How Risky Is It to Invest in South Korea?

By Tom Coyner

In the nearly two years I have been writing this business column, I have never attempted to address one of the fundamentals about doing business in Korea ― the political risks.

When considering the political risks of South Korea, North Korea plays an obvious role beyond the expected domestic considerations, such as ultra-nationalism. So, within the dangerous brevity of this column, I will attempt to cover the two major of many possible risks, namely possible reunification and the impact of nationalism on foreign business.

Let's first review the more sensational of risks, North Korea and the possible reunification of the two Koreas.

When considering the two Koreas, one must also consider the interests of surrounding powers. While Pyongyang must be mindful of China's likely long-term hegemonic designs on its territory, the North Koreans appear primarily concerned about maintaining face with the South. Yet the North Koreans need to worry that their northern border is weakened from both directions ― by their refugees' northward exodus and potentially by another onrush of Chinese ``volunteers,'' as happened during the Korean War as well as during prior wars over the centuries.

North Korea's fundamental irony is its dogmatic commitment to unifying Korea under its undisputed control. But in so doing, the ruling oligarchy has forced that impoverished nation on to a constant, delusional war footing, which has further weakened its economy. During the past decade, North Korea has had to increase its dependency on Chinese goodwill and direct investment, as well as on the unconditional aid from the South and the west.

In short, Pyongyang has devised a survival strategy that can only buy time, but with each year, it diminishes its likelihood to indefinitely maintain its de facto sovereignty in the face of creeping Chinese power.

The North's ruling oligarchy appears blatantly prepared to let millions starve during the short term and quite capable in the end of turning over the real controls of state to Beijing via Chinese-manipulated proxies in exchange for the elite families' long-term welfare. Consequently, I'm sorry to conclude, the eventual reunification of the nation may have already slipped from the Koreas' hands.

From the foreign investor's perspective, there is increasingly smaller chance of chaos from intra-Korean reunification damaging one's investment. Should North Korea suddenly implode, the Chinese have indicated in private circles that if called upon by Pyongyang, they would assist the North Koreans, but only with multinational permission, such as from the United Nations or possibly by members of the six-party talks. This is reasonable and may be expected.

The open question is what the Chinese might do if they were denied international approval. Some Korea watchers suspect the Chinese would move south, if only because they may feel they would have no other practical option, given the spreading chaos on their lightly defended border.

What is most likely not to happen would be the South Koreans moving northward given the chances for initial misunderstanding by the North Korean Army and the certainty of taking on North Korea's recovery that would cause both Korean economies to quickly nosedive for years ― and probably for decades. The U.S., of course, has no stomach for an optional escapade into North Korea that may escalate into a major clash with China. And that brings us back to the Chinese solution ― whether we like it or not.

Moving on to the more certain of these two major political risks, let's look at South Korean nationalism. We deal with this subject in our book, Mastering Korean Business, but one need look no further than recent newspapers.

Just a few weeks ago, Lone Star was delivered a setback on its plans to sell its shares of Korea Exchange Bank to HSB when its local office chief was found guilty of manipulating the share price of KEB's card affiliate in 2003. Given the presented evidence in court, I understand that the Texas company's legal team had been understandably confident of an acquittal. This is not to say with all the smoke there was no fire, but more likely the flames came from outside of the accused party's control ― not from Lone Star. But it didn't matter. The Korean public wanted ― and finally got ― a guilty verdict.

While many Koreans, who have not bothered to look into this case, may be pretty satisfied with that ruling, the court's decision may have sent another shiver through potential foreign direct investors.

Ultra-nationalism can be strong. As the nation's economy continues to improve, there is a growing sense of nationalism, which may also be a latent legacy of President Park Chung Hee's infusion of positive thinking and somewhat chauvinistic sentiments. More recently with the Kim Dae-jung, and most specifically by the Roh Moo-hyun, governments, populism has become a key element with a strong element of ``minjok-jui'' ― which literally means ``racism,'' but actually is something more along the lines as the Spanish word ``la raza'' or prideful recognition of a common ethnicity. The good news is Korean consumers generally associate foreign-origin brands with quality. Even though nationalistic sentiment may indicate otherwise, nowhere is Korean preference for things foreign more evident than in consumer behavior or buying habits. Consumer preference for value seems to transcend ideology everywhere. In reaction to this trend, some consumer activists have attempted to discourage the purchase of foreign-brand products, alleging that high royalties have to be paid to foreign licensers for using their brands on local products of the same quality as foreign brands.

The general perception of foreign companies in Korea among ordinary consumers is rather favorable, again relating to their quality goods and services, as well as with the impression that foreign firms generally provide better working conditions for local employees. Examples of the success of some foreign consumer companies' assimilation in the local market have definitely helped in this direction.

What that means is that if a foreign company's products already carry a strong, well-recognized brand, the foreign company may have a major advantage in establishing a coherent image vis-a-vis the local competition so long as that image is not inadvertently inappropriate with Korean culture.

Regardless of potential foreign brand advantage, it is highly prudent for foreign business professionals to be aware of nationalist sensitivities. As I have pointed out in previous columns, the Prosecutor's Office often reacts to general public sentiment in its effort to be of service to the common sense of justice. Consequently, if the uninformed media take a wrong cue about a foreign company, the situation can spiral downwards into an investigation by the Prosecutor's Office. More than most markets, it is essential to have an effective public relations component within one's Korean operations.

Lone Star, for example, is currently employing a well regarded public relations firm, but had there been similarly effective public relations on the part of Korea Exchange Bank prior to its sale to Lone Star, one may argue much of today's pain could have been minimized if not avoided.

In short, Korea is an underrated market compared to its neighbors. But like anywhere, one needs to have a handle on the risks.

Errata: In my last column, I suggested that one may do well not to engage lawyers in one's government relations strategies. I was soon thereafter notified by my attorney friends of the Attorneys' Act, which reserves to attorneys alone the right to interface with the government on behalf of a third party, when such activity is undertaken for a fee. So, technically, lobbying is restricted by Korean law to attorneys only. Some non-lawyers who offer ``government relations'' consulting may in fact be likely violating the Attorneys' Act. The true professional consultants, as a matter of routine, work with attorneys.

Tom Coyner is president of Soft Landing Korea, a consulting company focusing on sales and human resources issues. He is co-author of Mastering Business in Korea: A Practical Guide.