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We were recently alerted to a new report by Choson Exchange on the rules governing foreign direct investment in North Korea. The report is getting some play—for example at the WSJ blog--for its headline finding that current North Korean investment laws rely—not surprisingly—on a Chinese template.
Before taking a closer look at that overly-optimistic assessment of what the report actually says, what is Choson Exchange anyway? Founded by a Wharton grad, Geoffrey See, the organization is dedicated to academic and intellectual exchanges that have the ultimate goal of promoting knowledge of the outside world, including the market. Bravo! Wish we had thought of it. (The Pyongyang Project has done similar things).
Registered in Singapore and run as a social enterprise, the website is a little circumspect about how they actually operate (“We tap an international network of highly qualified and passionate volunteers from corporate, government and academic sectors as trainers to provide quality programs at a low cost unconstrained by location. We also share and cooperate with various North Korean institutions as well as NGOs and businesses operating in North Korea to maximize our impact. “ OK, but…)
Given the current climate in North Korea, circumspection is probably not a bad idea. Poking on the website to their occasional updates provides more concrete information on their modus operandi, which range from helping North Koreans study abroad to providing training of various sorts to personnel at worthy units. Not surprisingly, several of these programs have been postponed or canceled.
The report itself provides a very good overview, replete with notes that reference the relevant North Korean law. Some of the highlights:
- The investment law has encouraged, permitted, restricted and prohibited categories. Unfortunately, these designations correspond with the desire of North Korea to capture “high tech” investment (“high technology and other advanced technology, manufacturing of internationally competitive products, exploitation of natural resources, infrastructure construction, scientific research and technological development”) while discouraging investments that might be more appropriate for the country and its need to absorb labor (“investment will be restricted where it…relies upon outdated technology or production processes”)
- Foreign enterprises are not permitted to conduct business except through a DPRK business vehicle, typically either a limited liability company or representative office; the latter are in essence government offices that act like brokers, no doubt for a cut.
- The approval process remains relatively complicated. In addition to the Joint Venture and Investment Commission—which promises expedited review-- investors need to also touch base with state planning, finance, science and technology and sectoral bodies.
- The formation of a North Korean entity—either an Equity Joint Venture (EJV) and Contractual Joint Venture (CJV)—requires very precise delineation of the nature and scope of business, and includes provisions that would be considered discouraging of investment. For example, members of the management body are personally liable to compensate the EJV for loss or damage suffered by the EJV as a result of their negligence and control of CJVs remains in North Korean hands. Investment laws also require corporate commitments that may or may not be warranted (required contributions to a “reserve fund,” expectations that the company will reinvest 10% of their annual profits to expand production, develop technology, or provide employee bonuses, welfare and training, etc.
- The government seems to be directing most JVs to Rason, hardly the most auspicious location in the country.
- Dispute resolution is underdeveloped. Arbitration by North Korean bodies is the first line of defense in case of a dispute, with international arbitration requiring a reciprocal enforcement treaty with the country in question. The report is worth quoting on this point: "In discussions with DPRK officials and foreign investors, there appears to be little if any knowledge of dispute resolution processes involving foreign investment having taken place within the DPRK (whether through internal mechanisms or enforcement of external mechanisms), let alone evidence of rulings rendered and enforced against DPRK state owned enterprises."
We have been relentlessly downbeat on investment prospects in North Korea, but the recognition that the country needs more modern investment laws is at least a first step. Nonetheless, the Choson Exchange report repeatedly returns to two themes: the ongoing penchant for control and micromanagement; and the warning that the de jure and de facto investment regime may or may not coincide. The rules governing foreign investment are not a function of what is on paper but on precedent, reputation and how practice evolves over time.
