Foreign investment in North Korea

In North Korea, foreign investment (외국인투자/外國人投資) shall be approved and regulated by the Foreign Investment Act.

At present, over sixty laws and regulations are implemented with regard to foreign trade and external economy in North Korea. From South Korea's legal point of view, it is almost impossible to categorize North Korean statutes by hierarchy or nature such as public or private law, and civil or commercial law.

Key words
North Korea, foreign investment, socialist economy

History of Foreign Investment Legislation in North Korea
The economic realities given a certain period of time often define the scope and nature of legislation. It was true that South Korea had to establish foreign investment-friendly laws and regulations when it was in great need of foreign capital in the 1960s and 1970s. So did the North Korean regime, the Democratic People's Republic of Korea ("DPRK" or the "Republic"), to survive the economic and social changes and, in particular, to make a successful precedent of China.

From 1945 to 1960s: In pursuit of Self-sustaining Economy
The communist regime, which occupied the northern part of the Korean Peninsula, introduced socialistic ownership and a centrally controlled planned economy. The North Korean government implemented a heavy industry-oriented development strategy, with an eye towards military power, assisted by plentiful natural resources and foreign aid from the Soviet Union and China. The foreign trade was regarded as supplementary to the self-sustaining economy on the basis of national monopoly, autarky and reciprocal equality with foreign countries.

In the 1970s: Impending Crisis upon Socialist Economy
Until the first half of the 1970s, when oil shock shook the world, North Korea continued to expand foreign trades with Japan and other Western countries. The expanded trade helped promote economic growth that had been ignored by military buildup. Also, the Pyongyang regime was spurred by the successful economic development of South Korea led by the export-oriented policy.

But the two oil crises made an insurmountable impact on the North Korean economy. Foreign aid from the Soviet Union and China were drastically curtailed and largely changed into imports on credit. A sharp increase of the prices of international commodities and the interests on foreign loans endangered North Korea's foreign exchange holdings. Since 1975, North Korea has often failed to settle the payments of foreign trade. As a result, North Koreans were increasingly shunned and avoided by foreign traders.

From 1980s to early 1990s: Trial and Error of External Economic Policies
The North Korean leaders paid close attention to the open-door policy of China in the 1980s. Accordingly, in September 1984, the standing committee of the Supreme People's Assembly passed the Equity Joint Venture Act (Hap-yeong-beop) after the model of a Chinese law with the same name, which was intended to encourage foreign direct investment in North Korea. But the Act achieved almost nothing, and North Korea changed its course.

In December 1991, North Korea established the Rajin-Sunbong ("Rasun") Free Trade Zone, a special economic zone modeled after those in China.

From 1992 to early 2000s: Restoration of Socialist Economy
In 1992, the North Korean Parliament made an epoch-making amendment to the DPRK Constitution by allowing partly the private ownership of properties, and encouraging the equity/contractual joint venture by North Korean institutions, enterprises and associations. In this connection, the North Korean legislature established or amended over 50 foreign trade and economic cooperative laws and regulations including the Foreign Investment Act in 1992. The change of policy toward foreign investment resulted from the limited effect of the existing Equity Joint Venture Act. North Korean leaders had been greatly impressed by the transition economies in the Eastern Europe and China.

As a result, North Korea introduced such other partnerships as a contractual joint venture and a foreign-owned enterprise. Also, detailed legal frameworks were formulated to operate efficiently the free trade and special economic zones.

In 1998, the DPRK Supreme People's Assembly adopted the Socialist Constitution. Further, a number of foreign trade and economic cooperative laws and regulations were revised or newly made in the following years.

Since 2002: Reinforcing the Inter-Korean Economic Cooperation
Until 2002, foreign investments had been restricted to the Rasun Free Trade Zone as a matter of fact, but produced few significant results. So the North Korean government expanded the special economic zone to Mt. Geumgang and Sinuiju.

Mt. Geumgang (or Kumgang-san) tourism, which started in November 1998, has been quite impressive in generating stable revenues, and inducing hundreds of thousand tourists.

The year of 2002 was remarkable for a series of economic reforms:
 * On July 1, 2002, the North Korean government proclaimed the Economic Management Improvement Measures ("July 2002 Economic Measures ") which included the sharp increase of laborers' wages, realization of commodity prices, partial abolition of the necessity distribution system, introduction of the self-supporting accounting system, among others; and
 * The Pyongyang regime designated the Sinuiju Special Administrative Region on September 12, the Geumgang Tourism Zone on November 23, and the Gaeseong Industrial Complex on November 27, in accordance with the newly enacted special economic zone (SEZ) laws. These acts allegedly provide for various favorable incentives, in particular, for South Korean entrepreneurs. For example, the Geumgang Tourism Zone and the Gaeseong Industrial Zone were constructed by South Korean companies including Hyundai Asan.

The progressive attitude of the Pyongyang regime and the competitive wage rate as implemented in the Gaeseong Industrial Zone have changed the more or less negative attitude of the South Korean business community regarding investment in North Korea. The on-going Inter-Korean economic cooperation is sure to create great potential for mutually beneficial relations and a vast market to South Korean companies.

While South Korean investors are experiencing unexpected difficulties in China, South Korean investors in North Korea will have better-than-expected results by combining capital from the South and cheap labor force of the North.

At present: Temporary or permanent stall?
On July 11, 2008, a Korean woman who was taking a walk on the shore trespassing the limited zone early in the morning was shot dead by a North Korean soldier. The South Korean government stopped the tourism organized by a Korean company, Hyundai-Asan demanding the investigation on the site and the prevention of similar incidents from the North Korean authorities concerned. It was expected that North Korean military would make no response toward South Korea.

To make matters worse, on March 26, 2010, a Korean Navy ship Cheonan was sunk allegedly by a torpedo attack by a unidentified North Korean submarine near Baengnyeong Island in the Yellow Sea. The South Korean government was swift to implement the May 24 measures to suspend the Inter-Korean economic cooperation. Further the North Korean army's shelling of Yeonpyeong Island near Baengnyeong Island on November 23, 2010 was enough to stifle the remaining Inter-Korean cooperative atmosphere. Exceptionally the Gaeseong Industrial Zone was allowed to maintain the lowest level of operations.

After the sudden death of Kim Jong-il on December 17, 2011, however, the Pyonyang regime has been adamant to avoid any dialogue channel with the South Korean government under President Lee Myung-bak.

Foreign Investment-related Acts
The Foreign Investment Act seems to be the basic law or general law in the area of foreign trade and external economy in North Korea. So the Equity Joint Venture Act, the Contractual Joint Venture Act and the Foreign-owned Enterprise Act are, respectively, the special act in view of the types of foreign investors under the Foreign Investment Act. In this regard, the Foreign Investment Bank Act belongs to a different kind of law in terms of the specific nature of banking business.

We can count some individual laws such as the Foreign-owned Enterprise and Tax Law, the Act on External Contract, the Land Lease Act, the Foreign Exchange Control Act, the Act on External Civil Relations, the Notary Act, the Customs Act, the Insurance Act, the Foreign Trade Law, and so on.

At the level of regulations, there are the Regulation for the Registration of Foreign-owned Enterprise, the Labor Regulation, the Corporate Naming Regulation, the Corporate Accounting Regulation, the Corporate Accounting Examination Regulation, the Real Estate Investment Regulation, etc.

Within the Rasun area, the Act on the Rajin-Sunbong Free Trade and Economic Zone and other regulations are applicable e.g., the Foreigner Immigration Regulation, the Regulation on Foreigner's Stay and Habitation, the Regulation on the Transfer and Mortgage of Buildings, the Processing Trade Regulation, the Frontier Quarantine Regulation and the Intermediate Trade Regulation.

Recent Developments
Foreign investment was initially realized through an equity joint venture in accordance with the Equity Joint Venture Act of 1984. In order to promote foreign investment within the Rasun area, tax incentives were provided and, foreign individuals and South Korean businessmen were allowed to invest in an equity joint venture, a contractual joint venture or a foreign-owned enterprise.

These types of foreign investment are regulated by the Equity Joint Venture Act, the Contractual Joint Venture Act and the Foreign-owned Enterprise Act, respectively. It should be noted that since the latest amendment to the Socialist Constitution in September 1998, foreign investment-related laws and regulations have been revised in line with the rapidly changing economic environment. And such features as capital investment, managerial autonomy and profit sharing, which were unthinkable in the socialistic economy, are reflected to some extent upon the revision of legislation. The North Korean government, which has operated a closed economic system, seems to be gambling with its future.

Foreign Investment Act
The Foreign Investment Act was revised in 1999 following the amendment to the Constitution:
 * to separate Korean residents in foreign countries from other foreign investors under this Act;
 * to limit the venue of investment to the Rasun area;
 * to reinforce the supervision and guidance of the central government toward the foreign investors; and
 * to allow direct and appropriate employment of workers including variable wage rates rather than through an indirect mandatory employment agreement.

It is understood that foreign investment conducted by South Korean companies are regulated by the Inter-Korean Basic Agreement of 1991 rather than the DPRK foreign investment-related laws.

Under the Foreign Investment Act, a foreign-invested enterprise means a company established in the territory of North Korea as one of the equity joint venture, contractual joint venture or foreign-owned enterprise.

As exemplified in China, the equity joint venture is a company, invested and operated jointly by a foreign investor and its North Korean partner, whose profit is distributed in proportion to the investors' equity. The contractual joint venture is a company co-invested by a foreign investor and a North Korean partner. But its management is solely up to the local North Korean partner and its profit is distributed in accordance with the investment agreement.

The foreign-owned enterprise is a company that is invested solely, and managed independently, by a foreign investor. In this regard, a foreign-invested enterprise is allowed to establish children companies, i.e., subsidiaries. Both the equity joint venture and the contractual joint venture can be established anywhere in North Korea, while the foreign-owned enterprise is allowed only in special economic zones. This restriction on foreign-owned enterprise is to bring in badly needed foreign capital while limiting the influence or potential influence of foreign investors upon North Korean citizens to a certain district. But it is noteworthy that the Pyongyang regime is considering introducing the Western-style stock company and financial system on the basis of market mechanism. It signified a further step from a simple open-door policy.

Other Statutes
There are other foreign investment-related laws like the Foreign Exchange Act, the Foreign-invested Enterprise and Foreigner Tax Law, the Foreign Investment Bank Act, the Bankruptcy Act for a Failed Foreign-invested Enterprise, and so forth.

Special Economic Zones
See the Special Economic Zone of North Korea.