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.