The Market Opens The crisis forced the Korean government to begin dismantling its policy of protecting domestic industries, not only because the IMF required it to do so but also because of pressure from advanced countries, who wanted the Korean market to open up. Today the government continues to liberalize trade regulations and harmonize import procedures with international standards. In fact, the government has made particular efforts to attract foreign direct investment. It has switched the emphasis in its FDI policy to "promotion and assistance" from "restriction and control." Under the new Foreign Investment Promotion Act of November 1998, the government streamlined complicated administrative procedures by dismantling or relaxing more than 50 percent of the restrictions. It also introduced the so-called one-step service system for inward FDI.
Mergers and acquisitions have been promoted in conjunction with liberalization. Before 1997, domestic or foreign investors were prohibited from acquiring Korean companies. However, takeover laws have been drastically liberalized since the crisis and hostile takeovers have been occurring freely. As a result of these measures to promote FDI and M, FDI in Korea reached a record high of $8.9 billion in 1998, compared to $3.2 billion in 1996. Of the total $8.9 billion FDI in 1998, M investment accounted for $4.7 billion, or 53.1 percent, indicating dramatic progress in establishing an investor-friendly business environment.
Since the crisis, Korea has also opened up a number of sectors to FDI; by the end of 1999, 99.4 percent of all industries were open to FDI. The business sectors liberalized since the 1997 crisis include financial services, security markets, commodity exchanges, investment companies and trusts, real estate, golf course operation, grain processing, insurance-related businesses, petrol service stations, power generation and waterworks.
Allowing foreigners to purchase land and other real estate for business and non-business purposes has also opened up the Korean distribution sector to foreigners. Discount retailers and chains such as Wal-Mart, Costco, Carrefour and the Price Club have already set up operations.
In accordance with the IMF's conditions, the financial sector has been restructured. This has increased the banking sector's independence from government, consolidated and strengthened the supervision of all financial institutions, liquidated a number of insolvent financial institutions and recapitalized viable ones. To increase transparency, the financial sector adopted international standards for disclosure and auditing.
To improve management accountability, financial institutions established boards of directors whose members are selected by shareholders. In particular, restructuring has opened the financial sector for FDI and M (Mergers and Acquisitions) and allowed competition from overseas financial institutions. Consequently, as of September 1999, substantial amounts of foreign capital were invested in Korean banks, and major foreign shareholders were participating in bank management.
Indeed, in September 1999, a troubled bank (Korean First Bank) was sold to Newbridge Capital in the United States, marking a watershed in the Korean financial sector. The presence of foreign capital in the banking industry is likely to enhance its competitiveness, transparency, accountability and risk management practices. At the same time, it will stop the government from intervening in the financial sector.
Chaebol Reform Reform of the chaebols has been pursued using the "five-plus three-point" principles that were agreed to by the chaebols and the government. The five principles refer to making management transparent, eradicating cross-debt payment guarantees among subsidiaries of the same chaebol, improving their financial structure, specializing in core businesses and improving corporate governance.
The additional three points are intended to prevent the chaebols from dominating the non-bank financial sector, to prohibit cross-investment and illegal internal trading among subsidiaries, and to prevent abnormal wealth inheritance. Once completed, these agreements will enhance the chaebols' operating transparency, financial soundness, corporate governance and ensure that they concentrate on their core competencies. They will also eliminate the institutionalized privileges that government had bestowed on the chaebols and address the endemic problem of collusion between the government and the chaebols. This will not only remedy the major causes of the financial crisis but also address the disadvantages foreign competitors experienced.
Substantial progress has already been made in reforming the chaebols along the five-plus three-point principles. At the same time, substantial foreign capital has flowed into Korean businesses. By the end of January 1999, the number of listed firms whose combined foreign interests exceeded the share of the largest domestic shareholder increased to 42. Foreign investors in Korean companies will require those companies to improve transparency corporate governance and management efficiency This will in turn decrease government intervention and collusion. As government-chaebol collusion disappears, so will the systemic privileges bestowed on chaebols.
As a result, chaebols' perception of infallibility will certainly fade away. One indication of this is the recent demise of the Daewoo group, the second-largest chaebol. In the absence of the privileges bestowed upon chaebols, financial institutions-which have in turn been penetrated by foreign capital-will lend to chaebols only if they have evidence of sound business operations. This will force chaebols to concentrate on their core competencies and to divest their marginal interests.
