One of the funniest things I find about blogging is connecting seemingly disconnected stories together. Sometimes it works perfectly, sometimes it does not. However I think many times its worthwhile, since many of us conduct the same exercise subconsciously so as to formulate thoughts on broader issues.
First, lets go back a few months. In February 2007, Hyundai Chairman Chung Mong-koo was convicted of embezzlement of a few hundred million US Dollars (the case is now under appeal). However he got the special consideration most of his type are afforded in Korea, as the Joongang originally reported:
A local court sentenced the head of Korea’s largest automaker to three years in prison for embezzling billions of won and violating the public’s trust. But Chung Mong-koo is allowed to leave the country, and he won’t serve any time in jail until the case winds through the expected appeals process.In its ruling, the Seoul Central District Court said Mr. Chung will not be immediately detained in order to “guarantee his right to a defense and minimize the impact on the nation’s economy.”
Now consider today’s news. Apparently other parts of the formerly more unified Hyundai empire were getting away with common extortion, again the Joongang:
After the former chairman of Hyundai Group and several executives took out fraudulent loans they didn’t repay, several major banks did not try to recover the money because they feared the conglomerate would do less business with them, a government agency said yesterday…Woo Byung-woo, head of the special non-performing loan investigation team at the deposit insurance corporation, said eight former Hyundai Engineering executives used false financial statements in 1998 to take out 27.6 billion won in loans they never repaid, and four Hynix Semiconductor executives did the same thing to take out 1.5 billion won in loans in 1999.
So we have one high flying Korean exec walking away with barely a tap on the wrist for embezzling billions of won from his company. We have a two companies extorting money from banks, and getting away with it for at least ten years. Furthermore the extortion article is about an attempt to recover the money, not any attempts to punish those who extorted it in the first place. Keeping things like that in mind, what do you think of when you see a pejorative headline in the Chosun like this:
Lone Star May Get Away Scot-Free
And what is the “crime” Lone Star is “getting away” with:
The offshore investment firm Lone Star is likely to slip out of Korea quietly without paying any tax from selling its stakes in Korean firms worth W2.15 trillion (US$1=W937)…Since the U.S. firm is for the purpose of these transactions based in Belgium, it will probably be spared capital gains tax due to a dual taxation agreement between Seoul and Brussels.
Its important to note here that Lone Star is not avoiding paying taxes (per se). The agreement is intended to avoid DUAL taxation, not absolve Lone Star from all taxes. All Lone Star has done is taken advantage of a set of agreements that the government of Korea freely and knowingly entered into so as to minimize its tax bill. Meanwhile there is a case of possible skullduggery on the sin front. Apparently two foreign majority owned liquor importers and marketers are in trouble:
Subsidiaries of the world’s two leading liquor makers, Diageo Korea and Pernod Ricard Korea, both U.K. based, are under the scrutiny of prosecutors on accusations that they raised slush funds and used them for a variety of purposes including bribery.
Now I personally hope that if true, they are prosecuted to the fullest extent. What I find interesting is what the “full extent” might entail, especially considering the above mentioned domestic firm’s punishments. Consider this article a few weeks ago on one of these companies, Diageo, paying the piper for some illegal tactics:
Industry watchers say that Diageo is getting ready for a suspension of its liquor license by tax authorities. The company has been under investigation by the National Tax Service since the end of last year, accused of tax evasion…it is most likely that Diageo would lose its license for three months and a subsidiary of the company would get a new license. Another theory is that the government may cancel only the manufacturing license, not the import license…
So lets sum up, we have two domestic cases of proven wide reaching embezzlement and extortion. Yet in both those cases the domestic firms and actors get almost nothing in punishment and freely carry on their business without sanction in the slightest. There are two foreign cases. One where no crime is committed in the slightest, yet the papers strongly insinuate a crime is committed and a government scrambling to find some way to “prosecute” the company. The other set of foreigners while engaging illegal activities could very well find themselves with a penalty of losing their rights to do business in Korea for an as yet undetermined amount of time.
Now, how would you the reader decide the question “Is there a bias against foreign firms in Korea?”
35 Comments
That question answers itself, doesn’t it?
I don’t think Koreans understand competition in business because they haven’t had any, so they go after companies that vie with the chaebol. Plus foreign = bad.
By the way, what happened to that $1 billion Chung said he was donating Korean society?
What happened with the story of the family of a certain cheabol’s founder using the company’s coffers as their own private bank account? According to the whistle-blower, the funds are kept in secret vaults at the offices of the cheabol’s subsidiaries.
Dram: The key phrase here is “minimize the impact on the nation’s economy,” which fits this simple calculus:
Chaebol titans abusing their fiduciary duty: Good for the economy.
Evil foreigners making money legitimately and taking it home via Belgium: Bad for the economy.
What really gets me is the idea they won’t be taxed (they will, but in Belgium). So, would it be OK if they repatriated the money through their Texas HQ and paid the U.S. capital gains tax? Would that be OK? Korea still wouldn’t get a won, but I guess the idea of someone taxing them feels better.
And if these dual taxation treaties suck so much, why don’t they just rip them all up and go back to the halcyon Hermit Kingdom days of yore?
BTW, good spelling and grammar. You have learned well, Grasshopper.
Despite all the seeming changes that have happened since the Asian crisis, Korea still has a long way to go. The Korea discount will prevail for a long time yet.
I think it’s more of a case that the law makers here know that the foreign companies wont send thugs out to beat down their families unlike the Chaebols.
More Bitching and Moaning about how unfair. biased, racist, it is for the foreigner trying to do business in Korea. Korea is not a level playing field, as the outsider you are at a HUGE disadvantage.
The solution is very easy DON’T DO BUSINESS IN KOREA!!
When flying into Korea invariably I meet ignorant know it all Management Consultants and Business People coming to Korea, who thing doing business here is the same as elsewhere.
The legal/illegal system is against you,
The media is against you,
The government is against you,
The people are against you.
Against such overwhelming obstacles, people want to do business???
Koreans can do business in our countries, they can open drycleaning business, and get a fair hearing in court.
Korea is a small, and declining market. Do the analysis, it’s not a viable business proposition!
That is not quite the case “austin”. Read up on Goldman Sachs and others in Korea. There is just some skill required to do it but it often seem like Harry Potter’s “Defense Against the Dark Arts” coursework.
I’m well aware of the reports of investment bankers and consultants such as Goldman Sachs. I’m also aware that their primary goal is to procure advisor fees. If a company decides not to do business in Korea. There are no advisor fees.
Doing business means doing transactions. Do enough transactions and inevitably disputes arrive. Disputes that go to court. Disputes that are in the public eye.
Those disputes will be with Korean nationals, companies, unions or government.
The Judge who hears the case has had a racist, nationalist education, is not independant and has questionable legal training.
The reporter who reports on tne dispute has also had the same education, and must tow the uri nara line or risk hindering his career prospects.
There is always a risk lurking in the background that despite running an honest and ethical business, that business may all of a sudden suffer a huge drop in revenue due to an unforseen incident such as a tank running over some girls.
Austin, this is why the Korea discount exists. At the same time, the Korean market holds out the promise of being very lucrative, if you can work your way through or despite the system, as many companies are trying to do. Same in China, an easy place to get conned, ripped off and scammed, yet foreigners are fighting to get through the door there because the potential for profits are huge. Why aren’t more companies coming to Korea instead? Because the potential for profits doesn’t warrant the risks, unlike China (which is nonetheless over-hyped, I think). And I agree, I would be very wary of doing business in Korea and wouldn’t trust any Korean partner other than my wife.
The bottom line is that Korea is a hostile country when it comes to foreigners and foreign businesses. In the long run, Koreans are only hurting themselves however. In the near future they will be left far behind other Asian countries that are moving much quicker to take advantage of foreign investment. Foreign businesses will find profit in much more affordable (and less hostile) markets than Korea and Koreans will be left scratching their heads and claiming they are once again the victim of foreigners. Koreans could stand to learn from the adage, “Be careful what you ask for, you just might get it.”
Forget it Jake, it’s Chinatown.
Found this linked from the Joongang article:
http://joongangdaily.joins.com.....id=2877258
The editorial really got under my skin after having read Dram_man’s analysis…
You know, there is discrimination, business-wise in other places too for example, take Malaysia:
Thus this sort of business situation occurs in different countries under different circumstances.
One could have a veritable flight of fancy in imagining what would happen to the business environment in Korea if there really was unification. It might resemble Malaysia more, but with some unique twists, for example.
From the Joongang, “why Lone Star is rushing to leave the country remains a bigger question” Well, here are the answers to that question:
Mark Mobius, who oversees $30 billion in emerging-market equities for Templeton Asset Management, said the backlash was politically motivated. “It has to do with nationalism and efforts to gain political mileage from nationalism,” he said.
“The moves to improve corporate governance are good,” he said. Yet the backlash against buyout firms is a deterrent to overseas investors, he added.
“The movement of the government against foreign investors like Lone Star is not good for South Korea’s image, and investors will think twice about the possibility of unexpected tax and other claims,” he said.
“Korea has been an extremely protected and chauvinistic economy,” says Jim Rogers, who founded the Quantum Fund with the billionaire investor George Soros and now runs his own commodities funds in New York. Rogers said he sold his Korean investments several weeks ago.
http://www.iht.com/articles/20.....xlone.php#
From the same article:
The head of the National Tax Service, Lee Ju Sung, told reporters in March that Lone Star’s Korea Exchange Bank acquisition might be nullified. Forcing the firm to comply with tax laws was a matter of “national pride,” he said.
Ah yes, national pride trumps international tax agreements.
“The government deceived its people and caused the leakage of state wealth,” says Choi Kyung Hwan, a lawmaker with the opposition Grand National Party and a member of Parliament’s financial and economic committee.
The profits from this private equity investment are not “state wealth” any more than the profits of Samsung or Hyundai.
The Korean prosecutors claimed they had evidence of a conspiracy in the Korea Exchange Bank takeover but after about a year they’ve yet to prove it.
“Leakage of state wealth” = what’s ours is ours and what’s yours is ours.
The funny thing is I disagree with at least half of the opinions here. I always think most things like this are outliners in the statistical trend, especially when you consider what Korea was like 10-20 years ago.
However what I find sad is the unwillingness of anybody domestically to take a high profile role in either defense, or in simply pointing out the parallels outlined above. More needs to be done, and until then the perception of Korea will not match reality.
For those of us holding won-denominated assets, this exit of foreign investors is relatively bad for the economy. Exiting foreign investors sell assets for won, then use the won to purchase US Dollars or other foreign currencies. This tends to offset demand for won from export trade, thus possibly affecting the exchange rate by weakening the won. If you hold won-denominated assets are not yourself holding a liquidation sale to flee the country, a strong won is what you want.
Yes, this idea of all wealth in the country being ’state wealth’ is ludicrous. Whatever happened to the idea of private property? Does this mean that my wife and I don’t really own our apartment here and if we sell it and try to take the money out of the country, we’ll be in trouble?
Koreans seem pretty good at capitalism, but it’s limited by the nationalist bullshit. They’d better watch out as nationalist insularity could screw Korea in the mid to long-term. The Chinese freight train is barrelling down the tracks and either it will roll over Korea or there will be a train wreck in which Korea will be hard pressed to escape from.
I think sometimes Koreans are actually not too good at capitalism, for instance the apartment speculation here only benefits a few and is a pyramid scheme waiting to collapse, and people open restaurants with no research on the area that go bust after a few months.
My prediction is China will roll over S.K. with its labor cost advantage, and the worst of it is that the chaebol families will be the main culprits in screwing the country with capital flight. Some chaebol are already moving their production out of the country:
http://asiaecon.org/?q=node/1797
Yes, very ironic all the talk of ‘national wealth’ when rich Koreans are and will pull their money out in any way they can, Korea be damned, when the crunch comes. Not that I really blame them, but this crap about national wealth is used by the chaebol as a way to cover for their uncompetitive ways and closed shop. Nothing changes here in Korea, as meanwhile, the foreigners get blamed for depleting the ‘national wealth.’
‘My prediction is China will roll over S.K. with its labor cost advantage…’
this prediction of yours is entirely based on the objective? my own opinion is korea’s going to be ok with regards to china’s rise. btw, could you tell me if you think china is going to ‘roll over’ japan too? is there any other country that’s going to be rolled over? australia, maybe? the us? just curious.
Ah, that mere mortals would presume to divine the purposes of the deities at Golman Sachs. With but $700 million under management in Korea, all of it other people’s money, they record fee-based income of $120 to $180 million per year. “just some skill” Mr. Elgin claims. That I possessed such skill…
But what do they do with it? Simple Macquarie-style infrastructure empire-building? No, all for development of Korea’s nascent futures and options market. Broadening and deepening the financial universe available to risk-seeking Koreans. Most free-marketeers would say they’re doing this country a huge favor. Earning just $10 million a month, and in return, boldly going where no Daewoo Securities or Hanwha Investment has gone before. How can I get them to accept some of my strong Korean won, to invest as they see fit?
Of key importance, I’m sure, is staying out of the papers. I wonder how they do that?
Brendon,
Either way, I’m screwed. The Canadian dollar keeps getting stronger and stronger.
“My prediction is China will roll over S.K. with its labor cost advantage, and the worst of it is that the chaebol families will be the main culprits in screwing the country with capital flight. Some chaebol are already moving their production out of the country”
I imagine there are productivity differences between Chinese and Korean workers, so I don’t think China is going to “roll over South Korea,” but Korean companies, like everybody else, are outsourcing production to China. Most of their manufacturing is exported to Western countries. China is an even harder place to do business than Korea. The rising cost of Chinese labor and other hassles are driving Chinese and foreign factory owners into Vietnam.
This very public and nationalistically motivated pursuit of supposed wrongdoings by Lone Star comes at the same time as Foreign Direct Investment declines for the 2nd year in a row.
Coincidence ? I think not.
At the same time, the U.S. is not exactly a level playing field, either. Remember the Chinese attempt to buy the small U.S. oil company Unocal ? The congressional vote to block that sale was blatantly nationalistic and far from fair.
Nope, no bias at all ! While the JoongAng says this in one article:
“Lone Star’s stake sales were made through a unit established in Belgium, with which Korea signed a treaty not to levy taxes on profits from stock sales.”
…the JoongAng editor says this in an opinion piece:
“Lone Star Funds intends to flee Korea.”
and
“The National Tax Service is just now looking into ways to tax the profits earned, but it appears as if they will fail. Just as Texans cried, “Come and take it!” during the Texas civil war, Lone Star is defiant.”
It sounds like foreign companies making money in Korea is considered a bad thing, despite whatever earlier agreements were signed.
If I was Lone Star, I’d be “fleeing”, too.
Wake up, Hermit Kingdom. Being so obviously biased against foreign investment will only ensure foreign capital ends up benefiting other countries rather than Korea.
I’m going to be the lone dissenter here.
What did Chung do wrong? He ‘embezzled’ company money. But what did he use it for? He didn’t use it for personal use. He used it to ‘lobby’ the government and he used it for backing certain candidates in election campaigns. He used the money so that Hyundai can do business in Korea without running into all kinds of government tape by going around it. Is that such a terrible crime, to use financial muscles to help promote your business? The problem is not with the Chaebols, it’s with Korea’s red tape and archaic laws which make the corporations break the law just so that they can stay in business.
My opinion is that Korean’s definition of “nation” and thus “national economy” is very much tied with race, not so much on culture, and certainly not based upon a consistent set of rules or law. So, as long as you have Korean blood, you’re “in” and get a pass on nearly everything illegal.
Otherwise, if you’re an evil foreigner, you get the book not only thrown at you, but re-written and then thrown at you.
It’s no wonder why Foreign Direct Investment into Korea continues to shrink.
cm,
I think there’s a huge cultural issue that to almost all foreigners, seems like favortism towards Koreans and bias against foreigners.
Much of it stems from the fact that most western companies have a long history of using (and most of the time respecting) laws and contracts when doing business, sometimes at the expense of pragmatism and spirit, whereas Korean companies seem to rely less upon laws and rules and more upon doing “what seems right at the time”.
The conflicts between the two sets of beliefs comes in when:
1) Westerners place more stock in laws and contracts than Koreans do
2) “Korean national interest” almost always (99.9% of the time) means favoring Korean nationals or those of Korean blood over foreigners.
Hence, the perceived bias many foreigners and foreign companies feel.
Say, for example, a western executive of a huge company with a huge presence in Korea (Korean citizen or not) did the same thing as the chairman of Hyundai for the same reasons. Do you believe the Korean legal system would have let him or her free to “guarantee his(her) right to a defense and minimize the impact on the nation’s economy.” ?
I seriously doubt it. Hence, the bias many here talk about and the “Korean discount” that still applies today in the business world. I believe “discount” is in terms of risk and is similar to bonds, where more risky bonds have to be sold “at a discount” when compared to lower-risk bonds. So, Korea has to “sell itself” to the rest of world at a discount versus other countries which have more uniformly enforced and consistent laws.
The message being (unintentionally) sent by Korea to foreign companies is that they better factor in a sizable risk premium. Should any dispute take place, the foreign company will most likely lose, whether monetarily or being forced out. It’s no wonder the “free economic zones” have been a complete failure at attracting foreign investment.
Interesting tact this is taking on some levels. I think some clarification is needed in the Chung case.
What Chung did (or at least what he did in the case quoted above) was to lowball company assets (in this case the stocks held in the cross linking structure of the Hyundai Motor chaebol), stole cash to buy the assets (actually this may have been as simple as an accounting entry to have one company with cash “buy” the now lowballed stock), and all with the intention of solidifying family control of the company.
In doing so the following parties were wronged:
1. The company(ies) for the loss value those assets if fairly valued
2. The shareholders for the loss of value of the stocks owned, and moreover for the breach of trust they placed with Chung as Chairman charged with maximizing the value of the company.
3. The government since they would normally collect taxes on things like a possible capital gain, dividends, and probate.
4. In a broad sense everyone, since Chung’s actions reflect poorly on Korea’s business environment and corporate governance.
CM> So no, Chung’s actions were in no way connected to “business use”, even in the broad sense you use the terms. They were for purely a selfish venture.
Furthermore using your argument, the liquor companies mentioned should be absolved of any wrong doing, both for the slush funds and the distribution practices. So even with your twisted definition of “business use”, there is still a double standard.
Miguk> I think the real problem here is not the corruption per se, but the unpredictable nature of it and the business and legal environment it creates. For example Lone Star. Its one thing to have a bias towards foreign capital. Its another to encourage it, international agreements aiding, accept 99% of transactions in a seemingly fair and legal manner, and then arbitrarily go after 1% of the transactions by twisting the law like a pretzel maker.
That 1% creates further unpredictability to the business, and as said above is one of the reasons for the “Korea Discount”.
pawikirogi — just saw your comment. China ia far more welcoming to foreign investment than Korea, and with lower labor costs it has the edge on Korea. Japan and the U.S. have a technological advantage that should keep their economies ahead of China’s for some time, while Korea does not (it is dependent on these countries for technology).
I’m not saying I want to see this outcome by any stretch, I hope the Korean gov’t gets its act together and pushes for innovative smaller companies to make up more of the economy.
“How can I get them to accept some of my strong Korean won, to invest as they see fit?”
Linkd, obviously many Koreans think that Goldman Sachs is providing them with a service they really want, having poured tons of money into their coffers. Is Goldman ripping people off and making too much profit? If you think so, don’t put your money in. But why should anyone give a damn how much profit any company makes, as long as the customers get what they want out of the services provided (and as long as they don’t get it illegally or screw the customer, the shareholders or others for it).
Hey, I’m with you, Snow. But GS doesn’t open accounts with just anyone for a few grand. They aren’t operating mutual funds here. Small numbers of premium customers with millions to put on the table, that’s their target customer. That’s all I was wistfully getting at.
I would hesitate to guess how many customers they have here. As few as possible, I’m sure. Probably banks, government bodies and local investment firms among them.
Linkd, I was confused by your post, as I know you’re in the business world and always seemed supportive of business, so wasn’t quite sure what you were getting at. Yes, it certainly would be nice to be able to get into the world of investment, to have the cash to do it seriously. At the same time, I’ve been burnt on a couple of stockmarket plays, so am a little wary, especially of things like futures and forex and the like, which I just don’t know much about. I’m happy to see that there are more and more people able to go the investment route, as it means that there’s more money being made and more people are getting rich. Just wish I could be one of them.
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