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Investment Climate Statement

Executive Summary

The Republic of Korea (ROK) has made tremendous economic gains during the past six decades, transforming from a recipient of foreign assistance to a high-technology manufacturing powerhouse and middle-income donor country. The country experienced real GDP growth of 2.7 percent in 2016, up from 2.6 percent growth in 2015, yet short of the government’s target of 3.1 percent announced in December 2015. Economic growth in 2016 was mainly backed by increased consumer demand and construction investment, in addition to a foreign consumption hike following a fall in the exchange rate. The economy’s growth was constrained in the second half of 2016, however, by uncertainties caused by external and internal factors, including Brexit, the United States election campaign, and a political scandal that led to the impeachment of President Park Geun-hye, causing a contraction of consumption and investment. Exports fell 5.9 percent from 2015 due to slow global growth 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 market. Economic growth potential for 2015-2018 is between 3.0 percent and 3.2 percent, according to the Bank of Korea (BOK), although many private-sector assessments are lower. The Constitutional Court on March 10 upheld an impeachment motion against President Park, resulting in her removal from office. A presidential election will be held on May 9, and Prime Minister Hwang Kyo-ahn is serving as acting President in the interim. The election is not expected to directly affect the ROK investment climate.

The U.S.-Korea Free Trade Agreement (KORUS FTA), which entered into force on March 15, 2012, was a major step forward in enhancing the legal framework for U.S. investors in the ROK. All forms of investment are protected under the KORUS 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 the ROK. In addition, the 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, are to 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 applying foreign direct investment (FDI) regulations would enhance the ROK’s investment climate. Unclear and opaque regulatory decision-making remained a significant concern, including informal “window guidance.” Sector-specific improvements in regulatory transparency have been made, however. For example, financial sector reforms enacted January 2016 require regulators to provide all guidance in written form, and companies cannot be punished for not following oral guidelines.

The ROK 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 unsuccessfully advocated for reforms to enhance labor market flexibility, while improving the benefits provided to part-time and contract workers.

Table 1

Measure

Year

Index/Rank

Website Address

TI Corruption Perceptions Index

2016

53 of 175

http://www.transparency.org/research/cpi/overview

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

2016

5 of 190

doingbusiness.org/rankings

Global Innovation Index

2016

11 of 128

https://www.globalinnovationindex.org/analysis-indicator

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

2015

$34.6 billion

http://www.bea.gov/international/factsheet/

World Bank GNI per capita

2015

$27,450

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

Openness To, and Restrictions Upon, Foreign Investment

Policies Toward Foreign Direct Investment

The ROK government’s attitude toward FDI is positive, and senior policymakers realize the value of foreign investment. Following the 2008-09 global financial crisis, inbound FDI continued to trend upwards from USD 5.4 billion in 2010 to USD 16.5 billion in 2015, falling to USD 9.76 billion in 2016 due to a sharp decline in global mergers and acquisitions. Foreign investment in the ROK 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 market domination by large conglomerates, or chaebol.

The Foreign Investment Promotion Act (FIPA) is the basic law pertaining to foreign investment in the ROK. FIPA and related regulations categorize business activities as open, conditionally or partly restricted, or closed to foreign investment.

FIPA features include:

  • Simplified procedures, including those for FDI notification and registration;
  • Expanded tax incentives for high-technology investments;
  • Reduced rental fees and lengthened lease durations for government land (including local government land);
  • Increased central government support for local FDI incentives;
  • Establishment of “Invest KOREA,” a one-stop investment promotion center within the Korea Trade-Investment Promotion Agency (KOTRA) to assist foreign investors; and
  • Establishment of a Foreign Investment Ombudsman to assist foreign investors.

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

KOTRA actively facilitates foreign investment through its Invest KOREA office. For KOTRA to assist in the establishment of a domestically-incorporated foreign-invested company, the investment must surpass KRW 100 million (USD 85,000). KOTRA and the Ministry of Trade, Industry, and Energy organize a yearly Foreign Investment Week to attract investment to the ROK. In 2016, over 1,000 attendees, including foreign investors and local press, participated in the event.

The ROK prioritizes investment retention, in part through a Foreign Investment Ombudsman. The position is commissioned by the President and heads a grievance resolution body that collects and analyzes information concerning problems foreign firms experience, requests cooperation from and recommends implementation of reforms to relevant administrative agencies, proposes new policies to improve the foreign investment promotion system, and carries out other necessary tasks to assist investor companies. More information on the Ombudsman can be found here: http://ombudsman.kotra.or.kr/eng/index.do.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities can establish and own business enterprises and engage in all forms of remunerative activity. Restrictions on foreign ownership remain for 30 industrial sectors, three of which are entirely closed to foreign investment. The ROK government occasionally reviews the list of restricted sectors 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 Organization for Economic Cooperation and Development (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 following is a list of restricted sectors for foreign investment. Figures in parentheses generally denote the Korean Industrial Classification Code, while those for the air transport industries are based on the Civil Aeronautics Laws:

Completely Closed

  • Nuclear power generation (35111)
  • Radio broadcasting (60100)
  • Television broadcasting (60210)

Restricted Sectors (partly open, no more than 25 percent foreign equity)

  • News agency activities (63910)

Restricted Sectors (partly open, no more than 30 percent foreign equity)

  • Hydroelectric power generation (35112)
  • Thermal power generation (35113)
  • Other power generation (35119)

Restricted Sectors (partly open, less than 30 percent foreign equity)

  • Publishing of daily newspapers (58121) (Note: Other newspapers with the same industry code 58121 are partly open, less than 50 percent foreign equity)

Restricted Sectors (partly open, no more than 49 percent foreign equity)

  • 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, no more than 50 percent foreign equity)

  • 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)
  • 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 an amendment bill to the Foreign Legal Consultant Act (FLCA) on February 4, 2016, that allows foreign law firms to establish joint ventures in the ROK. This revision was made to implement the ROK’s free trade agreement (FTA) market opening commitments with the United States, Australia, and the European Union (EU). The FLCA provides a framework for establishing joint ventures; however, it includes provisions that could restrict the ability of foreign firms to establish joint ventures, such as limiting the foreign party ownership of a joint venture to 49 percent. On December 29, 2016, the National Assembly approved an amendment to the Aviation Business Act to lift foreign investment barriers for air transportation support businesses beginning on March 30, 2017.

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 receiving foreign investment exports items that may later be 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 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.

Other Investment Policy Reviews

The ROK government has not undergone investment policy reviews or received policy recommendations from multilateral organizations, including the OECD, World Trade Organization (WTO), or United Nations Conference on Trade and Development (UNCTAD), in the past three years.

Business Facilitation

Registering a business in the ROK can be a complex process that varies according to the type of business being established and requires interaction with KOTRA, court registries, and tax offices. Foreign corporations can enter the market by establishing a local corporation, local branch, or liaison office. The establishment of local corporations by a foreign individual or corporation is regulated by FIPA and the Commercial Act; the latter recognizes five types of companies, of which stock companies with multiple shareholders are the most common. 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 with which to complete this process. For small- and medium-sized enterprises (SMEs) and micro-enterprises, the online business registration process takes approximately three to four days and is completed through Korean language websites. Registrations can be completed via the Smart Biz website (https://www.startbiz.go.kr). The 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.

Outward Investment

KOTRA has an Outbound Investment Support Office that provides counseling to ROK firms. There are some support measures for SMEs, and the government allotted KRW 5.4 billion (USD 4.6 million) in its 2017 budget for that support. The ROK government does not have any restrictions on outward investment.

Bilateral Investment Agreements and Taxation Treaties

The ROK has 15 FTAs encompassing trade with 52 countries, including the United States, and 94 bilateral investment treaties (BITs). An additional FTA with six South American countries was preliminarily signed on March 10 and is pending ratification. More information can be found here: http://english.motie.go.kr/en/if/ftanetwork/ftanetwork.jsp. Ongoing FTA negotiations include the Regional Comprehensive Economic Partnership (RCEP) among 16 Asian countries, a ROK-China-Japan FTA, and a FTA with Israel.

As of September 2016, the ROK had signed bilateral tax agreements with 94 countries. There are many Advance Pricing Agreement (APA) issues.  To solve these, the National Tax Service created a new unit on November 2, 2015, to process the increasing number of APA and Mutual Agreement Procedure (MAP) requests in a timelier manner.  The APA/MAP unit covers the regions of North America, Europe, and Australia. 

The ROK 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 and the following link: http://www.mofa.go.kr/trade/treatylaw/treatyinformation/bilateral/index.jsp?mofat=001&menu=m_30_50_40

Legal Regime

Transparency of the Regulatory System

As a member of the WTO and a country that has concluded FTAs with 52 countries, the ROK is improving the transparency of its policies to ensure its laws are non-discriminatory. The foreign business community remains concerned with the rapid increase in the number of Korea-unique (found nowhere else in the world) rules and regulations, however. Approximately 80 percent of regulations are introduced and passed by the National Assembly without a regulatory impact assessment (RIA) due to a loophole that requires only regulations written by ministries to undergo RIAs. While these regulations may have well-intended social aims, such as consumer protection or the promotion of SMEs, they often have unintended consequences for the economy by creating new trade barriers.

Laws and regulations are often framed in general terms and are subject to differing interpretations by government officials, who rotate frequently. Regulatory authorities often issue oral or internal guidelines or other legally enforceable dictates that many firms find burdensome and often difficult to follow. The former ROK government’s deregulation plan sought to eliminate the use of oral guidelines 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 regulations more transparently and proactively, and said that those failing to hold regulatory reviews would be held strictly accountable. The KORUS FTA also includes provisions designed to address such issues.

The ROK constitution allows both the National Assembly and the executive branch to introduce bills. The legal norm is for regulations to be introduced in the form of an act. There are subordinate statutes (presidential decree, ministerial decree, and administrative rules) for matters that are delegated by acts and matters needed to enforce acts. Ministries are in charge of drafting such subordinate regulations. Acts and their subordinate regulations can all be relevant for foreign businesses. Administrative agencies shape policies and draft bills on matters under their respective jurisdictions. Drafting ministries are required to clearly set policy goals and complete RIAs. When a ministry drafts a regulation, it is required to consult with other relevant ministries before it releases the regulation for public comment. The constitution also allows local governments to exercise self-rule legislative power to draft ordinances and rules, but they should be within the scope of federal acts and subordinate statutes.

The enactment of acts and their subordinate statutes, ranging from the drafting of bills to their promulgation, must follow formal ROK legislative procedures. These procedures should be in accordance with the “Regulation on Legislative Process” enacted by the Ministry of Legislation. 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. According to the Administrative Procedures Act, proposed laws and regulations (acts, presidential decrees, or ministerial decrees) must seek public comments at least 40 days prior to their promulgation. Regulations are sometimes promulgated with only the minimum required comment period, and with minimal consultation with industry. Guidelines and regulatory changes originating from legislation proposed by members of the National Assembly are not subject to public comment periods. As a result, 80 percent of all new regulations are written and passed through the National Assembly without rigorous quality control and solicitation of public comments.

When notifications of proposed rules are made public, they appear online in the Official Gazette. The draft acts and regulations are also posted on the websites of relevant ministries and the National Assembly, with executive summaries. These postings, however, are only in Korean; thus, much of the 40-day comment period can be exhausted translating complex documentation. The Ministry of Legislation reviews whether laws and regulations are in conformity with the constitution and monitors whether the government adheres to the “Regulation on Legislative Process.” All laws and regulation also undergo review by the Regulatory Reform Committee for restrictive elements. The Regulatory Reform Committee aims to minimize government intervention in the economy and to abolish all economic regulations that fall short of international standards or hamper national competitiveness.

The Office of Regulatory Reform in July 2015 launched Sinmungo, an online portal through which companies can comment in English on existing legislation and regulations, as well as enter complaints about regulatory impediments to business. As a result, the Regulatory Reform Committee can take the initiative to address concerns of foreign firms doing business in the ROK by receiving and acting on complaints on a timelier basis.

Business regulation in the ROK often lacks empirical cost-benefit analysis or impact assessment on the basis of scientific and data-driven assessment because regulations are finalized without sufficient stakeholder consultation or passed by the National Assembly without a regulatory impact assessment. When ministries draft regulations, they must submit their RIA to the Regulatory Reform Committee for its determination on whether the regulation restricts rights or imposes excessive duties. These RIAs are usually not publicly available for comment, and public comments received by regulators are not made public.

The ROK government enforces regulations with penalties (either fines or criminal charges) in the case of violations of the law. The government’s enforcement actions can be challenged through an appeal process or administrative litigation.

International Regulatory Considerations

The ROK is not part of a regional economic bloc. The ROK is working to harmonize its standards with international standards, including those of the United States and the EU. It still, however, has many Korea-unique rules and regulations that make it more difficult for foreign companies to operate domestically. The ROK is a member of the WTO and notifies the Committee on Technical Barriers to Trade of all draft technical regulations.

Legal System and Judicial Independence

The ROK legal system is based on civil law. Subdivisions within the district and high courts govern commercial activities and bankruptcies and enforce property and contractual rights with monetary judgments, usually levied in the domestic currency. The ROK has a written commercial law, and matters regarding contracts are covered by the Civil Act. There are only three specialized courts in the ROK: the patent, family, and administrative courts. In civil cases, courts deal with disputes surrounding the rights of property or legal relations. The ROK court system is independent and not subject to government interference in cases that may affect foreign investors. Efforts are being made to ensure the judicial process is more fair and reliable. Foreign court judgments are not enforceable in the ROK. Rulings by district courts can be appealed to higher courts and the Supreme Court.

Laws and Regulations on Foreign Direct Investment

Laws and regulations that have been completed within the past year:

  • Allow non-bank finance firms to operate foreign currency businesses;
  • Simplify and integrate ineffective and redundant laws and regulations relevant to foreign investment;
  • Allow joint law firms to be established between ROK firms and U.S. and EU firms;
  • Lower the limits for real-estate investment from KRW 700 million (USD 620,000) to KRW 500 million (USD 450,000);
  • Suspend changes made to the declaration form, when foreign firms establish branches in the ROK, for one year;
  • Establish more flexible standards to evaluate global education institutions when they establish branches in the ROK;
  • Introduce an omnibus account system, making it possible for foreign offshore institutional investors to handle orders from their clients in one account;
  • Reduce regulations for foreign firms when they do their initial public offering;
  • Reduce regulations that required eco-friendly certificates only from domestic agencies; and
  • Eliminate regulations that limited the ratio of foreign employees to 20 percent for small start-ups with foreign investors.

Pending laws and regulations:

  • Simplify procedures for foreign investors when they report their investment to the ROK government;
  • Address discrimination against foreign financial firms embedded in licensing requirements for financial investment businesses;
  • Relax the firewall system requirement inside financial companies;
  • Permit re-hypothecation of sovereign bonds to enhance the liquidity of assets; and
  • Expand entities exempt from an actual ownership check for financial transactions, including foreign branches of foreign financial companies.

There is no single website for investment-relevant laws and regulations. However, more information is available at the following websites: https://www.better.go.kr/, https://www.fsc.go.kr/, http://motie.go.kr/

Competition and Anti-Trust Laws

The Monopoly Regulation and Fair Trade Act authorizes the Korea Fair Trade Commission (KFTC) to review and regulate competition-related and consumer safety matters. KFTC has been active in investigating global information and communications technology (ICT) companies. A number of U.S. companies in the ICT sector have reported concerns about the KFTC, particularly regarding the agency's practices with respect to procedural fairness and case selection and under Chapter 16 (Competition-Related Matters) of the KORUS FTA.

Expropriation and Compensation

The ROK follows generally accepted principles of international law with respect to expropriation. ROK law protects foreign-invested enterprise property from expropriation or requisition. 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. There are many cases of expropriation in the ROK, but mainly for public reasons like developing new cities, building new industrial complexes, or constructing roads. These are done in a non-discriminatory manner, and claimants are compensated at fair market value or above. U.S. Embassy Seoul is not aware of any cases alleging a lack of due process.

Dispute Settlement

ICSID Convention and New York Convention

The ROK has been a member of the International Center for Settlement of Investment Disputes (ICSID) since ratifying the convention in 1967. It has also acceded to the New York Convention. There are no specific domestic laws providing for enforcement. South Korean courts have made rulings based on the ROK government’s position acceding to the convention, however.

Investor-State Dispute Settlement

The ROK is a member of the International Commercial Arbitration Association and the World Bank’s Multilateral Investment Guarantee Agency. ROK courts may ultimately be called upon to enforce an arbitrated settlement. When drafting contracts, it may be useful to provide for arbitration by a neutral body such as the International Commercial Arbitration Association. U.S. companies should seek local expert legal counsel when drawing up any type of contract with a South Korean entity.

The United States has a bilateral Treaty of Friendship, Commerce, and Navigation with the ROK that contains general provisions pertaining to business relations and investment. The KORUS FTA contains strong, enforceable investment provisions that went into force in March 2012.

There have been few serious investment disputes involving foreigners in South Korea. In November 2012, U.S.-based Lone Star Funds, a worldwide private equity firm, brought an investor-state dispute lawsuit against the South Korean government with the ICSID in Washington DC under the investment chapter of the KORUS FTA, and this case is still pending. The private equity firm blamed the ROK government for sharp declines in stock prices, claiming that it delayed the acquisition of Korea Exchange Bank without cause. The ICSID is expected to make a ruling in 2017. Foreign court judgments, with the exception of foreign arbitral rulings that meet certain conditions, are not enforceable in the ROK. There is no history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign 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 interpretation. ROK law prohibits foreign lawyers who have not passed the Korean Bar Examination from representing clients in South Korean courts. Civil procedures common in the United States, such as pretrial discovery, do not exist in the ROK. During litigation of a dispute, foreigners may be barred from leaving the country until a decision is reached. Legal proceedings are expensive and time-consuming, and lawsuits often are contemplated only as a last resort, signaling the end of a business relationship. ROK law governs commercial activities and bankruptcies, with the judiciary serving as the means to enforce property and contractual rights, usually through monetary judgments levied in the domestic currency. The ROK has specialized courts, including family courts and administrative courts, as well as courts specifically dealing with patents and other intellectual property rights issues.

Commercial disputes may also be taken to the Korean Commercial Arbitration Board (KCAB). The Korean Arbitration Act and its implementing rules outline the following 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 the ROK, either may request an arbitrator from a neutral country. If foreign arbitral awards or foreign courts’ rulings meet the requirements of Article 217 of the Civil Procedure Act, then those are enforceable by local courts. The U.S. Embassy is not aware of statistics involving state-owned enterprise investment dispute court rulings.

Bankruptcy Regulations

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 a 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 the ROK’s policies and mechanisms in place to solve insolvency fourth among 190 economies in its 2017 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.

Industrial Policies

Investment Incentives

The ROK government provides 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; and
  • Support from the Seoul Metropolitan government, separate from the central government, for SMEs, high-technology businesses, and the biomedical industry.

Research and Development

Several organizations affiliated with the Small and Medium Business Association (SMBA) support private sector research and development (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.

Foreign Trade Zones/Free Ports/Trade Facilitation

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 (Free Economic Zones, Free Investment Zones, and Tariff Free Zones), 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 the ROK’s various free trade zones is the government-run "Invest Korea," the inward investment promotion organization under KOTRA. More information is available here: http://www.investkorea.org. KOTRA also maintains offices in many countries, including the United States.

The ROK aims to attract more foreign investment by promoting its eight Free Economic Zones: Incheon (near Incheon Airport, to be completed in 2022); Busan/Jinhae (in South Gyeongsang Province, to be completed in 2020); Gwangyang Bay (in South Gyeongsang Province, to be completed in 2020); Yellow Sea (in South Chungcheong Province, to be completed in 2020); Daegu/Gyeongbuk (in North Gyeongsang Province, to be completed in 2022); Saemangeum/Gunsan (in North Jeolla Province, to be completed in 2020), East Sea (in Donghae and Gangneung, to be completed in 2024) and Chungbuk (in North Chungcheong Province, to be completed in 2020). Additional information is available at http://www.fez.go.kr/global/en/index.do.

As of April 2017, there are also four foreign-exclusive industrial complexes in Gyeonggi Province designed to provide inexpensiveland, with the national and local governments providing assistance for leasing or selling in the sites at discounted rates. In addition, there are 13 Free Trade Zones 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 25 Foreign Investment Zones designated by local governments to accommodate industrial sites for foreign investors. Special considerations for foreign investors vary among these options.

Performance and Data Localization Requirements

There are no such requirements. Companies should check if candidates of foreign nationality have a valid working permit (VIAS) prior to offering jobs. Anyone who is planning to work during his or her stay in the ROK is required by law to apply for a visa. Work visas can be obtained at the ROK Embassy or Consulate with jurisdiction over the applicant's place of legal residence. Work visas are usually valid for one year, and issuing work visas takes two to four weeks. Changing a tourist visa to a work visa is not possible within the ROK. This must be done at an embassy or a consulate outside the country.

Sectors such as public administration, national defense, and diplomacy are subject to certain restrictions imposed by the ROK government, but there are no government-imposed conditions or restrictions on investing in the ROK in most sectors. The conditions to invest in the ROK are elaborated in the FIPA. Foreign companies are not required to use domestic content or technology, nor are they required to turn over source codes or provide access for surveillance to ROK authorities. The ROK government, however, is implementing policies to foster the domestic software industry, which sometimes creates obstacles for foreign companies pursuing public procurement projects. The ROK ceased imposing performance requirements on new foreign investment in 1989 and eliminated all pre-existing performance requirements in 1992. There are no performance requirements that force foreign companies to ensure a certain level of local content, local jobs, R&D activity, or domestic shares in the company’s capital.  

There are no legal requirements for foreign information technology (IT) providers to turn over source codes and/or provide access to encryption. However, there are security certifications for some IT products. These certifications are referred to as “Common Criteria certification” (CC certification), the standards and assessments for which are established and implemented by the IT Security Certification Center. The source code for IT products might need to be submitted to the IT Security Certification Center during the review process to apply for CC certification. In January 2016, the ROK government announced guidelines stating that the CC certification is a requirement for cloud computing services to be provided to ROK government agencies or public institutions. 

ROK data privacy law has various requirements for companies that collect, use, transfer, outsource, or process personal information. This law applies uniformly to both domestic and foreign companies that process personal information in the ROK. The law imposes some restrictions on transferring personal information outside of the country. If a data controller intends to transfer the personal information of end-users outside of the ROK, it is required to obtain each end-user’s consent. In the case of overseas transfer of personal information for the purpose of IT outsourcing, the data controller may forgo obtaining each individual’s consent if the data controller discloses in its privacy policy: (i) the purpose of overseas transfer; (ii) the transferees of personal information; and (iii) other certain items about overseas transfer.

There are similar requirements for a data controller to transfer the personal information of end-users to a third party within the ROK. To transfer the personal information of end-users to a third party, a data controller must obtain each end-user’s consent. In addition, regulations prohibit financial companies in the ROK from transferring customers’ personal information and related financial transaction data overseas. As such, this financial transaction data cannot be outsourced to overseas IT vendors, and financial companies in the ROK must store customers’ financial transaction data in the ROK. The Financial Supervisory Service is the authority that regulates financial companies in the ROK.

Protection of Property Rights

Real Property

Property rights and interests are enforced under the Civil Act. Mortgages and liens exist, and the ROK’s recording system is reliable. The Alien Land Acquisition Act (amended in 1998) grants non-resident foreigners and foreign corporations the same rights as Koreans in purchasing and using land. The Real Estate Investment Trust (REIT) Act supports indirect investments in real estate and restructuring of corporations. The REIT Act allows investors to invest funds through an asset management company and in real property such as office buildings, business parks, shopping malls, hotels, and serviced apartments. Property interests are enforced, and there is a reliable system for registering mortgages and liens. As of June 2016, approximately 0.5 percent of land does not have clear title. The courts run the recording system. Legally purchased property cannot revert to other owners, but squatters may have very limited rights in special situations, such as a right to cultivation of unoccupied land.

Intellectual Property Rights

  • 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 the ROK’s strong interest in innovation, its 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, including the deletion of millions of illegal files online, enforcement of laws to prevent the further distribution of illegal materials, and blockage of numerous illegal file-sharing online service providers. Industry concerns include the continued government use of unlicensed software, end-user software piracy, and book piracy in universities.
  • Copyright Act was amended in 2016 with two noteworthy changes. First, the definition of phonogram was changed to include “sound in digital form” and “sound fixed in media.” Phonogram producers welcomed the widened scope of the definition of phonogram, as it better protected their rights, particularly because more music is being transmitted through digital formats. Second, the Ministry of Culture, Sports, and Tourism (MCST) changed the language from “phonogram produced for sales” to “phonogram published for commercial purposes,” thus broadening the protection of music producers and stakeholders. The KFTC amended its guidelines on unfair exercise of intellectual property rights on March 3, 2016, to better promote free and fair competition in the ROK marketplace by redefining the rights of standard essential patent holders and the conditions necessary to grant licenses.
  • 2016, MCST Judicial Police conducted special investigations of 10 streaming websites.  As a result of those investigations, MCST recommended five websites to the ROK’s Supreme Prosecutor’s Office (SPO) for possible indictment and prosecution.  Those streaming sites contained 479,000 illegal files, which were mostly broadcast content (e.g., dramas and movies). Furthermore, MCST and the Korea Customs Service jointly conducted special enforcement of illegally reproduced popular television characters (online and offline), which netted the seizure of 12,582 items. MCST also recommended to SPO that it indict 57 heavy uploaders of software remote file hosting services, or “webhards.”

MCST deleted 29.1 million illegal online files, a decrease from 117.4 million files in 2015.  MCST also destroyed 7.8 million hard copies of music files, videos, publications, games, and cartoons in 2016, a decrease from 14.5 million in 2015. MCST stated the decrease was due to better ROK government-led educational efforts about the illegality of downloading pirated materials. MCST investigated South Korean university campuses and confiscated 21,304 illegally copied books, up 30.4 percent from 16,335 copies seized in 2015. MCST Judicial Police conducted software inspections of 195 companies using special design software such as CAD and Adobe. It discovered 3,024 instances of illegal software usage, about the same number as in 2015.  MCST raided 271 companies and found 3,050 instances of illegal software usage, with a piracy rate of 29.6 percent.

MCST also recommended that the Korea Copyright Commission (KCC) block service to 220 illegal sites, 231 illegal bulletin boards, and 313 illegal files (764 blocks), up from 552 blocks in 2015.  Most of the sites and files were music and film sites hosted on foreign servers.  Because the number of illegal sites whose servers are located abroad is increasing, MCST is working to simplify the procedures and shorten the period for blocking such sites through the KCC from four months to three weeks. As a result of this effort, the frequency of KCC deliberations on blocking services increased from five in 2015 to 18 in 2016.

The total number of people indicted by the SPO for Copyright Act violations was 33,806 in 2016, down 34.9 percent from 51,936 in 2015.  In 2016, MCST Judicial Police recommended to the SPO that legal action be taken for 447 IPR cases, down 59 percent from 1,091 cases in 2015.

The Korean Intellectual Property Office (KIPO) also continued its enforcement activities in 2016.  KIPO’s Special Judicial Police seized 584,094 counterfeit items from 351 people in 2016, down from the 1,197,662 items seized from 378 people in 2014, and up dramatically from 28,590 items in 2011.  In addition, KIPO suspended 5,888 online transactions in 2016, up from 5,673 cases in 2015, and closed 368 illegal online shopping malls in 2016, down from 418 in 2015.  KIPO is improving its enforcement coordination with related agencies and local autonomous bodies by jointly issuing corrective recommendations to 1,832 people on 7,134 items.  KIPO is also providing training to enforcement officers, including local police, and pro-actively educating the public through television and media and rewarding those who file or report counterfeit goods. The ROK is not listed in the 2016 Special 301 report, nor are Korean markets included in the 2016 Notorious Markets List.

Resources for Rights Holders

The contact at U.S. Embassy Seoul for IPR issues is: SeoulECONTrade@state.gov

Additional local resources are as follows:

The American Chamber of Commerce in Korea
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

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

Financial Sector

Capital Markets and Portfolio Investment

The ROK has its own stock market and an effective regulatory system that encourages portfolio investment. There is sufficient liquidity in the market to enter and exit sizeable positions. The ROK government uses various incentives, such as tax breaks, to facilitate the free flow of financial resources into the product and factor markets. The ROK government respects International Monetary Fund (IMF) Article VIII on the general obligations of member states by refraining from restrictions on payments and transfers for current international transactions. Credit is allocated on market terms. The private sector has access to a variety of credit instruments, but non-resident foreigners are not able to borrow money in South Korean won, although they can issue bonds in local currency.

Foreign portfolio investors enjoy open access to the ROK stock market. Aggregate foreign investment ceilings in the Korean Stock Exchange (KSE) were abolished in 1998, and foreign investors owned 35.1 percent of KSE stocks and 10 percent of the Korean Securities Dealers Automated Quotations (KOSDAQ) as of the end of 2016. In recent years, foreign portfolio investment has fluctuated, influenced by external factors such as the November 2016 U.S. presidential election, the slowing of the Chinese economy, and domestic political turmoil caused by a corruption scandal surrounding impeached President Park Geun-hye.

Money and Banking System

Financial sector reforms are often cited as one reason for the ROK’s rapid rebound from the 2008 global financial crisis. These reforms aimed to increase transparency and investor confidence and generally purge the sector of moral hazard. Since 1998, the ROK government has recapitalized its banks and non-bank financial institutions, closed or merged weak financial institutions, resolved many non-performing assets, introduced internationally-accepted risk assessment methods and accounting standards for banks, forced depositors and investors to assume appropriate levels of risk, and taken steps to help end the policy-directed lending of the past. These reforms addressed the weak supervision and poor lending practices in the South Korean banking system that helped cause and exacerbate the 1997-98 Asian financial crisis.

The ROK banking sector is healthy. Rating agency Standard & Poor’s categorized ROK banks as low risk on June 22, 2016. Hanwha Bank’s total assets were KRW 330 trillion (USD 292 billion) at the end of 2015, for example. The ROK central bank is the Bank of Korea (BOK). Foreign banks or branches are allowed to establish operations in the country. They are subject to prudential measures or other relevant regulations. The ROK has not lost any correspondent banking relationships in the past three years, nor are any relationships in jeopardy.

Foreign Exchange and Remittances

Foreign Exchange

In categories open to investment, foreign exchange banks must be notified in advance of applications for foreign investment. All ROK banks, including branches of foreign banks, are permitted to deal in foreign exchange. In effect, these notifications are pro forma, and approval can be processed within three hours. Applications may be denied only on specific grounds, including national security, public order and morals, international security obligations, and health and environmental concerns. Exceptions to the advance notification approval system exist for project categories subject to joint-venture requirements and certain projects in the distribution sector.

According to the Foreign Exchange Transaction Act (FETA), transactions that could harm international peace or public order, such as money laundering and gambling, require additional monitoring or screening. Three specific types of transactions are restricted:

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

2) The Financial Services Commission 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.

Funds associated with any form of investment can be freely converted into any world currency. However, there might be some cost or technical problems in case of conversion into lesser used currencies, due to the relatively small foreign exchange market in the country. In 2016, 81 percent of spot transactions in the market were between the U.S. dollar and Korean won, while daily transaction (spot + future) was equal to USD 10.5 billion.

Exchange rates are generally determined by the market. The U.S. Treasury Department reports that ROK authorities have intervened on both sides of the currency market, but the sustained rise in their reserves and net forward position indicate that they have intervened on net to resist won appreciation.

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.

The ROK routinely permits the repatriation of funds, but reserves the right to limit capital outflows in exceptional circumstances, such as situations when uncontrolled outflows might harm the balance of payments, cause excessive fluctuations in interest or exchange rates, or threaten the stability of domestic financial markets. To withdraw capital, a stock valuation report issued by a recognized securities company or the 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. There are no time limitations on remittances.

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 Chief Executive Officer (CEO) of KIC, and the heads of MOSF and the BOK. KIC is on the Public Institutions Management Act (PIMA) list. KIC is mandated to manage assets entrusted by the ROK government and the BOK and generally adopts a passive role as a portfolio investor. Based on the continued increase in entrusted assets and gains realized on investments, assets under management stood at USD 91.8 billion at the end of 2015, with no domestic investments to date. KIC is required by law to publish an annual report, submit its books to the steering committee for review, and follow all domestic accounting standards and rules. It follows the Santiago Principles and participates in the IMF-hosted International Working Group on SWFs. The KIC has never invested in domestic assets.

State-Owned Enterprises

Many ROK state-owned enterprises (SOEs) continue to exert significant control over segments of the economy. There are 30 remaining SOEs 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. The ROK is party to the WTO Government Procurement Agreement; a list of SOEs subject to WTO government procurement provisions is available in annex three of the ROK’s agreement. The state-owned Korea Land and Housing Corporation is given preferential access to developing state-owned real estate projects, notably housing. The court system functions independently from the government and gives equal treatment to SOEs and private enterprises. The ROK government does not provide official data on SOEs’ market shares. It requires each entity to disclose financial statements, the number of employees, and average compensation figures.

The PIMA gives authority to MOSF to administer control of many SOEs, mainly focusing on administrative and human resource management. However, there is no singular government entity that exercises ownership rights over SOEs. SOEs subject to PIMA are required to report to a line minister; the President or line ministers appoint senior government officials or politically-affiliated individuals as CEOs or directors. SOEs are explicitly obligated to consult with government officials on their budget, compensation, and key management decisions (e.g., pricing policy for energy and public utilities). For other issues, the government officials informally require the SOEs to either consult with them before making decisions or report ex post facto.

Market analysts generally regard SOEs as a part of the government or entities fully guaranteed by the government, with some exceptions: SOEs listed on local security markets, such as the Industrial Bank of Korea and Korea Electric Power Corporation, are regarded as semi-private firms. The ROK adheres to the OECD Guidelines for Multinational Enterprises and reports significant changes in the regulatory framework for SOEs to the OECD. A list of South Korean SOEs is available at the following Korean-language website: http://www.alio.go.kr/home.html.

The ROK government announced that it would not give any non-market based advantages to SOEs competing in the domestic market, but the U.S. Embassy in Seoul has noted that the state-owned Korea Development Bank enjoys lower financing costs because of the government’s guarantee. This does not appear to have a major effect on the U.S. retail banking sector.

Privatization Program

ROK government efforts to privatize government-owned assets have been opposed by protests from labor unions and professional associations, as well as by a lack of interested buyers in some sectors. No state-owned enterprises were privatized between 2002 and November 2016. In November 2016, the government decided to sell its 29.7 percent stake in Woori Bank and finalized the deal in December 2016. The government recouped KRW 2.4 trillion (USD 2.07 billion) from this sale and pledged that it will sell the remaining 21.4 percent stake in the future.

Foreign investors are allowed to participate in privatization programs as long as they comply with ownership restrictions stipulated for the 30 industrial sectors indicated in section 1: Openness To, and Restrictions Upon, Foreign Investment. These programs have a public bidding process that is easy to understand, non-discriminatory, and transparent. The authority in charge or a delegated private lead manager provides the relevant information.

Responsible Business Conduct

Awareness of the economic and social value of responsible business conduct and corporate social responsibility (CSR) is growing in the ROK, but is still in a nascent stage. The Korea Corporate Governance Service, founded in 2002 by entities including the Korea Exchange (formerly Korea Stock Exchange) and the Korea Listed Companies Association, encourages companies to voluntarily improve their corporate governance practices. Since 2011, its annual assessments have included reviews of corporate environmental responsibility and CSR, in addition to the issuance of associated guidelines. The United Nations Global Compact (UNGC) Network Korea, established in 2007, actively promotes corporate involvement in the United Nations (UN) Public Private Partnership for Sustainable Development Goals 2016-2030 and guides the values and direction of CSR to be not only about charity, but also about future corporate sustainability. UNGC is focused on human rights, anti-corruption, labor standards, and the environment, with 240 South Korean companies listed as UNGC members as of March 2017. 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. Businesses also promote OECD Guidelines for Multinational Enterprises to enhance awareness of responsible business conduct.

For the promotion of OECD Guidelines for Multinational Enterprises, the ROK government operates websites and holds a wide range of seminars, in addition to publishing and distributing promotional materials. To enhance the implementation of the OECD Guidelines for Multinational Enterprises, the ROK government established a National Contact Point (NCP) in the then-Ministry of Foreign Affairs and Trade in 2000 (now two ministries, Ministry of Foreign Affairs and Ministry of Trade, Industry, and Energy) and designated the Korea Commercial Arbitration Board (KCAB) as the Secretariat of NCP. The International Human Rights Division of the Ministry of Justice oversees the National Action Plan to implement the guidelines. The KCAB recently addressed two cases related to the OECD Guidelines for Multinational Enterprises. It facilitated the discussion of the parties concerned and invited outside experts on arbitration to settle the issues, resulting in a favorable outcome.

The National Human Rights Commission, the Ministry of Employment and Labor (MOEL), the Korea Consumer Agency, and the Ministry of Environment enforce ROK law in the fields of human rights, labor, consumer protection, and environment effectively and fairly.  Shareholders are protected by laws such as the Act on an External Audit of Corporations under the jurisdiction of the Financial Services Commission, the Act on Monopoly Regulation and Fair Trade under the jurisdiction of the KFTC, and the Commercial Act under the jurisdiction of the Ministry of Justice. The Commercial Act is currently under revision to better represent minority shareholders and enhance the value of shareholders. Other organizations involved in responsible business conduct include the ROK office of Trade Union Advisory Committee to the OECD, the Korea Human Rights Foundation, and the Korean House for International Society.

The Korea Sustainability Investing Forum (KOSIF) was established in 2007 and is dedicated to promoting and expanding socially responsible investment and CSR.  Through regular fora, seminars, and publications, KOSIF provides educational opportunities, conducts research to establish a culture of socially responsible investment in the ROK, and supports relevant legislative processes. It actively engages with National Assembly members and stakeholders to influence decision-making processes.

The ROK does not maintain regulations to prevent conflict minerals from entering supply chains; however, 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.  ROK companies are often obligated to follow the conflict-free regulations of economies to which they export goods.  The Korea International Trade Association and private-sector firms provide consulting services to companies seeking to comply with conflict-free regulations.  The ROK is not a member of the Extractive Industries Transparency Initiative, but has a mining industry and has participated in the Kimberly Process since 2012.  The ROK government is taking measures to guarantee transparency through the Mining Act, Overseas Resources Development Business Act, other relevant law on taxation, environment, labor, and anti-bribery, and OECD Guidelines for Multinational Enterprises.

Corruption

Resources to Report Corruption

Government agency responsible for combating corruption:

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

Contact at "watchdog" organization:

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

In an effort to combat corruption, the ROK has introduced systematic measures to prevent civil servants from inappropriately accumulating wealth and conducting opaque financial transactions. The Public Service Ethics Act, drafted in 1981 and entered into force in 1983, requires high-ranking officials to disclose their assets, including how they were accumulated, and report gifts they receive, thereby making their holdings public. The Act on Anti-Corruption and the Establishment and Operation of the Anti-Corruption and Civil Rights Commission (previously called the Anti-Corruption Act) concerns reporting of corruption allegations, protection of whistleblowers, institutional improvement, and training and public awareness to prevent corruption, as well as establishing national anti-corruption initiatives through the Anti-Corruption and Civil Rights Commission (ACRC). The ROK still faces challenges in effectively implementing anti-corruption laws, however. Transparency International’s Corruption Perception Index in 2015 ranked the ROK 52 out of 176 countries and gave it a score of 53 out of 100 (with 100 being very clean).

Corruption among government officials drew widespread attention throughout 2016. Choi Soon-sil, a longtime friend and close confidante of then-President Park Geun-hye, was arrested and indicted on charges of fraud, coercion, and abuse of power. She was accused of amassing a personal fortune by using her personal ties to Park, and the President’s knowledge of or involvement in Choi’s activities came under investigation. In light of the scandal, lawmakers voted 234-56 to impeach President Park in December 2016, and the Constitutional Court upheld this decision on March 10, 2017.

The ROK legislature passed a comprehensive anti-corruption law known as the Anti-Corruption and Conflicts of Interest Act, or the Kim Young-ran Act, in March 2015. The anti-corruption law came into effect on September 28, 2016, and institutes strict limits on the value of gifts that can be given to public officials, lawmakers, reporters, and private school teachers. It also extends to the spouses of officials. The Act on the Protection of Public Interest Whistleblowers is designed to protect whistleblowers in the private sector and equally extends to reports on foreign bribery, with a reporting center operated by the ACRC.

In 2014, to reduce collusion between government regulators and regulated industries that contributed to the tragic sinking of the Sewol ferry, the ROK government tightened regulations governing the employment of retired government officials. The sinking, which resulted in the deaths of 304 passengers (mostly children on a school trip) and crew in April of that year, resulted in widespread criticism of the ferry operator, the regulators who oversaw its operations, and the South Korean government for its poor disaster response and attempts to downplay government culpability. The government expanded the list of sectors restricted from employing former government officials during a mandated period after retirement, extended the mandated post-retirement period from two to three years, and increased scrutiny of retired officials seeking jobs in fields associated with their former official duties.

Most companies maintain an internal audit function to prevent and detect corruption. Government agencies responsible for combating government corruption include the Board of Audit and Inspection, which monitors government expenditures, and the Public Service Ethics Committee, which monitors civil servants’ financial disclosures and their financial activities. The ACRC focuses on preventing corruption by assessing the transparency of public institutions, protecting and rewarding whistleblowers, training public officials, raising public awareness, and improving policies and systems.

In reporting cases of corruption to government authorities, nongovernment organizations and civil society groups are protected by the Act on the Prevention of Corruption and the Establishment and Management of the Anti-Corruption and Civil Rights Commission, as well as the Protection of Public Interest Reporters Act. Individuals reporting cases of corruption to the ACRC must provide their full name to make the submission. However, their personally identifiable information is protected under the law, and the government cannot release information without the consent of the reporting individual. Violations of these legal protections can result in fines or prison sentences. U.S. firms have not identified corruption as an obstacle to FDI.

The ROK ratified the UN Convention against Corruption in 2008. It is also a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and a member of the Asia-Pacific Economic Cooperation Anti-Corruption and Transparency Working Group.

The Financial Intelligence Unit has cooperated fully with U.S. and UN efforts to shut down sources of terrorist financing. Transparency International has maintained a national chapter in South Korea since 1999.

Political and Security Environment

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

The ROK is a modern democracy with active public political participation, and political demonstrations are common. Political divisions deepened amid the impeachment of President Park Geun-hye. Large-scale rallies were a regular occurrence throughout the impeachment process. They were largely peaceful and orderly, with almost no instances of violence.

Labor Policies and Practices

According to the MOEL, there were approximately 26 million economically active people in the ROK, with an employment rate (OECD standard) of approximately 66.5 percent. The overall unemployment rate of 3.8 percent in January 2017 was much lower than the unemployment rate of youth ages 15-29, which, at over 10 percent, is becoming a domestic concern. The country has two major national labor federations. The Federation of Korean Trade Unions (FKTU) has 2,372 labor unions and 843,442 members, and the Korean Confederation of Trade Unions (KCTU) has 373 labor unions and 636,249 members. KCTU and FKTU are affiliated with the International Trade Union Confederation. Most of FKTU’s constituent unions maintained affiliations with international union federations. There are 3,028 unions with 445,603 workers who do not belong to a nationwide federation.

The minimum wage is reviewed annually. Labor and business set the minimum wage for 2017 at 6,470 won (approximately USD 5.50) per hour, a 7.3 percent increase from the previous year. The Labor Standards Act also provides for a 50 percent higher wage for overtime. 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 being full-time and not temporary in nature. MOEL reported that there were approximately 6.16 million non-regular workers, comprising approximately 32 percent of the total workforce as of July 2016. 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.

For regular, full-time employees, the law provides employment insurance, national medical insurance, industrial accident compensation insurance, and participation in the national pension system through their employers or employer subsidies. Non-regular workers, such as temporary and contracted employees, are not guaranteed the same collection of benefits. With regard to severance pay for regular workers, South Korean law does not distinguish between the firing of an employee versus the laying off of an employee for economic reasons. Employers’ reliance on non-regular workers is partially explained by the costs that may be associated with dismissing regular full-time employees and the savings that may be realized through not having to provide insurance and other benefits.

There are no government policies requiring the hiring of nationals. In 2004, the ROK implemented a “guest worker” program known as the Employment Permit System (EPS) to help protect the rights of foreign workers. The EPS allows employers to legally employ a certain number of foreign workers from 15 countries, including the Philippines, Indonesia, and Vietnam, with which the ROK maintains bilateral labor agreements. In 2015, the ROK increased its annual quota to 55,000 migrant workers. At the end of 2016, approximately 222,000 foreigners were said to be working under the EPS in the manufacturing, construction, agriculture, livestock, service, and fishery industries.

Legally, unions operate with autonomy from the government and employers, although national labor federations, comprised of various industry-specific unions, receive annual government subsidies. The ratio of organized labor to the entire population of wage earners at the end of 2015 was 10.2 percent; this ratio has remained relatively stable over the last 10 years. ROK trade union participation is lower than the latest-available OECD average of 16.7 percent in 2014; more information is available at http://stats.oecd.org/Index.aspx?DataSetCode=UN_DEN.

Labor organizations are permitted in export processing zones (EPZs), but foreign companies operating in EPZs are exempt from some labor regulations. Exemptions include provisions that mandate paid leave, require companies with more than 50 people to recruit persons with disabilities for at least 2 percent of their workforce, encourage companies to reserve 3 percent of their workforce for workers over 55 years of age, and restrict large companies from participating in certain business categories. Foreign companies operating in Free Economic Zones have greater flexibility in employing “non-regular” workers in a wider range of sectors for extended contractual periods. ROK law provides workers with the right to associate freely and allows public servants and private workers to organize unions. The Trade Union and Labor Relations Adjustment Act provides for the right to collective bargaining and collective action and allows workers to exercise these rights in practice.

The Labor Relations Commission is the primary government body responsible for labor dispute resolution. It provides arbitration and mediation services in response to dispute resolution requests submitted by employees, employers, or both parties. MOEL labor inspectors also have certain legal authorities to participate in dispute settlement related to violations of labor rights. The Korea Workers’ Compensation and Welfare Service handles labor disputes resulting from industrial accidents or disasters. There was particularly strong opposition in 2016 against the merit-based wage system, and workers from a wide range of industries, including banking and public transit, participated in a series of consecutive strikes in September 2016. These demonstrations and strikes by labor unions in opposition to the labor reforms did not pose a significant risk to investment interests, however.

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. More information can be found in the Department of State’s Report on Human Rights Practices for 2016: https://www.state.gov/j/drl/rls/hrrpt/humanrightsreport/index.htm#section7

A tripartite commission consisting of the FKTU, government, and companies reached consensus on labor reform in September 2015; however, the agreement fell apart on January 19, 2016. A package of associated labor reforms bills submitted by then-President Park Geun-hye’s ruling party in September 2015 was not approved by the National Assembly.

OPIC and Other Investment Insurance Programs

U.S. investments in the ROK are eligible for insurance programs sponsored by the U.S. Overseas Private Investment Corporation (OPIC). OPIC has not, however, guaranteed any U.S. investments in the ROK since 1998, when OPIC reinstated coverage it had suspended in 1991 due to concerns about worker rights. Coverage issued prior to 1991 is still in force. There is no OPIC program in the ROK, but Daelim Energy announced on August 10, 2016, that the company had signed a financial agreement with OPIC amounting to approximately USD 100 million to support the Hawa project in Pakistan. This is the first project that Daelim Energy is investing in through the Inter-American Development Bank Infrastructure Fund II. The Hawa project’s purpose is to develop and run a 50-megawatt wind power farm in Sindh, which is in southern Pakistan. It has a total budget of about USD 130 million. The United States and the ROK signed an investment incentive agreement on July 30, 1998. The ROK has been a member of the World Bank’s Multilateral Investment Guarantee Agency since 1987.

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

2015

$1,378,000

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)

2016

$38,795

2015

$33,034

IMF data available at http://data.imf.org/

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

2016

$128,950

2015

$56,679

IMF data available at http://data.imf.org/CDIS

Total inbound stock of FDI as % host GDP

2015

12.26

2015

12.7

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 – http://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

169,659

100%

Total Outward

271,581

100%

Japan

44,767

26%

China, Mainland

65,865

24%

United States

33,034

19%

United States

56,679

21%

Netherlands

15,428

9%

China, Hong Kong

13,475

5%

United Kingdom

13,112

7%

Australia

9,455

3%

Singapore

9,304

5%

Cayman Islands

9,119

3%

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

Table 4: Sources of Portfolio Investment

Portfolio Investment Assets

Top Five Partners (Millions, US Dollars)

Total

Equity Securities

Total Debt Securities

All Countries

235,872

100%

All Countries

152,523

100%

All Countries

83,349

100%

United States

98,555

42%

United States

68,701

45%

United States

29,854

36%

United Kingdom

16,509

7%

Luxembourg

9,491

6%

United Kingdom

7,844

9%

China, Mainland

13,955

6%

China, Mainland

9,115

6%

France

6,703

8%

Luxembourg

11,825

5%

Japan

8,712

6%

China, Mainland

4,840

6%

Japan

11,665

5%

United Kingdom

8,664

6%

Brazil

4,244

5%

Contact for More Information

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


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