North Korea

As if almost on cue, state media announced that North Korea would launch a satellite in mid-December and successfully did so yesterday.   It seemed like the re-showing of a bad movie that Kim Jong Il  had used so successfully to influence global politics over the years: while some political analysts noted the launch’s proximity to both the upcoming Japanese parliamentary elections (December 16) and the South Korean presidential election (December 19), others pointed out that the launch was likely meant to coincide with the one-year anniversary of Kim Jong’s Il’s announced death. Whatever the ultimate reason for the launch, although North Korea’s truculent behavior to extract concessions will not likely change soon, the South Korean economy and foreign direct investment into the country seem more impervious to its influence.

Evidence from South Korean equity markets’ reaction to both the announcement of the missile launch and the actual missile launch shows progress in investors’ thinking. Indeed, whereas previously the mere mention of increased volatility on the Korean Peninsula would knock a few percentage points off the KOSPI and KOSDAQ (South Korea’s main equity indices), Korean markets actually showed small gains after both events were announced in December. While equity markets are not a perfect proxy for investors with a longer-term horizon, there are reasons to also be optimistic about South Korea’s FDI environment moving forward.

First, FDI inflows into South Korea have increased substantially in 2012: According to the Ministry of Knowledge and Economy, inward FDI into the country increased 33% through June of 2012 year-on-year; Q3 data also showed a substantial year-on-year increase.    While some of the increase is probably due to investors investing excess corporate balance sheet largesse and the sloshing of QE1-QE3 funds into Asia, there are also structural changes suggesting that South Korea’s economic environment may be improving.

A series of free trade agreements signed with major trading partners (including the US and EU) have slashed tariffs and, at least on the surface, have encouraged a more business friendly environment.  This is particularly true in the service industry where the reduction of non-tariff barriers and red tape is seen as a key driver of the nation’s future economic growth.  At the same time, talk of “economic democratization” in the country would seem to be positive for FDI.  Chaebol power in industries ranging from banking to manufacturing has long kept out foreign competition and kept small-to-medium enterprises (SMEs) chained to supplying for chaebol production without other options.  While greater enforcement of antitrust laws would cause increased volatility over the short-term, unencumbered SMEs would be good news for foreign investors looking to establish an operational foothold in the country.

While the change is gradual, the structure of the South Korea economy and the economic environment is changing due to trade liberalization and the hope of proposed economic reforms.  Although it will take time to come to fruition, it likely means that short of a North Korea collapse, its neighbor to the north will have less of an impact on South Korea and investment as the country moves forward.