Stubborn defense of currencies depleting foreign currency reserves led to financial crises in Korean and Thailand. This resulted in both countries agreeing to implement restructuring and liberalization measures in exchange for much needed assistance from the International Monetary Fund and other international financial institutions. Since the outbreak of the financial crisis in 1997, both countries have continued to work closely with the IMF and have made great strides toward recovery.

Demonstrating the success of Thailand's response, many foreign investors have made significant recommitment or continued commitment to the country. Investment from the EU, the US and Japan have all increased lately. In addition to the improving prospects of the domestic economy, investors are drawn to the lower labor and raw material costs offered since the fall in the value of the baht.

The Bank of Thailand announced that foreign direct investment (FDI) totalled USD 7.6 billion in 1998, the highest level in the country's history. A total of USD 2.1 billion was invested in the banking sector, with the remainder going to the real sector. Of the USD 5.5 billion investment in the corporate sector, USD 4.5 billion went towards equity investment. Japan was the largest investor in 1998, accounting for one-third of total inflows into Thailand, followed by the United States with a 17% share and Hong Kong with a 9% share.

The industrial sector received 47% of non-bank FDI in Thailand, followed by 18% in trading and holding companies and 13% in financial institutions, mostly in retail banking. Investment in the machinery and transportation sectors accounted for 31% of total industrial investment in 1998, followed by 17% going to the oil refinery sector, 16% in the ferrous and non-ferrous metals sector and 9% in the petrochemical sector.

The majority of foreign investment to Thailand in 1998 was used to boost the the financial structure and efficiency of local firms. Almost none went towards increasing production capacity. This trend will likely continue until recovery has been realized and positive growth has continued for a number of years. Meanwhile, worries of a widespread takeover of key Thai industries by foreign investors have proved largely unfounded. In a survey of 50 leading industrial firms in Thailand, only 14% of foreign investment in 1998 was characterized as investment intended to rest corporate management away from domestic control.

To further take advantage of the benefits of foreign investment, in June 1998, the Thai Government announced a series of measures designed to help revive the economy by attracting increased foreign investment. Such measures would also indirectly improve efficiency and the competitiveness of Thai industries, and decrease unemployment through the creation of new jobs.

These measures included the relaxation of restrictions on the location of export promotion zones. Such zones, in which foreign companies targeting exports out of Thailand may set up operations and receive various incentives, may now be established anywhere in the country, with the local governments given largely free reign as to what incentives they want to provide. Foreign companies will be able to import most raw materials and other intermediary goods intended for exports, and also machinery using higher technology, duty-free. Meanwhile, guidelines governing the evaluation of expansion projects by foreign companies have been clarified. Such investment must surpass the former company's one-year sales by 80% and increase employment by either 500 employees or by 50% of the prior level. For projects meeting these criteria, an income tax waiver for 3 years will be provided if the project is located in the Bangkok area and up to 5 years for projects outside of the capital.

Applications for these expansion projects must be submitted to the Board of Investment (BOI) no later than December 31, 1999.Other amendments under the Alien Business Laws that will boost foreign investment and presence in the Thai export sector will also be studied and implemented. The BOI will cooperate with the public and private sectors to study which agricultural and agro-industry activities can be added to the list of activities in which foreign companies may be eligible to receive incentives. Research will be conducted to determine measures to encourage foreign companies to provide greater levels of training, engage in increased levels of research and development and to apply environmental protection measures more widely. An environment will be created to revive the real estate sector by enabling foreign companies to purchase a specified number of existing buildings, within a given time frame. The liberalization of BOI Investment Laws and Alien Business Laws will be implemented to ensure all of the above take place.Despite these increased incentives to foreign investment in Thailand, Korean direct investment in Thailand has continued to fall, while that of Japan and most advanced western nations increase. This is largely due to Korea's own credit crunch and falling credit ratings making finding needed financing impossible.

As for Korean companies already operating in Thailand, performance has varied according to the type of sales targeted. Broadly, export-oriented Korean affiliates in Thailand have outperformed those affiliates relying mostly on domestic Thai sales due to the domestic economic difficulties. However, even export-oriented affiliates have not escaped difficulties as financial support from their parent companies back in Korea has been substantially reduced, forcing them to often totally fend for themselves. Particularly, in the case of those exporters that must first obtain raw materials from Korea, troubles of the home-based companies have interrupted a smooth supply of raw materials.
Meanwhile, those companies relying on sales to the domestic Thai market have had to try to reverse strategies and increase export sales.

Overall, the coping strategy of Korean affiliates operating in Thailand is an increase in the localization ratio of production. However, Thailand shows the greatest promise of recovery among those Asian economies suffering from the financial crisis. Thus, to capitalize on the eventual revitalization of the economy Korean companies must maintain a Thai presence and implement and pursue new investment strategies vis-a-vis the country. However, such investment is unlikely to be implemented unless government support is forthcoming. Such support is exactly what Japanese government is actively providing its own country's firms operating in Southeast Asia. Similar action by the Korean government would ensure continued competitiveness by Korean firms in the region and prevent Koreans from missing out on the substantial opportunities provided by still promising potential of Thailand.

The introduction of the Euro and its impact on Korea-EU tradeChong-Wha Lee, Cheol-Won Lee, Hoo-Young Chung
The introduction of the euro will likely be the most influential event affecting the international monetary environment since the institutionalization of the Bretton Woods system. Based on the economic size of the euro area, its integration of the intra euro markets, and the commitment to a stable currency by member countries, the euro will eventually, if not immediately, challenge the dominant position of the US dollar in world financial markets.

Prospects are for a stable and strong euro. Supporting this view are the sound fundamental economic conditions of the euro countries and strong initial euro demand coming from the integration of European capital markets. Furthermore, European economic recovery beginning last year continues and to expected to last well into 1999. Euro countries in 1999 are expected to realize a current account surplus of USD 200 billion; whereas the US is expected to run a deficit of more than USD 250 Other factors spurring robust euro demand will be the European Central Bank (ECB) billion. placing top priority on price stability. Thus, the ECB is likely to follow the anti-inflationary policy of the German Bundesbank.

Among the euro zone countries, the positive effects stemming from the euro will be summarized as follows. The elimination of transaction costs and hedging costs will increase the amount of internal trade. Price transparency in goods, services, capital, labor markets will increase and accelerate the unification of the markets and this will enhance competition among firms. The euro making pricing comparisons of all products sold inside the euro area instantaneous will boost competition and cause prices to merge at levels likely lower than existed in the pre-euro days.

The euro will increase competition among financial institutions as it pressures the area's financial markets to unify. Assurance of one interest rate and one exchange rate will boost euro-wide financial market activity as both liquidity and merger and acquisition activity increase. In addition to the increased interest of investors within the euro in financial markets, foreign investors are also expected to show higher interest in the euro area market.

The ECB will be in charge of EU-wide monetary policy whereas fiscal policy will remain under each individual member's control. Therefore, in case of symmetrical shocks, such as a fall in oil prices, an EU-wide response is needed to respond to the changed financial conditions and the member countries will normally rely on the ECB's single monetary policy. The recent(3rd December 98) interest rates cut in the euro area adopted to respond to the growing world economic crisis is one such example. However, when asymmetric shocks occur, such as the unification of Germany, and changes are only needed by individual members, then that member alone will implement the needed fiscal measures.One of the largest potential disagreements within the euro area may center around the proper exchange rate of the new currency. The ECB prioritizes price stability above all else. Meanwhile, the currently left-leaning governments dominating major European capitals want to see policies that prioritize job-creation. Based on last month's lowering of interest rates, it seems as though the job-creationists currently have the upper hand as the ECB was coerced into lowering interest rates.
As for exchange rates, again conflict arises between the ECB, which favors a strong euro, and individual governments, which are more concerned with maintaining the competitiveness of exports. However, both the ECB and the individual euro area governments are more concerned with intra euro conditions than with international factors. Thus, the euro exchange rate will not be given a high priority in economic policy making. This 'benign neglect' may lead to high fluctuations between the euro, the dollar and the yen.

Yet another area of conflict between euro authorities and individual member governments is the 'growth and stability pact' which will subject any country with a budget deficit exceeding 3% of GDP to fines. As individual euro members may now only rely on fiscal measures to deal with domestic problems, many euro members find this measure too restrictive. While economic conditions are currently relatively benign in Europe, once recessions hit, the 'growth and stability pact' is highly likely to be a hotly debated topic.

The goal and indeed the likely effect of the euro is stronger European growth and in the long-run, the region's demand for import will likely increase. However, as intra-euro competition increases due to the previously-mentioned factors, thereby boosting the competitiveness of euro firms, the area's exports are also likely to increase, pushing a number of non-euro exporter aside.While in the mid- to long-term, the introduction of the euro will likely boost European growth and thereby korean export opportunities in the region, in the short-term, Korean firms are likely to be challenged by the changes in euro trade structure. Furthermore, as intra-euro area competition heightens, this may further increase the use of anti-dumping measures against korea. Thus, even if the euro proves to be a strong currency relative to the won, in the short-term, the euro area will likely prove to be a difficult market for Korean exporters.

The combined domestic market capitalization of all 15 EU equity markets is currently half of that in the US. However, this gap will surely narrow as the huge European market is largely unified under the euro. Futhermore, a leading factor behind the preference for dollar denominated securities in international trading is the currency's low exchange rate and interest rate volatility.

However, as liquidity and size of the European financial market increase, the euro's interest rate and exchange rate volatility will likewise decrease.As European financial market instruments are to grow more advanced and numerous, the interest of European investors in investment products outside of conventional bank deposits and loans will certainly increase. This increased sophistication of euro investors, compounded by the likely higher economic growth for the area, portends higher foreign direct investment by euro countries. To capitalize on this opportunity, Korean firms and financial institutions should accelerate ongoing reforms and implement a transparent system that will lure the optimal amount of euro investment.

Ultimately, the euro is expected to decrease the international dependency on the dollar as a currency of settlement, especially in Eastern and Western Europe and in Africa. Thus, the Bank of Korea should prepare for the increased euro usage by increasing the share of euros in its foreign reserves. The central bank of China currently keeps 60% of its foreign reserves in dollars and 15% each in deutsche marks and yen. However, China plans to change its foreign reserve holdings to 40-50% in dollars and 30-40% in euros. In addition to public institutions, private financial institutions must also alter the composition of their portfolios based on the future importance of the euro. As the euro is likely to be a strong currency, the tendency is to denominate assets in euros and debt in dollars. According to the German Deutschebank, in the long term, 30-40% of world financial assets will be denominated in euros and the share of euros in the foreign reserves of the world's central banks will amount to 25-30%.

In raising the level of euros in its reserves, Korean public and private entities should give strong consideration to issuing euro denominated bonds as the euro will likely continue to have low interest rates. International organizations, such as the Asian Development Bank(ADB), is considering a large euro exposure and the government of the Philippines is considering issuing USD 50 billion in euro denominated bonds.

While it would be premature to conclude that the euro will soon gain stature in international markets equal to that of the dollar, the euro is off to a strong and promising start. Furthermore, major international financial institutions have implemented or are on the verge of implementing major buy orders for the currency. Korea should not allow itself to be forced into a catch-up policy concentring its euro policy. Instead, Korea must rise to the challenge to realize the benefits the advent of the euro can bring.

TILF and Ecotech have been pursued in an unbalanced way during the APEC's development. While developed economies emphasize the role of the private sector in promoting Ecotech, developing economies argue that governments should also play at least a complementary role in order to maintain the momentum of the APEC trade and investment liberalization process (TILF) that has accelerated recently. Redirection of developed economies' ODA policies in favor of APEC could alleviate financial limitations of Ecotech, promoting many concrete and practical programs and balancing Ecotech with TILF. In this context, we have discussed the possibility of the existence of a positive link between international trade and aid. Also, a recipient economy's tariff can be reduced by more aid. Empirically, we found that donors with high export/GNP ratios provide less ODA to recipients with smaller export shares. While all donors provide more ODAs to recipients with lower per capita income, except the U.S., Japanese ODA policy is directed toward APEC and France and German are against it. The U.S and U.K have no particular favor or disfavor on the APEC.

Therefore, as further liberalization of TILF programs will bring about higher trade interdependence, more aid from APEC developed economies could not only improve its own welfare but also promote APEC liberalization process. An obvious implication is that strengthening of Ecotech through more ODA toward the APEC and acceleration of TILF are mutually re-enforcing.

Currency Crisis and the Difficulties for Korean Overseas Affiliates: A Case Study on the Restructuring of Korean Affiliates in ChinaJong-Keun Kim

For the nearly ten years that preceded the recent financial crisis, and especially so following the establishment of formal diplomatic relations between the two countries in 1992, Korean foreign direct investment (FDI) in China had been rapidly increasing. However, the respective number of cases and amount of Korean FDI in China during the initial three quarters of 1998 fell 64.4% and 21.2% from the same period of 1997 to 160 cases and USD 423.54 million (Figure 1).
Figure 1. Korean Overseas Direct Investment in China(Units: US$ Thousand)

Note: Based on actual investmentSource: Ministry of Finance and Economy, 'Trend in International Investment and Technology Inducement'

Korean overseas affiliates in China are faced with the urgent need to restructure to adapt to the deteriorating economic situation in Southeast and East Asia. Top of the list of difficulties are over production, the difficulties of targeted Asian markets and slower growth of domestic consumption in China. Also necessitating restructuring and a reassessment of strategy is that the Chinese maintenance of the yuan's dollar peg despite the depreciation of most of the other regional currencies has slashed the amount of exports of Korean affiliates in the country. The United States has also hurt exports from China as it has tightened its textile quotas. The last hurdle that needs to be overcome is the regional credit crunch caused by the financial crisis.

Based on case studies, we discerned various patterns of restructuring by Korean companies in China to overcome and adapt to the deteriorating situation in China. One such strategy is the altering of employment structure, largely through implementing cost-cutting layoffs. Another strategy is to increase production efficiency and boost investment in high value-added production. This is part of an overall focus on efficiency and profits rather than market share and revenue. Finally, Korean companies in China are restructuring manufacturing and marketing divisions under one management structuring in order to increase responsiveness to the customer.

At the same time, Korean affiliates in China are diversifying export markets. Electronic components manufactures are turning to developed countries as new export targets, avoiding the past concentration on the markets of Southeast Asia and Russia. In addition, the toy manufacturing industry is moving its production facilities inland, away from the relatively affluent Chinese east coast in order to reduce labor costs. At the same time, such companies are attempting to find new export markets. Labor intensive industries, such as toy manufacturing, are successfully moving production sites as labor intensive production requires little infrastructure while sales are often implemented through long and dependable relationships with buyers.

Meanwhile, Korean affiliates in China relying largely on exports back to their home country are striving to enlarge domestic market share. Since the process cannot be done quickly, these affiliates are also trying to cut additional expenses by reducing local firm size while searching for new export markets.

As for financing, due to the deteriorating Korean economy, local Chinese banks are increasingly reluctant to lend money to Korean affiliates. Therefore overseas affiliates are pleading with the Korean government to intervene to improve lending conditions in China.

The difficulties of most affiliates aside, a few affiliates of the largest Korean conglomerates and a number of other Korean affiliates, mostly toy and textile manufacturers that have been able to maintain a stable sales networks, are actually increasing investment in China. Increased chaebol investment is based on the enormous potential demand of continued Chinese economic development. Meanwhile, the successful small- and medium-sized firms are mostly those riding the tides of economic boom in the United States and Europe, through which they continue to source their investment needs.
A number of overseas Korean affiliates in China are facing potential bankruptcy and are attempting to sell assets to stay afloat. Such measures begin with attempts to attract fresh capital investment, but often resort to the selling of often valuable assets, the proceeds of which go towards revitalization and restructuring measures. Finding and negotiating with potential buyers of such assets has been difficult, and even when sales have been agreed to, one or both parties have often found it difficult to live up to the terms of the hastily prepared sales contracts.

At the same time, FDI to China from developed countries is expected to increase while Asian investment appears poised to stagnate over the next few years. If Korea follows this trend, then much of its investment, which has not yet reached the stage where the full benefits can be realized, will wither and eventually be lost. Furthermore, Korean affiliates in China will have a hard time maintaining competitiveness with the increased presence of multinationals from developed countries. Therefore, in order to see the fruition of widespread investment in China and also maintain competitiveness vis-a-vis multinationals in China, the government needs to provide some form of financial and technical assistance to Korean affiliates operating in China.

International Financial Markets:Trends, Recent Developments, and Policy Issues

Ⅰ. Introduction (Yunjong Wang)
As a ripple effect of the East Asian Financial crisis, factors resident in the emerging markets that fueled instability forced an increasing number of countries to seek rescue from the International Monetary Fund. Financial crisis and recession spread and deepened, this ultimately led adbanced economies to undertake coordinated interest rate cuts. Partially as a result of the interest rate cuts, conditions in the current international financial market environment have improved since Russia declared a moratorium last August. Nevertheless, there continue to exist forces that could quickly bring a return to the chaos seen in 1997 and 1998.

First, signs of widespread insecurity remains in financial markets of the advanced economies. Despite the U.S. Federal Reserve Board three rounds of lowering interest rates, low-risk asset management remains the preferred investment strategy. Further, as the Long Term Capital Management(LTCM) crumbled last September, hedge funds have undertaken serious restructuring efforts. While, the collapse of the hedge funds will reduce enthusiasm for the risky investments that contributed to the financial crisis, the collapse has also severely damaged the health of the banks that did business with the hedge funds. As for Japan, the huge amount of non-performing loans led Moodys to downgrade the countries sovereign credit rating from Aaa to Aal last November. The resulting higher borrowing costs are affecting negatively Asian financial markets as Japanese interest rates rise.

From a short-term standpoint, the introduction of the euro may further exacerbate instability in international financial markets. The prevailing view is that the euros emergence will lead to USD 500 billion to 1 trillion worth of liquidity in international financial market. As countries adjust the composition of their foreign-currency reserves to the new currency and as the euro challenges the dollar as the currency of settlemint, short-term volatility of the foreing exchange market can be expected. As a result, the European nations will need to pay attention to the increase in the voltility of the dollar and euro if both monetary authorities will maintain a policy of benign neglect.

Financial anxiety within the emerging markets appears likely to persist for at least the short-term. Emerging markts ard largely high return-high risk propositions, Thus, if international investors continue to perfer safer investments, these emerging markets will continue to fall victim to al liquidity shortage. For this reason, 1999 will have to be a year in which the policy coordination to pervent continuation of an international financial crunch will rely on the initiatives of advanced economies.

To this end, this report seeks to educate and increase awareness of recent events in world financial markets based on the review of the most important current changes in international financial markets, and further discuss and suggest policy directions for the future. In Chapter Ⅱ, we will look at the formation and historical developments of international financial markets. In particular, we will focus on the euromarket and its effect on international capital markets. Through understanding the structural changes of the international financial environment and the internationalization of financial markets, we seek to identify the fundamental causes to the East Asian financial crisis. Furthermore, we have added our analysis of the most recent developments in the world financial markets and the capital flows into the emerging markets. In Chapter III, we have analyzed the effects the of the Asian financil crisis on international financial markets. We have descrigbed how the Asian financial crisis came about, spread and affected capital flows of emerging markets. The discussion leads to what extent the irregularty of capital flows results from the structural instability of the world financial markets. In Chapter IV a thorough analysis is provided concerning hedge funds, including our demonstration of how their recent downfall begun by the collapse of Long Term Capital management (LTCM), was primarily caused by the failure of exorbitant investments in the emerging markets. In Chapter V we have provided forecasts concerning the chnges and movements in international financial markets given the emergence of the euro. We place emphasis on how the euro will affect the exchange rate fluctuations of the U.S. dollar. We devote the final chapter to discussing current changes in international financial markets, the factors that may lead to instability in the future and the pressing policy issues and possible directions regarding the near future.

Ⅱ. Historical Developments of the International Financial Market(Jae Joon Lee)
The primary benefit of freer capital movements in international financial markets is that allocative efficiency of the investment can be attained at the international level. A significant amount of international liquidity has been supplied by the euromarket as the market includes a huge array of traded financial instruments, including bonds, stocks and derivatives. And because it is borderless within Europe and free from all national and most institutional regulations, the euromarket itself is close to being a perfectly competitive market. Likewise, the euromarket has developed financial institutions that are capable of providing creative and varied financial intermediary services.

Since the end of the second World War, the United States economy has gained preeminence and its currency has been the international currency of payment settlement. In adition to the need for and alternative to the dollar, there were a number of other contributing factors to the development of the euromarket : the intensification of the Cold War since the latter half of the 1950s, the nullification of foreign exchange controls in Western Europe since the 1960s, the oil shocks of the 1970s providing oil-exporting nations with an enormous surplus of dollars and the ability of investors to evade the haphazard regulations have led to continuous growth of the euromarket. Furthermore, since successful financial innovations instituted since the 1980s, including the U.S. Federal Reserve Boards change in monetary policy, emergence of floating rate-based financial commodities in response to the increasing volatility of interest rates, expediency of the settlement system, and the emergence of the U.S. International Banking Facilities (IBF), have likewise led to euromarket growth.

There are four underlying causes behind the drastic changes in world financial markets in the last 20 years. First, financial instruments and strategies have grown increasingly advanced and numerous. Second, market integration has grown as investors in advanced markets have looked for increased opportunities and as demand for capital in developing markets has grown.Third, traditional differences among financial institutions such as banks, securities firms, and insurance companies have been eroding. Fourth, mergers and acquisitions activity has resulted in an increasing world dominance by supra-national financial groups. These structural changes are molding a new international financial environment with investors more open to international markets.

The volume of capital financing in international financial markets prior to the Asian financial crisis in 1997 had been at an all-time-high. However, this all ended upon the outbreak of the currency crisis in Thailand in July. The issuance of government bonds in the fourth quarter of 1997 decreased 40 percent on average against the level of the first three quarters of the year.

Such pattern is prevalent throughout Asia and has had a strongly negative effect on international financial markets. However, the volume of international financial transaction volume improved in the first and second quarters in 1998.The roller coaster continued as the Russian crisis and worries of a recurrence of the Asian financial crisis caused investors to again fly to low-risk assets, a resulting spread of credit risk in emerging bond markets, ensured that the international financial crisis persisted. At this juncture, investors sitting on highly leverage positions largely bailed on or readjusted their bets. This resulted in increased fluctuations of major country bond yields and the yen/dollar exchange rate.
Since the Asian financial crisis, such reevaluation of credit risks in the emerging markets have affected capital flows into the markets. Therefore, in order to boost confidence in emerging markets and to resume capital inflows, the following points will need to be tackled. First, the governments of emerging markets should address financial structure weaknesses immediately. Second, lending institutions and investors should alike analyze credit risks more thoroughly. They should also discriminate between investment decision based on more asset-inherent factors instead of investment decisions based on more regional factors. Such strategy would reduce risk to one region and restrain contagion effects in the international financial system. Third, advanced economies and international financial institutions should institute policies that foster a stable supply and maintenance of liquidity in order to increase stability in international financial markets.
The massive fluctuations of capital flow in and out of emerging markets also must be addressed. While to an extent capital flows were based on differing levels of financial and corporate health, they were also undoubtedly exaggerated and exacerbated the growth and then contraction of affected markets. Some countries have instituted various forms of capital controls in the wake of the Asian crisis as a way of preventing such abrupt capital flight in the future. However, the costs of such barriers may be even greater than the gains in stability.

III. The Asian Financial Crisis and its Spillover Effect on the International Financial Market (Sang-Uck Loh, Woo Jin Kim)
Thailands financial crisis prompted by the Thai Bahts devaluation on July 2, 1997 developed into a financial crisis for the whole Asian region. Its spill-over effects on the world economy surpassed all expectations. The Asian economies, which had experienced an incredible period of high and sustained growth are now experiencing unprecedented recessions. This abrupt reversal has cut sharply into growth of the world economy in 1988 and has had a strong impact on international financial markets as it prompted a sudden reversal of the net inflow from international capital markets into emerging markets. Receiving the blunt of the blame for the crisis are the growing current account deficits, economic slowdown and rigid foreign exchange rate system; however, the structural instability of international financial markets should not be overlooked as a further cause.

The greatest impact of the Asian financial crisis on international financial markets is the sudden reversal of the capital inflows to the emerging markets, largely a result of the drastic capital outflow from the Asian region. This is where the greater impact of the Asian crisis can be clearly differentiated from the Mexican in late 1994. While there was an extended period of net capital inflows into both regions prior to the crisis, much of the huge outflow from Latin America in the crises relocated to other emerging markets.However, most of the large net outflow of capital from Asia following the regions crisis did not end up in other emerging markets, but instead fled to what were perceived as less risky markets.
Generally, the past strong capital inflow to emerging markets was the result of changes in the international financial market environment and its structure.The major recent changes included the low interest-rate policies of advanced economies, the globalization of international commercial and investment banks and widespread financial sector liberalization by emerging markets. When we observe the reversal of capital flows in three separate instances of financial crises since the 1980s, including the most recent Asian financial crisis, a question has to arise - whether current international financial markets can sustain stable capital flows into emerging markets and whether investors are accurately assessing risk. There has been a plethora of discussion and research recently attempting to clarify the structural instability of international financial markets.

More than a year has passed since the onset of the Asian financial crisis, but there is no clear sign of recovery. However, liquidity is again abundant in international financial markets due to the advanced economies low interest-rate policy and this has helped some emerging markets, including Asian markets to again gain access to a degree of international capital. Asian economies are also doing better as a result of the continued restructuring efforts and capital will likely begin flowing more strongly into the emerging markets in the near future, including Asia. The speed and the volume of capital inflows, however, would probably differ with those of the past.

Based on the particular development of the Asian financial crisis, it seems premature to expect international financial market mechanisms to rationally evaluate investment risks and provide sustained and sufficient liquidity to emerging markets. Further, as the Asian crisis clearly demonstrated, international capital market integration makes it highly likely that a new crisis in one country will have a widespread effect.

As a result, future capital flows of emerging markets may not be as drastic and reckless as they were in the past. Rather, they will take place on a more selective and steady basis. The investors will want to make investment decisions based on thorough due-diligence of the associated risks based on the most accurate of available information. Investors are unlikely to blindly invest in a broad range of areas, but instead invest in a specific country of interest.

Therefore, those emerging markets targeting foreign capital must improve the efficiency of their financial and industrial sectors through structural reforms and thereby meet the standards required by the international investment community.

Ⅳ.Long Term Capital Management (LTCM) Crisis and its Effect (Young Woo Lee)

The fury of the Long Term Capital Managements collapse last September was intense enough to shank up the worlds financial markets. Anxiety that the LTCM crisis would have a domino effect as the banking and investment institutions heavy losses in the hedge funds would create chaos in the financial markets had an immediate negative affect on liquidity and led to a chain of stock collapses in the New York Stock Exchange (NYSE), as well as in European and Asian stock markets. As a countermeasure, the 15 major creditors decided to financel a USD 3.6 billion emergency-rescue package for LTCM through the mediation of the Federal Reserve Board. The LTCM crisis continued to be an inexorable source of the loss of liquidity in the U.S. financial market. While the Feds lowering of interest rated allowed markets to recover, the effect of the collapse of LTCM still linger.

One of the main lingering effects is that many international investment banks have reconsidered their risk management models and discussed the need for stronger means to regulate hedge funds. Standard ＆ Poors announced that it would scrutinize the credibility of the firms that had invested in the hedge funds, taking the LTCM as the hedge funds, taking the LTCM as the initial case of the investigation. The U.S. Secretary of Treasury Rubin issued orders for the Department of Treasury, Federal Reserve Board, Securities and Exchange Commission, and Commodities Futures Trading Commission, and the Federal Deposit Insurance Company and other financial supervisory bodies to conduct thorough investigations of the trading between the hedge funds and banks. Prior to the LTCM crisis, the U.S. government did not pursue a positive regulation of hedge funds. However, in the wake of the collapse of LTCM, it now supports a certain degree of regulation, supervision and/or dissemination of information regarding hedge funds. At the October 5 Conference of G22 and the December 7 Finance Ministerial Conference of the G7, the participants decided on a set of standards to rigorously enforce the regulation and supervision of the hedge funds and their financial trading.

Some may characterize the Feds intervention of the LTCM crisis as a way to bring future stability to financial markets. This was the first case of the Feds intervening to give emergency-rescue-fund support to a non-financial institution. Financial markets appear to have evaluated the LTCM crisis intervention as an action taken to prevent a disastrous affect on financial markets. Regardless of the Feds motives, withholding financial institutions from incurring bad investment cost goes against market principles and if investors believe such bail-outs will be forthcoming in future crises, this could create widespread moral hazards.

Although there is a strong tendency to consider hedge funds as the refuge of rouge speculators, they have a diversified range of activities, and influence. In addition to their speculative activities, hedge funds invest in debt-restructuring funds, foster technological development and emerging market growth; hedge funds bring increased liquidity to financial market, thereby encouraging economic activities and a reallocation of capital towards efficient firms and countries their arbitrage trading.

In spite of this, hedge funds do pose a problem in financial markets as they are often associated with highly leveraged and speculative positions in the pursuit of high profitability. As evidenced in the LTCM crisis, the collapse of a single hedge fund can sap liquidity and vitality from the entire financial market. Thus, over-reliance on unfettered hedge fund activity may further increase the volatility of the markets. Extreme short-term mobility is another problem of hedge funds. As seen in the Asian financial crisis, hedge funds move faster than average investments. This is largely due to their strategy of short but huge bets based on market-beating accessibility to information and mobility. Therefore, the trading strategy of the hedge funds often leads to mob psychology in financial markets as other investors often copy the positions of large and successful hedge funds.

In the end, however, despite the negative affect hedge funds may bring, it is a question of whether it is even possible or practical to regulate hedge fund activity. Regulating hedge funds would be an immense task due the incredible amount of positions hedge funds take and the frequency with which they change these positions. Currently, there is discussion on institutionalizing the variable deposit requirement (VDR) to prevent excessive capital flows.However, such talk may not translate into action. Furthermore, if other countries do not institute the same regulations, then such controls will have little effect other than to push investment to less regulated foreign markets. In the end hedge funds can only partially be regulated foreign markets. In the end,hedge funds can only partially be regulated and for only a short period. As it is unrealistic to eliminate hedge funds, they must be accepted as part of the international financial structure. We can only seek to indirectly regulate the hedge funds by inducing financial institutions that trade with them to disclose the volume and content of their trading so as to enhance transparency as much as possible.

V. Euro and its Effect on the International Financial Market (Chae-Shick Chung)
Since the demise of the Bretton Woods system, the U.S. dollar has taken the dominant position in international trade and capital markets. However, the emergence of the European Monetary Union and the euro will likely result in two major currencies in world market. The emergence of a European financial market with a unified currency comparable to that of the United States in size will intensify the pressures for enlargement and securitization already underway since the early 1990s in international capital market. This will further contribute to increased international capital mobility and capital flows as advanced economies likely call for increased capital liberalization. Thus, the developing countries should consider undertaking sound fiscal and macroeconomic policies, coupled with sound policy towards the financial and foreign exchange markets.

In order for the euro to properly serve the needs of international financial markets as does the U.S. dollar, Europe must maintain currency stability, implement structural reforms in the labor market and construct a framework for an EU-wide payment system. Such improvement of the eurolands financial infrastructure and creation of a further diversified spread of financial assets will together satisfy the demands for the euro-denominated financial assets. will together satisfy the demands for the euro-denominated financial assets. In turn, this will increase stability of the euro and its stature as the currency-of-settlement in international markets. As the euro eliminates the foreign exchange risk within its market, thereby decreasing intra-euro transaction costs, it is likely to boost investment in the region. The recent low-interest policy of euro countries and the likelihood that euro authorities will target long-term low interest rates in the region should stimulate growth in the stock market, thereby advancing the regions financial markets to a new level of sophistication and activity.
As bond pricing throughout euro nations has been simplified and currency risk has disappeared, bond prices will eventually become merely a function of risk. The euro will ultimately decrease the issuing cost of governmant bonds and also the transaction costs for investors. This in turn would contribute to the eventual unification and consolidation of all euro bond markets.

As for European corporate bonds and their volume, there remain issues that need to be taken up due to the problems associated with regulatory and tax impediments. However, the future looks promising for corporate bonds as a stimulation of the bond markets is expected, with the resulting increasingly competitive environment pressuring bond underwriters and issuers to proceed with greater efficiency. Better performance of pension funds would also improve the lot for the European bond markets. Regardless, as the bond markets are likely to reduce financing costs, this will reduce the appeal of bank loans - the customary financing method of the past. However, the big bank domination of credit markets and their involvement in merger and acquisition activity and other securities-related areas are new areas where banks may thrive.As the Japanese yen risks being pushed aside by the newly emerged euro, there is speculation that Japan will make an effort to internationalize the yen.

The yens role as an international currency has been thus far limited due to the underdevelopment of its government bond markets. In response, Japan is considering such inducement as non-resident tax exemption (incurred on the dividend from short-term trading), transactions fee exemption for securities firms investing in government bonds, stimulation of secondary-markets for short-term securities, and improvement of the distribution and settlement structures for government bonds and short-term money markets. The internationalization of the yen could help Korea through boosting the efficiency of its private and public asset management. If Japan were able to truly establish the yen as an alternative to the dollar and the euro in international markets, this would reduce the wide fluctuation of the yen.The European Monetary Unions unified financial markets under the euro will unleash further advanced economy demand for capital liberalization.Therefore, the Korean government will need to complete its restructuring with expediency as well as make preparations if Japan appears poised to encourage use of the yen in international markets. Furthermore, Korea must plan for infrastructure developments in response to the drastic liberalization of foreign exchange controls.

Ⅵ. Recent Developments in International Financial Markets and the Policy Issues in Korea (Yunjong Wang)
Since the early 1990s, the mobility of international capital has increased due to the increasing demand for capital in emerging markets, growth of foreign direct investment, and developments in derivative markets. Such change is the direct result of widespread capital account liberalization efforts and the increased rate of growth of emerging markets. In the latter half of 1997, however, there was a decrease in the volume of private capital flows into emerging markets chiefly due to the East Asian financial crises. According to capital-flow analysis of the Institute of International Finance (IIF), the expected 1998 capital inflows into emerging markets are USD 158.2 billion, a 34.5 percent decrease from USD 241.7 billion in 1997 and the net volume of capital flows for 1999 is expected to remain similar to that of 1998.

A significant share of the international capital that was withdrawn from Asian markets since the regions crises has flown into other emerging markets. However, the government bond prices of the emerging markets have again plunged as investors flew to quality assets in response to the rising Russian crisis beginning in July of 1998. This phenomenon continued until the middle of October, when the worlds financial markets were stabilized by the U.S. Federal Reserve Boards two rounds of lowering interest-rates which the Fed justified by expressing concerns about the imminence of a credit crunch in the U.S.Although the world financial market is expected to become relatively stable in 1999, there still remain downside risks, including the possibility of a further collapse of hedge funds, continued financial anxiety in Wall Street and London, a depreciation of the yen if the Japanese financial reforms and economic boosting measures fail, latent factors causing further instability in emerging market (especially Russia and Brazil), and the unknown impact of the euro.Thus, skittishness is prevalent throughout international financial markets and the Korean government must design efficient and constructive measures to counter challenges that arise as external conditions inevitably change. To do so, Korea must pay close attention to movements in financial markets both at home and abroad and should develop policy options to circumscribe external shocks that may reverberate in the Korean economy.

In 1999, Korean government policy towards international financial markets should focus on 1) stabilizing the won, the current account balance and economic growth and other factors that are instrumental to the accomplishment of macroeconomic goals, 2) exhausting all efforts to boost international creditworthiness, 3) boosting access and financial instruments of the foreign exchange market in preparation for capital account liberalization, and 4)maintaining stability in the foreign exchange markets through improving the structure of external debts.

Short-term interest rates will remain an important policy instrument to stabilizing foreign exchange markets and achieving targeted inflation rates.Where the won faces strong appreciation pressure, Korea can easily lower short-term interest rates.

Foreign Direct Investment Policy: Policies of Foreign Countries and their Lessons for Korea- Investment Incentives -
Subsequent to the currency crisis that began in the end of 1997, the Korean government has actively pursued a policy objective of attracting FDI as a way to overcome the current economic crisis. In its efforts to attract foreign investments, the Korean government has enforced the new Foreign Investment Promotion Act on November 17, 1998, providing foreign investors with improved supporting services and increased incentives for investment to the surprise of many multinationals already operating in Korea.

Incentives for foreign investment stipulated in the New Foreign Investment Promotion Act can be summarized as follows:
First, opportunities for tax reduction or exemption have largely been expanded. A foreigner investing in businesses with advanced-technologies or in service businesses that support the competitiveness of domestic industry, for example, is eligible for a 100% tax exemption for an initial 7 years and 50% reduction thereafter over 3 years. The period for tax benefits begins at the first year showing positive earnings, reflecting the fact that during the initial stages of investment, earnings tend to be negative.

Accordingly, in the case where a foreign invested enterprise (FIE) pays dividends to its parent company abroad, the withholding tax on the dividends will be reduced by 100% and 50% for the initial 7 years and the following 3 years, respectively. Local taxes, including aggregate land tax, property tax, acquisition tax, and registration tax on properties owned by FIEs for business purposes will be reduced or exempted for 8-15 years by 50-100%. In addition, customs duties, value added tax, and special excise tax on imported capital goods will be exempted for the above businesses.
Foreign investors investing in other businesses are also eligible for the same tax benefits, once designated as a Foreign Investment Zone (FIZ) depending on the investment amount and job creation effects, such as FDI amount exceeding 100 million U.S. dollars.

A second feature of the New Foreign Investment Promotion Act is the inclusion of opportunities for rental fee reduction or exemption. Central and local government properties are open to foreign investors for rent for up to 50 years, allowing foreign invested firms to use necessary factory sites for a maximum of 50 years, free of charge.

Third, subsidies for various purposes, such as employment and job training, are provided to foreign investors by a local government in partnership with the central government. The Act also requires the central government to fund local governments in support of their FDI inducement activities.

However, in spite of these numerous provisions, the Act leaves many holes when it comes to actual implementation. Thus, this paper analyzes successful cases of foreign countries in attracting FDI. Examples and lessons of how to efficiently manage an FDI incentive system are drawn from the U.K., Malaysia, and Singapore.
Based on the study, we propose three ways to improve Korea's FDI incentive system.

First, incentives need to be provided more flexibly through consultations, or negotiations if necessary, with individual foreign investors, rather than by the previous uniform criterion. This will enable public funds for incentives to be used more efficiently, while allowing the Korean government to be more flexible in attracting potential foreign investors.
Second, more in depth analysis of the spillover effects of the investment is needed, especially in the areas of industrial and regional development. If substantial spillover effects are found to exist, then commensurate incentives need to be put in place.

Lastly, the autonomy of local governments in terms of FDI incentives need to be further enhanced, thereby expanding the role of local governments in inducing foreign investments. At the same time, possible harmful competition among local governments should be avoided in providing the incentives.

Taiwan's Globalization Approach

In 1984, the Taiwanese government, in the pursuit of a more open, efficient and internationally competitive economy, initiated its Corporate Globalization Policy. At the same time, the government launched the Science and Technology Island project and the Asia Pacific Operation Center (APROC) among other programs. The continued government support and encouragement of overseas activities by Taiwanese businesses has continually paid strong dividends and contributed greatly to the island's remarkable economic growth. Instead of direct intervention in the corporate sector, the government's role throughout has been one of supporting the accumulation of technology and know-how of Taiwanese firms competing in international markets. This support has led to an increasingly advanced and diversified economy that includes a high number of very competitive small- and medium-sized enterprises (SMEs).

The government's hands-off approach has taken the following forms. First, the government is actively leading and supporting the technological improvement of firms. The Science and Technology Island Plan attracts foreign firms possessing high levels of technology to Taiwan. The government encourages cooperation between manufacturers and firms with high technological capacity.

Second, the government has supported the growth of Taiwanese SMEs. This has allowed smaller Taiwanese firms to attain a level of competitiveness that is equal to that of large firms both at home and abroad. Taiwanese SMEs have full embraced the integration of production and sales systems is a necessity to survival in the current environment of fierce competition.

Third, by establishing the Asia Pacific Financial Center, the Taiwanese government is pursuing simultaneously the globalization of both the real and financial sectors. The Taiwanese government is planning to develop Taiwan as a financial hub of the Asia Pacific region in the hope that this will attract Multinational Enterprises (MNEs) to invest in Taiwan and indirectly boost the international competitiveness of Taiwanese firms. This support has resulted in a recent increase in the number of MNEs establishing research and development facilities and other facilities in Taiwan. The leading strategy behind this increased presence is the establishment of convenient access to the Chinese market.

Fourth, the Taiwanese government is not only encouraging strategic alliances between domestic firms but also between local and foreign firms. Again, such a strategy is a means of absorbing foreign capital and advanced product and process technology.

Fifth, new and global business techniques and philosophies, such as electronic commerce, are increasingly implemented by management of Taiwanese firms. The management awareness and understanding of the increasingly international business environment of Taiwanese firms, aided by continual government encouragement and support, is fostering a more flexible and adaptive approach by domestic firms to foreign competition.

While the government continues to encourage and support overseas activities of Taiwanese firms, the government has largely maintained a hands-off approach to the actual overseas operations. This has resulted in a multi-faceted overseas approach by Taiwanese firms, with strategies differing by region and investor motive. Firms investing in China and Southeast Asia seek manufacturing cost advantages and opportunities to capitalize on their linguistic and local-knowledge advantages. However, investments in Southeast Asia are also related to the government policy to check excessive dependence on the Chinese market. As for investment in the U.S., much of this Taiwanese investment is an effort to enter into technological tie-ups with U.S. companies and then export and tailor the such technology to mainly China and Southeast Asia.

Much of Taiwan's overseas operations are on an ordered equipment manufacturing (OEM) basis. Many firms prospered and expanded through this manufacturing strategy, especially telecommunications and data processing equipment manufacturers. Taiwanese overseas operations are also boosting technological and quality advancement through attaining ISO certification and international patent acquisition. Between 1994 and 1996 the amount of patents Taiwanese firms acquired from the U.S., Japan, and Europe rose from 31% to 54% of total patents purchased by domestic firms.
Much of this overseas drive has been spearheaded by small- and medium-sized enterprises (SMEs). SMEs make up 97.8% of the total number of Taiwanese firms and contribute 34.4% of total sales, 48.8% of exports and employ 78% of the workforce. While their role has diminished somewhat in recent years, SMEs will continue to play a key role in Taiwan's economic efforts both at home and abroad. The competitive strategies (action programs) that Taiwanese SMEs are emphasizing are new product development, value creation, efficiency gains, and diversification into new product lines. Recently, computer manufacturers are utilizing the BTO(Build to Order) system in order to better compete in the global business environment.

The Taiwanese government continues to encourage strategic alliances to enhance the technological capability and competitiveness of domestic firms. At first, such alliances were a means to attract foreign direct investment and high technology tie-ups; however, Taiwanese have in recent years began entering alliances in efforts to establish a more aggressive presence in Chinese and Southeast Asian markets. The combined effect of government-lead policies and the strong entrepreneurship of SMEs has made possible the successful global performance of Taiwanese firms.

Normal;The Russian Financial Crisis and Its Implications

From late 1997, the Asian financial crisis has subjected Russia to recurrent financial market pressures. Such pressures finally became too onerous and on August 17, 1998 the Russian authorities announced emergency measures including de facto devaluation of the ruble and a partial moratorium on Russian debt.

The Asian financial crisis affected the Russian financial crisis in two ways. First, the crisis emphasized the high risks of emerging markets in the eyes of capital investors and thereby helped lead to a massive outflow of capital from Russia. Second, it aggravated Russia's balance of payment situation by lowering world prices of raw materials which constitute most of Russia's exports.

While the Asian crisis was the spark, the roots of the Russian crisis appear to lie in the weakness of the Russian economic system - namely, the increasing budget deficit and mounting short-term debt. Problems of the Russian banking sector and the unstable Russian political situation also contributed to the outbreak of the Russian financial crisis.
In the wake of the collapse of the Russian financial sector in August, many feared the advent of a worldwide depression. While such a deep recession has not yet materialized, soon after the Russian crisis stock prices fell sharply all over the world. While financial asset prices recovered by the end of year in most advanced economy markets, the negative impact was more pronounced and long-lasting in developing economies as the Russian crisis extended the financial crisis, which had previously been limited in Asia, to other developing countries facing structural economic difficulties.

International markets aside, the damage by the August financial crisis on the Russian economy has been enormous. In 1997, Russia recorded its first economic growth since the beginning of economic reform in 1992. However, in September 1998, GDP shrank 9.9 percent and industrial output fell 14.5 percent off September 1997 levels. Still more dramatic were the rise in consumer prices and the devaluation of the ruble. In September, the consumer price index increased 38.4 percent, and the ruble fell from the pre-crisis level of R6.3 to the dollar to over R20 to the dollar on December 8. Furthermore, imposing the moratorium has rendered the Russian government unable to borrow from either domestic or international capital markets. This leaves Russia with no sources of funding other than printing money. However, this option can only further deteriorate the financial credibility of the Russian government both domestically and internationally as well as cause inflation to further soar.

In probing for solutions, no easy fix is apparent. Instead, Russian economic recovery will entail a long and painful process of economic reform where political stability is a sine qua non. With the nomination of Yevgeny Primakov as prime minister, Yeltsin has, at least for the moment, avoided further political turmoil. The Primakov government revealed its anti-crisis program in November 1998. Although it was supported by some politicians in Russia, the lack of details concerning financing have drawn criticism both in Russia and especially from abroad. The most damaging dissent of the Primakov program has come from the International Monetary Fund, which suspended funding to Russia. The short-term outlook of the Russian economy is decidedly gloomy and in 1999 the economy is expected to decline by 5-7 percent.
Unsurprisingly, Korea-Russian economic cooperation has also been negatively affected by the outbreak of the Russian financial crisis. Such impact can already be seen in the fall of bilateral trade between the two countries. Korea's exports to Russia shrank 78.7 percent and 82.5 percent, respectively, in September and October, from a year earlier. This trend of plunging Korean exports to the country is expected to last until Russia recovers from its financial crisis. As Korea-Russian trade represents only about 1 percent of Korea's total trade, it will not have a significant impact on the Korean economy. However, manufacturers of certain food products and electronic goods, the latter of which has been Korea's largest export to Russia, will certainly suffer from the shrinking Russian markets. Furthermore, Korean direct investment in Russia, which had already fallen in before the Russian financial crisis, has further contracted and is unlikely to recover until Russia begins to show signs that it will get its economic house in order.

In order to overcome these difficulties, Korean firms must adapt as quickly as possible to rapidly changing Russian markets. In particular, they must take into account the following factors: Russian consumers' reduced purchasing power, the Russian government's expected restrictive import policy for consumer goods and the collapsed Russian banking system. Therefore, Korean firms must search for new markets in which to diversify and thereby broaden their presence in Russia. For electronics and automobiles, they must continue to expand after service networks and attempt to increase automobile part exports. Meanwhile, the most promising area of Korea-Russian economic relations, where governments can play a constructive role, is science and technology cooperation.

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.