Brand Confucian

Today, Chosun Ilbo ran this piece on “What’s Behind Korea’s Falling Economic Ranking?”

Although such rankings are practically meaningless in our interconnected global economy, the article does make a few points that are worth considering. Once again, blue is the Chosun, black is me.

According to the World Bank’s rankings of nominal gross domestic product (the value of all goods and services produced in a country expressed in current prices) released on Monday, Korea stands at 15th place, after Australia. In 2003 Korea ranked 11th. Experts say the biggest reason behind the fall of four notches in just five years is lost growth momentum.

◆ Weakened Growth Momentum

Korea’s annual economic growth rate hovered between four to five percent over the past five years, while the economies of newly-emerging countries, such as China, Brazil and India, expanded close to 10 percent annually over the same period.

Sometime, Korea is going to have to stop comparing itself with developing nations. Granted, when the entire globe becomes developed, it is unlikely that Korea will be in the top 5 by real GDP. However, companies and the government mustn’t think about Korea’s place in terms of short-term economic growth, but of global industry share. Korean companies have been consistently poor performers when it comes to international expansion. In order to remain key players, Korean firms need to expand aggressively in the global arena over increasingly narrow product categories. Korea’s downgrade isn’t telling us about the growth trends of China, India, and Brazil, but about how Korean firms aren’t aggressively positioning themselves in these markets.

The article does hone in on the second reason for declining growth: piss-poor FDI.                         

“Korea is losing its growth momentum as investment has dropped markedly since 2000,” said Kwon Soon-woo, an economist at the Samsung Economic Research Institute (SERI). “With investment declining, Korea’s potential growth rate (the expansion that can be achieved if a country’s financial resources and labor force are put to full use) and real growth rates have been lackluster,” he added. Korea’s potential economic growth rate was 4.5 percent prior to the global financial crisis. But as investments have fallen drastically both last year and this year, it is estimated to have decreased further 

And why is investment (both domestic and foreign) declining? DongA Ilbo’s recent survey of 60 foreign firms doing business in Korea is telling. The firms give the following list of obstacles for doing business in Korea

1. Over regulation
2. Excessive corporate taxation
3. Unreasonable/unyielding labor unions
4. Language barriers
5. Instability due to North Korea
6. High cost and low productivity 

It’s telling that at least 4 out of 6 of these are completely controllable phenomena. And ‘high cost and low productivity’ could arguably be a product of the first 4 factors. 

◆ Effects of Consumer Prices and Foreign Exchange Rate 

The effects of rising consumer prices are directly reflected in nominal GDP. The more consumer prices rise, the larger nominal GDP becomes. “Until now, Korea maintained stable economic growth and consumer price levels, while Brazil, India and Russia’s nominal GDP are getting bigger due to high consumer price increases on top of high economic growth,” a Bank of Korea official said. Resource-rich Australia became the world’s 14th-largest economy last year thanks to growing exports and GDP, as raw materials prices have been climbing since 2006. 

Again, Korea needs to stop comparing itself with developing countries – inflation in Korea has been on par with or in excess of that in other developed nations. Yet the US, Germany, France, and a slew of other developed nations maintained comparative real GDP over the timeframe. 

In contrast, Korea’s consumer price increase was offset by the weak won. Nominal GDP is calculated in won and then converted into U.S. dollars. As a result, nominal GDP shrinks if a country’s currency is weaker than the dollar, even if consumer prices in that country rose. The Korean won was worth W955 against the dollar on average in 2006, W929 in 2007, but weakened to W1,103 in 2008. 

Although a factor, it must be said that the won is part of Korea’s competitive mix. Korean won value fluctuation isn’t an exclusive or completely random phenomenon. How the won fares against the pound, yen, euro, dollar, rupee, etc. is every bit as integral to Korea’s global competitiveness as is the quality of Samsung LCD TVs. It boggles my mind that the bank of Korea claims the ranking is too low due to weak currency. If BOK doesn’t take responsibility for Korea’s currency. Who will? 

◆ Need for New Growth Engines 

Experts say investment needs to rise in order for Korea to boost its global economic ranking. “Korea remains competitive in exports, but private consumption and investment remain weak. Korea’s domestic economic structure needs to be strengthened by reviving private consumption and Institute, said, “Korea’s economy could grow faster in the future, because Korean products have been increasing their share of the global market since the global financial crisis.” But Oh advised that Korea needs to tap into new growth engines in order to return to its previous rate of growth, since it would be difficult for the government to shift back to a strong won policy as officials seek to maintain the country’s current account surplus.investment,” Kwon at SERI said. Oh Moon-suk, a senior economist at the LG Economic Research. 

I absolutely agree with this assessment. Korea, like all developed nations needs new growth engines, new entrepreneurs, new ideas, new business development. Experts at places like SERI and LG Economic Research Institute are hoping these new growth engines will spawn from within their organizations. And they will. But the government needs to work on a system for promoting SME development that promotes healthy competition – not an easy task mind you, but crucial to long term growth.

The following article pushed several of my libertarian buttons. I’ll try not to get too worked up about it, but provide a fair and balanced counter argument. The blue text is my translation of the original article, and the black text is my own.

 

Stop the Foreign Technology Leak-Hole

Kyunghyang news

 

-42 exposures in 2008, an increase of 31 percent over 2007

-No regulation stopping leaks of core national technologies through M&A deals

 

The recession is increasing worries about industry technology leakage. This is because executives unsecure about employment are easily tempted to change companies, and the possibility of domestic firms being merged with or acquired by foreign firms is increasing.

 

Okay, the leaking of industry technology is a big deal, no question. And firms have a right to expect protection from intellectual property or trade secret theft. But let’s not confuse illegal trade secret theft with completely above-board M&A transactions. Korean firms go willingly into M&A transactions for their own selfish (and by that I mean good) reasons. The technology that such firms possess, and chose to sell to other parties (whether foreign or domestic), belongs to those firms alone. Such technology is not some intangible ‘Korean’ asset possessed by the Korean people as a whole by default due to the fact that the firm was originally established in Korea.

 

In the June 11th report, “The daily increasing severity of trade secret leakage,” Samsung Economic Research Institute (SERI) explained that the number of exposed trade secret theft cases has rapidly increased 31 percent from 32 cases in 2007 to 42 cases in 2008. The number of exposed trade secret theft cases increased around 1-3 cases annually from 26 cases in 2004, but as the economy worsened last year such cases increased dramatically. Had these trade secrets [actually] been leaked, [the report] estimates probable damages also increased from 1.3 trillion won (1.08 billion USD) per incident in 2004 to 1.9 trillion won (1.58 billion USD) per incident in 2008.

 

The report indicates that security and executive employee management systems development pale in comparison to technological advancement and that the probability of trade secret theft is high. [The report identifies] avenues of possible trade secret leakage including ‘internal agents’, ‘M&A deals’, and ‘joint ventures.’

 

Again, perfectly legal M&A deals, and joint ventures have no place in this list. And what about those ‘joint ventures’ anyway, wouldn’t a foreign firm have just as much claim to technology that was developed collaboratively?

 

Cases of current or former employees offered bribes or exceptionally attractive salary packages or promotions for stealing technologies are typical.

 

From 2004-2008 former employees contributed to 56 percent and current employees to 27 percent of exposed trade secret theft cases. In particular, as companies striving toward globalization increase overseas production and research facilities, they are beginning to see cases of foreign-subsidiary employee trade secret theft. Recently a mid-sized company’s ‘hydrogen storage alloy’ technology was leaked by employees receiving cash awards of 200 billion won (16.6 million USD) and high level promotions [from competitors.]

 

Now this is the kind of blatantly malicious trade secret theft against which companies need to protect themselves. However, if Korean firms, the Korean government, and the Korean press insist on conflating the issue to include completely legitimate instances where technology has transferred via legal merger or acquisition, they undermine their overall credibility on the matter.

 

Instances of trade secret leakage in merger or acquisition processes were also not few. In early 2000, Korean firms Sewon Telecom , Maxon Telecom, and Bellwave Telecom which had significant Chinese operations became largely insolvent as Chinese firms acquired mobile technologies through the acquisition of Korean firms Hyndai Syscomm (handset manufacturer), and Gigatelecom.

 

This is a perfect example where Korean firms with tentative foot-holds in the Chinese market simply lost market share to a local firm which acquired technology legally through legitimate M&A transactions.  Sewon, Maxon, and Bellwave wouldn’t maintain bitching rights if the M&A in question involved an American or European firm. Actually such bitching rights never existed. If they couldn’t compete in the Chinese market on their own, or by leveraging joint venture operations with local firms, frankly, that’s their own damned fault. Now, these companies might have legitimate concerns about trade barriers levied by the Chinese government that impeded their natural competitiveness in the Chinese market, but such concerns are unrelated to the trade secret issue.

 

Also Shanghai Motors, which acquired Korean subsidiary Ssangyong motors, is accused of leaking core technologies including hybrid diesel technology to China. Besides these cases were also 6 cases in the past 5 years of technologies leaked during joint research ventures where Korean scientists or researchers were invited overseas.

 

“Accused of leaking?” Give me a break. Shanghai Motors can’t ‘leak’ trade secrets they legitimately purchased. And as for the scientists, again, if the foreign company or university was funding the project, just the fact that a Korean brain participated in the research process doesn’t mean that the Korean public has any claim on technology developed on a foreign firm or university’s dollar.

 

According to Sungbae Park, executive researcher with SERI, “From a national perspective, Korea has designated ‘core national technologies’ but has no regulation addressing the leakage of these technologies when the companies that hold them are subject to mergers and acquisitions,” and “We should note that the US and Japan have a regulatory apparatus that allows for [the government] to block mergers and acquisitions of domestic firms by foreign entities.”

 

By Sukgi Kim skim@kyunghyang.com

 

I will admit that there may be certain technologies that warrant protection for national security reasons. The U.S. would be loath to allow a foreign firm to acquire a sensitive defense contractor like Boeing or Lockheed Martin. It is a good idea for Korea to set up a regulatory apparatus that allows it to review proposed M&A deals for possible threats to national security. But if that regulatory apparatus starts throwing out deals involving telecommunications firms or car manufacturers, the WTO is going to get righteously pissed off. In the US case, the regulatory apparatus Park is referring to is most likely the “Foreign Investment and National Security Act of 2007,” which was set up after previous regulations had failed to flag an M&A deal that essentially put a Dubai firm in charge of all US imports and exports in 6 major US ports – an obvious national security concern. The US doesn’t squabble about telecom, chip manufacturer, car manufacturer (actually the Obama administration actually required foreign acquisition of Chrysler by Fiat in order to allow the company to remain solvent) M&A transactions because the US still believes in a free-market system.

 

So what does Korea need to do to maintain competitiveness? The report, for all its intellectual backwardness, does have some good suggestions for firms concerned about trade secret threats which I echo:

 

1.      Treat your employees better. Reward performance commensurate with its value so that employees are proud to work for your firm and aren’t tempted by illicit offers (which you can’t stop from occurring).

2.      Establish a mechanism by which M&A deals can be reviewed and altered/rejected by the government in cases pertaining to national security. (The report includes technologies in this list, such as automobile and telecom technology which I would think are most likely not key to Korea’s national security. But having a regulatory body in place to make decisions (as opposed to leaving the matter open to the court of public opinion) about what does and does not constitute national security is a smart idea.

 

To this, I would add the following (note that the list for corporations is longer, because frankly, this is a matter to be dealt with by savvy business leaders, not national regulators):

 

1.      For the government:

a.       Fund the hell out of Korean technology and research universities, and demand only the best from all higher level educational institutions.

b.      Vigorously prosecute instances of trade secret theft and punish offenders harshly. Don’t back down from prosecuting Chinese companies and taking such issues up with the WTO.

2.      For companies:

a.       Fund the hell out of employee development programs. Create lucrative incentives for technology employees to be innovative.

b.      Create less hierarchical and more performance-based systems for promotions (kudos to Samsung here, which has done better than any other Korean firm in this department).

c.       Create joint programs with Korean universities to retain Korea’s best talent.

d.      Scout the best talent from foreign firms

e.       Get out there in the market and do your own foreign M&A shopping – that equilibrium can work both ways.