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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?
South Korea's political ideology prior to 1990 was inclined towards closing to all Foreign Direct Investment. The government had laid down strict restrictions on foreign entry into the country's retail sector. In the early 1960s, the government instituted sweeping economic policy changes emphasizing exports and labour-intensive light industries, leading to rapid debt-financed industrial expansion. The government carried out a currency reform, strengthened financial institutions, and introduced flexible economic planning. In the 1970s Korea began directing fiscal and financial policies toward promoting heavy and chemical industries, consumer electronics, and automobiles. Manufacturing continued to grow rapidly in the 1980s and early 1990s.
In recent years, Korea's economy moved away from the centrally planned, government-directed investment model toward a more market-oriented one. South Korea bounced back from the 1997-98 Asian financial crisis with assistance from the International Monetary Fund (IMF), but its recovery was based largely on extensive financial reforms that restored stability to markets. After the historic slump of 1997, the South Korean government lifted many restrictions of FDI including the regulations which prohibited foreign firms from making hostile takeovers of Korean enterprises.
These economic reforms, pushed by President Kim Dae-jung, helped Korea return to growth, with growth rates of 10% in 1999 and 9% in 2000. The slowing global economy and falling exports slowed growth to 3.3% in 2001, prompting consumer stimulus measures that led to 7.0% growth in 2002. Consumer over-shopping and rising household debt, along with external factors, slowed growth to near 3% again in 2003. Economic performance in 2004 improved to 4.6% due to an increase in exports, and remained at or above 4% in 2005, 2006, and 2007. With the onset of the global financial and economic crisis in the third quarter of 2008, annual GDP growth slowed to 2.3% in 2008 and just 0.2% in 2009.
Since prior to the independence South Korea was a colony of Japan, so it looked up to Japan as its role model and tried to emulate its economic model for making policy decisions related to the economy.
2) What was the impact on inbound FDI into South Korea as a result of its liberalization in 1990? Why Volvo acquired Samsung's Construction Equipment Division (CED) in February 1998?
The impact of the inbound FDI into South Korea in 1990 resulted in the entry of a number of retail giants from other countries including Carrefour and Promodes from France, Walmart and Costko from USA and Tesco from UK. Together they provided a new source of competition for Korea's indigenous discounters. This stimulated the local retailers E-Mart and Magnet to increase their operating efficiency and lower prices to keep foreigners at bay.
After the historic slump of 1997 when South Korea opened its doors to FDI for hostile takeovers of its corporations, the impact was a dramatic increase in FDI from $3 billion in 1997 to $9.3 billion in 2000. The total stock of foreign investment in South Korea surged from $5.2 billion in 1990 to $62.7 billion by the end of the decade.
Volvo acquired Samsung's Construction Equipment Division (CED) in a distress sale due to its losses for $572 million. Volvo acquired CED in an attempt to turn it into its main global base for excavators and other construction equipment due to its lower costs resulting from low wages of labour and low cost of raw material. The ultimate goal was to export 60-70 percent of the output from the plant, up from 35% when Samsung owned the plant.
Samsung Heavy Industries' construction equipment division had approximately 2,000 employees, and recorded sales of Won 760 billion (approx. USD 700 million) in 1997 and manufactured over 80 models covering excavators, forklift trucks, wheel loaders and cranes, among others. Out of the total, the forklift truck business employs 180 people and recorded sales of Won 80 billion last year. This was an attractive proposition for Volvo.
3) Why did the govt. Of South Korea permit this acquisition? What was the initial response of CED's employees and of South Korean citizens to this acquisition?
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.
Initially many Koreans viewed the new wave of foreign investment with deep suspicion, and the radical press demonised foreign companies as unwelcomed guests, feeding off the local market like leeches. The Samsung employees also viewed the takeover with deep apprehension. This fear and paranoia also resulted in the attrition of 13 percent of the 1,655 employees at the plant.
4) What are the learning for MNE's from this case? Explain the rationale for your answer.
The learning for MNE's from this case are as follows:
Country Objective: 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.
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. And since Korea's political and economic policies were made emulating Japan which already had a history of thriving industries, so little was at stake for Volvo.
Understanding the opportunities and risks before making any investment: Samsung's CED was already operating the country since 1974, so the government support was there, and since after the great slump of 1997 the South Korean government was more than willing to allow foreign investments to pump money in the ailing Korean companies which made acquisition and operation in Korea easy. Also since the setup was already there, just the financial support was required to pull the company out of the debt which it had accumulated. Volvo understood that using its managerial and technical expertise and coupling it with the low cost of production in Korea, it could make a healthy return on profit in a short time period.
Plotting countries on grids and matrices: After the data is collected on the host country, the MNE's should use grids and matrices to understand the position of the company as well as the country on the BCG matrix, for risk assessment and understand the company attractiveness.
Mercantilism: Since Korea was emulating Japan for its economic model so it supported more of exports, which was the country objective of Volvo from Korea. With the acquisition of Samsung Heavy's Construction Equipment, Volvo gains production capability in the East Asia Region.