IT Investments in South Korea Tamara Froese Wendy

IT Investments in South Korea Tamara Froese Wendy Palmer Ramprasad Suribhotla John Lang Lesley Cook 1

South Korea Agenda ØOverview ØHistory ØGeography ØSouth Korea vs. Hong Kong ØCulture and Business ØGovernment ØIT Industry ØEconomy ØIT Financing ØSWOT Analysis ØRecommendation 2

South Korea Overview Ø Grown to become one of the developing world’s biggest success stories from a devastated, agrarian economy in the 1950’s Ø Exports are strong along with recovery from the recent Asian crisis Ø Business environment is dominated by chaebol – large conglomerates that set the tone nationwide Ø Chaebol seems to be in decline – example is crisis at Daewoo 3

South Korea Overview Ø History of protectionism in business, favoring domestic competitors at the expense of outsiders Ø Rising standard of living is erasing the lowwage advantage that enabled it to rapidly develop Ø Seeking to focus on higher value products in order to compete in the global economy 4

South Korea History Ø Modern history begins with annexation by Japan in 1910. Ø Korea was treated as a de facto colony of Japan – creation of basic infrastructure. Ø Korean population was basically subservient to the Japanese, who occupied the top technical and government positions. 5

South Korea History Ø American confiscation and re-distribution of Japanese holdings back to Koreans after WW II. Ø Influx of refugees from North Korea and China Ø Emergence of the military as an important element of South Korean society. 6

South Korea Geography Ø Korean peninsula extends 1000 km from Asian peninsula – roughly the size of Minnesota Ø Bounded by Yellow Sea and Sea of Japan Ø South Korea is approximately the size of Indiana Ø Border with North Korea is the Demilitarized Zone – 38 th parallel Ø A narrow, heavily guarded strip of land that marks a cease – fire line 7

IT Geographics Industrial Clusters Ø Geographic concentrations of companies, colleges, research labs Ø Goal is to achieve synergy by sharing technologies, human resources and information Types: Academia – led Company-led Local Community Silicon Valley 8

IT Geographics Locations of Industrial Clusters in South Korea Ulsan – Automobile (Hyundai) Dae. Deok Valley- Academia Inchon/Seoul –Community Dae. Deok 21 st Century – The New Silicon Valley 9

IT Geographics Dae. Deok Valley Ø Began in 1973 as an R&D town, renamed to resemble Silicon Valley in 1998 Ø String of industrial complexes has become Korea’s foremost incubator of venture firms Ø Korean-American IT Forum established to share information on IT technology and market trends Ø Efforts to expand American investment in the Valley and marketing opportunities for its products in the US 10

IT Geographics Dae. Deok Valley Ø Central location makes it easily accessible, with access to airports, highways, and rail Ø Over 200 startups in 2001 Ø Over 700 companies by mid-2004 Ø IBM Supercomputing Technology Support Center in the area 11

Comparison South Korea with Hong Kong South Korea Hong Kong Population 48. 5 Mil(2004) 6. 85 Mil (2004) Median Age Male – 32. 8 yrs Female – 34. 7 yrs Male – 39. 3 yrs Female – 39. 6 yrs Languages Korean, English – widely taught in school Chinese (Cantonese), English – both are official Ethnicity Homogeneous (except 20, 000 Chinese) Chinese – 95%, Others – 5% Religion Christian – 26%, Buddhist – 26%, Confucianism – 1%, Other – 1% and No Affiliation – 46% Mixture of Local religion – 90%, Christian – 10% Literacy 97. 9% 93. 5% Government Type Republic Limited Democracy Legal System European Civil Law Systems, Anglo-American Law and Chinese Classical Thought Based on English Common Law Nationality Korean Chinese (Chinese 95%, other -5% GDP (Purchasing Power Parity) USD 857. 8 Billion (2003) USD 213 Billion (2003) 12

Comparison South Korea with Hong Kong South Korea Hong Kong GDP per capita USD 17, 800 USD 28, 800 Gini Index 31. 6 (1993) NA Unemployment Rate 3. 4% (2003) 7. 9% (2003) Industries Electronics, telecommunication, automobiles, chemical, ship building and steel Textile, clothing, tourism, banking, shipping, electronics, plastics, watches, toys and clocks Industrial Production Growth Rate 5. 1% (2003) -9. 2% (2003) Currency South Korean Won (KRW) I USD = 1, 191. 6 KRW (2003) Hong Kong Dollar 1 USD = 7. 7868 HKD (2003) Telephones – Main Lines Mobile Cellular 22. 87 Mil (2003) 33. 6 Mil 92003) 3. 81 Mil (2003) 7. 25 Mil (2003) Internet Users Internet Hosts 29. 22 Mil (2003) 0. 69 Mil (2001) 3. 21 Mil (2003) 0. 59 Mil (2003) Airports 102 (2003) 4 (2003) GDP- Real Growth Rate 5. 8% 0. 0% 13

South Korea Level of Economic Growth Political System Key MIS Management Issues Multinational Business and IT Strategy Culture 14

South Korea Culture and Business Ø Homogenous population with a common cultural and ethnic heritage Ø Strong nationalism and sense of discipline reflects years of subordination to foreign nations Ø South Koreans view themselves as a tightly knit national community with a common destiny Ø Group cohesion is very important 15

South Korea Culture and Business Ø While Americans are looked up to, Korean management style is quite different Ø More highly formal – not always as competent Ø Korean managers are usually hesitant about reporting upward Ø Decision making power is guarded Ø Smaller organizations usually have only one decision maker 16

South Korea Culture and Business Ø Koreans are extremely polite, friendly, and formal in their business dealings Ø Losing Face, a measure of dignity, is crucial to Koreans, as in other Asian cultures Ø This can instantly destroy business relationships. Avoidance of criticism in the presence of others is crucial Ø Koreans bow to each other, shake hands with foreigners Ø Business cards are important! 17

National IT Policies Government Emphasis Ø Privatization and deregulation of telecommunication industry resulted in structural changes throughout technology Ø Establishment of the broadband communication network caused widespread information throughout public sector Ø Government emphasis of the importance of R&D and IT training programs Ø Active nurturing of IT venture companies 18

IT Industry 1. Since the 1990’s government concentrating on 3 areas to increase South Korea’s technological competitiveness: 1. Fostering of research in basic sciences 2. Securing efficient distribution and use of R&D resources 3. Expanding international cooperation In 1999 South Korea envisioned itself to become one of Top 7 technologically advanced nations by Q 1 21 st century 3. End of 2002 total R&D investment accounted for 3% of GDP 2. 19

Telecommunications Industry Ø Developed in the 1980’s Ø Throughout 1990’s full-blown competition in the voice services market Ø New millennium brought emergence of data services Ø Industry is significantly liberalized already • Cost of telecommuting decreasing Ø As of 2003, nearly 23 million telephone main lines in use • Nearly every household has a telephone Ø 33 million+ mobile phone subscribers • Provide data, wireless internet, and video streaming 20

Computing and Internet Diffusion IT industry has developed rapidly with supervision of a proactive government Ø Approximately half of population is connected to the Internet Ø • Majority enjoy high-speed access at relatively low costs Ø Increasing number of Koreans using computerrelated communications, on-line services, and the Internet 1995 2002 On-line service subscribers 718, 000 17, 000 Internet users 366, 000 26, 300, 000 21

IT Industry (cont. ) Government recognized need for a networked society Ø Launched a plan to build an information super-highway in 1995 Ø • Stage 1 - 1997 • Stage 2 - 2000 South Korea now possesses a high-speed network infrastructure that offers high-quality data services nationwide Ø Positioned as one of the world’s “ 10 Most Advanced Countries” in terms of information networks Ø Number one country worldwide in terms of broadband Internet penetration and utilization Ø • 10 million+ subscribers Ø Broadband Internet use and expansion will enhance the quality of life for people. 22

Economy Overview Ø An impressive level of growth and integration into the high-tech modern economy Ø GDP in early 1960’s was roughly equal to poorer countries such as those in Asia or Africa Ø Today it is nearly equal to lesser economies of the EU in GDP per capita Ø Near the top ten of the world’s largest economies 23

Economy Business Opportunities Ø Automotive – parts and service equipment Ø Computer – hardware, software and peripherals Ø Electronic and Telecom equipment Ø Machine tools and metalworking Ø Medical and laboratory equipment Ø Food processing and packaging Ø Steel and Shipbuilding 24

Economy Major Economic Indicators ØSouth Korea’s GDP growth in 2003 was 6. 0% compared to Hong Kong’s 4. 8% growth rate 25

Economy IT Production Growth ØIT Production has increased from 76 trillion won in 1997 to 189 trillion won in 2002 ØIT Production share of GDP has also increased from 8. 6% in 1997 to 14. 9% in 2002 26

Economy E-Commerce ØThe Korean e-commerce market is approximately $44 billion USD Ø South Koreans spent more than $1. 6 billion shopping online in the first qtr 2004 Ø This is twice the per capita online spend of US residents 27

Economy E-Commerce Ø The South Korean B 2 B market is 89. 8% of total E-Commerce transactions Ø The US B 2 B market is 93% of the total Ecommerce transactions in the US 28

Economy IT Workforce Ø Total number of workers in IT industry is 1, 163, 000 (5. 4% of total workforce) Ø Compared to Hong Kong/US Ø Government expects a continuous growth of 4. 4% to reach a total of 1. 4 million by 2006 (6. 3% of total workforce) 29

Economy IT Workforce Ø Highest rate of growth is in computer professionals, electronic and telecommunication technicians, and other IT administrative jobs 30

Economy Effect of IT on Foreign Trade Korean IT Industry's Imports/Exports ØIT industry exports have increased from $313 billion USD in 1997 to $463 billion USD in 2002 ØThis is almost 30% of total exports for South Korea ØMajor IT exports include semiconductors, mobile handsets, and LCD panels 31

IT Financing • Financial Resources for IT Companies - KOSDAQ • KOSDAQ benchmarking NASDAQ in U. S • Used for initial public offering of high tech startup companies • Less restrictions and lower entry/exit barriers than standard Korean Stock Exchange Market 32

IT Financing • Financial Resources for IT Companies – Venture Capital • Venture Capital Industry formed in early 1980 s • KOSDAQ opened up new opportunity for investments • Less restrictions and lower entry/exit barriers than standard Korean Stock Exchange Market • Financial Resources for IT Companies – FDI • After 1997 financial crisis, the Korean government initiated tax reduction measures for high-tech and service business to cope with economic recession • Rent reduction policy also underway in industrial complex 33

IT Financing • Financial Resources for IT Companies – FDI • Less restrictions and lower entry/exit barriers than standard Korean Stock Exchange Market • Currently, there is no limitation on foreign ownership and value -added telecommunication service provider • No foreign ownership limitation on IT equipment and software business Direct Foreign Investment from 1997 - 2000 34

IT Strengths -Competitive Advantage IT Financing 35

South Korea IT Weaknesses Ø Continuous shortage of IT human resources Ø Level of IT workforce little bit higher than other Asian nations – result in relocation of manufactories Ø Software piracy is around 50%, compared to 24% in U. S (2002) - discourage the development of domestic software and foreign investment on the industry 36

South Korea IT Weaknesses ØFDI into Korea is still minimal ØDespite favorable business environment of IT industry, foreign companies hesitate due to economic crisis in 1997 and 1998 Ø Lack of core competency, higher entry barriers or high production cost for market expansion 37

South Korea IT Opportunities Ø IT Clusters / IT Education ØIncreased Demand for High Level Technology Ø E-Business Development Pointers Ø IT Service Companies and Software Development Ø IT Equipment Manufacturing 38

South Korea IT Threats Ø Korean government procurement law favors domestic over foreign suppliers Ø Foreign access to real estate controlled through the Alien Land Acquisition Act Ø Korean regulatory environment is difficult for domestic firms to work and even greater to foreign firms Ø Chaebols insistent on operating a joint venture in accordance with the overall policies and business culture of the group 39

SWOT Impact on IT Industry Impact on Telecommunication/e-commerce industry Ø Korean telecommunication market is fully de-regulated and privatized, will encourage market players to offer better product at lower prices through technology and re-engineering of business model Ø Internet usage expands to shopping, entertainments through multimedia or gaming. Ø Privacy protection and protection from fraud should be strengthened for e-Commerce industry, increase the usage in B 2 C and B 2 B market Ø The enforced policies and government efforts to protect intellectual property right will have impact on overall content provider market 40 Contd. .

SWOT Impact on IT Industry Impact on Hardware Industry Ø Korea positioned itself as leading nation in terms of semiconductor, mobile phones and LCD markets Ø Shortage of IT human resource and higher cost of labor force may force hardware manufacturers to move other nations like China and Malaysia 41 Contd. .

SWOT Impact on IT Industry Impact on Software Industry Ø IT professionals with IT cluster to share knowledge and information and commercialize eventually, will facilitate the development of software Ø Foreign Investment through either IT cluster or joint venture with domestic firms may pull the software industry to global level Ø The enforced policies and government efforts to protect Intellectual Property Right will encourage domestic development of software and foreign investment 42

IT Investment Recommendation Is Investment in the IT Industry in South Korea Recommended? 43

Framework of IT led Development Industrial Policy Environmental Factors Political, Social and Economic Environment Education & Skills Technology Policy Infrastructure IT Diffusion Industry Structure IT Production and Use Economic Payoffs Employment, Productivity and Economic Growth 44

South Korea Back-Up Material 45

Sources l l l http: //www. cia. gov/cia/publications/factbook http: //www. american. edu/carmel/jw 6194 a/Korea_files/software. htm http: //www. american. edu/initeb/cc 9979 a/hongkong. htm http: //geography. about. com/library/cia/blcsouthkorea. htm http: //www. state. gov/www/background_notes/southkorea_0006_bgn. html 46