A GROWTH MIRACLE LOOKING FOR RENEWAL

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A GROWTH MIRACLE

LOOKING FOR RENEWAL

BY M A R K S T O K R E E F | EM B A S S Y O F T H E RE P U B L I C O F KO R E A I N TH E HA G U E | AU G U S T 2 0 1 3¹

Driven by a high work ethic and collective determination, South Korea flourished from an agrarian society into a modern, open economy. What is the economy’s current standing? And what makes Korea stand out compared to other countries? This article analyzes the basic characteristics of the economy and the business opportunities the peninsula presents to Dutch entrepreneurs.

CL O S E E C O N O M I C T I E S T H E NE T H E R L A N D S A N D SO U T H KO R E A

After China, Japan, and Singapore, South Korea forms the most important Asian market for the Netherlands.

Since the EU-Korea Free Trade Agreement took into effect (July 1, 2011), the export share to South Korea rose to

€ 3.7 billion in 2011—an increase of 13% in relation to 2010. At the same time, import from South Korea increased by only 4%, thereby comprising a total value of € 2 billion.² For the Netherlands, it thus resulted in a trade surplus of € 1.7 billion in 2011. Currently, specialized machines and chemicals embody the largest chunk of Dutch export to Korea, whereas machines cover and transport materials (automotive parts and cars) represents

€ 1.2 billion of import from Korea to the Netherlands.

1 This article is a translation of the original Dutch article published in Fenedexpress, Nr. 379, July/August 2013 issue, pp. 36-38.

2 CBS, “Republiek Korea: Handelsoverschot toegenomen”, February 26 2013, can be accessed through: http://www.cbs.nl/nl-

NL/menu/themas/internationale-handel/publicaties/belangrijkste-handelspartners-nederland/archief/2012/2012-korea-2011-ih-art.htm .

Mutual investments also take place on a substantial scale. After the U.S. and Japan, the Netherlands is the third-largest investor in Korea, taking account for 10.7% of total Foreign Direct Investment (FDI).³ At this moment about 40 Dutch companies – such as ASML, AkzoNobel, and RoyalVopak – have establishments on the peninsula. In reverse, the Netherlands, being the Gateway of Europe, is one of the largest recipients of Korean investments within the EU. In that respect, it’s illustrative that 125 Korean firms have subsidiaries in the Netherlands. For instance, Hanjin Shipping and South Korea Energy are established in Rotterdam.

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PRODUCT $ Million %

Crude Petroleum 100,806 19.2

Semiconductor 32,483 6.2

Natural Gas 23,859 4.5

Petroleum Derivatives 22,883 4.4

Coal 18,477 3.5

Steel Plate-Rolled Products 12,872 2.5

Iron Ore 11,381 2.2

Computers 10,673 2.0

Equipment for Semiconductors 9,741 1.9

Fine Chemical Materials 8,893 1.7

FA V O R A B L E M A C R O-E C O N O M I C K E Y I N D I C A T O R S

South Korea is a consumer growth market. Currently, South Korea – with its rapidly ageing population of 50 million people – is the 13^th economy in the world.⁵ Despite the ailing global economic climate, the country continues to perform relatively well. Already in 2010 the country was back on track: It recorded a GDP growth of 6.3%, followed by estimated a 2.7% growth for 2013 according to the Bank of Korea.⁶ In the period up until 2017, annual growth of import is expected to be 12%, with an accumulated value of $ 511 billion.⁷ Moreover, the South Korean export anticipates a growth of 5.5% in 2013 and 8.2% in 2014.⁸ Therefore, it may come as no

3 U.S. Department of State, “2013 Investment Climate Statement – Republic of Korea”, February 2013, http://www.state.gov/e/eb/rls/othr/ics/2013/204670.htm.

4Korea International Trade Association, Annual Trade Indicator, “Foreign Trade”, 2011, can be accessed through:

http://global.kita.net/engapp/statistics/statistics_s2-3.jsp?grp=S3&code=S3011 .

5 CIA World Factook, “GDP (Purchasing Power Parity)”, Korea’s GDP (PPP) is $1,64 trillion est. 2012, https://www.cia.gov/library/publications/the-world- factbook/rankorder/2001rank.html.

6Simon Mundy, “S Korea economy: looking up”, in Financial Times, June 27 2013, http://blogs.ft.com/beyond-brics/2013/06/27/s-korea-economy- looking-up/#axzz2Z8qHGnYK .

7 ING en MKB Nederland, “Internationale groeikansen voor het MKB”, April 2013, p. 23, can be accessed through:

http://www.ing.nl/Images/Internationalisering%20MKB%20DEF_tcm14-133684.pdf?id=20130709071826.

8Central Bank News, “Bank of Korea cuts 2013 growth and inflation forecast”, January 11 2013, can be accessed through:

http://www.centralbanknews.info/2013/01/bank-of-korea-cuts-2013-growth-and.html.

KO R E A N E X P O R T B Y P R O D U C T

GL O B A L M A R K E T S D O M I N A T E D B Y

KO R E A

TO P 1 0KO R E A N IM P O R T S ⁴

YEAR ON YEAR INFLATION RATE (%) OF THE WON

surprise that Korea was the world’s 7^th largest export nation in 2012: the value of merchandise export amounted to $ 547.9 billion.⁹ Adding to these growth prospects is the prediction that the Korean GDP per capita will outstrip countries such as Germany by 2030.¹⁰

South Korea has built up a firm economic foundation. After the Asian financial crisis (1997-1998), the government implemented substantial reforms in its financial system. For example, the foreign exchange reserves were lifted up to $ 317 billion in order to absorb possible external shocks.¹¹ Also, the Bank of Korea doesn’t engage in the monetary activity of quantitative easing like Japan is doing. This leads to an estimated Korean inflation of 1.7% in 2013 and there are hardly exchange rate risks. In addition to that, export remains stable despite a relatively strong Won.¹²

In that respect it’s also exemplifying that Korea was one of the few countries to receive an upgrade of its credit rating in the period 2008-2012. For that reason Moody’s said in March of this year: “The Korean government’s Aa3 rating […] reflects Korea’s very high economic strength, high institutional strength, and very

9 UN, International Merchandise Trade Statistics, Yearbook 2012, Republic of Korea, can be accessed through:

http://comtrade.un.org/pb/FileFetch.aspx?docID=4859&type=country%20pages

10 Asian Development Bank, Asia 2050: Realizing the Asian Century, 2011.

11 IMF, “Time Series Date on Internatiol Reserves/Foreign Currency Liquidity”, May 2013, can be accessed through:

http://www.imf.org/external/np/sta/ir/IRProcessWeb/data/kor/eng/hstkor.pdf.

12 Eunkyung Seo, “Bank of Korea boosts 2014 growth estimate after holding key rate”, Bloomberg, July 11 2013, http://www.bloomberg.com/news/2013- 07-11/bank-of-korea-holds-rate-after-cut-in-may-to-boost-economy-1-.html

REAL GDP GROWTH RATE %: SOUTH KOREA VS.OECDAVERAGE (2007-2014)

high government financial strength. […] In addition, Korea has a strong external position, supported by competitive export industries and large holdings of official foreign exchange reserves.”¹³

SH O R T-L I V E D I M P A C T O F NO R T H KO R E A N P R O V O C A T I O N S

Although North Korean bellicose rhetoric frequently reached the news recently, it only has a short-lived negative effect on the South Korean financial markets.¹⁴ After 60 years, South Koreans are increasingly aware that the rhetoric and provocations by North Korea are first and foremost a survival mechanism of the regime in order to acquire domestic support against the common enemy—the United States. The KOSPI Index illustrates that investors are paying less and less attention to the verbal threats expressed by the northern neighbor (see graph).¹⁵

13 Global Credit Research, “Moody’s changes to stable, outlook on KDB’s Aa3 deposit ratings”, Moody’s, May 10 2013, http://www.moodys.com/research/Moodys-changes-to-stable-outlook-on-KDBs-Aa3-deposit-ratings--PR_272608.

14 Rob Minto, “Koreas and the market: charted”, in Financial Times, April 2 2013, can be accessed through: http://blogs.ft.com/beyond- brics/2013/04/03/korean-tension-and-the-market-charted/#axzz2Z8qHGnYK.

15 Ibid.

FIRM FUNDAMENTALS ENABLE THE SOUTH KOREAN ECONOMY TO REACT WITH RESILIENCE FOLLOWING NORTH KOREAN PROVOCATIONS

SUB-RANKINGS OF KOREA DIVIDED BY DOING BUSINESS TOPICS

MI R A C L E O N T H E HA N RI V E R

Korea’s economic rise has been remarkable. South Korea was the first country to rise from being a net receiver of development aid to net contributor when it joined the Development Assistance Committee (DAC) of the OECD in 2010. It lasted until 1968 before South Korea surpassed North Korea in terms of GDP per capita.¹⁶ In the 1960s it was President Park Chung-hee (1963-1979) who propelled export-led development and industrialization by setting ambitious targets in collaboration with Korean conglomerates—the well-known chaebols such as Samsung, LG, and Hyundai.

In present-day Korea these conglomerates continue to play a dominant role. The ten largest represent 76.5% of GDP sold on foreign markets.¹⁷ For the Dutch companies the challenge is to fond areas in the supply chain of chaebols in which they can add value or to introduce innovative technology into Korean SMEs as is actively supported by the government.

FA V O R A B L E B U S I N E S S C L I M A T E

The domestic market is to a high extent liberalized since the 1990s. In the World Bank’s ranking of the Ease of Doing Business, South Korea currently ranks 8^th, while China for instance occupies the 91^st spot. The legislation is well-structured: Property rights are subject to independent protection and expropriation is unlikely to occur.¹⁸ Moreover, Intellectual Property Rights (IPR) are well-protected. Not surprisingly, Korea takes the 4^th spot in the worldwide ranking for IPR applications.

Concerning compliance with contracts, Korea holds the 2^nd place, and in the field of exemption from trade barriers it is third.¹⁹ Yet if for some reason indistinctnesses or complaints about legislative issues do pop up, then the Foreign Investment Ombudsman stands ready to resolve such matters.

16 Young Iob Chung, South Korea in the Fast Lane: Economic Development and Capital Formation, 2007: Oxford UP, p. 14

17 Kwon Eung-jung, “Top ten chaebol now almost 80% of Korean economy”, in Kanhyoreh, August 28 2012, can be accessed through:

http://www.hani.co.kr/arti/english_edition/e_business/549028.html.

18Bertelsmann Stiftung, “BTI 2012 | South Korea Country Report”, 2012, p. 14, can be accessed through: http://www.bti- project.de/fileadmin/Inhalte/reports/2012/pdf/BTI%202012%20South%20Korea.pdf.

19 World Bank, Economy Rankings, June 2012, can be accessed through: http://www.doingbusiness.org/rankings.

FI S C A L I N C E N T I V E S

South Korea offers a wide array of fiscal incentives for foreign investors. In the first seven year after entering Korea there is exemption from corporate tax, exemption from paying acquisition and property tax for a period between five and fifteen years, five year exemption for VAT on capital goods, and location support through low or free-of-charge rental costs. In the end, on a case-by-case basis, the Ministry of Strategy and Finance decides whether a company can make use of those schemes. Especially investors that drive innovation and technological development qualify for the fiscal advantages. For more detailed information regarding FDI incentives, be advised to visit the InvestKorea website.²⁰

RE G I O N A L B U S I N E S S H U B

South Korea can serve well as a business hub for the market of the region of Northeast Asia. It is situated in the heart of an economically powerful region: Northeast Asia produces 25% of worldwide GDP and houses one-third of the world population.

The extensive network of free trade agreements turns Korea into an ideal logistics hub. Besides the EU- Korea FTA, free trade agreements have been signed with the U.S., Singapore, India (CEPA), and Turkey amongst others. Moreover, currently new FTA negotiations are ongoing with countries such as China and Japan.

OVERVIEW OF FREE TRADE AGREEMENTS IN EXISTENCE OR IN P ROGRESS²¹

In Effect Concluded Under Negotiation Under Consideration

Korea-Chile FTA (2004) Korea-Turkey FTA Korea-Canada Korea-MERCOSUR FTA

Korea-Singapore FTA (2006) Korea-Colomia FTA Korea-Mexico FTA Korea-Israel FTA Korea-EFTA (Iceland, Norway,

Liechtenstein, Switzerland) FTA (2006)

Korea-GCC (Bahrein, Kuweit, Oman, Qatar, Saudi Arabia, UAE) FTA

Korea-Central America FTA

Korea-ASEAN FTA (2007) Korea-Australia FTA Korea-Malaysia FTA

Korea-India CEPA (2010) Korea-New Zealand FTA

Korea-EU FTA (2011) Korea-China FTA

Korea-PERU FTA (2011) Korea-Vietnam FTA

Korea-U.S. FTA (2012) Korea-Indonesia FTA

Korea-China-Japan FTA RCEP (Regional Comprehensive Economic Partnership) Korea-Japan FTA

20 Korea Trade Center, InvestKorea website: http://www.investkorea.org/ikwork/iko/eng/cont/contents.jsp?code=1020403 .

21 Ministry of Foreign Affairs of the Republic of Korea, MOFA.go.kr, overview of current status of free trade agreements can be checked on:

http://www.mofat.go.kr/ENG/policy/fta/status/overview/index.jsp .

OVERVIEW OF THE FREE ECONOMIC ZONES WITH EACH ITS SPECIALTY AREA(S) OF BUSINESS(ES)

Also, the presence of Free Trade Zones (FTZs) serves as an impetus for international trade. In FTZs it’s possible to trade exempt from customs duties and without VAT taxation on commodities. Four seaports are designated as FTZ: Busan New Port (world’s 6^th largest port for cargo transhipment), Incheon Port, Gwangyang Port (container import, steel production, shipbuilding), and Pyeongtaek Dangjin Port. Please note that Incheon International Airport is the only FTZ using air transport.

Besides FTZs, South Korea has seven Free Economic Zones (FEZs). FEZs are self-contained living and business districts featuring air and sea transportation where multinational corporations settle and set up cooperative initiatives with like-minded firms. For instance, bio-tech company Crucell from Leiden (Netherlands) has a production facility for vaccines in the Incheon FEZ nearby Seoul. Others FEZs with each their own dominant industries can be found in Busan-Jinhae (logistics, shipbuilding, automobile industry), Gwangdang Bay Area (logistics, medical, heavy industry), Yellow Sea FEZ (shipbuilding, auto parts, machinery, components), Saemangeum-Gunsam (green-tech, agro), Daegu-Gyeongbuk (knowledge-based industries), and Jeju Free International City Development Center (medical, high tech, education).

NO R M S O F N A T I O N A L B E H A V I O R

Two important cultural aspects are essential for doing business with South Koreans. Firstly, hierarchy plays a larger role in Korea than in the Netherlands where the society is more much more egalitarian. For a large part due to the influence of Confucianism, hierarchy is deeply rooted into the Korean society. The way Koreans bow to superiors within their organization demonstrates that as a good case in point.

For Dutch businessmen it is useful to realize how hierarchy influences the decision-making process within a Korean company. It is important to close deals with individuals who occupy high positions in the organizational structure. Also, using differential forms of addressing people is also highly appreciated in the Korean business culture.

Secondly, building up relations is more important and time-consuming in Korea compared to the Netherlands. Building up relations requires both social finesse as well as patience. Without good relations it can be hard to open doors or to make appointments with a company. Then it can make a difference if a mutual friend introduces you. Furthermore, it is helpful to take a drink together with business partners in order to build up a relationship. In that case a karaoke night with some Soju drinking offers the opportunity to stay informed about possible changes within the staff of dynamic companies.

FO C U S O N I N N O V A T I O N A N D G R E E N G R O W T H

The government is committed to obtain innovation in order to keep the economy competitive. It’s important for the government to create high-quality jobs. 65% of the youngsters (age 25-34) have followed a higher education, but a sufficient number of high-quality jobs are lacking.

In order to retain its current

competitiveness, the government stimulates SMEs in Korea.

Minister Yoon Sang-jick of Trade, Industry, and Energy (MOTIE) put forward the target to increase the number of SMEs –each generating $ 100 million export value – from 116 in 2011 to 300 by 2017.²² President Park also emphasizes the need for co- prosperity between the chaebols and SMEs in order to advance

22The Korea Herald, “Park urges cheabol-SME coprosperity”, May 25 2013, can be accessed through:

http://m.koreaherald.com/view.php?ud=20130325000856&ntn=0.

PRESIDENT PARK GUEN-HYE PLEDGES ACTIVE SUPPORT FOR SMES

innovation. And the country encourages Korean SMEs to look for mergers and acquisitions abroad.²³ Dutch firms from innovative sectors such as horticulture, biotechnology, creative industries, high-tech, and the water sector who bring along high-value technology to Korea will receive an extra warm welcome.²⁴

A case in point for the hunger to boost innovation and technology is the Green Growth strategy that must contribute to energy security of Korea. For two reasons the government strives for energy independence:

Firstly, because of scarcity of raw materials, and secondly because 86% of primary energy needs are met through import. In this context, in 2009 former President Lee Myung-bak formulated the National Strategy for Green Growth.

Besides investments in renewable energy, the government keeps stimulating nuclear energy to achieve the environmental targets—in 2020 the emission of greenhouse gases must have been reduced by 30%.

Annually, the expenditures to advance green growth form 2% of GDP. One component of the Green Growth strategy is the Renewable Portfolio Standard, which is a subsidy scheme established to generate renewable electricity. Korea also wants to expand offshore wind energy to an annual capacity of 7.7 Gigawatt. Finally the government also supports the development of smart-grids in order to prevent black-outs of electricity grids from happening.²⁵

CO N C L U S I O N

All things considered, the economic growth and trade prospects present fertile circumstances for a wide variety of activities to start (or rack up) business initiatives in Korea. Although it takes some time to understand cultural customs and characteristics of the domestic market, the liberalized Korean domestic market, favorable fiscal schemes, and the governmental drive for innovation offer many opportunities to seize for the Dutch SMEs and sectors.

Be inspired!

23Wouter Wolzak, “Opkomst van M&A en private equity in Zuid-Korea”, May 7 2013, can be accessed through: http://mena.nl/artikel/18569/opkomst- van-m&a-en-private-equity-in-zuid-korea.

24 Rijksoverheid, “Verhagen wil handelsrelatie met Zuid-Korea verder uitbouwen”, April 29 2011, can be accessed through:

http://www.rijksoverheid.nl/nieuws/2011/04/29/verhagen-wil-handelsrelatie-met-zuid-korea-verder-uitbouwen.html.

25 Korean Smart Grid Association, more information on: http://www.ksmartgrid.org.