South Korea: Government and business associations

In politics, as in economic life, South Korea has more closely fit the “strong state” model, in which the government has tended to outweigh particular social or group interests. Nonetheless, the balance between the government and various interest groups showed some dramatic changes in the late 1980s; as the 1990s began, observers found it likely that such changes would continue, despite efforts by the government to retain its traditionally strong position.

During most of the post war period, the South Korean government had encouraged organizations for the communication of economic interests, but had not encouraged professional or occupational interest groups to voice political demands. Independent or unsanctioned interest groups had come into existence from time to time to challenge fundamental policies of the government. In the late 1980s, such challenges accounted for a sizable proportion of extra governmental political activity.

The relationship between government and business associations in South Korea had its roots in the period of Japanese colonial rule, when the governor general established the Seoul Chamber of Commerce and Industry and other industrial associations as a means of communicating economic policies to the business community. Since 1952 all businesses were required by South Korean law to belong to the Korean Chamber of Commerce and Industry, the bylaws and initial membership of which closely paralleled those of the Seoul Chamber of Commerce and Industry of the colonial period. Since 1961, when the Park government began its economic development plans, the Federation of Korean Industry has represented the major conglomerates. A larger organization, the Federation of Small and Medium Industries, has had much less influence.

The government recognizes only a single association as the representative of that industry. Major business leaders may have individual access to administrators through personal ties and might be able to influence the government in minor ways, such as obtaining exemptions from specific taxes. For the most part, however, business associations through the 1980s were dominated by the government. As noted by one specialist, “it is through industry associations that the Korean government implements its policies, enforces routine compliance, gathers information, and monitors performance.” In the 1980s, this process was sometimes facilitated by the placement of retiring senior military or national security officials in industry association positions.

Institutional changes and pressures toward open markets began to change the traditional government-business relationship in the mid- and late 1980s. Larger corporations became interested in having a role in policy formulation more commensurate with their contribution to more than two decades of economic growth. This interest took several forms, including substantial corporate contributions to all major political parties during elections. As economic ministries grew in influence within a more decentralized economic planning structure in the 1980s, the related industry associations, just as in Japan and the United States, gained a greater voice.

Growing liberalization of the domestic market under foreign pressure also led to greater friction between the interests of specific economic sectors and the need of the government to satisfy its foreign critics or risk a loss of access to vital foreign markets. As the 1990s began, these frictions seemed likely to continue and to lead eventually to further readjustments.

In general, the higher-paid professions establish and administer their own associations and cooperate closely with the appropriate government ministries, but receive no government support. These associations are chiefly concerned with maintaining standards and the economic status of the professions concerned and have been traditionally regarded by the government as politically safe. The major exception has been the Korean Bar Association, which became increasingly outspoken on human rights and related legal issues in the 1970s and 1980s.

The government has attempted to keep tight controls on the intellectual professions, sponsoring the formation of the Korean Federation of Education Associations and the Federation of Artistic and Cultural Organizations of Korea. Membership in the Korean Federation of Education Associations was compulsory for all teachers through high-school level. Members of these umbrella groups received significant medical benefits, and they tended to avoid political controversy. The Korean Newspaper Association and Korean Newspaper Editors’ Association were politically cautious during the early 1980s, but became much less constrained during the early years of Roh’s rule.

The government has been especially sensitive about unauthorized professional associations among teachers. Many teachers, and some opposition political leaders, have been determined to reduce the state’s control over the political views of teachers and the content of education. In early 1989, President Roh vetoed an opposition-sponsored amendment to the Education Law that would have allowed teachers to form independent unions. In spite of the president’s veto, activist leftist teachers–numbering about 10 percent of the nation’s primary through high-school faculties–announced their intention to form such a union.

The National Teachers Union (Chon’gyojo), inaugurated in late May 1989, criticized the Korean Federation of Education Associations as pro government and weak in protecting teachers’ rights. The Ministry of Education responded by dismissing more than 1,000 members of the new union in the spring and summer of 1989, resulting in the eventual withdrawal of more than 10,000 additional teachers. The Agency for National Security Planning conducted a well-publicized investigation into the union’s ideology, with the implication that members could be charged with aiding an anti state organization under the National Security Act. Police broke up pro-National Teachers Union rallies; members participating in a signature-gathering campaign to support the union were charged with traffic violations. Eventually, several teachers’ union leaders received prison terms on various charges. The Ministry of Education produced new guidelines that permitted teachers’ colleges to deny admission to students with activist records and that allowed district education boards to screen out “security risks” when testing candidates for employment. These measures effectively halted the activities of the National Teachers Union.

The modern Korean labour movement, including unions of skilled and unskilled workers, dates to the first decade of Japanese colonial rule. South Korean law and constitutions since 1948 have recognized the “three rights” of labour: the right to organize, the right to bargain collectively, and the right to take collective action. In practice, however, the government has consistently attempted to control labour and mitigate the effects of unionism through the use of a variety of legal and customary devices, including company-supported unions, prohibitions against political activities by unions, binding arbitration of disputes in public interest industries, which include 70 percent of all organized labour, and the requirement that all unions be affiliated with one of the seventeen government-sponsored industrial unions and with a general coordinating body, the Federation of Korean Trade Unions (FKTU). In the 1980s, large companies, often supported by the police and intelligence agencies of the government, also exerted pressure on unions to prevent strikes, to undermine the development of white-collar unions, to retain control of union leaders, and to prevent persons with some college education from attempting to organize workers by taking positions as industrial labourers.

Despite such measures, the government has never exercised total control of the labour movement. Even the Federation of Korean Trade Unions occasionally has been able to file administrative suits against government rulings or to lobby– sometimes successfully–against laws that would have a negative impact on working conditions or rights of unions. Through most of its existence, however, the federation has been able to do little beyond submit proposals for legal reform to the government. Throughout the post-war period, dissenting labour organizations have either attempted to function apart from the government- sanctioned structure under the Federation of Korean Trade Unions, or have formed rival umbrella organizations, such as the National Council of Trade Unions, established in 1958.

South Korea experienced an explosion of labour disputes from 1987 through 1989 under the more open political conditions following the crisis of late June 1987 and the pressures created by long-deferred improvements in wages and working conditions. More than 3,500 labour disputes occurred from August through November 1987. Most were quickly resolved by negotiated wage increases and by the prospect that another common demand–freer scope for union activities–would be met in forthcoming legislation. In 1988 labour-related laws were amended to make it easier to establish labour unions and to reduce government intervention in labour disputes. Unions were still prohibited, however, from articulating any demands that the government interpreted as political in nature.

In 1988 the number of unions increased from 4,000 to more than 5,700. This figure included numerous new white-collar unions formed at research institutes, in the media, and within the larger corporations.

There was a general privatization of labour-management conflict during 1988 and 1989 as the government adopted a more neutral, hands-off stance. Companies experimented widely with tactics such as lockouts (5 in 1987; 224 in 1988), and labour unions achieved new levels of joint action by workers in different regions and industries.

The government’s ability to manage organized labour through the traditional means of controlling the FKTU declined. The FKTU, under criticism for the many years it represented the government more than labour, also began to take a more independent posture as the 1980s came to a close. In 1989 the once-docile umbrella organization prepared to sponsor union candidates in anticipated local elections (an illegal activity under existing law) and held education seminars and rallies to press for “economic democracy” through revision of labour laws and other reforms. Notwithstanding the increasing ability of labour to organize and to present economic demands, however, the government continued to suppress leftist labour groups that appeared to have broad political goals or that questioned the legitimacy of the government, such as the National Council of Labour Unions (Chonnohyop), which was formally established in early 1990.

In early 1990, the government announced new measures to support its return to more restrictive policies governing strikes. The number of intelligence agents at key industries was more than doubled (from 163 to 337) and a special riot police task force–sixty-three companies in strength–was deployed against “illegal” strikes.

Although most South Korean farmers continued to belong to cooperatives, two pressures converged in the late 1980s to change the way in which farmers’ interests were represented. First, as rural-urban income disparities grew in the late 1970s and 1980s, farmer dissatisfaction with the government cooperatives’ role in setting crop prices and the costs of agricultural supplies also increased. Some farmers turned to independent organizations, such as the Korean Catholic Farmers Association or the Christian Farmers Association. These groups, which were viewed as dissident organizations by the government, performed a variety of services for farmers and also took public positions on government agricultural and price policies, sometimes using mass rallies. The second change, which affected larger numbers of farmers, was the result of South Korea’s growing trade surpluses in the late 1980s. As the government responded to pressure from major trading partners, such as the United States, to open South Korea’s domestic markets, farmers became increasingly active in large-scale protest rallies against both the government and the major political parties. As the 1990s began, it was clear that the traditional harmony of political interests between a conservative rural population and conservative governments had ended.

Answer 2.

Since the late 20th century, one of the most dynamic objectives of the Korean economy has been the emergence of South Korea (Republic of Korea or ROK) as a major player in the North-east Asian market through foreign direct investment (FDI)-driven globalization. With this goal set as a policy focus, the Korean government has sought to become a prime location for foreign investors. During the four-year period after the financial crisis (1998 to 2001), Korea attracted about $52 billion in FDI, which is nearly double the entire amount of the previous four decades.

More recently, while the total inward FDI during the period of 1962 to 1997 was minimal, total FDI during the eight-year period of 1998 to 2005 alone tallied about $91 billion on a notification basis. This is nearly quadruple the $25 billion posted during the

previous thirty-five years, or about 79 percent of the $115-billion aggregate FDI figure recorded from 1962 to 2005.

In the case of Korea, only after reaching the brink of default in late December 1997 did it realize that foreign borrowing, particularly of the short-term variety, carries substantial risks and that FDI encompasses a variety of benefits including a stabilizing function against the uncertainty of imminent financial panic. The combination of sweeping liberalization measures and pro-FDI institutional reforms designed to lure foreign investors enabled Korea to record a dramatic increase in inward FDI after 1997. While the amount of total inward FDI

from 1962 to 1997 was minimal, total FDI during the following eight-year period (1998-2005) alone tallied about $91 billion on a notification basis, which is nearly quadruple the $25 billion posted during the previous thirty-five years or about 79 percent of the $115-billion aggregate FDI figure recorded from 1962 to 2005.

By the end of 2000, Korea had posted an annual record of $15.2 billion in FDI (notification

basis), with a cumulative total of 9,403 foreign-invested companies. Such a sharp increase in inbound FDI corresponds with a rise in foreign investor confidence in Korea. According to the UNCTAD’s World Investment Report 2002, in 2000, Korea ranked eighteenth in the world and third in Asia in terms of FDI inflows, up from thirty-second and eighth place, respectively, in 1997.

In 2004, the downward trend in FDI inflows since 1999 was sharply reversed. On a notification basis, total FDI performance in 2004 reached $12.8 billion, a whopping increase of 97.4 percent compared to $6.5 billion in 2003. But 2005 saw a decline of nearly 10 percent in FDI inflows into Korea, amounting to $11.6 billion ($7.2 billion, according to UNCTAD data), stemming from tightened tax rules and anti-foreign capital sentiments in Korea. In 2005, in terms of FDI inflows, Korea ranked twenty-fifth in the world and sixth in Asia.

The number of foreign-invested companies increased, however, by about 3.3 times, from 4,419 companies in 1997 to 14,720 companies in 2005, which included about 53 percent (264 firms) of the Fortune Global 500 (as of 2005 year end) and all of the world’s top twenty corporations such as Exxon-Mobil, General Motors, BP, and General Electric.

Despite FDI having increased significantly since 1997 (at least up to the year 2000), Korea has not attracted a large amount of FDI relative to the size of its economy. Although the ratio of inward FDI stocks to gross domestic product (GDP), according to the UNCTAD’s World Investment Report 2006, surged to 8 percent in 2005, up from 3.5 percent in 1997 (based on Korean data, as shown in, the ratio of inward FDI stocks to GDP climbed from 3.2 percent in 1997 to 9.6 percent in 2005), it was still far below that of China (14.3 percent), Malaysia (36.5 percent), and Singapore (158.6 percent), as well as below the average of developing economies (27.0 percent) and the world average (22.7 percent). Korea’s comparatively lackluster efforts to induce FDI are evidenced further by UNCTAD’s analysis. By ranking countries in terms of attracting inward FDI and their potential in that respect, UNCTAD finds Korea belonging to the group of economies that are performing below their potential. While Korea was one of the leaders in the potential index (seventeenth place) in 2004, it was a laggard in the performance index (114th place), down from nine-ty-third in 2000, indicating that Korea has failed to lure greater amounts of FDI despite its physical as well as non-physical resource bases.12 Among the clear reasons for such poor performance are policy failures, excessive regulations, anti-business sentiment, and Korea’s deep-rooted anti-foreign ethos.

The market for excavators accounts for one third of the total world market for construction equipment. Samsung’s broad range of excavators will represent a significant contribution to VCE’s existing product program. Samsung manufactures some ten different types of excavators, mostly in the 7-28 ton category.

The acquisition will also give VCE access to an industrial structure in Asia and an efficient distribution network in South Korea, a significant market for construction equipment in Asia. The acquisition will also strengthen Volvo Construction Equipment’s presence in East Asia and provide opportunities to increase market shares in the company’s other product areas, such as wheel loaders, graders and articulated haulers.

“This transaction is an important part of Volvo’s growth strategy in the construction equipment business area. It represents a significant and essential strengthening of our product program and industrial structure. Volvo’s position will be reinforced considerably in a very competitive industry,” says Leif Johansson, Volvo’s President and Chief Executive Officer.

In addition to a production facility, with a capacity of about 10,000 machines annually, the acquisition will include significant capability for product development, sourcing, and market support. The operations to be acquired also include small-scale production of wheel loaders, cranes and other equipment. Samsung Heavy Industries’ business area for forklift-trucks is not included in the acquisition.

Samsung’s construction equipment business, formed in 1983, has approximately 2,000 employees in South Korea, most of whom are in the 110,000 m2 plant in Changwon, in the southern part of the country. Sales of construction equipment totaled USD 728 M (WON/USD 952) in 1997, with excavators accounting for more than 70 percent. About 50 percent of total sales are in South Korea, where the company had a market share of around 35 percent in 1997. The company has its own sales organization in the domestic market and about 150 dealers for construction equipment in some 60 other countries.

“Our products and distribution networks complement each other very well and the transaction is of major importance for our volume growth and profitability,” says Tryggve Sthen, President of Volvo Construction Equipment, in a comment on the acquisition.

The deal with Samsung Heavy Industries means that Volvo Construction Equipment will acquire the assets in SHI’s construction equipment division for an estimated amount of USD 572 M, of which USD 107 M is goodwill. In addition, Volvo has undertaken, on behalf of SHI, to collect accounts receivable of an amount of approximately USD 150 M, which is not included in the amount stated above.

The integration of Samsung Construction Equipment with VCE should give rise to substantial synergies, both commercial as well as industrial. The acquisition has significant potential for rationalization, which together with such synergies, should provide substantially improved economies of scale. For implementation of initial structural changes, a provision of USD 115 M will be made in VCE’s accounts for the second quarter of 1998. For further structural changes, an additional provision of USD 80 M as goodwill will be made in the balance sheet. Excluding effects of restructuring costs, the impact on VCE’s results in 1998 is expected to be marginally negative.

Figures above are based on an agreed upon exchange rate of 1465 WON/USD.

The final price will be adjusted for the changes in the exchange rate and net assets at acquisition date.

The acquisition is subject to approval and permission from SHI’s shareholders and relevant government authorities in a number of respects.

Answer 3

With the outbreak of the Asian financial crisis, Korean authorities, as well as firms, had to change course. As far as FDI is concerned, the liberalization move, which was already under way, gained renewed momentum as of 1998, and FDI was prioritized as a key component of the country’s revival strategy. In the wake of the crisis, Korea was sorely in need of inflows of foreign capital, whether in the form of portfolio or FDI. As a result, the country resolutely embarked on an active FDI-promoting strategy. FDI is now clearly favoured over borrowing

because it provides a more stable way of financing development. In addition, it has been shown to lower the odds of currency crashes.

The Korean Government revised acts related to foreign investment and proposed a new Foreign Investment Promotion Act (in November 1998), which strongly emphasizes the liberalization of foreign investment, improvement of the investment incentive system, introduction of the ombudsman system, streamlining foreign investment notification procedure, and the establishment of one-stop service. The Korea Trade- Investment Promotion Agency (KOTRA) established the Korea Investment Service Center in July 1998, a one-stop service institution for foreign investors, which provides administrative support for investment as well as counselling services and post investment services. Virtually all business

sectors are now open to foreign investors and FDI is subject to no specific restrictions provided it does not violate national security, public health and conservation of the environment. Out of a total of 1,121 industries of activity under the Korea Standard Industry Classification, 63 including public administration, diplomatic affairs and national defence are closed to foreign investment. Out of the 1,058 business areas, which are subject to foreign investment, two remain prohibited (radio, television and satellite broadcasting) and 24 are partially open to foreign investment. Different degrees of limitation on foreign equity participation or the exclusion of some business lines to foreign investment are the most common types of restriction found in these partially opened business sectors.

While foreign investors and foreign-invested companies enjoy the same rights as local residents or locally-owned companies, unless otherwise legally specified, in some cases they enjoy even greater privileges in the form of tax incentives. Such is the case in particular, in the so-called FTZs. Gimpo, Songdo, and Youngjong Island have been given the status of such special economic zones. In July 2002, five additional special economic zones were created as part of a package of incentives to attract foreign companies to Korea.

Volvo Korea (a result of Sweden’s Volvo takeover of Samsung’s construction equipment

Divisi Zon in February 1998) is a good example where an MNC helped change the management system of a Korean firm. Under Volvo’s influence, the administrative process of the Korean subsidiary has been rationalized and transparency has been enhanced. Generally, changes in strategy from growth orientation to profit orientation can be observed under the pressure of foreign investors. Large firms are increasingly withdrawing from diversified activities, while they tend to focus on the business in which they have a competitive advantage. Changes of a similar nature can be observed in the financial sector. As a result of the change in the form of foreign involvement in the financial sector, foreigners are now participating actively in the management of banks, leading to substantial changes in lending practices in particular. The refusal of the new foreign management of Korea First Bank to participate in the government-organized bailout of Hyundai and other large Korean corporations in January 2001 may be seen as a promising development. Similarly, since the takeover by Germany’s Commerzbank, Korea Exchange Bank has reduced its exposure to high-risk corporate giants like Daewoo, improved its lending practices and strengthened the credit analysis by its staff. For more details on the impact of foreign involvement in the Korean banking and financial sectors

Answer 4.

One of the most revolutionary aspects of the Korean company since the 1997 Asian financial crisis is that Korea has emerged as a major recipient of foreign capital for both strategic and non-strategic industrial areas, ranging from consumer products to telecommunications. By 2001, more than 11,500 foreign firms had invested in Korea (Economist Intelligence Unit 2002: 8) and by 2000 more than 1,100 business sectors of Korea had been fully opened up to foreign investors (Economist Intelligence Unit 2002: 29). In particular, during the four-year period after the crisis (1998-2001), Korea has attracted around US$52 billion in FDI, which is almost more than double the entire amount of the previous four decades (Kim & Choo 2002: 30). Although Korea’s attractiveness of FDI relatve to its economy, which was 13% to Gross Domestic Product (GDP) in 2000, Korea’s recent inward FDI trend implies that the Korean market is rapidly changing and open to outsiders offering opportunities to maximize market benefit in Korea.

On the other hand, the Korean government has shown its ambition in recent years to level up the country’s economic status by setting up the new national agenda. In April 2002, the Korean government, then the Kim Dae-jung administration, unveiled its grand ambition to turn the nation into an international business hub of Northeast Asia. This master plan included establishment of the so-called “special economic zones” that consist of 132 sq km (40 million pyeong) of land encompassing Youngjong Island, Songdo New Town of Incheon and Gimpo to promote international business. This new vision by radically improving market environment (covering foreign investment, finance, logistics, information technology, manufacturing and research and development) is now listed as one of the new government’s (the Roh Moo-hyun administration, February 2003 – present) ten national agendas (Kim 2003: 17). In particular, Korea’s new President Roh has established a special task force team to develop and implement the new vision, specializing in three main specific sectors including logistics, finance and industry. The logistics dimension is considered to be crucial given Korea’s strategic and business location between Japan and China. The Roh administration has also promised to improve the business and operating environment for the multinational corporations (MNCs) through socioeconomic and institutional reforms such as labour market conditions, chaebol (mostly family-owned large industrial conglomerates), liberalization of immigration policy and tax benefits at the national level. In other words, tha attraction of MNCs has become one of the top priorities for the current Korean economy.

The main reason for not having a larger business presence in Korea is due to its long history of economic nationalism stimulated by negative experiences as a result of earlier interactions with foreign regimes. A strong belief in self-sufficiency has inevitably resulted in a tough business climate, seemingly especially hostile to foreign companies. Korea has always been for foreign companies a difficult market to set up and invest in. It has also been difficult to form joint ventures so it has not been an easy market.

It has been taken for granted that Korea’s economic policy over the last three decades has been strongly nationalistic. Prevailing perceptions are that there is chronic inefficiency and opaqueness in the Korean government and across society, difficulty in market access, unequal treatment in the domestic market, and relatively higher political and social instability than in other major Asian markets.

Laws and regulations are often generally framed. In particular, government’s current policy of frequent working-level post rotation (1 to 2 years) decreases the degree of expertise. The meaning of the law in practice thus depends on discretionary interpretations by working-level officials, thus increasing the opportunities for inconsistent application, discrimination and corruption. Working-level officials, particularly in divisions like Immigration and Taxation Departments, often rely on unpublished internal ministerial guidelines and unwritten administrative guidance in interpreting and administering the law. But one thing that differentiates Korea from the rest of the world is that the personal relationships are a little bit more effective in Korea. This is because relationships are much more formal in Korea. Over 60% of interviewees cited the exceptional nature and importance of networks that distinguish Korean business culture from other Asian countries. Those with experience of other major markets thought that the importance and intensity of networking exceeds both that of Japan, Hong Kong and other Asian countries. These networks incorporate school friends (secondary and tertiary) going back 40 to 50 years, the region from which people originate, particular universities and of course army friends. The following remarks made by a CEO of an MNC in Korea depicts the difficulty of doing business in Korea.