Trade tensions hit South Korea FDI

South Korea is suffering a decline in FDI as trade tensions hit its economy. Following a record $17.9bn in 2017, headline FDI inflows have fallen for a second consecutive year, according to Unctad’s Global Investment Trends Monitor. The flows declined by 46% to $7.8bn in 2019. 

Unctad attributed this fall to “trade tensions and investment policy changes” as the country is caught in the crosshairs of the ongoing trade tensions between China and the US, and an ongoing trade and political dispute with Japan.

The fall in greenfield investment was even more drastic. Capital expenditure in greenfield projects into South Korea declined by 60% to $3.31bn in 2019, compared with $8.4bn in 2018 according to data from crossborder investment monitor fDi Markets. 

Japan has been historically the second largest source market of greenfield FDI, but announced greenfield investment from Asia’s second-largest economy into South Korea has declined since 2016. Tensions escalated between the two Asian powerhouse economies in summer 2019, as Japan imposed export controls on its electronics sector to disadvantage major South Korean companies such as Samsung. 

The US maintained its top spot as the largest source market of FDI into South Korea in 2019, with $1.26bn of estimated investment, according to fDi Markets. It was also South Korea’s largest greenfield investor in projects numbers, with 42. Twenty-one of these projects were sourced in the second half of the year, compared with 12 between February and June 2019. 

This can be partly attributed to the US-China trade war, as the rise in US-sourced investments followed the G20 Osaka Summit on 29 June, where US and China’s presidents Donald Trump and Xi Jinping agreed to hold off on new tariffs and proceed with trade negotiations.

Since then, the second half of 2019 was better for South Korea in terms of sourcing greenfield FDI. Having attracted £893.3m in FDI greenfield between February and June, South Korea had inflows of £1.55bn between July and December 2019, according to fDi Markets.  

Despite this increase, Asia’s fourth-largest economy was under pressure throughout 2019. Exports declined by 14.7% year-on-year in October, falling for an 11th consecutive month, as “global demand remained week and semiconductor markets had not picked up” according to a report by South Korea’s ministry of economy and finance. 

As an export-oriented economy that is sensitive to external demand shocks, South Korea was heavily affected by the US-China trade war which involved its two biggest trading partners.

The declining global demand for South Korean vehicles and electronics particularly affected the country’s manufacturing economy, leading to 81,000 job losses in the industry as employment rates hit a six-year low in October 2019, according to South Korea’s Pulsenews. 

Greenfield FDI inflows in South Korea’s manufacturing sector were $1.5bn in 2019, the lowest year recorded since fDi Markets data began in 2003. Furthermore, automotive OEM projects also declined steeply, falling from seven in 2018 to just one in 2019, according to fDi Markets.

To make matters worse, South Korea lost 43.2 workdays per 1000 workers to strikes in 2019, compared with only 0.25 days in Japan, according to data from the Korea Labour Institute.

Although South Korea ranks fifth in the World Bank’s Ease of Doing Business Report 2020, investors have been wary of the labour situation. This was confirmed by a survey in November 2019, as the Korea Trade-Investment Promotion Agency found that 24.1% of foreign-invested companies cited the labour environment as the most urgent problem in South Korea.