IT Investments in South Korea

1
IT Investments in South Korea
Tamara Froese Wendy Palmer Ramprasad
Suribhotla John Lang Lesley Cook
2
South Korea

• Agenda
• Overview
• History
• Geography
• South Korea vs. Hong Kong
• Culture and Business
• Government
• IT Industry
• Economy
• IT Financing
• SWOT Analysis
• Recommendation

3
South Korea
Overview

• Grown to become one of the developing worlds
  biggest success stories from a devastated,
  agrarian economy in the 1950s
• Exports are strong along with recovery from the
  recent Asian crisis
• Business environment is dominated by chaebol
  large conglomerates that set the tone nationwide
• Chaebol seems to be in decline example is
  crisis at Daewoo

4
South Korea
Overview

• History of protectionism in business, favoring
  domestic competitors at the expense of outsiders
• Rising standard of living is erasing the
  low-wage advantage that enabled it to rapidly
  develop
• Seeking to focus on higher value products in
  order to compete in the global economy

5
South Korea
History

• Modern history begins with annexation by Japan
  in 1910.
• Korea was treated as a de facto colony of Japan
  creation of basic infrastructure.
• Korean population was basically subservient to
  the Japanese, who occupied the top technical and
  government positions.

6
South Korea
History

• American confiscation and re-distribution of
  Japanese holdings back to Koreans after WW II.
• Influx of refugees from North Korea and China
• Emergence of the military as an important
  element of South Korean society.

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South Korea
Geography

• Korean peninsula extends 1000km from Asian
  peninsula roughly the size of Minnesota
• Bounded by Yellow Sea and Sea of Japan
• South Korea is approximately the size of Indiana
• Border with North Korea is the Demilitarized
  Zone 38th parallel
• A narrow, heavily guarded strip of land that
  marks a cease fire line

8
IT Geographics
Industrial Clusters

• Geographic concentrations of companies,
  colleges, research labs
• Goal is to achieve synergy by sharing
  technologies, human resources and information
• Types
• Academia led Company-led
• Local Community Silicon Valley

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IT Geographics
Locations of Industrial Clusters in South Korea
Ulsan Automobile (Hyundai) DaeDeok Valley-
Academia Inchon/Seoul Community DaeDeok 21st
Century The New Silicon Valley
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IT Geographics
DaeDeok Valley

• Began in 1973 as an RD town, renamed to
  resemble Silicon Valley in 1998
• String of industrial complexes has become
  Koreas foremost incubator of venture firms
• Korean-American IT Forum established to share
  information on IT technology and market trends
• Efforts to expand American investment in the
  Valley and marketing opportunities for its
  products in the US

11
IT Geographics
DaeDeok Valley

• Central location makes it easily accessible,
  with access to airports, highways, and rail
• Over 200 startups in 2001
• Over 700 companies by mid-2004
• IBM Supercomputing Technology Support Center in
  the area

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Comparison South Korea with Hong Kong
13
Comparison South Korea with Hong Kong
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South Korea
15
South Korea
Culture and Business

• Homogenous population with a common cultural and
  ethnic heritage
• Strong nationalism and sense of discipline
  reflects years of subordination to foreign
  nations
• South Koreans view themselves as a tightly knit
  national community with a common destiny
• Group cohesion is very important

16
South Korea
Culture and Business

• While Americans are looked up to, Korean
  management style is quite different
• More highly formal not always as competent
• Korean managers are usually hesitant about
  reporting upward
• Decision making power is guarded
• Smaller organizations usually have only one
  decision maker

17
South Korea
Culture and Business

• Koreans are extremely polite, friendly, and
  formal in their business dealings
• Losing Face, a measure of dignity, is crucial to
  Koreans, as in other Asian cultures
• This can instantly destroy business
  relationships. Avoidance of criticism in the
  presence of others is crucial
• Koreans bow to each other, shake hands with
  foreigners
• Business cards are important!

18
National IT Policies
Government Emphasis

• Privatization and deregulation of
  telecommunication industry resulted in structural
  changes throughout technology
• Establishment of the broadband communication
  network caused widespread information throughout
  public sector
• Government emphasis of the importance of RD and
  IT training programs
• Active nurturing of IT venture companies

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IT Industry

• Since the 1990s government concentrating on 3
  areas to increase South Koreas technological
  competitiveness
• Fostering of research in basic sciences
• Securing efficient distribution and use of RD
  resources
• Expanding international cooperation
• In 1999 South Korea envisioned itself to become
  one of Top 7 technologically advanced nations by
  Q1 21st century
• End of 2002 total RD investment accounted for 3
  of GDP

20
Telecommunications Industry

• Developed in the 1980s
• Throughout 1990s full-blown competition in the
  voice services market
• New millennium brought emergence of data services
• Industry is significantly liberalized already
• Cost of telecommuting decreasing
• As of 2003, nearly 23 million telephone main
  lines in use
• Nearly every household has a telephone
• 33 million mobile phone subscribers
• Provide data, wireless internet, and video
  streaming

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Computing and Internet Diffusion

• IT industry has developed rapidly with
  supervision of a proactive government
• Approximately half of population is connected to
  the Internet
• Majority enjoy high-speed access at relatively
  low costs
• Increasing number of Koreans using
  computer-related communications, on-line
  services, and the Internet

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IT Industry (cont.)

• Government recognized need for a networked
  society
• Launched a plan to build an information
  super-highway in 1995
• Stage 1 - 1997
• Stage 2 - 2000
• South Korea now possesses a high-speed network
  infrastructure that offers high-quality data
  services nationwide
• Positioned as one of the worlds 10 Most
  Advanced Countries in terms of information
  networks
• Number one country worldwide in terms of
  broadband Internet penetration and utilization
• 10 million subscribers
• Broadband Internet use and expansion will enhance
  the quality of life for people.

23
Economy
Economy Overview

• An impressive level of growth and integration
  into the high-tech modern economy
• GDP in early 1960s was roughly equal to poorer
  countries such as those in Asia or Africa
• Today it is nearly equal to lesser economies of
  the EU in GDP per capita
• Near the top ten of the worlds largest
  economies

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Economy
Business Opportunities

• Automotive parts and service equipment
• Computer hardware, software and peripherals
• Electronic and Telecom equipment
• Machine tools and metalworking
• Medical and laboratory equipment
• Food processing and packaging
• Steel and Shipbuilding

25
Economy
Major Economic Indicators

• South Koreas GDP growth in 2003 was 6.0
  compared to Hong Kongs 4.8 growth rate

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Economy
IT Production Growth

• IT Production has increased from 76 trillion won
  in 1997 to 189 trillion won in 2002
• IT Production share of GDP has also increased
  from 8.6 in 1997 to 14.9 in 2002

27
Economy
E-Commerce

• The Korean e-commerce market is approximately 44
  billion USD
• South Koreans spent more than 1.6 billion
  shopping online in the first qtr 2004
• This is twice the per capita online spend of US
  residents

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Economy
E-Commerce

• The South Korean B2B market is 89.8 of total
  E-Commerce transactions
• The US B2B market is 93 of the total E-commerce
  transactions in the US

29
Economy
IT Workforce

• Total number of workers in IT industry is
  1,163,000 (5.4 of total workforce)
• Compared to Hong Kong/US
• Government expects a continuous growth of 4.4
  to reach a total of 1.4 million by 2006 (6.3 of
  total workforce)

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Economy
IT Workforce

• Highest rate of growth is in computer
  professionals, electronic and telecommunication
  technicians, and other IT administrative jobs

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Economy
Effect of IT on Foreign Trade
Korean IT Industry's Imports/Exports

• IT industry exports have increased from 313
  billion USD in 1997 to 463 billion USD in 2002
• This is almost 30 of total exports for South
  Korea
• Major IT exports include semiconductors, mobile
  handsets, and LCD panels

32
IT Financing

• Financial Resources for IT Companies - KOSDAQ

• KOSDAQ benchmarking NASDAQ in U.S
• Used for initial public offering of high tech
  startup companies
• Less restrictions and lower entry/exit barriers
  than standard Korean Stock Exchange Market

33
IT Financing

• Financial Resources for IT Companies Venture
  Capital

• Venture Capital Industry formed in early 1980s
• KOSDAQ opened up new opportunity for investments
• Less restrictions and lower entry/exit barriers
  than standard Korean Stock Exchange Market

• Financial Resources for IT Companies FDI

• After 1997 financial crisis, the Korean
  government initiated tax reduction measures for
  high-tech and service business to cope with
  economic recession
• Rent reduction policy also underway in industrial
  complex

34
IT Financing

• Financial Resources for IT Companies FDI

• Less restrictions and lower entry/exit barriers
  than standard Korean Stock Exchange Market
• Currently, there is no limitation on foreign
  ownership and value-added telecommunication
  service provider
• No foreign ownership limitation on IT equipment
  and software business

Direct Foreign Investment from 1997 - 2000
35
IT Strengths -Competitive Advantage
IT Financing
36
South Korea IT Weaknesses

• Continuous shortage of IT human resources
• Level of IT workforce little bit higher than
  other Asian nations result in relocation of
  manufactories
• Software piracy is around 50, compared to 24
  in U.S (2002) - discourage the development of
  domestic software and foreign investment on the
  industry

37
South Korea IT Weaknesses

• FDI into Korea is still minimal
• Despite favorable business environment of IT
  industry, foreign companies hesitate due to
  economic crisis in 1997 and 1998
• Lack of core competency, higher entry barriers
  or high production cost for market expansion

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South Korea IT Opportunities

• IT Clusters / IT Education
• Increased Demand for High Level Technology
• E-Business Development Pointers
• IT Service Companies and Software Development
• IT Equipment Manufacturing

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South Korea IT Threats

• Korean government procurement law favors
  domestic over foreign suppliers
• Foreign access to real estate controlled through
  the Alien Land Acquisition Act
• Korean regulatory environment is difficult for
  domestic firms to work and even greater to
  foreign firms
• Chaebols insistent on operating a joint venture
  in accordance with the overall policies and
  business culture of the group

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SWOT Impact on IT Industry
Impact on Telecommunication/e-commerce industry

• Korean telecommunication market is fully
  de-regulated and privatized, will encourage
  market players to offer better product at lower
  prices through technology and re-engineering of
  business model
• Internet usage expands to shopping,
  entertainments through multimedia or gaming.
• Privacy protection and protection from fraud
  should be strengthened for e-Commerce industry,
  increase the usage in B2C and B2B market
• The enforced policies and government efforts to
  protect intellectual property right will have
  impact on overall content provider market

Contd..
41
SWOT Impact on IT Industry
Impact on Hardware Industry

• Korea positioned itself as leading nation in
  terms of semiconductor, mobile phones and LCD
  markets
• Shortage of IT human resource and higher cost of
  labor force may force hardware manufacturers to
  move other nations like China and Malaysia

Contd..
42
SWOT Impact on IT Industry
Impact on Software Industry

• IT professionals with IT cluster to share
  knowledge and information and commercialize
  eventually, will facilitate the development of
  software
• Foreign Investment through either IT cluster or
  joint venture with domestic firms may pull the
  software industry to global level
• The enforced policies and government efforts to
  protect Intellectual Property Right will
  encourage domestic development of software and
  foreign investment

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IT Investment Recommendation
Is Investment in the IT Industry in South Korea
Recommended?
44
Framework of IT led Development
45
South Korea
Back-Up Material
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Sources

• http//www.cia.gov/cia/publications/factbook
• http//www.american.edu/carmel/jw6194a/Korea_files
  /software.htm
• http//www.american.edu/initeb/cc9979a/hongkong.ht
  m
• http//geography.about.com/library/cia/blcsouthkor
  ea.htm
• http//www.state.gov/www/background_notes/southkor
  ea_0006_bgn.html