Korea, Democratic People's Republic of (DPRK) - Foreign investment

In 1984, the Joint Venture Act permitted foreign direct investment (FDI) for the first time. Investment mainly came from Soviet bloc countries, however, as both the United States and South Korea were closed to products from the DPRK. Companies found it difficult to do business in North Korea because of limits to equity ownership and a suffocating bureaucracy. In any case, the law was abruptly withdrawn in 1985, reinforcing perceptions of an unstable atmosphere for business.

In 1991, faced with the collapse of the Soviet bloc, the president announced plans to establish a multinational special economic zone (FETZ) in the Tuman River estuary region. On 11 December 1992 the Supreme People's Assembly passed three laws relating to foreign investment—the Foreign Investment Law, the Foreign Enterprise Law, and the Joint Venture Law. The laws allowed 10% foreign ownership and loosened government control over employee layoffs. Three types of enterprises were distinguished: contractual joint ventures, equity joint ventures, and "foreign enterprises." Citizens of the ROK are treated as foreigners under the investment laws. Foreigners are prohibited from establishing a "technologically backward" enterprise, or one that threatens DPRK national security. In practice the most suspect categories are those involved in publishing, the press, broadcasting, and telecommunications. Also not permitted are businesses that do not conform with the "ideological emotions of the people."

Most trade with ROK enterprises is conducted in the contractual joint venture mode in which, typically, the DPRK partner take responsibility for production and management while the ROK partner supplies both advanced technology and access to export markets. Most meetings between North and South Korean partners are held outside both countries. Applications for investment have remained limited; most have come from Japan-based Korean investors. As of 2002, the FETZ could not be rated very successful. The investment attracted totals about $140 million. The main investors included the Emperor Group with a $60 million hotel project, and Loxley Pacific with a $29 million investment telecommunications infrastructure.

In 2002 the DPRK formally established three more special economic zones: a mainly tourist zone at Mount Kumgang, an industrial zone near Kaesong, and an special autonomous region (SAR) modeled on Hong Kong in the northwest city of Sinuiji on the Chinese border. In all three, free enterprise was officially guaranteed with a land lease period of 50 years with the possibility of extension. The Mount Kumgang and Kaesong zones were mainly aimed at attracting South Korean investment, whereas Sinuiji is designed to attract Chinese participation.

The Mount Kumgang zone is a direct descendant of a money-losing tourism enterprise initiated by the ROK conglomerate, Hyundai Group, in 1999. Tours peaked at about 212,000 in 2000, the year of the historic 13 June handshake between the leaders of the two Koreas, but had fallen to 56,680 by 2001. As of 2002, the Hyundai group had lost about $400 million on the operation.

The Kaesong industrial zone also got its main impetus from firms connected with the Hyundai Group. Though the official decree establishing a 66-sq-km (25-sq-mi) "international industrial, trade, commercial, financial and tourist" zone was made law 28 November 2002, its roots are in an agreement between the Hyundai Group and the DPRK government in August 2000 to open an expanded industrial zone. Kaesong is connected to P'yongyang by railway and expressway. To make it a viable investment venue, the rail and highway connections to South Korea must be restored. In late December 2002, however, the third session of talks on the restorations of connections was called off, with no further discussions scheduled.

Much more devastating to hopes for increased foreign investment, however, has been the rapid escalation of tensions after October 2002 when a US State Department envoy asserted that the North Koreans had admitted to conducting a secret nuclear program. In November 2002, the United States announced that there would be no more oil supplied through the Korea Peninsula Energy Development Organization (KEDO). The United States also achieved an agreement to slow down the construction of the Light Water Reactors (LWRs), which were already years behind schedule. In apparent retaliation, a letter from a North Korean bank was circulated to foreign missions and businesses stating that as of 1 December 2002 US dollars would not be accepted at North Korean shops and hotels.

By late December 2002 all IAEA inspectors had been expelled from DPRK, and all IAEA monitoring devices had been removed. In February 2003, the IAEA referred the matter of North Korea's nuclear program to the UN Security Council.