South Korea: Boom on the domestic front.

South Korea: Boom on the domestic front. - Consumers are flush with money and opportunities abound for the businessman prepared to tackle bureaucracy. By John Ridding.

Last Updated: 31 Aug 2010

Consumers are flush with money and opportunities abound for the businessman prepared to tackle bureaucracy. By John Ridding.

Since the early 1980s South Korea has been one of the world's most dynamic economies. Gross national product expanded at an annual rate of about 10% over the past decade while exports, the engine of the country's economic development, have registered stronger growth.

Entering the 1990s, the story remains largely the same. Last year the economy grew by about 8% in real terms and a similar figure is likely to be achieved this year. The only significant difference - and one of great importance to foreign businessmen - is that the engine of growth has shifted from the external to the domestic sector.

Last year, and in 1989, increased production costs, higher wages and appreciation of the Korean won against major international currencies meant that exports achieved only a meagre growth rate of between 2 and 3%. There has been some recovery so far this year but, for the foreseeable future, domestic demand will remain the driving force in the economy. Consumption, investment and the other components of domestic demand are all growing strongly. Private consumption has increased at a double-digit rate in each of the past two years and shows little sign of slackening. Investment, particularly in the construction sector, has increased even more rapidly.

For foreign businesses this spells a number of opportunities. On the one hand, strong domestic consumer spending - partly the result of the rapid rise in wages and disposable incomes over recent years - provides a large potential market for consumer products. Foreign textiles, clothes, electronics and automobiles are all making inroads into the Korean market and are being displayed and bought in ever increasing numbers.

It is not, however, easy business. Obstacles to trade, in the form of tariffs, quotas and opaque distribution systems, remain common. Perhaps more importantly, there is a psychological wariness about buying imports. But improvements are being made. The consensus among top economic policymakers is that markets will be liberalised, and the past few years have seen a wave of reductions in tariffs and quotas. Strong pressure from trading partners forced a reversal of the anti-consumption campaign.

In this respect, an important reform by the Korean Government is the liberalisation of the domestic retail and distribution markets. From July 1 this year foreign companies have been allowed to establish 10 retail outlets - of limited size - in which to sell their products. According to the Ministry of Trade, such access will be expanded.

South Korea's own economic needs also provide a number of opportunities for foreign businesses. In particular, huge projects aimed at upgrading the country's creaking transport infrastructure present the need for technology, capital goods and engineering skills. Roads, railways, ports and subways are all being overhauled or constructed.

Business opportunities exist, too, in Korea's traditional export industries, from textiles to cars and from electronics to chemicals. Korean manufacturers are faced with the need to upgrade the quality of their products and overcome their increased cost base.

Foreign companies are increasingly facing demands for technology and skills which will enable Korean industry to upgrade the quality and value added of production. European and American companies will see particular benefit as the Government pressures Korean industry to diversify its sources of technology and capital goods away from Japan.

Whatever the product or service that they are selling, however, foreign businesses will be faced with the same question of whether to make an investment in Korea or to run their Korean operations from an offshore base. The advantages of having a permanent presence in a country in which one is doing business apply even more in the case of South Korea, where the maintenance and development of contacts are essential. But there is also a series of disincentives. Labour problems, rising wages, the high cost of operating in Korea, and the complex set of requirements and regulations which must be satisfied by investors are frequent complaints among foreign businessmen in Korea. So too is the difficulty of bringing in capital.

But in these areas, too, there is improvement. Foreign investment guidelines are in the process of being substantially simplified, while the deregulation of the country's capital markets should gradually improve access to funding. Strikes and labour disputes, a headache for foreign managements, have sharply declined since 1988 and 1989.

In line with the changes in the domestic economy, the type of foreign investment flowing into Korea is also undergoing a shift. The small-scale, export-orientated operations which proliferated in the 1970s and 1980s have been steadily withdrawing from the market. Instead, larger-scale operations which focus on the Korean domestic market represent the bulk of new investments. Hence many of Europe's blue chip companies, from ICI to Siemens, have a presence in Korea.

The facilities available to the business traveller have also seen improvement. The hotels can compare with those in any modern business city while communications are also relatively efficient. But it is as difficult as it is important to locate good interpreters, and little English is spoken compared with in most other Asian capitals.

Outside of business, there is a reasonable choice of tourist activities to keep the traveller occupied. A day trip to the border with North Korea, one of the last bastions of cold war tension, is always fascinating, as are trips to folk villages on the outskirts of Seoul.

For those with more time on their hands there are also several attractive tourist destinations away from the capital city. On the East Coast, Mount Sorak provides a scenic area for hiking. Kyongju, the ancient Korean capital which is located to the south-east of Seoul, is home to traditional buildings and arts. Tours to all of these places can be arranged through travel agencies at the hotels or at the offices of the Korea Tourist Association.

(John Ridding is a Financial Times writer based in Seoul.)

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