Proper FDI incentives needed

By Jeffrey I. Kim

In the U.K. referendum on Brexit, the Leave group beat Remain by 1.27 million votes and the British government will have to go through tough negotiations with the European Commission before the U.K. officially leaves the EU.

While many people say that Brexit is not a matter of good or bad from the standpoint of the U.K.’s welfare, a great number of people fear that a strong wind of trade protectionism will blow over the world. Some people even raise objections to the provision of incentives to inbound FDI. From the standpoint of the entire world’s welfare, however, a global reversal to trade protectionism and denial of FDI incentives would be one of the greatest mistakes in human history.

We may learn a lesson from the Brexit experience, “How difficult it is to maintain a regional currency union, regional monetary integration and regional political unification!” However, we should also learn the lesson from the world’s economic history that if countries reverse trade protectionism and engage in trade wars, they will all lose.

Economists argue that freer trade brings about mutual benefits. This argument has been proven true. Historically numerous countries ― whether developed, developing or emerging economies ― have gained from trade and have become richer. Even socialist China has become very wealthy after opening its economy to the West. The Chinese economy has expanded enormously since it became the 143rd member of the World Trade Organization (WTO) in 2001.

Nevertheless, many global leaders raise their voices that trade liberalization efforts have failed and they have lost confidence in providing preferential treatment to foreign investors. But they need to be convinced again of the miracle of free trade on a global basis. People with no formal education would know by common sense that an island economy cannot prosper without visitors from the mainland.

Trade theories have evolved from the model of two products with the same technology to that of multiple products with different technologies. Cross-border trade takes place whenever there is a significant difference in product prices between two countries. The price differential occurs when the two countries differ significantly either in factor endowment, consumption preference or technology level.

The model of factor intensities in the two-product world in terms of labor intensity and capital intensity well explains the direction and benefits of trade. Differences in manufacturing technology in the multi-product world can better explain trade flow of not only the final products but also the technology-intensive intermediate goods. Foreign investors try to produce technology-intensive products including the investment goods in the host country where they can make the maximum profit.

Korea is seeking FDI by offering proper incentives for the following reasons:

(1) FDI leads to continued exports and sustained GDP growth, which is why international organizations such as the World Bank and UNCTAD strongly recommend FDI to developing countries.

(2) FDI helps exports of high-value products and the international markets for foreign investment are highly competitive. Therefore, a country has to offer the best feasible incentives that it can provide.

(3) FDI tends to bring with it brand new technologies which can be transferable to the host country. These years they use a new conversion technology that integrates telecommunication technologies with the services sector. This leads to the creation of new products which can capture a major proportion in the new market.

(4) On equity grounds, proper incentives need to be offered to win the competition for FDI. Due to limited access to market information, lack of social networking and language barriers, foreign firms cannot compete with domestic firms in the host country. Unless the foreign firms are sufficiently compensated, they would not come to a foreign country for a longer-term investment. The argument that domestic firms are unjustly discriminated against in favor of foreign firms is almost groundless.

(5) Although Korea stands high in credit ranking and provides a huge amount of ODA for poor countries every year, the government is struggling to keep a trend of rational labor movement and keep peace on the Korean Peninsula. All in all, appropriate incentives are absolutely needed for attraction of FDI.

Dr. Jeffrey I. Kim is a foreign investment ombudsman, a presidentially appointed troubleshooter for investors and entrepreneurs from overseas. He earned a Ph.D. in economics from the University of Chicago and taught at the University of Colorado, Boulder and Sungkyunkwan University.

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