North Korea Needs Foreign Investment, But Has Done Little to Attract It

Beyond nuclear sabre-rattling, North Korea spooks investors with its attitudes toward profit repatriation and managerial flexibility.

North Korean crafts on display at a China-North Korea trade show in the Chinese border city of Dandong, in file photo.

Early this month, the Hyundai Economic Research Institute published a report which deals with North Korea’s attitude toward foreign investment. The report’s findings are by no means a revelation. In a nutshell, it says that the North Korean leadership is very much interested in foreign investments, but still unable to attract much.

In recent years, Kim Jong Un’s regime has begun carrying out economic reforms–without admitting this openly. North Korean state media, of course, continues to loudly insist that North Korea is the “fortress of socialism," but the actual economic policies of Kim Jong Un, in fact, have many similarities with the Chinese reforms of the early 1980s. Predictably, the market-oriented policies are beginning to bear fruit: The North Koreans live better now.

However, there is one serious problem with the reform policies of Kim Jong Un: The country still cannot attract foreign investment, and without such investment, reforms are significantly less likely to generate the high level of economic growth, which is vital for political stability.

North Korean leaders are well aware that their country needs foreign investment. The North Korean government passed a Joint Venture Law as early as 1984, and in 1991 it established its first Special Economic Zone (SEZ) in Rason, near the border with China and Russia. Under Kim Jong Un, the number of SEZs increased drastically, so now North Korea has 26 SEZs. However, most of these SEZs exist in name only: Foreign investors show little, if any, interest in being there.

What are the reasons behind such failure? On the one hand, it is the nuclear weapons issue which can be blamed. The nuclear program brings international tensions, which hinder investment. Investors hardly want to deal with a country which is associated in their mind with nuclear tests, bellicose rhetoric and UN sanctions.  The North Korean government's threat every few months to deliver a "merciless strike" on South Korea and transform Seoul into a “sea of fire” does not help. This is a bluff, of course, and nobody in either Korea takes it seriously, but for foreign entrepreneurs, such picturesque threats do not sound encouraging.

Failure to grasp logic of investors

However, there is a more important reason behind North Korea’s inability to lure investors from overseas. The North Koreans cannot understand the very logic of foreign investment.

This is partially justifiable: after all, through the 70 years of its history, North Korea seldom engaged in reciprocity-based economic cooperation and had attracted very few commercial investments. When the foreign companies came to North Korea, they usually did it because of some political and strategic considerations. When during the Cold War, the Soviet Union and other countries of the Communist bloc built factories or roads in North Korea, they called it investment, but for all practical purposes this was not investment, but aid. They wanted to maintain North Korea as a useful counterweight to the U.S. presence in South Korea. These pseudo-investors from the Soviet bloc had no intention to make money in North Korea. As a result, North Korea has little in its history to teach it about regular investment which is, of course, done for profit only.

Indeed, now investors are coming to North Korea to make money, so they need a great deal of managerial freedom, control over production lines, and the right to exchange and repatriate profits. None of these are things North Korean decision makers are going to provide. They try to limit the presence of foreigners at North Korean factories, insist that only North Koreans will do the hiring and firing of the personnel, and they are remarkably nebulous on profit repatriation–clearly expecting that all money earned in North Korea will stay in North Korea.

Moreover, the North Korean government cannot even understand the attitude of foreign investors. I often met with foreign business people who were invited by the North Korean government as potential investors. They do not like what they hear. As my businessman friend, a frequent visitor to North Korea, recently told me: “In a nutshell, the North Koreans tell me that I should give them my money, and then they will do what they want with this money, and finally, if they feel like, they might even give me some profit. Well, not my type of game, you know”.

On top of that, the astonished foreign visitors usually learn that their hosts expect them to create entire infrastructure from scratch. The designated SEZs usually have no paved road access, no connection with the power grid, and are, frankly, just pieces of land in the middle of nowhere.

So, one should not be surprised that the efforts to lure overseas money have been so unsuccessful. Facing such problems and attitudes of the hosts, the potential investors usually come to the conclusion that it is both safer and more profitable to deal with China or Vietnam and other countries in Southeast Asia.