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South Korea says foreign direct investment dives

SEOUL, July 4 (Reuters) - Foreign direct investment plans lodged with South Korea fell for the fourth successive quarter in the April-June period, data showed on Wednesday, denting the Asian nation's ambition of becoming a regional business hub. The commerce ministry said foreign direct investment commitments fell 35 percent to $1.76 billion for the second quarter from a year earlier, following 28 percent and 3.9 percent annual drops respectively for the previous two quarters.

Analysts listed high equity valuations, high costs of doing business and an inflexible labour market among the factors that have been pushing foreign investors away from South Korea and toward cheaper places such as China, Vietnam and India.

"At the heart is the cost. Everyone knows there's no game with such countries as China in terms of costs," said Huh Chan-guk, director of macro-economic research at Korea Economic Research Institute.

"The country should then assure potential investors that it can stand out in some other aspects, such as high level of engineering or language skills, but it has not got there yet."

It marked the eighth out of the past nine quarters that South Korea saw foreign direct investment commitments drop from the year-earlier quarter, the commerce ministry data showed.

South Korea aims to win around $11 billion in foreign direct investment commitments for the whole of this year, steady from $11.24 billion last year. Investment commitments shrank 3 percent in 2006 after a 10 percent drop in 2005.

The Seoul stock market's benchmark KOSPI index has doubled since 2005 and is on a fresh record-breaking run, meaning that a potential foreign investor would now have to pay twice as much as two years ago to acquire a South Korean company.

The costs of doing business as well as living in South Korea have risen sharply in line with growing wages and real estate prices, while the appreciating won has exacerbated the situation in foreign-currency terms.

Foreign investors have also blamed a long tradition of life-time employment and often confrontational labour relations for making the country less attractive to do business with.

It comes as a severe blow to President Roh Moo-hyun's government, which has pledged since taking power four years ago to turn the country into a regional business hub by containing living costs and removing as many regulations as possible.

All this is has been happening in South Korea as places such as China, Vietnam and India have emerged fast as prime investment destinations over the past several years.

For the first five months of this year, China said it drew 10 percent more in foreign direct investment than a year earlier, while Vietnam said foreign direct investment rose an estimated 8 percent for the first six months from a year earlier.

It is not only foreign investors that are shunning the costly South Korea as a business location. Data from a government-run bank shows local companies are also expanding investment in cheaper places to remain competitive.

Overseas investment plans by South Korean companies more than doubled to $18.44 billion last year from $9.03 billion in 2005, the Export-Import Bank of Korea data showed. The 2006 figure was more than treble the $5.57 billion registered in 2003.