While the reported foreign direct investment (FDI) in 2015 was a record USD 20.9 billion, the ripple effects of FDI, the performances of special economic zones, and the results of attracting the high-value-added service sector are emerging as issues. Against this backdrop, this report conducts an in-depth evaluation on these issues and explores institutional implications and recommendations for policy improvement based on the assessment.

   For the economic ripple effects of foreign investment in 2015 compared with those in 2005, analysis shows that the effects on production inducement and job creation increased by 0.32%p and 0.30%p, respectively, but the effect on added value creation decreased by 0.04%p, implying that the contribution of foreign investment to economic growth is insignificant. Analysis of the function of special economic zones demonstrates that the profitability of businesses with foreign investment that move into special economic zones was higher than those without foreign investment by 1.2-1.3%p on average, but the profitability of all businesses with foreign investment has decreased each and every period since 2011. In terms of the performances of free economic zones (FEZ) among special economic zones, analysis shows that the accumulated FDI in FEZs from 2004 through 2015 stood at USD 5.6 billion, or a mere 5.0% of the total accumulated FDI in Korea, lagging behind the initial expectations. Moreover, 72% of the accumulated FDI in FEZs, or USD 4 billion, was concentrated in the Incheon Free Economic Zone, which means that the policy goal of balanced national development has not been achieved. According to the analysis of the global theme park program as a case study in attracting the high-value-added service sector, the program poses a challenge as it requires large-scale investment with a long ROI period and difficulty in forecasting its operational profit. In particular, due to conflicts of interest across the public sector, no sufficient discussions have been made on the support and engagement of the sector, and therefore, uncertainty looms large over the program.

   Korea needs to shift its FDI-related policy goals from quantitative ones to expand its scale to qualitative ones that focus on attracting cutting-edge technology industries in connection with the nation’s future strategy for its industrial structure. Most of all, in order to overcome market failures related to foreign investment attraction in the high-value-added service sector, the strategic role and mechanism of the public sector needs to be adjusted, and the owner, procedure, and criteria of related policies should be overhauled to promote private sector investment. In addition, as special economic zones show overall poor performance today due to excessive and overlapping designation, differentiated locational conditions should be provided, and unique functions need to be created by reflecting regional features. Furthermore, to enhance the cluster effect, differential treatment exclusive for foreign capital through investment incentives and exemption from regulations should be reduced.