The Changing Capital Markets of East Asia

By Ky Cao | Go to book overview

Chapter 7

The political economy of Korean foreign direct investment in Southeast Asia

You-II Lee and Moon-Joong Tcha1


INTRODUCTION

Over the last three decades, Korea has experienced the most successful economic growth in the developing world. The average real annual growth during the period between 1962 and 1991 exceeded 9 per cent, and radical changes in the economic structure saw a move away from previous import substitution policies. The state implemented major economic reforms—such as the adoption of more realistic exchange rates, centralisation of import controls, and the introduction of export incentives—that encouraged industries to look to global markets and to develop the country’s comparative advantage such as low production costs and, until the early 1980s, a relatively compliant workforce. Consequently, agriculture’s contribution to the gross domestic product (GDP) dropped from 36 per cent to 13.8 per cent and the share of manufacturing increased from 25 per cent to 50 per cent between 1962 and 1985. 2 These elements have converted the image of Korea from that of an underdeveloped country in the 1960s to that of a newly industrialising country (NIC) by the late 1970s.

A significant consequence of Korea’s economic development has been an increase of investment in Southeast Asia where, since the late 1980s, it has emerged as one of the largest investors. In 1992, Korean foreign direct investment (FDD 3 in the region stood at over US$1.2 billion: more than twice the sum total of FDI in the period between 1968 and 1985 (US$570 million). In the period between 1986 to 1988, 96.2 per cent of Korean FDI went to Indonesia. Despite this dramatic increase, however, internationalisation of Korean capital is still at an early stage; the 1990 figure (US$820 million) represented no more than 0.4 per cent of Korea’s gross national product (GNP)—US$238 billion.

A large number of Korean investments realised in Southeast Asia are small-and medium-sized and engaged in labour-intensive manufacturing industries like textiles, footwear, garments and toys. Korean FDI by manufacturing firms in the region has shown remarkable growth since 1988, especially in Indonesia. The total amount of Korean FDI (US$48.17 million)

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