[Silver Prize] What will make Korea more attractive?
University of St. Gallen in Switzerland
Korea has become a truly globalized country, displaying a trade openness index of 92.3 percent as of 2008. The Korean economy is now as integrated in as it is tributary of international commerce.
In a world dominated by increased competition over foreign capital, Korea must push forward its effort to become more investor-friendly in order to attract more foreign direct investments. FDIs are a direct channel to advanced knowledge and technology. They increase the domestic economy’s efficiency and allow local companies to specialize, recognize threats and ultimately stay relevant.
If Korea fails to remain a fairly competitive destination for FDIs, it will eventually lose out to major economies emerging in Asia, namely India and China, who are moving up the value chain and increasingly competing with Korean firms, posing a potential threat to the country’s economic wealth. This paper offers some leads worth exploring.
Education system to meet new challenges
Academic excellence is a Korean tradition that has been preserved through a harsh but effective school system. Young Koreans top the Program for International Student Assessment (PISA) studies and are more successfully admitted to American universities than any other Asians.
General English literacy has also starkly improved. The current education system however is still heavily geared toward supporting a mass production economy, which is not in line anymore with the needs of the domestic economy. There is already a growing mismatch between labor supply and demand within Korea, which is affecting FDI allocation.
The integration of China and India, better suited to mass production, into the world economy, is diverting FDIs from other recipients. If it is to resist intensifying competition for foreign capital, Korea must strengthen its already ongoing efforts to shift toward quality- and knowledge-based, productivity-driven growth strategies.
Creativity must thus be more heavily emphasized upon in school curriculums in order to match graduates’ profiles with the innovation needs of the economy.
Overhaul labor culture
Much related to the education challenge, unstable industrial relations and an inflexible labor market have had a negative impact on foreign businesses’ willingness to invest in Korea. Productivity and management-workforce relations have remained a troubling issue in the last years, culminating in the much publicized 2011 labor unrest at Standard Chartered First Bank over the expansion of a merit-based compensation and promotion scheme within the company.
Age privilege is still the norm in most Korean businesses, which stifles pioneering and creativity as it prevents bright young minds from taking the lead and receiving the full credit they deserve.
Shift toward ‘greener’ economy
Although the current economic slowdown has somewhat dampened the global push toward more ambitious carbon dioxide emissions reduction targets, the respite is only temporary. Corporations do not commit FDIs without taking into account post-Kyoto scenarios and their possible financial implications.
Korea displays the seventh highest CO2 emissions-to-GDP ratio among OECD countries, which could have serious effects on the cost of doing business in the country. Green innovation in industrial processes and energy sourcing is therefore a must in securing high-impact foreign investment.
This is also a matter of energy security, as Korea currently imports 97 percent of its power. It makes no doubt sustainability issues will play an increasing role in assessing national and industry competitiveness.
Tackle economic nationalism
Korea drags a reputation for staunch economic nationalism, discouraging foreign investors from committing to high-visibility transactions. The drama around the purchase of Korea Exchange Bank (KEB) by Texas private equity firm Lone Star Funds and the subsequent attempted sales to Kookmin Bank in 2006 and Hana Financial Group in 2011 has become a popular case study of the difficulties foreign companies are confronted to.
The KEB case is beyond the scope of this paper but it does point out to a paradox in the perception of FDI in Korea: “Greenfield” FDIs are welcomed because they create growth, jobs and exports while takeovers are vilified as they diminish local ownership and do not appear to generate additional value.
FDI’s greatest value to a country is its ability to channel ideas, technology and skills across borders. Those benefits however can be transmitted as efficiently — sometimes more so — through acquisitions as through the construction of new operational facilities.
The post-1997 recovery under foreign ownership of troubled Korean banks, Renault’s revival of Nissan in Japan, as well as Jaguar’s renaissance as a Tata subsidiary all indicate strong evidence of this.
The concern that foreign ownership relocates decision-making power to their global headquarters also lacks proof, as multinational corporations display a growing tendency to localize decisions and resort to outsourcing.
The critique of FDI is stronger in countries where domestic corporations wield excessive power. Korean lawmakers should further limit the influence of chaebol, whose rent-seeking behavior and resulting attempts to trump competition policies are harming the country, and recognize the positive impact of FDI, whether greenfield- or acquisition-based.
Economic nationalism however cannot be defeated without providing Korean citizens with opportunities to invest in domestic firms.
The undervaluation of the Korean won is channeling savings mainly into U.S. consumer debt, while foreigners are taking advantage of this situation to massively invest in the Korean stock market over 30 percent of total market capitalization.
Such policy of preventing market forces from determining the exchange rate could spark a nationalist backlash, with dire implications for FDI growth.