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IPE-K < Lecture Note 4> 2013.03.29. IPE -K: Trends in 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: Yoo Soo Hong

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slide1

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

major economic indicator
Major Economic Indicator

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

industrial power of korea
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

developments in korea s trade liberalization policy
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

trends in exports and imports of korea
Trends in Exports and Imports of Korea

(billion $)

Source: KITA (Korea International Trade Association).

korea s trade volume
Korea’s Trade Volume

Million USD

Korea’s per capita Export Volume: $5,287

- larger than Japan($4,712)

and the US($2,824)

foreign reserves as of june 2007
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

top ten trading partners 2008
Top Ten Trading Partners (2008)

Source: Korea International Trade Association

top ten export items top five markets 2008
Top Ten Export Items & Top Five Markets (2008)

($ Mil., %)

Source: Korea International Trade Association

top ten import items top five markets 2008
Top Ten Import Items & Top Five Markets (2008)

($ Mil., %)

Source: Korea International Trade Association

slide15

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

slide16

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

slide17

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
slide18

“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

about kita
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
slide20

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.

korea s exports markets
Korea's Exports Markets

Consideration for Selection of FTA Partners

Source: KIEP

overview of fdi in korea
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?
international comparison of inbound fdi
International Comparison of Inbound FDI

Source: UNCTAD, World Investment Report 2007

recent inflows of foreign direct investment to korea
Recent Inflows of Foreign Direct Investment to Korea

(Unit: million US dollar)

Source: Statistics Korea. 2011.

foreign direct investment by country
Foreign Direct Investment by Country

($ Mil.)

Source: Ministry of Knowledge Economy

korea s shift to proactive fdi regime
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
slide28
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.
slide29
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.
slide31
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

slide32
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

slide33
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.
slide34
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

slide35
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.
investment liberalization and promotion
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

slide37

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

slide38

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

slide39

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

outward fdi odi
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

pattern of korean fdi in abroad
Pattern of Korean FDI in Abroad

Korea’s ODI Trends

Source: Korea Export-Import Bank. 2007

pattern of korean fdi in abroad1
Pattern of Korean FDI in Abroad

FDI by Region

Source: Korea Export-Import Bank. 2007

pattern of korean fdi in abroad2
Pattern of Korean FDI in Abroad

FDI by Industry

($Million)

pattern of korean fdi in abroad3
Pattern of Korean FDI in Abroad

FDI by Company Size

Source: Korea Export-Import Bank. 2007

slide46

Trends in Overseas Investment

Source: Korea Eximbank. Overseas Investment statistics . 2012.

slide47

Trends in Overseas Investment

(Unit: US dollar)

Source: Korea Eximbank. Foreign Investment statistics. 2012.

slide48

Korea’s Overseas Investment by Region (2012)

(Unit: 1000 US dollar)

Source: Korea Eximbank. Overseas Investment statistics. 2012.

slide49

Korea’s Overseas Investment by Country (2012)

(Unit: 1000 US dollar)

Source: Korea Eximbank. Overseas Investment statistics. 2012.

slide50

Korea’s Overseas Investment by Industry (2012)

(Unit: 1000 US dollar)

Source: Korea Eximbank. Overseas Investment statistics. 2012.

korea s odi in asia
Korea’s ODI in ASIA

Trend of Korea’s ODI in Asia

Source: Korea Export-Import Bank. 2007

korea s odi in asia1
Korea’s ODI in ASIA

ODI by Major Destination in the World

motivation of korea s odi in asia
Motivation of Korea’s ODI in Asia

Motivation of Korean ODI by period

(percent)

Source: The Export-Import Bank of Korea (2004). Lee, S.B. (2006)

outward fdi policy
Outward FDI Policy

 Loan programs

- Loan program under the Export-Import Bank of Korea to finance OFDI: up to 80% of the total OFDI amount

- Loan program under the International Economic Cooperation Fund initiated by the Korean government: applicable to OFDI in developing countries with long-term return periods

 Information provisions

- Agencies: Export-Import Bank of Korea and the Korea Trade and Investment Promotion Agency

 Reduction of non-commercial risks

- Korean Export Insurance Corporation offers export insurance to investors to reduce non-commercial risks, such as losses from war, nationalization, etc.

- Korean government signed Investment Protection Agreements with more than 80 countries, and tax treaties with more than 70 countries

references
References

Lee, Seong-Bong. 2007. Korea’s New Trade and Outward FDI Policies: Facilitating the Presence of Korean SMEs in Regional and Global Markets. Korea Institute for International Economic Policy.

Ahn, Choong Yong. 2008. “New Direction Of Korea’s Foreign Direct Investment Policy In The Multi-track FTA Era: Inducement And Aftercare Services”. OECD Global Forum on International Investment.

Ernst & Young. 2012.”South korea Highlights”. (PDF. Google).

Korea International Logistics Council. Recent Year. “Invest in Korea as the Gateway to northeast Asia”. (PPT. Google).

KOTRA. 2012. “US-Korea FTA: Unlocking Opportunities in Korea”. (PPT. Google).

US Commercial Service. 2012. “Doing Business in Korea”. (PDF. Google).