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