"Foreign Peril" Costing South Korea as Many as 660,000 Jobs

Along with the recent troubles that Lone Star went through to sell Korea Exchange Bank, foreign investors are growing more and more wary about putting money in Korea. A new report released today shows the harmful effects it is having on the Korean economy.

BUSAN, South Korea -- Back in December of last year, a headline in Bloomberg Businessweek magazine referred to doing business in Korea as "foreign peril" and called the country "hostile to foreigners".

Not exactly the press you want being read by international investors perusing publications in the first class cabin on flights around the world.

Whether it's exaggerated by the media or not, Korea's anemic three percent growth of foreign direct investment not only points to an international reluctance to do business on the southern part of the peninsula, but newly released numbers by Korean researchers are shedding light on the harm an anti-foreign stance inflicts on the Korean workforce.

A report released recently by Seoul-based think tank Hyundai Research Institute says that Korea's foreigner-weary public has cost the country some 660,000 jobs.

The government's twice failed attempts to sell its 57 percent stake in Woori Bank highlights how foreign investment firms are steering clear of the "hostile" Korean market with its widely perceived fickle public stoked by nationalist politicians and a foreign-unfriendly media.

And while the government insists that the welcome mat is dusted off and firmly in place and that foreign investors are encouraged to come right in, the message itself at times rings hollow.

"During the [Woori Bank] sales process, both domestic and foreign investors will be treated equally under Korean law." - Kim Seok-dong, chairman of the Financial Services Commission.

The fact that officials need even issue a statement of equal treatment is problematic. If you were the mentioned "foreign investor", what is to be parsed from these words?

The Lone Star Legacy

One reason the government has had to adjust the tenor of their public relations pitch is to clean up the mess in the wake of the ignominious exit by Dallas-based private equity firm, Lone Star Funds.

In 2003 Lone Star bought the then failing Korea Exchange Bank (KEB) when no domestic investors would go near it. After bringing KEB back to prominence, Lone Star spent five years in "regulatory hell" dealing with the courts, regulators and lawmakers - all incited by intense public outcry.

Be it intentionally over-burdensome regulation, public protest or lack of transparency, the country's Lone Star PR debacle has given the investment world pause in coming to Korea.

What lesson is to be distilled from the Lone Star narrative by a foreign investor looking at a Korean prospectus? Mostly one of perception.

In short, it is the story of a foreign group buying a troubled bank, rebuilding it to the nation's fifth largest financial institution, creating jobs, preserving people's savings and then being burned in effigy in the streets. Not to mention being restrained from selling at a profit --the primary intent of any investor.

Perhaps more perplexing to foreign investors who watched the lengthy drama unfold is that the very people the buyout and rebuilding helped are in the streets calling for the head of the company's head.

The word "meogtwi" in Korean, which translates to "eat-and-run" in English, was frequently cited to describe Lone Star's KEB sale in the media.

Lone Star was eventually allowed to sell KEB this year to Korean-owned Hana Bank for 3.4 billion won - an almost 50 percent reduction of what Britain's HSBC offered in 2007, which was blocked by the Korean government wilting in the face of public vitriol.

Though Hana Bank got a great deal (knowing KEB had no choice) and kept the profits in country, so fierce was the public protest that Lone Star profited at all, Hana Bank's Korean CEO was forced to step down following the sale.

And yet, while protestors in Seoul were taunting government officials in protest, there was little in the way of protest in 2002 when Korean conglomerate LG bought out a struggling bank in Poland at a discount, turned the bank around to profitability and then did the same thing as Lone Star - sold it at a profit.

For their part, Lone Star was found guilty of stock manipulation - a crooked if not common practice - but at the end of the day the problem presented for Korea is all about perception: you can put your money in, but you can't take your money out.

The "Horror Show"

James Rooney, a Seoul-based CEO and a member of the investment committee at Macquarie Korea Opportunities Management put it best in an interview with Businessweek.

“Investors would look at this case [Lone Star] as a kind of horror show, where every kind of risk that is hated by professional investors seemed to show up and create a massive distortion of intelligent markets. This case has made the prospects much, much worse for Woori.”

Appointed government regulators, to their credit, are trying to fight back against public attitudes towards foreign investment, but politicians wanting to get voted back in to office know better than to cross a voting-age mob.

Perhaps most intriguing is how it flies directly in the face of Korea much-hoped for and much-hyped goal of being 'Asia's foreign financial hub'.

A version of this article originally appeared on the Idle Wordship Blog.

Related article from the WSJ: Lone Star and KEB - It's not over yet (May 29).

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