Doing Business in South Korea Essay Example
Doing Business in South Korea Essay Example

Doing Business in South Korea Essay Example

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  • Pages: 8 (2044 words)
  • Published: May 14, 2017
  • Type: Case Study
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South Korea is currently undergoing economic liberalisation and deregulation, although the government has not fully embraced a completely laissez-faire approach to the economy and trade. The UK TI team in South Korea is actively working to eliminate any remaining regulatory obstacles that may hinder entry into the market for UK-based companies (UK Trade and Investment, 2009).

In South Korea, the typical payment terms are "100 percent Confirmed Irrevocable Letter of Credit". This involves both the seller's bank (the accepting-bank) and the buyer's bank (the issuing bank) endorsing a Letter of Credit (L/C).

The seller is offered the highest level of protection through the use of a Letter of Credit (L/C). The L/C cannot be unilaterally canceled or have its terms changed by the buyer. Additionally, both banks involved in the transaction guarantee payment on t

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he specified due date. When conducting business in South Korea, it is important to mention and adhere to the terms of a Letter of Credit. Deposits before shipment, or deposits with order, are unlikely to be obtained and insisting on them may have negative consequences. Typically, Letters of Credit are opened 4-6 weeks ahead of the shipment date, with the expiration date being closely aligned with the promised delivery date.

The fulfillment of delivery promises is crucial, as failure to do so will result in the expiration of the Letter of Credit (UK Trade and Investment, 2009). Utilizing a Standby Letter of Credit (SBLC) is recommended over other types of Letters of Credit, as it can provide greater advantages for trade. The SBLC utilizes the original documents and bill of lading to ensure the seller receives payment for the merchandise from the buyer.

The proces

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of different parts concludes when the merchandise arrives at the port. Upon arrival, the documents are verified, and the process is usually fast and less strict. The beneficiary is ready to produce the required documents. Unlike other types of Letters of Credit, the Standby Letter of Credit process is well articulated. For a regular Letter of Credit, the original documents are passed from the advising bank to the issuing bank for verification. Verification is the final step and can take up to ten days.

For goods arriving by boat, the process may be delayed due to the documentation being received after the merchandise. In such cases, the shipping company requires the bill of lading to obtain the merchandise. Letters of Credit have an advantage over SBLCs in that they can be used as a form of payment. Although SBLCs offer some protection to the holder in case of non-payment, they do not function in the same way as other credit documents and should not be compared on these grounds. Both Letter of Credit and Standby Letter of Credit provide equal protection to the buyer and seller, although the Standby Letter of Credit tends to favor the seller more.

Based on the International Stand-by Rules, the reviewer may take three to seven days to review documents when they arrive at the port or airport. This benefits the seller as it allows for quick clearance of proceedings and ensures timely delivery of merchandise. However, this shorter review period may pose a risk for buyers, as there may be limited time to ensure the accuracy and absence of errors in the information. Some people consider SBLC similar to a blank

check when issued by the buyer.

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Standby Letter of Credit is a recently introduced concept in international trade and therefore it is also legally new. The applicability of legislations to this type of credit may be uncertain and not equally applicable when compared to other types of letters of credit.
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Dominant power in industry- Chaebol

(Isao, 2004) Chaebol refers to the large conglomerate family-controlled firms in South Korea that have strong ties with government agencies. The name, which means business association, is pronounced as jay BOL but the spelling pronunciation chay bol is also considered acceptable by Korean speakers. Family-owned enterprises existed in Korea before 1961, but the particular state-corporate alliance was established during the regime of Park Chung Hee (1961-1979). Park based this arrangement on the zaibatsu system that developed in Japan during the Meiji Era.

The zaibatsu and the chaebol had significant differences in terms of their capital source. The zaibatsu relied on a bank for their capital, while the chaebol were not allowed to own a bank. During the Park regime, the banks in South Korea were nationalized, allowing the government to allocate limited capital to industries and firms that were deemed important for national goals. As a result, the government-favored chaebol enjoyed special privileges and expanded in size. However, this led to a misleading perception of economic success for the chaebol, which was not always accurate.

In certain instances, chaebol expanded their businesses not due to their profitability but primarily because they were able to obtain substantial funds through borrowing. When the global economy experienced a downturn, these companies burdened with debt faced difficulties. In 1999, a quarter of

South Korean manufacturers could not generate sufficient earnings to fulfill their debt obligations. In recent times, there has been a rise in the establishment of mid-sized corporations that operate independently from the chaebol structure. One such example is Appeal Telecom, which was founded by Lee Ga Hyoung, a former Samsung employee.

Appeal Telecom, a mid-sized corporation in Germany, has emerged as a leading manufacturer and marketer of cell phones, playing a significant role in the economy. The South Korean government has shown interest in adopting an Anglo-American corporate governance system; however, implementing this system in Korea, with its considerable concentration of corporate stock ownership, has proven to be challenging. Nonetheless, the influence of foreign capital on the Korean economy has notably grown since the IMF crisis (Isao, 2004).

The Korean economy's development has been greatly influenced by foreign capital. According to Klingner (2006), in 2006, the South Korean political system was divided between progressives and conservatives, hindering Seoul's ability to address concerns from foreign investors and regional security challenges. Uncertainties persist regarding South Korea's economic policy, with business advocates urging Seoul to reduce regulations, overcome bureaucratic resistance to marketization, and clarify its strategy for foreign investment. The country's relations with the US and Japan remain strained, while there is no national consensus on the future form of South Korean society or its role in northeast Asia. President Roh Moo-hyun's political influence is diminishing as he relinquished some powers early in his presidency, which has increased the relative power of the National Assembly.

As the government increases the authority of the legislature, it gains more control over restricting the president's actions. However, due to strong party affiliations, the legislature

will face challenges in reaching agreements. The political divisions will worsen with the upcoming May national elections and December 2007 presidential election as the ruling Uri Party and main opposition Grand National Party (GNP) compete for support from an increasingly apathetic electorate. It is improbable that either party will achieve a majority in the legislature or gain widespread voter backing.

Moreover, there is a likelihood of the Uri Party splitting after the May elections due to increased internal factionalism. This will result in continued reactive and inconsistent government policies, with partisan confrontation taking the place of political dialogue. The political landscape will be dominated by debates on controversial issues such as tax increases, trade negotiations, regional development, foreign relations, and inter-Korean engagement. Although the national economic recovery is gaining traction and becoming less affected by short-term political fluctuations, it remains vulnerable to concerns from businesses regarding legislative gridlock and political volatility. Despite the highly unpredictable and volatile nature of the country's politics, foreign investors can clearly and fairly outline the advantages of a Free Trade Agreement (FTA).

The FTA allows for the utilization of South Korea's facilities without favoring any particular sector and aims to minimize the impact of burdensome and unnecessary labor and environment provisions. Despite its negative influence on labor and environment, the FTA presents significant new opportunities for foreign investors, businesses, and workers.

Anti-Dumping Policy

(Ahn, 2008) Certain foreign governments have implemented measures such as anti-dumping and safeguards to restrict exports from South Korea.

Anti-dumping duties are frequently applied to various products, including steel, petrochemicals, electrical goods and electronics, and textiles. The Korea Trade Council conducts investigations under the External Trade Act to assess

if significant harm or potential threats to domestic industries are caused by large-scale imports of a product. If this is found to be the case, domestic producers or the relevant government agency can request anti-dumping duties to be imposed.

The Law on Investigation of Unfair Trade Practices and Safeguard Response to Injury to Domestic Industry came into effect in May 2001. It stipulates that the KTC must make a decision on whether to investigate an alleged unfair trade practice within 30 days of receiving a petition. The KTC is also obligated to promptly conduct its investigation into alleged injury to local industry. Furthermore, the law transferred the authority for imposing penalties on unfair trade practices to the KTC after the commission's final ruling. In January 2004, an amendment was passed and implemented in October 2004, which grants the KTC the power to extend its investigative jurisdiction beyond domestic borders if foreign trade practices and systems violate international trade rules and are deemed harmful to South Korean industry. This same amendment also establishes safeguard procedures for imports from new WTO member countries and free-trade-agreement partners. Additionally, it raises the maximum fine for violations of this law, such as importing goods that infringe intellectual-property rights, from 20% to 30% of sales revenue. As discussions surrounding anti-dumping policy have gained increasing importance in trade policy circles, scholars and policymakers have shown greater interest in this field.

These have included both economists and lawyers. Important issues to be addressed include whether or not dumping is harmful and, therefore, whether or not anti-dumping laws are needed, what constitutes "fair" trade, and whether antidumping laws prevent fair competition from taking place. another important

issue addressed is whether the spread of anti-dumping is a form of backdoor protectionism that is gradually taking the place of more traditional forms of protectionism and threatening the expansion of world trade that has taken place over the past half century (Nigel, 2008).

Foreign companies should study the pricing level of similar products in order to avoid dissatisfaction and negatively impacting the demand for domestic products. Furthermore, Table 9 from Ahn (2008) reveals a range of grievances that foreign companies in Korea have filed from 2001-2006. These companies have requested timely and effective aftercare services. Tax-related complaints saw the greatest increase compared to previous years and made up the largest proportion of grievances registered in 2006. Complaints related to labor-management relations, which were previously the most frequently filed, have relatively decreased.

The stabilization of Korea's labor-management culture can largely be credited for the increase in customs and trade, investment incentive, and procedure-related grievances. The FDI system underwent changes and incentives were reduced, leading to this rise. Tax and tariff-related grievances saw a 24.6 percent increase, while customs and trade-related grievances significantly rose by 76 percent. Investment incentive grievances experienced a 20.0 percent rise between 2001-2006.

Though the overall ratio was relatively low, one area that stands out is the 150-percent increase in environment-related grievances, which rose from 4 to 10 cases. While tighter regulations are expected in this field, it is necessary to take more proactive measures. Labor-management grievances, which reached a peak of 106 cases in 2002, decreased to 38 cases in 2006. Aside from labor and management issues, there were also significant decreases in investment process-related grievances, finance and foreign exchange grievances, as well as

grievances related to construction and land - dropping by 12.9 percent, 16 percent, and 15.8 percent respectively. There were also substantial drops of 70.6 percent, 54.5 percent, and 66.7 percent respectively in operation and distribution complaints, disputes in the private sector, and those related to insurance and welfare. These declines were a result of regulatory reforms that affected permit acquisition, streamlined construction and land processes, authorized discount warehouses for operations and distribution, and influenced plant location.

According to Ahn (2008), the actions taken to enhance the investment environment for foreign multinationals have also led to a significant decrease in complaints regarding living conditions, power, and water. This indicates that the South Korean government's aftercare service is effectively improving the country's foreign direct investment efforts.

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