[Grand Prize] Fortress Korea: struggle with foreign investment
Hannah F. Nooney
Claremont McKenna College in California
Korea’s state developmental model, dubbed the Miracle on the Han, transformed a skeletal, starved Korean economy into a robust global player in a single generation. This purely Korean enterprise, made possible by the industriousness and ingenuity of its people, generated a historically unsurpassed sense of national pride and confidence.
During this period Korea was one of the world’s most impermeable markets, carefully guarded by the neo-mercantilist policies of its leaders. Amidst a global environment of deregulation and highly mobile capital, Korea has remained a bastion of protectionism.
While Korea’s cultural and economic history shed light on the status quo, the fact that the country continues to draw a relatively low level of foreign direct investment (FDI) is damaging in today’s competitive global markets. Fickle attitudes toward increasing FDI, derived from export-led state developmental growth, must be remedied if Korea intends to remain a strong global competitor.
Foreign investors clearly note their primary grievances: unclear regulations and endless red tape, a lack of transparency among the chaebol, militant labor unions, biased courts, and an illiquid debt market. Beyond these restrictions, Korea also lacks soft culture appeal: Seoul has not been able to achieve the same cosmopolitan attraction as East Asian hotspots like Hong Kong and Singapore.
Deeply instilled xenophobia presents another persistent obstacle that must be reconciled. Seoul will not be a first choice location in a global economy until it can enhance its allure to expatriates and match the level of convenience that other global business hubs provide.
Because Korea’s entire legal framework was created in the context of an export-led state development model, red tape and irregular loopholes remain when rapid economic change is met by hasty legislative measures.
Given inconsistent government action, initiative for structural change appears feeble. As societal pressures toward protectionism collide with increased openness, the government lacks the resolve to accept international standards.
While the business environment is more competitive and foreign investment has grown, corporate governance structures have not improved significantly: Korea is the only major economy in the world still dominated by opaque family controlled corporations. The market is riddled with ambiguities that few investors are eager to take on.
Korea’s official hub-based development strategy has yet to create substantial improvements. Foreign business executives are exasperated by ubiquitous suspicion of anything foreign while the government touts their acceptance of globalization, trying to convert Seoul into a global financial hub. While several state agencies are working to encourage an investor-friendly climate, the government simultaneously engages in activities that contradict the alleged commitment to change.
From overseas investors’ perspective, it sets a disconcerting precedent when the government will intervene in currency markets, ratchet up capital controls, pardon criminally convicted chaebol executives, and effectively nationalize the Korea Exchange. In the context of a purported quest for foreign investment, these are indicators of weak commitment to liberalization and only fair-weather cooperation with foreign enterprises.
The trifecta of systemic barriers, policy inconsistency, and lack of soft culture appeal can begin to be remedied by consistent policies and positive publicity on both the domestic and foreign front. The government needs to commit to deregulation, making a concerted effort to peel away red tape and increase transparency and accountability among the chaebol.
Labor union power must be diminished to allow for greater labor market flexibility, cutting down on exasperating clashes between workers and firms. Publicized union debacles, such as the current Standard Chartered First Bank strike, cast an embarrassing shadow over Korea’s external image. To achieve long run global competitiveness, Korea should pursue these strategies nationwide rather than in specific free economic zones.
Given the uneasy balance between interest groups and skeptical popular opinion, changes will not be politically popular and perhaps not even feasible in the immediate future. The public should be educated on the benefits of foreign presence in fostering positive competition, allowing for win-win situations between foreign and domestic firms, and creating other positive spillovers throughout the economy.
Carlos Ghosn’s successful transformation of an ailing Nissan in the early 2000s presents a clear example of how foreign leadership, introduced through a business alliance with French carmaker Renault, revitalized the weak Japanese firm with a fusion of Eastern and Western management strategies. Cross-cultural education is essential to fostering understanding between Koreans and foreigners.
Through changing macro-attitudes toward foreign economic presence in Korean society, the process will serve the dual purpose of breaking down more technical micro-barriers. The cycle will be self-perpetuating: as multinationals have positive business experiences in Korea, word-of-mouth will further contribute to a global reputation and vice-versa — as Korean companies highlight gains from interaction with foreign companies, this perception will become more common.
Gradually, through consistent policy improvements, educational measures, and positive feedback, Korea can gain the credibility it needs to facilitate vibrant global economic cooperation and investment rates on par with its economic stature.