Korean investment in ASEAN is changing

Korean investment in ASEAN is changing

By Park Bun Soon

The character of Korean investments in ASEAN countries has been changing gradually.

SINGAPORE: Korean companies first came as investors to ASEAN mostly in the late 1980s and early 1990s. From the mid-1980s, the factor costs in Korea had increased so rapidly that the labor intensive industries could not adjust themselves to the new situation.

What they could do was shift production facilities to foreign countries where the factor costs were cheaper. In this period, the main investing industries were garments, footwear, light electronics, plastics and so on. The garment and footwear industries were shifted to Indonesia, light electronics companies concentrated principally in Malaysia and Thailand, and in the case of plastics Indonesia and Thailand were the main destinations. Since the main investors were the firms in the labor-intensive industries, the size of investment was not significant and these small-sized and medium-sized companies were readily able to relocate their production facilities.

Korean investment in ASEAN has changed gradually in the 1990s. The main investing industries now are the capital and technology intensive industries such as the electronics components, automobile, steel, and cement industry. Compared to the small and medium sized investors in the 1980s and early 1990s, the large enterprises have represented the mainstream of new Korean investment to ASEAN. Conglomerates such as Samsung, Daewoo and LG are actively investing in a wide range of industries.

The push factors also changed from the passive maintenance of export competitiveness to the active creation of competitiveness because of market saturation in Korea, competition for globalization among big business groups, and the government's initiative for internationalization. Thus the investment motives are market penetration in the host countries, and in the case of big business groups, they consider the global strategy as well.

However, it should be noted that the Korean investors do not have sufficient firm-specific advantages which are considered necessary for success in foreign investment. One of the most important firm-specific advantages of Korean investment is a relatively efficient mass production system which is related to economies of scale, but the advantage of Korean firms is much weaker than the Japanese firms' advantages which are sophisticated technology and well organized production networks in ASEAN.

The positive effect of Korean investment, however, will not be small. The Korean firms which are investing in capital intensive industries can help to accumulate capital in the host countries. This would especially be the case in countries like Indonesia and Vietnam which urgently need capital for developing heavy industries and generating employment opportunities, and Korean investment can play a significant role in shaping the industrial map.

Korean firms which concentrate on industries such as steel, cement, and components of electronics goods can help to reduce ASEAN's import of these products which has been a cause of trade deficits. Moreover, to the extent that Korean investors have developed efficient production methods in circumstances of abundance of labor in Korea, this technology may be more suited to development of technological capabilities in some ASEAN countries than that from developed-country MNCs like those from Japan.

In terms of ASEAN's incentives for Korean investment, the traditional policies such as tax exemptions seem relatively less attractive to Korean investors when their motives are market penetration and global expansion. Moreover, the new international economic system under WTO will not allow the host countries to provide any preferential treatment to specific investors.

When a Korean motor company, KIA Motors, started to invest in the Indonesian national car project in cooperation with a son of President Soeharto, Japan, the U.S. and the EU protested strongly against Indonesian policy. As hosts, ASEAN countries do not have much of a policy-mix apart from improving institutions and infrastructure and supplying skilled labor.

In addition to these, ASEAN should gradually introduce competition policies in order to enhance the market mechanism even though it may deter some investment. ASEAN's other important task is to develop its own small and medium enterprises which can supply parts and components.

On the other hand, the Korean side should consider various aspects for itself and for development of the host country. First, Korean investors should realize that the political factors which Korean companies often took into account in investing in ASEAN may not be relevant in the changing environment. They should therefore emphasize purely economic considerations. One strategy to follow is efficiency-seeking. In view of the trend towards integration through AFTA, efficiency-seeking through vertical integration or establishment of industrial complexes should be encouraged.

The second concerns the development of small and medium enterprises in Korea. It has long been said that the Korean economy was dominated by a small number of large conglomerates, which hindered development of the parts and components industry.

It is in a sense true that the Korean economy has to develop small and medium enterprises in order to decrease the trade deficit. This argument can be applied even to Korean investment in ASEAN. As long as the Korean subsidiaries import the core parts and components from advanced countries like Japan, the weakness of the Korean economic structure is naturally extended to the host country and this situation will benefit neither ASEAN nor the Korean economy. Thus, there is an urgent need to develop the local parts and components industry. If ASEAN countries cannot do this in a short period, ASEAN and Korean companies can cooperate to develop the parts and components industry through joint-ventures.

Thirdly, it is important to establish a good division of production between Korea and host countries, so that the parent companies produce more capital and technology intensive products and subsidiaries produce more standardized products. This can prevent the hollowing out of Korean industry. If Korean firms cannot keep a well-organized differentiation of product between Korea and the host country, hollowing out will emerge as an important problem in Korea.

Dr. Park Bun Soon is Chief Researcher at the Samsung Economic Research Institute, Korea. He was recently a Visiting Fellow at ISEAS, Singapore.