./.WORLD TRADE
ORGANIZATIONWT/WGTI/W/49
7 July 1998
(98-2705)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM KOREA
The following communication, dated 1 July 1998, has been received from the Permanent
Mission of the Republic of Korea with the request that it be circulated to Members.
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I. DEFINITION OF INVESTMENT UNDER KOREAN LAW
1. In Korea, foreign direct investment is basically governed by the Act on Foreign Direct
Investment and Foreign Capital Inducement.  The Act defines foreign direct investment as one of thefollowing two items:
(a) An activity of a foreign national pursuant to this Act conducted to establish lasting
economic relations with a legal person of the Republic of Korea (including a legal
person under organization) or with an enterprise run by a national of the Republic of
Korea, which relationship includes participation in economic activities of the saidperson or enterprise, by means of ownership of stock or shares of the said legal
person or enterprise.
(b) A loan with a maturity of five years or more, which is lent in accordance with the
Enforcement Decrees, to a foreign invested enterprise
1 by the said foreign invested
enterprise's overseas parent company or an enterprise which has capital affiliation
with the said parent company, for the purpose of exercising material influence over
the management of the said foreign invested enterprise.
The underlined parts are clarified in the Enforcement Decree accompanying the Act.  This Decree
stipulates the following:
Establishment of lasting economic relations:  The establishment is deemed satisfied when: (1)
a foreign national owns more than 10 per cent of the total voting stock issued by, or total
capitalization of, the legal person or enterprise concerned and exercise voting rights with
respect thereto; or when (2) the exercise of material influence over the management of the
legal person or enterprise concerned by a foreign national, such as participation in thecorporate management, is factually proven with related evidentiary documents such as a joint
investment contract.
Enterprise which has capital affiliation with parent company:  An enterprise which falls under
the following items:  (1)  An enterprise which owns more than 50 per cent of the total stock or
total capitalization of overseas parent company,  (2) provided that the overseas parent
                                                     
1 A foreign invested enterprise is an enterprise in which a foreign investor has invested capital. The
foreign investor is a foreign national who acquires stocks or owns shares pursuant to the Act.WT/WGTI/W/49
Page 2
company of the foreign invested enterprise  owns more than 50 per cent of the total
outstanding stock or total capitalization of the said foreign invested enterprise, an enterprise
which owns more than 10 per cent of the total stock or total capitalization of the overseas
parent company, or an enterprise with respect to which the overseas parent company owns
more than 50 per cent of the total stock or total capitalization.
2. The definition is on the whole in accordance with the concept of FDI envisaged in the OECD
Code of Liberalization of Capital Movements.  However, two points need to be highlighted.
(a) Under the OECD Code, the creation or extens ion of a branch is an FDI.  However,
Korean law does not treat a branch as a form of FDI.
(b) According to the OECD Code, a loan of five years or longer falls under the concept
of FDI if the loan is supplied in order to exercise effective influence on the
management of a domestic company.  Korean law provides a more specific scope ofthe long-term loans it classifies as FDI. Only loans of five years or longer which a
foreign invested enterprise introduces from the parent company or other closely
related companies are considered as FDI.
3. As for investment protection, however, investment has a more comprehensive meaning in
Korean law.  It is provided in the Act that prop erty rights of foreign investors and foreign invested
enterprise shall be protected pursuant to relevant laws. The Korean BIT model also defines investment
as every kind of asset invested by an investor of one Contracting Party in the territory of the other
Contracting Party.
4. In short, Korean law takes a double-definition approach; a narrow enterprise-based definition
in respect to the treatment of investment at the pre-establishment stage, and a broad asset-baseddefinition at the post-establishment stage.
II. SUGGESTIONS
1. Korea is of the view that the definition of investment depends on its purpose. We stress that
the work at this forum should be limited to direct investment when discussing an aspect of
liberalization.  It is our understanding that the Ministerial Statement at Singapore does not intend thisWorking Group to deal with issues related to port folio investment, despite the statement mentioning
"investment" and not "foreign direct investment".
2. The most important concept which differentiates direct investment from portfolio investment
is "management and control".  Portfolio investment is an investment for the purpose of obtaining a
share of the company only.
3. Korea suggests that this Group resort, for the time being, to the IMF definition of direct
investment, if a definition is necessary for further discussion.  Direct investment is defined in the IMF
Balance of Payments Manual as "investment is that is made to acquire a lasting interest in an
enterprise operating in an economy other than that of  an investor, the investor's purpose being to have
an effective choice in the management of the enterprise".  With almost every country in this Groupalso a member of the IMF, the definition is most likely to be an acceptable one.
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