South Korea’s economic growth over the past few decades has been fascinating to witness. Sixty years ago, the country’s per capita GDP was equivalent to that of Ghana’s. Today, its openness and dedication to exports and technological innovation makes it both an Asian and international powerhouse. But market volatility, geopolitical tensions and constant competition mean the country has to work constantly to stay ahead of the curve.
Miracle on the Han River
One of the four so-called Asian Tigers – along with Singapore, Hong Kong and Taiwan – South Korea underwent rapid industrialisation in the 1960s, and maintained a consistent economic growth rate upwards of 7% until the mid-1990s. Investment began gaining momentum only after the devastating Korean War ended in 1953, when South Korea’s authoritarian president Park Chung-Hee opened the market up to international trade, encouraged domestic saving and subsidised family-owned conglomerates – among whom are internationally famous names such as Samsung and Hyundai.
South Koreans call this transformation 'the miracle on the Han River'. Growth continued at an impressive pace until the 1997-98 Asian financial crisis, which rocked the country primarily as a result of its non-performing corporate loans and a poorly regulated financial system. This is when the government began to use FDI as a tool for growth.
In order to pursue FDI, South Korea’s leadership, by that point democratic and open, instilled widespread reforms, shutting down badly performing banks and strengthening regulation. This, combined with IMF restructuring, swiftly put South Korea back on track. Today, the country is a member of the OECD, boasts an average per capita income of $23,000, and has the 11th highest GDP in the world.
Up by its bootstraps
South Korea cites its rigorous education system and hardworking population as two key factors behind its technology boom. The country invests 5% of its GDP in education, and a strict work ethic is instilled from a young age – studies estimate the average South Korean child spends 13 hours a day studying. In 2013, a study by publishing and education company Pearson found South Korea to have the second best education system in the world, after Finland. Nearly all South Koreans finish high school, and of those, 87% go on to higher education. At 65%, the country’s university graduation rate is one of the highest in the world. But this also means a dearth of jobs relative to graduates; of the country’s unemployed, 30% have university degrees.
Despite its internationally reputed education system, South Korea’s higher education institutions have room for improvement on the world stage. The country's best performing university – Seoul National – generally ranks between 50th and 100th in global rankings of the best universities, and only six of the country’s higher education institutions tend to crack the top 400. This has resulted in tens of thousands of South Korean students leaving home every year to pursue studies in the US and elsewhere.
This is yet another incentive for the government to attract FDI and welcome companies who will create more jobs for South Koreans. Already more than 16,000 foreign companies operate in South Korea; household names such as IBM, Siemens, Sony and General Electric have been there for more than four decades. And FDI’s role in the South Korean economy is not to be understated – foreign companies account for 21% of sales, 10% of employment, 21% of exports and 6.6% of R&D spending in the country.
According to Kotra, South Korea’s trade and investment promotion agency, the country plans to attract $20bn in foreign investment in 2015 after hitting a record $19bn in 2014. The majority of FDI in 2014 was received in business and professional services. Other leading FDI sectors were chemical engineering, minerals, property and machinery.
A fundamental driver of South Korea’s recovery has been its export-oriented economy. Rather than relying primarily on its domestic market, whose growth is limited by the country’s small geographic size, South Korea exports the vast majority of its production and in 2014 was ranked the fifth largest exporter in the world. The World Bank estimates that in the first decade of the 21st century, exports accounted for 68% of the country’s growth.
South Korea was recently placed first in Bloomberg’s Innovation Index, topping the world’s 50 most innovative economies for 2015. This is largely attributed to private sector R&D spending, which has helped modernise South Korea’s economy. In 2014, Seoul-based conglomerate Samsung spent $14bn on research, up from $9.1bn in 2009, and South Korea ranked in Bloomberg’s top five countries globally for hi-tech companies.
“The IT revolution in the 1990s dramatically changed the axis of the Korean economy from manufacturing to services and IT,” says Yoonjong Chun, director of the Planning Office of the Korea Free Economic Zone Authority. “We have a strong IT and software sector in particular, and the government is trying to boost the services sector, particularly education and medical services.” Semiconductors, mobile telecoms equipment, computers, motor vehicles, steel, ships and petrochemicals are South Korea’s main export products, of which 23% go to China. Its next biggest markets are the EU, the US and Japan.
A dedicated environment
Spurring South Korean trade and inward FDI is its business-friendly climate. Ranked fifth in the World Bank’s Doing Business survey, the country offers one of the lowest tax rates in the OECD, a diversified export market, strong intellectual property rights, low labour costs and several free economic zones. South Korea has free-trade agreements with 52 countries, representing 73.5% of the global economy, and markets itself as a stable and transparent launchpad for companies seeking opportunities in China or Japan. According to Kotra: “Korea aims to act as a linchpin connecting the fullest possible integrated trading market in east Asia… and intends to increase its commitment to trade liberalisation by engaging in multilateral negotiations under the World Trade Organization.”
Government incentives include 100% income and corporate tax reduction for companies operating in free economic zones in many industries. The country's infrastructure is modern and reliable, grants are provided for research, and transport hubs are widely accessible. “With China’s rise, there is competition to become the business hub of north-east Asia,” says Mr Chun. “Korea’s free zones are very well connected through logistics hubs – Incheon Airport, Busan port, highway expressways and the KTS railway.
“All of Korea’s free zones are trying to improve living conditions; they maintain a balance between industrial, logistics, and living sides." South Korea hosts 335.8-square-kilometres-worth of free zones, and to date, they have attracted nearly $10bn in reported FDI.
Dedicated support services are also available to foreign investors; Kotra’s Invest Korea agency offers a one-stop service for everything from pre-investment guidance to aftercare. Moreover, South Korea is a family-friendly environment, with numerous English-language and international schools and institutions.
US-based multinational Kimberly-Clark has been operating in South Korea for more than 40 years. Hari Nair, former global managing director at Kimberly-Clark’s global innovation centre, says of the country’s positive business environment: “First and foremost, Korea respects intellectual property rights and that creates a fertile environment to develop innovations. While other countries provide the same benefit, what makes Korea unique are excellent digital connectivity and infrastructure for doing business."
Some cite a lack of English speakers in the South Korean work force as being problematic. Kimberly-Clark, like many multinationals in the country, offers language training for its employees to overcome this challenge. “Korea has been providing us with excellent talent who are in global leadership positions. While some would say language is a challenge, I have found that there is more than adequate support in all business matters,” adds Mr Nari.
“The best thing about working and living in Korea is the opportunity to live in the ‘future’,” he says. “Living in Korea in many ways provides a glimpse of how the world will look in 10 to 15 years. The efficiency and speed at which commerce and trade happens is second to none. It's a friendly, clean and safe place, offering a sense of security for your family.”