Investing in openness: The evolution of FDI strategy in South Korea and Taiwan

Abstract

Click to increase image sizeClick to decrease image size Acknowledgments We wish to acknowledge a Discovery Grant from the Australia Research Council, which supported the research for this project. We also thank Martin Painter and participants of the Hong Kong Workshop on Policy Capacity, as well as three anonymous referees for their comments. We maintain an ongoing debt to many government officials in Taiwan and Korea who have given so generously of their time and money. Notes 1. See, for example, Iain Pirie, 'The New Korean State', New Political Economy, Vol. 10, No. 1 (2005), pp. 25–42; Kanishka Jayasuriya, 'Beyond Institutional Fetishism: From the Developmental to the Regulatory State', New Political Economy, Vol. 10, No. 3 (2005), pp. 381–7; Chung-In Moon & Sang-Young Rhyu, 'The State, Structural Rigidity, and the End of Asian Capitalism', in Richard Robison, Mark Beeson, Kanishka Jayasuriya & Hyuk-Rae Kim (eds), Politics and Markets in the Wake of the Asian Crisis (Routledge, 1999), pp. 77–98. 2. Space constraints dictate our focus on just one (investment) of three core areas of developmental industrial strategy (investment, technology and finance). Analysing changes in all three areas is, however, the subject of a larger study. 3. Alice Amsden, Asia's Next Giant: South Korea and Late Industrialisation (Oxford University Press, 1989); Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization (Princeton University Press, 1990); Sanjaya Lall, 'Linking FDI and Technology Development for Capacity Building and Strategic Competitiveness', Transnational Corporations, Vol. 1, No. 33 (2002), pp. 39–88. 4. Linda Weiss & Elizabeth Thurbon, '"Where There's a Will There's a Way": Governing the Market in Times of Uncertainty', Issues & Studies, Vol. 40, No. 1 (2004), pp. 61–72. 5. Lall, 'Linking FDI and Technology Development', p. 70. 6. Wade, Governing the Market. 7. Peter Evans, Embedded Autonomy: States and Industrial Transformation (Princeton University Press, 1995); Linda Weiss, The Myth of the Powerless State (Cornell University Press, 1998). 8. These few include Weiss & Thurbon, '"Where There's a Will There's a Way"' and William W. Keller & Richard J. Samuels, Crisis and Innovation in Asian Technology (Cambridge University Press, 2003). 9. There is no disputing that so-called 'neoliberal' states intervene to influence economic outcomes, to structure markets through regulatory controls, and in response to particular external pressures or industry demands. This much is sufficiently well known that we do not need to continue arguing over these grounds. The distinction is not the simplistic one of intervention versus non-intervention, but rather the extent to which the state's involvement forms part of a broader 'strategic' ambition or approach that puts substantive national goals before abstract liberal injunctions about competitive markets. 10. Michael Mann, States, War and Capitalism (Basil Blackwell, 1988); Peter Hall & David Soskice, Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Oxford University Press, 2001). 11. Steven Vogel, Freer Markets, More Rules: Regulatory Reform in Advanced Industrial Societies (Cornell University Press, 1996). 12. Keller & Samuels, Crisis and Innovation. 13. Peter Gourevitch, Politics in Hard Times: Comparative Responses to International Economic Crises (Cornell University Press, 1986). 14. For example, Moon & Rhyu, 'The State, Structural Rigidity and the End of Asian Capitalism'; Eul Soo Pang, 'The Financial Crisis of 1997–98 and the End of the Asian Developmental State', Contemporary Southeast Asia, Vol. 22, No. 3 (2000), pp. 570–89. 15. Colin Crouch & Henry Farrell, 'Breaking the Path of Institutional Development? Alternatives to the New Determinism', MPIfG Discussion Paper, No. 02/5 (2002); Colin Crouch, 'Models of Capitalism', New Political Economy, Vol. 10, No. 4 (2005), pp. 439–56. 16. See, for example, Steven Vogel's illuminating work on German and Japanese 'reform': 'The Crisis of German and Japanese Capitalism: Stalled on the Road to the Liberal Market Model', Comparative Political Studies, Vol. 34, No. 10 (2001), pp. 1103–34. 17. For example, the FCIA prohibited FDI that would involve foreign firms competing directly with Korean firms, or that would threaten their viability in any way; it prohibited mergers and takeovers outright and explicitly prioritised joint ventures over other types of FDI, as these were more likely to result in technology and skill transfer. The FCIA also stipulated local content requirements, export minima and regulations specifying the types of products that foreign firms could produce, as well as the provision of incentives for foreign firms willing to engage in technology licensing and transfer. Because these policies have already been amply discussed elsewhere, the details need not be repeated here. See Russell Mardon, 'The State and the Effective Control of Foreign Capital: The Case of South Korea', World Politics, Vol. 43, No. 1 (1990), pp. 111–37; Bernie Bishop, Foreign Direct Investment in Korea: The Role of the State (Macmillan, 2002), ch. 2. 18. On the loss of bureaucratic cohesion in this period, see Elizabeth Thurbon, 'Ideational Inconsistency and Institutional Incapacity: Why Financial Liberalization in Korea went Horribly Wrong', New Political Economy, Vol. 8, No. 3 (2003), pp. 341–62. 19. Bishop, Foreign Direct Investment in Korea, ch. 6. 20. Ibid., pp. 121–4. 21. Taik-Hwan Jyoung, 'Korean Investments in Latin America', unpublished paper written under the auspices of the Project on Latin America and the Pacific Rim, University of California, San Diego (1997), pp. 7–9. 22. Roy W. Shin, 'Implementation of Science and Technology Policies for Global Competition: Korea's Electronics and Telecommunications Industries', Journal of International Development, Vol. 10, No. 2 (1998), p. 728. 23. Jyoung, 'Korean Investments in Latin America', p. 13. 24. Korea Chamber of Commerce and Industry, 'Foreign Direct Investment in Korea', 21 January 2003, http://english.korcham.net/bus/bus03_4. 25. Of Korea's 1195 sectors (based on the Korean Standard Industry Classification) 1148 are now open to FDI, and of these only 21 have FDI restrictions in place. English translation of the FIPA prepared and published by Korea Investment Service Centre (KISC) under the guidance of Korea Legislation Research Institute and the Ministry of Commerce, Industry and Energy, 2001. 26. On the similarities between 1980s and 1990s restructuring efforts, see Linda Weiss, 'Guiding Globalisation in East Asia: New Roles for Old Developmental States', in Linda Weiss (ed.), States in the Global Economy: Bringing Domestic Institutions Back In (Cambridge, 2003), pp. 251–2. 27. Bank of Korea figures reported in 'M&A funds account for 70 pct of total FDI in Korea', Korea Times, 4 March 2002. 28. While foreign companies may be willing to license or transfer low- to medium-end technologies and skills to companies in which they do not hold a substantial share, they are highly unlikely to transfer cutting-edge technologies or marketing and distribution skills unless they hold a significant stake in the recipient company. 29. Pirie, The New Korean State, p. 38. 30. Elizabeth Thurbon, 'The Developmental Logic of Financial Liberalization in Taiwan', in W. R. Garside (ed.), Institutions and Economic Development (Routledge, forthcoming). 31. According to the BOK, 'The need for foreign capital in Korean banks has significantly fallen in view of the country's foreign currency reserves and healthy state of financial industry'. Reported in 'Curbing foreign ownership of Korean banks', Business Times Singapore, 23 December 2003. 32. 'South Korea offers to ease rules on Chaebol ownership in Banks', Agence France Presse, 6 May 2004. See also 'Equity funds set to counter foreign rivals', Korea Herald, 6 December 2004. 33. 'Toughened disclosure rules', Korea Herald, 6 December 2004. 34. An observation made by a MOCIE representative during an interview in 2004. 35. Interview with Wan Soon Kim, Foreign Investment Ombudsman, Seoul, February 2004. 36. Donghyun Park & Insoo Kang, 'Foreign Direct Investment in Korea: Recent Developments and Prospects', Asian Affairs, Vol. 27, No. 1 (2000), p. 13. 37. The parallels should not, however, be overplayed: to the extent that the Koreans engage increasingly with FDI, they do so on the basis of a much greater degree of independent technological capability than the Singaporeans. See, for example, John Mathews, Tiger Technology: The Creation of a Semiconductor Industry in East Asia (Cambridge University Press, 2000). 38. MOFE, DJnomics: A New Foundation for the Korean Economy (Korea Development Institute, 1999), p. 159. 39. iParks provide Korean companies with such supports as subsidised office space, assistance with securing finance, marketing advice and matchmaking with foreign firms. 40. 'Korea's US BioValley plan generates spy rumours', Korea Herald, 10 April 2002. 41. Keller & Samuels, Crisis and Innovation. 42. Nevertheless, Taiwan was far less dependent upon foreign investment than other developing nations; during the 1970s foreign investment averaged only 4 per cent of gross capital formation and 8 per cent of manufacturing investment in Taiwan. Wade, Governing the Market, p. 149. 43. The Investment Commission of the Ministry of Economic Affairs was formally responsible for screening and approving foreign investment, and was made up of representatives from the IDB, the Council for Economic Planning and Development (CEPD) and the Ministry of Finance. In reality, however, the IDB was responsible for much of the evaluation of the congruence of FDI proposals with developmental plans. Wade, Governing the Market, p. 205. 44. Lall, 'Linking FDI and Technology Development', p. 80. 45. Wade, Governing the Market, p. 152 46. Alice Amsden & Wan-wen Chu, Beyond Late Development: Taiwan's Upgrading Policies (MIT Press, 2003). Although, as Amsden and Chu point out, it was the government's efforts to adopt and adapt this technology via large-scale R&D investments with local firms that really facilitated the rise of Taiwan's dynamic electronics companies. 47. Ibid., p. 11 48. International Commercial Bank of China (ICBC), 'ROC Outward Investment: Present Status and Future Prospects', ICBC Economic Review, No. 314 (2000). 49. Ibid. 50. Incentives including low-interest loans from the Central Bank of China (CBC) and access to a US$20 billion investment fund overseen by CEPD. 51. Thurbon, 'The Developmental Logic'. 52. Restrictions remain in certain types of agriculture and fisheries, the manufacture of chemical materials and products, and the manufacture and repair of defence equipment and machinery (besides military aircraft), as well as certain types of transport, communication, financing and broadcasting/television. 53. Mei-Chih Hu & John A. Mathews, 'National Innovative Capacity in East Asia', Research Policy, Vol. 34, No. 9 (2005), pp. 1322–49. 54. ICBC, 'ROC Outward Investment'. 55. Amsden & Chu, Beyond Late Development. 56. Interview with IDB officials, Taipei, April 2004. 57. Ibid. 58. Ibid. 59. Interview with TAITRA officials, Taipei, April 2004. 60. Interview with the IC officials, Taipei, April 2004.