The Kaesong Industrial Complex has, for the most part, experienced relatively stable operation over the last decade, and has become the most visible and representative inter-Korean economic cooperation project amidst deteriorating inter-Korean relations. However, in the course of normalization of its operations after its sudden closure in 2013, the issue of internationalization of the Complex has been strongly raised, as part of efforts to ensure greater stability and continuity in its operations. Under these circumstances, many studies regarding the internationalization of the Kaesong Industrial Complex were recently conducted. However, most studies are limited in that they tend to utilize similar research methodology, merely presenting solutions to deal with its shortcomings in connection with the current situation. This study, in an attempt to provide a more systematic and differentiated analysis, tries a methodical approach with investment condition analysis based on a theory called “FDI Decision Factor”. The summary and results of this study are as follows.
In this study, the achievements of the Kaesong complex to date and the current situation including the overview of its development, related laws and systems, management/operating system, industrial structure and trade status are examined first prior to conducting detailed analysis on the Kaesong Industrial Complex in terms of international competitiveness. According to the initial observation, it is clear that improvements in the system as well as quantitative growth, such as increasing production scale and employment, have been achieved. However, various problems, including some major ones, still remain unresolved: facilitating entry procedures, upgrading of communications infrastructure, streamlining of customs rules and securing labor for the workforce.
Second, this study compares in both qualitative and quantitative terms the conditions of the Kaesong complex with industrial complexes in other countries such as China and Vietnam, based on a theoretical review on the FDI decision factors, divided by element factors, demand factors and institutional factors. According to the comparison, the Kaesong complex is evaluated as having comparative advantage in terms of production cost with respect to element factors, particularly in labor forces and supply of industrial sites. However, in terms of demand and institutional factors, the Kaesong complex has relatively low competitiveness in attracting FDI when compared to industrial complexes in China or Vietnam. With such conditions taken into consideration, the Kaesong Industrial Complex is assessed as being strong (among the types of FDI) in ‘resource seeking’ FDI, and particularly in ‘cost saving’ FDI, but has low comparative advantage in ‘market seeking’ and ‘efficiency seeking’ FDI.
Third, considering the current conditions of the Kaesong Industrial Complex based on aforementioned analysis on the factors, this study suggests methods to improve its investment environment. First, with respect to element factors, it highlights the need to provide proper supply conditions for labor forces and to strengthen autonomy in hiring and management of workers. In addition, to improve the supply of industrial sites, it suggests differentiated preferential treatment according to the enterprises and enactment of measures for providing additional industrial sites. On the other hand, in order to improve the conditions regarding supply of raw materials, bringing in raw materials from other areas in North Korea should be made possible in the long run. Concerning its physical infrastructure, the most important task is to improve communication environment along with expanding industrial and logistics infrastructure in the long term. Next, regarding demand factors, efforts should be made in the following areas. The governments should create favorable conditions for selling products from the Kaesong Industrial Park in North Korea and promote more inter-Korean economic cooperation projects to improve the growth potential of the North Korean economy and make an effort to have products from the Kaesong Industrual Park recognized as South Korean products by designating the Park as South Korea’s outward processing zone.
Meanwhile, regarding improvements in institutional conditions including trade liberalization, legal stability, intellectual property rights; the most important part is to utilize the Kaesong industrial complex as a test bed for experimental reform measures, enhancing international credibility through such efforts. Lastly, the two Korean governments need to establish a joint steering committee and operate the complex on the basis of mutual cooperation.
Fourth, based on the analysis of general conditions and evaluation results, this study presents both future development plans along with tasks in the short-term which need to be considered first. To begin with, given the overall conditions of the Kaesong Industrial Complex, it is better to maintain its current concept and develop stage by stage from a long-term perspective in the first stage of its development. Then over the long run, it is required that the complex be developed to serve as a leading benchmarking model of development and management for other development bases in the country. However, more realistically, even with various constraints at the moment, it is desirable for the governments to make Kaesong Industrial Park more attractive investment destination. In particular, both Korean governments should try to provide government-led public relations strategies, systematic support and favorable conditions for luring foreign investment through measures for overhauling support/management systems related to foreign investment.