IPE-K < Lecture Note 4> 2013.03.29

1. IPE-K <Lecture Note 4> 2013.03.29 IPE-K: Trendsin Trade and FDI *Some parts of this note are borrowed from references for teaching purpose only. Semester: Spring 2013 Time: Friday 9:00~12:00 am Class Room: No. 322 Professor: YooSoo Hong Office Hour: By appointment Mobile: 010-4001-8060 E-mail: yshong123@gmail.com Home P.: //yoosoohong.weebly.com

2. Trade

3. Major Economic Indicator Source: Korea Eximbank Overseas Economic Research Institute. 2010. 2010 World Country Review

4. The Korean Economy: past and present 4

5. Industrial Power of Korea Product World market share % (Rank) Company Semiconductors 49 (1) Samsung Electronics, Hynix Semiconductor TFT-LCDs Samsung Electronics, LG.Philips LCD 46.5 (1) 9.8 (4) Automobiles Hyundai-Kia Motors, GM Daewoo 80.0 (1) LNG carriers Hyundai Heavy Industries, Samsung Heavy Industries, Daewoo Shipbuilding & Marine Engineering Co. Petrochemical products 45 (1) LG Chem, SK Large diesel engines for ships 59.6 (1) Hyundai Heavy Industries, Doosan Engine Co., STX Heavy Industries Refrigerators 14.3 (1) Samsung Electronics, LG Electronics. Air-conditioners 22.3 (1) LG Electronics, Samsung Electronics 5

6. Developments in Korea’s Trade Liberalization Policy • Five measures of trade liberalization • Reduction of tariff barriers • Elimination of quantitative restrictions Major items: live cattle and beef products • Prohibition of trade-related subsidies • Enhancement of transparency in import certification procedures Customs services, IT-based clearance system, a new audit system - Establishment of FTAs

7. Trends in Trade

8. Trends in Exports and Imports of Korea (billion $) Source: KITA (Korea International Trade Association).

9. Korea’s Trade Volume Million USD Korea’s per capita Export Volume: $5,287 - larger than Japan($4,712) and the US($2,824)

10. Export Similarity Index

11. Foreign Reserves (As of June 2007) Source: US Department of the Treasury/Federal Reserve BoardForeign Reserves are as of July 2007, US Treasuries held are as of June 2007. Offshore holdings include UK, Carib banking, and Luxembourg

12. Top Ten Trading Partners (2008) Source: Korea International Trade Association

13. Top Ten Export Items & Top Five Markets (2008) ($ Mil., %) Source: Korea International Trade Association

14. Top Ten Import Items & Top Five Markets (2008) ($ Mil., %) Source: Korea International Trade Association

15. Geographical Location Located on the trade route connecting Europe, Asia, North America Located at the center of NEA between China and Japan Starting and Ending Point of trans-continental railway 광양만권경제자유구역청

16. Accessibility to the NEA Market NEA is emerging as a major economic bloc alongside EU and North America KOREA JAPAN • Thirdargesteconomy in GDP China • World’s largest manufacturing base • Second largest economy and fastest growing consumer market in the world -25% of World Population -20% of World GDP -30% of World Cargo Volume 광양만권경제자유구역청

17. World Trade Environment and Direction •  Global Economic Environment • - Profound Change in the Elements that Constitute Value and Competitiveness •  20th century • - Value: Productivity Based on Input of Labor • - Competitive Elements: Material Capital •  21st century • - Value: Productivity Based on Promoting • - Creativity and Quality of Labor • - Competitive Elements: information and Knowledge

18. “The Era of Borderless Competition” - Policies are standardized - Most debated economic issues: Globalization vs. Regional Economic Blocs  Digitalized & Knowledge-Based Economy - Knowledge becomes the major source of added value - Change in industrial structure from manufacturing to new industries such as IT

19. About KITA  Unique Identity • Over 66,000 trading companies as members • Function in close relations with MKE (Government)  History • Established in 1946  Role • International Trade & Investment Promotion • Research in Korea’s Trade policy & Strategy • Exhibition & Convention • e-Trade Promotion • IT/Trade Education • Hub of Northeast Asian Logistics

20. Characteristics of Recent FTAs •  Korea has adhered to ‘multilateralism’ because its trade relations were diversified.  Before the1990s, most FTAs aimed for market access through alleviation and elimination of trade barriers. Recent FTAs, which include service, investment, intellectual property rights, and government procurement, aim at being comprehensive.  FTAs are promoted not between neighboring countries but between countries in other regions.

21. Korea's Exports Markets Consideration for Selection of FTA Partners Source: KIEP

22. FDI

23. Overview of FDI in Korea • Korea’s Development Model before Asian Financial Crisis - Foreign loan-based financing for investment requirements far greater than domestic saving - Little reliance on FDI and foreign licensing to cultivate indigenous capability through reverse engineering of imported capital, parts, and finished goods, etc. - Sharp contrast to FDI-led industrialization models as in case of Malaysia and other developing nations • One of the lowest in the world in terms of FDI/GDP ratio • Why Korea was reluctant to invite FDI?

24. International Comparison of Inbound FDI Source: UNCTAD, World Investment Report 2007

25. Recent Inflows of Foreign Direct Investment to Korea (Unit: million US dollar) Source: Statistics Korea. 2011.

26. Foreign Direct Investment by Country ($ Mil.) Source: Ministry of Knowledge Economy

27. Korea’s Shift to Proactive FDI Regime  The Asian financial crisis provided "strong motivation" to attract FDI - Asian financial crisis in 1997/8 has enforced Korea to switch to proactive inducement of to overcome foreign exchange crisis under IMF conditionality • Actively joining WTO regime and FTA • To enable Korea as a regional business hub from the perspectives of logistics, finance and R&D

28. Korea’s FDI Inducement • Industrializing Period • Korea emphasized the promotion of absorptive capacity and the indigenization of foreign technology, while restricting both FDI and foreign licensing. • Korean firms assimilated imported embodied technology rapidly and achieved subsequent expansion while upgrading industrial structure to emerge as global brands (e.g. Samsung, Hyundai, and LG) from an agrarian economy in just three decades. • Korea relied heavily on foreign borrowing to finance its investment requirements and thus Korea’s FDI played only a marginal role in its rapid industrialization process. One of the lowest in the world even after adopting a more proactive FDI regime.

29. After the Asian Financial Crisis in 1997/98 • Korea was forced to pursue FDI-friendly policy initiatives in order to fulfill the conditionality of the IMF in exchange for standby credit. • Korean policy makers have acclimated to the global economy by welcoming greenfield investment and M&As to promote investment activities leading to the development of a more competitive economy. • Domestic investment sharply declined in 2000s while outbound FDI exceeded inbound FDI as pervasive globalization affecting the world economy. • Policy direction shifted from conventional loan-based borrowing to an FDI-based development strategy → necessary to establish a system capable of inducing new FDI and providing effective aftercare services. • Korea has been active in attracting foreign investment by setting up comprehensive service institutions to provide one-stop services. • However, still the record of F야 intoKorea is not impressive.

30. FDI Incentive Track in Korea

31. Results of Korea’s Aggressive FDI Inducement Policy • Inbound FDI notifications for 2007 recorded US$10.5 billion (marked the 4th consecutive year in which notifications reached or exceeded the US$10 billion). • As Korea’s inbound FDI increases during the decade since the Asian financial crisis, outbound FDI has also risen sharply as Korean companies take advantage of rapid globalization and subsequent supply chain expansion. Korea’s Overall Inbound FDI Trends

32. Recently, the EU has been the largest source of Korean inbound FDI, contributing more than 40% of total arrived FDI. Korea’s Inward FDI by Country of Origin

33. FDI-Friendly Regime: Actions and Challenges • Minimizing Negative Sentiment • Korea needs to recognize that many foreign companies have pointed out as some of Korea’s most serious negative factors the unlawful and occasionally militant labor movements in addition to the already comparatively high wage levels amongst Asian countries. • It also needs to supplement its FDI policy to function in a liberalized global trade environment. • Improving Absorptive Capacity • Changing the investment environment should be to improve domestic economic absorptive capacity for FDI in order to select and attract transnational companies that can significantly help Korea remain competitive in a global market place. Needs to upgrade its overall FDI-friendlyeconomic environment.

34. FSA and CSA • Korea should realize that inward and outward FDI is closely related through the dynamic process of MNCs upgrading CSA (Country Specific Advantage) and FSA (Firm-Specific Advantage) by accelerating production fragmentation and supply chains. • Thus, the Korean government needs to design policy measures effective for attracting foreign MNCs with FSAs of high quality. Application of Rugman’s FSA-CSA Matrix

35. Increasing Transparency of Laws and Systems • Korea must increase transparency of laws and systems in relation to FDI. Industrial clustering as contained in the Korea’s business hub strategy is a highly effective way to attract desired and selective FDI. • Making central and local government agencies’ incentive system more consistent to achieve global standards by doing away with tax and non-tax barriers is important. • Considering how to improve communication channels between the government and transnational companies is also crucial.

36. Investment Liberalization and Promotion  Inward Investment Liberalization Policy - After the financial crisis of 1997, extensive government liberalization of FDI.  Full liberalization of the real estate sector  Allowance of hostile M&As by foreign companies  Simplification of the FDI approval process -Procedures revised from a process of report and approval to notification.  Simplification of administrative procedures -Establishment of INVEST KOREA (IK), a one-stop agency for foreign investors, and the Office of the Investment Ombudsman  Expanding the range of incentives available to foreign investors -Tax exemptions and reductions, reduction of rental fees on government-owned factory sites and a range of subsidies

37. Free Trade Zone (FTZ) Industrial Park A … Industrial Park B Support Functions Distripark PORT … Industrial Park N FEZ : Free Economic Zone FTZ : Free Trade Zone Concepts of the FEZ and FTZ FreeEconomicZone (FEZ) 광양만권경제자유구역청

38. Incheon FEZ Incheon International Airport Incheon Port Gunsan Iksan Busan-Jinhae FEZ Masan Gwangyang Bay Area FEZ Gwangyang Port Locations of FEZs and FTZs Free Economic Zone Free Trade Zone 광양만권경제자유구역청

39. Incheon FEZ Songdo IT, BT, international business Yeongjong air logistics, tourism, IBC Incheon Cheongna leisure, int’l finance Busan Busan-Jinhae FEZ • maritime logistics hub Gwangyang • manufacturing & industrial parks, R&D Gwangyang FEZ • NEA maritime transshipment hub • Industrial clusters for oil and steel businesses Development Plans of the FEZs 광양만권경제자유구역청

40. ODI

41. Outward FDI (ODI) - Korea has become one of the main providers of FDI in Asia - Big investor in China - There are diverse motives for Korea’s outward FDI - Market access, export base, natural resources, low production cost, etc. - Asia (in particular, Southeast Asia) received more Korea’s FDI compared to other region. - Most of the investment has been in manufacturing. - Large enterprises led continuously Korea’s FDI outflow in most of the industries. SMEs and individuals come second and third, respectively

42. Pattern of Korean FDI in Abroad Korea’s ODI Trends Source: Korea Export-Import Bank. 2007

43. Pattern of Korean FDI in Abroad FDI by Region Source: Korea Export-Import Bank. 2007

44. Pattern of Korean FDI in Abroad FDI by Industry ($Million)

45. Pattern of Korean FDI in Abroad FDI by Company Size Source: Korea Export-Import Bank. 2007

46. Trends in Overseas Investment Source: Korea Eximbank. Overseas Investment statistics . 2012.

47. Trends in Overseas Investment (Unit: US dollar) Source: Korea Eximbank. Foreign Investment statistics. 2012.

48. Korea’s Overseas Investment by Region (2012) (Unit: 1000 US dollar) Source: Korea Eximbank. Overseas Investment statistics. 2012.

49. Korea’s Overseas Investment by Country (2012) (Unit: 1000 US dollar) Source: Korea Eximbank. Overseas Investment statistics. 2012.

50. Korea’s Overseas Investment by Industry (2012) (Unit: 1000 US dollar) Source: Korea Eximbank. Overseas Investment statistics. 2012.