IPE-K <Lecture Note 4> 2013.03.29 IPE-K: Trends in Trade and FDI *Some parts of this note are borrowed from references for teaching purpose only. Semester: Spring 2013 Time: Friday 9:00~12:00 am Class Room: No. 322 Professor: Yoo Soo Hong Office Hour: By appointment Mobile: 010-4001-8060 E-mail: yshong123@gmail.com Home P.: //yoosoohong.weebly.com 1 Trade 2 Major Economic Indicator 2006 2007 2008 2009e 2010f GDP (100 million dollar) 9,518 10,492 9,314 8,325 10,124 GDP per capita (dollar) 19,530 21,420 18,930 16,860 20,450 Economic growth (%) 5.2 5. 2.3 0.2 5.9 Unemployment rate (%) Consumer price inflation (%) 2.2 2.5 4.7 2.8 3.1 Exchange rate (W/dollar) 945 929.3 1,102.0 1,276.9 1,129.6 Current account balance (million dollar) 5,385 5,876 -5,778 42,668 35,253 Export (million dollar) 331,842 379,045 432,922 373,585 459,803 Import (million dollar) 303,938 350,877 427,254 317,457 415,024 Foreign reserve (million dollar) 238,882 262,150 201,145 269,933 Debt balance/GDP (%) 27.5 36.2 41.0 Source: Korea Eximbank Overseas Economic Research Institute. 2010. 2010 World Country Review 42.3 36.1 The Korean Economy: past and present YEAR 1961(a) 2008(b) (b)/(a) $ 2.3 Billion $ 928.7 B 403 GNI P/C $ 87 $ 19,231 221 Export $ 55 Million $ 422.0 B 7,672 Import $ 390 M $ 435.3 B 1,116 GDP 4 Industrial Power of Korea Product World market share % (Rank) Semiconductors 49 (1) TFT-LCDs 46.5 (1) Automobiles 9.8 (4) 80.0 (1) LNG carriers Petrochemical products 45 (1) Large diesel engines for ships Refrigerators Air-conditioners 59.6 (1) 14.3 (1) 22.3 (1) Company Samsung Electronics, Hynix Semiconductor Samsung Electronics, LG.Philips LCD Hyundai-Kia Motors, GM Daewoo Hyundai Heavy Industries, Samsung Heavy Industries, Daewoo Shipbuilding & Marine Engineering Co. LG Chem, SK Hyundai Heavy Industries, Doosan Engine Co., STX Heavy Industries Samsung Electronics, LG Electronics. LG Electronics, Samsung Electronics 5 Developments in Korea’s Trade Liberalization Policy Five measures of trade liberalization - Reduction of tariff barriers Elimination of quantitative restrictions Major items: live cattle and beef products Prohibition of trade-related subsidies Enhancement of transparency in import certification procedures Customs services, IT-based clearance system, a new audit system Establishment of FTAs 6 Trends in Trade Export Value Import Inc. Rate Value Balance Inc. Rate Value 2002 162,470,528 8.0 152,126,153 7.8 10,344,375 2003 193,817,443 19.3 178,826,657 17.6 14,990,786 2004 253,844,672 31.0 224,462,687 25.5 29,381,985 2005 284,418,743 12.0 261,238,264 16.4 23,180,479 2006 325,464,848 14.4 309,382,632 18.4 16,082,216 2007 371,489,086 14.1 356,845,733 15.3 14,643,352 2008 422,007,328 13.6 435,274,737 22.0 -13,267,409 2009 363,533,561 -13.9 323,084,521 -25.8 40,449,040 2010 (Jan~Sep) 338,628,512 30.5 309,574,057 34.5 29,054,455 7 Trends in Exports and Imports of Korea (billion $) Source: KITA (Korea International Trade Association). Korea’s Trade Volume Million USD Korea’s per capita Export Volume: $5,287 - larger than Japan($4,712) and the US($2,824) 9 Export Similarity Index Jap an Ko rea Taiwan Ho ng Ko ng wit h EA r egion: 2000- 04 China wit h EA r egion: 1990- 94 Thailand Sing ap o re Philip p ines M alaysia Ind o nesia 0 .0 0 .2 0 .4 0 .6 0 .8 1.0 av er age c or r elat ion c oef f ic ient of ex por t c omposit ion 10 Foreign Reserves (As of June 2007) China Japan Taiwan Korea Russian Federation India Foreign Reserves US Treasuries held Singapore Hong Kong United States United Kingdom Oil Exporters Offshore 0 200 400 600 800 1000 1200 1400 US $, Billions Source: US Department of the Treasury/Federal Reserve Board Foreign Reserves are as of July 2007, US Treasuries held are as of June 2007. Offshore holdings include UK, Carib banking, and Luxembourg 11 Top Ten Trading Partners (2008) Exports Imports Country Value ($ Mil.) Share to Total (%) Rank Country Value ($ Mil.) Share to Total (%) 1 China 91,389 21.7 1 China 76,930 17.7 2 USA 46,389 11.0 2 Japan 60,956 14.0 3 Japan 28,252 6.7 3 USA 38,365 8.8 4 Hong Kong 19,772 4.7 4 Saudi Arabia 33,781 7.8 5 Taiwan 16,293 3.9 5 Germany 19,248 4.4 6 Singapore 11,462 2.7 6 Australia 18,000 4.1 7 Germany 10,523 2.5 7 UAE 14,769 3.4 8 Russia 9,748 2.3 8 Taiwan 14,375 3.3 9 Mexico 9,090 2.2 9 Indonesia 12,129 2.8 10 UK 8,977 2.1 10 Kuwait 11,320 2.6 Rank Source: Korea International Trade Association 12 Top Ten Export Items & Top Five Markets (2008) ($ Mil., %) Value Top Five Markets(Component Ratio) No.1 No.2 No.3 No.4 No.5 Vessel, Ocean Structure and Part of Vessel 43,157 Panama Marshalls Singapore Germany Liberia Articles of Petroleum 37,573 China Singapore Japan Netherlands Hong Kong Wireless Communication Apparatus 35,713 USA China Hong Kong Finland France Automobile 35,032 USA Russia Canada Saudi Arabia Brazil Semiconductors 32,793 China Hong Kong Taiwan Singapore Japan Flat Display and Sensor 18,732 China Mexico Slovak Japan USA Steel Flate-rolled Products 15,948 China Japan USA India Thailand Synthetic Resin 14,909 China Hong Kong Japan Russia Vietnam Part of Automobile 13,950 USA China India Russia Slovak Computer 10,697 China USA Hong Kong Germany Japan Source: Korea International Trade Association 13 Top Ten Import Items & Top Five Markets (2008) ($ Mil., %) Value Top Five Markets(Component Ratio) No.1 No.2 No.3 No.4 No.5 Crude Petroleum 85,855 Saudi Arabia UAE Kuwait Iran Qatar Semiconductors 32,018 China Japan Singapore Taiwan USA Natural Gas 19,806 Qatar Oman Malaysia Indonesia Guinea Articles of Petroleum 17,534 India Saudi Arabia UAE Kuwait Indonesia Steel Flate-rolled Products 17,203 China Japan Taiwan France Sweden Coal 12,810 Australia China Indonesia Canada Russia Computer 9,723 China Taiwan Japan USA Singapore Alloy Iron, Pig Iron or Scrap Iron 7,960 Japan USA Russia China South Africa Fine Chemical Material 6,879 China Japan USA Belgium Germany Articles of Copper 6,228 Chile Japan Philippines China USA Source: Korea International Trade Association 14 Geographical Location Located on the trade route connecting Europe, Asia, North America Located at the center of NEA between China and Japan Starting and Ending Point of trans-continental railway 광양만권경제자유구역청 15 Accessibility to the NEA Market NEA is emerging as a major economic bloc alongside EU and KOREA North America JAPAN •Thirdargest economy in GDP China • World’s largest manufacturing base • Second largest economy and fastest growing consumer market in the world -25% of World Population -20% of World GDP 16 -30% of World Cargo Volume 광양만권경제자유구역청 World Trade Environment and Direction Global Economic Environment - Profound Change in the Elements that Constitute Value and Competitiveness 20th century - Value: Productivity Based on Input of Labor - Competitive Elements: Material Capital 21st century - Value: Productivity Based on Promoting - Creativity and Quality of Labor - Competitive Elements: information and Knowledge 17 “The Era of Borderless Competition” - Policies are standardized - Most debated economic issues: Globalization vs. Regional Economic Blocs Digitalized & Knowledge-Based Economy - Knowledge becomes the major source of added value - Change in industrial structure from manufacturing to new industries such as IT About KITA Unique Identity – Over 66,000 trading companies as members – Function in close relations with MKE (Government) History – Established in 1946 Role – International Trade & Investment Promotion – Research in Korea’s Trade policy & Strategy – Exhibition & Convention – e-Trade Promotion – IT/Trade Education – Hub of Northeast Asian Logistics Characteristics of Recent FTAs Korea has adhered to ‘multilateralism’ because its trade relations were diversified. Before the1990s, most FTAs aimed for market access through alleviation and elimination of trade barriers. Recent FTAs, which include service, investment, intellectual property rights, and government procurement, aim at being comprehensive. FTAs are promoted not between neighboring countries but between countries in other regions. 20 ConsiderationKorea's for Selection of FTA Partners Exports Markets Standards Details Economic benefits GDP, Trade Economic costs Restructuring costs Opportunity costs Political and diplomatic motivations National security, diplomatic needs Others Motivate to improve a domestic system Usage of Leverage effect Interests of FTA partners Faithful execution of agreements Source: KIEP 21 FDI 22 Overview of FDI in Korea Korea’s Development Model before Asian Financial Crisis - Foreign loan-based financing for investment requirements far greater than domestic saving - Little reliance on FDI and foreign licensing to cultivate indigenous capability through reverse engineering of imported capital, parts, and finished goods, etc. - Sharp contrast to FDI-led industrialization models as in case of Malaysia and other developing nations - One of the lowest in the world in terms of FDI/GDP ratio - Why Korea was reluctant to invite FDI? 23 International Comparison of Inbound FDI Inflow of FDI/Total Fixed Capital Formation ( %) Inward Stock of FDI as a Percentage of GDP 2004 2005 2006 2004 2005 2006 Developed Economies 6.6 9.3 11.8 8.2 16.4 24.2 Developing Economies 12.9 12.6 13.8 9.6 25.6 26.7 EU 8.1 18.2 18.1 10.5 26.0 38.0 UK 16.1 52.9 33.9 20.6 30.4 47.8 US 6.2 4.9 6.8 6.8 12.8 13.5 Netherlands 1.8 34.1 3.3 22.4 63.1 68.2 Africa 12.6 17.8 19.6 11.7 25.5 29.5 Asia 10.3 11.3 12.9 9.1 26.5 24.9 Latin America 17.0 15.3 12.9 9.1 21.1 26.6 China 8.0 8.8 8.0 5.4 17.9 11.1 Hong Kong 96.4 90.4 103.9 58.6 269.9 405.7 Malaysia 19.1 15.2 20.1 23.4 58.4 36.0 Korea 4.5 3.0 1.9 2.0 7.4 8.0 Singapore 77.5 57.6 79.5 82.6 121.5 159.0 Thailand 14.0 17.5 16.5 9.7 24.4 33.0 24 Source: UNCTAD, World Investment Report 2007 Recent Inflows of Foreign Direct Investment to Korea (Unit: million US dollar) Source: Statistics Korea. 2011. Foreign Direct Investment by Country ($ Mil.) Total Japan USA EU Others 2000 15,250 2,452 2,921 4,423 5,454 2001 11,286 776 3,886 3,052 3,572 2002 9,093 1,404 4,491 1,680 1,518 2003 6,469 540 1,242 3,046 1,623 2004 12,792 2,258 4,718 3,009 1,807 2005 11,563 1,879 2,690 4,781 2,214 2006 11,233 2,108 1,701 4,977 2,447 2007 10,514 990 2,340 4,332 2,852 2008 11,705 1,423 1,328 6,333 2,621 Source: Ministry of Knowledge Economy 26 Korea’s Shift to Proactive FDI Regime The Asian financial crisis provided "strong motivation" to attract FDI - Asian financial crisis in 1997/8 has enforced Korea to switch to proactive inducement of to overcome foreign exchange crisis under IMF conditionality Actively joining WTO regime and FTA To enable Korea as a regional business hub from the perspectives of logistics, finance and R&D 27 Korea’s FDI Inducement Industrializing Period - Korea emphasized the promotion of absorptive capacity and the indigenization of foreign technology, while restricting both FDI and foreign licensing. - Korean firms assimilated imported embodied technology rapidly and achieved subsequent expansion while upgrading industrial structure to emerge as global brands (e.g. Samsung, Hyundai, and LG) from an agrarian economy in just three decades. - Korea relied heavily on foreign borrowing to finance its investment requirements and thus Korea’s FDI played only a marginal role in its rapid industrialization process. One of the lowest in the world even after adopting a more proactive FDI regime. 28 After the Asian Financial Crisis in 1997/98 - Korea was forced to pursue FDI-friendly policy initiatives in order to fulfill the conditionality of the IMF in exchange for standby credit. - Korean policy makers have acclimated to the global economy by welcoming greenfield investment and M&As to promote investment activities leading to the development of a more competitive economy. - Domestic investment sharply declined in 2000s while outbound FDI exceeded inbound FDI as pervasive globalization affecting the world economy. - Policy direction shifted from conventional loan-based borrowing to an FDIbased development strategy → necessary to establish a system capable of inducing new FDI and providing effective aftercare services. - Korea has been active in attracting foreign investment by setting up comprehensive service institutions to provide one-stop services. - However, still the record of F야 into Korea is not impressive. 29 FDI Incentive Track in Korea 30 Results of Korea’s Aggressive FDI Inducement Policy - Inbound FDI notifications for 2007 recorded US$10.5 billion (marked the 4th consecutive year in which notifications reached or exceeded the US$10 billion). - As Korea’s inbound FDI increases during the decade since the Asian financial crisis, outbound FDI has also risen sharply as Korean companies take advantage of rapid globalization and subsequent supply chain expansion. Korea’s Overall Inbound FDI Trends 31 - Recently, the EU has been the largest source of Korean inbound FDI, contributing more than 40% of total arrived FDI. Korea’s Inward FDI by Country of Origin 32 FDI-Friendly Regime: Actions and Challenges Minimizing Negative Sentiment - Korea needs to recognize that many foreign companies have pointed out as some of Korea’s most serious negative factors the unlawful and occasionally militant labor movements in addition to the already comparatively high wage levels amongst Asian countries. - It also needs to supplement its FDI policy to function in a liberalized global trade environment. Improving Absorptive Capacity - Changing the investment environment should be to improve domestic economic absorptive capacity for FDI in order to select and attract transnational companies that can significantly help Korea remain competitive in a global market place. Needs to upgrade its overall FDI-friendly economic environment. 33 FSA and CSA - Korea should realize that inward and outward FDI is closely related through the dynamic process of MNCs upgrading CSA (Country Specific Advantage) and FSA (Firm-Specific Advantage) by accelerating production fragmentation and supply chains. - Thus, the Korean government needs to design policy measures effective for attracting foreign MNCs with FSAs of high quality. Application of Rugman’s FSA-CSA Matrix 34 Increasing Transparency of Laws and Systems - Korea must increase transparency of laws and systems in relation to FDI. Industrial clustering as contained in the Korea’s business hub strategy is a highly effective way to attract desired and selective FDI. - Making central and local government agencies’ incentive system more consistent to achieve global standards by doing away with tax and non-tax barriers is important. - Considering how to improve communication channels between the government and transnational companies is also crucial. 35 Investment Liberalization and Promotion Inward Investment Liberalization Policy - After the financial crisis of 1997, extensive government liberalization of FDI. Full liberalization of the real estate sector Allowance of hostile M&As by foreign companies Simplification of the FDI approval process -Procedures revised from a process of report and approval to notification. Simplification of administrative procedures -Establishment of INVEST KOREA (IK), a one-stop agency for foreign investors, and the Office of the Investment Ombudsman Expanding the range of incentives available to foreign investors -Tax exemptions and reductions, reduction of rental fees on governmentowned factory sites and a range of subsidies 36 FEZ : Free Economic Zone FTZ : Free Trade Zone Concepts of the FEZ and FTZ Free Economic Zone (FEZ) Free Trade Zone (FTZ) Industrial Park A … PORT Distripark Industrial Park B Support Functions … Industrial Park N 광양만권경제자유구역청 37 Locations of FEZs and FTZs Incheon FEZ Incheon International Airport Incheon Port Free Economic Zone Free Trade Zone Gunsan Iksan Busan-Jinhae FEZ Masan Gwangyang Bay Area FEZ Gwangyang Port 광양만권경제자유구역청 38 Development Plans of the FEZs Incheon FEZ Songdo IT, BT, international business Yeongjong air logistics, tourism, IBC Cheongna leisure, int’l finance Incheon Busan-Jinhae FEZ Gwangyang FEZ Busan • NEA maritime transshipment hub • Industrial clusters for oil and steel businesses Gwangyang 광양만권경제자유구역청 • maritime logistics hub • manufacturing & industrial parks, R&D 39 ODI 40 Outward FDI (ODI) - Korea has become one of the main providers of FDI in Asia - Big investor in China - There are diverse motives for Korea’s outward FDI - Market access, export base, natural resources, low production cost, etc. - Asia (in particular, Southeast Asia) received more Korea’s FDI compared to other region. - Most of the investment has been in manufacturing. - Large enterprises led continuously Korea’s FDI outflow in most of the industries. SMEs and individuals come second and third, respectively 41 Pattern of Korean FDI in Abroad Korea’s ODI Trends amount (million) 12,000,000 6,000 10,000,000 5,000 8,000,000 4,000 6,000,000 3,000 4,000,000 2,000 2,000,000 1,000 0 y ear Source: Korea Export-Import Bank. 2007 42 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 0 amount projects Pattern of Korean FDI in Abroad FDI by Region 7,000 6,000 5,000 4,000 2002 2003 3,000 2004 2,000 2005 1,000 2006 0 A sia N orth A m erica E urope Source: Korea Export-Import Bank. 2007 43 Latin A m erica M iddle E ast Pattern of Korean FDI in Abroad FDI by Industry ($Million) 6000 5000 manufacturing 4000 wholesale&retail 3000 real estate 2000 construction mining 1000 0 2003 44 2004 2005 2006 Pattern of Korean FDI in Abroad FDI by Company Size 100% 80% 60% Individuals 40% SMEs 20% Large Enterprises 0% 2003 2004 2005 Source: Korea Export-Import Bank. 2007 45 2006 Trends in Overseas Investment Source: Korea Eximbank. Overseas Investment statistics . 2012. Trends in Overseas Investment (Unit: US dollar) Source: Korea Eximbank. Foreign Investment statistics. 2012. Korea’s Overseas Investment by Region (2012) (Unit: 1000 US dollar) 250,000 200,000 150,000 100,000 50,000 0 Source: Korea Eximbank. Overseas Investment statistics. 2012. Korea’s Overseas Investment by Country (2012) (Unit: 1000 US dollar) 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Source: Korea Eximbank. Overseas Investment statistics. 2012. Korea’s Overseas Investment by Industry (2012) (Unit: 1000 US dollar) Professional, scientific and technical activities Real estate activities and renting and leasing Financial and insurance activities Information and communications Accommodation and food service activities Transportation Wholesale and retail trade Construction Sewerage, waste management, materials recovery and… Electricity, gas, steam and water supply Manufacturing Mining and quarrying Agriculture, forestry and fishing 0 40,000 Source: Korea Eximbank. Overseas Investment statistics. 2012. 80,000 Korea’s ODI in ASIA Trend of Korea’s ODI in Asia 7,000,000 4,000 6,000,000 3,500 3,000 amountt 5,000,000 2,500 4,000,000 2,000 3,000,000 1,500 2,000,000 1,000 1,000,000 year Source: Korea Export-Import Bank. 2007 51 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 0 500 0 amount projects Korea’s ODI in ASIA ODI by Major Destination in the World 2003 projects 2004 amount projects 2005 amount projects 2006 amount projects amount China 1,679 1,666 2,142 2,298 2,240 2,647 2,300 3,310 (ratio) (59.8) (41.0) (56.9) (38.4) (51.0) (40.4) (44.4) (30.8) (change) (21.2) (62.1) (27.6) (37.9) (4.6) (15.1) (2.7) (25.0) 526 1,051 828 1,339 1,070 1,243 1,257 1,754 (ratio) (18.7) (25.9) (22.0) (22.4) (24.4) (19.0) (24.2) (16.3) (change) (17.4) (84.8) (57.4) (27.3) (29.2) (-7.2) (17.5) (41.1) ASEAN 234 545 282 513 424 650 708 1,349 (ratio) (8.3) (13.4) (7.5) (8.6) (9.7) (9.9) (13.7) (12.6) (-12.7) (55.4) (20.5) (-5.8) (50.4) (26.6) (67.0) (107.7) 50 194 79 674 110 556 128 1,051 (ratio) (1.8) (4.8) (2.1) (11.3) (2.5) (8.5) (2.5) (9.8) (change) (-7.4) (-78.9) (58.0) (248.3) (39.2) (-17.5) (16.4) (89.0) total 2,809 4,062 3,764 5,989 4,389 6,557 5,185 10,731 (ratio) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) (change) (12.8) (9.9) (34.0) (47.4) (16.6) (9.5) (18.1) (63.7) US (change) EU 52 Motivation of Korea’s ODI in Asia Motivation of Korean ODI by period (percent) 1968~1993 1994 ~1996 1997~2001 After 2002 Securing or developing local or third-country markets 28.9 50.2 52.4 47.1 Utilizing local labor costs 14.7 37.2 30.3 38.5 Avoiding trade barriers 1.7 2.5 2.3 3.1 Securing raw materials 3.8 4.8 3.9 4.4 Acquiring advanced technology or management know-how 1.1 2.6 7.7 4.1 Developing natural resources 49.9 2.7 3.3 2.8 Source: The Export-Import Bank of Korea (2004). Lee, S.B. (2006) 53 54 - On per project basis, Singapore leads Korea’s outward FDI 55 56 57 Outward FDI Policy Loan programs - Loan program under the Export-Import Bank of Korea to finance OFDI: up to 80% of the total OFDI amount - Loan program under the International Economic Cooperation Fund initiated by the Korean government: applicable to OFDI in developing countries with long-term return periods Information provisions - Agencies: Export-Import Bank of Korea and the Korea Trade and Investment Promotion Agency Reduction of non-commercial risks - Korean Export Insurance Corporation offers export insurance to investors to reduce non-commercial risks, such as losses from war, nationalization, etc. Korean government signed Investment Protection Agreements with more than 80 countries, and tax treaties with more than 70 countries 58 US Assessment of KOR-US FTA The long anticipated Korea-U.S. Free Trade Agreement (KORUS-FTA) will be implemented on March 15, 2012 becoming our nation’s largest FTA since NAFTA. The agreement has the potential to increase U.S. exports to Korea by approximately USD 10-12 billion, and it will be especially beneficial for U.S. SMEs. In 2009, nearly 18,000 SMEs exported some USD 8.4 billion worth of merchandise to Korea. Total 2011 U.S.-Korea trade exceeded USD 100 billion for the first time ever. U.S. exports reached an all time high of USD 43.505 billion. U.S. exports increased 12% over 2010 levels. Korea is the United States’ seventh largest trading partner. The U.S. is the third largest exporter to Korea with a 9 percent market share. Key competitors include China with 16.8 percent, Japan with 15.3 percent, and the EU’s 27 nations with 10%. With the EU having already implemented its FTA with Korea, U.S. firms will now again be in a stronger competitive situation following KORUS implementation. (China’s trade reflects significant re-export activity.) - US Commercial Service 59 References Lee, Seong-Bong. 2007. Korea’s New Trade and Outward FDI Policies: Facilitating the Presence of Korean SMEs in Regional and Global Markets. Korea Institute for International Economic Policy. Ahn, Choong Yong. 2008. “New Direction Of Korea’s Foreign Direct Investment Policy In The Multi-track FTA Era: Inducement And Aftercare Services”. OECD Global Forum on International Investment. Ernst & Young. 2012.”South korea Highlights”. (PDF. Google). Korea International Logistics Council. Recent Year. “Invest in Korea as the Gateway to northeast Asia”. (PPT. Google). KOTRA. 2012. “US-Korea FTA: Unlocking Opportunities in Korea”. (PPT. Google). US Commercial Service. 2012. “Doing Business in Korea”. (PDF. Google). 60