In contrast to international trade, which expanded rapidly and played the role of engine for economic development in Korea, inward foreign direct investment(FDI) has remained sluggish and failed to contribute significantly to Kore an economic growth. Although it is well established that FDI can enrich a host country’'s economy in a number of ways, the Korean government restricted and controlled FDI, particularly up to the 1997 financial crisis. As a result, Korea was regarded as the worst place to invest among Asian nations. These restrictions of FDI and unhealthy FDI environments were reflected in the flagging level of FDI in Korea.

After 1997, however, the Korean government has undertaken a paradigm shift in FDI policy from “"restriction and control”" to “"promotion and assistance”", and undertaken a series of policy measures and all-out efforts to improve the business environment and attract FDI. As a result, inward FDI in Korea surged over the three-ye ar period 1998-2000. Despite this spurt, the magnitude of FDI in Kore a i s still small in comparison to other countries, and has been declining sharply since 2001.

How then, would the relatively low magnitude of FDI in Korea and a recent sharp decline be explained? What additional measures should Korea undertake to increase FDI inflows to a level comparable internationally? To address these vexing questions from a foreign perspective, a comprehensive survey was conducted from May to July 2002 of foreign companies that had undertaken FDI and have be en opera ting in Korea. A questionnaire comprising 96 questions was distributed to a bout 400 foreign companies, and a total of 69 responses were received.

According to the survey results, foreign firms undertake FDI in Korea to capitalise on the emerging business opportunities in Korea, and do not consider Korea as a stepping stone to gain market access to other Asian countries. Foreign business people generally have a negative view on the improvements in the Korean business environment in the recent past. Consistent with this, foreign business people point to various types of difficulties in establishing and operating FDI projects in Korea. These difficulties arise not only from excessive, complex and opaque government regulations, the excessive discretionary power of bureaucrats and cronyism and corruption, but also from inept labour relations and high wages, unfair advantages held by domestic firms, inefficient corporate governance of Korean companies, cultural and communication difficulties, Koreans’' prejudice against foreign products, closed Korean society, and poor social amenities for expatriate families. The respondent s also consider themselves disadvantaged in a system where Korean firms rely heavily on personal relationships for business operations. They recognise, however, strengths of Korean workers, such as diligence, loyalty toward companies, collaborative team spirit, and willingness to be trained, but point out poor English skills as the weakest aspect of Korean workers.

The present study demonstrates convincingly that there is substantial room for improvement in the area of government regulations and the business environment. This is despite substantial efforts in the recent past to liberalise the FDI regime and streamline entry procedures. Therefore, to further attract FDI, not only should Korea undertake an across-the-board liberalization of the FDI regime, but it should also improve the operational environment for foreign businesses. To improve the poor quality of the domestic business environment, not only should excessive government regulations and bureaucratic power be removed, but unfair advantages bestowed on domestic firms, continued rigidities in the labour market and living conditions of foreign expatriates should also be improved. Korean society and Koreans should also be more open and amicable to foreigners and foreign business operations in Korea.

The challenges confronting foreign firms that have been examined in this study could be the perceptions of survey respondents. The people of Korea may disagree profoundly with the respondents’' claims. Nevertheless, since the respondents have first-hand experience of FDI in Korea, and as it is these types of investors who the Korean government is trying to attract, the survey findings of this study point to the number of areas that government policy should reconsider in its bid to increase inward FDI in Korea.