By Daniel Sae-Chin Kim

danielkim@paulhastings.com

www.paulhastings.com

In 2003, Korea invested more in China ­ $4.4 billion ­ than any other country in the world. The US was a close runner-up at $4.2 billion. The trend continues, as Korea has reportedly invested $2.7 billion into China during the first five months of 2004, according to a Korean trade organization.

At the same time, there is growing worry that China's growth will overwhelm Korea. Shanghai Automotive Industry Corporation has agreed to purchase Ssangyong Motors, the Korean automobile manufacturer being sold by its creditors. China State Shipbuilding is reportedly building the largest shipyard in the world ­ which title currently belongs to Hyundai Heavy Industries' shipyard in Ulsan, Korea. While China was the top destination for Korean steel exports, China is also the second largest source of Korean steel imports.

Is China a Partner or a Competitor?

Korea sits, figuratively and literally, in the best possible seat to take advantage of China's growth as a leading world economic power, and it must continue to be a leading investor in China. Korea is directly prospering from China's emergence as a global economic power. As Korean companies continue to move towards higher-end manufacturing and high technology sectors, China has proved a very receptive market. One only has to spend a few hours in Beijing or Shanghai to see countless Samsung mobile phones being used by local people, LG flat-screen televisions on display in many public areas and stores, and scores of Hyundai and KIA automobiles on the streets. For Korea, China is and will continue to be an economic partner, albeit one that is becoming the more powerful partner. In fact, Korea will come to view China as part of its "domestic" market, or perhaps more appropriately, Korea will become one of China's "provinces", economically-speaking, and will grow as China grows.

China as Korea's Domestic Market

Several factors make a market a "foreign" one rather than a "domestic" one. Such factors include borders and geography, and government policies and regulations.

Obviously, a market is likely to be considered a foreign market if it is in a foreign country. However, as one can appreciate from the mature European Union market, it is possible for a "domestic" market to cross land and sea borders. Geographically, Korea could not be more closely situated to the economic centres of China. Beijing, Shanghai, Qingdao and Guangdong province are all within one to three flight hours or one shipping day from Korea.

The systems and philosophy of the Chinese government are very different from those of Korea today, but perhaps not so different from Korea during the high growth days of the 1960s and 1970s. As Korea struggled to become an industrial and manufacturing nation after the war ended in 1953, it faced many of the same issues (e.g., urbanization, international backlash against protectionism, corruption and bureaucratic inefficiencies) that China faces today. As a result, Korean businessmen are savvier and more flexible in dealing with a constantly evolving regulatory system and highly bureaucratic regimes than their counterparts from most other developed countries.

Korea's Action Plan

To its credit, the Korean government has been aggressively promoting investment in China. Korea's Ministries of Commerce, Industry and Energy have worked with the Federation of Korean Industries for the past several years to promote investment into China. The Korean government also formed with China the Cooperative Partnership for the 21st Century, which has led to regular meetings among ministers from both sides to further cooperation in key industries. And, although the Foreign Exchange Transactions Act of Korea requires reporting to, or approval from, the Bank of Korea and/or Ministry of Finance and Economy of Korea (depending on the nature and amount of the investment) for an investment or funds transfer outside of Korea, the Korean government provides a relatively unrestricted foreign investment environment for domestic companies seeking opportunities abroad.

However, in order to continue with its successes, Korea must continue to press forward with its own economic opening. Certain parts of the Korean economy, such as manufacturing and farming, may further suffer, but that is the price that Korea should be willing to pay in order to demand further opening and, ultimately, free trade with China and other countries. Finally, the Korean government must change laws that favour manufacturing in order to encourage the growth of the service sector (e.g., insurance, consulting and legal services).

Conclusion

For thousands of years, China and Korea have, for the most part, co-existed harmoniously. Korean companies do fear potential Chinese domination, but that fear is not a paralyzing one and, at least for now, seems to be a distant one. Korean conglomerates like Samsung, LG, Hyundai Motors and Posco are pumping billions of dollars into China, not only to take advantage of the lower cost of manufacturing, but also to gain a stronger foothold in the Chinese market. Indeed, Korean companies of all sizes are involved, with over 22,000 Korean companies, mostly small and medium enterprises, having invested in China to date. As part of making these investments, Korean companies are blurring the borders, crossing the cultural and economic divide, and shedding the "foreign" from foreign investment day by day.