High labor costs force Korean firms to relocate production
By Hendarsyah Tarmizi
SEOUL (JP): South Korea's rapid economic growth is a blessing for most of the people in this newly industrialized country but it is a threat to the survival of the manufacturing sector.
The rising labor costs and the surge in land prices have forced export-oriented manufacturers to relocate production overseas to maintain their international price competitiveness.
The change in the people's life style has also forced domestic-market-oriented companies to "import" laborers for a similar motive.
Korean workers, previously known for their discipline and hardship, are no longer interested in the manufacturing sector, which is often branded not only as dangerous and boring, but also "dirty."
Sung Hee Jwa, a senior fellow of the Korea Development Institute, said that Korean manufacturing companies have no option but to relocate their plants or to import workers from less developed countries.
"Relocating industrial activities abroad is a matter of prerequisite for Korean manufacturing firms if they want their products to remain competitive," he told The Jakarta Post in a recent interview.
The Korea Development Institute, a government-funded think tank agency specializing in the domestic economy, views overseas direct investment as an important aspect of South Korea's macroeconomic strategy.
Korea's direct investment abroad started in 1968. The investment was undertaken either to secure natural resources or to cope with trade barriers imposed by trading partners.
The motive of the overseas direct investment has swiftly changed in line with the rapid growth in the country's economy, which has caused sharp increases in labor costs and land prices.
Since 1990, the overseas direct investment has been marked by the relocation of production as an important business strategy to maintain international price competitiveness and to strengthen a foothold in the global market.
"The competitiveness of Korea's export-oriented companies has worsened due to growing labor costs and land prices," Sung said. "That's why they have to relocate their production."
Data at the Bank of Korea indicates the country's direct investment abroad amounted to US$5.43 billion as of the end of 1993, involving 2,726 projects. The overseas direct investment has recorded a 29.4 percent rate of annual growth in the number of projects during the past three years.
Investment is concentrated in Southeast Asia, which has abundant manpower and natural resources and in North America, one of Korea's major markets for export products. Investment in Southeast Asia was mainly made by light industries such as textiles, footwear, electronics and toys, while that in North America involved chiefly trade and capital intensive sectors.
Korea's investment in Indonesia totaled $796.25 million as of the end of last year. Indonesia was then the second largest recipient of Korean investment after the United States, which received Korea's direct investment of around $1.73 billion, while China was in the third rank, receiving around $474.57 million worth of investment in the same period.
The Korean embassy in Jakarta says the value of Korea's investment in Indonesia, including in the financial and mining sectors, totaled around US$3.6 billion as of last December, making Korea the sixth largest investor in Indonesia.
Incentives
Kang Sun In, director of the Economic Cooperation Bureau at the Ministry of Finance, said that the government has introduced a number of incentives to encourage direct investment abroad.
Korean investors are, for example, allowed to deduct the corporate income tax they have paid abroad.
He added that the government is also strengthening bilateral cooperation with each receiving country to further facilitate Korea's investment projects.
"Korea, for instance, has extended grants and soft loans to the Indonesian government," Kang told the Post about his government's assistance in promoting overseas direct investment activities.
However, in some cases, many Korean investors are still not satisfied with the government's incentives. They are still required to ask for permission from the Bank of Korea (the central bank).
Lee Jae Silk, a senior assistant of the central bank's Overseas Investment Division said the permission requirement is only a formality.
"We just want to make sure that businessmen investing overseas have clean accounts and have no bad debt problems in local banks," he told the Post.
Korean companies are required to report their overseas investment plan to the central bank if the amount of their investment exceeds $300,000. They have to ask for a permission if the amount exceeds $10 million.
Lee believes that the central bank's requirements will not hamper the overseas investment drive as the process of obtaining such approval will not take more than nine days.
Investment sites
Most government officials continue to consider Southeast Asia the most attractive investment site for Korea's labor intensive industries in the next five years despite the improvement in the investment opportunities in China, India and Vietnam.
Indonesia, which receives more than 70 percent of Korea's investment in the Southeast Asian region, is still ranked the best place for Korea's labor intensive industries.
Ro Jae Bong, a research fellow of the Korea Institute for International Economic Policy, said that Indonesia is still a better place than other developing countries such as Vietnam and India.
"It has not only a better infrastructure but also a better economic policy," he told the Post about the comparative edge of Indonesia.
But he warned that the position of Indonesia as the second largest recipient of Korea's overseas direct investment could be replaced by China if the Indonesian government does not further improve the business climate.
Ro said that there are a growing number of Korean companies relocating their production to China. "Some firms also go to Vietnam but I think Indonesia is still the best," he said.
Kang of the Ministry of Finance said that the government has never told Korean investors where they have to relocate their production or where they have to invest their money.
"It is a market drive and they will go to the places offering a better business climate," he said.
Not all happy
Not all Korean people are happy with their country's overseas investment drive. Some of them are concerned about the growing unemployment and others are worried about the widening of the country's current account deficit.
They believed that if the trend of going overseas are not limited, the number of unemployed people, which last year accounted for around 2.4 percent of the country's population of 44 million people, could further increase. The current account deficit, which reached $2.7 billion in the first semester of this year, could also widen on the impact of the increase in the outflow of investment funds.
Sung of the Korea Development Institute said that Korean people have, in fact, nothing to worry about in the relocation of labor intensive companies.
He said the number of new companies, especially those directing their products at the domestic market, is still growing despite the overseas direct investment drive.
"It means that a great amount of job opportunities are still available for Korean people," he said. "The government is also preparing a new policy to attract capital intensive industries into the country. It will also create jobs."
The official said unemployment is not caused by the scarcity of jobs but rather by the fact that many people no longer want to work in the manufacturing sector.
Korea's rapid economic growth, which substantially raised its GNP per capita to $7,466 last year from merely $2,242 in 1985, has swiftly changed the people's life styles.
"Young people prefer to work at the service sector," Sung said. "Working in factories is often considered dangerous and dirty."
This is one of the reasons why many small- and medium-scale companies recruit workers from other Asian countries such as the Philippines, Indonesia, India and Nepal.
The Korea Federation of Small Business, for example, brought in around 30,000 workers from Southeast Asian countries last year.
Ki Hyun Cho, commissioner of the federation's International Training Cooperation Agency, said that his agency recruited 20,000 workers from Indonesia, the Philippines, China and India in February this year.
"We plan to import another 10,000 workers from the region next month," he said.
Foreign workers are paid around US$200 per month, far lower than the country's monthly minimum wage of $280. Besides receiving free accommodation, foreign workers also get extra pay for overtime work.