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Policy Measures for Foreign Firms to Participate in Inter-Korean Economic Cooperation North Korean economy, Foreign direct investment

Author Jangho Choi, Jung-kyun Rhee, Yoojeong Choi, and Dae-eun Lee Series 21-11 Language Korean Date 2021.12.30

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This research stemmed from an inquiry into what issues would surface if foreign firms engaged in inter-Korean economic cooperation, recognizing this as a topic that could potentially emerge if inter-Korea relations improve and economic cooperation resumes. So far, the issue of foreign firms participating in inter-Korean economic cooperation has been focused on internationalizing the Kaesong Industrial Complex. Although the issue of foreign firms entering into Kaesong was intermittently reviewed from 2005 to 2016, it did not lead to tangible results. 
The objective of this research was to examine the various conditions for foreign firms to participate in inter-Korean economic cooperation and propose stimulation measures. For this, we (1) analyzed the theoretical background and the political/industrial incentives for foreign firm participation in inter-Korean cooperation, (2) investigated central and local government policies towards North Korea and case studies of foreign firms which had participated in inter-Korean economic cooperation, (3) examined how other countries utilized foreign firms during economic integration, and (4) reviewed institutional and non-institutional measures to promote the participation of foreign firms in inter-Korean economic cooperation. In addition, we also reviewed foreign firm participation in multiple inter-Korean economic cooperation projects. Our research defined foreign firm activity in inter-Korean economic cooperation as firms partaking in projects implemented in North Korea via South Korea. 
To begin with, in Chapter 2, we review the need for foreign firms’ participation in inter-Korean economic cooperation from a theoretical background and political/industrial demand. On the theoretical side, we examined the theories of a peace economy and capitalist peace, and reviewed the debate of foreign investment on economic growth. In addition, we also reviewed the political/industrial demand, such as economic incentives for inter-Korean cooperation projects, as well as exploring new methods, financing funds for North Korea’s development while sharing the benefits with the international community, and sectors that foreign firms can advance into when participating in inter-Korean economic cooperation.
In Chapter 3, we review the national and local government agenda related to inter-Korean economic cooperation and investigate foreign firms’ experiences with inter-Korean economic cooperation. First and foremost, we introduced the national government’s agenda to internationalize inter-Korean cooperation, such as the New Economic Map for the Korean Peninsula and Northeast Asia Cooperation, the DMZ Peace Zone, the Vision of an East Asian Railroad Community, West Joint Economic Zones/East Sea Tourism Zone, the Comprehensive Plan for Border Area Development and the Kaesong Industrial Complex. For local governments’ agenda on internationalizing inter-Korean cooperation, we examined projects implemented by Incheon City, Gangwon Province, and Gyeonggi Province, and the potential for attracting foreign investment. We also investigated case studies of foreign firms that had previously attempted to enter into North Korea and the issues involved.
In Chapter 4, we examine international case studies, focusing on the policy measures aimed at foreign firms and the economic impact of combining capitalist and socialist market systems. We analyzed the regulations and treatment that foreign firms received under the CEPA agreement during China and Hong Kong’s economic integration, and under the ECFA agreement during Taiwan and China’s economic exchange. Then we analyzed the role and investments made by foreign firms in former East Germany during the process of German unification, and what impact these had. These cases provided insight that could be used as reference on evaluating the roles, institutional measures for guarantees, and the economic impact of foreign firms when entering into inter-Korean economic cooperation.    
In Chapter 5, we explore measures that would improve the laws and institutions to foster foreign firms’ participation in inter-Korean economic cooperation. First and foremost, we looked at the varying legislation that would apply depending on the channels of internationalizing inter-Korean economic cooperation. Then, we analyzed the characteristics of the laws to be applied when foreign firms enter the scene. We also analyzed the incentives and obstacles for foreign firms and identified the legal issues involved and suggested areas of improvement. 
Overall, we believe that our research will make a positive contribution to a stable inter-Korean economic cooperation. From an economic standpoint, there are relatively sufficient incentives and interest in inter-Korean economic cooperation on the part of foreign firms. However, we found that the political and legal environment was somewhat lacking to provide the necessary support. 
First, foreign firms’ participation in inter-Korean economic cooperation will contribute to a more stable relationship between the two Koreas. In addition, we can expect foreign firms to function as a safety net and further the quality and scale of inter-Korean economic cooperation. This is because foreign firm participation rests on the assumption of peace on the Korean Peninsula. From the standpoint of peace economy theory, peace on the Korean Peninsula would bring economic benefits not only to the two Koreas but also the international community. In terms of capitalist peace, foreign firm participation would increase the benefits from inter-Korean economic cooperation due to a larger scale of projects and would lead to continued cooperation, thus providing a positive contribution to promoting perpetual peace.   
The economic incentives that foreign firms can expect represent the potential for economic growth of North Korea and the indirect benefits from inter-Korean economic cooperation projects. First, investment in North Korea carries incentives such as allowing first-mover advantage, low wages, access to abundant mineral resources, and geographic proximity to large markets such as South Korea, China and Japan. In addition, foreign firms can utilize the established legal institutions, such as investment guarantees from the Inter-Korean Cooperation Fund or tax reductions and tariff-free trade between the two Koreas, as well as indirect benefits from Korea’s numerous FTAs. With these incentives, we discovered that multiple foreign firms wanted to advance into the Kaesong Industrial Complex before it was completely shut down in 2016.
However, the political and legal environment for foreign firms to actually participate turned out to be weak. Although the South Korean government’s policy on the Peninsula aims to expand cooperation with neighboring countries, and even though there is a potential demand for foreign firms to participate, we maintain that there are currently no specific projects that envision such direction. Although substantial time is required for actual investment to occur, we see that there is a need for policies for foreign investors to be created and disseminated strategically. 
Given the right conditions, the Korean government needs to take the initiative and draft a successful pilot project. So far, one of the biggest obstacles of inter-Korean cooperation is that it is impossible to predict the outcomes due to the numerous uncertainties involved. No matter how effective the legislation is, few foreign firms will be willing to participate and take the first-mover advantage if this proves unrealistic. Pushing for successful pilot projects would elevate the feasibility of inter-Korean economic cooperations. Ultimately, it is necessary to devise a model for inter-Korean economic cooperation in which the opening of North Korea can be made compatible with the special relationship between the two Koreas.  
This research differs from previous studies in that it reviews the theoretical and political issues of foreign firms participating in inter-Korean economic cooperation, while providing a comprehensive analysis of their positions, international case studies, and legal/ institutional issues. In addition, this research categorizes different channels of foreign investment into inter-Korean economic cooperation and the issues that would occur with each channel. We expect that our findings will contribute to the South Korean government’s policy initiative for inter-Korean economic cooperation.  

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