[KS] KSR 2001-05: _Korean Multinationals in Europe_, by Judith Cherry

Stephen Epstein Stephen.Epstein at vuw.ac.nz
Thu Jun 7 06:48:27 EDT 2001

Judith Cherry, _Korean Multinationals in Europe_. Surrey: Curzon, 2001. 241
pages. $45.00. ISBN: 0-7007-1480-4.

Reviewed by Ruediger 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 chaeb™ls, 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 Eur!
ope 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 Chaeb™l and the Korean Economy in the 'IMF
Era'" are added.


(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 mor!
e 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
Py™ng-gil (1985, 1996), W™n Chong-g™n (1986), Jung Yongwook (1987), Ch'ae
Ch^¿m-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-y™ng
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
(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

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
w™n, 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 marke!
ts, 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). Aft!
er 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
 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 C!
herry 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 concl!
usions 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 Chaeb™l 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. 


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 misun!
derstandings 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 no!
t 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.

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

Frank, Ruediger. 2001
Review of Judith Cherry, _Korean Multinationals in Europe_,(2001)
_Korean Studies Review_ 2001, no. 05
Electronic file: http://www.iic.edu/thelist/review/ksr01-05.htm

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