Currency Crisis and Difficulties for Overseas Affiliates:A Case Study on the Restructuring of Korean Affiliates in Indonesia
Wan-Joong Kim

Indonesia's currency crises and political uncertainty have caused a decrease of FDI in Indonesia. Likewise Korean overseas direct investment in Indonesia has contracted(see Figure 1). While Korean firms in Indonesia regarded social, economic and political uncertainty as providing a negative environment for investment following the currency crisis of Indonesia, a cheap labor supply provides incentives to continue to do business in Indonesia(see Figure 2). Korean firms, therefore, could minimize the negative effects of the currency crisis in that they were largely export-oriented firms.

Figure 1. Korean Overseas direct Investment in Indonesia

Figure 2. Results of Survey concerning Indonesian InvestmentEnvironment following the Outbreak of the Financial Crisis
Korean firms participating in toy, clothing, and mining production in Indonesia have maintained a good business performance despite the currency crisis. However, the business performance of firms within the textiles, electronics and electricity, and automobiles industries have suffered during the same period. One of the reasons for the poor business performance of the latter group is the reduced number of overseas buyers of products from Indonesia as they fear political uncertainty. The decrease of global demand for such goods has also hurt such exports. In particular, Kia Motors' affiliate in Indonesia is currently experiencing difficulties due to the decrease of local demand for cars, revocation of tax favors from Indonesian government, and a halt of capital supply. As a result, prospects for the 'National Car Project' which Kia tried to enter as a joint venture with Tomy (former Indonesian president Suharto's third son) has become very uncertain.
In addition, the currency crises in Korea has caused great difficulties for firms established in Indonesia in raising needed capital. Thus, the withdrawal of Korean firms from Indonesia is more often due to the home country's economic conditions rather than host country's current situation. According to the author's survey, Korean firms that remain in Indonesia do not intend to withdraw from the country. Instead, some firms have plans to expand their production capacity in Indonesia as a result of improvements in export price competitiveness(see Figure 3).

Figure 3. Results of Survey concerning Coping Strategy of Korean Firms in Indonesia: Production Levels

Figure 4. Results of Survey concerning Coping Strategy of Korean Firms in Indonesia: Methods of Production, Marketing, Raising Capital, ets

Some of Korean firms which had relied on local demand have restructured themselves by reducing production capacity and number of local laborers. Many firms' restructuring process has been concentrated primarily on quality, such as increasing productivity, rather than focusing on quantity, such as decreasing the amount of labor and capacity. Other firms have changed their strategy to increasing target exports and the ratio of local procurement of raw materials(see Figure 4).

All Korean firms that were surveyed in Indonesia requested financial help from the Korean government to alleviate the difficulties of acquiring capital through banks. They have insisted that despite the political uncertainty which Indonesia is presently undergoing, there existed a good opportunity for increasing exports. However, these Korean firms are unable to capitalize on such opportunities as many of the Korean bank branches in Indonesia which Korean firms have been relied on for credit, have succumbed to the Indonesia crisis.

Korean firms in Indonesia have imported from Korea a large portion of raw material necessary for manufacturing. Therefore, exports of Korean firms established in Indonesia are closely connected to exports of Korean firms at home to Indonesia. Thus, Korean firms have requested the Korean government to provide desperately needed trade financing.

Currency Crisis and Difficulties for Oversea Affiliate: A Case Study on the Restructuring of Korean Affiliates in the U.S. Since 1990, Korean firms have actively engaged in FDI as part of their growing targeting of overseas markets. However, this expansion overseas has reversed course dramatically in the wake of the Asian crisis. During the initial eight months of 1998, FDI from Korean firms sharply decreased and this trend is expected to continue for at least the short-term. Not only have plans to purchase assets and companies in the U.S. been largely scraped, but the difficulties of domestic parent companies have affected affiliates already operating in the U.S. As domestic parent companies face the need to reduce debt to equity ratios, this has weakened their ability to act as guarantor of credit applications by overseas affiliates.

This inability to guarantee affiliate loans is significant as many Korean overseas affiliates continue to post losses. While parent companies were able to compensate for the deficits of overseas affiliates in the past, the drastic plunge in financial health of Korean parent firms in the last year has largely ended such ability. In response, practically every overseas Korean affiliate has been undergoing restructuring in an effort to make efficient those operations that hold out the potential for profit and dispose of the rest.

Korean affiliates have already reduced their size of operations, shed expansion plans, sold assets and some have even been forced to withdraw foreign operations.

Factors determining corporate restructuring patterns and process can be categorized into such as orporate level, industry level. Factors in the corporate level can make a profound influence on the restructuring process. For example, if a parent company goes bankrupty, then in most case, foreign affiliates no longer continue their operation. In this case, they can not but to sell their assets and withdraw from that country.

And factors in the industry level also affect the restructuring process. For example companies in semi-conductor sector where exists oversupply and market prospect is dismal cannot easily circumvent the crisis. So they now put off their whole investment project indefinitely.

Many of the best examples of suffering Korean affiliates operating in the U.S. come from the semiconductor and consumer electronics sectors. The Samsung, Hyundai, LG chaebols all took over U.S. semi-conductor or telecom companies, paying high prices to do so, and have since suffered continued significant losses. Not long after purchasing a 55% stake in perennial U.S. money loser Zenith Electronics, LG Electronics has been forced to send Zenith to Chapter 11 bankruptcy proceedings. LG's plan, should it be accepted by the court, will give LG 100% ownership of Zenith; however, the operations of the latter will be scaled back to a fraction of what they once were. Zenith has seen only one profitable year in more than a decade after getting clobbered in a grueling industry price war. The losses have forced Zenith to sell many of its peripheral businesses and go through downsizings. Attempting to compensate, Zenith invested in new technology, such as Internet television boxes, cable modems, and high-definition TV systems, and it upgraded color picture tube production capabilities.

Other examples of struggling Korean affiliates in the U.S. include Samsung's PC maker AST Research, which has already sold most overseas assets, including buildings, real estate and other assets, and has reduced the number of employees from 6,000 in 1995 to 600 as of November, 1998.

The primary cause of the difficulties was the inefficient operations themselves. AST was at one time among the fastest-growing high-technology firms in the world. The company stumbled its way to the computer market's version of skid row thanks to slow product introductions, and the dominance of cutthroat competitors. AST, which in the past has been split between consumer and corporate customers, intends to cater more to small-and medium-sized companies.
Not only is downscaling prevalent, many affiliates are being sold outright. These include the sale of Hyundai's Symbios, Odeum, TV/COM and Samsung's SMS and IGT. The Ssangyong Group disposed some of its overseas assets including two hotels for $150.5 million under the group's restructuring drive. Ssangyong Engineering & Construction Co. sold its two Marriott Residence Inn hotels for $30.5 million to Sunstone Hotel Investor, a U.S. investment trust company. Meanwhile, Ssangyong Cement Industrial Co. sold its cement factory in California, Riverside Cement Co., for $120 million to Texas Industries Inc. At that time, Under the assumption that the won/dollar exchange rate stands at 1,800 to the greenback, Ssangyong was expected to secure some 270 billion won in business funds through the disposal of its overseas assets.

Shinhan Bank realized a profit of $20 million by selling its US subsidiary, Marine National Bank(MNB), to the First Security Bank. Since its takeover of MNB in September 1996, Shinhan increased MNB's equity capital from $8 million to $30 million, while expanding its total assets from $100 million to $240 million. "This increase in value was the key for the successful sale of MNB," said an official of the bank. Hanil Bank had sold its affiliate in Los Angeles, the First Statebank of Southern California, to the Popular Bank of the United States for US$34 million and saw profit of US$19 million from the sale. The California bank, acquired by Hanil in 1982, has assets worth US$170 million and posted a net profit of US$1.3 million in the 1997 fiscal year.

While the Asian financial crisis brought to light the difficulties of the operations of Korean affiliates in the U.S., it was a secondary cause in many case including AST, Zenith. The primary cause of the difficulties was the inefficient operations themselves. Thus, There is an urgent need for corporate restructuring toward quality to prevent the health of Korean assets in the U.S. from deteriorating even further.

Foreign Direct Investment: A Key to Overcoming the Crisis
Executive Summary

1. Countries as diverse as the United Kingdom, Chile, and Mexico have successfully utilized foreign direct investment (FDI) to overcome financial crises. FDI contributed to these economic turnarounds by creating jobs and facilitating technology transfers. Thailand and Malaysia are two Asian countries that have been active in promoting FDI by removing restrictions on such investment and selling off financial institutions to foreign investors.

2. A major advantage of FDI is that it induces stable foreign capital without increasing domestic debt. Furthermore FDI facilitates financial and corporate restructuring. Such factors not only quickly contribute to the financial and corporate health of countries, but recent empirical studies show that a higher level of FDI is associated with a lower incidence of currency crisis and IMF rescue loan arrangements.

3. FDI increases consumer welfare by enhancing competition and boosting productivity through transfers of advanced technology and management know-how, benefits not normally associated with portfolio investment. A list of the benefits of trade and investment liberalization appearing in a recent publication of the OECD include greater freedom of choice, an increased degree of specialization and exchange based on comparative advantage, downward pressure on the prices of goods and services, productivity gains, technology and knowledge spillover, and a more efficient allocation of resources

4. Among these benefits, the spillover effect of advanced technologies of foreign invested firms is particularly important for developing countries. In Korea, the foreign subsidiaries Motorola Korea and Du Pont Korea have contributed to the upgrading of the technological capacity of domestic subcontractors. Such transfer has taken place through the operation of technology assistance centers, on-the-job training of quality improvement, and technical and managerial guidance. These subsidiaries also assisted former employees in establishing their own firms by transferring machines and later purchasing their products.

5. Besides these technology spillover effects, FDI promotes competition in domestic markets, thereby raising efficiency, and increases consumer welfare through lower prices. FDI liberalization alone has the ability of transforming entrenched monopolistic domestic markets into strongly competitive centers of activity.

6. Some worry that FDI may tip the current account of a country into deficit due to imports of intermediate goods, upward pressure on local currency, income transfers and the repatriation of profits by foreign multinationals. While some of this may be true, in the long-term, FDI improves current account due to its tendency to foster increases in -locally produced contents of intermediate goods,-exports,-follow-up and new investment that follows initial FDI, and-export competitiveness realized through transfers of advanced technology and management know-how.

7. FDI also creates jobs and, according to a recent OECD study, is complementary to environment protection. The foreign invested firms in the Masan Free Export Zone created over 50,000 jobs in the mid-1970s. Yuhan Kimberly has been campaigning for forest conservation since 1984, the first large-scale corporate environment protection campaign in Korea.

8. In Korea there is a lingering view that the privatization of state-owned enterprises (SOEs) will bring in bids below actual value. However, case studies of other countries demonstrate that the sale of SOEs to foreign investors not only bring resources needed for restructuring but also induce additional foreign investment by raising international credibility. According to a study by the Foreign Investment Advisory Service (FIAS), every dollar of FDI through privatization fosters an additional 0.88 dollars of FDI.

9. The Korean government has been undertaking active promotion of FDI by liberalizing cross-border M&As and foreign land acquisition, announcing liberalization of foreign exchange transactions and enacting the Foreign Investment Promotion Act. Such efforts have made Korean investment laws as liberal as those in advanced economies.

10. Thus, Korea should now focus its deregulatory efforts on improving efficiency of the internal regulatory environment. The transparency of regulations need to be enhanced through making laws more clear, removing any contradictions. Korea needs to eliminate those laws that hinder targeted deregulation while boosting the efficacy of those regulations that promote needed restructuring. In particular, it is urgent to lift regulations which deter foreign investment in small- and medium-size companies.

11. Now that investment incentives have been strengthened, the remaining task is the efficient applications of these incentives. For this purpose, local governments must be supported in the attempts to acquire expertise in inducing investment and be given greater autonomy.

12. When privatizing SOEs, the additional indirect benefits cannot be overlooked. Thus the government should implement privatization programs with firm objectives and avoid putting too much emphasis on the actual sale price of the SOE.

13. The bilateral investment treaties (BITs), such as the treaty currently being negotiated with the United States, can reduce foreign investor skepticism of Korea's true commitment to liberalization. Such treaties also introduce an effective dispute settlement mechanism. Hence, in pursuing the establishment of such treaties, Korea should employ flexibility to promote implementation of BITs.

14. Meanwhile, it is necessary to remove all possible import restrictive measures which act as investment barriers. Customs procedures also need to be streamlined to reduce the delay on customs clearance. In addition, there should be continuous efforts to fight corruption and lower hidden costs in doing business.

15. Finally, the Korean government needs to promote awareness in the general public of the benefits of FDI. Public officials, consumers, and workers need to be shown that FDI is not a 'win-lose' but a 'win-win' proposition. In particular, our young must be educated in a way that fosters an open and rational mind.

As the once dynamic Northeast Asian economies have been recently slowed by the recent regional turmoil, resulting in a shrinking volume of intra-regional trade and investment, the need for intra-regional economic cooperation has become much more pronounced. The rise of globalism being rivaled by the rise in regionalism further underscores this need for closer Asian cooperation. Yet traditional intra-regional trade liberalism alone may not suffice. As the initial cause of the recent regional turmoil was financial in nature, this has highlighted the importance of financial cooperation and macro-economic policy coordination among Northeast Asian countries.

In response to this need, the Korea Institute for International Economic Policy held a forum titled Prospects for Economic Cooperation Between China, Japan and Korea on into the 21st Century. Suggested and discussed were concrete measures to enhance economic cooperation between China, Japan and Korea. To promote the most promising measures of economic cooperation put forth at the forum, the establishment of the 'Economic Cooperation Council' was proposed.

Non-Tariff Barriers in APEC Economies Jungshik Son, Hongyul Han When APEC was first established in 1989, there was little expectation that the organization would be able to produce meaningful results. The very reasons of such skepticism comes from two basic principles of the APEC. The first is "open regionalism," whereby all the benefits of trade liberalization accrue to those both within and outside the region. The second principle is, "non-binding cooperation," meaning that the APEC will not utilize standard integration processes such as negotiations and agreements.

The development of the APEC shows that the members are still searching for some mechanism that can promote liberalization on the unilateral basis. EVSL is an attempt to produce such mechanism in APEC. EVSL adopts a 'semi-negotiation process' in selecting sectors for liberalization and cooperation, which greatly transforms the nature of the APEC from a forum of cooperation to a market for exchanging commitments for liberalization.

The main purpose of this study is to identify non-tariff measures applied to the products included in the EVSL, in order to facilitate the process of EVSL by providing information on non-tariff measures in APEC economies. The characteristics of non-tariff measures on the EVSL products can be summarized as follows. First, though the frequency of non-tariff measures in the APEC developed economies is smaller than that of developing economies, those measures are applied in a manner to directly influence trade flows. For example, the incidence of import quota, anti-dumping and countervailing measures are relatively more frequently found in developed economies.

Second, APEC developing economies are applying more general type measures like import authorization, non-automatic licences and import inspections rather than applying product specific measures. This characteristic seems to undermine the transparency of trade environment of developing economies.

Finally we suggest that more balanced approach is necessary for the successful conclusion of EVSL. First, as one of the reasons for developing economies to participate in EVSL is the unbalanced development between TILF and Ecotech, EVSL has to proceed in a more balanced way by emphasizing Ecotech. Second, it is desired to harmonize the level and frequency of non-tariff measures applied by the regional economies.

Currency Crisis and Difficulities for Overseas Affiliates: A Case Study on the Restructuring of Korean Affiliates in the United Kingdom Dongwha Shin

Since 1990s, Korean firms have pushed active FDI moves to Europe. Especially the U.K., among other European countries, has attracted FDI most, owing to its well-developed investment climates and efforts of U.K. government. However, things are changing after the financial crisis of Korea. Korean companies' overseas affiliates operating in the U.K. come to unable to afford financing the necessary capital from the parent companies nor from the local banks in the U.K. In the extreme cases, owing to the parent companies' bankruptcy, some affiliates are stopping their operations. Other companies are moving production lines to Eastern Europe to reduce labor costs. Practically every affiliate has been undergoing restructuring in a way to adjust to the changed environment. Nevertheless, patterns and processes of restructuring were not identical across affiliates.

Factors determining those patterns and processes can be categorized into three levels: corporate level, industry level, and regional level. Firstly, factors in the corporate level can make a profound influence on the restructuring process. For example, if a parent company goes bankruptcy, then in most cases, foreign affiliates no longer continue their operation. In this case, they can not but to do sell their assets and withdraw from that country. Secondly, factors in the industry level also affect the restructuring process. For example microwave oven market conditions and prospects being favorable, affiliates in this sector can overcome the financial crisis or adverse parent company position, only by increasing their productivity and efficiency with more efficient management and inventory control. But companies in semi-conductor sector where exists oversupply and market prospect is dismal cannot easily circumvent the crisis. So they now put off their whole investment project indefinitely. Finally we can think of factors in the regional level.

Let's take the appreciation of sterling pound for example. Traditionally the labor cost in the U.K. is the lowest among the EU members, and is similar to that of Korea. But things are changing dramatically in the strong sterling pound era. For the Korean affiliate, the merits in operating in the U.K. are disappearing. In this case there are different patterns of restructuring, such as transferring production site to the Eastern Europe and automizing production processes.

Despite industrial countries concerted policy coordination efforts to prevent a synchronized deep recession of the world economy, there still remain several downside risks that might adversely affect the global economy. The most conspicuous and significant risks are the possibility of an international liquidity crunch, the potential instability of emerging markets, and the possibility of a further financial meltdown and continued depression in Japan. However, if appropirate policy measures are undertaken, the prospects for the world economy in 1999 are promising.

In 1999, the world economy is poised to bounce back from 1998? 2.0% economic growth to a more benign 2.4% growth. This optimistic forecast is based on a number of recent developments that potentially reduce the risks of a global recession. To begin with, the United States still shows quite strong economic fundamentals. The third recent interest rate cut by the Federal Reserve this year successfully ended the credit crunch triggered by the near collapse of Long-Term Capital Management which took place just after the Russia? de facto debt default in August. Furthermore, the Dow Jones industrial index, which plunged in late August and September has fully recovered. Waning U.S. consumer confidence also recovered in November on the back of the recovery of stock prices. As consumer spending is two-thirds of the nation's overall economic activity, the rise in consumer confidence indicates that the U.S. economy is unlikely to soon slide into recession.

The European Central Bank (ECB) also delivered an early Christmas gift by participating in concerted interest rate cuts. On December 3rd, ECB reduced the administered interest rates from 3.3% to 3.0%, despite continued denials that it would do so. Although the lower interest rates will not change short-term growth prospects, which are mainly influenced by the slump in foreign demand, they will have a positive influence on business confidence, especially in the financial sector. The successful launching of the Euro, bolstered by lower interest rates will also contribute to economic growth prospects for West Europe and peripherial economies.

The Japanese banking crisis remains one of the largest, if not the single largest, threat to the world economy. While the Obuchi government? financial rescue and fiscal stimulus packages are not fully satisfactory, they may be sufficient to bring at least a temporary end to the Japanese recession in 1999. Meanwhile, non-Japan Asian economies are expected to begin improving late this year or at least in the first half of 1999. Foreign investment is increasing, particularly in Korea and Thailand, and the current account crisis is literally over. The key issue is now whether the recovery will be characterized by a slow U-shaped or a strong V-shaped cyclical rebound.

Economic Effects of Early Voluntary Sectoral Liberalization on the Korean Economy Jai-Won Ryou, Honggue Lee
We examined the merits of the proposals for early voluntary sectoral liberalization (EVSL) as applied to Korea by considering their potential effects on welfare and trade flows. For that purpose, we took up 15 commodity sectors for analysis. (For nine of them, the liberalization plan is supposed to be implemented immediately, and, for the remaining six, their liberalization is to be carried out later.)

We first looked at the patterns of comparative advantage of these sectors. According to the revealed comparative indices calculated for the sectors considered, Korea has comparative advantage in fertilizers, automotive, fish and fish products, gems and jewellery. On the other hand, Korea has comparative disadvantage in chemicals, forest products, medical equipment and instruments, food, oilseeds and oilseed products.

Second, we considered the effects of EVSL on trade flows. By eliminating tariffs, EVSL is expected to increase imports in Korea. Our analysis shows that the increase in imports in terms of volume will be greater in automotive, energy, and chemicals sectors than any others, while automotive, food, fish and fish products sectors will experience a most rapid change in imports in terms of growth rates. At the same time, EVSL is likely to increase Korea's chances for more exports to the member countries as many of them constitute Korea's major trading partners and some still have substantial tariff barriers. We anticipate a substantial increase in automotive exports among other items.

Third, we made use of both the conventional surplus measures and the trade restrictiveness indexes in our welfare analysis. In our estimation of the positive effects on resource allocation of EVSL, food and automotive sectors turned out to have the greatest improvement. Yet the resource allocation improvement is relatively meager in the sectors such as forest products, gems and jewellery, fertilizers, natural and synthetic rubber. Scale and pro-competitive effects are substantial in chemicals, food, automotive, natural and synthetic rubber, whose importance is decreasing in that order.
We also examined the merits of EVSL by comparing the changes in trade restrictiveness indexes during the period between the time (dating back to 4-5 years ago) when the APEC process started and the hypothetical time of implementing the proposals for EVSL. According to our estimation, EVSL is likely to enhance welfare far more substantially than did the liberalization efforts for the past 4-5 years. It will be particularly so in food, fish and fish products, and automotive.

■ Following the outbreak of the foreign currency crisis in November 1997, the resolution of domestic debt has emerged as the primary task for restoring economic stability in Korea. A year of economic turmoil and efforts at reform have now passed and it seems to be a good time for a reflection; for this purpose, KIEP held an international seminar, focusing on the two most important and intertwined aspects of economic reform: financial sector reform and corporate restructuring.

■ The financial sector reform has been reviewed by Dr. Stijn Claessens of the World Bank, and corporate restructuring by Dr. Ira Lieberman, also from the World Bank. The papers provide updated information on the reform process, and identify the size of the debt and the size of funds to resolve it as the biggest and immediate problem to be taken care of.

■ Both argue that this should take priority to any long term measures, and that greater government role is paramount in setting the speed and providing a central guidepost through, for example, greater use of fiscal policy and setting up of funds or a special purpose vehicle (SPV) to purchase debt to turn it into equity.