The torrential rain in early July did not stop hordes of tourists and local South Koreans from streaming into Myeongdong’s narrow streets in the capital of Seoul to sample the street food and check out the clothing stores. Well known as one of Seoul’s trendy shopping districts, Myeongdong’s roads have been a draw for fashionistas, lined with Western retailers such as Zara and Gap, as well as home-grown South Korean brands such as Eight Seconds and Aland.

On weekday evenings the area serves as a popular hangout for young professionals. Take 25-year-old Hyeryung Chloe Chung. Sipping her Americano in the coffee chain Starbucks while clutching her H&M shopping bag, she epitomises the type of globalised citizen that South Korea has worked to cultivate. Ms Chung complains about the weather in English, while casually reading messages on her Samsung mobile phone.

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“It’s the start of the monsoon season, so the rain will be heavy for a while,” she says. Educated in Seoul and France, and fluent in Korean, English and French, Ms Chung returned from a brief sojourn in Paris to work as a civil servant in South Korea, as she believed the country was rich with opportunities for graduates. “Travelling is exciting, but my dream was to start my career here as a diplomat,” she says.

Although South Korea has become better known for the excessive power of its business conglomerates, locally known as chaebols, and its growing income inequality, Ms Chung’s case illustrates how the government has invested in its youth, to promote an innovative and globally competitive workforce.

Miracle on the Han River

Located on the southern part of the Korean peninsula, South Korea shares a border with North Korea. Following a brokered ceasefire between the two countries in 1953, which ended the Korean War, South Korea’s economy has expanded rapidly. Between 1960 and 1985 it experienced an average increase in per capita income of 6.8%, according to research from Columbia University. The country’s economic take-off was initially centred on Seoul, through which the Han River flows, leading locals to refer to South Korea as “the miracle on the Han River”.

The government’s export-led growth strategy, which resulted in the country’s rapid industrialisation, allowed South Korea to become the first country in north-east Asia to transition from being a recipient of aid from the Organisation for Economic Co-operation and Development (OECD) to becoming a donor. By 1996, South Korea had joined the OECD as an official member.

Despite being resource-poor, South Korea’s development has largely been attributed to the government’s overseas focus, which is at the heart of its economic policy. Home to a population of 50 million people, its framework was led by a realisation that South Korea’s semiconductor, automotive, steel and shipbuilding capabilities exceeded domestic market demand. And so with government support, the country’s chaebols have become global heavyweights. The Korea Trade-Investment Promotion Agency estimates that 14 South Korean chaebols are among the Fortune Global 500 companies, including automobile manufacturer Hyundai, multinational steelmaker Posco and electronics manufacturer Samsung.

Friends in high places

As the world’s eighth largest trading country, South Korea has developed strategic ties with several countries including the US, Japan and UK. Outward FDI from South Korea is significantly higher than FDI into the country, according to greenfield investment monitor fDi Markets. Between January 2003 and May 2013, South Korean companies invested $250bn in 2310 greenfield projects overseas, while foreign enterprises invested $90bn into 1124 projects in South Korea during the same period. Christoph Heider, secretary-general of the European Chamber of Commerce in South Korea, maintains that while Korean outbound investment is considerable, it is important not to understate the interest of European enterprises in the country.

“From a foreign point of view I feel the Korean economy is developing nicely, although the expected GDP growth rate of 2.8 % [this year] is dependent on [global economic conditions],” he says. “Hence there are a few Europeans that are very active here, including German and French companies.” 

Although data from greenfield investment monitor fDiMarkets for 2003 to 2012 shows that the US and Japan were the leading investors in South Korea accounting for a combined 497 projects, Germany follows as the third largest investor, accounting for 73 projects. France ranks as the fifth largest investor, with 48 projects from the likes of car maker Renault and retail outlet Carrefour.

Despite the protracted slowdown in global trade, inward FDI flows to South Korea have remained relatively stable and the GDP growth this year reveals prospects may be brightening for foreign enterprises. The Bank of Korea reported that GDP growth in the second quarter of this year was 2.3%, which was the country’s fastest quarterly expansion recorded in more than two years. Although this was mainly boosted by a rise in state spending by president Park Geun-Hye’s new administration, consumer spending has rebounded, which could further reinforce foreign investor confidence in South Korea.

Structural weaknesses

Yet Xavier Coget, the head of the trade section of the delegation of the EU to South Korea, maintains that while South Korea has made notable attempts to draw inward FDI, the country has not proven that it is immune to the global recession. Asked whether the growth in the early part of 2013 is sustainable once the government withdraws its stimulus measures, Mr Coget says: “South Korea depends on what happens outside, in the global economy. The EU is one the largest economic blocs of the world and one of the largest trading partners of Korea, so the EU crisis has affected Korea’s trade.”

In addition, while South Korea’s reliance on its chaebols has not only resulted in a problematic monopolisation of key industries, making market entry difficult for foreign enterprises, it has also resulted in the country’s high exposure to the global recession. This was particularly evident when the country’s economic growth dropped from 6.2% in 2010 to 3.6% in 2011, according to research firm Roubini Global Economics. Although South Korea’s conglomerates contributed to the country's economic success, they are increasingly becoming a source of fragility.

“The Hyundai Kia Motor Group’s market share in the automotive industry [in South Korea] is 70%,” says Mr Heider. Pointing to Samsung, currently the world’s largest smartphone maker, Mr Heider says the company’s ubiquity in South Korea seeps into several aspects of citizens’ lives. “There are several hospitals that bear the Samsung brand,” he says. “It also has a credit card company, offers life insurance, it has amusement parks, and it is also involved in construction.”

Geographical fault lines

While South Korea has been commended by international rating agencies such as Standard & Poor’s for managing its finances with aplomb against a difficult global backdrop, diplomatic tensions especially with North Korea continue to pose an ominous threat. Although Standard & Poor’s issued a stable AA- rating for South Korea’s local currency, the country’s diplomatic fall out with North Korea in April 2013 led North Korea to block access to the shared Kaesong Industrial Complex, highlighting the fact that South Korea sits on delicate fault lines.

Such bouts of sabre-rattling from North Korea combined with territorial disputes over islands with Japan and China are a concern, but Michael Reed, the head of FIL Asset Management’s South Korea operations, says these issues are usually overstated abroad. “If you look at the news, it is all driven by international media,” he says. “The foreign press were wrapped up in the [Kaesong Industrial Complex] story, but if you were here, there was no effect.”

While the good news is that the political reality of such fallouts has been largely decoupled from the investment climate of South Korea, and its business continues as usual, the bad news is the export-led growth that has underpinned South Korea’s success may no longer be the silver bullet that will solve the country’s short-term needs. It remains to be seen whether the government’s spending will power the growth of its small and medium-sized enterprises, which provide 90% of jobs in the country, and whether decentralising growth away from its chaebols, as well as encouraging consumer spending, will enable South Korea to weather the global slowdown in trade.