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Firstly, I will discuss about definition of joint venture and give example about it. Besides that, I also discuss risks of South Korea for investment. In this part, I show the advantages and disadvantages of investment for MNEs which want to invest in South Korea and how LCD television activity work in South Korea as a joint venture. Next, I point out the risks that we may consider when we invest in South Korea. After that, I analyze some of the major risks such as economic risk, legal and regulatory risk, technical risk and labor risk. Then, I recommend some of the ways that a MNE may consider as the ways to solve problems. Finally, a conclusion will be given for my assignment.
Risks assessment of South Korea
Overall the risks of operating in South Korea are low. Although tensions between South and North Korea have increased since May 2010 that killing 46 sailors, in one of the deadliest provocations since the two countries ended the Korean War in a truce in 1953. Beside that, macroeconomic risk will remain relatively elevated owing to the risk that the global economy could suffer from a double-dip recession. Moreover, exports have remained the main growth driver due notably to robust sales in South Korea. The main weakness is still the persistent sluggishness of private consumption, with inflation fueled by high farm and oil prices. In that context, companies operating in the domestic market have been more prone than exporting companies to payment incidents. Moreover, many organizations have used international joint ventures extensively as a vehicle to enter new investment markets around the world (Mohamed, 2002).
2. Risks Analysis
2.1 Government effectiveness risk
The impact of the government is high, its can lack of transparency and also hinders business efficiency for foreign joint venture such as delaying the granting of approvals and so on. Beside that, unclear of communication between bureaucrats and politicians which often lead in delays in the implementation of central government policies.
Many unspecific policies and regulations are issued by both the central and local governments. Besides, there are differences in regulation and policy which can impact on joint venture enterprises such as increasing costs resulting from the variations in policy.
In addition that changes in the state’s tax system cause risky matters. The solution in risk relates to the possibility of gains and losses that brings about income transaction occurring during the year (Clark.E, 2002). Upon policies of the government, there are many kinds of taxation (fee) and the different amount of items in different regions such as: production cost, land management, electricity, industrial and commercial administration, culture, and protection of environment, labor flow, auditing, and statistics and so on.
Economists are worried that South Korea’s economic growth potential has down because by structural problems, include the amount of old people high. Moreover, South Korea has rigid labor market. Despite its close economic relationship with Korea, China has often ended up siding with its ideological neighbor, North Korea, as shown in a recent series of deadly border incidents provoked by the North. “Korea should not let China use ‘trade’ as a pressuring tool on it,”
So Korea should ratify its free trade agreements with the European Union and the United States and invest in and build up trade partnerships with emerging countries such as India, Brazil and Indonesia. On the other hand, the increase risks of higher inflation as relatively strong economic growth and rising oil and grain prices also are problems of consumer.
2.3 Legal & regulatory risk
Although improve are being made to the quality of the regulatory environment, with the transparency is low. We must concern to the government’s highly interventionist stance, especially with economic reforms. So it can make firms being forced to take decisions that contradict with its strategy. The attitude of the government still disagree for foreign capital, with regard to that only limited progress in untie informal barriers to foreign direct investment is likely to be implement.
Foreign trade & payments risk
Barriers to trade in goods and services are one of problem for foreign business. South Korea has often controversy with the US and the EU to protect local companies from foreign competition brings, but the risk of trade embargoes can minimize.
South Korea’s foreign trade and payments risk is low. Moreover, some problems about price of product such as Samsung Electronics have been caught up in a price-fixing controversy.
2.5 Technical risk
Have some technical risks, such as alterative and mistake in design, equipment failure, and lack of resources, injuries and accidents and so on. However, a typical technical risk combination with joint venture in South Korea is considered due to the partners’ different habit although it does not appear among the most significant risks. In my opinion, the major causes for the problem of contractual disputes are due to lack of communication and misunderstanding and various in technical practices. However, Korean companies face growing challenge from Japanese and Chinese firms. Japanese TV vendors are making bold investments to secure next-generation TV technologies, while Chinese TV makers rapidly narrow the gap with leading TV makers, helped by strong government support.
John and Hannu (Darling. J. R and Serito. H. T, 2004) suggest 10 key steps for a success exporting strategy involve:
– Analyze market opportunity
– Assess product potential
– Establish market entry mode
– Make a firm commitment
– Allocate necessary resources
– Identify technical issues
– Develop strategy marketing plan
– Organize operational team
– Implement marketing strategy
– Evaluate and control operations.
Research and analysis of aims and objectives can help success in a joint venture. Firstly, we need to cooperate and maintain good relationships with local government. On the other hand, we need consider about strengths and weaknesses – performing a SWOT analysis to discover whether the two businesses are a good fit. We also need to look at proper risk allocation in contract which means the local partner in a joint venture has all the knowledge about the local environment. It has demonstrated effective to allocate risks at the operational level to the local partner. The joint venture also takes insurance risk of violating the contract by either party. Moreover, monitoring and controlling the technical risk is also a way.
The understanding of those risks is essential in order to apply risk management strategies for joint venture. The several practical risk management strategies provide useful references to other joint ventures or those overseas enterprises which making their businesses preparation for setting up in South Korea. Insight and grasp play an important role in conducting further effective measures to ensure the right direction of future development and create a more attractive market to overseas production professionals.
Appendix : Risk table on January 10th 2011
Political stability risk
Government effectiveness risk
Legal & regulatory risk
Foreign trade & payments risk
Tax policy risk
Labour market risk
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Darling, J. R. and Serito, H. T (2004) “Key steps for success in export markets”, European Business Review, vol. 16, no. 01, pp. 28-43
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