Foreign direct investment plans reported to the South Korean government fell 9.6 per cent last year to $11.56bn and was expected to remain at about $11bn this year, the commerce ministry said on Wednesday.

The fall in FDI plans was expected as a tax reduction period for foreign investors had been cut to seven years from 10 years from the beginning of 2005. The value of pledged FDI had almost doubled in 2004 to $12.79bn as many foreign investors brought forward their plans before the change was made.

The ministry said there were also a number of negative factors. “It will be difficult for the FDI to increase significantly because of high global oil prices, rising interest rates, the unstable foreign exchange rate and competition with a neighbouring country,” it said.

However, experts noted that the falling FDI plans underlined neighbouring China’s emergence as a magnet for foreign investment.

They also said the investment climate for foreigners in South Korea had deteriorated with increasing scrutiny of foreign capital and new regulations against hostile takeovers. Foreign investors cite a tax probe into foreign private equity funds and other strengthened rules against their investments.

“Anti-foreign sentiment may have played a part in discouraging foreign capital from acquiring Korean companies, as it brought about stronger regulations against them,” said ParkHyun-soo, an analyst at Samsung Economic Research Institute.

Economists also said the fall in pledged FDI was contrary to the South Korean government’s plan to become a north-east Asian hub attracting foreign businesses into the country.

“There is much left to be done to achieve a goal to become a financial hub and compete with cities like Singapore, Shanghai and Tokyo, such as getting rid of unnecessary regulations,” said Lee Soo-hee, an economist at Korea Economic Research Institute.

The ministry said foreign investors had implemented about 83 per cent of the investment plans they pledged to the government in the first 10 months of last year. Actual FDI inJanuary-October totalled $6.86bn, with the ministry planning to release full-year data in the second quarter.

Pledged FDI in the manufacturing sector dropped 50.5 per cent to $3.08bn in 2005, while that in the service sector jumped 35.2 per cent to $8.3bn, the ministry said.

The European Union was the biggest foreign direct investor in Korea last year, committing $4.78bn, up 58.9 per cent. The most notable investment came from Standard Chartered Bank, which bought Korea First Bank. But FDI plans from the US plunged 43 per cent to $2.69bn and those from Japan fell 16.8 per cent to $1.88bn.

The estimated value of mergers and acquisitions by foreigners decreased 14.6 per cent to $5.27bn last year, as many big South Korean assets fell into the hands of domestic buyers amid rising concerns about outflows of national wealth.

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