International Business Project

South Korea

November 2008
 South Korea
When looking to invest in a foreign country there are many aspects to consider. A

countries history, political framework, cultural uniqueness, financial environment, as well

as, other risk factors can influence investments and be the deciding factor that makes an

investment profitable or not. The country we decided to take a closer look at was South

Korea, also known as the Republic of Korea. With all the industries to choose from the

industry that intrigued us the most was shipbuilding, since South Korea is ranked #2

industry wide. Shipbuilding involves both the architecture of the ship and the

manufacturing of it. As already mentioned South Korea is an industry leader with over $

$$ sales in 2007. Based on this alone it is very impressive, but other risk factors needed

to be considered. Throughout the entirety of this paper these risk factors will be

evaluated and a quantitative model will also be included to explain our answer to the

question, “Would you invest in this country?”

 Section 1

Social and Cultural Environment

Section 1 includes an in depth evaluation of South Korea’s social and cultural

environments. A person’s social environment includes their living and working

conditions, income level, educational background, and the communities they are part

of. First off, South Korea is located in eastern Asia and is on the southern half of the

Korean Peninsula bordering the Sea of Japan and the Yellow Sea. The surrounding

waters have played an integral role in the lives of the Koreans since ancient times,

contributing to the early development of shipbuilding and navigational skills. During

certain times of the year the surrounding waters give threat of typhoons, but for the most

part the climate is temperate with rainfall heavier in the summer than in the winter. Other

environmental threats consist of air pollution in large cities, occasional acid rain, and

water pollution from the discharge of sewage and industrial effluents. The land itself is

considered to be 45% cultivatable with 2/3 of the country being mountainous with natural

resources consisting of coal, tungsten, graphite, molybdenum, and lead.

As for the Korean population, they are one of the most ethnically and

linguistically homogenous countries in the world. According to an estimate in July of

2008, the population totaled 48,379,392. In particular the median age for males is 35.5

years and for females is 37.9. South Korea is also experiencing a growth rate of 0.269%

in 2008. Throughout the country the population is Korean dominated with a small

Chinese population of about 20,000. Korean is the primary language of the country, but

English in addition to a little bit of Chinese is taught as a second tongue. In recent times,
educational facilities have expanded enormously. The country itself spends 4.6 % of its

GDP on school expenditures, totaling roughly two hundred institutions of higher

education, about half of which are located in Seoul, the countries capital. These include

colleges and universities, graduate schools, junior colleges, and other specialized

institutions. On average males spend 18 years enrolling in educational programs and

women spend 15 years of their lives in schooling.

Religion is also a big part of the people and has had a significant influence on the

culture. The two major religions in South Korea are Buddhism and Christianity. Koreans

are proud that the Christian religion was not introduced by missionaries; rather it was

introduced by a scholar who was baptized catholic in 1777 (Kiss, Bow, or Shake Hands).

On his return to South Korea Catholicism was introduced. Even though both of the

above religions are dominant, the religions that have had the most influence are

Confucianism, Shamanism, and Chon-do-gyo, which is a mixture of Buddhism,

Confucianism, and Taoism. Confucianism has contributed to the formation of Koreans’

moral values and stresses to preserve harmony in the home by preserving certain

reciprocal responsibilities in relationships. Whatever their formal religion most Koreans

follow traditional shamanistic beliefs. “These include the belief in spirits, the veneration

of ancestors, and the usefulness or fortune telling” (Kiss, Bow, or Shake Hands).

The Korean way of living has been dependent on the surrounding waters. Fish

remains the chief source of protein in the Korean diet. The fishing waters off Korea are

among the best in the world. The long coastline and numerous islands, inlets, and reefs

provide excellent fishing grounds, and the presence of both warm and cold currents

attracts a great variety of species, including squid, anchovy, yellow corvina, hairtail,
saury, pollack, flounder, cod, sandfish, herring, and mackerel (Columbia Gazetteer). In

addition to this seaweed is valuable, due to agar (a seaweed product) being an important

export. The deep-sea fishing industry is the Korean way of living and has greatly

expanded. Korean ships now range into the Atlantic and Arctic oceans. Almost all of the

deep-sea catch is canned and exported. In 1990 South Korea’s fish catch was the seventh-

largest in the world (Columbia Gazetteer). The dependency on fish has had a positive

affect on the shipbuilding industry since so many ships are needed to navigate the seas.

In recent times though, agriculture has also expanded in effort to protect the fish

resources. Cattle, hogs, chickens, and other livestock are raised, but typically are not

consumed in the Korean diet. Agricultural products include rice, root crops, barley,

vegetables, fruit, cattle, pigs, chickens, milk, and eggs. Other industries that are a big

part of the Korean population are electronics, telecommunications, automobile

production, chemicals, and steel.

GDP has dipped in the early half of the last century, but has seen a steady growth

over the last couple of years. Between 2003 and 2007, growth moderated to about 4-5%

annually. A downturn in consumer spending was offset by rapid export growth. Moderate

inflation, low unemployment, and an export surplus in 2007 characterize this solid

economy, but inflation and unemployment are increasing in the face of rising oil prices

(CIA World Fact Book). According to a CIA estimate in 2007, the unemployment rate is

3.3%. In addition, the work force totals roughly 24.22 million, with 7.5% being

agriculture, 17.3% being industry related, and 75.2% being service related. From these

industries come Korean exports, such as semiconductors, wireless telecommunications

equipment, motor vehicles, computers, steel, ships, and petrochemicals. Imports consist
of machinery, electronics and electronic equipment, oil, steel, transport equipment,

organic chemicals, and plastics.

Doing business in South Korea is much different from doing business in North

America. One difference to be aware of is the use of eye contact. In South Korea not

much eye contact is used when conversing about business. Koreans of equal status look

at each other about half of the time. Koreans of unequal status, differ in that the lower

ranking person will avert their eyes through much of the conversation. In South Korea

extended eye contact can be seen as being aggressive or angry. Another key tip is to

make sure you show respect to Korean supervisors. In order to do so, never put anything

on the manager’s desk because Korean executives are very territorial (Kiss, Bow, or

Shake Hands). Negotiations also differ when compared to the United States. When

negotiating in the states, it all comes down to the facts and providing support for those

facts, but in South Korea the truth is seen in a persons personal feelings. The use of

objective facts is becoming more common in negotiations.

In addition, it is very important to be punctual. Punctuality is expected from

foreigners as a sign of good business practice. Also it is key to develop a good

relationship with your contact because that contact is going to have to sell your proposal

to the entire company. Age and rank are very important in South Korea as well. If you

are attending a group meeting it is important to walk in order of importance with the most

important or highest ranking person walking in first and so on. When greeting Koreans,

men greet each other with a slight bow and sometimes an accompanying handshake while

maintaining eye contact. Women typically do not shake hands so don’t try it. Also wait

to be introduced and avoid introducing yourself because it can be seen as rude. When
addressing someone, address them by their title alone or by both their title and their

family name. A couple other tips that are useful are being sure to use proper gestures.

Physical contact is seen as inappropriate with older people, people of the opposite sex, or

people who are not good friends. Also feet are considered dirty and are not to touch any

objects besides the floor. Always be sure to keep your feet on the ground. Finally it is

considered tasteless to blow your nose in public. If you have to blow your nose excuse

yourself and blow it in private. As you can see doing business in South Korea is

completely different. If not aware of these tips, a business person can offend someone

and ruin the business trip, resulting in not getting additional business or possibly losing

business that you may already have.

 Section 2

Financial and Economic Environments

After South Korea signed an armistice with North Korea in 1953, the nation’s

economy has grown rapidly at a rate almost 14 times that of North Korea (CIA World

Factbook). Currently, the nation has the 13th largest economy, with a gross national

product of $25,000 per capita. Through economic policy changes and improvements in

labor relations, the nation’s GNP increased almost 250% from 1963 (US State

Department).

During the 1960s, President Park Chung Hee emphasized the nation’s economy

on exports and industries requiring high amounts of labor. Using debt to finance South

Korea’s industrial breakthroughs, the country was able to develop credit for businesses

while providing an investor-friendly economy. Throughout the decade, President Hee

reformed the nation’s currency, while strengthening financial institutions (US State

Department). South Korea began focusing its fiscal policies on heavy and chemical

industries, consumer electronics and automobiles during the 1970s. Currently, South

Korea is working towards a more market-oriented economy with the assistance of the

International Monetary Fund. After the Asian market crisis in 1997, South Korea saw its

GDP grow between 7% and 10% between 1999 and 2002. Growth rates remain around at

least 4% (US State Department).

The economy is currently being influenced by an aging population, as well as

labor management issues and underdeveloped financial markets. The nation is concerned

with a decreasing foreign direct investment, as nations are investing in China and other

low-wage Asian countries. President Lee-Myung-bak is working on tax reforms,

increased FDI, and new free trade agreements to stabilize and grow the South Korean

economy.

South Korea has seen healthy growth of its gross domestic product during the past

several years. Currently, the nation’s GDP is at $1.2 trillion, with growth at 5% during

2007. Between 2004 and 2007, South Korea’s GDP has been growing at 4-5% annually.

A significant amount of the nation’s GDP is comprised of services and industry, at 58%

and 39% respectively (CIA World Factbook). The other 3% of the nation’s GDP

represents agriculture, which focuses on farming, as well as forestry and fisheries. South

Korea cultivates products such as rice, barley, vegetables, and fruits, while raising pigs,

chickens, and cattle. The nation has significant natural resources, including coal,

tungsten, and graphite. With significant water resources, the country can develop

hydroelectric power to energize its citizens. South Korea’s industries are comprised of

electronics, telecommunications, shipbuilding, auto manufacturing, mining and

petrochemicals (US State Department).

2007 Economic South Korea United States South Korea Rank

Indicators
Gross Domestic Product $1.206 trillion $13.78 trillion 16
GDP real growth rate 5% 2% 114

GDP per capita $20,015 $45,800 52

Consumer Price Index 2.5% 2.9% 63
Exports $379 million $1.148 trillion 12
Imports $349.6 million $1.968 trillion 14
Population 48,379,392 303,824,640 27
Exchange Rate $1 USD = 929.2 KRW $1 USD = $1 USD n/a

FDI Inflows $119.6 billion $2.093 trillion 24

FDI Outflows $82.1 billion $2.791 trillion 26
Reserves of Foreign $262.2 billion $70.57 billion 6
Exchange and Gold
Budget Revenues $262.2 billion $2.568 trillion n/a
Budget Expenses $225.8 billion $2.73 trillion n/a
Labor Workforce 24.22 million 153.1 million 24
Unemployment Rate 3.3% 4.6% 38
 The gross domestic product per capita for the citizens of South Korea is about

$20,000. This amount pales to that of the United States, which is over $45,000. The

nation has a modest rank among other countries at 52. South Korea’s GDP per capita is

equal to that of developing European nations (Forbes Magazine). During the 1980s and

1990s, the South Korean government focused on directed credit and import restrictions,

which promoted national growth within the nation. The country focused on certain

industries, promoting growth within electronics and telecommunications industries. The

government encouraged savings and investment from its citizens.

After the financial crisis between 1997 and 1999, South Korea’s financial

instabilities were exposed. To reform the economy, monetary policy was tightened, with

interest rates reaching a high of 20 percent. The public sector was trimmed, as the

government budget was held to a 3.8 percent rate of growth. Minimum standards were

established for banks, and those that failed to meet them were closed. Banks are

nationalized, but until the late 1990s, South Korea began privatizing banks (Library of

Congress). Overnight rates for banks are at 3.5%. GDP per capita began to grow again

once consumer spending and exports increased. New real estate policies made owning

property easier, while labor laws were relaxed. This produced a low unemployment rate,

moderate growth, and an export surplus, allowing the GDP to grow and provide a

wealthier lifestyle for its citizens (Forbes). Foreign reserves, which at one point during

the crisis fell to US$8.9 billion, now exceed liabilities at US$174.5 billion, making South

Korea the fourth largest holder of foreign reserves in the world (Library of Congress).

During the 1980s, the GDP per capita was around 1700, and then in the 1990s, it rose to

almost 8000. Since then, it has expanded quickly, until it decreased slightly during 2008.
This is most likely due to the credit crisis, which the nation is currently struggling to

maintain.

Before the credit crisis of 2008, South Korea had the sixth highest amount of reserves in

the world at $262 billion. The country had a lot of money to finance its economy,

including financial institutions and government projects, while keeping its exchange rate

steady. Currently, the nation is engulfed in another financial crisis, and reserves have

fallen more than $22 billion since the beginning of the year (UPI Asia). Foreign reserves

were used to inject money into the swap market in order to stabilize the Korean market

and help the struggling Korean won. This action has led to significant inflation, causing

the price of energy imports to rise dramatically. The government plans to inject another

$10 billion into the currency swap market, and another $5 billion into national banks

(UPI Asia). Fortunately for South Korea, there are significant reserves available to help

strengthen the nation’s currency, while helping financial institutions weather the current

credit crisis.
 Over the past year, the Korean won has become very unstable, due to the global

credit crisis. Asian markets have been hit significantly, as financial institutions have

heavy amounts of debt invested in the United States. During January 2007, 1 US dollar =

925 Korean won (KRW). Now, the currency trades at 1 USD = 1300 KRW. Though the

currency is fluctuating dramatically, and inflation rates are increasing, Korea’s excessive

reserves allow the government to provide capital as needed. Due to the economic

policies of the 1980s, which encouraged saving and investing, the nation now has money

to fix its current crisis. The nation must be able to stabilize its currency in order to

stabilize its economy. South Korea’s short-term foreign debt has been increasing, and

economists worry that its debt will outweigh its credit (UPI Asia). If the nation can

control its currency and slow its credit crisis quickly, it will not have to utilize as much of

its reserves, and begin to focus on growth and expansion of its economy.
 Since the fall of 2003, the Korean won has gradually strengthened against the US

dollar. Much of this is due to the new foreign exchange policies introduced during the

summer of 2005. Non-financial institutions were able to increase investments in foreign

financial institutions from $1 million to $3 million. Real estate regulations were relaxed,

and investors could purchase foreign real estate without clearing it with the Bank of

Korea. Investments in won backed securities by foreign investors were increased by 5

billion won to 10 billion won (International Financial Law Review). Other limitations

were relaxed, allowing foreigners to invest more heavily in the Korea won, strengthening

the currency until the rise of the credit crisis. Certain types of transactions must still be

reported, preventing manipulation within the banking sector.

Three financial development institutions supplied credit for business and

government projects for South Korea. The Export-Import Bank of Korea extended

medium- and long-term credit to both suppliers and buyers to facilitate exports of capital

goods and services, major resources development, and overseas investment. This allowed

small and large businesses to fund projects, utilizing the currency available and

strengthening its value. The Korea Development Bank, which was the government's

shareholder in state-run enterprises, raised funds from the government as well as from
international financial institutions and foreign banks to fund key industries and

infrastructure projects. The Korea Long-Term Credit Bank financed equipment

investment. All of these institutions produced methods for domestic and foreign nations

to invest in the nation, while “purchasing” more Korean won to fund their projects (US

Library of Congress).

Under the Foreign Exchange Transaction Laws, if the South Korean government

determines that certain emergencies arise, it may impose any necessary restrictions to

correct its markets. This would include requiring foreign investors to obtain prior

approval from the Minister of Finance and Economy for the acquisition of Korean

securities or for the repatriation of interest, dividends or sales proceeds arising from

Korean securities or from disposition of such securities (Korea Law). Emergencies

within the system may include sudden fluctuations in interest rates or disturbances within

the economic markets.

South Korea is currently negotiating with the United States to open up a free trade

agreement between the two nations. Talks have been breaking down due to issues over

beef, pharmaceuticals and anti-dumping laws (YaleGlobal). South Korea is very

protective of its economy, and does not want other nations to manipulate its economy,

bringing a decrease to its investment value. South Korea has free trade agreements in

negotiation or completed with the European Union, as well as other Asian nations.

As a developing nation, South Korea has a lot of leverage, allowing it to create

bilateral trade agreements with nations that will help expand its economy. South Korea

has a strong trade agreement with North Korea, where trade reached $1.8 billion in 2007

(US State Department). 60% of all transactions are commercially-based, while another
significant amount is from South Korean humanitarian assistance to North Korea. In

2007, both countries reconnected their east and west coast railroads, and began cross-

border transportation services in December 2007. South Korean firms currently employ

33,000 North Korean workers, and hope to increase that figure to 300,000 by 2012 (US

State Department).

Between 2002 and 2006, imports and exports increased by 100% (Industry Canada).

Imports and exports have moved in tandem with each other, as more investors infuse

capital into the country. The nation’s largest trading partners are China and the United

States, followed by smaller markets with Hong Kong and Japan. As the nation finalizes

more trade agreements, foreign capital will become easier to attract. More electronics,

automobiles and ships will be purchased from the nation, expanding the economy even

further.

Since South Korea exports more goods than it exports, it is not as reliant among

other economies to serve its citizens. With the bargaining power it has due to its status as

a developing nation, along with relaxing monetary and investment policies, South Korea

is in a position expand its foreign relations. The nation is one of the world’s largest

manufacturers of ships, which are utilized for military purposes as well as trade purposes.

With the ability to develop cheap, quality electronics, countries such as the United States
and the European Union are reliant on South Korea for chips and small electronic

components. Though foreign direct investment has decreased over the past several

years, the new president of South Korea is working to reform the economy to increase

foreign investments. Foreign direct investment is equal to more than 10% of the nation’s

GDP (Library of Congress). Concerns about corruption, political stability, and

unfavorable trade practices continue to limit the scope and extent of foreign investment

(Library of Congress). Asia remains a strong market for investment; South Korea’s

market policies should be sustainable, while expanding the overall economy of the nation

and the continent. However, concerns about corruption, political stability, and

unfavorable trade practices continue to limit the scope and extent of foreign investment

(US Library of Congress).

Population rates have remained steady in South Korea, as the population remains

at around 48 million people. Though the population pales in comparison to the United

States, the nation has the 26th largest population in the world. Birth rates have remained

steady, while the citizens are forced to expand vertically. Citizens live in high rise

buildings where cities remain crowded and overflowing. The unemployment rate has

also remained steady, as nations continue to invest capital into South Korea and jobs are

plentiful. Due to the strengthening Korean won, inflation slightly decreased between
2005 and 2007, allowing consumers to gain more purchasing power. Imports have

become cheaper to purchase until recently, when the Won dropped significantly in value.

Inflation has increased, and imports are becoming more costly for consumers.

In 2007, the labor force in South Korea was more than 23 million people. 70

percent of the workforce is employed in the service businesses, 20 percent are employed

in industry, and 10 percent are in agriculture. Unemployment rates are at 3.1% as of

2007, which have dropped from as high as 6.8% in 1998 (Library of Congress). As of

2003, minimum wage levels were at $2.09 USD, with companies with less than 10

employees exempt from minimum wage laws. According to the Mististry of Health, 3%

of the population lives below the poverty level, while 7 percent are very close to poverty.

There are more than 6500 unions which represent 11% of the workforce. Industrial trade

unions are broken up into two national federations: the Federation of Korean Trade

Unions and the Korean Confederation of Trade Unions. In the past, the South Korean

government has come under criticism for arresting and imprisoning union leaders for

obstructing business.

Quality of Life South Korea United States South Korea Rank

Variable
Life Expectancy 78.64 years 78.14 40
Literacy Rate 97.9% 99% n/a
School Life 17 years 16 years n/a
Expectancy
Landline Telephones 23.9 million 163.2 million 13
Mobile Phones 43.5 million 255 million 21
Internet Users 35.59 million 223 million 10
Television stations 43 2,218 n/a
Airports 105 14,947 59
Roadways 102,062 km 6,465,799 km 42

The quality of life in South Korea is comparable to that of the United States. Life

expectancy rates are slightly higher than that of the United States. Education rates in
South Korea extend, on average, to 17 years for students. In South Korea, it is expected

for students to have extended educations, as many students continue their education past

undergraduate colleges. Educational credentials and where students attended college are

far more important to the success of students than personality and skills. The pressures

on students are so high that depression and suicide are common throughout the nation.

Due to these academic pressures for success, suicide is the second-highest cause of death

in the country. These pressures are much larger than in the United States, where though

students are expected to enroll in undergraduate colleges, it is more important for

students to develop skills while in college in order to succeed.

In South Korea, more than 43 million cell phones are in use. Similar to the

United States, citizens rely more on mobile phones than landline telephones. As of 2007,

South Korea ranked 13th in the world in terms of number of landline phones, but lagged

behind 20 countries with the number of mobile phones in use. Internet usage in South

Korea is very high, with almost as many internet users as mobile phones in the nation.

South Koreans rank 10th highest in terms internet usage. The country has significantly

few television stations than the United States, mainly due to the different lifestyles that

South Koreans live. There are currently more than 60 million television sets in South

Korea. Due to the small size of South Korea, the nation is limited to the number of

airports and roadways. The number of airports available for commercial and residential

use is very excessive due to the small area of South Korea, yet provides many

opportunities for the nation.

The South Korean shipbuilding industry is one of the largest in the world, with 6

of the 10 top shipyards located in the country. The nation built more than 40% of all
ships in 2006, and is fully booked with orders through 2010 (BusinessWeek). The three

largest shipbuilders in the world are located in South Korea, including Hyundai Heavy

Industries, Samsung and Daewoo. 80% of liquefied gas carriers are made by Korean

companies, the most sophisticated type of ship built (BusinessWeek).

Recently, the industry has been threatened by Chinese shipbuilders. During the

first quarter of 2007, Chinese businesses accounted for more than 55% of new contracts,

while South Korea only signed 27% of the total contracts. Currently, South Korean

companies have 1200 orders waiting to be fulfilled due to heavy demand since 2002.

These orders account for $100 billion, a significant inventory during this part of the

cyclical industry. Profits for Korean shipbuilders are expected to continuously rise, as

demand continues to increase (BusinessWeek). Profits for the largest companies have

doubled from 2002 to 2005, while Hyundai quadrupled its profits in 2006. The industry

took off as China’s economy began to boom, changing shipping patterns and demands for

ships. The price of ships has also increased due to the high demand, as ship prices have

doubled over the past several years. As freight charges continue to skyrocket, companies

look to fulfill orders of bulk carriers in order to carry larger loads of freight

(BusinessWeek).
 Section 3

Political and Legal Environments

This section is on the political and legal environments of the country. The

political and legal aspects of a country are risk factors that need to be evaluated in effort

to make a sound financial decision. The particular industry of shipbuilding could be

profitable and seem to be a smart investment, but political instabilities, as well as, the

legal structure could have negative effects that would result in a poor return on your

investment.

The political environment overall is stable and well balanced. In South Korea the

government is a republic with power shared by the presidency, legislature, and the

judiciary. Even though power is segregated among these parties government is

traditionally dominated by the president. The president is the chief of state and is elected

for a single term of 5 years. The 299 members of the unicameral national assembly are

elected to 4 year terms. Out of this 299, 243 are from single seat districts and 56

members are chosen by proportional representation. The judiciary portion of government

is independent under the constitution and consists of a Supreme Court, appellate courts,

and a constitutional court. Amongst the population there are numerous political parties.

Parties include the Uri Party, Grand National Party, Democratic Party, Democratic Labor

Party, and the People Centered Party.

Korea has a past full of turmoil and as a result has split into North and South

Korea. After WWII and the split of Korea, South Korea was formed and at this time

began to develop into what it is today. In 1910 Japan annexed Korea and outlawed the
Korean culture and language. At the Yalta Conference towards the end of WWII, the

United States and the Soviet Union jointly established temporary administrative

trusteeship over Korea until democratic elections could take place. The Republic of

Korea, which was proclaimed in August 1948, immediately sought support from the US

military for economic and political aid. By doing so, this enabled South Korea to

overcome attempts by North Korea led by Kim II Sung, to demoralize the regime.

Today the South Korean government is led by President Lee Myung-bak.

President Lee was elected to a 5 year term in the beginning of 2008 and his main focus is

on the South Korean economy. The following is part of his speech that he delivered to

the South Korean population in his early months of being president.

“The economy must be revived without fail. Over the past 10 years, the global
economy has enjoyed an unprecedented boom, but Korea has failed to go with the current
of the times. Consequently, some competing countries are coming up right behind us, and
the gaps with the advanced countries are growing wider. Now, we are at a critical
juncture. If we now fail to join the ranks of advanced countries, we might never have
another chance. Korea now stands at a crossroads of historical significance of whether it
can rise to the rank of advanced countries or not. Today, the global economy is faced
with the biggest crisis since the oil shock of the 1970s. The price of oil, food and raw
materials is skyrocketing. To make matters worse, the price hikes are coupled with the
U.S. financial crisis. Soaring commodity prices and unemployment are weighing heavily
on many people of the world. We are not an exception to this global phenomenon. Now is
high time for us to strengthen the economic fundamentals of our country and make
watertight preparations to turn this crisis into an opportunity as early as possible. More
than 70 percent of the Korean economy depends on foreign trade. The Korea-U.S. Free
Trade Agreement no doubt constitutes a new way out for the Korean economy. The
accord will help increase exports and foreign investment as well as national income. First
and foremost, the KORUS FTA will create over 300,000 new jobs. We cannot afford to
miss this opportunity for the desperate young job seekers in particular. We need to secure
better trade conditions than our competitors in the United States, the biggest market in the
world. And the KORUS FTA is the answer. Of course, some sectors like agriculture are
likely to undergo difficulties. For them, the Government has already prepared
comprehensive support measures. If necessary, we will work out other follow-up
measures.” (Korean Embassy)
As you can see South Korea has established free trade with the United States and realizes

the positive affect it can have on the South Korean economy. In addition to this,

President Lee has made many visits to other countries such as Brazil, Peru, and the

United States. While in Brazil, President Lee and his Brazilian counterpart President

Luis Inacio Lula da Silva agreed to widen bilateral economic and commercial

cooperation. In addition, President Lee suggested that Korea and Brazil should form

close cooperation and corporate investments in three areas by merging six related

industries -- mineral development and plant construction industry, oil development and

shipbuilding, automobile and the green industry. President Lee also visited Peru where

he and President Alan Garcia discussed ways to boost economic cooperation between

Korea and Peru, since Peru is resource-rich with substantial deposits of copper, gold and

zinc. At the meeting, the two leaders are expected to declare the launch of negotiations

on a two-way free trade agreement. While visiting the US, South Korean President Lee

signed an agreement to work together to prevent and combat crimes. The agreement was

signed for a mutual verification on travelers with suspicious backgrounds, therefore

effectively blocking criminals and terrorists before entering Korea or the U.S. (Korean

Embassy). On a different occasion, President Lee spoke with President Obama over the

telephone about the relations between the U.S. and Korea. President Obama stated that

the Korea/U.S. relations are already strong, but that he wants to make them even stronger.

Both presidents agreed that a stronger bilateral alliance is the cornerstone for peace and

stability in Asia.

A huge part of the political environment is the relationship with North Korea.

North and South Korea have established a better relationship that has improved greatly
over the past eight years. Economically speaking the countries have established free

trade zones in North Korea and South Korea is permitted to open businesses in certain

areas of North Korea and even employ North Korean citizens. Also the rail system

connects the countries together making the exchange of goods possible. Politically

speaking overall the relationship has improved, but in recent times conflicts have risen

and North Korea cut off dialogue with South Korea, claiming the peninsula was on the

brink of another war. The two countries have technically remained in a state of war since

the Korean War ended in 1953. The Korean conflict ended in a truce, but no formal

peace treaty was ever signed. Leaders of the two nations held an historic summit in 2000,

paving the way for the reunification of some families who were separated during the war.

A second summit followed in October 2007, but concerns over North Korea's nuclear

program have loomed over interactions between the two countries. North Korea agreed

last year to dismantle its nuclear program in exchange for economic aid and better

relations with the United States. North Korea still must finish the nuclear disablement

process for the first phase of the agreement (CNN).

The legal environment was also evaluated when determining to invest in the

South Korean shipbuilding industry. The South Korean legal system is derived from

Anglo-American law, as well as European civil law and Chinese classical thought. The

President of the nation appoints the chief justice and most justices of the Constitutional

Court to six year terms (US Library of Congress). There are 6 types of courts in Korea,

which are the Supreme Court, the High Courts, the District Courts, the Patent Court, the

Family Court, and the Administrative Court. The District Courts, the High Courts and the

Supreme Court are the courts for the basic three-tier system. The Patent Court is on the
same level with the High Courts, and the Family Court and the Administrative court are

on the same level with the District Courts (NYU Law).

In South Korea, there is no trial by jury; judges preside over local courts and

render verdicts. Both defendants and prosecutors can appeal first to the district appellate

court and then to the Supreme Court. Any challenges made to the constitution are made

through the Constitutional Court. Citizens are given similar rights in court as Americans,

with protection against self-incrimination, freedom from double jeopardy and the right to

a speedy trial (Library of Congress). In 2008, South Korea adopted a jury system for

criminal cases.

The primary source of law for South Korea is written. These written laws are

divided into four capitals: statutes passed by the legislature, decrees issued by the

President and other government ministries, rules and regulations by government

regulations and international agreements (NYU Law). Per the South Korean

Constitution, international laws derived from treaties have the same effect as domestic

laws within the country.

The National Assembly of South Korea is responsible for purposing and deciding

on amendments to the Constitution, while ratifying treaties. The Ministry of Government

Legislation is responsible for legislative affairs within the executive branch. South

Korean has no codification system like the United States, but is divided into categories of

subjects. Government regulations and laws are easily searchable through the

government’s website. All laws and regulations are integrated throughout the system,

which allows citizens to easily search for information (NYU Law).

 During the twentieth century, the South Korean government restricted freedom of

the press. After the Basic Press Law was repealed in 1987, the number of television

stations and newspapers rapidly expanded. The National Security Law allows the

government to limit the expression of ideas deemed pro-North Korean or communist;

broad interpretations of this statute place a chill on peaceful dissent (US Library of

Congress). In addition, in 2003 President Roh brought a libel suit against four of the

major national newspapers, while the government has stated that editorials are subject to

legal action if they are found to contain falsehoods.

During an economic zone committee meeting, the government decided to extend a

tax emption period for large corporations in specific industries within the nation’s

economic free zones. Currently, South Korea has four economic free zones, including:

Incheon, Pusan, Jinhae, and Kwangyang-man. The country is looking to expand these

zones into two or three other regions (Korea Law). The nation continues to reduce

regulations in order to create a more favorable business environment for foreign investors

(Korea Law). Under current law, foreign businesses are 100% exempted from corporate

income tax and income taxes for three years, and 50% for an additional two years.

Import tariffs on goods are exempted for three years as well, sparking an inflow of

foreign goods into the nation. These exemptions relate to foreign businesses investing at

least $10 million USD into manufacturing or tourism, or at least $5 million USD into

logistics or medical fields (Korea Law). Legislation is currently in process to extend tax

exemptions an additional 2 years with higher investments, while exempting value added

taxes to imported goods for three years.

 Along with other foreign investment opportunities, South Korea is working to

create tax incentives and benefits to attract more research facilities. The nation is looking

to add additional information technology and biotechnology research facilities by

creating tax-friendly atmospheres to multinational corporations (Korea Law).

South Korea is a participant in several international trade associations, including:

Asia-Pacific Economic Cooperation, International Confederation of Free Trade Unions,

Organization for Economic Cooperation and Development, and the World Trade

Organization. The nation has economic and trade agreements with North Korea,

allowing South Korean businesses to invest in North Korea and set up facilities. Though

there are still some tensions between the two nations, North and South Korea are opening

up trade routes and increasing the flow of goods into each nation. Significant amounts of

trade are involved with North Korea, one of the nation’s top trading partners.

The trade agreement between the United States and South Korea (KORUS) has

opened up new investments for American and South Korean companies. This free trade

agreement will eliminate tariffs and non-tariff barriers to trade in goods and services,

promote economic growth, and enhance trade between the United States and Korea (US

Trade Representative). Under KORUS, the United States will have duty-free exports to

Korea for agricultural goods, opening another market for farmers. The flow of

manufacturing facilities, mainly for automobile companies, will increase for the United

States, with most tariffs being eliminated with 10 years. This partnership will allow the

United States increased tax benefits and incentives within South Korea. The government

will provide stronger protections of American investors, preventing anti-competitive

practices and improving intellectual property securities (US Trade Representative). The
agreement prevents nationalized businesses from monopolizing an industry, allowing the

United States to actively compete within industries such as technology and

telecommunications.

Companies seeking potential investment in South Korea have benefited from the

Foreign Investment Promotion Act (FIPA). The act allows foreign investors to have

access to most types of business in South Korea, while allowing new investors to only

have to notify government regulators of their intent to invest, rather than seek consent

(Korea Law). Of South Korea’s 1140 industries, only 13 remain permanently closed to

foreign investors. Direct foreign investment in South Korea is established by at least

10% acquisition of domestic firms’ assets or equity. Under the Special Tax Treatment

Control Act of Korea, foreign investors receive tax incentives to encourage further

investment within the country (Korea Law).

As companies looks to profit from the Korean stock market (KODAQ), foreign

companies which wish to list their companies must follow the same listing requirements.

Companies need at least 20 billion won of average sales during the past 3 years, along

with 10 billion won of shareholders’ capital. Return on equity must remain over 10%, or

have net profits of at least 2 billion won (Korea Law). After the company has been listed,

it may not change its accounting principles, whether they use American accounting

principles or international principles. Since transparency of documentation and income is

important to the nation, companies must also provide all documentation in Korean in

order for local investors to more accurately assess the company’s value (Korea Law).

Trading in South Korea has become much more efficient. The cost of importing

goods into the country has decreased from $1040 USD to $745 USD between 2007 and
2008. As shipping becomes more important to companies, it is important for these costs

per container to decrease, while the number of days to complete the import has fallen by

2 days (WorldBank). According to The World Bank, South Korea is ranked as the 13th

easiest place to trade, large jump from the previous year. The tax rate for businesses has

fallen, from 35.6%, to just less than 34.9%. As the nation continues to lower taxes and

create a friendlier trade environment, more countries will look to increase their

investments in South Korea.

One of South Korea’s premier industries is its shipbuilding industry. The industry

is second to only China, which just recently became the world’s leader. Since the

industry is so vital to world trade, it felt appropriate to use this for a statistical model.

The purpose of the model is to determine what variables affect the number of ship orders

that South Korea generates. It was important to use relevant economic variables which

will have a direct impact on the health of the industry, while determining how the nation

can create more pressure on China.

In the model, nine different variables were used to create a regression analysis.

The affects of GDP per capita, purchasing power per capita, inflation, unemployment and

exchange rates were used to determine future ship orders. These variables were then

tested with world economic growth by including: net trade in South Korea, world trade,

interest rates in South Korea and total foreign direct investments in South Korea.

Investors look for the health of the nation’s economy, while weighing the cost of

borrowing capital. Low interest rates and lower inflation will help investors to borrow

greater amounts of inexpensive capital. GDP per capita and unemployment rates present
the financial health of South Korea, giving an investor the ability to determine if the

necessary labor will be available to carry out projects.

Once the model was generated, it was then possible to predict with some certainty

future orders of ships in South Korea. The regression analysis produced a best-fit model

(r2) of 85% based on 15 years worth of data. The standard deviation of the predicted and

actual data was almost 63 ships; though not a very accurate number, it does show that

these nine variables do play key roles in determining the health of the industry. Below is

a comparison of the ship orders using the regression model and the actual orders for each

year:

Between 1993 and 1999, the regression analysis was fairly accurate. At the turn

of the century, the model produces a smoothed curve, which does not represent the true

increases and decreases of orders. This could be due to the minor recession within the

United States are 2000. Also, accurate information could not be found which portrayed

political and economic risks within the nation. Additional variables could have been
added to the model to create a truer fit line, portraying more accurate information for an

investor.

Since the world is relying more heavily on international shipping due to

globalization, the shipbuilding industry will become more vital for product transportation.

South Korea’s current financial standards have put it into a position to succeed in this

industry, which it has already done so. Orders continue to increase to more than 700 per

year, which provides a more solid base for investment. During the current financial

crisis, this industry may see a slow down, yet will still provide enough inflows of capital

to keep the economy afloat. As noted in the economic section of the analysis, South

Korea has a growing economy, while regulations continue to be relaxed for foreign

investors. The nation is in an excellent position to once again become the global leader

in shipbuilding, which provides new investors an excellent opportunity to see high

returns on their investment.

South Korea has many aspects that make it an excellent place for foreign direct

investments. Businesses are treated to a friendly culture, where foreigners are respected.

The government has provided many tax incentives that allow companies to succeed,

without potentially being impeded by nationalized industries. Intellectual property is

becoming more secured through new legislation, and the legal system provides

businesses a fair opportunity to challenge those who steal property. The nation has

restructured its policies to attract more foreign companies, and should be seen as a place

to see high returns on all investments.