Foreign Direct Investment in the South Korean Computer Industry

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Table of Contents

Expropriation and Confiscation Threats
Foreign Goods and Labor Laws in South Korea
Political Risks Leading to Economic Changes
Discussion of Political Risks from Both Macro and Micro Perspectives
Conclusions and Recommendations
References

The assessment of political risks and legal environments is a necessary stage before deciding on the foreign direct investment (FDI) in the concrete country. The reason is that the political situation in a country can have negative effects on the company’s development and the safety of investments. Therefore, international legal environments need to be assessed to propose efficient strategies for the company planning the FDI (Debaere, Lee, & Lee, 2010). The computer and high technology industry are actively developing in South Korea, and it is characterized by a qualified workforce. Therefore, the decisions regarding the FDI in this country are mostly made by IT companies and producers of laptops and computer components. This paper aims to assess political risks and examine specific legal factors that can affect the decision on the FDI in the computer industry in South Korea with the focus on the macro and micro perspectives, and the other purpose is the provision of recommendations to address the situation.

Expropriation and Confiscation Threats

In South Korea, threats of expropriation and confiscation for laptop production centers are minimal. The reason is that the country refers to the international laws regarding the practices of expropriation of the invested properties (Foreign direct investment hit record in 2014, 2015; Lall, 2013, p. 20). Thus, the foreigners’ private property is protected by laws, and this principle is also relevant for producing and selling laptops because they represent the significant niche in the technological market of the country (U.S. Government, 2015, p. 3). Although the confiscation is not prohibited in the country directly, the compensation for the possible expropriation of the property for the public use is guaranteed.

It is important to state that South Korea has many regulations regarding business development and foreign investment. Therefore, the use of business models that are not authorized or adopted in the South Korean environment has legal consequences (Chung, 2014, p. 223). Moreover, the level of government interference in various industries and businesses is different, and it is correlated with the level of the industry openness to the FDI. The laptop industry of South Korea is open to the FDI, and the level of government control is low (U.S. Government, 2015, p. 2). As a result, many producers of laptops choose to invest in South Korea in order to use the significant technological base and the high-quality workforce.

Foreign Goods and Labor Laws in South Korea

The regulation of business development in South Korea is perceived differently by investors. The opinion shared by the majority of foreign executives operating in South Korea is that it has the “overly burdensome regulatory environment” (U.S. Government, 2015, p. 3). This approach is also reflected in developing campaigns limiting the entrance of foreign goods in the country. However, in spite of the fact that the South Korean market is mainly protected from foreign goods, this practice is not relevant for the laptop production as a part of the computer industry (Vu & Im, 2013, p. 19). Such campaigns do not work for marketing laptop components that are produced abroad (Kotrajaras, 2010, p. 13). Many foreign investors are officially invited to the laptop industry to build partnerships with Korean companies and develop the research and development sector (U.S. Government, 2015). Thus, the FDI in the South Korean computer industry is supported without focusing on threats of foreign goods dominating the market.

Planning the investment in South Korea, executives rely on attracting a high-quality workforce. Nevertheless, foreign investors in South Korea need to refer to the labor law on unions and associations at the workplace revised in 2011 (Seol, 2012). Employees working for the foreign-invested business should have the opportunity to join the union and receive the associated benefits (Kang, Lee, & Park, 2011). The mandatory labor laws include the provision of paid leave and the recruitment of diverse people and persons with disabilities. These laws should be strictly followed by foreigners producing laptops because the high-quality technicians’ work in this sphere is valued.

Political Risks Leading to Economic Changes

To decide on the FDI in the South Korean laptop industry, it is also necessary to assess the role of such political risks as civil wars and violent conflicts in influencing changes in taxation, inflation, and currency devaluations. The reason is that such risks directly affect the profitability of the developing business and investors’ revenues. Traditionally, South Korea is discussed as a country with a low potential for political risks (Geun-Hye, 2011; South Korea: Country risk report, 2015). However, the problem is in the fact that South Korea is in a state of war with North Korea. As a result, any escalation of the conflict, as it was in August of 2015, has adverse effects on the country’s business environments (Park & Kim, 2015, para. 2). Still, South Korea works to protect the interests of foreign investors in the country, and the production of laptops can be affected only indirectly.

The dependence of the economy on the political situation is supported by the fact that the escalation of the conflict between North Korea and South Korea in August of 2015 led to increasing the risk of currency devaluations and to changes in the inflation rate. In August of 2015, the inflation rate was 0.70 in contrast to the lowest level in 0.40, recorded in April of 2015 (Trading Economics, 2015). Discussing the taxation in South Korea, it is important to state that taxes typical for the laptop industry in the country are minimal. According to the South Korean Foreign Investment Promotion Act (FIPA), the regular increase in taxation is not related to this industry, and the focus is on providing the tax incentives and decreased rental fees for foreign investors in the laptop sector (Lee & Min, 2011; U.S. Government, 2015). However, such political and economic changes can affect the laptop industry because of the threat of freezing the projects and decreasing the local demand.

Discussion of Political Risks from Both Macro and Micro Perspectives

Political risks are discussed from two perspectives. The macro perceptive analyzes political risks related to all foreign investors operating in the concrete country. The micro perspective explains the risks associated with a certain industry (Kotrajaras, 2010). In the case of South Korea, the macro perspective, political risks, and legal factors are threats of expropriation, necessities to follow the labor laws strictly, and risks of the further conflict escalation between North Korea and South Korea (Poulsen & Hufbauer, 2011, p. 12).

Focusing on the micro perspective, it is important to state that the laptop industry is under the threat of intensifying governmental and legal regulations and changes in FDI and taxation laws (South Korea property investment guide 2013, 2013). The problem can arise if South Korea limits the foreign investors’ impact and control in the industry after revising the list of industries available for the investment. The problematic political situation regarding the development of the North Korea-South Korea conflict can also result in restricting tax incentives for the FDI in the high technology industry.

Conclusions and Recommendations

The assessment of the political and legal environment for investing in the laptop industry in South Korea demonstrates that the overall environment for the FDI is rather beneficial because South Korea focuses on following the international laws regarding the FDI. The FIPA also contributes to creating positive conditions for foreign investors operating in this industry. However, a year ago, South Korea was discussed as one of the most stable economies to invest in, and the situation is different today. Although the compensation for the possible property confiscation is guaranteed for foreign investors, the development of the military conflict can affect this situation. The other important risk is the strengthening of regulations in the laptop industry that remains open for the FDI and having limited governmental control. The current unstable situation in the country can have adverse effects for producers of laptops investing in South Korea because any political changes will lead to economic losses, and radical political changes will lead to property confiscation without reasonable compensation.

It is possible to formulate the recommendations for planning the FDI in the laptop industry in South Korea. Currently, the risk for the FDI is rather high, but the implementation of certain recommendations can decrease the risk to a minimum. Thus, the following recommendations need to be used by the company’s management:

the choice of the political risk insurance for those situations when compensation is not paid to the investor;
the examination of the country’s legal base to determine the secure strategies for the business development;
and the formulation of the strict agreement with the South Korean partners on principles of the FDI that is supported by the international and national laws on the FDI.

Such an agreement should reflect the laptop industry specifics. In addition, prior to making the final step and investing in business activities in South Korea, it is important to complete the additional monitoring of the political, legal, and economic situation in the country.

References

Chung, S. (2014). Environmental regulation and foreign direct investment: Evidence from South Korea. Journal of Development Economics, 108(1), 222-236.

Debaere, P., Lee, H., & Lee, J. (2010). It matters where you go: Outward foreign direct investment and multinational employment growth at home. Journal of Development Economics, 91(2), 301-309.

Foreign direct investment hits record in 2014. (2015). Web.

Geun-Hye, P. (2011). A new kind of Korea. Foreign Affairs, 90(5), 13-18.

Kang, S. J., Lee, H., & Park, B. (2011). Does Korea follow Japan in foreign aid? Relationships between aid and foreign investment. Japan and the World Economy, 23(1), 19-27.

Kotrajaras, P. (2010). Foreign direct investment and economic growth: A comparative study among East Asian countries. Applied Economics Journal, 17(2), 12-26.

Lall, S. (2013). Direct investment in South East Asia by the NIEs: Trends and prospects. PSL Quarterly Review, 44(179), 19-28.

Lee, B., & Min, B. S. (2011). Exchange rates and FDI strategies of multinational enterprises. Pacific-Basin Finance Journal, 19(5), 586-603.

Park, J., & Kim, S. (2015). North Korea and South Korea are fighting a war over loudspeakers. Web.

Poulsen, L. N., & Hufbauer, G. C. (2011). Foreign direct investment in times of crisis. Peterson Institute for International Economics, 1(2), 11-23.

Seol, D. H. (2012). The citizenship of foreign workers in South Korea. Citizenship Studies, 16(1), 119-133.

South Korea property investment guide 2013. (2013). Web.

South Korea: Country risk report. (2015). Web.

Trading Economics. (2015). South Korea inflation rate. Web.

U.S. Government. (2015). Korea investment climate statement. Web.

Vu, T. B., & Im, E. I. (2013). Impacts of FDI relations between the US and East Asia on economic growth. Asia-Pacific Journal of Social Sciences, 5(1), 18-27.

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