Investment, trade and general dialog between Korea and the European Union are all reaching new heights. Is it because of a more open Korea, a more aggressive Europe, a new breed of Western-trained managers in Korea, or simply a better mutual understanding and newfound discovery of the potential opportunities?
Korea's trade and investment portfolio has traditionally highlighted two dominant stakeholders, the United States and Japan. But with a changing economic environment, both in global terms and certainly within Korea itself, a real diversification of partners is materializing. And an especially big move into Korea is being made by the Europeans.
In 1996, European Union investment into Korea surpassed American and Japanese numbers and a genuine partnership seems to be taking shape. Whether because of geographical distance, a lack of historical ties, cultural differences, or the general geopolitical situation in the world during most of the cold war period, Korea and Europe had never before developed a good connection. Now, with a more cohesive Europe and a more open and affluent Korea, the two markets are finally recognizing the opportunities that come with cooperation.
This collaboration is taking the form, not only of greater bilateral trade and investment, but also of increased dialog, especially in forums like the WTO, OECD, ASEM, and a recently signed Framework Agreement that sets the tone for the future partnership. In the 1960s and '70s, Korea had emerged on the world scene as a supplier of basic manufactured goods through export-led development. Korean exports to the EU, however, still accounted for only a small proportion of EU imports. In the 1980s, Korea became a much more interesting market for EU exporters, as Korean living standards increased dramatically. By 1991, bilateral Korea-EU trade had reached $21.2 billion.
In the 1990s, a more sophisticated partnership has developed between Korea and the EU based on mutual benefit for both parties. And trade has continued to grow.
Korea's imports from the EU reached $21.2 billion in 1996, a 16.6 percent increase over 1995, while representing 14.1 percent of Korea's total imports. The US and Japan accounted for 22.2 percent and 20.9 percent of Korea's imports, respectively.
Korean exports to the EU were recorded at $15.3 billion in 1996, a 6.0 percent decline from 1995 and accounting for 11.8 percent of Korea's total exports. The USA and Japan received 16.7 percent and 12.2 percent of Korea's exports.
Germany ranks first in terms of Korea's trade volume with individual European countries. In 1996, bilateral trade reached nearly $12 billion, accounting for 32.7 percent of Korea's total trade with the EU and making Germany Korea's fifth largest trading partner overall. The United Kingdom was Korea's second largest EU partner (17% of EU total), followed by Italy (10.9%), France (9.3%) and the Netherlands (7.9%). Korea was the EU's 10th largest external trading partner in 1995, outranking countries such as the Czech Republic, Singapore, Taiwan, and Hungary.
Trade between the EU and Korea has naturally been evolving in parallel with Korea's industrial structure, toward capital goods such as electronic components, industrial electronics, motor vehicles, and machinery. It should be noted that the trade balance has turned in the EU's favor since 1991 and the gap has been widening ever since. In 1996, the deficit with the EU hit nearly $5.9 billion dollars, accounting for about 28.5 percent of Korea's total $20.6 billion trade deficit.
The growing trade deficit is undoubtedly fueled by Korea's market opening policies, but of late the lion's share of accountability lies on the export side, with some of the nation's major exports, like semiconductors and automobiles, losing steam in overseas markets. While consumer imports are responsible for only a relatively small portion of the problem, Korea's "frugality campaign" has labeled many foreign imports "luxuries," causing a stir among EU trade boosters.
Korea-EU trade is still rising, but as barriers and borders fall worldwide, the resulting web of international transactions and relationships makes simple trade statistics a rather weak indicator of the real trends. Other factors must be taken into consideration, most notably the growing investment trend.
With multinational companies leading the charge, corporations are putting their fingerprints all over the world-be it manufacturing, marketing, services, or other ventures-to make their operations globally efficient. Last year in Korea, foreign direct investment hit a record high of $3.2 billion in 966 cases, according to the Ministry of Finance and Economy, a rise in 64.9 percent in amount over 1995. And the European Union outranked both the US and Japan, traditionally the top investors in Korea.
European Union nations invested $892 million in 183 Korean projects last year, nearly double the 1995 figure of $461 million. While US investment rose by 32.7 percent, Japanese investment fell 39.5 percent.
Examples of European investments last year included $214 of investment in Hyundai Oil Refinery from a holding company taking advantage of Ireland's tax laws, Germany's BASF investment of $22 million, and Carrefours' investment (registered from the Netherlands) of $105 million in a new discount sales outlet in Seoul's satellite city of Ilsan.
This increase in investment indicates a real change that is taking place in the relationship between Europe and Korea, much of which is born from the links developing through the OECD and WTO.
"The yardstick for Korea is no longer the group of 77 developing countries where you often have a difficult investment situation due to political, social or economic reasons, government interference, corruption, financial problems, scarce foreign funds and so on," says Dr. Thorsten Hutter, First Secretary for Economic Affairs at the German Embassy. "Since last year, when Korea joined the OECD, the yardstick is the developed world. Korea is the eleventh largest economy in the world, and it's number 9 of the 29 countries that are part of the OECD."
That status as a large, important economy seems to currently be the draw for most foreign investors. With a population of 45.5 million consumers and now an industrial powerhouse in Asia, Korea is a market which cannot be ignored by Europe's global players.
Europeans have, of course, been involved in East Asia for a long time. Colonial interests brought the British to Hong Kong, Singapore, Malaysia and Australia, the Dutch to Indonesia and Taiwan, the Portuguese to Macao, the Spanish to the Philippines, the French to Vietnam, and a number of countries to various outposts in Japan, China and Southeast Asia. Although colonialism's last vestiges are soon to be handed back to China, many of the Europe-Asia relationships are still quite strong. Korea was never a party to European colonialism and so does not have such historic ties to Europe.
Korea, then got "caught in the middle" between the first waves of European countries investing in front-running Japan and their former colonies, and the new wave of investment being made in countries with inexpensive labor-like China. Mr.Wout Biegstraaten, Second Secretary at the Dutch Embassy says of the heightened interest there, "If you shout 'China!' in the Hague, you'll quickly have a huge convention hall full of people."
Living in Seoul without children gives you a big advantage: you can choose where you want to live rather than being tied to the areas near the French, German or American/English schools. We decided to settle for Myung Ryun Dong, near Hyewha Dong, an inner suburb of Seoul, allowing us to live in a traditional Korean area close to the city and my office located near city hall. It is not a mean privilege to live 15 minutes away from your office as every Seoulite knows how important it is to avoid the city traffic. It is also important to live in an area inhabited by Koreans if one wants to understand and enjoy the Korean way of life. Not far away from home there is a primary school and every morning I enjoy watching little kids going to school, very neatly dressed, and generally quite well behaved though very jolly and full of enough energy to burst. Our proximity to Sung Kyun Kwan University also makes the neighborhood very lively. Although trends among that age group are becoming universal (sports shoes, jeans, baseball caps), I also find the young Koreans much neater than their European and US counterparts. The neighborhood is full of cafes, fast food, music shops, and small delicatessens where one can buy a snack. The road belongs to young pedestrians who seem to splendidly ignore the mechanical gender and its dangers. To get to my office, I drive along the fences of the Secret Garden, and through Insa-dong where I turn onto what I call Buddha Street, for most of the boutiques are selling religious Buddhist items. From there the bank is just a few traffic lights away in an area dominated by large department stores, some of Seoul's best Hotels-Lotte, Chosun, Plaza-and last but not least, the Bank of Korea. Business life in Korea is for a banker similar to many other countries, except that Korea's economic path is much faster than anywhere else-an average 7.5% growth rate for the last 30 years! A fast changing environment is therefore a constant characteristic of our job, and constant watch and updating is a must for understanding and assessing the evolution of business. Working meetings, conventions, site inspections, and cocktail parties are a regular feature of my daily life, which means that I meet a lot of people, clients, and fellow competitors of all nationalities, but mostly Koreans. My lack of knowledge of the Korean language is certainly frustrating-although most of my interlocutors master English-as I feel it would be so much richer to be able to communicate in Korean. I enjoy the food in Seoul, kalbi in particular, but also mandu and fresh vegetables. I even started to enjoy kimch'i, which I initially found a bit too spicy. To get rid of all the extra calories, I regularly attend a health club, opportunely located near my office, to which I go during my lunch break whenever I am not involved in a business lunch. Social life is pretty busy, between official functions and private dinner parties. We like to mix nationalities when we receive at home, especially when receiving visitors from abroad, because we feel that we should give our guests an opportunity to meet Korean people. However, our preferred entertainment activity is centered on music. We have been privileged with attending recitals given by world class artists, both Korean and foreign. My wife is a professional musician, so I also have had the advantage of having home recitals with the participation of outstanding Korean musicians. We also follow, as much as we can, the exhibitions that are organized in Seoul, or in provincial Korea when travelling. Last Fall, for example, we enjoyed visiting the Botero exhibition at the Hoam Art Hall. As you can see, our life in Seoul is well filled, and I can not remember a dull moment since we arrived here. I think that to mix with a lot of Korean people is the key factor to our positive impression. I am always surprised when I hear foreigners complaining about their life in Korea and I would give them as advice the Pierre de Coubertin motto: "L'important, c'est de participer." |
So it has only been recently that the Koreans and Europeans seem to have recognized each other as potential partners, and on a fairly high and equal level. European integration started the ball rolling, transforming a hodgepodge of far-away lands into a single, somewhat cohesive unit and the largest integrated market in the world. Then in its bid to become a more active member of the world community, Korea began participating in international organizations-the UN (1991), the WTO (1995), ASEM (1996), and the OECD (1996), for example.
October 28, 1996, saw another important upgrading of Korea-EU relations, with the signing in Luxembourg of the Framework Agreement for Trade and Cooperation between the Republic of Korea and the European Community and its Member States. For the first time, Korea-EU relations had been put on a long-term contractual basis. The agreement contains provisions aimed at developing and intensifying trade and bilateral economic cooperation in several fields. Some of its major points include non-discriminatory market access, an open climate for investment, business cooperation, and harmonization of technical standards. The agreement also provides for cooperation in other areas, such as science and technology, environment and energy, and cultural exchange.
The European Commission Vice President, Sir Leon Brittan, said when the Framework Agreement was initialled in Brussels earlier in the year, that the agreement means the EU and Korea are no longer just distant trading partners, but will now become more closely engaged both politically and economically. And in connection with the October ceremony, Irish Foreign Minister Dick Spring, President of the EU Council, remarked that the charter is "The most comprehensive and most ambitious agreement we have negotiated with any of our Asian partners."
The European Commission and Korea also initialled an agreement in November in Brussels on telecommunications procurement, the result of three years of negotiations which will pave the way for opening the respective telecom markets to the other party.
Obviously, Korea's responsibilities now are many. As active participants in the protocols it has signed onto, Seoul must quickly open its markets and restructure its legal framework for equal trade and investment treatment. And the Europeans are watching closely to make sure they do it.
Dr. Hutter explains that the market opening measures already institutionalized definitely make the environment more attractive, but at least in the case of German companies, "The reason for additional investment is that companies that are doing business here have been attracted by the market and by the growth rates. Unlike 10 or 15 years ago, nobody comes to Korea because of cheap labor. They come increasingly because they want to provide products for the Korean market proper. They see that the Korean economy is in a mature stage and they have something to offer. They also see that more and more Korean companies are investing abroad, which makes it convenient for them to hook up with German companies who are active globally."
Others speculate that European companies are scrambling to get a foothold in the Korean market before Korea fully opens up to the Japanese companies that have been blocked by Korea's diversification policies,which are soon on the way out.
Whatever the reason, European investment is on the rise, although the statistics, again, are somewhat difficult to interpret. Germany is the undisputed leader among investors in Korea. In 1996, applications for almost $95 million of new investment in 33 cases was submitted. Statistics show that investment from Ireland and the Netherlands exceeded that figure, but another trait of today's borderless economy is the difficulty in tracing money flows.
"When some of these large refining companies invest, there usually is a lot of money involved," says Jim Enters, head of the European Union Chamber of Commerce and President of the local office of the Dutch chemical group, Akzo-Nobel. "ARAMCO, for example, has an office in the Netherlands, so their holding of Ssangyong Refining has been recorded as a Dutch investment."
So the Irish and Dutch figures, especially, are inflated because of those countries' attraction for holding companies from all over the world, although the same could be the case for any country. Another difficult thing to trace is any profits that are plowed back in to the local investments by the companies already on the ground here.
Dr. Hutter explains, "If a company here uses 50 percent of its profits to build a new warehouse or buy computers or whatever, that's something you can't possibly compute, either using the Korean method of counting applications, or our method of tracking international money transactions, because there is no application made or transfer of money involved between the two nations."
"If you take real investment, I think you will find that the Germans, the British, and the French are the strongest investors here," he continues, "and it should only increase as Korea integrates its policies with internationally accepted norms. Obviously Korea has to play a permanent role and Korea will be measured by its investment standards against what other OECD countries are doing and no longer by what developing countries are doing."
"This point will be continuously pressed both within the WTO and the OECD, where there is a push in the general agreement that not only should world trade policy be leveled and streamlined, but, and it is a comparatively new development, the situation in different countries should be evened in terms of investment as well," says Hutter. "The main argument is that investors should be treated alike, everywhere, whether they are domestic or foreign. That is the main purpose of this initiative and the OECD is working quite actively on an MAI (multilateral agreement on investment). The Koreans are participating in this, so they are aware of what the other developed countries want. And, of course, the situation here is still off that mark. Foreign and Domestic investors are not treated alike. There are problems, especially in regard to financing of investments."
Financial obstacles, resulting from high interest rates and the limitations on securing overseas financing, is also on Mr. Enters' list of the "high fives" of doing business in Korea. He also cites high land cost (and certain restrictions on freely using property), high labor costs, high distribution costs, and a high number of rules and regulations, as barriers for investment. And both Mr. Enters and Dr. Hutter agree that foreign companies often feel targeted for inspections in certain areas-tax audits, to reveal proprietary production details, or inform the Korean authorities about financial matters.
But Dr. Hutter goes on to say that companies that are experienced global players know that the business and investment climate in foreign countries is something to which they must adjust. They have undoubtedly had to do it in other countries and they do it in Korea.
"I think German companies in particular are extremely successful at adapting to foreign countries and their business practices," he says. The nature of German industry, with very large companies in a comparatively large and rich country leads to the fact that German companies are very well known abroad. Names like Siemens, BASF, Bosch, Bayer, Mercedes-Benz and BMW have all been around in Korea for a long time, many of them with a very large presence, in fact.
"For small and medium sized companies, it is usually quite difficult to maintain an operation abroad-especially to maintain operations in several countries abroad-because it's just too costly. They don't have the money or human resources to do that," says Hutter. "We have around 160 companies working here."
One common issue that everyone from the Korean government to the European Chamber of Commerce to every European commercial counsellor has to deal with is Korea's image problem. Many say that "Nothing is as good as a bad story." And Korea's image has been damaged by a series of easy-to-sensationalize "bad" stories. Over the span of three years, the Songsu Bridge collapsed, gas explosions occurred in Seoul and in the Taegu subway, the Sampoong Department Store collapsed, two ex-Presidents have been sent to jail, there were violent student demonstrations, a North Korean submarine incursion, strikes, Hanbogate, and constant news about the economic "crisis."
"They show these things on TV and it produces a very negative perception of Korea," says Mr. Enters, "and I don't think Korea deserves it."
All of the foreign embassies, organizations and companies in Korea report fielding calls from anxious business people asking if it's safe to come to Korea. And those who answer the calls spend a fair amount of time defending Korea as an investment site. "The investment climate is certainly getting better," says Dr. Hutter, "and Korea is an important market. We tell our German visitors who come here that China has a GDP of roughly $500 billion per year. Korea, even though it is comparatively small, has about the same GDP as China or the same as all seven ASEAN countries combined. That shows our people in Germany that the Korean market is extremely interesting for exports, and also that the Korean marketplace is very interesting for joint ventures or investments as well. The economic situation here is still good and the outlook is good. It is good for people to be here early, secure a foothold and start to do business while others are still not here. So even though in the media world the Korean image is suffering, we are trying to promote the opposite. We are trying to explain to people that there are some real opportunities here and nothing to be scared of."
The problem lies in the fact that Europeans just don't know much about Korea. "A lot of people don't know where to find Korea on the map," says Jim Enters.
But they are learning. In the Netherlands, according to Mr. Biegstraaten at the Dutch Embassy, before Samsung's bid for Fokker, "The general public didn't have the faintest idea about Korea. They knew Samsung from audio/video equipment and such, but no one knew the company could have anything to do with aerospace or shipping or all the things they're involved in."
"Then they learned a lot," he continues. "The newspapers started writing about Korea, the chaebol, and the economic miracle. Later on, more and more people got comfortable with the idea of Samsung taking over a Dutch aerospace company, and as people got to know more about Korea and about Samsung, they thought it was a good solution."
Unfortunately the deal eventually fell through.
Image problems are not a one-way street for embassy staff, either. The Daewoo-Thomson flap may have set Korean-French relations back a bit, and other foreign dignitaries are also working to change the image Koreans have of Europe.
At the British Embassy, Mr. Adrian Stephens, Head of the Commercial Section, says that Koreans think of the British as "gentlemen" but not necessarily producers of advanced technology. He would like to see the latter image prevail, but without entirely dismissing the former. And at the French Chamber of Commerce, it's the same story. How can constructive business relationships develop if Koreans think of France simply as a producer of artists and perfume?
Whatever the European countries are doing to promote an image conducive to attracting Korean investments must be working. Investments into Europe jumped about 93.6 percent from $674 million in 1995 to $1.3 billion last year. Notably, Korean investments in Britain saw a year-to-year increase of 318 percent from $202 million in 1995 to $846 million last year. The LG Group announced in July of 1996 plans to invest $2.63 billion in Wales to manufacture monitors, picture tubes and semiconductors, at that time the biggest ever Korean investment in Europe. A two-phase Hyundai Electronics investment in the UK promises to top even that. Daewoo completed construction of a CTR manufacturing factory in Lorraine, France, a $120 million project, and Samsung announced an ambitious $700 million plan to create a massive electronic manufacturing complex in the UK. In Germany, Kia Motors began producing Korean automobiles for the first time in the EU last year.
Back in Korea, European companies are building a stronger and stronger presence and a good network of support is gradually being constructed. In addition to the European Chamber of Commerce, the British Chamber of Commerce in Korea, the French Chamber of Commerce and Industry in Korea, the Korean-German Chamber of Commerce and Industry, and the Italian Trade Commission have representatives in Seoul to promote the interests of their countries' companies. Cultural interests are also well represented, by the British Council, Centre Culturel Francais, Goethe-Institut, the Italian Cultural Center, and the Portuguese Cultural Center. There are also informal gatherings, for example a monthly Dutch Business Luncheon, where members get together to discuss items of interest.
And, of course, there is the European Union delegation which is responsible for trade policy and official negotiations on behalf of all the EU members. Dr. Hutter explains, "When it comes to market access, and that's the most important issue, it's totally EU. The way we work in this case is that the European member states here-the embassies and the EU delegation, get together. We have a monthly meeting of commercial counsellors and we discuss ideas, problems, questions, and demands and we formulate a common policy. We give that to officials in our capitals who discuss the issues in Brussels at regular meetings of the trade committee. There are biannual meetings in Brussels or in Seoul between the European Union Commission and the Korean government on trade policy matters where the EU puts forth our demands."
"So in that sense, we work very closely together," adds Hutter. "We present a huge market for the Koreans, and the European Union, supported by the member states, represents an economic force in the world."
The field of investment is not yet structured in the way that trade has been, so it's pretty much every country for itself in that regard until a more precise general rule on investment is created. So in other words, while a country like Germany cannot negotiate trade policy for itself, it does support its companies in their investment ventures. And so does every country from Finland to Portugal, Ireland to Greece.
The tools are now in place for Korea and Europe to resolve any outstanding differences and to further enhance cooperative ties. Seoul has committed itself to becoming an equal partner with Europe and the other developed countries and the process toward that end is underway. Participation in the OECD, ASEM, and the 1996 Framework Agreement, gives Korea a direct line to Europe and the chance for more open dialog and alliance in a world where Korea and Europe are not so far apart anymore.
| by Don Hackney |
by Christian Kesberg, Initially, the Embassy had little difficulty in accessing the required information on the regulatory environment for investors. The material published by the Korean government in 1995 on foreign investment was sufficient yet antiquated and a bit unstructured. The various publications failed to address important issues like labor costs in different industries and land prices as well as procurement procedures for locations outside industrial estates. There was no information whatsoever available on the industrial environment of individual provinces. After careful consideration, Engel chose Korea as the desired location for their investment in Asia. The company was convinced that for a high tech manufacturer, the availability of high quality semi-finished goods and components and the possibility to tap into a qualified and highly educated workforce would offset the relatively high land prices and labor costs in Korea. Transport logistics superior to developing countries in the region and of course the vicinity to the important and rapidly growing automobile and electronic industries were other decisive factors for the decision to invest in Korea. During the initial implementation of the project, contacts to the one-stop investment service center at MOTIE proved to be helpful. The center provided quick and unbureaucratic confirmation of the eligibility of Engel's technology for tax incentives-a key issue for the investment. Although very helpful and professional, the center could only provide a little information on land acquisition and factory sites available and was not in the position to act as an intermediary between the foreign investor and provincial and local authorities. The Embassy's attempt to directly contact provincial governments for location related information did not lead to any useful results. Due to language problems and communication gaps, the use of Korean real-estate agents did not turn out to be successful either. Finally, retainment of the services of a professional consulting company to conduct an independent location study seemed to be the last option, albeit a costly one. At this point the case was referred to KOTRA, Korea's foreign trade promotion agency, only recently entrusted by the Korean government with the promotion of incoming investments. Although having little previous experience with investment promotion, KOTRA handled the project with remarkable efficiency and professionalism enhanced by the language skills and the experience of their officers in cross cultural communications. The requirements Engel had established for a location in Korea were immediately understood and in very short time a cross-section of potential locations with matching parameters was suggested. Already on the occasion of the first field trip, a suitable plot of land was selected. During the subsequent negotiations between the foreign investor and local provincial and federal authorities, KOTRA acted as an intermediary and interpreter on behalf and in the interest of Engel, strongly identifying itself with the cause of the foreign investor. The timing of Engel's $40 million investment project in high tech machinery manufacturing coincided with a transitional phase in Korea's attitude toward foreign investment. Changing slowly from the politics of liberalization to investment promotion, a number of promotional tools like financial incentives and subsidies, although existing already on paper, had not been put to practice when Engel decided to pursue investment opportunities in Korea. It was KOTRA who convinced government authorities to rapidly enact these incentives and who also realized that investment promotion goes much further than assistance with approvals and encompasses a wide range of services and guidance for a foreign company, not only in legal but also in practical matters. KOTRA rendered invaluable services to the Engel Group and deserves to be credited with the major progress that this investment project has made over the last couple of months. With their involvement in investment promotion in Korea, the thorny roads to opportunity should be much easier to navigate for future investors. |
y wife and I arrived in Seoul ten months ago and we started to enjoy our life in Korea after a brief period of adjustment which coincided with our moving into our new home. I believe that our family really qualifies as international-my wife is Australian and we have spent more than 20 years living away from home. Our three grown children are living in Paris and Los Angeles.