Foreword by Andrew Chilvers
Despite these uncertain times, expanding overseas can be a key driver for future growth for an ambitious business. International expansion can breathe new life into a company, drive huge value and set it on a path of continued success.
Expanding a business overseas is a strategic opportunity that will help diversify revenue streams, revitalise product development and give high returns on investment. But expanding a business into different jurisdictions takes time – this is a long distance run, not a sudden sprint to the finish line. Furthermore, expanding operations into a new jurisdiction can be fraught with challenges and risks that need to be addressed long before the first boots are on the ground.
For any company turning up in a foreign country, a multitude of tax and legal issues need to be addressed. This can be a labyrinthine experience and not for the faint hearted – but then faint hearted businesspeople seldom set their sights on overseas expansion.
Tax and compliance have to be at the top of any board’s agenda, ensuring the correct steps are taken the moment the company representatives land in-country. It’s pivotal to learn these issues to avoid any costly mistakes from the start.
What are the main government incentives available in your jurisdiction to attract multi- nationals and FDI investment?
South Korea is an economic powerhouse with the world’s 12th largest economy by GDP, one place below Russia and immediately above Spain. Initially, growth was driven by heavy industries and construction, then later it was manufacturing, automobiles, electronics, IT and biotech. After the financial crisis of the late 1990s, South Korea sought to liberalise its economy and attract more foreign technology and capital. It enacted a legislative framework to promote greater inward foreign investment.
The primary legislation in this regard is the Foreign Investment Promotion Law (FIPL) and accompanying enactments which create foreign investment, free economic and free export zones. The FIPL confers certain benefits for qualifying investments – which include certain intellectual property, long-term loans (in excess of 5 years), or a minimum cash investment of KRW100 million (around US$82,000).
The benefits involve guaranteed remittances to the home country and equal treatment with local companies. Investment visas are also more likely to be issued. In general terms, there are no restrictions on the proportion of equity in the local company that the foreign investor can take; however, there are certain restricted industries such as defence, broadcasting and agriculture.
The government does provide certain additional incentives at both a national and local level to promote foreign investment. These include taxation incentives – either tax reductions or exemptions – particularly in new growth driver industries. Other incentives include certain cash grants – again at both a local and national level and also industrial site support.
What industries do you feel there are opportunities in for international investors/ businesses in your jurisdiction? What factors do you think contribute to inward investment?
South Korea has historically been an export economy. Korean electronics and automobile brands are household names across the world. The dominant nature of these companies has caused some problems domestically. Korea also has one of the lowest birth rates in the world; its population is rapidly aging.
In recognition of this, the South Korean government announced that it would be investing around US$27 billion before 2022 in new growth technologies including super intelligence, smart factories, smart farms, fintech, new energy industries, smart cities, drones and autonomous vehicles.
More recently, the Ministry of Trade, Industry & Energy introduced a policy of nurturing five future industries: electric and autonomous vehicles, the Internet of Things, biohealth, new energies and semi-conductors and displays. These are perceived to be the main future areas of growth driving the South Korean economy and the government is likely to keep policies in place to encourage foreign investment thereto.
The country is also a popular place for foreign funds that invest in the local financial markets and in real estate.
In a more general sense, there are a number of factors which make South Korea a propitious venue for inward foreign investment. It is essentially a manufacturing economy. It has become a global leader in certain sectors such as electronics. It has first class infrastructure and logistics and a highly educated work force.
South Korea also has a number of Free Trade Agreements with countries and economic blocs around the world, notably the EU, the USA, ASEAN, Australia and New Zealand. While the USA has historically been Korea’s long-term strategic and economic partner, South Korea is likely to forge more strategic part – nerships with other countries thereby mitigating its risk to China and the USA.
Why is it important to hire a local firm to support international expansion? How can you help smooth the process for your clients and overcome common pitfalls?
The decision to enter any new foreign market is a significant one and as such should be undertaken very carefully. The obvious first step is to commission a feasibility study. These can range from the cheap to the rather expensive. Market entry experts may also assist in finding a local partner.
It is also important to bear in mind that South Korea is dominated by the chaebol – large family owned conglomerates. It would generally be considered a mistake to attempt to compete with these groups due to the amount of horizontal and vertical integration these corporate behemoths have. It would therefore be preferable to seek to work with them, and if not, then not to directly compete. Of course, the extent of domination varies from sector to sector and the country does have a nascent and thriving start up culture.
This may be self-evident but Korea has its own language and culture. What works in the home market will not necessarily work in South Korea. It is important for foreign companies and their dispatched employees to be open minded. Often foreign staff take the view that they will be in South Korea for 2-3 years; their horizons are limited accordingly. This can lead to friction. The corollary to this is that local staff then start taking a short-term view. This is a mistake because foreign companies are often perceived to be preferable places to work compared to local companies.
The need to hire local professionals is also obvious. They would be skilled in navigating the often labyrinthine laws and regulations. They would be able to advise on the maximisation of any government incentives etc. It is also important to develop more than simply “transactional” relationships to enable your professional advisors to keep an eye on the long term for you.