(Photo: Businesskorea DB)
The nature of Foreign Direct Investment (FDI) in the first quarter of this year is shifting away from building new facilities like factories and towards acquiring existing assets, with a restructuring towards the service sector instead of manufacturing, and a focus on mergers and acquisitions (M&A), now in full swing.
This shift in the form of foreign investment could negatively impact employment in Korea, along with a decrease in tangible investment. Analysts diagnose that in the long term, this could lead to phenomena such as the weakening of industrial competitiveness, highlighting an urgent need for countermeasures.
The Ministry of Trade, Industry and Energy announced on April 3 that FDI in the first quarter (on a notification basis) reached $6.41 billion, a 0.1% increase year-on-year. Arrived investment amount increased by 82.9% to reach 7.14 billion, marking the highest ever.
Looking at the figures alone, the performance is considered strong, maintaining an upward trend in foreign investment even amid a contraction in the global investment environment. The government assessed that this demonstrates the solid confidence of foreign investors in Korea’s investment environment.
However, the decline in both notified and arrived greenfield investments compared to the previous year is a point of concern. In the first quarter of this year, notified greenfield investments recorded $3.74billion, a 19.8% decrease compared to the previous year. Arrived greenfield investment recorded 1.85 billion, a 4.2% decrease year-on-year.
Greenfield investment refers to the method of building new facilities, such as factories, and installing equipment on undeveloped land. An increase in greenfield investment can be expected to lead to capital flow into the domestic manufacturing sector, revitalization of local economies, and job creation effects.
This can be understood as: building a factory, purchasing the necessary equipment in Korea, hiring employees to work in the factory, and boosting local consumption while the factory is in operation. Furthermore, it can contribute to the transfer of advanced technology from foreign companies and, in the long term, help strengthen industrial competitiveness.
The current situation can be largely interpreted as follows: while funds promised for past greenfield investments are flowing into the country, new investments are decreasing due to factors such as instability in the Middle East and uncertainty over U.S. tariffs.
In fact, notified greenfield investment amounts for the manufacturing and service sectors in the first quarter of this year decreased by 45.6% and 15.2% to $1.15 billion and $1.74 billion, respectively. In terms of arrivals, manufacturing increased by 42.6% to $650 million, but the service sector decreased by 12.1% to $1.14 billion.
In contrast, M&A notifications and arrivals increased significantly. In the first quarter, notified M&A amounts increased by 53.4% to $ 2.67 billion, and arrival amounts rose by 168.45% to $5.29 billion.
By sector, notified M&A amounts in manufacturing decreased by 68.8% to $60 million, while in the service sector, they increased by $71.1% to reach $2.59 billion. Arrival amounts in manufacturing recorded a 2034.5% increase to $3.2billion, and in the service sector, they grew by 14.9% to $2.08 billion.
The decrease in manufacturing M&A notifications can be interpreted as a decline in demand for new acquisitions considering the heightened global uncertainty. The increase in arrival amounts can be seen as a concentration of fund execution for previously signed contracts, with a few large deals in advanced manufacturing and AI data centers driving the capital inflow.
Synthesizing the investment flows, the manufacturing sector is seeing new investments shrink while existing contracts are being executed, which can be viewed as being in the execution and completion phase of the investment cycle. In the service sector, new investments are expanding and fund execution is ongoing, which can be interpreted as a continuation of the investment cycle.
In other words, Korea’s FDI in the first quarter can be positively assessed in the short term, as it recorded the second-highest notification amount and the highest arrival amount ever, increasing foreign exchange inflows. However, there is an opinion that structurally, this should be seen as a warning sign, as new investments are showing a clear downward trend, and the decline in greenfield investments could have repercussions in the manufacturing sector.
Regarding the decrease in Q1 greenfield notifications, the government projected a recovery from the second quarter onwards, with large-scale greenfield investments expected, and cautioned against viewing a single quarter’s decline as an indicator of a decrease in tangible investment or an impact on Korean industry.
Nam Myeong-woo, Director-General for Investment Policy, stated, “Greenfield investments have a long-term nature, so we should look at the annual trend rather than a quarterly one. It may seem to have dropped slightly in the first quarter, but we expect it to recover as there are promising projects in the second and third quarters. By the end of the year, we expect it to show a continuous upward trend.”
Director-General Nam added, “The significant increase in M&A is due to the large size of specific projects. For example, there were deals worth around $3 billion that had an impact, but even excluding those, M&A is still increasing. Whether it’s greenfield or M&A, we expect both to continue their upward trend when viewed on an annual basis by the end of the year.”
Yoon Young-sil
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