This article has been written by Srishti Saxena pursuing the Diploma in Business Laws for In-House Counsels from LawSikho.

Introduction

A Foreign Direct Investment (FDI) is an investment made by a firm or an individual in one country into business interests located in another country. Generally, FDI takes place when an investor establishes foreign business operations or acquires foreign business assets in a foreign company. “When a Foreign company invests more than 10% or holds more than 10% stake in any of the companies outside their country, this refers to FDI.” Why do we encourage FDI? Here are some good reasons, 

(i). To stimulate economic development, 

(ii). To increase employment opportunities, 

(iii). Development of human resources, 

(iv).  Increase in Exports, 

(v). Exchange rate stability, 

(iv). Improves Capital Flow, (Provision of Finance and Technology, etc.) 

FDI is like a channel between Countries. This has recently taken a huge toll to promote Foreign Direct Investments in India, the government has taken many initiatives to improve ease of doing business and relaxing FDI norms, which has given positive results.

The reason for interest in FDI is the concern it raises about the causes and consequences of foreign ownership. The views on this issue are so diverse, falling between the extreme of regarding FDI as symbolizing new colonialism or imperialism, and the other extreme of viewing it as something without which the host country cannot survive. Foreign Direct Investment in countries shows an ambivalent attitude towards FDI. Inward FDI is said to have negative employment effects, retard home-grown technological progress, and worsen the trade balance. Substantial foreign ownership often gives rise to concern about the loss of sovereignty and compromise of national security. Outward FDI is sometimes blamed for the export of employment, and for giving foreigners access to domestic technology. While we are on the topic of FDI, we will notice how the norms for Korea changed with respect to Foreign Direct Investments.

National Policy with regard to FDI

Korea, after facing a huge downfall understood many different aspects of FDI and therefore, made astounding changes. Foreign Investments took a turn in Korea decidedly after the financial crisis of 1997, this was caused due to the government failure in two major policy areas: exchange rate policy and industry policy which resulted in the huge shift from a rigid and restricted policy to an open door, supporting policy to attract foreign investments. There were steps taken to update the FDI system to draw more foreign investments. One of the major changes was, from seeking approval from the Ministry of Finance and Economy to initiating a foreign investment shifted to investing freely as long as the investments are duly reported in accordance with the Foreign Investment Promotion Act (FIPA) or the Foreign Exchange Transaction Act (FETA).

Laws applicable with respect to FDI

International investments seek a huge amount of legal framework to work in good capacity and cater a safe place for the foreign investors to invest, with this comes to a great responsibility on national security to keep things in check. There are several dos and don’ts that have to be followed, with respect to the FDI. As explained above, FIPA applies to cases where foreign investment is limited on the grounds of national security and public order. FIPA also dictates :

• There are certain sectors that are prohibited for foreigners to invade or invest in (e.g., postal services business, central bank, nuclear generation business, newspaper publication business, radio broadcasting business).
• Foreign investors are allowed to invest within a permitted range unless the sales of the prey company do not exceed 1% of the total sales excluding the restricted businesses mentioned in the first point.  
• The Minister of Trade, Industry, and Energy has the authority to limit the foreign investments on the basis of national security, after reviewing with the Foreign Investment Committee. 

Sectors and industries under scrutiny

As mentioned and discussed above, there are several sectors that are prohibited and confined to foreign direct investments. Till the time the investments are duly reported, foreign investments can be carried forward easily. Moreover, with an exception for investing in defense industry companies, it is only permitted if the Minister of Trade, Industry, and Energy authorizes it after reviewing it with the Minister of Defence. Additionally, the Korean government issues the Integrated Public Announcement of foreign investment stating certain restrictions for the foreign investors, because of this if any statutes apply then the investment is directly restricted even if it is not covered under FIPA.  

How does the law treat the terms “foreign investment” and “foreign investor”?

Under the FIPA, an individual who comes with a foreign nationality, an entity with the grounds of foreign law, an agency that works on behalf of the foreign investors, the organization that has day to day work related with the investments processing on the international grounds is subjectively known as “foreign investment”. Whereas, on the other hand, the term “foreign investor”, is someone who is actively taking part and holding stocks, etc., or has contributed according to FIPA, and the term “foreign-invested company” signifies an organization invested by a foreign investor.

Essentials one needs to consider while investing in South Korea

• South Korea has an efficient education system which results in a highly-skilled workforce.
• Research and Development capabilities.
• Advanced infrastructure and dominance in advanced technology.
• Growth in the banking sector and investment.
• The willingness of consumers to spend on quality products
• Strong shipping and air cargo services. 

Issues with jurisdiction

To move forward with investing in a foreign space, one should have the information of the legalities that will come with it. Korea Trade-Investment Promotion Agency (“KOTRA”) was set up within Korea to encourage and support the foreign investors to do business in Korea providing them the required information and consultation services to help enhance the FDI to enhance the level of Korea. As mentioned above, when a transaction consists of Foreign Investment, the FIPA applies and comes into the picture whereas, on the other hand with any other foreign currency or cross-border transactions, FETA applies. It is mandatory to file under the FIPA and FETA, without any filing fee as a plus point. As a responsible Foreign investor, it is important to report all the foreign investments under the FIPA or record all the acquisition of securities under the FETA, without any negligence. Points covered in the Foreign Investment Report under the FIPA will include the following:     

• An application consisting of the acceptance report on foreign investment is known as inter alia.
• The Identity proof documents of the investor (certificate of business registration).
• There shall be no such documents or statements that will contradict the foreign investment and the documents provided are satisfactory with the circumstances.
• For any exceptional requirement, the documents can vary.
• Documents comprising the value of the target can be also required.

Moreover, if a foreign investor acquires shares of equity interests in a Korean-based company, the investor should duly report the acquisition of securities in accordance with the FETA, which initially includes, Inter alia, documents related to identical parties and other important documents to back up itself.

Conclusion & analysis

The most important thing to keep in mind before investing in Korea is to follow the principle, that foreign investment can be made easily, with the compulsion of reporting and registering the securities under FIPA. The principle stands still in the case where there are certain sectors that are prohibited for investing to protect the national security and there is no room for any discretion that should be exercised by the authorities. The Minister of trade, Industry, and Energy are the decision-makers and keep national security in mind. In case an investment poses a national security risk, the Minister of trade, industry, and energy can call it off and prohibit the foreign investment, reverse the transfer of stocks, etc, or grant more of an exceptional, conditional approval. Korea’s aim towards foreign direct investment is a consequence of the country’s highest economic development over the years. Korea is known for new technologies for information and communication. However, lack of transparency is still a major concern. In 2020, Doing Business has ranked South Korea as the 5th country with a highly developed environment for business purposes. Therefore all the policies are intact and aiming towards the growth as well as the national security of Korea. We can appreciate how freely and conveniently the Korean government has made logical choices for the investors to enter into the regime of FDI. I believe that FETA and FIPA are absolutely appropriate to the point concerning the Foreign Direct Investment and Korea should continue with these terms as long as it is benefitting them and bringing the growth home. 

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

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