Are foreign buyouts a national threat?

Jasper S. Kim, The Korea Herald/Asia News Network, Seoul

A clear pattern has emerged recently of foreigners taking increasingly larger positions in Korean assets, such as KOSPI shares, domestic banks and local real estate. But are such foreign buyouts on balance a threat to the republic?

Examples of prominent foreign buyouts this year include the sale of Korea First Bank (KFB) to Standard Chartered Bank (SCB), a large British bank, Citibank's takeover of Koram Bank, Korea's sixth largest lender, and Lone Star Building to a Singaporean entity late last year. Foreigners also currently own a significant proportion of Korean KOSPI-traded blue chip shares. Thus, it would seem at first instance that such foreign intervention constitutes an intrusive threat to Korean national interests.

But contrary to such opinion, foreign buyouts help more than hurt the republic. First, foreign buyers of Korean assets in KOSPI represent a clear market signal that a future upside exists within onshore equity markets. For example, global investors holding Samsung Electronics paper hold the view that its share holdings value will increase (not decrease) in the future. Foreign investment bullishness is a clear sign that such high- grade corporate entities are healthy (i.e., that they are operating under sound fundamentals) or will become healthy.

From a corporate perspective, greater inflows, albeit from foreigners or domestic investors, represent extra cash for research and development (R&D), hiring of new employees and expansion efforts into new markets and new products.

From a consumer perspective, greater inflows, albeit from foreigners or domestic investors, means more cutting edge technology, new jobs and better products. With greater inflows come high share prices, and thus much-needed wealth creation for individuals. Therefore, both the producers and consumers benefit from foreign buyouts.

Second, regarding foreign buyouts of Korean banks, foreign ownership of Korean banks also represents a win-win situation. For example, Standard Charter's stake in Korea First Bank helps pump needed revenue into KFB. KFB will benefit not only from the added capital but also from SCB's global banking expertise.

Conversely, SCB also benefits from KFB's domestic banking knowledge, local brand name and its extensive onshore branch locations to do business in Korea. Much like Newbridge Capital (which held a controlling stake in KFB until its sale), SCB hopes to make KFB even more competitive, whether it plans to keep or sell its KFB stake interest in the future.

Third, regarding foreign buyouts of Korean real estate, foreign ownership of Korean property will not lead to a mass uprooting of all foreign owned buildings out of Seoul into foreign countries. Much like with foreign ownership of banks, the physical structures stay in Korea and little adverse change will occur whether a foreign or domestic entity owns the ownership paper for a Korean commercial building.

Even if foreign majority shareholders of Korean assets somehow go against Korean interests, the republic, as a sovereign state, has the option to nationalize private property located within its territory. Partially for this reason, the United States does not view foreign ownership of its assets as a primary threat to its interests.

Foreigners, including Koreans, are largely able to purchase real estate and shares of listed corporations in the United States with little red tape, which adds value to the U.S. economy. The rationale for this is that market forces should rule and that foreign investment, even in large sums, is a form of positive wealth creation that should be welcomed. This open investment model has proved successful for the United States and many other economies, and Korea is no exception.

But one impediment to this approach is nationalistic anti- foreign buyout sentiment that exists in nearly every nation.

For example, many Americans were shocked and concerned when news broke in 1990 that the Rockefeller Center (which included Radio City Music Hall) in New York City was sold to Mitsubishi, a large Japanese corporation.

The sale of such historic American property to the Japanese was on the back of rising anti-foreign (notably anti-Japanese) sentiment because of a rising tide in the 1980s of foreign purchases of U.S. assets. But after Mitsubishi's purchase, the real estate market slumped and the Japanese entity took a financial hit, forcing it to sell Rockefeller Center for a significant loss to the Goldman Sachs Group, a U.S. investment bank. So, despite all the fears, the prized U.S. asset returned to American hands, with an American entity realizing upside at the cost of a large foreign competitor.

But even during Mitsubishi's ownership of Rockefeller Center, tourists who came to visit the American landmark saw little or no substantive difference. The classic American flags still flew, the ice skating rink was still a central attraction and the building tenants remained pretty much the same. Mitsubishi, much like any other entity in the free-market global economy, merely wanted to realize an upside on its investment by investing more money to create a healthier and more competitive entity.

In the same way, when foreign investors buy significant interests of Korean assets, few if any adverse changes will most likely take place except for the exchange of a paper into a different pair of hands, while Korean entities are positioned to become healthier and more competitive. And, for that one piece of paper, certain foreign investors are willing to pay Korean asset owners extremely large sums of cash. Until the day that such global enthusiasm stops, Korean entities and owners should not discourage but encourage such behavior.

After all, such behavior is a win-win situation for both sides involved and is thus an opportunity, not a threat, for the Korean republic.