ΆΓ [Ombudsman] Foreign Investment to Help Develop Distribution Industry

Korea Times 2001. 4. 9

The competitiveness of the Korean manufacturing industry has made great strides relative to advanced countries, but this is not the case in the distribution industry.

A significant hallmark of the distribution industry is that it functions like a pipeline connecting production to consumption, spanning from the producer's 'exit' to the consumer's 'entrance'.

Although the distribution industry is becoming increasingly important due to the draconian transformations occurring in the economy's service- oriented sector and worldwide distribution network, Korea's distribution industry remains underdeveloped, levying significant costs to the whole domestic economy.

A remarkable transformation has taken place in Korea's distribution industry since the government lifted some of its restrictions effectively barring foreign service suppliers from the domestic market prior to 1996, such as the entry of large discount stores. The total number of wholesale market stores reached 164 in 2000 with almost 30% of them being foreign- invested firms.

However, with regards to inducing further investment from foreign retailers in Korea, there remains a long way to go. Foreign retailer grievances recently received at the Office of the Investment Ombudsman indicate that they have serious concerns about transparency and lack confidence in the government administrative sector.

Last year, a foreign distribution business in Korea brought forward a grievance related to building a large shopping mall and requiring the cooperation of the Seoul ward office. The official denied approval due to traffic congestion problems around the planned construction of the shopping mall. However, the Court of Administrative Litigation decided that the related ward office's return measure was not fair in response to the foreign firm's request. Despite this, the ward official still remains opposed due to pressure from the affected small and medium sized businesses nearby.

In another similar case, a world-renowned foreign distribution firm intended to build a new shopping mall. It submitted its case concerning the building of a new shopping mall, which required permission from city hall, last September.

The official required some supplemental measures to relieve traffic congestion, such as securing another lane. The foreign firm fulfilled the official's supplemental demands but the official still rejected the case.

This stands out in sharp contrast to a similar domestic large shopping mall that entered the market without any opposition.

The reluctance of local governments to approve the entrance of large-sized discount stores into their jurisdiction is clear. Because small and medium- sized businesses have a large influence on local public opinion, the political authorities, dependent on votes, are very sensitive to their concerns.

In contrast, almost all the local residents generally welcome the entrance of large discount stores because they can enjoy the direct benefits such as price competition and enhanced services from the large discount stores.

Foreign discount stores are leading the distribution revolution in Korea.

Now price determination is put in the hands of retailers through their increased bargaining power relative to manufacturers. Also, prices are more competitive while cutting operating costs on the basis of high productivity.

In fact, in 1995 the price margin of supermarkets and department stores have lowered from 17.8 percent and 24.2 percent to 13.6 percent and 21.7 percent in 1998. The number of retailers has increased and the size of stores has grown.

Furthermore, foreign retail firms through spillover have transferred advanced techniques in merchandising and inventory management, as well as new technologies, such as the point of sales (POS) systems.

It is also highly probable that foreigners are planning to make inroads into the domestic medical supplies market as well. As discussed, foreign investments in the distribution industry has many positive effects. These include boosting competition, price reductions, and the introduction of advanced management skills.

Thus, to induce foreign investment in Korea, the central government and local authorities should consistently apply established rules and regulations more reasonably in the process of granting permission and authorization to do business.

In sum, the liberalization of the distribution industry will no doubt enhance benefits to the Korean consumer as well as contributing to Korea's restructuring process and economic recovery.