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FDI by Volvo in South KoreaIB 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 thechanges in ideology in the 1990¶s? Explain briefly South Korea¶s ideology from1990¶s onwards. Which country was South Korea¶s role model?

Political Ideology prior to 1990On August 15, 1948, the Republic of Korea was formally established. There was

autocratic leadership for more than a decade from then. South Korea experienced politicalturmoil under the leadership of Syngman Rhee. This autocratic rule was ended in 1960 bythe 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. Soonthere was a military coup by Park Chung-hee in 1961. Park¶s administration started theterm by announcing the Five Year Economic development Plan, an export-orientedindustrialization. He extended friendly relationships with free economy nations like

United States. Park regime used the influx of foreign aid from Japan and the United Statesto provide loans to export businesses. This government also kept close ties with theUnited States, and continued to receive large amounts of aid. Economic and technologicalgrowth during this period improved the standard for living, which expanded opportunitiesfor 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 plansfocused 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 IdeologyDespite the economic growth and results in diplomacy, the government, having

gained power by a coup, was essentially a military regime. Public support and trust waslow when the promises for democratic justice never materialized. The students were

protesting in large quantities. But the military power crushed the people protesting. Thiscaused a huge unrest among the people. Soon there was new government. Thegovernment set out to eliminate past vestiges of authoritarian rule, by revising laws anddecrees to fit democratic provisions. Freedom of press was expanded, universityautonomy recognized, and restrictions on overseas travels were lifted.

After 1990Kim 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. Thegovernment set out to correct the mistakes of the previous administrations. Thegovernment also carried out substantial financial and economical reforms, joined theOECD in 1996. In 1997, the nation suffered a severe financial crisis. The governmentfaced 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 thecitizen's gold-collecting campaign, the country was able to come out of the crisis in arelatively short period of time. After regulatory and economic reforms, the economy has

bounced back, with the country's economy marking growth and apparently recoveringfrom the global recession.

The country always took Japanese as their role model. South Korea implemented allthe economic developmental activities keeping the Japanese in mind. Though they hadauthoritarian rulers, they were supportive to free economy nations. The idea of exportoriented 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 itsliberalization in 1990? Why Volvo acquired Samsung¶s Construction EquipmentDivision (CED) in February 1998?

FD I Impact The South Korean government made the historic decision to remove many of the

restrictions to foreign direct investment, including the regulations that prohibited foreignfirms from making hostile takeovers of Korean enterprises. Even though the Koreangovernment made efforts to liberalize FDI in the 1990s, effective progress remained slowand uncertain until the end of the decade.

Korea allowed FDI into a larger number of activities, eased policies on approvals, andcreated incentives especially for high-tech investments, but various impedimentsremained and implementation was only partial, notably because of resistance amonglower level bureaucrats. Foreign companies kept complaining about bureaucratic

procedures and controls. In 1996±97, with Korea¶s accession to the OECD,10 a new setof measures²including the liberalization of policies on friendly mergers and acquisitions(M&As) by foreigners²was 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 inthe Korean economy surged from $3 billion in 1997 to $9.3 billion in 2000. The totalstock 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 2000Korea¶s level of FDI restriction was much more comparable with that of other OECDmember countries. Data for the first 4 months of 2000 indicate such investment totaledUS$3.7 billion, about 33 percent higher than the same period in 1999. South Korea's GDPgrew by 10.7 percent in 1999, and continued its growth in the first quarter of 2000. Theestimated growth rate for the entire year is about 8 percent. The recovery pushed theunemployment 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 averageinflation rate in the 1980s was 8.4 percent.

V olvo Acquisition

V olvo acquired Samsung¶s construction equipment division because of the followingreasons:

y The market for excavators accounts for one third of the total world market for construction equipment. Samsung's broad range of excavators will represent asignificant contribution to V CE's existing product program. Samsung manufacturessome ten different types of excavators, mostly in the 7-28 ton category.

y The acquisition will also give V CE access to an industrial structure in Asia and anefficient distribution network in South Korea, a significant market for constructionequipment in Asia. The acquisition will also strengthen V olvo Construction

Equipment's presence in East Asia and provide opportunities to increase marketshares in the company's other product areas, such as wheel loaders, graders andarticulated haulers.

y In addition to a production facility, with a capacity of about 10,000 machinesannually, 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 V CE gave rise tosubstantial synergies, both commercial as well as industrial. The acquisition had

significant potential for rationalization, which together with those synergies, providedsubstantially improved economies of scale.

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

V olvo- Samsung CE D deal

Government roleIn 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 themodel of Japan. In 1990, the Korea started to open the trade and allow the foreigncompanies 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 opportunitiesin the country. One of the reason was to allow the foreign investment is due to the Asianfinancial 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.V OL V O entered in the Korean Market by making the investment of 200 million dollarson a production plant for the production of construction equipment. V olvo moved histechnology to the Korea to their plant to increase the efficiency and productivity.

Employee responseV olvo 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 culturalincompatibility between Samsung and V olvo. The management styles were particularly

different. Though they look dissimilar, the two companies¶ share three importantattributes that helped make the acquisition a success-A strong belief in quality, strongcompany pride and strong brand names. The planned acquisition was announced inFebruary 1998. The very next month, Samsung workers reacted by initiating aspontaneous strike. Soon V olvo initiated some actions that calmed the situation. But inthe latter months of 1998 and early 1999, the Asian economy declined. The productionvolumes of V olvo declined, so it reduced headcount to maintain profitability. Theworkers were stung by this response and organized a union in the early 1999. There werealmost 13% of 1655 employees at the plant leaving V olvo. It was during this time thecitizens of South Korea too viewed this acquisition with suspicion and the radical pressdemonized these companies as unwelcome guests feeding off the local markets likeleeches.

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