opaque regulatory decision-making remained a significant concern, including informal “window guidance.” This can discourage FDI by creating uncertainty for investors and fostering an impression that the ROK remains hostile to foreign investment. Sector-specific improvements in regulatory transparency have been made: January 2016 financial sector reforms require regulators to provide all guidance in written form, and companies cannot be punished for not following oral guidelines.

Regarding labor, South Korea boasts a hard-working, educated workforce and high levels of institutional labor protections. However, foreign investors cited volatility in labor-management relations and increasing labor costs as issues that can hamper FDI. The Park administration has advocated for reforms to bring greater flexibility to the labor market while improving the benefits provided to part-time and contract workers. The National Assembly, however, has not approved associated bills submitted by the government in September 2015.

Investment Trends

In 2015 the Ministry of Trade, Industry, and Energy (MOTIE) reported that inbound FDI to South Korea rose to a record high USD 15.9 billion, up 32 percent from 2014. Foreign investment in the service sector - mostly from the United States and China - led the increase, while FDI inflows to manufacturing industries fell by 0.7 percent from 2014. South Korea experienced net portfolio outflows of USD 2.9 billion in 2015, as investors reallocated capital in anticipation of a rise in the U.S. interest rate and its impact on emerging markets. Foreign investment in South Korean bonds was USD 396 million in 2015, as the return on ROK sovereign debt and other securities remained competitive in an environment of low interest rates in advanced economies. The ROK’s sovereign debt rating stood higher than that of Japan and Taiwan, but below the United States’ rating, according to Moody’s and Fitch credit ratings. The high ranking reflected the ROK’s strong fiscal fundamentals, increasing current account surplus, and record-high net international investment position, in addition to its ability to withstand domestic risks and external shocks, including elevated tensions between North and South Korea in early 2016 due to North Korean nuclear and missile testing.

U.S. FDI in South Korea, according to MOTIE, came to USD 27.9 billion as of December 2015, or 16.5 percent of South Korea’s stock of FDI since the 1960s, and comparable to Japanese investment totaling 29.5 billion, or 17.5 percent of South Korea’s stock of FDI for the same time period. Investments from the United States in 2015 increased 25 percent (USD 5.47 billion) over the previous year, whereas investments from Japan decreased over 43 percent. Japan recorded USD 1.2 billion of FDI into South Korea in 2015, much reduced from the USD 2.1 billion it recorded in 2014, as the yen depreciated significantly against the South Korean won under Japan’s continued policy of quantitative easing. The finance, insurance, logistics, and business service sectors are expected to absorb the majority of FDI in South Korea in the near future, largely through mergers and acquisitions.

Table 1

Measure

Year

Index or Rank

Website Address

TI Corruption Perceptions index

2015

37 of 168

http://www.transparency.org/cpi2015/#results-table

World Bank’s Doing Business Report “Ease of Doing Business”

2015

4 of 189

www.doingbusiness.org/rankings

Global Innovation Index

2015

14 of 141

globalinnovationindex.org/content/page/data-analysis

U.S. FDI in partner country ($M USD, stock positions)

2015

USD 27,916

ROK Ministry of Trade, Industry and Energy

World Bank GNI per capita

2014

USD 27,090

data.worldbank.org/indicator/NY.GNP.PCAP.CD

Openness To, and Restrictions Upon, Foreign Investment

Attitude toward Foreign Direct Investment

The ROK government’s attitude toward FDI is positive, and senior policy makers realize the value of FDI. Following the 2008-09 global financial crisis, inbound FDI continued to trend upwards from USD 5.4 billion in 2010 to USD 15.9 billion in 2015. Foreign investment in South Korea is still at times hindered by insufficient regulatory transparency, including inconsistent and sudden changes in interpretation of regulations, as well as underdeveloped corporate governance, high labor costs, an inflexible labor system, and significant economic domination by large conglomerates, or chaebol.

Other Investment Policy Reviews

The WTO conducted a Trade Policy Review of South Korea in 2012. The report can be accessed here: https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S006.aspx?Query=(@Symbol=%20wt/tpr/g/*)%20and%20((%20@Title=%20korea%20)%20or%20(@CountryConcerned=%20korea))&Language=ENGLISH&Context=FomerScriptedSearch&languageUIChanged=true#

Laws/Regulations on Foreign Direct Investment

The Foreign Investment Promotion Act (FIPA) is the basic law pertaining to foreign investment in South Korea. 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 FDI;
  • 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 to assist foreign investors;
  • Establishment of an Ombudsman office to assist foreign investors.

South Korea’s court system is independent and not subject to government interference in cases that may affect foreign investors.

The ROK National Assembly website provides a list of laws pertaining to foreigners (including the FIPA) in English. The site can be accessed here: http://korea.assembly.go.kr/res/low_03_list.jsp?boardid=1000000037

Business Registration

Registering a business in South Korea can be a complex process that varies according to the type of business being established and requires interaction with the Korea Trade-Investment Promotion Agency, court registries, and tax offices. Foreign corporations can enter the South Korean market by establishing a local corporation, a local branch, or a liaison office. The establishment of local corporations by a foreign individual or corporation is regulated by the Foreign Investment Promotion Act and the Commercial Act, the latter of which recognizes five types of companies; stock companies with multiple shareholders are the most common. To establish a stock company, 24 required documents are submitted to a court registry office, and an additional nine to a tax office. There is no single website by which to complete this process.

The Korea Trade-Investment Promotion Agency (KOTRA) facilitates FDI into South Korea. For KOTRA to assist in the establishment of a domestically-incorporated foreign-invested company, the investment must surpass KRW 100 million (USD 85,000).

For small- and medium-size enterprises (SMEs) and micro-enterprises, the online business registration process takes approximately three to four days and is completed through Korean language websites. Registrations can be completed via the Smart Biz website (https://www.startbiz.go.kr). The website received an assessment of 2.5/10 in the UN’s Global Enterprise Registration listing, indicating improvements could be made to provide clear and complete instructions for registering a limited liability company.

The definitions of micro-enterprise, small business, and SMEs vary depending on the sector. For the manufacturing and mining, construction, and transportation sectors, the ROK defines a micro-enterprise and a small business as fewer than 10 and 50 workers, respectively. An SME in these sectors has fewer than 300 workers and a maximum capital worth of KRW 8 billion (USD 6.8 million) for manufacturing and KRW 3 billion (USD 2.6 million) for mining, construction, and transportation. For administrative work and agriculture, micro-enterprises and small businesses (MSMEs) have fewer than five and 10 workers, respectively. SMEs in the administrative sector must have fewer than 300 workers and sales less than KRW 30 billion (USD 25.6 million), while agricultural SMEs must have fewer than 200 workers with sales less than KRW 20 billion (17.1 million). The ROK has several acts to promote the establishment and competitiveness of MSMEs, including the “Small and Medium Enterprises Promotion Act” and the “Promotion of Small and Medium Enterprises and Encouragement of Purchase of Their Product Act.” In 2015, South Korea began offering a streamlined advanced pricing arrangement (APA) for foreign SMEs with annual sales of less than KRW 50 billion (USD 43 million). Given the complexity of South Korean APAs, which can take two years or more to complete, APAs are normally pursued by large multinational enterprises.

Industrial Promotion

The Ministry of Strategy and Finance (MOSF) administers tax and other incentives to stimulate advanced technology transfer and investment in high-technology services. There are three types of special areas for foreign investment, including Free Economic Zones (FEZ), Free Investment Zones (FIZ), and Tariff Free Zones (TFZ), where favorable tax incentives and other support for investors are available. The ROK government announced on December 16, 2015, plans to create 14 “regulation-free zones” (RFZ) outside of Seoul in an effort to develop promising sectors, including bio-health, smart devices, and drones. A bill that would allow the creation of RFZs was submitted to the National Assembly on March 25, 2016. A good source of information on South Korea’s various free trade zones is the government-run "Invest Korea," the inward investment promotion organization under KOTRA. More information is available here:

Invest Korea, KOTRA Building

13, Heolleungno, Seocho-gu, Seoul, Republic of Korea
Tel: (82) 1600 – 7119
Fax: (82-2) 3497 – 1611
http://www.investkorea.org

KOTRA also maintains offices in many countries, including the United States.

Limits on Foreign Control and Right to Private Ownership and Establishment

Restrictions on foreign ownership remain for 31 industrial sectors, three of which are entirely closed to foreign investment. The ROK government reviews the list of restricted sectors from time to time for possible changes. According to the Ministry of Trade, Industry, and Energy (MOTIE), the number of industrial sectors open to foreign investors is well above the OECD average. The KORUS FTA provides for U.S. companies to be treated as non-foreign entities in selected sectors, including broadcasting and telecommunications.

Relevant ministries must approve investments in conditionally or partly restricted sectors. Most applications are processed within five days; cases that require consultation with more than one ministry can take 25 days or longer. The ROK’s procurement processes comply with the WTO Government Procurement Agreement, but some implementation problems remain.

The Ministry of Knowledge Economy (restructured and now called MOTIE) published a 2011 Consolidated Public Notice, updating new code numbers and titles for business sectors in accordance with the ninth revision of the Korea Standard Industry Code (KSIC). According to an earlier 2009 notice, the number of KSIC industrial classifications of business sectors increased from 1,121 to 1,145 and by the reclassification, business sectors where foreign investment was restricted increased from 28 to 30. A minor change in industry codes in a July 13, 2015, MOTIE notice increased the restricted sectors to 31.

The following is a list of Restricted Sectors for Foreign Investment. Figures in parentheses denote the Korean Industrial Classification Code, while the numbers of air transport industries are based on the Civil Aeronautics Laws:

Completely Closed

  • Nuclear power generation (35111)
  • Radio broadcasting (60100)
  • Television broadcasting (60210)
  • Restricted Sectors (partly open not more than 25 percent)
  • News agency activities (63910)
  • Restricted Sectors (partly open not more than 30 percent)
  • Hydroelectric power generation (35112)
  • Thermal power generation (35113)
  • Other power generation (35119)
  • Restricted Sectors (partly open less than 30 percent)
  • Publishing of newspapers (58121)
  • Restricted Sectors (partly open not more than 49 percent)
  • Satellite and other broadcasting (60229)
  • Program distribution (60221)
  • Cable networks (60222)
  • Wired telephone and other telecommunications (61210)
  • Mobile telephone and other telecommunications (61220)
  • Satellite telephone and other telecommunications (61230)
  • Other telecommunications (61299)
  • Restricted Sectors (partly open not more than 50 percent)
  • Farming of beef cattle (01212)
  • Inshore and coastal fishing (03112)
  • Transmission/distribution of electricity (35120)
  • Wholesale of meat ( 46312)
  • Coastal water passenger transport (50121)
  • Coastal water freight transport (50122)
  • Other support activities for air transportation (52939)
  • Publishing of magazines and periodicals (58122)
  • International air transport (51)
  • Domestic air transport (51)
  • Small air transport (51)
  • Open but Regulated under the Relevant Laws
  • Growing of cereal crops and other food crops except rice and barley (01110)
  • Domestic commercial banking except special banking area (64121)
  • Radioactive waste collection, transportation, and disposal except radioactive waste management (38240)
  • Other inorganic chemistry production except fuel for nuclear power generation (20129)
  • Other nonferrous metals refining, smelting, and alloying (24219)

The National Assembly approved on February 4, 2016, an amendment bill to the Foreign Legal Consultant Act (FLCA) that would allow foreign law firms to establish joint ventures in South Korea. This revision was made to implement South Korea’s FTA market opening commitments with the United States, Australia, and the European Union. The FLCA provides a framework for establishing joint ventures; however, the implementing act limits the scope of practice by foreign law firms, prohibiting participation in litigation, labor sector consulting, real estate, intellectual property rights, notarization, mining, and cases involving family relations or inheritance, among others fields.

Privatization Program

ROK government efforts to privatize government-owned assets have been slowed by protests from labor unions and professional associations as well as a lack of interested buyers in some sectors. Foreign investors are allowed to participate in privatization programs as long as they comply with ownership restrictions stipulated for the 31 industrial sectors indicated above.

The ROK government injected public funds into the banking sector during the 1997-98 Asian financial crisis to promote sectoral and broader economic stability, thereby acquiring de facto ownership of many of South Korea’s commercial banks. The government committed to refrain from interfering in bank lending and management decisions, except with regard to prudential supervision. In late 2002, the ROK government began its ambitious plan to re-privatize banks under its control, with the program initially scheduled to end by the first quarter of 2005. Much of this re-privatization has taken place, although the government continues to own the majority of shares in Woori Bank and minority shares in other banks.

No state-owned enterprises (SOEs) have been privatized since 2002. The Lee Myung-bak administration called off most plans to restructure SOEs for reasons both political (conflict with labor unions) and economic (concern about the impact the privatizations would have on the economy in the midst of the global financial crisis).

Screening of FDI

The ROK government may review foreign investments that affect national security. The government may restrict investments that disrupt production of military products or equipment, or if the company the foreigner is investing in exports items that may be later used for military purposes differing from their originally intended use. The ROK government may also restrict foreign investment in cases where contracts classified as state secrets may be disclosed or the investment considerably impedes international efforts to achieve world peace or assure security. Foreigners linked to a country or an organization that may pose a threat to national security will also be subject to limitations on their investments in South Korean firms. Related government agencies must ask MOTIE to review the case within 30 days of a foreign investor filing an application for regulatory approval, and MOTIE must make a decision within the following 90 days.

If the investment fails the review, the foreign investor must transfer ownership to a South Korean national or corporation within six months of the close of the corporate fiscal year.

Competition Law

The Monopoly Regulation and Fair Trade Act (MRFTA) authorizes the Korea Fair Trade Commission (KFTC) to review and regulate competition-related matters as well as consumer safety. The KFTC is proactive in carrying out its mandate. The Korea Commission for Corporate Partnership (KCCP) reviews competition between SMEs and large corporations and is empowered to limit large corporations from entering or expanding in markets designed for SMEs.

Although the Monopoly and Fair Trade Act has been amended repeatedly – most recently in January 2015 – the practical impact of South Korea’s laws and policies regulating monopolistic practices and unfair competition has been limited by the long-standing economic strength of the family-run conglomerates, or chaebol. Management control at the chaebol continues to involve complicated webs of cross-shareholdings among chaebol affiliates, and many chaebol still conduct business based on family and personal connections. Chaebol-government relations can also sometimes influence the business-government dialogue, to the detriment of foreign enterprises and SMEs. Thus, chaebol influence in the South Korean economy may sometimes cause practical business problems for foreign investors. SME suppliers, for example, may be reluctant to deal with foreign firms for fear of jeopardizing a prized chaebol relationship.

The KFTC announced revised Guidelines for Review of Unreasonable Exercise of Intellectual Property Rights (the "guidelines”) on March 30, 2016. The amended guidelines distinguish de facto standard essential patents (SEP) in the definition of standard technologies, reflecting U.S. industry’s position that SEPs and de facto SEPs must be treated differently, as de facto SEPs are an outcome of market competition. Amendments also clarify factors to be considered in determining whether to refuse issuance of intellectual property licenses, thereby reducing the tendency to consider any refusal of IP licenses as anti-competitive behavior and a violation of the MRFTA. KFTC’s commitment to non-discrimination, transparency, and procedural fairness in the area of competition policy is an important aspect of the KORUS FTA.

Conversion and Transfer Policies

Foreign Exchange

In categories open to investment, foreign exchange banks must be notified in advance of applications for foreign investment. All South Korean banks are permitted to deal in foreign exchange, including branches of foreign banks. 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:

1. Non-residents are not permitted to buy won-denominated hedge funds, including forward currency contracts;

2. The Financial Services Commission (FSC) will not permit foreign currency borrowing by "non-viable" domestic firms; and

3. 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.

Exchange rates are generally determined by the market. The U.S. Treasury Department reports that South Korean authorities have intervened on both sides of the currency market, but the sustained rise in their reserves and net forward position indicate that they have intervened on net to resist won appreciation. The U.S. government urges South Korea to reduce foreign exchange intervention, allow the won to appreciate, and increase transparency in foreign exchange operations.

Remittance Policies

The right to remit profits is granted at the time of original investment approval. Banks control the now pro-forma approval process for FETA-defined open sectors. For conditionally or partially restricted investments (as defined by the FETA), the relevant ministry must provide approval for both investment and remittance.

When foreign investment royalties or other payments are proposed as part of a technology licensing agreement, the agreement and the projected stream of royalties must be approved by either a bank or MOSF. Approval is virtually automatic. An investor wishing to enact a remittance must present an audited financial statement to a bank to substantiate the payment. To withdraw capital, a stock valuation report issued by a recognized securities company or the South Korean appraisal board also must be presented. Foreign companies seeking to remit funds from investments in restricted sectors must first seek ministerial and bank approval, after demonstrating the legal source of the funds and proving that relevant taxes have been paid.

South Korea 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. The ROK government did not impose such restrictions either during the Asian financial crisis or the global financial crisis, where sharp capital outflows played a major role. However, the government has installed a series of capital control measures under the name of “macro-prudential stability policy,” which includes lowering foreign exchange forward-position limits for foreign bank branches in 2010, re-introducing a withholding tax on foreign investors’ government bond purchases, and imposing a bank levy on non-deposit financing in foreign currency from August 2011. On December 3, 2012, the government lowered the forward-position limits again and changed bank levy provisions to promote long-term financing. On June 25, 2015, MOSF gave notice that it would change the bank levy scheme effective July 1 to extend the existing foreign exchange levy on banks to other foreign debts held by securities firms, creditors, and insurance companies, in an effort to improve fair treatment among financial companies and improve the structure of foreign exchange debt.

At its June 2014 meeting, the Financial Action Task Force (FATF) recognized that South Korea had taken sufficient measures to bring its anti-money laundering and counterterrorism-financing system in line with FATF recommendations identified in its 2009 mutual evaluation report. FATF thus removed South Korea from additional follow-up reporting requirements.

Expropriation and Compensation

The ROK follows generally accepted principles of international law with respect to expropriation. South Korean law protects foreign-invested enterprise property from expropriation or requisition. If private property is expropriated, it can be taken only for a public purpose and only in a non-discriminatory manner, and claimants are afforded due process. Property owners are entitled to prompt compensation at fair market value. U.S. Embassy Seoul is not aware of any cases of uncompensated expropriation of property owned by U.S. citizens, nor aware of high-risk sectors prone to expropriation actions.

Dispute Settlement

Legal System, Specialized Courts, Judicial Independence, Judgments of Foreign Courts

South Korean 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. This includes family courts and administrative courts, as well as courts specifically dealing with patents and other intellectual property rights issues. There have been few serious investment disputes involving foreigners in South Korea. Foreign court judgments are not enforceable in the ROK.

Bankruptcy

The Debtor Rehabilitation and Bankruptcy Act 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 group of creditors and determination by the court that a company is bankrupt. The court will designate 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 South Korea’s policies and mechanisms in place to resolve insolvency fourth among 189 economies in its 2016 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.

Investment Disputes

Over the past several years, there have been a few high-profile cases involving U.S. firms that have had difficulty exiting the South Korean market; these cases have increased the concerns of other potential U.S. investors. In regard to portfolio investments, foreign investors have questioned the extent to which the family-owned structure of several large South Korean conglomerates results in decision-making that is not in the best interest of shareholders, but rather serves to preserve family leadership.

International Arbitration

South Korea is a member of the International Commercial Arbitration Association and the World Bank’s Multilateral Investment Guarantee Agency. South Korean 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.

Commercial disputes may also be taken to the Korean Commercial Arbitration Board (KCAB). The Korean Arbitration Act and its implementing rules outline the following steps in the arbitration process: 1) parties may request the KCAB to act as informal intermediary to a settlement; 2) if unsuccessful, either or both parties may request formal arbitration, in which case the KCAB appoints a mediator to conduct conciliatory talks for 30 days; and 3) if unsuccessful, an arbitration panel consisting of one to three arbitrators is assigned to decide the case. If one party is not resident in South Korea, either may request an arbitrator from a neutral country.

The United States has a bilateral Treaty of Friendship, Commerce, and Navigation with South Korea, which contains general provisions pertaining to business relations and investment. During then South Korean President Kim Dae-jung’s visit to the United States in 1998, President Clinton and President Kim agreed to negotiate a Bilateral Investment Treaty between the two nations. However, negotiations in 1998 and 1999 stalled after the two sides could not resolve differences on certain issues. The KORUS FTA contains strong, enforceable investment provisions that went into force in March 2012.

ICSID Convention and New York Convention

South Korea has been a member of the International Center for the Settlement of Investment Disputes (ICSID) since ratifying the convention in 1967. It has also acceded to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).

Duration of Dispute Resolution – Local Courts

Although commercial disputes can be adjudicated in a civil court, foreign businesses often feel that this is not a practical means to resolve disputes. Proceedings are conducted in Korean, often without adequate translation. South Korean law prohibits foreign lawyers who have not passed the Korean Bar Examination from representing clients in Korean courts. Civil procedures common in the United States, such as pretrial discovery, do not exist in South Korea. 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.

Performance Requirements and Investment Incentives

WTO/TRIMS

South Korea does not maintain any measures notified to the World Trade Organization (WTO) as being inconsistent with (or that are alleged to be inconsistent with) the WTO Agreement on Trade-Related Investment Measures (TRIMs Agreement). In 2015, no member countries of the TRIMs Agreement issued complaints against South Korea’s trade-related investment measures or otherwise claimed inconsistency with the TRIMs Agreement.

Investment Incentives

The ROK government allows the following general incentives for foreign investors:

  • Tax and cash incentives for qualified foreign investments in free trade zones, foreign investment zones, free economic zones, industrial complexes, etc.;
  • Tax and cash incentives for the creation and expansion of workplaces for high-tech business plants and research and development (R&D) centers;
  • Reduced rent for land and site preparation for foreign investors;
  • Grants for establishment of convenience facilities for foreigners;
  • Reduced rent for state or public property;
  • Preferential financial support for investing in major infrastructure projects;
  • Support from the Seoul Metropolitan government, separate from the central government, for SMEs, high-tech businesses, and the biomedical industry.

Research and Development

Several organizations affiliated with the Small and Medium Business Association (SMBA) support private sector R&D. The Korea Technology and Information Promotion Agency supports R&D investment and the Korea Technology Credit Guarantee Fund provides credit guarantees for technology development. The Ministry of Science, ICT, and Future Planning also supports R&D projects. According to the SMBA, foreign companies are eligible to apply for public R&D funds through their South Korean subsidiary.

Performance Requirements

The ROK ceased imposing performance requirements on new foreign investment in 1989 and eliminated all pre-existing performance requirements in 1992. The ROK government has no requirement that investors purchase from local sources or export a certain percentage of output. There is no requirement that South Korean nationals must own shares in foreign investments or that technology be transferred on certain terms. With the exception of certain defense procurements, the ROK government does not impose "offset" requirements on investors to invest in specific manufacturing, R&D, or service facilities. There are also no government-imposed conditions on permission to invest.

Data Storage

Foreign companies are not required to use domestic content or technology, nor are they required to turn over source code or provide access for surveillance to South Korean authorities. In June 2015, the Financial Services Commission revised regulations that limited financial data transfers and IT outsourcing. The revised regulations incorporated several key recommendations of U.S. industry and reduced reporting burdens on companies by eliminating the approval process for the outsourcing of IT facilities and transitioning to a post-reporting data outsourcing system that, in most cases, no longer requires companies to provide prior notification and wait for approval. Additional revisions to the regulation further simplified reporting procedures and provided greater flexibility to companies in the offshore services they might procure. However, payment systems and mobile credit information of South Korean consumers must be maintained on servers based in South Korea. The ROK government made good progress in 2015 implementing KORUS commitments governing cross-border data transfer in the financial services sector, but concerns remained including the impact the Act on Promotion of Cloud Computing and Protection of Users, passed March 2015, will have on future data outsourcing in certain circumstances. The U.S. government is working with the ROK government and relevant industry stakeholders to monitor this issue. The Financial Services Commission sets the policy regarding financial information, and the Financial Supervisory Service is the enforcement body.

Protection of Property Rights

Real Property

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.

Intellectual Property Rights

Since its removal from the Special 301 Watch List in 2009, the ROK government has continued to make strides in intellectual property rights (IPR) enforcement. The ROK government’s interest in IPR protection is driven by both South Korea’s growing status as a creator of intellectual property and its efforts to implement the commitments made under the KORUS FTA. During the past year, the ROK government continued to combat IPR violations through a variety of enforcement activities, to include the deletion of millions of illegal files online, the enforcement of laws to prevent the further distribution of illegal materials, and blockage of numerous illegal file-sharing online service providers. The ROK government has made demonstrable efforts, particularly within the technology sector, to increase transparency and improve coordination with industry in its rule-making process. There were no new laws or IP regulations enacted in 2015, but the ROK government opened a comment period for suggested amendments to be made to the ROK’s IPR guidelines. There is no information to suggest there are higher risks for labor rights violations in the production or sale of counterfeit goods in the ROK, including child labor, forced labor, and dangerous working conditions.

The ROK government has demonstrated its commitment to IPR protection by continuing to devote significant resources to copyright enforcement. The Ministry of Culture, Sports, and Tourism (MCST) allocated 15 billion won (USD 12.5 million) for IPR protection for 2016, an increase from 14.7 billion won (USD 12.2 million) in 2015 and 13 billion (USD 10.8 million) in 2014.

The Ministry of Culture, Sports, and Tourism (MCST) and the Korean Intellectual Property Office (KIPO), the ROK government’s lead entities on copyright issues and the entities responsible for seizing, storing, and destroying counterfeit goods, continued their strong efforts to combat IPR violations through a variety of enforcement activities in 2015. MCST and KIPO have ex officio authority to seize and destroy counterfeit goods, and their enforcement activities are outlined below:

In 2015 MCST Judicial Police conducted special investigations of 10 streaming sites. As a result of those investigations, MCST delivered all 10 sites to South Korea’s Supreme Prosecutor’s Office (SPO) for possible indictment and prosecution. In 2015, MCST deleted 117.4 million illegal online files, a decrease from 141.7 million files deleted in 2014. MCST also destroyed 14.5 million hard copies of music, video, publications, games, and cartoons in 2015, the same number as in 2014. MCST recommended that the Korea Copyright Commission (KCC) block service to 552 illegal file-sharing online service provider (OSP) sites (140 sites and 412 files), up from 44 OSP sites in 2014. MCST investigated South Korean university campuses and confiscated 16,335 illegally copied books, up 5.5 percent from 15,474 copies seized in 2014. Judicial Police of MCST conducted software inspections of 271 companies in 2015 and discovered 3,050 instances of illegal software usage with a piracy rate of 29.6 percent. The total number of people indicted by the SPO for Copyright Act violations was 52,196 in 2015, up 24.6 percent from 41,900 in 2014. In 2015, Judicial Police recommended 1,091 IPR cases for legal action, down 48.9 percent from 2,136 cases in 2014.

In 2015, the KCC issued 264,982 corrective recommendations, down 10.5 percent from the 296,360 issued in 2014. MCST, however, did not need to issue any warnings or suspend any user accounts as all the violators complied with the corrective recommendations issued by KCC.

ROK government agencies are required to conduct audits of software licenses twice a year and report the results to MCST. In 2015, 2,662 public organizations conducted self-audits, and MCST conducted on-site investigations at 195 agencies and found a ratio between legal and illegal software of 0.58 percent. There is nevertheless no mechanism for the MCST to verify the accuracy of the agencies’ self-audits, and the MCST provides advance warning to agencies selected for on-site investigations.

KIPO also increased its enforcement activities in 2015. KIPO’s Special Judicial Police seized 1,197,662 counterfeit items from 378 people in 2015, up from the 1,114,192 items seized from 430 people in 2014 and up dramatically from 131,599 items seized in 2012. In addition, KIPO suspended 5,673 online transactions and closed 418 illegal online shopping malls in 2015, down from 454 in 2014.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

Resources for Rights Holders

The contact at U.S. Embassy Seoul for IPR issues is:

Hyon Sim
Economic Officer
Tel: +82-2-397-6424
Email: simhb2@state.gov

Additional local resources are as follows:

The American Chamber of Commerce in Korea
#4501, Trade Tower 159-1
Samsung-dong, Gangnam-gu
Seoul, 135-729
Tel: +82-2-564-2040
Fax: +82-2-564-2050
Email: amchamrsvp@amchamkorea.org
http://www.amchamkorea.org/index.php

U.S. Embassy Seoul List of Attorneys
http://photos.state.gov/libraries/korea/187344/ACS/Lawyers_List.pdf

Protecting Your Intellectual Property in Korea:

Several general principles are important for effective management of intellectual property (“IP”) rights in Korea. First, it is important to have an overall strategy to protect your IP. Second, IP may be protected differently in Korea than in the United States. Third, rights must be registered and enforced in Korea, under local laws. For example, your U.S. trademark and patent registrations will not protect you in Korea. There is no such thing as an “international copyright” that will automatically protect an author’s writings throughout the entire world. Protection against unauthorized use in a particular country depends, basically, on the national laws of that country. However, most countries do offer copyright protection to foreign works in accordance with international agreements.

Granting patents registrations are generally is based on a first-to-file [or first-to-invent, depending on the country basis. Similarly, registering trademarks is based on a first-to-file [or first-to-use, depending on the country], so you should consider how to obtain patent and trademark protection before introducing your products or services to the Korea market. It is vital that companies understand that intellectual property is primarily a private right and that the U.S. government cannot enforce rights for private individuals in Korea. It is the responsibility of the rights' holders to register, protect, and enforce their rights where relevant, retaining their own counsel and advisors. Companies may wish to seek advice from local attorneys or IP consultants who are experts in Korea law. [http://www.export.gov/southkorea/usefullinks/lawfirms/index.asp].

While the U.S. Government stands ready to assist, there is little we can do if the rights holders have not taken these fundamental steps necessary to securing and enforcing their IP in a timely fashion. Moreover, in many countries, rights holders who delay enforcing their rights on a mistaken belief that the USG can provide a political resolution to a legal problem may find that their rights have been eroded or abrogated due to legal doctrines such as statutes of limitations, laches, estoppel, or unreasonable delay in prosecuting a law suit. In no instance should U.S. Government advice be seen as a substitute for the responsibility of a rights holder to promptly pursue its case.

It is always advisable to conduct due diligence on potential partners. A good partner is an important ally in protecting IP rights. Consider carefully, however, whether to permit your partner to register your IP rights on your behalf. Doing so may create a risk that your partner will list itself as the IP owner and fail to transfer the rights should the partnership end. Keep an eye on your cost structure and reduce the margins (and the incentive) of would-be bad actors. Projects and sales in Korea require constant attention. Work with legal counsel familiar with Korea laws to create a solid contract that includes non-compete clauses, and confidentiality/non-disclosure provisions.

It is also recommended that small and medium-size companies understand the importance of working together with trade associations and organizations to support efforts to protect IP and stop counterfeiting. There are a number of these organizations, both Korea or U.S.-based. These include:

  • The U.S. Chamber and local American Chambers of Commerce
  • National Association of Manufacturers (NAM)
  • International Intellectual Property Alliance (IIPA)
  • International Trademark Association (INTA)
  • The Coalition Against Counterfeiting and Piracy
  • International Anti-Counterfeiting Coalition (IACC)
  • Pharmaceutical Research and Manufacturers of America (PhRMA)
  • Biotechnology Industry Organization (BIO)

IP Resources

A wealth of information on protecting IP is freely available to U.S. rights holders. Some excellent resources for companies regarding intellectual property include the following:

  • For information about patent, trademark, or copyright issues -- including enforcement issues in the US and other countries -- call the STOP! Hotline: 1-866-999-HALT or visit www.STOPfakes.gov.
  • For more information about registering trademarks and patents (both in the U.S. as well as in foreign countries), contact the U.S. Patent and Trademark Office (USPTO) at: 1-800-786-9199, or visit http://www.uspto.gov/.
  • For more information about registering for copyright protection in the United States, contact the U.S. Copyright Office at: 1-202-707-5959, or visit http://www.copyright.gov/.
  • For more information about how to evaluate, protect, and enforce intellectual property rights and how these rights may be important for businesses, please visit the “Resources” section of the STOPfakes website at http://www.stopfakes.gov/resources.
  • For information on obtaining and enforcing intellectual property rights and market-specific IP Toolkits visit: www.stopfakes.gov/businesss-tools/country-ipr-toolkits. The toolkits contain detailed information on protecting and enforcing IP in specific markets and also contain contact information for local IPR offices abroad and U.S. government officials available to assist SMEs.

The U.S. Department of Commerce has positioned IP attachés in key markets around the world. You can get contact information below for the IP attaché who covers the following countries:

CHINA

Beijing, China
Joel Blank
joel.blank@trade.gov

Guangzhou, China
Timothy Browning
timothy.browning@trade.gov

Shanghai, China
Michael Mangelson
michael.mangelson@trade.gov

Southeast Asia
Vacant – contact Dominic Keating
Dominic.Keating@USPTO.GOV

South America
Vacant – contact Dominic Keating
Dominic.Keating@USPTO.GOV

Geneva, Switzerland
Deborah Lashley-Johnson
deborah_e_lashley-johnson@ustr.eop.gov

Mexico, Central America and the Caribbean
Todd.Reves@trade.gov

India & South Asia
Vacant
– contact Dominic Keating
Dominic.Keating@USPTO.GOV

Transparency of the Regulatory System

The South Korean regulatory environment can pose challenges for firms, both foreign and domestic. Laws and regulations are often framed in general terms and are subject to differing interpretations by government officials, who rotate frequently. Regulations are sometimes promulgated with only minimal consultation with industry and with only the minimally required comment period. Lastly, regulatory authorities often issue oral guidelines or other legally enforceable dictates that many firms find burdensome and often difficult to follow. President Park’s deregulation plan seeks to eliminate the use of oral guidelines and dictates or subject them to the same level of regulatory review as written regulations. On March 17, 2016, the Prime Minister’s Office re-emphasized the need for government officials to enforce the regulations more transparently and proactively and pledged severe punishment for unresponsive regulatory review. The KORUS FTA also includes provisions designed to address such issues.

According to South Korea’s Administrative Procedures Act, proposed laws and regulations (Acts, Presidential Decrees or Ministerial Decrees) should be published and public comments solicited at least 40 days prior to promulgation. Draft bills are often available on the websites of relevant ministries without notice that they have been published. Proposed rules are sometimes published with insufficient time to permit public comment and industry adjustment. For example, regulatory changes originating from legislation proposed by members of South Korea’s National Assembly are not subject to public comment periods. When notifications of proposed rules are made public, they usually appear in the Official Gazette and only in the Korean language; thus, much of the 40-day comment period can be exhausted translating complex documentation. The rule-making process often remains non-transparent, particularly for foreigners. There are also many South Korean-unique rules and regulations that are being adopted, creating new barriers for foreign businesses.

In July 2015, the Office of Regulatory Reform launched a new "portal" through which companies can comment in English on draft legislation and regulations as well as enter complaints about regulatory impediments to business.

Since 2011, all publicly listed companies are 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.

Efficient Capital Markets and Portfolio Investment

Foreign portfolio investors now enjoy good access to the ROK stock market. Aggregate foreign investment ceilings in the Korean Stock Exchange (KSE) were abolished in 1998, and foreign investors owned 32.1 percent of KSE stocks and 10 percent of the Korean Securities Dealers Automated Quotations (KOSDAQ) as of the end of 2015. In recent years, foreign portfolio investment has fluctuated, influenced by external factors such as the December 2015 rise in the U.S. Federal Reserve’s targeted interest rate band, the slowing of the Chinese economy, and the Japanese yen’s depreciation.

The market turnover rate was 416 percent of market capitalization in 2015. Retail investors are extremely active in South Korean stock markets. More than 80 percent of KSE and KOSDAQ retail trading is conducted online. A large majority of retail investors are day traders, implying a constant source of volatility for the markets. The ROK government permits stock purchases on margin, requiring that transactions be settled within three business days.

Portfolio investors showed extreme appetite for the smaller, more volatile, technology-rich KOSDAQ in 2015. Since the collapse of the Daewoo Group in 1999, South Korea’s largest corporate bankruptcy, the country’s bond market has been almost moribund, as sellers have far outnumbered buyers. The total assets of South Korea’s commercial banks as of the end of 2014 were 1,803 trillion won, or about USD 1.6 trillion.

Foreign firms are able to access credit on the local market. However, obtaining access to credit may be complicated by the privileged relationships that competing South Korean family-run conglomerates enjoy with local banks. This risk is mitigated by regulations that limit a bank’s exposure to any single chaebol group’s companies to 25 percent of capital, and stipulate that at least 25 percent of all banks’ lending go to SMEs.

Money and Banking System, Hostile Takeovers

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.

Capital account liberalization under the Foreign Exchange Transaction Act has also been extensive. All capital-account transactions are permitted unless specifically prohibited. In addition, 72 of the 91 transactions specified by the OECD code of liberalization of capital movements are now permitted. Non-residents may open deposit accounts in South Korean won with maturities of more than one year and may engage in offshore transactions and issue won-denominated securities abroad.

Almost no restrictions remain on foreign ownership of stock in South Korean firms. South Korean law permits foreign direct investment through mergers and acquisitions with existing domestic firms, including hostile takeovers. Nonetheless, no hostile takeovers have occurred in South Korea in part because of the lack of relevant implementing regulations for the Foreign Investment Promotion Act. In addition, the political environment for hostile takeovers remains unfriendly.

Competition from State-Owned Enterprises

Many South Korean State-Owned Enterprises (SOEs) continue to exert significant control over segments of the economy. There are 30 remaining SOEs in South Korea, active in the energy, real estate, and infrastructure (railroad, highway construction) sectors. The legal system has traditionally sought to give SOEs a leading role in these sectors, but over the past several years the government has tried to attract more private participation as well, especially in the real estate and construction sectors. SOEs are generally subject to the same regulations and tax policies as private sector competitors and do not have preferential access to government contracts, resources, and financing. South Korea is party to the WTO Government Procurement Agreement; a list of SOEs subject to WTO government procurement provisions is available in annex three of South Korea’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 any official data on SOEs’ market shares. The ROK government requires each entity to disclose financial statements, the number of employees, and average compensation figures. A list of South Korean SOEs is available at the following Korean-language website: http://www.alio.go.kr/home.html.

OECD Guidelines on Corporate Governance of SOEs

South Korea is an OECD member state and reports significant changes in the regulatory framework for SOEs to the OECD. The Public Institutions Management Act (PIMA) gives authority to the Ministry of Strategy and Finance 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.

Responding to political pressure and criticism of inefficiency, lax management, and high levels of debt at SOEs, the ROK government introduced a plan to rein in excess debt and upgrade lax management policies in its Three-Year Plan for Economic Innovation, introduced on February 27, 2014. According to the debt reduction plans, debt for the 18 “highly indebted” SOEs, which had been forecast to continue climbing until 2017, will begin falling in 2016, and the debt ratio for 41 SOEs or other quasi-governmental institutions will drop to 200 percent in 2017 from 237 percent in 2013. By the end of 2014, total debt for 175 non-financial public institutions was 408.5 trillion won (USD 340 billion), up 2 trillion won from the previous year. The debt level was equal to approximately 64.5 percent of the nation’s GDP, up 1.6 percent point from the previous year.

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 Electronic Power Corporation, are regarded as semi-private firms.

Sovereign Wealth Funds

The Korea Investment Corporation (KIC), a sovereign wealth fund (SWF), was established in July 2005 under the KIC Act. KIC is wholly government-owned with an independent steering committee that has the authority to undertake core business decisions, composed of six professionals from the private sector, the CEO of KIC, and the heads of MOSF and the Bank of Korea. KIC is on the PIMA list. KIC is mandated to manage assets entrusted by the ROK government and the Bank of Korea (BOK) and generally adopts a passive role as a portfolio investor. Based on the continued increase in entrusted assets and gains realized on investments, assets under management stood at USD 84.7 billion at the end of 2014, with no domestic investments to date. It 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. KIC also follows a voluntary code of best practices for SWFs, known as the Santiago Principles, and participates in the IMF-hosted International Working Group on SWFs.

Responsible Business Conduct

The economic and social value of responsible business conduct (RBC) and corporate social responsibility (CSR) awareness is growing in South Korea, but is still in a nascent stage. The Korea Corporate Governance Service, founded in 2002 by entities including the Korea Exchange (formerly Korea Stock Exchange) and the Korea Listed Companies Association, encourages companies to voluntarily improve their corporate governance practices. Since 2011, their 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 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 366 South Korean companies listed as UNGC members as of March 2016. The ROK government also encourages companies, including foreign subsidiaries and branches, to engage in CSR activities, particularly with the current Park Administration’s emphasis on shared growth. 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.

South Korea does not maintain regulations to prevent conflict-minerals from entering supply chains; however, the Ministry of Trade, Industry, and Energy supports companies’ voluntary adherence to OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. South Korean 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. South Korea is not a member of the Extractive Industries Transparency Initiative, but has participated in the Kimberly process since 2012.

OECD Guidelines for Multinational Enterprises

South Korea is an OECD member country, and adheres to the OECD Guidelines for Multinational Enterprises. South Korea’s RBC national point of contact is an independent private body composed of committee members recommended by government departments and relevant institutions. The Korean Commercial Arbitration Board, a non-profit corporate entity, acts as the executive office.

South Korean National Contact Point
43rd Floor, Trade Tower, World Trade Center,
Samseong-dong, Gangnam-gu,
Seoul, 135-729, Korea
Tel: +82-2-551-2022
Fax: +82-2-551-2113
Email: koreancp@kcab.or.kr
Web: www.ncp.or.kr

Political Violence

The ROK is a modern democracy with active public political participation, and political demonstrations are common. However, it does not have a history of political violence directed against foreign investors. There have not been reports of politically motivated threats of damage to foreign-invested projects or foreign-related installations of any sort, nor of any incidents that might be interpreted as having targeted foreign investments. Labor violence unrelated to the issue of foreign ownership, however, has occurred in foreign-owned facilities in the past.

The Democratic People’s Republic of Korea (DPRK, or North Korea) and the ROK technically remain in a state of war. There is general peace and stability on the Korean Peninsula because of an armistice agreement that has lasted over 60 years. From time to time, DPRK military provocations, including missile launches and nuclear tests, have increased tension between the countries. The unprovoked sinking of a ROK naval vessel by the DPRK in March 2010 killed 46 South Korean sailors. The artillery shelling of an island off the northwest coast of the ROK in November 2010 resulted in the deaths of two South Korean soldiers and two civilians. The DPRK’s January 2016 nuclear test, followed by a ballistic missile launch in February and additional short-range missile launches in March, elevated tensions on the Peninsula but also galvanized the international community to approve the strongest set of DPRK sanctions adopted by the UN Security Council in 20 years.

Corruption

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, first drafted in 1981 and entering into effect 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 allegation, protection of whistleblowers, institutional improvement, and training and public awareness to prevent corruption, as well as setting national anti-corruption initiatives through the Anti-Corruption and Civil Rights Commission (ACRC). Most companies maintain an internal audit function to prevent and detect corruption. However, South Korea still faces challenges in effectively implementing anti-corruption laws. Transparency International’s Corruption Perception Index in 2015 ranks South Korea 37 out of 168 countries and gives it a score of 56 out of 100 (with 100 being very clean).

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 the civil servants’ financial disclosures and their financial activities. The ACRC focuses on corruption prevention by assessing the transparency of public institutions, protecting and rewarding whistleblowers, training public officials, raising public awareness, and improving policies and systems. The Financial Intelligence Unit has cooperated fully with U.S. and United Nations efforts to shut down sources of terrorist financing. Transparency International has maintained a National Chapter in South Korea since 1999.

In 2014, to reduce collusion between government regulators and regulated industries that contributed to the tragic sinking of the Sewol ferry, the ROK government tightened regulations governing the employment of retired government officials. The 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.

On March 3, 2015, the South Korean legislature passed a comprehensive anti-corruption law known as the Anti-corruption and Conflicts of Interest Act, or the Kim Young-Ran Act. The anti-corruption law institutes strict limits on the value of gifts that can be given to public officials, lawmakers, reporters, and private school teachers. The law also extends to the spouses of officials. The law is scheduled to take effect in September 2016; however, concerns over its constitutionality may lead the government to revise the law before implementation.

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 ACRC.

UN Anticorruption Convention, OECD Convention on Combating Bribery

South Korea signed the UN Convention against Corruption on December 10, 2003, and ratified it on March 27, 2008. South Korea 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.

Resources to Report Corruption

The ROK government anti-corruption agency is:

Anti-Corruption and Civil Rights Commission
Government Complex-Sejong, 20, Doum 5-ro
Sejong-si, 339-012
Tel: +82-44-200-7151
Fax: +82-44-200-7916
Email: webmaster@acrc.go.kr
http://www.acrc.go.kr/eng/index.do

An independent anti-corruption monitoring organization is:

Anti-Corruption Network in Korea (aka Transparency International Korea)
#1006 Pierson Building, 89-27 Sinmunro 2-ga, Jongno-gu
Seoul, 100-761
Tel: +82-2-717-6211
Fax: +82-2-717-6210
Email: ti@ti.or.kr
http://ti.or.kr/xe/eintro

Bilateral Investment Agreements

South Korea has signed 95 bilateral investment treaties and investment chapters in 14 FTAs. The United States has a bilateral Treaty of Friendship, Commerce, and Navigation with South Korea, which contains general provisions pertaining to business relations and investment. During then-ROK President Kim Dae-jung’s visit to the United States in 1998, President Clinton and President Kim agreed to negotiate a Bilateral Investment Treaty (BIT) between the two nations. However, negotiations in 1998 and 1999 stalled after the two sides could not resolve differences on certain issues. The KORUS FTA contains strong, enforceable investment provisions that went into force in March 2012.

Bilateral Taxation Treaties

South Korea has a bilateral income tax treaty with the United States that entered into force in 1979. A complete list of countries and economies with which South Korea has concluded bilateral investment protection agreements, such as BITs and FTAs with investment chapters, is available at http://investmentpolicyhub.unctad.org/IIA.

OPIC and Other Investment Insurance Programs

U.S. investments in South Korea 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 Korea 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 South Korea signed an investment incentive agreement on July 30, 1998. South Korea has been a member of the World Bank’s (IBRD) Multilateral Investment Guarantee Agency (MIGA) since 1987.

Labor

According to the Ministry of Employment and Labor (MOEL), there were approximately 27 million economically active people in the ROK with an employment rate (OECD standard) of approximately 65.7 percent. The overall unemployment rate of 3.6 percent in 2015 was much lower than the unemployment rate of youth ages 15-29, which at 9.2 percent is becoming a domestic concern. In 2004 South Korea implemented a “guest worker” program known as the Employment Permit System (EPS) to help protect the rights of foreign workers. EPS allows employers to legally employ a certain number of foreign workers from 15 countries, including the Philippines, Indonesia, and Vietnam, with which the ROK maintains bilateral labor agreements. For 2015, South Korea increased its quota to 55,000 migrant workers. At the end of June 2015, approximately 570,000 foreigners (including 293,749 overseas Koreans) were said to be working under EPS in the manufacturing, construction, agriculture, livestock, service, and fishery industries.

South Korean 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 (TULRA) provides for the right to collective bargaining and collective action, and allows workers to exercise these rights in practice. The law also empowers workers to file complaints of unfair labor practices against employers who interfere with union organizing or who discriminate against union members. The National Labor Relations Commission can require employers found guilty of unfair practices to reinstate workers fired for engaging in union activities. The 2010 revision of the TULRA, which became law in 2011, restricted the number of full-time labor union officials and banned employers from paying wages to such officials for union work. Labor law was also amended in 2011 to authorize union pluralism. 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 2014 was 10.3 percent; this ratio has remained relatively stable over the last 10 years. South Korea’s trade union participation is lower than the latest-available OECD average of 16.9 percent in 2013; more information is available at

http://stats.oecd.org/Index.aspx?DataSetCode=UN_DEN.

The country has two major national labor federations. The Federation of Korean Trade Unions (FKTU) has 2,396 labor unions and 834,174 members, and the Korean Confederation of Trade Unions (KCTU) has 366 labor unions and 631,415 members. KCTU and FKTU are affiliated with the International Trade Union Confederation (ITUC). Most of FKTU’s constituent unions maintained affiliations with international union federations. There are 2,683 unions with 430,881 workers who do not belong to a nationwide federation.

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, requiring companies with more than 50 people to recruit persons with disabilities for at least 2 percent of their workforce, encouraging companies to reserve 3 percent of their workforce for workers over 55 years of age, and restricting large companies from participating in certain business categories. Foreign companies operating in Free Economic Zones have greater flexibility in employing “non-regular” workers, who do not receive the same range of benefits and job stability as regular employees, in a wider range of sectors for extended contractual periods.

The Labor Standards Act prohibits the employment of persons under age 15 without an employment authorization certificate from MOEL. Because education is compulsory through middle school (approximately age 15), few employment authorization certificates were issued for full-time employment. The minimum wage is reviewed annually. Labor and business set the minimum wage for 2016 at 6,030 won (approximately USD 5) per hour, an 8.1 percent increase from the previous year. The Labor Standards Act also provides for a 50 percent higher wage for overtime.

The government sets health and safety standards, and the Korea Occupational Safety and Health Agency (KOSHA) is responsible for monitoring industry adherence to these standards. KOSHA conducts inspections both proactively according to regulations and reactively in response to complaints. KOSHA reports on its website descriptions of and statistics on work-related injuries and fatalities biannually. In 2014, there were 90,909 work-related accidents and 1,850 fatalities, a 0.06 percentage point decrease and 0.13 percentage point decrease, respectively, from the previous year. KOSHA provides training and subsidies to improve work safety and reduce work-related accidents. Its services are extended to migrant workers as are its training materials, which are available in 10 languages and disseminated to various worksites.

Contract and other "non-regular" workers accounted for a substantial portion of the workforce, particularly in labor-intensive sectors such as the automotive and shipbuilding industry, despite many positions not being temporary in nature. MOEL reported that there were approximately 6.27 million non-regular workers, composing approximately 32.5 percent of the total workforce as of July 2015. Korea Statistics reported that in 2011 non-regular workers performed work similar to regular workers but received approximately 56 percent of the wages of regular workers. Difficulty faced by employers in dismissing regular full-time employees, and the savings realized through not having to provide insurance and other benefits, partially explains employers’ reliance on non-regular workers. For regular, full-time employees, employers are required to provide or subsidize the cost of employment insurance, national medical insurance, industrial accident compensation insurance, and participation in the national pension system. Non-regular workers, such as temporary and contracted employees, are not guaranteed the same collection of benefits. With regard to severance pay for regular workers, South Korean law does not distinguish between the firing of an employee versus the laying off of an employee for economic reasons.

The Act for Part-Time and Temporary Workers’ Protection prohibits discrimination against non-regular workers and requires that non-regular workers employed longer than two years be converted to permanent status. The two-year rule went into effect on July 1, 2009. Both the labor and business sectors have complained that the two-year conversion law forced many businesses to limit the contract terms of the non-regular workers to two years and incur additional costs with the entry of new labor every two years. A tripartite commission consisting of labor, government, and companies succeeded in reaching a consensus on labor reform in September 2015; however, discussions fell apart on January 19, 2016 when labor representatives abandoned discussions and threatened strikes. A package of associated labor reforms bills submitted by President Park Geun-hye’s ruling party in September 2015 was not approved by the National Assembly. Demonstrations and limited strikes by labor unions in opposition to the labor reforms did not pose a significant risk to investment interests. More information can be found in the Department of State’s Report on Human Rights Practices for 2014:

http://www.state.gov/j/drl/rls/hrrpt/humanrightsreport/index.htm#section7

Foreign Trade Zones/Free Ports/Trade Facilitation

The Foreign Investment Promotion Act (FIPA) is meant to support potential investors and create a business environment conducive to increased foreign investment. FIPA offers foreign investors various incentives, including tax breaks and cash grants for projects.

Korea aims to attract more foreign investment by promoting its eight Free Economic Zones (FEZ): 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 2020); Daegu/Gyeongbuk (in North Gyeongsang Province, to be completed in 2022); Saemangeum/Gunsan (in North Jeolla Province, to be completed in 2020), East Sea (in Donghae and Gangrung, to be completed in 2024) and Chungbuk (in North Chungcheong Province, to be completed in 2020). The FEZs differ from other zones designated for foreign investment in their focus on creating a comprehensive living and working environment with biotechnology, aviation, logistics, manufacturing, service, and other industrial clusters as well as international schools, recreational facilities, and international hospitals. In 2009, the National Assembly passed the Special Act on Free Economic Zones to increase tax benefits for investment, increase the FEZ infrastructure budget, and streamline the approval process for land development. On December 28, 2010, the government announced a plan to abolish inefficient, underperforming, and unfeasible portions of the nation’s free economic zones as part of its efforts to reorganize the specially created districts. Under the plan, the Ministry of Knowledge Economy (now MOTIE) removed the FEZ status from 90.51 square kilometers (22,366 acres), or 15.9 percent of the total land in the zones, in February 2012. Additional information is available at

http://www.fez.go.kr/global/en/index.do.

Songdo City in the Incheon FEZ in 2012 won the right to host the UN’s Green Climate Fund and aims to become an innovative, state-of-the-art Northeast Asia business hub. The city is the first LEED (Leadership in Energy and Environmental Design) certified district in South Korea and the largest project outside North America to be included in the LEED Neighborhood Development Pilot Program. It offers commercial office space, residences, retail shops, hotels, schools, hospitals, and cultural facilities. Additional information is available at http://www.songdo.com.

As of April 2014, there are also four foreign-exclusive industrial complexes in Gyeonggi Province (Hyungok, Pyosung, Chupal, and Hansan), designed to provide inexpensive plant sites, with the national and local governments providing assistance for leasing or selling in such sites at discounted rates. In addition, there are 13 Free Trade Zones in Donghae, Suncheon, Gunsan, Daebul, Masan, Ulsan, Gimje, Yulchon, and seven logistics areas near airports and harbors, where companies may pursue their business with government support, but without the usual legal requirements such as approval procedures for exports and imports and customs duties. There are also 21 Foreign Investment Zones designated by local governments to accommodate industrial sites for foreign investors. Special considerations for foreign investors vary among these options.

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

Economic Data

Year

Amount

Year

Amount

 

Host Country Gross Domestic Product (GDP) ($M USD)

2015

1,377,500

2014

1,410,383

www.worldbank.org/en/country

Foreign Direct Investment

Host Country Statistical source*

USG or international statistical source

USG or international source of data: BEA; IMF; Eurostat; UNCTAD, Other

U.S. FDI in partner country ($M USD, stock positions)

2015

27,916

2014

34,896

BEA data available at http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm

Host country’s FDI in the United States ($M USD, stock positions)

2015

61,346

2014

36,056

BEA data available at http://bea.gov/international/direct_investment_multinational_companies_comprehensive_data.htm

Total inbound stock of FDI as % host GDP

2015

12.26

2014

12.8

http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx

*Sources: GDP - http://ecos.bok.or.kr/; inbound FDI - http://www.motie.go.kr; outbound FDI - https://www.koreaexim.go.kr

Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data

From Top Five Sources/To Top Five Destinations (US Dollars, Millions)

Inward Direct Investment

Outward Direct Investment

Total Inward

170,704

100%

Total Outward

253,714

100%

Japan

47,896

28%

China, Mainland

63,720

25%

United States

32,057

19%

United States

44,664

18%

Netherlands

16,174

9%

China, Hong Kong

10,866

4%

United Kingdom

13,325

8%

U.S. Virgin Islands

9,586

4%

Singapore

7,831

5%

Netherlands

7,881

3%

"0" reflects amounts rounded to +/- USD 500,000.

*Sources: GDP - http://ecos.bok.or.kr/ ; inbound FDI - http://www.motie.go.kr ; outbound FDI - https://www.koreaexim.go.kr

Table 4: Sources of Portfolio Investment

Foreign-held portfolio investment assets in South Korea as reported by the IMF (see table below) are significantly lower than local figures from the Financial Supervisory Service. Data discrepancies could be explained by differences in the definition and qualifying criteria of foreign investors, and different starting dates for the calculation of total asset stock.

The Cayman Islands, commonly regarded as a tax haven, is the 12th largest foreign portfolio investor in South Korea as of December 2015, holding 8.56 trillion won (USD 7.56 billion) worth of South Korean stocks.

Portfolio Investment Assets as of End June 2015

Top Five Partners (Millions, US Dollars)

Total

Equity Securities

Total Debt Securities

All Countries

230,466

100%

All Countries

157,023

100%

All Countries

73,444

100%

United States

93,097

40%

United States

69,739

44%

United States

23,358

32%

United Kingdom

16,113

7%

China, Mainland

10,291

7%

United Kingdom

7,551

10%

China, Mainland

16,086

7%

Luxembourg

8,562

7%

France

6,346

9%

Luxembourg

12,683

6%

United Kingdom

8,137

5%

Brazil

5,357

7%

Japan

10,363

4%

Japan

7,155

5%

China, Mainland

4,854

7%

Source: IMF

Contact for More Information

Julianna Kim
Unit Chief, Macroeconomic and Trade Policy, U.S. Embassy Seoul
188 Sejong-daero, Jongno-gu, Seoul, Republic of Korea, 03141
Tel: +82-2-397-4114 (main switchboard)
Email: kimjj4@state.gov


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