South Korea Investing Guide
Transcript of South Korea Investing Guide
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International Business Project
South Korea
November 2008
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South Korea
When looking to invest in a foreign country there are many aspects to consider. A
countries history, political framework, cultural uniqueness, financial environment, as well
as, other risk factors can influence investments and be the deciding factor that makes an
investment profitable or not. The country we decided to take a closer look at was South
Korea, also known as the Republic of Korea. With all the industries to choose from the
industry that intrigued us the most was shipbuilding, since South Korea is ranked #2
industry wide. Shipbuilding involves both the architecture of the ship and the
manufacturing of it. As already mentioned South Korea is an industry leader with over $
$$ sales in 2007. Based on this alone it is very impressive, but other risk factors needed
to be considered. Throughout the entirety of this paper these risk factors will be
evaluated and a quantitative model will also be included to explain our answer to the
question, Would you invest in this country?
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Section 1
Social and Cultural Environment
Section 1 includes an in depth evaluation of South Koreas social and cultural
environments. A persons social environment includes their living and working
conditions, income level, educational background, and the communities they are part
of. First off, South Korea is located in eastern Asia and is on the southern half of the
Korean Peninsula bordering the Sea of Japan and the Yellow Sea. The surrounding
waters have played an integral role in the lives of the Koreans since ancient times,
contributing to the early development of shipbuilding and navigational skills. During
certain times of the year the surrounding waters give threat of typhoons, but for the most
part the climate is temperate with rainfall heavier in the summer than in the winter. Other
environmental threats consist of air pollution in large cities, occasional acid rain, and
water pollution from the discharge of sewage and industrial effluents. The land itself is
considered to be 45% cultivatable with 2/3 of the country being mountainous with natural
resources consisting of coal, tungsten, graphite, molybdenum, and lead.
As for the Korean population, they are one of the most ethnically and
linguistically homogenous countries in the world. According to an estimate in July of
2008, the population totaled 48,379,392. In particular the median age for males is 35.5
years and for females is 37.9. South Korea is also experiencing a growth rate of 0.269%
in 2008. Throughout the country the population is Korean dominated with a small
Chinese population of about 20,000. Korean is the primary language of the country, but
English in addition to a little bit of Chinese is taught as a second tongue. In recent times,
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educational facilities have expanded enormously. The country itself spends 4.6 % of its
GDP on school expenditures, totaling roughly two hundred institutions of higher
education, about half of which are located in Seoul, the countries capital. These include
colleges and universities, graduate schools, junior colleges, and other specialized
institutions. On average males spend 18 years enrolling in educational programs and
women spend 15 years of their lives in schooling.
Religion is also a big part of the people and has had a significant influence on the
culture. The two major religions in South Korea are Buddhism and Christianity. Koreans
are proud that the Christian religion was not introduced by missionaries; rather it wasintroduced by a scholar who was baptized catholic in 1777 (Kiss, Bow, or Shake Hands).
On his return to South Korea Catholicism was introduced. Even though both of the
above religions are dominant, the religions that have had the most influence are
Confucianism, Shamanism, and Chon-do-gyo, which is a mixture of Buddhism,
Confucianism, and Taoism. Confucianism has contributed to the formation of Koreans
moral values and stresses to preserve harmony in the home by preserving certain
reciprocal responsibilities in relationships. Whatever their formal religion most Koreans
follow traditional shamanistic beliefs. These include the belief in spirits, the veneration
of ancestors, and the usefulness or fortune telling (Kiss, Bow, or Shake Hands).
The Korean way of living has been dependent on the surrounding waters. Fish
remains the chief source of protein in the Korean diet. The fishing waters off Korea are
among the best in the world. The long coastline and numerous islands, inlets, and reefs
provide excellent fishing grounds, and the presence of both warm and cold currents
attracts a great variety of species, including squid, anchovy, yellow corvina, hairtail,
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saury, pollack, flounder, cod, sandfish, herring, and mackerel (Columbia Gazetteer). In
addition to this seaweed is valuable, due to agar (a seaweed product) being an important
export. The deep-sea fishing industry is the Korean way of living and has greatly
expanded. Korean ships now range into the Atlantic and Arctic oceans. Almost all of the
deep-sea catch is canned and exported. In 1990 South Koreas fish catch was the seventh-
largest in the world (Columbia Gazetteer). The dependency on fish has had a positive
affect on the shipbuilding industry since so many ships are needed to navigate the seas.
In recent times though, agriculture has also expanded in effort to protect the fish
resources. Cattle, hogs, chickens, and other livestock are raised, but typically are notconsumed in the Korean diet. Agricultural products include rice, root crops, barley,
vegetables, fruit, cattle, pigs, chickens, milk, and eggs. Other industries that are a big
part of the Korean population are electronics, telecommunications, automobile
production, chemicals, and steel.
GDP has dipped in the early half of the last century, but has seen a steady growth
over the last couple of years. Between 2003 and 2007, growth moderated to about 4-5%
annually. A downturn in consumer spending was offset by rapid export growth. Moderate
inflation, low unemployment, and an export surplus in 2007 characterize this solid
economy, but inflation and unemployment are increasing in the face of rising oil prices
(CIA World Fact Book). According to a CIA estimate in 2007, the unemployment rate is
3.3%. In addition, the work force totals roughly 24.22 million, with 7.5% being
agriculture, 17.3% being industry related, and 75.2% being service related. From these
industries come Korean exports, such as semiconductors, wireless telecommunications
equipment, motor vehicles, computers, steel, ships, and petrochemicals. Imports consist
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of machinery, electronics and electronic equipment, oil, steel, transport equipment,
organic chemicals, and plastics.
Doing business in South Korea is much different from doing business in North
America. One difference to be aware of is the use of eye contact. In South Korea not
much eye contact is used when conversing about business. Koreans of equal status look
at each other about half of the time. Koreans of unequal status, differ in that the lower
ranking person will avert their eyes through much of the conversation. In South Korea
extended eye contact can be seen as being aggressive or angry. Another key tip is to
make sure you show respect to Korean supervisors. In order to do so, never put anythingon the managers desk because Korean executives are very territorial (Kiss, Bow, or
Shake Hands). Negotiations also differ when compared to the United States. When
negotiating in the states, it all comes down to the facts and providing support for those
facts, but in South Korea the truth is seen in a persons personal feelings. The use of
objective facts is becoming more common in negotiations.
In addition, it is very important to be punctual. Punctuality is expected from
foreigners as a sign of good business practice. Also it is key to develop a good
relationship with your contact because that contact is going to have to sell your proposal
to the entire company. Age and rank are very important in South Korea as well. If you
are attending a group meeting it is important to walk in order of importance with the most
important or highest ranking person walking in first and so on. When greeting Koreans,
men greet each other with a slight bow and sometimes an accompanying handshake while
maintaining eye contact. Women typically do not shake hands so dont try it. Also wait
to be introduced and avoid introducing yourself because it can be seen as rude. When
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addressing someone, address them by their title alone or by both their title and their
family name. A couple other tips that are useful are being sure to use proper gestures.
Physical contact is seen as inappropriate with older people, people of the opposite sex, or
people who are not good friends. Also feet are considered dirty and are not to touch any
objects besides the floor. Always be sure to keep your feet on the ground. Finally it is
considered tasteless to blow your nose in public. If you have to blow your nose excuse
yourself and blow it in private. As you can see doing business in South Korea is
completely different. If not aware of these tips, a business person can offend someone
and ruin the business trip, resulting in not getting additional business or possibly losing business that you may already have.
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Section 2
Financial and Economic Environments
After South Korea signed an armistice with North Korea in 1953, the nations
economy has grown rapidly at a rate almost 14 times that of North Korea (CIA World
Factbook). Currently, the nation has the 13 th largest economy, with a gross national
product of $25,000 per capita. Through economic policy changes and improvements in
labor relations, the nations GNP increased almost 250% from 1963 (US State
Department).
During the 1960s, President Park Chung Hee emphasized the nations economy
on exports and industries requiring high amounts of labor. Using debt to finance South
Koreas industrial breakthroughs, the country was able to develop credit for businesses
while providing an investor-friendly economy. Throughout the decade, President Hee
reformed the nations currency, while strengthening financial institutions (US State
Department). South Korea began focusing its fiscal policies on heavy and chemical
industries, consumer electronics and automobiles during the 1970s. Currently, South
Korea is working towards a more market-oriented economy with the assistance of the
International Monetary Fund. After the Asian market crisis in 1997, South Korea saw its
GDP grow between 7% and 10% between 1999 and 2002. Growth rates remain around at
least 4% (US State Department).
The economy is currently being influenced by an aging population, as well as
labor management issues and underdeveloped financial markets. The nation is concerned
with a decreasing foreign direct investment, as nations are investing in China and other
low-wage Asian countries. President Lee-Myung-bak is working on tax reforms,
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increased FDI, and new free trade agreements to stabilize and grow the South Korean
economy.
South Korea has seen healthy growth of its gross domestic product during the past
several years. Currently, the nations GDP is at $1.2 trillion, with growth at 5% during
2007. Between 2004 and 2007, South Koreas GDP has been growing at 4-5% annually.
A significant amount of the nations GDP is comprised of services and industry, at 58%
and 39% respectively (CIA World Factbook). The other 3% of the nations GDP
represents agriculture, which focuses on farming, as well as forestry and fisheries. South
Korea cultivates products such as rice, barley, vegetables, and fruits, while raising pigs,chickens, and cattle. The nation has significant natural resources, including coal,
tungsten, and graphite. With significant water resources, the country can develop
hydroelectric power to energize its citizens. South Koreas industries are comprised of
electronics, telecommunications, shipbuilding, auto manufacturing, mining and
petrochemicals (US State Department).
2007 EconomicIndicators
South Korea United States South Korea Rank
Gross Domestic Product $1.206 trillion $13.78 trillion 16
GDP real growth rate 5% 2% 114
GDP per capita $20,015 $45,800 52Consumer Price Index 2.5% 2.9% 63
Exports $379 million $1.148 trillion 12Imports $349.6 million $1.968 trillion 14
Population 48,379,392 303,824,640 27Exchange Rate $1 USD = 929.2 KRW $1 USD = $1 USD n/a
FDI Inflows $119.6 billion $2.093 trillion 24FDI Outflows $82.1 billion $2.791 trillion 26
Reserves of ForeignExchange and Gold
$262.2 billion $70.57 billion 6
Budget Revenues $262.2 billion $2.568 trillion n/aBudget Expenses $225.8 billion $2.73 trillion n/aLabor Workforce 24.22 million 153.1 million 24
Unemployment Rate 3.3% 4.6% 38
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The gross domestic product per capita for the citizens of South Korea is about
$20,000. This amount pales to that of the United States, which is over $45,000. The
nation has a modest rank among other countries at 52. South Koreas GDP per capita is
equal to that of developing European nations (Forbes Magazine). During the 1980s and
1990s, the South Korean government focused on directed credit and import restrictions,
which promoted national growth within the nation. The country focused on certain
industries, promoting growth within electronics and telecommunications industries. The
government encouraged savings and investment from its citizens.
After the financial crisis between 1997 and 1999, South Koreas financialinstabilities were exposed. To reform the economy, monetary policy was tightened, with
interest rates reaching a high of 20 percent. The public sector was trimmed, as the
government budget was held to a 3.8 percent rate of growth. Minimum standards were
established for banks, and those that failed to meet them were closed. Banks are
nationalized, but until the late 1990s, South Korea began privatizing banks (Library of
Congress). Overnight rates for banks are at 3.5%. GDP per capita began to grow again
once consumer spending and exports increased. New real estate policies made owning
property easier, while labor laws were relaxed. This produced a low unemployment rate,
moderate growth, and an export surplus, allowing the GDP to grow and provide a
wealthier lifestyle for its citizens (Forbes). Foreign reserves, which at one point during
the crisis fell to US$8.9 billion, now exceed liabilities at US$174.5 billion, making South
Korea the fourth largest holder of foreign reserves in the world (Library of Congress).
During the 1980s, the GDP per capita was around 1700, and then in the 1990s, it rose to
almost 8000. Since then, it has expanded quickly, until it decreased slightly during 2008.
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This is most likely due to the credit crisis, which the nation is currently struggling to
maintain.
Before the credit crisis of 2008, South Korea had the sixth highest amount of reserves in
the world at $262 billion. The country had a lot of money to finance its economy,
including financial institutions and government projects, while keeping its exchange rate
steady. Currently, the nation is engulfed in another financial crisis, and reserves have
fallen more than $22 billion since the beginning of the year (UPI Asia). Foreign reserves
were used to inject money into the swap market in order to stabilize the Korean market
and help the struggling Korean won. This action has led to significant inflation, causing
the price of energy imports to rise dramatically. The government plans to inject another
$10 billion into the currency swap market, and another $5 billion into national banks
(UPI Asia). Fortunately for South Korea, there are significant reserves available to help
strengthen the nations currency, while helping financial institutions weather the current
credit crisis.
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Over the past year, the Korean won has become very unstable, due to the global
credit crisis. Asian markets have been hit significantly, as financial institutions have
heavy amounts of debt invested in the United States. During January 2007, 1 US dollar =
925 Korean won (KRW). Now, the currency trades at 1 USD = 1300 KRW. Though the
currency is fluctuating dramatically, and inflation rates are increasing, Koreas excessive
reserves allow the government to provide capital as needed. Due to the economic
policies of the 1980s, which encouraged saving and investing, the nation now has money
to fix its current crisis. The nation must be able to stabilize its currency in order to
stabilize its economy. South Koreas short-term foreign debt has been increasing, and
economists worry that its debt will outweigh its credit (UPI Asia). If the nation can
control its currency and slow its credit crisis quickly, it will not have to utilize as much of
its reserves, and begin to focus on growth and expansion of its economy.
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Since the fall of 2003, the Korean won has gradually strengthened against the US
dollar. Much of this is due to the new foreign exchange policies introduced during the
summer of 2005. Non-financial institutions were able to increase investments in foreign
financial institutions from $1 million to $3 million. Real estate regulations were relaxed,
and investors could purchase foreign real estate without clearing it with the Bank of
Korea. Investments in won backed securities by foreign investors were increased by 5
billion won to 10 billion won (International Financial Law Review). Other limitations
were relaxed, allowing foreigners to invest more heavily in the Korea won, strengthening
the currency until the rise of the credit crisis. Certain types of transactions must still be
reported, preventing manipulation within the banking sector.
Three financial development institutions supplied credit for business and
government projects for South Korea. The Export-Import Bank of Korea extended
medium- and long-term credit to both suppliers and buyers to facilitate exports of capital
goods and services, major resources development, and overseas investment. This allowed
small and large businesses to fund projects, utilizing the currency available and
strengthening its value. The Korea Development Bank, which was the government's
shareholder in state-run enterprises, raised funds from the government as well as from
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international financial institutions and foreign banks to fund key industries and
infrastructure projects. The Korea Long-Term Credit Bank financed equipment
investment. All of these institutions produced methods for domestic and foreign nations
to invest in the nation, while purchasing more Korean won to fund their projects (US
Library of Congress).
Under the Foreign Exchange Transaction Laws, if the South Korean government
determines that certain emergencies arise, it may impose any necessary restrictions to
correct its markets. This would include requiring foreign investors to obtain prior
approval from the Minister of Finance and Economy for the acquisition of Koreansecurities or for the repatriation of interest, dividends or sales proceeds arising from
Korean securities or from disposition of such securities (Korea Law). Emergencies
within the system may include sudden fluctuations in interest rates or disturbances within
the economic markets.
South Korea is currently negotiating with the United States to open up a free trade
agreement between the two nations. Talks have been breaking down due to issues over
beef, pharmaceuticals and anti-dumping laws (YaleGlobal). South Korea is very
protective of its economy, and does not want other nations to manipulate its economy,
bringing a decrease to its investment value. South Korea has free trade agreements in
negotiation or completed with the European Union, as well as other Asian nations.
As a developing nation, South Korea has a lot of leverage, allowing it to create
bilateral trade agreements with nations that will help expand its economy. South Korea
has a strong trade agreement with North Korea, where trade reached $1.8 billion in 2007
(US State Department). 60% of all transactions are commercially-based, while another
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significant amount is from South Korean humanitarian assistance to North Korea. In
2007, both countries reconnected their east and west coast railroads, and began cross-
border transportation services in December 2007. South Korean firms currently employ
33,000 North Korean workers, and hope to increase that figure to 300,000 by 2012 (US
State Department).
Between 2002 and 2006, imports and exports increased by 100% (Industry Canada).
Imports and exports have moved in tandem with each other, as more investors infuse
capital into the country. The nations largest trading partners are China and the United
States, followed by smaller markets with Hong Kong and Japan. As the nation finalizes
more trade agreements, foreign capital will become easier to attract. More electronics,
automobiles and ships will be purchased from the nation, expanding the economy even
further.
Since South Korea exports more goods than it exports, it is not as reliant among
other economies to serve its citizens. With the bargaining power it has due to its status as
a developing nation, along with relaxing monetary and investment policies, South Korea
is in a position expand its foreign relations. The nation is one of the worlds largest
manufacturers of ships, which are utilized for military purposes as well as trade purposes.
With the ability to develop cheap, quality electronics, countries such as the United States
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and the European Union are reliant on South Korea for chips and small electronic
components. Though foreign direct investment has decreased over the past several
years, the new president of South Korea is working to reform the economy to increase
foreign investments. Foreign direct investment is equal to more than 10% of the nations
GDP (Library of Congress). Concerns about corruption, political stability, and
unfavorable trade practices continue to limit the scope and extent of foreign investment
(Library of Congress). Asia remains a strong market for investment; South Koreas
market policies should be sustainable, while expanding the overall economy of the nation
and the continent. However, concerns about corruption, political stability, andunfavorable trade practices continue to limit the scope and extent of foreign investment
(US Library of Congress).
Population rates have remained steady in South Korea, as the population remains
at around 48 million people. Though the population pales in comparison to the United
States, the nation has the 26 th largest population in the world. Birth rates have remained
steady, while the citizens are forced to expand vertically. Citizens live in high rise
buildings where cities remain crowded and overflowing. The unemployment rate has
also remained steady, as nations continue to invest capital into South Korea and jobs are
plentiful. Due to the strengthening Korean won, inflation slightly decreased between
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2005 and 2007, allowing consumers to gain more purchasing power. Imports have
become cheaper to purchase until recently, when the Won dropped significantly in value.
Inflation has increased, and imports are becoming more costly for consumers.
In 2007, the labor force in South Korea was more than 23 million people. 70
percent of the workforce is employed in the service businesses, 20 percent are employed
in industry, and 10 percent are in agriculture. Unemployment rates are at 3.1% as of
2007, which have dropped from as high as 6.8% in 1998 (Library of Congress). As of
2003, minimum wage levels were at $2.09 USD, with companies with less than 10
employees exempt from minimum wage laws. According to the Mististry of Health, 3%of the population lives below the poverty level, while 7 percent are very close to poverty.
There are more than 6500 unions which represent 11% of the workforce. Industrial trade
unions are broken up into two national federations: the Federation of Korean Trade
Unions and the Korean Confederation of Trade Unions. In the past, the South Korean
government has come under criticism for arresting and imprisoning union leaders for
obstructing business.
Quality of LifeVariable
South Korea United States South Korea Rank
Life Expectancy 78.64 years 78.14 40Literacy Rate 97.9% 99% n/aSchool LifeExpectancy
17 years 16 years n/a
Landline Telephones 23.9 million 163.2 million 13Mobile Phones 43.5 million 255 million 21
Internet Users 35.59 million 223 million 10Television stations 43 2,218 n/aAirports 105 14,947 59Roadways 102,062 km 6,465,799 km 42
The quality of life in South Korea is comparable to that of the United States. Life
expectancy rates are slightly higher than that of the United States. Education rates in
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South Korea extend, on average, to 17 years for students. In South Korea, it is expected
for students to have extended educations, as many students continue their education past
undergraduate colleges. Educational credentials and where students attended college are
far more important to the success of students than personality and skills. The pressures
on students are so high that depression and suicide are common throughout the nation.
Due to these academic pressures for success, suicide is the second-highest cause of death
in the country. These pressures are much larger than in the United States, where though
students are expected to enroll in undergraduate colleges, it is more important for
students to develop skills while in college in order to succeed.In South Korea, more than 43 million cell phones are in use. Similar to the
United States, citizens rely more on mobile phones than landline telephones. As of 2007,
South Korea ranked 13 th in the world in terms of number of landline phones, but lagged
behind 20 countries with the number of mobile phones in use. Internet usage in South
Korea is very high, with almost as many internet users as mobile phones in the nation.
South Koreans rank 10 th highest in terms internet usage. The country has significantly
few television stations than the United States, mainly due to the different lifestyles that
South Koreans live. There are currently more than 60 million television sets in South
Korea. Due to the small size of South Korea, the nation is limited to the number of
airports and roadways. The number of airports available for commercial and residential
use is very excessive due to the small area of South Korea, yet provides many
opportunities for the nation.
The South Korean shipbuilding industry is one of the largest in the world, with 6
of the 10 top shipyards located in the country. The nation built more than 40% of all
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ships in 2006, and is fully booked with orders through 2010 (BusinessWeek). The three
largest shipbuilders in the world are located in South Korea, including Hyundai Heavy
Industries, Samsung and Daewoo. 80% of liquefied gas carriers are made by Korean
companies, the most sophisticated type of ship built (BusinessWeek).
Recently, the industry has been threatened by Chinese shipbuilders. During the
first quarter of 2007, Chinese businesses accounted for more than 55% of new contracts,
while South Korea only signed 27% of the total contracts. Currently, South Korean
companies have 1200 orders waiting to be fulfilled due to heavy demand since 2002.
These orders account for $100 billion, a significant inventory during this part of thecyclical industry. Profits for Korean shipbuilders are expected to continuously rise, as
demand continues to increase (BusinessWeek). Profits for the largest companies have
doubled from 2002 to 2005, while Hyundai quadrupled its profits in 2006. The industry
took off as Chinas economy began to boom, changing shipping patterns and demands for
ships. The price of ships has also increased due to the high demand, as ship prices have
doubled over the past several years. As freight charges continue to skyrocket, companies
look to fulfill orders of bulk carriers in order to carry larger loads of freight
(BusinessWeek).
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Section 3
Political and Legal Environments
This section is on the political and legal environments of the country. The
political and legal aspects of a country are risk factors that need to be evaluated in effort
to make a sound financial decision. The particular industry of shipbuilding could be
profitable and seem to be a smart investment, but political instabilities, as well as, the
legal structure could have negative effects that would result in a poor return on your
investment.
The political environment overall is stable and well balanced. In South Korea the
government is a republic with power shared by the presidency, legislature, and the
judiciary. Even though power is segregated among these parties government is
traditionally dominated by the president. The president is the chief of state and is elected
for a single term of 5 years. The 299 members of the unicameral national assembly are
elected to 4 year terms. Out of this 299, 243 are from single seat districts and 56
members are chosen by proportional representation. The judiciary portion of government
is independent under the constitution and consists of a Supreme Court, appellate courts,
and a constitutional court. Amongst the population there are numerous political parties.
Parties include the Uri Party, Grand National Party, Democratic Party, Democratic Labor
Party, and the People Centered Party.
Korea has a past full of turmoil and as a result has split into North and South
Korea. After WWII and the split of Korea, South Korea was formed and at this time
began to develop into what it is today. In 1910 Japan annexed Korea and outlawed the
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Korean culture and language. At the Yalta Conference towards the end of WWII, the
United States and the Soviet Union jointly established temporary administrative
trusteeship over Korea until democratic elections could take place. The Republic of
Korea, which was proclaimed in August 1948, immediately sought support from the US
military for economic and political aid. By doing so, this enabled South Korea to
overcome attempts by North Korea led by Kim II Sung, to demoralize the regime.
Today the South Korean government is led by President Lee Myung-bak.
President Lee was elected to a 5 year term in the beginning of 2008 and his main focus is
on the South Korean economy. The following is part of his speech that he delivered tothe South Korean population in his early months of being president.
The economy must be revived without fail. Over the past 10 years, the globaleconomy has enjoyed an unprecedented boom, but Korea has failed to go with the currentof the times. Consequently, some competing countries are coming up right behind us, andthe gaps with the advanced countries are growing wider. Now, we are at a critical
juncture. If we now fail to join the ranks of advanced countries, we might never haveanother chance. Korea now stands at a crossroads of historical significance of whether itcan rise to the rank of advanced countries or not. Today, the global economy is facedwith the biggest crisis since the oil shock of the 1970s. The price of oil, food and rawmaterials is skyrocketing. To make matters worse, the price hikes are coupled with theU.S. financial crisis. Soaring commodity prices and unemployment are weighing heavilyon many people of the world. We are not an exception to this global phenomenon. Now ishigh time for us to strengthen the economic fundamentals of our country and makewatertight preparations to turn this crisis into an opportunity as early as possible. Morethan 70 percent of the Korean economy depends on foreign trade. The Korea-U.S. FreeTrade Agreement no doubt constitutes a new way out for the Korean economy. Theaccord will help increase exports and foreign investment as well as national income. Firstand foremost, the KORUS FTA will create over 300,000 new jobs. We cannot afford tomiss this opportunity for the desperate young job seekers in particular. We need to secure
better trade conditions than our competitors in the United States, the biggest market in theworld. And the KORUS FTA is the answer. Of course, some sectors like agriculture arelikely to undergo difficulties. For them, the Government has already preparedcomprehensive support measures. If necessary, we will work out other follow-upmeasures. (Korean Embassy)
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As you can see South Korea has established free trade with the United States and realizes
the positive affect it can have on the South Korean economy. In addition to this,
President Lee has made many visits to other countries such as Brazil, Peru, and the
United States. While in Brazil, President Lee and his Brazilian counterpart President
Luis Inacio Lula da Silva agreed to widen bilateral economic and commercial
cooperation. In addition, President Lee suggested that Korea and Brazil should form
close cooperation and corporate investments in three areas by merging six related
industries -- mineral development and plant construction industry, oil development and
shipbuilding, automobile and the green industry. President Lee also visited Peru wherehe and President Alan Garcia discussed ways to boost economic cooperation between
Korea and Peru, since Peru is resource-rich with substantial deposits of copper, gold and
zinc. At the meeting, the two leaders are expected to declare the launch of negotiations
on a two-way free trade agreement. While visiting the US, South Korean President Lee
signed an agreement to work together to prevent and combat crimes. The agreement was
signed for a mutual verification on travelers with suspicious backgrounds, therefore
effectively blocking criminals and terrorists before entering Korea or the U.S. (Korean
Embassy). On a different occasion, President Lee spoke with President Obama over the
telephone about the relations between the U.S. and Korea. President Obama stated that
the Korea/U.S. relations are already strong, but that he wants to make them even stronger.
Both presidents agreed that a stronger bilateral alliance is the cornerstone for peace and
stability in Asia.
A huge part of the political environment is the relationship with North Korea.
North and South Korea have established a better relationship that has improved greatly
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over the past eight years. Economically speaking the countries have established free
trade zones in North Korea and South Korea is permitted to open businesses in certain
areas of North Korea and even employ North Korean citizens. Also the rail system
connects the countries together making the exchange of goods possible. Politically
speaking overall the relationship has improved, but in recent times conflicts have risen
and North Korea cut off dialogue with South Korea, claiming the peninsula was on the
brink of another war. The two countries have technically remained in a state of war since
the Korean War ended in 1953. The Korean conflict ended in a truce, but no formal
peace treaty was ever signed. Leaders of the two nations held an historic summit in 2000, paving the way for the reunification of some families who were separated during the war.
A second summit followed in October 2007, but concerns over North Korea's nuclear
program have loomed over interactions between the two countries. North Korea agreed
last year to dismantle its nuclear program in exchange for economic aid and better
relations with the United States. North Korea still must finish the nuclear disablement
process for the first phase of the agreement (CNN).
The legal environment was also evaluated when determining to invest in the
South Korean shipbuilding industry. The South Korean legal system is derived from
Anglo-American law, as well as European civil law and Chinese classical thought. The
President of the nation appoints the chief justice and most justices of the Constitutional
Court to six year terms (US Library of Congress). There are 6 types of courts in Korea,
which are the Supreme Court, the High Courts, the District Courts, the Patent Court, the
Family Court, and the Administrative Court. The District Courts, the High Courts and the
Supreme Court are the courts for the basic three-tier system. The Patent Court is on the
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same level with the High Courts, and the Family Court and the Administrative court are
on the same level with the District Courts (NYU Law).
In South Korea, there is no trial by jury; judges preside over local courts and
render verdicts. Both defendants and prosecutors can appeal first to the district appellate
court and then to the Supreme Court. Any challenges made to the constitution are made
through the Constitutional Court. Citizens are given similar rights in court as Americans,
with protection against self-incrimination, freedom from double jeopardy and the right to
a speedy trial (Library of Congress). In 2008, South Korea adopted a jury system for
criminal cases.The primary source of law for South Korea is written. These written laws are
divided into four capitals: statutes passed by the legislature, decrees issued by the
President and other government ministries, rules and regulations by government
regulations and international agreements (NYU Law). Per the South Korean
Constitution, international laws derived from treaties have the same effect as domestic
laws within the country.
The National Assembly of South Korea is responsible for purposing and deciding
on amendments to the Constitution, while ratifying treaties. The Ministry of Government
Legislation is responsible for legislative affairs within the executive branch. South
Korean has no codification system like the United States, but is divided into categories of
subjects. Government regulations and laws are easily searchable through the
governments website. All laws and regulations are integrated throughout the system,
which allows citizens to easily search for information (NYU Law).
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During the twentieth century, the South Korean government restricted freedom of
the press. After the Basic Press Law was repealed in 1987, the number of television
stations and newspapers rapidly expanded. The National Security Law allows the
government to limit the expression of ideas deemed pro-North Korean or communist;
broad interpretations of this statute place a chill on peaceful dissent (US Library of
Congress). In addition, in 2003 President Roh brought a libel suit against four of the
major national newspapers, while the government has stated that editorials are subject to
legal action if they are found to contain falsehoods.
During an economic zone committee meeting, the government decided to extend atax emption period for large corporations in specific industries within the nations
economic free zones. Currently, South Korea has four economic free zones, including:
Incheon, Pusan, Jinhae, and Kwangyang-man. The country is looking to expand these
zones into two or three other regions (Korea Law). The nation continues to reduce
regulations in order to create a more favorable business environment for foreign investors
(Korea Law). Under current law, foreign businesses are 100% exempted from corporate
income tax and income taxes for three years, and 50% for an additional two years.
Import tariffs on goods are exempted for three years as well, sparking an inflow of
foreign goods into the nation. These exemptions relate to foreign businesses investing at
least $10 million USD into manufacturing or tourism, or at least $5 million USD into
logistics or medical fields (Korea Law). Legislation is currently in process to extend tax
exemptions an additional 2 years with higher investments, while exempting value added
taxes to imported goods for three years.
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Along with other foreign investment opportunities, South Korea is working to
create tax incentives and benefits to attract more research facilities. The nation is looking
to add additional information technology and biotechnology research facilities by
creating tax-friendly atmospheres to multinational corporations (Korea Law).
South Korea is a participant in several international trade associations, including:
Asia-Pacific Economic Cooperation, International Confederation of Free Trade Unions,
Organization for Economic Cooperation and Development, and the World Trade
Organization. The nation has economic and trade agreements with North Korea,
allowing South Korean businesses to invest in North Korea and set up facilities. Thoughthere are still some tensions between the two nations, North and South Korea are opening
up trade routes and increasing the flow of goods into each nation. Significant amounts of
trade are involved with North Korea, one of the nations top trading partners.
The trade agreement between the United States and South Korea (KORUS) has
opened up new investments for American and South Korean companies. This free trade
agreement will eliminate tariffs and non-tariff barriers to trade in goods and services,
promote economic growth, and enhance trade between the United States and Korea (US
Trade Representative). Under KORUS, the United States will have duty-free exports to
Korea for agricultural goods, opening another market for farmers. The flow of
manufacturing facilities, mainly for automobile companies, will increase for the United
States, with most tariffs being eliminated with 10 years. This partnership will allow the
United States increased tax benefits and incentives within South Korea. The government
will provide stronger protections of American investors, preventing anti-competitive
practices and improving intellectual property securities (US Trade Representative). The
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agreement prevents nationalized businesses from monopolizing an industry, allowing the
United States to actively compete within industries such as technology and
telecommunications.
Companies seeking potential investment in South Korea have benefited from the
Foreign Investment Promotion Act (FIPA). The act allows foreign investors to have
access to most types of business in South Korea, while allowing new investors to only
have to notify government regulators of their intent to invest, rather than seek consent
(Korea Law). Of South Koreas 1140 industries, only 13 remain permanently closed to
foreign investors. Direct foreign investment in South Korea is established by at least10% acquisition of domestic firms assets or equity. Under the Special Tax Treatment
Control Act of Korea, foreign investors receive tax incentives to encourage further
investment within the country (Korea Law).
As companies looks to profit from the Korean stock market (KODAQ), foreign
companies which wish to list their companies must follow the same listing requirements.
Companies need at least 20 billion won of average sales during the past 3 years, along
with 10 billion won of shareholders capital. Return on equity must remain over 10%, or
have net profits of at least 2 billion won (Korea Law). After the company has been listed,
it may not change its accounting principles, whether they use American accounting
principles or international principles. Since transparency of documentation and income is
important to the nation, companies must also provide all documentation in Korean in
order for local investors to more accurately assess the companys value (Korea Law).
Trading in South Korea has become much more efficient. The cost of importing
goods into the country has decreased from $1040 USD to $745 USD between 2007 and
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2008. As shipping becomes more important to companies, it is important for these costs
per container to decrease, while the number of days to complete the import has fallen by
2 days (WorldBank). According to The World Bank, South Korea is ranked as the 13 th
easiest place to trade, large jump from the previous year. The tax rate for businesses has
fallen, from 35.6%, to just less than 34.9%. As the nation continues to lower taxes and
create a friendlier trade environment, more countries will look to increase their
investments in South Korea.
One of South Koreas premier industries is its shipbuilding industry. The industry
is second to only China, which just recently became the worlds leader. Since theindustry is so vital to world trade, it felt appropriate to use this for a statistical model.
The purpose of the model is to determine what variables affect the number of ship orders
that South Korea generates. It was important to use relevant economic variables which
will have a direct impact on the health of the industry, while determining how the nation
can create more pressure on China.
In the model, nine different variables were used to create a regression analysis.
The affects of GDP per capita, purchasing power per capita, inflation, unemployment and
exchange rates were used to determine future ship orders. These variables were then
tested with world economic growth by including: net trade in South Korea, world trade,
interest rates in South Korea and total foreign direct investments in South Korea.
Investors look for the health of the nations economy, while weighing the cost of
borrowing capital. Low interest rates and lower inflation will help investors to borrow
greater amounts of inexpensive capital. GDP per capita and unemployment rates present
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the financial health of South Korea, giving an investor the ability to determine if the
necessary labor will be available to carry out projects.
Once the model was generated, it was then possible to predict with some certainty
future orders of ships in South Korea. The regression analysis produced a best-fit model
(r 2) of 85% based on 15 years worth of data. The standard deviation of the predicted and
actual data was almost 63 ships; though not a very accurate number, it does show that
these nine variables do play key roles in determining the health of the industry. Below is
a comparison of the ship orders using the regression model and the actual orders for each
year:
Between 1993 and 1999, the regression analysis was fairly accurate. At the turn
of the century, the model produces a smoothed curve, which does not represent the true
increases and decreases of orders. This could be due to the minor recession within the
United States are 2000. Also, accurate information could not be found which portrayed
political and economic risks within the nation. Additional variables could have been
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added to the model to create a truer fit line, portraying more accurate information for an
investor.
Since the world is relying more heavily on international shipping due to
globalization, the shipbuilding industry will become more vital for product transportation.
South Koreas current financial standards have put it into a position to succeed in this
industry, which it has already done so. Orders continue to increase to more than 700 per
year, which provides a more solid base for investment. During the current financial
crisis, this industry may see a slow down, yet will still provide enough inflows of capital
to keep the economy afloat. As noted in the economic section of the analysis, SouthKorea has a growing economy, while regulations continue to be relaxed for foreign
investors. The nation is in an excellent position to once again become the global leader
in shipbuilding, which provides new investors an excellent opportunity to see high
returns on their investment.
South Korea has many aspects that make it an excellent place for foreign direct
investments. Businesses are treated to a friendly culture, where foreigners are respected.
The government has provided many tax incentives that allow companies to succeed,
without potentially being impeded by nationalized industries. Intellectual property is
becoming more secured through new legislation, and the legal system provides
businesses a fair opportunity to challenge those who steal property. The nation has
restructured its policies to attract more foreign companies, and should be seen as a place
to see high returns on all investments.