South Korea: Country Attractiveness Report

FACULTY OF BUSINESS AND ECONOMICS KATHOLIEKE UNIVERSITEIT LEUVEN D0M19B - International Business Strategy SOUTH KOREA Shortened Country Attractiveness Report Antoine Hirschland Prof. Dr. Sleuwaegen Leo – 2010 – I. Introduction Thanks to the globalization, Asian economy is drawing more and more the attention of the rest of the world. Nevertheless, when we talk about economic growth in Asia, we think mostly about China, India or Japan whereas South Korean economy is staying quite unknown in Belgium.

However, since the war in the Korean peninsula and the formation of the Democratic People's Republic of Korea (North Korea) and the Republic of Korea (South Korea) in 1948, South Korea has becoming a major economic power. Indeed, South Korea ranked fifteens (in terms of GDP) among the best world’s economies and fourth among Asian economies in 2009.

To reach this, the Korean economy has experienced three development stages since the end of the Korean war: the economic autonomy increase from the ’50 to the ’60 in order to become less dependent on importations; the massive expansion of exportations during the ’70; the development of some industries form the ’70 until now to become one of the world leader in sectors like high technology, automotive, shipbuilding and steel industry. Furthermore, since the financial crisis of 1997, we can observe a decrease of the government intervention in the Korean economy and the development of a market-oriented economy.

But South Korea is currently facing important difficulties like the lack of raw materials, the small size of the country, the competition with Chinese and Japanese industries and the political and military issues with North Korea. The purpose of this paper is to study the economic attractiveness of South Korea based on the “Diamond Model” framework of Porter (1998). We will also examine the main industries, the balance of trade and the political and commercial risks of investing in South Korea. II. Main industries

Even if the largest and most known Korean companies around the world are producing goods (LG, Hyundai, etc. ), services represent the highest share of South Korean GDP with more than 55%. Almost all the rest of the GDP consist of manufacturing industry (around 40%), agriculture representing only 4% (mostly rice crops). It is also important to know that South Korea is the largest shipbuilder and the first producer of semi-conductor worldwide, and that the country has one of the largest automotive- and steel-industry. III. Balance of trade

South Korea has always been heavily dependent on international trade. In 2009, the country was the 8th largest exporter ($363 billion) and the 10th largest importer ($323 billion) worldwide and the trade surplus amounted to $40 billion. As we mention it in the introduction, South Korea is suffering heavily from the lack of raw materials. As a consequence, the largest share of the imports consists in mineral products -1- (33%). In total, imports amounted to more than 323 billion in 2009 and the most of those imports came from China (23,9%) followed by the United States (10,4%) and Japan (6,0%).

In 2009, Korean exports amounted to more than 43% the GDP, South Korea being the most dependent country on exports of the G-20 major economies. Electrical and electronic products represent the largest share of the exports (38%) followed by the sale of ships (14%). In recent years, chaebols (large industrial groups such as LG, Hyundai, Samsung, etc. ) have adopted a new export strategy aimed principally to emerging economies (South-East Asia, Africa and South America) at the expense of developed countries.

Indeed those markets are less saturated and Korean goods compete there better with North American and European products thanks to lower costs and the low purchasing power of those countries. IV. South Korean competitive advantage based on the Porter’s Diamond The “Diamond Model” framework developed by Michael Porter in his book The Competitive Advantage of Nations (1998) describes the reasons why a nation becomes competitive in particular industries.

This framework consists in four attributes that promote or hinder the creation of competitive advantage for this nation. Firm strategy, structure, and rivalry Factor Endowments Relating and supporting industries Demand conditions A. Factor endowments Factor endowments can relate to either basic- (natural resources, climate and location) or advanced factors (skilled labour, infrastructure and technological know-how). i. Basic factors South Korea’s basic factors are not especially advantageous in general.

Indeed, South Korea is characterized by a variety of different climates. Located in the monsoon region of East Asia, the country has warm and wet summers and dry and cold winters. On average, temperatures are equal to -10°C in winter and 30 to 35 degrees in summer. In June, July and August precipitations are more abundant. -2- Moreover, South Korea has no natural resource setting apart coal, tungsten and graphite. Finally, the location of the country can be considered both as a drawback and as an advantage. On the first hand, South Korea has borders nly with North Korea and crossing this one is almost impossible. On the other hand, South Korea is located in one of the most growing economic region in the world, just between China and Japan. ii. Advanced factors Those factors are a lot more advantageous. South Korea enjoys high quality infrastructures (communication, transportation, etc. ) to ensure the functioning of economic activity. According to the Global Competitive Report (GCR) 2010-2011, South Korean infrastructure ranks 12 among a total of 139 countries.

Regarding technologies, South Korean industry has always been a pioneer in the technological know-how which has allowed the country to become one of the most advanced countries in this field. Lastly, the education system has always been based on rigour and excellence (South Korean higher education and training ranked 15th in the GCR) that allowed the country to build up a high-skilled workforce. B. Demand conditions The Korean home demand is characterized by high buyer sophistication. Indeed, according to the GCR, South Korean buyer sophistication ranks 11.

This can be explained (in part) by the high level of education. Moreover, this sophisticated home demand means that consumers require products of high quality and influences positively the development of capabilities and pressures South Korean firms to be competitive and to innovate in order to respond to this demand. C. Firm strategy, structure, and rivalry The Korean industry organisation is characterized by the predominance of large groups (as LG, Hyundai, Samsung etc. ) called chaebols doing business in a large diversity of activities. The structure is therefore principally oligopolistic.

Currently, chaebols are responsible of the majority of Korean exportations. The Korean economic growth has therefore been mostly concentrated on the development of those -3- chaebols supported by financial institutions and the government at the expense of small and medium-sized enterprises. Even if the Korean market is defined by an oligopolistic structure (which normally does not promote rivalry), the global presence of the chaebols and the high competition in the global markets force the chaebols to innovate, to reduce cost or to improve quality.

Nowadays, as far as innovation is concerned, South Korea ranks 12 the GCR, meaning that Korean companies spend significantly on R. Finally, with regards to the Korean management style, firms are generally organized with a clear hierarchy where values like respect, perseverance or obedience are quiet significant. D. Relating and supporting industries Since the ’60, the South Korean government has always promoted the development of clusters specialized in the sectors of exports, heavy industries and high technologies.

This development has been supported by the high-quality infrastructures (transportation and communication). Moreover, the multiplicity of the chaebols’ activities has contributed to create international competitive and successful industries in South Korea. As a result of those government’s policies and the chaebols’ formation, South Korea rank quite high in the CGR: 33rd for its local supplier quality and 25th regarding its local supplier quantity and its cluster development. V. Business risks

The risks of investing in a foreign country are determined by both political and commercial factors. According to the Ducroire-Delcredere’s Country risks analysis, South Korea presents a political risk of 1 out of 7 (“1” meaning low risks) and a commercial risk of “A” (“A” meaning low risks, “C” meaning the highest). Nevertheless some specific risks can be pointed out. The major risk by which the Korean business environment could be affected by political forces is represented by the actual conflict with North Korea.

Recent military tensions between those two countries are indeed worldwide perceived as a threat to the region’s stability and making therefore investments in South Korea more risky. On political level, two other risks linked to the Korean government can also be identified. Firstly, the administrative bureaucracy seems to be inefficient to allow foreign investments. Secondly, in recent years, there has been an increase in corruption cases between politicians and some companies and we could think that in order to achieve a successful investment in South Korea, it seems quite important to have the favours of some government officials. 4- With regards to commercial risks, specific measures applied only to foreign investors can be considered as a risk in the sense that the Korean law is more restricting for foreign companies in general. Conclusions The Porter’s Diamond model applied to South Korea shows that despite the lack of raw material and its disadvantageous location, the country became the fifteenth world best economy in less than 60 years.

This success has been made possible thanks to the creation of large industrial groups (the chaebols), the development of the infrastructures, the politics to acquire the highest technological know-how, the emergence of a high-skilled workforce and the massive expansion of exports. Nevertheless, some barriers seem to restrict the development of foreign direct investment in South Korea. Among them are the fears caused by the tensions with North Korea, the corruption issues and the government inefficiency.

To conclude, it seems clear that South Korean economic attractiveness is high and that this country can represent a very interesting location for potential investors. List of references Ducroire-Delcredere SA. NV (2009). Political and Commercial Risks per country. http://www. delcredere. be/WebDucDel/Website. nsf/AllWeb/Korea+(South)? OpenDoc ument=1=en [24/11/10] KOTRA (2009). The Investment Environments of Major Asian Countries, Seoul, 176 p. http://www. scribd. com/doc/27330092/The-Investment-Environments-of-Major-AsianCountries [20/11/10] Ministry of Knowledge Economy (2009).

Investment Environment & Business Opportunities, Seoul, 40 p. http://www. Investkorea. com/ [20/11/10] OECD (2010). OECD Economic Surveys: Korea, 17 p. http://www. oecd. org/dataoecd/14/34/45432048. pdf [22/11/10] PricewaterhouseCooper (2009). Doing Business in Korea, 68 p. http://www. pwc. fr/assets/files/pdf/2010/07/coree/pwc_doing_biz_in_korea. pdf [24/11/10] Smart Export (2010), Market study: Rep. of Korea. http://www. smartexport. com/en/Rep. _of_Korea. html [21/11/10] Wikipedia (2010), South Korea. http://en. wikipedia. org/wiki/South_Korea#Economy