1 ipe-k 2013.03.29 ipe-k: trends in trade and fdi *some parts of this note are borrowed from...

1 IPE-K 2013.03.29 IPE-K: Trends in Trade and FDI *Some parts of this note are borrowed from references for teaching purpose only. Semester: Spring 2013 Time: Friday 9:00~12:00 am Class Room: No. 322 Professor: Yoo Soo Hong Office Hour: By appointment Mobile: 010-4001-8060 E-mail: [email protected]@gmail.com Home P.: //yoosoohong.weebly.com

2 Trade

Major Economic Indicator 2006200720082009 e 2010 f GDP (100 million dollar) 9,51810,4929,3148,32510,124 GDP per capita (dollar) 19,53021,42018,93016,86020,450 Economic growth (%) 5.25.2.30.25.9 Unemployment rate (%) Consumer price inflation (%) 2.22.54.72.83.1 Exchange rate (W/dollar) 945929.31,102.01,276.91,129.6 Current account balance (million dollar) 5,3855,876-5,77842,66835,253 Export (million dollar) 331,842379,045432,922373,585459,803 Import (million dollar) 303,938350,877427,254317,457415,024 Foreign reserve (million dollar) 238,882262,150201,145269,933 Debt balance/GDP (%) 27.536.241.042.336.1 Source: Korea Eximbank Overseas Economic Research Institute. 2010. 2010 World Country Review

The Korean Economy: past and present 4

LG Electronics, Samsung Electronics 22.3 (1)Air-conditioners Samsung Electronics, LG Electronics. 14.3 (1)Refrigerators Hyundai Heavy Industries, Doosan Engine Co., STX Heavy Industries 59.6 (1) Large diesel engines for ships Hyundai Heavy Industries, Samsung Heavy Industries, Daewoo Shipbuilding & Marine Engineering Co. 80.0 (1) LNG carriers Hyundai-Kia Motors, GM Daewoo 9.8 (4) Automobiles Samsung Electronics, LG.Philips LCD 46.5 (1) TFT-LCDs Samsung Electronics, Hynix Semiconductor 49 (1)Semiconductors Company World market share % (Rank) Product Petrochemical products LG Chem, SK 45 (1) Industrial Power of Korea 5

Developments in Koreas Trade Liberalization Policy Five measures of trade liberalization -Reduction of tariff barriers -Elimination of quantitative restrictions Major items: live cattle and beef products -Prohibition of trade-related subsidies -Enhancement of transparency in import certification procedures Customs services, IT-based clearance system, a new audit system - Establishment of FTAs 6

Trends in Trade ExportImport Balance ValueInc. RateValueInc. Rate Value 2002162,470,5288.0152,126,1537.810,344,375 2003193,817,44319.3178,826,65717.614,990,786 2004253,844,67231.0224,462,68725.529,381,985 2005284,418,74312.0261,238,26416.423,180,479 2006325,464,84814.4309,382,63218.416,082,216 2007371,489,08614.1356,845,73315.314,643,352 2008422,007,32813.6435,274,73722.0-13,267,409 2009363,533,561-13.9323,084,521-25.840,449,040 2010 (Jan~Sep) 338,628,51230.5309,574,05734.529,054,455 7

(billion $) Source: KITA (Korea International Trade Association). Trends in Exports and Imports of Korea

Million USD Koreas per capita Export Volume: $5,287 - larger than Japan($4,712) and the US($2,824) 9 Koreas Trade Volume

Export Similarity Index 10

Foreign Reserves (As of June 2007) Source: US Department of the Treasury/Federal Reserve Board Foreign Reserves are as of July 2007, US Treasuries held are as of June 2007. Offshore holdings include UK, Carib banking, and Luxembourg 11

Top Ten Trading Partners (2008) Rank Exports Rank Imports CountryValue ($ Mil.) Share to Total (%) CountryValue ($ Mil.) Share to Total (%) 1China91,38921.71China76,93017.7 2USA46,38911.02Japan60,95614.0 3Japan28,2526.73USA38,3658.8 4Hong Kong19,7724.74Saudi Arabia 33,7817.8 5Taiwan16,2933.95Germany19,2484.4 6Singapore11,4622.76Australia18,0004.1 7Germany10,5232.57UAE14,7693.4 8Russia9,7482.38Taiwan14,3753.3 9Mexico9,0902.29Indonesia12,1292.8 10UK8,9772.110Kuwait11,3202.6 Source: Korea International Trade Association 12

Top Ten Export Items & Top Five Markets (2008) Value Top Five Markets(Component Ratio) No.1No.2No.3No.4No.5 Vessel, Ocean Structure and Part of Vessel 43,157 PanamaMarshallsSingaporeGermanyLiberia Articles of Petroleum37,573 ChinaSingaporeJapanNetherlandsHong Kong Wireless Communication Apparatus 35,713 USAChinaHong KongFinlandFrance Automobile35,032 USARussiaCanadaSaudi ArabiaBrazil Semiconductors32,793 ChinaHong KongTaiwanSingaporeJapan Flat Display and Sensor 18,732 ChinaMexicoSlovakJapanUSA Steel Flate-rolled Products 15,948 ChinaJapanUSAIndiaThailand Synthetic Resin 14,909 ChinaHong KongJapanRussiaVietnam Part of Automobile13,950 USAChinaIndiaRussiaSlovak Computer10,697 ChinaUSAHong KongGermanyJapan Source: Korea International Trade Association ($ Mil., %) 13

Top Ten Import Items & Top Five Markets (2008) Value Top Five Markets(Component Ratio) No.1No.2No.3No.4No.5 Crude Petroleum85,855 Saudi ArabiaUAEKuwaitIranQatar Semiconductors32,018 ChinaJapanSingaporeTaiwanUSA Natural Gas19,806 QatarOmanMalaysiaIndonesiaGuinea Articles of Petroleum17,534 IndiaSaudi ArabiaUAEKuwaitIndonesia Steel Flate-rolled Products 17,203 ChinaJapanTaiwanFranceSweden Coal 12,810 AustraliaChinaIndonesiaCanadaRussia Computer 9,723 ChinaTaiwanJapanUSASingapore Alloy Iron, Pig Iron or Scrap Iron 7,960 JapanUSARussiaChinaSouth Africa Fine Chemical Material 6,879 ChinaJapanUSABelgiumGermany Articles of Copper6,228 ChileJapanPhilippinesChinaUSA Source: Korea International Trade Association ($ Mil., %) 14

Starting and Ending Point of trans-continental railway Located at the center of NEA between China and Japan Located on the trade route connecting Europe, Asia, North America Geographical Location 15

NEA is emerging as a major economic bloc alongside EU and North America China JAPAN KOREA Thirdargest economy in GDPThirdargest economy in GDP Accessibility to the NEA Market -25% of World Population -20% of World GDP -30% of World Cargo Volume Worlds largest manufacturing base Worlds largest manufacturing base Second largest economy and fastest growing consumer market in the world Second largest economy and fastest growing consumer market in the world Worlds largest manufacturing base Worlds largest manufacturing base Second largest economy and fastest growing consumer market in the world Second largest economy and fastest growing consumer market in the world 16

World Trade Environment and Direction Global Economic Environment - Profound Change in the Elements that Constitute Value and Competitiveness 20th century - Value: Productivity Based on Input of Labor - Competitive Elements: Material Capital 21st century - Value: Productivity Based on Promoting - Creativity and Quality of Labor - Competitive Elements: information and Knowledge 17

The Era of Borderless Competition - Policies are standardized - Most debated economic issues: Globalization vs. Regional Economic Blocs Digitalized & Knowledge-Based Economy - Knowledge becomes the major source of added value - Change in industrial structure from manufacturing to new industries such as IT

Unique Identity Over 66,000 trading companies as members Function in close relations with MKE (Government) History Established in 1946 Role International Trade & Investment Promotion Research in Koreas Trade policy & Strategy Exhibition & Convention e-Trade Promotion IT/Trade Education Hub of Northeast Asian Logistics About KITA

20 Korea has adhered to multilateralism because its trade relations were diversified. Before the1990s, most FTAs aimed for market access through alleviation and elimination of trade barriers. Recent FTAs, which include service, investment, intellectual property rights, and government procurement, aim at being comprehensive. FTAs are promoted not between neighboring countries but between countries in other regions. Characteristics of Recent FTAs

21 Korea's Exports Markets Source: KIEP Consideration for Selection of FTA Partners StandardsDetails Economic benefitsGDP, Trade Economic costsRestructuring costs Opportunity costs Political and diplomatic motivations National security, diplomatic needs Usage of Leverage effect OthersMotivate to improve a domestic system Interests of FTA partners Faithful execution of agreements

FDI 22

Overview of FDI in Korea Koreas Development Model before Asian Financial Crisis - Foreign loan-based financing for investment requirements far greater than domestic saving - Little reliance on FDI and foreign licensing to cultivate indigenous capability through reverse engineering of imported capital, parts, and finished goods, etc. - Sharp contrast to FDI-led industrialization models as in case of Malaysia and other developing nations -One of the lowest in the world in terms of FDI/GDP ratio -Why Korea was reluctant to invite FDI? 23

International Comparison of Inbound FDI Inflow of FDI/Total Fixed Capital Formation ( %) Inward Stock of FDI as a Percentage of GDP 200420052006200420052006 Developed Economies6.69.311.88.216.424.2 Developing Economies 12.912.613.89.625.626.7 EU8.118.218.1 10.526.038.0 UK16.152.9 33.920.630.447.8 US6.2 4.96.8 12.8 13.5 Netherlands1.834.13.322.463.168.2 Africa12.617.819.611.725.529.5 Asia10.311.312.99.126.524.9 Latin America17.0 15.3 12.9 9.121.126.6 China8.08.88.05.417.911.1 Hong Kong96.490.4103.9 58.6269.9405.7 Malaysia19.115.220.123.458.436.0 Korea4.53.01.92.07.48.0 Singapore77.557.679.582.6121.5159.0 Thailand14.017.516.59.724.433.0 Source: UNCTAD, World Investment Report 2007 24

Recent Inflows of Foreign Direct Investment to Korea (Unit: million US dollar) Source: Statistics Korea. 2011.

Foreign Direct Investment by Country TotalJapanUSAEUOthers 200015,2502,4522,9214,4235,454 200111,2867763,8863,0523,572 20029,0931,4044,4911,6801,518 20036,4695401,2423,0461,623 200412,7922,2584,7183,0091,807 200511,5631,8792,6904,7812,214 200611,2332,1081,7014,9772,447 200710,5149902,3404,3322,852 200811,7051,4231,3286,3332,621 Source: Ministry of Knowledge Economy ($ Mil.) 26

Koreas Shift to Proactive FDI Regime The Asian financial crisis provided "strong motivation" to attract FDI - Asian financial crisis in 1997/8 has enforced Korea to switch to proactive inducement of to overcome foreign exchange crisis under IMF conditionality Actively joining WTO regime and FTA To enable Korea as a regional business hub from the perspectives of logistics, finance and R&D 27

28 Koreas FDI Inducement Industrializing Period -Korea emphasized the promotion of absorptive capacity and the indigenization of foreign technology, while restricting both FDI and foreign licensing. -Korean firms assimilated imported embodied technology rapidly and achieved subsequent expansion while upgrading industrial structure to emerge as global brands (e.g. Samsung, Hyundai, and LG) from an agrarian economy in just three decades. -Korea relied heavily on foreign borrowing to finance its investment requirements and thus Koreas FDI played only a marginal role in its rapid industrialization process. One of the lowest in the world even after adopting a more proactive FDI regime.

29 After the Asian Financial Crisis in 1997/98 -Korea was forced to pursue FDI-friendly policy initiatives in order to fulfill the conditionality of the IMF in exchange for standby credit. -Korean policy makers have acclimated to the global economy by welcoming greenfield investment and M&As to promote investment activities leading to the development of a more competitive economy. -Domestic investment sharply declined in 2000s while outbound FDI exceeded inbound FDI as pervasive globalization affecting the world economy. -Policy direction shifted from conventional loan-based borrowing to an FDI- based development strategy necessary to establish a system capable of inducing new FDI and providing effective aftercare services. -Korea has been active in attracting foreign investment by setting up comprehensive service institutions to provide one-stop services. -However, still the record of F into Korea is not impressive.

30 FDI Incentive Track in Korea

31 Results of Koreas Aggressive FDI Inducement Policy -Inbound FDI notifications for 2007 recorded US$10.5 billion (marked the 4 th consecutive year in which notifications reached or exceeded the US$10 billion). -As Koreas inbound FDI increases during the decade since the Asian financial crisis, outbound FDI has also risen sharply as Korean companies take advantage of rapid globalization and subsequent supply chain expansion. Koreas Overall Inbound FDI Trends

32 -Recently, the EU has been the largest source of Korean inbound FDI, contributing more than 40% of total arrived FDI. Koreas Inward FDI by Country of Origin

33 FDI-Friendly Regime: Actions and Challenges Minimizing Negative Sentiment -Korea needs to recognize that many foreign companies have pointed out as some of Koreas most serious negative factors the unlawful and occasionally militant labor movements in addition to the already comparatively high wage levels amongst Asian countries. -It also needs to supplement its FDI policy to function in a liberalized global trade environment. Improving Absorptive Capacity -Changing the investment environment should be to improve domestic economic absorptive capacity for FDI in order to select and attract transnational companies that can significantly help Korea remain competitive in a global market place. Needs to upgrade its overall FDI-friendly economic environment.

34 FSA and CSA -Korea should realize that inward and outward FDI is closely related through the dynamic process of MNCs upgrading CSA (Country Specific Advantage) and FSA (Firm-Specific Advantage) by accelerating production fragmentation and supply chains. -Thus, the Korean government needs to design policy measures effective for attracting foreign MNCs with FSAs of high quality. Application of Rugmans FSA-CSA Matrix

35 Increasing Transparency of Laws and Systems -Korea must increase transparency of laws and systems in relation to FDI. Industrial clustering as contained in the Koreas business hub strategy is a highly effective way to attract desired and selective FDI. -Making central and local government agencies incentive system more consistent to achieve global standards by doing away with tax and non-tax barriers is important. -Considering how to improve communication channels between the government and transnational companies is also crucial.

Investment Liberalization and Promotion Inward Investment Liberalization Policy - After the financial crisis of 1997, extensive government liberalization of FDI. Full liberalization of the real estate sector Allowance of hostile M&As by foreign companies Simplification of the FDI approval process -Procedures revised from a process of report and approval to notification. Simplification of administrative procedures -Establishment of INVEST KOREA (IK), a one-stop agency for foreign investors, and the Office of the Investment Ombudsman Expanding the range of incentives available to foreign investors -Tax exemptions and reductions, reduction of rental fees on government- owned factory sites and a range of subsidies 36

Free Economic Zone (FEZ) FEZ : Free Economic Zone FTZ : Free Trade Zone Distripark Distripark PORT Industrial Park A A Support Functions Industrial Park B B N N Free Trade Zone (FTZ) 37 Concepts of the FEZ and FTZ

IksanGunsan Incheon FEZ Incheon International Airport Incheon Port Masan Gwangyang Bay Area FEZ Gwangyang Port Busan-Jinhae FEZ Free Economic Zone Free Trade Zone 38 Locations of FEZs and FTZs

Gwangyang Gwangyang FEZ NEA maritime transshipment hub NEA maritime transshipment hub Industrial clusters for oil and steel businesses Industrial clusters for oil and steel businesses Busan Busan-Jinhae FEZ maritime logistics hub maritime logistics hub manufacturing & industrial parks, R&D manufacturing & industrial parks, R&D Incheon Incheon FEZ SongdoSongdo YeongjongYeongjong CheongnaCheongna IT, BT, international business air logistics, tourism, IBC leisure, intl finance 39 Development Plans of the FEZs

40 ODI

41 Outward FDI (ODI) - Korea has become one of the main providers of FDI in Asia - Big investor in China - There are diverse motives for Koreas outward FDI - Market access, export base, natural resources, low production cost, etc. - Asia (in particular, Southeast Asia) received more Koreas FDI compared to other region. - Most of the investment has been in manufacturing. - Large enterprises led continuously Koreas FDI outflow in most of the industries. SMEs and individuals come second and third, respectively

42 Pattern of Korean FDI in Abroad Koreas ODI Trends Source: Korea Export-Import Bank. 2007

43 Pattern of Korean FDI in Abroad FDI by Region Source: Korea Export-Import Bank. 2007

44 Pattern of Korean FDI in Abroad FDI by Industry ($Million)

45 Pattern of Korean FDI in Abroad FDI by Company Size Source: Korea Export-Import Bank. 2007

Source: Korea Eximbank. Overseas Investment statistics. 2012. Trends in Overseas Investment

Source: Korea Eximbank. Foreign Investment statistics. 2012. Trends in Overseas Investment (Unit: US dollar)

Koreas Overseas Investment by Region (2012) Source: Korea Eximbank. Overseas Investment statistics. 2012. (Unit: 1000 US dollar)

Koreas Overseas Investment by Country (2012) Source: Korea Eximbank. Overseas Investment statistics. 2012. (Unit: 1000 US dollar)

Koreas Overseas Investment by Industry (2012) Source: Korea Eximbank. Overseas Investment statistics. 2012. (Unit: 1000 US dollar)

51 Koreas ODI in ASIA Trend of Koreas ODI in Asia Source: Korea Export-Import Bank. 2007

52 ODI by Major Destination in the World Koreas ODI in ASIA

53 Motivation of Korean ODI by period Motivation of Koreas ODI in Asia 1968~19931994 ~19961997~2001After 2002 Securing or developing local or third-country markets 28.950.252.4 47.1 Utilizing local labor costs14.737.230.338.5 Avoiding trade barriers 1.7 2.5 2.3 3.1 Securing raw materials 3.8 4.8 3.9 4.4 Acquiring advanced technology or management know-how 1.1 2.6 7.7 4.1 Developing natural resources49.9 2.7 3.3 2.8 (percent) Source: The Export-Import Bank of Korea (2004). Lee, S.B. (2006)

- On per project basis, Singapore leads Koreas outward FDI 55

Outward FDI Policy Loan programs - Loan program under the Export-Import Bank of Korea to finance OFDI: up to 80% of the total OFDI amount - Loan program under the International Economic Cooperation Fund initiated by the Korean government: applicable to OFDI in developing countries with long-term return periods Information provisions - Agencies: Export-Import Bank of Korea and the Korea Trade and Investment Promotion Agency Reduction of non-commercial risks - Korean Export Insurance Corporation offers export insurance to investors to reduce non-commercial risks, such as losses from war, nationalization, etc. - Korean government signed Investment Protection Agreements with more than 80 countries, and tax treaties with more than 70 countries 58

US Assessment of KOR-US FTA The long anticipated Korea-U.S. Free Trade Agreement (KORUS-FTA) will be implemented on March 15, 2012 becoming our nations largest FTA since NAFTA. The agreement has the potential to increase U.S. exports to Korea by approximately USD 10-12 billion, and it will be especially beneficial for U.S. SMEs. In 2009, nearly 18,000 SMEs exported some USD 8.4 billion worth of merchandise to Korea. Total 2011 U.S.-Korea trade exceeded USD 100 billion for the first time ever. U.S. exports reached an all time high of USD 43.505 billion. U.S. exports increased 12% over 2010 levels. Korea is the United States seventh largest trading partner. The U.S. is the third largest exporter to Korea with a 9 percent market share. Key competitors include China with 16.8 percent, Japan with 15.3 percent, and the EUs 27 nations with 10%. With the EU having already implemented its FTA with Korea, U.S. firms will now again be in a stronger competitive situation following KORUS implementation. (Chinas trade reflects significant re-export activity.) - US Commercial Service 59

References Lee, Seong-Bong. 2007. Koreas New Trade and Outward FDI Policies: Facilitating the Presence of Korean SMEs in Regional and Global Markets. Korea Institute for International Economic Policy. Ahn, Choong Yong. 2008. New Direction Of Koreas Foreign Direct Investment Policy In The Multi-track FTA Era: Inducement And Aftercare Services. OECD Global Forum on International Investment. Ernst & Young. 2012.South korea Highlights. (PDF. Google). Korea International Logistics Council. Recent Year. Invest in Korea as the Gateway to northeast Asia. (PPT. Google). KOTRA. 2012. US-Korea FTA: Unlocking Opportunities in Korea. (PPT. Google). US Commercial Service. 2012. Doing Business in Korea. (PDF. Google). 60

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