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Korea's Next Challenge: Global Competitiveness

Korea has weathered the economic downturn remarkably well. Analysts expect it to register GDP growth over the past four quarters of just under 1%, far below its historical average growth of nearly 5% but an impressive performance for an economy heavily export-oriented and almost exclusively reliant on imported energy.

Several factors account for this. The Korean won fell precipitously in U.S. dollar terms relative to the Japanese yen and Chinese yuan early in the downturn, helping to preserve the competitiveness of Korean exports. Korean consumers rallied to the cause, shifting purchases from imports to local products in behavior evocative of the "IMF sales" of the 1997 financial crisis. Korea's low labor costs also bolstered the country's performance. As the crisis peaked in the fourth quarter of 2008, Korea was the only OECD country to register a decrease in its unit labor costs. While Korea's labor costs fell 4.3%, Japan's grew 1%.

The bulwark of Korean competitiveness remains its large companies, and their resilience in the face of the economic downturn has proved critical. Today 14 of the Fortune 500 companies and four of the 100 largest—Hyundai (005380:KS), LG Electronics (066570:KS), Samsung (005930:KS), and SK Telecom (017670:KS)—are Korean. The nation's dominant businesses are leading exporters of products that range from cars and flat-panel displays to memory chips and telecommunications handsets.

Five Critical Areas

But as Korea emerges from the global recession, its biggest companies should revisit their strategies of international competitiveness. The era in which Korea can rely on labor market flexibility and exchange rate advantages is waning. Korea's historically successful globalization model will come under increasing pressure due to unsettled financial markets, a weakened U.S. dollar, increased protectionism, and stronger competitors.

To succeed in the future, Korean multinationals will have to adopt flexible managerial systems and more sophisticated financial tools. They will have to transform their traditionally hierarchical and risk-averse cultures in order to sharpen their competitive positions relative to Japan, China, and other emerging countries. That will require fresh thinking in five critical areas:

• Strengthen external governance to attract more foreign capital. With changes in its commercial code and the way securities are traded, Korea has made substantial progress over the past 10 years in the rules it sets for business operations. Korean companies now boast much improved financial reporting, restrictions on self-dealing, and the beginnings of board independence. Yet many foreign investors and potential partners remain skeptical of Korea's commitment to the sound governance and accounting practices demanded in today's global markets. Moves by Korean companies to adopt "poison pills" (measures that insulate executives and inhibit shareholder value and flows of private equity) have done little to allay that skepticism.

Improving external governance will help fuel a more robust capital sector, allow greater liquidity in its financial markets, and present fewer barriers to consolidation and investment from overseas. While the Korean government estimates infusions of foreign capital hit a record $12.5 billion in 2009, that was less than one-third the foreign direct investment that Japan received and a tiny fraction of what flowed into China. With such an advanced economy, Korea should have attracted far larger pools of domestic and international private equity and venture capital.

Regions : Asia

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