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The State and The Effective Control of Foreign Capital: The Case of South Korea

Published online by Cambridge University Press:  13 June 2011

Russell Mardon
Russell Mardon
Affiliation:
California State University, Fresno
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Abstract

The literature on the political economy of developing nations has focused attention upon the weakness and vulnerability of the nation-state and its limited ability to deal with and effectively alter the dominant forces of the international economy. Despite common international structures, however, the empirical pattern of foreign ownership and control of the means of production varies in newly industrializing nations. Domestic political structures and alternative state strategies may therefore have a significant impact on the pattern of foreign ownership and on the degree of control that foreign capital may exert on a developing economy.

The author examines the principal legal and bureaucratic mechanisms utilized by the South Korean state to regulate the domestic economy's interaction with international capital, as well as the impact of these mechanisms upon domestic production patterns. The South Korean case demonstrates that, through the formulation and implementation of appropriate policy, the state in a developing nation possesses the capacity to shape the pattern of interaction with international economic forces. Legal and bureaucratic mechanisms have facilitated an industrial development that is predominantly owned and effectively controlled by Korean nationals.

Type
Research Article
Information
World Politics , Volume 43 , Issue 1 , October 1990 , pp. 111 - 138
Copyright
Copyright © Trustees of Princeton University 1990

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References

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9 Koo (fn. 4), 171.

10 This study draws on several sources of primary data collected by the author while conducting field research in Korea between August 1984 and December 1986, and during the summer of 1988. These data fall into three general categories: (1) statistical yearbooks and other sources of published Korean government data and policy papers; (2) internal government documents made available to the author by government officials who were interviewed for this study (interviews were conducted with approximately 60 government officials who were directly involved in formulating and implementing economic policy); (3) data obtained from approximately 75 foreign business and banking officials in Seoul who agreed to complete questionnaires and to be interviewed.

11 Koo, Bohn-young, Industrial Structure and Foreign Investment: A Case Study of Their Interrelationship in Korea (Seoul: Korean Development Institute, Working Paper No. 8402, 1984), 7.Google Scholar

12 In an interview, Bohn-young Koo, Special Economic Advisor to the Minister of the Economic Planning Board, explained the loan approval procedure. He emphasized that, in order to approve a foreign loan, the government must be convinced that a high level of certainty exists that the borrowed capital will generate a rate of return in excess of interest payments; that it will aid the balance of payments; that it will flow to a targeted industry; and that it will flow to a producer with sufficient technical and marketing expertise to meet projected output levels.

Koo's argument was strongly supported by my 1986 survey of 18 major American, Japanese, British, and French bank officers in Seoul. All of them agreed that the screening process allows the state to control the size and sectoral flow of all foreign capital loans. They further agreed that the screening process assures a high level of certainty that foreign loans will aid the balance of payments. Moreover, all but two of the bank officers in the survey agreed that the screening process assures a high level of certainty that borrowed funds will flow to targeted industrial development.

One bank officer who had served in Brazil for five years in the 1970s asserted that in Brazil, the government had little idea of where foreign loans would flow or whether they would lead to increased production. Often, loans were not monitored and were used for consumption. In Korea, the state monitors foreign loan funds closely to ensure that they flow only into approved investment and that output projections are met after the production facility becomes operational.

13 Cho, Dong Sung, “Incentives and Restraints: Government Regulation of Direct Investment between Korea and the United States,” in Moskowitz, Karl, ed., From Patron to Partner (Cambridge; Harvard University Press, 1985), 45Google Scholar; Ministry of Finance, Investment Guide to Korea (Seoul: Ministry of Finance, 1984), 19Google Scholar; Westphal, Larry et al., Korean Industrial Competence: Where It Came From (World Bank Staff, Working Paper No. 469, 1977), 18.Google Scholar

In 1981, the making of approval decisions on foreign capital and technological inflows was transferred to the Ministry of Finance. For a comparison of incentives to foreign investment offered by various governments in Asia, see “Special Survey of Foreign Investment in Asia,” The Economist, June 23, 1979, pp. 8–9.

14 Koo(fn. 11), 18, 26–28.

15 Cho (fn. 13), 46–47.

16 Jefferson Coolidge, T. Jr, “The Realities of Korean Foreign Investment Policy,” Asian Affairs 12 (July/August 1981), 370–85Google Scholar; Chang, Dal-joong, Economic Control and Political Authoritarianism: The Role of Japanese Corporations in Korean Politics 1965–1979. (Seoul: Sogang University Press, 1985), 174–78.Google Scholar

17 Moskowitz (fn. 13), 11.

18 In an interview, Bohn-young Koo stated that “loans have always been preferred over direct investment because more benefits stay in Korea. Direct foreign investment is restricted to those projects where foreign marketing or technical skills are required. If only capital was required, the government would attempt to borrow it. After the 1974 oil shock, when funds became readily available, this strategy could be followed relatively easily.”

In a survey of foreign bank officers in Seoul (see fn. 10), 81% of respondents stated that the government has consistently followed a strategy of encouraging loans for foreign capital needs.

19 This conclusion is based upon a series of interviews and questionnaires (see fn. 10). According to the International Monetary Fund's representative in Seoul, “the Korean foreign capital accumulation strategy has been to borrow capital and license technology wherever possible in order to avoid foreign equity ownership.” The general manager of the Chase Manhattan Bank in Seoul asserted that “it has been the conscious and managed policy of the Korean government to use external borrowing to promote growth of the economy. At the same time, it is the conscious and managed policy of the Korean government to ensure that domestic industry is not foreign-controlled. That means more debt and less foreign equity.”

The general manager of Dupont in Seoul maintained that “if technology is locally available, a direct foreign investment will simply not be allowed”; a senior official with Westing-house stated, “the Koreans would prefer to operate totally without foreign investment if that would be possible.”

According to 92% of the foreign bank officers surveyed, Korean borrowing to finance foreign capital requirements has allowed a greater degree of national control over major economic decisions than a similar level of foreign direct investment would have.

20 Study on the Criteria for Foreign Direct Investment and Joint Venture in Korea (Seoul: International Management Institute, Korea University, 1972), 54–56. In interviews, this argument was also made by Kwan-tae Shin, Deputy Director, Investment Promotion Division of the Korean Ministry of Finance; by Bohn-young Koo, Special Economic Advisor to the Minister of the Economic Planning Board; and by Dong-gyu Shin, Assistant Director of the Foreign Capital Policy Division of the Ministry of Finance. Also see Jo, Sung-hwan, Direct Foreign Private Investment in South Korea: An Economic Survey (Seoul: Korean Development Institute, Working Paper No. 7707, 1977), 68.Google Scholar

21 Major Statistics of the Korean Economy (Seoul: Economic Planning Board, 1985).

22 Economic Analysis and Projections Department: International Bank of Reconstruction and Development, Consolidated Balance of Payments (Washington, DC: World Bank, May 19, 1978).Google Scholar

23 Moskowitz (fn. 13), 11.

24 Barone, Charles A., “Dependency, Marxist Theory, and Salvaging the Idea of Capitalism in South Korea,” Review of Radical Political Economics 15, no. 1 (1983), 48.CrossRefGoogle Scholar In a survey of 45 foreign investors in Korea (fn. 10), 100% of the respondents asserted that the Korean state exercised much more control over the pattern of direct foreign investment than other capitalist developing states with which they were familiar. All respondents also maintained that the Korean government effectively excluded foreign investment in areas where domestic producers could meet production demands.

25 Koo(fn. 11), 26–28.

26 Ministry of Finance data (fn. 10). For the same period, comparable figures are: almost $8 billion in foreign direct investment in Taiwan, $17 billion in Mexico, $24 billion in Brazil, and $7 billion in Singapore (U.S. Department of Commerce, Overseas Business Reports, 1987).

27 Ministry of Finance data (fn. 10).

28 Economic Planning Board data (fn. 10).

29 Koo (fn. II), 21.

30 Ministry of Finance data (fn. 10).

31 Curhan, Joan P., Davidson, William H., and Suri, Rajan, Tracing the Multinationals (Cambridge: Cambridge University Press, 1977), 314Google Scholar, as cited in Koo, Bohn-young, The Role of Foreign Direct Investment in Korea's Recent Economic Growth (Seoul: Korean Development Institute, 1983), 26.Google Scholar

32 Ministry of Finance data (fn. 10).

33 Chang (fn. 16), 137.

34 Ibid., 134–36.

35 Information on the Korean repurchase of foreign-held equity in the oil refinery sector has principally been obtained in interviews with Caltex officials, Korean government officials, and professors at Seoul National University School of Business and Management.

36 Koo(fn. II), 82.

37 This information was collected in interviews with Amoco and Samsung officials in Seoul.

38 Eul Young Park, “An Analysis of the Trade Behavior of American and Japanese Manufacturing Firms in Korea,” in Moskowitz (fn. 13), 24, 31.Google Scholar

39 Westphal et al. (fn. 13), 53.

40 Survey of 45 foreign investors (fn. 10).

41 Business Korea, July 1985, 76.

42 Vernon, , The Storm over the Multinationals: The Real Issues (Cambridge: Harvard University Press, 1977), 72Google Scholar; Evans (fn. 2, pp. 103–25) defines denationalization as the displacement of local enterprises by foreign ones. He traces the denationalization of several industries in Brazil and highlights a Brazilian industrial ownership structure where, because of the superior capital and technological levels of multinational corporations, local enterprise tends to survive only in small-scale, non-capital-intensive enterprises.

43 Economic Planning Board data (fn. 10).

44 The information on the divestiture of foreign-held equity was obtained through an interview with the Seoul branch manager of a major Japanese bank who was personally involved in the negotiations to buy out several Japanese firms.

45 Chang (fn. 16), 192.

46 See Evans, Peter, “National Autonomy and Economic Development: Critical Perspectives on Multinational Corporations in Poor Countries,” in Keohane, Robert O. and Nye, Joseph S. Jr, eds., Transnational Relations and World Politics (Cambridge: Harvard University Press, 1972), 328–30Google Scholar; Barnet, Richard and Muller, Ronald, Global Reach (New York: Simon & Schuster, 1974), 152–65Google Scholar; Economic Commission for Latin America, External Financing in Latin America (New York: United Nations, 1965)Google Scholar; Devlin, David T. and Kruer, George R., “The International Investment Position of the United States,” Survey of Current Business 50, no. 1 (October 1970).Google Scholar