ΆΓ  [Ombudsman]Making the Case for Cross-Border M&As

Korea Times 2000.12.26

According to the World Investment Report 2000 released by UNCTAD, capital flows in the form of foreign direct investment (FDI) in 1999 stood at $865 billion and is projected to hit the $1 trillion mark in 2000. However, this FDI figure should not be taken to mean that multinational corporations have been engaged in the business of constructing new factories. FDI comes in two major forms: (1) mergers and acquisitions (M&As) with existing firm's assets and (2) Greenfield Investments entailing the construction of new factories/facilities.

Statistical figures going back 20 years, support the trend of most FDI taking the form of M&As. According to UNCTAD estimates, ``the total number of all M&As worldwide has grown at 42 percent annually between 1980 and 1999." Particularly in 1999, M&As,comprising 83 percent of total FDI, reached $720 billion.

The reasons for the phenomenal growth of M&As, worldwide, is attributable to two main advantages not provided for by greenfield investments. First of all, ``M&As represent the fastest means of building up a strong position in a new market, gaining market power and indeed market dominance'' with the taking-over of existing assets and human resources (UNCTAD, World Investment Report 2000, p.19, 20).

Secondly, M&As enables a company to adjust swiftly to the ever changing conditions of the volatile market.

In general, ``cross-border M&As allow firms to realize synergies by pooling the proprietary resources and capabilities of the firms involved.'' (Ibid., p.20). In the long-run, companies involved in both M&As and greenfield investments aim to expand production in the host country in order to strengthen their competitiveness and regional corporate restructuring and consolidation efforts.

While M&As have dominated the FDI landscape in recent times, there have been backlashes to this development in the host countries due to fears of foreign-takeovers and the sense of a loss of sovereignty and perceived outflow of national wealth. Some believe that Korea has recovered from the financial crisis of 1997 and hold the opinion that Korea should change its foreign investment promotion policy to a more selective basis. In other words, they believe that greenfield investments should only be permitted, with M&A type investments being restricted. With regards to greenfield investments, I agree with the theory that they provide greater economic benefits relative to the benefits derived from M&As, but only in the case of developing countries, such as the expansion of production capacities and job creation at the time of entry.

But for countries like Korea, which is under mounting pressure to complete the restructuring process in the financial, corporate, and government sectors in a short period of time, M&As can play a more useful role than greenfield FDI.

The Korea model fits the case of a country on the verge of an economic crisis with external and internal forces acting to hamper Korea's economic vitality. Externally, oil prices are up and overseas markets have begun to experience an economic slowdown. Internally, large-scale layoffs and labor disputes arising from the government-led restructuring efforts are further eroding consumer confidence in the economy. This dire situation requires a fast-track approach via M&A investments as the most effective and speediest way to refurbish and streamline the Korean economy in accordance with international practices.

In 1999, total FDI in the form of M&As, according to the Ministry of Commerce, Industry, and Energy's narrow definition of M&A, was about $2.2 billion, merely 14 percent of total FDI. This ratio falls far below the average M&A percentage in developed countries, which far exceeds 50 percent of FDI. ``Cross-border M&As are today the dominant mode by which FDI enters the United States market.''(Ibid., p.24).

There are two underlying reasons for the shortfall in M&A investments. First of all, this is due to the undeveloped nature of the legal system in promoting the recently introduced concept of M&A in Korea. Secondly, the M&A market, early on, struggled due to negative public perceptions of M&As and the fears invoked of hostile takeovers by amoral foreign corporate raiders, which - like a double-edged sword - not only brought increased efficiency but a cut-throat, zero-sum environment not embraced by Korean society.

The media has capitalized on these fears by appealing to xenophobic nationalism, citing the bargain prices that foreign-invested companies received when acquiring a financially-strapped Korean company. Instead of dismissing the value of M&As based on unsubstantiated fears, Koreans must rise to the occasion and develop an international mindset that transcends its own borders in order to reap the economic benefits of the 21st century. With this said, I encourage all Koreans to embrace M&A investment as a powerful tool to help restructure our economy with much needed foreign capital and expertise, thereby equipping the Korean economy to be highly competitive and a major player in the global economy..