Korean Firms and Globalisation (Sheffield Centre for Japanese Studies RoutledgeCurzon)

Foreign Direct Investment in Post-crisis Korea

In this book, Judith Cherry analyses the impact of economic and cultural globalization on efforts to promote inward foreign direct investment (IFDI) in South Korea over the past four decades. The book traces the development of Korean IFDI policy from one of restriction and control to one of encouragement and promotion. Specifically, it focuses on the challenges inherent in reforming the ‘software’ of IFDI promotion (socio-cultural issues, mindsets and perceptions) as opposed to changing its ‘hardware’ (systems, laws and regulations). Although the Korean government has made sustained efforts over the past decade to enhance Korea’s attractions as a host for inward investment, it has faced significant challenges in improving Korea’s IFDI performance. The discussion in this book of the wide range of transparent and non-transparent barriers that continue to hamper efforts to promote inward investment draws not only on the Korean debate concerning strategies for maximizing the benefits of IFDI but also on the assessment of the Korean business and investment environment revealed in interviews conducted with European investors and officials in Seoul. Foreign Direct Investment in Post-crisis Korea will appeal to students and scholars of international business, economics, globalization and area studies, as well as to those with a more general interest in Korean society. Dr Judith Cherry is Lecturer in Korean Business and Management at the School of East Asian Studies, University of Sheffield. She is the author of Korean Multinationals in Europe (Curzon 2001) and received the MBE in 1999 for services to exports to Korea.

Routledge advances in Korean studies

1 The Politics of Economic Reform in South Korea A fragile miracle Tat Yan Kong 2 Market and Society in Korea Interest, institution and the textile industry Dennis McNamara 3 Social and Economic Policies in Korea Ideas, networks and linkages Dong-Myeon Shin 4 North Korea in the World Economy Edited by E. Kwan Choi, Yesook Merrill and E. Han Kim 5 Legal Reform in Korea Edited by Tom Ginsburg 6 Women, Television and Everyday Life Journeys of hope Youna Kim 7 Transformations in Twentieth Century Korea Edited by Chang Yun-Shik and Steven Hugh Lee 8 The Development of Modern South Korea State formation, capitalist development and national identity Kyong Ju Kim 9 Industrial Relations in Korea Diversity and dynamism of Korean enterprise unions from a comparative perspective Jooyeon Jeong

10 The Global Korean Motor Industry The Hyundai Motor Company’s global strategy Russell D. Lansbury, Chung-Sok Suh and Seung-Ho Kwon 11 Korean Workers and Neoliberal Globalisation Kevin Gray 12 Korea in the New Asia East Asian integration and the China factor Francoise Nicolas 13 Foreign Direct Investment in Post-crisis Korea European investors and ‘mismatched globalization’ Judith Cherry

Foreign Direct Investment in Post-crisis Korea European investors and ‘mismatched globalization’ Judith Cherry

First published 2007 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Ave, New York, NY 10016 This edition published in the Taylor & Francis e-Library, 2007. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” Routledge is an imprint of the Taylor & Francis Group, an informa business © 2007 Judith Cherry All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested ISBN 0-203-93906-9 Master e-book ISBN ISBN10: 0-415-27006-5 (hbk) ISBN10: 0-203-93906-9 (ebk) ISBN13: 978-0-415-27006-9 (hbk) ISBN13: 978-0-203-93906-2 (ebk)

Contents

List of tables Acknowledgements Romanization and reference system Introduction and theoretical framework

x xii xiii 1

Globalization and foreign direct investment: the theoretical perspective 2 Economic globalization 2 Economic globalization and foreign direct investment 5 Cultural globalization 6 Hybrid globalization 9

1

Korea and inward foreign direct investment 1962–1992

14

The theoretical debate 14 Korea and ‘expansive globalization’ 16 Korea and IFDI: the early years (1962–1969) 19 Korea and IFDI: the shift to heavy and chemical industries (1970–1983) 26 Korea and IFDI: liberalization and deregulation (1984–1992) 27 Conclusions 41

2

Globalization in the Kim Young-sam era: Segyehwa and inward foreign direct investment (1993–1997) Kim Young-sam and Segyehwa 44 Segyehwa and Korean IFDI (1993–1997) 53 Korean IFDI in the pre-crisis era (1962–1997) 58 Conclusions 65

43

viii

3

Contents

The 1997 financial crisis and the ‘IMF era’: Segyehwa in transition

67

The search for a scapegoat 68 The end of the developmental state? Reform in post-crisis Korea 73 Reform and the role of the government 77 Conclusions 79

4

Inward foreign direct investment in post-crisis Korea I (1998–2002)

81

A new strategy for IFDI promotion 83 Trends in post-crisis IFDI 85 Barriers and hindrances to post-crisis inward investment: economic factors 95 Barriers and hindrances to post-crisis inward investment: the business and investment environment 96 Conclusions 101

5

Inward foreign direct investment in post-crisis Korea II (2003–2006)

103

The debate on IFDI policy and strategy 104 A new national investment promotion agency: Invest Korea 107 IFDI performance under the Roh Moo-hyun administration 109 Barriers to investment: the investors’ perspective 116 Conclusions 120

6

South Korea, the European Union and the European Free Trade Area (1962–2006)

122

Korea and the EU 122 Korea–EU Trade 124 Korea and EFTA 126 European investment in pre-crisis Korea (1962–1997) 129 European investment in post-crisis Korea (1997–2006) 131 Conclusions 137

7

Case study: European investors in post-crisis Korea Korea’s competitive advantages 141 The domestic market 142

139

Contents

ix

Human resources 143 The IT environment 144 Strategic location 144 Barriers to IFDI: mismatches and disconnections 145 Implementation of policy and regulations 145 The labour market 150 The workforce 152 Anti-foreign capital sentiment 154 Korea’s image overseas 157 Attitudes towards globalization 157 Korea’s business and investment environment: suggestions for change 159 Education 161 The regulatory environment 164 Marketing Korea 165 Conclusions 166

8

Conclusions

169

Appendix Notes Bibliography Index

176 179 184 197

Tables

1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 1.14 1.15 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 3.1 4.1 4.2 4.3 4.4 4.5

Korean IFDI, 1962–1969 Korean IFDI: by sector, 1962–1969 Korean IFDI: by major manufacturing industry, 1962–1969 Korean IFDI: by major service industry, 1962–1969 Korean IFDI: by major investor, 1962–1969 Korean IFDI, 1970–1983 Korean IFDI: by sector, 1970–1983 Korean IFDI: by major manufacturing industry, 1970–1983 Korean IFDI: by major service industry, 1970–1983 Korean IFDI: by major investor, 1970–1983 Korean IFDI, 1984–1992 Korean IFDI: by sector, 1984–1992 Korean IFDI: by major manufacturing industry, 1984–1992 Korean IFDI: by major service industry, 1984–1992 Korean IFDI: by major investor, 1984–1992 Trends in global FDI, 1991–1997 Korean IFDI, 1993–1997 Korean IFDI: by sector, 1993–1997 Korean IFDI: by major manufacturing industry, 1993–1997 Korean IFDI: by major service industry, 1993–1997 Korean IFDI: by major investor, 1993–1997 Korean IFDI, 1962–1997 Korean IFDI: by sector, 1962–1997 Korean IFDI: by major manufacturing industry, 1962–1997 Korean IFDI: by major service industry, 1962–1997 Korean IFDI: by major investor, 1962–1997 IFDI flows and key ratios, 1996 South Korea: direct and indirect investment flows, 1990–1998 Korean IFDI, 1998–2002 Korean IFDI: by sector, 1998–2002 Korean IFDI: by major manufacturing industry, 1998–2002 Korean IFDI: by major service industry, 1998–2002 Korean IFDI: by type, 1997–2002

20 22 23 24 25 26 28 29 30 31 33 34 36 37 38 53 55 56 57 57 58 59 60 61 62 63 64 69 85 87 88 90 91

Tables xi 4.6 4.7 4.8 4.9 4.10 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 6.12 6.13

Korean IFDI: by major investor, 1998–2002 Korean IFDI: selected countries, 1998–2002 Korean IFDI: new and additional investments, 1997–2002 Korean IFDI: size of investments, 1998–2002 IMD World Competitiveness Yearbook 2002: IFDI-related indices Korean IFDI, 1998–2006 Korean IFDI: by sector, 2003–2006 Korean IFDI: by major manufacturing industry, 2003–2006 Korean IFDI: by major service industry, 2003–2006 Korean IFDI: by major investor, 2003–2006 Korean IFDI: selected countries, 2003–2006 Korean IFDI: by type, 2003–2006 Korean IFDI: new and additional investments, 2003–2006 Korean IFDI: size of investments, 2003–2006 Korean IFDI: from the PRC, 1990–2006 Korea–EU: trade, 1971–2006 South Korea: external trade, 1971–2006 Korea–EFTA: trade, 1971–2006 Korean IFDI: from Europe, 1962–1997 Korean IFDI: by top ten European investors, 1962–1997 Korean IFDI: from top ten European investors by sector, 1962–1997 Korean IFDI: from Europe, 1998–2002 Korean IFDI: by top ten European investors, 1998–2002 Korean IFDI: from top ten European investors by sector, 1998–2002 Korean IFDI: from Europe, 2003–2006 Korean IFDI: by top ten European investors, 2003–2006 Korean IFDI: from top ten European countries by sector, 2003–2006 Korean IFDI: from Europe, North America and Japan, 1998–2006

91 92 93 93 97 110 111 112 113 114 114 115 115 116 117 125 127 128 129 130 131 132 133 133 135 135 136 137

Acknowledgements

First and foremost, I should like to thank the European Chamber of Commerce in Korea (EUCCK) and all the EUCCK members and officials who gave so very generously of their time during my research trips to Korea – this book would not have been possible without their help and support. I am also very grateful to Mr Dorian Prince, the former European Commission Ambassador to Korea, for his enthusiastic contributions to the project and to Mr Chung Tong-soo and Mr Alan Timblick of Invest Korea for their invaluable insights into inward investment promotion activities in Korea. The research trips to Seoul were funded by the Leverhulme Foundation, the British Academy and the University of Sheffield Social Science Devolved Funding Scheme; I am extremely grateful to those institutions for their generosity. Many thanks to all my Korean friends and to my colleagues at Ewha University for their assistance while I was in Korea on my various research trips and, as always, very special thanks to my good friends Mr Kim Hae-kun and Jerry. Finally, I should like to express my gratitude to the staff at Routledge for their forbearance while this book made its slow journey towards publication and to Professor Glenn Hook and the manuscript reviewer for their invaluable comments and suggestions along the way.

Romanization and reference system

The system of romanization used in this book is the McCune–Reischauer (M–R) system. Five of the Korean authors whose works appear in the bibliography have published in both English and Korean. In these cases, all works are listed under the author’s romanization of his or her name, with the M–R version appearing in parentheses in the first entry. The authors in question are Jung Ku-hyun [Choˇng Ku-hyoˇn], Kim Hee-kyung [Kim Huˇ i-gyoˇng], Yoo Jang-Hee [Yu Chang-huˇ i], Yoon Young-Kwan [Yun Yoˇng-gwan] and Yun Mikyung [Yun Mi-gyoˇng]. In the references within the text, full names are given for Korean authors with the family name of Kim or Lee, to avoid confusion.

Introduction and theoretical framework

The principal aim of this book is to analyse trends in inward foreign direct investment (IFDI) in the Republic of Korea1 over the past four decades, tracing the development of Korean IFDI policy from one of restriction and control to one of encouragement and promotion. Specifically, the book focuses on the challenges inherent in reforming the ‘software’ of IFDI promotion (sociocultural issues, mindsets and perceptions) as opposed to changing its ‘hardware’ (systems, laws and regulations). The history of inward investment in Korea has been characterized by tight control and regulation by the state, a slowly growing awareness of the importance of IFDI and the advantages that it can bring, and a gradual shift in policy in the late 1980s and early 1990s to allow foreign companies greater access to the domestic market. The 1997 financial crisis brought into sharp relief the need for higher levels of inward investment in Korea and resulted in sweeping reforms of investment promotion policies and institutions. This reappraisal of the costs and benefits of inward investment came at a time when all nations were facing intense competition in attracting investment by ‘footloose’ multinational corporations (MNCs) capable of providing the capital, technology and skills needed to achieve national economic goals. Although the Korean government has made sustained efforts over the past decade to enhance Korea’s portfolio of advantages as a host for inward investment, it has faced significant challenges in improving Korea’s IFDI performance in the post-crisis era. The discussion in this book of the wide range of transparent and nontransparent barriers that continue to hamper efforts to promote inward investment draws not only on the Korean debate concerning strategies for maximizing the benefits of IFDI but also on the assessment of the Korean business and investment environment revealed in interviews conducted with European investors and officials in Seoul in 2006. This analysis is placed within the broader framework of Korea’s experience of and response to globalization; while this study of inward investment in Korea is discussed principally within the context of economic globalization, in order to understand the full range of barriers that hinder IFDI promotion, it is also necessary to consider the changing social and cultural context in which business is done and investments are made. A key concept here is Lowell Dittmer’s ‘hybrid globalization’ in Asia; a process which he describes as a combination of ‘pell-mell

2

Introduction

economic globalization and political-cultural exceptionalism’. According to Dittmer (2002: 22), the Asian modernizers have embraced globalization in a highly selective manner, with economic convergence often occurring at great speed while political systems, social structures and traditional values have remained highly resistant to change. Korea provides an excellent case study of this phenomenon: a country where the pace of globalization has been uneven and where there is a significant mismatch between the speed of the reform of economic systems and practices on the one hand and political, cultural and social change on the other.

Globalization and foreign direct investment: the theoretical perspective In less than 40 years, ‘globalization’ has become the ‘all-inclusive, all-enveloping catchword of our time’ (Kinnvall 2002: 3); it is a term used by academics, journalists, government officials, businessmen and political activists in reference to all areas of life, ranging from economics and business to culture and the environment. Held et al. (1999: 27) describe globalization as ‘a multifaceted or differentiated social phenomenon’ that refers to ‘patterns of growing global interconnectedness within all the key domains of social activity’. The debate on the phenomenon of globalization, its all-embracing nature and the various characteristics it exhibits has generated a substantial body of literature that continues to grow at a steady pace. Definitions of globalization vary according to academic discipline; views on its costs and benefits are polarized, and some analysts and researchers have questioned the newness of this phenomenon and its very existence.2 In 1996, Petrella identified seven key concepts of globalization: the globalization of finance and capital ownership through the deregulation of financial markets, increasing levels of capital mobility and mergers and acquisitions; the globalization of markets and strategies, as firms establish overseas networks of production, distribution and sourcing and enter into strategic alliances with foreign partners; and the globalization of knowledge, technology, research and development that enables firms to create global partnerships and networks. Petrella also cited the globalization of culture and consumption resulting from the creation of global consumer markets; the globalization of regulations and governance and the consequent diminishing of the role played by national governments; and the globalization of perception and consciousness as seen in the ‘One Earth’ and ‘globalist’ movements. Finally he listed the globalization and political unification of the world through the ‘integration of world societies into a global political and economic system led by a core power’ (Petrella 1996: 64–6).

Economic globalization Contemporary economic globalization has been described as the ‘cutting edge’ or ‘vanguard’ of globalization (Drache 1996: 57; Dittmer 2002: 21), characterized

Introduction

3

by ‘flows of trade and finance within the major regions of the world economy’ (Held et al. 2003: 55), ‘the entire world becoming a single market transcending national borders’ (Yoo 2002: 101), and ‘an increase in trade, capital movements, investments and people across borders’ (Woods 2000: 1). Held et al. (2003: 55) argue that, to these basic definitions of economic globalization, we must add a sense of the extensity (or stretching) of global networks, the velocity of global flows, and the intensity and impact propensity of global interconnectedness. Advances in information technology and communications, combined with the deregulation of key markets have facilitated the creation of global networks in finance, production and trade (Woods 2000: 2–3). New technology enables firms to extend their business activities across the globe and makes it possible for capital to move around the world at the click of a button. The increasing volume and speed of transcontinental trade and global capital flows can have significant implications for nations and the policies that are formulated and implemented by their governments. In terms of the impact of economic globalization, both negative and positive outcomes are cited in the literature. The positive perspective sees globalization as allowing the poorer nations of the world to be integrated into global systems of finance, trade and production, giving them access to the technology needed for further economic development and to low-cost finance from ‘core’ countries. The benefits from increased trade and investment are enjoyed by developing and industrialized countries alike: enhanced competition leads to higher quality, lower prices and greater consumer choice, while the reduction of state intervention in the market diminishes levels of collusion and corruption. Global relationships promote economic efficiency, productivity and growth, creating jobs and boosting standards of living, while increased international investment provides infrastructure in the poorer countries of the world (Sachs 1998: 1; Scholte 2000: 25, 31; Sutherland 1998: 1). In short, supporters of globalization contend that, for countries seeking to sustain or boost their rates of economic growth, openness to global markets is essential and a source of many significant benefits (Held and McGrew 2002: 46). Critics of globalization claim that its effect is to divide and polarize societies, with higher unemployment, increasing inequality, deindustrialization and the destruction of the welfare state. The all-powerful market offers protection only to those who can adapt to the new environment, with the rest remaining ‘misfits and outcasts’. Thus, the consequences of globalization are ‘far reaching but differentiated’ (Friedman and Ramonet 1999: 6–10; Samuel Kim. 2000a: 18) and some see it as a ‘far from universal process’ with a ‘significant segment of the world . . . untouched directly by globalization or largely excluded from its benefits’ (Held and McGrew 2003: 3–4). Globalization has variously been described by its critics as the end of geography, as the world becomes one giant factory and shopping centre; the end of the nation state, as government influence diminishes and markets and entrepreneurs increase their power; and the end of democracy, as nations surrender their sovereignty (Veseth 1998: 20–2). Those who oppose globalization speak of ‘global apartheid’, the ‘global trap’, and ‘global

4

Introduction

pillage’; they highlight crippling debts and financial crises, the reduction in aid flows to poorer countries and welfare provision for the vulnerable sectors of society, and rising levels of unemployment (Scholte 2000: 25–9). Some critics see globalization as ‘an extension of US hegemony’ in which the International Monetary Fund (IMF) and other global organizations act at the bidding and in the interests of the United States (Samuel Kim 2000a: 6). Those who argue that globalization leads to the ‘demise or at least the functional irrelevance’ of the nation state (Samuel Kim. 2000a: 5) and the decreasing importance of national economies focus on the fact that, in a truly globalized world, governments would have far less control over access to and accumulation of resources. Corporations could source capital, labour, materials and technology in global markets and would, therefore, be less dependent on their home markets and governments (Drache 1996: 40; Veseth 1998: 27). Supporters of this view contend that, as the process of globalization accelerates, globally oriented firms will gain control of the world economy, with nation states reduced to playing a ‘pale and secondary role’ (Petrella 1996: 74). However, in response to those who view globalization as a zero-sum game in which the rise of the market inevitably means the demise of the nation state and the reduction of the government’s ability to manage the national economy on a day-to-day basis, many argue that globalization results in a change in rather than a weakening of the role of the nation state. Samuel Kim (1999: 12–13) claims that globalization has ‘redefined what it takes to be a competent and effective state in an increasingly interdependent and interactive world’. Held and McGrew (2002: 47) note that, according to the sceptics, ‘National governments remain, for the most part, the sole sources of effective and legitimate authority in the governance of the world economy, while also being the principal agents of international economic coordination and regulation’. Weaker states may find their autonomy eroded and face external pressures to liberalize and deregulate their economies and, with no real alternative to accommodating the forces of globalization, may have little control over the terms of their integration into the world economy. However, stronger states may find their role enhanced and strengthened by some aspects of globalization (Woods 2000: 10–12). Proponents of this view contend that, rather than eroding the ability of nation states to coordinate and manage economic activity, economic interdependence has, in some cases, enhanced those capabilities (Held and McGrew 2003: 26). Factors such as the influence of developments in global financial markets, the possibility of the worldwide transmission of financial instability, pressure to conform to global regulatory standards, and competition to create a favourable and attractive business and investment environment have increased the importance of the nation state and strengthened its role in terms of mitigating the impact of global change and instability on the national economy. An expansion of the power of the market creates a need for an increase in the power of the state, which assumes responsibility for areas as diverse as the environment, education and training, labour policy and transportation and communication, especially in the case of developing and less developed economies (Drache 1996: 54; Veseth

Introduction

5

1998: 9–10, 36–9). The fact that trade-related agreements, the membership of international institutions and so forth are subject to the democratic process and ratification by the national legislature in many countries ensures that the nation state does not surrender its sovereignty when entering into such arrangements (Burtless et al. 1998: 117–20, 126). States may become ‘instruments for adjusting their economies to the pressures of the world market’ with a crucial role to play by providing a ‘steadying hand’ to help domestic firms develop global competitiveness and adapt to changes in the global economy (Hoogvelt 1997: 138; Drache 1996: 56). For nations that are undergoing a process of economic restructuring and adapting to the global economy, it may be necessary for the government to take an active role in effecting the transition to a free market economy; in such cases, the retreat of the state takes place once re-regulation has occurred. That is, the state oversees the processes of deregulation, liberalization and privatization and ensures that alternative systems and frameworks are in place before assuming the role of monitor and referee (Prakash 2001: 131). The new rules of the game, fair business practices and transparent laws and regulations will not evolve naturally as the market economy develops; the state must assist in the ‘creation and maintenance of a fair, favourable and transparent business environment’ (Yoo 1998: 70, 82).

Economic globalization and foreign direct investment In the contemporary global economy, the focus of trade has switched from goods and services to capital and credit with three major types of capital flows: monetary and financial flows linked to trade in goods and services, portfolio (indirect) investment and foreign direct investment (FDI). According to Ikenberry (1999: 139, 141), the ‘increasingly footloose character of capital . . . epitomize(s) the logic of globalization’ and national borders now matter less than locations that offer low-cost labour, abundant resources and good prospects for corporate profitability. FDI has become a key feature of globalization and its ‘rise and spread has become . . . one of the most important sources of change in the contemporary economy’. Stiglitz (2002: 67–72) sees FDI as a key element of the ‘new globalization’, as the Washington Consensus seeks to create an environment conducive to investment through promoting privatization, liberalization and macroeconomic stability, thereby encouraging and promoting economic growth. A clear manifestation of the increase in global economic activity in recent decades has been the surge in the number and activities of MNCs. In 1997, a total of 53,000 MNCs operated 450,000 subsidiaries worldwide, selling goods and services valued at US$9.5 trillion; by the year 2000, the overseas affiliates of the world’s 60,000 MNCs numbered 820,000 with annual sales of US$15.6 trillion. By the end of the twentieth century, multinational production had outstripped global exports: MNCs accounted for at least 25 per cent of world production and 70 per cent of global trade, with sales equivalent to almost 50 per cent of

6

Introduction

world gross domestic product (Held and McGrew 2002: 53). The growth in MNC activity has, naturally, been mirrored by significant increases in global flows of FDI as MNCs seek to create worldwide networks of research, production, sales and distribution. FDI activity has also been boosted by programmes of deregulation and liberalization, advances in information technology, transportation and communications and the increasing mobility of firm-specific advantages. Between 1970 and 1974, global inflows and outflows totalled US$18.1 billion and US$18.9 billion respectively; between 1995 and 1998, these totals soared to US$447.0 billion and US$462.2 billion. Despite the overall expansion in FDI activity since the 1970s, there have been periods when the rate of growth slowed to single digits. Between 1980 and 1984, FDI flows into and out of advanced countries declined compared with the previous five-year period; during that period, developing country FDI accounted for the lion’s share of global investment activity. Most industrialized countries saw FDI flows contract between 1990 and 1994, but this period of stagnation was followed by spectacular increases worldwide of more than 20 per cent per annum between 1995 and 1998. In the wake of the 1997 Asian financial crisis, FDI outflows from the newly industrializing economies declined as economic growth rates fell and programmes of financial and corporate restructuring got underway. At the same time, outflows from advanced countries increased as favourable exchange rates and increasing opportunities for mergers and acquisitions in Asia stimulated investment in the region (Kim Zu Kweon 2003: 86–90). Another important factor in the increase in global FDI activity has been the shift in perceptions of inward investment on the part of many developing countries from the ‘highly critical – if not downright hostile’ attitude adopted in the 1970s and 1980s to a much more positive assessment in the 1990s of the potential benefits of IFDI and the contribution it can make to economic development and growth (Dunning 2002: 223 –5, 240). Countries seeking to access essential capital, technology and skills began to pay more attention to attracting inward investment and made greater efforts to improve their country’s attractiveness as an investment location. An important element in the race to attract IFDI is the increasing value of ‘created assets’: the knowledge-based, often intangible and therefore ‘locationally mobile’ firm-specific advantages that will prove to be a crucial factor in promoting economic growth. This perception shift regarding the benefits of IFDI has been particularly evident in East Asia, where some, but not all, countries have opened their markets to foreign investors in the hope of attracting the capital, technology and expertise needed to enhance their firms’ competitiveness in global markets (Kim Zu Kweon 2003: 86–90).

Cultural globalization While globalization clearly possesses a material aspect, involving as it does identifiable and recordable flows of goods, services, finance, investment capital

Introduction

7

and workers around the world, it also involves the dissemination of information, images, ideas, icons and cultural products. Kinnvall (2002: 5) notes that many of the flows associated with globalization are social and human in nature – global movements of people through travel, tourism and migration – and that these are connected with flows of culture in the broadest sense: that of thoughts, values and ideas. Indeed Held et al. (1999: 327) observe that: Few expressions of globalization are so visible, widespread and pervasive as the worldwide proliferation of internationally traded consumer brands, the global ascendancy of popular cultural icons and artefacts, and the simultaneous communication of events by satellite broadcast to hundreds of millions of people at a time on all continents. The most public symbols of globalization consist of Coca-Cola, Madonna and the news on CNN. The increase in the magnitude and intensity of levels of human interaction is facilitated by the same technological developments that underpin the expansion of trade, financial and investment flows (Held and McGrew 2003: 3). Developments such as the increasing reach of global mass media companies, the dominance of English as a global lingua franca, the development and widespread adoption of the Internet, satellite and digital technology and the deregulation, liberalization and privatization of the communications and media industries have made possible global cultural flows and exchanges that are unprecedented in their scale, scope, speed and accessibility. The debate relating to cultural globalization is closely linked with the concepts of nationhood and national identity which have themselves commonly been associated with the rise of the modern nation state. The emergence of nation states and the creation of national identities and cultures towards the end of the eighteenth century were accompanied by the establishment of organizations, infrastructures and systems capable of transmitting and embedding culture, identity and allegiances among the citizens of newly emerged nations. The ‘balance of effective cultural power’ remained with the nation states and national cultures until the contemporary era, when a shift began to occur with the challenges posed to national cultures and identities by increasing global cultural flows (Held et al. 1999: 328–41). Within the debate on cultural globalization, the ‘globalists’ or ‘hyperglobalizers’ write of the emergence of a global popular culture, the process of hybridization of national cultures and the erosion of fixed political identities. Predicting the homogenization of the world under the influence of Western – principally American – popular culture, they argue that the constructed nature of national cultures makes it possible for them to change and adapt in a global age (Held and McGrew 2003: 37; 2002: 30; Held et al. 1999: 327). The sceptics, however, point to the lack of a global way of thinking and the absence of a shared global history which might bring people together in a global culture and also contrast the ‘thinness and ersatz quality’ of global culture with the richness of national and local cultures. Sceptics also see a resurgence in nationalism and national

8

Introduction

identity and the survival of robust national and local cultures, and doubt that national identity and nationhood ‘can be eroded by transnational forces and, in particular, by the development of a so-called global mass culture’ (Held and McGrew 2003: 14, 37; 2002: 30; Held et al. 1999: 327–41). Kinnvall (2002: 6) argues that globalization is as much about fragmentation and hybridity as it is about convergence and homogenization; indeed, an increasing awareness of other cultures and cultural differences may lead to friction and even conflict rather than harmony. Held and McGrew (2003: 4; 2002: 29) observe that it is already evident that globalization ‘can create new animosities and conflicts and fuel reactionary politics and deep-seated xenophobia’ and Robins (2003: 196–7) concurs that globalization may led to a ‘collision of cultures’ and a ‘defensive and protective response to cultural encounter’. According to Kinnvall and Jönsson (2002: 258), ‘Globalization can foster openness, exchange and mutual benefits but it can also strengthen chauvinism and nationalism. Changes come quickly, and people search for old roots to hold on to when they feel lost in the new world’. It is important to note that the infrastructure used to convey and disseminate popular culture is also used to gain access to business and commercial information. Indeed, Held et al. (1999: 341, 368) refer to the ‘rise of Western popular culture and interbusiness communication’ as ‘the primary content of global cultural interaction’. Interaction with tourists from other countries, the importing of foreign consumer goods, the global transmission of television and radio broadcasts and the insight offered into other lifestyles and cultures have a clear impact on the global awareness of nations. Similarly, the movement of business personnel around the world as executives undertake assignments as expatriate managers, the importing of business practices and governance systems by foreign investors, and access to corporate information through the media or Internet all contribute to the flow and exchange of business information. If globalization is a process by which actors in the world become more aware of each other, then it multiplies the chances of linkage and the possibilities for exchange. The enhanced possibilities for networking in a global world make it easier for individuals, communities, firms and labour unions to bypass (the state and other organizations), to look round by themselves, and to adopt the patterns of economic action and organizational form that they find most appealing. (Guillén 2001: 228) Guillén (2001: 230–2) writes of the ‘diversity in economic action and organizational form’ that results from increased communication and exchanges and highlights the importance of that diversity within the global economy. Rather than leading to convergence on a ‘universally superior pattern of economic organization and behaviour’, globalization requires us to focus on the ‘unique and valuable’ aspects of the development models, business practices, managerial systems and organizational structures adopted by different countries and regions

Introduction

9

and in various industries and corporations. Robins (2003: 201) argues that we should see globalization in terms of both homogenization and hybridization: What globalization in fact brings into existence is a new basis for thinking about the relation between cultural convergence and cultural difference. The globalization process must be seen in terms of the complex interplay of economic and cultural dynamics, involving confrontation, contestation and negotiation.

Hybrid globalization The ‘hybrid globalization’ described by Dittmer and exhibited among Asian globalizers is a key concept for the analysis of the ‘hardware’ and ‘software’ elements of Korea’s efforts to promote IFDI presented in this book. Dittmer’s (2002: 22) central argument is that the globalization of many Asian countries ‘. . . has been moving in counterpoint with (their) attempt to maintain a distinctive normative regime and political-economic culture’. Dittmer notes the paradox inherent in the fact that many of the Asian states which have sought to protect their cultures have been among the greatest beneficiaries of economic globalization through increased access to export markets and to the capital, technology and know-how necessary for economic and industrial development. However, he maintains that this paradox must be seen in the context of the Asian approach to embracing globalization, which has been ‘highly selective’ with the ‘realm of ultimate values . . . typically . . . excepted’. The result has been a distinctively Asian hybrid of pell-mell economic globalization and political-cultural exceptionalism. Globalism’s inherent homogenizing tendencies . . . were not particularly welcome in a region of revitalized nationalism. This was not only because these tendencies are identified with Western imperialism but because the successful Asian modernizers had evolved their own institutional alternatives, to which various socioeconomic interests became attached in the course of successful development. (Dittmer 2002: 22) Dittmer identifies three phases of Asian globalization. During the first (‘expansive globalization’), which lasted from the 1960s to the late 1990s, the Asian ‘hybrid globalizers’ were ‘(shifting) smoothly into mercantilist mode’, developing their export industries and penetrating western markets. Dittmer (2002: 34) describes the phenomenon of the ‘one-sided and partial’ adoption of globalization, as ‘. . . economic free-riding went in tandem with the preservation of distinctly Asian political and cultural values’. During this phase of globalization, economic modernization and industrialization in many Asian countries was underpinned by the Confucian value system with its focus on education, diligence, frugality, discipline and hierarchy. The creation of close and often corrupt relations between the state and big business, the suppression of labour, the lack of

10

Introduction

transparency in financial matters and corporate governance and the organization of major corporations showed little sign of change in the face of increasing integration into the global economy. The first major challenge to these nations and their ‘institutional alternatives’ came with the 1997 Asian financial crisis, which forced a re-evaluation of the institutions and systems that had driven their earlier successes. Thus, the second phase of globalization – ‘capital flight crash globalization’ – came with the outbreak of the 1997 financial crisis when the Asian values that had been hailed as a major factor in the region’s success came under attack by those who held them responsible for its economic downfall. Many of those who had lauded the achievements of the Asian developmental state now predicted its demise in the face of neoliberal reform. The third phase of globalization – the ‘austerity globalization’ experienced by countries implementing the reform programmes and austerity packages mandated by the IMF as a condition for providing bailout funding – was a period of rapid change in terms of institutions, systems and regulations. According to Dittmer, those commentators who continued to uphold the primacy of Asian values and laid the blame for the crisis on globalization were in the minority. The majority of the crisis countries who sought financial help from the IMF accepted a remedy which he describes as ‘homeopathic’: curing globalization with more globalization and even greater integration into the global economy. Dittmer (2002: 34–6) concluded that, with the discrediting of the Asian ‘capitalist developmental state’, Asian values, systems and institutions would come under increasing scrutiny as the recovering crisis nations sought to adapt and bring them into line with international standards. In the case of Korea, this book presents evidence to support the existence of a fourth aspect of globalization, that of ‘mismatched globalization’. In the wake of the 1997 financial crisis, the Korean government sought to boost levels of IFDI with the twin aims of helping Korea recover from the crisis and ensuring sustainable economic growth. Although the reforms implemented by the Kim Dae-jung and Roh Moo-hyun governments achieved some notable successes, Korea’s performance in attracting IFDI lagged its potential, given its ranking in the global economy. Interviews with European investors and officials in Seoul in 2006 revealed a range of cultural, social and political issues that continue to serve as barriers or hindrances to inward investment, despite the successful efforts by the Korean government to reform the country’s legislation and institutions. The term ‘mismatched globalization’ derives from the consensus among interviewees that the survival of deeply embedded Asian values and socio-politico-cultural systems amidst sweeping reforms to the economy and the business environment reflects the disparity between the rapid pace of economic globalization and the far slower speed of change in social, cultural and political areas. The first chapter of this book analyses patterns of Korean IFDI during the first three decades of the country’s economic development. A brief summary of some of the key theoretical issues relating to the costs and benefits of IFDI is followed by an overview of Korean government policy and an analysis of the

Introduction

11

forms, flows and characteristics of inward investment during the period between the first case of IFDI in 1962 and the end of the Roh T’ae-woo administration three decades later. During this period, the government demonstrated a clear preference for foreign capital in the form of commercial loans rather than FDI as a means of financing its development plans and so sought to control and restrict inward investment. Although the 1980s witnessed the gradual easing of regulations governing IFDI, the fundamental attitude of the South Korean government and people remained passive and negative through to the early years of the 1990s. Annual notifications of FDI remained below the US$500 million mark between 1962 and 1986, only rising above the US$1 billion level in the late 1980s and early 1990s (Investment Notification Statistics Center, 2006).3 The process of liberalizing and deregulating the Korean economy, which had begun in the 1980s, accelerated in the early 1990s under pressure from major trading partners and as the Korean government pursued its goal of joining the Organization for Economic Cooperation and Development (OECD). The globalization of the Korean economy began in earnest with the implementation of the Kim Young-sam government’s Segyehwa (globalization) policy in 1993; Chapter 2 outlines the key policy issues relating to Segyehwa and analyses its impact on Korean IFDI. Efforts by the new government to liberalize IFDI led to a gradual increase in annual investment notifications, which had reached US$3.2 billion by the end of 1996 (Investment Notification Statistics Center 2006). The financial crisis that engulfed Korea in 1997 prompted a re-evaluation of the benefits of IFDI and of the role that foreign investment might play in helping Korea to recover from the crisis, restructuring the corporate and financial sectors and creating a foundation for sustainable economic growth. Chapter 3 focuses on the role played by Kim’s Segyehwa policy and IFDI in the build-up to and unfolding of the 1997 financial crisis; it also considers the impact of developments in the domestic economy and financial markets and assesses the role played by domestic and external actors. Here Dittmer’s concept of ‘hybrid globalization’ is particularly relevant as many academics seeking to identify the causes of the crisis have considered the role of globalization and neoliberal reform on the one hand and of Asian values on the other. In the second section of the chapter, a brief outline of reforms carried out in the financial and corporate sectors and the labour market provides the context for the analysis of post-crisis inward investment that follows. The 1997 crisis led to a sea change in attitudes towards IFDI in Korea and prompted a dramatic shift in policy from regulation and control to promotion and encouragement. The Kim Dae-jung government made wide-ranging changes to Korea’s IFDI policy and created new institutions and systems to promote and encourage inward investment. Annual FDI inflows soared as the new promotion policies took effect; notifications more than doubled from US$7 billion in 1997 to US$15.5 billion in 1999, and remained steady at around the US$15 billion mark in 2000 (Investment Notification Statistics Center 2006). Chapter 4 analyses trends in IFDI under the Kim Dae-jung administration, focusing on the shift

12

Introduction

in attitudes towards inward investment, the sweeping changes in policy and the concerted efforts by the Korean government to promote inward investment as a means of overcoming the crisis and gaining access to competitivenessenhancing assets. Despite the government’s best efforts, the post-crisis boom was followed by a three-year decline in IFDI levels that saw annual inflows drop from US$15.2 billion in 2000 to US$6.5 billion in 2003, the final year of the Kim Dae-jung administration. This downward trend prompted a further re-evaluation of IFDI policies by the incoming Roh Moo-hyun government and led to renewed efforts to enhance Korea’s attractiveness as an investment location. Although the new initiatives appeared to be having a positive effect as IFDI notification levels increased to US$12.8 billion in 2004, inflows fell by 10 per cent year on year to reach US$11.6 billion in 2005 and declined further to US$11.2 billion in 2006 (MOCIE 2007). Chapter 5 continues the analysis of inward investment in postcrisis Korea, focusing on the efforts of the Roh Moo-hyun government to boost declining levels of IFDI and on the debate among government officials, academics and business practitioners on Korea’s potential as a host for IFDI and strategies that the Korean government might adopt to fulfil that potential. Over the past four decades, European corporations have played an increasingly important role as investors in Korea, reflecting both the evolving relationship between South Korea and Europe and the growing awareness of the benefits that closer economic, political and diplomatic ties could bring to both sides. Having lagged behind the United States and Japan since the 1960s in terms of the value and volume of their investments in Korea, the Europeans became major investors after 1997, overtaking the United States in value terms in five out of the past eight years, including 2005 and 2006. In 2006, European firms accounted for almost half of all investment notifications made by foreign MNCs, with investments valued at US$5.2 billion out of a total of US$11.2 billion; the shares for the United States and Japan in that year were 15.1 per cent (US$1.7 billion) and 18.8 per cent (US$2.1 billion) respectively (MOCIE 2007). However, despite the increasing importance of European investment in Korea, attention in the literature has focused more on the activities and interests of American investors; the choice of European investment in post-crisis Korea as a case study for this book seeks to redress that imbalance. Chapter 6 assesses the evolution of relations between the Republic of Korea and Europe and traces the development of European investment in Korea, creating the context for the case study of European investors in Korea that follows. Chapter 7 presents the findings of a series of in-depth interviews carried out in 2006 with European investors and officials in Seoul, which sought to shed light on their views of the business and investment environment in Korea, their assessment of government actions to promote and facilitate inward investment, their opinions concerning existing barriers to investment and successful business operations in Korea and their suggestions for the further improvement of the business environment. A major theme of this chapter is the mismatches perceived by investors between the improvements

Introduction

13

to the ‘hardware’ of IFDI promotion and the changes in its ‘software’. This discussion brings together the separate elements of Dittmer’s ‘hybrid globalization’ through an analysis of the barriers to investment created by the uneven speed of change and convergence in the economy, politics, bureaucracy and society of South Korea. This chapter introduces the fourth phase of Korean globalization – the phenomenon of ‘mismatched globalization’ identified in the interviews with European investors in Korea; the eighth and final chapter presents the conclusions of the study.

1

Korea and inward foreign direct investment 1962–1992

The increase in global flows of foreign direct investment (FDI) and the rise of multinational corporations (MNCs) has attracted much attention and been the subject of great debate in academic and government circles. In the early twentyfirst century, corporations seek to maximize their profits by entering new markets, accessing low-cost resources and production factors, creating global production and distribution networks and entering into strategic alliances with global competitors. Developing countries have come to realize the benefits of inward foreign direct investment (IFDI), which range from access to capital, advanced technology and know-how to employment and wealth creation. Accordingly, many countries formerly wary of or hostile to foreign investment have liberalized and deregulated their markets and revised their IFDI policies in order to attract inward investment that will enhance national competitiveness and enable them to sustain and even accelerate economic growth. However, South Korea has lagged behind its regional competitors and the industrialized nations of the world in terms of implementing measures to attract inward investment. The history of IFDI in South Korea has been characterized by tight control and regulation by the state, a slowly growing awareness of the importance of IFDI and the advantages that it can bring and a gradual shift in policy in the mid-1980s and early 1990s to allow foreign companies greater access to the domestic market. This chapter assesses Korea’s performance in terms of attracting IFDI during the first three decades of the country’s economic development; a brief discussion of the costs and benefits of IFDI from the perspective of the host country provides the context for an analysis of the forms, flows and characteristics of Korean IFDI during this 30-year period.

The theoretical debate The academic literature on IFDI identifies a broad range of positive and negative effects deriving from inward investment. The aspects of economic performance upon which FDI inflows may have an effect (be it positive or negative) include fixed capital formation; technology and skill transfer; productivity and efficiency at industry or enterprise level; international competitiveness; employment and national wealth; trade and the balance of payments situation; and economic

Korea and IFDI 1962–1992 15 concentration. Forward and backward linkage effects, connecting the investing company and its suppliers (backward linkages) and the investing company and its customers (forward linkages) may serve to reinforce the effects further (Hood and Young: 1979; Kim Mi-a 1999: 81; Invest Korea 2004: 1). In terms of specific effects deriving from inward investment, a foreign investor may introduce capital, technology and management skills that are scarce or lacking in the host country and thus help to enhance the productivity and efficiency of domestic firms. Funds raised by the MNC at home may help to make up a shortfall in investment finance in the host country; similarly, projects financed with capital sourced within the host country may put to productive use local funding that would otherwise have remained idle. However, the funding of an MNC project by local financial institutions might also deprive domestic firms of capital needed for their own projects (Hood and Young 1979: 179–84). The introduction of advanced technology contributes to economic growth by raising the marginal productivity of labour and capital as it spreads to local firms, suppliers and subcontractors, resulting in an improvement in their technological capabilities. The investor may provide local associates with information and intermediate products needed for their own production processes, and local suppliers may also strive to meet the quality and reliability requirements of the foreign firm. Finally, the ‘demonstration effect’ encourages local firms previously wary of using new technology due to the costs or risks involved to make use of it, once foreign investors have demonstrated its advantages (Findlay 1978: 1). If the foreign firm is actively engaged in research and development (R&D), visits by or contact with specialist research personnel may enable local firms to enhance their technology. Local firms without close links to the investor may be motivated to increase their own research efforts or to accelerate the introduction of new technology in order to keep pace with their foreign competitors (Kokko 1994: 279; Blomström and Kokko 1996: 13; KIEP 1998: 54–5; Kim Mi-a 1999: 82–3; Ch’oe So˘ng-il 2003: 63). Similarly, the introduction of different financial, management and corporate governance systems can lead to increased transparency, improved management quality and higher standards of corporate governance in domestic firms (Ch’oe So˘ng-il 2003: 63). However, if it is the mother company rather than the overseas affiliate that is engaged in technology development, there may be little R&D carried out in the host country and the MNC may wish to retain ownership and control over its technological advantage (Hoˇ 2001: 21). When a foreign investor enters the market and replaces exports with local sales, the host country’s trade balance situation will improve as imports decline. If the MNC begins to import capital goods, intermediate materials, parts and components from the mother company or overseas suppliers it will boost imports; however, over time, the firm may begin local production of these items, thus restoring the status quo ante (Mun 2004: 36). The host country’s exports may be boosted by foreign investors’ sales to third countries, thus improving the balance of payments situation. Furthermore, through their interaction with foreign exporters, local firms may be able to acquire information on export practices and foreign markets, thereby improving their own export performance

16

Korea and IFDI 1962–1992

(Pak 2003: 6). Although IFDI will have an initial effect of improving the balance of payments, subsequent payments of dividends, royalties and interest to the mother company and the repatriation of profits may offset this positive effect to some degree (Hood and Young 1979: 179, 190). The tendency of MNCs to enter sectors with high entry barriers where monopolies or oligopolies already exist may lead to an increase in competition and efficiency in those sectors, as local firms come under pressure to improve their performance and compete with the new entrants. However, despite the short-term increase in competition, concentration levels may increase over time as less efficient domestic enterprises are forced to exit the market (Blomström and Kokko 1996: 29; Ch’oe 1998: 55; Hood and Young 1979: 180, 191–4). Finally, given the influence of the mother company over the business operations of its overseas subsidiary, IFDI can be expected to result in some loss of decision-making power for the host government (Hood and Young 1979: 191, 195). In terms of the effects on employment and wealth creation, greenfield investments will require the creation of a new workforce, whereas mergers and acquisitions (M&As) and consequent improvements in productivity and efficiency may result in job losses. IFDI can create additional jobs indirectly as local firms increase their workforce to handle work contracted to them; conversely, a decision by the MNC to source materials from overseas may lead to a reduction in local employment levels. Finally, increased competition in an industry or sector may force weaker local firms out of business, contributing to a rise in unemployment levels (KIEP 1998: 67–8; Hwang 1999: 5–6; Kim Mi-a 1999: 81; Mun 2004: 35–6). In terms of the creation of national wealth, investors who have not negotiated tax exemptions as a condition of entry will contribute to tax revenues and corporate profits may be re-invested, contributing to further fixed capital formation and creating additional tax income (Ch’oe 1998: 55; Hoˇ 2001: 14 –15, 18). Despite the negative aspects or costs of IFDI identified in the literature, there appears to be widespread agreement that, particularly in the case of developing countries, the benefits outweigh the costs. From a long-term perspective, the effect of IFDI on trade and balance of payments is more likely to be positive than negative, as the introduction of advanced technology and know-how enhances the international competitiveness of domestic firms and boosts export performance (Mun 2004: 37). Thus FDI makes a positive contribution through technology and know-how transfer, the enhancement of efficiency, job creation and improved trade flows. Writing in the early 1990s, Haddad and Harrison (1993: 52) observed that, whatever the costs and benefits of IFDI might be, governments of developing countries were increasing their efforts to induce foreign investment in the hope of benefiting from technology transfer and related spillovers.

Korea and ‘expansive globalization’ This book’s analysis of the development of IFDI in Korea begins with the period between the first recorded case of IFDI in 1962 and the end of the Roh T’ae-woo

Korea and IFDI 1962–1992 17 administration 30 years later. This stage of Korea’s economic development, which falls within Dittmer’s phase of ‘expansive globalization’ in Asia, was characterized by rapid export growth and an expansion of imports (principally to support industrialization) on the one hand, and much slower growth in outward and inward foreign investment activity on the other. These three decades saw the beginning of the process of the country’s integration into the global economy through external trade and FDI and also witnessed the evolution of the systems and institutions that provided the momentum for Korea’s industrialization and economic modernization through to the early years of the 1990s. In these systems and institutions, we see evidence of Dittmer’s ‘political and cultural exceptionalism’ and the influence of a deeply embedded value system based on the Confucian ideals of respect for authority and hierarchy, discipline, diligence, a strong sense of group and community and a desire for education that had underpinned Korean society for centuries. In a rapidly industrializing economy dominated by hierarchical, family-controlled businesses, these values promoted compliance and productivity among the labour force, willingness to undergo training and acquire work-related skills and cooperation in the pursuit of corporate and national goals (Dittmer 2002: 22, 34 –5). The development of strong connections between the state and big business, the creation of a central planning agency (the Economic Planning Board), the phenomenon of government intervention in, and control of, economic activity and the emergence of family-owned conglomerates (chaebol ) as key players in the domestic economy were major elements in the Korean development model and key characteristics of the ‘developmental state’ described by Chalmers Johnson (1982). Although Johnson’s concept of the ‘developmental state’ was most closely associated with post-war Japan, its features can be identified in other East Asian ‘late developers’, including Korea. Johnson highlighted the importance of the symbiotic relationship between the state and big business in the pursuit of transformative goals and of the combination of public control and private ownership that achieved rapid industrial development and sustained economic growth (Woo-Cumings 1999: 1–5). This emphasis on the potential benefits of state intervention in economic activity contrasts sharply with the ideals of neoliberalism, which emphasizes the supremacy of market forces, the need for deregulation and liberalization and the necessity of limiting government intervention in economic activity. According to Dittmer (2002: 34), from the 1960s to the late 1990s, Korea (along with other modernizing Asian economies) benefited from economic globalization as Korean corporations developed export industries and penetrated Western markets. The broad aims of government policy during this period were to promote Korean exports while restricting imports of non-essential goods and services and to manage FDI activity to ensure that FDI flows served national goals. In the space of three decades, Korean exports rose from US$54.8 million to US$76.6 billion as local corporations targeted markets in the United States and Europe, while imports swelled from US$421.8 million to US$81.8 billion (KITA 2006). Cho (1994: 156) argues that Korea’s trade policy in the 1960s and

18

Korea and IFDI 1962–1992

1970s ‘smacked of mercantilism’, as the government sought to promote exports while restricting imports to the raw materials, capital goods, semi-finished goods and intermediate products that were essential for economic and industrial development. Although the phased implementation of import liberalization measures had raised the ratio of freely importable goods from 51 per cent in 1976 to 97.7 per cent by 1992, the effectiveness of the liberalization policy was frequently undermined by the application of high import tariffs, the passing of special laws to protect specific sectors4 and the presence of non-tariff barriers such as antiluxury goods campaigns. In the late 1980s, as Korea’s trade account turned into surplus, the Korean government came under increasing pressure from major trading partners (including the United States and Europe) to allow them greater access to the domestic market, and the latter years of this period saw further reductions in import restrictions including the lowering of tariffs and the removal of many non-tariff barriers (Cho 1994: 153–8). For most of this period, the Korean government regarded outward foreign direct investment (OFDI) principally as a means of securing stable supplies of resources needed for industrial development at home and boosting export sales of Korean manufactured goods via global distribution and sales networks. While the government did offer incentives to potential outward investors in target sectors, up to the mid-1980s OFDI was restricted to a relatively small number of essential projects in an attempt to prevent the outflow of foreign exchange reserves, a deterioration in the nation’s balance of payments situation and the hollowing out of Korean industry as local firms relocated overseas (Jo 1981: 68; Kim Shi-jung et al. 1992: 29–32; Waitt 1993: 202; Kiernan 1994: 26–7). In the latter half of the 1980s, the Korean government faced the twin challenges of managing a rapidly swelling current account surplus as exports boomed and fending off demands from major trading partners for greater access to the domestic market. Accordingly, the government changed its policy focus from restricting OFDI activities to using overseas investment as a means of easing friction with major trading partners and promoting the globalization of Korean industry. This shift in policy and the series of measures implemented by the government with the aim of promoting overseas investment by Korean firms5 resulted in a significant increase in OFDI activity. The annual net value of Korean overseas investments, which had totalled just US$145 million between 1968 and 1980 and had remained around the US$100 million level during the first half of the 1980s, jumped to US$410 million in 1987, US$963 million in 1990 and finally broke through the US$1 billion level in 1991 (Export-Import Bank of Korea 2007). Thus, during the period of ‘expansive globalization’, the Korean government sought to maximize the benefits of interaction with the global economy in terms of raising finance for its development projects, sourcing essential materials for production, accessing export markets and creating worldwide sales and production networks for the nation’s emerging MNCs. At the same time, the government implemented measures to limit foreign participation in the domestic economy, both in the form of the restrictions on imports mentioned above and

Korea and IFDI 1962–1992 19 the controls on inward investment that are described in the following section of this chapter.

Korea and IFDI: the early years (1962–1969) In the immediate aftermath of the Korean War (1950–1953), the Korean government relied on overseas aid (principally from the United States) to finance its efforts to begin rebuilding the nation’s shattered economy. However, in the early 1960s, a shift in Korea’s economic policy from post-war recovery and import substitution to growth and export promotion, combined with the lack of domestic savings and the US government’s decision to replace aid to Korea with loans made it necessary for the Park Chung-hee government (1962–1979) to induce foreign capital in order to finance its industrialization and modernization plans. During the first three decades of economic development, the government implemented what Noland terms a ‘capital channeling development strategy’, under which the government sought to restrict corporate finance options for local firms to borrowing from domestic commercial banks and financial institutions which would comply with the government’s directives on providing finance for specific industries, projects and corporations. The government’s ability to control the allocation of financial resources was enhanced by restrictions on the activities of foreign bank branches in Korea, limits on foreign participation in the domestic capital markets6 and the underdeveloped state of the Korean bond and money markets (Noland 2005: 5–6). Although the Korean government was keen to control the allocation of financial resources, it was clear that the ambitious development plans it planned to pursue would require, over time, access to the technology, skills and know-how that foreign investors could provide. The principal challenge for the Park administration and for successive governments was that of maximizing the benefits of IFDI while keeping the costs to a minimum and ensuring that the state provided no more incentives than were strictly necessary to bring in the capital and skills needed for economic development (Korhonen 2001: 38). A secondary but equally important challenge was to balance the need for inward investment and foreign participation in the domestic economy with public concerns over the possibility of foreign economic domination. This fear reflected Korea’s relatively recent colonial experience following its annexation into the Japanese empire between 1910 and 1945. The result of Korea’s ‘xenophobic suspicion’ of foreign economic domination was that it became ‘one of the least hospitable countries for FDI for many decades of its modern development history’ (Maigov 2001: 22). The legal basis for inducing foreign capital into Korea was the 1957 Foreign Capital Inducement Act, but this early piece of legislation was considered to be too restrictive regarding inward investment and was subsequently revised as the Foreign Capital Inducement Promotion Act (Song 2004: 15). The government offered incentives including tax reductions and exemptions to potential foreign investors (who were required to make a minimum investment of 25 per cent of the project capital) and welcomed investment that would contribute to the

20

Korea and IFDI 1962–1992

Table 1.1 Korean IFDI, 1962–1969 Notification volume (in cases)

Notification value (millions of dollars)

1962 1963 1964 1965 1966 1967 1968 1969

2 4 4 10 22 28 60 65

3.6 5.7 0.7 21.8 15.6 28.3 25.6 48.6

Total

195

149.9

Year-on-year growth rate (%) 58.3 –87.7 N/M –28.4 81.4 –9.5 89.8

Source: Investment Notification Statistics Center 2006. Note N/M: Not meaningful.

fulfilment of the nation’s five-year economic development plan (Maigov 2001: 22). However, the legislation also prohibited sectors in certain sectors (including domestic airlines, military equipment and monopoly businesses) and outlawed projects that might result in excessive production, speculation or a waste of Korea’s foreign exchange holdings (Kim Ch’ang-gyu et al. 2002: 39). Between the introduction of the legislation and its first revision in 1966, there were no more than ten cases of IFDI per year (see Table 1.1), and in 1962, foreigners invested a total of just US$3.6 million in two projects. These first cases of inward investment in Korea were undertaken by American firms in the automobile and nylon industries; in both ventures, the foreign investor took a 50 per cent share with investments totalling US$3 million in car production and US$575,000 in nylon manufacturing (Song 2004: 16). The cumulative total for the period between 1962 and 1965 amounted to US$31.8 million in 20 projects; Song (2004: 15) attributes the low levels of investment in the early 1960s to negative perceptions of inward investment which reflected concerns about foreign domination of the Korean economy and the potentially negative effect of FDI inflows on the formation of domestic capital. Other factors that contributed to the lack of inward investment during this period included the weakness of the local economy, the low levels of demand for advanced technology and sophisticated skills and know-how in light industrial, labour-intensive manufacturing industries and the reliance of Korean firms on the mature technology embedded in the outdated machinery they imported from overseas (SaKong 1993: 119; Kim Pyoˇng-sun 2002: 14). In August 1966, the Park government revised the legislation relating to the introduction of foreign capital, promulgated the Foreign Capital Inducement Act and created an Office of Investment Promotion within the Economic Planning Board (Korhonen 2001: 75). The revisions to the law aimed to reconcile duplicated and overlapping regulations, provide tax incentives, eliminate the

Korea and IFDI 1962–1992 21 remaining restrictions on profit remittance by foreign-invested firms, abolish the 25 per cent minimum capital requirement for foreign investors and remove the requirements regarding employment of Korean workers (Korhonen 2001: 75). Although the Park government subsequently implemented further measures to promote IFDI and publicly welcomed foreign investment in light manufacturing, it discouraged foreign investment in sectors protected by import substitution measures and often imposed performance requirements on foreign-invested firms relating to technology transfer, local content and export quotas (Hong 1997: 80; Kim and Hwang 1998: 7; Kim Kyoo H. 1999: 390; Kim June-Dong 1999: 9; Kim Ch’ang-gyu et al. 2002: 41). By the end of the 1960s, cumulative IFDI stood at US$150 million in 195 projects on a notification basis; roughly three quarters of the funds invested went into the manufacturing sector (US$118.1 million) with far smaller levels of investment in the service industries (US$27.3 million) and the primary sector (US$500,000), reflecting the government’s primary policy focus on industrialization and the development of export industries (see Table 1.2). Manufacturing investment focused on two key strategic industries – chemicals and electronics – which together accounted for 64.1 per cent of IFDI value (US$75.4 million), with textiles and apparel and non-metallic minerals accounting for a further 18.4 per cent of all notifications (US$21.8 million) (see Table 1.3). Investment in the service sector began in 1965; the small amount invested during the remainder of the decade targeted five sectors: business services (US$11 million and 40.3 per cent of the total); wholesale and retail businesses (US$4.9 million and 17.9 per cent); hotels and restaurants (US$3.8 million and 13.9 per cent); transportation and storage (US$3.4 million and 12.5 per cent) and finance and insurance (US$3 million and 11 per cent). Together, these five sectors accounted for more than 95 percent of the value of all notifications of service sector investment in the 1960s (see Table 1.4). At this early stage of Korea’s industrialization, there was no investment in telecommunications and restrictions on foreign ownership of land prohibited investments in real estate businesses. Investment in Korea during the 1960s was dominated by the United States, Europe and Japan; throughout most of the decade, investors from these nations took a combined share of between 85 and 100 per cent of investment notifications (see Table 1.5)7 Japanese MNCs were later entrants than firms from other countries, as diplomatic relations between the Republic of Korea and Japan were not established until 1965. However, following the signing of a normalization treaty between the two countries in that year, the Japanese became the most active investors in Korea, accounting for an average share of more than 40 per cent of the value of notifications between 1966 and 1969. By the end of the 1960s, on a cumulative notification basis, American firms took a 42.1 per cent share of the total value (US$63.1 million) invested in Korea, while their Japanese and European competitors took shares of 33.8 per cent (US$50.6 million) and 11.4 per cent (US$17.1 million) respectively. Although absolute levels of investment remained small in the 1960s, some analysts were encouraged by the steady growth seen during this period. This

0.5

Total

0.3

0.0 0.0 14.3 0.1 1.9 0.0 0.4 0.0

Total (%)

118.1

3.6 5.7 0.6 10.8 11.7 21.4 19.3 45.0

Manufacturing

Source: Investment Notification Statistics Center 2006.

0.0 0.0 0.1 <0.1 0.3 0.0 0.1 0.0

1962 1963 1964 1965 1966 1967 1968 1969

Primary

78.7

100.0 100.0 85.7 49.5 75.0 75.9 75.4 92.6

Total (%)

Table 1.2 Korean IFDI: by sector, 1962–1969 (in millions of dollars)

27.3

0.0 0.0 0.0 11.0 3.6 6.8 2.4 3.5

Services

18.2

0.0 0.0 0.0 50.4 23.1 24.1 9.4 7.2

Total (%)

3.9

0.0 0.0 0.0 0.0 0.0 0.0 3.8 <0.1

Other

2.6

0.0 0.0 0.0 0.0 0.0 0.0 14.8 0.2

Total (%)

149.9

3.6 5.7 0.7 21.8 15.6 28.2 25.6 48.6

Total

3.6

Total

5.7

5.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.6

1963

Source: Investment Notification Statistics Center 2006.

0.0 0.0 0.6 0.0 0.0 3.0 0.0 0.0 0.0 0.0 0.0

Chemicals Electrical and electronics Textiles and apparel Non-metallic minerals Machinery Transportation equipment Metals Pharmaceuticals Food and beverages Paper and lumber Other

1962

0.6

0.0 0.0 0.0 0.2 0.0 0.2 0.0 0.2 0.0 0.0 0.0

1964

10.8

10.0 0.4 <0.1 0.0 0.0 0.0 0.0 0.2 0.0 0.0 0.2

1965

11.7

4.0 6.3 0.2 0.0 0.2 0.0 <0.1 0.0 0.1 0.0 0.8

1966

21.4

3.5 7.5 2.4 6.0 1.1 0.0 0.0 0.6 0.0 0.0 0.3

1967

Table 1.3 Korean IFDI: by major manufacturing industry, 1962–1969 (in millions of dollars)

19.3

2.5 2.1 5.5 4.0 0.6 0.7 1.8 0.0 0.6 0.0 1.5

1968

45.0

22.4 11.9 2.5 0.1 4.5 0.0 1.8 1.6 <0.1 0.1 <0.1

1969

118.1

47.2 28.2 11.4 10.4 6.3 3.9 3.6 2.5 0.8 0.2 3.6

Total

100.0

40.1 24.0 9.6 8.8 5.3 3.3 3.0 2.1 0.7 0.1 3.0

Total (%)

24

Korea and IFDI 1962–1992

Table 1.4 Korean IFDI: by major service industry, 1962–1969 (in millions of dollars) 1965 Business services 10.5 Wholesale and 0.0 retail Hotels and 0.5 restaurants Transportation and 0.0 storage Finance and 0.0 insurance Real estate and 0.0 leasing Culture and leisure 0.0 Telecommunications 0.0 Other 0.0 Total

11.0

1966

1967

1968

1969

Total

Total (%)

<0.1 3.3

0.2 0.4

<0.1 0.0

0.2 1.2

11.0 4.9

40.3 17.9

0.0

3.3

<0.1

0.0

3.8

13.9

0.2

1.2

0.0

2.0

3.4

12.5

0.1

1.0

1.9

0.0

3.0

11.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0 0.0 0.0

0.0 0.0 0.7

0.0 0.0 0.4

0.0 0.0 0.1

0.0 0.0 1.2

0.0 0.0 4.4

3.6

6.8

2.4

3.5

27.3

100.0

Source: Investment Notification Statistics Center 2006.

was attributed by one writer to the successful completion of the first five-year economic development plan, the normalization of relations with Japan, the strengthening of IFDI promotion activities and the enactment of the Foreign Capital Inducement Act (FCIA) (Pak 1968: 85). A survey of foreign businesses operating in Korea carried out by the Federation of Korean Industries at that time indicated that the prospects for attracting higher levels of foreign capital into Korea were good. More than three quarters of respondents (77 per cent) took a positive view of their investments in Korea and 35.3 per cent selected Korea as the most attractive host country out of a list including Taiwan, Hong Kong, Thailand, Vietnam, Indonesia and Japan. The key determinants of Korea’s attractiveness were quality of labour (with 66.7 per cent of respondents favouring Korea), political and economic stability (50 per cent) and domestic market prospects (41.7 per cent). Other factors mentioned in the survey were the incentives provided under the FCIA, Korea’s international credibility and the country’s level of infrastructure development (Pak 1968: 91–4). During this early stage of foreign investment in Korea, there was an active debate on the costs and benefits of IFDI. Some Koreans feared the domination of the national economy by foreign-invested firms and the erosion of Korea’s economic sovereignty and autonomy or expressed concerns that the introduction of foreign capital might obstruct economic growth by hindering autonomous development (Kim Mun-han 1968: 8). However, others felt that these fears of foreign domination were unfounded arguing that, as Korea had not yet liberalized its capital markets, it would be impossible at this stage for foreign investors to take over local firms. Moreover, the positive effects of IFDI could already be seen in the introduction of the capital, technology and skills that were essential for Korean economic development. An interesting strand of the debate even at this

149.9

Total

63.1

3.6 5.1 0.2 10.7 5.4 14.7 8.5 14.9

USA

42.1

100.0 100.0 28.6 49.1 34.6 51.9 33.2 30.7

Total (%)

Source: Investment Notification Statistics Center 2006.

3.6 5.7 0.7 21.8 15.6 28.3 25.6 48.6

1962 1963 1964 1965 1966 1967 1968 1969

Total value

17.1

0.0 0.0 0.2 10.6 0.02 0.6 0.5 5.2

Europe

Table 1.5 Korean IFDI: by major investor, 1962–1969 (in millions of dollars)

11.4

0.0 0.0 28.6 48.6 0.1 2.1 2.0 10.7

Total (%)

50.6

0.0 0.0 0.0 0.5 7.8 9.8 11.2 21.3

Japan

33.8

0.0 0.0 0.0 2.3 50.0 34.6 43.7 43.8

Total (%)

87.3

100.0 100.0 57.2 100.0 84.7 88.6 79.0 85.2

Combined total (%)

26

Korea and IFDI 1962–1992

early stage was the sense of a need to change the Koreans’ negative way of thinking about foreign participation in the local economy and to increase the awareness of the contribution that foreign firms could make to economic development and industrial modernization (Pak 1968: 95–6).

Korea and IFDI: the shift to heavy and chemical industries (1970–1983) The shift in Korea’s economic policy in the 1970s away from labour-intensive light industrial manufacturing sectors towards the development of heavy and chemical industries necessitated an easing of the restrictions on IFDI that could bring in the capital, technology and skills needed for the successful transformation of the economy. However, as inward investment increased in the 1970s, the influx of foreign capital (particularly from Japanese investors seeking lower production costs in Korea) exacerbated concerns about the possible negative effects of IFDI and prompted the government to revise the laws once again, giving priority to joint ventures in which foreigner’s shares were capped at 50 per cent (Maigov 2001: 22). These new restrictions on inward investment, combined with rising wage levels, led to a decline in IFDI notifications; between 1974 and the first major revisions to IFDI policy in 1984, annual notification levels stayed well below the US$300 million level, dropping as low as US$79 million in 1976. By the end of 1983, the cumulative value of investment notifications stood at US$2.2 billion to be invested in 2,367 projects (see Table 1.6). During this period, the share accounted for by the manufacturing sector Table 1.6 Korean IFDI, 1970–1983 Notification volume (cases) 1962–1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 Total

Notification value (millions of dollars)

195 136 126 250 488 274 97 152 124 121 144 101 106 104 144

149.9 75.9 40.2 122.0 318.2 152.8 207.3 79.2 83.6 149.4 191.3 143.1 153.2 189.0 269.5

2,367

2,174.7

Source: Investment Notification Statistics Center 2006.

Year-on-year growth rate (%) 56.2 –47.0 303.5 260.8 –52.0 35.7 –61.8 5.5 78.7 28.0 –25.2 7.1 23.4 42.5

Korea and IFDI 1962–1992 27 declined to 64.3 per cent (compared with 78.7 per cent in the 1960s) as investment increased in the service sector, where the share of total value rose from 18.2 per cent to 28.6 per cent (see Table 1.7). Total investment notifications for the manufacturing sector for the period from 1970 to 1983 registered US$1.4 billion and notifications for the service sector amounted to US$622 million. The textiles and apparel, chemicals and electronics sectors dominated IFDI in manufacturing with a combined value of US$970 million or 69.4 per cent of the total value (see Table 1.8). The dominance of the chemicals sector, with a share of more than 30 per cent of the total notifications made in this period, reflects the importance afforded to the industry under the government’s Heavy and Chemical Industries Plan. Within the service sector, the hotel and restaurant industries accounted for more than half the value of notifications in this period (US$328 million and 52.8 per cent). The second- and third-ranked industries were finance and insurance (US$131 million and 21.1 per cent) and wholesale and retail (US$71 million and 11.4 per cent) (see Table 1.9). In terms of the nationality of inward investors, once again the lion’s share of notifications (89.3 per cent) was accounted for by firms from the United States, Europe and Japan; during this period, their combined share only fell below the 80 per cent mark in one year8 The rankings of the three major sources of IFDI shifted during this period as Japan took first place with US$1.2 billion (a share of 54.4 per cent), leaving the United States in second place with US$583 million (26.8 per cent) followed by Europe with US$176 million (8.1 per cent) (see Table 1.10). The dominance of Japan and the United States reflects the high degree of Korea’s economic dependence on these two countries, which together accounted for 52 per cent of Korea’s exports in 1984, 47 per cent of imports and 74 per cent of technology transfers (Jung 1987: 275).

Korea and IFDI: liberalization and deregulation (1984–1992) From the mid-1980s, the Korean government implemented a series of measures aimed at deregulating and liberalizing IFDI and improving the country’s business and investment environment in order to make Korea a more attractive host for investment by MNCs. The weakening of the preference seen in previous years for commercial loans over IFDI as a means of financing economic development was prompted by both domestic and external factors. In the late 1980s, Korean companies found their international competitiveness eroded by high wage increases and faced a growing challenge at the low end of the market from newly industrializing economies within the region who still possessed the competitive advantage of lowcost labour. The switch to the technology-intensive, high value-added production necessitated by these developments required access to the advanced technology possessed by MNCs from the major industrialized economies of the world. In addition, the Korean government’s reliance on overseas borrowing in the 1960s and 1970s had resulted in a rapid increase in the country’s total foreign debt, which had soared from US$89 million in 1962 to US$2.2 billion in 1970 and US$40.4 billion in 1983 (SaKong 1993: 258–9). The US government’s policy of maintaining

0.7 0.2 1.8 2.6 1.3 0.7 0.7 0.5 0.7 0.7 0.0 1.2 1.8 1.5 14.4

0.9 0.5 1.5 0.8 0.9 0.3 0.9 0.6 0.5 0.4 0.0 0.8 1.0 0.6 0.7

Total (%) 62.1 29.1 109.6 197.9 128.1 169.9 55.9 38.8 61.9 97.7 100.7 128.3 115.0 104.7 1,399.6

Manufacturing

Source: Investment Notification Statistics Center 2006.

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983

Primary 81.9 72.4 89.8 62.2 83.8 82.0 70.6 46.4 41.4 51.1 70.3 83.8 60.8 38.8 64.3

Total (%)

Table 1.7 Korean IFDI: by sector, 1970–1983 (in millions of dollars)

7.4 9.7 10.5 101.6 21.7 34.8 21.3 40.4 73.3 69.1 36.6 9.1 39.1 147.5 622.1

Services 9.7 24.1 8.6 31.9 14.2 16.8 26.9 48.3 49.1 36.1 25.6 5.9 20.7 54.8 28.6

Total (%) 5.7 1.2 0.1 16.1 1.7 1.9 1.3 3.9 13.5 23.8 5.8 14.6 33.1 15.7 138.4

Other

7.5 3.0 0.1 5.1 1.1 0.9 1.6 4.7 9.0 12.4 4.1 9.5 17.5 5.8 6.4

75.9 40.2 122.0 318.2 152.8 207.3 79.2 83.6 149.4 191.3 143.1 153.2 189.0 269.4 2,174.7

Total (%) Total

5.7

2.9 2.8

0.4 0.9

3.6

0.6 0.1

2.9

4.8

0.5 0.2

10.7 0.4

5.5

0.0 0.0

2.6

62.1

Total

109.6

4.7

0.0 0.3

2.2

4.2 3.2

4.8 3.5

33.4

10.4 43.0

1972

197.9

11.3

1.2 0.3

11.7

9.5 2.1

7.9 5.6

88.6

18.7 40.9

1973

Source: Investment Notification Statistics Center 2006.

29.1

4.9 4.3

28.1 9.3

1971

Chemicals Electrical and electronics Textiles and apparel Metals Transportation equipment Machinery Food and beverages Non-metallic minerals Pharmaceuticals Paper and lumber Other

1970

128.1

2.8

0.6 0.2

7.2

6.7 1.3

7.5 10.0

33.2

38.0 20.7

1974

1976

1.9

3.3

0.0 0.5

1.9

2.3 1.9

169.9 55.8

0.4

0.5 0

1.5

0.7 0.7

0.9 10.3 0.4 6.0

6.2

152.5 10.0 6.1 17.6

1975

38.8

2.7

0.2 0.0

5.1

3.6 3.4

1.8 1.8

0.6

10.5 9.0

61.8

4.6

0.0 1.0

2.5

4.7 0.9

11.8 6.1

0.2

14.7 15.2

1977 1978

97.7

1.7

1.0 1.7

10.0

10.5 17.1

13.1 6.0

0.3

14.2 22.1

100.7

1.2

0.0 0.2

2.4

5.2 4.6

4.8 5.6

0.0

41.4 35.4

1979 1980

Table 1.8 Korean IFDI: by major manufacturing industry, 1970–1983 (in millions of dollars)

128.3

1.5

5.7 1.2

1.6

2.7 10.6

6.2 1.6

2.1

54.4 40.5

1981

3.1

12.4 2.1

0.3

1.4 8.2

1.4 11.4

2.2

8.6 53.6

44.0

36.9 15.3

55.9

65.5 61.4

76.7 73.4

182.8

444.5 343.1

1983 Total

3.1

2.6 1.1

4.0

4.7 4.4

5.5 5.2

13.1

31.8 24.5

Total (%)

115.0 104.7 1,399.5 100.0

1.3

14.7 7.6

0.3

2.9 6.1

2.7 12.3

3.6

38.2 25.4

1982

0.0

3.6

0.2

0.1

0.0

0.0

3.0

0.4

0.7

1.7

3.0

0.0

0.0

0.3

7.4

Total

10.5

0.4

0.2

0.0

0.3

3.4

4.6

1.3

0.1

1972

101.6

0.2

0.8

1.4

0.2

15.5

8.0

1.0

74.4

1973

Source: Investment Notification Statistics Center 2006.

9.7

2.8

1.2

1971

Hotels and restaurants Finance and insurance Wholesale and retail Transportation and storage Business services Real estate and leasing Culture and leisure Other

1970

21.7

0.1

Neg.

0.0

2.1

2.4

4.2

3.6

9.1

1974

34.8

1.9

1.1

2.1

0.0

0.2

7.1

0.6

23.8

1975

21.3

1.4

0.0

0.3

0.5

0.9

3.3

4.0

10.9

1976

40.4

0.9

0.0

0.2

2.1

5.1

3.4

17.5

11.2

1977

73.3

0.0

0.0

0.0

5.5

12.0

7.0

11.4

37.4

1978

Table 1.9 Korean IFDI: by major service industry, 1970–1983 (in millions of dollars)

69.1

0.0

0.0

0.0

3.4

1.0

8.2

50.2

6.4

1979

36.6

0.9

0.0

0.0

0.8

10.3

11.8

11.7

1.1

1980

9.1

0.0

0.0

0.0

0.2

1.9

1.5

3.1

2.4

1981

39.1

0.6

0.1

0.0

0.4

2.2

7.0

22.0

6.8

1982

9.0

1.2

1.9

22.0

57.6

70.9

1.4

0.2

0.3

3.5

9.3

11.4

21.1

52.8

Total (%)

147.5 622.2 100.0

0.0

0.0

0.0

1.3

0.6

0.2

4.6 131.3

140.7 328.3

1983 Total

2,174.7

Total

582.8

45.2 12.0 33.1 16.6 35.9 34.9 14.4 19.6 39.2 46.7 70.6 59.5 101.0 54.1

USA

26.8

59.6 29.8 27.1 5.2 23.5 16.8 18.2 23.4 26.2 24.4 49.3 38.8 53.4 20.1

Total (%)

Source: Investment Notification Statistics Center 2006.

75.9 40.2 122.0 318.2 152.8 207.3 79.2 83.6 149.4 191.3 143.1 153.2 189.0 269.5

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983

Total value

176.3

2.4 1.1 4.1 2.8 3.5 21.6 6.8 11.8 25.1 23.4 16.3 18.7 14.2 24.5

Europe

Table 1.10 Korean IFDI: by major investor, 1970–1983 (in millions of dollars)

8.1

3.2 2.7 3.4 0.9 2.3 10.4 8.6 14.1 16.8 12.2 11.4 12.2 7.5 9.1

Total (%)

1,183.7

21.3 26.1 77.0 294.3 94.8 111.8 49.2 40.1 76.0 104.5 42.5 37.7 40.3 168.1

Japan

54.4

28.1 64.9 63.1 92.5 62.0 53.9 62.1 48.0 50.9 54.6 29.7 24.6 21.3 62.4

Total (%)

89.3

90.9 97.4 93.6 98.6 87.8 81.1 88.9 85.5 93.9 91.2 90.4 75.6 82.2 91.6

Combined total (%)

32

Korea and IFDI 1962–1992

high interest rates and a strong dollar, which had the effect of increasing both the principal and interest on loans from American financial institutions and the debt crisis in Latin America prompted a reevaluation of the Korean government’s policy of restricting and controlling IFDI. In addition, the Korean government was coming under increasing pressure to open its markets to foreign goods and services; this pressure was backed up with threats from the US government that Korea would be designated a Priority Foreign Country for negotiations and that sanctions would be imposed under the provisions of the Super 301 trade laws.9 The situation called for a change in policy that would shift the focus more towards promoting IFDI in order to benefit from foreign capital without assuming the burden of interest payments and the repayment of principal associated with commercial loans. In the words of one Korean scholar, the government shifted its attitude to one of a ‘cautious welcome’ for inward investment, with rigorous approval procedures but generous benefits for those who did invest (Jung 1987: 271). In June 1984, the Chun Doo-hwan administration revised the FCIA as a first step towards the liberalization of inward investment. The government adopted a negative list system, under which all sectors not listed were open to foreign investment, with automatic approval for investment in some specially designated industries. The gradual opening of more sectors to inward investment raised the foreign investment liberalization ratio from 61 per cent in 1982 (521 out of 855 sectors) to 76 per cent (762 sectors out of 999) in 1985; by 1993, the ratio would rise to more than 80 per cent. By sector, the approval ratio was 93 per cent for manufacturing, 100 per cent for construction (where investment was limited to joint ventures) and 80 per cent for mining; the ratio for the service sector, however, remained relatively low (Jung 1987: 283). Approval procedures were simplified and the restrictions on foreign equity participation and the overseas remittance of dividends were eliminated. Whereas the government had previously specified investment limits of 50 to 100 per cent for different industrial sectors, under the new legislation, the percentage of ownership could be decided by the parties involved except in cases where restrictions were imposed in accordance with other domestic laws. The government also offered tax benefits and reductions on customs duties and tariffs for imported equipment and raw materials for foreign-invested firms – incentives that were not made available to domestic companies. In 1989, the government abolished a range of performance requirements that had been imposed on foreign-invested firms including stipulations relating to export quotas, local content and technology transfer. Finally in 1991, the government revised the FCIA once again, this time with the aim of introducing a notification system for inward investment; the system was implemented in 1992 making notification to the authorities the norm and seeking prior approval from them the exception (Jung 1987: 283–4; Kim and Hwang 1998: 10–11; Korhonen 2001: 86–94) Although the changes implemented by the Korean government signalled a shift to a more positive promotion policy for inward investment, they did not mean the end of the preference for loans over IFDI, which was reflected in the low share of foreign capital inflows accounted for by inward investment.

Korea and IFDI 1962–1992 33 Table 1.11 Korean IFDI, 1984–1992 Notification volume (cases)

Notification value (millions of dollars)

Year-on-year growth rate (%)

1962–1969 1970–1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

1,678 2,367 182 204 314 550 532 511 482 510 445

2,589.4 2,174.7 422.3 532.2 354.7 1,063.3 1,283.9 1,090.3 802.6 1,396.0 894.5

56.7 26.0 –33.4 199.8 20.7 –15.0 –26.4 73.9 –35.9

Total

3,730

7,839.8

Source: Investment Notification Statistics Center 2006.

However, this share gradually increased as economic development progressed, climbing slowly from 2.8 per cent between 1962 and 1969 to 4.9 per cent in the 1970s and 8.6 per cent in the 1980s. Nevertheless, the vast majority of investment funds were still sourced from foreign financial institutions rather than foreign corporations or investors (Kim Ch’ang-gyu et al. 2002: 25–6). The measures to promote IFDI achieved some degree of success, as notifications broke through the US$1 billion mark in 1987 and cumulative investment reached US$7.8 billion between 1984 and the end of 1992 on a notification basis, with total volume in excess of 3,700 projects (see Table 1.11). IFDI performance was boosted by the economic boom of the late 1980s and increased investment activity in the service sector ahead of the 1988 Olympic Games. Project notifications remained above the US$1 billion mark until 1989; thereafter, the economic problems facing Korea and affecting domestic firms including slower economic growth, union militancy, rising production costs and excessive red tape caused annual IFDI notifications to fluctuate between US$800 million and US$1.4 billion through to the end of 1992. In terms of patterns in inward investment, this period saw the beginning of a marked trend away from IFDI in the manufacturing sector, as Korea lost its competitive advantage of low-cost labour and towards investment in the service industries. The respective shares for the secondary and tertiary sectors were 64.3 per cent and 28.6 per cent respectively in the 1970s and early 1980s; by the end of 1992, these shares had changed to 52.5 per cent and 46.2 per cent (see Table 1.12). In manufacturing, investment was once again led by activity in the electronics and chemicals sectors; along with transportation equipment, these industries accounted for more than 60 per cent of the value of manufacturing investments (US$2.6 billion). One noteworthy point is that the labour-intensive textiles and apparel industry fell out of favour with foreign investors as wages rose sharply in the

0.1 0.9 1.7 0.7 7.0 1.6 0.5 1.2 1.4 15.1

0.02 0.2 0.5 0.1 0.5 0.1 0.1 0.1 0.2 0.2

Total (%) 250.6 174.9 256.0 660.3 694.9 562.9 518.3 477.6 516.0 4,111.5

Manufacturing

Source: Investment Notification Statistics Center 2006.

1984 1985 1986 1987 1988 1989 1990 1991 1992

Primary 59.3 32.9 72.1 62.1 54.2 51.6 64.6 34.2 57.7 52.5

Total (%)

Table 1.12 Korean IFDI: by sector, 1984–1992 (in millions of dollars)

125.1 345.6 94.9 400.2 574.0 514.1 282.1 912.3 376.8 3,625.1

Services 29.6 64.9 26.8 37.6 44.7 47.2 35.1 65.3 42.1 46.2

Total (%)

46.6 10.8 2.1 2.1 7.9 11.7 1.7 4.9 0.3 88.1

Other

11.0 2.0 0.6 0.2 0.6 1.1 0.2 0.4 0.03 1.1

Total (%)

422.4 532.2 354.7 1,063.3 1,283.8 1,090.3 802.6 1,396.0 894.5 7,839.8

Total

Korea and IFDI 1962–1992 35 late 1980s, taking a share of the total value of just 2.5 per cent (US$102 million). This contrasts with the share of 13.1 per cent and value of US$183 million in the previous period (see Table 1.13). In the service sector, investment activity continued to focus on the hotel and restaurant, wholesale and retail and finance and insurance industries. This reflected, in part, the retail and leisure opportunities created by the rising levels of disposable income in Korea as wages increased sharply in the late 1980s and the infrastructure investment necessitated by the 1986 Asian Games and 1988 Olympics. With a 90 per cent share of the value of investment (US$3.6 billion), even the smallest sector of the three – finance and insurance at US$701 million – dwarfed the fourth ranked sector, which was real estate and leasing with US$145 million (see Table 1.14). The MNCs from the USA, Europe and Japan continued to dominate Korean IFDI in the late 1980s and early 1990s, with their combined share remaining above 90 percent for the whole period. Japan retained its leading position with investments of US$2.9 billion (a 37.6 per cent share of the total) with the United States in second place with US$2.3 billion and a 29 per cent share. Although Europe remained in third place, its share of total investment increased from 8.1 per cent in the previous period to 27.3 per cent by the end of 1992 (see Table 1.15). A survey of motivations for IFDI carried out during the earlier part of this period revealed that foreign investors were aiming to enhance their price competitiveness by reducing production costs through the exploitation of Korea’s cheap and abundant labour; to break into or maintain their presence in the Korean market; to make use of government incentives in order to enhance their competitiveness and to secure high profits by investing in the dynamic and expanding Korean market (Kim Pyoˇng-sun 2002: 21). Although inward investment in Korea had increased during the boom years of the 1980s as the Korean economy enjoyed a period of strong growth and the nation prepared to host the 1988 Olympics, FDI inflows began to slow down again at the end of the 1980s and in the early 1990s. Inward investment, which peaked at US$1.3 billion in 1988, declined by 15 per cent in 1989 and fell by a further 26.4 per cent in 1990 to US$803 million. After rallying to US$1.4 billion in 1991, notifications dropped by 35.9 per cent the following year, dipping back below the US$1 billion mark. This trend reflected the economic problems facing Korea as the boom years came to an end; Korea’s export performance deteriorated, economic growth slowed and foreign investors were discouraged by political instability, rapidly rising wages, labour unrest, high real estate prices and complex bureaucratic procedures. The stagnation of IFDI levels made it more difficult for Korean firms to gain access to the foreign capital, technology and skills they needed to enhance their competitiveness and cope with the rapidly changing domestic and international business environment (Kim Kyoo H. 1999: 390; Ch’oe So˘ ng-il 2003: 51–2). In 1985, two years before the short-lived boom in IFDI began, the Bank of Korea published a report assessing the role played by foreign investors in the development of the Korean economy, drawing attention to the contribution

250.6

Total

174.9

24.7 31.0 42.3 17.8 4.2 8.7 14.2 2.1 2.4 0.7 26.6

1985

Source: Investment Notification Statistics Center 2006.

173.4 8.5 17.5 13.0 5.4 6.7 13.7 1.7 4.0 1.6 15.2

Electrical and electronics Chemicals Transportation equipment Food and beverages Machinery Pharmaceuticals Non-metallic minerals Paper and lumber Metals Textiles and apparel Other

1984

256.0

65.4 34.5 65.6 43.1 14.4 5.0 1.7 0.2 11.4 8.2 6.6

1986

660.3

196.9 166.8 84.4 49.3 55.7 29.9 14.7 18.1 18.0 16.3 10.2

1987

694.9

259.5 224.2 72.1 20.0 21.2 27.7 13.1 6.8 16.4 18.6 15.2

1988

562.9

124.6 103.5 171.4 35.2 31.2 33.7 12.5 7.7 21.4 11.1 10.7

1989

Table 1.13 Korean IFDI: by major manufacturing industry, 1984–1992 (in millions of dollars)

518.3

82.2 108.6 48.4 27.4 61.0 34.2 98.7 1.6 14.5 19.1 22.6

1990

477.6

84.2 110.3 67.5 68.2 46.6 35.7 2.4 10.7 9.2 11.8 31.0

1991

516.0

46.6 145.0 60.6 43.2 15.0 55.0 11.1 97.3 18.5 15.0 8.7

1992

4,111.5

1,057.6 932.3 629.8 317.3 254.7 236.6 182.1 146.2 115.9 102.4 136.8

Total

100.0

25.7 22.7 15.3 7.7 6.2 5.8 4.4 3.6 2.8 2.5 3.3

Total (%)

125.1

10.7 96.4 13.3 0.4 3.7 0.3 0.3 0.0 0.1

345.6

9.3 311.2 18.4 0.0 2.6 0.7 3.5 0.0 0.0

1985

94.9

16.3 24.7 10.4 37.2 5.2 0.5 0.0 0.0 0.7

1986

Source: Investment Notification Statistics Center 2006.

Total

Wholesale and retail Hotels and restaurants Finance and insurance Real estate and leasing Business services Transportation and storage Culture and leisure Telecommunications Other

1984

400.2

102.8 204.1 16.9 48.0 16.9 4.0 3.7 0.0 3.9

1987

574.0

181.7 271.4 93.4 Neg. 16.0 2.6 1.6 0.0 7.3

1988

514.0

161.5 54.0 201.9 55.6 30.7 3.6 2.3 0.0 4.3

1989

Table 1.14 Korean IFDI: by major service industry, 1984–1992 (in millions of dollars)

282.1

100.1 25.3 125.5 0.0 25.7 3.3 0.1 0.1 1.9

1990

912.3

655.0 46.8 180.4 0.0 22.5 5.3 0.0 0.0 2.2

1991

376.8

228.9 58.1 40.7 3.2 19.8 9.8 8.5 <0.1 7.7

1992

3,624.9

1,466.3 1,091.8 700.8 144.5 143.1 30.0 20.0 0.2 28.1

Total

100.0

40.5 30.1 19.3 4.0 3.9 0.8 0.6 <0.1 0.8

Total (%)

7,839.8

Total

2,273.1

193.3 108.0 125.1 249.1 284.4 319.4 317.8 296.6 379.2

USA

29.0

45.8 20.3 35.3 23.4 22.2 29.3 39.6 21.2 42.4

Total (%)

Source: Investment Notification Statistics Center 2006.

422.3 532.2 354.7 1,063.3 1,283.8 1,090.3 802.6 1,396.0 894.5

1984 1985 1986 1987 1988 1989 1990 1991 1992

Total value

2,143.1

49.9 39.8 63.4 216.5 243.0 216.9 207.0 824.4 282.2

Europe

Table 1.15 Korean IFDI: by major investor, 1984–1992 (in millions of dollars)

27.3

11.8 7.5 17.9 20.4 18.9 19.9 25.8 59.1 31.5

Total (%)

2,944.7

164.9 364.6 138.7 497.0 697.3 466.0 235.5 225.9 155.2

Japan

37.6

39.0 68.5 39.1 46.7 54.3 42.7 29.3 16.2 17.4

Total (%)

93.9

96.6 96.3 92.3 90.5 95.4 91.9 94.7 96.5 91.3

Combined total (%)

Korea and IFDI 1962–1992 39 that they had made to total fixed capital formation, economic growth, import substitution and the expansion of exports. The report noted the relatively small amounts of IFDI induced since the 1960s and emphasized the desirability of attracting more inward investment in the future as a means of creating employment and improving the balance of payments situation through import substitution. The bank’s analysts recommended that the government prioritize IFDI in strategic export sectors and high-tech industries where spontaneous growth was hindered by low levels of technology and a weak domestic production base. The report also highlighted the need to offer a range of incentives commensurate with the level of economic effects to be gained from each investment and also to diversify the sources of investment in order to reduce the dependence on American and Japanese investors. Finally, the report recommended that the government strengthen its supervisory capacities in order to prevent unfair and illegal practices by foreign firms operating in the domestic market (Han’guk Uˇ nhaeng 1985: 27–9, 41). Yu Ch’ang-guˇn (2002: 84–6) attributed the low levels of inward investment in Korea during this period to three main factors: Korea’s weak domestic economic situation, its unfavourable business environment and the inadequacy of the government’s IFDI policies. In terms of economic factors, Yu noted the disadvantages of Korea in the areas of natural resources, labour and technology (for resource-seeking investment); market size and growth (market-seeking investment); and productivity and factor costs (efficiency-seeking investment). Foreign investors perceived Korea as a difficult market to approach due to the dominance of the chaebol and their intra-group trading structures, the exclusionist distribution systems and restrictions on investment in the service sector (for example, barriers to investment in the financial and insurance industries), which was of increasing importance in global FDI activity. There were also concerns relating to bubbles in asset values, frequent labour unrest and excessive wage increases, weak infrastructure (including transportation and telecommunication systems) which inflated indirect production costs and a high-cost, low-efficiency economic structure that was prompting even local firms to seek more advantageous production locations overseas. Finally, differences in business culture often led to friction and difficulties in areas ranging from negotiations to human resource management and labour relations. On a policy level, Korea’s weaknesses were apparent in the overall legislation and in regulations relating to business operations and the treatment of foreign-invested firms. According to Yu, Korea’s ‘backward’ FDI policy lacked transparency and consistency; in addition, the ‘passive’ activities of officials focused on regulating and managing inward investment rather than promoting it. The preference was still for loans over FDI, and liberalization tended to take place in government-designated strategic industries or sectors related to exports in order to promote high levels of economic growth. Although M&A activity was the dominant form of global FDI, restrictions on takeovers and stock purchase by foreigners closed off a significant channel for the inflow of investment funds. The Korean government was not proactive in its efforts to establish

40

Korea and IFDI 1962–1992

bilateral investment treaties, even with major trading partners such as Japan and the United States. Finally, foreign investors faced legal barriers to the purchase of commercial real estate, and reforms aiming to improve labour market flexibility (including legislation to allow worker layoffs) were thwarted by strong opposition from unions and other pressure groups. Compared with its more successful regional competitors such as China, Singapore and Malaysia, Korea was weak in terms of its FDI promotion activities, investment incentives, the provision of post-investment care for investors, social amenities for expatriates and so-called ‘hassle costs’, including corruption. The lack of a centralized inward investment promotion agency meant that no single organization was responsible for dealing with foreign investors in need of systematic information and support. The situation was even worse outside the capital city as levels of inefficiency were higher and promotion efforts weaker in the regions than in Seoul. The limited incentives offered by the Korean government focused on tax reductions and, in general, government officials made little effort to encourage foreign investors to re-invest in or expand their businesses. More than anything, Yu (2002: 84–6) concluded, the weakness of the Korean investment environment was due to the country’s failure to realize the significance of the phenomenon of globalization and its inability to adjust to changes in the global economic environment. Despite the positive assessment of the contribution made by foreign investors put forward by the central bank, there were still concerns about the potentially negative effects of higher levels of IFDI activity. Writing in 1987, Jung sought to answer a crucial question: would foreign-invested firms come to dominate the economy or would local firms be able to strengthen their competitiveness and compete with foreign MNCs in the domestic and global markets? The government’s decision in the 1960s to nurture Korean firms within a protected and highly favourable domestic business environment with little foreign competition had, ironically, been a major factor contributing to their weak competitiveness two decades later. Many firms were small in scale and weak in technology, marketing, and management skills and so, Jung argued, could have their very survival threatened by an influx of globally competitive MNCs. The best approach would be to promote competition within the domestic market by liberalizing imports, thus allowing Korean consumers access to a broader range of cheaper, good quality products and encouraging Korean firms to enhance their competitiveness in order to secure their market positions at home and overseas. The government could then liberalize inward investment once the competitive situation of local firms had improved. In his article, Jung returned to familiar themes: highlighting concerns that foreign investors could (in theory, at least) withdraw quickly from Korea should their competitiveness weaken or the domestic economy begin to deteriorate, thus further aggravating a situation of economic stagnation or instability. In the (albeit unlikely) situation where domestic production became heavily dependent on foreign companies, the bargaining power of foreign MNCs would increase along with their domination of the Korean economy, forcing the government to take

Korea and IFDI 1962–1992 41 decisions that acted against Korean interests. Dependence on foreign technology and skills would relegate Korea to the status of a second-class country with little autonomy or real power; Jung (1987: 285–8) was adamant that the government should reconsider its plans to increase IFDI on a broad scale: ‘We must not accept the subordination of the Korean economy to foreign firms’.

Conclusions Between 1962 and 1992, the ‘one-sided and partial’ adoption of globalization described by Dittmer (2002) was clearly manifested in Korea; during this period of ‘expansive globalization’, the Korean government sought to promote exports while restricting imports and controlling FDI, both outward and inbound. Korea’s economic success was the result of policies formulated and implemented by a strong capitalist developmental state that intervened in all areas of economic activity. Government efforts to protect and foster infant industries involved the creation of a business environment in which domestic companies could thrive, shielded from undesirable levels of competition with foreign MNCs but able to access their technology, skills and know-how when necessary. Korea’s distinctive development model was thus characterized by a powerful alliance between the government and big business, state control of financial resources and restrictions on foreign participation in the domestic economy. The institutions and systems associated with the Korean developmental state were underpinned by Asian (Confucian) values that promoted diligence, obedience, respect for education and hierarchy, discipline and frugality. At the same time, these values influenced the development of a business culture and environment that foreign investors found unfamiliar and challenging, with its focus on rigid hierarchies, an authoritarian and paternalistic management style, and unquestioning obedience and loyalty to the group. Thus, in the early stages of Korea’s economic development, the government sought to reap the benefits of economic globalization by accessing global markets and resources, while preserving long-established and deeply embedded socio-cultural values that influenced all areas of life including economic planning, policy implementation, corporate governance, business culture and social interaction. The relatively low levels of IFDI in Korea between 1962 and 1992 can be attributed to a number of factors, including the government’s desire to control the allocation of financial resources and the lack of awareness or appreciation of the potential benefits of IFDI. Another important factor was the negative public sentiment that prevailed in some sectors of society regarding foreign participation in the Korean economy – specifically, concerns that increased levels of inward investment might lead to an erosion of Korea’s economic sovereignty. During this period, the government demonstrated a clear preference for foreign capital in the form of loans rather than IFDI; the focus of Korea’s IFDI policy, therefore, was on regulating and managing rather than encouraging and promoting inward investment. Although the Roh T’ae-woo government took some measures in the latter

42

Korea and IFDI 1962–1992

half of the 1980s to liberalize inward investment and improve Korea’s locational advantages as a host for IFDI, there was still a strong preference for foreign commercial loans over inward investment. FDI inflows were not low because potential investors were discouraged by strong domestic competition; on the contrary, the weak competitiveness of key industrial sectors in Korea demonstrated the need for access to the capital and technology which foreign MNCs could provide. Nevertheless, the Korean government continued to limit the role played by foreign corporations in the country’s industrialization and economic development and, by so doing, ran the risk of denying domestic firms important opportunities to enhance their competitiveness in global markets. The first real challenge to the passive and reactive attitude towards inward investment adopted by successive governments since the early 1960s came with the inauguration of Kim Young-sam as president of Korea in 1993 and the implementation of neoliberal reforms designed to enable Korea to respond to the growing challenges posed by economic globalization.

2

Globalization in the Kim Young-sam era Segyehwa and inward foreign direct investment (1993–1997)

During the first three decades of economic development in Korea, the statebusiness alliance which was created in the early 1960s facilitated and promoted rapid economic growth and industrialization. The Korean developmental state intervened in all areas of economic activity, channelling financial resources to specific projects, industries or enterprises, promoting the expansion of exports and controlling foreign participation in the domestic economy through imports, IFDI or portfolio investment. However, the gradual process of economic liberalization and deregulation that had begun in the 1980s, largely in response to pressure from major trading partners, accelerated in the early 1990s as the Kim Young-sam government implemented a programme of neoliberal reforms in order to meet the challenges posed by the increasing integration of the global economy. Through its globalization (Segyehwa) policy, the Kim government aimed to transform Korea into a ‘first-rate nation’ and a central player on the world stage by reforming areas as diverse as the economy, education, law, politics and government, environment, culture and consciousness (Kim Eun Mee 2000b: 107; Samuel Kim 2000b: 244). In economic terms, the new policy represented a commitment to move towards the establishment of a free market economy based on the neoliberal ideals of unrestricted operation of market forces, free and fair competition, transparency and the reduction of government intervention in economic activity. In terms of culture and consciousness, Segyewha would mean the abandoning of Korea’s ‘Hermit Kingdom mentality’ – a legacy of the closed mindset that had been prevalent among Koreans facing the challenge from the West at the end of the nineteenth century – and the nurturing of more open and globally oriented attitudes among the Korean people. The process of creating a more open and transparent economy inevitably eroded the government’s ability to use tools such as credit control, resource allocation, incentives and subsidies to achieve its developmental goals and also meant a shift in its role from ‘commander-in-chief’ to ‘senior partner’ as its power to intervene and control economic activity weakened. The most significant changes were seen in the areas of financial reform and industrial policy; the state relinquished its control over capital flows and the allocation of credit and, with some minor exceptions, dismantled industrial policy, which had been tarnished

44

Globalization in the Kim Young-sam era

by its association with the authoritarian, interventionist regimes of the past. Weiss described the abolition of Korea’s pilot agency, the Economic Planning Board, under the Kim administration as a potent symbol of the ‘retreat of the stateguided model’ and argued persuasively that the events of the early 1990s marked the evolution of Korea from a ‘developmental’ to a ‘transformative’ state (Weiss and Hobson 1995: 190–5, Weiss 2000: 28–9; 2003: 249). The final years of Dittmer’s (2002: 34) period of ‘expansive globalization’ saw the increasing integration of Korea into the global economy and the weakening of the developmental state model as Korea moved towards the establishment of a free market economy based on neoliberal principles. Korea was still reaping many of the benefits of economic globalization, with Korean corporations penetrating new export markets, establishing global networks of production and distribution and, during this period, gaining access to new sources of corporate funding in international financial markets. At the same time, moves were under way to allow greater participation in the domestic economy for foreign companies and financial institutions. Measures taken by the new government to liberalize and deregulate the domestic financial markets and ease the regulations controlling inward investment resulted in a significant increase in both IFDI and foreign portfolio investment activity. Moreover, in the early 1990s, it was clear that the politico-cultural values and systems that had underpinned Korea’s early success were also coming under increasing pressure to change. The developmental state appeared to have outlived its usefulness and it seemed that greater levels of interaction with the global economy and other cultures would inevitably have an impact on the Koreans’ deeply embedded values, perceptions and beliefs. Segyehwa was intended as a response to changes in the global economy, a strategy for meeting the challenges of financial and economic integration and a means of achieving political goals and securing Kim’s presidential legacy. While there can be little doubt that Korea’s involvement in and exposure to the global economy increased in the mid-1990s, by the end of Kim’s five-year term of office in February 1998, his keynote policy was being criticized at home and abroad for having failed to meet its key objectives and, even more importantly, for contributing to the crisis that engulfed Korea in 1997. The first section of this chapter analyses the context and content of the Segyehwa policy before moving on to consider the impact of Kim Young-sam’s globalization policy on inward investment in Korea during the immediate pre-crisis period.

Kim Young-sam and Segyehwa At the time of Kim Young-sam’s inauguration, the Korean economy was facing a number of major problems, including a weakening of export competitiveness, a slowdown in the gross domestic product (GDP) growth rate and the spread of what was known as the ‘Korean disease’: a combination of corruption, lax social discipline, excessive consumption and a decaying work ethic that threatened the continuing development of the Korean economy (Kim Eun Mee 2000b: 106;

Globalization in the Kim Young-sam era

45

Samuel Kim 2000b: 242). A World Bank report published in 1993 downgraded Korea from the status of one of the ‘Four Asian Dragons’, ranking alongside Hong Kong, Singapore and Taiwan, to that of an ‘Asian Tiger’ in company with Thailand and Malaysia. The report was based on an analysis of the countries’ per capita GDP in 1991 and their GDP and export growth rates in 1992. In 1991, South Korea’s per capita GDP was slightly over US$6,000 while the other three ‘dragons’ were all approaching the US$10,000 mark. South Korea’s GDP and export growth rates were the lowest among the four nations in 1992: GDP rose by 4.7 per cent year on year (compared with 6.1 per cent in Taiwan, 5.6 per cent in Singapore and 5.1 per cent in Hong Kong) while exports expanded by 6.6 per cent (compared with 6.9 per cent in Taiwan, 7.4 per cent in Singapore and 21.2 per cent in Hong Kong). Finally, Korea was the only country out of the four to record a current account deficit, amounting to almost US$5 billion (Business Korea 1993b: 16–17). According to Samuel Kim (2000b: 245), there was a growing realization in the early 1990s that the developmental model that had served Korea well during the first three decades of its modernization and industrialization was ill-equipped to deal with the challenges posed by the creation of the World Trade Organization (WTO), the gradual integration of the global economy and the intensification of competition in world markets. With the domestic economy weakening, the new government had to take action to enhance the international competitiveness of Korean exports, revitalize the economy and integrate it more closely into the rapidly changing world economy. The first year of the Kim administration ended with the first of a series of national disasters, including the collapse of the S˘ongsu Bridge and the Sampoong department store (both located in the capital Seoul) that left 732 dead and more than 1,000 injured. Investigations into the accidents revealed shoddy construction, the use of substandard materials and the violation of construction codes. For many, the heavy loss of life resulted from corruption and the sacrificing of quality and safety to rapid development and underlined the urgent need for reform in Korea (Business Korea 1994: 18; Lee and Sohn 1995: 29–30). For one writer, the S˘ongsu Bridge disaster ‘symbolized the collapse of Korea’s credibility’ (Lee Byung-Jong 1994: 17); decisive action was needed to restore voter confidence in the Kim administration,10 mobilize political support, offer a solution to the nation’s economic and social problems and enable Korea to move forward again. In addition to economic and social problems at home, the Kim government also faced heightened tensions in its relationship with North Korea; in the early 1990s, the north’s refusal to allow international inspections of its nuclear sites had fuelled suspicions that the government had embarked on a nuclear weapons development programme. A crisis was averted thanks to a deal brokered by former US president Jimmy Carter, under which North Korea would receive assistance in upgrading its nuclear power generation facilities in return for calling a halt to any weapons development programme that might be underway. However, critics of the Kim Young-sam government expressed concern that it was relying on the United States to resolve key issues with North Korea rather

46

Globalization in the Kim Young-sam era

than adopting a firm policy of its own (Jung 1994: 7). Looking beyond the Korean peninsula, a response was needed to the changes occurring in the world at the close of the twentieth century, including the end of the Cold War and the shift in balance of power between the Soviet bloc and industrial giants such as the United States, Japan and Germany. The increasing autonomy of regional economic blocs such as the European Union (EU) and the North American Free Trade Agreement (NAFTA), the growing importance of international economic and trade organizations, developments in the areas of communications and information technology, and the increase in global cooperation and competition all demanded the formulation of a response to the phenomenon of globalization (Ha 1999: 165, 168). Returning to Seoul from the Asia-Pacific Economic Cooperation meeting in Indonesia and a state visit to Australia in November 1994, President Kim announced his ‘Sydney Vision’: the Segyehwa policy that would transform the nation in areas as diverse as economics, government, diplomacy and culture. On 21 January 1995, the government established the Presidential Segyehwa Promotion Committee; the concept of Segyehwa was formally announced to the Korean people four days later, and the new policy was promoted from that point onwards (Ch˘on 2004: 120–1). In terms of the economy, Segyehwa would achieve an ‘economic revolution’ that would transform Korean companies into world-class enterprises with global production and sales networks and enhance competitiveness by allowing greater competition in the domestic market between local and foreign firms. The process of financial reform would be accelerated and Korean business systems would be brought into line with global standards, creating a country in which people were happy to work and invest (Bobrow and Na 1999: 184–5). The principal aims of economic Segyehwa were to eliminate government intervention in economic activity; to liberalize the domestic market; to improve the environment for bilateral trade and investment and to make a shift from high-cost, low-efficiency operations to low-cost, highefficiency business activity (Korhonen 2001: 96). The key area for reform, upon which the Kim Young-sam government focused most of its efforts, was the financial sector; the process of financial deregulation and liberalization which had begun in the 1980s as a response to pressure from major trading partners for greater market access for their financial institutions, gathered pace in the 1990s. Pressure also came from Korea’s own economic technocrats, who saw financial liberalization as a way of allowing the chaebol access to alternative sources of funding and thus cutting the collusive ties between the state and big business, and from Korean firms in search of cheaper sources of corporate finance (Weiss 2000: 34; Noland 2005: 10). Under the Kim administration, the Korean financial markets were to become as open and deregulated as those in advanced countries, with a free-floating currency, open capital markets and unrestricted access for domestic firms to commercial loans from international financial institutions (Business Korea 1993a: 47). In addition to creating a more efficient, transparent and globally oriented financial sector, these reforms would satisfy key requirements for Korea’s entry

Globalization in the Kim Young-sam era

47

to the Organization for Economic Cooperation and Development (OECD) and thus achieve both national and presidential ambitions. The government believed that joining the OECD would enhance Korea’s economic standing and policymaking role in the world and provide the momentum for Korea to become a truly advanced nation. For Kim Young-sam, OECD membership offered an opportunity to assure his place in history as the president who had guided the nation to its new, elevated position in the global economy (Korea Focus 1995: 127–9; Kang 2000: 76–7). Critics of the government, however, viewed the membership bid as a perfect example of the ‘psychological use’ of globalization to gain approval for market opening and other economic policies that might otherwise have been difficult to ‘sell’ to the Korean public as part of the country’s broader globalization drive (Kang 2000: 76–7). Furthermore, many politicians and academics were of the opinion that the application for membership of the OECD was premature and would bring only negative side effects and economic burdens (Korea Focus 1995: 127–9). When the Segyehwa policy was announced to the Korean public, the ensuing debate on globalization focused on many of the topics discussed by scholars in other countries, including the appropriate policy response to the changes facing Korea and the world, the role of the government in formulating and implementing that response and the costs and benefits of integration into the global economy.11 According to Samuel Kim, the term ‘Segyehwa’ had different meanings for different groups of people: for the government it was ‘a strategic principle . . . a mobilizing slogan . . . a new national identity badge for a state aspiring to advanced world-class status . . . a passport to the OECD’. For the chaebol, it meant freedom from state control and access to new sources of funding for their global expansion plans, but to critics it was little more than ‘political sloganeering’ to distract attention from the economic and social problems facing the nation (Samuel Kim 2000b: 243–4). Although the government and some scholars emphasized the positive aspects of Segyehwa in terms of enhancing the competitiveness of Korean industry, revitalizing the economy and ensuring the future prosperity of the nation, other academics and journalists warned of the potential negative side effects of embracing globalization. According to former Minister of Finance Lee Kyus˘ong (1995: 52), economic globalization would benefit Korea in the long term; whether looked at from the point of view of economic theory or historical experience, free exchanges were, he argued, better for economic development than protectionism. The head of the Korea Institute for International Economic Policy saw global economic developments as offering Korea an ‘opportunity to participate positively in building a new global economic order’ by bringing national systems in line with international standards. The expansion of market liberalization and the intensification of global competition could be either a shock or an opportunity for Korea, and the impact of globalization would depend to a great extent on the nation’s abilities and its efforts to respond to this phenomenon. For the Koreans, globalization was not a matter of choice; they had to be active participants, assuming the responsibilities and performing the

48

Globalization in the Kim Young-sam era

duties commensurate with their new position in international society (Yoo 1995: 80–2). In terms of the impact of globalization on trade, Korea would have to dismantle the barriers that had protected domestic industries in the past and Korean firms would face unprecedented direct competition from foreign goods in the domestic market. Although sectors and firms which were already competitive might profit from liberalization, weaker sectors including agriculture would be adversely affected and this could lead to political problems in terms of opposition from farmers and other actors (Yoon 1995b: 44–5). As in the trade sector, the effects of globalization would be unevenly felt in the financial industry as large firms with good credit ratings would benefit from greater access to foreign sources of capital, while small- and medium-sized enterprises (SMEs) would not benefit to the same extent. If Korea joined the OECD on schedule in 1996, the government would have to remove the restrictions on foreign ownership of Korean companies and ease regulations governing the capital and foreign exchange markets. Foreign financial institutions would be able to enter the Korean market, where they would be afforded equal treatment with local institutions despite the inherent weaknesses of the domestic financial sector. Faced with these challenges the government would find its policy options limited and would be required to cooperate with foreign countries to coordinate policies. The demolition of the ‘isolation apparatus’ that Korea had maintained while pursuing state-led development strategies would ultimately lead to the weakening of national sovereignty and an increase in vulnerability to external shocks (Ch’oe 1995: 26; Yoon 1995b: 47–9). Potential problems notwithstanding, there appeared to be widespread agreement that, as an export-dependent country, Korea had little choice but to embrace globalization, abandon its ‘neomercantilist, statist concept of government’ and dismantle the systems and barriers created in the process of pursuing state-led development (Yoon 1995a: 17–22). Another strand of the globalization debate focused on the role of the state; there was consensus that the role of the government would inevitably change as Korea responded to the pressures of globalization, breaking away from the tradition of government intervention in the economy, the special relationship between the state and big business and the corruption and moral hazard that the relationship had engendered. In future, the government would have to assume the role of monitor and umpire, ensuring fairness and efficiency, adhering to the rules of the game, adjusting to the market rather than suppressing it and mediating between social groups and classes (Yoon 1995b: 50–1). Key economic tasks for the government included maximizing efficiency, boosting productivity, developing positive labour-management relations, fostering the parts and components industries and supporting SMEs that were weak in terms of capital, technology, marketing and management (Ch˘ong 1995: 42–4; Pak Chong-mun 1995: 56–8). At a corporate level, the government would need to promote the globalization of Korean firms by allowing foreign firms with advanced technology and management skills to enter the Korean market. In order to boost IFDI,

Globalization in the Kim Young-sam era

49

the government would have to enhance Korea’s location-specific advantages to attract foreign capital and the competitiveness-enhancing technology and skills that foreign firms could bring into Korea. This would entail removing barriers to entry, expanding and improving the nation’s infrastructure, enhancing telecommunications and information technology networks, developing and fostering human resources, increasing investment in R&D activities and easing or eliminating regulations that hampered creativity and autonomy in business operations (Ch’oe 1995: 28–31; Ch˘ong 1995: 42–4; Pak Chong-mun 1995: 56–8; Yoo 1995: 81–2). Just as the government would have to change in order to meet the challenge of globalization and civil servants would have to change their ‘passive and defensive’ attitude, the Korean people would also have to alter their perceptions and mindset. Writing in 1993, Lee Hong-koo (who later served as Prime Minister under Kim Young-sam) identified Korea’s ‘cultural exclusivism’ as a potential barrier to the success of the government’s Segyehwa policy and highlighted ‘neo-Confucian ethical concepts, the myth of national homogeneity, limited experience with cultural diversity, fear of foreign powers and antiinternationalization’ as significant obstacles to the implementation of globalization policies in Korea (Samuel Kim 2000b: 258). Although the Korean economy was becoming increasingly integrated into the global market and the nation’s industrial structure had undergone a rapid transformation, some commentators argued that there had been no corresponding change in the attitudes and consciousness of the Korean people. The Koreans retained an ‘emotion-ridden nationalist sentiment and traditional closed mentality’, and ‘behaved as though they were living in a closed economy’ (Yoon 1995a: 13–15). Rather than regarding globalization as a threat, the Koreans should look on joining the OECD and all the reforms that entailed as an opportunity to make their country’s economic system more advanced. Thus, once again, the problem of the Koreans’ negative mindset regarding foreign participation in the economy was identified as a key issue; using the analogy of a computer, one writer warned that, with the best ‘hardware’ in the world (legislation, institutions and systems), it would be difficult or even impossible to enhance its capabilities using outdated ‘software’ (perceptions, attitudes and practices) (Yoo 1995: 79; Ch’oe 1995: 28–31). In October 1996, the Republic of Korea became the twenty-ninth member country of the OECD and only the second Asian nation to join the organization after Japan. Despite opposition within the National Assembly on the grounds that Korea’s economic situation was not favourable for joining and the burden of associated costs (such as US$3.7 million a year in membership fees) was too high, the news was welcomed by the chaebol and other entrepreneurs, who saw joining the OECD as a means of boosting competitiveness and a sign that government control of economic activities would diminish even further. Although Korea’s membership was officially ratified by the National Assembly on 26 November, doubts remained about the significance and value of Korea’s achievement, with critics arguing that it should not be seen as a success, nor should it be ‘promoted as if it were a political achievement’. The fact remained

50

Globalization in the Kim Young-sam era

that, far from reaching the level of economic development achieved by major industrialized nations, Korea was still a developing country in terms of its economic foundation and industrial structure (Korea Focus 1996: 160–1). Kim Young-sam and his ‘Civilian Government’ came to power promising political and economic reform, a break with the authoritarian past and a ‘new Korea’. Prohibited by law from seeking a second term of office, Kim had to achieve these goals and create a positive presidential legacy within a relatively brief period of time. Events at home and abroad during the first year of his administration led directly and indirectly to the formulation of the Segyehwa policy that was to become the hallmark of the Kim Young-sam era. The continuing weakening of the Korean economy, disasters at home and tensions with North Korea highlighted the need for the government to take decisive action in order to mobilize support and resolve the problems facing the nation. Perhaps more importantly, changes in the global economy exemplified by the conclusion of the Uruguay Round negotiations in 1994 demanded a response from the government to the phenomenon of globalization. As a newly industrialized economy dependent on overseas markets for sales, capital and technology and desirous of advanced nation status, Korea could not turn its back on globalization. Faced with the prospect of increasing pressure to conform to global standards and play by global rules, Korea had to develop a strategy for managing globalization in order to maximize the opportunities it seemed to offer and minimize the threats it might entail. By the end of 1996, there was mounting criticism of the Kim government, its policies and campaigns; with economic performance faltering, government policies were being dismissed as ‘loud slogans with little substance’. In the financial sector, perceptions that little had been achieved in the way of real reform were strengthened with each delay to and revision of the original liberalization plan. With one year left before the projected full opening of the Korean financial markets, the local media remained sceptical; some journalists reported the view that the reforms to date had been little more than ‘lip service’. There had, they argued, been little change in the day-to-day running of commercial banks, government influence and intervention was still apparent, and competitiveness had been eroded by limited competition, poor management and overstaffing (Kim Chong-tae et al. 1997: 25–7). One academic pointed out that any proposals for reform would be meaningless unless there were changes in the roles of and relationship between the government, banks and conglomerates. He also noted that government officials were continuing to oppose or undermine the proposed reforms and interfere in the operations of commercial banks and that, without reform within the bureaucracy, little more than superficial change would be accomplished (Chung 1997: 159–61). Early assessments of the Segyehwa policy made after the end of Kim Youngsam’s term of office noted that Korea’s standing in the international community had been enhanced in the sense that Korea had become an active member of such organizations as the OECD, the Bank for International Settlements and the United Nations Economic and Social Council.12 However, the Korean people

Globalization in the Kim Young-sam era

51

were lampooning major policies, including Segyehwa, describing them as ‘more like fancy wrapping paper than well-designed and viable programmes’. Korea’s leaders were perceived to be ‘concerned only about winning votes or about their image as liberal intellectuals’ (Kim Pyung-joo 1996: 139–41) and commentators overseas were equally sceptical about a policy that was ‘undertaken for largely politically symbolic reasons’ (Noland 2005: 10). In terms of the Kim administration’s achievements in the area of economics, critics were quick to point out the ‘chronic discrepancy’ between promise and performance, citing as an example the government’s failure to enhance Korea’s international competitiveness. According to the 1998 IMD Competitiveness Yearbook, Korea’s competitiveness actually declined during the Kim administration, with Korea’s ranking dropping from thirty-second out of 46 countries in April 1991 to twenty-seventh in April 1994. Korea’s ranking in terms of globalization – defined as the extent to which a country participates in global trade and investment – dropped from fourth out of 15 countries in 1991 to forty-fifth out of 46 countries in 1997 (Samuel Kim 1999: 32; 2000b: 247, 252, 254; Kim Yong-Hak 2000: 90). Although some of the reform proposals were impressive, the government’s failure to implement them in a consistent and thorough manner made Korea more vulnerable to external pressures and changes, resulting in instability and an increasing awareness in the international financial community of the scale of the problems facing the Korean economy. The ‘national ego trip’ that was Segyehwa had, in many respects, failed to deliver its promises and was characterized by rhetoric rather than substance, resulting in the liberalization but not the reform, of the domestic market (Samuel Kim 1999: 32; 2000b: 252, 254; Kim and Moon 2000: 61). In his analysis of Segyehwa, Samuel Kim (2000b: 273) observed: Perhaps more than any other state in the 1990s South Korea extolled globalization unabashedly, only to achieve so little. In many respects the Republic of Korea remains far from being or becoming an attractive, advanced and globalized country that people all over the world would want to come to, invest in and live in. However, in some respects the available data from this period present a positive picture of the outcomes of the Segyehwa policy in terms of trade, overseas FDI and foreign portfolio investment in Korea. In the early- to mid1990s, Korea remained a ‘quintessentially trading state’ with one of the highest ratios of trade to GDP in the world. In 1996, Korea’s ratio stood at 58 per cent, compared with 17 per cent in Japan, 24 per cent in the United States and a global average of 43 per cent (Samuel Kim 2000b: 247). Between 1992 and 1997, Korea’s external trade volume continued to expand at a rapid pace; exports increased from US$82.2 billion to US$136.1 billion while imports soared from US$83.8 billion to US$144.6 billion, peaking at US$150.3 billion in 1996. Starting from an almost equal base of around US$82 billion in 1993, the rapid growth rate for exports was outpaced by the rise in imports in 1994

52

Globalization in the Kim Young-sam era

and 1995 (growth rates of 16.8 per cent and 30.3 per cent for exports against increases of 22.1 per cent and 32 per cent for imports). Accordingly, Korea’s trade deficit deepened to US$20.6 billion in 1996 from US$1.6 billion in 1993; however, the deficit shrank to US$8.5 billion in the final year of the Kim administration as imports posted a year-on-year decline of almost 4 per cent (KITA 2006). The early 1990s saw a surge in inflows of foreign portfolio investment as market liberalization programmes were implemented and total portfolio investment, which had totalled US$2.5 billion in 1991, soared to US$29.7 billion three years later.13 As local firms were given the freedom to tap foreign financial markets for investment finance, international loans increased from US$21.7 billion to US$32.4 billion (Kang 2000: 84). The surge in foreign capital inflows prompted the Kim government to take further action to promote OFDI, in the hopes of counterbalancing the inflow of funds, reducing the possibility of an acceleration in inflationary pressures and enhancing the international competitiveness of local exporters. In 1994, the Korean government implemented a complete overhaul of the investment approval system, reflecting its new perception of OFDI and the need for the creation of global networks of production and distribution as a key part of corporate Korea’s strategy for survival and growth (Lee Chae-min 1997: 4–5). The year 1996 saw the liberalization of the remaining sectors in which OFDI was restricted and further simplification of approval and supervision procedures. In the following year, the government abolished the self-financing requirement for outward investment, which required investors to contribute internally generated funds for OFDI projects, allowing firms to finance their plans entirely with external funding and subject to few restrictions (Pak Sang-ho 1995: 195; 1996: 182–95; Han To-suk 1996: 81–2). Accordingly, the early 1990s saw an explosion in Korean OFDI; in the previous decade, the annual amount invested overseas by Korean corporations had fluctuated between US$28 million and US$571 million. In 1991, Korean OFDI passed the US$1 billion mark and remained at that level for the next two years, before breaking through the US$2 billion level in 1994, the US$3 billion mark in 1995 and reaching US$4 billion in 1996. For many companies, the move overseas was an inevitable step in their efforts to counteract changes in the domestic and international business environment. At home, they faced an erosion of their competitive advantage due to the appreciation of the w˘on, rising wages and land prices, falling productivity and labour unrest. Internationally, they had to overcome trade friction and import restrictions and formulate a response to the emergence of regional economic blocs such as NAFTA and the EU. For many companies, survival meant relocating production facilities overseas in developing countries to achieve lower production costs and investing in industrialized countries to combat protectionism and acquire advanced technology and management expertise. Between 1968 and 1997, Korean firms invested US$20.1 billion in 8,410 projects; three-quarters of both the value (US$14.8 billion or 73.6 per cent) and volume (6,310 projects or 75 per cent) of cumulative Korean OFDI was invested during the Kim Young-sam administration. In

Globalization in the Kim Young-sam era

53

1996, overseas FDI amounted to US$4.5 billion in 1,472 projects and that one year accounted for 22.2 per cent and 17.5 per cent respectively of the total cumulative value and volume of Korean OFDI recorded between 1962 and 1997 (Export-Import Bank of Korea 2007).

Segyehwa and Korean IFDI (1993–1997) For the first 30 years of Korea’s economic development, the government showed a clear preference for foreign capital in the form of loans rather than IFDI as a means of financing its development plans. This reluctance to allow a greater degree of foreign participation in the domestic economy stemmed from a desire to control the allocation of financial resources but also reflected public concerns that increased levels of inward investment might lead to foreign domination of the Korean economy. Although moves towards liberalizing IFDI had begun in the mid-1980s, it was only in the early 1990s that the Korean government began to open up the domestic market to foreign investors in any significant way; according to Park Yoon-shik (2003: 224), Korea was a ‘late and very reluctant convert to the many virtues of FDI in the post-colonial era’. When the conversion took place, it was largely the result of external pressures; in order to join the OECD, Korea would have to bring its IFDI policy and systems into line with international practice. The early 1990s saw a steady increase in global FDI inflows and outflows, which increased from a combined total of US$357 billion in 1991 to US$824 billion at the end of 1997 (see Table 2.1). During this period, FDI inflows to the industrialized nations of the world more than doubled from US$114.7 billion to US$232.8 billion and outflows saw similar growth rates, rising from US$189.8 billion to US$359.6 billion. The expansion in FDI flows to and from developing countries was far more rapid, with inflows increasing more than threefold from US$41.7 billion to US$148.8 billion and outflows soaring more than sevenfold – Table 2.1 Trends in global FDI, 1991–1997 (in billions of dollars)

1991 1992 1993 1994 1995 1996 1997

Total inflows

Total outflows

AC inflows

AC outflows

DC inflows

DC outflows

158.9 173.8 218.1 238.7 316.5 349.2 400.0

198.1 201.5 239.1 251.1 338.7 346.8 424.0

114.7 119.7 138.8 142.2 205.9 208.2 232.8

189.8 179.7 204.8 209.7 291.3 294.7 359.6

41.7 49.6 73.0 90.4 96.3 128.7 148.8

8.3 21.7 34.1 40.7 47.0 51.5 61.1

Source: Kim Chin-jung 2000: 34 –5. Notes AC: Advanced (industrialized) countries. DC: Developing countries.

54

Globalization in the Kim Young-sam era

albeit from a small base – from US$8.3 billion to US$61.1 billion. Overall, the share of global flows accounted for by the advanced nations of the world declined from 95.8 per cent of outflows and 72.2 per cent of inflows in 1991 to 84.8 per cent and 58.2 per cent respectively in 1997. There was a clear trend towards developing countries becoming more important as host nations as the liberalization of IFDI progressed. (Kim Chin-jung 2000: 34–5). In the early 1990s, the Kim Young-sam government further eased the regulations governing IFDI as a response to the difficulties facing the Korean economy, increasing pressure from trading partners to allow greater access to the domestic market for foreign goods and services, and the need to conform to the OECD membership requirements regarding inward investment. On 30 June 1993, the Kim Young-sam government announced a Five-Year FDI Liberalization Plan, which aimed to continue the process of easing IFDI-related regulations, expand the number and range of sectors open to foreign investment and increase efforts to promote inward investment. The plan was revised annually and the original schedule was amended as additional sectors were opened up to foreign investors. In March 1994, permission was given to local banks with licenses to carry out foreign exchange transactions to accept notifications from foreign investors, and the time needed to process notifications was significantly reduced from between 20 and 30 days to just three hours. In 1995, the Korea Trade Promotion Corporation (KOTRA) changed its name to the ‘Korea Trade and Investment Promotion Corporation’ reflecting its new role in promoting cross-border investment and providing support for technological and industrial cooperation projects (Korhonen 2001: 75, 88). The five-year plan also simplified investment procedures, provided investment incentives including tax exemptions, created new industrial estates for foreign investors, and opened more sectors to IFDI (with the aim of raising the liberalization ratio to 98 per cent by 1997). However, the rhetoric used by the Kim administration, describing Korea as ‘a most hospitable place for business’ was described by one writer as ‘unheard phrases in a previously hostile country’ and dismissed as ‘loud sloganeering’ as restrictions remained on the permissible level of foreign ownership and requirements for minimum export performance and local content levels stayed in place (Korhonen 2001: 96). In 1996, when Korea was accepted as a member of the OECD, the government took steps to bring Korea’s inward investment systems and procedures in line with international best practice. In January 1997, the FCIA was revised and promulgated as the Foreign Investment and Foreign Capital Inducement Act, providing for the liberalization of 47 out of the 81 sectors that remained closed to foreign investment by the year 2000. In February 1997, foreign firms were given permission to acquire outstanding shares in Korean companies through ‘friendly’ M&A transactions which had the approval of the target firm’s board of directors (Kim and Hwang 1998: 10–1, 17, 35). As a result of these reforms, Kim Young-sam’s five-year term of office saw a steady increase in FDI inflows from US$1 billion on a notification basis in 1993 to US$7 billion at the end of 1997. The real surge came in 1996 and 1997 when investment amounted to

Globalization in the Kim Young-sam era

55

Table 2.2 Korean IFDI, 1993–1997 Notification volume (cases)

Notification value (millions of dollars)

1962–1969 1970–1983 1984–1992 1993 1994 1995 1996 1997

195 2,367 3,548 466 672 905 1,007 1,110

149.9 2,174.7 7,417.4 1,044.3 1,316.5 1,947.6 3,202.6 6,970.9

Total

4,160

14,481.9

Year-on-year growth rate (%)

16.7 26.1 47.9 64.4 117.7

Source: Investment Notification Statistics Center 2006.

US$10.2 billion accounting for 70 per cent of total notifications during Kim Young-sam’s term of office and for 42 per cent of total IFDI between 1962 and 1997 (see Table 2.2). During this period, both the manufacturing and service sectors saw a steady increase in inward investment, from US$391 million in 1993 to US$2.5 billion in 1997 (manufacturing) and from US$590 million to US$4.4 billion (services). The trend towards greater levels of investment in service-related industries continued; by the end of 1997, manufacturing accounted for 42.3 per cent of all inward investment (US$6.1 billion) between 1993 and 1997, while services claimed 53.8 per cent (US$7.8 billion). Investment in the primary sector remained sluggish, the only exception being an investment of US$230 million in a mining venture by an Irish firm in 1996 (see Table 2.3). Within the manufacturing sector, the food and beverages, chemicals, electronics and transportation equipment industries attracted the highest levels of investment; their combined share of the notifications in this period stood at 72.6 per cent (US$4.5 billion out of US$6.1 billion). This investment activity reflected the importance of these sectors both within the domestic economy as disposable incomes increased and private consumption expanded, and for Korean exporters, particularly in the case of automobiles and electronics (see Table 2.4). Foreign investors in the service sector were targeting wholesale and retail opportunities in the mid-1990s; with a total investment of US$4.5 billion, these industries accounted for almost 60 per cent of the funds invested and the secondranked industry – hotels and restaurants – attracted only one quarter of that sum (US$1.3 billion). These two industries, which benefited from the growing wealth of and consumption by Korean society, took a combined share of almost three quarters of the funds invested in the service sector during the five-year period. The third-ranked industry was finance and investment; here, the small amount invested (US$1 billion or less than one quarter of the investment notifications made in the wholesale and retail sector) reflected the continuing restrictions on IFDI by foreign financial institutions (see Table 2.5).

266.9

Total

1.8

0.0 2.2 0.1 7.3 0.1

Total (%)

6,124.1

390.6 490.7 1,062.2 1,673.0 2,507.6

Manufacturing

Source: Investment Notification Statistics Center 2006.

0.0 28.4 1.6 232.8 4.1

1993 1994 1995 1996 1997

Primary

42.3

37.4 37.3 54.5 52.2 36.0

Total (%)

Table 2.3 Korean IFDI: by sector, 1993–1997 (in millions of dollars)

7,782.4

590.2 789.2 819.9 1,221.3 4,361.8

Services

53.8

56.5 59.9 42.1 38.1 62.5

Total (%)

308.6

63.5 8.2 64.0 75.5 97.4

Other

2.1

6.1 0.6 3.3 2.4 1.4

Total (%)

14,481.9

1,044.3 1,316.5 1,947.6 3,202.6 6,970.9

Total

Globalization in the Kim Young-sam era

57

Table 2.4 Korean IFDI: by major manufacturing industry, 1993–1997 (in millions of dollars) 1993 Food and beverages Chemicals Electrical and electronics Transportation equipment Paper and lumber Machinery Pharmaceuticals Metals Non-metallic minerals Textiles and apparel Other Total

1994

1995

1996

1997

Total

Total (%)

83.3 77.1 72.8

76.3 91.7 74.7

54.4 194.6 238.1

303.3 547.7 347.8

883.0 340.4 334.5

1,400.2 1,251.5 1,067.9

22.9 20.4 17.4

30.4

56.0

140.4

112.9

392.4

732.1

11.9

2.0 49.6 21.9 17.9 6.6

14.1 79.7 12.7 38.5 21.5

91.7 92.2 98.9 87.7 21.5

104.7 99.5 18.3 19.4 67.1

260.3 107.7 79.6 25.2 17.4

472.8 428.8 231.4 187.9 134.2

7.7 7.0 3.8 3.1 2.2

5.1 24.7

8.1 17.5

19.7 22.9

17.5 34.8

28.7 38.2

79.1 138.2

1.3 2.3

390.6

490.7

1,062.2

1,673.0

2,507.6

6,124.1

100.0

Source: Investment Notification Statistics Center 2006.

The dominant position in Korean IFDI activity that the United States, Europe and Japan had enjoyed since the 1960s was eroded during this period, as their average combined share of the total value of notifications fell to 80.7 per cent from 93.9 per cent between 1984 and 1992. In 1996, the share dropped as low as 68.2 per cent due to investments of around US$900 million from firms based in or making investments via Malaysia and Hong Kong. Another striking feature of this period was that Europe moved into second place, ahead of Japan, with Table 2.5 Korean IFDI: by major service industry, 1993–1997 (in millions of dollars) 1993

1994

1995

Wholesale and retail 349.2 Hotels and 61.3 restaurants Finance and insurance 36.5 Business services 88.6 Telecommunications 29.6 Transportation and 4.8 storage Culture and leisure 11.4 Real Estate and leasing 0.0 Other 8.7

320.4 223.9

326.4 93.3

185.2 14.7 0.3 41.7

Total

590.2

1996

1997

Total

552.1 211.4

2,965.8 666.8

4,513.8 1,256.7

58.0 16.1

291.3 88.9 1.9 7.7

205.9 137.2 12.1 43.0

341.2 152.3 133.7 28.5

1,060.1 481.6 177.5 125.6

13.6 6.2 2.3 1.6

0.0 0.0 3.1

3.0 0.6 6.8

7.7 27.5 24.6

26.0 1.2 46.3

48.2 29.3 89.5

0.6 0.4 1.2

789.2

819.9

1,221.3

4,361.8

Source: Investment Notification Statistics Center 2006.

Total (%)

7,782.3 100.0

58

Globalization in the Kim Young-sam era

Table 2.6 Korean IFDI: by major investor, 1993–1997 (in millions of dollars) Total value

USA

Total (%)

Europe

Total (%)

Japan

Total (%)

Combined total (%)

1993 1994 1995 1996 1997

1,044.3 1,316.5 1,947.6 3,202.6 6,970.9

340.7 311.0 642.8 875.0 3,189.5

32.6 23.6 33.0 27.3 45.8

307.4 406.7 475.2 1,058.3 2,409.7

29.4 30.9 24.4 33.0 34.6

286.0 428.4 424.5 254.7 265.4

27.4 32.5 21.8 7.9 3.8

89.4 87.0 79.2 68.2 84.2

Total

14,481.9

5,359.0

37.0

4,657.3

32.2

1,659.0

11.5

80.7

Source: Investment Notification Statistics Center 2006.

investments of US$4.7 billion and a share of 32.2 per cent. The United States held the leading position with a share of 37 per cent (US$5.4 billion) up from 29 per cent in 1984–1992, as European investors began to close the gap with the other investor regions (see Table 2.6). However, even as liberalization progressed in the mid-1990s and levels of inward investment increased, the Korean government was still perceived to be restricting the role played by foreign MNCs in the country’s industrialization and demonstrating a preference for ‘indigenous industrialization rather than FDI-based development’ (Kim and Hwang 1998: 7). According to Ha (2001: 1–3), this ‘restrictive and passive’ attitude reflected a ‘tacit agreement’ that economic growth and industrial development should centre on Korean rather than foreign firms. In contrast to the promotional activities being carried out by Korea’s competitors in Southeast Asia, the Korean government was ‘not interested in removing various impediments or promoting FDI in general’ (Kim June-Dong 1999: 9–10). According to Yu Ch’ang-g˘un, (2002: 71–8) the state and corporate view of globalization in Korea was distorted: the government and major corporations believed that increased levels of OFDI were evidence of the globalization of the Korean economy and so failed to focus on the importance of IFDI. Kim Eun Mee (2000b: 108–9) observes that government policy in this respect was ‘more passive than active’ and notes that the role played by the Kim administration was ‘minimal and reactive’, with officials doing little more to promote globalization than removing obstacles to overseas investment by Korean firms and encouraging them to globalize their business operations.

Korean IFDI in the pre-crisis era (1962–1997) In the 35-year period between 1962 and 1997, IFDI in Korea totalled US$24.6 billion on a notification basis, to be invested in 10,452 projects. Of the total value, less than 10 per cent was invested in the early stages of Korea’s economic development when the government focused on inducing foreign capital in the form of loans, and between 1962 and 1983, IFDI notifications amounted to

Globalization in the Kim Young-sam era

59

Table 2.7 Korean IFDI, 1962–1997 Notification volume (cases) 1962–1969 1970–1983 1984–1992 1993–1997 Total

Percentage of Notification value total (millions of dollars)

Percentage of total

195 2,367 3,730 4,160

1.9 22.6 35.7 39.8

149.9 2,174.7 7,839.8 14,481.9

0.6 8.8 31.8 58.8

10,452

100.0

24,646.3

100.0

Source: Investment Notification Statistics Center 2006.

US$2.3 billion in 2,562 projects. Although the state’s preference for financing development with loans continued well into the 1990s, revisions of IFDI legislation and improvements to the investment promotion system resulted in an increase in cumulative IFDI between 1984 and 1992, when notifications rose to US$7.8 billion. The Kim Young-sam government’s action to deregulate and liberalize inward investment in the early 1990s led to a doubling of notifications to US$14.5 billion during Kim’s five-year presidency (see Table 2.7). Of the US$24.6 billion invested between 1962 and 1997, almost equal amounts were invested in the manufacturing and service sectors, which together accounted for 96.6 per cent of all notifications. Although investment in the service sector was dwarfed by the activity in manufacturing from the early 1960s to the mid-1980s, there was a surge in tertiary sector investment notifications after 1984, with cumulative value rising from US$622 million in 1970–1983 to US$3.6 billion in 1984–1992 and further to US$7.8 billion in 1993–1997 (see Table 2.8). This reflected the preparations for the 1986 Asian Games and 1988 Olympics, the gradual liberalization of the service sector and the rapid increase in disposable income and leisure activities in Korea in the latter half of the 1980s. As the share of the value of notifications for the service sector rose from 18.2 per cent in the 1960s to 53.8 per cent in the early 1990s, there was a corresponding fall in the share accounted for by the manufacturing sector, from 78.7 per cent to 42.3 per cent. Within the manufacturing sector, investment focused on four industries, which together accounted for more than 70 per cent of IFDI notifications in value terms: chemicals (US$2.7 billion and a 22.9 per cent share of the total), electronics (US$2.5 billion and 21.2 per cent), food and beverages (US$1.8 and 15.1 per cent) and transportation equipment (US$1.4 billion and 12.2 per cent) (see Table 2.9). The electronics sector maintained a position in the top three host sectors throughout the 35-year period, reflecting the importance of electronics as a strategic export sector for the Korean government. The chemicals industry also saw strong levels of investment, remaining in the top two investment sectors except for between 1993 and 1997, when it was edged into third place by food and beverages. One noteworthy point is that the textiles and apparel sector, which was ranked in the top three between 1962 and 1983, fell out of favour

296.9

Total

1.2

0.3 0.7 0.2 1.8

Total (%)

Source: Investment Notification Statistics Center 2006.

0.5 14.4 15.1 266.9

1962–1969 1970–1983 1984–1992 1993–1997

Primary

11,753.3

118.1 1,399.6 4,111.5 6,124.1

Manufacturing

Table 2.8 Korean IFDI: by sector, 1962–1997 (in millions of dollars)

47.7

78.7 64.3 52.5 42.3

Total (%)

12,056.9

27.3 622.1 3,625.1 7,782.4

Services

48.9

18.2 28.6 46.2 53.8

Total (%)

539.0

3.9 138.4 88.1 308.6

Other

2.2

2.6 6.4 1.1 2.1

24,646.3

149.9 2,174.7 7,839.8 14,481.9

Total (%) Total

118.1

47.2 28.2 0.8 3.9 6.3 0.2 2.5 3.6 10.4 11.4 3.6

Source: Investment Notification Statistics Center 2006.

Total

Chemicals Electrical and electronics Food and beverages Transportation equipment Machinery Paper and lumber Pharmaceuticals Metals Non-metallic minerals Textiles and apparel Other

1962–1969

1,399.5

444.5 343.1 61.4 73.4 65.5 15.3 36.9 76.7 55.9 182.8 44.0

1970–1983

4,111.5

932.2 1,057.5 317.3 629.8 254.7 146.2 236.6 115.9 182.1 102.4 136.8

1984–1992

Table 2.9 Korean IFDI: by major manufacturing industry, 1962–1997 (in millions of dollars)

6,124.1

1,251.5 1,067.9 1,400.2 732.1 428.8 472.8 231.4 187.9 134.2 79.1 138.2

1993–1997

11,753.3

2,675.5 2,496.7 1,779.7 1,439.2 755.3 634.5 507.4 384.1 382.6 375.7 322.6

Total

100.0

22.9 21.2 15.1 12.2 6.4 5.4 4.3 3.3 3.3 3.2 2.7

Total (%)

27.3

Total

Source: Investment Notification Statistics Center 2006.

4.9 3.8 3.0 11.0 3.4 0.0 0.0 0.0 1.2

Wholesale and retail Hotels and restaurants Finance and insurance Business services Transportation and storage Telecommunications Real estate and leasing Culture and leisure Other

1962–1969

622.2

70.9 328.3 131.3 22.0 57.6 0.0 1.9 1.2 9.0

1970–1983

3,624.9

1,466.4 1,091.8 700.8 143.1 30.0 0.2 144.5 20.0 28.1

1984–1992

Table 2.10 Korean IFDI: by major service industry, 1962–1997 (in millions of dollars)

7,782.3

4,513.8 1,256.7 1,060.1 481.6 125.6 177.5 29.3 48.2 89.5

1993–1997

12,056.7

6,056.0 2,680.6 1,895.2 657.7 216.6 177.7 175.7 69.4 127.8

Total

100.0

50.2 22.2 15.6 5.5 1.8 1.5 1.5 0.6 1.1

Total (%)

Globalization in the Kim Young-sam era

63

after 1984, as the competitiveness of the domestic industry weakened with rising wages and production costs. Between 1962 and 1997, investment in the service sector was dominated by three industries – wholesale and retail, hotels and restaurants and finance and insurance – which together took a share of almost 90 per cent of cumulative investment notifications in Korean services at the end of 1997. Among these three industries, wholesale and retail had established a leading position by the early 1990s; on the eve of the 1997 crisis, investment in these areas accounted for half of all foreign investment activity in Korea with a total value of US$6.1 billion (see Table 2.10). With the exception of the 1960s, when a US$11 million investment in business services moved it into the top three sectors, the remaining service industries accounted for a small proportion of IFDI between 1962 and 1997. The domination of global FDI activity by the triad – the United States, Europe and Japan – was reflected in the distribution of Korean IFDI activity by country. From the early 1960s through to the latter half of the 1990s, firms from the United States, Japan and Europe dominated investment activity in Korea, never taking a combined share of less than 80 per cent (see Table 2.11). The United States and Japan jockeyed for the leading position, with the USA gaining dominance in 1962–1969 (a 42.1 per cent share) and 1993–1997 (a 37 per cent share). Japan led inward investment activity in the 1970s and 1980s, taking shares of 54.4 per cent in 1970–1983 and 37.6 per cent in 1984–1992. Although Europe was consistently ranked third, its share of IFDI increased steadily between 1970 and 1997, rising from 8.1 per cent in 1970–1983 to 32.2 per cent in 1993–1997, setting the stage for the emergence of European firms as major investors in the post-crisis era. The early 1990s saw a steady increase in levels of inward investment activity in Korea, with notifications reaching the US$1 billion mark in 1993 and 1994, before increasing to US$7 billion in 1997. This long-term and comparatively stable source of funding was dwarfed, however, by the surge of portfolio investment into Korea which had passed the US$30 billion mark by 1995 – investment that was short term in nature, volatile and vulnerable to changes in economic performance and investor sentiment (Yu Ch’ang-g˘un 2002: 78). Statistics published by United Nations Conference on Trade and Development (UNCTAD) Table 2.11 Korean IFDI: by major investor, 1962–1997 (in millions of dollars) Total value

USA

Total (%)

Europe

Total (%)

Japan

Total Combined (%) total (%)

1962–1969 1970–1983 1984–1992 1993–1997

149.9 2,174.7 7,839.8 14,481.9

63.1 582.8 2,273.1 5,359.0

42.1 26.8 29.0 37.0

17.1 176.3 2,143.1 4,657.3

11.4 8.1 27.3 32.2

50.6 1,183.7 2,944.7 1,659.0

33.8 54.4 37.6 11.5

87.3 89.3 93.9 80.7

Total

24,643.3

8,278.0

33.6

6,993.8

28.4

5,838.0

23.7

85.7

Source: Investment Notification Statistics Center 2006.

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show that, as Korea moved towards the financial crisis of 1997, cumulative IFDI in Korea amounted to just US$12.5 billion, compared with totals of US$41.5 billion in Malaysia, US$68.1 billion in Singapore and US$172 million in mainland China (see Table 2.12). In terms of the ratios of IFDI to GDP and total foreign capital, Korea once again lagged behind, with ratios of 2.6 per cent and 1.3 per cent respectively; these compared poorly with Thailand (11.6 per cent and 3 per cent), China (24.7 per cent and 17 per cent), Malaysia (48.6 per cent and 11.1 per cent) and Singapore (72.4 per cent and 27.5 per cent). Clearly, IFDI was still not a key feature of Korea’s economic policy and planning; despite efforts on the part of the Kim Young-sam government to ease the restrictions on inward investment, Korea continued to focus on loans rather than on IFDI as a source of investment capital (Yu Ch’ang-g˘un 2002: 78). Between 1962 and 1997, despite the restrictive and controlling nature of Korea’s inward investment policy, foreign MNCs did enter the country and made a significant contribution to economic growth and development that was acknowledged by some Korean scholars and practitioners. There was evidence of a positive contribution to total factor productivity growth in the manufacturing sector, with significant spillover effects in the electronics, chemicals and textiles sectors (Yun 2000: 152). Yun and Lee (2001) observed that foreign firms played an important role in the establishment and development of key industries such as electronics and pharmaceuticals by providing skilled workers and managers, offering technical guidance to subcontractors and boosting local research capabilities. Hong (1997: 79, 88) concluded that foreign capital had been ‘an essential part of Korea’s economic development from the beginning’ and had played a key role in enhancing productivity through the transfer of technology and know-how. Kim June-dong noted that, despite the lack of substantial amounts of firmlevel data, case studies and anecdotal evidence indicated that FDI and technology

Table 2.12 IFDI flows and key ratios, 1996 (in billions of dollars) KOREA SIN Cumulative IFDI (CIFDI) Cumulative OFDI CIFDI: GDP (%) CIFDI: Total foreign capital (%) Trade: GDP (%)

MAL

THAI

PRC

UK

USA

12.5

68.1

41.5

19.5

172.0

237.5

630.0

13.8 2.6 1.3

37.5 72.4 27.5

12.6 48.6 11.1

3.3 11.6 3.0

17.9 24.7 17.0

355.1 20.5 14.6

793.0 8.3 7.0

63.0

328.0

165.0

71.0

34.0

46.0

19.0

Source: Yu Ch’ang-g˘un 2002: 78. Notes MAL: Malaysia. PRC: People’s Republic of China. SIN: Singapore. THAI: Thailand.

Globalization in the Kim Young-sam era

65

transfer had played a significant role in the development of key industries such as consumer electronics, semiconductors, pharmaceuticals and retailing. Using data collected between 1970 and 1992, Kim Yoon-chul and Ahn Byung Kwon (1994) found that inward investment made a ‘noticeable contribution’ to economic growth and income expansion; however, although there was a statistically significant impact on exports, they concluded that the same was not true for imports. In terms of improvements in gross factor productivity, Kim and Hwang (1998) noted that, while there was a ‘somewhat positive’ effect, the gain was not statistically significant but a report published by the Korea Institute for Industrial Economics and Trade (KIET 2001) found that IFDI had made a positive contribution in this area (Kim June-dong 1999: 40–9). Although the small absolute amounts of IFDI made it difficult to determine accurately the effects of inward investment, Kim Hee-kyung (2004a: 140–1) concluded on the basis of these findings that, ‘[a] majority of the research conducted in Korea has confirmed that foreign direct investment has positively impacted Korea’s economy through gains in gross factor productivity and exports’.

Conclusions As the period of ‘expansive globalization’ drew to a close, the Korean government came under increasing pressure both at home and abroad to formulate a response to the challenges posed by economic globalization. For Korea, fully embracing globalization would not only demand sweeping changes in the area of economics and business but would also require the Korean people to develop a more open and accepting attitude towards foreign participation in their economy. The inauguration of Kim Young-sam as president of Korea in 1993 and the implementation of his Segyehwa policy moved Korea into new and unfamiliar territory. During his five-year term of office, Kim implemented a programme of sweeping reforms which aimed to reduce government intervention in the economy, transform and internationalize the domestic financial sector and move Korea away from the developmental state model towards a free market economy. The government also took steps to enhance Korea’s locational advantages as a host for inward investment, seeking to attract the ‘created assets’ necessary for the transformation of the Korean economy. As the implementation of reforms got under way, Korea continued to enjoy the benefits of globalization as exports rose, OFDI boomed, foreign portfolio investment experienced rapid levels of growth and Korean businesses tapped overseas financial markets for the funds they needed to expand further. However, in the eyes of Kim’s critics, key areas of the domestic economy remained weak and in need of reform, and these problems were left unresolved by the Segyehwa policy measures even as the local market opened wider to foreign investors. The policies of liberalization and deregulation adopted by the Kim Young-sam government had a clear and significant impact on levels of inward investment in Korea during the early- to mid-1990s. Almost 60 per cent of the inward investment notifications made between 1962 and 1997 occurred during Kim’s five-year

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term of office, reflecting the increasing attractiveness of the Korean market and the new opportunities for foreign MNCs that were created by the revisions of IFDI-related laws and regulations. Nevertheless, Korea continued to lag its regional competitors – in particular the People’s Republic of China, Singapore and Malaysia – in terms of attracting foreign MNCs. Despite the positive assessments made by Korean scholars and FDI experts of the role played by foreign companies in Korea’s economic development, on the eve of the 1997 crisis, the Kim Young-sam government maintained, to a significant degree, the restrictive and passive attitude towards inward investment that had characterized the policies adopted by its predecessors. However, the economic and financial crisis that engulfed Korea at the end of Kim’s presidency brought about a sea change in attitudes towards IFDI and prompted the Korean government to develop new strategies to increase Korea’s attractiveness as a host for IFDI.

3

The 1997 financial crisis and the ‘IMF era’ Segyehwa in transition

The early years of the 1990s saw the increasing integration of Korea into the global economy through trade, finance, and investment; while this brought benefits for domestic firms in terms of market access and opportunities to enhance their international competitiveness, it also increased the nation’s vulnerability to instability in global capital markets and shifts in investor sentiment and confidence. In early 1997, Korea moved into the second phase of Asian globalization described by Dittmer (2002: 34–6): ‘capital flight crash globalization’, as a string of corporate failures, including some of Korea’s largest conglomerates, sent shockwaves through the domestic economy. In July of that year, the Southeast Asian currency crisis began with the fall of the Thai baht and, as the financial crisis spread within the region, foreign analysts and investors became uneasy about the health of the Korean economy and the soundness of its financial institutions. Following the decision by the international credit agency Standard and Poors to downgrade Korea’s long-term sovereign credit rating, foreign financial institutions began to turn down requests from Korean banks to roll over their loans, and demand for foreign currency to redeem foreign debts and liquidate portfolio investments increased rapidly. The drain on South Korea’s foreign exchange reserves, as the central bank tried to meet domestic demands for foreign currency and the financial authorities endeavoured to defend the value of the woˇn, brought the country to crisis point by the end of November. Korea’s foreign debts were estimated at US$120 billion, with US$66 billion due for repayment by the end of the year and, with usable foreign currency reserves standing at just US$7.3 billion, the country was in danger of defaulting on its debts (Kim Chong-tae 1997: 18–21; Business Korea 1998a: 54). In November 1997, the Kim Young-sam government sought bailout funding from the International Monetary Fund (IMF) as Korea stood on the verge of bankruptcy, its foreign exchange reserves almost exhausted, its international credibility in ruins and its corporate and financial sectors in chaos.14 Three decades of stateled development had created flaws and weaknesses in both the financial and corporate sectors that played a significant role in the build-up to the crisis; the events of 1997 brought into sharp focus the shortcomings of the Korean development model and the Asian values that underpinned it. As a condition of providing

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a rescue package for the country, the IMF imposed conditions that sought to ensure that Korea now moved towards an Anglo-American, neoliberal style of economic management and corporate governance. The incoming Kim Dae-jung government would be required to establish institutions, systems and regulations that were in line with international standards and embed within the economy the neoliberal ideals of unrestricted operation of market forces, free and fair competition, transparency and the reduction of government intervention in economic activity. The sense of national shame at what was perceived by many to be the loss of Korea’s economic autonomy and the relinquishing of its sovereignty to the IMF was profound and prompted a heated discussion on the causes of the 1997 crisis, which was complemented by a vigorous debate on who should bear responsibility for Korea’s economic woes. The key strands of these discussions offer a useful insight into the connections made by commentators between the Kim government’s decision to embrace globalization and institute a programme of neoliberal reform on the one hand and Korea’s economic collapse in 1997 on the other. This chapter focuses on the role played by Kim’s Segyehwa policy and IFDI in the build-up to and unfolding of the 1997 financial crisis; it also considers the impact of developments in the domestic economy and financial markets and assesses the role played by domestic and external actors. Here Dittmer’s concept of ‘hybrid globalization’ is particularly relevant as many academics seeking to identify the causes of the crisis have considered the role of globalization and neoliberal reform on the one hand and of Asian values on the other. In the second section of this chapter, a brief outline of reforms carried out in the financial and corporate sectors and the labour market provides the context for the analysis of post-crisis inward investment that follows.

The search for a scapegoat The debate on where to place the blame for the outbreak of the 1997 crisis was wide ranging and encompassed both domestic and international actors; the principal targets for criticism identified by Korean and international observers include foreign portfolio investors, the Americans and Japanese, the chaebol, President Kim Young-sam and his government. The years immediately preceding the crisis saw a surge in foreign capital inflows as foreign investors and financial institutions took advantage of the opportunities created by Kim Youngsam’s programme of financial liberalization and deregulation. However, as foreign lenders and investors began to lose confidence in the Korean economy and the Kim Young-sam government, the rush to invest in Korea became a stampede to exit the market. Almost US$19 billion in bank credits flowed out of Korea in 1997, and the following year saw a net withdrawal of more than US$1 billion in portfolio investments (see Table 3.1) (Athukorala 2003: 202–5). As events unfolded in 1997, foreign investors came under attack, with critics in Korea accusing them of ‘herd-like behaviour’, of reacting to news with ‘either

The 1997 financial crisis and ‘IMF era’

69

Table 3.1 South Korea: direct and indirect investment flows, 1990–1998 (in billions of dollars)

Inward FDI Outward FDI Net FDI Net portfolio flows Net bank credits etc.

1990–1994

1995

1996

1997

1998

0.82 1.50 –0.68 5.11 1.78

1.78 3.55 –1.78 11.71 7.46

2.33 4.67 –2.35 15.10 1.78

2.05 3.44 –1.39 9.92 –18.85

5.41 4.74 0.67 –1.22 0.74

6.21

17.40

14.54

–10.32

0.19

Net total Source: Athukorala 2003: 202.

an excess of pessimism or optimism’ and, when the news was negative, contributing to the spread of financial panic from one country to another (Jung 1999: 82–3). Others reported that, reassured by the government guarantees of the past, foreign banks had been loaning ‘vast sums’ to Korean borrowers without carrying out stringent credit checks or risk analysis and, in some cases, ‘not even (trying) to gather and analyse the available information’ (Park 1999: 156–7). Although there was criticism in some sections of the Korean media and among the general public of the ‘indiscriminate’ withdrawal of funds and loans by foreigners and a view that foreign financial institutions should take responsibility for their decisions and bear any losses incurred, a case was also made in defence of foreign lenders, arguing that it was only natural for them to withdraw their funds rather than risk losing their capital (Ko 1998: 192). Furthermore, it was argued, speculative funds or ‘hot money’ would not have flowed into a sound and stable economy; highly leveraged Korean firms had been driven to seek short-term financing from overseas speculators by their inability to raise funds through more conventional channels (Cho 1998: 21). While there was heavy criticism of portfolio investors, IFDI attracted attention only in as much as it might have helped to prevent or mitigate the effects of the crisis. In the latter half of the Kim administration, the government’s efforts to promote inward investment were bearing fruit as IFDI inflows rose from US$1.3 billion in 1994 to US$1.9 billion in 1995 and then jumped to US$3.2 billion in 1996, approaching the dollar total for net outward investment by Korean firms in that year (Investment Notification Statistics Center 2006). Nevertheless, IFDI levels were still small in absolute terms and in comparison with Korea’s regional competitors, and the cumulative total contrasted sharply with the substantial amounts of indirect (portfolio) investment that entered the country as a result of financial reform under the Kim Young-sam administration. Yu Ch’ang-gu˘n argued that, while low levels of IFDI could not, per se, be sufficient reason for a financial crisis, they could increase a country’s vulnerability to such an event and contended that the stagnation of IFDI had made some contribution to the outbreak and spread of the crisis in Korea. The sudden withdrawal of foreign loans and portfolio investments was a key factor in the crisis and

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highlighted the problems inherent in attracting indirect investments that were short-term and volatile in nature compared with IFDI, which was undertaken with a long-term perspective and tended, therefore, to be more stable. Companies engaged in IFDI were generally less inclined to withdraw their funds in a crisis; this contrasted with the actions of portfolio investors who could and did move swiftly to liquidate their holdings as the crisis approached (Yu Ch’anggu˘n 2002: 87–90). The search for a scapegoat led some observers to put forward theories of a conspiracy that aimed to weaken Korea’s international standing, fully open the domestic market to foreign goods and services and increase American influence in the region. Although the United States had offered help to Korea in the past when the country had come close to a foreign exchange crisis, this assistance (which had been based primarily on security considerations) was not made available to Korea as the country approached bankruptcy in 1997. Rather, the US government kept its distance and advised Japan to act in concert with other nations rather than offer help to Korea on its own (Cho 1999: 4). Furthermore, the US government’s opposition to Japan’s proposal for the establishment of an Asian Monetary Fund was seen as indicative of its desire to ensure that US hegemony within the region was maintained and that any offers of assistance made to the crisis countries in Asia were consistent with America’s interests (Kim Hyun-Chul 1999: 26–7). As Korean writers have acknowledged, it was difficult (if not impossible) to prove the existence of a conspiracy to weaken the Korean economy and thereby improve access to its markets and assets. The reluctance of the US government to offer direct and unilateral assistance to Korea might simply have reflected concerns over the possible scale of the bailout and the response of American taxpayers to using public money to help a major competitor. Once the crisis had occurred, however, the need for assistance from the IMF undoubtedly presented an opportunity for Korea’s trading partners to further their own national interests. The widespread criticism of the IMF’s policy towards Korea and the programme of reforms implemented as part of the bailout package included accusations of ‘abuse of conditionalities’ that enabled the United States and Japan to resolve outstanding market access issues with Korea and of requiring reforms that had little to do with the crisis and its causes (Jomo 1998: 21).15 On the domestic scene, critics of the chaebol contended that the financial crisis had its roots in the structure of the Korean conglomerates and their strategy of rapid diversification and expansion at home and overseas, using bank loans rather than internal revenues or financing from the capital markets. This approach had encouraged imprudent investments that in turn resulted in an escalation of foreign debt and an even greater accumulation of non-performing loans in the financial sector (Shim 1999: 9, 11–18). The strategy that the chaebol had employed was a risky one; by relying on bank loans rather than internally generated funding for their investments, they were able to expand more rapidly but only as long as the Korean economy continued to grow rapidly and export performance remained strong. In the 1990s, the conglomerates faced problems

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71

of rising debts, weakening cash flow, thinner profit margins and smaller returns on their investments as production costs increased and demand for key exports weakened (Ahn 2001: 455). However, those defending the chaebol highlighted the shortcomings of the banking system and argued that the conglomerates’ expectations of easy credit and continuing expansion had been fuelled by the willingness of the financial sector in the past to provide capital regardless of risk or profitability. Moreover, during three decades of close collaborative relations with the government, diversification and expansion were encouraged through the government’s industrial policy in the national economic interest. The ability and willingness of Korean financial institutions to lend to the conglomerates in turn reflected years of state control over the financial sector in general and lending practices in particular, that led to high levels of bad debt, unwise lending decisions and a lack of stringent credit and risk analysis capabilities. The most obvious scapegoat for any national crisis is the government of the day; in view of this, it is hardly surprising that a significant portion of the blame for Korea’s ‘national disgrace’ was laid at the feet of President Kim Young-sam and his government. In addition to criticism of the Kim administration’s response to individual events such as the bankruptcies of two major chaebol (Hanbo and Kia) on the eve of the crisis, a number of major policy errors were cited by scholars as the root cause of the crisis. The government also came under fire for recognizing but failing to address the structural problems in the financial, labour and corporate sectors that were threatening to undermine the future growth of the Korean economy in the 1990s. While Western scholars have also highlighted and commented on the government’s role in the crisis, Korean academics scholars, analysts and journalists have been far harsher in their criticism, accusing President Kim and his administration of arrogance, egotism, naivety, misjudgement and incompetence. A key focus of the criticism was the Kim Young-sam administration’s hasty implementation of the Segyehwa policy which aimed to integrate Korea into the global economy. The ‘dismal failure’ of Kim Young-sam’s ‘premature and incoherent’ globalization strategy was cited as a major cause of the crisis (Kim and Moon 2000: 61), and President Kim’s adoption of Segyehwa was perceived by critics to be little more than a ‘national ego trip’ (Samuel Kim 2000b: 254) with the political aim of gaining entry to the OECD, securing kudos for Kim and achieving for Korea the status of an advanced industrial nation. A major criticism of the Kim Young-sam government was that it promoted the deregulation and liberalization of the domestic financial markets in line with the policy of Segyehwa but failed to recognize the potentially negative effects of these measures and did not put in place systems that would ensure the stable and sound operation of the financial sector after liberalization (Ahn 1998: 2; 1999: 69; Lee Yeon-ho 2000: 117–20, 130). The dismantling of the old system of government control and regulation had not been followed by the establishment of new systems for monitoring activity in the financial sector or the creation of safeguards to ensure that institutions behaved in a responsible manner. The government’s failure to

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The 1997 financial crisis and ‘IMF era’

monitor the activities of financial institutions (especially the merchant banks in international financial markets) led to high levels of foreign borrowings with an alarming proportion of short-term debt (Lee Yeon-ho 2000: 117–20, 130). Another area for concern was the Kim government’s deregulation of the corporate sector, principally the easing or lifting of restrictions on the chaebol, which freed the conglomerates from the grip of the government after more than three decades of control.16 From the early 1990s, the conglomerates enjoyed greater freedom in tapping overseas markets for the funds to finance their expansion plans, and their control of non-banking financial institutions provided an important additional source of finance. In the years leading up to the Asian financial crisis, the chaebol expanded and diversified rapidly both at home and overseas, focusing on increasing their market share and global reach, often by undertaking ambitious overseas investment projects. The Kim administration was accused of adopting a ‘neoliberal, hands off stance’ or a policy of ‘intentional neglect’ with regard to the corporate sector. The focus on overseas direct investment as a vehicle for globalization gave the chaebol unrestricted access to funding for further expansion despite their weak financial structures and increased their power and influence over the economy, even as they failed to bring about improvements in their financial structures (Kim Sunhyuk 2000: 90; Ahn 2001: 454; Lee Chung H. et al. 2002: 25, 28). As in the deregulation of the financial sector, the government failed to establish new institutions to monitor the private sector and ensure market discipline, and the business sector was quick to exploit the new opportunities that the relaxed environment could offer (Kim Hyuk-Rae 2000: 568–73). Widening his focus from the Segyehwa policy implemented in Korea to the broader concept of globalization, Lee Chun-gu (1998: 55–6) compared it to a twoedged sword. Lee argued that, although the globalized economic order provided the right conditions (including access to capital) for developing countries to realize their dreams of rapid growth, globalization was also ‘a destructive power that can destroy an inefficient economy in no time at all’. Given the sensitivity of global capital to business cycles and fluctuations in profit forecasts and investor confidence, it was highly speculative in nature and could be swiftly withdrawn from a market, as Korea had learned to its cost. While acknowledging that it was a combination of the impact of Segyehwa and fundamental economic problems arising from three decades of state-led growth that brought about the crisis in Korea, Lee was unequivocal about the ‘terrible destructive power’ of globalization and its role in the events of 1997: ‘The crisis has come about as a result of rushing recklessly into the current (of globalization), seduced by its sweetness and not knowing what is hidden inside the globalized economic order’ (Lee 1998: 67). However, despite the events of 1997, even the harshest critics of globalization realized that it would be impossible for Korea to turn away from integration into the world economy. Although the neoliberal, market-oriented policies adopted by the Kim Young-sam government had proved to be ‘a magic flute that led the nation in to a foreign exchange crisis’ and whatever problems the ‘dark side’ of globalization might bring, it was not feasible for Korea to fight the trend

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(Ahn 1999: 70–3). According to Lee Chun-gu, Korea faced two choices: to respond to the risks of globalization by ‘gradually taking our feet out of the stream’ or to go with the flow of globalization. The former would mean limiting participation in the global economy to the minimum level of exchanging necessary goods with foreign countries and blocking the inflow and outflow of foreign capital. In this way, Korea might be able to avoid shocks to the foundations of its economy from external factors, but it would also have to sacrifice the benefits to be gained from participating fully in the global economy and abandon its dream of strong economic growth and higher standards of living. The latter choice would involve adopting a positive attitude and making efforts to maximize the benefits of globalization. Lee concluded that, while rapid growth in the past had brought about its own problems, slowing down ‘to a turtle’s pace’ would create even more difficulties. Korea had crossed the bridge of no return a long time ago as far as globalization was concerned; the only way for Korea to survive in the new global economic order was to eliminate inefficiency and non-transparency in the domestic economy and carry out comprehensive reforms (Lee 1998: 67–8). In short, Korea’s best option was Dittmer’s (2002: 34–6) ‘homeopathic remedy’: curing the problems associated with globalization with more globalization. Thus, the collapse of Korea’s financial system and the nation’s near bankruptcy did not lead to an abandonment of Korea’s commitment to globalization. Rather, the ‘tragic legacies’ of the Kim Young-sam government and the IMF conditionalities of sweeping reforms in key sectors of the economy gave the new president Kim Dae-jung ‘decisive leverage’ to continue with and complete the task of integrating Korea into the global economy (Moon and Mo 1999: 407). In addition to the widespread criticism of the various domestic and international players mentioned in this chapter, another target for attack after the crisis was the system of Asian values that had underpinned the Korean developmental state and the country’s economic and business systems for more than three decades. Whereas, before 1997, these values had been praised in Korea and overseas for the role they played in promoting growth and development, after the crisis struck, critics focused on the negative influence exerted by Confucianism over politics, business and everyday life. The darker side of Asian values – nepotism within family-run business empires, lack of transparency in their business dealings, corruption and collusion in government-business relations, blind obedience to authority and acceptance of paternalistic and authoritarian management styles – would not sit well with the new vision of a free market economy based on neoliberal ideals and underpinned by international (Anglo-American) value systems.

The end of the developmental state? Reform in post-crisis Korea Although some academics saw the 1997 crisis as signalling of the end of the developmental state and the beginning of a transition towards a new economic

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order, others argued that it was ‘problematic and even dangerous’ to assume that liberalization inevitably led to the minimization of state intervention in East Asian economies (Lee S. H. 1998: 210; Moon and Rhyu 2000: 97; Beeson and Robison 2000: 17). These scholars emphasized the need for a strong state to manage the process of change in the post-crisis era of reform and restructuring (Lee and Kim 2000: 116–18). According to Cerny, as globalization progressed, the developmental state would not disappear, but would be reincarnated as a ‘competitive state’: an ‘enforcer and stabilizer of rules and practices’ charged with the tasks of creating a fair business and investment environment, investing in the development of human capital and infrastructure, promoting research and development and enhancing the nation’s quality of life (Chon et al. 2004: 1, 18–21). Weiss (2000: 21–5) also argued that, far from ‘normalizing’ or converging with the neoliberal (or Anglo-American) ‘norm’, the developmental state would adapt to the new global order and the increasingly competitive business environment and innovate in order to meet the challenges they presented. The inauguration of Kim Dae-jung as President of South Korea in February 1998 marked the beginning of a new phase in Korea’s transition from a developmental state to a free market economy and ushered in Dittmer’s third phase of ‘austerity globalization’ as the new government implemented the reform programmes and austerity packages mandated by the IMF. Central to President Kim’s economic philosophy was the belief that the long-term route to advanced nation status, strong and healthy economic growth and an open society was the simultaneous pursuit of participatory democracy and a market economy. The role of the government in establishing this new economic order was clear: while the state should refrain from intervening directly in the allocation of resources in order to allow the establishment of a genuine market economy, there could be ‘limited’ government intervention. The state had a crucial role to play in maintaining market discipline, institutionalizing democracy in the economic system and ensuring the proper functioning of market mechanisms (Han’guk Kaebal Yo˘n’guwo˘n 1998: 27–8, 32–3). The approach adopted by the new Korean government was described as ‘four plus one’: the four areas targeted for reform were the financial, corporate and public sectors and the labour market, and the ‘plus one’ referred to was the government’s commitment to the continuing liberalization of the Korean market in general and the financial markets and foreign direct investment activity in particular. Given the broad consensus on the key role played by the overambitious expansion of the chaebol and the structural weaknesses of the Korean financial sector in the 1997 crisis, it was not surprising that the principal focus of the IMF reforms was the restructuring of Korea’s leading corporations and financial institutions. The financial crisis also prompted a re-evaluation of the role that IFDI could play in the domestic economy, in terms of both implementing the IMF-mandated reforms and thus helping Korea recover from the crisis and ensuring sustainable growth in the future. The proposed reforms in the corporate, financial and labour sectors17 were, therefore, crucial in two respects: first, as a means of building an economic structure that could withstand any

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further external shocks and helping local corporations develop into world-class enterprises and, second, as a way of creating a business environment that would attract substantial amounts of high-quality IFDI. For corporate Korea, the IMF reforms fell into three main categories: ownership and governance structures, business and financial structures and management structures. Improvements in the ownership and governance structures would be achieved by establishing a system of outside (non-family) directors within corporations, with the role of the board of directors changing from one of automatic approval of decisions taken by family management to the monitoring of strategic decisions and corporate performance. Other measures included the strengthening of the rights of minority shareholders18 and the legalization of mergers and acquisitions (M&As). The business and financial structures of the conglomerates would be strengthened by imposing stricter and more transparent accounting, auditing and disclosure standards, reducing debt-to-equity ratios and emphasizing profits and cash flow rather than expansion and turnover. The conglomerates would be encouraged to adopt a more conservative approach to investment (with corporations being required to have creditor bank approval before embarking on a new business venture), rely more on equity financing than debt financing and guarantee the independent management of group affiliates. All existing cross-payment guarantees between chaebol subsidiaries were to be unwound by March 2000 with no further new credit to be extended on that basis, and consolidated financial statements would become mandatory from fiscal year 1999 onwards. Finally, the management structure of the groups would be improved through specialization in areas of core competence, cooperative ventures with small- and medium-sized enterprises, strategic alliances with foreign companies, the introduction of foreign capital and a shift away from the traditional fleet-style system of chaebol management towards the professional operation of independent companies (Jung 1999: 83–5; Lee JaeWoo 1999: 247–8; Kim Eun Mee 2000a: 184; Cha 2000: 110–12). For existing and potential foreign investors, a key aspect of the corporate reform programme was the pressure placed on major Korean corporations to improve their financial structures by using the proceeds from the sale of non-core business divisions to reduce their debt levels and by seeking injections of foreign capital into viable but financially weak subsidiaries. In addition, the requirement that Korean corporations should improve their management and corporate governance systems to bring them into line with international best practice would create a more transparent environment in which to invest and do business. In the financial sector, the Korean government moved quickly to stabilize the nation’s markets and took steps to restructure weak domestic financial institutions. Laws were passed to enhance the autonomy of the central bank and bring all the supervisory functions within the financial sector together under the control of one autonomous organization: the Financial Supervisory Commission (FSC). Thus, the government ushered in a new era of more stringent reviews of capital adequacy and risk assessment and the implementation of stricter standards of accountancy and disclosure. Five insolvent commercial banks were

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closed down in July 1998 with their assets and liabilities taken over by five healthier institutions; nine other insolvent banks escaped closure on condition that they enter workout programmes, under which they would strengthen their financial position and restructure their management and organization. The two banks that were giving the most cause for concern – Seoul Bank and Korea First Bank – were to be recapitalized and sold off to foreign investors.19 By the end of 1999, the government had spent a total of US$17.1 billion on buying non-performing loans and US$36.2 billion on recapitalizing financial institutions (Business Korea 2000: 36–7). In April 1998, prompt corrective action procedures were adopted, enabling the financial supervisory authorities to suspend, liquidate or merge any bank that failed to meet specified criteria including standards relating to capital adequacy, liquidity, management and asset quality. The financial regulators also highlighted their intention to ensure that companies and financial institutions abided by international best practice in the areas of accountancy and disclosure, with severe penalties for institutions that violated the recommended procedures (Business Korea 2000: 37). In terms of foreign participation in the financial and capital markets, barriers to entry to the banking sector were lifted in March 1998 (bar a few ‘nominal’ restrictions) with the aim of reducing government intervention in the markets and enhancing the competitiveness of domestic institutions. The ceiling on stock ownership by foreigners was raised from 26 per cent to 55 per cent by the end of 1998, before being abolished completely in 1999, and restrictions on investment in the bond market and the purchase of short-term money market instruments were lifted (Kim Chong-tae 1997: 19). The reforms relating to labour and the workplace that were implemented by the Kim government covered a wide range of issues, including the strengthening of the social safety net and expansion of the unemployment insurance system that had been introduced in 1995; job creation, retraining and vocational training initiatives; and public works programmes and public assistance schemes, including livelihood protection and income support. Of the greatest relevance to existing and potential foreign investors, however, were the measures that were implemented with the aim of enhancing the flexibility of the labour market. A key issue in this regard was the passing of laws to legalize lay-offs; the principle of flexible employment adjustment would be crucial to foreign investors buying assets in Korea, as it would enable them to streamline their work force in the interests of increasing efficiency or reducing costs. Although legislation had been passed in 1997 to allow lay-offs, the implementation was delayed for two years; in the wake of the crisis and under pressure from the IMF, the government moved to accelerate the implementation of the new laws despite opposition from workers and labour unions (Moon et al. 1999: 84–9; Samsung Economic Research Institute 2000: 84, 87–9; Kim Dae Il 2002: 265, 267). In January 1998, the government established the Tripartite Commission, comprising representatives from labour, management and government and charged it with, inter alia, the task of resolving the issues surrounding the implementation of the laws relating to lay-offs. Following the reaching of a ‘grand

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compromise’ between all parties concerned a month later, the government was able to pass and implement several laws and regulations, including those relating to flexible employment adjustment (Samsung Economic Research Institute 2000: 86; Kim Dae Il 2002: 265). However, critics contended that the new regulations aggravated rather than relieved the problems facing employers, as they stipulated preconditions for the lay-offs that could be problematic due to their subjective nature. The four requirements were that: there should be an ‘urgent managerial need’ for the lay-offs; all other avenues should have been exhaustively explored; the process of selection for lay-offs should be of a ‘reasonable and fair’ standard and the employers should have consulted ‘sincerely’ with the relevant unions. Clearly it could be a matter for dispute whether or not the management had, for example, been ‘sincere’ in its dialogue with the union and had ‘exhausted’ all other avenues. As employers who did not observe the procedures could face fines or even imprisonment, both Korean and foreign firms faced problems in their efforts to trim their labour forces through lay-offs. Ultimately, the period of harmony and ‘grand compromise’ between labour and management proved to be short-lived. Although the unions cooperated with the government and employers in the immediate post-crisis period, signs of the old adversarial relationship began to re-emerge as the economic recovery got under way, with some unions once again demanding high annual wage increases for their members, this time as compensation for the concessions they had made in more troubled times (Kim Dae Il 2002: 265–70).

Reform and the role of the government A controversial aspect of the Kim government’s various initiatives was the degree of state intervention in the process of reform. Although the government had made a commitment to the creation of a market economy driven by market mechanisms with limited government intervention, it quickly became clear that President Kim was not prepared to take a passive role and, in particular, was unwilling to trust the chaebol to come up with more than token gestures and cosmetic reforms as they had in the past (Nam 1998). This was particularly evident in the government’s industrial realignment initiative, known as the ‘Big Deals’, which required leading chaebol to swap or merge business divisions.20 Despite repeated denials from the government, it was said to be ‘common knowledge’ that ‘Big Brother’ was behind the deals, which were seen as a ‘disguised form of industrial policy’ implemented by an ‘inflexible and authoritarian’ government. For many observers, this brought back memories of former ‘imperial presidencies’ and presidents who had made the same mistake of believing that they knew better than the market (Jung 1999: 86–8; Lee Jae-Woo 1999: 231, 251, 253, 264; Mo and Moon 2003: 141). Suspicions that the government was taking an active role in pushing through the industrial realignment initiative were compounded by concerns over its renewed control of the financial sector. In the aftermath of the 1997 crisis, the government had become a major shareholder in key commercial banks and had

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created the FSC to function as a ‘neutral and independent supervisory and policymaking body’ with a mandate to oversee the restructuring and reform of the financial and corporate sectors. The FSC was given the authority to monitor and discipline financial institutions, issue licences for the financial industry, review the appointment of bank governors and examine corporate bank accounts. Rather like the Korean developmental state’s pilot agency the Economic Planning Board (EPB) in its heyday, the FSC was empowered to implement government policy and had leverage over financial institutions and the chaebol through its ability to influence the allocation of credit. Another feature in common with the EPB was the FSC’s ability to discipline banks or financial institutions that extended credit to firms considered non-viable by the government and to cut off the credit supply to conglomerates that failed to implement the state’s policies for reform and restructuring. Thus, the creation of the FSC ‘represented a significant recomposition of state capacity’ (Jang 2001: 12–13; Weiss 2003: 252). In January 1999, the FSC was expanded by merging the four agencies charged with supervising the banking, non-banking, securities and insurance sectors of the financial industry and was re-launched as the Financial Supervisory Service (FSS). The FSS’s range of powers and the dependence of many commercial banks on state support in the early stages of restructuring prompted one writer to describe the FSC/FSS as ‘the state’s main organizational weapon’ in promoting corporate reform, representing the ‘resurrection of the state-controlled financial sector of the developmental era’ (Jang 2001: 12–13). Given that excessive government intervention in the development process and the non-market allocation of resources had been identified as key factors contributing to the crisis in 1997, many commentators were concerned that the tradition of state intervention in the economy was continuing unchecked. Mo and Moon observed of the government’s approach to reform: It is ironic that the Kim Dae-jung government’s neoliberal reforms, which were designed to curb the interventionist developmental state, ended up being quite interventionist, even domineering, in the early stages. The original idea of transitional, strategic intervention was soon forgotten and the government went well beyond the role of a neutral rule-maker and ruleenforcer. (2003: 137) However, some commentators acknowledged that, in formulating its reform programmes, the Kim government was constrained by economic, political and social considerations. Leaving reform (and the future of the Korean economy) to market mechanisms that were not yet fully functioning was a risky strategy (Yang 1999: 23). In the short term, it was inevitable that the state would play an active role in initiating market-oriented reform; delays in the restructuring process while the government attempted to establish an institutional framework or accommodate democratic principles such as consensus forming and compromise could exacerbate the crisis and compound the problems facing the nation.

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In a time of crisis, ad hoc ‘control and command’ measures were inevitable while policies were devised to bring about long-term reforms (Mo and Moon 1999: 151–2; 2003: 142; Jang 2001: 22). Political considerations also played a part in the government’s plan of action with regard to corporate reform, most notably the prospect of a further increase in unemployment (which peaked at around eight per cent in early 1999) in the event that even more businesses went bankrupt. Additional corporate failures could have a domino effect in terms of job losses at suppliers or contractor firms, bankruptcies for affiliates linked through cross-payment guarantees and an exacerbation of the problems facing domestic financial institutions. The exclusionist sentiment that had acted as a deterrent to hostile M&A activity by foreign firms in the past might escalate into anti-foreign sentiment if there was a marked increase in foreign participation in domestic economic activity leading to higher rates of unemployment as newly acquired businesses were streamlined or downsized. It was, therefore, possible that reforms based on market principles that led to large-scale bankruptcies or foreign takeovers would have had considerable political costs, which could be managed and minimized through government action (Lee H. C. 1999: 23–42). Although the crisis and the ‘IMF era’ might have been expected to herald the collapse or destruction of the developmental-transformative state, in fact, it regained much of the power that had been eroded, as the balance of power shifted away from the weakened and (temporarily) defenceless chaebol and back to the state. The government enjoyed support at home and overseas for its reform policies and used a combination of old and new tools to achieve its goals in terms of industrial realignment. It can be argued, therefore, that elements of the developmental state reappeared in this period: the creation of a powerful, centralized government body (the FSC), state control of the finances underpinning the reform and restructuring initiatives and the exercise of autocratic power through President Kim’s personal involvement in bringing the chaebol to heel. However, in May 2001, government officials announced that the basic framework for a market economy was in place, enabling Korea to move forward into the ‘continuing restructuring phase’, in which the economy would operate according to market principles and become strong enough to withstand domestic and external shocks (Korea Now, 2001: 20). The government reiterated its longterm commitment to replace government regulation with market discipline ‘on a gradual basis’ and minimize direct intervention in the economy, assuming the role of an ‘impartial umpire’ charged with the task of further entrenching market discipline and curbing unfair trade practices (Jin 2001a: 18; 2001b: 17). Three months later, the Kim government repaid the last of the funds lent to Korea by the IMF, bringing to an end Korea’s period of ‘austerity globalization’.

Conclusions Although critics of globalization were quick to attribute the blame for the 1997 crisis to Kim Young-sam’s Segyehwa policy and the president’s efforts to integrate Korea more closely into the global economy, the transfer of power to the

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Kim Dae-jung administration in 1998 was not accompanied by a backlash against globalization and foreign capital. The debate on the causes of the crisis focused on the role played by the debt-financed expansion of the chaebol, the weakness of the domestic financial sector and the policy errors made by the Kim Young-sam government. In addition, the systems and institutions that had promoted and facilitated economic growth and development since the 1960s came under intense scrutiny, and commentators at home and abroad focused on the negative aspects of the Asian values that had underpinned that growth. The way forward in the ‘IMF Era’ would be to move the Korean economy even further away from the old developmental state model and towards an Anglo-American system based on neoliberal principles. The crisis marked a turning point in the Korean government’s attitude toward IFDI; far from seeking to restrict and control IFDI as its predecessors had done, the new government’s strategy was to enlist the assistance of foreign MNCs in pursuing an ambitious programme of restructuring and reform. The principal goals of the reform programme implemented by President Kim Dae-jung under the supervision of the IMF were to reduce Korea’s vulnerability to external shocks, to enhance the international competitiveness of domestic firms and to create a foundation for stable, sustainable economic growth. The action taken by the Kim administration in terms of revising IFDI-related regulations, restructuring the nation’s corporate and financial sectors, actively seeking foreign buyers for failing firms and financial institutions, enhancing labour market flexibility and creating a more open and transparent business and investment environment created new opportunities for inward investment and enhanced Korea’s attractions as a host for IFDI. In addition, efforts to bring Korea’s laws, regulations, governance and management systems into line with international best practice aimed to reassure existing and potential investors that many of the problems that had served as barriers or hindrances to doing business in Korea in the past would now be removed. However, the method of implementation of some of the reforms and, in particular, the role played by President Kim Dae-jung raised concerns that the Korean government was returning to the interventionist, authoritarian ways of the past. During the period of reform and restructuring between 1998 and 2001, there were clear signs that, even while the government was driving forward a neoliberal agenda and moving the country towards a free market economy, the old habits of intervention, persuasion and even coercion that had been features of the pre-crisis state-business-finance relationship were proving highly resistant to change. This hinted at the possibility that efforts to fix the ‘hardware’ of the Korean economy by reforming the corporate, financial and labour sectors might be hampered by the continued existence of outdated ‘software’. The eradication of the flaws and structural weaknesses that had contributed to the 1997 financial crisis would require the president and his government to forge a new relationship with corporations and banks (both domestic and foreign) and to disseminate their altered perception of the value and role of IFDI inside Korea’s bureaucracy, within business and financial circles and throughout society at large.

4

Inward foreign direct investment in post-crisis Korea I (1998–2002)

The period of ‘capital flight crash globalization’ in Korea gave way to Dittmer’s (2002: 34) third and final phase of ‘austerity globalization’ as the Kim Dae-jung government began to implement the programme of reforms and restructuring required by the IMF as a condition of its rescue package. The immediate postcrisis period was marked by sweeping reforms in major sectors of the Korean economy that aimed to establish a free market economy based on neoliberal principles and continued the process of bringing Korea’s institutions, systems and regulations into line with international standards. In implementing the reforms, the Korean government created new opportunities for foreign investors and encouraged the creation of a more open, transparent and attractive business environment in which they could operate. The Asian values that had underpinned these systems and had also influenced the country’s perceptions, attitudes, management style and business culture were also called into question after the crisis, and it seemed inevitable that the rapid changes in Korea’s ‘hardware’ would demand corresponding changes in its ‘software’. From the early 1960s through to the eve of the 1997 crisis, the Korean government had sought to limit the participation of foreigners in the domestic economy by restricting imports and controlling inward investment. For many Koreans, economic globalization simply meant increasing access to export markets and seeking greater opportunities for Korean MNCs to establish production and sales networks across the world, rather than allowing foreign goods, services and investors free access to the domestic market. After the crisis, external trade remained a key focus of economic policy as the government sought to reinvigorate exports, which have always played a crucial role in driving economic growth. Although exports increased from US$132.3 billion to US$162.5 billion between 1998 and 2002, the annual growth rate declined in 1998 (–2.8 per cent) and 2001 (–12.7 per cent) – the first reverses in export performance since 1958 – as the full force of the crisis was felt. In 2002, however, export growth rates had returned to positive territory, recording a year-on-year increase of eight per cent and setting the stage for an export boom in 2003–2006 (KITA 2006). After plunging by 35.5 per cent in 1998 to US$93.3 billion, imports staged a dramatic recovery, jumping to a record high of US$160.5 billion two years later. Although import growth rates fell by 12.1 per cent in 2001, by the end of the

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Kim administration, annual imports had once again returned to pre-crisis levels, registering US$152.1 billion in 2002. As with exports, the decline in import growth rates seen in the immediate post-crisis period was the first for more than three decades – in this case, since 1964 (KITA 2006). In terms of OFDI, the years immediately following the crisis saw a stagnation in OFDI, as major Korean corporations streamlined and restructured their overseas operations and also witnessed a surge in Korea’s inward investment performance. Although FDI outflows had declined to US$3.7 billion in 1997 from a record high of US$4.5 billion in 1996, they set a new record of US$4.8 billion in 1998 as major Korean firms invested capital in their overseas operations to stabilize and restructure them. However, for the remaining four years of the Kim Dae-jung administration, Korean net overseas investment fluctuated between US$3.3 and US$5.2 billion per annum (Export–Import Bank of Korea 2007). One of the most dramatic changes that occurred in the wake of the 1997 financial crisis in Korea was the shift in government policy and attitudes towards IFDI. Having been regarded as the second-best option for financing development from the 1960s through to the late 1990s, IFDI took on a new significance and attraction for policy makers. As the financial crisis had unfolded and confidence in the Korean economy and the Kim Young-sam government had begun to waver, massive amounts of foreign capital had been withdrawn from Korea. In contrast to foreign bank loans and portfolio investment, which had proved to be volatile and vulnerable to changes in investor sentiment, FDI now appeared to be an attractive option in that it was more stable in nature and was usually undertaken from a long-term point of view. After the crisis, there was a growing consensus that Korea had to make concerted efforts to attract higher levels of IFDI in order to recover from the crisis, enhance the international competitiveness of domestic corporations and ensure future growth. The newly inaugurated president, Kim Dae-jung, made it clear from the earliest days of his administration that the old attitudes toward IFDI would have to change: ‘We have been hostile toward foreign capital and have a negative national sentiment towards (foreign investors). But we have to treat them as valuable (sic) guests’ (Business Korea 1998b: 18). In addition to helping Korea in the short term by providing much needed injections of capital and acquiring insolvent or struggling Korean corporations, foreign investors could make a valuable long-term contribution to replenishing Korea’s depleted foreign exchange reserves, boosting production, increasing exports, enhancing productivity and creating jobs and wealth. Foreign capital in the form of IFDI could also play a crucial role in the process of corporate restructuring in post-crisis Korea as foreign MNCs investing in Korea would bring with them the technology, know-how and skills that were essential for Korean companies to enhance their international competitiveness (Crotty and Lee 2002: 675–6). These insights into the benefits of IFDI were, of course, nothing new; what had changed was Korea’s need and desire to accept inward investment. The crisis thus promoted a sea change in the Korean government’s perceptions of and policy regarding IFDI; the months and years following the

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crisis saw ‘dramatic liberalization measures and aggressive solicitation of foreign investors’, and the promotion of IFDI activity quickly became a core element of Korea’s post-crisis economic policy (Yun and Lee 2001: 3). Changes in government policy and domestic business conditions led to a startling increase in FDI inflows in 1998–2000, as existing investors increased their stake in Korean ventures or expanded their operations into other businesses and new investors took the opportunity to move into the Korean market. However, the post-crisis inward investment boom was short-lived and by the end of Kim Dae-jung’s five-year term as president, IFDI performance was beginning to weaken due to a variety of international and domestic factors. While sceptics had predicted that an upswing in the Korean economy would erode the new-found enthusiasm for IFDI and might even lead to a return to the status quo ante, the fall in IFDI levels prompted a wide-ranging debate on strategies for enhancing Korea’s attractions as a host for inward investment. The first section of this chapter provides an overview of the changes in IFDI policy between 1998 and 2002 and an analysis of key trends in the flows and forms of IFDI. The second section focuses on the decline in IFDI levels in the early years of the twenty-first century and the debate on the reasons and proposed remedies for this reversal in Korea’s fortunes.

A new strategy for IFDI promotion In November 1998, the Kim Dae-jung government enacted the Foreign Investment Promotion Act with the stated aim of attracting US$20 billion in IFDI by 2002 and placing Korea in the top ten host nations for IFDI in the world. In addition to this new piece of legislation, the shift in policy from ‘passive liberalization to active promotion’ would involve the establishment of new institutions, major revisions to IFDI-related regulations, the full-scale liberalization of investment sectors, the revamping of incentives and the creation of an investment environment capable of attracting internationally competitive MNCs (Kim June-Dong 2003a: 24; Hwang Chin-u 1999: 3; Kim Pyoˇng-sun 2002: 24). Institutional changes had begun even before the promulgation of the new law, with the establishment in April 1998 of the Korea Investment Service Centre (KISC). KISC was charged with providing a one-stop service for potential investors, offering assistance in all investment-related matters ranging from the application process to labour issues, taxation and legal matters (Kim Suk 2000: 292; Pak 2003: 13). The Office of the Investment Ombudsman was established in October 1999 to resolve any problems experienced by foreign investors in their business and daily lives, with ‘home doctors’ providing one-to-one assistance for investors in matters such as obtaining business permits and raising grievances with the authorities (Park 2003: 229–30). These efforts to create an institutional basis for handling the concerns of foreign investors were a new departure for Korean officials; according to Yun (2003: 239), the issues raised by foreign companies operating in Korea were ‘not seriously addressed’ before the crisis.

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In addition to creating new institutions charged with the task of promoting inward investment, the government took action to revise the relevant IFDI regulations. Investment procedures were greatly simplified and the range of institutions to which notifications could be made was expanded from the headquarters of banks licensed to carry out foreign exchange transactions to include their branch offices and the headquarters, regional offices and overseas branches of KOTRA. Investors were no longer required to report the introduction of foreign capital into Korea to the Ministry of Finance and Economy, and the number of documents required to complete the process was reduced, with only four or five documents submitted prior to investment and the remainder after the event (Kim Suk 2000: 292–4). The government also expanded the number of industries open to foreign investment on two occasions in 1998; newly opened sectors included real estate rental and sales, securities dealing and insurance-related businesses, the operation of petrol stations, commodity exchanges and investment trust companies. Nevertheless, despite these moves towards greater liberalization, some sectors remained partially or wholly closed to IFDI including radio and television broadcasting, inshore and coastal fishing, newspaper and periodicals publishing, air transportation, telecommunications and cable and satellite broadcasting. In addition, legal, medical and other services requiring a professional licence remained effectively closed (Kim June-Dong 2003a: 22–3). Among the most important changes implemented by the government was the complete liberalization of M&A; in 1998, permission was given to foreign firms to engage in hostile M&A transactions, which had been banned before the crisis. This move, along with the elimination of the ceiling on foreign equity ownership in the stock market in May 1998, gave foreign companies far greater access to Korean corporations than ever before. Another highly significant move was the complete liberalization of the Korean real estate market in July 1998 and the revision of the Foreigners’ Land Acquisition Act. This action was hailed by the American Chamber of Commerce (AMCHAM) in Korea as one of the most dramatic changes made in the post-crisis period, given the Koreans’ strong emotional attachment to the land (Kim June-Dong 2003a: 24). In addition to allowing foreigners to purchase land, the government established a number of industrial parks, where factory sites were offered at low prices to investors who made a commitment to invest more than US$30 million and create more than 300 new jobs (Park 2003: 229). In the post-crisis period, the Korean government expanded the range of tax incentives available from central and regional governments for foreign investors by broadening the range of eligible projects, extending the periods of tax exemption and raising the levels of exemption. The Special Tax Treatment Control Act provided for a variety of tax incentives with the principal aim of attracting large-scale, high-tech manufacturing investment which would create jobs and boost tax revenues. Incentives were offered to investors in possession of advanced technology, firms in the service sector that could contribute to enhancing the competitiveness of local companies and investors locating in Foreign Investment Zones, where the minimum investment value was US$50

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million and investors had to make a commitment to creating more than 1,000 new jobs. Although the purpose of these moves was to reduce the tax burden for foreign MNCs operating in Korea, not all investors were eligible to receive the benefits. The tax exemptions and reductions applied only to investors engaging in greenfield investments through the acquisition of newly issued stocks and were not applied to the purchase of previously issued stocks of existing Korean companies (Park 2003: 228–9). In order to improve the working environment, enhance transparency in the workplace and bring Korean business practices in line with international standards, the government also strengthened the protection of international property rights (IPR), pledged to introduce international accounting standards by October 1998 and required all businesses to produce consolidated financial statements from fiscal year 1999.21 Finally, the government created the Korean Accounting Institute, an independent legal accounting organization, charged with the task of bringing Korea’s accounting systems and standards into line with international best practice (Kim Suk 2000: 294; Pak 2003: 13).

Trends in post-crisis IFDI The impact of these changes on inward investment levels was dramatic, further accelerating the growth seen immediately before the crisis, when the value of IFDI had steadily increased from US$1.3 billion in 1994 to US$3.2 billion in 1996 and US$7 billion in 1997. After rising to US$8.9 billion in the year following the IMF bailout, IFDI notifications soared above the US$15 billion mark in 1999 and maintained that level the following year (see Table 4.1). Actual levels Table 4.1 Korean IFDI: 1998–2002 Notification value (millions of dollars) 1962–1969 1970–1983 1984–1992 1993–1997 (1997) 1998 1999 2000 2001 2002

149.9 2,174.7 7,417.4 14,481.9 (6,970.9) 8,852.6 15,531.4 15,249.6 11,286.2 9,092.6

Total

60,012.4

Year-onyear increase (%)

(117.7) 27.0 75.4 –1.8 –26.0 –19.4

Notification volume (cases)

Actual value*

Year-on-year increase (%)

195 2,367 3,548 4,160 (1,110) 1,401 2,103 4,144 3,344 2,409

— — — — — 5,308.0 10,851.0 10,238.0 5,055.0 3,804.0

— — — — — 71.7 104.4 –5.7 –50.6 –24.8

13,401

32,256.0

Source: Investment Notification Statistics Center 2006. Note * Actual value statistics from Invest Korea database: none available prior to 1998.

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IFDI in post-crisis Korea I (1998–2002)

of investment also experienced rapid growth, doubling from US$5.3 billion in 1998 to more than US$10 billion in 1999 and 2000. Announcing these figures, the Ministry of Commerce, Industry and Energy (MOCIE) attributed the strong performance to Korea’s success in creating a business environment that was attractive to foreign investors (Invest Korea Journal 2000a). Although the government’s liberalization measures and more positive approach to IFDI promotion were clearly a factor in the surge in inward investment, another major factor was the fall in stock and asset prices caused by the depreciation of the Korean currency. This, combined with the large number of business put up for sale due to bankruptcy or restructuring, led to a ‘fire sale’ of Korean businesses. According to UNCTAD figures, Korea experienced the second largest fall in asset and currency prices among the Asian crisis countries: the fall in stock prices (63.1 per cent) in Korea was second only to that seen in Indonesia (94.5 per cent). A fall of 79.8 per cent in the dollar prices of shares in Korea allowed buyers to make their purchases at one-fifth of the pre-crisis cost; in Indonesia, the bargain prices were up to 95 per cent off the original price. The fall in the value of the woˇn also reduced operating costs for export-oriented foreign firms (Yu Ch’ang-gu˘ n 2002: 91). Given the temporary nature of some of the key factors fuelling inward investment after 1998 – exchange rate fluctuations, the fall in stock prices and the rush to sell off assets – the investment boom of the late 1990s was inevitably shortlived. In 2001, notifications dropped by 26 per cent to US$11.3 billion and declined by a further 19.4 per cent to reach US$9.1 billion in 2002. A similar trend was seen in the value of actual investments, which peaked at US$10.9 billion in 1999 and then eased back to US$10.2 billion in 2000 before dropping to US$5.1 billion in 2001 and US$3.8 billion in 2002. Before looking at the reasons for this reversal in Korea’s fortunes, it will be useful to identify and explain trends in inward investment during this period and highlight concerns that were being expressed over the quality of foreign investment entering Korea. One of the most significant trends in Korean IFDI after the crisis was the continuing ‘tertiarization’ of inward investment: the shift from investment in manufacturing to a focus on the service sector. In 1997, investment in service industries had accounted for 62.5 per cent of the total value of IFDI notifications in Korea; the corresponding share for manufacturing was 36 per cent. Investment in the service sector declined immediately after the crisis due to the recession in the domestic economy, falling levels of disposable income, declining demand for service industry products and concerns about the country’s economic prospects (see Table 4.2). However, it increased again after 1999 with the rapid recovery of the Korean economy, the restructuring of the financial sector and the further liberalization of the tertiary sector. By 2001, the service sector had attained a dominant position in terms of IFDI, accounting for 64.1 per cent share of the value of notifications – a sharp contrast with the share of 25.8 per cent taken by the manufacturing sector in the same year. In terms of the absolute amounts invested, manufacturing industries saw a rapid increase immediately after the crisis; IFDI jumped from US$2.5 billion in 1997 to

113.2

Total

0.2

0.9 0.1 <0.1 0.1 0.2

Total (%)

26,310.7

5,829.9 8,356.2 6,877.0 2,911.1 2,336.5

Manufacturing

Source: Investment Notification Statistics Center 2006.

78.4 8.3 3.6 6.8 16.1

1998 1999 2000 2001 2002

Primary

43.8

65.9 53.8 45.1 25.8 25.7

Total (%)

Table 4.2 Korean IFDI: by sector, 1998–2002 (in millions of dollars)

29,840.1

2,591.0 6,783.1 8,114.1 7,229.8 5,122.1

Services

49.7

29.3 43.7 53.2 64.1 56.3

Total (%)

3,748.5

353.2 383.9 254.9 1,138.6 1,617.9

Other

6.2

4.0 2.5 1.7 10.1 17.8

Total (%)

60,012.4

8,852.5 15,531.4 15,249.6 11,286.2 9,092.6

Total

88

IFDI in post-crisis Korea I (1998–2002)

US$5.8 billion in 1998 and US$8.4 billion in 1999 as manufacturers moved quickly to sell off assets and improve their companies’ financial health. The statistics showed strong activity in the paper and lumber industries in 1998 as foreign MNCs such as Procter & Gamble (USA), Bowater (USA) and Norske Skog (Norway) entered the market, after which investor interest switched to electronics, chemicals, transportation equipment and machinery, reflecting active restructuring in these industries (Kim Chin-jung 2000: 39) (see Table 4.3). In the electronics sector, both Samsung NEC and Sumitomo Chemicals (Japan) announced their intention to build semiconductor factories in Korea and Motorola Korea, which had opened a non-memory semiconductor factory in 1997, announced plans to expand its semiconductor production lines, invest in a software center and purchase PanTech, a leading domestic firm in the telecommunications area. Investment in the chemicals sector was led by BASF (Germany) which acquired Daesang Corporation’s lysine division, Degussa (Germany) which bought LG Chemicals’ carbon black business and Columbia International Chemical Company (USA) which acquired Kumho Petrochemicals’ carbon black division. In addition, Dow Chemical (USA) established a 50:50 joint venture with LG Chemicals, creating LG-Dow Polycarbonate. Major MNCs were also active in the transportation equipment industry with General Motors (USA) acquiring Daewoo Motor Company, Renault (France) buying into Samsung Motors and DaimlerChrysler establishing a strategic partnership with Hyundai Motor. In the machinery sector, FAG (Germany) took over the bearing division of Hanwha Machinery; Samsung Heavy Industries sold its heavy

Table 4.3 Korean IFDI: by major manufacturing industry, 1998–2002 (in millions of dollars) 1998 Electrical and 1,455.7 electronics Chemicals 779.9 Machinery 495.5 Transportation 114.8 equipment Paper and lumber 1,654.4 Food 782.5 Metals 128.9 Non-metallic 198.2 minerals Textiles and apparel 57.2 Pharmaceuticals 104.8 Other 58.0 Total

5,829.9

1999

2000

2001

2002

Total

Total (%)

3,831.2 2,575.4

896.1

517.2

9,275.6

35.3

1,372.2 778.4 626.6 1,588.9 779.6 839.6

515.3 84.7 144.9

141.0 219.7 588.2

3,586.8 3,015.4 2,467.1

13.6 11.5 9.4

24.0 304.2 677.8 600.1

75.5 84.3 302.5 386.2

68.3 624.2 47.3 241.4

51.7 48.4 507.1 65.5

1,873.9 1,843.6 1,663.6 1,491.4

7.1 7.0 6.3 5.7

66.7 13.0 60.8

96.4 93.0 56.8

200.4 19.0 69.5

56.5 45.2 96.0

477.2 275.0 341.1

1.8 1.0 1.3

8,356.2 6,877.0 2,911.1 2,336.5

Source: Investment Notification Statistics Center 2006.

26,310.7 100.0

IFDI in post-crisis Korea I (1998–2002)

89

equipment division to Volvo of Sweden, creating Volvo Construction Machinery Korea, and its fork lift division to Clark of the United States. Other major IFDI transactions included joint ventures in the cement industry between Lafarge SA (France) and Tongyang Cement and between TCC (Japan) and Ssangyong Cement. In the food and beverages sector, Interbrew and Hops Cooperatieve UA (both from the Netherlands) bought the OB brewery from the Doosan Group, and investment in the steel industry was spearheaded by the USbased Nabors Consortium which took over Hanbo Iron and Steel Company. Finally, foreign investors established a dominant position in the seeds industry following the acquisition of leading domestic seed companies – Hungnong by Seminis (Mexico) and Seoul Seed by Novartis of Switzerland (Son 1999; Invest Korea Journal 2000c; 2001; Duerden 2001b; 2002a; 2002b; 2003b). Between 1998 and 2002, the electronics sector retained its leading position in terms of investment by foreign firms, accounting for more than one third of the value of notifications in this period. Chemicals and machinery were ranked in second and third places with shares of 13.6 per cent and 11.5 per cent respectively (see Table 4.3). Together, these three sectors accounted for more than 60 per cent of all notifications, with a combined value of US$15.9 billion out of a total of US$26.3 billion. Investment in manufacturing began to decline after 2000 and had fallen to US$2.3 billion by 2002; the decline was due in large part to the stagnation in the global information technology business, which had been an important factor in the investment boom during the immediate post-crisis period (Ch’oe So˘ng-il 2003: 32). However, many other key sectors were affected by the overall decline in IFDI levels in 2001 and 2002, and in the final year of the Kim Dae-jung administration, none of Korea’s manufacturing industries attracted more than US$600 million in foreign investment. In the immediate post-crisis period, foreign investors in the service sector were attracted to finance-related industries and the wholesale and retail businesses; together, these industries accounted for more than half of the value of notifications in the tertiary sector, with culture and leisure taking a further 19 per cent (see Table 4.4). European banks including ING (Belgium) and Commerzbank (Germany) were active in the financial sector, while major activities in the insurance industry included investments by Allianz (Germany) and the purchase of Korea Life Insurance by the Hanwha consortium (including Orix Corporation of Japan and Macquarie of Australia). NTT DoCoMo’s (Japan) purchase of SK Telecom stock and LG Telecom’s sale of almost one quarter of its equity to British Telecom boosted investment in telecommunications, while the wholesale and retail sector saw large investments by global players including Wal-Mart (USA), Tesco (United Kingdom) and Carrefour (France). In the hotel and restaurant industry, the Daewoo Group sold the Seoul Hilton Hotel to CDL International Ltd. of Singapore (Son 1999; Invest Korea Journal 2000f; Guilherme 2001; Duerden 2001a; 2003a). After peaking at US$8.1 billion in 2000, investment in the service sector also declined, falling to US$7.2 billion in 2001 and US$5.1 billion in 2002 (see Table 4.3). The decline in inward investment was not reflected as strongly across

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IFDI in post-crisis Korea I (1998–2002)

Table 4.4 Korean IFDI: by major service industry, 1998–2002 (in millions of dollars) 1998

1999

2000

2001

Finance and insurance 554.0 2,533.4 Wholesale and retail 1,680.6 1,759.4 Culture and leisure 4.8 591.1 Hotels and restaurants 220.0 489.8 Real estate and leasing 2.7 307.3 Business services 109.6 430.1 Transportation and 17.8 314.9 storage Telecommunications 0.2 247.3 Other 1.4 109.9

1,918.6 1,769.0 2,031.3 1,489.9 1,238.5 2,495.6 469.1 436.8 943.3 554.2 778.7 292.2 280.1 22.4

Total

8,114.0 7,229.8

2,591.1 6,783.1

191.0 263.4

155.7 14.0

2002

Total

Total (%)

1,023.5 587.3 1,352.3 814.5 565.5 272.5 416.6

7,798.5 7,548.5 5,682.3 2,430.2 2,373.0 1,883.1 1,051.8

26.1 25.3 19.0 8.1 8.0 6.3 3.5

68.5 21.3

662.7 410.0

2.2 1.4

5,122.0 29,840.1 100.0

Source: Investment Notification Statistics Center 2006.

the service sector; although investment in the wholesale and retail industries, real estate and leasing, business services and telecommunications dropped sharply between 2000 and 2002, IFDI in the finance and insurance sectors, while declining, remained above the US$1 billion level, as foreign banks continued to take the opportunity to increase their shares in Korean financial institutions (Kim Chin-jung 2000: 42–3). Investment in the culture and leisure industries maintained the level seen in 2000, while IFDI in hotels and restaurants and transportation and storage actually increased towards the end of the period. Another important trend in post-crisis IFDI in Korea was the increasing level of M&A activity as the lifting of the government’s ban on hostile takeovers paved the way for a rapid increase in this type of investment. In many cases in Korea, local firms with liquidity problems received injections of cash from an existing or new partner who wished to increase their share of the business or take it over. The share of total IFDI notifications accounted for by M&A transactions rose from 10 per cent in 1997 (US$700 million) to 15 per cent in 1999 (US$2.3 billion) before falling back to 8.4 per cent in 2000 (US$1.3 billion) (see Table 4.5). The share increased once again in 2001, doubling to reach 16.8 per cent (US$1.9 billion) before returning to the US$700 million level. Although greenfield investments accounted for the largest share of IFDI transactions, ranging from 73.7 per cent (US$6.5 billion) in 1998 to 90 per cent in 2002 (US$8.2 billion), the absolute amount invested declined from a peak of US$13.6 billion in 2000 to just over US$8 billion in 2002. Similarly, the value of M&A transactions peaked at US$2.3 billion in 1999 (at the height of the restructuring sales) to just US$714 million in 2002. The fall in the value and share of M&A transactions came at a time when concerns were being expressed about the quality of IFDI in terms of the relative decline in manufacturing investment and increases in M&A deals, which might result in streamlining and job losses (compared with greenfield investments, which are guaranteed to create employment).

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Table 4.5 Korean IFDI: by type, 1997–2002 (in millions of dollars) Total IFDI

Greenfield Total (%)

M&A

Total (%)

Long-term Total (%) loans

(1997) 1998 1999 2000 2001 2002

(6,970.9) 8,852.6 15,531.4 15,249.6 11,286.2 9,092.6

(6,207.6) 6,524.2 12,560.7 13,625.3 8,776.0 8,182.6

(699.6) 1,245.0 2,333.4 1,277.2 1,901.0 714.4

(10.0) 14.1 15.0 8.4 16.8 7.8

(63.7) 1,083.4 637.4 347.0 609.4 195.6

(0.9) 12.2 4.1 2.3 5.4 2.2

Total

60,012.4 49,668.8

2,872.8

4.8

(89.1) 73.7 80.9 89.3 77.8 90.0 82.8

7,471.0 12.4

Source: Investment Notification Statistics Center 2006.

The third major trend in post-crisis inward investment in Korea was the emergence of European nations – principally member states of the EU – as major investors in Korea. Between 1962 and 1997, IFDI was dominated by the United States in terms of the value of notifications; US firms maintained their lead in 1998, despite the small decline in the amount invested from US$3.2 billion in 1997 to US$3 billion (see Table 4.6). Investment by Japanese companies remained well below that of American and European firms, fluctuating between a low point of US$504 million in 1998 and peak of US$2.5 billion two years later. While Japanese OFDI had been negatively affected by the long-term economic recession in Japan and the restructuring taking place in the late 1990s and early twenty-first century, the increase in notifications from Japan after the crisis raised hopes that Japanese firms would once again increase their levels of activity in the Korean market (Invest Korea Journal 2000b; Yu Ch’ang-gu˘ n 2002: 94–6; Kim Soˇn-shik 2002: 52). In 1999, Europe became the leading investor region, with notifications of US$6.4 billion, compared with US$3.7 billion from the United States and US$1.7 billion from Japan. After maintaining that position in 2000, Europe lost its leading position to the United States the following year but, over the five-year period, Table 4.6 Korean IFDI: by major investor, 1998–2002 (in millions of dollars) Total IFDI

USA

Total (%)

Europe

Total (%)

Japan

Total (%)

Combined total (%)

1998 1999 2000 2001 2002

8,852.6 15,531.4 15,249.6 11,286.2 9,092.6

2,970.8 3,739.0 2,921.4 3,886.0 4,490.7

33.6 24.1 19.2 34.4 49.4

2,964.5 6,413.8 4,456.2 3,102.1 1,869.8

33.5 41.3 29.2 27.5 20.6

504.2 1,749.2 2,451.9 776.3 1,403.5

5.7 11.3 16.1 6.9 15.4

72.7 76.6 64.5 64.8 85.4

Total

60,012.4

18,007.9

30.0

18,806.4

31.3

6,885.1

11.5

72.8

Source: Investment Notification Statistics Center 2006.

92

IFDI in post-crisis Korea I (1998–2002)

European firms accounted for the largest share of cumulative investment in Korea: 31.3 per cent (US$18.8 billion) compared with shares of 30 per cent for the United States (US$18 billion) and 11.5 per cent for Japan (US$6.9 billion). Although this period clearly marked the beginning of the emergence of European MNCs as major investors in the Korean economy, the trend also reflected an increasing propensity among US firms to make their investments through third countries. Indeed, another notable feature of IFDI in this period was the rising trend in investment via tax havens or countries that had entered into favourable tax treaties with Korea (see Table 4.7).22 In 1998, the United States, Europe and Japan accounted for 72.7 per cent of all IFDI notifications in Korea; almost all the remainder came via Bermuda, the British Virgin Islands, the Cayman Islands, Hong Kong, Malaysia and Singapore. Together, these countries accounted for one quarter of all notifications in terms of value (US$2.2 billion); their share of the total peaked at 28.7 per cent in 2000 (US$4.4 billion out of a total of US$15.2 billion) before declining to 7.4 per cent (US$670 million) in 2002. Two trends that were giving Korean government officials cause for concern during this period were the increasing proportion of IFDI accounted for by new, rather than additional, investments and the move towards small-scale projects. With the exception of 2000, the share of total IFDI accounted for by foreign MNCs making additional investments in their Korean subsidiaries fluctuated around the 40 per cent mark (see Table 4.8). A higher proportion of notifications to re-invest might be taken as an indication of a strong degree of satisfaction on the part of the investor regarding their business operations in Korea and a positive view of Korea’s future economic prospects. Between 1998 and 2000, the number of notifications for investment projects rose from 1,401 to 4,144; however, as inward investment activity declined in the early years of the twenty-first century, the number of projects fell, reaching Table 4.7 Korean IFDI: selected countries, 1998–2002 (in millions of dollars) Total IFDI

BER

BVI

CAY

1998 1999 2000 2001 2002

8,852.6 31.1 15,531.4 18.2 15,249.6 1,384.8 11,286.2 57.3 9,092.6 6.4

69.3 27.9 255.6 80.6 30.7

631.4 26.6 898.1 19.6 43.0

Total

60,012.4 1,497.7

464.1 1,616.7

HK

Combined total

Total (%)

SIN

2,216.7 2,740.9 4,374.4 1,299.4 670.4

25.0 17.6 28.7 11.5 7.4

1,023.7 4,459.5 2,238.0 11,301.8

18.8

38.4 262.7 1,183.8 460.2 1,793.9 414.1 123.5 1,408.2 304.2 167.4 784.8 189.7 234.1 210.0 146.2

Source: Investment Notification Statistics Center 2006. Notes BER: Bermuda. BVI: British Virgin Islands. CAY: Cayman Islands. HK: Hong Kong. MAL: Malaysia. SIN: Singapore.

MAL

IFDI in post-crisis Korea I (1998–2002)

93

Table 4.8 Korean IFDI: new and additional investments, 1997–2002 (in millions of dollars) Total IFDI

New

Total (%) Additional

Total (%)

Loans Total (%) (63.7) (0.9) 1,083.4 12.2 637.4 4.1 347.0 2.3 609.4 5.4 195.8 2.2

(1997) (6,970.9) (4,021.2) (57.7) 1998 8,852.6 4,133.8 46.7 1999 15,531.4 8,553.0 55.1 2000 15,249.6 5,456.2 35.8 2001 11,286.2 6,346.4 56.2 2002 9,092.6 5,678.2 62.4

(2,886.0) 3,635.5 6,341.0 9,446.4 4,330.4 3,218.8

(41.4) 41.1 40.8 61.9 38.4 35.4

Total

26,972.0

44.9

60,012.4

30,167.5

50.3

2,872.9

4.8

Source: Investment Notification Statistics Center 2006.

2,409 by the end of 2002. Immediately after the crisis, the share of all investment notifications accounted for by projects valued at less than US$10 million was just over 90 per cent (see Table 4.9). The trend towards small-scale projects continued and increased through to 2002, by which time 96 per cent of all projects notified to the Korean authorities were valued at less than US$10 million; during this period, fewer than 45 projects in any year were valued at US$100 million or more. The downturn in IFDI notified and actual investment levels in 2001–2002 prompted a vigorous debate in government and academic circles about identifying and removing the remaining barriers to promoting inward investment. Considering the broad range of reforms that had already been implemented in terms of legislation, regulation and systems, it was inevitable that attention should also focus on the ‘softer’ aspects of IFDI promotion. These included attitudes towards inward investment and foreign MNCs, foreign investors’ perceptions of the local business and investment environment, issues relating to business culture and concerns about the living environment for expatriate families. Prior to the 1997 crisis, the negative image of IFDI and foreign MNCs amongst Koreans was due in part to a lack of awareness of the benefits of inward investment and the role it might play in Korea’s economic development. Table 4.9 Korean IFDI: size of investments, 1998–2002 (in cases) 1998

1999

2000

2001

2002

>US$100 million 20 Total % 1.4 US$10–100 million 108 Total % 7.7
43 2.0 141 6.7 1,919 91.3

30 0.7 132 3.2 3,982 96.1

27 0.8 97 2.9 3,220 96.3

23 1.0 72 3.0 2,314 96.0

Total cases

2,103

4,144

3,344

2,409

1,401

Source: Investment Notification Statistics Center 2006.

94

IFDI in post-crisis Korea I (1998–2002)

Therefore, a key element in the debate on post-crisis IFDI in Korea was the analysis of the role played by inward investment in Korea’s recovery from the crisis. Chang (2001: 50) identified five major contributions made by IFDI in postcrisis Korea: promoting industrial restructuring; securing advanced technology; increasing exports and thereby improving the trade account situation; boosting production and creating employment and securing stable foreign exchange reserves.23 After the crisis, a substantial number of domestic firms moved quickly to sell off assets in order to streamline their business operations and pay down their debts; faced with a lack of suitable local investors, they turned to foreign corporations (Yun 2000: 140). KIET estimated that the top 30 conglomerates raised a total of US$8 billion by entering into joint venture agreements with foreign investors, enabling them to proceed with their restructuring plans (Chang 2001: 40–1). The Korean government also benefited from foreign participation in the restructuring process; the sale of public corporations such as steel giant POSCO and Korea Telecom accelerated the process of privatization, provided additional funding to expand the nation’s social safety net and publicly demonstrated the government’s commitment to restructuring and liberalization (Ch’oe 1998: 56; KIEP 1998: 77–8). Inward investment also helped to upgrade the technological capabilities of domestic firms and enhance Korea’s international competitiveness immediately after the crisis, as foreign firms introduced technology to Korea, established research facilities, engaged in R&D activities and provided advanced skills and know-how in areas such as global management, corporate and financial governance. Furthermore, foreign-invested firms were active exporters, contributing almost US$5 billion to the trade surplus in 1999 alone (Chang 2001: 34–40). The improvement in the ratio of annual IFDI to domestic fixed capital formation, from 1.2 per cent in 1996 to 8.3 per cent in 1999, was also partly attributed to foreign capital; although the ratio declined to 6.6 per cent in 2000 (as FDI inflows slowed down), total fixed capital formation continued to grow. In the two years immediately following the crisis, foreign investors’ share of domestic manufacturing production increased steadily and foreign-invested firms accounted for 44 per cent of the total increase in manufacturing production (US$20 billion out of US$45.3 billion). Finally, between 1998 and 2002, Korea’s foreign exchange reserves increased by a total of US$101 billion; inflows of foreign capital in the form of FDI contributed US$29.2 billion, or 28.9 per cent of the total (Chang 2001: 21). During the immediate post-crisis period, therefore, it appeared that the Korean government’s efforts to induce foreign capital were successful and were also justified in terms of the beneficial effects seen in the domestic economy. With various branches of the media reporting this success story and discussing the positive effects of IFDI in terms of its contribution to productivity, employment, exports and industrial restructuring, people who expressed negative views about IFDI were regarded as ‘ultranationalists’ or people who were out of touch with the needs of the times (Yang 1999: 34).

IFDI in post-crisis Korea I (1998–2002)

95

However, despite the post-crisis boom in inward investment, Korea still occupied a low ranking in terms of global FDI flows; according to statistics published by UNCTAD and the World Bank, Korea attracted an average annual inflow of US$6.8 billion between 1998 and 2001, placing it in twenty-fifth position globally. In terms of the ratio of FDI to GDP, Korea ranked eighty-third in the world, a position hardly commensurate with its ranking as the country with the thirteenth largest GDP in the global economy (Pak 2003: 16–20). Calculating its IFDI Index for 1998–2000, which was designed to measure the attractiveness of countries taking into account their size and competitiveness, UNCTAD reported a score of 0.6 for Korea, compared with 10.6 for Hong Kong and the People’s Republic of China (PRC), 3.3 for Singapore, 3.8 for the United States and 2.3 for the United Kingdom. The one crumb of comfort for the Koreans was that Taiwan and Japan were placed even lower in the rankings, with an index of 0.4 and 0.2 respectively (Kang 2002: 14–15). Given the role that foreign firms had played in Korea’s recovery from the crisis and the contribution that foreign firms could be expected to play in enhancing Korea’s international competitiveness and thus ensuring sustainable growth in the future, it was clearly a matter of urgency to identify and address the factors that were dampening inward investment.

Barriers and hindrances to post-crisis inward investment: economic factors Between 1998 and 2001, although Korea was ranked eighteenth in the world by UNCTAD in terms of its potential to attract IFDI, it was placed ninety-second in terms of its actual performance (U˘nhaenggye 2004: 30). The reversal of Korea’s fortunes in terms of attracting inward investment and its inability to fulfil its potential as a host for IFDI had its roots in both international and domestic developments. Externally, the most important factors were the stagnation of the global economy and FDI flows and the emergence of the PRC as a major host for inward investment. After 2000, many countries in the world, including Korea, began to experience a decline in levels of inward investment as investor confidence faltered in the face of global economic stagnation. Global economic growth declined from 3.9 per cent in 2000 to 1.7 per cent in 2002, and global FDI flows dropped from US$1.5 trillion to US$534 billion in the same period. In 2001 alone, global FDI flows declined by 40 per cent from US$1.3 trillion to US$760 billion; this represented the first downturn since 1991 and the largest fall in 30 years. Cross-border M&A transactions, which had accounted for the lion’s share of global FDI flows in the late 1990s, fell sharply between 2000 and 2001 from US$1.1 trillion and 7,900 deals to US$600 billion and 6,000 transactions (Kim June-Dong 2003a: 18; 2003b: 198; Mun 2004: 21). Factors contributing to the slowdown in global investment included the terrorist attacks of 11 September 2001 and tensions between the United States and Iraq on the one hand and the United States and North Korea on the other (Samsung Economic Research Institute 2003: 6). In the case of Korea, media

96

IFDI in post-crisis Korea I (1998–2002)

reports of anti-American sentiment and demonstrations focusing on the US military presence in Korea further increased uncertainty among investors from the United States. As a result of these factors, MOCIE reported that a number of significant deals by US firms had been delayed or cancelled, including investments in SK Telecom (US$3 billion), KEB Credit Card Service Company (US$450 million), Hyundai Securities (US$800 million) and Kookmin Bank (US$300 million) (Duerden 2002c; O Su-gyun 2003: 369). In the late 1990s and early twenty-first century, the PRC had emerged as a major global economic player and an important host country for IFDI. With a population of 1.3 billion, the sixth largest economy in the world, an abundance of workers willing to work long hours for low wages, no major labour problems and plenty of cheap land, China was an attractive market for foreign investors. The FDI Confidence Index published by AT Kearney in 2002 ranked the PRC in top position, followed by the United States and the United Kingdom. In contrast, Korea ranked twenty-first in the listings, ahead of Taiwan (twenty-fourth) but below Japan (twelfth). In 2002, the PRC attracted more than US$52 billion in investment funds and overtook the United States as the leading host nation for the first time. By 2003, China had attracted a total of US$500 billion24 in inward investment from MNCs that included 400 of the firms listed in the Fortune 500. This amount was almost ten times as large as Korea’s cumulative IFDI between 1962 and September 2003, which stood at US$53.3 billion (Ch’oe Soˇng-hwan 2003: 95–9; Kim Hee-kyung 2004b: 110). A wide range of domestic factors also played their part in the slowdown in inward investment; as the Korean economy began to recover, exchange rates stabilized and the most urgent phases of the financial and corporate restructuring programmes were completed, fewer businesses were put up for sale to foreign investors. The initial rush to dispose of assets subsided; entrepreneurs were far less willing to sell their businesses at bargain prices, and creditors were prepared to take a longer term view of the assets under their control, building up their value before approaching the market. Accordingly, it became more difficult for foreign investors to find suitable targets for investment where they could inject funds and add value through restructuring. Another problem was that, despite the opening of additional industrial and service sectors to foreign investment after the crisis, some key industries such as broadcasting, publishing, legal and medical services remained partially or completely closed to foreigners. Finally, concerns that the nation’s wealth was ‘falling into foreign hands’ and that the domestic market would be dominated by foreign firms contributed to a ‘weakening of the social consensus’ that foreign investors should play a key role in the future growth of the Korean economy (Kim June-Dong 2003a: 1–2, 23).

Barriers and hindrances to post-crisis inward investment: the business and investment environment In addition to the economic and social factors mentioned in earlier sections, levels of IFDI were dampened by problems with the investment environment

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97

and dissatisfaction among foreign investors. According to the OECD’s IFDI Regulation Index, foreign investors in Korea continued to be plagued by ‘excessive and unnecessary regulations’ in the years immediately following the crisis. Korea ranked seventh out of all the OECD member countries in terms of the degree of regulation imposed on investors regarding ownership of local firms, procedures for approval, restrictions on the employment of foreigners and so forth (Song 2004: 23–4). The World Competitiveness Yearbook published by the IMD in 2002 ranked Korea forty-fifth out of 49 countries in terms of the degree of discrimination against foreign investors, twenty-seventh on the basis of incentives offered for investment, and thirty-ninth in terms of the degree of protection afforded to foreign investors (see Table 4.10) (Samsung Economic Research Institute 2003: 7). Foreign investors complained about a lack of transparency and consistency concerning the laws and regulations relating to inward investment in general and taxation in particular; ambiguous regulations were open to various interpretations, while duplicated or overlapping regulations and the need to prepare an excessive number of documents forced many investors to seek help from consultants, advisors and translators, which increased their operating costs. The situation was exacerbated by a lack of cooperation from some officials, poor information flows between government and working-level officials or between central and regional governments, problems in transferring paperwork among departments and the government’s failure to check whether or not the proposed improvements to the regulatory systems had actually been implemented (Kim Chin-jung 2000: 65–6). The institutions created by the government to promote inward investment also came under attack; specific issues included the lack of adequate investor relations management and post-investment support services, the lack of cooperation between key government agencies involved in investor support (including KOTRA, MOCIE and the Ministry of Finance and Economy) and the absence of channels for regular dialogue between KISC and high-level government officials. Although KISC had been established to operate as a ‘one-stop shop’, Table 4.10 IMD World Competitiveness Yearbook 2002: IFDI-related Indices (ranking among 49 countries)

South Korea Hong Kong Singapore China Japan Ireland

Discrimination against foreigninvested firms

Incentives for foreigninvested firms

Protection of foreigninvested firms

45 9 12 36 47 3

27 20 3 17 43 2

39 28 14 23 33 7

Source: Samsung Economic Research Institute 2003: 7.

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the Korean government retained the right to make the final decisions on matters of approval and permission. KISC was playing an important role in helping to remove barriers and resolve problems, but there were limits to the level of specialist services that it could provide, and simple referrals to local law firms or consultancies were often the only option for foreign investors. A final criticism concerned the lack of overseas promotion regarding potential investment sectors and the Korean investment and business environment, leaving companies interested in investing in Korea to rely on existing investors for market information. This, it was acknowledged, might be a risky strategy should the information provider be pessimistic about Korea’s economic prospects or dissatisfied with the investment environment and level of investor support (Kim Chin-jung 2000: 68–70) According to the Samsung Economic Research Institute (2003: 7), the investment incentives provided by the Korean government were inferior to those offered by major competitors such as Hong Kong, Singapore and Shanghai. One example of the discrepancy in incentives was the key area of taxation: the rates of 39.6 per cent for income tax and 29.7 per cent for corporation tax in Korea were generally higher than those of these three major competitors. In Singapore, the rates were 26 per cent and 22 per cent, in Hong Kong, 17 per cent and 16 per cent and in Shanghai, 45 per cent and 15 per cent (Kim June-dong 2003a: 25). One Korean analyst called the incentives ‘ineffective’, particularly in the case of hightech industries, and expressed concern that offering incentives on a preferential basis might create problems if that was seen to be having a negative impact on other regions and firms. He noted the low level of interest in the foreign investment zones that had been created to attract MNCs and attributed this to their distance from capital, the traffic congestion on major routes from the regions to Seoul and the inadequacy of infrastructure including roads, railways and port handling facilities. Other factors were the lack of facilities for foreign businesses and expatriates in the provinces and the desire of many foreign-invested firms to be viewed as local firms rather than exacerbating exclusionist views among the Koreans by locating in a foreigners-only zone (Kim Chin-jung 2000: 69). The creation of effective trade unions in Korea in the wake of the 1987 democracy movement was followed by a period of intense labour-management friction and high wage increases that created an extremely negative image of the Korean labour market among foreign businessmen. Even after the 1997 crisis and the rapid rise in unemployment that had followed, an official from the Federation of Korean Industries (FKI) identified a strong relationship between the stagnation in IFDI and continuing problems with labour. While labour costs had risen by 50 per cent in Korea between 1995 and 2003, wages in Japan and the United States had only increased by 5 per cent and 17 per cent respectively (Song 2004: 24). The Korea Productivity Centre reported that hourly wage rates in the manufacturing sector had risen by 5.8 per cent in 1999, by 10.1 per cent in 2000 and by 8.6 per cent in 2001, compared with annual increases in labour productivity of 17 per cent, 9.8 per cent and 4 per cent respectively, resulting in a real increase in labour costs of 0.2 per cent in 2000 and 4.4 per cent in 2001.

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Unions continued to make excessive wage demands regardless of the financial situation of the company involved in wage negotiations, and the number of labour disputes increased from 78 in 1997 to 129 in 1998 before doubling to reach 250 in 2000 (Kang 2002: 35–6). In addition, the lack of labour market flexibility and high levels of union militancy presented problems for investors wishing to streamline the workforces of companies they had purchased (Kim Chin-jung 2000: 62). More than 90 per cent of respondents to a survey of AMCHAM members called for changes to the Korean Labour Law, which prohibited the downsizing of a company’s workforce until the firm was, effectively, facing a crisis (Kim JuneDong 2003a: 26). The IMD’s World Competitiveness Yearbook 2002 ranked Korea thirty-fifth out of 49 countries in terms of labour market flexibility, far behind two of its major competitors – Singapore (ranked first) and Hong Kong (ranked second) – and even lagging behind mainland China, which was ranked in twenty-third position (Samsung Economic Research Institute 2003: 9). Finally, although the financial sector had been the focus of determined reform efforts after the crisis, foreign investors still faced problems in terms of restrictions on the movements of foreign exchange, the inefficiency of the Korean capital markets, the underdeveloped derivatives market and the lack of hedging instruments. Criticism also focused on the high level of dependence on debt for funding and the restrictions facing foreign banks, which included determining the limits on business activities (such as the extension of loans, the ability to raise local currency funding and the holding of foreign exchange positions) on the basis of the local branch’s capital rather than that of the bank’s headquarters (Kim Chin-jung 2000: 62–3, 67). Foreign-invested firms found it hard to move funds freely and faced sanctions for failing to comply with the government’s requirements regarding the reporting of and approval for transfers of funds (Kim June-Dong 2003a: 25). In addition to these quantifiable problems facing foreign investors and despite evidence of the positive contribution made by foreign investors after the crisis, the old exclusionist sentiments began to resurface as the economy started to recover. According to Korean commentators, there was ‘great suspicion’ of the negative effects of FDI (Yun 2000: 158), and there was discussion in some quarters of Korean society as to whether IFDI was, in fact, an ‘absolute good’ (Yang 1999: 34). Negative reports about the activities of foreign firms circulated, fuelling deep-rooted concerns about the possible domination of the domestic economy by foreign MNCs (Kim Chin-jung 2000: 70–2). Kim JuneDong (2003b: 208) noted that there was a shift in the Korean government’s attitude at this time, as it began to pay greater attention to opposition groups and held back from taking a proactive stance with regard to union resistance to, and negative public perceptions of, inward investment. However, Kim Dae-jung warned the Koreans of the dangers of failing to break away from the closed and nationalistic mindset of the past; according to the president, the era of nationalism was over, and the Koreans had to face a ‘new era of universal globalization’ (Choˇn 2004: 122). Analysts also reported criticisms from some quarters of society including

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academia and the media regarding the ‘fire sales’ of Korean companies to foreign investors and the ‘outflow of national wealth’ that accompanied higher levels of inward investment (Ch’oe Soˇng-hwan 2003: 99). Some media sources highlighted the rapid penetration of some Korean industries by foreign MNCs; an article in the Han’guk Kyoˇngje Shinmun published on 10 July 2000 reported that foreign firms had taken shares of 80 per cent in the aluminium industry, 75 per cent in the newsprint business and 50 per cent in the petroleum industry. The 25 June 2001 issue of the Munhwa Ilbo claimed that the Korean food industry was being ‘devoured’ by foreign capital and that mainstream industries were being monopolized by foreign-invested firms. Although the assertions were disputed by some academics who pointed out that these sector shares were, in most cases, a combined share of several foreign firms some of which were in joint ventures with local businesses, negative sentiments persisted (Yun 2000: 124–6). The negative perceptions were by no means one-sided; foreign investors were concerned about the irrational and debt-financed business expansion by Korean firms, the lack of transparency, the problems they encountered in obtaining credible financial and corporate information, the preference for business relationships based on personal connections rather than logic and economic principles and the ‘widespread’ bribery and corruption (Kim Chin-jung 2000: 63, 71–2). According to Transparency International’s Corruption Perception Index, where an index of 10 indicates the lowest level of corruption, Korea was given a mark of 4.5, compared with 8.2 for Hong Kong and 9.3 for Singapore, reflecting continuing problems with administrative inefficiency, corruption and the application of non-transparent regulations (Pak 2003: 37). A series of surveys carried out in Korea in the early years of the twenty-first century confirmed that these domestic factors were contributing to the slowdown in inward investment. The Business Environment Survey carried out by AMCHAM ranked the Seoul business environment as the least favourable out of five major cities, including Hong Kong, Singapore, Tokyo and Shanghai, based on a survey of 1,700 business people including the Chief Executive Officers of 100 MNCs. The survey covered eight areas (global business conditions, taxation, foreign exchange transactions, labour market, working conditions for foreigners, English language skills, country image, and macroeconomic environment); Seoul was ranked last in terms of global business conditions, foreign exchange transactions, labour market flexibility and immigration, third in terms of taxation and fourth in terms of use of English in the work place. Respondents felt that, despite the efforts made by the government to improve the investment and business environment, investors still faced restrictions and the institutions created to serve and advise foreign investors lacked the authority to ease regulations or resolve problems. Finally, the survey identified Korea’s poor national image overseas as a cause for concern, with only 27 per cent of interviewees holding a positive impression of Korea (Kim Hee-kyung 2004b: 118–20). Indeed, AMCHAM provided a long list of areas for improvement in the business and living environment. The list included: the arbitrary interpretation of ambiguous laws by government officials; the lack of equity in the tax system

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and uncompetitive tax rates; the complexity of foreign exchange regulations; the inflexibility of the labour market; the lack of transparency in information; corruption and collusion; the xenophobic tendencies of the Koreans; problems in communication using the English language and a poor image for the country as a whole (Yoo 2002: 109–12; Kim June-Dong 2003b: 200–5). Finally, a survey carried out by the Hong Kong-based Political Economy Risk Consulting group (PERC) in May 1998 ranked Seoul as the lowest of ten East Asian capital cities in terms of living standards, citing exclusionist attitudes among the Koreans, communication problems, traffic congestion, high levels of pollution and the high cost of living (Kim June-Dong 2003a: 42). A survey of 1,000 executives carried out by PERC three years later ranked Korea ninth out of 12 Asian nations in terms of its business environment (ahead of the Philippines, India and Vietnam), with Singapore being assessed as the best place to do business in Asia. Factors contributing to Korea’s low ranking included excessive levels of red tape, the risk of labour unrest and strikes and problems with the use of English (O Su-gyun 2003: 382).

Conclusions In the years immediately following the 1997 crisis and the IMF rescue package, the Korean government accepted what Dittmer (2002: 32–4) termed a ‘homeopathic remedy’ of curing globalization with more globalization. In post-crisis Korea, this would mean allowing foreign investors, corporations and financial institutions greater access to the local market, reflecting the government’s altered perception of the contribution that foreign capital could make to the Korean economy. Having determined that IFDI had a critical role to play, both in Korea’s recovery from the crisis and in its future economic growth, the Kim Dae-jung government made determined efforts in the immediate post-crisis period to boost levels of inward investment in Korea. In the short term, these efforts were rewarded with a sharp increase in investment notifications, as many existing investors took the chance to expand their presence in the market, and new investors were attracted by the opportunities created by the government’s programme of sweeping reforms. However, the investment boom was short-lived and a range of domestic and international factors combined to dampen IFDI activity in the latter part of the Kim Dae-jung administration. Although it was undeniable that considerable progress had been made in reforming and restructuring the corporate and financial sectors and that Korea was now, in many respects, a more attractive host for inward investment, many expatriates remained dissatisfied with certain aspects of the reform programme. Key areas for concern were regulations in general, taxation in particular, restrictions on investment activity in key sectors such as finance, labour problems and inadequate incentives and investor support. Equally important as factors acting as a barrier to inward investment were the negative perceptions on the part of both the Koreans and foreign investors. Many Koreans still harboured anti-foreign capital sentiment that

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derived from fears of foreign domination of the domestic economy and, for their part, significant numbers of foreign investors had unfavourable perceptions of Korea, its business culture and living environment. By 2001, Korea had moved through the phase of ‘austerity globalization’ as the Korean government repaid the IMF loans and regained full autonomy in managing the economy. In terms of IFDI, the final phase of Dittmer’s Asian globalization process had been characterized in Korea by new opportunities created by sweeping reforms in the corporate and financial sectors and business environment, a marked shift in the government’s perception of the value and potential role of IFDI and, as a result, significantly higher levels of investment activity. However, the decline in notification levels in the early years of the twenty-first century indicated that much remained to be done in terms of embedding the new systems and practices introduced after the crisis, addressing the problems facing existing foreign investors, identifying and removing the remaining barriers to potential investors and convincing the Korean people of the benefits that would derive from higher levels of foreign participation in the domestic economy.

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Inward foreign direct investment in post-crisis Korea II (2003–2006)

Despite the best efforts of the Kim Dae-jung government in the immediate post-crisis period and notwithstanding the boom in inward investment in 1999 and 2000, IFDI levels were declining towards the end of President Kim’s fiveyear term of office, with notifications falling from a peak of US$15.5 billion in 1999 to US$9.1 billion by the end of 2002. The downturn in IFDI notifications came at a time when the Korean economy was showing signs of recovery as GDP and per capita GDP both returned to pre-crisis levels of US$546.9 billion dollars (at current prices) and US$11,499 respectively. There had also been a spectacular recovery in usable foreign exchange reserves, which had increased from US$8.8 billion dollars at the end of 1997 to US$121.4 billion by the end of 2002 (KOSIS 2007; Invest Korea 2007). While there had been concerns over the 12.7 per cent decline in exports in 2001 (to US$150.4 billion), export growth became positive once more in 2002, rising by 8 per cent to reach US$162.5 billion, the second highest level in Korea’s history25 (KITA 2006). The recovery in these key economic indicators prompted the question: would the Korean government be as keen to promote inward investment now that the immediate dangers associated with the 1997 crisis appeared to have passed? Given the reluctance of successive governments in the past to open up the Korean market fully to foreign goods and services, the continuing dissatisfaction expressed by existing investors about barriers to their operations in Korea and the weakening of the social consensus regarding the desirability of increased levels of IFDI, it seemed entirely possible that efforts to boost inward investment would begin to weaken with the upswing in Korea’s economic fortunes. The change of government in 2003 was a potential watershed, the point at which IFDI promotion policies and systems could be further enhanced to stem the decline in inward investment or the point at which attention could be re-focused on other policy issues. Following the inauguration of Roh Moo-hyun as President of Korea in February 2003, the Korean government confounded sceptics by continuing with and even intensifying efforts to attract IFDI. The policy of taking further action to improve the Korean business and investment environment and thus boost IFDI was closely linked with the Roh administration’s key policy objective of transforming Korea into a hub for Northeast Asia.26 For the new government, success

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in achieving its goal of developing the country into a regional logistics base, a financial hub and a centre for the headquarters of global MNCs would depend to a great extent on its ability to complete the process of transforming Korea into an attractive host nation for IFDI (Krause 2003: 33–4). This chapter highlights key elements of the debate surrounding the government’s efforts to further enhance Korea’s advantages as a host for inward investment and assesses the efforts made by the Roh Moo-hyun government to re-invigorate IFDI activity in Korea.

The debate on IFDI policy and strategy As FDI inflows continued to decline in 2002 and 2003, academics, local research institutes and journalists offered the new Roh Moo-hyun government advice as to how it might remove the economic, political and social barriers that continued to obstruct IFDI. The suggestions were wide ranging, covering areas as diverse as the type of investment that should be sought, the role of the national investment promotion agency, the provision of investment incentives, improvements to the domestic business environment, the need for a change in the social mindset of the Korean people and the need to boost Korea’s national image overseas. Yu Ch’ang-gu˘ n (2002: 98) argued that there was a need to focus on high-quality investments; with the Korean economy showing signs of recovery, there was no longer any need to adopt a ‘fire sale’ strategy, selling assets quickly and cheaply to bring in foreign capital. The situation now called for a more cool-headed and long-term approach with a consistent and transparent policy of creating an environment with strong locational advantages in which foreign firms could thrive. Some commentators observed that, in order to attract higher levels of goodquality IFDI, Korea needed to offer better incentives than its regional competitors. After the crisis, Korea was offering incentives in the form of tax reductions and exemptions for foreign firms locating in export zones and/or bringing in advanced technology, together with reductions in or exemptions from leasing costs in foreigners-only or state-owned industrial zones (Kim Pyoˇng-sun 2002: 26–7). O Su-gyun (2003: 363–4) argued that government incentives should be offered according to the sector, size of investment, export performance, production capability, potential to create new jobs, forward and backward linkages, contribution to regional development and so forth, rather than on a uniform basis as in the past. Other commentators and analysts warned that, while it was desirable to provide incentives in order to gain access to benefits including advanced technology, this should not result in reverse discrimination against local firms. Offering incentives and applying various laws and regulations less strictly to foreign MNCs than to domestic companies could disadvantage local firms, especially small- and medium-sized enterprises. In order to avoid charges of reverse discrimination against local companies and to lessen the risk of stirring up negative perceptions about foreign investment, the government should, in future, offer incentives to both foreign MNCs and domestic firms, including employment subsidies (for training and so forth), tax benefits and support for the

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acquisition of sites or plots of land for industrial use (Kim Pyoˇng-sun 2000: 106; Kim Hee-kyung 2004b: 121–2). An active area of the debate centered on the Korean business and management environment and covered a broad range of issues including regulations, transparency, corruption, labour issues, financial matters, R&D activities and human resources. A key issue for many observers was the need to create a sense of confidence among foreign investors that the Korean management environment now met with international standards and that Korean firms were suitable and responsible business partners. To achieve this, Korean firms needed to further improve their corporate governance systems to ensure transparency and accountability, eliminate corruption and collusion and bring their accounting, reporting, auditing and management systems into line with global best practice (Kim Pyoˇng-sun 2002: 26–7; Kim Hee-kyung 2004b: 123–5). Some of the most important and most frequently cited barriers to inward investment in Korea related to ongoing problems in the labour market. Despite the government’s efforts to increase flexibility and improve labour-management relations, chief executive officers of foreign-invested firms in Korea continued to face problems with labour unions, ‘extreme illegal behaviour’ (such as intimidation) in the workplace and labour unrest in the form of stoppages and sit-ins. Kim Hee-kyung (2004b: 120) highlighted the need for the unions to ‘get out of the mindset of a zero sum game’ and seek to establish three-way agreements between the government, labour and management. However, she also noted that, while it was essential for all firms to be able to respond to changes in the business environment by adjusting their employment levels, there was also a need to expand the social safety net and create re-training opportunities for workers affected by reductions in employment levels. As regards financial matters, suggestions included the further easing or removal of restrictions and regulations, particularly in the area of foreign exchange transactions (O Su-gyun 2003: 382). As Kim June-Dong (2003a: 41) noted, plans to abolish the Foreign Exchange Transaction Act and complete the liberalization of the foreign exchange system by 2011 would ultimately see the necessary reforms in place but possibly too late to achieve the government’s short-term goals of attracting higher levels of inward investment. The early liberalization of the foreign exchange system and the creation of guarantees that MNCs would be able to move funds in and out of the country freely would boost the induction of foreign capital and enhance Korea’s credibility in global financial markets (Kim Suk 2000: 296; Kim Hee-kyung 2004b: 119). In terms of R&D activities, the main issues to be addressed were fostering capable specialist personnel, improving government support systems and strengthening the protection for intellectual property rights. In addition to reforms in these areas, the government would need to foster strong links between foreign and domestic research institutions, offer support for joint programmes of research and increase incentives for MNCs to establish their overseas research facilities in Korea (O Su-gyun 2003: 363–4; Kim Hee-kyung 2004b: 122–3). Closely connected with the question of fostering high-quality

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human resources was the challenge of developing competence in the English language, particularly in terms of verbal and written skills. With the growth of global and regional networks, it was essential that staff were able to communicate with the corporate headquarters and global affiliates; this would require a review of syllabuses and the teaching of languages in the Korean education system (Pak 2003: 42). In terms of mindsets and attitudes towards inward investment, many commentators highlighted once again the need to switch focus from the ‘hardware’ of IFDI – institutions, legislation and regulations – to the ‘software’, including attitudes, practices and perceptions. Although a report published by the Korea Institute for International Economic Policy (KIEP) in 2003 noted that barriers to entry by foreign MNCs had been ‘extensively eliminated’, its author drew attention once again to the ‘softer’ side of IFDI promotion: removing obstacles that ‘are part operating practice, part regulation and part cultural custom’ (Kim June-Dong 2003a: 40). The fearful and suspicious mindset of many Koreans with regard to foreign participation in the economy had improved to some degree after the crisis when foreign firms were playing a crucial role in post-crisis reform and restructuring. However, negative views remained in some quarters of society and re-surfaced once signs of economic recovery began to appear. Yu Byoung Gyu (2002: 42–4) emphasized the need for the authorities responsible for promoting inward investment to convince the Korean people that inward investment provided both tangible and intangible benefits to the domestic economy: ‘It is necessary for Koreans to better appreciate the value of foreign capital and discard their lingering distaste for foreign investment in Korean business’. Many Korean writers felt that, rather than dwelling on fears of foreign domination and the erosion of national economic sovereignty, the Koreans should afford equal treatment to foreign and domestic firms, focusing on whether a given company created employment and added value rather than on its nationality or ownership. The government and the media needed to take action to get rid of the Koreans’ exclusionist mindset, providing accurate information to civil groups and non-government organizations in order to raise awareness of the importance of IFDI and of the contribution it had already made and could continue to make to economic development and growth (Kim Suk 2000: 297; Ahn 2003: 17; Kim Hee-kyung 2004b: 124). In order to deal with the problem of Korea’s weak image overseas and possible investor concerns about political and social instability and tensions with North Korea, the Samsung Economic Research Institute recommended that the government strengthen its external public relations efforts, establishing a clear stance on key issues such as relations with North Korea, anti-American sentiment and demonstrations and demands for the withdrawal of US armed forces from Korea. Building credibility and trust with analysts at foreign financial institutions, foreign journalists based in Korea, the Korea Desks of foreign governments and their embassies in Korea would create channels for clear communication and the diffusion of accurate news stories. Crucial to changing foreigners’ perceptions of Korea would be raising the standard of living for

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expatriates and improving their quality of life not only by providing better housing, health care and educational facilities but also by opening up channels of communication and exchange between expatriates and Koreans to create an ‘atmosphere of mutual understanding and cooperation’ (Samsung Economic Research Institute 2003: 24–7).

A new national investment promotion agency: Invest Korea The Roh government demonstrated its commitment to boosting Korea’s performance in terms of attracting IFDI by re-launching the national investment promotion agency in November 2003. Invest Korea’s mission was to create an investor-focused promotional system and provide support and incentives for investment in specific industrial sectors, targeting in particular the cutting edge investment needed to advance Korea’s economic goals. Whereas its predecessor, KISC, had operated within KOTRA, Invest Korea was created as an autonomous, project manager-based organization, which would continue to offer one-on-one support to investors from the initial enquiry through to the start of business operations. In addition, it would recruit industry experts from the private sector and appoint officials from the relevant government ministries and agencies to offer targeted advice and support to existing and potential investors. The decision to appoint Alan Timblick, a Korean-speaking British businessman with a long and successful track record of doing business in Korea, as the head of Invest Korea and as a Senior Vice President of KOTRA clearly demonstrated the government’s determination to raise the profile of its IFDI promotion institutions and to address the needs and concerns of foreign investors. The new agency lost no time in clarifying its position on IFDI promotion and setting its goals for the future: in the immediate post-crisis period, the aim of Korea’s inward investment policy had been simply to attract as much foreign capital as possible in order to stabilize the foreign exchange market, replenish the nation’s depleted foreign exchange reserves and promote reform and restructuring. Five years on, Korea’s situation and requirements had changed but the national investment promotion policy had not evolved in response to those changes. Korea now needed a strategic, focused inward investment promotion policy that would target ‘qualitatively superior forms of investment capable of generating powerful economic ripple effects’. In practical terms, staff at Invest Korea would gather information and prepare materials to meet the specific needs of potential investors, including industry overviews, market competition reports and information on incentives and available plants and industrial sites. The main office would provide investment promotion manuals to regional staff, offer training seminars and create nationwide consulting and advisory resources with access to legal and accounting professionals. In the medium term, Invest Korea would construct the Invest Korea Plaza in Seoul,27 a complex that would include ‘incubation services’ for newly arrived foreign-invested firms, offering assistance on a variety of issues including legal and taxation issues, education and housing (Invest Korea 2004).

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Invest Korea aimed to link investment incentives to the broader goal of enhancing Korea’s international competitiveness by identifying target investment industries to which incentives and preferential funding could be applied. While some industries in Korea such as transportation equipment, general automobile parts and precision chemicals had already achieved a reasonable degree of competitiveness, others had not yet reached that level. These industries (including pharmaceuticals, precision machinery, electrical automobile components, telecommunications devices and digital home appliances) needed foreign investment to play a ‘nurturing role’ and support efforts to enhance their competitiveness. Although IFDI had focused thus far on manufacturing, sales and distribution, investment was also needed in areas such as design and R&D (Invest Korea 2004). In tandem with Invest Korea’s IFDI promotion activities, the Korean government announced that it would establish a ‘Three-Year Business Environment Improvement Plan’ and a ‘Five-year Living Environment Improvement Plan for International Residents’, which would address issues in areas ranging from education, health services and housing to entry and departure procedures and cultural problems. On this ‘software’ side, the agency would take action to address negative perceptions about doing business in Korea by, for example, arranging meetings between investors and labour unions to discuss issues of mutual interest and providing seminars on Korean traditions, business culture and everyday life for foreign residents (Invest Korea 2004). Invest Korea’s proactive approach drew support from individuals whose cooperation would play an important role in encouraging foreign investment, most notably key figures in the labour union movement and the Mayor of Seoul. In September 2004, the President of the Korean Federation of Trade Unions (KFTU), Lee Yong-Deuk, accepted an invitation from Invest Korea to take part in its efforts to promote IFDI at home and abroad. KFTU officials subsequently took part in road shows to North America, and Lee addressed the Invest Korea Advisory Council (IKAC)28 in November 2004. During his presentation to IKAC and in other similar meetings, Lee assured foreign businessmen that the KFTU welcomed inward investment and that its members recognized the vital role that foreign-invested firms could play in job creation and technology transfer. While Lee pledged that they would join forces with Invest Korea to promote inward investment, he also warned that the members of the KFTU took a negative view of investments by hedge funds and speculative investments, which he referred to as ‘hot money’ (Invest Korea Journal 2005e: 95–6). Writing in the Invest Korea Journal, Lee Tae-young, Director General of the Foreign Investor Support Office, assured investors that there had been a ‘gradual yet real change (in labour relations) since 2004’ with a ‘substantial’ reduction in illegal or violent strikes at foreign-invested companies. As of the end of 2004, there had been labour disputes at just 34 out of a total of 8,735 companies nationwide with foreign equity holdings equal to or exceeding 50 per cent, and the number of cases in which foreign firms had been forced to shut down operations had declined from ten in 2003 to just one in 2004. Lee attributed the decrease in union activity and the achievement of timely resolutions of disputes

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to the shift in public opinion towards a more critical view of the excessive demands by unions and to efforts by workers and management to abide by labour laws and regulations (Lee Tae-Yong 2005: 94–5). Invest Korea’s efforts were also complemented by the action taken by Seoul Mayor Lee Myung-bak to improve the capital’s investment and living environment. In addition to consulting with IKAC and the Seoul International Business Advisory Council (comprising 19 regional managers of MNCs based in Seoul), Lee established the Seoul Help Centre for Foreigners and instigated regular ‘Town Hall’ meetings at which foreign residents could raise issues and grievances. In terms of concrete steps to improve the quality of life, the Seoul government contributed land for the construction of a new foreign school (due for completion in the summer of 2006), undertook a major renovation of the public transport system and further expanded the capital’s subway system. Other transportation projects included creating a median bus-only lane system to ease traffic congestion, providing information broadcasts in English at bus stations, publishing bus route maps in English, broadcasting English-language reports of traffic conditions and providing better foreign language and service training for taxi drivers. A major project that benefited all residents in Seoul was the Ch’onggye-ch’on project; the restoration of a city centre waterway to become an eye-catching leisure area in the heart of the city (Invest Korea Journal 2005b: 13–19).

IFDI performance under the Roh Moo-hyun administration Although the value of IFDI notifications continued to fall in the first year of the Roh administration, declining by almost 30 per cent to around the US$6.5 billion mark, the following year saw investment flows almost double, with the value of notifications soaring to US$12.8 billion. After dipping by almost 10 per cent the following year, falling to US$11.6 billion, notifications declined by a further 2.9 per cent in 2006, remaining just above the US$11 billion mark (see Table 5.1). In contrast, the value of actual investments increased by almost 35 per cent to US$5.1 billion in 2003, jumped a further 81 per cent to US$9.3 billion in 2004 and then edged up to US$9.6 billion in 2005, before declining by 2.5 per cent to US$4.4 billion in the first six months of 2006. The volume of IFDI also remained fairly stable, fluctuating between 2,600 and 3,700 cases between 2003 and 2006. However, it is important to bear in mind that the official statistics showed only new or additional investments and that annual inward investment figures were not, therefore, calculated or published net of any withdrawals, as is the case with OFDI statistics. This was particularly significant in the first half of 2006 when French and US retail giants Carrefour and Wal-Mart both sold their Korean operations to local firms. Carrefour, which cited ‘insufficient profitability’ as the main reason for withdrawing from the market, sold its 32 stores to fashion retailer E-Land for US$1.8 billion (Olson 2006). A spokesman for Wal-Mart told the media that ‘in South Korea’s current environment, it will be difficult for us to reach the scale we desired’ as the company sold its 16 outlets to Shinsegae Company for US$882 million (Olsen 2006).

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Table 5.1 Korean IFDI: 1998–2006 Notification Notification volume value (cases) ($ million)

Year-on- Actual year value* increase ($ million) (%)

Year-on- Notification year less actual increase ($ million) (%)

1,401 2,103 4,144 3,344 2,409 2,600 3,110 3,707 3,108

8,852.6 15,531.4 15,249.6 11,286.2 9,092.6 6,470.6 12,792.0 11,563.5 11,232.8

27.0 75.4 –1.8 –26.0 –19.4 –28.8 97.7 –9.7 –2.9

71.7 104.4 –5.7 –50.6 –24.8 34.9 80.5 4.1 –2.5

Total 12,525 1998–2006

42,058.9

1998 1999 2000 2001 2002 2003 2004 2005 2006

5,308.0 10,851.0 10,238.0 5,055.0 3,804.0 5,130.0 9,262.0 9,643.0 4,372.0

3,544.6 4,680.4 5,011.6 6,231.2 5,288.6 1,340.6 3.530.0 1,920.5

Source: MOCIE 2007; Invest Korea 2007. Note * Actual investment statistics available only for the period 1998–2006 (Jan.–Jun.)

The fall in investment notifications in 2003 was attributed by MOCIE to the global economic slowdown, the resulting decline in FDI inflows to most countries of the world (with the exception of China and Vietnam) and negative investor sentiment due to the war in Iraq (Invest Korea Journal 2003a; 2003c; 2004b). Nevertheless, UNCTAD gave Korea an improved ranking in terms of its global attractiveness as an investment destination in 2003, moving it up to twenty-first place from twenty-seventh in 2002 (Invest Korea Journal 2004a). As IFDI activity recovered in 2004, boosted by Citigroup’s acquisition of Hanmi (KorAm) Bank, Korean government officials attributed the rise in capital inflows to the increase in global M&A activity as the recovery of the world economy got under way and, closer to home, to the concerted efforts made by Invest Korea to increase levels of inward investment. However, MOCIE warned that, despite the improvement in performance, factors including skyrocketing oil prices, global terrorism and strained labour–management relations could dampen investment activity in the short term (Invest Korea Journal 2004a; 2004b; 2005d). In 2004, UNCTAD’s World Investment Report ranked Korea sixteenth out of 195 nations in terms of the volume of FDI it attracted during that year. This was the highest position that Korea had achieved since it was first included in the survey in 1991; having been placed in twenty-second position in 2000 and then falling back to thirty-first place in 2001, Korea had moved back up to twenty-ninth position in 2002 and twenty-seventh the following year (Invest Korea Journal 2005a). Although 2005 began well with the takeover of Korea First Bank by Standard Chartered Bank, notifications had declined by almost 10 per cent by the end of the year, with MOCIE citing the strength of the woˇn, the rise in

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international energy prices and the reduction in investment incentives in Korea as factors depressing IFDI activity (Duerden 2003a; Thewlis 2006; Invest Korea Journal 2006b). However, seen over a ten-year period, the trend was encouraging; in the nine years following the 1997 crisis, the average annual value of notifications was US$11.3 billion. Following the initial decline in IFDI levels under the new government, annual inflows equalled or exceeded that average amount in 2004 (US$12.8 billion), 2005 (US$11.6 billion) and 2006 (US$11.2 billion). Furthermore, the gap that has always existed between notifications and actual investments narrowed considerably, falling from US$5.3 billion in 2002 to US$1.3 billion in 2003. After widening to US$3.5 billion in 2004, the discrepancy shrank to US$1.9 billion the following year (MOCIE 2007; Invest Korea 2007). The mid-1990s had seen a marked decline in foreign investment in the manufacturing sector as more investors tended to favour the service industries. In 1995, investment in manufacturing had accounted for 54.5 per cent of all FDI inflows to Korea; after falling to 36 per cent in 1997, the secondary sector’s share recovered to 65.9 per cent in 1998 as Korean manufacturers sold off struggling or bankrupt business divisions to foreign investors. However, from that point onwards, the ratio of investment in manufacturing to total IFDI went into a steady decline falling from 53.8 per cent in 1999 to 25.7 per cent at the end of 2002. During the Roh administration, with the exception of strong performance in 2004, the share of total notifications accounted for by manufacturing companies fluctuated between 26 and 38 per cent, registering US$4.2 billion out of a total of US$11.2 billion invested in 2006 (see Table 5.2). Within the manufacturing sector, foreign investors showed a preference for the electronics, chemicals and transportation equipment industries; together, these sectors accounted for three quarters of foreign investment in manufacturing between 2003 and 2006 (see Table 5.3). Among the remaining industries, only the machinery sector attracted more than US$1 billion in notifications during the four-year period, while the remaining sectors saw cumulative investment notifications ranging from US$160 million to US$710 million. During this period, a number of major MNCs notified the Korean government of their plans for manufacturing investments in Korea. German electronics giant Siemens Table 5.2 Korean IFDI: by sector, 2003–2006 (in millions of dollars) Primary

Total (%)

2003 2004 2005 2006

15.1 0.7 3.0 1.8

0.2 <0.1 <0.1 <0.1

Total

20.6

Source: MOCIE 2007.

Manufacturing

1,683.1 6,224.3 3,083.7 4,228.8 15,219.9

Total (%) 26.0 48.7 26.7 37.6

Services

4,345.2 6,133.3 8,334.4 6,636.3 25,449.2

Total (%) 67.2 47.9 72.1 59.1

Other

427.0 433.8 142.5 365.9 1,369.1

Total (%)

Total

6.6 3.4 1.2 3.3

6,470.4 12,792.2 11,563.6 11,232.8 42,058.9

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Table 5.3 Korean IFDI: by major manufacturing industry, 2003–2006 (in millions of dollars) 2003 Electrical and electronics Chemicals Transportation equipment Machinery Non-metallic minerals Food and beverages Metals Pharmaceuticals Textiles and apparel Paper and lumber Other Total

2004

2005

2006

Total

Total (%)

319.3 668.4 125.3 235.4 41.1 30.0 150.6 15.9 14.8 36.5 45.7

2,953.1 1,351.7 918.4 354.5 127.9 117.6 105.2 166.9 6.6 29.0 93.4

1,042.7 281.2 705.8 125.9 378.3 325.4 31.0 8.0 28.5 84.7 72.1

1,780.3 763.6 501.5 359.6 163.5 59.8 247.2 55.9 223.3 10.0 64.1

6,095.5 3,064.9 2,251.0 1,075.4 710.8 532.8 534.1 246.7 273.2 160.3 275.2

40.0 20.1 14.8 7.1 4.7 3.5 3.5 1.6 1.8 1.1 1.8

1,683.0

6,224.3

3,083.6

4,228.8 12,519.9

100.0

Source: MOCIE 2007.

announced in June 2004 that it would invest US$119 million in Korea by the end of the decade, and the Korean-Dutch joint venture LG Philips LCD announced plans to invest US$10 billion in the construction of a next-generation thin-film transistor liquid crystal display (TFT-LCD) production facility (Invest Korea Journal 2005a). Other major deals included the creation of S-LCD, a joint venture between Samsung and Sony of Japan, the sale of Hynix Semiconductor’s non-memory chip operations to Citigroup Inc., the establishment of a joint venture between Atofina of France and Samsung General Chemicals and investments by Asahi Glass and Hikari of Japan in the manufacture of plasma display panels and environmental equipment (Duerden 2003a; Invest Korea Journal 2003b; 2003c; 2004a; 2005d; 2006b). Investment trends in manufacturing were, of course, mirrored by fluctuations in the share of investment taken by service sector industries, which rose steadily after the crisis from 29.3 per cent in 1998 to 64.1 per cent in 2001. After declining to 56.3 per cent in 2002, investment in the service sector recovered to take a 67.2 per cent share in 2003, before falling back once again to 47.9 per cent in 2004 (see Table 5.2). The following year saw a recovery in the service sector’s share of total IFDI to more than 70 per cent (US$8.3 billion out of US$11.6 billion), followed by a slight decline to 59.1 per cent of notifications (US$6.6 billion out of US$11.2 billion) in 2006. Among the service industries, investors were most active in the finance and insurance industries during this period with transactions in finance-related industries accounting for just under half of all service sector investment activity (US$11.9 billion out of US$25.4 billion). Wholesale and retail industries accounted for the second largest share of inward investment, though by a great margin with just 13.0 per cent of the total (US$3.3 billion); the third-ranking sector was business services with notifications amounting to US$2.5 billion (9.8 per cent of the total) (see Table 5.4).

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Table 5.4 Korean IFDI: by major service industry, 2003–2006 (in millions of dollars) 2003

2004

2005

2006

Finance and insurance Wholesale and retail Business services Real estate and leasing Hotels and restaurants Transportation and storage Culture and leisure Telecommunications Other

1,662.8 898.9 308.8 340.7 210.3 131.5

3,220.8 1,104.2 500.0 264.1 52.8 394.0

3,960.6 803.4 960.9 958.9 306.9 363.5

3,021.5 11,865.5 495.3 3,301.8 712.5 2,482.2 325.5 1,889.2 1,114.1 1,684.0 567.6 1,456.6

254.3 505.0 33.0

470.3 35.0 92.1

309.3 637.8 33.1

Total

4,345.3

6,133.3

8,334.4

325.8 49.8 24.3

Total

Total (%) 46.6 13.0 9.8 7.4 6.6 5.7

1,359.7 1,227.6 182.4

5.3 4.8 0.7

6,636.4 25,449.2

100.0

Source: MOCIE 2007.

Investments in the financial sector were boosted by a series of major transactions including Citigroup’s US$1.7 billion takeover of KorAm Bank, Standard Chartered Bank’s acquisition of Korea First Bank, BNP Paribas’ acquisition of stock in the Shinhan Financial Group, Woori Asset Management’s sale of a stake in its business to Credit Suisse and Allianz’s capital increase for its local subsidiary Allianz Life Insurance Korea. In the telecommunications sector, United States software giant Microsoft opened its Mobile Innovation Lab at the headquarters of its Korean affiliate in Seoul to develop wireless technology for next-generation mobile devices (Invest Korea Journal 2005a; 2005c; 2006a; Duerden 2006). The MNCs from the triad – the United States, Europe and Japan – maintained their dominant position among foreign investors in Korea in the early years of the twenty-first century, accounting for between 75 per cent and 82 per cent of all notifications on a value basis between 2003 and 2006 (see Table 5.5). European firms accounted for the largest share of IFDI in 2003 (US$3.1 billion or 47.8 per cent of the total), 2005 (US$4.9 billion or 42.2 per cent) and 2006 (US$5.2 billion or 46.6 per cent). On a cumulative basis during this period, the Europeans took the largest share of IFDI, with notifications valued at US$16.4 billion or 39.0 per cent of the total; the cumulative value and shares for the United States and Japan were US$10.4 billion (24.6 per cent) and US$6.8 billion (16.1 per cent) respectively. Japan remained in third place throughout this period as the value of its investments fluctuated around the US$2 billion mark between 2004 and 2006, and investment from the United States was adversely affected by the country’s economic recession and the tendency of American firms to concentrate their investment in Korea in sectors that were sensitive to business cycles such as infrastructure-related industries (U˘nhaenggye 2004: 30; Kim Heekyung 2004b: 113). However, it should also be noted that the lower levels of investment from the United States in 2003 and 2005 also reflected, to some degree, the increasing tendency for major American companies such as Lone Star, New Bridge Capital and Lehman Brothers to invest in Korea through third

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Table 5.5 Korean IFDI: by major investor, 2003–2006 (in millions of dollars) Total value

USA

Total (%)

Europe

Total (%)

Japan

Total (%)

Combined total (%)

2003 2004 2005 2006

6,470.6 12,792.0 11,563.5 11,232.8

1,242.2 4,717.1 2,689.8 1,701.0

19.2 36.9 23.3 15.1

3,092.2 3,212.9 4,874.3 5,232.3

47.8 25.1 42.2 46.6

541.9 2,262.5 1,878.8 2,108.0

8.4 17.7 16.2 18.8

75.4 79.7 81.7 80.5

Total

42,058.9

10,350.1

24.6

16,411.7

39.0

6,791.2

16.1

79.7

Source: MOCIE 2007.

countries. Nevertheless, the combined share of total notifications accounted for by the triad between 2003 and 2006 was higher than in the previous five years, rising from an average of 72.8 per cent to 79.7 per cent. The rise in the triad’s share of investment notifications was matched by a decline in the combined share for Bermuda, the British Virgin Islands, the Cayman Islands, Hong Kong, Malaysia and Singapore, from 18.8 per cent between 1998 and 2002 to 11 per cent of IFDI notifications in 2003–2006 (US$4.6 billion out of US$42.1 billion) (see Table 5.6) This reflects a more recent trend for third-country investments in Korea to be made by non-European corporations registered in and investing through EU countries such as the Netherlands, Belgium and Ireland. While these countries are not tax havens, they do offer attractive opportunities for companies to make tax-efficient investments; for example, while US-based firms would have to pay Korean withholding tax on interest or capital gains repatriated to the United States, firms registered in the Netherlands would be exempt from that tax. However, many of the MNCs registered in the Netherlands, Belgium and Ireland are in fact EU companies; examples are the British companies Tesco, British Telecom and Powergen, all of Table 5.6 Korean IFDI: selected countries, 2003–2006 (in millions of dollars) Total IFDI

BER

BVI

CAY

2003 2004 2005 2006

6,470.6 12,792.0 11,563.5 11,232.8

6.1 35.4 39.8 8.3

165.9 25.9 23.3 40.9

301.2 189.2 144.2 94.5

54.8 90.1 819.7 164.8

417.3 167.0 210.5 62.9

235.9 376.0 388.8 556.6

18.3 6.9 14.1 8.3

Total

42,058.9

89.6

256.1

729.1

1,129.5

858.1

1,557.4

11.0

Source: MOCIE 2007. Notes BER: Bermuda. BVI: British Virgin Islands. CAY: Cayman Islands. HK: Hong Kong. MAL: Malaysia. SIN: Singapore.

HK

MAL

SIN

Combined total (%)

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Table 5.7 Korean IFDI: by type, 2003–2006 (in millions of dollars) Total IFDI

Greenfield Total (%)

M&A

Total (%) Long-term Total (%) loans

2003 2004 2005 2006

6,470.6 12,792.0 11,563.5 11,232.8

4,631.6 7,118.8 6,507.6 6,656.7

71.6 55.7 56.3 59.3

1,759.2 4,634.1 4,965.8 4,187.7

27.2 36.2 42.9 37.3

79.8 1,039.1 90.0 388.4

1.2 8.1 0.8 3.5

Total

42,058.9 24,914.7

59.2

15,546.8

37.0

1,597.3

3.8

Source: MOCIE 2007.

which have invested in Korea through Dutch holding companies (Invest Korea Journal 2000a; Yu Ch’ang-gu˘ n 2002: 94–6; O Hoˇ-yong 2004: 63).29 The share of total FDI inflows accounted for by M&A transactions, which had stood at just 7.8 per cent in 2002, rose sharply during the early part of the Roh Moo-hyun administration, reaching 42.9 per cent of investment notifications during 2005 (US$5.0 billion out of a total of US$11.6 billion) (see Table 5.7). There was a corresponding decline in the share accounted for by greenfield investments which, having peaked at 90 percent in 2002 (US$8.2 billion out of US$9.1 billion), accounted for less than 60 per cent of notifications made during 2006 (US$6.7 billion out of US$11.2 billion). Although greenfield investments continued to account for the majority of notifications during this period (US$24.9 billion out of a total of US$42.1 billion), the trend towards a preference for M&A transactions over new investments had worrying implications for Korea in terms of employment. One of the potential side effects of a foreign takeover was the reduction in staff levels as a result of higher efficiency and to reduce operating costs, thus increasing unemployment levels in Korea. However, there was better news for the authorities in terms of the tendency of foreign investors to expand their businesses in Korea; between 1998 and 2002, the share of total IFDI accounted for by foreign MNCs making additional investments in their Korean subsidiaries fluctuated around the 40 per cent mark. During this period, however, the share accounted for by additional investments ranged from 43 per cent to 66 per cent, indicating a higher degree of satisfaction with and Table 5.8 Korean IFDI: new and additional investments, 2003–2006 (in millions of dollars) Total IFDI

New

Total (%)

Additional Total (%)

Loans Total (%)

2003 2004 2005 2006

6,470.6 12,792.0 11,563.5 11,232.8

2,455.1 6,197.2 3,795.0 4,226.4

37.9 48.4 32.8 37.6

3,935.7 5,555.6 7,678.5 6,618.0

60.9 43.4 66.4 58.9

79.8 1,039.1 90.0 388.4

Total

42,058.9

16,673.6

39.6

23,787.8

56.6

1,597.3 3.8

Source: MOCIE 2007.

1.2 8.2 0.8 3.5

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Table 5.9 Korean IFDI: size of investments, 2003–2006 (in cases) 2003

2004

2005

2006

>US$100 million Total % US$10–100 million Total %
10 0.4 75 2.9 2,498 96.7

22 0.7 125 4.0 2,951 95.2

20 0.5 122 3.3 3,547 96.2

19 0.6 135 4.3 2,969 95.1

Total cases

2,583

3,098

3,689

3,123

Source: MOCIE 2007. Note The total number of cases cited in this set of data does not correspond exactly to the data used for Table 5.1 due to discrepancies between various sections of the database.

confidence in the Korean investment and business environment (see Table 5.8). The early years of the Roh administration saw a steady increase in the volume of notifications of IFDI projects, which had recovered from the decline in 2002 and reached almost 3,700 by 2005 (see Table 5.9). However, investment activity continued to be dominated by small-scale projects; immediately after the crisis, the share of all investment notifications accounted for by projects valued at less than US$10 million was over 90 per cent. The trend continued from 2003, with the share increasing to 96.7 per cent and remaining at a similar level through to the end of 2006. During this period, fewer than 25 projects in any year were valued at US$100 million or more, indicating that foreign investors were not choosing Korea as the location for large-scale investment projects. The increase in small-scale projects was also due in part to the emergence of the PRC as a key investor in Korea – in terms of volume rather than size (see Table 5.10). The PRC’s share of the total value of IFDI notifications has risen above the one per cent mark on only two occasions: in 2002, when Hynix Semiconductor sold its TFT-LCD unit to Beijing Orient Electronics and in 2004, when Shanghai Automotive Industry Corporation bought Ssangyong Motors and Sinochem acquired oil refiner Inchon Oil for a combined investment totalling just over US$1 billion (Invest Korea Journal 2005c). However, its share of the volume of investment notifications has increased steadily, rising from 0.2 per cent in 1990 to 27.3 per cent ten years later (1,165 cases out of 4,275) before settling into a range of 11 to 23 per cent between 2001 and 2006. These levels of activity by smaller Chinese firms reflected a trend towards increased investment in trading businesses by companies from mainland China, led by retail firms seeking to establish a presence in the Korean market (Invest Korea Journal 2000d).

Barriers to investment: the investors’ perspective As in the previous period, the stagnation in investment notifications resulted in a wide-ranging debate on ways to enhance Korea’s attractiveness as a host for IFDI

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Table 5.10 Korean IFDI: from the PRC, 1990–2006 (notification basis: in millions of dollars, cases, per cent) Volume (cases)

Total volume (cases)

Total (%)

Value ($ million)

Total value ($ million)

Total (%)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

1 3 6 29 33 51 63 76 97 323 1,165 812 442 522 596 672 333

504 544 455 466 672 906 1,077 1,111 1,457 2,170 4,275 3,421 2,442 2,600 3,110 3,707 3,108

0.2 0.6 1.3 6.2 4.9 5.6 5.8 6.8 6.7 14.9 27.3 23.7 18.1 20.1 19.2 18.1 10.8

0.1 0.7 1.1 6.9 6.1 10.9 5.6 6.5 8.4 26.6 76.3 70.4 249.4 50.2 1,164.8 68.4 39.6

802.6 1,396.0 894.5 1,044.3 1,316.5 1,947.6 3,202.6 6,971.1 8,852.6 15,531.4 15,249.6 11,286.2 9,092.6 6,470.6 12,792.0 11,563.5 11,232.8

<0.1 0.1 0.1 0.7 0.5 0.6 0.2 0.1 0.1 0.2 0.5 0.6 2.7 0.8 9.1 0.6 0.4

Total

5,224

32,025

16.3

1,792.0

119,646.5

1.5

Source: MOCIE 2007.

and prompted the government and other institutions to engage with existing foreign investors to hear their views on obstacles to inward investment. In July 2003, five months after the inauguration of the Roh Moo-hyun government, the FKI carried out a survey of 76 major investors from the United States, Europe and Japan with the aim of assessing the changes already made to the post-crisis business and investment environment and identifying areas in need of further improvement. Just over half of the respondents (52.6 per cent) felt that the investment environment had changed for the better in recent years but 39.5 per cent felt there had been no change, and an additional 7.9 per cent of respondents believed that things had actually got worse. The top three ranking areas identified as being in need of improvement were labour relations and the cost of labour, the lack of transparency in government policy and the inconsistent implementation of administrative regulations. Within these areas, 86.9 per cent of respondents felt that things were no better or were even worse in terms of production costs, 75 per cent in terms of the tax system and 67.1 per cent in terms of labour relations. Almost one quarter of the firms polled said that they had asked the government to take action regarding these barriers but only 16 per cent felt that things had improved thereafter. Fewer than half of the respondents (40.8 per cent) felt that Korea offered a more attractive business environment than China, and 82.9 per cent expressed the view that Korea was at a disadvantage in terms of wage levels, even when differences in the levels of skills and education were taken into account (Song 2004: 26–31). One foreign entrepreneur interviewed made the point that both government

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officials and the Korean people themselves appeared to be forgetting that foreign investors had other options in terms of investment location and warned that the continuation of a closed-off and exclusionist attitude could only lead to a reduction in the amount of foreign capital entering Korea. He argued that it would be difficult for the Korean government to increase levels of IFDI as long as the problems of militant unions, excessive wage increases, an inflexible labour market and deeply-rooted rejection of and discrimination against foreigners remained unresolved (Song 2004: 32–5). On this last topic, one Western journalist accused the Koreans of ‘putting on a bit of a Jekyll and Hyde show for foreign investors’, with the media thwarting the government’s efforts to attract inward investment by ‘fuelling skepticism and fear . . . of an imminent financial takeover of their country by outsiders’. According to the article, the president himself was guilty of adding to these concerns by calling for the ‘safeguarding of prime Korean companies as national assets’ (Weisbart 2004). Finally, in terms of the general living environment in Korea, a survey carried out by the FKI in the spring of 2003 canvassed opinion among 122 foreign residents on a range of issues including housing, healthcare, education, environment and transportation. In the responses given, the degree of satisfaction was never higher than 3.5 out of a possible 5 with particularly low marks for traffic and the environment (Song 2004: 32–5). As investment notification levels declined in 2005, the government took action once again to regenerate the national investment promotion agency, and in early 2006, Chung Tong-soo, an American citizen who had trained as a lawyer and worked in the US Department of Commerce, was appointed as the new Head of Invest Korea. In an interview with Invest Korea Journal, Chung was upbeat about Korea’s IFDI performance: while he did not believe that the decline in 2005 was indicative of a pattern, he admitted that ‘it does ring some alarm bells as to what we are doing’ (Invest Korea Journal 2006c). The new chief executive made it clear that he viewed Invest Korea as just one element of the national drive to promote IFDI and noted that other government ministries and agencies had a key part to play in the process. Thus, the role for Invest Korea going forward would be one of facilitator and coordinator, seeking to improve collaboration between ministries and between central and regional governments in matters relating to inward investment. In the interview, Chung also suggested that Invest Korea needed to improve its relationship with the foreign business community and establish itself as a vital resource for foreign investors: I intend to look at what was done over the past two years and continue what has worked and improve upon what didn’t work. I’m certainly going to make an outreach to the foreign business community and respond to their needs as much as possible, which will not be limited to what Invest Korea can do, but rather what can be done through government ministries and bodies other than our own . . . so that we can really become the agency that foreign companies will turn to when in difficulties. If we can do that, then we will have succeeded in our mission. (Invest Korea Journal 2006c)

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In September 2006, I was invited to meet Chung Tong-soo and Alan Timblick at Invest Korea’s offices in Seoul during the second round of my interviews with European investors. Reflecting on recent trends in IFDI, Chung noted that, while annual notifications and actual investments were remaining fairly stable at around US$11–12 billion and US$9 billion respectively, a clear trend was emerging towards small-scale investments. This he attributed in part to the fact that, once the ‘top tier’ MNCs had invested in industries such as automobile parts and electronics, the next phase consisted of smaller companies entering the market as suppliers and typically making investments worth tens of millions, rather than hundreds of millions of dollars. This presented challenges for Invest Korea, both in terms of managing its growing client base and in terms of its own performance, which was assessed in terms of the value of investments rather than the volume. In the recent past, Invest Korea’s annual performance and progress towards MOCIE’s dollar-based targets had been distorted by mega-investments such as Citibank’s acquisition of Hanmi (KorAm Bank) in 2004 and Standard Chartered Bank’s takeover of Korea First Bank in 2005. Chung felt that the time had come for a change in the way in which his organization’s performance was assessed to one that would reflect these new trends in inward investment: One of the dialogues I am going to have with the Ministry is not to evaluate us in terms of dollars but in terms of actual cases completed plus the quality of the investments coming in and (the) impact on the development of Korean industry. In terms of the most pressing issues facing foreign investors, staff at Invest Korea had identified labour problems and tax-related complaints as the two key major areas of concern. Invest Korea had responded to these concerns by, for example, brokering discussions between the Investment Ombudsman and the National Tax Service on improving the regulatory environment and seeking the cooperation of leading labour unions for their IFDI promotional activities. Chung acknowledged that there was a gap between the perceptions of the pace of change in Korea and the actual progress of reform and that this was fuelled to some degree by negative reporting on labour problems, obstacles to inward investment and demonstrations of anti-foreign capital sentiment. One of the challenges facing Invest Korea was that of changing deeply embedded attitudes, the most damaging of which were the lingering perception among foreign executives that ‘Korea is a difficult place to do business’ and among some Koreans that foreigners would come to dominate the economy and drain the country of its wealth and resources. Chung observed: Sometimes perceptions don’t change that fast and journalists make a living generally writing negative stories as opposed to positive stories so negative news tends to predominate. But it’s also true that there is a struggle going on within Korea as to the desired direction the country should take. I think there is a distinct and very loud minority that would rather see not so much

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IFDI in post-crisis Korea II (2003–2006) openness, not so much globalization, which is also the case in many of the OECD countries.

Responding to the view expressed by a number of the European interviewees that some government officials were not fully supporting the Roh administration’s policy of attracting more IFDI, Timblick pointed out that the government ‘is not one body and they don’t think absolutely with one single mind’. In contrast to the tight controls exercised by the government in the past, the shift to a more democratic form of government had led to the devolution of power and to differences in agenda. Within the government, different ministries and officials had their own objectives and agendas; for the National Tax Service, for example, the most important objective was increasing tax revenues, from both foreign and domestic firms. In that respect, Timblick argued, it could appear that different parts of the government were working against each other or against the spirit of government policy (Chung and Timblick 2006).

Conclusions As President Kim Dae-jung’s term of office drew to a close, sceptics forecast that, with FDI inflows declining in the latter half of his administration and the economy apparently back on the road to growth, the incoming government would have little incentive to take active steps to boost levels of IFDI. However, the incoming Roh government reiterated its commitment to inducing IFDI and redoubled its efforts to attract foreign capital, partly as a means of achieving its long-term goal of creating a Northeast Asian business hub in Korea. Government action to revamp the national investment promotion agency and take further action to address the concerns of foreign investors achieved some degree of success, as annual inflows recovered in 2004 and stabilized around the US$11.5 billion mark between 2004 and 2006. However, concerns persisted about Korea’s inability to realize its potential as a host for IFDI (given its rankings in the global economy), the quality of the investment inflows, the trend towards M&A rather than greenfield investment and the overwhelming proportion of small-scale investments among the annual notifications. It was clear that in 2006, almost a decade after the financial crisis, existing foreign investors still faced a number of problems and challenges in their daily working life, while potential investors were often exposed to negative reporting about the Korean business environment and the exclusionist sentiments that lingered in some quarters of Korean society. Korean and foreign commentators identified the same barriers to investment: the regulatory framework (including the lack of transparency of regulations and the inconsistency in their interpretation and implementation particularly in the areas of taxation and foreign exchange); union militancy and the high costs of labour; the challenges posed by the unfamiliar business environment despite attempts at reform; anti-foreign capital sentiment and Korea’s poor image among foreigners as a place to live, invest and do business.

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None of these barriers were new; indeed, many of these complaints and criticisms had been made by Korean analysts and foreign investors both before and after the 1997 crisis. In the immediate post-crisis period, the Kim Dae-jung government had taken action to reform and restructure the corporate and financial sectors and had implemented measures to bring the country’s systems, institutions and regulatory framework into line with international best practice. Under the Roh administration, perhaps understandably, more attention was being paid than before to the ‘softer’ side of IFDI promotion; this was seen in Invest Korea’s efforts to address cultural issues and negative perceptions among both Koreans and foreigners, and to improve the living environment for expatriates and their families. Many of the problems still facing foreign investors and the barriers to IFDI that remained appeared to be more social, cultural and bureaucratic in nature, rather than purely economy- or business-related. In 2006, I carried out a series of in-depth interviews with European officials and investors in Seoul to explore further the theme of the challenges facing the Korean government in its efforts to reform the ‘hardware’ and ‘software’ of IFDI promotion. The following chapter presents an overview of the development of relations between Korea and Europe and the history of European investment in Korea, providing the context for the case study of European investors in Korea that forms the final chapter of this book.

6

South Korea, the European Union and the European Free Trade Area (1962–2006)

In the four decades since MNCs from Europe began investing in Korea, European IFDI activity has been dominated by the industrialized nations of Western Europe. This chapter provides a brief overview of the evolving diplomatic and trading relationships between Korea, the EU and the European Free Trade Area (EFTA) member states before analysing the trends in and characteristics of European investment in Korea between 1962 and 2006.

Korea and the EU31 It is only in the past 20 years that Korea has established a strong and meaningful relationship with the European Community (EC) and, latterly, with the EU.32 Although diplomatic relations were established between Korea and the EC in 1963 and some efforts were made to develop closer ties during the 1970s and early 1980s, signs of real interest in the bilateral relationship only emerged in the latter half of the 1980s. Over the past two decades, the Koreans have come to realize the importance of Europe as a counterbalance to their traditional political, economic and diplomatic dependence on the United States and Japan, as a major market for Korean exports, as a host for Korean OFDI, as a provider of technology and expertise and as a supporter of their government’s efforts to consolidate Korea’s place on the world stage. For their part, the Europeans have become increasingly aware of Korea’s growing economic and political stature, both within Asia and globally, recognizing the Republic’s status as Asia’s third largest economy and its ‘potential as a serious partner in the areas of trade and economics’ (Cho 1993: 74). A key factor in the surge of Korean interest in trade and investment relations with Europe was the creation in 1993 of the largest single trading bloc in the world: the Single European Market. The realization of the importance of this development, both in terms of the potential threat to Korean firms and the opportunities offered to exporters and investors, came at a time when the full impact of restrictions and non-tariff barriers against Korean exports to Europe was beginning to be felt. For the Koreans, being locked out of ‘Fortress Europe’ was not an option: in addition to the market potential for Korean goods, the countries of Western Europe offered access to the technology and expertise that Korea would need in the process of industrial restructuring and globalization.

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123

The first annual ministerial meeting between the Korean government and the European Commission (the executive branch of the EC) was held in 1983 and the annual ‘European Commission-Korea Monitoring Discussions’ were held for the first time three years later, changing their name to ‘European CommissionKorea High-Level Consultations’ in 1993. The Delegation of the European Commission to the Republic of Korea (DELKOR) was established in Seoul in November 1989, charged with the conduct of all relations between Korea and the EC. Its specific remit was to publicize, explain and implement EC policy, to report on political, economic and social developments on the Korean peninsula and to promote the EC’s trade and investment interests (DELKOR 2006c). The turning point in relations between the EC and Korea came in 1993 with the drafting and adoption of an EC Communiqué on relations with Korea. The document, entitled ‘Relations between the EC and Korea: Towards a Growing Partnership’, noted the need for the further development of bilateral trade, economic relations and exchanges between Europe and Korea. President Kim Young-sam’s tour of major European countries in the spring of 1995 reflected the Kim administration’s desire to widen Korea’s diplomatic horizons and counterbalance the Republic’s long-standing dependence on the United States and Japan in political and economic affairs. The visit also aimed to muster support for Seoul’s position on reunification with North Korea and its bid to obtain both a non-permanent seat on the UN Security Council and membership of the OECD (Korea Times 1995: 2). However, perhaps of greatest importance in the eyes of the Koreans was their request for the establishment of a framework agreement for trade and cooperation with the EU, which would regulate bilateral relations in trade, economics, business, science, the environment and culture. The EU had already established similar agreements with three non-European G-7 members (the United States, Japan and Canada) as well as a number of Latin American and Asian governments. The growing recognition of Korea’s economic importance within Asia and the global economy and its success in consolidating democracy encouraged the EU to view the Koreans’ request in a positive light (Europa 2006). In March 1996, Korea and the EU initialled a framework agreement, which called on Korea and the EU member states to promote bilateral trade and cooperation in a variety of areas including science and technology, environment, energy, telecommunications and intellectual property rights (Korea Newsreview 1996: 4). Both sides agreed to adopt measures to improve access to each other’s markets, eliminate non-tariff barriers, improve the transparency of their regulations and facilitate cooperation between the customs authorities of the EU, its member states and Korea. The process of ratification by the member states lasted for almost five years, but the final decision to conclude the Framework Agreement was taken on 19 March 2000, and the document went into force on 1 April 2001 (Europa 2006). Negotiations for a Science and Technology Agreement began in 2005; a year later, EU and Korean representatives signed a series of science and technology cooperation agreements in areas as diverse as life sciences, telecommunications, sustainable development and satellites. Specific

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Korea, EU and EFTA (1962–2006)

agreements related to fusion energy research, civil navigation satellite systems and the International Thermonuclear Experimental Reactor (ITER) (DELKOR 2006g). The satellite systems and ITER agreements were signed on the occasion of the third Korea–EU Summit, held in Helsinki in September 2006; during the summit, representatives considered ways to build upon the ‘already important EU–South Korea trading relations’ and discussed a wide range of regional and global political issues, including North Korea’s nuclear programme and the World Trade Organization Doha Development Agenda. A press release issued by DELKOR (2006f) noted that the two sides welcomed the ‘continuing, dynamic development of their bilateral relations’ and reported that ‘[t]he EU and the Republic of Korea view the success of this summit as very substantive and as a further stepping stone in (the) . . . progress towards the achievement of shared goals’. During a visit to Korea earlier in 2006 for meetings with President Roh Moo-hyun and key government ministers, EU Commissioner Benita Ferrero-Waldner formally opened the European Union Centre at Seoul National University, one of Korea’s most prestigious higher education institutions. The role of the Centre, which is being developed in collaboration with the Korean Institute for International Economic Policy and funded by the European Commission,33 is seen as ‘becoming a national independent and informed voice in Korea on the European Union’. Reporting on the opening of the Centre, local media sources noted that ‘[t]he Centre is based on the principle that increased knowledge of Europe and of European integration in Korea is important to the EU’s international role and its long-term economic, academic and cultural interests and relations with Korea’. Staff at the Centre will develop EU-related curricula and teaching and will organize international conferences, public lectures and seminars with the aim of informing business circles, the media and professional people about the EU and its significance for Korea. The Centre will also ‘encourage and support research . . . on EU-related matters and carry out outreach activities to enhance a positive perception in Korea of the EU and the integration model it embodies’ (Seoul Times 2006).

Korea–EU trade To a great extent, trade between Korea and the EU reflects the progress of their developing relationship; levels of bilateral trade between Korea and Europe were low in the early to mid-1970s, amounting to just US$2 billion in 1976. However, growth rates in the 1980s and 1990s were impressive: Korean exports rose more than tenfold from US$4.7 billion in 1986 to US$48.5 billion in 2006, while imports from the EU expanded from US$3.6 billion to US$30.1 billion during the same period (see Table 6.1). Although the balance of trade was in Korea’s favour during the 1970s and 1980s, the Republic’s trade account with the EU moved into the red between 1991 and 1997 as EU exports to Korea experienced strong rates of growth. The decline in Korean exports to Europe during this period was due in large part to the loss of price competitiveness

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Table 6.1 Korea–EU: trade, 1971–2006 (in millions of dollars) Exports to the EU 1971 1976 1981 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

86.6 1,289.0 2,988.7 4,655.8 7,377.1 8,942.3 8,213.5 10,002.9 10,538.0 9,831.0 9,935.7 11,247.4 16,301.5 15,324.8 16,863.9 18,170.8 20,240.5 23,423.7 19,626.6 21,694.0 24,887.2 37,830.0 43,658.9 48,450.0

Year-on-year growth (%)

Imports from the EU

58.5 21.2 –8.1 21.8 5.3 –6.7 1.1 13.2 44.9 –6.0 10.0 7.7 11.4 15.7 –16.2 10.5 14.7 52.0 15.4 11.0

257.0 731.6 2,223.5 3,608.5 5,065.6 6,524.1 7,039.6 9,065.6 10,703.9 10,475.4 11,123.0 14,536.4 18,191.0 21,204.2 18,982.8 10,927.6 12,629.0 15,788.2 14,921.1 17,106.6 19,382.6 24,187.0 27,295.6 30,060.6

Year-on-year growth (%)

Trade balance

40.4 28.8 7.9 28.8 18.1 –2.1 6.2 30.7 25.1 16.6 –10.5 –42.4 15.6 25.0 –5.5 14.7 13.3 24.8 12.9 10.1

–170.4 557.4 765.2 1,047.3 2,311.5 2,418.2 1,173.9 937.3 –165.9 –644.4 –1,187.3 –3,289.0 –1,889.5 –5,879.4 –2,118.9 7,243.2 7,611.5 7,635.5 4,705.5 4,587.4 5,504.6 13,643.0 16,363.3 18,389.4

Source: KITA 2007.

following substantial wage rises at home, and increasing competition from mainland China and Southeast Asian countries with lower wage costs and growing manufacturing bases (Kim Bak-soo 1994: 3). Following the 1997 crisis, the balance of trade swung back in Korea’s favour; EU exports to Korea, which had declined by US$8 billion between 1997 and 1998, saw a gradual return to pre-crisis levels and broke the previous record of US$21.2 billion (set in 1996) as exports passed the US$24 billion level in 2004. On the other hand, Korean exports to the EU saw steady growth (with the exception of a 16 per cent decline in 2001) with exports expanding from US$16.9 billion in 1997 to US$48.5 billion in 2006, resulting in a trade surplus for the Koreans of US$18.4 billion (KITA 2007). Commenting on the bilateral trade situation in 2006, DELKOR noted: Despite the strong EU-Korea trade relations there has been a structural EU deficit since the late 1990s. To an extent this can be attributed to the difficulties EU companies have in accessing and operating in the South Korean market as South Korean requirements for products and services often create barriers to trade. Thus, one of the main interests of the EU is to facilitate

126

Korea, EU and EFTA (1962–2006) bilateral trade not only by supporting the reforms but also by strong expert level co-operation in order to remove the existing trade barriers . . . and to prevent new ones from appearing. (DELKOR 2006h)

Although the past four decades have seen encouraging rates of growth in trade and investment between Korea and the EU, bilateral economic exchanges have, until recently, remained below the levels seen between Korea, Japan and the United States. However, while the EU’s share of Korea’s exports and imports has remained relatively stable, the shares accounted for by firms from the United States and Japan have recently been eroded, partly by the emergence of the PRC as a major trading partner for Korea since the late 1980s. Between 1971 and 2006, the EU’s share of Korea’s total imports remained steady at around ten per cent, rising to challenge the 15 per cent level in the 1990s; the EU’s share of Korea’s total exports has also remained fairly stable at around 13 to 15 per cent (see Table 6.2). In contrast, the share of Korea’s exports accounted for by the United States has declined from almost half (49.5 per cent) in 1971 to between 13 and 20 per cent in the first years of the twenty-first century, and the United States’ share of Korean imports has also declined from over 20 per cent before the crisis to a range of 11 to 15 per cent in more recent years. The same trends can be seen in exports to and imports from Japan; having accounted for almost a quarter of Korean exports in the 1970s, Japan has taken a share of around eight per cent in the past five years. Imports from Japan, which accounted for between 35 and 40 per cent of Korean imports in the 1970s, took a share of 16 to 20 per cent in the early years of the twenty-first century. At the end of 2006, the EU and the United States accounted for roughly comparable shares of Korean exports (14.9 per cent and 13.3 per cent respectively), while Japan’s share stood at 8.1 per cent. In terms of Korean imports, again the shares held by the Europeans and Americans were similar in 2006 (9.7 per cent and 10.9 per cent), but both were lower than Japan’s ratio of 16.8 per cent. One reason for the erosion of the shares accounted for by the US and Japan was the increasing importance of trade between Korea and the PRC; exports to China increased from US$150 million in 1980 (the first year that exports were recorded) to US$69.5 billion in 2006, while imports jumped from US$180,000 in 1975 to US$48.6 billion in 2006. In that year, the PRC accounted for 21.4 per cent of Korea’s total exports – in first place, ahead of the EU, United States and Japan – and 15.7 per cent of all imports – second to Japan but ahead of the United States and the EU (KITA 2006).

Korea and EFTA Given the importance of inward investment from the member states of EFTA – two EFTA nations ranked among the top ten European investors in post-crisis Korea – it will be useful to look briefly at recent developments in relations between Korea and the EFTA member states. EFTA was created in 1960 but,

325.5

284.4

253.8

193.8

162.5

150.4

129.7

71.9

34.7

21.3

7.7

1.1

Source: KITA 2007.

Total %

1971 Total % 1976 Total % 1981 Total % 1986 Total % 1991 Total % 1996 Total % 2001 Total % 2002 Total % 2003 Total % 2004 Total % 2005 Total % 2006

Total exports

14.9

0.1 7.5 1.3 16.7 3.0 14.1 4.7 13.4 10.5 14.7 15.3 11.8 19.6 13.0 21.7 13.4 24.9 12.8 37.8 14.9 43.7 15.4 48.5

Exports to EU

13.3

0.5 49.5 2.5 32.3 5.6 26.2 13.9 40.0 18.6 25.8 21.7 16.7 31.2 20.7 32.8 20.2 34.2 17.7 42.8 16.9 41.3 14.5 43.2

Exports to USA

8.1

0.3 24.3 1.8 23.3 3.4 16.2 5.4 15.6 12.4 17.2 15.8 12.2 16.5 11.0 15.1 9.3 17.3 8.9 21.7 8.5 24.0 8.4 26.5

Exports to Japan

21.4

0.0 0.0 0.0 0.0 Neg. Neg. 0.1 0.45 1.0 1.4 11.4 8.8 18.2 12.1 23.8 14.6 35.1 22.7 49.8 19.6 61.9 21.8 69.5

Exports to PRC

Table 6.2 South Korea: external trade, 1971–2006 (in billions of dollars)

309.4

261.2

224.5

178.8

152.1

141.1

150.3

81.5

31.6

26.1

8.8

2.4

Total imports

9.7

0.3 10.9 0.7 8.3 2.2 8.5 3.6 11.4 10.7 13.1 21.2 14.1 14.9 10.6 17.1 11.2 19.4 10.8 24.2 10.8 27.3 10.5 30.1

Imports from EU

10.9

0.7 28.5 2.0 22.3 6.1 23.3 6.5 20.7 18.9 23.2 33.3 22.2 22.4 15.9 23.0 15.1 24.8 13.9 28.8 12.8 30.6 11.7 33.7

Imports from USA

16.8

1.0 39.7 3.1 35.3 6.4 24.4 10.9 34.4 21.1 25.9 31.5 20.9 26.6 18.9 29.9 19.6 36.3 20.3 46.1 20.6 48.4 18.5 51.9

Imports from Japan

15.7

0.0 0.0 Neg. Neg. 0.1 0.3 0.6 1.8 3.4 4.8 8.5 6.6 13.3 8.8 17.4 11.4 21.9 12.3 29.6 13.2 38.6 14.8 48.6

Imports from PRC

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Korea, EU and EFTA (1962–2006)

with the defection of several countries over the years to join the EEC (now the EU), its member states are currently only Iceland, Liechtenstein, Norway and Switzerland, with a total of 12 million citizens. This has not, however, prevented it from becoming the world’s ninth largest merchandise trader; in addition, EFTA has established free trade relations with the EU and has concluded Free Trade Agreements (FTAs) with 15 countries (EFTA Secretariat 2006). In the 1970s and 1980s, Korean exports to the EFTA states increased gradually from less than US$1 million in 1971 to US$519 million in 1986; EFTA’s exports to Korea increased from US$3.8 million to US$295 million during the same period. In the early 1990s, trade between Korea and the EFTA member states remained fairly stable, with Korean exports to EFTA fluctuating between US$300 million and US$500 million and Korean imports from EFTA remaining below the US$1 billion mark (see Table 6.3). However, Korean imports broke through the US$1 billion level in 1994 and had risen well above the US$2 billion mark by 1997. In the post-crisis period, imports from EFTA remained stable at around US$1.5–2 billion per annum; after a short-lived surge between 1997 and 1999, Korean exports to the EFTA member states also settled into a range of US$800 million to US$1.6 billion. By the end of 2006, Korean exports to and imports from the EFTA member states stood at US$1.6 billion and US$2 billion respectively. Since the early 1990s, Korea has recorded an annual Table 6.3 Korea–European Free Trade Association: trade, 1971–2006 (in millions of dollars) Exports to EFTA 1971 1976 1981 1986 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0.9 48.3 358.0 519.3 481.6 470.5 535.7 328.0 432.7 965.8 953.0 2,486.1 5,595.7 2,383.6 1,063.2 817.2 840.5 1,188.9 863.5 1,090.4 1,603.5

Source: KITA 2007.

Year-on-year growth (%)

Imports from EFTA

–2.6 –2.3 13.9 –38.8 31.9 123.2 –1.3 160.9 125.1 –57.4 –55.4 –23.1 2.9 41.5 –27.4 26.3 47.1

3.8 55.0 214.1 294.8 671.4 802.2 830.9 722.0 1,006.0 1,678.8 2,505.3 2,594.4 1,864.2 1,708.1 1,402.3 1,257.8 1,615.5 1,986.4 1,793.9 1,818.1 1,990.3

Year-on-year Trade growth (%) balance

20.4 19.5 3.6 –13.1 39.3 66.9 49.2 3.6 –28.1 –8.4 –17.9 –10.3 28.4 23.0 –9.7 1.3 9.5

–2.9 –6.7 143.9 224.5 –189.8 –331.7 –295.2 –394.0 –573.3 –713.0 –1,552.3 –108.3 3,731.5 675.5 –339.1 –440.6 –775.0 –797.5 –930.4 –727.7 –386.8

Korea, EU and EFTA (1962–2006)

129

deficit in its trade with EFTA, which was only alleviated for two years during the post-crisis surge in exports, when Korea recorded trade surpluses of US$3.7 billion in 1998 and US$676 million in 1999 (KITA 2007). In December 2005, the EFTA states became the first European countries to sign an FTA with South Korea, covering all areas of trade relations including trade in goods and services, procurement, competition, intellectual property rights and the settlement of disputes. In addition, the EFTA states signed an agreement on basic agricultural products, and Korea concluded individual investment agreements with Iceland, Liechtenstein and Switzerland (EFTA Secretariat 2006). The inclusion of FTAs in Korea’s trade policy reflected the beginning of a shift way from a sole focus on multilateral negotiations and towards a broader of policy of combining these consultations with bilateral and regional initiatives. The agreement signed with EFTA was Korea’s third FTA, following the conclusion of similar agreements with Chile and Singapore; a fourth free trade agreement, between Korea and the ASEAN nations (excluding Thailand), went into force on 1 June 2007. Although negotiations for a Korea–US free trade agreement were concluded in April 2007, two months later the United States asked Korea to modify parts of the deal relating to labour and environmental standards in order to facilitate the approval of the FTA by Congress. On 6 May 2007, the South Korean government and the European Commission began negotiations on their own FTA; after a successful first round of talks in Seoul, hopes were high that the FTA would be concluded by the end of 2007 or early in 2008 (BBC News 2007; Cheong 2006: 17–23; DELKOR 2006d; Hangyoreh Shinmun 2007).

European investment in pre-crisis Korea (1962–1997) During the first two decades of Korea’s economic development, European IFDI in Korea remained at low levels, totalling just under US$200 million in 175 projects (see Table 6.4) and accounting for less than 10 per cent of all IFDI between 1962 and 1983 (Investment Notification Statistics Center 2006). This performance reflected both the low level of bilateral relations between Korea and Europe at the time and the Korean government’s general preference for loans over IFDI. Table 6.4 Korean IFDI: from Europe, 1962–1997 Volume (cases) 1962–1969 1970–1983 1984–1992 1993–1997 1962–1997 Total IFDI Total IFDI %

Value ($ million)

11 164 767 970 1,912

17.1 176.3 2,143.1 4,657.3 6,993.8

10,452 18.3

24,646.3 28.4

Source: Investment Notification Statistics Center 2006.

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Korea, EU and EFTA (1962–2006)

Table 6.5 Korean IFDI: by top ten European investors, 1962–1997 Value ($ million) Total EFDI (%) Volume (cases) Total EFDI (%) Netherlands Germany Ireland France United Kingdom Switzerland Denmark Sweden Belgium Italy Subtotal

2,250.8 1,118.7 1,005.8 857.6 789.4 646.6 87.4 79.6 51.5 44.2 6,931.6

32.2 16.0 14.4 12.3 11.3 9.2 1.2 1.1 0.7 0.6

283 468 60 208 291 219 56 75 39 41 1,740

14.8 24.5 3.1 10.9 15.2 11.5 2.9 3.9 2.0 2.1

Total European IFDI 6,993.8

99.1

1,912

91.0

Source: Investment Notification Statistics Center 2006.

However, between the first major revisions to IFDI legislation in the early 1980s and the beginning of the Kim Young-sam regime in 1993, cumulative European IFDI rose steadily to pass the US$2 billion level. Although Europe remained in third place after the United States and Japan as a source of inward investment, the gap between the leading investors was closing as the Europeans’ share climbed to 27.3 per cent. With IFDI from Europe more than doubling during Kim’s five-year term of office to reach USS4.7 billion, the Europeans moved into second place with a share of 32.2 per cent, less than five per cent behind the Americans. Between 1962 and 1997, cumulative investment notifications by European corporations amounted to US$7 billion in almost 2,000 projects, accounting for 18.3 per cent of the total volume and 28.4 per cent of the total value of FDI in Korea (Investment Notification Statistics Center 2006). Between 1962 and 1997, European investment in Korea was dominated by nine EU member states and one EFTA nation (Switzerland); the top ten investors accounted for all but one per cent of the value of European inward investment in Korea and for more than 90 per cent of the volume (see Table 6.5). However, there were significant differences between the amounts invested by the top ten countries; whereas the Netherlands, Germany and Ireland registered notifications of between US$1 billion and US$2 billion, the bottom four countries in the group recorded amounts of less than US$100 million each. Reflecting the general trends in IFDI in Korea, the lion’s share of European investment in the pre-crisis period was almost equally divided in terms of value between manufacturing (US$3.4 billion) and services (US$3.2 billion) with far smaller amounts for the primary sector (US$272 million) and ‘other’ industries (US$114 million). The share of total European investment across these sectors accounted for by the top ten investors ranged from 98.1 to 99.4 per cent (see Table 6.6). In terms of total foreign investment in Korea, European investors accounted for 91.5 per cent of investment in the primary sector (due to an

Korea, EU and EFTA (1962–2006)

131

Table 6.6 Korean IFDI from Europe: by top ten European investors and sector, 1962–1997 Primary

Manufacturing

Services

Other

Total

Netherlands Germany Ireland France United Kingdom Switzerland Denmark Sweden Belgium Italy Subtotal European Subtotal Top 10 as %

0.0 8.6 229.5 31.0 0.0 0.6 0.0 0.0 0.0 0.0 269.7 272.0 99.2

492.3 912.3 442.0 571.9 380.2 425.1 62.2 50.2 14.3 38.8 3,389.3 3,429.1 98.8

1,750.8 189.8 334.3 233.0 406.6 149.7 25.0 29.4 36.6 5.4 3,160.6 3,178.5 99.4

7.7 8.0 0.0 21.8 2.6 71.2 0.2 0.0 0.6 0.0 112.1 114.3 98.1

2,250.8 1,118.7 1,005.8 857.6 789.4 646.6 87.4 79.6 51.5 44.2 6,931.6 6,993.8 99.1

Total IFDI Europe as %

297.2 91.5

11,753.3 29.2

12,056.8 26.4

539.0 21.2

24,646.3 28.4

Source: Investment Notification Statistics Center 2006.

investment from Ireland of US$230 million in a mining venture in 1996), 29.2 per cent in manufacturing, 26.4 per cent in services and 21.2 per cent in ‘other’ industries, including utilities. European investors in the manufacturing sector during this period included Siemens (Germany) in engineering, Philips (Netherlands) in electronics, BP (United Kingdom) in petroleum products and Shell (United Kingdom) in oil products, chemicals and gas.34 Akzo Pharma (Netherlands), Novo Nordisk (Denmark) and AstraZeneca (United Kingdom) were active investors in pharmaceuticals, Degussa (Germany) and DyStar Textilfarben (Germany) in chemicals, Diageo (United Kingdom) in alcoholic beverages, Unilever (United Kingdom/Netherlands) in consumer goods, and Chanel (France), Cartier (France) and Prada (Italy) in the luxury goods sector. In the service sector, the Europeans demonstrated a preference for two major investment areas: wholesale and retail and the finance and insurance industries. The latter saw the entry of major names such as Barclays Bank (United Kingdom), Deutsche Bank (Germany) and ING (Belgium). Other important investors in pre-crisis Korea were Makro (Netherlands) in wholesale and retail, Nokia (Finland) and BT (United Kingdom) in telecommunications and Maersk (Denmark) in logistics.

European investment in post-crisis Korea (1997–2006) In the aftermath of the 1997 financial crisis, the Kim Dae-jung administration devoted its efforts and energies to attracting inward investment from MNCs with the capital, technology and know-how needed to support the government’s ambitious recovery and restructuring plans and to enhance the international

132

Korea, EU and EFTA (1962–2006)

competitiveness of domestic firms. In the decade that followed, European nations emerged as major investors in Korea; although the IFDI statistics were inflated to some degree by the routing of investments from non-European countries through the Netherlands and Belgium (to take advantage of their bilateral tax treaties with the Koreans), there is no doubt that the Europeans themselves were playing a significant role in the rebuilding of post-crisis Korea and the recovery of the domestic economy. In the immediate post-crisis period, as Korea experienced a boom in IFDI activity, European investment increased rapidly, rising by 23 per cent in 1998 to reach almost US$3 billion and then more than doubling in 1999 to break through the US$6 billion level. However, the first three years of the twenty-first century saw a steady decline in investment activity by the Europeans, with notifications falling by 30 per cent in 2000 and 2001 and by 40 percent in 2002 to reach US$1.9 billion by the end of the Kim administration (see Table 6.7). The value of notifications by European firms fell from US$6.4 billion in 1999 to US$1.9 billion at the end of 2002: a fall of more than 70 per cent during the four-year period. This decline was even more rapid than the downturn in Korea’s overall IFDI performance, as total notifications fell by 40 percent from a peak of US$15.5 billion in 1999 to US$9.1 billion in 2002. During the Kim Dae-jung administration, European nations invested a total of US$18.8 billion in 1,834 projects (on a notification basis); the top ten European investors together accounted for 98.3 per cent of the value of investment from the region (US$18.5 billion) and 84.8 per cent of the volume (1,556 cases) (see Table 6.8). The Netherlands, Germany, France, the United Kingdom and Belgium together accounted for 88 per cent of the value (US$16.6 billion) and 65.8 per cent of the volume (1,205 cases) between 1998 and 2002. Once again, there was a significant gap between the top and bottom of this group as notifications by the countries ranked seventh to tenth were below the US$500 million mark. In contrast, the Netherlands and Germany together accounted for almost two-thirds of European investment in this period, with cumulative notifications of US$8.1 billion and US$4.1 billion respectively. Table 6.7 Korean IFDI: from Europe, 1998–2002 Volume (cases)

Value ($ million)

Year-on-year growth rate (%) 23.0 216.4 –30.5 –30.4 –39.7

1998 1999 2000 2001 2002 European total

347 361 444 366 316 1,834

2,964.5 6,413.8 4,456.2 3,102.1 1,869.8 18,806.4

Total IFDI Total IFDI %

13,766 13.3

60,012.4 31.3

Source: Investment Notification Statistics Center 2006.

Korea, EU and EFTA (1962–2006)

133

Table 6.8 Korean IFDI: by top ten European investors, 1998–2002 Value ($ million)

Total EFDI %

Volume (cases)

Total EFDI %

Netherlands Germany France United Kingdom Belgium Luxembourg Sweden Ireland Switzerland Norway Subtotal

8,095.8 4,114.9 2,263.0 1,171.8 923.4 577.0 493.4 369.5 318.0 160.0 18,486.8

43.0 21.9 12.0 6.2 4.9 3.1 2.6 2.0 1.7 0.9

315 390 221 228 51 85 50 65 125 26 1,556

17.2 21.3 12.1 12.4 2.8 4.6 2.7 3.5 6.8 1.4

Total European IFDI

18,806.4

98.3

1,834

84.8

Source: Investment Notification Statistics Center 2006.

In the years immediately following the crisis, European investors showed a preference for investment in manufacturing over services, with notifications totalling US$10.9 billion and US$7.5 billion respectively (see Table 6.9). The top ten investors dominated all sectors during this period with shares of 100 per cent in the primary and ‘other’ sectors and 99.7 per cent and 98.7 per cent in manufacturing and services respectively. In terms of total IFDI in Korea, the share of notifications in the primary sector accounted for by European investors was just 1.8 per cent, far lower than the shares of 41.3 per cent in manufacturing, Table 6.9 Korean IFDI: by top ten European investors and sector, 1998–2002 (in millions of dollars) Primary

Manufacturing

Netherlands Germany France United Kingdom Belgium Luxembourg Sweden Ireland Switzerland Norway Subtotal European Subtotal Top 10 as %

1.1 0.0 0.9 <0.1 0.0 0.0 <0.1 0.0 0.0 0.0 2.0 2.0 100.0

5,359.6 1,873.7 1,164.2 659.1 761.8 37.2 326.7 242.0 227.5 0.9 10,842.1 10,869.8 99.7

2,572.8 2,183.3 1,030.5 512.0 62.9 539.9 166.7 127.6 86.0 159.0 7,440.7 7,541.7 98.7

162.3 57.8 67.4 0.6 98.7 0.0 0.0 0.0 4.5 0.0 392.9 392.9 100.0

8,095.8 4,114.9 2,263.0 1,171.8 923.4 577.0 493.4 369.5 318.0 160.0 18,486.8 18,806.4 98.3

Total IFDI Europe as %

113.2 1.8

26,310.7 41.3

29,840.1 25.3

3,748.5 10.5

60,012.4 31.3

Source: Investment Notification Statistics Center 2006.

Services

Other

Total

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25.3 per cent in services and 10.5 per cent in ‘other’ industries. These shares represented a significant increase for manufacturing (compared with 29.2 per cent in the pre-crisis period), a slight decline for services (down from 26.4 per cent) and a larger fall for ‘other’ industries (down from 21.2 per cent). During this period, the share of all IFDI notifications in Korea accounted for by European investors increased from 28.4 per cent to 31.3 per cent, reflecting the increasing participation of European firms in the Korean economy. Major European investors35 in this period in the manufacturing sector were Interbrew and Hops Cooperatieve UA (both from the Netherlands) which bought the OB brewery from the Doosan Group, Carlsberg (Denmark), which invested in the Hite Brewery Company and Allied Domecq (from the United Kingdom), which took a majority share in soju manufacturer36 Jinro to create Jinro Ballantines.37 In the automobile sector, Renault (France) invested in a passenger car joint venture with Samsung; DaimlerChrysler (Germany) went into partnership with Hyundai Motor and Volvo (Sweden) acquired Samsung Heavy Industries’ heavy equipment division. Philips (Netherlands) was a major investor in the electronics sector with activities including a US$1.6 billion investment in a joint venture with Korean electronics giant LG in 1999 and, in the paper and lumber sector, Norway’s Norske Skog acquired Shinho Paper. In the chemicals industry, BASF (Germany) acquired Daesang Corporation’s lysine division, LG Chemicals sold its carbon black business to Degussa (Germany) and Swiss firm Novartis bought Dong Yang Chemical’s agrochemicals business (Son 1999; Duerden 2001b). European investment in the service sector was led by Carrefour (France)38 and Tesco (United Kingdom), with Tesco entering into a joint venture with Samsung in the wholesale and retail industries. Other significant investments were made by BT (United Kingdom) and Ericsson (Norway) in telecommunications and by ING (Belgium), Commerzbank (Germany) and Allianz (Germany) in finance and insurance. BT bought LG Telecom’s personal communications services (PCS) business and the UK’s Callaghan Investment Partners took a substantial stake in Korea Telecom’s Freetel division (Son 1999; Invest Korea Journal 2000b). Another notable investor during this period was British energy company Powergen, which invested in the Korean utilities sector (classified under ‘other investments’ in the official statistics) through a holding company in the Netherlands. After declining steadily between 2000 and 2002, European investment in Korea began a strong recovery in 2003, the first year of the Roh Moo-hyun administration, jumping from US$1.9 billion in 2002 to US$3.1 billion, an increase of 165 per cent. After expanding slightly in 2004, European investment increased by more than 50 per cent in 2005, rising to challenge the US$5 billion level but still below the 1996 peak of US$6.4 billion. The following year saw a moderate increase of 7.3 per cent to US$5.2 billion (see Table 6.10); in contrast, Korea’s total IFDI declined by 28.6 per cent between 2002 and 2003 (from US$9.1 billion to US$6.5 billion) and then almost doubled in 2004 (to US$12.8 billion). After dropping back by almost 10 per cent in 2005 (to US$11.6 billion), total IFDI notifications edged down further, declining by 2.9 per cent to reach US$11.2 billion (MOCIE 2007).

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Table 6.10 Korean IFDI: from Europe, 2003–2006 Notification volume (cases) 2003 2004 2005 2006 European Total Total IFDI Total IFDI %

Notification value ($ million)

Year-on-year growth rate (%)

362 492 587 266 1,707

3,092.2 3,212.9 4,874.3 5,232.3 16,411.7

165.4 3.9 51.7 7.3

12,525 13.6

42,058.9 39.0

Source: MOCIE 2007.

Between 2003 and 2006, European investment was dominated by firms from the United Kingdom, the Netherlands, Belgium, Germany and France, which together accounted for 83.7 per cent of notifications in terms of value (US$13.7 billion) and 65.3 per cent in terms of volume (1,190 cases) (see Table 6.11). The United Kingdom, the Netherlands and Belgium had a combined share of almost two-thirds of European investment in this period with cumulative notifications of US$4.5 billion, US$3.4 billion and US$2.1 billion respectively. The top ten investor nations together accounted for 95.5 per cent of all European investment notifications in terms of value and 82 per cent in terms of volume. The lower share for volume reflects the trend towards a large number of smallscale investment projects from other countries in western, central and eastern Europe. The early years of the Roh administration saw a strong swing back to European investment in the service sector in general and the financial sector in particular, which accounted for more than two-thirds of all notifications (US$11.1 Table 6.11 Korean IFDI: by top ten European investors, 2003–2006 Value ($ million)

Total EFDI %

United Kingdom Netherlands Belgium Germany France Ireland Sweden Switzerland Luxembourg Norway Subtotal

4,525.5 3,420.3 2,146.6 2,045.8 1,589.9 700.2 378.8 360.2 322.4 177.0 15,666.7

27.6 20.8 13.1 12.5 9.7 4.3 2.3 2.2 2.0 1.1

296 262 53 357 222 68 41 90 62 44 1,495

16.2 14.4 2.9 19.6 12.2 3.7 2.2 4.9 3.4 2.4

Total European IFDI

16,411.7

95.5

1,823

82.0

Source: MOCIE 2007.

Volume (cases)

Total EFDI %

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Table 6.12 Korean IFDI: by top ten European country and sector, 2003–2006 (in millions of dollars) Primary

Manufacturing Services

Other

Total

United Kingdom Netherlands Belgium Germany France Ireland Sweden Switzerland Luxembourg Norway Subtotal European Subtotal Top 10 as %

<0.1 0.0 0.0 0.0 0.0 0.0 0.0 10.4 0.0 0.0 10.4 10.7 97.2

514.1 1,392.9 332.2 1,239.0 375.8 181.1 239.5 191.5 19.2 63.5 4,548.8 4,820.1 94.4

3,924.6 1,894.7 1,654.9 762.6 1,203.0 519.1 139.3 158.3 303.0 113.5 10,673.0 11,093.6 96.2

86.7 132.7 159.5 44.2 11.0 0.0 0.0 0.0 0.2 0.0 434.3 487.3 89.1

4,525.5 3,420.3 2,146.6 2,045.8 1,589.9 700.2 378.8 360.2 322.4 177.0 15,666.5 16,411.7 95.5

Total IFDI Europe as %

20.6 51.9

15,219.9 31.7

25,449.2 43.6

1,369.1 35.6

42,058.8 39.0

Source: MOCIE 2007.

billion out of US$16.4 billion) by European investors, leaving a share of just 29.4 per cent (US$4.8 billion) for manufacturing (see Table 6.12). This increase in service sector IFDI reflected the notification of substantial investments in the financial sector, including Standard Chartered Bank’s acquisition of Korea First Bank. The top ten investors took a share of 97.2 per cent of notifications from Europe in the primary sector (thanks to a US$10.4 million investment in the agriculture sector from Switzerland) and continued to dominate the other sectors with shares of 94.4 per cent for manufacturing, 96.2 per cent for services and 89.1 per cent for ‘other’ industries. In terms of total IFDI in Korea, the share of notifications in the primary sector accounted for by European investors jumped from 1.8 per cent in 1998–2002 to 51.9 per cent, thanks to the Swiss investment. Their share of investment in the manufacturing sector declined from 41.3 per cent to 31.7 per cent between 2002 and 2006, while their share in the service sector jumped from 25.3 per cent to 43.6 per cent. The share of notifications in the ‘other’ sector surged from 10.5 per cent to 35.6 per cent, due largely to investments by the United Kingdom, the Netherlands and Belgium totalling US$421 million in utilities. During this period, European investors continued to expand their share of total IFDI notifications; having increased from 28.4 per cent in the pre-crisis period to 31.3 per cent under the Kim Dae-jung administration, their share rose further, to reach 39 per cent by the end of 2006. Major European investors in this period included Schott and Mann and Hummel from Germany in the manufacturing sector, and DNV (Germany), ING Investment Management (Netherlands) and Credit Suisse Asset Management (Switzerland) in the service sector.

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Table 6.13 Korean IFDI from Europe, North America and Japan, 1998–2006 Notification volume (cases) Europe North America Japan Total IFDI

3,607 4,964 4,650 25,926

Total volume (%) 13.9 19.1 17.9

Notification value ($ million) 35,218.1 28,358.0 13,676.1

Total volue (%) 34.5 27.8 13.4

102,071.3

Source: MOCIE 2007.

Between 1998 and 2006, Europe was the largest source of IFDI for Korea, with total notifications of US$35.2 billion for more than 3,600 projects (see Table 6.13). This represented a share of 34.5 per cent of Korea’s total IFDI in value terms and a share of 13.9 per cent in terms of volume. Firms from North America accounted for 27.8 per cent of notification value (US$28.4 billion) and 19.1 per cent of volume (4,964) cases; Japanese firms took shares of 13.4 per cent (US$13.7 billion) and 17.9 per cent (4,650 cases).

Conclusions The past two decades have seen the deepening of relations between Korea and Europe, as witnessed in the higher levels of diplomatic activity, the signing of agreements in the fields of business, science and technology, culture and environment and the mutual interest that has been demonstrated in negotiating and concluding FTAs. The post-crisis period saw the emergence of Europe as a major source of Korean IFDI, accounting for more than one-third of all investment notifications made between 1998 and 2006. The increasing prominence of European firms reflected the deepening political and economic relationship between Europe and Korea and mirrored the growth in bilateral trade; within the space of two decades, Korea’s bilateral trade with the EFTA member states increased from US$814 million to US$3.6 billion, while bilateral trade with the EU soared from US$8.3 billion in 1986 to US$78.5 billion in 2006. While there have been positive developments in the areas of trade and investment, there is still cause for concern and room for improvement, at least as far as the EU is concerned. Despite the provisions of the 1996 Framework Agreement in terms of improving access to each other’s markets, eliminating non-tariff barriers and improving the transparency of regulations, barriers to European imports remain in place. According to the European Commission, DELKOR and the European Chamber of Commerce in Korea (EUCCK), these impediments to trade, which include non-tariff barriers, violations of intellectual property rights and restrictions on foreign participation in certain sectors of the domestic economy,39 also serve as barriers to inward investment and undermine efforts to create closer ties between Korea and Europe. In 2006 the EUCCK celebrated its twentieth anniversary; on the occasion of the publication of the EUCCK’s annual Trade Issues and Recommendations

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Peter Thewlis, vice-president of the Chamber and chairman of the Intellectual Property Rights Committee, spoke of the close relationship between Korea and the EU and told the local media that the European business community ‘warmly welcomes’ moves towards an FTA with Korea. However, Thewlis added the proviso that ‘a number of lasting trade irritants between the two parties are addressed and solved once and for all’ (Thewlis 2006). The message from the European Chamber was unequivocal: in the interests of further developing their bilateral relationship, enhancing the trade and investment environment, increasing the European presence in Korea and moving towards the conclusion of an FTA, it was imperative that the Korean government address the problems facing European businesses in Korea.

7

Case study European investors in post-crisis Korea

In the wake of the 1997 financial crisis, a key policy goal for the Kim Dae-jung government was to attract higher levels of IFDI to Korea from MNCs in possession of the capital, technology and know-how needed to enhance the competitiveness of local corporations and financial institutions and ensure sustainable economic growth. The corporate, financial and labour reforms implemented by the Kim administration during the ‘IMF Era’ were designed to move Korea’s economic and business systems away from the old developmental state model underpinned by Asian (Confucian) values towards a neoliberal, Anglo-American style of economic management. At the same time, the government’s reform programme aimed to bring corporate governance, management styles and business practices into line with international standards. An important goal for the Korean government in carrying out these reforms was to create a more transparent, equitable, familiar and welcoming environment for investors, overcoming the deeply embedded perception among foreigners that Korea was a ‘difficult place to do business’. Although the reforms implemented by the Kim Dae-jung government led to a surge in IFDI in 1999 and 2000, the investment boom was short-lived and FDI inflows were declining once again towards the end of the Kim administration. Despite predictions that efforts to attract IFDI would slacken as the Korean economy recovered from the 1997 financial crisis and the consensus on the need for foreign participation in the economy weakened, the incoming Roh Moo-hyun government did not waver in its public commitment to IFDI promotion. The re-launching of the national investment promotion agency in 2003 was the most visible manifestation of that commitment, and an important part of Invest Korea’s role was to identify the remaining barriers to IFDI and find ways to enhance further the country’s locational advantages as a host for inward investment. A notable feature of the academic and business literature concerning the attractions and disadvantages of the inward investment environment in Korea has been a tendency to highlight the activities and concerns of American investors. To a great extent, this reflects the dominant position that American MNCs held in Korea for almost four decades after the first foreign investment was made in 1962. However, the late 1990s and the early years of the twenty-first century saw

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a substantial increase in the value and volume of investment from Europe in general and the EU member states in particular, as diplomatic and trading ties between Korea and Europe strengthened. Between 1998 and 2006, Europe was the largest single source of IFDI for Korea, with notifications for a total of US$35.2 billion in more than 3,600 projects. This represented a 34.5 per cent share of Korea’s total inward investment in value terms and a 13.9 per cent share in terms of volume during this period (MOCIE 2007). An article in Invest Korea’s monthly journal published in 2004 highlighted the ‘massive contribution’ made by European firms to Korea’s economic development and growth but noted that there was ‘little in the way of independent analysis of the phenomenon’ (Invest Korea Journal 2004d). This chapter presents a case study of European investors in Korea, based on 40 in-depth interviews conducted in April and September 2006 with European businessmen, members of DELKOR and officials and members of the EUCCK. The interviewees included expatriates with a wide range of experience in Korea (from less than one year to more than thirty years) representing a variety of nationalities and a broad spectrum of businesses, ranging from manufacturing to services and from major MNCs to small- and medium-sized enterprises. In many cases, the executives and officials interviewed play an active role in lobbying the Korean government on behalf of European business interests, and the advice of senior and experienced expatriates is often sought by other companies considering an entry into the Korean market. In this respect, therefore, the interviews replicated part of the ‘look-see’ process for potential investors visiting Seoul and seeking market advice as part of their decision-making process. The interviews, which were conducted on the understanding that strict anonymity would be maintained, sought to analyse changes in the business and investment environment since the 1997 crisis, assess Korea’s advantages as a host for inward investment, identify obstacles to investment and the smooth running of business operations and make suggestions for overcoming those obstacles and boosting IFDI levels.40 The European investors interviewed in 2006 recognized and praised the achievements of the Korean government during the decade since the crisis, in terms of improving the business environment and enhancing Korea’s competitive advantages as a host for IFDI. However, at the same time, they indicated a number of areas where there were gaps between policy and implementation, between the speed of change and resistance to reform and between perception and reality. For many, this phenomenon of ‘mismatched globalization’ was symbolized by the capital city itself; executives and their spouses who had visited Seoul on a ‘look-see’ prior to taking up residence in Korea remarked on the contrast between the sophisticated, cosmopolitan and modern façade of the city that they saw during their visit and the traditional, conservative and, in many respects, unfamiliar society and culture that they subsequently experienced on a day-to-day basis. In the interviews, the discussions focused particularly on the discrepancy between government policy at the decision-making level and its implementation

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at the working level; the gap between the effort put into education in Korea and the outcome in terms of the skills needed by global managers; and the disconnection between the commitment to reforms in the immediate post-crisis era and the extent to which these changes had been embedded and institutionalized. Other common points of concern were the contrast between Korea’s ranking in the global economy and the persistence of ‘Hermit Kingdom attitudes’ and the disparity between the Koreans’ self-perception and their country’s image overseas. The existence of these disconnections was generally attributed to the mismatch between the speed of convergence in terms of economic globalization and the far slower pace of change in terms of cultural globalization. A fascinating strand of the discussions was the breadth and depth of changes that the interviewees felt were required, in the interests of both domestic and foreign firms, in order to move through the phase of ‘mismatched globalization’. The changes and reforms they suggested related not only to the economic structure of the nation but also to the social, political and cultural facets of life that have a direct impact on the business and investment environments. Given that one of the key aims of this book – and a major goal for the Korean government and staff at Invest Korea – is to identify the factors that continue to act as deterrents to attracting higher levels of IFDI to Korea, the discussions with European executives inevitably focused on the problems and challenges facing investors in their working lives. However, every interview began with a discussion of the advantages that Korea has to offer foreign MNCs and the reasons why the interviewees’ companies had chosen to invest (and remain) in Korea. The case study begins, therefore, with a brief analysis of Korea’s attractions as a host for IFDI in the eyes of a cross section of European investors, before moving on to identify barriers to investment in Korea and present the European executives’ suggestions for change and reform.

Korea’s competitive advantages In October 2005, Invest Korea published a report identifying Korea’s ten principal advantages as a host for IFDI: a substantial domestic economy; talented human resources; excellent profitability; advanced information technology (IT) environment; strategic regional location; creativity and innovation; state-of-the-art infrastructure; world-class MNCs; strong government support and stimulating lifestyle (Invest Korea 2005a).41 When asked to discuss these and other competitive advantages, interviewees focused on domestic market potential, human resources, IT infrastructure and Korea’s strategic location within northeast Asia. The relative importance of these factors to each of the companies and individuals interviewed varied greatly; while the quality of human resources was a key issue for almost everyone, the importance of the domestic market size and Korea’s strategic regional location depended on the nature of, and the specific motivations for, the individual company’s investment. In addition to the four factors mentioned earlier, for some investors a significant attraction offered by Korea had been the opportunity to acquire assets after the 1997 crisis.

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The domestic market The economic data published by Invest Korea in 2005 were impressive; with GDP standing at US$679.9 billion and per capita GDP registering US$14,105, Korea ranked as the tenth largest economy in the world at the end of 2004. The country’s GDP growth rate of 4.6 per cent compared well with the rates seen in the industrialized nations of the world including the United States (4.4 per cent), the United Kingdom (3.2 per cent), Japan (2.6 per cent), France (2.1 per cent) and Germany (1.6 per cent). Furthermore, Korea recorded a US$27.6 billion surplus in its current account in 2004, thanks to strong growth in exports, particularly in IT-related industries. The surplus – Korea’s seventh consecutive black ink figure since 1998 – placed the country in fifth position among OECD member countries in terms of the size of its current account surplus, after Japan, Germany, Switzerland and Norway (Invest Korea 2005b). Invest Korea’s positive view of the importance of and opportunities offered by the domestic market met with both agreement and dissension among the interviewees. A common distinction was that made between the prospects for investment in the consumer goods, finance- and service-related industries and manufacturing for export-related sectors on the one hand and opportunities for manufacturers targeting the domestic market on the other. Across a broad spectrum of industries, European executives cited the importance of the performance of the local economy and the ‘high-margin, extremely lucrative, fast-moving and competitive domestic market’ that was ‘not a small market by European standards’. Several investors cited the size of the domestic market as an advantage not only in terms of overall GDP and external trade but also for their own particular industry: the twelfth largest cosmetics market in the world, the ninth or tenth largest pharmaceuticals market, the seventh largest life insurance market and so forth. In the retail sector, one investor commented: ‘It’s a huge market – the fourth or fifth biggest in Asia for us with 14 million homes. Looking at the statistics you have got to have a go!’ European companies in the financial sector saw substantial opportunities in terms of offering services and products such as retail banking and insurance to Korea’s increasingly wealthy population, as well as providing support for Korean firms penetrating overseas markets or relocating their production facilities offshore. Although one banker noted that the competitive gap between foreign and domestic financial institutions was narrowing in terms of more ‘traditional’ products and services, another European investor still saw Korea’s financial markets as ‘big and ripe and juicy’ with considerable potential in as yet underdeveloped areas including asset management, derivatives and pensions. Korea’s attractions for foreign financial institutions were further enhanced by the fact that, in contrast to their activities in less developed markets such as China and India, they could market more complex and sophisticated financial products in Korea, capitalizing on their competitive edge vis-à-vis domestic competitors. In contrast with the pre-crisis period, when Korea was considered to be ‘a bit different, a bit more risky’ than other countries, investors now viewed it as

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a safer, ‘normalized’ environment, similar to mature markets in the region such as Japan and Hong Kong.42 In industries ranging from cosmetics to fashion and from beverages to pharmaceuticals and medical equipment, investors listed among the attractions of the market the Koreans’ preference for certain foreign products (particularly designer brands and foreign drugs), the sophistication of the consumer base and the willingness and ability to pay premium prices for high-quality products. One investor in the apparel and luxury goods sector saw huge potential in Korea with ‘a great consumer who understands quality and is discerning . . . a fantastic consumer society of aspiring people’. Officials at one national chamber of commerce felt that there was a ‘good fit’ between European products and services and the Korean market; moreover, changes in Korean society including rising levels of disposable income, the increasing urbanization of Korea and the aging of its population were making the market even more attractive to foreign firms in related sectors. On the manufacturing side, there were significant opportunities for companies that were supporting or supplying Korea’s major export industries and investing in strategic sectors of the local economy or whose products were in demand in the Korean market; firms with ‘a niche market, a good product (and) smart marketing’ could be very successful in Korea. In other sectors, however, the prospects were not so bright. For example, investors in the telecommunications sector reported that they could not expect to sell their ‘outdated’ or ‘antique’ technology in Korea and so the strategy of helping Korean firms achieve their goals in the European market made more sense than battling with them in their own territory. It also was said to be ‘tough’ to try to invest and operate in areas that were close to Korean culture or linked to national interests, and some European companies had withdrawn from the market in the face of fierce local competition. Some interviewees felt that potential investors in the manufacturing sector might be discouraged by high labour costs, low productivity and the high real estate prices – factors that were driving many domestic manufacturers to relocate their facilities overseas. Finally, commenting on the increasing trend towards investment by small- and medium-sized enterprises, one interviewee warned that the Korean market had in the past proved unsuitable for smaller firms with limited managerial and financial resources and little or no experience in Asia.

Human resources In its assessment of Korea’s human resources, the Invest Korea report praised the workers’ ‘earnestness and dedication’ and cited statistics from the 2004 IMD World Competitiveness Yearbook, which had ranked Korea fifth in the world in terms of the percentage of 25- to 34-year-olds completing higher education courses (40 per cent), seventh in terms of the average number of working hours per annum (2,270) and fifth in terms of the level of international experience of Korean managers. The report also noted the ‘high productivity and relatively lower wages’ in Korea as an advantage for foreign investors

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(Invest Korea 2005a). In the interviews, the loyalty, commitment, motivation and high educational level of Korean workers were frequently commented upon and often received high levels of praise, with one employer reporting that his workers ‘can move mountains and quite literally . . . can do it overnight if asked’. However, it is worth noting that, although many of the interviewees concurred with the government’s assessment of the quality of Korea’s human resources, the basis for comparison was often competitor nations in Asia rather than the industrialized countries of the West. In the view of a number of investors, the quality of the Korean workforce ranked above that of workers in developing Asian countries such as China and Vietnam and on a par with Japan but lower than that of workers in Western Europe.

The IT environment According to the Invest Korea report, the sophistication and attractiveness of the Korean IT environment is demonstrated by the fact that the country now leads the world in terms of broadband usage (with 21.3 per cent of the population using broadband) and ranks in second place globally in terms of Internet users, with 603 users per 1,000 head of population. In 2004, IT exports totalled US$74.7 billion and accounted for almost 30 per cent of Korea’s exports, with overseas sales dominated by mobile phones, computers and semiconductors (Cho Hyun-jin 2005: 29–31; Invest Korea 2005a). The general consensus among the European investors interviewed was that the IT environment was indeed a positive factor for Korea; the country’s technological infrastructure was variously described as being significantly ahead of Europe, ‘world-class standard’, ‘superb’ and ‘the highest level in the world after Japan’. However, opinions varied on whether or not it was a crucial factor in investment decisions; understandably it was perceived to be vital for firms such as web-based service providers using Korea as a ‘laboratory of the Worldwide Web’ for testing Internet services, while for others it was seen more as a bonus for investors coming to Korea.

Strategic location Finally, the Invest Korea report highlighted Korea’s advantageous location ‘at the centre of the Northeast Asian economic region, where 25 per cent of the global population lives and 22 per cent of global GDP is produced’. According to the report, Korea provides quick and easy access to China and Japan for foreign investors and is well equipped with an excellent logistical infrastructure (Invest Korea 2005a). The importance of Korea’s location within the region varied according to the sector and the strategy of the foreign investor, but for some interviewees, it was a clear advantage. By locating in Korea in order to service the Chinese market, some investors were able to avail themselves of the competitive advantages that Korea enjoys vis-à-vis China, including a welldeveloped logistical infrastructure and access to skilled labour. Other investors took a similar view, describing Korea’s locational advantage as that of being

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between ‘developed Japan with its high costs and sometimes insular attitude’ on the one hand and ‘undeveloped China’ on the other. Nevertheless, some interviewees commented that the advantage might quite easily and quickly turn into a disadvantage; as the Japanese economy recovers and China becomes increasingly important in the global economy, Korea runs the risk of being caught between the two economic superpowers.

Barriers to IFDI: mismatches and disconnections In the eyes of most of the European executives interviewed, Korea is an attractive market and an important part of their company’s global strategy. Nevertheless, expatriate managers face a range of problems on a day-to-day basis that make the running of their businesses challenging and that, if unresolved, might negatively affect their companies’ decisions regarding re-investment or expansion. In addition, the operational difficulties facing foreign investors and the negative reporting about IFDI and the activities of foreign firms in the local press might serve as a deterrent to MNCs considering entering the Korean market. While not all interviewees had experienced or even been affected by the barriers to investment discussed next, which relate to the implementation of policy and regulations, protection of intellectual property rights, the labour market, human resources, anti-foreign capital sentiment, Korea’s image overseas and attitudes towards globalization, these issues emerged overall as the major themes for discussion in 2006.

Implementation of policy and regulations The greatest source of frustration for many European investors in 2006 – from major MNCs to small enterprises – was the ‘massive mismatch’ between, on the one hand, the policies adopted by the Korean government and the regulatory framework created in order to support those policies and, on the other, the actual implementation of those policies and regulations by working-level officials. For many interviewees, the frustration lay in the fact that the necessary legislation and regulations did exist (and in many cases were as robust as any in the industrialized nations of the world), but they were either not enforced or were implemented in an inconsistent and non-transparent manner, making day-to-day operations and relations with the Korean bureaucracy ‘extremely time consuming and frustrating’. A common complaint among European investors was the ambiguity of, and large number of grey areas in regulations, which gave lower level bureaucrats leeway to make arbitrary decisions and interpret legislation in an inconsistent manner.43 Other sources of frustration were the difficulty faced in getting a firm decision in writing and the fact that the response to an enquiry could vary according the level at which the enquiry was made, the person consulted and even, some felt, the date and time at which the question was asked. This led to a lack of predictability in key areas of business such as taxation and made planning corporate strategy and developing business plans ‘very difficult’.

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At a broad policy level, investors highlighted the contrast between the government’s general commitment to liberalizing and deregulating the economy, abiding by international codes of practice and creating a more favourable investment environment and decisions taken by individual ministries and agencies which aimed to protect Korea’s interests but, in fact, undermined the government’s credibility among investors. As one investor observed, various ministers, the prime minister and the president himself might make ‘encouraging noises’ about promoting liberalization and deregulation and encouraging inward investment, but at the working level, policies were often watered down to a greater or lesser extent, and sometimes, there was little follow-through on top-level directives. An example of the discrepancy between what the government said and what its officials did was the Lone Star affair in 2006, which directly involved a number of EU member states and had potentially serious repercussions for EU–Korean diplomatic relations. In recent years, a significant number of foreign MNCs and financial institutions have chosen to channel their investments through third countries (including the Netherlands, Belgium and Ireland within the EU) that have negotiated favourable tax treaties with Korea. The provisions of these treaties enable investors to maximize the tax efficiency of their investments by, for example, exempting them from payment of Korean withholding tax on the repatriation of profits generated in Korea. After the financial crisis, the American private equity fund Lone Star invested in the Korean real estate market and financial sector through Belgium. The tax treaty that had been negotiated between Belgium and Korea proved to be extremely beneficial for Lone Star when the time came to repatriate profits of W280 billion (approximately US$300 million at current exchange rates) made on the disposal of a prime piece of real estate in southern Seoul. Lone Star also purchased a majority share in Korea Exchange Bank for US$1.2 billion in 2003 and, after restructuring the bank into a profitable entity, planned to sell its majority share to local competitor Kookmin Bank, making a profit of more than US$4 billion in two and a half years (Choe 2006). Once again, because the original investment was made through Belgium, the profits on the sale would not be subject to Korean withholding tax when repatriated.44 In early 2006, it was reported that the Korean National Assembly was preparing a piece of ‘anti-tax treaty shopping legislation’ which would require foreign investors to pay withholding taxes (possibly retroactively) even on transactions carried out through countries that had signed taxation treaties with Korea and was drawing up a list of countries to which that new law would apply (Choe 2006).45 The taxes would be refunded once the investor had provided proof that it was not a ‘paper’ company, existing in the third country in name only in order to benefit from the tax exemptions. There was great concern within the European business community that countries such as Ireland, the Netherlands and Belgium would be placed on the list, and the European Commission acted swiftly to warn the Korean government about the potential impact on European inward investment of re-interpreting treaties unilaterally and applying legislation retroactively. Although, in the event, only the island of Labuan was included

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on the list and the government announced that no retroactive action would be taken, substantial damage had already been done in terms of foreigners’ perceptions of the officials’ actions, and concerns persisted that other countries might be added to the list in the future. The Lone Star controversy highlighted the problems facing investors trying to predict their tax liability when repatriating profits to their home countries; similar problems existed for many European investors in terms of the tax liabilities for their Korean business operations. A common complaint among investors was the ambiguity and inconsistent application of Korean tax laws which were, in the opinion of one interviewee, ‘deliberately ambiguous . . . written in such a way that no-one can ever be sure that what he or she is doing is strictly legal’. Investors referred to tax audits as ‘stressful’ and creating a ‘hostile and unfavourable environment’, and the uncertainty surrounding the interpretation of tax regulations and, therefore, the likely size of a company’s tax liability in any one year was described by one expatriate as ‘a real stopper on people investing’. However, one long-term resident of Seoul felt that there was little difference in the way that foreign and domestic firms were treated in terms of audits and their general dealings with the National Tax Service. Another area of legislation giving great cause for concern was the enforcement of intellectual property rights (IPR) protection. While IPR enforcement was not seen as a major issue in areas such as telecommunications where the Koreans were far ahead of the foreign competition in terms of their technology, it was identified as a significant potential deterrent to investment for companies operating in industries such as software and computer games, as well as in brand-sensitive areas such as fashion and retail. Although Korean legislation in this area was up to world-class standards and foreign investors had recourse to the Korean judicial system when their rights were violated, the problem once again lay in the inconsistent implementation of the regulations. The interviewees whose businesses were most affected by violations of IPR laws expressed anger and frustration, and one executive made a direct connection between the weakness of IPR protection in some areas and Korea’s performance in terms of attracting inward investment. The intensity and effectiveness of enforcement varied between sectors; one investor in the pharmaceuticals sector pointed out that, in his experience, the potential health hazards of illegally copied and manufactured drugs being sold on a large scale prompted the Korean government to take action against violators. Nevertheless, some pharmaceuticals companies had found that the pre-registration of drug specifications (the ‘recipe’ for the drug) required under Korean law had facilitated the copying of their products. The situation in the pharmaceuticals sector contrasted with the more lax enforcement of IPR regulations in the fashion and software businesses, where lives were not endangered by counterfeit goods. In the area of designer and luxury goods, investors spoke of ‘blatant copies’ made by ‘highly skilled workers’, and in the computer games sector, there was, allegedly, widespread ‘piracy’ of Western content. The Korean government was taking action in certain areas to stop counterfeit sales and protect foreign brands, including

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crackdowns on violators and the creation of computer databases allowing the identification of foreign brand names in paperwork relating to import consignments. Nevertheless, some interviewees felt that, in other areas, the efforts were limited and the crackdowns were valuable only in terms of public relations benefits for the government. Another investor, whose company subsequently withdrew from the market, felt very strongly that in his software-related sector, the authorities focused their efforts on protecting domestic rather than Western content. The Lone Star affair and issues relating to taxation, IPR protection and the general regulatory environment thus indicated a gap between the government’s stated policy and public commitments and some of the actions taken by ministries, agencies and individual bureaucrats. In the opinion of many interviewees, this mismatch was directly connected to the disparity between the rapid reform of the economic ‘hardware’ in Korea and the resistance to change in terms of the ‘software’. There was little doubt among the investors interviewed that many ministers and high-level officials were sincere in their desire to promote liberalization and deregulation, thereby improving the prospects for attracting inward investment. However, it was equally clear that there were deeply embedded forces of resistance within government institutions, and government policy was often undermined or even thwarted by a number of factors. These included the devolution of power to individual ministries and agencies; the attitudes and actions of working-level officials; factionalism within the government; the government’s inability or failure to monitor the actions of its civil servants and the frequent turnover of staff. In analysing the disconnection between policy and implementation, many interviewees used the analogy of a pendulum swinging from the state-run economy of the past, with government control over and intervention in all areas of economic activity, to the more recent devolution of power to individual ministries and agencies. While the president and his ministers were publicly committed to making efforts to promote inward investment, there appeared to be less of a sense of urgency at working levels, where the policy implementation was felt to be more ‘hit and miss’. The Lone Star affair, the action over the payment of withholding tax and the possibility of retroactive application of tax legislation appeared to indicate that the government was ‘no longer monolithic’ but had devolved power to agencies with ‘very poor lines of communication’ and staffed by civil servants who sometimes failed to consider the wider ramifications of their actions. Furthermore, newly empowered bureaucrats were expected to behave in a responsible manner without any supervisory institutions or coordinating mechanisms to monitor their activities. The lack of coordination among the actions of government officials in different ministries and agencies was also attributed by some interviewees to factionalism, which had been a key characteristic of the Korean political scene for centuries and now manifested itself as a division between those in favour of increased levels of inward investment and those who opposed it. Within the government, there appeared to be a conflict between the ‘more liberal and open-minded’

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Ministry of Finance and Economy and other government ministries and agencies including parts of the ‘more conservative and nationalistic’ FSS. Interviewed in September 2006, one expatriate observed: Part of the government wants to promote inward FDI desperately and part of the government couldn’t care less. Some government officials are very Korea-centric and think that Korea would be better off with its ‘borders’ closed but some are very eager to promote FDI. Some government staff seem to think that (foreign companies) are some kind of criminals and some think that they bring important know-how and finance to Korea. However, to many interviewees, it seemed unlikely that the government would be unaware that some officials were taking action that was potentially damaging in terms of its own credibility. The devolution of power argument was contested by those who believed that the hand of the government was still clearly visible at times and who felt that ‘the belief that you have to micromanage everything from the Blue House (the presidential palace) is still very strong’. Thus, opinions were divided on the question of why the Korean government was not enforcing laws and regulations or taking action against bureaucrats who were working against the spirit of its policies and legislation. While some believed that the government had devolved responsibility to the various ministries and agencies to such an extent that it was no longer able to micromanage their activities, sceptics felt that it might sometimes be in the government’s interests to have the process of liberalization and deregulation slowed down at the working level. Politicians and political parties facing the run-up to the presidential elections in December 2007 were well aware of the negative sentiments expressed by right-wing, nationalistic elements in the media and of the increase in anti-foreign capital sentiment in some sectors of Korean society. In that context, interviewees felt that it might not be in the ruling party’s interests to rein in the National Tax Service or FSS. As a number of interviewees observed, the Roh government had been elected without significant support from big business and so the best chance for the government’s Uri Party to remain in power was to appeal to its original voter base, including sectors of society that were less well-disposed to higher levels of inward investment. Another major factor identified by European investors in terms of the mismatch between government policy and its implementation was the frequent turnover of senior positions within the government. The tendency for senior officials in ministries and agencies to move on after as little as three or six months in a post made consistency in policy implementation difficult and the creation and maintenance of an ‘institutional knowledge base’ all but impossible. One investor reported having to deal with five different ministers during his three-year posting, making it difficult to achieve any level of continuity, and other European businessmen pointed out the problems they faced in developing a network of solid relationships at the higher levels of Korean bureaucracy given the frequent turnover of staff.46 They reported that new ministers often felt the need to make

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changes in order to stamp their authority on the office and demonstrate that they were taking action. The more cynical investors saw this as ‘rather convenient’ in some respects as newly appointed officials did not feel under any obligation to honour the commitments made by their predecessors. Furthermore, the lack of experience of some high-level officials created opportunities for lower-ranking officials to pursue their own agenda and thwart unpopular initiatives with delaying tactics.47 The knowledge that the minister’s tenure could be less than one year also undermined his authority and power to implement policy. At the working level, some interviewees felt that the lack of consistency and transparency in the interpretation and implementation of regulations was a power issue, as bureaucrats at the working level were reluctant to take any action that might diminish their power base or authority. According to some executives, it seemed that working-level officials did not want to have clear and transparent regulations because ambiguity gave them a significant amount of discretion and, therefore, power; in essence, Korean bureaucrats ‘still love to have their fingers in the pie’. One expatriate observed that bureaucrats possibly felt that they were under no obligation to offer any explanation for their actions as, in a hierarchical society like Korea where challenging one’s superiors is not considered acceptable, officials felt they did not have to justify their actions to ordinary citizens.

The labour market The experience of the interviewees in terms of their interaction with labour unions and the problems encountered in the annual rounds of wage negotiations varied greatly. While some firms, most notably in the finance-related industries, saw labour difficulties as a major issue and a factor that might well act as a deterrent to inward investment, smaller companies (with fewer than 500 employees) often did not have a union and some firms had experienced few or no labour problems.48 Nevertheless, even interviewees with no direct experience of labour problems other than going through tough annual wage negotiations had anecdotes to relate on this topic that certainly might be reported back to head office or passed on to companies looking to enter the Korean market. The principal areas of concern with regard to the labour market were the role and influence of the unions, the high cost of labour and annual wage demands that many felt were unreasonable and unrealistic. The annual wage negotiations in Korea were clearly stressful and emotionally charged for companies with active and sometimes aggressive unions, and the dramatic manner in which union leaders and members made their demands often contributed to an increase in the tensions between foreign investors and their workers. In one extreme case, an expatriate businessman whose company was engaged in wage negotiations with its labour union had to walk across a paper carpet with the slogan ‘CEO go home!’ in order to reach the elevators in his office and did this every day for three months. At the same company, union officials instructed workers to wear face masks during a meeting to allow them to

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listen to, but not communicate directly with, the foreign managers. At another foreign-invested firm, an expatriate reported that union members wearing black shirts and red headbands ‘to convey an image’ had occupied their offices, put up barricades and had done ‘just about everything that can legally be done’, causing European colleagues experiencing this for the first time to feel ‘physically and emotionally concerned’. They can be vocal and they can be physical if they want to – they can be quite intimidating. Yesterday there was a big demonstration. I speak a little bit of Korean but I don’t speak enough to understand what I am hearing. The voices . . . you close your eyes and what do you hear? It’s war! It’s got to be war! In addition to the emotional tensions, problems arose because of the amount of time taken up by wage negotiations; one interviewee observed that pay negotiations could take as long as nine months and, having reached an agreement, there would then be just three months before the next annual round got under way. There were also concerns that some companies had to deal with often ‘completely irrational’ expectations in terms of pay increases – sometimes as high as 45 per cent or 70 per cent – and that, in the end, many might have little option but to give annual increases averaging around ten per cent, regardless of corporate revenue and profit growth. There was a feeling among some investors that the excessive wage demands made by workers reflected both the belief that foreign firms had deep pockets and also a very short-term view of what was necessary and good for the company – the inability ‘to join the dots and see what the outcome will be’. That is, workers could keep asking for higher wages and might have their demands met for a while, but at some point, if faced with declining profitability, the company might be forced relocate to a cheaper place or close down completely, as was the case even for local firms. In the eyes of many interviewees, the problems they faced in the labour market reflected the highly accelerated nature of Korea’s development and the short space of time in which labour and management had been trying to create a framework for coexistence. Whereas industrial relations had a history of more than 100 years in many European countries, in Korea, effective labour unions had been created after the democracy movement of 1987, just ten years prior to the financial crisis.49 The years immediately following the democratic reforms in Korea saw a surge in union activity with widespread strikes, violence both in terms of the union action and government responses and high wage increases. Although, according to Invest Korea and some of the interviewees, the incidence of militant union activity had declined in recent years, the image of Korean unions remained negative in the eyes of many existing and potential foreign investors and would take time and effort to change. An important discrepancy in this area was that between the developments in the labour market and the efforts of the Korean government to increase labour flexibility and promote harmonious industrial relations and the attitudes of union

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leaders that often seemed to be behind the times and highly resistant to change. In some cases, the union leaders appeared to have learned little in terms of mediation and negotiation during the past two decades, simply resorting to theatrical tactics to achieve their goals. To a number of investors, it seemed that the more militant leaders were playing power games and serving their own political interests of advancing within the union movement rather than taking care of the needs of the union members. It should, however, be noted that some interviewees acknowledged that labour problems were sometimes exacerbated by poor management, the failure to communicate effectively with the union leaders and a lack of cultural awareness on the part of the expatriate staff. Finally, companies that had taken over Korean firms or financial institutions often found themselves faced with the problems caused by the presence of non-performing workers or ‘access providers’ (senior Koreans hired for their connections and networking abilities) and the lack of flexibility in the labour market in terms of streamlining the workforce. Not only did the presence of non-performers add to the company’s fixed costs without making a significant contribution to the bottom line, but it also created ‘blockages’ in the company with regard to creating promotion opportunities for the younger, emerging talent within the company.

The workforce In the interviews, there was a strong degree of consensus among the European executives about some of the advantages that Korea can offer in terms of human resources, particularly in comparison with regional competitors such as Vietnam and China. However, many interviewees expressed concern about the quality of the education received by Koreans, particularly as it related to the development of the work-related and linguistic skills needed to function effectively in the global business arena. In discussions about the quality of human resources and education levels in Korea, many investors noted the mismatch between the quantity of education and training received by many employees and the effort that they put into their studies and the quality of education in terms of the acquisition of skills that would enhance their employability at foreign-invested firms and help them develop into global managers. With regard to management practices, another important contrast identified by investors was that between the efforts made after the crisis to bring business and management systems in line with international best practice and the continuing adherence to more traditional approaches that many investors discovered in Korean companies and institutions. Among the interviewees, there was a general and very positive consensus regarding the commitment, loyalty and motivation of Korean workers and an appreciation of the amount of education and training they had undergone. ‘It is just fantastic; it’s such a pleasure working in an environment . . . where the employees, to a person, are just so motivated to accomplish a goal’. Many expatriate managers felt that, given good instructions and with time invested in training and development, there was no problem raising their workers’ skills to

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the required standard and creating a good team. However, some reported that difficulties could arise when a situation called for employees to use creative thinking or engage in problem solving. Workers facing a problem often expected their boss to provide a solution for them rather than seeking one by themselves and, in the experience of one investor, employees struggled to adapt to multifunctionality and flexibility in the workplace. On the issue of productivity, some interviewees highlighted difficulties arising from the tendency of Korean white collar workers to be process- rather than performance-oriented and from their desire to be assessed in terms of their input of hours rather than their output in terms of meeting targets and goals. However, one interviewee reported that productivity at his manufacturing plant was the best within his firm’s global network and praised the high level of technical skills among his staff and the excellent cooperation and working relationship within the company. In addition to issues relating to creativity, responsibility, initiative and productivity, the quality of language skills was a cause for concern, with investors referring to ‘a low level of English speaking’ and the fact that ‘you don’t find the fluency that you do in some other Asian countries’. One investor in the financial sector reported that, even though finance-related industries were well placed to choose from the best Korean graduates, it was difficult to find people who combined fluent language skills with professional expertise and, for SMEs, the problems were even greater. As hard as it was to find fluent speakers of English, European investors struggled even more to find a wide pool of potential employees with skills in other European languages and so, in a worst case scenario, faced a double language barrier. One investor commented that, ‘[t]he first issue is language – a lot of good, talented and enthusiastic people cannot work with international businesses because of the language barrier’. Many interviewees linked the weaknesses in terms of creativity and initiative to the Korean education system, where the focus has traditionally been more on rote learning, memorization and passing examinations than on interaction between teacher and student, analysis and discussion. They also highlighted the socialization process in Korea, where challenging their elders and superiors is still widely regarded as unacceptable behaviour for the young. In essence, the Korean education system was struggling to equip its graduates with some of the work skills that foreign employers considered to be essential, including the ability to be a self-starter, to participate in creative and strategic discussions and to engage in critical analysis. Furthermore, in terms of language skills, the focus in language teaching at schools and universities on repetition and memorization and concerns over losing face by making mistakes when trying to speak in a foreign language meant that there was a gap between active and passive skills, with ability in reading tending to be higher than proficiency in speaking. One investor felt that the Korean education system had served Korea well during the first three decades of rapid industrialization and development and had been an important element in its pre-crisis success. The system had equipped Koreans to perform well in domestic firms and when working within the Korean business model, but it was far less likely to enable them to work as global

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managers either overseas or in foreign firms. This would have repercussions not only for government officials working to promote inward investment but also for Korean firms aiming for success in the global economy and for Koreans seeking careers within MNCs. Although the Korean government has begun to implement education reforms in terms of the development of language skills (by, for example, having certain classes taught in English), one long-term resident of Seoul noted that even Korean families were ‘turning their backs on the Korean system’ and trying to have their children educated overseas or enrol them in international schools in Korea. In terms of business culture, one interesting aspect of the interviews was that the cultural difficulties and challenges highlighted by the European managers were, in many respects, the same as those cited ten or 15 years ago,50 demonstrating the slow pace of change in this regard. Although there had been a great deal of discussion about the need for changes to corporate governance and management styles in the wake of the 1997 crisis, some investors felt that there had been limited change in key respects. Common observations were that business continued to be conducted on the basis of networks and relationships with greater focus on contacts than contracts, that promotion was still dependent on seniority rather than performance, that the zero-sum mindset still predominated in areas such as labour–management relations and that negative attitudes towards female managers persisted in the workplace. Rigid hierarchies remained in place in many firms; there was still reluctance among senior and junior employees to engage in two-way communication, and there was a lack of a performance-based assessment culture, which created problems in terms of defining and assessing progress towards goals and targets. Nevertheless, investors tended to view these business culture issues as a challenge and an integral part of doing business in Korea rather than as a potential deterrent to investment – ‘not so much a disadvantage, more a difference’. It makes business more interesting rather than more difficult. It is like playing chess – if you don’t know how to move the pieces it is not exciting at all and it is really complicated and frustrating. But if you learn how to play you can have an amazing game!

Anti-foreign capital sentiment Interviewees expressed a wide range of opinions on the issue of anti-foreign capital sentiment in Korea and identified a number of factors that might underlie some Koreans’ suspicions of the activities of foreign businesses and their antipathy towards foreign ownership of domestic companies and financial institutions. These included the legacy of the country’s colonial past, fear of foreign domination of the economy and a lack of awareness of the potential benefits of IFDI. Investors noted the contrast between the efforts on the part of the government and Invest Korea to promote inward investment and the lingering resentment in some quarters of society as regards the profits earned by foreign

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firms. Once again taking the Lone Star affair as an example, investors noted that media attention appeared to focus on the issue of the profits that Lone Star stood to make on the deal and the company’s exemption from paying withholding tax, rather than on the fact that Lone Star had taken a risk and helped to turn a failing bank into a ‘very strong, semi-global player with good financials and now worth four times more than it was four years ago’. Thus, a key element of the discussions on Korean attitudes towards foreigninvested firms was the apparent suspicion of foreign investors’ motives and concerns over the prospect that they could make ‘too much money’ in the Korean market – a concept that itself was ‘inconsistent and non-transparent’. There was a consensus, particularly in the financial sector, that many Koreans seemed to be concerned about the potential damage that IFDI could inflict on Korean firms and the domestic economy and that domination of the local economy by foreign MNCs would disadvantage both Korean companies and Korean consumers. In terms of the success of foreign firms in Korea and the potential outflow of national wealth as foreign-invested firms repatriated their profits, investors felt there was a perception among some Koreans that ‘every dollar spent on a foreign product is a dollar that they lose, a dollar that Korea loses’. Such negative feelings were exacerbated when the dollars made in Korea actually left the country. There was a strong consensus among most interviewees that, while there was clearly anti-foreign capital sentiment in a few areas of government51 and in some quarters of Korean society, the Koreans themselves were ‘incredibly kind’, ‘open-minded’, ‘welcoming and friendly’, and there was little or no overt antiforeign sentiment on a personal, individual level. Korean co-workers were generally seen as being friendly, interested in foreign culture and business methods, pleased that foreign firms were investing in their country and creating job opportunities and eager to make their own contribution to the company’s success. The issues surrounding anti-foreign sentiment once again highlighted the mismatch between Korea’s efforts to attract more investment by liberalizing and deregulating the economy and the lingering suspicion and even dislike of foreign firms in some areas of society. In the opinion of some interviewees, the concerns over the money being made by foreign firms seemed to have a cultural aspect in that, they believed, the Koreans tended to think in terms of zero-sum outcomes rather than win-win situations. This gave rise to the tendency to focus on the negative aspects of IFDI including the ‘loss’ of money repatriated to MNC headquarters from an investment project rather than factoring in the benefits accruing to Korea from that same investment. For foreign investors, this view seemed doubly unfair in view of the fact that they had often taken risks in making investments, and the Koreans had benefited in terms of capital, technology and jobs. However, they were then criticized in some quarters for taking the rewards – ‘making too much money’ – when the gamble paid off. Others felt that the anti-foreign capital sentiment that did exist stemmed less from a dislike of foreigners than from a fear of them coming into Korea and succeeding where domestic firms were struggling or failing. The success of foreign firms such as

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Starbucks, Pizza Hut and Tesco could be attributed to their ability to find the right formula for doing business in Korea, but that was itself a ‘recipe for resentment’ in that it created the perception that ‘foreign companies know how to sell to our people better than we do ourselves’. These observations led the discussions into the area of seeking to determine whether the anti-foreign capital sentiment that does exist is an expression of xenophobia or of nationalism. One long-term resident of Seoul felt that, although the two were ‘different sides of the same coin’, it was more a case of nationalism than anti-foreignism. Others concurred, seeing expressions of what foreigners and the media termed ‘anti-foreignism’ as reflecting inclusiveness (maintaining group solidarity among the Koreans and protecting national interests) rather than exclusiveness (a determination to keep foreigners out of the country). Many interviewees commented on the strong sense of insularity and solidarity among the Koreans, which they partly attributed to the country’s struggles for autonomy and independence in the twentieth century. They really think that they have to be so nationalistic and for them, the question is not whether they like us or not – it’s that Korea is always first, Korea must come first, that’s what has to be! So, anti-foreign sentiment . . . I think it is so much part of them that it’s their constitution, it’s the way they are – it’s their make up and there is nothing we can do to change that. Whatever the roots of anti-foreign sentiment, there was agreement that the feelings were cyclical in nature; once again the image of the pendulum was used to illustrate the swing from a general lack of awareness of the benefits of inward investment and reluctance to open up the market to foreign firms before 1997 to a more open attitude while the country struggled to regain stability and recover from the crisis. Although fears of foreign domination were mitigated to some extent by the role that foreign investors played in Korea’s post-crisis economic recovery, the return to economic growth itself prompted concerns that Korea had sold off its national assets at too cheap a price, resulting in the re-emergence of more nationalistic sentiments. Since the crisis, negative sentiment had been exacerbated from time to time by economic issues such as the Lone Star controversy and by incidents such as the road accident in 2002 in which two Korean girls were crushed by a US army armoured vehicle.52 However, one interviewee felt that it was important not to exaggerate the problem and to bear in mind the rapid expansion of the presence of foreign companies in Korea since 1997; another noted that Korea was ‘becoming less and less the Hermit Kingdom’ but warned that this change was ‘not an overnight process’. Whatever degree of anti-foreign capital sentiment and protectionism exists in Korea, many investors felt it only fair to acknowledge that Korea was not alone in seeking to protect its market and the interests of its companies and financial institutions. The Europeans had also protected their industries until they were strong enough to compete on a world level; Korea was moving towards the point where its companies had the competitive edge they required, but it had not yet

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reached the point where protectionism was no longer deemed necessary. Although there was recognition that the government was making efforts to move away from the exclusionist mindset of the past and the practices associated with it, many interviewees reported that ‘old-fashioned, nationalistic, knee-jerk protectionism’ re-emerged from time to time, was at a higher level than seen elsewhere and remained a problem for foreign investors.

Korea’s image overseas The reporting of anti-foreign capital sentiment in Korea in the international media was one of a series of negative factors cited in relation to Korea’s image overseas which, according to interviewees, ranged from ‘limited’ and ‘not very positive’ to ‘negative’ and ‘zero’. Many interviewees identified a contrast between the strong and vibrant image of Korea within Asia and the positive publicity generated by recent events such as the 2002 World Cup, and the overall lack of knowledge about the country in other parts of the world, including Europe. A major problem in terms of Korea’s image overseas was that, according to some interviewees, many people back in their home countries who knew exactly where to find China and Japan on the map were not even sure of Korea’s location. For the majority of Europeans, Korea was not considered as a tourist destination, and the tourist industry in Korea appeared to be oriented towards Koreans and Asian travellers; the resulting lack of tourism from the West in general and Europe in particular blocked one of the routes of transmission for cultural globalization. In addition, much of the Korea-related news appearing in the foreign media tended to be negative, focusing on North Korea53 and, in the financial press, issues like the Lone Star controversy. Investors felt that efforts by the government, including placing advertisements in business magazines and running IFDI success stories in their publications, were inadequate in that they did not reach a sufficiently broad audience. The problem clearly lay in marketing; despite the Koreans’ prowess in advertising and exporting Korean society and culture through their film, television and music industries, they were perceived to be less successful in advertising their country’s economic success and the advantages and attractions of their country as a place to visit, work and live. The basic problem for Korea was summed up by one investor: Korea’s biggest problem is that they are so poor in advertising themselves. It’s sad. Korea has a lot of investment possibilities and tourism possibilities but the number of foreign travellers is very small, especially outside Japan and China. It is still the Hermit Kingdom.

Attitudes towards globalization Another interesting strand of the discussion of the presence or absence of antiforeign capital sentiment in Korea was that of Korean attitudes towards

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globalization; within these discussions, a clear contrast was made between cultural and economic globalization. With regard to the former, the Koreans’ relatively limited experience in overseas travel (which has only been permitted for most citizens since 1987) and the comparatively low levels of interaction with non-Asian travellers at home has restricted the extent to which cultural globalization can occur in its broadest sense: that of the exchange of thoughts, values and ideas as opposed to the importing of icons and artefacts. In the area of economic globalization, a number of interviewees referred to globalization as being a ‘one-way’ street in Korea. In their opinion, the Koreans saw globalization as a chance to boost exports and to encourage the advance of domestic corporations into global markets, with far less willingness to open Korea’s markets and encourage greater levels of foreign participation in the domestic economy. However, other investors cited the increasing presence of Western goods in Korea, the determined efforts by the government to liberalize the Korean market after the 1997 crisis and the rising number of foreign firms operating in the domestic market as evidence that Korea was opening up to the global economy. In response to this, a number of country managers in the retail sector observed that it was an open market for goods that the Koreans wanted – particularly aspirational products that they wished to be seen to be consuming – but not for products that threatened the interests of local firms; a case of a ‘protected’ market rather than a ‘closed’ one. Although some interviewees felt that the emergence of a number of Korean firms on the world stage was proof of economic globalization, others argued that, despite the existence of some world-class Korean companies and internationally recognized brands like Samsung, LG and Hyundai,54 the insular attitudes of the past and the reluctance to implement elements of international business practices remained unchanged. In fairness, some interviewees were quick to point out that Korea was not alone in its desire to maximize the benefits and minimize the costs of globalization; even industrialized countries like the United States and some EU member states were witnessing a protectionist backlash, with citizens expressing concerns over foreign domination of their economies and acquisition of their assets. One interviewee concurred that ‘every country in the world would like globalization to be a one-way street!’ but also observed that part of the problem for the Koreans might be that they still believed that it was possible for it to be that way. Thus, there was a mismatch between Korea’s status as a major player in the global economy and the limited understanding of, or readiness to embrace, globalization. However, a number of interviewees observed that Koreans had only been dealing with the global economy, travelling overseas and hosting major world events such as the Olympics and the World Cup for a relatively short period of time.55 If there was a level of naivety in some areas of business and society, limited awareness about how the global economy works and a lack of information about the benefits of globalization, it was inevitable that negative perceptions would tend to predominate.

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Korea’s business and investment environment: suggestions for change The principal aim of the interviews conducted in 2006 was to identify the factors that caused problems for existing investors in Korea and that might serve as a deterrent to potential investors, and also to make suggestions for change and reform that might help the Korean government achieve its goal of boosting inward investment levels. The majority of the investors interviewed saw significant attractions in the Korean market and, as a number of them observed, they would not remain in the market in the long term if they were not satisfied with their profit levels or confident that margins could be increased over time. Investors learned to deal with the challenges of running a business in Korea, including those posed by regulations, labour unions and business culture, and many of the interviewees emphasized the need for expatriates to invest time and effort in learning about and understanding the various social and cultural factors that have an impact on the Korean business and investment environment. However, the opinions and attitudes of potential investors could be affected by negative reporting in the media on these and other issues or by discussions during a ‘look-see’ with disgruntled or frustrated executives working in Seoul. In such cases, the factors that were seen by some existing investors as ‘irritants and bad press for Korea (rather) than obstacles to doing business or reasons to exit the market’ could turn into something much more damaging. As one investor observed, with reference to labour problems: If I were sat in an office in London or Hong Kong or New York and I hadn’t experienced this and I was thinking about where to invest a few billion dollars . . . then maybe something like that would be a cross rather than a tick on my spreadsheet. The issues identified by existing investors as ‘irritants’ or potential obstacles are precisely the barriers to investment that Invest Korea is seeking to dismantle; the role that foreign investors could or should play in this process proved to be an extremely fruitful area of discussion during the interviews with European businessmen and officials. In the opinion of many of the interviewees, there were three ways in which existing investors could deal with areas of the business and investment environment that they found to be unsatisfactory: accept and adapt to the situation, engage with the government in an effort to bring about change or give up and withdraw from the market. There was a strong feeling among many of the interviewees that it was vital to get away from a ‘complaints mentality’ and to be ‘engaged and not opposed’ in terms of action to enhance the business and investment environment. In other words, foreign investors should be part of the solution rather than part of the problem. Similarly, they felt that it was in the Korean government’s interests to engage in dialogue with willing participants and to draw on and benefit from their experience, skills and competences. However, in the view of one expatriate businessman, the expectation that the

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Korean government should or would listen and acquiesce to the demands of foreign businessmen and implement reforms at the pace that they dictated, regardless of the potential impact on the Korean economy and business environment was somewhat misguided: They (the government) will work with people who care about their problems, their situation, their vision for the future. And I think that is the whole key in Korea – if you can do that I think you will always be successful here. We have demands, yes – but we are not putting them aggressively on the agenda. We are trying to go in (sic) a much more step-by-step approach. Although many investors were highly appreciative of the level of engagement and the extent of open dialogue that was possible between the government and investors at the policy level, some doubted the effectiveness of the lobbying and consultation process. There was also frustration due to the fact that dialogue with government ministries and agencies led to fewer results than the investors would hope for, especially when their opinions and advice had been actively sought by government officials. As one investor remarked, it was a matter of courtesy in Asia to listen politely and patiently, but the fact that officials said ‘We will do our best’ did not necessarily mean they would do anything, just as ‘yes’ was more likely to mean ‘I see or I hear you’ than ‘I agree’. In order to ease this feeling of frustration and demonstrate a commitment to change, many interviewees felt that it was important for the Korean government to explain why certain things could not be changed, to give a time frame for things that could and would be changed and then to change them as promised. In the interests of demonstrating a willingness to move beyond seeking the opinions of foreign investors to responding to their comments and taking action on key issues, one interviewee called on the government to ‘. . . just make one quick fix, one small change, one gesture which you could publicize in the foreign press’. The danger was that, if no action was taken, the expatriates might, in time, feel that there was little point in participating in the consultation process. In the course of the interviews, the European executives and officials offered wide-ranging opinions on the issue of how the government could enhance Korea’s portfolio of locational advantages. The changes they suggested would, of course, benefit foreign enterprises but would also increase the international competitiveness of Korean firms and better equip them for their dealings with MNC partners and competitors in the global marketplace. In the context of this book’s focus on the challenges presented by changes in ‘hardware’ and reform of the ‘software’, it is interesting to note that most of the changes suggested had a strong cultural or social element and that the theme of education was particularly important. That’s a clear characteristic of Korea . . . that the hardware is there to the highest international standards but developing people takes more time.

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It’s something that will take a long time – you cannot change people in one generation. All of these things cannot be solved in three or five years. Many of the proposals made by European investors, including those relating to education and the regulatory environment involved long-term changes rather than quick fixes, and thus, foreign investors would need to develop strategies to cope with the challenges facing them in the market while waiting for changes in the medium to long term. Another area highlighted during the discussions on suggestions for change was that of Korea’s image overseas and the need for more intensive marketing strategies. Although this would not have an impact on the day-to-day running of foreign-invested companies in Korea, it would play an important role in changing perceptions of the country among potential investors and encouraging higher levels of inward investment.

Education Some of the most important and critical changes that the interviewees felt necessary were in the area of education, both in the sense of reforms in the national education system and in its broader sense of addressing misconceptions and stereotypes. In the discussions, attention focused on using different approaches to learning and teaching in order to equip young Koreans with the skills needed in the global workplace and on addressing, through education, the negative perceptions that Koreans and foreign investors held about each other. The interviewees’ suggestions included educating Koreans about the benefits of globalization in general and IFDI in particular and the role that foreign companies can play in the domestic economy and informing foreign investors about Korean business culture. A major drawback for many investors in Korea was the difficulties they faced in terms of recruiting employees with the necessary combination of technical expertise and language skills. There was a general consensus among interviewees that an education system based on rote learning and memorization that did not encourage students to engage in critical analysis or to challenge thoughts and ideas would struggle to produce graduates who were self-starters capable of engaging in critical debates and taking initiative in the workplace. For foreign investors, it was often necessary to invest considerable resources in terms of time and effort to mould the talented individuals they had recruited into a team capable of meeting the expectations of their employers. The focus on memorization and rote learning also had an adverse effect on developing creative language skills; the situation in terms of both workplace skills and language ability was exacerbated by social factors including the reluctance to lose face by making mistakes and the existence of rigid hierarchical structures in Korean society and many domestic companies. In general terms, interviewees felt that a change to an education system that encouraged creativity and initiative would benefit foreign investors, domestic firms and Korean job seekers in terms of the quality of human resources available.

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However, this was clearly a long-term goal requiring as it did social and cultural changes that would allow the breaking down of hierarchies and the embedding of new attitudes regarding the desired outcomes of education, including the fostering of creativity, initiative and critical abilities. There has to be a fundamental change in the education system here and it needs to start at the primary levels – this kind of change is measured over a generation as opposed to a government policy such as having classes taught in English at schools. Until such time as these changes occurred and became embedded, foreign investors would have to find ways to adapt, including providing the additional training and education mentioned earlier. In terms of language skills, some investors reported that they had changed their policy on language requirements in the workplace, either by recruiting staff simply on the basis of their work-related skills and employing interpreters where necessary or making Korean the working language of the company, rather than English. Although many interviewees acknowledged that they could play a role in resolving communication issues by learning Korean, they felt that, realistically, the Korean skills they could develop during their limited tour of duty would really only be useful in social settings and that business dealings were better handled in English or through professional interpreters. A more practical approach would be for them to develop active communication and listening skills in order to encourage their staff to develop their English language abilities and give them the confidence to use them. The investors acknowledged that the Korean government had made determined efforts, particularly since the 1997 crisis, to deregulate and liberalize the economy, open the domestic market to higher levels of imports, allow greater levels of participation for foreign-invested firms and bring Korea’s economic system and institutions into line with international best practice. In terms of the economy, many interviewees felt that Korea had made good progress in becoming more globalized; this contrasted, however, with the persistence of the ‘Hermit Kingdom’ or island mentality and the anti-foreign capital sentiment that lingered in some sectors of society. Concerns among Koreans focused on the negative aspects of inward investment and globalization including foreign domination of the economy and the erosion of domestic firms’ competitiveness. Thus, in a broader educational sense, many felt that the government – and foreign investors themselves – had an important role to play in creating a more open society, with an awareness of the benefits of inward investment in terms of providing capital, technology, jobs and know-how and an understanding of globalization in all sectors of Korean society that would enable a balanced debate on its benefits as well as its costs. One of the things about globalization is explaining to people what it is all about and why there is no need to be frightened about it. It seems here there is no explanation of it and there is no real interest in it.

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The education of foreign investors was another key focus of the debate on the business and investment environment; specifically, the crucial importance of understanding Korean business culture. Korea’s business and management culture was not specifically identified in the interviews as a barrier to inward investment; one interviewee observed that dealing with the culture was ‘not a disadvantage . . . it’s just part of being in Korea’. However, most interviewees had experience of cultural problems and were able to make suggestions for ways to avoid culture clashes, and there was a strong sense of the need to learn about Korean culture in order to understand the country’s business environment and working practices. The way I characterized it during my first couple of years here was that you could take everything you learned about doing business in North America or Europe, put it in a box, put a nice ribbon around it and put it on a shelf. It’s very nice and might be handy to have some day but you don’t need it here in Korea – there are other things you need to learn. Other investors concurred that, after centuries of socialization underpinned by Confucian values, it was unreasonable and somewhat misguided to believe that foreign investors should or could enforce any fundamental changes within a short space of time. Furthermore, attempting to turn employees into wholly Westernized managers could disadvantage them when they were dealing on the company’s behalf with other Koreans working in local companies and institutions. There was clearly a conflict at times between modernity and tradition and, for the Koreans, the challenge was to find a way to hold on to the values they cherished while adapting to a global business environment where Asian (Confucian) values sometimes sat uneasily with Anglo-American norms. For expatriates, the challenge was to learn about the culture, to recognize the battles that would never be won but that they could afford to lose, to take a hard line on those battles that they did not want to lose and to work on integrating Western best practice and valuable aspects of Korean business and management systems. Thus, there was recognition that there could and should be a two-way learning process with Korean partners and colleagues, seeking to create a system that embraced the best of both cultures. Furthermore, culturally aware country managers had a vital role to play as a buffer between the Korean operations and the head offices at home, interpreting cultural differences and facilitating smoother communication. Thus, the choice of expatriate personnel for a foreign-invested firm was crucial, beginning with the selection of the country manager; rather than sending an internal staff member with little or no Asian experience who was reluctant to relocate to Korea, a better approach would be to recruit an individual with knowledge of the country and its culture from outside the organization. Changes in Korean management culture would take place only through agreement and consensus, as a result of good communication and consistent efforts to convince employees of the benefits of new systems and practices.

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Once the messages were put over and the new systems were explained and implemented, there was a very good chance they would stay in place, particularly given that many workers had sought employment at an international firm precisely because the management style would be different from a more traditional Korean company. Despite the resistance to change and obstructive activities by union officials reported by some interviewees, others had been successful in introducing new practices such as flexitime, merit-based promotion, placing women in managerial positions, setting individual goals and objectives and performance-based compensation.

The regulatory environment As far as the regulatory environment was concerned, while acknowledging that in some European countries the business environment was just as highly regulated as in Korea, investors were unanimous in their desire for greater consistency and transparency between policy and implementation and between the actions of high-level and working-level officials. This would involve establishing systems to monitor the progress of reforms and check on the implementation of regulations and, in an ideal world, allowing senior officials to remain in post for longer periods in order to ensure consistency and enable the building of relationships with both Korean and foreign businessmen. As one investor observed, the Korean authorities needed to ‘walk the walk rather than just talk the talk’ and a fellow expatriate concurred: ‘The Koreans need to put better people in their own system . . . people who are going to do something rather than just say something . . . men of action in important positions’.56 The transparency of regulations could be improved by providing explanatory notes on the interpretation of laws and regulations and by the publication of officially binding interpretations and rulings. In the case of taxation, the difficulties that foreign firms and individuals faced in making financial projections could be alleviated by receiving estimates of future tax liabilities from the tax authorities. In the sectors most directly affected by the weak enforcement of IPR legislation, there were clear ideas on how the government might help foreign investors in terms of action against offenders. Suggestions included allocating more manpower to the task of cracking down on offenders, tightening border controls at the customs clearance stage, imposing much stiffer penalties for violations and educating the Koreans about the negative impact of IPR violations. Overall, investors felt that there should be a focus in legislation on long-term programmes rather than ad hoc adjustments and that the government should establish a consultative process for all new legislation affecting foreign-invested firms; finally, they were adamant that legislation should be not be applied retroactively under any circumstances. Considering labour issues from a policy and regulatory perspective, investors urged the government to make further efforts to help foreign companies resolve problems relating to the labour–management conflicts and work towards creating a mediation system that would help to bring about a mutually agreeable

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result within a shorter space of time. While the social benefits of creating a social safety net for Korean workers were acknowledged, achieving this objective by restricting the ability of companies to adjust their workforce according to economic necessity and thus virtually guaranteeing lifetime employment presented investors with major problems, particularly those who had invested in Korea by acquiring domestic assets. It was, therefore, important for the government to follow through on the changes to the nation’s labour laws relating to key issues such as labour flexibility that were proposed in the wake of the crisis but that had yet to reach the statute books. Once again, there was recognition that many of the problems faced by foreign businesses in terms of the regulatory environment were socio-cultural in nature and thus would take a great deal of time to change. In the interim, a number of investors suggested that it was important for them to ‘plug the gap’ with Korean nationals who understand the current systems and the regulatory framework and can help foreign mangers to work within them. Thus, it was important to hire staff in areas such as taxation on the basis of both their technical skills and knowledge and their personal contacts, which would be useful in creating good working relationships with ministries and government agencies. The services of third-party negotiators could be used for annual wage discussions to speed up the process and avoid face-to-face confrontation, and Koreans with an openminded and flexible attitude who would support the introduction of new systems and working practices could play a valuable role in the more senior levels of management at foreign-invested firms.

Marketing Korea Most interviewees agreed that the Koreans needed to do a great deal more in terms of public relations work in order to ‘sell’ Korea to foreign investors and to demonstrate the positive aspects of investing, working and living in Korea. In addition, it was essential for the government and inward investment promotion agencies to be proactive in handling the circulation of negative perceptions and rumours about Korea; taking action to deal with them if true and, if false, addressing the issue through positive public relations activities. As one longterm resident of Seoul observed: ‘It doesn’t matter what KOTRA says or what Invest Korea says or what (companies) that have had successful businesses here say . . . all of that goes out of the window when you hear one big negative’. Investors suggested that the government should promote the translation and publication of books on Korea, and Korean embassies worldwide should also take a more proactive role in marketing the attractions of Korea as a place to invest, work and live. Finally, interviewees urged Korean government officials to avail themselves of the support, advice and experience offered by foreign investors in their efforts to improve Korea’s image overseas and promote inward investment: ‘Give the companies that have invested in and made a commitment to Korea the chance to show that they can be successful and they will be a role model to others who are looking to invest here’.

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Conclusions The major theme that emerged in the interviews carried out in 2006 supported the principal proposition of this book: that, in Korea, there are significant mismatches between the speed and effectiveness of the reforms made to the ‘hardware’ of IFDI (regulations, systems and institutions) and the changes seen in the ‘software’ (culture, business practices and attitudes). These mismatches reflect, to a great extent, the disparity between the speed at which Korea has emerged as a major player in the global economy and an important trading partner of the industrialized nations of the world and the rate at which mindsets and attitudes have altered – in terms of Koreans’ attitudes towards foreign participation in their economy, their perceptions of the world and their place in it and foreigners’ views of Korea. In the interviews, European executives and officials highlighted a number of areas where there were gaps between policy and implementation, speed of change and resistance to reform, and perception and reality. In terms of government policy, many investors identified a clear disconnection between the commitment at the top levels of government to the liberalization and deregulation of the Korean economy and the creation of an attractive investment environment and the lack of consistency and transparency in the implementation of those government policies at the working level. This can be explained to a great extent by the presence of forces of resistance within institutions and organizations, including bureaucrats reluctant to relinquish their power base or have their authority diminished by more transparent regulations that are not open to a variety of interpretations. Actions on the part of officials who see a way to resolve what they perceive to be a situation that works against national interests – such as the unilateral reinterpretation of tax treaties that serve to reduce the government’s tax revenues – without considering the broader ramifications of their actions also indicate a world view that has not kept pace with changes in Korea’s global duties and responsibilities. In the same way, the actions of union leaders and employees who make excessive wage demands on the assumption that foreign employers will not relocate operations to a country with lower labour costs (as many Korean firms are already doing) suggest a lack of awareness of the realities of global business and the choices facing ‘footloose multinationals’. Moreover, they appear not to realize that the drama surrounding high-profile wage negotiations creates a negative image of Korean union militancy that can act as a deterrent to potential foreign investors. As in the case of the bureaucrats, however, it may well be that promoting inward investment is not high on their agenda, and they see little reason to change their attitudes and actions just to suit foreign investors. In discussions about the quality of human resources and education in Korea, many investors noted the contrast between the quantity of education and training received by many employees and the quality of education in terms of the development of job-related skills such as creativity and initiative and fluency in foreign languages. Despite the high levels of interest in Western management techniques immediately after the 1997 crisis when Asian values came under

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attack, there was an obvious discrepancy in some areas of corporate Korea a decade later between those early efforts to bring business and management systems into line with international best practice and the limited achievements in terms of a switch away from more traditional approaches to management based on Confucian values and beliefs. The persistence of deeply entrenched educational methods, management systems and business culture characteristics reflects to some degree the belief among those who resist change that the Korean approach remains valid in the new global business environment. It may also stem from a desire to hold on to more familiar values and systems in a rapidly changing global business environment. Finally, the disconnection between the Koreans’ perceptions of themselves and their place in the world and the overall lack of knowledge about Korea in other parts of the world (including Europe) is the result of the underdevelopment of Korea as a tourist destination for nonAsian travellers and the weakness of marketing activities aimed at highlighting the country’s attractions as a tourist destination and investment location. In discussing all these mismatches, there was real awareness among interviewees of the very short time frame during which Korea had transformed itself from an impoverished and war-ravaged nation to one of the major players in the global economy. Given that so many issues highlighted by investors have their roots in Korea’s culture and social systems, some of the reforms that are needed cannot simply be legislated for by the government, and there a few, if any, quick fixes. These changes will inevitably take time – significantly more than the 40 years (or single generation) that has elapsed since the beginning of Korea’s industrial development and since the first FDI was made in Korea. The broad range of suggestions made by the interviewees included both short- to mediumterm strategies for dealing with day-to-day problems in the workplace and longterm political and social changes that would eventually feed through to make the investment and business environment more attractive to foreign investors and, in turn, create a better image for Korea among potential investors. Many of the changes they suggested would benefit the Korean nation as whole, contributing to the building of a strong and highly competitive economy; greater consistency in the implementation of policy and regulations would help domestic and foreign businesses equally, and changes in education would benefit the nation in terms of fostering a creative and talented workforce with the skills to work as global managers either in Korea or overseas. During the interviews, it became apparent that the impact of each of the negative factors identified by investors could vary greatly among existing investors and also between existing and potential investors. In extreme cases, problems with militant unions, weak enforcement of IPR legislation and so forth could cause investors to liquidate their investments, as was the case with one investor interviewed in 2006. For companies that were well established and profitable, the challenges they faced on a day-to-day basis were serious and time consuming but were viewed by many as part of doing business in Korea, and one investor even referred to them simply as ‘irritants’. However, in terms of promoting inward investment, these issues could become much more significant as they

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might discourage existing investors from re-investing in and expanding their operations and could also deter MNCs looking for a new investment location in Asia. Here, Korea’s lack of image overseas is crucial. The absence of positive news stories, the lack of knowledge and understanding of the social and cultural issues underpinning Korean business and the inability to put key issues in the context of Korea’s highly accelerated economic development can create and exaggerate negative perceptions of the country, the market and the people. While some potential investors are undeterred by these issues and focus on the competitive advantages of Korea, others may question the wisdom of investing in a country that is portrayed by some sections of the media and described by some disgruntled and dissatisfied expatriates as hostile to foreign capital with militant unions and an alien business culture. Equally, the lack of understanding of the benefits of globalization in general and foreign investment in particular and the lingering suspicion about the motives of foreign investors found in some sections of Korean society and the local media exacerbate a situation which one Seoul-based foreign journalist referred to as the existence of ‘emotion without information’. In the eyes of most of the European executives and officials interviewed, the answers to resolving the problems that hampered business operations in Korea and that might serve as deterrents to future investment were more often political and socio-cultural rather than economic. In the area of policy and regulation, there was a need to create monitoring systems that could ensure that government policy was being implemented rather than undermined or discredited and a need to consider lengthening the terms of office for key ministers and even for the president in order to facilitate greater consistency between the formulation and implementation of policy. Education could play a crucial role in bringing about the changes suggested by interviewees, both in terms of reforming the national education system so that it would support the development of global managers and in the more general sense of educating government officials, regulators, the media and the public about the need for globalization and foreign investment and the benefits that it has already brought and can continue to bring to Korea. Negative perceptions could be challenged and overcome by proactive marketing and public relations activities, and foreign investors could play their part by becoming culturally aware, making determined efforts to understand Korean society and culture, and engaging with the government in discussions on enhancing Korea’s advantages as a host for inward investment, as many of the European executives interviewed have already done and continue to do. With these changes in place and given time, a new class of Korean managers, workers, officials and regulators will emerge; until that happens, the Korean government and foreign investors share the challenge of achieving a win-win situation in which Korea creates an investment environment that will attract the high-quality investment needed for further economic growth and a truly open society in which the contribution made by foreign investors is recognized and welcomed.

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The principal aim of this book is to analyse trends in IFDI in Korea over the past four decades, tracing the development of Korean IFDI policy from one of restriction and control to one of encouragement and promotion. In particular, it focuses on the problems facing the Korean government as it seeks to attract high-quality inward investment from MNCs in possession of the capital, technology, skills and know-how needed to enhance the global competitiveness of domestic firms and ensure sustainable economic growth in the years to come. This analysis is placed within the broader framework of Korea’s experience of and response to globalization, considering the phenomena of economic globalization, which has an impact on reforms of the ‘hardware’ of investment promotion (regulations, systems and institutions) and cultural globalization, which influences changes in its ‘software’ (mindsets, perceptions and attitudes). A central theme of this book is Lowell Dittmer’s (2002) concept of ‘hybrid globalization’ in Asia; a process during which the Asian globalizers, including Korea, have embraced globalization in a highly selective manner. Whilst economic convergence has often occurred at great speed political systems, social structures, traditional values and deeply embedded perceptions and attitudes have remained highly resistant to change. Dittmer identified three phases of Asian globalization; during the phase of ‘expansive globalization’, which lasted from the early 1960s through to the late 1990s, the Asian modernizers developed export industries and penetrated Western markets while preserving ‘distinctly Asian political and cultural values’. The first major challenge to these countries and their ‘institutional alternatives’ came with the 1997 financial crisis which ushered in the phase of ‘capital flight crash globalization’, forcing a re-evaluation of the institutions and systems that had underpinned their earlier successes. The third phase of globalization – ‘austerity globalization’ under the tutelage of the IMF – was a period of rapid change in terms of institutions, systems and regulations, that is, the ‘hardware’ of the economy. The majority of the crisis countries which had sought financial help from the IMF endeavoured to overcome their difficulties by fully embracing globalization and seeking even greater integration into the global economy. Dittmer concluded that the discrediting of the Asian ‘capitalist developmental state’ would lead to a re-evaluation of the ‘software’

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that had underpinned earlier successes but that had also contributed to economic failure at the end of the twentieth century. In South Korea, the period of ‘expansive globalization’ described by Dittmer lasted from the beginning of state-led economic development in 1962 to the outbreak of the financial crisis of 1997 and was characterized by externally oriented, export-driven growth. Economic policies were formulated by the state, implemented by the business groups or chaebol and financed by foreign capital in the form of aid in the immediate post-war period and principally by bank loans thereafter. These funds were channelled by the state to carefully selected businesses in support of specific projects and initiatives; the main conduit used to allocate resources was the privately owned but state-controlled domestic banking sector. For three decades, the partnership between the Korean developmental state and the rapidly expanding business groups achieved spectacular success in terms of high rates of economic growth and a steady improvement in the standard of living for most Koreans. The ‘hybrid’ nature of this phase of globalization in Korea is demonstrated by the contrast between the eagerness of Korean manufacturers to access world markets (first through exports and, from the mid-1980s, through the establishment of global production and distribution networks) and the Koreans’ determination to retain the distinctively Asian institutions and systems that underpinned and drove their economic success. Characteristic of Dittmer’s (2002: 22) ‘political-cultural exceptionalism’ in Korea were the durability of the authoritarian nature of Korean government and its power to control all areas of economic activity, the close and often corrupt links between the state and big business, the lack of autonomy for domestic financial institutions and the dominance of the economy by family-owned and controlled business empires. Within corporate Korea, management styles were heavily influenced by the Confucian ideals of diligence, respect for seniority, obedience and commitment to the goals and interests of the group, which were in turn reflected in key relationships within business and society. The predominance of family in senior management, the strictly hierarchical nature of corporate structures and decision-making processes, the reliance on personal relationships and connections as a basis for business and the need for close links with the Korean bureaucracy were key features of the Korean business environment throughout this period. Another important aspect of this ‘hybrid globalization’ was the attitude of the government towards IFDI. For three decades, the government appeared to view IFDI as a second-best option for financing and sought to limit entry into the Korean market to foreign MNCs that could provide access to the technology and know-how needed for each particular phase of development. The combination of government controls on inward investment, barriers to entry, restrictions on business operations, the unfamiliarity of the business and management culture and the closed mindset and exclusionist attitudes in some areas of Korean society gave the country a reputation among foreign investors as a difficult place to do business. At this time, Korea’s approach to globalization is accurately summarized by Dittmer’s description of ‘one-sided and partial adoption’ of

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globalization, as the state encouraged and promoted exports and (to a lesser extent) overseas FDI, but regulated and controlled foreign participation in the economy. The financial crisis of 1997 brought about a sea change in the Korean government’s perception of IFDI and, as Korea moved through the ‘capital flight crash globalization’ phase into the ‘austerity globalization’ of the ‘IMF Era’, it became clear that the enhancement of Korea’s business and investment environment would achieve at least two important goals. First, action taken to implement neoliberal reforms that aimed to move Korea towards a free market economy, establish an Anglo-American model of economic management, restructure the corporate and financial sectors and bring the regulatory framework and corporate governance systems into line with international best practice would satisfy the conditions attached to the bailout funding provided by the IMF. Second, that action and the creation of a more transparent and familiar investment environment would attract foreign MNCs that could play a vital role in Korea’s recovery from the crisis and its return to long-term, sustainable growth. While the action taken by the Kim Dae-jung and Roh Moo-hyun governments achieved some notable successes in terms of attracting foreign MNCs to Korea, the value of inward investment (on an actual rather than a notification basis) remained comparatively low during the decade after the crisis, fluctuating between US$4 billion and US$11 billion between 1998 and 2006. The government’s public commitment to attracting greater amounts of high-quality investment did not waver following Korea’s economic recovery, the repayment of the IMF loans in 2001 and the change of administration two years later but, despite further action to reform Korea’s ‘hardware’ and to remove barriers to inward investment, Korea still struggled to achieve levels of FDI inflows commensurate with the nation’s standing in the global economy. In 2006, I conducted a series of in-depth interviews with European officials and investors in Korea; in addition to assessing the progress made so far by the Korean government in its efforts to enhance the attractiveness of the Korean investment environment, the interviewees were asked to identify factors that hamper day-to-day business operations for existing investors and that might act as a deterrent to potential investors. The message from the majority of investors and officials was clear: while great progress had been made in reforming the ‘hardware’ that related to inward investment including the creation of worldclass legislation, regulations, systems and institutions, there had been far less change in terms of the ‘software’, as traditional values, mindsets and attitudes remained deeply embedded in certain sectors of Korean bureaucracy, business and society. The interviews revealed a strong consensus that the major problems experienced by Europeans investing in Korea were the result of a ‘mismatch’ between the pace of economic reform and the slower speed of change in Korean politics, business, education and society. During discussions on barriers to investment, attention focused on the regulatory environment, the labour market, human resources and education, anti-foreign capital sentiment, the Koreans’ attitudes toward globalization and Korea’s image

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overseas. In terms of government policy, many investors identified a clear mismatch between the commitment at the top levels of government to the liberalization and deregulation of the Korean economy and the creation of an open and transparent investment environment and the lack of consistency and transparency in the implementation of those government policies at the working level. Another important discrepancy was that between the actions taken by the Korean government to increase labour flexibility and promote harmonious industrial relations and the attitudes of union leaders, which often seemed to be behind the times and resistant to change – a clear example of outdated ‘software’. In the area of human resources, the gap was between the quantity of education and training received by many employees and the quality of that education in terms of the acquisition of skills that would enhance Koreans’ employability at foreign-invested firms and help them develop into global managers. Efforts made after the 1997 crisis to bring business and management systems in line with international best practice contrasted with the continuing adherence to more traditional approaches and systems that many investors found in Korean companies and institutions. An important mismatch that attracted a great deal of negative media attention was that between Korea’s efforts to attract more investment by liberalizing and deregulating the domestic economy and the lingering suspicion and even dislike of foreign firms and financial institutions in certain areas of Korean government, business and society. Interviewees also found disconnections between the strong and vibrant image of Korea within Asia, the positive publicity generated by recent events such as the 2002 World Cup and the strong sense of nationalism and national pride within Korea, and the overall lack of knowledge about the country in other parts of the world, including Europe. Finally, many noted the contrast between Korea’s status as a major player in the global economy and the limited understanding of, or willingness to fully embrace, globalization in some quarters of Korean society. While most interviewees had not experienced anti-foreign sentiment on a personal level, they were well aware of strong nationalistic sentiments among the Koreans which fuelled concerns about the potential domination of the local economy by foreign MNCs. The discussions about anti-foreign capital sentiment echoed Kinnvall and Jönsson’s (2002: 258) view that globalization can strengthen chauvinism and nationalism, and the view expressed by some investors that the Koreans often seemed to be reaching out to the future while holding on to the past is reminiscent of their description of people ‘(searching) for old roots to hold on to when they feel lost in the new world’. The interviewees showed a deep understanding of the political, social and cultural issues that both underlie and help to explain the mismatches they experienced in their working lives and they emphasized the connection between these isssues and the speed at which the Koreans have transformed their economy, evolved from an authoritarian to a democratic political system and emerged as a significant player in the global economy, and the challenges they face. Given the highly compressed nature of Korea’s economic, social and political development, many investors were not surprised that the country’s ‘software’ has

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struggled to keep up with the rapid pace of economic change. Sixty years have passed since Korea was liberated from Japanese colonial rule; 50 years have elapsed since the end of the Korean War and just 40 years have gone by since the country’s economic transformation began under the Park government. It is only 20 years since Koreans began to travel freely overseas, since the country hosted its first major international event and since the democracy movement ushered in a new era of political change and confrontational industrial relations. This timescale provides a marked contrast with centuries of socialization underpinned by the (Confucian) Asian values that helped to shape the development of modern economic institutions and systems and that continue to influence them in the early years of the twenty-first century. The interviews produced a wealth of evidence to support the proposition that, once Korea had emerged from IMF stewardship after repaying its loans in 2001, a fourth phase of globalization became evident – that of ‘mismatched globalization’. Given the hybrid nature of the process of globalization in Korea, there has, inevitably, always been a gap between the speed of economic and cultural convergence, as the Koreans have promoted the former (at least in terms of seeking to boost exports and OFDI) while resisting the latter. In the pre-crisis era, both the ‘hardware’ and ‘software’ of the Korean economy were distinctively Asian as the economy centred on a developmental state underpinned by Confucian values. In the post-crisis period, however, the institutions and systems changed at great speed, creating an expectation or assumption in the minds of many foreign investors that there would be corresponding shifts in the Koreans’ mindsets and attitudes. This assumption was often reinforced in the minds of foreign visitors to Seoul by the physical appearance of the capital city with its modern infrastructure, cosmopolitan appearance and familiar multinational brands and cultural icons. ‘Mismatched globalization’ arises when the speed of economic globalization and convergence has outpaced that of cultural globalization to a significant extent and this can, as in the case of Korea, create problems in terms of attracting IFDI. This is because economic globalization can remove transparent barriers to IFDI by reforming the ‘hardware’ of investment promotion, whereas cultural globalization may encourage changes in the ‘software’ and thus helps to dismantle non-transparent or invisible barriers to foreign investment. Examples of mismatches given by the European executives and officials interviewed in 2006 included the lack of transparency in the interpretation and implementation of legislation and regulations that are the equal of any found in the industrialized nations of the world; the undermining of government policies seeking to promote IFDI, liberalize and deregulate the economy by forces of resistance within public institutions, and the difficulties faced by foreign investors in recruiting young people with the skills needed in the global workplace from an education system that is ranked among the world’s best in terms of the proportion of the population graduating from higher education institutions. The changes needed to address these and other problems facing foreign investors relate more to Korean society, culture and bureaucracy than they do

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to business and economics. Even if the social and cultural changes that are crucial for transforming the Korean ‘software’ are accepted as being necessary and in the national interest, they cannot, broadly speaking, be legislated for by the government and are likely to take more than one generation to accomplish. The phase of ‘mismatched globalization’ is, therefore, likely to be a lengthy one and the Korean government has a clear and significant contribution to make during this period if it wishes to dismantle the barriers to investment identified by European investors in 2006. In the opinion of the interviewees, that role is one of involvement rather than intervention; an important task is the creation of monitoring and supervision systems to ensure consistency in policy implementation once power is fully devolved away from central government. This will enable the state to adopt the role of monitor and referee once fair and transparent systems have been established. Perhaps the most crucial role for the Korean government lies in education, both in terms of reforming the national education system so that it can produce the human resources and skills demanded by the global economy and, in a broader sense, educating the general public about the benefits of globalization in general and inward investment in particular, counteracting negative perceptions and allowing a balanced debate to take place. The issue of perceptions is crucial; anecdotes about problems and bad experiences in the workplace spread quickly within the expatriate community and may be communicated to potential investors visiting Seoul, while negative reporting in the media reinforces worries and concerns about Korea in countries where it has a weak or poor image. Foreign investors with positive experiences and success stories to tell can make an important contribution by promoting a greater awareness and understanding of Korea in their home countries and by ensuring that good news circulates within the Korean and international business community in Korea and overseas. As far as the problems and obstacles that are created by ‘mismatched globalization’ are concerned, all expatriate managers need to develop strategies to address these issues until such time as they can be resolved. This will involve continued and intensified efforts to understand the social and cultural context in which business is conducted in Korea and will require investors to continue to seek ways to integrate the unique and valuable aspects of Korea’s business culture into their respective systems and structures. Some existing investors whose business operations are currently profitable may regard issues such as the non-transparent and inconsistent implementation of regulations, the militancy of labour unions, violations of IPR legislation and negative media reporting on their activities as ‘irritants’. However, it is unlikely that less profitable or loss-making firms operating in Korea and MNCs considering a variety of investment locations in Asia will take the same generous view. The Korean government must be aware that the country’s future success in attracting high-quality IFDI will depend to a great extent on its efforts and success in addressing these problems. While the onus in terms of promoting change and reform clearly lies with the Korean government, foreign investors

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also have an important role to play in this process. Provided that they have a sense of confidence that dialogue and debate can lead to substantive changes, foreign investors should continue to engage with the Korean government in pursuit of a common goal: the promotion of political, social and cultural change that will benefit Korean corporations and foreign MNCs alike by creating a business and investment environment in which they can all thrive and contribute to Korea’s continuing economic growth and success.

Appendix

Interview schedule – April and September 2006 Korea’s competitive advantages Economic growth potential Domestic market size and growth potential Technological capabilities/information technology environment Quality of labour Infrastructure Research and development/training facilities Stability of financial markets Inward investment policy and incentives Strategic position in Asia Political stability Korea’s disadvantages as a host nation Tensions with North Korea Anti-foreign sentiment Labour unrest and inflexibility of labour market Poor national image overseas Negative media coverage of Korean issues Corruption and collusion Government policy and regulations Clarity of policies Consistency of policies Transparency of policies Implementation of policies Attitude of government officials Tax regulations Entry-related regulations Foreign exchange-related regulations

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Customs and trade-related regulations Operations-related regulations (intellectual property rights protection, antitrust regulations, labour laws, etc.) Treatment of foreign-invested firms Institutional support from Invest Korea Overall quality of services and support Pre-investment support After-investment support Training and special events (e.g. seminars) Referral to specialist services (e.g. tax, legal services) Response to grievances, complaints/ombudsman services Incentives (tax, leasing/rental, cash grants, employment and training grants, R&D grants) Special economic zones for foreigners Business practices and management systems Corporate governance structure Corporate competency and efficiency Productivity Financial and accounting transparency Communication skills Availability of information Social and cultural conditions Koreans’ attitude towards foreigners Consumer attitudes towards foreign products Labour union attitudes towards foreign companies Business culture Observance of hierarchies (e.g. decision-making, pay, status, etc.) Willingness to take initiative and assume responsibility Gender-based role allocation of office duties Importance of maintaining face Priority of the group’s interests over individual needs Importance of personal relationships Methods of conflict resolution Negotiation styles Quality of life Housing Health facilities

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Education facilities Traffic and transportation Communication and use of English Leisure facilities Cost of living Environment/pollution Additional questions What are the best and worst things about living in Korea for you and your family? What do you know now that you wish you had known before investing in Korea? If you were asked to give your successor one piece of advice about working in Korea, what would it be? What could Korea change or do differently in order to attract more IFDI?

Notes

Introduction and theoretical framework 1 Hereafter ‘Korea’ or ‘South Korea’. 2 For an excellent overview of the globalization debate, see Held, David and McGrew, Anthony, eds, The global transformations reader: An introduction to the globalization debate (Cambridge: Polity Press, 2003), and Held, David and McGrew, Anthony, eds, Globalization/Anti-globalization (Cambridge: Polity Press, 2002). 3 Official Korean IFDI statistics are quoted on a notification basis, registering the value and volume of projects approved by the government but yet to be carried out. Thus, there is a gap between these figures and the amounts cited for the value and volume of actual investments made in a given year or period. 1 Korea and inward foreign direct investment 1962–1992 4 Examples include the Grain Management Act, the Fertilizer Management Act and the Pharmaceutical Act (Cho 1994: 157–8). 5 Measures taken included a switch from approval to notification for investment in specific sectors, the reduction of the number of sectors in which OFDI was restricted, the simplification of documentation requirements and the easing of restrictions on the purchase of real estate (Ch’oe 1997: 66–7; Han 1996: 81–2; Kim Shi-jung et al. 1992: 29–32; Pak 1996: 182–95). 6 Korea’s capital markets remained closed to foreign investors in the 1960s and 1970s; although limited and indirect portfolio investment was permitted from 1982 through special funds such as the Korea–Europe Fund, direct investment was only permitted after 1994. 7 The decline to a combined share of 57.2 per cent share for the United States, Japan and Europe in 1964 was due to a US$224 million investment made through Panama in the non-metallic minerals sector, which accounted for 34.3 per cent of notifications that year. 8 The decline to just three-quarters of the total value in 1981 was due to a US$34 million investment from Hong Kong, which accounted for 22.2 per cent of all IFDI notifications that year. 9 Under the Super 301 provision of the Trade Act of 1974, as amended by the Omnibus Trade and Competitiveness Act of 1988, the US Trade Representative had the authority to identify Priority Foreign Countries – countries considered to have trade barriers and/or unfair trade practices. 2 Globalization in the Kim Young-sam era: Segyehwa and inward foreign direct investment (1993–1997) 10 In his first year of office, President Kim’s popularity rating had plummeted from more than 80 per cent to just over 40 per cent (Lee Byung-Jong 1994: 17).

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11 Discussion on Korea’s role in the global economy under the new administration had begun in late 1993, when the government held a New Economy Internationalization Strategy Conference at which President Kim Young-sam emphasized the need for internationalization and announced measures and plans to boost inward and outward FDI, liberalize external trade and promote the development of outward-oriented institutions. There was widespread recognition that this shift in direction would mean a sea change for Korea’s economic policy and management in terms of increased exposure to world markets and foreign competition, and Koreans were urged to look on internationalization as a means of revitalizing the economy rather than as a threat to national interests as they had tended to do in the past (Ha 1994: 72–3). 12 For more details, see Bobrow, Davis B. and Na, James J., ‘Korea’s affair with globalization: Deconstructing Segyehwa’, Democratization and globalization in Korea: Assessments and prospects, edited by Moon Chung-in and Mo Jongryn (Seoul: Yonsei University Press, 1999). 13 The ten per cent ceiling on foreign investment in ‘ordinary’ companies listed on the Korean stock exchange was raised to 12 per cent in December 1994 and 15 per cent in July of the following year (Noland 2005: 10). 3 The 1997 financial crisis and the ‘IMF era’ 14 The causes and aftermath of the Korean crisis have generated a vast body of literature; for an excellent analysis of the crisis, see McLeod, Ross H. and Garnaut, Ross, East Asia in crisis: From being a miracle to needing one? (London and New York: Routledge, 1998); Haggard, Stephan, The political economy of the Asian financial crisis (Washington DC: Institute for International Economics, 2000); and Delhaise, Philippe F., Asia in crisis: The implosion of the banking and finance systems (Singapore: John Wiley and Sons, 1998). 15 For more detail on this, see journal articles by Jeffrey Sachs (Harvard Institute for International Development), Joseph Stiglitz (World Bank) and Martin Feldstein et al. (National Bureau of Economic Research). 16 Previous efforts at chaebol reform, centering on the sale of non-commercial real estate, the designation of core businesses and the easing of family ownership and control had failed in the face of the conglomerates’ increasing political and economic power and diminishing dependence on the government for support and finance (Lee Chung H. et al. 2002: 24). 17 The principal areas of focus for public sector reforms were: the reorganization and downsizing of government bodies, deregulation, the privatization of state-owned companies, the restructuring of government-owned research institutes and the ‘sharing’ of pain through wage cuts and reductions in early retirement compensation for public officials (SERI 2000: 78–82). 18 Measures included a reduction in the minimum number of shares needed for an investor to have the power to dismiss a member of the board, view the company accounts, take legal action against the firm and so forth. In addition, a cumulative voting system was to be introduced enabling small shareholders to take action as a group (Lee Jae-Woo 1999: 247). 19 Although HSBC agreed to pay US$900 million for a 70 per cent stake in Seoul Bank, negotiations foundered in 1999 on the issue of asset valuation, especially with regard to non-performing loans (The Economist, 4 September 1999). 20 See: Cherry, Judith, ‘‘‘Big Deal” or Big Disappointment? The Continuing Evolution of the South Korean Developmental State’, Pacific Review, vol. 18, no. 3 (2005), pp. 327–54.

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4 Inward foreign direct investment in post-crisis Korea I (1998–2002) 21 The absence of legislation requiring business groups to produce consolidated financial statements rather than a series of accounts for individual firms within the group had made it difficult to track the flow of funds within an organization. 22 Tax havens offer a base through which MNCs can trade, invest and benefit from beneficial tax arrangements such as exemptions on corporate or individual income earned overseas – all on an anonymous basis. 23 For a detailed discussion of the role played for foreign investors in Korea’s post-crisis recovery, see Cherry, Judith, ‘Killing five birds with one stone: Inward foreign direct investment in post-crisis Korea’, Pacific Affairs, vol. 79, no. 1 (2006), pp. 9–27. 24 The amount of IFDI that had entered China by 2003 was roughly comparable to Korea’s gross domestic product in 2002 (US$477 billion). 5 Inward foreign direct investment in post-crisis Korea II (2003–2006) 25 The highest level of exports recorded in any one year up to this point was US$172.3 billion in 2000 (KITA 2006). 26 The debate on Korea’s potential as a financial, business and logistics hub of Northeast Asia has generated a huge volume of literature and is a topic worthy of study in its own right. In this book, we make mention of the policy simply in terms of its connection with IFDI promotion strategies. 27 Invest Korea Plaza opened in the autumn of 2006. 28 The membership of the Invest Korea Advisory Council, which meets quarterly to advise on investment promotion, includes the Chief Executive Officers of 35 MNCs active in Korea, heads of major chambers of commerce and senior professionals. 29 A European executive interviewed in 2006 commented that, while the post-crisis data for European investment might have been distorted somewhat by investments from third countries, in the past, European investment had been under-represented to a degree by investments made through the Asian regional headquarters or US offices of European MNCs. 30 The volume statistics given in this part of the INSC database do not match those given in the section used to create Table 5.1; the value statistics, however, are consistent. 6 The Republic of Korea, the European Union and the European Free Trade Area (1962–2006) 31 For a detailed analysis of Korean–European relations up to 1996, see Cherry, Judith, Korean Multinationals in Europe (Surrey: Curzon Press, 2001). 32 The European Union was established on 1 November 1993. 33 The Centre will receive EC funding of nearly C800,000 over a three and a half-year period as one of a network of EC-funded Centres at prominent universities in countries that are recognized as EU’s key partners among the industrialized nations of the world, including the United States, Canada, Japan, Australia and New Zealand (Seoul Times 2006). 34 The original nationality of the company is given in parentheses but the investment may have been routed through the Netherlands, Belgium or Ireland as in the cases of BT, Tesco and Powergen from the United Kingdom. 35 As some major investments were made on an anonymous basis through holding companies in third countries, it has only been possible to cite investments made by firms using their own names. 36 Soju is an extremely popular alcoholic drink in Korea, made from fermented sweet potatoes.

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37 Jinro Ballantines was later acquired by Pernod Ricard. 38 In 2006, Carrefour sold its Korean operations to Korean fashion retailer E. Land. 39 The legal services industry, for example, remains closed to foreign firms. 7 Case study: European investors in post-crisis Korea 40 The interview schedule can be found in the Appendix. 41 The ten advantages cited were based on the findings of the ‘Why Korea?’ project, in which staff consulted with members of the Invest Korea Advisory Council, in-house project managers, FDI experts and investment promotion specialists and collected data on Korea’s chief competitors in order to carry out a regional comparative analysis of various host countries’ locational advantages (Cho 2005: 28–9). 42 Foreign investors in the financial sector continue to press for acceleration in regulatory reform and the further opening of the market through a process of active engagement and dialogue with the Korean government. Issues of particular interest to European financial institutions include: the schedule for foreign exchange liberalization; the adoption of a more open universal banking system; the outsourcing of noncore business functions; enhanced access to the financial services market and the lingering concerns over the possibility of the retroactive application of new tax legislation and regulations. 43 Highlighting the difference between the service industries and manufacturing operations, one investor with a manufacturing plant in Korea reported that he had not experienced any problems with the regulations governing his sector, which were transparent and consistently applied. Another interviewee felt that the problem lay in the frequent policy changes made by the government, commenting that ‘if something is not working they immediately review it’. 44 Lone Star’s purchase of Korea Exchange Bank was subsequently investigated by the Korean authorities who were seeking to determine whether or not the fund had actually been qualified to take a majority share in the bank in the first place. The investigation delayed Lone Star’s proposed sale of a majority share to Kookmin Bank and the deal eventually fell through in November 2006 (Chen 2006). 45 For Lone Star, the change in regulations would mean an additional tax liability in excess of US$1 billion. 46 However, one expatriate observed that the relatively frequent turnover of country managers in foreign-invested firms, typically every two to three years, could also cause problems for the Koreans in terms of building relationships. 47 One interviewee compared the situation with the popular 1980s’ British comedy programme ‘Yes Minister’, in which a hapless minister’s plans, strategies and efforts at reform were routinely diverted or thwarted by his permanent civil service staff. 48 The percentage of unionized labour is small in Korea; interviewees estimated it at between 10 and 20 per cent. One interviewee observed that the labour situation at major corporations in Korea was ‘very different from the situation for 80 to 90 per cent of the firms here’. 49 Describing the tensions surrounding the annual collective bargaining agreement negotiations in Korea, one investor compared the situation with that experienced by the United Kingdom at the height of union militancy in the late 1960s and early 1970s. 50 See Cherry, Judith, Business Briefings: Republic of Korea (London: Cassell, 1993). 51 One interviewee drew attention to reports that a number of members of the National Assembly were attempting to introduce new restrictions on IFDI. The reports followed allegations that the Korean government’s actions to promote IFDI were tantamount to reverse discrimination against local firms and claims that there was mounting resentment in Korean business circles of the hostile takeover of Korean companies by MNCs. In an interview in 2005, the Director General for International Trade and Investment at MOCIE, Choi Pyeong-rak commented:

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[a] government has a duty to safeguard national assets such as resources critical to national prosperity and welfare. The Korean government, even as it pursues greater involvement of foreign capital in the domestic economy, will always be committed to protecting Korean firms from hostile takeovers by speculative capital. (Invest Korea Journal 2005d: 44) 52 The incident led to demonstrations demanding that the two soldiers involved be tried by the Korean judicial system and not by an US Army court martial (Brooke 2002). 53 Interestingly, only a small number of interviewees mentioned North Korea in the context of promoting IFDI, one in terms of the economic burden that the south would face in the event of reunification and another commenting that it was more of a consideration for non-residents of Korea rather than for people living and working in Seoul. One investor felt that the possibility of reunification was ‘too remote to be part of a realistic future (sic)’; however, he added that, if and when it happened, ‘it would change the Korean situation immediately. To what extent and into what direction can not be imagined at this stage’. 54 However, some interviewees reported that many people in their home countries were under the impression that these firms were, in fact, Japanese companies. 55 Overseas travel was heavily restricted by the Korean government until 1987. 56 In April 2006, at the time of the first round of interviews, there was widespread admiration in the European business community for the pro-IFDI Minister of Finance/Deputy Prime Minister Han Duck-soo; by the time the next round took place in September, Minister Han had been replaced.

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Interviews Chung Tong-soo and Timblick, Alan (Current and former Chief Executives of Invest Korea) in discussion with the author, September 2006.

Index

Tables are indicated by italic page numbers. access providers 152 additional investments 92, 93, 115, 115–16 Ahn Byung Kwon 65 anti-foreign capital sentiment 154–7 Asian countries, globalization of 9–10 asset prices 86 ‘austerity globalization’ 10, 74 Bank of Korea report 35, 39 banking system and 1997 crisis 71 barriers to IFDI: anti-foreign capital sentiment 154–7; attitudes towards globalization 157–8; business culture 154; business and investment environment 96–101, 159; economic 95–6; education of foreign investors 163; education system 152–4, 160–2; factionalism 148–9; government dialogue with investors 160; implementation of policy and regulations 145–50, 164–5; intellectual property rights protection 147–8; investors’ perspective 116–20; labour market 150–2, 164–5; language skills 153, 162; marketing of Korea 165; overseas image 157; turnover of senior government officials 149–50; workforce issues 152–4 benefits of IFDI, debate on (1960s) 24, 26 business culture 154 business environment as barrier to IFDI 96–101, 105, 159–61 Business Environment Survey (AMCHAM) 100 ‘capital flight crash globalization’ 10 Carrefour 109

case study of European investors: anti-foreign capital sentiment 154–7; attitudes towards globalization 157–8; background to and summary of interviews 140–1; benefits to domestic market 142–3; business and investment environment 159–61; competitive advantages of Korea 141; human resources 143–4; implementation of policy and regulations 145–50; issues covered 176–8; IT environment 144; Korea’s image overseas 157; labour market 164–5; marketing of Korea 165–6; regulatory environment 164–5; strategic geographical location of Korea 144–5; workforce 152–3; see also Europe; European Union cement industry 89 Cerny, P.G. 74 chaebol: and 1997 crisis 70–1; deregulation of 72; reform of structures 75 Chang Yun-jong 94 chemical industry: 1998–2002 88, 89; development of 26; dominance of 27 China 96, 116, 117, 126, 127 Cho Soon 17–18 Chung Tong-soo 118–19 competition, effect on of IFDI 16 competitiveness, international 108 conglomerates: and 1997 crisis 70–1; deregulation of 72 conspiracy theory (1997 crisis) 70 corporate sector: deregulation of 72; reform of structures 75 corruption 100 costs of IFDI, debate on (1960s) 24, 26

198

Index

countries investing: 1962–1997 63, 63; 1970–1983 27, 31; 1984–1992 35, 38; 1993–1997 58; 1998–2003 91, 91–2; 2003–2006 113–15, 114; 1960s 21, 25; see also Europe; Japan; United States crisis of 1997 67–8; blame for 68–73; globalization following 10 cultural exclusivism 49, 99–100, 106, 119–20 cultural globalization 6–9, 158 currency prices 86 deregulation of IFDI (1980s) 27, 32–3 developing countries, attitudes to foreign direct investment 6 developmental state: adaptation to globalization 73–4; changes in 1993–1997 43–4; concept of 17; reappearance of elements of 79 Dittmer, Lowell. 9–10, 17 domestic market, benefits to of IFDI 142–3 economic barriers to IFDI 95–6; see also barriers to IFDI economic globalization 2–6, 158 economic indicators post-crisis 103 education 160–4, 174 electronics sector 88, 89 employment: effect on of IFDI 16; reforms 76–7; see also labour market English language 106; see also language skills Europe: 1962–1997 63, 63, 129, 129–31, 130, 131; 1970–1983 27, 31; 1984–1992 38; 1993–1997 57–8, 58; 1997–2006 131–7, 132–3, 135–7; 1998–2002 91, 91–2; 2003–2006 113–14, 114; major investors 1997–2006 134; problems facing businesses from 138; 1960s 21, 25; see also case study of European investors; Japan; United States European Free Trade Association (EFTA), trade with 126–9 European Union: Centre at Seoul National University 124; development of trade and cooperation with 123–4; relations with 122–3; trade with 1971–2006 124–6, 125, 127, 128; see also case study of European investors ‘expansive globalization’: Asian countries 9–10; and Korea 16–19 exports: effect on practices of IFDI 15–16; post-crisis 81; see also trade

factionalism 148–9 financial sector: 1998–2002 89; 2003–2006 113; barriers to IFDI remaining 99; domestic market 142–3; liberalization of 71–2; reform of 75–6; removal of restrictions and regulations 105 financial sector, reform of 46 Financial Supervisory Commission (FSC) 75, 78 Five Year FDI Liberalization Plan 54 flexibility of the labour market 76–7, 99 food and beverages sector 89 foreign direct investment, inward: 1962–1969 19–26, 20, 22, 23, 24; 1970–1983 26, 26–7; 1984–1992 27, 32–41, 33, 34, 36, 37, 38; 1993–1997 53–5, 55–8, 57–8; 1998–2000 83; 1998–2002 85–95, 87, 88, 90–3; 2003–2006 109–116, 110–16; 1962–1997 pre-crisis era 58–9, 59–64, 63–5; and 1997 crisis 69–70; anti-foreign capital sentiment 154–7; attitudes of developing countries 6; barriers to, post-crisis 95–101; benefits of, post-crisis 93–4; compared to other Asian countries 64, 64; concern over negative effects of 40–1; cumulative in 1996 64, 64; debate on cost and benefits of (1960s) 24, 26; downturn 2001–2002 93; early 1990s surge 52; and economic globalization 5–6; education of investors 163; effects of 14–16; first cases of 19–20; flows of 6; global 53, 53–4; government shift in policy towards 82–3; incentives 104–5; increase in, early 1990s 63; legislation to induce 19–20; new investments 1998–2002 92, 93; outward (1962–1992) 18; positive contribution to economy 64–5; rank of Korea globally 95; revision of regulations 1998–2002 84–5; Segyehwa policy 53–5, 55–8, 57–8; slow down (late1980s/early1990s) 35, 39–40; suspicion of negative effects 99–100; via tax havens 92, 92; see also countries investing; sector analysis foreign investment zones 98 Foreigners’ Land Acquisition Act 84 free trade agreements 129 global investment, slowdown after 2000 95–6 globalization: and 1997 crisis 71–3; of

Index 199 Asian countries 9–10; attitudes towards 157–8; austerity 10; concepts of 2; criticism of 3–4; cultural 6–9; cultural exclusivism as barrier 49; definitions 2; economic 2–5; effect on trade 48; enablers of 3; expansive 9–10; following crisis of 1997 10; hybrid 9–10; as leading to conflict 8; mismatched 10; role of government 48–9; role of the nation state 4–5; Segyehwa policy 44–53; supporters of 3 governance structures, reform of 75 government: dialogue with investors 160; level of intervention in reform process 77–9; limited intervention of 74; role of with globalization 48–9; shift in policy towards IFDI 82–3; turnover of officials 149–50 greenfield investments 115, 115 Guillén, M.E. 8 Ha P’yo˘ng-gi 58 Haddad, M. 16 Harrison, A. 16 heavy industry, development of 26–7 Held, David 2, 3, 4, 7, 8 hotel and restaurant industry 89 human resources 143–4; see also labour market Hwang Sang-in 65 ‘hybrid globalization’ 9–10 Ikenberry, G.J. 5 implementation of policy and regulations 145–50 imports: liberalization of measures (1962–1992) 18; post-crisis 81–2; see also trade industries open to investment 84 insurance industry: 1998–2002 89 intellectual property rights (IPR) protection 147–8 International Monetary Fund (IMF): criticism regarding Korean policy of 70; reforms 74–5 Invest Korea 107–9, 118–19 investment environment 96–101, 159–61 investors: lack of support for 97–8; view of barriers to IFDI 116–20; see also case study of European investors IT environment 144 Japan: 1970–1983 27, 31; 1984–1992 35, 38; 1993–1997 57, 58; 1998–2002 91,

91–2; 1998–2006 137, 137; 2003–2006 113–14, 114; 1960s 21, 25; trade with 126, 127; see also Europe; United States Johnson, C. 17 Jönsson, K. 8 Jung Ku-hyun 40–1 Kim, Samuel 4, 45, 51 Kim Dae-jung government: level of intervention in reform process 77–9; reform programme 74–9; strategy for promotion of IFDI 83–5 Kim Eun Mee 58 Kim Hee-kyung 65, 105 Kim June-dong 64, 65, 99, 105 Kim Yoon-chul 65 Kim Young-sam government: blame for 1997 crisis 71–2; Five Year FDI Liberalization Plan 54; neoliberal reforms 43–4; passive policy regarding IFDI 58; presidential tour of European countries 123; Segyehwa policy 44–53, 71–2 Kinnvall, C. 7, 8 Korea: attractiveness to foreign businesses in 1960s 24; competitive advantages of 141; image of overseas 157; marketing of 157, 165–6; rank regarding global FDI flows 95, 110; reforms post-crisis 10; strategic geographical location of 144–5 Korea Investment Service Centre (KISC) 83 Korean Accounting Institute 85 Korean Federation of Trade Unions (KFTU) 108 labour market 99, 105, 108–9, 119, 150–2, 164–5 labour reforms 76–7 language skills 106, 153, 162 lay-offs, legalization of 76–7 Lee Chun-gu 72, 73 Lee Hong-Koo 49 Lee Kyu-so˘ng 47 Lee Myung-bak 109 Lee Sungmi 64 Lee Tae-young 108–9 Lee Yong-Deuk 108 legislation 19–20, 20–1, 26, 32, 54, 76–7, 83, 84, 164 liberalization: of IFDI (1980s) 27, 32–3; of import measures (1962–1992) 18 living environment of Seoul 109

200

Index

Lone Star affair 146–7, 155 machinery sector 88–9, 89 manufacturing sector: 1962–1997 59, 60, 61, 63; 1970–1983 26–7, 28, 29; 1984–1992 33, 34, 35, 36; 1993–1997 55, 56, 57; 1998–2002 86, 87, 88, 88–9; 2003–2006 111, 111–12, 112; European investment 1998–2006 133, 133–4, 136, 136; 1960s 21, 22, 23 marketing of Korea 157, 165–6 McGrew, A. 4 mergers and acquisitions (M&A): 2003–2006 115, 115; increase in 1998–2002 90, 91; liberalization of 84 ‘mismatched globalization’ 10, 173–4 Mo Jongryn 78 Moon Chung-in 78 multinational corporations, growth in 5–6 nation state: and cultural globalization 7–8; role of in globalization 4–5 neoliberal reforms of Kim Young-sam government 43–4 O Su-gyun 104 Office of the Investment Ombudsman 83 Organisation for Economic Cooperation and Development (OECD) 47, 48, 49–50 outward foreign direct investment: 1962–1992 18; increase in early 1990s 52–3; post-crisis 82 overseas promotion of IFDI, lack of 98 ownership structures, reform of 75 Park Chung-hee government: balancing benefits and costs of IFDI 19; control of financial resources 19; legislation to induce IFDI 19–20, 20–1 People’s Republic of China (PRC) see China Petrella, R. 2 pharmaceuticals sector 147 policies and regulations, implementation of 145–50 Political Economy Risk Consulting Group (PERC) 101 portfolio investment 63, 68–9, 69 post-crisis reform 73–7 PRC see China pre-crisis era, IFDI in 58–9, 59–64, 63–5 promotion of IFDI 83–5, 93, 106 public relations, international 106–7, 165

reform, post-crisis 73–7 regulations: as barrier to IFDI 97, 97; consistency and transparency of 164; implementation of 145–50 research and development activities 105 retail sector 89 Robins, K. 8, 9 Roh Moo-hyun government: differences within 120; efforts to attract IFDI 103–4 sector analysis: 1962–1997 59, 60, 61, 62, 63; 1970–1983 28, 29, 30; 1984–1992 33, 34, 35, 36, 37; 1993–1997 55, 56; 1998–2002 86, 87, 88, 88–90, 90; 2003–2006 111, 111–13, 112, 113; European investment 1962–1997 130–1, 131; European investment 1997–2006 133, 133–4, 135–6, 136; potential of domestic market 142–3; 1960s 21, 22, 23, 24 seeds industry 89 Segyehwa policy: criticism following crisis 71–2; and IFDI 53–5, 55, 56, 57, 57–8, 58; Kim Young-sam government 44–53 Seoul business environment 100–1, 109 service sector: 1962–1997 59, 60, 62, 63; 1970–1983 26–7, 28, 30; 1984–1992 33, 34, 35, 37; 1993–1997 55, 56, 57; 1998–2002 86, 87, 89–90, 90; 2003–2006 111, 112–13, 113; European investment 1998–2006 133, 133, 134, 135–6; 1960s 21, 22, 24 small-scale projects 92–3, 93, 116, 116, 119 South Korea see Korea Special Tax Treatment Control Act 84 steel industry 89 Stiglitz, J.E. 5 support for investors, lack of 97–8 surveys: Business Environment Survey (AMCHAM) 100; foreign businesses in 1960s 24; Political Economy Risk Consulting Group (PERC) 101 tax: application of laws 147; havens 92, 92; incentives 84–5, 98; regulations 164 technology, introduction of through IFDI 15 telecommunications industry 89 textiles and apparel industry 33–4 Thewlis, Peter 137–8 third country investments 114, 114–15 Timblick, Alan 107, 119, 120 trade: balance, effect on of IFDI 15; early

Index 201 1990s 51–2; effect of globalization on 48; with European Free Trade Association (EFTA) 126–9; post-crisis 81–2 trade unions 98–9, 105, 108–9, 150–2 transparency of laws and regulations 164 transportation equipment industry 88 Tripartite Commission 76 United States: 1970–1983 27, 31; 1984–1992 38; 1993–1997 57–8, 58; 1998–2002 91, 91–2; 1998–2006 137, 137; 2003–2006 113–14, 114; reaction to 1997 crisis 70; 1960s 21, 25; trade with 127; see also Europe; Japan

value system 17, 41; negative influence of 73 wages: increases in 98–9; negotiations for 150–1 Wal-Mart 109 wealth creation, effect on of IFDI 16 Weiss, L. 74 wholesale sector 89 Yu Byoung Gyu 106 Yu Ch’ang-gu˘n 39, 58, 69–70, 104 Yun Mikyung 64 zones, foreign investment 98