ΆΓ Boosting the components industry through FDI

Korea Herald 2001. 4. 25

After an exhaustive one and a half year study, on Feb. 3, 2001 the government announced the introduction of the "Special Law for the Development of Parts and Materials-Specialized Industries" to overcome the chronic trade deficit with Japan.

For decades, Korea's industrial development policy has been geared towards producing semi and fully assembled products, so its industrial structure is largely import-oriented in nature. Due to this policy, Korea finds itself lacking in the parts and materials sector, and must import from overseas suppliers such as Japan.

Without a sufficient local industrial base to offset the balance of payments inequality between Korean and Japan, Korea has faced difficulties in developing a high-value added industrial structure, thereby inhibiting its international competitiveness. However, these structural weaknesses can be overcome by making full use of foreign direct investment (FDI).

Since the mid-1980s, Korea has tried unsuccessfully to reverse its over-reliance on Japan for parts and materials. As the overall trade surplus has fallen from $39 billion in 1998 to $11.8 billion in 2000, the trade deficit with Japan has correspondingly increased from $4.6 billion in 1998 to $11.4 billion in 2000.

Since the Korea-Japan National Partnership Agreement in 1965, trade losses with Japan have amounted to about $4.3 billion annually up to 1999. This is 6.8 times larger than Korea's average annual world trade deficit, totaling $0.64 billion. The significant disparity in trade losses is even more impressive when looking at the 1965 - 2000 period as a whole, when total trade losses amounted to over $160 billion.

Even worse, losses in trade with Japan have increased at a faster rate than during Korea's initial stages of economic development in the 1960s and 1970s. The above figures reflect the negative effect of Korea's reliance on imports of Japanese parts and materials. Ironically, as Korea's export volume and profits increase so too does its trade deficit with Japan. This vicious circle can only be broken by Korea's adoption of new industrial measures that would reduce its reliance on imports.

According to a report by the Bank of Korea, Korea must import 68 Won worth of parts and materials from Japan in order to export 1,000 won worth of Korean end products to overseas countries. And, almost half of Korea's exports depend on imports from Japan.

Specifically, more than 80 percent of total imports from Japan are comprised of parts and materials used for end products made in Korea. To remedy this situation many agree that domestic industries specializing in parts and material production need to be fostered. To this end, Japanese industries engaged in the parts and materials production business should be induced to invest and do business in Korea, and provide Korea with a domestic source of parts and materials in the process.

Similar to the Korean soccer team, where the mid-fielder position tends to be the weakest, the Achille's heel of Korean industry is in the parts and materials-oriented sector, also occupying a mid-fielder like position in the Korean economy. With this in mind, the competitiveness of Korean industry should come from the parts and material manufacturing base, which like the mid-fielder position in soccer, is where the attack commences.

FDI from Japan totaled US$3.8 billion from 1962 to 1990, whereas $2.2 billion in FDI from the U.S. was recorded during the same period. This means that Japan was the leading source of investment up to the 1980s. However, after the 1990s, investment from Japan has tapered off due to labor-management relations problems and excessive payroll increases outstripping productivity growth, which weakened Korea's competitiveness abroad.

To address this decline in investment, President Kim Dae-jung visited Japan last September hoping to attract at least $7 billion in FDI from Japanese parts and material manufacturing industries over a two and a half year period. Thus far, FDI from Japan has increased from $0.5 billion in 1998 to $1.75 billion in 1999 and to $2.45 billion in 2000.

Through the formation of strategic alliances, a significant amount of investment has been made in the parts and material manufacturing industries. Such joint partnerships include Korea Kyongnam Taiyoyuden Co., Ltd., Toray Saehan Inc., LG-Nikko Copper Inc., and Asahi Glass Co., Ltd. These partnerships should improve Korea's global competitiveness since it will be less reliant on imports of intermediary goods.

To further bolster and improve the foreign investment climate, industrial relations must become more cooperative and flexible. With the specter of large wage increases and militant labor unions haunting foreign investors, all efforts must be made to enhance and stabilize the labor environment to allay any concerns or jitters that foreign investors may be harboring. As Japan invests about US$50-60 billion overseas every year, FDI from Japan in the parts and material manufacturing sector can certainly be increased if the investment environment in Korea is made more hospitable through the resolution of labor issues.