International Business Assignment No. 3Case: FDI by Volvo in South Korea Submitted By:Parag GadekarRoll No: 112PGDM-B, 2010-12 batch <br /> 1) What was South Korea’s political ideology prior to 1990? What caused the changes in ideology in the 1990’s? Explain briefly South Korea’s ideology from 1990’s onwards. Which country was South Korea’s role model?<br />First Republic: <br />On August 15, 1948, the Republic of Korea was formally established, with Syngman Rhee as the first president. The political ideology of South Korea was strongly aligned with America and was against the North Korea. The main policy of the First Republic . North Korea was anti-communism and ‘unification by expanding northward’. The period 1950-53 witnessed the Korean war initiated by North Korea, supported by People’s Republic of China , against South Korea, supported by America. After the armistice, South Korea experienced political turmoil under years of autocratic leadership of Syngman Rhee, which was ended by student revolt in 1960. Subsequent protests throughout the country shook the government which resulted in formal resignation and end of Rhee’s government. <br />Second Republic:<br />After the student revolution, power was briefly held by an interim administration under the foreign minister Heo Jeong. A new parliamentary election was held on July 29, 1960. The Democratic Party, which had been in the opposition during the First Republic, gained power and the Second Republic was established. The Second Republic saw the proliferation of political activity which had been repressed under the Rhee regime. Under pressure from the left, the Chang government carried out a series of purges of military and police officials who had been involved in anti-democratic activities or corruption. In economic terms as well, the government was faced with mounting instability. Although the government had been established with support of the people, it had failed to implement effective reforms which brought about endless social unrest, political turmoil and ultimately, coup d'état in 1961.<br />Third Republic:<br />The military coup d'état led by Major General Park Chung-hee in May, 1961, put an effective end to the Second Republic. The National Assembly was dissolved and military officers replaced the civilian officials. The military rule was ended by elections took place 1963,in which Park elected as president.<br />Park's administration started the Third Republic by announcing the Five Year Economic development Plan, an export-oriented industrialization policy. Relations with Japan were normalized by the Korea-Japan treaty ratified in June 1965 and the government also kept close ties with the United States. Economic and technological growth during this period improved the standard for living, which expanded opportunities for education. In 1971, the government decided to implement measures to increase farm productivity and income by instituting the Saemauel Movement (New Village Movement). The movement's goal was to improve the quality of rural life, modernize both rural and urban societies and narrow the income gap between them. To allow president to seek a third term Park had an amendment in the constitution which led to major protests and demonstrations, with large support gaining for the opposition leader Kim Dae-jung. Park, feeling threatened, declared martial law in 1972, dissolving the National Assembly and suspending the constitution.<br />Forth Republic:<br />The new constitution adopted in November 1972 gave Park effective control over the parliament and the possibility of permanent presidency. Despite social and political unrest, the economy continued to flourish with the export-based industrialization policy.<br />Students and activists for democracy continued their demonstrations and protests and in the face of continuing popular unrest, Park's administration promulgated emergency decrees in 1974 and 1975, which led to the jailing of hundreds of dissidents. The protests grew larger and stronger, with politicians, intellectuals, religious leaders, laborers and farmers all joining in the movement for democracy. In 1979, mass anti-government demonstrations occurred nationwide, which resulted in assassination of Park Chung-hee by the director of the KCIA, Kim Jae-kyu, thus bringing the 18-year rule of military regime to an end. <br />Fifth Republic:<br />The social unrest continued in South Korea even after the assassination of Park. The confrontations between the military establishment and the various unions, students resulted in Gwangju Massacre in 1980, killing around 200 civilians. <br />Towards the later years of 1980s, government promised a new era of economic growth and democratic justice. . In foreign policy, ties with Japan were strengthened by state. The relations with the Soviet Union and China were also improved. The rapid economic growth, however, widened the gap between the rich and the poor, the urban and rural regions, and also inter-regional conflicts. These dissensions, added to the hard-line measures taken against opposition against the government, gave rise to intense rural and student movement, which had continued since the beginning of the republic. Roh Tae-woo succumbed to the demands and announced the Declaration of Political Reforms which called for the holding of direct presidential elections and restoration of civil rights. The direct elections for a new president were carried out in December 1987, bringing the 5th Republic to a close.<br />Sixth Republic:<br /> The Sixth Republic began in 1987 and remains the current republic of South Korea as of 2010. It started with the election of Roh Tae-woo as president for the 13th presidential term in the first direct presidential election in 16 years. The government set out to eliminate past vestiges of authoritarian rule, by revising laws and decrees to fit democratic provisions. Freedom of press was expanded, university autonomy recognised, and restrictions on overseas travels were lifted. Roh's government announced the official unification plan, Nordpolitik, established diplomatic ties with the Soviet Union, China, and countries in East Europe. Although the relations with North Korea remained tense even after some friendly moves from both sides (they became member of UN together in 1991). Due to severe financial crisis in 1997 (Asian crisis), there was a change in government with Kim winning the elections and officially inducted as the president of South Korea in 1998. South Korea had maintained its commitment to democratize its political processes and this was the first transfer of the government between parties by peaceful means. <br />The Roh administration succeeded in overcoming regionalism in South Korean politics, diluting the collusive ties between politics and business, empowering the civil society, settling the Korea-United States Free Trade Agreement issue and continuing summit talks with North Korea. There was still labour unrest due to discontinued labour reforms and wide spread corruption. Later Roh’s successor Lee became the president in 2008. There were hurdles like recession in 2007, strained relations with North Korea, rampant political conflicts etc. The Lee administration tackled these issues by actively issuing statements, timely reshuffling the cabinet, and implementing administrative and industrial reforms. Later after continuous affirmative action and regulatory & economic reforms, they bounced back and they are currently one of the leading economies in the world.<br />Role Model:<br />South Korea closely adhered to the Japanese model of development. Chaebol, the groupings of affiliated companies who dominated South Korea's economy in the late 1980s were similar to Japanese keiretsu. <br />The country’s role model has always been Japan. <br />2) What was the impact on inbound FDI into South Korea as a result of its liberalisation in 1990? Why VOLVO acquired Samsung’s Construction Equipment Division (CED) in February 1998?<br />Impact on inbound FDI into South Korea as a result of its liberalisation in 1990:<br /><ul><li>Surge in FDI: As result of economic liberalisation, the FGI in Korean economy surged from $3 billion in 1997 to $9.3 billion in 2000. The total stock of foreign investment in South Korea soared from $5.2 billion in 1990 to $62.7 billion by the end of the decade. Graph below shows increase in Inward FDI flow in South Korea as a percentage of GDP over three decades.
The FDI to US$8.9 billion in 1998 and soon soared to US$15.5 billion, exceeding the total foreign investment over the previous 35 years.
The recovery pushed the unemployment rate down to 4.8 percent (1,353,000 workers) in 1999, and it fell to 3.7 percent (about 800,000) in May 2000.
Data for the first 4 months of 2000 indicate such investment totalled US$3.7 billion, about 33 percent higher than the same period in 1999.
It also brought the inflation rate down to 0.8 percent in 1999, a record low rate over the previous 3 decades. Inflation in 2000 was expected to be about 3 percent, far lower than during the 1980s, when the average inflation rate in the 1980s was 8.4 percent. </li></ul>Reasons behind acquisition of Samsung’s Construction Equipment Division (CED) by Volvo:<br /><ul><li>Restructuring of Samsung group: Financial crisis affected most of the companies in S. Korea including Samsung. Samsung wanted to reduce the number of its affiliated companies by selling some of loss making business units like CED to overseas companies.
Increased product portfolio for Volvo: Samsung was manufacturing some ten different types of excavators, mostly in the 7-28 ton category. Samsung's broad range of excavators contributed significantly to VCE's existing product program.
Increased market share for Volvo: The acquisition gave Volvo access to an industrial structure in Asia and an efficient distribution network in South Korea, a significant market for construction equipment in Asia. The acquisition also strengthened Volvo Construction Equipment's presence in East Asia and provided opportunities to increase market shares in the company's other product areas, such as wheel loaders, graders and articulated haulers.</li></ul>3) Why did government of South Korea permit this acquisition? What was the initial response of CED’s employee s and South Korean citizens to this acquisition?<br />ASEAN Financial crisis:<br />The government of South Korea permitted this acquisition since after the economic crises of 1997, Korea’s long period of economic boom came to an abrupt end which produced a sharp drop in the economic activity in South Korea. The Korean currency slumped across the dollar, requiring the government to seek $58 billion in aid from the International Monetary Fund. As the demand for their products plummeted, dozens of highly leveraged Korean companies found themselves unable to service the debt that they had taken on during the boom years to finance their expansion. Many teetered on the edge of bankruptcy. The South Korean govt responded by making the historic decision to remove many of the restrictions to foreign direct investment, including the regulations which prohibited foreign firms from making hostile takeovers of Korean enterprises.<br />Need for FDI inflow:<br />As demand for their products plummeted; many of the highly influential Korean conglomerates (chaebols) became unable to service their debts and were near to bankruptcy. These companies either wanted to sell off their stakes to boost their liquidity or be acquired over by foreign company, thereby transferring their ownership. It was recognized that allowing free flowing FDI was the only way to achieve this. <br />Also as per the theoretical concept of impact of FDI, the FDI does not only bring capital but also it brings technology, knowledge and due to the spill over effect, development of process remains for the long run. FDI works as the catalyst for the economic growth of a country, especially for the developing countries like South Korea.<br />Volvo was the reputed global company in automobile and industrial sector. Government thought Volvo’s global exposure will help ailing company more efficient with better productivity.<br />Initial response of CED’s employee s and South Korean citizens to this acquisition:<br />Acquisition whether hostile or non hostile always comes with a tag of corporate restructuring which directly results in job cuts .As a result acquisition is always seen as an opposition agent from labour and trade unions and same was witnessed in case of Volvo acquisition in South Korea. <br />Initially many Koreans and CED workers viewed the new wave of foreign investment with deep suspicion. The very next month after the acquisition was announced in January 1998, the workers of CED went on strike. <br />4) What are the learning for MNE’s from this case? Explain the rationale for your answer.<br />Importance of FDI:<br />Case showcases the importance of FDI and liberal trade policies which is needed for overall development of the country. Case also introduces acquisition as one of the host country entry policies (FDI Based) through which MNE along the world can directly tap the local market and infrastructure. Acquisition also helps the host country in improving the industrialization standards and technological know –how.<br />Country Objective: <br />Volvo had evaluated its country objective before it invested in Samsung’s CED. They wanted to export 60-70% of its products produced at the plant. Since South Korea has cheap and abundant labour and also it has a history of workers involved in industries producing heavy machinery, so the learning curve ensures that the labour is also productive. <br /> Volvo had evaluated South Korea also on the invariant and acquired factors. Since Korea has a vast coastline so shipment of products becomes easier. Also Korea had a history of boom where in the country progressed in many sectors. If we look at the acquired factors then people skills were there in place which ensures that the workers are hardworking and productive.<br />Need and Importance of M&A<br />Host company point of view:<br /> Mergers and Acquisitions can prove to be really beneficial to the companies when they are going through turbulent times may be due to financial or operational problems. MNEs not only bring the capital but also bring the latest technology and best business practices which are tested successfully by MNE in other parts of world. <br />MNE point of view:<br />Access to local markets of different countries is possible through international mergers and acquisitions. M&A provides direct access for MNE to the local or regional market and thus increase in market share.<br />M&A helps MNE in gaining cost efficiency through economy of scale.<br />The labour cost is relatively cheaper in developing countries. Thus by setting up manufacturing hub in developing countries, MNEs can lower the cost of production. MNE gets access to infrastructure, resources and distribution channel of company in host country.<br /> <br />References<br />http://en.wikipedia.org/wiki/History_of_South_Korea<br />http://www.samsung.com/hk_en/aboutsamsung/corporateprofile/history01.html<br />http://volvogroup-qa.volvo.com/group/global/en-gb/newsmedia/pressreleases/previous/1998/Pages/newslist.aspx<br />http://www.ifri.org/files/Economie/FDI_Economic_Status_Korea.pdf<br />