Multinationals and Public Policy in Korea

In Hyeock Lee
Department of Management
Gordon Ford College of Business
Western Kentucky University
1906 College Heights Blvd.
Bowling Green, KY 42101-1058
TEL: 270-745-5810 FAX: 270-745-6376
ian.lee@wku.edu

Alan M. Rugman
L. Leslie Waters Chair in IB
Kelley School of Business
Indiana University
1309 East 10th Street
Bloomington, IN 47405-1701
TEL: 812-855-5415 FAX: 812-855-9006
rugman@indiana.edu
Multinationals and Public Policy in Korea1

Abstract

It is now accepted that multinational enterprises (MNEs) are the key institutions driving
globalization. The world’s 500 largest MNEs account for about 90% of the world’s stock of
foreign direct investment (FDI). In this paper, we explore the Korean data on both inward and
outward FDI (1990 – 2004), and suggest firm-level explanations on foreign investment decisions
of MNEs. The main findings are two-fold: (1) both inward and outward FDI of Korea is regional
in nature and (2) three main shifts in the MNE-host government relationships have contributed to
the symmetry of FDI in Korea.

Keywords
Korea; multinational enterprises; foreign direct investment; FDI symmetry; regional MNEs;
firm-specific advantages.

2
Introduction

This paper has two main objectives. First, it examines the regional nature of foreign direct

investment (FDI) in the context of Korea. Building on prior research on the regional nature of

multinational enterprises (MNEs) we demonstrate the deepening process of regionalism of both

inward and outward FDI in recent years with evidences from the Republic of Korea (hereafter,

Korea). Second, building upon the model of Rugman and Verbeke (1998) we address the

dynamic process of achieving FDI symmetry (a symmetrical pattern of inward and outward FDI)

using Korean data on these two types of FDI. For this purpose, three main shifts in the

relationship between MNEs and host country governments, identified by Rugman, Verbeke and

Greidanus (2005), will be applied to and discussed in a Korean context.

FDI, mainly implemented by MNEs, is one of the most important drivers for upgrading

both the country-specific resources and the firm-specific capabilities of host countries. FDI

contributes to the development of host countries through several channels, for example, by

transferring financial resources directly to the FDI recipient countries (Peng, 2001; Urata and

Kawai, 2000), by technological and managerial spillovers to domestic firms of the host countries

(Buckley, Clegg and Wang, 2006, 2007; Caves, 1974), and/or by helping the host countries join

the global sales, investment, and technology networks of foreign MNEs (Buckley et al., 2006,

2007; Caves, 1974; Urata and Kawai, 2000). Recently, the importance of FDI to the

sophisticated development of host countries has increased even more as MNEs have been

recognized as ‘flagship’ firms. They directly develop a network with key suppliers and other

partners of the host countries in an asymmetrical business network model (Rugman and D’Cruz,

2000).

3
 Most of the world’s FDI is made by MNEs in the triad, a group of three major trading

and investment blocks in the world: North America, Europe, and the Asia-Pacific regions

(Rugman, 2005). About 80% of the world’s total FDI is conducted in the triad, and the world’s

largest 500 MNEs account for about 90% of the world’s stock of FDI. Moreover, most of these

firms have the vast majority of their sales within their home region of the triad (Rugman, 2005;

Rugman and Verbeke, 2004). Abundant empirical evidences on the home region oriented

activities of MNEs have been suggested across different countries and industries (Collinson and

Rugman, 2007; Oh and Rugman, 2006; Rugman and Brain, 2003; Rugman and Collinson, 2004,

2005, 2006; Rugman and Girod, 2003). Therefore, understanding the importance of the triad and

the strong intra-regional dimension of MNE activities is a prerequisite for our analysis on FDI of

Korea.

Governments of host countries are now actively involved in the process of attracting FDI,

making the interaction between MNEs conducting FDI and their host countries’ governments

even more critical to the upgraded developmental process of the host countries (Peng, 2000). The

complexities of such MNE-public policy dynamics were first introduced in Rugman and Verbeke

(1998), and extended in Rugman et al. (2005). Three main shifts were identified in the MNE-

host government relationships – a shift towards complementary goals between the two, a shift

towards national responsiveness of MNEs in host countries leading to FDI symmetry of the host

countries, and a shift towards endogenous government policies in the host countries. In this

paper, this framework is usefully applied to the MNE-government relationships in a Korean

context to interpret the data on both the inward and outward FDI of Korea.

Therefore, we aim to link the country-level FDI data and the firm-level explanations on

foreign investment decisions of MNEs built on the firm-level focus of the resource-based view

4
(Bartlett and Ghoshal, 1991; Peng, 2001). Specifically, we contribute to the current literature on

the regional activities of MNEs and the MNE-host government relationship by asking: (1) Is the

nature of both inward and outward FDI of Korea regional?; and (2) How has the MNE-host

government relationship changed to support the dynamic two-way process of achieving FDI

symmetry in Korea? We present two sets of data for these purposes. First, we analyze the data on

inward FDI notifications to Korea and outward FDI notifications from Korea which have been

accumulated at the Korean government [http://www.mocie.go.kr/index2.html/ and http://

mgr.kisc.org/insc/] and the Export-Import Bank of Korea [http://www.koreaexim.go.kr/kr/

oeis/m03/s01_1101.jsp/], respectively. The data show that both inward and outward FDI are

regional, not global. Second, we collect archival data from a vast source of information such as

the unpublished reports by the Korean government, the analyses by the trade and investment

promotion agency in Korea (Invest Korea), Fortune Global 500, and some documents from

UNCTAD. These archival data suggest that the three main shifts in the MNE-host government

relationships have contributed to a current two-way flow of FDI in Korea. Thus we focus on

firm level data, and we report on several specific case studies to illustrate these data.

Korea is at a good and relevant stage for the analysis of regional aspects of FDI and the

application of the three main trends identified in Rugman et al. (2005). In Korea, the focus of its

economic development policy has shifted from a foreign loan-based development strategy to an

FDI-based one during the 1990s. This change in policy focus became apparent especially after

the financial crisis in 1997. For example, Korea attracted $60 billion from 1998 – 2002 as inward

FDI, which is 2.4 times the total amount of $24.6 billion for 1961 – 1997 (Korea MOCIE, 2003).

Attracting inward FDI helped Korea reform its national economic system for further economic

5
development, and in recovering its status as one of the top four foreign exchange reserve nations

in the world.

This paper will be organized as follows: in the next two sections on theory-building,

regional aspects of the world’s largest 500 MNEs will be discussed, followed by the firm-

specific advantages (FSAs) and country-specific advantages (CSAs) framework for the

subsequent analysis of MNEs’ activities; in section 4, data on both inward and outward FDI of

Korea will be analyzed in terms of the modern theory of MNEs; in section 5, three main shifts in

MNE-government relationships will be applied to the context of Korea; and policy implications

for Korea will conclude this paper.

Regional Multinational Enterprises

Multinational enterprises are defined as companies headquartered in one country but having

some upstream and/or downstream operations in other countries (Rugman and Hodgetts, 2003).

According to this definition of MNEs, all the companies in the Fortune Global 500 are classified

as MNEs. Recent studies have shown that most MNEs are not global, but regional. The great

majority of both new upstream and downstream activities occur in their home region of the triad

(Collinson and Rugman, 2007; Oh and Rugman, 2006; Rugman and Brain, 2003; Rugman and

Collinson, 2004, 2005, 2006; Rugman and Girod, 2003; Rugman and Verbeke, 2004). Rugman

(2005) investigates the data on the regional sales of the Fortune Global 500, and concludes that

there are only 9 global firms having sales of 20% or more in each region of the triad, but less

than 50% in any one region.

------------------------------------------
Insert Table 1a and 1b about here
------------------------------------------

6
 Table 1a confirms the regional aspects of the world’s largest 500 MNEs in more detail.

Among 380 MNEs with available geographic segment data on sales, 320 companies are regional

MNEs having at least 50% of their sales in their home region of the triad. Among 75 MNEs

operating in the Asia-Pacific region, 66 companies are regional MNEs. Table 1b shows that the

average intra-regional sales by the 380 MNEs represent 72.2% of their average sales. For

example, 75 companies in Asia-Pacific average 74.3% of their average sales ($27.4 billion) from

their home region.

--------------------------------
Insert Table 2 about here
--------------------------------

We can find a similar picture in the regional aspects of the largest Asia-Pacific MNEs.

Table 2 shows the distribution of regional sales by the 45 Asia-Pacific MNEs which provide full

data on their geographic sales in each region of the triad. They average 73.2% of their sales in

the Asia-Pacific region and only 16.0% and 7.6% from North America and Europe, respectively.

Most of the 45 Asia-Pacific MNEs are dominated by Japanese MNEs having 74.6% of their

average sales in Asia-Pacific (Collinson and Rugman, 2008). There are only two Korean MNEs

on the list, which average 69.0% of their sales in Asia-Pacific.

--------------------------------
Insert Table 3 about here
--------------------------------

Korea had 12 and 11 companies in 2001 and 2004, respectively, on the list of the Fortune

Global 500. Only five Korean MNEs provide data on their geographic sales in the triad in 2004.

Table 3 shows that all of them are home region oriented MNEs with 70.2% of their average sales

in Asia-Pacific. POSCO, the largest steel company in Korea, has the highest regional sales ratio

of 91.9% from its home region. Hyundai Motor is second with 81.6% of its average sales in

7
Asia-Pacific. Samsung Electronics, the highest ranked on the Fortune Global 500 among Korean

companies, also realizes more than 60% of its average sales in the home region. LG Electronics

and Hyundai show similar geographic sales patterns.

Conceptual Framework: The Firm-Specific Advantages and Country-Specific Advantages

Framework

The theoretical basis for the regional nature of the world’s largest 500 MNEs can be partly

explained by the liability of regional foreignness which most MNEs face when they go abroad

(Rugman and Verbeke, 2007). Due to this disadvantage, foreign MNEs, relative to domestic

incumbent firms that understand how to better operate in the domestic market, go through a

learning process in similar markets to realize low transaction costs (Oh and Rugman, 2007). This

encourages MNEs to enter nearby countries, first learning about international business in an

incremental fashion (Johanson and Vahlne, 1977; Rugman, 1981), leading to a pattern of limited

geographic diversification (Collinson and Rugman, 2007; Peng and Delios, 2006) and semi-

globalization (Ghemawat, 2001, 2003) in their home region. This theoretical argument is

consistent with the recent discussion on an institution-based view of business strategy, because

formal and informal constraints of a given institutional framework rendering strategic choices

tend to be more different across inter-regions than within intra-regions (Peng, 2002; Peng and

Delios, 2006; Peng and Zhou, 2005). Therefore, institution-friendly choices of strategies by

MNEs in intra-regions will result in decreased costs of doing business abroad (Peng and Delios,

2006), and, thereby, lead to the regional nature of their operations in their home region as

evidenced in the previous section.

8
 The expansion of MNEs abroad helps them to realize their firm-specific advantages

(FSAs) in foreign countries. An FSA is a unique capability proprietary internalized to the firm

built on innovations on product or process technology, marketing, or distributions skills

(Rugman, 1981, 2005). The FSAs of each MNE can be supported or reinforced by country-

specific factors from its home country (Rugman, 1981). These country-specific advantages

(CSAs) are based on multiple factors such as national endowments (e.g. natural resources, labor,

and land), large market size, innovations, cultural characteristics, or government supports/

regulations of each country where an MNE is headquartered (Rugman, 1981, 2005). Therefore,

MNEs should make decisions about the optimal configuration of FSAs and CSAs, which lead to

the best choice of strategies when they go abroad to expand their FSAs into the foreign markets.

This dynamic process can be explained diagrammatically with the FSA-CSA matrix as follows.

--------------------------------
Insert Figure 1 about here
--------------------------------

Quadrant 1 depicts the situation where MNEs go abroad using strong CSAs from their

home countries without unique and strong FSAs. The MNEs in this quadrant are resource-based,

mature, and globally oriented firms producing a commodity-type product at the later stage of the

product life cycle (Rugman and Hodgetts, 2003). Since CSAs (such as natural resources, labor,

and land) are important for maintaining competitive advantage in the global market, MNEs

usually adopt low cost leadership strategies. Any resulting FSAs in economies of scale are

strictly based on CSAs of their home countries and are not sustainable FSAs.

Quadrant 2 is a situation where MNEs do not have strong FSAs or CSAs. Any MNEs in

this quadrant are regarded as being inefficient and will likely exit (Rugman and Hodgetts, 2003).

9
 Quadrant 3 is the area where MNEs going abroad have both strong FSAs and CSAs. For

example, since the strong CSAs of low production costs from the home country can be

complemented by the strong FSAs of the MNEs in distribution channels, they can adopt both

cost leadership and differentiation strategies in the global market (Rugman, 2005).

Quadrant 4 depicts the case where MNEs go abroad based on their strong FSAs, but the

CSAs from their home countries are not required for their competitive advantage in the global

market. The MNEs in this quadrant are differentiated firms with strong FSAs in brands or

customization (Rugman, 2005).

By including not only home countries, but also host countries as the sources of CSAs, we

can expand the FSA-CSA framework for a better understanding of MNEs’ activities in several

ways. First, we can overcome the limitations of Porter’s (1990) view of MNEs relying solely on

a strong home base diamond, which has been criticized by scholars in international business

(Davies and Ellis, 2000; Dunning 1993a, 1996; Moon, Rugman and Verbeke, 1995, 1998;

Rugman and Verbeke, 2003a). Weak CSAs from home countries can be complemented or

upgraded by strong CSAs from host countries when MNEs implement FDI for upstream

activities such as innovations in the host countries (Kogut and Chang, 1991; Peng and Wang,

2000). We analyzed in the previous section that 380 of the world’s largest 500 MNEs have an

average of over 70% of their sales from their home region. We should note that, in the world

cosmetics industry, the upstream activities of the MNEs are more home region based than their

downstream activities (Oh and Rugman, 2006). Moreover, subsidiaries in host countries can add

to the development of the MNEs’ FSAs through subsidiary capability-building based on the

strong CSAs from the host countries (Peng, 2001; Peng and Wang, 2000).

10
 Second, we can identify the different key location-specific advantages of host countries

for different types of foreign direct investment (FDI) – natural resource seeking, market seeking,

efficiency seeking, and strategic asset seeking (Dunning, 1998). For example, cell 1 of Figure 1

explains the rather strong country factors behind natural resource seeking and market seeking

FDI. It also explains strategic asset seeking FDI, as this is usually obtained by access to location

bound clusters, as in California’s Silicon Valley. Only efficiency seeking FDI has strong FSA

characteristics, so it can be placed in cells 3 or 4. Therefore, the FSA-CSA framework can be

augmented for the analysis of inward FDI into a host country. Some company examples will be

provided when we analyze the data on inward FDI into Korea in the subsequent section.

Third, we can analyze the dynamic process of upgrading FSAs and CSAs through

interactions between the two advantages with the framework. The location choices by MNEs

have dual objectives not only to realize their competitive advantages at a firm level, but also to

upgrade the locational advantages of the places where they operate at a country level (Rugman

and Verbeke, 2003a). Therefore, for example, if an FDI with employees of high managerial skills

locates in a host country, it will upgrade the quality of labor endowment in the country. This will,

in turn, act as a catalyst for upgrading the FSAs of companies in the host country through

knowledge spillover, competition in labor market, and flexibility of labor movement (Buckley et

al., 2006, 2007). This dynamic process of upgrading CSAs and FSAs will lead to outward FDI in

the future by the domestic firms in the host country based on their upgraded FSAs by the initial

inward FDI. Therefore, expanding the sources of CSAs from home countries to host countries

gives us a good basis for the current trends toward the symmetry of FDI to be discussed in

section 5.

11
Inward and Outward FDI in Korea

Inward FDI

Inward FDI is the inflow of the funds from foreign countries to a domestic country while

outward FDI means the reverse (Hill, 2005). The FDI is undertaken by MNEs in order to

establish footholds in foreign markets by setting up operations (greenfield FDI) or acquiring

other businesses (M&A). In both cases, MNEs can exercise direct control over their foreign

affiliates (Rugman and Hodgetts, 2003). We shall analyze data on FDI notifications here (this is

the best available data, and it forecasts actual levels of FDI to a reasonable extent). We also

report several company case examples to illustrate our findings.

--------------------------------
Insert Table 4 about here
--------------------------------

Table 4 reports the data on inward FDI notifications to Korea for 15 years (1990 – 2004)

from each region of the triad in three categories of time series. About 95% of the total investment

of $96.8 billion was made after 1995. The largest sourcing region of inward FDI into Korea was

Europe until late 1990, but changed to North America from the beginning of the 21st century.

However, according to the detailed data on industry segmentation (not reported here for space

consideration), we should note that the most important sourcing region for inward FDI in the

manufacturing industries has been Europe since 1995. The role of Asia-Pacific, Korea’s home

region of the triad, has become more important for inward FDI in manufacturing industries with

the portion of 26.9% for 1995 – 1999 increasing to that of 31.7% for 2000 – 2004.

--------------------------------
Insert Table 5 about here
--------------------------------

12
 Table 5 reports the data on inward FDI notifications to Korea made by the 2001 Fortune

Global 500 companies for the same time period. From these 500, 195 MNEs have invested a

total amount of $19.6 billion in Korea from 1990 – 2004, which comprises 20.2% of the total

inward FDI into Korea. The largest portion of inward FDI by the Fortune Global 500 has been

made by MNEs from Europe with about 60.5% from 1990 – 2004. The role of Europe has

decreased in both categories of industries, for example, from 67.4% (1995 – 1999) to 55.5%

(2000 – 2004) in the entire industries, and from 71.9% to 52.8% in the manufacturing industries

for the same time periods. Instead, the portion from the Asia-Pacific region has increased from

7.8% to 18.4% in the entire industries, and from 13.5% to 25.1% in the manufacturing industries

for the same time periods.

Several characteristics can be identified on the recent trends of inward FDI into Korea

based on the FSA-CAS framework and the regional nature of MNEs discussed in the previous

sections. First, MNEs from Europe have brought their advanced FSAs to Korea through inward

FDI in manufacturing industries. Renault, Philips, BASF, Alstom, and Nokia can be listed as

good examples which have a unique knowledge capability proprietary to them, built on

innovations on product or process technology and management skills. MNEs from North

America are important for the inward FDI to Korea in service industries. Costco, Citigroup, and

FedEx have aimed to realize their FSAs in Korea built on their unique capabilities in marketing

or distribution skills. However, in 2006, Wal-Mart withdrew from Korea.

Second, each of these inward FDI in Korea can be positioned in the FSA-CSA matrix

depending on the CSAs by which MNEs want to be upgraded or complemented from their

investment in Korea. For example, General Electric, ranked at 9th by the Fortune Global 500 in

2001 and one of the home region oriented companies (Rugman, 2005), can be positioned in

13
quadrant 1 at the beginning of their investment in Korea. GE was seeking natural resources (e.g.

labor of low cost but high quality) in Korea during the 1970s and 1980s, pursuing a low cost

leadership strategy in household electric appliances, medical devices, and lighting (Invest Korea,

2004). Since these items are commodity-type products at the late stage of the life cycle, GE’s

FSAs were not as important as Korea’s strong CSAs in low-cost labor and efficient production

processes at that time. Recently, GE has moved to quadrant 3 based on its strong R&D activities

in Korea. It has developed ultrasonic diagnosis devices at the R&D facilities in Seongnam City,

which have been supplied to the global market through GE’s global distribution networks (Invest

Korea, 2004). Nokia, the world’s largest manufacturer of mobile devices ranked at 147 th by the

Fortune Global 500 and one of the nine global firms (Rugman, 2005), can be positioned in

quadrant 3. Based on its strong FSAs in R&D and brand awareness, Nokia has been seeking

strategic assets (on IT infrastructure and technological capabilities of parts suppliers) in Korea.

These strong CSAs from Korea have complemented Nokia’s FSAs (Invest Korea, 2004). Nokia’s

recent contract with Samyoung Technology, one of the mobile phone parts suppliers of high

quality in Korea, is evidence for this positioning in the matrix. Tesco, ranked at 114th by the

Fortune Global 500 as one of the home region based MNEs (Rugman, 2005), can be positioned

in quadrant 4. In the retail industries, MNEs go abroad solely based on their strong FSAs, but the

CSAs of the host countries are not essential for their success in the global market. Based on its

existing FSAs in brands and distribution channels, Tesco has developed location bound FSAs in

Korea (e.g. quality control, customization, and differentiated stores with entertainment, culture,

and high quality service) to realize the full benefits of national responsiveness (Invest Korea,

2005b).

14
 Lastly, the data on inward FDI to Korea by each region of the triad confirms the

importance of the home region orientation for MNEs’ activities. It shows the deepening process

of regionalism of inward FDI into Korea in recent years, especially in manufacturing industries

and by the world’s largest 500 companies. This result is consistent with recent finding that most

MNEs are not global, but regional.

Outward FDI

--------------------------------
Insert Table 6 about here
--------------------------------

Table 6 reports the data on outward FDI notifications from Korea for 15 years (1990 – 2004) for

each region of the triad in three categories of time series. 2 84.1% of the total outward FDI of

$73.8 billion was made since 1995. We should note that the majority of the total outward FDI

was made in Asia-Pacific, Korea’s home region of the triad. This tendency has been recovered in

recent years from 48.7% for 1995 – 1999 backup to 53.2% for 2000 – 2004. The detailed data on

the outward FDI in the manufacturing industries (not reported here for space consideration)

confirm the deepening process of regionalism for MNEs activities. The average portion of the

Asia-Pacific region increased from 54.2% for 1995 – 1999 to 65.6% for 2000 – 2004.

--------------------------------
Insert Table 7 about here
--------------------------------

Table 7 reports the data on outward FDI notifications from Korea made by the large firms

defined as having more than 300 employees or more than 30 billion won of revenues (in Korean

currency, which is roughly $30 million). The outward FDI by the large firms has decreased in

recent years in spite of the increase in the total amount of outward FDI over the same time

15
period. For example, 82.6% of the total outward FDI of $52.1 billion was made after mid 1990s,

but it has decreased from $23.4 billion for 1995 – 1999 to $19.7 billion for 2000 – 2004. The

data on outward FDI in the manufacturing industries confirm this tendency, as 83.9% of the

outward FDI of $26.9 billion in the manufacturing industries was made since 1995, but it has

decreased from $12.5 billion for 1995 – 1999 to $10.0 billion for 2000 – 2004. The Asia-Pacific

is the largest region of the triad as the destination of the outward FDI from Korea by large firms.

Korea’s home region is receiving 46.2% and 49.7% of Korea’s outward FDI, respectively, for

the two categories of industries.

Several characteristics can be identified on the outward FDI from Korea based on the

discussion in the last section. First, the outward FDI of Korea is expanding and realizing its

FSAs mainly in the Asia-Pacific region, Korea’s home region of the triad. The evidence of home

region orientation by outward FDI from Korea becomes stronger in the manufacturing industries,

because of the upstream activities of Korean MNEs, for example, such as Samsung Electronics

off-shoring to China for assembly of commodity-type electronics products. This trend of

regionalism by outward FDI from Korea has been deepening in recent years, which is consistent

with recent empirical evidence that most MNEs are regional, operating in their home regions.

Second, while the total amount of outward FDI by Korean MNEs is increasing over the

1990 – 2004 period, the outward FDI by the large firms has decreased in recent years. This

implies that the recent outward FDI from Korea has been driven by small and medium-sized

enterprises (SMEs). The underlying driving forces for this increasing trend of outward FDI by

SMEs are multifold, but one potential explanation can be arguably found from the upgraded

FSAs of SMEs in Korea. We should note that Korea has been very active in attracting inward

FDI from foreign MNEs with sophisticated FSAs, for example, from Europe in the

16
manufacturing industries, and from North America in the service industries, as discussed in the

previous section. Previous research show that foreign MNEs operate with world-wide

competition, and they have developed efficient value chains networks for the learning process of

local SMEs (Buckley et al., 2006). Many of the small and medium-sized enterprises in host

countries can have more interactions with foreign MNEs as current or prospective parts suppliers

than before, and capture spillovers of tacit knowledge from the presence of MNEs (Buckley et

al., 2006; Caves, 1974). In some cases, they receive direct investment from the foreign MNEs,

leading to the increase of their productivity (Buckley et al., 2006). Therefore, through the

dynamic process of upgrading the CSAs of Korea and the FSAs of the local SMEs, the outward

FDI by Korean SMEs can be made possible based on their upgraded FSAs.3

Lastly, the data on outward FDI from Korea and the dynamic process of upgrading CSAs

and FSAs by the initial inward FDI from foreign countries suggest that Korea has become a dual

player of inward and outward FDI by being both a recipient and an exporter of substantial

amounts of FDI. This implies that Korea is moving toward the ‘deep integration’ of FDI

symmetry to be discussed in the next section.

The MNE-Government Relationships and FDI in Korea

Rugman et al. (2005) introduce three recent shifts in MNE-government relationships: (1) the

goal consistency between MNEs and governments at a macro-level; (2) the high national

responsiveness of MNEs and the symmetry of inward and outward FDI at an institutional level;

and (3) the interaction between MNEs and government policy at a firm strategy level. These

17
shifts will be used as a framework for evaluating the relationship between MNEs and the Korean

government and suggesting policy implications for FDI in Korea.

Complementary MNE-government goals

Rugman et al. (2005) attribute the initial conflict of goals between MNEs and governments of

the host countries to the difference of their ultimate objectives. Foreign MNEs pursue

efficiencies at a micro level by minimizing (transaction) costs and maximizing profits while

governments want to attain efficiencies at a macro level by achieving distributional objectives,

which usually result in the conflicting interaction between the two parties (Peng, 2000).

However, as the host governments understand the importance of FSAs which MNEs bring with

them into the host country (Rugman and Verbeke, 2003b), they will generally implement policy

measures for the liberalization of inward FDI. This is reinforced when the host governments

realize the impossibility of direct acquisition of the FSAs from the MNEs, who internalize them

as intermediate goods (Dunning, 1994; Rugman and Verbeke, 2003b). Therefore, the increasing

number of measures for liberalizing inward FDI reflects the complementarity between the

efficiency goal of MNEs and the equity goal of governments (Dunning, 1993b).

--------------------------------
Insert Table 8 about here
--------------------------------

There is a strong shift in Korea’s policy focus on inward FDI towards recognition of the

complementary goals between foreign MNEs and the government. Korea has adopted a series of

policy measures to liberalize inward FDI. For example, inward FDI was used only for promoting

export-driven and/or import-substitute industries in the 1960s, but almost all sectors in

18
manufacturing and service industries were liberalized before the end of the 1990s (Invest Korea,

2005a). The regulation on foreign ownership structure (50:50) was eliminated during the 1990s,

and inward FDI was made possible based only on notification to, not permission from, the

Korean government in the mid 1990s (Invest Korea, 2005a). Additional strong incentives for

inward FDI began to be provided after 1998, partly to overcome the financial crisis in 1997,

including preferential tax treatment and provision of locational advantages for greenfield FDI,

etc (Korea MOCIE, 2003). Table 8 confirms the trend towards complementary MNE-

government goals in Korea. The rate of liberalization on inward FDI is defined as a ratio of the

number of industries opened for inward FDI divided by the total number of industries in Korea.

The data show that Korea has achieved a 97.3% of liberalization on inward FDI as of 2002. This

is good evidence of the goal consistency between the foreign MNEs operating in Korea and the

Korean government.

High national responsiveness and FDI symmetry

Rugman et al. (2005) also consider recent trends in MNE strategy, moving from low national

responsiveness of MNEs (where non-location bound FSAs of the MNEs are created exclusively

in their home countries) to high national responsiveness of MNEs (where the development of

location bound FSAs in their host countries becomes indispensable). With strategic asset seeking

FDI, the objective for the MNE is to develop its FSAs abroad and to realize the benefits of

national responsiveness in the host countries. This leads to a high dispersion of FSAs for the

MNEs. Such a high FSAs dispersion of MNEs will be encouraged by the national treatment of

the host country government, which, in turn, leads to a symmetry between inward and outward

19
FDI. A country is said to have achieved a symmetry of FDI if it becomes both the origin and

recipient of substantial amounts of inward and outward FDI. Therefore, public policy measures

toward MNEs will be highly dependant on whether the country has a symmetrical or

asymmetrical pattern of FDI (Dunning, 1993a; Rugman and Verbeke, 2003b). The concept of

FDI symmetry is an important departure from the traditional literature on FDI discussed by

Caves (1996).

The trend from low national responsiveness to high national responsiveness of MNEs can

be observed from failed cases of inward FDI in Korea due to the lack of national responsiveness.

The best examples are Wal-Mart and Carrefour, which decided to withdraw from Korea in 2006.

Wal-Mart is the world’s largest company with $219.8 billion of sales in 2001 (Rugman, 2005).

Carrefour is ranked 35th with $62.2 billion of sales in 2001 by the Fortune Global 500, but is the

largest retail company in Europe (Rugman, 2005). Both Wal-Mart and Carrefour are home

region based MNEs with 94.1% and 81.3% of intra-regional sales, respectively. Both have

accumulated high FSAs in marketing and distribution channels attributed to an economies-of-

scale strategy based on reduction of costs, all of which have been developed exclusively from

their home regions (Rugman, 2005). However, they could not succeed in Korea, because they did

not develop location bound FSAs in the host country. They ignored different relationships with

suppliers (e.g. long-term relationships) and different shopping styles and tastes of consumers

(e.g. preference for easy access to stores and the quality of goods and services, dislike for frozen

foods, etc) in Korea. These examples demonstrate the importance of the development of FSAs in

national responsiveness for inward FDI in Korea.

--------------------------------
Insert Table 9 about here
--------------------------------

20
 We can also find the trends toward the symmetry of inward and outward FDI in Korea.

Korea has been increasingly involved in substantial volumes of both inward and outward FDI

since 1995. This has lead to a ‘deep integration’ with FDI symmetry (e.g. inward FDI: $43.7

billion and outward FDI: $43.5 billion in 2002). The degree of symmetry in Korea is higher than

that of the Asia-Pacific region and China, but much lower than that of developed economies and

Japan. We find a similar picture with FDI stocks as a percentage of GDP. Table 9 shows that

Korea was a recipient of FDI before 1995 (e.g. inward FDI: 2.1% and outward FDI: 0.9% in

1990), but has achieved a symmetry of FDI since 1995 (e.g. inward FDI: 9.2% and outward FDI:

9.1% in 2002).4 This is a standard pattern for most developed countries, and, suggests that the

previous inward FDI have been a good basis for the subsequent increase of outward FDI by

Korean MNEs resulting in the current status of FDI symmetry. However, it is still much below

the average of developed economies or Japan.

The most important aspect of this for public policy is that it is the national treatment of

the host country government that encourages the high national responsiveness of MNEs

(Dunning, 1994; Rugman and Verbeke, 2003b). This, in turn, leads to outward FDI by the

domestic firms of the host country, based on their upgraded FSAs through the initial inward FDI

from foreign countries. Although governments might support their MNEs to become first-movers

in a global market with strong subsidies or preferential treatments, it has been shown that such

policies have not been successful enough, because governments have limited capabilities to

guide domestic MNEs in that direction (Rugman and Verbeke, 1990, 2003b). Public policy

measures toward attracting inward FDI from foreign countries will have a direct and indirect

impact on the outward FDI by domestic MNEs.

21
MNEs and government policy

Rugman et al. (2005) also discuss the bargaining relationship between MNEs and government

policy at a firm strategy level (Brewer, 1992; Peng, 2000) as the final shift in the MNE-

government relationships. MNEs intentionally attempt to influence the process of public policy

formation by the government of the host country so that they can capture the benefits of national

responsiveness which make both sides better-off (Peng, 2000). Therefore, negotiations between

foreign MNEs and the Korean government become an important issue in the process of attracting

inward FDI.

It is too early to evaluate the trend towards the interaction between MNEs and

government policy at a firm strategy level in Korea, but the next two examples will give some

insights. The first case is the negotiation between LG-Philips LCD and the Korean government

in 2004 during the process of implementing its plan to transform the Paju area into the world’s

largest cluster for the production of flat-panel display. LG-Philips LCD is a joint venture created

between Royal Philips and LG Group in 1999, which became the leading manufacturer of Thin

Film Transistor Liquid Crystal Displays (TFT-LCDs) in a global market (Invest Korea, 2005b).

It initiated the construction of its main factory in the Paju area from 2003 with total investments

of $20 billion for the next ten years, and negotiated with local and central governments of Korea

making them build industrial complexes for parts suppliers, roads leading to the factory, and a

waste water disposal plant for the factory for free.

The second case is the newly introduced incentive for attracting inward FDI into Korea in

2005 – cash grants. According to the guidelines for awarding the cash grants, greenfield FDI

with over 30% of foreign ownership and total investments of $10 million in high-tech industries

22
is eligible for the cash grants (Invest Korea, 2006). At least 5% or over of the inward FDI can be

covered by the cash grants through the negotiation between the MNE and the Korean

government. The grants should be used for the purchase or rent of land for the factory, the

construction of the factory and common facilities, the purchase of production machineries or

R&D facilities, and training programs for employees (Invest Korea, 2006). The application of the

cash grants have not been reported yet, but the adoption of this incentive system will make

MNEs investing in Korea start to think of government policies as being endogenous and critical

to their success of business strategies in host countries.

Conclusion

After analyzing the data on inward and outward FDI of Korea for the past 15 years (1990 –

2004), Rugman et al.’s (2005) framework has been applied to investigate three recent shifts in

MNE-government relationships. The data suggests that both inward and outward FDI of Korea

have a strong regional dimension and that there is now a symmetric pattern of inward and

outward FDI. Our study also shows that the complementarity of goals between the MNEs and the

Korean government has increased since the 1990s as shown by the proactive liberalization

measures on inward FDI by the Korean government. The increased complementarity of the goals

has fostered the substantial amounts of inward FDI flow into Korea based on the national

treatment of foreign MNEs. The development of location bound FSAs in Korea based on

national responsiveness by the MNEs became indispensable for their survival in the Korean

market (high FSA dispersion of MNEs) as evidenced by the withdrawals of Wal-Mart and

Carrefour from Korea. This led to an increase of outward FDI by Korean MNEs based on their

upgraded FSAs, making Korea a country with FDI symmetry. This provides the MNEs investing

23
in Korea with a strong incentive to negotiate the process of policy formation by the Korean

government at a firm strategy level as evidenced by the LG-Philips LCD case and the newly

adopted cash grants system. We should note that these three shifts in MNE-government

relationships in Korea are interrelated and able to reinforce each other in a virtuous circle.

The policy implications for Korea are multifold. First, the crux of FDI is the realization

of an FSA. Inward and outward FDI is closely interrelated through the dynamic process of

MNEs’ upgrading CSAs (and FSAs) in host countries. Korea’s public policy towards inward FDI

has a direct and indirect impact on outward FDI by Korean MNEs, as discussed in the previous

section. Designing policy measures effective for attracting foreign MNEs with FSAs of high

quality is a short-cut to upgrade the FSAs of Korean MNEs, making them go abroad as outward

FDI to realize their enhanced FSAs in foreign countries. This process is especially true when an

MNE investing in Korea can act as a leading ‘flagship’ firm which plays an important role as a

strategic leader of the partners in an asymmetrical business network model (Rugman and

D’Cruz, 2000).

Second, under the positive interactions between inward and outward FDI, the increase of

outward FDI is not an outflow of national wealth anymore. It is to realize upgraded FSAs of

domestic MNEs in foreign markets leading to the creation of national wealth abroad. This gives

us a good rationale for making the achievement of FDI symmetry as another policy focus in

Korea. Korea has a two-way flow of FDI today, a symmetrical pattern of cross investments,

which is typical of the mature economies in North America and Europe. However, as we can see

from Table 9, Korea is still much behind developed economies in terms of both absolute values

of FDI stocks and FDI stocks as a percentage of GDP. Public policy goals for encouraging

inward and outward FDI could be set towards that direction.

24
 Third, the importance of home region orientation for MNEs’ activities should be fully

understood. Most MNEs are not global, but regional, operating in their home regions. The data

show that Korea has the imported high quality FSAs of foreign MNEs from Europe in the

manufacturing industries and from North America in the service industries, while it has exported

its upgraded FSAs in the Asia-Pacific region (Korea’s home region of the triad) in past years.

However, the data also show that the process of regionalism of both inward and outward FDI of

Korea in the Asia-Pacific region has been deepening and/or recovering in recent years. This

evidence should help policy makers choose strategic regions when they design policy measures

for attracting inward FDI into, and encouraging outward FDI from, Korea.

25
Notes
1
An earlier version of this paper was presented at the Foreign Investment Symposium 2006:

Globalization and Korea – Why Should We Compete for Multinational Investment? in Seoul,

Korea, 1-3 November 2006.

2
Data on both notifications and realizations are available for outward FDI from Korea, but there

is no significant difference between them in terms of qualitative interpretation. The Pearson

correlation coefficient was 0.96 (p < 0.0001) between the two.

3
Another explanation can be the increase of outward FDI by Korean SMEs into China due to

relatively cheaper labor in that country. This is a CSA for China, and, even in this case, Korean

SMEs need to have their unique FSA internalized inside them to utilize the cost difference

between the two countries.

4
It should be noted that the symmetric pattern of inward and outward FDI in Korea has been

maintained consistently even after the Asian financial crisis.

26
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Table 1a. The Regional MNEs
Host-region Home-region Insufficient
Region Global Bi-regional Total
oriented oriented data
Asia-Pacific 3 3 2 66 1 75
Europe 3 16 8 86 6 119
North America 3 6 1 167 8 185
Other 0 0 0 1 0 1
Total 9 25 11 320 15 380
† Source: Rugman (2005).
†† Data are for 2001.

Table 1b. Intra-regional Sales by Triad Region

Region Number of MNEs Average Revenue Intra-regional Sales (%)
Asia-Pacific 75 27.4 74.3
Europe 119 31.1 62.8
North America 185 28.8 77.2
Other 1 24.5 88.0
Total 380 29.2 72.2
† Source: Authors’ calculation based on Rugman (2005).
†† Data are for 2001. Revenues are in billions of US$.

32
Table 2. Regional Sales of Asia-Pacific MNEs

Regional Sales (%)

Number of Average
Country
MNEs Revenue North
Asia-Pacific Europe Unidentified
America
Japan 37 35.9 74.6 7.3 14.8 3.3
Australia 4 13.9 68.8 7.2 21.9 2.1
Korea 2 26.3 69.0 5.4 21.2 4.5
Singapore 1 13.1 22.4 30.9 46.3 0.4
Taiwan 1 11.6 100.0 0.0 0.0 0.0
Total 45 32.4 73.2 7.6 16.0 3.1
† Source: Authors’ calculation based on Rugman (2005).
†† Data are for 2001. Revenues are in billions of US$.

33
Table 3. Regional Sales of Five Korean MNEs

F/T Sales Regional Sales (%)

Company Revenue
(%) Asia-Pacific Europe North America
Samsung Electronics 36.0 N/A 60.6 18.3 20.8
Hyundai Motor 30.9 20.9 81.6 0.3 18.1
LG Electronics 23.1 N/A 60.4 11.7 23.6
Hyundai 21.7 46.2 56.3 10.5 24.2
POSCO 10.2 N/A 91.9 0.0 2.9
Average 24.4 33.6 70.2 8.2 17.9
† Source: Authors’ calculation based on Rugman (2005).
†† Data are for 2001. Revenues are in billions of US$.

34
Table 4. Inward FDI Notifications in Korea
1990 – 2004 1990 – 1994 1995 – 1999 2000 – 2004
Region
(US$ bn) (%) (%) (%)
Asia-Pacific 26.7 30.0 27.2 27.6
Europe 31.1 37.2 36.5 28.7
North America 33.5 30.6 32.9 36.2
South America 4.7 1.4 2.7 6.7
Africa-M. East 0.6 0.3 0.5 0.8
Others 0.2 0.4 0.3 0.1
Total 96.8 100 100 100
† Source: Authors’ calculation based on the inward FDI statistics at the Ministry of Commerce, Industry and Energy
in Korea [http://www.mocie.go.kr/index2.html/].

35
Table 5. Inward FDI Notifications by Fortune Global 500 in Korea
1990 – 2004 1990 – 1994 1995 – 1999 2000 – 2004
Region
(US$ bn) (%) (%) (%)
Asia-Pacific 2.5 8.4 7.8 18.4
Europe 11.8 48.1 67.4 55.5
North America 5.2 43.4 24.8 26.0
South America 0.02 0.02 0.05 0.1
Total 19.6 100 100 100
† Source: Authors’ calculation based on the inward FDI statistics at the Investment Notification Statistics Center in
Korea [http:// mgr.kisc.org/insc/].

36
Table 6. Outward FDI Notifications from Korea
1990 – 2004 1990 – 1994 1995 – 1999 2000 – 2004
Region
(US$ bn) (%) (%) (%)
Asia-Pacific 38.4 56.8 48.7 53.2
Europe 11.1 10.8 16.2 15.5
North America 17.5 23.9 25.7 21.9
South America 4.9 3.4 6.4 8.0
Africa-M. East 2.0 5.3 3.1 1.3
Total 73.8 100 100 100
† Source: Authors’ calculation based on the outward FDI statistics at the Export-Import Bank of Korea in Korea
[http://www.koreaexim.go.kr/kr/ oeis/m03/s01_1101.jsp/].

37
Table 7. Outward FDI Notifications by Large Firms from Korea
1990 – 2004 1990 – 1994 1995 – 1999 2000 – 2004
Region
(US$ bn) (%) (%) (%)
Asia-Pacific 24.1 50.5 45.2 45.4
Europe 10.4 13.0 19.1 24.0
North America 13.1 27.3 25.8 23.6
South America 2.7 2.6 6.3 5.0
Africa-M. East 1.8 6.7 3.7 2.0
Total 52.1 100 100 100
† Source: Authors’ calculation based on the outward FDI statistics at the Export-Import Bank of Korea in Korea
[http://www.koreaexim.go.kr/kr/ oeis/m03/s01_1101.jsp/].

38
Table 8. Trend of Liberalization on Inward FDI in Korea
Jan. 1997 Jan. 1998 Jan. 1999 Mar. 2000 Mar. 2002
Total number of industries (A) 1,148 1,058
Number of Not opened (B) 30 21 7 4 2
industries
regulated for Partially
24 29 16 24 27
inward FDI opened (C)
Rate of liberalization
95.3 95.6 98.0 97.4 97.3
on inward FDI (%)
† Source: Korea. Ministry of Commerce, Industry and Energy (2003).
†† Rate of liberalization on inward FDI (%) = (A – B – C) / A × 100

39
Table 9. FDI Stocks as a Percentage of Gross Domestic Product
Region/Economy 1990 1995 2000 2001 2002
World
inward 9.3 10.3 19.6 21.2 22.3
outward 8.6 10.0 19.3 20.4 21.6
Developed Economies
inward 8.2 8.9 16.5 17.9 18.7
outward 9.6 11.3 21.4 23.0 24.4
Developing Economies
inward 14.8 16.6 31.1 33.4 36.0
outward 3.9 5.8 12.9 12.8 13.5
Asia and the Pacific
inward 17.9 19.1 32.1 32.7 33.3
outward 2.6 5.8 15.8 15.3 15.4
Korea, Republic of
inward 2.1 1.9 8.0 9.5 9.2
outward 0.9 1.6 11.0 9.6 9.1
Japan
inward 0.3 0.6 1.1 1.2 1.5
outward 6.6 4.5 5.8 7.2 8.3
China
inward 7.0 19.6 32.3 33.2 36.2
outward 0.7 2.3 2.4 2.7 2.9
† Source: UNCTAD (2003).

40
Figure 1. The FSA-CSA Matrix

Firm-Specific Advantages

Weak Strong

1 3

Strong

Country-
Specific
2 4
Advantages

Weak

† Source: Adapted from Chapter 8 in Rugman, Inside the Multinationals, New York: Columbia
University Press, 1981; 25th anniversary edition, Basingstoke, UK and New York: Palgrave Macmillan,
2006.

41
Word Count: 8,920 includes cover page, abstract, key words, text, notes, references, tables and figures

Date: June 17, 2008

 List of Tables and Figure Captions

Table 1a The Regional MNEs

Table 1b Intra-regional Sales by Triad Region

Table 2 Regional Sales of Asia-Pacific MNEs

Table 3 Regional Sales of Five Korean MNEs

Table 4 Inward FDI Notifications in Korea

Table 5 Inward FDI Notifications by Fortune Global 500 in Korea

Table 6 Outward FDI Notifications from Korea

Table 7 Outward FDI Notifications by Large Firms from Korea

Table 8 Trend of Liberalization on Inward FDI in Korea

Table 9 FDI Stocks as a Percentage of Gross Domestic Product

Figure 1 The FSA-CSA Matrix

43