Will Korean Companies Increase Their Overseas Investment in the ALADI
Countries?: Implications of Investment Success Cases
Hong, Uk Heon
Division of Public Administration, Uiduk University
Contents
I. Introduction: Small at Present but Great Potential
II. What Promoted Korean Companies to Invest in Latin America and the Caribbean?
1. Which Korean Companies Invested in What Industries and How?
2. Why the ALADI Countries?
III. How Did Korean Overseas Companies Operate in ALADI?
1. KOBRASCO Case
2. Samsung Tijuana Park Case
IV. Conclusion: More Active for the Manufacturing of El Dorado
Reference
I. Introduction: Small at Present but Great Potential
Latin America and the Caribbean, especially the ALADI (Asociación Latinoamericana de
Integración) countries, have emerged as an important overseas investment market for the Korean
companies since the late 1980s. For example, the Korean accumulated overseas investment in
Latin America and the Caribbean until the end of 1985 amounted only to 10.8 million US dollars at
current price, 1.6% of that in the world. But the figures increase rapidly up to 3,479 million dollars,
7.8% of the Korean total accumulated overseas investment at the end of Jan. 2004 (See Table 1).
In the late 1980s and again the late 1990s when world foreign direct investment (FDI) was booming
to go to China, Korean overseas investment grew more rapidly in Latin America and the Caribbean
than in the world (See Table 2).
Korean companies are expected to expand their overseas investment in Latin America at a
considerably high speed in the coming decades. Why? First, the size of Korean overseas
investment is relatively small compared to that of Korean economy. While Korean overseas
investment was about 3.0 billion dollars in 2002, its share in the world FDI captured only 0.4%.
Korean overseas investment also grasped 0.4% of the world FDI in Latin America and the
Caribbean. However, Korea attracted 2.6% of the world FDI inflow. The share of Korean GDP and
trade in the world was 1.4% and 2.3% respectively. Second, Korean overseas investment in the
world is riding on the wave of growing. It has increased rapidly since the late 1980s. As seen in
Graph 1, Korean overseas investment increased 6 times during the five years from 1986 to 1990, 4
times from 1991 to 1995, and 2 times from 1996 to 2000 respectively, compared to the previous
five years. In the midst of world recession from 2001 to 2003, the annual average of Korean
overseas investment amounted to 3.9 billion dollars. Third, Korean companies are highly exportoriented. The share of trade in the Korean GDP reached over 80% in 2002. Under a situation of
forming regional free trade blocs, such as NAFTA and MERCOSUR, Korean companies are likely
to choose overseas investment to keep up with export market share. Korean overseas investment
occupied 0.8% of its GDP, but Latin American one was 3.7%, much higher with less dependence
on export. Fourth, increasing domestic labor costs propel various manufacturing industries to
search for cheaper labor outside. For example, Korean light industries such as textile and clothing
are moving their production facilities rapidly to China to reduce labor costs.
Although Korean and Latin American general economic environments are unfolded to
interdependent investment, its actualization seems to depend on complex processes. This paper
intends to present some information that may help enhance Korean overseas investment in Latin
America and the Caribbean, especially in the ALADI countries, by observing the Korean recent
overseas investment experiences. This paper does not aim at proving any investment theory.
Rather, it tries to present their implications. My observation shows that Korea and the ALADI
countries, though they locate far away and have different cultures, have great potential to become
important economic partners for development.
2
Table 1. Composition of Korean Accumulated Overseas Investment Value by Area, until Jan. 2004
1980 (% )
Asia
Middle East
North America
Latin America &
the Caribbean
Europe
Africa
Oceania
Total
(1,000 US$)
1985 (% )
1995 (% )
2000 (% )
2003 (% )
Jan. 2004 (% )
33.9
16.0
22.4
21.6
9.7
31.8
42.4
5.1
30.4
40.8
2.3
29.9
41.0
1.8
28.9
41.0
1.8
28.8
3.3
3.6
17.3
3.4
100.0
145,986
2.0
11.2
5.1
18.6
100.0
546,915
3.8
13.0
2.5
2.9
100.0
11,924,464
9.0
13.3
2.1
2.5
100.0
32,791,497
7.8
16.5
1.7
2.3
100.0
44,401,401
7.8
16.6
1.7
2.3
100.0
44,658,820
Source: Export-Import Bank of Korea, “Overseas Investment Information,” 2004.
Table 2. Annual Growth Rates of Korean Overseas Investment Value in the World and Latin
America & the Caribbean from 1981 to 2003
W orld (%)
Year
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
19.4
58.2
39.7
13.1
26.0
33.4
56.2
19.0
42.3
49.8
38.7
30.5
24.2
35.5
35.7
37.0
22.0
23.7
13.3
17.4
15.4
8.1
8.5
Latin America & the
Caribbean (%)
20.0
18.1
4.5
10.2
35.9
25.1
31.2
80.0
173.3
76.4
27.0
18.6
18.8
18.1
37.4
59.6
39.2
24.4
18.4
102.3
3.3
8.1
4.9
Source: Export-Import Bank of Korea, “Overseas Investment Information,” 2004.
3
4,500,000
4,173,407
4,000,000
3,869,968
3,500,000
1,000 US$
3,000,000
2,500,000
2,000,000
1,807,594
1,500,000
1,000,000
467,915
500,000
80,186
0
1981-85
1986-90
1991-95
1996-00
2001-03
Period
Graph 1. Annual Average of Korean Overseas Investment Dollars during 1981-03
II. What Promoted Korean Companies to Invest in Latin America and the Caribbean?
Few can deny that Korean companies will invest in Latin America and the Caribbean region to
maximize their profit. However, the reasons why Korean companies evaluate the area to be
profitable may differ from company to company and from country to country. Characteristics of
recent Korean overseas investment experiences can help to clarify them. Among others, which
Korean companies participated in overseas investment in Latin America and the Caribbean? In
which industries were they engaged? In what size project did they invest? Which countries were
attractive to them?
1. Which Korean Companies Invested in What Industry and How?
Up to January 2004, over 500 Korean overseas projects invested 3,480 million US$ in Latin
America and the Caribbean, except Belize (See Table 3). It is Korean large companies that were
dominant investors. In terms of realized investment value, Korean large companies occupied more
than 70% in manufacturing, construction, hotels and restaurants (See Table 4).
However, Korean small and medium companies played a major role in business services and
clothing. For example, Littawatech, a Korean small internet venture, invested 1,376 million dollars
in internet business in Bermuda in 2000, which was the largest project among all the Korean
investment there. Korean small and medium companies were concentrated in textile and clothing
industries (See Table 5). They also contributed over a half of the total Korean overseas investment
in some other manufacturing industries, such as assembled machines, nonmetallic minerals, paper
and printing, and machines (See Table 6).
4
Table 3. Korean Accumulated Investment Cases and Amount in Latin America, until Jan. 2004
Projects
AlADI
Mexico
Peru
Brazil
Argentina
Venezuela
Chile
Bolivia
Colombia
Ecuador
Paraguay
Uruguay
Central America
The Caribbean
Others
Total
Amount
%
46.7
15.5
3.6
7.9
7.7
1.3
4.5
1.3
2.1
1.1
0.9
0.9
38.3
14.4
0.6
100
250
83
19
42
41
7
24
7
11
6
5
5
205
77
3
535
(1,000 US$)
1,196,759
283,741
282,689
277,836
136,417
66,491
61,761
59,316
19,309
5,336
3,260
603
394,689
1,883,792
4,265
3,479,505
%
34.4
8.2
8.1
8.0
3.9
1.9
1.8
1.7
0.6
0.2
0.1
0.0
11.3
54.1
0.1
100
Source: Export-Import Bank of Korea, “Overseas Investment Information,” 2004.
Table 4. Share of Korean Overseas Investment Value by Large Firms in the Total, up to Jan. 2004
Asia Middle
North Latin America Europe
Africa Oceania
& the
East America
Agriculture, Forestry &
Fishing 34.2
Mining 93.6
Manufacturing 59.8
Construction 79.6
Wholesale & Retail 84.7
Transportation & Storage 71.3
Communication 91.6
Banking & Insurance
0
Restaurants & Hotels 86.1
Real Estates & Business
Services 69.3
Others
0.0
Total of Large Firms 66.7
Caribbean
100.0
100.0
83.3
77.6
90.2
95.1
0
52.6
71.0
86.8
68.7
86.8
41.5
61.5
18.0
65.8
57.7
97.0
73.1
90.7
93.4
74.8
8.7
0.3
97.5
87.4
97.2
46.9
0
80.4
1.7
0
45.1
40.3
84.8
95.2
100.0
98.3
94.2
100.0
0.0
96.9
74.5
95.3
Total
of
Large
Firms
2.1
98.9
90.1
87.3
97.4
0
99.9
99.9
85.4
63.6
49.8
55.9
89.7
5.8
79.4
30.5
58.6
89.8
73.4
75.3
89.7
65.4
75.9
12.4
79.3
36.3
95.5
77.0
69.9
40.6
0
74.9
Source: Export-Import Bank of Korea, “Overseas Investment Information,” 2004.
5
Table 5. Composition of Korean Total Overseas Investment in Manufacturing Industries in Latin
America & the Caribbean by Company Size, until Jan. 2004
Food & Beverage
Textile & Clothing
Shoes & Leather
Timber & Furniture
Paper & Printing
Petroleum & Petrochemical
Nonmetallic Mineral
Iron & Steel
As s embled Metal
Machine
Electronic
Communication
Equipments
Trans portation Machines
Others
Total
Small and Medium
Large
Companies (%)
4.3
74.3
2.9
1.3
0.1
3.7
0.3
0.0
3.5
1.7
Companies (%)
4.6
19.7
1.9
0.4
0.0
8.6
0.1
13.2
0.0
0.4
All
Companies
(%)
4.5
34.2
2.2
0.7
0.0
7.3
0.2
9.7
0.9
0.8
5.5
1.1
1.3
100.0
49.5
1.2
0.4
100.0
37.8
1.2
0.7
100.0
Source: Export-Import Bank of Korea, “Overseas Investment Information,” 2004.
Table 6. Composition of Korean Companies in Manufacturing Industries in Latin America & the
Caribbean, by Accumulated Investment Value up to Jan. 2004
Small and Medium Large Companies All Companies
Companies (%)
(%)
(%)
Food & Beverage
25.2
74.8
100.0
Textile & Clothing
57.7
42.3
100.0
Shoes & Leather
35.1
64.9
100.0
Timber & Furniture
52.6
47.4
100.0
Paper & Printing
100.0
0.0
100.0
Petroleum & Petrochemical
13.3
86.7
100.0
Nonmetallic Minerals
49.0
51.0
100.0
Iron & Steel
0.1
99.9
100.0
Assembled Metals
100.0
0.0
100.0
Machines
59.8
40.2
100.0
Electronic Communication
3.8
96.2
100.0
Equipments
Transportation Machines
24.1
75.9
100.0
Others
51.7
48.3
100.0
Total
26.5
73.5
100.0
Source: Export-Import Bank of Korea, “Overseas Investment Information,” 2004.
In which industry did Korean companies invest? Business services drew the largest project from
Korean investors. The tax-free Caribbean islands were popular to them as good places to locate a
corporate headquarter. Manufacturing and mining are the next most attractive industries to Korean
companies. In terms of realized investment dollars, Korean companies tended to invest in
manufacturing and mining second to business services (See Table 7). Wholesale and retail
services attracted Korean companies much less in Latin America and the Caribbean than in North
6
America and Europe.
What size projects were Korean companies willing to invest in? Compared to Asia and Oceania,
Latin America and the Caribbean had a larger share of large firms over 50 million US$ (See Table
8). Korean companies tended to invest in large projects of over 50 million dollars. Until 1985, there
were no projects over 5 million US$ by the Korean companies (See Table 9). However, they have
financed projects with over 50 million US$ after 1995. Korean investment projects with 50 million
US$ and over occupied about 60 % of all the projects’ value at the end of Jan. 2004 (See Table 10).
Table 7. Composition of Korean Accumulated Overseas Investment Value by Area and Industry, up
to Jan. 2004 (%)
Asia
Middle
North
Latin
America &
the
America Caribbean
Europe
3.4
14.2
26.8
0.8
7.6
0.1
2.6
53.8
0.1
34.5
0.9
25.2
23.4
0.2
16.6
14.1
26.3
9.5
7.6
25.7
1.0
6.2
53.2
1.8
21.8
1.1
4.1
0.3
3.5
0.1
2.6
0.4
0.1
0.6
3.1
0.0
0.0
0.0
0.0
0.0
0.1
1.4
30.3
7.7
2.5
East
Agriculture,
Forestry & Fishing
0.6
0.0
0.4
Mining
3.3
84.1
2.7
Manufacturing
67.7
7.5
47.7
Construction
2.5
4.3
1.4
Wholesale & Retail
13.4
1.1
31.6
Transportation &
Storage
0.8
0.2
0.5
Communication
3.0
0.0
3.2
Banking &
Insurance
0.0
0.0
0.1
Restaurants &
Hotels
1.9
0.1
2.9
Real Estates &
Business
Services
6.8
2.6
9.5
Others
0.0
0.0
0.0
Total (%)
100.0
100.0
100.0
Amount
18,307,625 811,309 12,881,444
Africa
Oceania
Total
Areas
41.9
3.7
0.8
8.7
9.7
0.0
0.0
0.0
0.0
0.0
100.0
100.0
100.0
100.0
100.0
3,479,505 7,404,797 751,808 1,022,332 44,658,820
Source: Export-Import Bank of Korea, “Overseas Investment Information,” 2004.
Table 8. Composition of Korean Overseas Investment Value by Project Size, until Jan. 2004 (%)
Less than Less than Less than
Less than
Over 50
Total
1 million 5 million 10 million
50 million
US$
US$
US$
US$ million US$
Asia
13.3
17.6
9.6
28.2
31.3
100.0
Middle East
2.7
5.0
1.5
14.1
76.7
100.0
North America
7.1
8.6
6.3
18.3
59.7
100.0
Latin America &
the Caribbean
2.9
9.1
4.8
23.4
59.8
100.0
Europe
1.8
4.0
4.5
28.0
61.8
100.0
Africa
2.5
5.5
3.3
58.0
30.7
100.0
Oceania
11.5
13.6
8.8
36.3
29.8
100.0
Total
8.4
11.6
7.2
25.4
47.6
100.0
(1,000 US$)
3,729,480 5,170,774 3,195,858 11,325,707 21,237,001 44,658,820
Source: Export-Import Bank of Korea, “Overseas Investment Information,” 2004.
Table 9. Korean Overseas Investment in Latin America and the Caribbean, 1985 (1,000 US$)
7
ALADI
Chile
Argentina
Brazil
Mexico
Uruguay
Venezuela
Ecuador
Central America
Panama
Honduras
El Salvador
Costa Rica
The Caribbean
Bermuda
Dominican Rep.
Cayman Irslands
Puerto Rico
Others
Surinam
Total
Projects Projects'
of Less
Value of
than I Less than
Million
I Million
US$
US$
11
714
0
0
2
107
2
269
4
153
1
66
1
60
1
59
23
4,691
20
3,531
1
450
1
410
1
300
2
844
1
500
1
344
0
0
0
0
1
20
1
20
37
6,269
Projects Projects'
of Less
Value of
than 5 Less than
Million
5 Million
US$
US$
2
4,558
1
2,500
1
2,058
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
2
4,558
Total
Total
Projects'
Projects
13
1
3
2
4
1
1
1
23
20
1
1
1
2
1
1
0
0
1
1
39
Value
5,272
2,500
2,165
269
153
66
60
59
4,691
3,531
450
410
300
844
500
344
0
0
20
20
10,827
Source: Export-Import Bank of Korea, “Overseas Investment Information,” 2004.
Table 10. Composition of Korean Investment Project Size in Latin America and the Caribbean,
up to Jan. 2004 (%)
A lA D I
M exico
P eru
B razil
A rgentina
V enezuela
C hile
B olivia
C olom bia
E cuador
P araguay
U ruguay
C e n tra l A m e ric a
T h e C a rib b e a n
O th e rs
Total (% )
(1,000 U S $)
P rojects of
Less than 1
M illion U S $
P rojects of
Less than 5
M illion U S $
P rojects of
Less than 10
M illion U S $
3.5
4.3
1.1
2.6
4.3
2.4
7.7
1.9
19.8
22.6
14.4
100.0
10.5
0.9
100.0
2.9
100,464
10.0
15.2
1.5
6.0
16.4
3.0
22.6
7.7
28.2
77.4
85.6
0.0
37.4
2.5
0.0
9.1
317,623
4.7
2.0
5.9
3.1
13.5
10.1
0.0
0.0
0.0
0.0
0.0
0.0
15.0
2.8
0.0
4.8
168,674
P rojects of
P rojects of
Less than 50 O ver 50 M illion
M illion U S $
US$
46.5
78.5
16.3
52.1
65.8
0.0
69.6
0.0
52.0
0.0
0.0
0.0
20.9
9.3
0.0
23.4
813,734
Total
P rojects'
V alue
35.3
100.0
0.0
100.0
75.3
100.0
36.2
100.0
0.0
100.0
84.5
100.0
0.0
100.0
90.3
100.0
0.0
100.0
0.0
100.0
0.0
100.0
0.0
100.0
16.2
100.0
84.5
100.0
0.0
100.0
59.8
100.0
2,079,010 3,479,505
Source: Export-Import Bank of Korea, “Overseas Investment Information,” 2004.
2. Why the ALADI Countries?
8
Korean overseas investment in Latin America and the Caribbean had increased remarkably from
1986 to 1990 and from 1996 to 2000. As shown in Table 11, about 6 % and 12% of the total Korean
overseas investment went to Latin America and the Caribbean countries respectively.
Manufacturing industries absorbed most of investment dollars. Brazil and Mexico held its lion’s
share in the late 1990s (See Tables 12 and 13).
Latin America was attractive to Korean companies for three reasons: the expansion of export
market, the development of raw materials, and the reduction of labor costs. Korean overseas
investment in Peru and Chile was mainly for the development of raw materials. The Caribbean
countries were attractive because of their tax-free policies and low labor costs. Dominican Republic,
Guatemala and other Middle American countries were known for low labor costs. Korean overseas
investment in Mexico and Brazil aimed to expand export market. Before NAFTA, Mexico’s
Maquiladora program allowed Korean companies to utilize free customs zone for assembling and
exporting their products to North America. Recent Korean investment in Mexico and Brazil aimed to
expand domestic market.
Korean companies had been interested in Middle America much more than in ALADI until the
early 1990. For example, Guatemala and Panama topped the Korean overseas investment in Latin
America until 1994. Textile and clothing were a major industry into which Korean investors thronged.
Its target market was not Middle America but North America. The former was attractive as
production bases because they provided with free trade zone and their products could get an easy
access to the North American market. After NAFTA, the ALADI countries attracted more Korean
overseas investment than other neighbors. ALADI countries were especially attractive in
manufacturing industries, such as electronic communication equipments, to Korean investors.
Table 11. Korean Total Overseas Investment by Region and Years, up to Dec. 2003
(Unit: 1,000 US$, %)
Up to Jan. 1981- Jan. 1986- Jan. 1991- Jan. 1996- Jan. 2001Total
1980
Dec. 85
Dec. 90
Dec. 95
Dec. 00
Dec. 03 (1981-03)
Asia
49,533
68,525
599,287 4,335,996
8,326,397
4,811,042 18,190,780
Middle East
23,393
29,630
264,292
289,413
141,452
59,606
807,786
North America
32,727
141,372 1,088,542 2,362,048
6,183,551
3,031,117 12,839,357
Latin America &
the Caribbean
(Share in Total)
Europe
Africa
Oceania
Total
4,879
3.3
5,213
25,266
4,975
145,986
5,948
1.5
56,099
2,740
96,615
400,929
143,396
6.1
111,107
36,941
96,012
2,339,577
293,641
3.2
1,378,370
233,000
145,504
9,037,972
2,516,187
12.1
2,806,834
403,386
489,226
20,867,033
507,081
4.4
2,965,550
48,128
187,380
11,609,904
3,471,132
7.8
7,323,173
749,461
1,019,712
44,401,401
Source: Export-Import Bank of Korea, “Overseas Investment Information,” 2004.
Table 12. Composition of Korean Total Investment in Manufacturing in Latin America and the
Caribbean by Project Size, up to Jan. 2004 (%)
9
P ro jects o f
P ro jects o f P ro jects o f P ro jects o f P ro jects o f
Less than Less than
O ver 5 0
Less than 1 Less than 5
1 0 M illio n 5 0 M illio n
M illio n
M illio n U S $
M illio n U S $
US$
US$
US$
ALAD I
3 6 .1
3 3 .9
2 8 .9
6 7 .7
7 1 .0
B razil
5 .7
2 .8
0 .0
3 8 .0
4 5 .5
M exico
1 7 .1
1 9 .2
9 .2
2 9 .7
0 .0
Venezuela
0 .1
0 .0
1 0 .7
0 .0
2 5 .5
C hile
4 .5
5 .5
0 .0
0 .0
0 .0
Argentina
1 .6
4 .4
0 .0
0 .0
0 .0
P eru
0 .2
0 .0
9 .0
0 .0
0 .0
C o lo m bia
3 .5
1 .2
0 .0
0 .0
0 .0
P araguay
0 .1
0 .8
0 .0
0 .0
0 .0
B o livia
1 .5
0 .0
0 .0
0 .0
0 .0
E cuado r
1 .1
0 .0
0 .0
0 .0
0 .0
U ruguay
0 .8
0 .0
0 .0
0 .0
0 .0
C entral Am erica
5 5 .5
5 8 .6
4 3 .3
8 .5
2 9 .0
The C aribbean
8 .3
7 .5
2 7 .8
2 3 .8
0 .0
To tal
1 0 0 .0
1 0 0 .0
1 0 0 .0
1 0 0 .0
1 0 0 .0
Source: Export-Import Bank of Korea, “Overseas Investment Information,” 2004.
To tal
Investm ent
D o llars
5 6 .3
2 7 .3
1 8 .1
6 .7
1 .5
1 .1
0 .6
0 .5
0 .2
0 .1
0 .1
0 .1
2 9 .9
1 3 .8
1 0 0 .0
Table 13. Composition of Korean Total Investment Dollars in Latin America and the Caribbean by
Industry, up to January 2004 (%)
Agriculture, Mining Manufac Wholesale Communi Others*
Total
Forestry &
Fishing
turing
& Retail
cation
0.2
0.0
59.6
14.4
17.4
8.3
100.0
0.0
93.5
2.0
4.2
0.0
0.2
100.0
0.0
3.1
91.7
2.7
0.8
1.8
100.0
24.7
0.0
50.6
20.1
0.0
4.6
100.0
Mexico
Peru
Brazil
Panama
British Virgin
5.1
0.0
67.5
1.8
0.2
25.5
100.0
Islands
Argentina
21.6
28.6
7.5
40.8
0.0
1.5
100.0
Cayman Islands
0.4
4.0
0.7
0.8
61.3
32.7
100.0
Honduras
12.5
0.0
86.2
0.6
0.0
0.6
100.0
Guatemala
0.0
0.0
99.9
0.0
0.0
0.1
100.0
Puerto Rico
0.0
0.0
0.0
100.0
0.0
0.0
100.0
Venezuela
0.1
0.0
94.6
5.3
0.0
0.0
100.0
Chile
4.8
50.5
23.0
21.5
0.2
0.0
100.0
Bolivia
2.4
90.3
1.6
5.7
0.0
0.0
100.0
Bahamas
0.0
0.0
6.6
0.0
0.0
93.4
100.0
Costa Rica
11.9
0.0
83.8
1.8
0.0
2.4
100.0
Colombia
0.0
0.0
23.8
75.3
0.4
0.5
100.0
El Salvador
0.0
0.0
100.0
0.0
0.0
0.0
100.0
Jamaica
0.0
0.0
100.0
0.0
0.0
0.0
100.0
Nicaragua
23.9
0.0
76.1
0.0
0.0
0.0
100.0
Ecuador
79.3
0.0
12.2
8.6
0.0
0.0
100.0
Uruguay
19.6
0.0
80.4
0.0
0.0
0.0
100.0
Bermuda
0.0
6.2
0.0
0.0
0.9
92.9
100.0
Others
43.9
4.6
48.4
3.1
0.0
0.0
100.0
Total
3.4
14.2
26.8
7.6
4.1
43.9
100.0
*: Includes construction, transportation & storage, banking & insurance, real estate, & business services,
and hotels & restaurants.
Source: Export-Import Bank of Korea, “Overseas Investment Information,” 2004.
III. How Did Korean Overseas Companies Operate in ALADI?
10
Although Latin America is unfamiliar to Koreans, their overseas investment results show that the
region has no evidence of disadvantage to Korean economic activity compared to other areas.
Actually, Korean overseas investment in Latin America has been remarkably successful. For
example, the ratio of liquidated Korean overseas investment among the realized was quite low. The
percentage of realized investment value among the planned was higher than the Korean average.
In the ALADI countries, except Uruguay and Chile, the liquidated rates were about 10% or lower
(See Tables 14 and 15).
Most Korean overseas investment cases in Latin America had a type of 100 % stockholding.
Investment dollars by joint venture firms were only 5% of the total. While American or European
overseas investment was for merge and acquisition, Korean one was mainly for production and
export (See Table 16).
In the operation, Korean investors were much concerned with a high turnover rate of employees.
To reduce it, salary was paid at different days in group. Another concern was that Labor market
was considerably inflexible. Although labor regulations became less tight, it is desirable that they
still become more flexible.
The following two investment success cases may help to understand how to operate Korean
overseas investment more effectively. One case is Kobrasco, a joint venture by POSCO and CVRD.
The other is Samsung Tijuana Park, all of whose stocks Samsung Group owns.
Table 14. Korean Accumulated Overseas Investment by Area and Project Status, up to Jan. 2004
N um ber of Project
Investm ent Am ount
Realized/Pl Invested/P Liquidated/ Realized/Pl Invested/Pl Liquidated/
anned
lanned
Realized
anned
anned
Realized
Projects
Projects
Projects
(% )
(% )
(% ) Dollars (% ) Dollars (% ) Dollars (% )
Asia
83.6
79.5
4.8
58.1
79.6
24.3
M iddle East
78.3
49.6
36.6
82.0
34.7
63.7
N orth Am erica
90.4
79.5
12.1
73.6
78.2
25.7
Latin Am erica &
the C aribbean
81.7
67.3
17.6
68.8
88.6
9.5
Europe
84.6
71.4
15.6
71.1
81.6
18.7
Africa
74.2
55.6
25.2
62.4
74.6
30.7
O ceania
84.2
73.5
12.7
30.4
85.5
25.7
A verage
84.8
78.3
7.7
63.7
79.8
23.5
Source: Export-Import Bank of Korea, “Overseas Investment Information,” 2004.
Table 15. Ratios of Korean Realized, Liquidated Investment Cases and Amounts over the Planned
in Latin America, until Jan. 2004
11
Total
Realized
Cases/Total
ALADI
Peru
Mexico
Brazil
Argentina
Chile
Venezuela
Bolivia
Colombia
Ecuador
Paraguay
Uruguay
Ce n tr a l Ame r ic a
T h e Ca r ibbe a n
Oth e r s
Total
Planned (%)
80.8
86.4
80.8
79.2
85.4
78.1
87.5
77.8
73.3
75.0
85.7
71.4
82.4
82.1
100.0
81.7
Total
Total
Total
Realized
Liquidated
Liquidated
Amounts/Tot
Cases/Total
al Planned Amounts/Total
Realized (%)
(%) Realized (%)
13.0
52.4
10.0
5.3
54.3
8.1
7.1
67.1
12.8
16.7
44.3
1.3
14.6
42.6
12.3
8.0
87.9
43.7
28.6
67.3
10.2
14.3
34.8
1.1
9.1
56.0
8.3
33.3
30.7
1.9
16.7
41.7
3.6
80.0
61.2
85.9
23.3
68.1
27.4
16.7
86.3
5.4
33.3
79.2
0.5
17.6
68.8
9.5
Source: Export-Import Bank of Korea, “Overseas Investment Information,” 2004.
Table 16. Korean Investment in Latin America and the Caribbean by Financing Type, Jan. 2004
Investment Cases (%)
Investment Dollars (%)
Joint Venture
1.1
5.1
Loan
1.1
9.0
Private Financing
1.5
0.0
Stock Investment
96.3
85.9
Total
100.0
100.0
Source: Export-Import Bank of Korea, “Overseas Investment Information,” 2004.
1. KOBRASCO Case
A. Brief Introduction of Kobrasco
○. Company Name: Companhia Coreano-Brasileira De Pelotizacao (KOBRASCO). Located in
Vitoria, Espirito Santo, Brazil. Connected to Tubarao port.
○. Major Business: Production and sale of 4 million tons of pellet a year.
○. Foundation: March 6, 1996.
○. Total Investment Amount: 220 million US$
○. Investment Capital: 77 million US$
○. Investment Type: Joint venture. POSCO: 50%, CVRD (Companhia Vale do Rio Doce): 50%.
○. Representative: Co-executive. One from CVRD, another from POSCO
○. Employees: 80 persons.
○. Management: Only CVRD is in charge of operation.
B. Short History
○ July 29, 1995: Agreement signing of joint venture and stock-holding type
12
○ Sept. 28, 1995: Firm site began to be constructed at CVRD’s yard.
○ March 6, 1996: A joint venture corporation was established.
○ Sept. 9, 1996: Main facility began to be constructed.
○ Oct. 9, 1998: Production began.
○ Nov. 16, 1998: Ceremony held for the completion of construction.
C. POSCO and CVRD
Pohang Iron and Steel Co., Ltd. (POSCO), established April 1968, is the largest steel mill in the
world in terms of crude iron production. POSCO has two steel works at Pohang and Gwangyang,
which had expanded their production capacity until 1992. POSCO, privatized completely on Oct.
2000, produces some 26 million tons of iron and steel each year, enough to produce about 100,000
compact cars a day. Today, POSCO exports its products to over 60 countries around the globe. Its
major products include hot rolled sheet, plate products, steel wire rods, cold rolled sheet, electrical
sheet, and stainless steel
CVRD, a Brazilian conglomerate, produces iron ore and pellets, operates logistics, and runs
three hydroelectric power plants. CVRD was privatized in 1977
E. Why Did POSCO Decide to Build Kobrasco?
From the late 1980s, POSCO has been little interested in expanding production facilities for
crude iron, because of its world oversupply. However, it was concerned with improving its quality,
its international competitiveness, and its value-added products, such as stainless steel and
electrical sheet. In the early 1990s, POSCO increased its direct overseas investment actively in
Southeast Asia and China to promote the export of value-added steel products.
Why did POSCO decide to invest in Brazil for pellet? POSCO’s overseas investment in pelletmaking is intended to secure its stable import. Pellet, processed iron ore, can increase in the
productivity of crude-iron making. In POSCO’s view, the success of its overseas investment
depended not on maximizing profit but on obtaining low-priced quality pellet. POSCO had invested
in Australia and Canada to secure the import of other raw materials from the early 1980s.
POSCO has achieved surplus net profit after depreciation every year since 1974, which means
that it has financial capacity for overseas investment in pellet-making. What mattered was where to
invest. India, Australia, and Brazil were known to be good places to produce pellet. Although India
was blessed with pellet material, it was not chosen as the best place to invest because of poor
transportation infrastructure. Australia also owned affluent materials for pellet, but was already one
of the largest suppliers of iron ore to POSCO. Brazil was chosen for pellet site, because it had
affluent quality iron ore and adequate transportation infrastructure. Brazil could be an alternative
supplier of iron ore. Moreover, Brazil was less regulative to pellet production.
13
Kobrasco was a success to POSCO in several aspects. First, Kobrasco took only one year of
experimental operation before reaching its full operation. Compared to Nabrasco, a Nippon SteelCVRD joint venture, Kobrasco took two years less for the full operation. Second, it took only three
years from making contract to finishing Kobrasco plants, which was shorter period than expected.
Since steel industry took considerably long period from plant construction to production, the
shortening of construction period was important to reduce production costs. Third, Kobrasco
operated at full capacity for 6 years and provided POSCO with pellet. Although Kobrasco did not
expand production capacity, it achieved stable production and sale to POSCO.
What contributed to the stable production of pellet at Kobrasco? Among others, the localization of
operation is the most important. While POSCO’s representative participated in executive, the
Brazilian partner, CVRD, was in full charge of operation. Second, Brazilian partner, CVRD,
participated fully in preparation stages for joint venture, which allowed POSCO to save time and
man power. POSCO sent only two professionals for preparing the joint venture.
However, there were some bottlenecks in POSCO’s investment in Brazil. First, Brazil’s high
interest rates, high country risk and strict foreign exchange regulation impeded local financing. For
example, POSCO chose to borrow 220 million US$ from Citibank by project financing instead of
borrowing from Brazilian Banks. It is because Brazilian interest rate was 3% higher than the Libor
rate, and Brazil applied interest rates of hot money to loans with less than 7 years of maturity.
Continuous devaluation of Real reduced Kobrasco’s asset to a half. Second, insecurity in city life
made foreigners to be reluctant to reside in Brazil. POSCO’s correspondents in Brazil mentioned
that they seldom went out at night. Third, Brazilian labor conditions were still conceived strict in
hiring and firing. For example, the rule of six months’ paid leave to pregnant employees made
foreigners cautious about recruiting women.
2. Samsung Tijuana Park Case
A. Brief Introduction
- Samsung Tijuana Park is composed of three Samsung plants:
○ Samsung Mexicana (Samex): Produces television sets, computer monitors, cellular phones and
computers.
○ Samsung Display Interface Mexicana (SDIM): Manufactures the cathode-ray tube (CRT)
monitors. In 1997, the plant began to produce Liquid Crystal Display (LCD) monitors.
○ Samsung Electro-Mecánicos Mexicana (SEMSA) Produces electronic components for televisions,
monitors, which are used in the above two plants.
- The three plants are located in Tijuana, Baja California.
14
- Major Figures in 2003
○ Employment: 6,000 full-time employees.
○ Operation rate: 96.2%.
○ Sales: 2,059 million US$
○ Production: Monitor, 4 million sets (CDT models: 5, LCD models: 9); TV production, 3 million sets
(TV models: 90); Assembled PCs, 100 thousand; HHP production, 900 thousand.
- Investment amount: Over US$ 200 million. Samsung Group owns 100% of stocks.
- Samsung Electronics is also operating two other plants in Querétaro and Mexico City.
B. Samsung Electronics and Samsung Group
Samsung Electronics is a global company, which operates everywhere in the world. Among
others, it operates 28 overseas production facilities and 11 research institutes. Samsung
Electronics is a major company of Samsung Group.
C. Brief History of Samsung Tijuana Park
Samsung Electronics initiated its overseas investment in Tijuana in 1988. SAMEX aimed entirely
at the North American Market and utilized merits of Maquiladora program. SAMEX started with
investment of 3,700 million US$ and assembled television sets.
After NAFTA became effective, Samsung Electronics changed its target market from North
America to Mexico. It also adopted the strategy of localization of electronic parts. In 1994,
Samsung Group inaugurated Samsung Tijuana Park, and integrated the production of components
and finished products vertically. Over 200 million US$ was invested. Until 2001, five new plants and
renovation continued. Samsung Display Interface (SDI) and Samsung Electro-Mechanics (SEM)
invested respectively in SDIM and SEMSA.
D. How Did Samsung Tijuana Park Run?
Samsung Group succeeded in its overseas investment in Samsung Tijuana Park in terms of
market expansion and of regional development in Mexico. The Park sold about 30 percent of its
products inside Mexico in 2003. Turnover rates of employees there recorded only 3% in 2003 and
labor union was not organized yet.
What contributed to the Samsung Group’s investment success in Tijuana? In general, Samsung
Group’s management experiences became congruent with Mexican investment conditions. Among
the Samsung Group’s experiences, active risk-taking management was important. Samsung Group
makes it a management principle to invest and sale anywhere there is a market.
Second, Samsung Group emphasizes the importance of employee welfare and community
services. Samsung Tijuana Park was not exceptional. For example, the Park provided various
cultural, sports events for employees regularly. It also organized community service teams with
15
volunteer employees to help local communities frequently. Daycare Center and clinic were built in
2000. Samsung Tijuana Park made a commitment to provide handsome scholarship to Mexican
students from 2000. Lat year, 20 university students received benefits. These students have job
offers from the Park after their graduation.
Third, Samsung Tijuana Park gave a special importance to employee training and education. In
2003, it supported 16 employees to enroll to MBA program. The emphasis on human resources is
an old management principle of Samsung Group. Samsung Group employs over three thousand
professionals with doctorate degrees. Its present President says, “One excellent person can
supports one hundred thousand people to hold jobs,” and “Ten second-grade Go players cannot
beat one professional first-grade one.”
Fourth, the localization and decentralization of management contributes to the perfection of
products. Samsung Group has a tradition to scrutinize all the aspects of applicant, but provide with
best salary and autonomy when hired. Samsung Tijuana Park filled most of managerial positions
except CEO with the Mexicans.
Fifth, the Park invested actively in Mexico to localize its components. Unlike traditional
Maquiladora assembly plants, the Park has three major vertically integrated plants of components
and finished products. Now it is sourcing most of its materials locally. Over 900 of all materials are
procured locally.
Sixth, Mexico’s investment environments also contributed to the success of Samsung Tijuana
Park. The formation of NAFTA was a turning point for foreign capital to invest in Mexico. Its
domestic market is much more favorable to foreign direct investors. Tijuana is also a good
industrial park to get components for electronic equipments with cheap price and to cooperate with
other electronic companies. Tijuana is the television capital of the world, churning out sets for all
the top brands. Tijuana has numerous foreign production and sales subsidiaries of the globally
famous electronic companies.
However, there are some barriers for Korean investors in expanding their investment in Mexico.
Among others, Mexico needs to provide more industrial sites for groups of component producers to
cooperate and supply other companies. Mexico has tax-free zones but does not have many
industrial parks deep inside border.
IV. Conclusion: More Active for the Manufacturing of El Dorado
Korean and Latin American general economic environments encourage vital, interactive
overseas investment. First, Korean companies are highly export-oriented, which makes them to
expand overseas market for further growth. While many Korean companies invest in China, they
also tend to diversify overseas investment markets. Second, Latin America and the Caribbean
countries tend to open their domestic markets to FDI and trade as well as to form exclusively
preferential regional economic blocs within and together with North America after NAFTA. Korean
16
overseas investment in the ALADI countries receives a favorable response from the latter in terms
of beneficial economic cooperation. In 2001, President Vicente Fox remarked at the summit
meeting with President Kim Dae-Jung that “the recent expansion of trade and investment between
Korea and Mexico is positive to economic growth of both countries, and Mexico wants further
Korean support for improving Mexican information technology and education.” Third, statistics of
Korean overseas investment show that Latin America and the Caribbean is not especially difficult
place for Korean companies to do their businesses, although they are far away from each other
and have a different cultural tradition. Fourth, Korean companies have high quality technologies
and financial capacities enough to diversify their overseas investment in Latin America and the
Caribbean. While the population of Latin America and the Caribbean is 1.5 times larger than that of
North America, Korean overseas investment in the former is only a fifth of that in the latter. Korean
overseas investment was concentrated in a few countries, Brazil and Mexico and a few
manufacturing industries, such as in IT and clothing industries.
Various guidelines have already been published for successful overseas investment in Latin
America and the Caribbean. Instead of adding another checkpoints and going into details, I will
make several remarks based on previously-mentioned statistics and investment stories. First,
industrial park with favorable business environments can promote Korean companies to invest in
Latin America. Industrial park, like Tijuana, can bring various component producers to be gathered
so that any related firms can get easy, cheap supplies of parts. Industrial park can also increase
intra-industry interdependence, which leads to broader, advanced economic cooperation. Foreign
small and medium firms are as important members as large companies to industrial parks. A survey
of foreign investors in Seoul shows that a third of them chose Seoul because of abundant
components.
Second, the localization of business operation as well as preparation should be conducive to an
effective management. In case of Kobrasco, co-partner CVRD managed Kobrasco, which allowed
POSCO to reduce its manpower. While Samsung Electronics owned 100% stocks of Samsung
Electronics at Querétaro, its management is entrusted to other professional managerial firm. While
joint venture was not a preferred investment type to Korean investors, it seems to be an effective
alternative to total ownership.
Third, business information about Latin America is out of sight, which discourages Korean
businessmen to go there and instead to China. Latin America is still unfamiliar place to most
Korean businessmen and women. To them, China is incomparably closer than Latin America is.
Regular business forums in Seoul and Montevideo will be helpful for Korean businessmen and
women to consider overseas investment in Latin America. For demonstration effect, ALADI
companies, rarely seen in Korea, may establish some business subsidiaries in Korea.
Fourth, while IT industry is the major Korean overseas investment in the ALADI now, other
Korean competitive technologies, such as construction and food industries, may be alternatives.
Korean construction industry has success stories in Middle East and Africa, which can be useful in
Latin America.
17
Fifth, Latin American countries have been marching toward free-market economy, especially after
the late 1980s, but many Korean investors are still suspicious of its further development. According
to an economic freedom index, which rates countries' policies against free-market principles (for
example, small government, low taxes, sound money, secure property rights and free trade), most
of Latin American countries, except Chile, rank low in the world. Latin America Trade and
Transportation Study points out several barriers for Latin American countries to attract foreign
investors. One of them is incoherent economic and administrative policies. “Some Latin American
countries are well known for frequent changes in economic and administrative regulations. This
makes the economic climate very uncertain and risky from foreign investor’s point of view.” Another
is domestic insecurity. Uncertain future regarding terrorism and homeland security in some Latin
American countries can be a barrier.
18
Reference
“Enhancing Economic Cooperation between Korea and Mexico in the Area of IT Industry,” Maeil
Business Newspaper (Korean), June 5, 2001.
Kim, Young-Suk, “Latin America and the Caribbean: Increase in M&A due to Expected Economic
Recovery,” EXIM Overseas Economic Information (Korean), pp. 41-44 (March 2004)
Lee, Young-Soo), “A Financial Analysis of Korean Overseas Corporations),” (EXIM Bank Overseas
Economy), Dec. 2002: 19-36.
Interview with POSCO’s managers of overseas investment, April 2004.
Interviews with Samsung Electronics’ managers of overseas investment, April 2004.
James Gwartney and Ian Vasquez, “Why Latin America Needs a Free-Trade Zone?,” National Post
(Canada), April 18, 2001. Cato Institute, http://www.cato.org/dailys/04-21-01.html
Korea Institute for International Economic Policy, Free Trade Area of the Americas: Current Issues
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Lee. Se-Gu, The Inducement of Foreign Direct Investment in Seoul, (Research Institute for Seoul
Municipal Administration, 1997).
“Life after debt,” Economist, Apr. 1, 2004.
Ministry of Foreign Affairs and Trade, A Comprehensive Survey of the Trade Environment (Korean),
2003.
Overseas Economic Research Institute, Export-Import Bank of Korea, “What is the Problem of the
Latin American Economy?,” EXIM Korean news, April 2002.
-------------, “Mexico: Continuing Decline in Maquiladora Industries,” EXIM Korean news,
March 2003.
-------------, “Argentine Investment Environments,” 2003
-------------, “Mexican Investment Environments,” 2003
-------------, “Brazilian Investment Environments,” 2003
-------------, “Chilean Investment Environments,” 2003
-------------, “An Analysis of World FDI in the late 1990s,” 2004.
POSCO, Building Steelworks for a quarter Century, 1992
19