South Korean companies outward investment

1
South Korean companies outward investment

• Dr. Kristiina Korhonen
• Center for Markets in Transition

2
Official Development Aid (ODA)

• made up of the developed nations of the world
• given by governments through international aid
  agencies (bilateral aid), multilateral
  institutions (eg World Bank) or development
  charities
• world ODA in 2005 was USD 10 billion
• target for development aid is 0.7 of GDP

3
ODA as percentage of the top recipient (Iraq) in
2005
Net ODA in 2005 as percentage of the top
recipient Iraq USD 21 billion
4
South Korea as a donator

• an emerging donor in the international community
• providing ODA since the late 1980s
• ODA is modest, 0.05 of GDP
• USD 455 million (in 2006)
• the Korean government is committed to extending
  the program
• used for human resources programs
• about 130 recipients
• 80 of aid is bound for Iraq, Afghanistan,
  Vietnam, China and Cambodia

5
Concept of foreign direct investment (company
perspective)

• FDI, foreign direct investment
• long-term capital movement by a foreign company
  to
• establish a new company (greenfield investment)
• acquire shares of the local company (acquisition)
• transnational company (TNC), operations in at
  least two countries
• multinational company (MNE), at least six
  production units abroad

6
Ownership

• wholly-owned (100 ) subsidiary
• joint venture owned together with the local
  company
• majority ownership (gt 50 )
• minority ownership (10 lt 50 )
• equity ownership (50-50)
• by definition, portfolio investments (ownership
  less than 10 ) are not foreign direct
  investments at all

7
Concept of foreign direct investment (national
perspective)

• Outward investment
• here South Korea as a home country
• origin of FDI flows into other countries
• Inward investment
• here South Korea as a host country
• destination of FDI from other countries

8
Concept of foreign direct investment (flow vs.
stock)

• Investment flows
• annual flows

• Investment stock
• cumulative value of the annual flows

Investment flows (left axis)
Investment stock (right axis)
USD million
USD million
9
Concept of divestment

• voluntary closure of a foreign subsidiary, or
• the sale of a foreign subsidiary
• rather common (30-60 of investments)
• correction of failure, or
• strategic choice

10
Development of the global foreign direct
investment

• take-off of global FDI in the 1940s
• huge increase in the 1990s
• temporary downturn in the beginning of the 2000s
• the upward trend of global FDI is expected to
  continue
• FDI concentrates in high-income countries
• European Union is the worlds largest source of
  investment almost half of the world FDI
• United States is the largest investment
  destination
• the rapid increase of FDI in the most prosperous
  developing countries

11
Development of the global FDI
Source UNCTAD 2006.
12
Outward investment flows in 2006 from selected
Asian economies (USD billion)
Source UNCTAD 2007.
13
South Koreas outward investment

• started in 1968
• very modest growth until 1986
• government began liberalise regulations on
  outward investment in 1986
• balance of payments surpluses since 1986
• Korean companies had enough financial resources
  to participate in global business activities
• rapidly increasing trend until the Asian crisis
  in 1998
• increasing trend since 2002

14
South Koreas outward investment flows in
1984-2006 (USD billion)
15
Comparison of South Koreas inward and outward
investments in 1984-2006 (USD billion)
16
South Koreas outward investment stock by
industry

• manufacturing sector has been the driving force
• weak presentation of service sector reflects a
  low competitiveness

17
South Koreas outward investment stock by region

• Asia has always occupied the majority of Koreas
  outward investment
• China has become the greatest recipient
• role of North America has declined
• annual growth is highest in the Middle East (200
  ), Africa (89 ) and Latin America (72 )
• in Asia, annual growth is highest in Cambodia
  (296 ) and Vietnam (93 )

18
South Koreas outward investment stock by
company size

• large firms (chaebols) dominate 69 of outward
  investment stock
• large firms invest a large amount of money in a
  few projects
• Small and Medium-sized Enterprises (SMEs) occupy
  27 of outstanding investment
• SMEs invest a small amount of money in large
  number of projects
• (remaining 4 of outstanding investment is
  occupied by other individual investors)

19
South Koreas outward investment stock by
motivation

• Large companies invest abroad to secure or
  develop market
• SMEs invest in neighboring countries in order to
  minimise the labour costs and the transport costs
  

20
South Koreas outward investment conclusion

• investment in Asia is going to increase
• investment will increase in all industries and
  become more diversified
• chaebols are going to dominate the outward
  investment