SOUTH KOREA GLOBALIZATION IMPACT

Executive Summary:
The end of World War II, and the subsequent divide of the Republic of Korea, marked the beginning of South Korea as a country. The first few years of its existence as a country were far from ideal. With help from the United States and the UN, South Korea was rehabilitated and pointed in the right direction. South Korea received financial aid, military assistance and trading partners that would prove to be extremely valuable in its efforts to become a self-sustaining successful country.

South Korea began as an autocratic country and over the years moved toward becoming fully democratic. Although the country is now under democratic rule, it is still considered to lack freedom from corruption. Although business freedom is above global average, trade freedoms and fiscal freedom, two factors controlled directly by the government, are below global average.

Early leaders of South Korea pushed the country toward industry and manufacturing, away from the prior focus of agriculture. Today, the economy in South Korea is based on the technology industry, along with strong competitors in the automotive and shipbuilding industries. The 10 largest companies in South Korea make up 80 percent of the countries GDP (Eun-Jung, 2012). Exports remain a vital part of the South Korean, making up 53% of their economy (Naidu-Ghelani, 2012).

Despite a few years of economic turn down, South Korea has the 15th largest GDP in the world and maintains a trade surplus of 28.5 billion US dollars in 2012, down from 41.2 billion in 2010 (Ningzhu, 2013).

The culture of South Korea is influenced by many variables. Prior to the division of the Republic of Korea, the area that is now South Korea was occupied by Japanese rule. As expected, the cultures of Japan and neighboring Asian countries have had an effect on the cultural development of South Korea. Western Cultures have also had an effect on South Korea, via the long lasting relationship with the United States and members of the UN. South Korea also builds upon the teachings of Confucius and what used to be their primary religion Buddhism. Borrowing from all these factors, South Korea has emerged to a collectivist, feminine culture with a high power distance and high uncertainty avoidance. This directly differs from the characteristics of the United States culture characteristics of an individualistic, low power distance, low uncertainty avoidance and masculine culture.

South Korea is a country that was almost forced into globalization throughout the course of its history. Japan had occupied the Republic of Korea before the end of WWII, after which the United States took over. After the takeover, the United States and other UN members supplied financial aid and military support throughout the Korean War. Since then, South Korea has remained trade partners with the European Union and the United States.

Exports now make up more than half of South Korea’s economy. If businesses in South Korea want to continue to succeed, they need to continue to globalize to access new markets, internally diversify their economy and move away from the focus on a small number of companies.

Country Analysis

In wake of WWII, with a U.S. backing, South Korea moved toward a democratic based government, while North Korea, backed by the Soviet Union, adopted a communist government (Thomas White International, 2013). The new country border placed along the 38th parallel left South Korea with significantly fewer natural resources than the newly formed North Korea. The northern invasion and resulting Korean War also left South Korea with little functioning industry to sustain the economy. After the war the United States maintained a military presence in South Korea, supplying more than half of the nations armed forces.

In the years following the Korean War, South Korea was put through economic and political hardship. After the Korean War had ended, South Korea was in need of heavy rehabilitation. The United Nations Korean Reconstruction Agency provided financial aid required to stabilize the country. Individual UN members, most notably the United States, also made significant contributions to the newly established country (Mongabay, 2010). Through the heavy military occupation and extensive financial aid supplied by the United States, South Korea adopted a more Westernized culture than most Asian countries and also gained an invaluable business partner that would fuel its economic growth. Under an autocratic authority South Korea worked with what little resources it had available to move toward a higher level of industrialism. In the early years South Korea was primarily an exporter of textiles and shoes (Thomas White International, 2012). After a political take over in 1960 by General Park Chung-Hee, the country began to flourish economically. The “Miracle on the Han River” is the name given to economic transformation and overall rehabilitation of South Korea. South Korea has moved away from agriculture and its early, lower technology industrial mindset and is now home to technology giants Samsung and LG along with automobile producers Hyundai and Kia.

The economy of South Korea has remained strong over the years, although the South Korean economy is very sensitive to the economies of the countries it exports to. All countries that export are prone to following suit when one of its global partners goes under: the larger the stake in exports, the more sensitive the exporter’s economy is to other countries economic recession or boom. South Korea is faced with the choice of changing focus from exports to domestic demand. Exports have always been a focus of South Korea, but increase in exports does not always yield an increase in employment, as employment is usually stimulated by the domestic sector (Cooper, 2012).

The current ideology of South Korea has traces of standard Asian cultures mixed with western cultures and European influences. In some aspects, Korean culture is certainly moving away from their roots. Male superiority is a staple in many Asian cultures, especially Japan. On February 25, 2013, the first woman will be sworn in as South Korean president, effectively moving the country toward a more gender equal society.

South Korea has remained a strong homogeneous population since its creation and movement away from the former Japanese rule. South Korean’s take pride in their homogeneous mixture and therefore a strong sense of collectivism is established. After 60 years of occupation by Japan, South Koreans are trying to regain their identities, rather than the ones imposed on them by the occupiers. As a result of this pride in homogeneity, South Korean is emerging as a racist nation with a general disliking and negative feeling toward foreigners. Increased globalization is bringing foreigners into closer contact with locals. It’s hard to tell how South Korean’s will respond although it is unlikely that instilled beliefs will change rapidly.

Although foreign investors and entrepreneurship stimulate a majority of its economy, South Korea has not always been the easiest country to enter as a business. Migration to South Korea requires permits and registration with the government. Permanent migration to the country is not normal.

South Korea is also notorious for having extensive regulatory and legal practices. Extensive labor regulations do not make the country ideal as a source for low cost labor. Recently the government has begun to move away from business regulation. As a result, the countries Ease of Doing Business Index has dropped from 23rd to 8th (with 1 being the easiest) in the world.

South Korea is now home to a population of 48.8 million, all packed into an area slightly larger than the state of Indiana. This gives South Korea one of the highest population densities in the world, with 508 people per square kilometer. The average age of the population is 39, but is predicted to continue aging rather than getting younger. Despite a with a birth rate of 8.4, a death rate of 6.3 and a migration rate of 0, the median age is expected to increase to 56 by 2050 (Neumann, 2012). This is stemmed by the estimate that by 2050 over 40% of the South Korean population will be over 65 (Kuhn, 2013).

The language most spoken in South Korea is Korean, while English is taught in middle school. Education expenditures account for 7.9% of the countries GDP, which ranks 2nd among Organization for Economic Cooperation and Development (OECD) members (NCEE, 2012). South Korea is ranked first among all OECD members for citizens aged 25-34 attaining tertiary education with 63% (Bell, 2011),

January 2013 unemployment rate was 3.2 %, the highest in the past 7 months. Overall employment numbers fell by about 400,000 jobs, with about 2 million of those jobs lost coming from the agricultural and construction industry (Staff Writer, 2013).

In the third quarter of 2012, South Korean disposable income grew by 4.6% from the previous year, marking the fastest growth since 2004. Oddly enough, consumer consumption decreased by .7 percent in the third quarter compared to a year earlier (Lee, Yoo, & Meijer, 2012).

Although the United States has had a large impact on it’s history and economic development, South Korea still maintains their own cultural identity. Neighboring Asian cultures, Confucianism, Buddhism and recently Christianity, have certainly also played their part in shaping the culture of South Korea.

South Korea is known to be a country with a higher power distance, which is characteristic of Asian cultures. High power distance indicates a hierarchical society, where subordinates respect their superiors and often do not associate or have any contact with higher management. The United States on the other hand, holds a low power distance, also characteristic of western and European nations. The low score of 40 in this category reflects the American principle of “liberty and justice for all” and their focus on equal. Communication between managers and lower ranking employees is normal and part of everyday operations.

South Korea, much like other Asian cultures, maintains a high collectivist ranking compared to the high individualist rating achieved by the United States. South Korea, with a score of 18, and the United States, with a score of 91, are about as far apart as possible in this category. Collectivist societies such as South Korea have a higher loyalty to their companies and groups, where the focus is the good of the group, not the individual. The United States highly individualistic habits translate into a loosely knit society. People in the US are more concerned about the well being of themselves and immediate family, rather than the business as a whole or a given group’s well being.

The United States and South Korea also differ on the scale of masculinity. A high masculinity score, like the United States, indicates a focus on success and material items, while a femininity score, like South Korea’s, indicates a focus on well being and quality of life. This femininity score is likely derived from the teachings of Confucius and the dominant religion of Buddhism as femininity is not a characteristic of most Asian nations.

The final dimension, uncertainty avoidance, is a measure of a countries willingness to accept or avoid a risk. South Korea scores are among the highest in the world in this category, while the United States tends to accept uncertainty. If a new unorthodox idea or custom presents itself to individuals in each country, South Koreans would more than likely avoid the risk, while Americans would be more likely to consider the idea.

Culture is something that is influenced by many different variables. The former occupation of the Republic of Korea may have caused South Korean’s to rebel against the Japanese culture that was instilled in them or adopt the ideals. Religion may also have had an effect in the development of South Korea’s culture as Confucianism has deep roots in Korea.

The political system in place is democratic, with a president holding a five-year term after being elected. Much like the United States, South Korea features two main parties with numerous third parties. Since the Asian financial crisis of 1997 South Korea has taken a stand to fight corruption in the government. Despite having a democratic system, South Korea still experiences its share of corruption. A study published in 2009 reports that 76.8 percent of middle and high school students see Korean society as corrupt (The Korea Times, 2009). The current president, Lee Myung Bak, has been surrounded by bribery scandals and embezzlement charges. Although no charges have been filed against him, many of his presidential aides, senior officials and even family members have been indicted or convicted of corrupt practices (Sang-Hun, 2012). Park Geun Hye, South Korea’s new president, views government corruption as a major problem and vows to focus on fighting the corruption throughout her five year term. In addition to the efforts made by elected officials, the Anti-Corruption & Civil Rights Commission (ACRC) is a major force in fighting corruption within South Korea. In 2012 the ACRC won the UN award in the category of Preventing and Combating Corruption in the Public Service, beating out 1,377 other anticorruption agencies (H. Lee, 2012) A major implication of a corrupt government is the message it sends to foreign investors: a country with a significant political risk can prove to be problematic for foreign investors. While other risk factors are not as negative, such as a low organized crime and high human rights, the corrupt political system in place is undoubtedly negatively impacting the countries growth. The respect for human rights in South Korea is one of the cultures priorities. As stated earlier, South Korea holds a high femininity score in Hofstede’s cultural dimensions. The culture of South Korea holds happiness and quality of life as a higher priority than material possessions. South Koreans are also very collectivistic, meaning they think as a whole rather than placing importance on the individuals well being. These two characteristics coupled with a highly homogenous population leads to an ethical based society with a low crime rate. The forces of globalization have shaped the past century of Korea’s history and transformed its economy from one of the world lowest to one of the highest. These globalization forces are still at work today and will continue to change the country in various ways.

Globalization Forces

The divide of the Republic of Korea and the Korean War put South Korea into close contact with the UN and the US, connections that South Korea would later capitalize on to become a major player in the global economy. When South Korea was separated from North Korea, it had approximately the GDP of Ghana and other poor African countries. Starting in the 1960’s, South Korea started to move away from agriculture and move towards industry and exports, leading to the “Miracle on the Han River”.

Today, South Korea holds a trade surplus of 28.6 billion USD, and the 15th largest GDP in the world. The explosion of the South Korean economy was without a doubt catalyzed by the extensive aid extended to them by the United States and the UN as a whole. Over a 20-year period from the end of the Korean War in 1953 to 1973, the United States gave out 6 billion US dollars in loans and aid to South Korea to rebuild its economy (Green, 2011). In 1973 when South Korea stopped accepting aid from the United States, the countries GDP had reached 13 billion USD, almost 6 times of what it was 10 years prior.

Exports have always been the main part of South Korea’s economy. Allies from the past such as the European Union and the United States presented themselves as good trading partners for South Korea and today a majority of South Korea’s exports go to the United States, members of the European Union, China and Japan.

The US-South Korea Free trade agreement was put into action March 15, 2012 with hopes of increasing trade between the two nations. South Korea also passed a free trade agreement with the European Union in July of 2007. Opponents to the deal, although few in number, claimed that this will decrease the South Korean agricultural industry even faster than it has been decreasing. The agreement will allow agricultural goods to be shipped from the United States and Europe cheaper than they can be produced in South Korea. Although it is possible that South Korea’s agriculture industry may be damaged through these FTA’s, South Korea anticipates this agreement increasing their exports, ultimately increasing their GDP in the long run. These trade agreements are favorable for the economy of South Korea.

In the past few years, South Korea has emerged as one of the most “wired” countries in the world. South Korea is home to the world’s fastest average Internet speed and a smart phone usage rate of 60% of its population (Brian, 2012). South Korean based technology company, Samsung, accounted for 20% of the nation’s 1.1 trillion dollar economy in 2011(Weissmann, 2012). South Korea is also home to technology company LG, and emerging automotive giants Hyundai and Kia. These four companies make up a majority of South Korea’s exports and overall economy. South Korea’s technology industry is of vital importance to their economy as four out of the nation’s top five biggest companies compete in technological based or influenced industries. Globalization is key to fueling the growth of exports and the economy for South Korea’s technology industry.

Since President Lee Myung Bak took office in 2008, South Korea has shifted focus to government deregulation. Foreign investments and entrepreneur activities are large parts of the Korean economy. In 2012, foreign direct investments hit an all time high in South Korea, topping 16.2 billion US dollars (Jun, 2013). In past years the lack FDI coming into South Korea was problematic for their future. FDI coming into the country creates new jobs, increase GDP and a standard of living increase.

As expected, South Korea’s outward FDI is larger than its inflow, characteristic of an export-based economy. Outward FDI’s are important to maintain growth in exports. Growth in exports does not always indicate increased employment, although the increased revenue of the exporting company effectively raises GDP.

With a country as heavily based on exports as South Korea, outsourcing and offshoring are two major concerns. While outsourcing and offshoring into South Korea would be beneficial to the country, the same action done by Samsung, Hyundai or LG could be extremely harmful to the economy. Offshoring and outsourcing are an integral part and are possibly even part of the definition of globalization. Offshoring and outsourcing can create jobs in the target country while decreasing jobs in the home country. The money saved by companies through offshoring and outsourcing may add stability to a failing company, therefore helping the countries economy and the GDP.

Migration rates can prove to be problematic in some countries, such as the United States. Net immigration rates can have effects on staffing and unemployment rates. An emerging country such as South Korea in the 1970-80’s can be viewed as an attractive place to live and work, due to the drastically increasing economy ultimately caused by globalization. An influx of immigrants can be useful to properly staff companies, but may also raise the employment rate. With an unemployment rate on the rise, an increase in net migration is not beneficial to South Korea at this time.

South Korea narrowly avoided a recession the first quarter of 2009 by posting a .1 percent increase in GDP. That however, does not mean that South Korea emerged unaffected. The burst of the US housing bubble in 2006 triggered declines in credit availability and decrease in investor confidence, ultimately resulting in a negative impact of stock markets worldwide. As the US dollar decreased in value so too did the Korean Won. Samsung reported a decrease in sales for the 4th quarter of 2008 along with South Korean auto exports. The decrease in these business markets yielded a 5.1% decrease in national GDP for the 4th quarter of 2008 (Leitzing, 2009). The countries high export dependence on the United States and other European Union members also hit by the recession ultimately set them up for failure.

South Korea quickly recovered from the Great Recession, with stimulus package of 14 trillion Won (10.8 Billion USD). A majority of the stimulus package, 4.6 trillion won, was spent on regional infrastructure while another 3 trillion won was provided in tax benefits (Kim, 2008). Through this stimulus package, South Korea avoided dipping back into a decrease in GDP and has posted increases ever since Q4 of 2008.

During the Great Recession, the Korean Won decreased much faster than the Japanese Yen: about 65% against the Yen (Veale, 2009). This made services and domestic goods in South Korea popular amongst the Japanese. Whose Yen is now able to buy the same product cheaper Korea than in Japan. Tourism rates in February 2009 rose 71% compared to the previous year and stores in Seoul often had waiting lines to get in (Veale, 2009).

The great recession in my mind was positive in the long run for South Korea. The recession showed South Korea the value of a diversified economy. Exports may flourish when local currency devalues, but will yield poor returns when foreign currency drops. Domestic made goods and services paired with diversified global partners can be a good backdrop if other contributions to the nations GDP crash.

South Korea is a very homogenous population, and in recent years racism and prejudice toward outsiders has become more prevalent. Although permanent migration to South Korea is not common due to laws and regulations, the atmosphere is still unfriendly toward non-Korean visitors. Organized crime remains low, reflecting their cultural value of femininity. The low crime rate is attractive toward potential investors. The racism and prejudice on foreigners that is established in the country is non violent in nature and does not seem to effect global business greatly. The homogeneity and nonviolent/criminal nature of South Korea is a positive for the society and culture as a whole. The racism and prejudice could be positive or negative, depending on if you are a Korean who values the homogeneity, or a foreigner just trying to fit in.

The globalization of South Korea has transformed it from a war torn, poor, undeveloped land with little natural resources to a global economic competitor that it is today. North Korea is a prime example of what could have happened to South Korea, were it not for the economic prosperity it has developed through the years. Overall, globalization has had a very positive impact on South Korea.

Recommendations

As stated earlier and support in the previous section, I feel that South Korea can greatly benefit from a greater diversified economic portfolio. This can be accomplished by a variety of means: more global partners, higher diversified make up imports/exports/domestic demand, and movement away from such a major dependence a small number of large businesses. In the past few years South Korea has signed two major free trade agreements: one with the United States and one with the European Union. South Korea already conducts business with a majority of the world’s top economies, but still has the capability of expanding to other markets. Further FTA’s with non-technology and automotive focused countries such as Canada and Middle Eastern countries could be of great benefit to the South Korean economy. South Korea should be careful when selecting partners for their FTA’s, as to avoid negotiations with a partner that could be potentially damaging to the nations economy. The movement toward establishing more global partners is important to South Korea to ensure economic stability. When the Great Recession took its toll on the United States, it took South Korea right along with it. While it is true that when the world’s biggest economy goes into recession, that most countries will feel some repercussions, it is possible to avoid the same fate and remain stable through careful planning and awareness of economic weak points. South Korea is known world wide for its extensive use of exports.

While the countries exports can lay majority claim to the countries success, it is important that South Korea does not ignore the other aspects of the economy. Coming out of the Great Recession, domestic goods played an important part of keeping the country afloat while exports were failing to support the GDP as they did in the past. Exports also do not support jobs as readily as they did in the past. Production has become more streamlined and less labor dependent. In order to sustain the countries low unemployment rate more focus must be placed on domestic demand. Samsung and Hyundai are two of South Korea’s largest businesses. The top 10 biggest companies in South Korea contribute to 80% of the nations GDP, with 20% coming from Samsung alone. Few, large businesses driving the economy is characteristic for emerging countries. South Korea is now an established country with a competitive economy that needs to move away from the unstable reliance on a small amount of companies. Major developments within a company or an industry can mean economic down turn for the country as a whole. Actions as internal as changing of board members and even lawsuits on an individual company cannot be given the opportunity to damage the national economy. Countries such as Poland remained strong through the Great Recession due to their lack of dependence on a single exporter. To mimic this, South Korea needs to encourage development of small and medium sized businesses capable of taking small shares of the nations economy. Although there are already laws and regulations in place to protect “ma and pa” shops from bullying that might occur by big business, South Korea needs to focus on the development of these businesses into players in the local and national economy, rather than strictly protecting existing business. South Korea has been labeled as a model for all emerging countries. At its creation, it was seemingly set up for failure, yet it succeeded and is now one of the world largest economies. South Korea now needs to move out of the development stage and into the maintenance stage, to secure its position near the top of the global economy.

Works Cited

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