FDI by Volvo in South Korea

IB Assignment-3

Submitted by:-

Krishna Chaitanya. A

Rollno-123

PGDM-B
1. What was the South Korea’s political ideology prior to 1990? What caused the
changes in ideology in the 1990’s? Explain briefly South Korea’s ideology from
1990’s onwards. Which country was South Korea’s role model?

Political Ideology prior to 1990

On August 15, 1948, the Republic of Korea was formally established. There was
autocratic leadership for more than a decade from then. South Korea experienced political
turmoil under the leadership of Syngman Rhee. This autocratic rule was ended in 1960 by
the student revolt. After august, 1960 there was second republic and there was a
proliferation of political activity which had been repressed under the Rhee regime. Soon
there was a military coup by Park Chung-hee in 1961. Park’s administration started the
term by announcing the Five Year Economic development Plan, an export-oriented
industrialization. He extended friendly relationships with free economy nations like
United States. Park regime used the influx of foreign aid from Japan and the United States
to provide loans to export businesses. This government also kept close ties with the
United States, and continued to receive large amounts of aid. Economic and technological
growth during this period improved the standard for living, which expanded opportunities
for education. Despite social and political unrest, the economy continued to flourish under
the authoritarian rule with the export-based industrialization policy. The first two five-
year economic development plans were successful, and the 3rd and 4th five-year plans
focused on expanding the heavy and chemical industries, raising the capability for steel
production and oil refining. Soon another general took control after the assassination of
Park. So, till 1987 there was almost authoritarian rule.

Change in Ideology
Despite the economic growth and results in diplomacy, the government, having
gained power by a coup, was essentially a military regime. Public support and trust was
low when the promises for democratic justice never materialized. The students were
protesting in large quantities. But the military power crushed the people protesting. This
caused a huge unrest among the people. Soon there was new government. The
government set out to eliminate past vestiges of authoritarian rule, by revising laws and
decrees to fit democratic provisions. Freedom of press was expanded, university
autonomy recognized, and restrictions on overseas travels were lifted.

After 1990
Kim Young-Sam was elected president in the 1992 elections. He was the country's
first civilian president in 30 years and he promised to build a New Korea. The
government set out to correct the mistakes of the previous administrations. The
government also carried out substantial financial and economical reforms, joined the
OECD in 1996. In 1997, the nation suffered a severe financial crisis. The government
faced the daunting task of overcoming the economic crisis, but with the joint efforts of the
government's aggressive pursuit of foreign investment, industry's cooperation and the
citizen's gold-collecting campaign, the country was able to come out of the crisis in a
relatively short period of time. After regulatory and economic reforms, the economy has
bounced back, with the country's economy marking growth and apparently recovering
from the global recession.

The country always took Japanese as their role model. South Korea implemented all
the economic developmental activities keeping the Japanese in mind. Though they had
authoritarian rulers, they were supportive to free economy nations. The idea of export
oriented economy also is part of taking Japanese as their role model.

2. What was the impact on inbound FDI into South Korea as a result of its
liberalization in 1990? Why Volvo acquired Samsung’s Construction Equipment
Division (CED) in February 1998?

FDI Impact
The South Korean government made the historic decision to remove many of the
restrictions to foreign direct investment, including the regulations that prohibited foreign
firms from making hostile takeovers of Korean enterprises. Even though the Korean
government made efforts to liberalize FDI in the 1990s, effective progress remained slow
and uncertain until the end of the decade.

Korea allowed FDI into a larger number of activities, eased policies on approvals, and
created incentives especially for high-tech investments, but various impediments
remained and implementation was only partial, notably because of resistance among
lower level bureaucrats. Foreign companies kept complaining about bureaucratic
procedures and controls. In 1996–97, with Korea’s accession to the OECD,10 a new set
of measures—including the liberalization of policies on friendly mergers and acquisitions
(M&As) by foreigners—was put into place. The real turning point toward Korea’s active
promotion of FDI came with the 1997 financial crisis. The impact was dramatic. FDI in
the Korean economy surged from $3 billion in 1997 to $9.3 billion in 2000. The total
stock of foreign direct investment in South Korea soared from 45.2 billion in 1990 to
$62.7 billion by the end of the decade. As a result of this set of measures, by 2000
Korea’s level of FDI restriction was much more comparable with that of other OECD
member countries. Data for the first 4 months of 2000 indicate such investment totaled
US$3.7 billion, about 33 percent higher than the same period in 1999. South Korea's GDP
grew by 10.7 percent in 1999, and continued its growth in the first quarter of 2000. The
estimated growth rate for the entire year is about 8 percent. The recovery pushed the
unemployment rate down to 4.8 percent (1,353,000 workers) in 1999, and it fell to 3.7
percent (about 800,000) in May 2000. It also brought the inflation rate down to 0.8
percent in 1999, a record low rate over the previous 3 decades. Inflation in 2000 was
expected to be about 3 percent, far lower than during the 1980s, when the average
inflation rate in the 1980s was 8.4 percent.

Volvo Acquisition

Volvo acquired Samsung’s construction equipment division because of the following

reasons:

 The market for excavators accounts for one third of the total world market for
construction equipment. Samsung's broad range of excavators will represent a
significant contribution to VCE's existing product program. Samsung manufactures
some ten different types of excavators, mostly in the 7-28 ton category.
 The acquisition will also give VCE access to an industrial structure in Asia and an
efficient distribution network in South Korea, a significant market for construction
equipment in Asia. The acquisition will also strengthen Volvo Construction
Equipment's presence in East Asia and provide opportunities to increase market
shares in the company's other product areas, such as wheel loaders, graders and
articulated haulers.
 In addition to a production facility, with a capacity of about 10,000 machines
annually, the acquisition will include significant capability for product development,
sourcing, and market support. The operations to be acquired also include small-scale
production of wheel loaders, cranes and other equipment.

The integration of Samsung Construction Equipment with VCE gave rise to

substantial synergies, both commercial as well as industrial. The acquisition had
significant potential for rationalization, which together with those synergies, provided
substantially improved economies of scale.

3. Why did the government of South Korea permit the acquisition? What was the
initial response of CED’s employees and of South Korean citizens to the
acquisition?

Volvo- Samsung CED deal

Government role
In history South Korea did not allowed any foreign investment in their country due to
the fear of foreign company's acquisition on the national assets. South Korea adopted the
model of Japan. In 1990, the Korea started to open the trade and allow the foreign
companies to make investment in their country. So government of South Korea allowed
many companies to do business in their country and they remove all the barriers for
foreign investment. The decisions were taken by the government in order to provide
benefit to the consumer of the Korea with low prices and increase in the job opportunities
in the country. One of the reason was to allow the foreign investment is due to the Asian
financial crises due to which the Korean economy adversely affected and the only option
was available to the government is to attract the foreign direct investment in country.
VOLVO entered in the Korean Market by making the investment of 200 million dollars
on a production plant for the production of construction equipment. Volvo moved his
technology to the Korea to their plant to increase the efficiency and productivity.

Employee response
Volvo is an experienced acquirer, having bought companies in France, Germany and
Canada, the acquisition in South Korea was a big challenge. It was evident in the cultural
incompatibility between Samsung and Volvo. The management styles were particularly
different. Though they look dissimilar, the two companies’ share three important
attributes that helped make the acquisition a success-A strong belief in quality, strong
company pride and strong brand names. The planned acquisition was announced in
February 1998. The very next month, Samsung workers reacted by initiating a
spontaneous strike. Soon Volvo initiated some actions that calmed the situation. But in
the latter months of 1998 and early 1999, the Asian economy declined. The production
volumes of Volvo declined, so it reduced headcount to maintain profitability. The
workers were stung by this response and organized a union in the early 1999. There were
almost 13% of 1655 employees at the plant leaving Volvo. It was during this time the
citizens of South Korea too viewed this acquisition with suspicion and the radical press
demonized these companies as unwelcome guests feeding off the local markets like
leeches.