Korean Multinationals in Europe, reviewed by Frank

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KOREAN STUDIES REVIEW

Judith Cherry, Korean Multinationals in Europe, Surrey: Curzon 2001. 241 pages. ISBN: 0-7007-1480-4. US $45.

Reviewed by Rüdiger Frank
Humboldt University, Berlin

This is the second book by Judith Cherry, after "Business Briefings: Republic of Korea" (1993). She lectures on Korean Business and Management in the School of East Asian Studies at the University of Sheffield and is director of a management consultancy company specializing in cultural awareness training. "Korean Multinational in Europe" is the published version of her Ph.D. thesis.

Key question and structure
Cherry defines the following as the central issue of her book: "The key question is: ...has Korean consumer electronics investment in Europe truly been a case of involuntary internationalization?" (p. 3). To answer this, the book is divided into eight chapters, with about 20 pages each. The first chapter examines the Western and Japanese contributions to the theory of Foreign Direct Investment (FDI). It is followed by the Korean perspective on FDI theory. These two chapters contain the theoretical framework of the book. They are followed by an introduction to the growth and development of South Korea's economy and its chaebôls, which is further specified for consumer electronics in chapter four. In the next chapter, Cherry moves to South Korea's overall FDI activities, with a focus on South Korean FDI in Europe in chapter seven. Chapter six contains an overview of Korea's relationship with Europe. The final chapter deals with South Korean consumer electronics investment in Europe from a theoretical/macroeconomic perspective, followed by a summary and conclusions. Since most of the research for the book was finished before 1997, as a postscript 17 pages on "The Chaebôl and the Korean Economy in the 'IMF Era'" are added.

Contents
(1) A Historical Overview of the Development of the Theory of Foreign Direct Investment and the Multinational Enterprise
There are several established ways in which economic theory tries to explain the internationalization of enterprises in the sense of establishing production facilities in other countries instead of just exporting their products: Monopolistic advantage (Hymer, Kindleberger), the international product cycle (Vernon), oligopolistic parallel-behavior (Knickerbocker), the theory of internationalization (Buckley/Casson, Rugman), an adaptation of portfolio theory (Markowitz) on FDI and Dunning's eclectic paradigm (Gabler 1993: 1700).

Cherry manages to process the vast literature and extract the major points of all those theories plus Kojima's macroeconomic approach and Wells' application of the product life cycle model on just a handful of pages, using a style which makes this section an easy read for non-economists; the user-friendliness would perhaps have been even more enhanced by the integration of the main features of every theory into a matrix. Since most of the theory is focussed on FDI from industrial to developing countries, Cherry adds a section on theories of FDI originating in developing countries and by their MNEs. After a definition of FDI, the main question is why enterprises consider it to be feasible to go beyond international trade and establish a risky direct presence abroad for production and/or distribution in spite of the many obstacles including the so-called "costs of foreignness". Economies of scale and strategic investment are just two of the many ways in which economic theory more or less successfully tries to explain this phenomenon. When it comes to FDI from developing countries, established theories face enormous difficulties in giving a proper explanation. This is even more the case for so-called Reverse Direct Investment (RDI), i.e. FDI from developing countries to industrial ones. Among the most important factors here are the active role of the governments, the defense of export markets in the face of trade restrictions and hedging of risks stemming from political instability in domestic markets.

(2) Foreign Direct Investment Theory: The Korean Perspective
As Cherry outlines in this chapter, in spite of widespread criticism of the theories presented above - mainly for not appropriately considering RDI - only a few Korean writers have made their own, original contributions to the debate (p. 18). An introduction is given to the works of Koh Bohn-young (1985), Pan Pyông-gil (1985, 1996), Wôn Chong-gôn (1986), Jung Yongwook (1987), Ch'ae Ch^øm-gil (1991), Shin Ki-t'aek (1990) and Choi Yong-rok (1996). The latter describes the "ethnic tie theory" as one of six major strands of Developing Country FDI (DCFDI): Ethnic ties overseas are exploited to obtain information from ethnic groups in the host country. Empirical analysis indeed shows that in the early stages of South Korean FDI, firms targeted areas with large populations of emigrant Koreans in the USA, northeast China and central Europe (p. 24).

Further, the complex FDI-theories of Yun Tong-jin, Jun Yongwook and An Se-yông are presented. Among these theories, a heavy concentration on consumer electronics is visible, explaining and supporting Cherry's above mentioned emphasis on this sector. There are many striking and unique results of the Korean scientists' analysis. For example, according to Jun Yongwook (1988) and Park Gi-han (1996), South Korean consumer electronics firms show the interesting feature of an asymmetric market position at home (major players) and overseas (minor players) (pp. 32-33).

Since most of the mentioned works are available only in Korean, the merits of this chapter go far beyond the presentation of a theoretical framework, providing a fascinating insight into the academic discussion on FDI in South Korea. Against this background, it might have been an option to sacrifice part of the - otherwise excellent - conciseness and go a bit more into details here.

(3) The Economic Context: The Republic of Korea (1948-1997)
Here, after discussing the theoretical framework in the first two chapters, the virtual second part of the book starts. It consists of chapters three, four and five and leads from South Korea's overall economic development to sector-specific and FDI-specific deepening. In chapter three, Cherry focuses on two aspects of South Korea's economic development: The active and often dominant role of the state and the oligopolistic market structure, the latter produced by the conglomerates. In describing the economic development on the peninsula, special emphasis is laid on showing the constantly declining export competitiveness of Korean enterprises since the end of the 1970s, in spite of short-term effects like the appreciation of the Yen and other major currencies. Especially the economic restructuring after 1989 is depicted as the reason for South Korean companies to move overseas in search of lower production costs, technology and skills (p. 56).

The integration of this chapter into the whole context of the book is not done as perfectly as in the first two chapters, but nevertheless the basic intention of the author becomes visible: To show the major inner forces of Korea's economy as the background for the expanding FDI activities, namely a strong developmentalist state and big conglomerates who prospered under the conditions of an at best oligopolistic domestic market, with formal criteria like market share being given priority over economic efficiency and rate-of-return considerations, and to emphasize the strong dependency of the Korean economy on exogenous developments in world markets.

(4) The Development and Characteristics of the Korean Consumer Electronics Industry
This part is a specification of South Korea's economic development story as presented in chapter three with the focus on one sector. After a brief overview over the literature available in English and Korean, Cherry outlines the development of the country's consumer electronics according to five phases from simple assembly of imported parts through the development and manufacture of consumer electronics products and on to the production of advanced industrial electronics products, including semiconductors and telecommunication equipment, covering the period from the 1950s until the mid-1990s. It is shown how the focus of the industry shifted from import substitution to passive, later active export promotion. After the export competitiveness got lost due to rising wages, labor problems and the strong wôn, and restrictions like import quotas, anti-dumping duties and technical barriers against Korean consumer electronics products were applied by the USA and other key export markets, overseas production was applied as a defense strategy. Among the theories presented above, Yun Tong-jin's post-PLC model is applied. Throughout the development of the sector, the strong role of the state is emphasized.

After this chronological review, the characteristics of the Korean consumer electronics industry are examined. They include a high export dependency, a strong foreign presence in manufacturing and exports, lagging technology, a weak parts and components industry, an oligopolistic market structure, heavy reliance on a small number of markets and the dominance of a few mature and standardized products. Since it has been extensively outlined throughout the first part of the chapter, the heavy intervention and direction by the government could also have been included into this list of characteristics (but it is highlighted in the conclusion). Even though a heavy concentration on OEM sales and a lack of indigenous R&D are identified as major problems of Korean manufacturers, alternative strategies like reverse engineering are only indirectly mentioned.

(5) Korean Foreign Direct Investment
Following the very clear and logically consistent structure of her book, after showing the overall and sector-specific economic development and its limitations, Cherry as a next step presents FDI as the solution to the problems stemming from trade restrictions in South Korea's key export markets and from the eroding price competitiveness of Korean products. First, a chronological overview of Korean FDI between 1953 and 1966 is provided, followed by an analysis of manufacturing investment and of the distribution of Korean FDI between developed and developing countries. This chapter contains 17 of the total of 43 tables, showing the highest concentration of empirical data (followed by chapter 7 with 15 tables).

In the 1960s and 1970s, FDI was made primarily to open up markets for exports and to secure stable supplies of essential resources - mainly raw materials - for the growing domestic industry (p. 84). In the first half of the 1980s, as a result of the government's efforts to prevent an outflow of funds, FDI dropped and its focus shifted from Southeast Asia to the USA. The biggest portion of Korean FDI has been made since the end of the 1980s, Southeast Asia being the most significant target area again. The manufacturing sector accounted for more than half of Korean FDI, with textiles taking the largest share. Fabricated metals (incl. consumer electronics) followed with 18 per cent of FDI projects (p. 82). FDI was now used as a means to ease trade frictions with major partners and to promote the globalization of South Korea's industry (p. 89). Accordingly, relevant regulations were eased substantially, leading to an explosion of FDI; about 60% of all Korean FDI (both in value and volume) until 1996 have been made since 1994 (p. 92).

FDI became an integral part of the restructuring process of South Korea's economy, (1) taking advantage of lower production costs in developing countries, (2) combating protectionism and seeking for advanced technology and management expertise in developed countries and (3) benefiting from the opening up of former Eastern block countries, now transition economies. The latter term is not mentioned; especially in the tables, Cherry does not explicitly differentiate between developing countries and transition economies. The distribution of overall Korean FDI until 1996 between developed and developing countries was only slightly in favor of the latter, while for manufacturing, the focus is more clearly on this area with over 71 per cent (p. 102). Most of Korean FDI in developed countries was made in trade (39.%), followed by manufacturing (35.1%). Fabricated metals made up for 33.2 per cent of the latter, only second place after paper and printing with 34.4 per cent (p. 103). After what had been said about South Korea's economic development, it is not surprising that the government played a crucial role in curbing, promoting and directing FDI.

(6) Korea's Relations with Europe: An Overview
In what can be seen as a third part of her book, Cherry now moves on to give her analysis a regional focus on Europe. Again, she starts with overall considerations and becomes more specific in the following chapters. Chapter six examines the development of economic and political relations between South Korea and the countries of Europe, the Korean attitudes towards the European integration and their impact on investment in the region.

Korea's expansion to Europe can be seen as part of a diversification strategy away from the dependency on Japan and the USA. This strategy has not been too successful in the 1960s and 1970s and changed only slightly in the 1980s. It took until the last decade for the economical and political relationship between South Korea and Europe to mature, as reflected by several important declarations, agreements and exchange programs. According to Cherry, one of the major driving factors was the common aim on both sides to provide a balance to the strong US influence in Asia (pp. 112-113). Accordingly, ASEM is extensively dealt with. After those more or less political aspects of the relationship, ROK-EU trade receives special consideration. What could have been added here is - especially since 1994 - the integration of this topic into the wider context of the GATT/WTO, which is only briefly mentioned in chapter eight (p. 166). Very interesting and the most valuable part of this chapter is Cherry's analysis of the debate in South Korea on whether to see the European integration as an obstacle or a chance. Proponents of both directions focussed on the same expected results (mainly harmonization of standards, cost reduction, enhanced efficiency and expansion of the EU to eastern Europe) but differed on their actual impact on Korean businesses. The last section of chapter six deals briefly with Eastern Europe.

(7) Korean Direct Investment in Europe
This is the second chapter with a vast amount of data, as reflected by 15 tables on 20 pages. It is shown that Europe accounted only for 15.3 per cent of South Korea's total FDI until the end of 1996. The UK and Germany were the main targets with 17.7 and 17.6 per cent, respectively, followed by the Netherlands with 11.3 per cent (p. 133). By sector, manufacturing investment dominated with 53.6 per cent (value), fabricated metals accounting for over 71 per cent of total. Eastern Europe, mainly Uzbekistan, Romania and Poland, showed a surprisingly high level of popularity among South Korean investors, together taking more than 40 per cent of South Korea's manufacturing investment in Europe (p. 134). A glance at the investment by sector and by size in transition economies and western European industrial countries shows a strong disparity, stemming from differences in development levels. It is therefore important not to regard Europe as an homogenous entity, as is emphasized by Cherry in her analysis of Korean's motivations for investment (pp. 141 ff.). Parts of the last section, which deals with Korean consumer electronics investment, could have been included in the preceding or the next chapter.

(8) Korean Consumer Electronics Investment in Europe: A Theoretical/Macroeconomic Perspective
With the exception of chapter four, an explicit application of the theoretical framework as developed in the first two chapters was missing. This gap is now filled. First, the main results of the preceding chapters are displayed in brief. Among them, the absence of firm-specific monopolistic advantages of Korean consumer electronics firms engaged in FDI in Europe is especially emphasized (p. 152), leaving top priority to strategic motivations of different kinds (protection of export markets, circumvention of trade barriers, rivalry in oligopolistic markets etc.).

In a next step, Korean consumer electronics investment in Europe until June 1997 is presented in detail, including an analysis following some of the theories as displayed in the first two chapters. Follow-the-leader patterns among the "big three" (Samsung, Goldstar/LG and Daewoo) are not observed in all European countries, except for the most important markets (the UK, Germany, France and Italy). Interestingly, the possibility of collusion between Korean companies investing in the same overseas market is not mentioned, even though it would be highly probable in an oligopolistic industry and against the background of an alien environment facing the investors. Why compete against each other, sharing the same blood and nationality, when there are so many other competitors at hand? It does not become clear whether Cherry excludes this option as a result of her research, or whether there was just - quite naturally - no such information in the analyzed sources. Since important conclusions are drawn from comparatively examining which company invested when, where and in what form, leaving the possibility of collusive action open could pose a serious threat to the whole analysis. That such behavior is not only theoretical is shown by the Korea Fair Trade Commission (Annual Reports on Competition Law and Policy in Korea, available bot in English and Korean from the KFTC's webpage at www.ftc.go.kr).

Realizing the incapability of most established theories to fully explain Korean consumer electronics FDI in Europe, Cherry on the last ten pages of this chapter presents her own views based on the work of Yun Tong-jin (structural irreversibility) and Jun Yongwook (involuntary internationalization). She does so in chronological order and starts with the period from 1963-1986, shifting to a second phase from 1987-1996. It becomes evident again that the political and strategic component of the complicated set of motivations behind FDI clearly outweighed purely economic efficiency-based considerations.

(9) Summary and Conclusions
On only four pages, Cherry manages to present an impressive summary of the preceding eight chapters, highlighting the main findings as described above. It requires a high degree of mastery over a subject in order to be able to produce such a compressed, yet still good and readable synthesis of a multi-faceted and complicated topic.

(10) The Chaebôl and the Korean Economy in the 'IMF Era'
It is understandable that the author felt the need to include information on such a major event like the financial and economic crisis of late 1997/1998 in her book which was published in 2001. But it is no coincidence that this - like the rest of her book, excellently written - part has been added as a postscript even after the summary and conclusion section, since it does not fit perfectly into the main contents of the book. The reforms are presented following South Korea's official line (four reforms: financial, corporate, public, labor). The liberalization of trade and FDI is briefly described on two pages (pp. 185-186). The last section of this chapter contains a macroeconomic overview of the South Korean economy in the aftermath of the crisis, covering the period from 1998 to 2000.

Conclusion
Prior to some critical remarks: the book is a must-read for all who are interested in the South Korean Economy, South Korean FDI, the South Korean consumer electronics industry and in South Korea's relations with Europe. It benefits both economists and non-economists. Cherry has put much effort into processing a vast amount of data and complex theories, creating a high quality and user-oriented product, which makes reading both enjoyable and beneficial.

The book is on FDI of South Korean transnational enterprises with both a strong sectoral focus on the consumer electronics industry and a regional focus on Europe. The title "Korean Multinationals in Europe" does not reflect all these facts properly and can in fact be misleading, mainly for two reasons. The presented work is on Foreign Direct Investment only, not on the whole range of activities Korean enterprises conduct(ed) in Europe like trade, R&D and strategic alliances, to name only a few. Further, after a look at the contents and reading the introduction, it becomes evident that not the whole range of FDI of Korean companies in Europe is the focus of the book, but more or less exclusively the consumer electronics sector: "The purpose of this book is to move that debate forward by analyzing Korean consumer electronics investment in central, eastern and western Europe from a theoretical/macroeconomic perspective." (p. 2). Hence, a subtitle would have helped to avoid misunderstandings on the basic contents.

Even though widely used in the literature, there is no accepted definition of the term "multinationals" in economics (Altmann 1993: 45). "Multinational," "international" and "transnational" enterprise are often used as synonyms. This is definitely not the author's fault, but can nevertheless be confusing. If the enterprises in question are clearly attributable to one nation state and conduct economic activities with their own production lines and distribution networks across national borders, a better way to describe them would be as transnational or "multinationally active". There is the danger that for a part of the readership, "multinational enterprise" implies a kind of joint venture or alliance between partners from several nations, which is clearly not the case here. In this sense, "Korean [one nation] multinationals" may be understood as an oxymoron. Unfortunately, information on the ownership and management structure of the overseas affiliates of Korean companies is not provided. This could have been done for example by presenting a case study of one instance of Korean FDI in the UK. Concrete cases of FDI - regrettably, only in the electronics industry - are to be found in appendix G (pp. 202-204), a very interesting table with information on host country, mother company, name of the affiliate, main products etc. provided. An analysis of these and other cases could be a rewarding area for further research and for testing the macro-economically generated findings of Cherry's book.

The author's choice of the study's regional and structural focus is not explicitly explained. The data themselves do not help too much here, since it is shown in chapter five that Southeast Asia (region) and textiles (sector) were the main FDI areas of South Korea. If looking only at investments in advanced countries (RDI), it remains unclear why Europe (15.4 per cent of total net invested until 1996) has been chosen instead of the USA (31.4 per cent) (p. 93). The percentage for Europe has to be reduced further if we consider the heterogeneous structure of this region with both highly advanced countries and developing transition economies. The argument of the "Fortress Europe" is only relevant for EU members, which does not include such markets as on the territory of the former Soviet Union. Some explanatory words on the reasons behind the regional and sectoral focussing of the analysis would have been helpful.

For a book published in 2001, it is regrettable that most data run until only 1996. On the other hand, due to the extraordinary developments after the 1997 crisis and the according biases in long-term data rows, it can be seen as a blessing that the research for the book was conducted before. Again, a subtitle could have offered information on this aspect of the work.

One of the most laudable features of Cherry's book is the concise and easily readable style in which complicated theories are summarized and applied. The length of the chapters does not exhaust the reader, who is provided with an always visible thread to follow and all necessary information to both get an impression of Korea's FDI strategies and understand Cherry's arguments. The extensive use of both theoretical and empirical Korean sources, many of them for the first time in a Western language, is another strength of the presented volume. Except for the points mentioned above, Cherry's book is an excellent work which can only be recommended.

References:
- Gabler (1993): Gablers Wirtschaftslexikon, Wiesbaden: Gabler
- Altmann, Joern (1993): Aussenwirtschaft fuer Unternehmen: Europaeischer Binnenmarkt und Weltmarkt, Stuttgart und Jena: G. Fischer

Citation:
Frank, Rüdiger 2001
Review of Judith Cherry, Korean Multinationals in Europe (2001)
Korean Studies Review 2001, no. 5
Electronic file: http://koreanstudies.com/ks/ksr/ksr01-05.htm

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