Economic growth in South Korea

In order to see the affects of labour-intensive exports we are going through some details. In 1970’s, while unskilled and labour-intensive products accounted for a relative high share in exports, by 1987 the share of these had fallen to one-third, mainly due to the steep decline in the relative importance of textile due to rising barriers in the industrial countries. However, electrical machinery, apparatus and appliances requiring skilled labour and technology in many production lines and unskilled labour in assembly operations, had already accounted for an 11% share in the 1970’s. But this has risen dramatically to nearly on fifth in 1987, and was the leading export item. The supply capability of the major exporters in industrial machinery and transport equipment, requiring higher capital and technology inputs also expanded. In the field of labour-intensive production like clothes and shoes, some South Korea firms have moved to lower wage economies in the region and elsewhere. And the information of technology was obtained from trade literature, equipment suppliers or foreign buyers for making simple manufactures. These efforts above enabled South Korea to achieve rapid growth in exports and subsequent increases in income.

2. Heavy and Chemical Industries:

In the early 1970s, the changing international economic environment had a significant impact on Korea. During the 1960s and early 1970s, the commodity structure of Seoul’s principal exports changed from the production of primary goods to the production of light industrial goods, and after 1974, the government created new firms to give rather low priority, therefore there was a rapid expansion in the production and exports of heavy and chemical products. Moreover, the emphasis on promoting the heavy and chemical industries was built into South Korea’s the Third Five-Year Plan (1972-1976) and 1972 indicated the beginning of South Korea’s heavy and chemical industries. Consequently fiscal and financial policies such as provisions for more financial loans, special allowances, and low tax rates…were directed to support these industries. Also technology is these sectors was relatively ready and there was a little product differentiation, but these were highly capital intensive which regard easier access to markets as a more important consideration, and required technological knowledge to build and manage them. We are going to look at Pohang Iron and Steel Company (POSCO) that is a good example of heavy industry sector:

In the 1970s, the steel industry developed after the government constructed the POSCO mill to service Seoul’s rapidly growing automobile, shipbuilding and construction industries. From the beginning POSCO was a small, government-owned steel company, but now POSCO has developed over the years to become the world’s leading steel producer. POSCO now operate two of the world’s premier steel producing facilities, and have forged strategic alliances and partnerships with numerous companies all over the world. Over the past, POSCO has continuously struggled to lead a way in steel production, whereas in the company early days, they relied on low-cost production as a comparative advantage, they also send engineers to the US, Japan, and Europe to study steel plants…POSCO’s experienced was duplicated to varying degrees in South Korea’s heavy industries and demonstrates how a company could require different types of technological capability.

3. High Technology Sectors:

The electronics and automotives industries are both of the youngest and also the one that have an act upon for the future economic evolution of developing economies. The most important sources of productive growth for South Korean manufacturers had traditionally been directly or indirectly related to the ability of South Korea companies to acquire new technology from abroad and to modify it to domestic conditions.

A clearly example of the development of South Korea’s high technology sectors was semiconductor industry. As a driving force for Korea's economic growth, the semiconductor industry has become one of the most important industries in Korea since the mid-1980s. Samsung, Goldstar, Hyundai and Daewoo are the four leading Korean conglomerates that have developed, as extremely advanced semiconductor producers have been little short of sensational. In the beginning, these companies were completely dependent on technology acquired from the United States and Japan and they just focused on effortless types of semiconductor of low capacity-products. Another companies also have established production facilities in the United States or moving into Europe. As we could see, major features of the Korean semiconductor industry are high export rate and heavy dependence on imports. It is the huge import dependency of semiconductor manufacturing equipment and materials also.

TECHNOLOGY POLICIES AND REASEARCH AND DEVELOPMENT EXPENDITURE

Korean science and technology policy (S&T) has passed through several phases in response to changing economic and social needs, throughout the period of national development, S&T policy has been adjusted to complied with national development goals and strategies.

Initially, the target was set at laying the foundation for economic growth through the development of import-substitution industries, Korea’s national S&T policy focused mainly on the introduction, attraction, and application of foreign technologies. In 1966, in order to reinvigorate the development of advanced science and technology, the government organized the Korea Institute of Science and Technology (KIST). Its tasks began by doing contract reference for local companies and helping them evaluate and modify imported technology. Most significantly, the Ministry of Science and Technology (MOST) was established in 1967 as the central government agency for S&T development, the ministry was ordered with arranging national technology policies. The emphasis of S&T policy was placed on strengthening technical and engineering education in the fields of heavy and chemical industries, improving the institutional mechanism for adapting imported technology, and promoting domestic Research and Development (R&D) to meet industrial needs. Through time, some Technology Development Plan was created in order to make another great transition to join to ranks of the advanced economies. A Long-range Science and Technology Plan was published by MOST in 1985, it called for Korea to place among the world’s top most technologically advanced countries by 2000. The implementation of the Five-Year Plan for Scientific and Technological Innovation (1997-2002), the implementation of the Highly Advanced National (HAN) Project (1992) and the Creative Research Initiative (1997) were also invented with same goals.

In addition, the National Research and Development (R&D) Program was initiated in 1982 to build up domestic R&D capabilities in the areas of core and public welfare technologies with generic characteristics. Since the 1960s, spending in R&D in Korea had increased rapidly; also the Korean government has undertaken a variety of measures, including incentive systems, to promote R&D in the private sector. These enterprises are qualified for a maximum subsidy of 50% of the total R&D expenditures; the government also provides financial support of up to 80% to big firms and up to 90% of the total cost to individuals or small firms to help commercialize new technologies.

EDUCATIONAL SYSTEM AND POLICIES

Asian countries have long been noted for the importance, which they attach to education. But in South Korea, the competition for a good education has become even more intense in order to demand future opportunities.

South Korea has had a long history of providing formal education. But during the Choson Dynasty, the central government established a system of secondary schools in Seoul and the provinces. Students at both private and state-supported secondary schools were exempt from military service and had much the same social distinction as university students enjoy today in South Korea. During the late nineteenth and early twentieth centuries, modern private schools were established both by Koreans and foreign Christian missionaries, the latter were particularly important because they promoted the education of women and the diffusion of Western social and political ideas. However during the years when Park Chung Hee was in power, the control of education was gradually taken out of hands of local school broads and concentrated in centralized Ministry of Education. The ministry was responsible for administration of schools, allocation of resources, setting of enrolment proportion, certification of schools and teachers, curriculum development and other basic policy decisions, they also tried to expand the supply of scientists and engineers in higher education. Moreover, ever since computer education was first introduced in the 1970s in South Korea, The government has made constant efforts to adapt education to the information age. They believes that a successful educational reform is the most effective way to build a create knowledge society.

TECHNOLOGY IMPORT POLICIES

On the technological development, technology import policies are one of the most supplements, but not opposite. At the limit of this assignment, I am going to focus on   the most important policy that is foreign direct investment (FDI).

Foreign Direct Investment:

In certainly, in order to develop the Korean economy, South Korea needed to access to modern technologies which, for the most part, had to be obtained from abroad. In the 1970s, South Korea strictly screened FDI, enclosing to selected industries and also restricted the repatriation of capital. However, as economic conditions and the environment of the global and domestic economy changed, part of a broad enacted a liberalized foreign investment law in 1984. Therefore the domestic market was opened up to a greater degree of imports and inward FDI began to be encouraged following this Law which greatly increased the number of manufacturing industries open to foreign investment. FDI will be fully liberalized for all industries, except for those involving national security concerns and cultural considerations such as the mass media. Certain sectors subject to international negotiations over FDI such as the communications and shipping industries will also remain controlled. South Korea has also developed an institutional framework for mutual fund so that these funds can function as a key instrument for long-term financing. Furthermore, tax incentives were introduced for projects in high-technology sectors.

THE CONTEMPORARY CHALLENGES FACING THE ECONOMY

Over the past three decades, Korea has enjoyed an annual average economic growth of 8.6% and has emerged as the world’s 12th largest trading nation. In less than two generations, the nation has established itself as one of the world’s leading shipbuilders and manufactures of electronics, semiconductors and automobiles. We are going to see come statistics to consider the contemporary challenges facing the South Korea economy.

Affect of the bursting of the credit and consumption bubble in 2003 cause GDP to contract in the first and second quarters in 2003. However, the economy appears to be rebounding surprisingly. GPD grew at a 4.7% annual rate in the third quarter of 2003, exports also continued to surge in the fourth quarter, and are continuing to grow quickly in the first half of 2004, thanks to strong demand from China and United States. This has led to increased industrial output, for capacity expansion and also cost reduction. Thus, overall growth will continue at a fast rate, as it shifts from the external sector to domestic sectors. For this year overall, exports will show growth of more than 20%, while import growth will be slightly less than that.

In the contrary, risks and alternative scenarios would also be considered. As consumption rebounds sooner than expected, and export growth does not decelerate, causing overheating in the second half of this year and into 2005. Also there is less labour activism as high unemployment makes workers more concerned about job security. Furthermore, because of an unstable policy, South Korea is also facing an unequal economy challenges. A president Roh Moo promised that he would continue the independence foreign with USA, softly but also strictly strategies with North Korea, and sending army to Iraq. These strategies will have a clearly effects on the developing economy of South Korea in the future.

THE SOUTH EAST ASIAN FINANCIAL CRISIS OF 1997 and GLOBALIZATION

The South East Asian Financial Crisis of 1997:

It can be said that the stable growth of the South Korean economy is indispensable for the development of East Asia as a whole where economic interdependence is deepening. Therefore, the Asian financial crisis of 1997-1998 was not only exposed long-standing weaknesses in South Korea’s development model but also affected the role of East Asia’s miracle. It included high corporate debt-equity ratios, massive foreign borrowing, led to increased unemployment, foot prices increases especially hit the poor, prices of imported goods raised as a consequence of devaluation and an undisciplined financial sector in which lending liberally supported headlong industrial expansion without due regard for profitability. The 1997 Asian financial crisis hit South Korea particularly hard. For examples, the South Korean economy contracted 6.8% number of business failures and South Korea’s budget deficit climbed very much. The most important factor that started the crisis was external factor, it started external capital flow and this extreme volatility was exacerbated by their banking system. For that reason, at the end of 1997, South Korea signed a $US58 billion emergency loan package, including loans from the IMF, World Bank and Asia Development Bank. And under the term of this program, South Korea agreed to accelerate the opening of its financial and equity markets to foreign investment and to reform and restructure its financial and corporate sectors to increase transparency, accountability and effiency. To many economists, the economic slowdown indicates that South Korea’s economy is in need of additional reforms. Since South Korea’s economy is an integral part of the other Asian economies, any slowdown or recession would have widespread throughout the region.

Globalization:

Two decades after the achievement of vast industrialization through export-oriented development, South Korea is making still another adjustment to the global market. This expansion of South Korean overseas investment constitutes the first process of globalization. Korean capital has moved labour- intensive processing or assembling to less developed countries in Asia, the Caribbean, and Eastern Europe. Korean investments in North America and Europe have increased for different reasons but the effects are the same: for the first time, the South Korean state no longer retains full control over the large conglomerates it helped create, and South Korean capital has become global.

While globalization is a world-wide phenomena, a unique aspect of Korean globalization involves North Korea as well as the Korean diaspora.

Border-crossing transactions involving both capital and labour have brought globalization home to Korea, and the Korean experience not only expresses various courses and limits of globalized movements of capital and labour, but also suggests how seemingly borderless economic relations may create new forms of nationalism. South Korea has also created a close relationship with America in order to increase their trade, overseas investment …from the biggest economy in the world. Finally, in 1988, the Olympic Games that were organized in Seoul had the highest participation ever. And Seoul gained new global recognition and visibility as more than 3 billion people around the world watched the Games being televised live.

 

STRATEGIES TO PROMOTE FUTURE ECONOMIC PROSPERITY AND CONCLUSION

Through this Assignment, South Korea’s economy has been highly investigated. The reasons for the economy growth, contemporary challenges, global developments or mega-trend…also have been clearly considered. South Korea economy that basically based on agriculture has been expanded with a really fast record. Five Year Economic Plans concentrated on the development of export-oriented and import-substituting

manufacturing. While economic aid, especially from United States and Japan, has been vital to economic growth of the country, which is the span of a generation grew of the world’s poorest nations to an industrial power. In order to keep developing the economy, South Korea’s government should:

• Keep their contemporary challenges facing the economy developing
• Promotes comparative advantage, educational systems, and technology developments
• Create a closer relationship with North Korea. In order to do this, they have to do two things:

1. Commit to the principle that engagement should be done on efficient, transparent terms with North Korea

2. While engaging, South Korea should prepare for the possibility of collapse

And also in order to prevent another financial crisis like 1997-1998, South Korea needs more than one solution to solve a multidimensional problem. South Korea and other East Asian countries need to manage the international capital flows more closely and in a more integrated fashion. And finally, lack of transparency, greater caution about financial liberalisation and globalization also needs to be addressed.

In my opinion, by doing this Assignment, it really helps me to have some ideas not only about the South Korea economy but also international business environment’s knowledge

 

REFERENCE

From websites and searching articles:

•  (University of Northumbria- Learning Resources)

From text books:

Dicken, Peter. - Global shift: Transforming the world economy. - 3rd ed. - London: Paul Chapman, (1998).

Griffin, Ricky W.. - International business: A managerial perspective / Ricky W. Griffin / Micha. - Internat.4r.e. - Prentice-Hall, (2004).

Hickson, David J., David John, 1931-. - Management worldwide: distinctive styles amid globalization / David J. Hicks. - [2nd Ed]. - London: Penguin, (2002).

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