Foreign Direct Investment

Definition of Foreign Direct Investment

FDI refers to an investment made in order to forge lasting economic relations with a corporation of the Republic of Korea or a company run by a national of the Republic of Korea and includes the following forms of investment: acquisition of the stocks or shares of a Korean company; a foreign parent company’s provision of long-term loans with a maturity of five years or longer to a foreigninvested company; and a foreign national’s contribution to a non-profit organization. It is regulated by the Foreign Investment Promotion Act and other related laws. FDI differs from portfolio investment, which is the purchase of stocks by foreign nationals with a view to realizing short-term financial gains.

Forms of Foreign Direct Investment

Under the Foreign Investment Promotion Act, FDI includes the acquisition of the stocks or shares of a Korean corporation or a company run by a national of the Republic of Korea, the supply of a long-term loan to a foreign-invested company, a contribution to a non-profit organization, etc.

Acquisition of the Stocks or Shares of a Domestic Company

‘Acquisition of the stocks or shares of a domestic company’ refers to a foreigner’s purchase of the stocks or shares of a Korean corporation (including one in the process of being established) or a company run by a Korean national for the purpose of establishing continuous economic relations with the corporation or company through participation in management activities, etc.

  • Under the Foreign Investment Promotion Act, FDI should meet the following conditions:
    • The amount of investment should be 100 million won or more.
    • A foreigner should own 10 percent or more of either the total number of voting stocks issued by a Korean corporation or a company run by a national of the Republic of Korea, or its total equity investment (Article 2 (2) of the Enforcement Decree of the Foreign Investment Promotion Act).

If there are two or more foreign investors involved, each should meet the above conditions. The foreign investment ratio is measured when the investment is completed. The investment amount includes foreign investor-held shares after a foreign-invested company capitalizes its earned surplus reserves (Article 2 (3) of the Enforcement Decree of the Foreign Investment Promotion Act). However, when a foreign investor of a registered foreign-invested company makes an additional investment, there is no limit on the amount and ratio (Article 2 (3) of the Enforcement Decree of the Foreign Investment Promotion Act, effective as of October 6, 2010).

  • While no exceptions are recognized with regard to the investment amount, exceptions may be allowed for the foreign investment ratio. Even if the foreign investment ratio is less than 10 percent with the amount of foreign investment being 100 million won or more, the investment may be exceptionally recognized as FDI when a foreign investor has entered into one of the following contracts with a domestic corporation or company:
    • A contract for the dispatch or appointment of executive officers
    • A contract for the delivery or purchase of raw materials or products for a period of one year or more
    • A contract for the provision or introduction of technology or for joint research and development

Long-Term Loans

  • Loans with a maturity of not less than five years (based on the loan maturity prescribed in the first loan contract) supplied to a foreign-invested company by the following entities are recognized as FDI:
    • ① An overseas parent company (OPC) of the foreign-invested company (corporation)
    • ② A company that has capital investment relations with ①
    • ③ A foreign investor (individual)
    • ④ A company that has capital investment relations with a foreign investor (individual) (Article 2 (4), (5) of the Enforcement Decree of the Foreign Investment Promotion Act)
※ A company that has capital investment relations refers to:
  • A company that holds at least 50 percent of the total number of stocks issued by, or of the total equity investment of, its OPC
  • A company whose OPC owns at least 50 percent of the total number of issued stocks or total equity investment of a foreign-invested company and falls under any one of the following:
    • A company that holds at least 10 percent of the total number of issued stocks or the total equity investment of its OPC
    • A company whose OPC holds at least 50 percent of the total number of issued stocks or the total equity investment of the company
    • A company that holds at least 50 percent of the total number of issued stocks or the total equity investment of its OPC holds at least 50 percent of the total number of issued stocks or total equity investment of the company
  • A company of which at least 50 percent of its total issued stocks or total equity investment is held by an individual foreign investor who owns at least 50 percent of the foreign invested-company’s total issued stocks or total equity investment

Contribution to a Non-Profit Organization (NPO)

  • A contribution to a non-profit organization is recognized as FDI when the NPO has independent research facilities in the field of science and technology, and meets any one of the following conditions:
    • The scale of regular employment of full-time research staff is five persons or more, consisting of persons with a master’s degree or higher in the field of science and technology, or persons with a bachelor’s degree in the field of science and technology with a research career of not less than three years.
    • Research and development activities are conducted for businesses that accompany high technology pursuant to the Restriction of Special Taxation Act.
  • Other contributions of no less than 50 million won by a foreigner to an NPO that meets one of the following conditions, and which are recognized as foreign investment by the Foreign Investment Committee, are recognized as FDI.
    • An NPO established for the purpose of promotion, etc. of science, art, medical services, or education and which continues to conduct its business with a view to developing professionals in the relevant fields and to expanding international exchanges.
    • An NPO that is a regional office of an international organization that engages in international cooperation business between civilians or governments.