by Edward M. Graham, Peterson Institute for International Economics
Op-ed in the Financial Times
August 4, 2005
© Financial Times
Almost a decade after the Asian financial crisis, South Korea cannot quite bring itself to fully accept the foreign investors who saved its economy.
The official attitude is confused. Some government agencies regularly roll out the welcome wagon, reminding global investors of the profits to be made in South Korea. At the same time, other agencies such as the Financial Supervisory Commission (FSC) threaten harsh penalties against minority shareholders who seek to influence Korean corporate “management decisions” without having advertised in advance, at the time of their investment, their intention to do so. This ambivalence requires foreign investors to exercise exquisite cultural sensitivity. Even then, the outsider must work hard to avoid the stigma of “foreign exploiter.”
When it comes to foreign equity funds, it seems Seoul cannot quite decide if
the “V” in VC stands for “venture” or “vulture” capital. The experience of Newbridge Capital, which recently sold its 50 percent equity position in Korea First Bank for a 400 percent profit, is illustrative. Newbridge, which invoked a Malaysian-Korean investment treaty to avoid Korean taxes on its gains, was portrayed by South Korean critics as a vulture that picks the bones of a proud homeland institution and flies away. This ignored the fact that the South Korean government owned about half of Korea First and shared almost equally with Newbridge in the spectacular capital gain.
Korean critics also forgot that when Newbridge bought the bank in 1999, Korea First was in the worst shape of all Korean national banks and had no equity value. Newbridge took a huge risk in trying to turn the bank around. Newbridge shifted the institution's focus from the corporate sector to the underdeveloped consumer credit sector. This allowed Korea First to move beyond its large portfolio of nonperforming corporate loans.
However, Newbridge had ignored the implicit wishes of the Korean government to use the banks to prop up favored but troubled companies—the very sort of unsound practices that imperiled the banking system in the first place. Korea First resisted efforts by the FSC to direct banks to advance large loans to two failing companies, Hynix and LG Credit. Korea First did advance loans to Hynix but under protest. Both companies were members of chaebols—old-style, family-controlled conglomerates that remain the backbone of Korea's economy. In short, Korea First refused to play the game by the traditional rules in Korea and was demonized as a result.
South Korean xenophobia is counterproductive. After the chairman of SK Corp spent a few months in prison for a multibillion-dollar fraud, Sovereign Asset Management, a Dubai-based fund, demanded his resignation. Sovereign's request was treated by SK as an intolerable demand from overbearing foreigners—apparently triggering the government's proposed penalties for such foreign meddling. But Korea's state goal following the financial crisis was that its companies become more responsive to the interests of nonfamily shareholders who hold majority ownership of all large chaebol-affiliated companies in Korea. This certainly would include responding to demands for change in management when the existing one was found wanting. Sovereign's problem seems to be that it represented non-Korean interests in SK.
The experiences of Newbridge and other foreign investors underscore a valuable lesson for South Korea. It can be beneficial for the country for foreign investors to acquire and operate Korean companies. The emerging turnaround of Daewoo Motors, once a failing member of the now-defunct Daewoo chaebol but now a thriving affiliate of US-based General Motors, is an example. But Newbridge's experience shows that so long as South Korea's ambivalence toward foreign investment persists, it will remain an environment in which, from a foreign investor's standpoint, “no good deed goes unpunished.”
To maximize foreign investment's contribution to South Korea's continued growth, its government must suppress its defensiveness towards foreign acquisitions and operations. It cannot, and should not, attempt to control the inevitable press sensationalism and nationalism that will accompany almost any high-visibility foreign-owned company operating in Korea. But it need not pour gasoline on the fire, as it has often done in such cases. South Korea's leaders need to focus on the long-run health, and growth, of Korea's economy. These goals can only be furthered by a less ambivalent attitude toward foreign investment in the Korean economy.
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