Pestle Analysis

PESTLE analysis

PESTLE ANALYSIS Summary South Korea has been politically stable since becoming a democratic state. However, its relationship with North Korea continues to present a strong challenge. South Korea fell into a brief financial crisis in 1997 due to structural weakness in the banking sector, however strong economic and financial reforms quickly countered the downturn and put the country back on a growth path by the following year. With the opening up of markets after the financial crisis in 1997, the country became one of the largest technology markets in the world. As far as social issues are concerned, the country has low population growth and fertility rates, leading to an ageing population. Furthermore, the country has a highly qualified labor force, which makes it possible to both produce and commercialize advanced technologies. The country is also well equipped with extensive broadband network and telecommunication facilities. Legal procedures in the country are time consuming and complex, which makes it very difficult for foreign investors. The environmental scenario of the country is characterized by the breach of emission standards, which is reaching unreasonable limits in spite of its relatively small area and population in comparison to other countries.

Republic of Korea: Country Analysis Report – In-depth PESTLE Insights © Datamonitor. This brief is a licensed product and is not to be photocopied

Published 06/2008 Page 11

PESTLE analysis

Political analysis Overview South Korea had a turbulent political past, characterized by frequent changes in government, little political freedom and military coups. However, in 1986 the democratic process was streamlined and the president was vested with maximum power. Due to the centralization of authority, policy making became straight forward. The president is the chairman of all the committees, which makes it very easy to co-ordinate and run the whole system. The country also has strong political and economic support from the US. Although South Korea has been a democracy for over two decades, the military continues to wield considerable power. There is a high-degree of political violence in the country and relations with North Korea continue to be tense. This is costing South Korea both economically and politically. There have been frequent summits between the two countries; however they have so far failed to reach a consensus.

Table 3:

Analysis of South Korea’s political landscape

Current strengths

Current challenges

Centralization of power

▪

Political will for economic reforms

▪

▪

▪

Military influence in South Korean politics

Political violence

Strong foreign relationships

▪

Future prospects

Confidence building measures with North Korea

▪

Future risks

Uneasy relationship with North Korea

▪

Strengthening relations with the EU

▪

Source: Datamonitor

DATAMONITOR

Current strengths Centralization Centraliza tion of pow er

In South Korea, the president plays a key role in both the economy and polity of the country. The president is the head of state, head of government and chief of the armed forces. The president has the power to execute and amend any laws or policies of the country. He also has the power to dissolve the national assembly. Due to the centralization of power in the hands of the president, he has to regulate and solve all administrative issues. All the committees in South Korea are headed by the president and are known as presidential committees. This makes it very favorable in terms of consistency and mutual co-operation and interdependence among various national and state bodies. The new president, Lee MyungBak, has created the ‘Korea 747 Vision’, a policy completely focused on all round economic development. He aims to expand growth to 7% and double per capita income to $40,000. One of the policy's most ambitious aims is to make the country the seventh largest economy in the world in a decade’s time.



PESTLE analysis

P o l i t ic a l w i l l f o r e c o n o m i c r e f o r m s

South Korea faced its toughest challenge during the Asian financial crisis which provided stern tests for both the president and the country's economic policies. At that time, the country was following a conservative economic policy that had been passed down through various political administrations. In 1997, this was changed to liberalized market policies. In the aftermath of the financial meltdown, South Korea's willingness to undertake tough reforms and adopt more economic freedom allowed the economy to swiftly bounce back from the financial turmoil. This was largely due to Kim-Dae Jung's effective use of his presidential power. Many reform measures were employed to guard against the weakness that led to the crisis. Non-performing loans have been effectively dealt with through extensive financial reforms, and the banking sector has been strengthened. As a result of swift and effective political intervention, the country's growth curve quickly returned to normal and the Asian financial sector stabilized. Continued economic reforms by the government are the main drivers of the development of South Korea. S t r o n g f o r e i g n r e l at i o n s h i p s

After the Japanese–Korean War ended in 1945, it was the US which turned the country's economic f ortunes around. As a result, the country’s relationship with the US remains very firm, and South Korea concluded a free trade agreement with the US in June 2007. The US military troops stationed in the country provide support to the South Korean army, as relations with North Korea continue to be volatile. Furthermore, the country also has very strong ties with China, Japan and Russia. South Korea has been a member of the United Nations since 1991 and has diplomatic relations with almost 170 countries. The former foreign minister Ban Ki-moon is presently the Secretary General of the United Nations, which is likely to help the country improve relations with North Korea, and also strengthen ties with other nations.

Current challenges M i l it a r y i n f l u e n c e i n S o u t h K o r e a n p o l i t i c s

The military staged coups in 1961 and 1980 and it continues to influence political decisions and policies. Although 1986 saw the direct election of a president formulated by the constitution, the constant military threat posed by North Korea means that military leaders still exert considerable influence over the country's political decisions. After a short naval battle with North Korea in 2002, a summit was held in North Korea in 2004 in an attempt to improve relations between the two countries. Although the summit did not result in any major changes, one third of the US troops stationed in South Korea were withdrawn. As a result, both military leaders and other political parties in South Korea demanded that security issues be prioritized among national policies, which has perpetuated the military's strong influence in South Korean politics. Political violence

South Korea has been witnessing political violence in the past four decades. Political violence in the country began due to different protests staged by the students to overthrow the presidents during 1960s and 1970s. By the late 1980s, violenceprone student radicals, although a small minority, demonstrated increasing effectiveness in organizing temporary lock outs and arson against facilities. In 1988, under the general guidance of the National Association of University Student Councils or the Seoul Area Federation of Student Councils, small groups of students staged more than two dozen raids on the US diplomatic and military facilities. After the presidential elections, the political violence seems to have reduced but it could be still used as a means of resistance.



PESTLE analysis

Future prospects Confidence building measures with North Korea

The two Koreas are still officially at war and the situation remains fraught. In early October 2007, a historic Korean summit was held in Pyongyang, North Korea. During this summit, both countries agreed that a solution to the historic rivalry over border issues needs to be found and as such both sides have signed a peace declaration aimed at replacing the armistice with a permanent peace treaty. In addition, the summit also resulted in an agreement between North and South Korea to establish a joint economic area in the border port city of Haeju in 2008. The proposal included joint fishing areas along the sea border and a joint shipyard at Haeju. This is seen as a necessary first step towards thawing relations between South and North Korea.

Strengthenin g relations with the EU

The EU and South Korea are major commercial partners, with mutual trade reaching $80 billion in 2006. The EU is South Korea's second biggest trading partner after China. In May 2007, the first round of negotiations on a possible free trade agreement was held and negotiations have been ongoing since then, with the sixth round of negotiations completed at the end of January 2008. Among other things, negotiations have focused on creating a uniform auto standard for the automotive industry. Both parties were also keen to solve tariff and quota issues. If this agreement comes into force, it will provide South Korea with very lucrative future trade prospects, as the country strengthens its ties with other EU nations. Incidentally, the EU is also one of the biggest investors in South Korea.

Future risks U n e a s y r e l at i o n s h i p w i t h N o r t h K o r e a

South Korea has made consistent efforts towards reconciliation with North Korea. However, provocative military actions and North Korea's efforts to build and acquire nuclear weapons are a cause for concern. Moreover, the intrusions by the North-Korean ships in the South-Korean seas ended in a short naval battle in 2002. In late 2007, the summit resulted in boosting cooperation between the two countries especially in the area of transportation and logistics. However, the intrusions by the North-Korean ships into South-Korean seas have continued even in 2008, which have increased the tension between the two countries. Furthermore, North Korea warned South Korea over the alleged sending of the propaganda leaflets into its territory in May 2008 with the concomitant escalating of tensions between the two countries. The relations between the two countries continue to remain tense and North Korea continues to remain a major military threat to South Korea.



PESTLE analysis

E c o n o m i c a n al y s i s Overview The economic structure is well supported by government policies in South Korea. Due to strong economic reforms, the country has continued to experience steady economic growth. The powerful export sector is the main reason for economic growth in the country. Although the country is developed in terms of all-round economic health, and provides a good investment climate, it still suffers from structural weaknesses due to very stringent rules on imports and FDI. These restrictions are affecting the domestic market and make it internationally uncompetitive. Even though the country is on a path of economic growth, it has been affected by declining FDIs. Furthermore, the nuclear test conducted by North Korea has created uncertainty among investors in South Korea, which has led to instability in markets.

Table 4:

Analysis of South Korea’s economic landscape

Current strengths

Current challenges

Powerful export sector

▪

Successful economic reforms

▪

▪

▪

Low level of imports Declining level of FDIs Low intensity of competitiveness

▪

Future prospects

Future risks

Competitive tax policy

▪

Liberalized service sector

▪

▪

▪

Nuclear crisis Growing local hatred for foreign companies

Implementation of free trade agreements (FTA)

▪

Source: Datamonitor

DATAMONITOR

Current strengths Powerful export sector

South Korea is now the world’s 12 th largest economy, growing at a rate of 5.4% in the third quarter of 2007. This was largely due to exports, which were on a roll, with the country's export volume standing at $325.5 billion in 2006, compared to $284.4 billion in 2005. According to the central bank, the export pattern is going to be similar for the coming years. Most of this comes from electrical and electronic products, which brought in about $91 billion. South Korea is now one of the largest producers of computer memory chips and mobile phones. The magnitude of exports acts as a major attraction drawing foreign investors to South Korea.



PESTLE analysis

Successful economic reforms

The Asian financial crisis of the late 1990s exposed a variety of structural weaknesses in the South Korean economy. South Korea’s recovery from the crisis, in terms of gross domestic product (GDP) growth, was remarkable. GDP shrank by 6.7% in 1998, but grew by 9.3% in 1999. This was largely due to financial and economic restructuring carried out by the government. As a part of the reforms, many banks were nationalized. The country also went on to liberalize restrictions in the capital and foreign exchange markets. As a result, the country attained macro economic stability and demonstrates the strong structure of economic reforms in South Korea. This liberalization is also slowly helping the country to reduce its reliance on exports.

Current challenges Low level of imports

In South Korea, the level of imports is comparatively low compared to its Asian neighbors. The import tariffs, duties and restrictions are highly regulated and as a result, the country’s import volume is considerably lower compared to other countries. Consequently, the imports required for production are scarce both for domestic and foreign corporations. Imports to South Korea stood at $356 billion in 2007 compared to $917 billion for China and $570 billion for Japan during the same year. Declining level of FDIs

The FDI regulations are still not streamlined in South Korea in comparison to its neighbors. In spite of being a developed country, South Korea is still unable to attract FDI into the country due to absence of clear policies and streamlined processes. The FDI stock in South Korea in 2006 was around $118 billion compared to $699 billion in China. With India too becoming a strong contender for FDI, it will be quite a challenge for South Korea to attract FDI into its own territory. Furthermore, the clear public animosity, insufficient transparency and over regulation have further driven away FDI. L o w i n t e n s i t y o f c o m p e t i t i v en e s s

After emerging from the Asian financial crisis, South Korea made great strides in its economic reforms to put the economy back on track. However, the country has yet to commence its second wave of market oriented reforms to make the domestic market more competitive. Small and medium scale enterprises in the country account for almost 80% of employment and 40% of exports, but these markets are still under government regulation and have strong interventions from trade unions, which has resulted in a low level of competitiveness against emerging regional rivals. According to government sources, foreign investment in the country is also decreasing due to a lack of support for foreign companies. Foreign investment inflow fell from around $11.5 billion in 2005 to around $10 billion in 2007.

Future prospects C o m p e t i t i v e t ax p o l i c y

The previous tax policy had a differentiated tax system for domestic and foreign corporations. In tax reforms implemented in 2007, the government brought in an equitable tax system, with a corporate tax rate of 25% for both domestic and foreign corporations. This should augur well as it will not only attract more foreign firms to the country but also increase



PESTLE analysis

competition. This tax rate is certainly lower than its rivals' China and Japan and is expected to be cut further to 20%, which will bring greater fiscal freedom to markets. Liberalized service sector

South Korea is historically known for its technological innovation and possesses a very advanced form of technology development. The country is one of the largest producers of computer peripherals and memory chips, which makes it a crucial driver in the global service sector. The country is yet to reform its service sector and open it up further. A highly educated work force with the requisite technical skills puts South Korea in an advantageous position in the services sector. This provides it with a good opportunity to become a world class service sector destination, allowing it to compete with several other Asian majors like India and China. Implementation of free trade agreements (FTA)

Liberalizing South Korea's markets will provide a renewed chance to improve trade freedom, and also help the economy to implement effective economic reforms. Implementing FTAs will send a powerful signal to foreign and domestic investors and provide a new growth engine to improve competitiveness. The FTA between South Korea and the US was ratified in 2006 and the country is inching towards a FTA with the EU. These FTAs will greatly improve future prospects of economic expansion in South Korea.

Future risks Nuclear crisis

The constant tension with North Korea is creating economic ramifications in South Korea. Worries over North Korea's nuclear ambitions have now been branded as the biggest hazard to the South's economy by the nation's central bank. The nuclear test conducted by North Korea has been credited with causing a range of problems, from the falling stock market to hollowed-out foreign investment. Although the recent summits have improved relations, there is still a lot of uncertainty with regard to its relations with North Korea. This has now become a major disadvantage for the country’s economic growth prospects. Growing local hatred for foreign com panies

There is a growing local hatred surrounding foreign companies in South Korea. There is strong resistance to foreign investment from labor unions in South Korea, which are against both the US-Korea FTA and also the proposed EU FTA. This resistance is a significant threat to foreign investors and will also hamper the level of exports due to increased protests, strikes and lockouts.



PESTLE analysis

Social analysis Overview In South Korea, the wages are generally higher than other neighboring countries and the labor force is well educated and technically qualified. The country’s literacy rate is one of the highest in the world; however, the country's low fertility rate still presents a significant challenge as South Korea is faced with an increasingly ageing population. In spite of rapid urbanization, government spending on social welfare is low. The labor unions are resistant to the rising wage disparity, which continues to be a serious problem for South Korea.

Table 5:

Analysis of South Korea’s social landscape

Current strengths

Current challenges

High wages

▪

▪

Low fertility rates

Highly educated workforce

▪

▪

Rapid urbanization

▪

Future prospects

Future risks

▪

Ageing society Low social welfare spending

Low unemployment rate

▪

Rising awareness of human rights

▪

▪

▪

Source: Datamonitor

Wage disparity Rising power of labor unions DATAMONITOR

Current strengths High wages

South Korea has one of the highest wage levels in Asia. The minimum wage payable in South Korea is $3.84 per hour, $30.74 per day and $868.27 per month. This is much higher than the wages paid by its regional counterparts. High wages also mean that there are a large number of people willing to join the industry and this continuous flow of people into the sector ensures that there is continuous production, and a consistent output. Moreover, the level of output and productivity is higher due to infrequent layoffs. High wages have also enhanced the standard of living in the country which is higher than any regional economy in Asia. Highly educated workforce

In terms of growth of productivity, from 1994 to 2005, South Korea was ranked second with annual average gains of 3.9% according to Employment Outlook published by the OECD. Over 97% of the labor force in South Korea possesses either a college education or vocational training backgrounds. The work force at senior levels has an immense exposure to international experience and, according to the OECD, the country ranks fifth in terms of educated workforce in Asia. In addition, South Korea fundamentally has one of the highest literacy rates of 97.9% for the total population.



PESTLE analysis

Rapid urbanization

After the Korean W ar, rapid industrialization brought on a massive population shift from rural to urban areas. Approximately 30 million rural dwellers have migrated to urban areas over the last four decades. As a result, the urban ratio increased from 35.8% in 1960 to 88.5% in 2002, with the urban population increasing by approximately 800,000 a year. The major characteristic of urbanization has been the concentration of people and economic activities in the metropolitan region of Seoul. The population in the Seoul Metropolitan Area grew from 5 million (20.8%) in 1960 to 21 million (46.3%) in 2000. Furthermore, the country was supported by the US since the time of attainment of independence from Japan. This longstanding relationship with the US provided the country with strong infrastructural support which contributed to the development of its cities.

Current challenges Low fertility rates

South Korea has one of the lowest fertility rates in world. The total fertility rate was as low as 1.28 children per woman compared to 1.75 in China and 2.81 in India. According to a special report by the UN Population Fund, State of World Population 2007, South Korean women registered the fourth lowest fertility rate among the 155 nations surveyed. The high divorce rate in the country plays a large part in this. South Korea has one of the highest divorce rates in the world, although the US still tops this list. Continuation of low fertility rates will have a negative impact on the population growth of the country, which in turn will have an adverse effect on the economic growth through declining labor force. Ageing society

Due to the low fertility and high divorce rate, South Korea is now classed as one of the ageing societies in the world. In 2006, the population aged between 0–14 comprised just 18% compared to more than 31% in India. In addition, the population above 65 years was more than 9% compared to 5% in this population group in India during the same period. This causes a huge concern in terms of future productivity and economic activity. L o w s o c i a l w e l f ar e s p e n d i n g

The nation's social welfare spending has grown at 18.3% annually over the 13 years from 1994, and the percentage share of GDP of social welfare spending has doubled. Nevertheless, South Korea's social welfare spending as a percentage of GDP is about half that of the US and Japan, and about a third of the European average. The percentage of people receiving a public pension among persons aged 65 or over was 13.9% in 2004, compared to 60–70% on average in advanced European countries. Despite rapid growth in welfare spending since 1987, the indices show that South Korea's welfare standard has a long way to go.



PESTLE analysis

Future prospects Low unemp loyment rate

The unemployment rate in South Korea is one of the lowest in the world, which is mainly due to labor market reforms in the early 1990s. In 2007, it stood at just 4%. In order to systematically cope with unemployment problems caused by a slowdown in economic growth; the government passed several major laws. The Employment Insurance Act (1993), the Basic Employment Policy act (1995) and the Vocational Training Promotion Act (1997), were some of the policies which laid the ground work for South Korean employment policies. Various efforts are further being made to improve employment support services. For instance, services that are aimed at specific, vulnerable groups such as the “YES” program for young people and "Restart" for the homeless; are being rolled out. These programs provide encouragement and give students the opportunity to venture into higher studies and new avenues. R i s i n g a w a r en e s s o f h u m a n r i g h t s

There has been an increased awareness of human rights among the citizens of South Korea in recent times. The social atmosphere in South Korea is now such that judicial or police authorities cannot detain people at will, as was the rule in the past. For example, the number of prisoners has fallen mostly due to democratic governance and regulation. This in turn quelled the student unrest, and on the whole increased awareness about the protection of human rights. The continued awareness and respect of human rights is therefore expected to lead to more harmonious living conditions in South Korean cities.

Future risks Wage disparity

The percentage of earned (labor) income out of total national income fell from 63.1% in 1996 to 58.2% in 2002, before increasing again to 61.4% in 2006, although this is still below the figures recorded before the 1997–98 Asian financial crisis. The wage disparity of the lower 10% of earners versus the upper 10% rose to a factor of 5.4 in 2006 from 4.8 in 2001, meaning that wages for the top deciles of earners were nearly five and a half times greater than those of the lowest deciles of earners, a factor higher than the US under the same parameters. South Korea also held a dubious first place in terms of abuse and discrimination against part-time and short-term contract workers among OECD members. While the unemployment rate is comparably low and real wages have increased, both the quality of employment and structure of income redistribution pose a future risk. Rising power of labor unions

South Korea's labor market flexibility has been hampered by high costs and the militancy of the country's labor unions. Despite noticeable progress in past years, labor laws are still viewed as restrictive by the standards of many other countries in the region. Union membership reached an apex in 1989 with 19.8% of all workers participating in some sort of labor organization. However, union membership has recorded a downward trend since then, receding to around 12% during 1997–2001 and falling further to 10.3% in 2005. But even after such a drop, the unions still influence many political decisions and their hatred for foreign corporations may turn out to be a risk to the country in future.



PESTLE analysis

Technological analysis Overview South Korea has been historically known for technological innovation. Moreover, with a highly educated workforce and well equipped infrastructural facilities, the country is a favored destination for R&D. South Korea is the most wired country, in terms of communications and internet facilities, in the world. The gap between innovation and commercialization is also very small in South Korea. There are about 900 R&D centers that include foreign participation in South Korea, although over regulated governance and low cost competitive neighbors cause a major threat to the country.

Table 6:

Analysis of South Korea’s technology landscape

Current strengths

Current challenges

Robust telecom sector

▪

▪

Presence of large global and domestic players

▪

Future prospects

Future risks

▪

Scarce natural resources Rising R&D costs

Government policies promoting R&D

▪

Growing R&D centers

▪

▪

▪

Foreign companies pulling out of the country Over-regulated governance

Commercialization of new ideas

▪

Source: Datamonitor

DATAMONITOR

Current strengths Robust telecom sector

South Korea has world's highest broadband internet subscription rate, while the country’s 68% mobile-phone penetration rate is also one of the highest in the world. South Korea also introduced the world's first commercial wireless broadband (WiBro), satellite digital media broadcast (DMB), and telephonic-DMB services. WiBro services began in 2005 and are now being run on a commercial basis (in August 2006, Sprint of the US adopted Samsung WiBro technology as its wireless communication platform). Satellite digital multimedia broadcast (DMB) services began on a commercial basis in June 2005. Terrestrial DMB began on a pilot basis in the second half of 2005 and was placed on a commercial footing in 2006. On the mobile telecom front, commercial WCDMA services began in 2005, HSDPA was due to begin in 2006 and HSUPA in the first half of 2007. All these developments act as major attractions to foreign technology investors to set up their R&D centers in the country. P r es e n c e o f l a r g e g l o b a l a n d d o m e s t i c p l a y e r s

The powerhouses of South Korean economic growth are its world-leading industries that act as powerful draws to foreign investors. South Korea is the world's sixth largest automobile producer, and ranks first in DRAM semiconductor manufacturing, and LCD production. South Korean mobile phone producers Samsung Electronics, LG Electronics and



PESTLE analysis

Pantech are among the world's largest mobile firms. Major South Korean companies have joined the celebrated Fortune 500 list.

Current challenges Scarce natural resour ces

South Korea has very few natural resources as the majority of the country is covered by high mountains. As a result, any natural resources required for advanced biological research are hard to come by, and the scope of such activities is completely restricted to imports of such materials. This presents a problem in terms of encouraging technological advancement in biotechnology and related areas. Rising R&D costs

Added to high wages and strict labor laws, the cost of maintaining an R&D center in South Korea i s rising. This problem i s compounded by scientific personnel in emerging economies like China and India demanding much lower wages for the same productivity. As a result, the R&D costs in South Korea have now become a worrying factor for many MNCs and without radical changes to the cost structure; the country is likely to be further disadvantaged.

Future prospects Government policies promoting R&D

The South Korean government has formulated favorable policies to encourage foreign firms to locate their research centers in the country. These policies are focused on developing new growth engines and making industrial improvements. The government has employed a variety of methods to attract the R&D centers of cutting-edge institutions and corporations such as Pasteur (France), Cavendish, University of Warwick (the UK), Novartis (Switzerland), Intel, HP, IBM and Microsoft (the US). As part of these efforts, in 2003, the South Korean government implemented the "Free Economic Zones Act" to improve the business environment in South Korea and bring it to the same level as that in advanced nations. The government provides tax breaks and financial support to foreign firms moving into government-designated Free Economic Zones (FEZs) in addition to various other measures aimed at boosting foreign investment in R&D. The consistency in the policies is expected to improve R&D prospects in South Korea. Growing R&D centers

Multinational corporations have begun to pay serious attention to the rapid growth in the technology sector and the state-ofthe-art technologies available in the South Korean market. As a result, there has been a dramatic increase in the number of corporate research institutes and R&D centers built in South Korea. These research facilities are a key element of most companies' headquarters. As of September 2005, the total number of foreign investment R&D centers reached 901, including 137 corporate R&D centers that are wholly owned by foreign investors. The US owns 52 R&D centers (100% foreign owned) in the country, followed by Germany, which owns 17 R&D centers. The Netherlands, France, Switzerland, Singapore, and China also own R&D centers in South Korea. Growing number of R&D centers will enhance the country’s research competence.



PESTLE analysis

Comm ercialization of new ideas

South Korea is known for its high technology innovation and is also very quick to implement ideas, resulting in a very small time gap between innovation and commercialization in South Korea. High technology exports contribute almost 9% to GDP every year. This shows the consistency of the process and also a low turnaround period.

Future risks Foreign companies pulling out of the country

Although the South Korean government has a favorable at titude towards investments into R&D, t here is a lot of local hatred against foreign companies. This has been a growing concern among foreign companies operating in South Korea and may lead to further problems due to the influence of the labor unions. In January 2007, chip maker Intel Corporation announced closure of its R&D center in South Korea. Although the company announced this as a strategic move to consolidate its centers around the world, the South Korean government will need to monitor the R&D environment to ensure that this does not develop into a trend among large R&D companies. Over-regulated gov ernance

Government intervention has always been a long standing weakness among East Asian economies and South Korea is no exception. With more and more markets opening up, there is a growing need to reduce restrictions, various business procedures and processes. Moreover, increased competition from neighboring economies will pose a risk to further investment in South Korea if these processes are not streamlined.



PESTLE analysis

Legal analysis Overview The South Korean judiciary is based on the US and German court systems and juries are not present during trials. The country also has an exclusive constitutional court, which keeps a check on government decisions and law making. Very few students pass the tough law examinations in South Korea and, consequently, the country is facing a shortage of judges. After becoming a member of the OECD, South Korea gained the status of a developed country and it provides one of the most attractive regulatory incentives for industrial development among the OECD nations. The country earns a very large income from exports, which makes it an attractive destination for FDI. However, procedural delays and hostility towards foreign investors act as a discouragement.

Table 7:

Analysis of South Korea’s legal landscape

Current strengths

Current challenges

Regulatory incentives

▪

Favorable tax policies

▪

▪

An exclusive constitutional court

▪

Future prospects

Future risks

▪

▪

Absence of juries Inefficient customs operations Weak IPR enforcement

Judicial system similar to US and Germany

▪

Advantage of tax abatements and tax treaties for FDIs

▪

▪

▪

Source: Datamonitor

Judges quitting for private practice Low rate of students clearing the la w examination DATAMONITOR

Current strengths R e g u l at o r y i n c e n t i v e s

A major attraction for investing transnational companies is the array of incentives offered by the South Korean government. Among all the O ECD countri es, South Korea offer s f oreign investor s some of t he best incentives in the south east Asian region. Among the incentives offered, financial incentives include reductions/exemptions of corporation, local, and income taxes, as well as cash grants for investment in high-tech industries that have a broad economic impact. In addition to offering major financial incentives, the Free Economic Zones (FEZs) of Incheon, Gwangyang, and Busan/Jinhae are committed to creating an international business and living environment. These incentives are attractive to investors looking to enter the country. Favorable tax policies

In order to promote investment, the country has been dishing out favorable tax policies. The ratio of net profit to sales among foreign-invested companies in South Korea is far higher than that of domestic companies. Moreover, the South Korean subsidiaries of transnational corporations tend to be among their more profitable, if not their most profitable units. At the end of 2005, some 264, or 53%, of the corporations listed in the Fortune Global 500 had invested in South Korea, as



PESTLE analysis

had all of the world's top 20 corporations. This is due to the relaxed tax policy and the fact that reinvestment of earnings is not compulsory. The country's high export earnings make it one of the most attractive destinations to invest in. An exclusive constitutional court

The constitutional court of South Korea was established in 1988, and is designed to protect the people's fundamental rights and effectively check governmental powers. The power to determine the constitutionality of laws is vested in the constitutional court and acts as a check-and-balance mechanism on the legislative branch, as well as allowing the governance of various decisions to be monitored.

Current challenges Absence of juries

The South Korean political system is based on balance and checks among the president, parliament and the judiciary. Constituents select the president and members of parliament through a direct vote. The president and parliament appoint the judges of the Supreme Court. The South Korean legal system does not have juries; instead the court is composed of one or three judges who hear cases. South Korea is relatively unusual among developed countries in that it does not use juries in its judicial system. This makes it diffi cult for people to engage with and participate in the country's j udicial system. This creates incompatibility between the South Korean judiciary and most western models, such as the US and German systems on which the country's judiciary is allegedly based. I n ef f i c i en t c u s t o m s o p e r a t io n s

Imports into South Korea have to undergo a long drawn out procedure in order to clear the customs department. This customs clearance involves nine stages and each stage has internal procedural loops. The procedure also involves declaration, pre-tax review, inspection, the submission of documents and so on, which delays the timely supply of raw materials. This is one of the causes of the low level of imports into the country. Weak IPR enforcem ent

In spite of some progress in the enforcement of intellectual property rights (IPR) in South Korea, infringements are prevalent across segments like software, entertainment, books and pharmaceuticals; insufficient protection of proprietary information and trademarks are also an issue. IPR protection issues have raised international concerns, which can prove to be an impediment to the country’s initiative to enhance FDI inflows. Moreover, the US has kept South Korea on its IPR "watch list" for 2008, but the former expects that the Korea-US free trade agreement will lead to significant improvements in IPR protection.

Future prospects Judicial system s imilar to the US and Germany

The South Korean legal system is similar to that of Germany and the US. For instance, the South Korean constitution was established in 1948, and was influenced in part by the US legal system. In many respects, judicial law is compatible with



PESTLE analysis

that of the both US and many European countries; as a result the South Korean judicial system should not be totally alien to investors from these parts of the world. Adv antage of tax abatements and tax treaties for FDIs

In South Korea, foreign investors can apply for tax abatements, and once procedures have been followed, investors can claim tax reductions. The tax treatment is carried out at different levels of government priority. Benefits can also be gained from a tax treaty benefit. These tax treaties will depend on South Korea’s agreements with the respective nations that investors belong to. The tax treaties are generally in place in order to help the investors avoid double taxation and to prevent fiscal evasion with respect to taxes on income and capital. These provisions reap higher returns for the investor.

Future risks J u d g e s q u i t t i n g f o r p r i v a te p r a c t i c e

One of the problems for the South Korean legal system is that many competent judges and prosecutors have left their jobs to start their own private practices, usually for economic reasons. To solve this problem, the Supreme Court is attempting to select judges that are practicing lawyers. This problem has come about because judges must serve long, 10 year terms at each level without receiving any real growth in income. If this trend continues, it will become more difficult to persuade the younger generation to pursue legal studies. Low rate of students clearing the law examination

Students take a four year undergraduate course in South Korean the law schools. They study basic subjects such as the constitution, contracts, torts, corporations, criminal law, civil procedure and criminal procedure. Law school graduates have to pass the Korean Bar Examination, which is considered one of the most competitive examinations in the country. About 1,000 people pass among the 25,000 that take it every year. In addition, graduation from law school does not necessarily guarantee a job as a lawyer. Therefore, there is a clear need for reforms across the whole system in order to address the falling number of legal professionals in South Korea.



PESTLE analysis

Environm ental analysis Overview South Korea has modest natural resources. Government policies and directives on environmental development have lead to the formation of national eco parks and environmentally-friendly technology. The government has adopted several control measures in urban areas and is promoting environmental education in schools and business communities. However, South Korea’s high emission levels are a cause for concern.

Table 8:

Analysis of South Korea’s environmental landscape

Current strengths

Current challenges

Promotion of national parks

▪

▪

Strong governmental intervention to protect environment

▪

Future prospects

Future risks

▪

Limited natural resources Soil erosion

Environmental technology development

▪

Eco-businesses and green GDP

▪

▪

▪

Rising emissions levels Dam in North Korea

Promotion of environmental education

▪

Source: Datamonitor

DATAMONITOR

Current strengths Promotion of national parks

South Korea's national parks are well preserved and protected public land in the country. Most forms of development are prohibited on this land. National parks cover 6.6% of the country's total area, and are typically located in mountainous or coastal regions. The country's largest mountain park is Jirisan National Park in the southwest and the largest marine park is in Dadohae, which has an area of more than 2,200 sq km. These form the main biological and natural resource reserves for South Korea and government ensures there is no development in these areas. S t r o n g g o v e r n m e n t a l i n t er v e n t i o n t o p r o t e c t e n v i r o n m e n t

The government's policies to protect the environment in South Korea have been commendable. The government addresses air pollution through a special act on metropolitan air quality improvement. Industrialized areas do not come under this act, as they are grouped in five different categories of emissions that are monitored with relevant taxation. The government has also established tele-monitoring systems to capture the discharge volume of emissions. With regard to water pollution, the government has been actively implementing the water shed management system for conserving water and is also focusing on the purification of the four major rivers. On the waste management front, the country has been successful in formulating extended producer responsibility, which holds the producers responsible for recycling their industrial waste. In this way, the government has enforced strong environmental policies, which strengthen the environmental scenario in the country.



PESTLE analysis

The South Korean government has also pledged to try to freeze its greenhouse gas emissions at 2005 levels until 2012, when the first period of the Kyoto Protocol on climate change expires. The move is the country's first government initiative to rein in carbon dioxide and other gas emissions to help combat global warming.

Current challenges Limited natural resources

In South Korea, high mountains cover 80% of the land, making it unusable for farming and agriculture. As a result, natural resources in the form of plants and ecology are widely missing in the country, which makes the country highly dependent on agricultural imports. Due to the high mountain ranges, South Korea’s per capita natural resource endowment is poor and it has very few exportable natural resources. Moreover, the attempts made by the government for conservation and protection of forests also been unsuccessful due to high mountain terrains making conveyance a difficult task. Soil erosion

Over the centuries, Korea's inhabitants have cut down most of the ancient Korean forests, with the exception of a few remote and mountainous areas. The disappearance of the forests has been a major cause of soil erosion and flooding. Infrastructural development and increased requirement for wood is exacerbating the problem.

Future prospects E n v i r o n m e n t a l t ec h n o l o g y d e v e l o p m e n t

The Ministry of Environment has been making a focused investment into the research and development of major environmental technologies, with the goal of expanding the domestic environmental market, job creation, and increasing exports. Simultaneously, information technology (IT), biotechnology and environmental technology are now considered core industries for strategic national development. Environmental technology development includes projects such as G-7 and the Eco-Technopia 21 project, which have already been launched. These projects are focused on developing technologies for conservation and they increase the prospects for environmental conservation in South Korea. Eco-businesses and green GDP

The South Korean government has developed environmental management guidelines to make businesses environmentally friendly. The number of products with the eco-label continues to expand and the country is also making efforts to gain internationally recognized environmental certifications. In addition, there are plans to enact legislation to promote the consumption of environmentally friendly products. A 10 year plan to calculate a green GDP for establishing an integrated environment-economy account is also under implementation in South Korea. P r o m o t i o n o f e n v i r o n m e n t a l ed u c a t i o n

South Korea has included the environment as a subject in school textbooks since 1982, and it became an official elective subject in 1995. In 2006, the Ministry of Environment launched one of its more important programs, the 'Purumi (Green) Environmental Learning Center'. It is a mobile environmental education center that utilizes the learn-by-experience concept,



PESTLE analysis

using specially equipped trucks with hands-on environmental education tools and materials. The ministry is also promoting environmental education in the business sector.

Future risks R i s i n g e m i s s i o n l e v e ls

With more than 500 million tons of carbon dioxide emissions in 2007, South Korea is one of the largest producers of CO 2 in the world. This kind of emissions level enhances its environmental risk which may subsequently dent approval of new industries in the country. South Korea is also the ninth largest consumer of ozone-depleting chlorofluorocarbons. Despite being small in size and having a small population, it heavily contributes to environmental damage. This could be a future risk for the country’s environmental front, and will soon lead to international pressure to reduce emissions levels.

Dam in North Korea

North Korea started constructing Imnam dam very close to the demilitarized zone (DMZ) in 1986. The construction of this dam was completed in 2003. The dam is constructed in such a way that a sudden release of flood water would flow into the Han River (a river close to Seoul), which can flood the city of Seoul. This kind of sudden uniformed release was done by North Korea in 2001, 2002 and as recently as September 2007.This issue still remains unaddressed even though there were two summits in 2007. This presents a probable environmental risk for the country. Though the country has in response constructed the Peace dam against the possible flood release, the scientific research predicts that the collapse would be very destructive.



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