Country Risk Analysis - South Korea - Case Study Example

Country Risk Analysis – South Korea SUMMARY South Korea, the Republic of Korea, is a presidential republic, a developed country with high standard ofliving. To evaluate whether the nation is conducive to foreign investments, political and economic risk assessment becomes essential. The political risk assessment was conducted based on factors such as the political stability, the labor market, the population, the tax burden, and the unemployment rate. In addition, the infra structure prevalent in the country, the population and the national culture were assessed. South Korea is politically stable and has excellent infrastructure. With consistent reformation policies, the Government has been able to transform the country into a knowledge-based service-oriented economy. The labor market is flexible but the wages are higher than the neighboring countries. The workforce is highly qualified but the country has an aging population as the population growth rate is extremely low. Unemployment rate in the country is very low. Having a culture of uncertainty avoidance, risk assessments would be done and precautions and risk measures adopted. Being a collectivist society, loyalty is given importance. Economically too, the country is sound with low inflation rate, and the currency resilient to shocks. South Korea is an open economy ranking among the top 20 economies in the world. The private sector can operate freely without Government interference. The two major concerns are the aging population and corruption prevalent in the country. However, with the right business partner and sound knowledge of the economy, would help foreign businesses achieve the desired objective. Introduction South Korea, the Republic of Korea, is a presidential republic, a developed country with high standard of living. Having its origin in the World War II, South Korea is a fully functional modern democracy. However, political and economic analysis would help a multinational evaluate investment decisions. Location/Climate South Korea is strategically located on the Korean Strait covering a total area of 99,720 sq. km with a coastline of 2,413 km (CIA, 2012). This mountainous peninsula has the Yellow Sea on the west, and the Sea of Japan on the east. The southern tip of the peninsula lies on the Korea Strait and the East China Sea (Southkoreangovernment, 2012). Most of the land in South Korea is not arable. The peninsula comprises of about three thousand islands that are mostly small and uninhabited. South Korea has a temperate climate with very cold winters and a short rainy season. The average January temperature range is -7°C to 1°C (19°F to 33°F) in Seoul. Along the southern coast the winter temperatures are higher but they are lower in the inner mountainous areas. June through September is the rainy season. Population The population of South Korea as of July 2012 was 48, 860,500 with 73% of the population being in the 15 to 64 years age group. Population in South Korea has been growing at the rate of 0.204 percent which is considered a very low rate, leading to an aging population (Datamonitor, 2009). The population is mostly homogenous with just about 20,000 Chinese residing in South Korea. However, people of South Korea are either Buddhists or Christians and almost half the population (49.3 percent) does not follow any religion (CIA, 2012). The literacy rate is 97.9 percent while the unemployment rate is 9.8 percent. Most South Koreans live in urban areas because of the excessive migration that took place during the country’s expansion between 1970 and 1990. As of April 2005, the number of foreign laborers in South Korea was 378,000 and 50% of these were without official authorization. Most foreign workers are from South Asian and Southeast Asian nations in addition to workers from the former Soviet Union countries and Nigeria. About 11,000 expat English teachers also live in South Korea apart from 31,000 US military personnel (Southkoreangovernment, 2012). Cultural Values The cultural dimensions of any nation are essential to understand the people and the business practices prevalent in that region. In this context Geert Hofstede’s dimensions enable investors to identify the business processes and rules followed in that country. South Korea has developed a unique cultural identity even though it shares traditional culture with North Korea. Power Distance (PDI) South Korean society is a high power distance society with a power index of 60 against the World PDI average of 55 (Geerte Hofstede Cultural Dimensions). This suggests that this is a hierarchical society and people follow instructions. The manager usually has an autocratic attitude. Individualism/Collectivism (IDV) South Korea with a low score of 18 against the world average of 43 is a collectivist society. This has its roots in the Confucian principles where filial piety is important. People belong to in-groups in collectivist societies and loyalty in this culture is paramount (Geerte Hofstede Cultural Dimensions). Employee/employer relationship is more like a family and not that of a manager and subordinate as in individualistic cultures where people are concerned with individual growth and development. Masculinity Index (MAS) With a score of 39 on this index against the world average of 50, South Korea is considered a feminine society. The society believes in equality and consensus, and conflicts are resolved through negotiations and compromises (Gerte Hofstede Cultural Dimensions). Competition, achievement and success do not rule the society as in the case of societies with high masculine score. Uncertainty Avoidance Index (UAI) With a score of 85, South Korea is one of the most uncertainty avoiding countries in the world. Uncertainty avoidance is the extent to which the members feel threatened by unknown situations. Hence they maintain rigid codes of belief and behavior. They believe in precision and punctuality while innovation is resisted. Natural resources and the environment South Korea has several international agreements such as Antarctic-Environmental Protocol, Antarctic-Marine Living Resources, Antarctic Treaty, Biodiversity, Climate Change, Climate Change-Kyoto Protocol, but none of these are ratified. Air and water pollution can be found in large cities because of the discharge of the sewage and industrial effluents (CIA, 2012). Due to breach of emission standards, pollution is reaching unreasonable limits (Datamonitor, 2009). Infrastructure The country has extensive networks of railways, highways, bus routes, air routes and ferry services across the nation. Major cities have express bus terminals and inter- and intra-city bus services are also available (Southkoreangovernment, 2012). There are several expressways and highways, and major cities have subway system. There are eight international airports and seven domestic airports in the country. Political Risk Analysis Government The government of South Korea is divided into three branches - executive, judicial, and legislative (Southkoreangovernment, 2012). The executive and legislative branches carry out functions at the national level although certain ministries in the executive branch carry out certain local functions as well. The judicial branch, however, operates at both the local and the national level. The country is divided into nine provinces, 6 cities, one special city and one special self-governing city (CIA, 2012). The legal system is a mix of European civil law, Anglo-American law, and Chinese classical thought. Elections are held for the post of the President (for a term of 5 years) while the President appoints the Prime Minister with the consent of the Assembly. The judicial board is also appointed by the President. South Korea is fairly stable republic where the powers are shared between the President, the legislature and the courts (USA.gov, 2012). International Relations South Korea maintains diplomatic relations with 170 countries (Southkoreangovernment, 2012). It also has links with ASEAN. It maintains good relations with its neighbors – China, Japan and Russia. It became a member of the UN in 1991. South Korea had to rely on international trade for economic development. FDI liberalization was adopted early while preferential trade agreement (PTA) and free trade agreement (FTA) were adopted much later (Andreosso-O’Callaghan, 2009). The US-South Korea FTA was ratified in 2011 (CIA, 2012). Globalization was adopted as its national goal reforms were brought in different sectors such as education, market and economic systems, politics, environment and culture. South Korea encourages FDI and foreigners can buy land. Unemployment and Wages The unemployment rate in South Korea is one of the lowest in the world (Datamonitor, 2009). The average unemployment rate in South Korea has been 3.68 percent which has peaked to 7.10% in June 1999 and has been the lowest in September 2012 at 2.9 percent (Trading Economics3, 2012). The country has a highly qualified work force and the wages are higher than the neighboring countries (Datamonitor, 2009). The labor unions resist the rising wage disparity. Source: Trading Economics3 (2012). Corruption and Crime While South Korean economy is dynamic and its legal framework is in place, corruption damages the Government’s integrity (The Heritage Foundation, 2012). Corruption is a cause of concern. Labor Market The labor market flexibility has been hampered by the high costs and the militancy of the labor unions (Datamonitor, 2009). The labor laws are considered to be restrictive when compared to the standards prevalent in other countries. Union membership was only 10.3% in 2005 but despite this the unions influence many political decisions and this can be a deterrent for foreign investors. Taxes & Tariffs, IP Rights The legal framework is modern and well-functioning; the protection of private property rights is strong (The Heritage Foundation, 2012). The judicial system is also efficient but the protection of IP rights needs improvement. The highest income tax rate is 35% and the highest corporate tax is 22 percent, both being subject to 10 percent surtax. The overall tax burden amounts to 25.6 percent of the GDP. However, foreign investors can apply for tax abatements and then claim for tax reductions (Datamonitor, 2009). Financial Risk Analysis Macro Economic Factors Over the past four decades South Korea has experienced phenomenal growth and global integration, and is now a high-tech industrialized economy (CIA, 2012). It is a major international, economic power (Southkoreangovernment, 2012). Its GDP in the 1960s could be compared to the poor countries of Asia and Africa but currently it is among the top 20 economies of the world. After the Asian Financial crisis in 1997, the GDP had plunged, but recovered by 9 percent in 1999-2000 (CIA, 2012). As of 2011 the GDP was $1.116 trillion (The World Bank, 2012). Today it is a relatively open economy as a result of an export-led growth model started in 1961 (Andreosso-O’Callaghan, 2009). Banks and companies considered non-viable were either closed or merged with stronger institutions (Moak, 2000). ‘Internal liberalization’ enabled the private sector to operate without Government interference (Ungson, Steers & Park, 1999). With its focus on logistics, finance and industry, the government has been able to transform the country into a knowledge-based service-oriented economy (Lee & Hobday, 2003). Despite a growing economy, the nation has an aging population, inflexible labor market and the GDP relies heavily on exports. Moreover, it has stringent rules on imports and FDI has been declining despite the country being on the path of economic growth (Datamonitor, 2009). Currency The official currency of South Korea is the Korean Won. After the 2008 financial crisis the volatility of the currency has sharply reduced. This indicates that financial soundness of the banking sector and adoption of macro-prudential measures can make the country and its currency resilient to shocks Xinhua, 2012). The currency volatility had risen to 1.76% in 2008 following the collapse of Lehman Brothers but it dropped to 0.54% in 2011 when the US sovereign rating was downgraded. Inflation Rate Inflation rate is a measure of the general rise in prices against the purchasing power. In South Korea, from 1966 until 2012, the inflation rate averaged 8.1 percent while reaching an all-time high of 32.5% in October 1980 (Trading Economics, 2012). The lowest inflation rate was in February 1999 at 0.2%. In October 2012, the inflation rate was 2.1 percent. The chart below shows the changes in inflation since January 2011. Interest Rate Decision on the interest rates in South Korea is taken by the Bank of Korea’s (BOK) Monetary Policy Committee. The interest rate has been at an average of 3.82 percent while the benchmark interest rate has been 2.75% as last reported (Trading Economics2, 2012). In 2000, the interest rate was the highest at 5.25% and the lowest at 2% in February 2009. Conclusion An analysis of South Korea suggests that the country is politically stable, and maintains good international relations. The infrastructure in South Korea is conducive to investments. Being a collectivist society loyalty and importance to in-groups is given. Overall, Government policies are business friendly and the nation has been attracting FDI as it is a major economic power. The currency volatility is low and so is the inflation rate. Foreign investors would need to be aware that the nation has an aging population, high wages and corruption that prevail in the country. Selection of the right partner would be essential in achieving the desired business objectives but since the country has a culture of high uncertainty avoidance, chances of success are high. Works Cited Andreosso-O’Callaghan, Bernadette. "Economic structural complementarity: how viable is the Korea-EU FTA?" Journal of Economic Studies 36.2 (2009): 147-167 CIA. "The World Factbook." Web. 04 Nov 2012. "Geerte Hofstede Cultural Dimensions." Web. 04 Nov 2012. Lee, You-ll. and Hobday, Michael. (2003). "Koreas new globalization strategy: can Korea become a business hub in Northeast Asia?" Management Decision 41.5 (2003): 498-510 Moak, Samuel K. "GLOBALIZATION AND MARKET ADJUSTMENT: KOREAN CASE." Allied Academies International Conference. Academy of Marketing Studies. Cullowhee 5.2 (2000): 24-29 "Southkoreangovernment.com." Geography and Climate. Web. 04 Nov 2012. "South Korea Country Profile." Datamonitor. Datamonitor. Ebscohost, June 2009. 1-91 USA.gov. "Background Note: South Korea." US Department of State. Web. 04 Nov 2012. The Heritage Foundation. South Korea. Web. 04 Nov 2012. "Trading Economics." South Korea Inflation Rate. Web 04 Nov 2012. "Trading Economics2." South Korea Interest Rate. Web 04 Nov 2012. "Trading Economics3." South Korea Unemployment Rate. Web 04 Nov 2012. Xinhua. "S.Korean currencys volatility sharply down on resilience to external shocks." September 9, 2012. Web. 04 Nov 2012. Read More