South Korea’s global reputation has risen in recent years. This has been driven by the popularity of its exported brands, K-Pop stars and K-Dramas, as well as a rising awareness of the importance of South Korean firms in global supply chains, particularly in sectors like semiconductors and electric vehicles.
South Korea is also an attractive foreign investment destination. Traditionally, investment has focused on manufacturing and some areas of services and consumer markets. However, increasingly, investment is being directed towards advanced strategic and emerging technology.
What are the factors investors need to consider?
Emerging technology: politicisation and vulnerability
South Korea’s Ministry of Trade, Industry and Energy has signalled intent to roll out tax incentives and cash grants for foreign investment into critical supply chains and strategic technologies like batteries, alternative energy and semiconductors. This would create a fertile environment for opportunity and innovation in the country. Coordination with the US, Japan and other countries is also adding momentum and funding.
This technology requires critical minerals. South Korea does not have its own domestic deposits and must rely on an increasingly politicised global supply chain to acquire them. Initially slow off the mark in securing overseas sources, South Korea is working to increase its resilience regarding critical minerals by reaching out to countries that could be potential suppliers. In June 2024, South Korea hosted a summit with delegations from 48 African Union members, and in 2023 the country launched a charm offensive with Mongolia that included increased aid. Seoul also followed a US-Korea-Japan summit with a China-Korea-Japan summit – a reflection of how even the current, Washington-friendly administration in Seoul is seeking to hedge US-China competition.
While the politicisation and vulnerability of South Korea’s supply chain for emerging technology is not unique, it is acutely pronounced. As governments and companies seek to address these challenges, opportunities for investment are becoming apparent, but so are risks. Investors must not overlook supply chain exposure beyond South Korea or the still-emerging policy and regulatory environment.
Geopolitics: on the front line
South Korea is on the front line of geopolitical competition, literally and figuratively. Exports are 42% of GDP for South Korea, compared with 10% for the US, 13% for Japan and 25% for Australia. This makes South Korea particularly vulnerable to global forces, even when compared to other major exporters.
Seoul has redoubled efforts under consecutive governments to hedge geopolitical risk. However, South Korea’s global relationships are very exposed to changes in leadership and policy – both abroad and at home. South Korean presidents can only serve a single five-year term, which means sudden shifts in strategy and emphasis should be expected. Abroad, South Korea must contend with pressure from both the US and China. Under the last Trump presidency, the US administration forced Seoul to renegotiate a key existing free trade agreement. South Korea has also faced punitive economic measures and intense diplomatic pressure from Beijing over perceived “pro-US” or “anti-China” moves. South Korean firms will continue to face potential risks of restricted market access from both the US and China.
While war risks are extremely low, ongoing tensions on the peninsula between North and South Korea pose geopolitical risks that will persist for the foreseeable future. The cyclical escalation in tensions has very little to do with the value of an investment, but when things do escalate —as they did in 2010 and 2017, and as they likely will again in the next year or two — it can take up a lot of bandwidth with panicky stakeholders. In the unlikely event of a major conflict on the peninsula, the potential for catastrophic results, and severe impacts regionally and globally, are comparable to Taiwan scenarios, but receive far less attention and planning.
Given how export-focused South Korean economy is, investors cannot ignore the exposure of their investment targets to shifting geopolitical sands. Investors should consider whether they are reliant on any current free trade or market access arrangements and what could impact them.
Business culture and governance: understanding the chaebol system
Probably the greatest mistake any outside investor can make is thinking the South Korean business environment is just another Japan, Germany or Canada. The South Korean economy is intensely concentrated, with highly dominant and expansive chaebols (South Korean conglomerates), which account for around 60% of GDP by some measures. This concentration, as well as the rapid ascent of the country from a low-income post-war footing to one of the most technologically advanced economies in the world, makes for an idiosyncratic business culture.
South Korea is a corporate environment where compliance standards and business practices are inconsistent. Chaebols have significant political influence, and the relationships between executives and government officials can be murky. This is an environment ripe for corruption, as was so dramatically demonstrated in 2017 when former president Park Geun-hye was convicted of bribery and abuse of power for collecting bribes from three chaebols. The family-run nature of the companies means they often do not have the usual governance systems you would expect to see in companies of their size, which can create challenges in terms of expectations, reporting and integration with outside partners.
Given their dominance in the economic landscape, it is more than likely that an investment into South Korea will involve a chaebol. Even if it does not, their lead has defined much of South Korean business culture. Before investing, it is important to have a clear vision of what non-negotiable requirements are in terms of culture, governance and practice and then to seek clear intelligence about these factors, rather than assuming standard corporate behavior and practices.
Labour relations: a simmering pot
South Korea has long had a reputation of complex labour relations. These can have a profound impact on business operations. Unions are not limited just to heavy industry or manufacturing; professional services also have active unions, and foreign banks and insurers have, in recent years, found themselves subject to protests and work-to-rule campaigns, such as refusing to answer phones or deliberately slowing work. But even in lightly unionized companies, such as small to medium sized enterprises (SMEs), labour management and unionization movements can take up an inordinate amount of time.
President Yoon Suk Yeol has committed to a labour reform agenda in line with the standard pledges of successive conservative governments: a pro-business approach supporting labour market flexibility, flexible working arrangements and a pledge to introduce transparency into the unions.
This agenda has been criticised as being too focused on business convenience, rather than improving the environment for all stakeholders. And given the landslide win of the opposition party and its coalition in the last general election, any further labour reforms by the Yoon administration are unlikely.
Still, there are many factors that could trigger labour activism, given President Yoon’s continuing feud with the unions. The current labour frictions will likely persist, potentially giving rise to new unions and more widespread strikes. In June 2024, Samsung Electronics workers went on strike for the first time ever.
What this means for investors is that labour activism and its attendant operational challenges will remain a key risk for any opportunity. When considering an investment, particularly if it is in a labour-intensive industry or one dependent on human capital, map out the unions active among the labour force and understand what the relations have been like between the workforce and management. Take into account these potential disruptions and associated costs when considering investment returns and how they may impact any plans to adjust strategy or restructure.
Contextualising opportunities
The opportunities on offer in South Korea, particularly in the emerging technology space, are immense, and the government will be looking to increasingly support inward investment.
By acknowledging and examining the unique business culture and geopolitical space South Korea occupies in relation to each opportunity, investors can ensure they are obtaining maximum value while also protecting themselves.
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