KOREA, DOING BUSINESS IN THE
REPUBLIC OF



The Republic of Korea (South Korea) from the early 1960s through the mid-1990s was among the fastest-developing economies in the industrialized world. By the 1990s South Korea's gross national product was well over $290 billion annually, with an annual growth rate consistently maintained for three decades at over 8 percent. In 1962 South Korea's total export of goods was a mere $60 million; by 1993 its exports had reached $82 billion. The South Korean general business climate thus was arguably among the most favorable in the world.

South Korea began its economic climb by concentrating on straightforward industries with little value added, such as textile and plastics. As the economy grew in the 1970s, South Korean companies began to shift to heavy industries such as shipbuilding and steel. By the 1980s the economy was fully industrialized, and South Korean firms became world leaders in a range of products from microwaves and televisions to automobiles and major home appliances. By the early 1990s South Korean firms expanded vigorously into high technology products, for example, taking the world leadership in DRAM (dynamic random access memory) chips.

As Korea's economy grew, however, so did the demands of its labor market. As Korea's authoritarian government began to loosen its grip in the late 1980s, Korea's labor unions became more active, gaining benefits for their members through highly effective strikes. In 1989, for example, manufacturing labor costs rose 25 percent. This in turn raised overall manufacturing costs, and manufacturers began to leave Korea in order to seek lower manufacturing costs. They took advantage of the comparatively inexpensive labor pool elsewhere in Asia, notably the People's Republic of China and Indonesia.

To counter its loss of labor-intensive manufacturing jobs, South Korean firms invested heavily to provide cutting-edge technology. As a result, in 1996, South Korea officially became the 29th member of the Organisation for Economic Co-operation and Development. This brought South Korea out of the category of developing nation and fully into competition with the major industrial nations of Western Europe, North America, and Japan. This heavy investment in state-of-the-art capital goods and equipment, however, came with a heavy price attached. By 1995 Korea's current account deficit had reached just under $9 billion, and its terms of trade took a sharp downward turn in 1996, adding to a current account deficit of $23.7 billion. This, in turn, made South Korea particularly vulnerable to any economic downturn.

SOUTH KOREA AND THE EAST ASIAN
ECONOMIC CRISIS

When Thailand's currency collapsed in July 1997, South Korea was largely unprepared for the economic maelstrom into which it was pulled along with the rest of East Asia's major economies. South Korea's companies had remained competitive not only by maintaining state-of-the-art technology funded by high levels of foreign debt, but by keeping profit margins to a minimum. This policy was sustainable only for a rapidly growing economy, which Korea had, in all fairness, come to expect after 35 years of consistently high annual growth.

Nevertheless, under these conditions, even a minor economic downturn would have created great instability in Korea, and the Asian economic crisis of 1997 was anything but minor. In the last two quarters of the year, the won (Korea's currency) sank to half its precrisis value against the U.S. dollar. Even more staggering, in the last six months of 1997, total stocks listed on the Korean stock exchange lost a full 40 percent of their value, for a loss of $60 billion.

The result was a torrent of corporate bankruptcies and the weakening of even Korea's strongest chaebol (giant trading company). These, in turn, caused a near collapse of South Korea's banking industry. To counter this, the South Korean government orchestrated a $53 billion restructuring of the nation's financial institutions. One year following the beginning of the crisis, South Korea saw the closure of 5 commercial banks, 16 merchant banks, 10 leasing firms, 6 security companies, 4 life insurance companies, and 2 trust-investment firms. Additionally, Korea's unemployment rate nearly quadrupled from roughly 2 percent at the time the crisis began in July 1997 to 7.6 percent a year later in July 1998.

Faced with the threat of near total economic collapse, South Korea turned to the International Monetary Fund (IMF). In late 1997 the IMF put together a $60 billion package for South Korea. The initial results of the bailout seemed favorable. In 1998 Korea's trade surplus reached a record high point of $40 billion, a dramatic contrast to 1997's $8 billion trade deficit. Still, as the decade closed, South Korea's economy faced a difficult road to full recovery.

OVERVIEW OF THE KOREAN
ENVIRONMENT FOR BUSINESS

The success of South Korea's economy during its 35-year climb to success, from the 1960s until the economic crisis of 1997, is all the more noteworthy since the Korean peninsula has very few natural resources and the Republic of Korea is among the most densely populated of nations. South Korea is an extremely crowded country. The entire nation—including Cheju Island in the East China Sea—is only 38,316 square miles, an area that would fit easily into the state of Kentucky. Crowded into this area are more than 42 million people, well over ten times Kentucky's population.

The extreme population density is made even more a factor by the fact that 80 percent of the country is heavily mountainous, providing difficulties for farming and transportation. These rugged regions remain relatively sparsely populated. By contrast (and in part as a result), roughly three-fourths of the country's people live in urban areas. Indeed, nearly one in every four South Koreans lives in the capital city of Seoul—which has a population of just less than 11 million people. Chief among the other major cities are Pusan (4 million people), Taegu (2.2 million), and Inchon, Kwangju, and Taejon, each with well over I million people.

The Republic of Korea consists of roughly the lower 45 percent of the Korean Peninsula in northeastern Asia. At its furthest point, South Korea comes within less than 50 miles from Japan's Tsushima Islands in the Strait of Korea, and within approximately 120 miles of the main Japanese island of Honshu. Dividing the peninsula about 600 miles from the tip to the north is the approximately 150-mile long demilitarized zone that has separated the Republic of Korea from the hostile Democratic People's Republic of Korea (communist North Korea).

HISTORY OF SOUTH KOREA

Korea has a long and ancient history. The region was inhabited as early as 3000 B.C. The state of Chosen, occupying a major portion of the peninsula, was well established by the fourth century B.C. During the first century B.C., the numerous tribes of Korea centralized into three kingdoms. By the late seventh century A.D. the three kingdoms had united through a series of wars under the kingdom of Silla, which lasted roughly until the late eighth century A.D. During this period, both Buddhism and Confucianism took firm root in Korea and the foundation of much of modern Korean culture was laid. By the early ninth century A.D., Silla weakened by provincial rebellions, again divided into three—a period known as the Later Three Kingdoms. These three kingdoms were again reunited under the Koryo dynasty in A.D. 935. It was this dynasty that gave the country its English name. Four centuries later, following internal reforms, the Koryo dynasty was supplanted by the Yi dynasty, which ruled Korea through 26 monarchs from its founding in 1392 until the Japanese conquest of Korea in 1910. Korea was liberated from Japan by Allied forces following World War II.

In 1948 Korea was divided into a communist North and a noncommunist South. The Korean War broke out in 1950 after North Korea invaded South Korea in an attempt to reunify the country. The war—never officially ended—-established a cease-fire and a demilitarized zone that has divided the two Koreas since 1953. In 1991 North and South Korea set up their first commercial relations, but continuing tensions in the 1990s regarding the development of nuclear weapons in North Korea and the death in July 1994 of Kim II Sung (the first and until his death only chairman of the North Korean Communist Party) have lent a degree of political instability to the peninsula as a whole.

POLITICAL AND ECONOMIC
STRUCTURES

South Korea is a republic. The Constitutional Referendum of 1980 established what is generally called the Fifth Republic. The basic model for the republic is the U.S. tripartite system of government with a separate executive branch led by a president, a legislative branch in the form of the National Assembly, and a judiciary branch with a supreme court. While the Republic of Korea is a democracy, the Democratic Justice Party (formerly the Democratic Republican Party) has held power since it was established in 1963. Trends toward a greater freedom in election results were seen in the December 1992 election. In that election—following a series of scandals connecting government, military, and major business leaders—South Korea elected to the presidency Kim Young Sam, an outspoken dissident with no previous ties to the military.

In February 1998, amidst the worst of the Asian Economic Crisis, South Korea maintained its commitment to increased liberalization, electing to the presidency Kim Dae-Jung. It is significant that Kim Dae-Jung did not use the crisis as an excuse to reimpose more authoritarian rule on Korea. As a result, despite the economic disaster the country faced in the first years of his presidency, Kim Dae-Jung maintained approval ratings as high as 80 percent.

Still, the government of South Korea has had and continues to have a strong influence on business development in the nation. Beginning in the 1960s the government of South Korea began to formulate an industrial policy by which it established target industries and even target companies. These target industries and companies received special aid from the government to help nurture their growth. Under both Presidents Park Chung Hee and Chun Doo-Hwan, five-year plans were established to ensure the economic well-being of these companies through subsidies, tax relief, and protective tariffs. These policies contributed in part to the subsequent success of the Korean giant trading companies or chaebols. Following the economic crisis, the South Korean government forced the restructuring of the financial industry of the nation. More importantly, the government has forced the great chaebols to concentrate more on core businesses, pressured them to trade less profitable divisions among themselves to consolidate, and banned their practice of maintaining mutual debt payment guarantees among chaebol member firms.

THE CHAEBOL

South Korean business is dominated by a collection of industrial groups whose corporate organization is unique to Korea. These industrial groups are known as chaebols. Richard M. Steers, Yoo Keun Shin, and Gerardo R. Ungson defined the Korean chaebol as "a financial clique consisting of varied corporate enterprises engaged in diverse businesses and typically owned and controlled by one or two interrelated family groups." Steers, Shin, and Ungson indicated that there are six main characteristics of the chaebol: (1) family control and management, (2) paternalistic leadership, (3) centralized planning and coordination, (4) an entrepreneurial orientation, (5) close business-government relations, and (6) strong school ties in hiring policies.

Currently there are roughly 50 chaebols in Korea of varying strength and size. Over 60 percent of South Korea's gross national product (GNP) comes from the largest five of these: Samsung, Hyundai, the LG Group (formally the Lucky-Goldstar Group), Daewoo, and Sunkyong.

Chaebols consist of numerous companies tied together by internal affiliations, shared boards, and family connections. This federation of interrelated companies is often difficult to understand in the Americas and Europe since no counterparts exist in those regions.

For example, Samsung, the largest chaebol, consists of over 30 individual enterprises, each of which would be considered an independent company in the United States. Some of these Samsung "firms" are publicly held and others are privately held. The enterprises themselves cover an enormous array of industrial areas ranging from Samsung Electronics (the second-largest semiconductor manufacturer worldwide) to insurance companies (Samsung Life Insurance, Ankuk Fire & Marine Insurance); from ship-building to petrochemicals, and so on.

The other chaebols are similar in organization both in the number of affiliated companies and in the diverse sectors in which their affiliated firms are involved. Thus the LG Group consists of nearly 40 firms ranging from consumer electronics to financial services to oil refineries. The Hyundai group consists of over 25 member companies ranging from automobile to elevator manufacturing. Daewoo has more than 20 firms in its family of companies—ranging from overseas construction projects to heavy equipment manufacturing and personal computer production.

CONDUCTING BUSINESS IN KOREA

LANGUAGE.

Korean, the language of Korea, is limited to Korea and has few cognates with Western languages. As a result, many Korean businesspeople are accustomed to Westerners being unable to speak Korean. English is spoken by many educated Koreans, and due to favorable ties to the United States both in trade and militarily, the use of English is often well-received. Nonetheless, the businessperson unable to understand Korean is at a severe disadvantage in Korea. As Boye DeMente observed, the businessperson "who does not learn Korean is greatly limited in both his professional and social contacts in Korea. Those who cannot communicate at all in Korean are severely handicapped in their ability to relate to and participate in life outside the confines of the foreign community and world of international business."

Korean itself as a language has several factors affecting translation into Western languages. For example, the language reinforces hierarchical differences that are untranslatable. The businessperson unable to understand Korean therefore misses both subtle clues to levels of respect directed toward him or her, and the hierarchy established among the Koreans with whom the business is conducted.

Koreans also share the same family names in numbers virtually inconceivable in Western languages. Fifty percent of all Koreans share the same family names: Pak or Park, Lee, Choi, and Kim. The need to memorize a business partner's full name, therefore, becomes a necessity. This situation takes on even more importance when one considers the importance of family ties in hiring in many Korean companies.

GENDER ROLES.

Gender roles remain traditionally differentiated along Confucian lines in Korea. Korean women, consequently, are rarely in positions of importance in government or business. Increasingly, Korean women are receiving employment in Western companies, although their role in interacting with Korean men in Korea remains subject to socially learned value systems. Western women are also subject to these traditional attitudes as well, although significantly less so than are Korean women. To some extent, as more and more Western businesswomen play an active role in Korean business with foreigners, they are afforded what amounts to a third gender status outside of the traditional male-female dichotomy.

CONTEXTING.

Korea is what is called a high-context culture. As a result, Koreans place a strong emphasis on how a message is said rather than on just the words used. Messages are understood in terms of the full context of the communicators' relationship with one another. This particularly affects the importance for social etiquette and formality in official situations (including business meetings) and creates an emphasis on face-saving.

As a direct consequence of the high-context nature of Korean communication, it is necessary to build a personal relationship in conducting business with Koreans. Without the context of that personal relationship, little if any substantive communication can take place, and necessary levels of trust are inadequate to undertake most business arrangements.

As in most high-context cultures, Korean behavior is more likely to be governed by individual interpretation and the need to save face rather than on external rules and regulations. As a result, in Korea, personal understandings are more binding than contracts. Indeed, contracts in Korea are often seen as the beginning of a relationship that can be modified as the business progresses. This contrasts with the view of low-context cultures (such as the United States) in which the contract is viewed as not subject to change.

Finally, in high-context societies, understood or unofficial rules are often as (or even more) important as written rules. This holds true even in relations with government officials. These unwritten rules, called naekyu in Korean, are subject to the context of the situation to which they are applied. As a result, naekyu may be employed in some instances and overlooked in others, depending on the context of the individuals involved and of the situation particular to the incident at hand.

STATUS AND AUTHORITY CONCEPTION.

Status differences are strongly recognized in Korea. These differences are reinforced through language and traditional Confucianist views of authority as well as such factors as place of education, rank in the organization, and family wealth. Acknowledging differences in rank, showing respect for titles and other symbols of authority, and acting appropriately to one's own social class are important in conducting business in Korea. Foreigners, including those from ostensibly egalitarian societies, are not exempt from these standards, although most foreign business executives are perceived as belonging to the upper-middle or higher class.

NONVERBAL COMMUNICATION.

Because face-saving is so important and because contexting is so high, considerable emphasis is placed on nonverbal cues in Korean business communication. Nunch'i or the reading of facial expression is particularly important to determine negative reactions or reservations regarding a proposal. This is because the fear of making another person lose face in Korea makes most Korean businesspeople very hesitant about openly saying something disagreeable or unpleasant.

LEGAL CONSIDERATIONS.

The framework of Korea's modern legal system was laid out under the Japanese occupation of the first part of the 20th century. Like Japan, South Korea follows the civil and commercial codes of Continental Europe. As with other civil codes in Japan and Europe, Korea's civil code is comprised of general legal principles and is subject to considerably more interpretation by courts than the case law system of common law practice in the United States. Unlike older civil code countries, however, South Korea's post-occupation Civil Code was officially only put into place in 1960. This poses additional difficulties. As Kyu Wha Lee noted, "Korean courts and lawyers must interpret the laws based on only some 30 years of modern Korean legal history and a sparse body of either case decisions or commentaries by legal scholars." As a result, as Lee concluded, "from an American viewpoint, it may create an impression of too little predictability in the interpretation of laws."

Additionally, as with many high-context cultures, Korean laws are not as strictly consistent or enforceable as in low-context cultures. This is reinforced by the Confucian tradition in which lawsuits are generally brought as a last resort; most conflicts are expected to be resolved outside of the courts. As DeMente pointed out, "Lawyers in Korea do not look upon themselves as owing their primary allegiance to a client … they put the welfare of Korean society in general (and by extension, the country itself) above the interests of their clients." Lawyers in Korea are peacemakers and maintainers of harmony rather than client advocates.

CONCLUSION

The Republic of Korea maintains consulates and trade advisories in most Western nations. Many Western nations additionally maintain chambers of commerce and trade consulates in South Korea. The Republic of Korea's Ministry of Trade and Industry maintains a Korean Trade Promotion arm and the Korean Chamber of Commerce and Industry, both useful to foreign business involved in South Korea. Finally, many other organizations exist that can help the new business in Korea, such as the nonprofit Korean-American Business Institute. These organizations may be contacted for a more thorough follow-up to this brief introduction.

SEE ALSO : Cross-Cultural/international Communication

[ David A Victor ]

FURTHER READING:

Biggart, Nicole Woolsey. "Deep Finance: The Organizational Bases of South Korea's Financial Collapse." Journal of Management Inquiry 7, no. 4 (December 1998): 311-20. DeMente, Boye. Korean Etiquette and Ethics in Business. 2nd ed. Lincolnwood, IL: NTC Business Books, 1994.

Ehrlich, Craig P., and Jay K. Lee. "Governance of Korea's Chaebols: Role in Crisis, Coming Changes." East Asian Executive Reports 20, no. 3 (15 March 1998): 9, 23.

Lee, Kyu Wha. "International Business Negotiations in Korea." In The ABA Guide to International Business Negotiations, edited by J. R. Silkenat and J. M. Aresty. Chicago: American Bar Association, 1994, 157-63.

Steers, Richard M., Yoo Keun Shin, and Gerardo R. Ungson. The Chaebol: Korea's New Industrial Might. New York: Harper & Row/Ballinger, 1989.

Victor, David A. International Business Communication. New York: HarperCollins, 1992.



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