Dr. Ahn participated in 2012 World Investment Forum, Dohar, as a speaker and panelist.

The following is the remakrs of Dr. Ahn at IIA Conference of the World Investment Forum;

Remarks by Dr. Choong Yong Ahn, Foreign Investment Ombudsman, Korea

At the 2012 International Investment Agreements (IIA) Conference of the World Investment Forum, April 22, 2012, Doha, Qatar

Madam Chairperson and Distinguished Ladies and Gentlemen,

I am very honored to be here and delighted to share Korea’s experiences toward a robust IIA regime with you, as the Foreign Investment Ombudsman as well as the Chair of the Regulatory Reform Committee. I would like to begin by thanking the organizers of this great conference for inviting me.

Given limited time, I would like to go directly to how we can make the IIA regime work better for sustainable development with special reference to Korea’s experience, the operational principles for maximizing the IIA regime’s contribution to sustainable development and how we can ensure coherence between international and national investment policies. At the outset, I should recognize there is no one-size-fits-all formula given several modes of cross-border investment flows such as North-North, North-South, Emerging South-Developing South and South-North.

Let me highlight some of Korea’s experiences and our important policy evolution toward enhancing formidable IIAs.

First, Korea switched from a positive to negative list system for an inward FDI screening framework. This is a basic condition for a sustainable IIA regime. Korea’s shift occurred in 1998 when Korea revised the Foreign Investment Promotion Act right after the Asian Financial Crisis, following the IMF’s conditions for standby credit. Before 1998, FDI in Korea played only a marginal role in nurturing Korea’s indigenous firms.

Second, given the stalled Doha round, high-quality FTAs can ensure a sustainable IIA regime. Korea had pursued WTO-based multilateralism. As a result, ten years ago, Korea was a latecomer to the FTA partner search. In April of 2004, Korea put into effect its first FTA, with Chile. Since then, Korea has proactively pursued multi-track FTAs to become the first country with FTAs with both the EU and the U.S., the first and the second largest economies, respectively, in addition to about ten more RTAs or bilateral FTAs with smaller economies. Korea’s trade share with its FTA partners reached 60% of its total trade this year. Last year, Korea became the 9th country in the world to reach the $1 trillion trade benchmark.

Korea’s FTAs with both the EU and the U.S. require that Korea must harmonize its domestic acts and subordinate statutes with those of its FTA partners. Undoubtedly, legal harmonization between domestic and international FTA partners and IIAs would provide potential foreign investors with a more predictable and transparent FDI environment.

Third, Korea’s Ombudsman system, as an aftercare institution of a host economy for existing foreign investors, proves highly effective for preventing ISDs, making IIAs robust and conducive to sustainable development. Although Korea has a total of 95 bilateral investment treaties in effect, it does not have a single ISD case. Among other things, the aftercare function under the Ombudsman system has contributed significantly to resolving grievances of foreign-invested companies and to keeping those grievances from escalating into investor-state disputes. By providing preemptive aftercare services as a troubleshooter for grievances raised by foreign investors, Korea has been able to induce reinvestment or increased investment. This accounts for more than 50% of the annual inbound FDI over the past six years from about 150,000 foreign companies, with more than 250 companies of them being in the Fortune 500.

During my years as the Ombudsman for the past nearly six years, my office has succeeded in revising 90 cases of acts and decrees in order to resolve grievances of foreign investors, and we have resolved 350 cases of minor grievances via administrative actions annually through intra-governmental coordination and business consultations by civilian experts in my office. I believe the aftercare service function is a core element of a sustainable and effective IIA regime, or a powerful and in-advance alternative to dispute resolutions instead of a formal, post-ISD legal settlement or arbitration mechanism.

One might ask why grievances continue to arise in Korea despite its Ombudsman services. Perhaps this question applies to every country. In any country, the legal and regulatory environment tends to lag behind what is actually happening in the field because of rapid changes in technology and the international business environment.

Fourth, regulatory transparency and reform are crucial for a robust IIA regime. Legal harmonization between domestic laws and IIAs must be carried out to ensure that IIAs are robust, predictable and implementable. For example, advance notification of the introduction or strengthening of acts and subordinate statutes must be established and followed by sufficient comments period by domestic and foreign stakeholders. In particular, labor standards, environmental regulations, pricing policies for original and generic drugs, etc. are important in this regard in Korea.

Well, I happen to wear two hats, one as the Foreign Investment Ombudsman on a full-time basis and the other as Chairman of the Presidential Regulatory Reform Committee (RRC), which is part-time. These jobs mutually reinforce each other to help me carry out my duties more effectively.

The main function of the RRC, which consists of civilian experts, is to play the role of a rational deterrent in introducing or strengthening laws and subordinate statutes. A law called the Perkins’s Law states that government ministries and agencies across the board in every country tend to maximize their administrative influence and usable budgets to make each administrative organization more powerful.

When reviewing new or strengthened regulations, the Regulatory Reform Committee adopts largely the following principles to make a final verdict to accept, drop or revise the proposed regulations. The Committee considers: a) whether the regulation is in harmony with market economic principles, b) whether the required benefit and cost analysis are properly done, c) how global best practices and related international rules are reflected, and d) how stakeholders’ views -- domestic, international and foreign -- are considered.

As a result of RRC reviews, roughly 50% of introduced and strengthened regulations are either turned down or substantially revised. Based on Korea’s experience, I would like to recommend regulatory transparency as a crucial part of ensuring a robust IIA regime through periodic reviews and the harmonization and proper interpretation of each clause thereof.  

Fifth, given the proliferation of bilateral investment / tax treaties along with FTAs / regional trade arrangements among countries in different development stages, there exists the danger of the spaghetti bowl effect of cross-border investments due to the inherent complexities and differences among treaties. As we encourage cross-border investments, we should recognize the great challenge of minimizing possible investment spaghetti bowl effects. A challenge UNCTAD might address is how to establish minimum common formidable standard or agreements applicable to different modes of international investment flows between North to North, North to Emerging South, North to Developing or Least Developed South. Perhaps UNCTAD will work on these challenges.

Sixth, effective IIA requires two-way traffic efforts from a dynamic perspective. For host economies and MNCs as well, global value chains and production fragmentation must be viewed as natural market forces contained in indigenous capacity building such as entrepreneurial development, SOC, manpower and outward networking policies on the part of host economies, and technology transfer, contribution to local manpower development and corporate social responsibility on the part of MNCs. Obviously, the synergistic partnership between host economies and MNCs can be further enhanced through a robust IIA regime. However, given ongoing income polarization and uneven development across nations, effective IIAs must be flexible enough to adjust to the local conditions of host economies and MNCs, such as some applications to environmental, cultural and socially lagging sectors and social safety nets.

Last but not least, corporate social responsibilities of MNCs in host economies should not be confined to social safety nets. Some foreign companies with leading technologies have systematically included on-the-job training programs for local science and engineering schools. This linkage allows foreign companies to recruit qualified and ready human resources and to contribute to the formation of human capital for host economies.