ASEAN and Korea: Trends in Economic & Labour Relations 9789814377300

This volume looks at some of the issues arising from the growing interaction between Southeast Asia and Korea. Subjects

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ASEAN and Korea: Trends in Economic & Labour Relations

Table of contents :
List of Tables
List of Figures
1. Southeast Asia and Korea in Historical Perspective: The Case of Malaysia-South Korea Relations
2. Labour Migration to South Korea: The Case of Philippine Workers
3. Trade and Financial Liberalization in South Korea and Implications for Southeast Asia
4. South Korea-China Economic Relations and Implications for Southeast Asia
5. Labour Policy and Industrial Relations in South Korea
6. South Korean Construction Industry in Southeast Asia
7. South Korean Tourism in Southeast Asia: A Case Study of Thailand
8. Vietnam's Labour Policies towards Foreign Firms: The Case of South Korean Firms in Vietnam

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ASEAN AND KOREA Trends in Economic and Labour Relations

Edited by

Daljit Singh Reza Y. Siregar


Published by Institute of Southeast Asian Studies llcng Mui Keng Terrace Pasir Panjang Singapore 11959() ln/!'nu'/e-mail World Wide Web: http:/ /w\\"\\·

All rights H'S(TVcrl. No part of this publication mav be reproduced. stored in a retrieval systenl, or transtnitted in any fonn or by any nle lower classes looked for economic opportunities in foreign trade. Korean seafarers, including one named Chang Po-go, became so successful that they dominated the thret>-way trade of Korea, japan, and China. Building better ships, the Koreans carried goods between China and Japan. 1 There were no reports of Korean merchant ships sailing south beyond China to Southcast Asia. It was reported that dur·ing the period of the Shilla some Korean travellers and pilgrims passed through Southeast Asia. Buddhism had been introduced to Korea in the fourth century and large numbers of Buddhists began going to China to study. A number· proceeded on to Buddhist holy places in India. However when the overland route across central Asia was disrupted because of political unrests, some Koreans used the sea route through Southeast Asia. These pilgrims represented the first direct contact between the Korean and the Southeast Asian regions. It is difficult to ascertain how many of such pilgrims there might have been. I Tsing, the Chinese monk who arrived in the Malay Peninsula in 672 en route to India and who stopped by again in 685 on his way back, referred to the presence of two Korean pilgrims in P'olu-shih, a place believed to be either Barus or a port on the northwestern coast of Sumatra. ~ P' o-lu-shih was a transit port for ships travelling in both directions. The Korean pilgrims had probably taken a ship from China and were waiting at l''o-lu-shih for another to take them to India. However, while there, both of them died. That I Tsing encountered these two would suggest that there could have been other Korean pilgrims who passed through Southeast Asia. One of the more famous of these pilgrims was Hyech 'o, "vho recorded his pilgrimage in a well-known work entitled Rixord of a Journey to the Five Indian Kingdoms.: 1 Hycch'o very likely travelled first to Guangzhou in south China. From there he took a ship which sailed down the Vietnamese coast. Hyech'o could have visited Palembang, Kcdah, and Barns on a route similar to that taken by the two earlier pilgrims mentioned by I Tsing. Hyech'o probably left Guangzhou around 720 to 724 and reached India some time later. 4 Hindu-Buddhist temples and monasteries established in Southeast Asia at the beginning of the millennium might also have been a factor in attracting Korean pilgrims to use the sea route. During this period there were several well-established Hindu-Buddhist states, the most powerful being the Sri Vijaya empire. These rulers became patrons of learning and some established monastery schools and temples. Korean pilgrims would therefore have found Southeast Asia a culturally inspiring and hospitable place. Through these travels Korean pilgrims brought back to Korea knowledge


of Southeast Asia and possibly introduced new products. There were accounts that Southeast Asian goods, including camphor, were later exported to Korea. Barus was then world renowned for camphor and P'o-lu-shih, where Korean pilgrims reportedly visited, was Barus or a place close to it. Despite these early contacts through the pilgrims, Korea did not pursue any sustained trade links with Southeast Asia. Rather it came to depend largely on intermediary merchants for the import of exotic and luxury items such as sandalwood, pepper, and camphor. The rare occasions of Korean visits to Southeast Asia were of a diplomatic rather than commercial nature. More significantly, there were no reports of Korean ships turning up in Southeast Asian waters and indeed the account by I Tsing of the two pilgrims waiting in P' o-lu-shih suggests that Korean travellers relied on foreign boats. By the time of the Koryo dynasty (91R-1392), fewer Korean pilgrims had used the Southeast Asian sea route. This could be due to the reopening of the overland passage through China and central Asia. Secondly, the period of the Koryo witnessed a decline in foreign trade. The sharpening of class distinctions weakened the social position and int1uence of the merchants. Buddhism in Korea, too, reportedly declined and this lessened the previously keen desire for cultural and religious contact with India and China. Finally, towards the end of the Koryo dynasty .Japanese pirates, largely based in Tsushirna, frequently raided the Korean coasts and set·iously disrupted trade." Hindu-Buddhist influence in archipelago Southeast Asia was at this time also on the wane. The Sri Vijaya empire no longer exercised complete command of the Straits of Malacca. Without the patronage of the powerful rulers, Hindu-Buddhist monasteries and centres oflearning declined. In their place came Islam which hum the f(mrteenth century gradually extended its influence ovtT the Malay Peninsula. From this period of the Koryo dvnasty until the end of the Yi dynasty ( 1392191 0), Korea practised a policy of relative seclusion. Close links were continued only with China with whom it had trade and cultural exchanges. Some commerce was opened with Japan and the Ryukyu islands. V\'hatever commercial contacts it had with Southeast Asia were largely through intermediaries. Of these intermediary merchants the most important were the Chinese based in Fujian and the southern provinces of China who had established trade links with Southeast Asia. Chinese ships, mainly from the Fujian port of Amoy, had begun visiting Southeast Asia since the ninth century. Pepper, spices, camphor wood, benzoin, birds' nest, and variousjungle produce were highly sought after and exchanged for Chinese silk and porcelain. Some of these Chinese traders carried Southeast Asian goods to Korea and Japan. Koreans trading with China also imported Southeast Asian products brought back by Chinese merchants. 1i During the Ming period China showed increased official interest in overseas aff~1irs. During the reign of Emperor Yongle the court sent out seven naval

The Case ufMalaysia-South Korea R.Plations

expeditions between 1402 and 1424 under Admiral Zheng He. The expeditions conferred recognition to several Malay states and offered them protection against neighbouring Siam (now Thailand). Besides the merchants from the ports in southern China there were several small but flourishing communities of Chinese traders in Southeast Asia and, significantly, in the Ryukyu islands near Japan. These merchants, because of their wide commercial network and knowledge of the region, also gained access to the courts of the various rulers. They were therefore used occasionally in trade and diplomatic missions. At least two states in Southeast Asia, Siam and a Javanese principality, made use of these Chinese merchants to open up contact with the Korean court. These missions represented the few known occasions in the pre-colonial period of direct encounter between Korea and Southeast Asia. The earliest of these was in 1391 when a Siamese envoy, Nai Goong, visited Korea. This was followed by a second mission to Korea in 1394 which was led by Chen Yen-hsiang, a Chinese merchant. He was accompanied by another Chinese merchant, Nai Chang Ssu-tao. While in Korea, Chen was conferred an official court title. On its way home the Siamese mission was attacked by Japanese pirates and was forced to return to Korea. 7 As an act of courtesy, the Korean court sent an envoy to accompany the mission back to Siam. There are few details about the purpose of these Siamese visits. Trade was possibly an important reason. It is also likely that there was an interest in cultural and religious exchanges. Chen, who led the second Siamese mission to Korea, was an itinerant wealthy merchant. He was one of those Chinese traders whose ships plied between Korea, China, and Southeast Asia. Some year·s after his visit to Korea he was asked by a state in Java to lead a mission to Korea. Leaving Java in 1406, the mission was attacked by Japanese pirates ofT the coast of Cholla Province. The survivors managed to reach Korea. Later that year the Koreans gave the delegation a small ship to take them home. But on its way back the vessel was shipwrecked off the coast of.Japan and once again attacked by Japanese pirates. The bahufit (the shogun government in Japan) provided a ship for Chen and his men to return to Java. Chen was in a subsequent mission sent to convey the appreciation of the Javanese ruler to the Japanese bakufu. The mission was also scheduled to visit Korea. Delayed by storm, the mission reached Hakata in 1412. Chen carried a .Javanese title (A-lieh) which he used in a letter addressed to the Korean court. He expressed the desire to visit Korea to convey his appreciation for the courtesy received in his earlier mission there. However, as he could not make the trip he was sending his grandson, Shih-ch'ung, in his place. Towards the middle of the fifteenth century, the intermediary role of the Chinese was seriously weakened when the Ming government, largely because of internal politics, ended all official overseas interest. More significantly, it banned its citizens from leaving China. The ban had some effect and this led



Kam Hing and Lpe K)'nng-chan

to a reduction in the supply of Southeast Asian goods to Korea, Ryukyu, and Japan. Given this development, merchants from Ryukyu entered the Southeast Asian trade. Ryukyu, being a small country with little natural resources, had turned to maritime trade to support its economy. From about 13H5 Ryukyu's trade flourished. Hundreds of Ryukyu ships traded with Korea and japan. Soon Ryukyu traders were taking Korean, Chinese, and Japanese goods to exchange for Southeast Asian produce. Ryukyu merchants went to the ports which Chinese merchants had previously frequented. They also invited Fujian traders to reside in the Ryukyus, gaining from their experience and their contacts. During this period, therefore, Ryukyu merchants provided some commercial links between Korea, Japan, and Southeast Asia. The first record of a Ryukyu ship visiting Malacca was in 1460 and since then there were records of at least twenty visits by Ryukyu merchants. Southeast Asian goods were taken to the Ryukyus and to Kyushu in Japan. Japanese ships bound for Korea during the early years of the fifteenth century usually carried as part of their cargo Southeast Asian commodities such as pepper, sapanwood, cinnabar wood, ivory, cloves, sandalwood, garu-wood, rhinoceros horn, and Barus camphor.H This period of the fourteenth and the fifteenth centuries marked an important phase in the cultural development and growth of trade in the Southeast Asian region. Religious teachings came h-orn the West, and Hindu-Buddhist beliefs first and then Islam transformed the indigenous political and cultural systems. Port-states such as Malacca flourished by serving as trade centres for boats crossing the Indian Ocean and the South China Sea. There was some trade between Southeast Asia and Northeast Asia which might have included Korea. But in this trade there is no evidence that Korea directly participated. Korea confined itself to dealing with China and, to an extent, with Japan and Ryukyu. Its need for Southeast A~ian goods was amply met by supplies provided by intermediary merchants. Conditions, too, were not favourable to foreign trade outside the China-:Japan region because ofthe preference by the Korean court for seclusion and also increasingly because of dangers along its coasts posed by Japanese pirates.

Ill. Period of Western Presence in Southeast Asia The arrival of the Portuguese in Southeast A~ia and their occupation of Malacca in Fill marked the beginning ofVI'estern dominance in the region. Western powers expanded commercial or political control and with that the links of states in Southeast Asia became increasingly oriented and subordinated to the Vl'est. Indeed, following the arrival of the Portuguese, there were no more records of Ryukyuan traders coming to Malacca. Ryukyuan ships reacted to the new power balance by shifting their trade to Patani. Even this link soon came to an end. The gradual withdrawal of the Ryukyuans from the Southeast

The Case ofMalaysia-South Korea Relations


Asian trade had important consequences in Northeast Asia. The decline of Ryukyuan overseas activities resulted in less frequent commercial contact between Ryukyu and Korea and even this ended by the close of the sixteenth century. Ryukyuan ships were also no longer involved in the trade between Korea andJapan . .Japanese merchants had little interest in the Ryukyuan trade once Ryukyuan ships stopped bringing Southeast Asian goods. In effect then Korea lost whatever commercial intermediary it had with Southeast Asia. Following the disappearance of the Ryukyuan trading role, Japanese ships began to visit Southeast Asia in large numbers. This interest intensified from 1580. During these years there were some 299 ships arriving at Tongking, Cochinchina, Champa, Cambodia, Siam, Patani, and the Philippines. Japanese ships brought silver from mines in Japan to exchange for Southeast Asian products.'l Overall, the changing trade and political patterns in Southeast Asia following the arrival of the Europeans in the sixteenth century probably further convinced the Koreans of the wisdom of pursuing their prudent policy of seclusion. Events in Southeast Asia soon came to the knowledge of the Korean court. In 1521 the first-ever report of Westerners found in Korean records referred to a people called the Fo-lang-chi (a transliteration of Feringhi or Franks, a term used by Muslims for West Europeans during the time of the Crusades) who had captured Man-la, a tributary of China. Man-la was likely to be Malacca. 10 The account also described the attempts by the Fo-lang-chi to gain trading privileges near Canton. This report is almost certainly a reference to the Portuguese capture of Malacca and of their subsequent visit to China seeking commercial access. This information was gathered by Korean envoys in Beijing who dutifully transmitted it to the Korean court. By the beginning of the seventeenth century the Spaniards, Portuguese, and Dutch had moved close to the vicinity of Korea. But only the Dutch, and reportedly the Portuguese in Macao, showed some interest in opening cmnmercial relations with Korea. The Dutch East India Company, from its factory in Nagasaki, monitored developments in Korea. An event that for the first and perhaps only time drew direct Dutch interest in Korea was the repatriation to the Netherlands of several Dutchmen who had spent a number of years as captives in Korea. These Dutchmen were crew members of the ship 5)fHlrrow Hawk (Sperwer) which sank off the coast of Korea during a storm in August 1653. The ship had left Batavia in the Netherlands East Indies on 18 June 1653 and was on its way to Nagasaki. Out of a crew of sixty-four, thirtysix survived. The survivors were taken prisoners and forced to serve as bodyguards to a general in Seoul. In 1666, after several attempts, eight managed to escape in a small fishing boat and reached an island off the Go to Archipelago. From there they were taken to Nagasaki where they were handed to the chief Dutch agent ( Opperhoojt). They were then sent home to the N etherlands. 11


Lee Kam Hin[; and Lee Kyung-chan

Officials of the Dutch East India Company in Batavia and in Amsterdam questioned the survivors about their experience. They were especially keen to find out about trade opportunities in Korea. The home directors seemed keen enough to consider sending some of the men back to Korea to help negotiate a trade agreement. Indeed, a newly built ship in 1669 was given the name Corea. The oflicials in Batavia were less impressed about the prospects of DutchKorea trade despite noting that a number of items imported into Korea from Japan, as observed by the survivors, were goods obtained from the Dutch East India Company in Indonesia. These included deerskin, pepper, sugar, and sandalwood. The officials wrote to their representative in Nagasaki seeking his opinion on the feasibility of opening direct Dutch trade with Korea, thus bypassing the Japanese middlemen. The Nagasaki official wrote back advising strongly against such a move, warning that the Lord of Tsushima had a monopoly of the trade with Korea. Dutch attempts to open direct trade links with Korea would harm their relations with the Japanese and thereby endanger the position of the factory in Nagasaki. This advice must have ended any interest the officials in Batavia might have in Korea. 12 Occasional reports from the Dutch factory in Nagasaki kept Batavia informed of whatever news it could get of Korea. From Nagasaki, Dutch otlicials could monitor Korea's dealings with Japan. In .January 1654, for instance, the general letter from Batavia to the company directors in Amsterdam contained a comment from Nagasaki that an ambassador from Korea was expected in Edo the following year. 11 The subject of a visit by a Korean envoy to Japan again appeared in Batavia's general letter of 1 February 1656 and 31 January 1657. 14 Batavia's general letter of 17 November 1669 reported that the Portuguese in Macao might be attempting to open commercial links with Korea. 1" The general letter or :n January 1672 mentioned Korea's trade. 11' In the next two centuries vVestern economic inf1uence became more dominant in most of Southeast Asia. Political power helped in the expansion and consqlidation of Western trade. Southeast Asia itself was developed as a source of raw materials, such as rubber, palm oil, tin, and copra, by vVestern enterprises. At the same time \1\'estern private companies and investments replaced state trading companies like the English East India Company and the Dutch East India Company. Agency houses such as the North Borneo Company, Harrisons and Crosfield, and .Jardinc Matheson, and large corporations like Hong Kong and Shanghai Banking Corporation crt>ated a transnational business network in Asia. Through these, European and American businesses dominated the trade, and their activities linked the regions of Nonheast Asia, Southeast Asia, and Europe. Western powers from their base in Southeast Asia generally wer·e more keen on doing business with China and Japan and displayed comparatively little interest in Korea. British trade and investments in Korea at the end of the

'Jhe Cast ojJ'vtalrnsia-South Korea Relations

nineteenth century were small. Isabella Bird, the well-known British traveller who visited Malava in 1879 and then was in Korea on four trips between 1894 and 1899, made an observation of British influence there, commenting that: 'The effacement of British political inf1uence has been effected chiet1y by a policy of laisscz-Ltire, which has produced on the Kor·ean mind the double impression of indifference and feebleness, to which the dubious and hazy diplomatic relationship naturally contributes" 17 The other intermediary group linking Korea tenuously to Southeast Asia were thejapanese. The .Japanese had begun to invest in the region at the turn of the twentieth century. Encouraged particularly by the rubber boom in 1909 and l910,Japanese businessmen bought large tracts ofland to open up rubber estates in Malaya, especially in.Johor. .Japancse companies also developed the iron mining industry. 1H These developments took place at a time when japan was gaining strong political and economic control in Korea. Korea was occupied in 1910 andJapanese enterprises made steady inroads into its economy. One interesting feature during the early part of the twentieth century was the large number ofjapanese residing in Southeast Asia. There were, however, few records of comparable Korean presence. For instance while the 1911 census report for the Federated Malay States had an entry of ~,0~9 Japanese, there was no mention of Koreans. 19 It is possible that in the post-191 0 period overseas Koreans were classified as Japanese. Only in 1917 did some .Japanese consuls categorize Koreans and Taiwanese separately.~ 0 A 1946 file on Japanese and Koreans kept by the British Military Administration in Malaya suggests the presence in Southeast Asia of the latter group in the pre-war and war years. However, the number could have been very small. V\'ithin such a colonial political and economic order there was very little direct Korea-Southeast A~ia contact. The economic interests and trade of both Southeast Asia and Korea were subordinated to the broader objectives of major colonial powers in the two regions and this pattern continued to keep the two apart. And as in the past, whate\'er links there were came to be mediated through other merchants.

IV. The Transition: 1948-60 After V\'orld V\'ar II Korea and Malaysia went through a process of decolonization and nation-building. This process was not easy as both countries had to endure a determined and protractt:>d communist challenge. The source and character of conflict in the two places were different. But what happent>d in one arena of conflict could not be entirely separated from c\'ents in the other. Leaders in London and Washington certainly did not consider the two crises as unrelated. The implication of the crisis in one place came to have considerable bearing on the other. In the end this common anti-communist


Lee Kam Hing and !~PP Kyu11g-rhrm

experience helps explain why in the early period of Malaysia-South Korea relations, both countries came to regard each other as natural friends. In Malaya a state of emergency was declared by the British in June 194H following attacks by armed members of the Malayan Communist Party (MCP) on rubber estates. The MCP, fighting to gain independence from the British and to establish a communist state, had at its height mobilized some I 0,000 armed men. In response the authorities brought in some 40,000 regular troops, including units from Commonwealth countries and raised nearly 70,000 auxiliary police personnel. Until1953 the military situation remained critical in Malaya. Rubber estates and tin mines came under regular attacks by the MCP in an eflort to damage the economy, and there were widespread assassinations to demoralize the civilian population. Despite large military reinforcements the authorities were not able to win quickly the battle against the communists. In .June 1950 a new Director of Operations, General Sir Harold Briggs, was sent by London to take charge in Malaya. One of the first tasks of General Briggs was to shift some 500,000 rural squatters, mostly Chinese some of whom were suspected to be MCP sympathizers, into settlements called New Villages in a move to deny food and supplies to the armed communists.~' It was at this critical point that war in the Korean Peninsula broke out. On 25 June 1950 communist troops from the north moved to occupy the southern part of the peninsula. The United Nations (UN), largely at the initiative of the United States, intervened to defend South Korea. U .S. troops under General MacArthur landed in South Korea to lead a military offensive against the communist north. Other members of the UN joined in and Thailand, the only Southeast Asian country to do so, sent a small force. The war on the Korean Peninsula was fierce and caused Inassive destruction as UN troops initially pushed back the North Korean troops. Some UN troops reached the Yalu River that divided Korea from Manchuria hut then retreated when in October 1950 China intervened. The British were deeply concerned with what was happening in KorTr North Korea. The Sin Clwwjit Poh, belonging to Tan Kah Kee, the influential community leader, stated that "the American imperialist will not be able to stop the North Korean People's Republic in the task ofliberating South Korea and thereby establishing a united Korea". 21 Despite these reservations the B1·itish Government came to a decisive and committed stand both in Malaya as well as in Korea. Malaya was important to Britain because despite the Emergency it was still the most important sterling earner through its rubber exports. Britain had large investments in Malaya, particularly in rubber estates, tin mines, and financial services. There was therefore no question of abandonment and Malaya was to be held at all costs. Secondly, de~pite its weakened economy Britain was anxious to maintain its premier status in Europe. To do so it needed a strong alliance with the Cnited States. This would give it military protection in Europe and it would also be able to influence U.S. policy elsewhere. But to gain a special relationship with the United States, the leaders in London felt that Britain needed to demonstrate that it was still a militarily credible and reliable ally. The immediate challenge before Britain was to demonstrate to the Americans the ability to defend Malaya and to give military support to the United States in Korea. 2'' Thirdly, the invasion by North Korea and the MCP insurrection in Malaya were not seen as unrelated and some V\'estern analysts were convinced that these were part of a broader communist offensive. The communist threat had theref(>re to be resisted in Korea and Malaya to prevent a possible domino effect. As the situation in Korea became critical, the United State~ called on Britain to provide ground troops urgently. Already, there were proposals that some British troops in Malaya could be deployed in Korea. The argument was that Western troops in Malaya and Indochina were in battle-fit condition and could


readily be deployed. The press reported that there were available some 20,000 British regulars in Malaya and some 150,000 French troops in Indochina. In August 1950 it was announced that one armoured car squadron, the Fourth Hussars, would leavt> Malaya for Hong Kong. The squadron was to rt>place two British regiments there, the Middlesex Regiment and the Argyll and Sutherland Highlands, which were being dispatched to Korea. 2(i Plans were made for the sending of an additional brigade from Malaya later. British warships stationed in japan were sent to support l!.S. combat troops in Korea. By the beginning of 1901 British naval strength in Kort>an waters consisted of two aircraft carriers, four cruisers, and seven destroyers. A squadron of warplanes fi·om Singapore was also transferred to Korea. The war in Korea probably added a greater sense of urgency and crisis to the situation in Malaya. Thus, in Ft>bruary 1952 London sent a serving army general who had distinguislwd himself during World War II, General Gerald Templer, to take up tht> civilian post of High Commissioner. He was given sweeping new powers. The tough and decisivt> approach adopted by General Templer certainly helped to stabilize the situation in Malaya and by the end of 1952 the number of armed engagements with the MCP had dramatically declined. But there was an even mort' important impact of the Korean \Nar on Malaya. vVith China entering the conflict Oil the Korean Peninsula and the United States stockpiling its supply of strategic materials, the price of rubber, which had bt>en firming, rose sharply. In 1949 rubbn was only fetching 35 Straits cents a pound. Increased production in other Soutlwast Asian countries and the threat of synthf'lic rubber had depressed prices. But prices began to rise following tht> communist victory in China in October 1949. The prict> reached 60 cents in April 1950 and 74 cents in May. In June it stood at 95 cents. ·with the outbreak of war in Korea the price shot up to $1.21 injulv and $1.4 7 in August. In.January 1951 it had rt>ached $2.1R and briefly $2.~H. It rose to its highest weekly average of $2.20 in Apr·il 19Sl. Thereafter, the price of rubber began to fall gradually but still rt>mainccl well above the pre-Korean War levels.~ 7 It was calculated that in 1951 t>verv US cent per pound in price difference meant US$12 million in terms of Malaya's total production. The rise in the price of tin was just as dramatic in the t>arly months of the Korean vVar. Price had been moving up steadily over the months of 1950. Then as a rt>stdt of the Korean War, refined tin increased by $10 to $~~4:1 a picul in Singapore on I 2 July and another $20 the next day. ~H On the London Metal Exchange tin price in November 1900 had almost doubled compared to that at the beginning of the year. Tin was quoted at £S9R sterling per ton in March and was £1,083 per ton in November.~' 1 Dealers attributed this sharp increase to U.S. purchases for its stockpile as the conHict in Korea worsened. The increase in commodity prices provided a real bonanza to the Malayan economy at a time when there were heavy military expenditures. The impact

The Case ofJ'v1alaysia-Suuth Korea Relations

of commodity price increases was already in evidence in a $64 million favourable balance in Malaya's trade towards the end of 1950. In November 1950 an estimated surplus of $32 million was announced for the next year's budget after operating on a deficit the year before. The increased revenue enabled the government to introduce new programmes and expand existing facilities. This came at a most crucial time when additional funds were urgently needed to help resettle nearly half a million people. Increased spending on health service and provision of radio and educational programmes were eventually just as decisive in checking the communists from making military and political inroads. But just as important was the general effect the tin and rubber boom had on the population. As a result of disruptions caused by the Emergency, production ofrubber had fallen from 769,100 tons in 194R to a low of635,200 tons in 1954. This had caused initial reduction in earnings and some hardships among the population, especially among the rubber tappers. But the rise in rubber price more than made up the shortfall in production. The boom led to higher income and greatly improved employment prospects, especially in towns which absorbed the large number of people dislocated by the resettlement programmes. At the same time the owners of rubber estates and tin mines used their large profits to provide greater security measures against communist attacks. Replanting was carried out as some estates took the opportunity of increased earnings to replace ageing trees which had shown declining production yields. Thus, overall there was a resulting sense of wellbeing among the general population, which helped the government's efforts to gain broad civilian support. Today the Korean War and the Emergency years may have r:eceded from memory to become mere history. But the two crises and the manner in which the course of events touched one another must have impressed deeply upon the consciousness of many leaders, particularly those in Malaysia. This possibly helps to explain the positive response to links with South Korea by Tengku Abclul Rahman. The Tengku's unsuccessful negotiation with the MCP in Baling in 1955 made him even more distrustful of the communists and would thus explain his understanding of the anxieties of Seoul about North Kon~a. Leaders such as Mahathir Mohammed lived through the years of the Korean \Nar and the Emergency, and consequently must have been deeply impressed by the reconstruction of South Korea from the deYastation it suffered.

V. 1960-81: Low-Key Relations Following the establishment of formal diplomatic ties between Malaysia and South Korea, there were regular visits of high-ranking officials and ministers. The Malaysian Deputy Prime Minister, Tun Abdul Razak, led a five-man


Lee Karn Hing and Lee Kyung-rhan

mission to Seoul in November 1962 to sign the first trade agreement between the two countries. In Aprill965 the Tengku made a visit to South Korea. This visit was reciprocated six months later by South Korean Premier Chung IlKwon during which a cultural agreement was signed. Under this Malaysia invited twenty South Korean ~tudents for short-term training annually, and the first batch of Korean students visited Malaysia late that year for eight weeks' training. The background of the Korean War and the Emergency shaped the nature of relations between Malaysia and South Korea during this period. The war against the MCP was still on and the Tengku adopted a pro-V\Testern and anticommunist foreign policy. South Korea likewise, concerned about the fierce diplomatic competition over its legitimacy vis-a-vis North Korea, tried hard to gain broader recognition from the international community. Yet, the common anti-communist stance which encouraged both Kuala Lumpur and Seoul to open early diplomatic links did not lead immediately to any major or significant bilateral programmes. Indeed compared to what was to take place later, relations during this period may be described as correct but ordinary. Trade and cultural exchanges with each other were very limited. The main reason was that both countries, being small nations, saw their interests tied to the major Western powers. Malaysia maintained close defence ties with Britain and other Commonwealth countries while South Korea had security arrangements with the United States.:>o Being both strongly anticommunist and able to take for granted that they were natural friends, Malaysia and South Korea pursued cordial ties with each other but beyond this had little reason to evolve special relations. At the non-official level contact between Malaysia and South Korea was also not particularly outstanding. In .July 1962 the Malaysia Muslim V\'elfare Organization made a donation to a South Korean mosque and invited eleven South Korean Muslim students to Malaysia for a six-month education programme. In 1963 tweh·e South Korean nuns spent some time with the Catholic Order of the Little Sisters of the Poor in Penang. South Korean-Malaysian business ties also began modestly. The earliest mention of South Korean interest in Malaysia was Kang Chang Yeol, who in 1958 was associated with a shipping firm in Pcnang. Subsequently, South Korean business became actively involved in the timber industry. ln 1965, of some ninety-six South Koreans reportedly in Malaysia (including six embassy personnel in Singapore), forty-six were in the logging business. Several South Korean companies located in Miri exported logs, extracted from Sabah, to South Korea. Some of these South Korean businesses later shifted to the peninsula while others expanded into the furniture manufacturing industry. The furniture produced was exported to South Korea and other countries. South Korean exports to Malaysia in 1963 amounted to US$755,000, which was a mere 0.8 per cent of its total exports. They consisted of textile and

The Casr of Malaysia-Suuth Korea RPlations


agricultural and marine products. Malaysia's exports to South Korea were valued at US$4,768,000, mostly raw materials such as timber, rubber, coconut, and tin. For a short while in the 1960s the political division on the Korean Peninsula intruded into a Southeast Asian dispute. This came during the Confrontation conflict between Jakarta and Kuala Lumpur over the formation of Malaysia. In opposing Malaysia, Sukarno described it as a puppet of British neocolonialism. Indonesia in its foreign policy had moved closer to China and North Korea and Sukarno considered both as being part of an alliance of the New Emerging Forces. He spoke of a Jakarta-Beijing-Pyont,ryang axis and, as a warm friend of Pyongyang, regarded South Korea as a client-state of U.S. imperialism. Malaysia was uncomf()rtable with such political labelling. Tun Abdul Razak, who took over in 1970 as Prime Minister, was consequently anxious to adjust the direction of Malaysia's foreign policy. At the same time changing geopolitical configurations, such as the phasing out by the British of their military commitments in Southeast Asia, also caused Kuala Lumpur to move away from its traditionally close links with London. In the 1970s Malaysia decided to move closer to the non-aligned nations and to pay greater attention to emerging regional groupings. particularly the Association of Southeast Asian Nations (ASEAN). In 1970 Malaysia was admitted into the Non-Aligned Movement. In keeping with this new stance in its foreign policy Kuala Lumpur recognized North Korea on 2July 1973. In so doing, Kuala Lumpur maintained an equidistant stance from both Seoul and Pyongyang.

VI. The Look East Policy: 1981-95 The emergence of a new leadership in South Korea in 1980 and in Malavsia the following year had a most visible and major impact upon Malaysia-South Korea relations. In 1982 Kuala Lumpur adopted a Look East policy. This policy represented an important shift in Malaysia's overseas trade and economic links. Mahathir Mohammed, who assumed office as Prime Minister in July 1981, decided that Malaysia should shift emphasis from its traditional reliance on the West. The policy was, at the same time, to affirm his style and focus in external affairs. This was a significant departure from the past. Mahathir, unlike the three previous Prime Ministers, had not studied in the United Kingdom and did not share the same affection for all British institutions and traditions. Keen on an expanded and active international role for Malavsia, he was determined to take the country out of the pro-Western framev;ork which was seen as one of continued dependence, and towards a mm-c broad-based and independent policy.


Lee Kam Ring and l~ee Kyung-chan

It was suggested that the new orientation was also to help achieve the objectives of the New Economic Policy (NEP). The NEP aimed at restructuring the economy so that the Malays would have greater participation in the corporate and industrial sector. Mahathir saw that only by bringing in new foreign investment partners and the creation of fresh economic links could new opportunities be opened to the Malays. It would take too long for the Malays to break into the old Western-Chinese romjJradoralliance. Even as he made this announcement of the Look East Policy, Mahathir suggested that Malaysia could learn much from the economic success of the East Asian countries. The new Prime Minister was impressed by the growth and economic development in East A~ia, particularly Japan and South Korea, which were beginning to rival Western nations. He was keen to have these two countries serve as models for Malaysia and that closer trade and investment ties should benefit his country. The Look East Policy became more than just learning the values and work ethic of the East Asian countries. Steps were taken to increase trade and investment and preference given to Japanese and South Korean companies in the award of contracts for major projects in Malaysia. It was argued that such projects would facilitate the transfer of technology to Malaysia. Through the Look East Policy, cultural and, more importantly, trade and investment links between Malaysia and the two East Asian countries of South Korea and Japan have assumed far greater importance. Some observns suggested that it was .Japan that first inspired Malaysia's Look East Policy and that it was Japan which Mahathir had in mind as a model for Malaysia to follow. Since the early 1970s .Japan had steadily built a strong economic presence in Southeast Asia. By the beginning of the 1980s, .Japan had already replaced Britain as the largest investor in Malaysia, and trade between the two countries had greatly expanded. Indeed, between 1951 and 1978 Japan had already ranked second to the United States in investments in ASEAN countries. Japan took up 30 per cent of Malaysia's mineral production and 49 per cent of its wood and paper exports. Ten per cent of Japan's exports went to ASEAN countries. A substantial part of the exports of ASEAN countries in turn went toJapan.~ 1 .Japan certainly has returned to the economic role it once tried to play in early Southeast Asian history and also in the recent past. But its trade and investment dominance also revives fear and suspicions about .Japan. There had indeed been growing resentment in Southeast Asian countries at the highly visible Japanese economic presence, and violent demonstrations took place in Indonesia and Thailand during the visits of.Japanese Pr-ime Minister Tanaka in 1974. For this reason, the inclusion of South Korea would offer a wider and more acceptable appearance to the Look East Policy. Furthermore in the expected growth in trade and investment under the Look East Policy the inclusion of

Thr Case ofiVIalaysia-South Korm RPlatirms


South Korea would lessen Malaysia's dependence on Japan, including the supplies of parts as well as in seeking technological transfer to help develop its own industry. Clearly, too, the costs of South Korean products and projects would be more competitive than those ofJapan. Finally, South Korean intermediate technology, as compared to the more advanced .Japanese industries, was thought to be more appropriate and therefore easily transferable to Malaysia. It must be added here that recent developments in Malaysia-South Korea relations were just as much a result of South Korea's evolving policy during the early 19BOs. South Korea, on its part, was keen to move out of its heavy reliance on traditional trading partners such as Japan and the United States. This policy shift occurred, as in Malaysia, at a time of leadership change. In May 1980 a retired general Chun Doo Hwan became President. The new President took over at a time of great uncertainty in domestic politics. This was aggravated by an economic slow-down in the country caused in part by the international oil crisis. Anxious about domestic economic difficulties and of the regime's political legitimacy, the new South Korean leader searched for new areas of investment and trading opportunities.:12 Southeast Asia, with its huge market, low labour costs, and ample sources of raw materials for South Korea's growing industries, was a very attractive possibility. With continuing political stability, ASEAN countries were also making rapid and impressive growth and many of them, like South Korea, practised an open market economy.:n After making his first overseas trip in February 1981 to the United States, just three months after his inauguration, President Chun made a two-week visit to the ASEAN countries. This was the most extensive state tour to Southeast Asia by any South Korean president. In his meetings with the region's leaders, President Chun anxiously emphasized the necessity to develop a complementary economic relationship. He offered South Korean technology and trade opportunities in exchange for the energy, timber, and mineral resources of Southeast Asian nations. There was also a recognition by South Korea of the strategic diplomatic role exercised by ASEAN which Seoul could benefit from. ASEAN had demonstrated a certain political cohesion and, as a group, had taken the lead in helping to resolve the conf1ict in Indochina. The region's support fo1· greater South-South co-operation placed ASEAN in good standing with Third World countries. Countries such as Malaysia and Indonesia are also influential within the Islamic world and in organizations such as the Organization of Islamic Countries. Closer links with ASEAN could help improve South Korea's standing with countries of the Third World, especially in its desire to widen its export market. Malaysian-South Korean co-operation was formalized in a number of bilateral agreements. Following the introduction of the Look East Policy, Malaysia signed the Avoidance of Double Taxation Agreement with South


Lee Kam Hing and LPe Kyung-r!wJJ

Korea in 1982, the Visa Abolition Agreement in 1983, the Technology and Science Co-operation Agreement in 1985, and the Investment Guarantee Agreement in 1988. Furthermore, the Malaysia-South Korea Economic Committee was set up in 1984 to promote economic and technical cooperation. In addition, there are the multilateral agreements between South Korea and ASEAN. The ASEAN Committee in Seoul !ACS) was established to facilitate cultural and economic exchanges between the region and South Korea. In July 1991 South Korea became an ASEAN dialogue partner, and Malaysia had been in the forefront supporting Seoul's application. Since 1981 statistical data confirm that there has been a significant growth in economic ties between Malaysia and South Korea. By 1990, South Korea had become the fourth largest market for Malaysia's exports, after Singapore, the United States, and japan. South Korea is one of the major purchasers of Malaysia's wood, lumber, cork, pepper, and crude rubber besides taking large quantities of mineral fuels and crude petroleum.:>l In terms of import origin. South Korea was also in 1990 the eighth m;~or supplier to Malavsia. South Korea is also among the top ten investors in Malaysia and briefly in the early 1990s occupied the third spot.:"' In 1994 the ten biggest South Korean duu~bol (conglomerates) - Hyundai, Samsung, Luckv-Goldstar, Daewoo, Sunkyong, Ssangyong, Hanjin (including Korean Air), Korea Explosives, Hyosung, and Dongkuk Steel- each had at least one i1wc-;tmcnt pn~ect in Malaysia. There arc I 4 trading firms. 12 construction companies, and I 19 manufacturing concerns operating in Malaysia.:H> It is in the construction sector that the Sowh Korean pres

34.3 0.6 2.2 2.0 50.7 0.2 1.5 8.4

2!i.3 0.5 2.1 2.0 65.2 0.3 1.7 2.9














Frequency Distribution Asia Mrica Americas Europe Middle East Oceania Trust Territories Not reported All land-based workers


Percentage Distribution Asia Mrica Americas Europe Middle East Oceania Trust Territories Not reported Al11and-based workers


SOURCE: Philippine Overseas Employment Administration (POEA).


Stl'lla P C:o

in 1984, the percentage share of the Middle East went clown to 50.7 per cent in 1994. On the other hand, the percentage share of Asia rose from 12.9 per cent in 1984 to 34.3 per cent in 1994. During this decade Hong Kong, .Japan, Singapore, and Brunei became the largest importers of Philippine labour within Asia, ushering in a period that saw the increasing feminization of labour migration from the Philippines. The Filipino workers in Asia, mostly women, found jobs as domestic helpers in Hong Kong and Singapore and as entertainers in .Japan (Go 199S). The prominence of these four countries in Asia is evidenced by the bet that they have been among the top ten host countries fot· Filipino labour since 1984 (Go 199!1). I 11 the 1990s the newly industrializing economics of Taiwan and South Korea became attractiw destinations for a small but rapidly growing stream of Filipino workers, manv of whom were undocumented males. Very limited empirical data are available, however, about Filipino labour migration to these countries, particularly South Korea. This chapter focuses on the phenomenon of Filipino labour migration to South Korea and attempts to gin· an overview of this emerging migration stream in East Asia. It looks at the Ltctors that gave rise to this recent phenomenon, its patterns and trends, some problems and issues, and some policy implications.

11. Economic Development and International Labour Migration

The level of economic development of a country is a significant determinant of labour migration. \\'here the country's economy is unable to grow fast enough to meet the needs of its people, to sustain growth, and to provide domestic employment and competitive wages, emigration of labour is likely to occur and to continue for as long as the economic conditions within the country do not change and there is a demand for its labour in the international market. The entry of Filipino workers into the South Korean labour market to work in less than ideal circumstances isjust another chapter in the continuing saga of massive labour outmigration from the Philippines. Designed to help find relief from the country's economic dirficultics, labour migration has been made part of the oflicial government policy since 1974. In contrast to South Korea, which experienced a migration transition, thereby crossing the turning point from being a net labour-exporting country to being a net labourimporting country within the last twenty years, the Philippines has exhibited a continued reliance on the export of its labour to bolster its economy during the same period. . In Pang's model of migration transition (Pang 1994) a country is able to cross the threshold from being a net labour exporter to being a net labour

!JLillmr ,'\,1(!.,rmfion to South Korea: The Cwe ofPhilijJjJilll: \tl!llm:l


importer only after it has crossed three turning points which mark its passage from a lower lc\Tl of development to a higher one. The timing and pace at which a country crosses these turning points (measured by changes in the ratio of net outt1ows to the labour force) are dt:>tennined by the interplay of economic, social, cultural, and other factors. The first turning point is reached when the rate of net outflows decelerates to match the growth rate of the labour force. The second turning point occurs when the labour outflows are in balance with the labour inl1ows. This turning point is accompanied by changes in people's values and attitudes towards work which lead them to shun the 3D (dirty, dangerous, and diflicult) jobs, particularly in construction and agriculture. As a result, labour shortages occur in these sectors even if the country has not reached full employment. The final turning point is reached when the country reaches zero net migration, succumbs to the pressure from its employers feeling the labour pinch, and allows the legal entry of foreign workers. Given the emigration pressures impinging on Philippine society, it is unlikely that the Philippines will be able to cross even the first turning point in Pang's migration transition model in the near future.

Ill. The Philippine Economy Manv t;tctors ha\T interacted with each other, resulting in the poor economic performance of the Philippines and creating strong emigration pressures. External factors, such as changes in policy and fluctuations in income and prices in more developed countries, have interacted with internal Lu:tors, particularly the country's economic and political arrangements as well as unforeseen natural and man-made calamities. All these determined the direction of Philippine economic developmt:>nt through the years. A comparison of past and present conditions of the Philippines by Srinivasan (El9~) using aggregate socio-economic indicators from the \1\'orld Bank reveals the dismal performance of the Philippine economy through the years. During the period 196?1-90 the Yelopment in Kmea''. Asian and Parijit l\!lif!7alion .Journal:~, no. 1 ( 1994): 149-74. Philippine .Journal, 26 May 1995. Philij1pine Star; 3 August 1995. Sriniyasan, T.N. "Powrty in tht> Philippines". In Penpativrs on PhilijJjJinr Poverty, edited by Arsenio M. Balisacan et al. Diliman, Quezon City: Centcr for IntegratiYe and Deyclopment Studies, UniYersity of the Philippines Press, and Council on Southeast Asian Studies, Yak Univnsity, 1993. Stalker, Peter. The Work of Strangrrs: A Survey oflntemalional Labour i\li,1.,rmtion. Geneva: International I ,a hour Organization, 1994. Lfh Soo-Bong. "Employment Structure". In Labour in Korea, edited by Park Young-hum. Seoul: Korean Labour Institute, 1993. World Bank. World Bank Devrlopment Report 1992: Drvelojnnent and I~nvironmenl. Washington, D.C., 1992.


Trade and Finandal Liberalization in South Korea and Implications for Southeast Asia Dong-Chon Suh

I. Introduction

Economic liberalism and liberalization are in vogue in East Asia. Almost all the countries in the region have recently embraced the liberal ideology of free trade and investment and adopted market-oriented approaches in their economic policies. They have unilaterally undertaken trade and financial liberalization and committed themselves to multilateral obligations of the World Trade Organization (WTO) and Asia-Pacific Economic Co-operation (APEC). South Korea is no exception to this general trend. Despite its successful outward-oriented growth record, it was a model of dirigistr~ regime with heavy government interventions in trade, financial, and industrial policies. From the early 1980s, however, South Korea has followed a cautious, gradual approach to liberalization and hopes to reach the standard of industrialized countries by the late 1990s. This chapter discusses some political-economic aspects related to South Korea's trade and financial liberalization. It reviews South Korea's liberalization process, examines the motives behind it, and assesses how far it has reached. It draws some lessons from the difficulties encountered in the process and considers prospects for and constraints on further liberalization. Finally, it attempts to draw some implications for the Southeast Asian economies which are increasingly interdependent with the South Korean economy and are also on the path of liberalization.

11. Trade Policy Background From a theoretical point of view, export promotion and import protection


f)ong-Ciwn Suh

are mutually conflicting objectives in terms of resource allocation. Thus most developing economies in the post-World V\'ar li period are classified as either export-promoting or import-substituting trade regimes. Curiously enough, South Korea had pursued these two objectives simultaneously in the early phase of its industrialization. Exports wen' promoted by various means of subsidization while imports were restricted by tariffs and quantitative restrictions. In theory, the resource allocation effects of this policy are twofold. First, in the two-sector· general equilibrium framework, the resulting resource allocation would be biased in favour of the export sector or the import-substituting sector, depending on which forces are stronger. It is also possible that the two distortions offset each other exactly so that the resource allocation effect would be neutral. Second, if the non-traded sector is added in the above framework, then the traded sector grows at the expense of the non-traded sector. \-\'hat actuall) happened in South Korea was that the protection of the import sector was effectively offset by even higher subsidies to the export sector so that the resulting resource allocation was biased towards the export sector. Thus, South Korean exports were not hampered by the distortion and South Korea was classified as a strongly out\vard-oriented country showing high growth (v\'orld Bank 1987, p. 83). The reason why South Korea had maintained such high rates of protection on imports in the early stage despite its outward-oriented strategy could be found in the structure of South Korea's imports. Since South Korea possesses virtually no natural resources, most of the industrial ra\\· materials had to be imported. These imports had taken nearly half of the total imports. In the early stages or industrialization most capital goods and components had to he imported also and these accounted f(Jr another 40 per cent of imports. The remaining I 0 per cent had been available for the impon or consumption goods, including cereals and processed foods. This import composition has been stable for nearly thirty years, as shown in Figure :~.1. As the raw materials and capital goods were mostly non-cornpetitive imports, these imports entered with low tariffs or duty-free where thev were used for the production of exports. Thus, although South Korea recorded very high rates of export gnl\\'th, thf'se imports gn~w jmri passu and South Korea expe1ienced chronic trade deficits. Foreign exchange was in constant short supply ckspite the rapid expansion of exports and the massive overseas borrowings. In order to save the scarce f(>rt'ign exchange, non-essential imports had to be curtailed to the necessary minimum. Quantitative restrictions and high tarifls were imposed on these and imports of some unnecessary consumption goods were completely prohibited. Furthermore national campaigns were periodically waged to encourage buying of South Korean products. It was uudcr such circumstances that South Koreans developed a cultural prejudice against imports; little utility was attached to imports except f(n· their 11se in production and consumption of imported goods was regarded as unpatriotic.


'fradf' and Finnnriof Ubnofizotion in South Korm and lmjJ!imtions for SEil

FIGURE 3.1 South Korea: Commodity Composition of Imports (In percentages)



. ls Raw matena



a goocs








Consumer gno d s























Korea Foreign Trade Assocircentages) 1976-94

1976 l97R l9RO 19R2 l9R4 19R6 1988 1990 1992 1994

51.0 65.0 69.0 77.0 85.0 92.0 95.0 96.0 9R.O 9R.5 1994, by Sector

Agriculture, fisheries, forestry products Manuhtctured products Total SOURCE:

Ministry of Trade and Industry. South Korea.

92.0 99.9 9R.5


IJonp;-Chon Suh

TABLE3.3 South Korea: Average Tariff Rates (In percentages)

1976-94 Statutory Tariff\

1976 197R 1981 19R3 1986 1988 1990 1992 1993 1994

35.7 24.9 23.7 23.7 19.9 18.1 11.4 10.1 8.9 7.9 1994, by Sector

Agriculture, fisheries, forestry products Manufactured products Tnts largely aim to export to third countries. The fact that South Korean investments are concentrated in labour-intensive industries is no differt>nt from most other foreign investments in China since 1989. However, whereas a large number of foreign investments in China arc concentrated in tht> southeast region around Guangdong Province ancl the Shanghai area, South Kort>an investments arc concentrated in tlw Bohai Bay area and the three provinces in the northeast. Secondly, the number of South Korean investments in the form of wholly owned companies stood at 301 (46.6 per cent of the total) at the end of 1993, which implies that South Koreans prefer wholly owned investments. This figure is far greater than that of other foreign direct investments (FDls) in China. The following are the major findings from research conducted by the Korea Institute of International Economic Policy (KIEP) on the characteristics of South Kort>an investments in China: 1


Largely small-scale investments by small and medium-sized firms


• investmt>nt scale (permit basis): dropped from US$0.99 million in 199:1 to US$0.77 million in 1994 • investment scale (actual basis): 533 cases were under US$1 million in 19~r:; (tl~.5 per cent of the total); only nine cases were over US$5 million • however·, the actual rate is rather high, 60.6 ptT cent on a cumulative basis in 1994 The mtal

465.1 100.0

TABLE4.6 Trend of South Korean Investments in China by Industry Manufacturing





Actual number Share(%)

605 93.7

(140) (21.7)

(73) (11.3)

(68) (10.5)

41 6.3

646 100.0

Actual amount (VS$ million) Share(%)

427.4 91.9

(78.8) (16.9)

(91.2) (19.6)

(G2.0) (13.3)

37.8 (8.1 \



End of 1993, cumulative basis.

SOURCE: KIEP (March 1995), p. 104.




Jong Kif Kim

The absolute amount of South Korean investment in China is still insignificant compared to that of other countries. For instance, South Korean ftHeign investment in China recorded US$381 million in the Chinese statistics (actual basis) in 1993. However, this constituted only 1.37 per cent of the total foreign investment inflows to China in that year. Traditionally, the bulk (more than 60 per cent) of foreign investment inflows to China come from Hong Kong and Macao (Table 4.7). In the meantime, Chinese firms arc also active investing in South Korea. Up to the end of 1993, projects of those firms in South Korea had reached forty in n um her and a total sum of US$11 million in investment. In addition, onT fifty Chinese import and export firms, banks, and civil aviation companies have set up branches or offices in South Korea.~ The Chinese investment figures for 1994 rose to seventy-two firms and US$18 million, according to South Korea's Ministry of Trade and Industry.:;

Ill. Prospects of Future Economic Relations between South Korea and China 1. Trade Relations South Korea's Ministry of Track and Industry estimated that bilateral track with China would rise 28 per cent, from CS$11. 7 billion to US$15 billion in 1995. This is not so surpr-ising when we consider that the annual growth rates of bilateral trade between South Korea and China were 43.6 per cent, 42.3 per cent, and 285 per cent since the normalization of relations in 1992 (Table 4.1). And as long as China maintains a policy of high growth, the ministry also expects the bilateral trade to grow annuallv between 20 and 30 per cent a year, reaching approximately US$i?i0 billion in the year 200 I, which will be about eight times larger than that in the first year alter normalization. However, this expectation of sharp rise in bilateral trade is not based solely on recent experience. There arc many t:1ctors which would substantiate this expectation. The most important one would he the continued rise in the demand for intermediate and capital goods to sustain high growth and to ;u~jnst the industrial structur-e in China. Also China would have to lower its ta1·iff and non-tariiT trade barriers in order to be accepted as a member of the V\'orlcl Trade Organization (WTO). And considering the capacity of South Korea as a highly competitive producer of the kind of products China needs, it is almost certain that this trend of strong trade growth will continue.

South Kormn /•,'xjJorts to China

The structure of South Korean exports to China is expected to change in the

TABLE4.7 Foreign Capital Actually Used in China by Source (l;S$1 0,000) 199:1

1992 Total

Foreign Loans

FDI and Others


Foreign Loans

FDiand Others



I, 129,162




Hong Kong

1141,6:):1 (4:1.83)

71,041 (8.98)

770,612 (68.25)

1,8R9,297 (48.49)

144,804 (12.94)

I ,744,49:1 (62.82)


:117.994 (16.56)

24:1,167 (30.74)

74,R27 (6.6:1)

·190,602 (12.59)

:154,46.') (:11.68)

1:16,1:17 (4.90)

l'nited States

58,114 (3.03)

6,170 (0.78)

:'i1,9H ( 4.f)0)

266.253 (6.113)

59,4611 (5.:11)

206,785 (7.45)

South Korea

12,025 (1.6:1)

12,02.') (1.06)

38,449 (0.99)

300 (0.03)

38,149 (1.:17)


28,886 (L;')O) 2.()17 2,467 1,905 1·1.065 i-1.432

I ,722 (0.22)

27.164 (2.41) 2,017 2.467 l.li5!J 12,!'i93 R,432

118.HR4 (:1.05) 6,57:) 9,142 12,250 67,480 23,4:17

18,:100 ( 1.64)

IOO,:Ji-14 ( :1.62) 6.575 9.142 12,250 49,180 23,4:17

109.704 (5.71)

109,70·1 (13.H7)

190,491 (4.89)

190.491 (1 7.0:1)


Indonesia Malavsia Philippines Singapore Thailand ·world Bank

2:)0 1,472

:\OTE: \'umbers in parentheses are percentage shares. SOl'RCF: State Statistical Bureau. China (1994). pp.





following aspects. First, exports of final consumer goods from South Korea to China arc expected to increase steadily. This is because ( 1) Chinese demand for consumer goods will be tising as their incomes grow and (2) the more the Chinese economy integrates into the world economic system and the more China wants tojoin the V\'TO, the harder it will be to maintain its trade barriers. More importantly there will also be a rise in exports of South Korean capital goods, f()r Chinese demand for certain capital goods will certainly rise as China tries to upgrade or deepen its industrial structure. This is implied in Table 4.2. For instance, South Korean exports of non-durable consumer goods rose 3.3 times, durable consumer goods 2.1 times, and capital goods 2.5 times between 1992 and 1994. Thus, the shares of these product groups in total South Korean exports to China rose from 1.3 per cent to 2.3 per cent, fi·om 3.3 per cent to 5.2 per cent, and 13.6 per cent to 21.5 per cent respectively during this period. Second, the share of intermediate industrial supplies in the total South Korean exports to China is likely to decline, although the absolute amount of these exports will probably rise. The reason for this is that China will try to substitute these imporl~ as it enters a higher stage of industrial development. In fact, the share of industrial supplies out of the total South Korean exports to China decreased from Hl.7 per cent in 1992 to 70.4 per cent in 1994.

South Kormn Importsfrorn China First, as in the case of exports, there will be a rise in South Korean imports of non-durable consumer goods from China, as the Chinese labour-intensive industry produces more efficiently and exports at lower prices. The import share of these goods out of the total South Korean imports from China has already increased, from 3.3 per cent in 1992 to 7.4 per cent in 1994. Second, there will be a similar increase in South Korean imports of intermediate industrial supplies fi·om China, as the robust South Korean economy demands such products. Lastly, the absolute amount of South Korean imports of Chinese food and direct consumer goods, which was quite significant in the early period of the bilateral trade, will still be high. However, the share or the importance of these imports from China will probably diminish as China tries to diversifY its export structure and restrains its exports of food and other agricultural products when its own domestic demand for these products also rises. China is also keenly aware that the bilateral trade balance has turned against it since 1992. Some worried Chinese even demand that South Korea import more from China to reduce China's trade deficit with South Korea. They also demand that South Korea not restrict high-technology export products to China. 4 This is quite reminiscent of the South Korean demands over the years that.Japan should try to reduce the trade surplus it enjoys with South Korea and should be more willing to transfer technology to it.

South Korm-China Economic Relations and lmplirationsfiir Southeast A.sia


2. Investment Relations Positive Factors

South Korean investment in China reached a cumulative total ofUS$1.8 billion in 1994. China is now the biggest recipient of South Korean investment. But in 1993 it formed only 1 per cent of total inward investment in China (Table 4. 7). Many factors could affect the bilateral investment relations between South Korea and China. However, as in the past the investment flows will be one sided, that is from South Korea to China, at least in the near future. The following factors are expected to lead to an increase of South Korean investment in China: ( 1) the Chinese Government is still determined to maintain high growth rates; (:!) investment demand for further industrialization - both in depth and breadth - is also strong, not only in industrial investment but also in infrastructural investment; ( 3) the expansion of private consumption is likely to continue as the average income and the real purchasing power rise;'' and ( 4) other institutional factors which make international capital flows easier. Besides these economic factors, there are also some political factors in favour of more South Ko1·ean investment in China. First, China, by allowing and enticing further South Korean investment, may hope to prod European, American, and Japanese companies to invest greater sums and transfer more technology in China. Second, the Chinese Government is suspicious that the United States will continue trying to link trade with political issues. Third, China feels that it will be extremely difficult to get Japanese companies to transfer the kind of high technology that it Under these circumstances South Korean investment would work as a second best choice. Recently South Korean investment in China has been changing from small scale to large scale; from footwear and textiles to steel, chemicals, and airplanes; and from low-wage, labour-intensive production to focusing on China's vast market. 7 As Frankenstein notes, "V\'hile businesses in Hong Kong and Taiwan tend to b!" small or medium size family firms, Korean businesses with interests in China tend to the chaebols, or industrial conglomerates .... Korean expertise in large-scale industry assures it a continuing role in China's economic evolution" (Frankenstein 1993, p. 882).

Negative Factors

While it is almost certain that future investments between the two countries will increase, there may be political and economic factors that can hinder this process. Among the political f~tctors, there is the domestic political uncertainty in China, stemming largely from the fact that the man responsible for Chinese 'open-door' and other reform policies, Deng Xiao-ping, has died. Will the policies

Jong Kil Kim


of 'open-door' and reform be continued? The present consensus seems that they will in general, although there are different views concerning how strongly and effectively they will be pursued. Second, it is also uncertain when China will become a member of the WTO. The sooner China becomes a member of the vVTO, the more it will open and absorb FDI. It seems that China will be a member of the WTO 'soon'. But again, this depends on the politics of international economic relations. There are also economic factors. First, the Chinese Covernment recently announced that it would change its policies on inflows of FDI to China in order to be more selective (industry-wise, region-wise, and technology-wise) and to reduce a variety of benefits (fiscal, monetary, and administrative) which have t:p to now been offered to foreign investors. Second, there will be more competition for foreign investment between China and other newly emerging Asian countries. So far, China has competed mainly with Southeast Asian countries for FDis. However, South A~ian countries as well as China's close neighbours in Indochina arc also opening their economies and actively looking for foreign sources of capital. The above factors will affect all foreign investments. But there are also factors that will specifically affect adversely South Korean investment in China. First, there is an international political factor: China will delicately balance the extent of South Korean investment into China so as not to offend its traditional ally, North Korea. Second, compared with .Japan and the United States, South Korea lacks political clout in China. This is somewhat natural if we consider how recently f(1nnal diplomatic relations between South Korea and China wen· established. Third, there are also economic factors. A lack of experience in overseas investment and tough competition from .Japanese, American, and V\'estern European companies will limit South Korea's presence in China for the time being. Fourth, South Korean investments in China- and in Southeast Asia -unfortunately have acquired a poor reputation in some specific cases with respect to labour management and relations. Lastly, but perhaps most importantly, what happens in the Korean peninsula between South Korea and North Korea will have a tremendous impact on South Korea-China economic relations. If the South Korean-North Korean relationship develops in a positive way then some South Korean investments would be diverted to the Korean peninsula.

IV. Implications for Southeast Asia So br we haw· considered trade, investment, and othtT economic relations between South Korea and China. V\'e have seen a sharp rise in most of the bilateral economic relations between the two countries, especially since the normalization of relations in I 992, and we expect this trend to continue in the near future. What does this South Korea-China relationship imply for Southeast Asia?



Hmnomic Relations and Irnfilimtionsfor Southeast Asia

Indeed, the share of the Southeast Asian region in South Korean trade has declined, although the absolute amount of the bilateral trade continues to increase, as South Korea expands trade with China. The same can be said with respect to the investment relations. That is, before the normalization between South Korea and China in 1992, a number of South Korean investments were heading towards Southeast A~ian countries. But now, as we have seen, China is the final destination for more than half of South Korean investments abroad. Thus it seems that China and ASEAN are in a more or less substituting or competing position, rather than being in a complementing or co-operating position, with respect to both trade and investment with South Korea as well as other countries. This is because, first of all, both Southeast Asia and China arc at about the same level of industrial development. Both produce similar products for export, and demand similar intermediate and capital goods to sustain their growth and to acljust their industrial structures. Secondly, both try to attract foreign investment by offering comparatively low wages. But how true is this description? Will there be no room for co-operation between Southeast Asia and China in other markets of the world and in South Korea in particular? In other words, we will be exploring the implications of the development of South Korca-China economic relations for Southeast Asian countries, in terms of trade and investment.

1. Implications for Trade SouthNLSl Asian Tmrlr with South Korl!a and China

Between 1992 and 1994, the total amount of bilateral trade between South Korea and China increased 82.9 per cent, from US$6.38 billion to CS$11.67 billion, while that between South Korea and ASEAN rose 22.8 per cent, from US$15.31 billion to US$18.80 billion (Tables 4.8 and 4.9). But, the Chinese share out of the total South Korean trade rose from 4.0 per cent to 5.9 per cent, while ASEAN's share declined slightly from 9.7 per cent to 9.5 per cent during this period. The decline of ASEAN's share in South Korean trade is particularly noteworthy on the import side; ASEAN's share in the total South Korean imports declined from 8.24 per cent to 7.24 per cent in just two years (Table 4.9). The decline of AS FAN's share in South Korean import~ is found in almost all pmduct gnJUps. The ASEAN share of South Korean i rn port of food and direct consumer goods was reduced from 12.2 per cent to 10.9 per cent, and that of non-durable consumer goods from 3.7 per cent to 2.6 per cent between 1992 and 1994. And in the case of food and direct consumer goods imports, even the absolute amount of imports declined, albeit slightly. This is in contrast with the case of China. The Chinese share in South Korean imports rose fstment projects which would have headed for SoutheastA~ia have been shifted to China. So far, most South Korean investments in China, as mentioned earlier, are concentrated (1) in the Bohai Bay area, which is geographically close to South Korea, and the northeast provinces where there is a large ethnic Korean population (about 1.9 million); and (2) in labour-intensive manuhu:turing industries. \1\'ith cultural familiarity and linguistic homogeneity (Korean), and also with relatively low wages, China will continue to draw South Korean rt'sources away from the traditional inves~ment sites in Southt>ast A~ia, at least in the near future (Steinberg 1995, p.85). Table 4.13 shows the following salient features of South Korean overseas investments by the end of.Junt' 1994. First, out of the total 3,374 cases and US$6.35 billion of overseas investments, those that went to China constituted 30.1 per cent of the total cases and 11.1 per ccn t of the total arnoun t, whereas those that went to ASEAN countries constituted 19.1 per cent of the totalmunber and 20.0 per cent of the total amount. Second, the average amount per case was US$1.88 million for South Korean investment as a whole. However, the per case amount for China was only US$0. 7 million, while that for ASEAN was larger than the average, US$1.97 million. Here again, the smallnt>ss in size of the average South Korean investment in China is revt>aled. Third, 67 per cent of the total cases and 53.7 per cent of the total amount of South Korean investmt'nl~ went to the manut;tcturing sector. But, out of the total South Korean investments in China, those that went to the manubcturing industries were very high- 90.1 pet- cent of the cases and 89.1 per cent of the total amount. The figures for ASEAN arT similar but slightly less- 82.2 per cent and 67.5 per

TABLE4.13 South Korean Overseas Direct Foreign Investments by Region and Industry World







Amount (US$1,000)


Amount (CSS1,000)


Amount (US$1 ,000)

Mining Forestry Fishery Manufacturing Construction Transport Trade Finance and insurance Others Real estate

45 17 118 2,057 86 55 750 0 218 2R

629,749 81,022 117,273 3,413,250 90,890 33,761 1,397,908 0 444,573 146,319

12 9 36 1,663 43 30 282 0 94 12

323,162 32,646 14,147 1,751,208 23,495 13,980 I 70,230 0 97,0RO 129,640

7 2 14 915 8 6 10 0 53 1

2,503 325 2,514 630,424 9,543 5,093 3,015 0 40,319 13,530

.S 6 14 531 24 2 45

17 2

320,659 32, I 71 5,740 859,807 3,803 940 22,280 0 27,931 631









I ,273,962



Amount (l:S$1,000)


Industry Mining Forestrv Fisherv :vianufacturing Construction Transport Trade Finance and 111surance Others Real estate Total






Amount Number (CSS1,000)

Amount :'-Jumber (US$1 ,000)

Amount :'-Jumber (US$1,000)

Amount Number (US$1,000)

Amount ;\lumber (USS1,000)

3 6 8

205 2 0 0

316,893 32,171 4,764 426,675 340 ()


0 0 97 164,151 1,242 0 703

1 0 5 170 2 0 4

0 6


0 2




0 1,011 0






lm-estments actuallv made. 2. As at cndJune 1994. SOCRCE: KTEP (October 1994). pp. 221-29.

i':OTES: 1.

0 0 2 83 10 0 7





2 5 1 2 26

0 0 700 11,717 31 940 20,091

1 0 0 68 9 0 8

179 128,343 46 0 435

0 2 1 185


0 3,000 101

0 3 1




292 530

4 ()

3,467 0






() ()

128,921 2,144 0 1,051


Jonf!; Kif Kim

cent. Thus, it can be said that, while slightly more than half of South Korean overseas investments went to manufacturing industries, almost all the South Kon:·an investments in China went to manufacturing industries. Fourth, investments in Indonesia took the lion's share of South Korean investments in Southeast Asia, constituting 35.1 per cent of the total cases and 62.9 per cent of the total amount. Fifth, as far as South Korean investments in ASEAN are concerned, the second largest sector after the manufacturing sector was the primary sector of mining and forestry industries in Indonesia.

Rivalr)' between S'oulhmsl 1lsia and Chinaj(Jr Imwstmmts? Steinberg ( 1995, p. 82) classifies the main reasons behind South Korean FDI into the following three types: (I) market-seeking projects to capture host-country market shares; (2) efficiency-seeking projects to take advantage of low-cost production for return-country or third-country exports; and (3) resource-seeking projects to ensure access to raw materials. At the early stages, before the mid1980s, South Korean overseas investments were of the third type, resource-seeking. However, since the mid-1980s, when there has been a sharp rise in overall South Korean overseas investmcnL~ and particularly since China has been added to the list of destinations in the early 1990s, the dominant form has been the second type, efficiency-seeking. For instance, the hourly wage rates for electronic and electrical appliance industries in South Kor·ea, Thailand, and China were US$4.80, US$0. 7:1, and US$0.28 respectively in 1992 (Lee 1995, p. 70) . 11 V\'hile there is still room for expansion in efficiency-seeking investment, such investment is beginning to Ltce objections from the Southeast Asian host countries and China for the following reasons. First, these economies have simply grown and thus have become more selective in terms of the kind of technology or environmental aspects of FDis. Second, labour-intensive and low-technology investments often involve undesirable labour relations and practices so they prefer large-scale, capital- and technoil-,'}'-intensive industries associated with the rhaebol (industrial conglomerates) of South Korea. However, unlike the small and medium-sized firms, the rhaebollirms want not onlv lower wages but also bigger market shares in the host countries. The discussion so l~1r seems to suggest that ASEAN and China are vying with each other for foreign capital and technology, as was tlw case for trade. Indeed it seems that a competitive relationship between the two with regard to South Korean FDI is inevitable. Because FDI has been verv important in sustaining robust t>Conomic growth of the ASEAN countr·it>s- and of China- there arc g-rounds for concern that the shift of FDI to China may adversely affect the growth prospects of the ASEAN countries. Thus, in order to cope with the rise of China and not fall behind in the competition, the ASEAN countries adopted

South Korea-China Economic Relations and lmjJlirationsj(!r Southeast Asia


a number of policies for promoting FDI in their countries (Fukushima and Kwanl99S,p.l7). Yet how serious or inevitable is the rivalry between Southeast Asia and China in attracting FDI? If we look at other aspects of competition besides labour costs, such as availability of infrastructure, institutions, and management experience, then the rivalry or the substitutability of China for Southeast Asia is not always clear. ArifT stresses the point in the following manner: Labor costs in China are significantly lower than those in ASEAN, which would give a competitive edge to the former. However, there are other considerations which would work in ASEAN's favor. Tht"I'C arc indications that the relatively high labor costs in ASEA~ arc being neutralized by productivity increases through technological innovations. Besides, labor cost rt"prcsents only a fi·action of the total cost of production in most manufacturing activities. Non-wage components seem to be far more important as determinants of competitive advantage. In this regard, ASEAN is at an advantageous position vis-a-vis China in terms of infrastructure, institutions, organizational structure, industrial experience, international exposure, and entrepreneurial capacity (Ariff, 1991). All this may serve to keep production and transaction costs in ASEAN low, compared to China. It can therefore bt" argued that ASEAN and China are not on a collision course. (Ariff 1994, p. 34.)

This finding IS similar to the one reached in the discussion on trade. Furthermore, if the primary motive of FDI is to seek host country market share, then markets in Southeast Asia look more promising, because (l) it would take more time for China to really open its domestic market wider and deeper, and (2) income level is much higher in Southeast Asia, and the market size of Southeast Asia in terms of purchasing power potential, not population, is almost as great as that of China. 1 ~

Future Prospects

However, the direction ofFDI is changing and should be changing fi:n· the following reasons. First, the situations in Southeast Asia and China have changed. They no longer want more of the traditionallabour·-intcnsive investment which mainly uses low levels of technology and cheap labour. As they successfully graduate from the initial stage of industrial development, they want to upgrade their industrial structure towards more capital- and technolof.,ry-intensive indus'tries. The majority of South Korean investments in these countries were initiated by small and medium-sized firms in the labour-intensive industries. These industries are also not wanted because of the new environmental concerns of these countries, and because of their reservations over the South Korean style of labour management. In short, they want companies which have superior or up-to-date

]ongKil Kim


technolot,ry and also a better labour management record. The last point is more relevant for Southeast A~ian countries than for China, because China still has a large pool of unemployed workers from the countryside, among other reasons. Second, South Korean firms also want to invest overseas not only to lower production cost~ hut also to penetrate the domestic market~ of the host countries. Some recent South Korean investments in ASEAN, Vietnam, and China clearly demonsti·ate this intention. This trend is likely to continue. Third, South Korea is also trying to attract foreign investment. At least until the mid-1980s, South Korea needed foreign capital for its industrialization, but the dominant form of foreign capital inflow to South Korea was loans, oflicial or commercial. FDI inflow was rather minor compared to the loans. However, as South Korea faced increasing difficulties in upgrading its industrial structure and acquiring higher technologies, it began to realize that one of the best ways of achieving this was by attracting foreign investment. Therefore, South Korea, ASEAN, and China all vie for foreign capital. The absorptive capacity f(Jr foreign capital and technolo1-,ry may differ among the three, and the kind offoreign investment and technology South Korea would like to acquire is a little different from those of Southeast Asia and China.

V. Other Factors with Respect to South Korea-China-Southeast Asia Economic Relations So far we have been examining the implications of the South Korea-China relationship for Southeast Asia mainly in terms of trade and investment. But there are other aspects to consider, which are not only important by themselves but also affect future prospects of the trade and investment environment in these Asian economies and the economic co-operation among them.

1. Technology and Development Gap among South Korea, Southeast Asia, and China Geographically close and culturally similar, there can be a wide range of technological co-operation between South Korea and China. There arc two aspects to China in the science and technology fidel: one of backward technol!-,'Y in the production of medium- and low-end consumer products, and the other of advanced technology in areas such as basic science, aerospace, materials, and bio-technolot,ry. which is br ahead of the level in South Korea. Since South Korea has some experience in commercializing industrial technologies, particularly in the production of consumer goods, it can transf(T these technologies to China through direct investments or through technology licensing agreements. South Korea in turn can acquire basic scientific knowledge and technologies from

South Km-m-China Emnomir Helations and Implimtionsfor Southeast Asia

11 l

China. Indeed, South Korean technolot,ry exports amounted to 305 cases (US$214.9 million) between 1973 and the end of 1992. Out of these, about a third, 104 cases, went to Southeast Asia, and those that went to China totalled only forty-seven cases. But technology exports to China began as recently as 1989 when there was only one case. In 1992 the number of technology exports to Chinajumped to thirty-six, constituting about 45 per cent of the total technolot,ry exports of eighty cases. 1 ~ It is likely that technology exports to China would have expanded far more since 1992 - the year of normalization of relations between South Korea and China. However·, the kind of commercial technology South Korea ex pons to China is wanted only to a limited extent in Southeast Asian countries as a whole. This is mainly because industrial and technological development in Southeast Asia is ahead of China in many areas. According to a research study by Nomura Institute, it is estimated that the economic gap between .Japan and the NICs is ten years for Singapore and Hong Kong and twenty-two years for South Korea. In the meantime ASEAN countries arc catching up i~1st. The economic gap between South Korea and ASEAN is nine years for Malaysia, sixteen years for Thailand, twenty-three years for the Philippines, and twenty-four years for Indonesia; it is thirty years for China. If we treat China's coastal zone and inland areas separately, it is already at a higher stage of economic development than Indonesia (Fukushima and Kwan I 995, p. 15). What this implies is that there are still good opportunities for complcmentarity in trade and investment among South Korea, Southeast Asia, and China.

2. Labour Migration According to the South Korean Ministries of Labour and .Justice, the total munber of foreign workers in South Korea was l 02,878, which is about 0.8 per cent of the total South Korean labour force of 12.8 million at the end of.July 1995. About 60 per cent of these workers were illegal workers (61,472), 33.5 per cent were workers on technolo)..,ry training programmes (34,931), and the rest, 65 per cent, legal workers (6,4 75). Out of the ilk gal workers, about 42 per cent were Chinese (2!1,970), and most of these illegal Chinese were ethnic Koreans residing in China (20,722). In any case the Chinese (numbering 41 ,040) made up more than 40 per cent of the total foreign workers in South Korea. 11 There is no doubt that this foreign \vork-f(nce, legal or illegal, contributes to the South Korean economy. Theref(>re, although the rising illegal stay (and presumably also illegal employment) poses a rathtT new social problem in South Korea, their condition in South Korea should be improved. Also, it should be noted in passing that those workers on technical training programmes, when they go back to their countries of origin, would positively contribute to impro\ing the



productivity of the organizations they belong to, however meagre this contribution might be. It should also be mentioned that some South Korean firms overseas unfortunately have earned a poor reputation with regard to labour relations. This is true especially for small (and medium-sized) firms whose major motive for overseas expansion is to make use of relatively cheaper local labour. These firms should try sincerely to alleviate the problems. One hopeful sign is that, as the nature of South Korean overseas investment changes from basically small and medium-sized firms to larger ones with better labour management record, things would improve.

3. South Korean Overseas Construction Activities As is well known overseas, South Korea has a long history of overseas construction. Starting with highway construction in Thailand in the 1960s, South Korean overseas construction activities in the Middle East in the 1970s brought huge sums of scarce foreign exchange at a time when South Korea faced a dire shortage of foreign exchange and a domestic economic downturn around 1980. Recently, there has been another surge of South Korean overseas construction activities in Southeast Asian countries. As these countries realize that deficiency in infrastructure is one of the major obstacles on the road to further growth and industrialization, they are actively seeking to expand and improve their infrastructure. Furthermore, recent South Korean construction exports arc moving more towards higher value-added areas like plant, electricity, and communications, away fi·om the early concentration on simple labmu·-intensive civil engineering activities. 1r, The Chinese economy also has the problem of deficient infrastructure. And this deficiency constitutes a formidable bottle-neck to furtht>r expansion of the Chinese economy. South Korean experience and knowledge in the construction business will certainly contribute to this need. Moreover, the co-operation between South Korea and China- South Korean capital and t>xptTience and Chinest> rnanpowt>r- for construction activities in other countries is also a possibility in the future.

4. South Korean Overseas Economic Co-operation The South Korean Government began to expand economic co-operation with other developing countries from the mid-1980s. The three major channels for this are (I) loans through the Economic Development and Co-operation Fund (EDCF); (:!) grants and technical assistance through the Korea International Co-operation Agency (KOlCA); and (3) contributions for bilateral or multilateral



Hmnmnic Relations and fmjJlimtionsfoT Southeast;lsia


co-operation through official development assistance ( ODA). However, the overseas economic co-operation activity of the South Korean Government is still at the infancy stage. u; This will change shortly, because ( 1) overseas economic co-operation will help to improve economic, political, and diplomatic relations; (2) South Korea now has the capacity to undertake such co-operation; and (3) South Korea expect~ to be a member of the OECD, which requires a member to expend a certain level of development assistance to developing countries.

5. Rise of the Vietnamese Economy Like China, but several years behind it, Vietnam began transforming it~ economy by introducing many reform measures domestically and opening its economy to the outside world ( doi moi) in the mid-1980s. There has been a spectacular jump in the inflows of FDI into Vietnam and South Korea is one of the major sources. And since the goods Vietnam can sell in South Korea and other international markets are similar to those of China, there is a good possibility that China and Vietnam will be in a competitive relationship in the near future. South Korea and Vietnam normalized their relations in December 1992, a few months after the South Korea~China normalization. The United States also normalized its relations with Vietnam in March 1995, and Vietnam became a full member ofASEAN in .July 1995. Trade with Vietnam and investment inflows to Vietnam are expanding h1st. According to Vietnam's State Committee for Co-operation and Investment (SCCI), the amount of FDI in Vietnam in the first six months of 1995 was US$3.6 billion (permit basis), twice that in the same period the year before. For the same period, Japanese FDI (US$822 million) ranked first, followed by those of Taiwan (US$588 million), British Virgin Islands (US$434 million), and South Korea (US$397 million) . 17 It seems likely that Vietnam and China will be in a competitive position for a wide range of export products as well as for inflows of FDI. As Ariff notes, "Vietnam is also opening up its economy in a big way and the spectrum of goods it can possibly sell in the international market in the medium term is likely to fall within the wide range of China's manufactured exports" (ArifT 1994, p. 34). In a certain way the competition between Vietnam and China will be keener than the one between Southeast Asia and China.

6. Political Factors As is well known, political factors can play an important role in shaping the economic environment and in determining the effectiveness of economic cooperation. There are political factors within the South Korea-China-Southeast A~ia triangle as well as with outside regions, particularly the United States and


]ong Kil Kim

Japan, which have a major influence in East Asia. \Vi thin the intra South KorcaChina-Southeast Asia triangle, two aspects are noteworthy. First is the relationship between Southeast Asia and China. Southeast Asian countries have lung been suspicious and worried about Chinese intentions and power. The disputes over the Spratly Islands arc one manifestation of this. The sensitive subject of the role of ethnic Chinese in Southeast Asia is another. Secondly, in relations between South Korea and China there is the North Korean factor. By enhancing bilateral economic co-operation, South Korea wants China to play a more act.ive role in persuading North Korea to be more positive in South Korea-North Korea dialogue. China seems to maintain a delicate balance between the two Koreas. The speed and manner in which the relationship between the two Koreas changes will have profound implications for other countries. \1\'ith regard to the inter-regional factors, it can be said that these Asian countries are ambivalent towards both the United States and Japan. On the one hand, these two major capitalist markets arc still the most important markets to these Asian countries. On the other hand, China seems to have objections to some U .S. foreign and economic policies towards China. Also, Southeast Asian countries (and to a lesser extent South Korea and China) havt' concerns about the dependence of their economics on Japan. All these intra- and interregional political factors will play an important role in the future prospects of economic development and co-operation among South Korea, China, and Southeast Asia.

VI. Conclusion

South Korea has a fairly long economic relationship with Southeast Asian countries. The relationship began expanding in the late 1980s, particularly in the form of South Kor·ean irl\'estment flows to Southeast Asian countries. However, the bilateral economic relations between South Korea and Southeast Asia ban: changed in some important as1wcts since the normalization of relations bt'twt>en South Kon~a and China in 1992. Southeast Asian shares in total volumes of South Korean trade and ovt'rst'as in\Tstmcnt have dt'clined although the absolute amounts have still been increasing, while the shares of China have surged. The bilateral tr·ade and investment relations between South Korea and China have expanded sharply, although the history of these relations is rather short. Balance of trade has turned in South Korea's favour since 1993. The major South Korean exports to China arc industrial supplies and capital goods in tilt' heavy manufacturing sector while the major South Korean imports from China are also industrial supplies and food and direct consumer goods. The total amount of South Korean investments in China has reached about half of the total South Korean overseas investments. Nevt'rthdess, this is a small

South Korm-China Fmnomir HP!ations and Imjilicationsfor Southmst Asia


fraction, slightly more than l per cent, of the total foreign investments China receives a year. Most South Korean investment~ in China are by small or mediumsized firms in the manufacturing industries, looking for lower wages, and are located in the Bohai Bay area or in the three provinces in the northeast. The future prospect~ for expansion of bilateral trade and investment relations between South Korea and China are !-{OOd because of optimism about the economic development and industrialization of both countries. There are, howt'ver, some economic and non-economic factors which could have a negative bearing on this relationship. For example, what happens in the Korean peninsula between South Korea and North Korea could have a tremendous impact on the South Korea-China relationship. The development of South Korca-China economic relations will certainly have implications for Southeast Asia. This is because there are both compkrnentary and competitin" aspects in trade and investment between Southeast Asia and China with respect to the South Korean market. On the surface, the competitive aspects seem much more pronounced, since China and some Southeast Asian countries are at about the same level of industrial development and produce similar products for export. They also seem to vie for foreign capital and technology. However, as f~u· as South Korea is concerned, in reality they art' not so directly competitive with each other. In terms of the primary goods trade, what South Korea imports from Southeast Asia is little different from its imports from China. However, among manufactured imports of South Korea, the imports from China seem to be in the relatively lower ends of the manubcturing sector. V\'ith respect to the investment implications, there has been, to a cntain extent, a di\-ersion of South Korean investment to China, which would otherwise have headed for Southeast Asia. This was particularly true in the early phase of the normalization of relations between South Korea and China, when political hKtors in the determination of foreign trade were as important as economic factors. But, when economic factors play a more important role in the future, and they should, then it is not clear how long and extensive this diversion will continue to be. It is true that the labour cost is chcapn in China. However, this is only one aspect that attract~ FDI. Southeast A~ia is a more attractive place if we takt' into account other transaction costs that arise in connection with the availability of infrastructure, management experience, etc. All these indicate that the development of South Korea-China relations will not directly affect Southeast Asia in a negative way. Finally, other aspects besides trade and investment, such as technology and development gaps, labour migration, South Korean overseas construction activity and economic co-operation, the rise of the Vietnamese economy, and other political factors, should not be ignored. These h1ctors arc not only important by themselves but will also undoubtedly iniluencc the future course of South Korea, China, and Southeast Asian economic relations.


]ong KilKim

Comm ents Pasuk Phongp aichit

This chapter by Professor Jong Kil Kim is well written, clearly argued, and very comprehens ive, with a multi-discip linary approach, covering issues in trade, investments, internationa l relations, geo-politics as well as cultural aspects. It is a pleasure to read. I have only a few things to add, mainly from a Southeast Asian perspective. China has a giant of an economy (with a population of over 1.1 billion), and with much economic and political clout in the region. Once it becomes industrialized and decides to play a more active role in the region, it will inevitably become a competitor to all countries in Asia, not only to Southeast Asia. And it will use its political clout as a lever in trade and investment relations with other countries, as it did with Thailand in relation to the Cambodian and Vietnamese conflicts and with several ASEAN countries over the issue of Spratly Islands. It could do the same with South Korea, for instance to bargain for trade and investment deals vis-a-vis japan, using tl1e issue of North Korea-South Korea relations. China is certainly a force to be reckoned with economicall y and politically. Professor Kim has shown clearly that since South Korea normalized its economic relations with China, its investment in and trade with Southeast Asia have declined relatively. This is inevitable in the short run. Professor Kim tried to console ASEAN by saying that "there are still good opportunitie s for complementarity in trade and investment among South Korea, Southeast Asia, and China". But the following points may be noted: 1.


In trade, both China's and ASEAN's exports are in agricultural and cheap manufactur ed products. ASEAN has been losing its competitiven ess in cheap labour-inten sive manufactur ed goods and will inevitably continue to do so in view of China's continued advantage in some of these areas. The decline in trade with South Korea may be a big blow for countries which have a high current account deficit. But ASEAN may benefit in the medium- and long-term by being able to increase exports to China, as China's industrializa tion proceeds further with the help of foreign investments not only from South Korea but also

South Korea-China Economic Relations and Implications for Southeast Asia




from other countries. China will have difficulties in producing enough food and raw materials for domestic demand. There will still be room to sell food products like rice, and materials like rubber and palm oil to China. More important is the question of competition among the ASEAN group of countries, such as in the case of rice between Thailand and Vietnam and possibly Myanmar; and in the case of rubber and palm oil between Thailand and Malaysia. Areas where South Korea and Southeast Asia will continue to co-operate and benefit from one another, despite the China factor, are tourism and sale of military hardware. On FDI, 1 wonder if the decline in FDI from South Korea will be so negative for ASEAN, in view of the fact that now ASEAN countries are looking to diversify FDI towards more 'quality investment', a point Professor Kim has also made. Also I wonder if China is not an alternative for South Korean investment because of the fierce competition from Japan in the ASEAN region .

On implications to ASEAN, I would like to add and ask the following: The China factor in the region will have a positive impact in that it will force ASEAN countries to restructure their industrial structure. They will have to become more compelitive at what they are already doing. And they will be forced to upgrade their technological level. This upgrading of the industrial sector is important because it will enable ASEAN to export some intermediate and capital goods to China and also to other less developed countries in Asia. There are good prospects for ASEAN in this area (which South Korea presently dominates), but very little development has taken place in this direction in recent years because ASEAN has positioned itself too much as an industrial backyard of Japan and other countries and because it takes time to build this industrial capacity. It may be asked if it is possible to speculate whether in the near future some countries in ASEAN may be able to compete with South Korea to sell intermediate and capital goods to China. After all, Malaysia is only nine years behind Soutl1 Korea in terms of technological development, and Thailand sixteen years. Since new technology can he bought and learned in a relatively short time, the gaps can be narrowed quickly. This of course implies that ASEAN countries must pursue their industrialization more vigorously. The competition with South Korea will not be regarded as a serious matter if we take tlle view tllat China is such a large market that there is room for all to benefit. Will tlle China factor quicken tlle pace at which ASEAN may progress towards a common market type of integration as in the case of the European Union? I would like to make some observations on South Korean direct investment in the region.


fang Kil Kim

There appear to be some similarities between South Korea and Japan in the pattern of investment in the region, starting with early investment in Indonesia focusing on natural resources, because both South Korea and Japan lack natural resources; then moving on to investment in labour-intensive manufacturing; and then moving on to attempts to penetrate the domestic market~ of host countries. Is this Japanese pattern applicable to South Korea as well, or do we need a new theory of FDI for South Korea? As South Korea develops further, it will also need an industrial backyard, places for South Korean investors to produce goods cheaply for export, places to invest in inputs which it lacks, and places to focus as a source of demand in competition with other foreign investors in the region. Japan has considered ASEAN as its industrial backyard, and more so as it is having some difficulties (like other countlies too) in operating smoothly iu China. \'\There does South Korea wish to have its industrial backyard? Will it have a better chance in China? Possibly, because there are at least 2 million Korean-Chinese in China's territory, living near the border with South Korea. In this case the extension of South Korean investment, with China's agreement, will be easier than making the more difficult effort in ASEAN. Will China allow this to happen? Will it use this as a bargaining chip with japan? However, ASEAN also represents a large market and South Korea cannot possibly ignore ASEAN completely. Professor Kim has touched on this slightly. Perhaps it could be pursued further. Lastly, FDI from NICs like South Korea is contributing to the rapidity of industrialization in the ASEAN countries, although the pace and extent vary from country to country. Although so far the relationship among South Korea, China, and ASEAN may be based on comparative advantages, to understand tl1e future trends of relations among these countries, we must look at factors which determine the dynamic comparative advantages of these countries, especially in development of entrepreneurship, technological capability at firm level, and government roles in industrialization. We need more research into these areas, especially in ASEAN member countlies. NOTES 1. Korea Institute of International Economic Policy (KlEP) , journal of Ana Studies 4,

no. 3 (March 1995): 98-106. 2. China Economic News, 5 Decembe r 1994. 3. Dong-A Ilbo, 23 August 1995. 4. For example, see the following article in the China Daily: "South Kore Quarlnl\' ( 1994).

contractors ha~ doubled every three years since new licences are issued every three years. As would be expected, the ratio of small- and medium-sized contractors was very high: 93 per cent as at the end of 1993. Also, only forty-three general contractors were listed on the stock market. The size of the construction market in 1994 was estimated at 51 trillion won at 1990 constant prices. Civil engineering works covered 30 per cent of the total activities and the remaining 70 per cent involved building construction. The share of the private sector has been increasing, reaching 60 per cent of all construction activities in 1994. The share of the public sector decreased to 40 per cent (Table 6.2). In 19R7-88 the private and public sectors had an equal share of 50 per cent each. Several characteristics of the South Korean construction firms may be cited. Major general contractors are smalkr in size in terms of asset5, capital, and debt than major companies in advanced countries such as .Japan. The debt ratio is quite high. In 1993 among the top lOO general contractors, eight had a debt ratio of over 1,000 per cent and thirty-three over 500 per cent. Therefore South Korean construction firms had high financing costs. Twenty companies among the top


I 00 bad a financing cost ratio of over 10 per cent. On the other hand, only six companies had an earning ratio of over 10 per cent. This implies that some South Korean construction firms paid more interest than their earnings. The construction sector's limited access to the financial market due to the government's tight credit allocation policy has aggravated this problem. On the other hand, South Korean construction firms have shown high sales growth rates. In 1993 twenty-five companies among the top lOO contractors showed a sales growth rate of over 20 per cent. The South Korean construction industry is in the expansion stage, focusing on volume rnaximization rather than )Xofitability. As for the government's policy towards the construction sector, protectionism, including a very restrictive entry harrier, prevailed from the 1960s up to the 19HOs. It is interesting that the protectionism was targeted against potential domestic competitors. This internal protectionism has been lifted since 1989. In n~sponse to the v\TO system and the opening up of the government's procurement market, the South Korean construction market will be gradually opened to international competition. The government is now taking steps in this direction, while strengthening the regulations of quality, safety, and consumer rights in the construction industry. Having acquired the basic skills necessary for international contracting, through participation in the projects of the American military. South Korean construction firms entered the low-technology end of the construction market in Southeast Asia, which is close to home and relatively less developed than South Korea. The first overseas construction job by a South Korean firm serving as a prime contractor was obtained in 1965, for a two-lane highway project in Thailand financed by the World :Bank. The contract for the 99.7-kilometre highway was secured at US$5.2 million. Hyunclai Construction Company won the bid. The Vietnam War (1965-75) opened up more opportunities for the international expansion of South Korean construction firms. South Korea enjoyed a special rTlationship with the military in South Vietnam in the construction of military facilities, hospitals, and port projects, f()r both South Korean and American troops. During this period South Korean firms also sought new construction markets. South Korean contractors expanded their overseas operations mainly thnmgh subcontracting. and projects were limited to civil engineering works employing standardized labour-intensive technology. In 1975 the fall of South Vietnam left many South Korean contractors with no jobs, idle equipment, and unemployed workers. So they concentrated on expanding their market beyond the Asian region. The !VIiddlc East construction bonanza was about to begin. The Middle East construction market has been the largest in history open to international bidding. South Korean contractors were ready to contribute their experience to the infrastructure projects in the region. The first major project was undertaken by Samwhan Corporation for the construction of a I 64-kilomctre (US$24 million) highway in Saudi Arabia in 1973. Another·

South Korean Construrtion Industry in Southrast Asia


landmark was the contract awarded to Hyundai Construction Company in 1976 for the construction of the Jubail Industrial Harbour, valued at US$1 billion. In 1983 another South Korean contractor, Dong-Ah Construction, was awarded the biggest construction contract to date, the US$3.3 billion 'Great Man-Made River' project in Libya. From 1973 onwards, the operations of South Korean contractors in the Middle East expanded rapidly, reaching a peak of US$13.7 billion in 1981. Almost entirely as a result of this expansion in the Middle East, total overseas construction activities grew at an average annual rate of 54 per cent from 1973 to 1983, making a significant contribution to the economy and stabilizing growth by counterbalancing the loss of foreign exchange from more costly oil imports. The decrease in Middle East construction contracts in the 1980s and the domestic construction boom during the period 1987-92 resulted in a fall in the total value of overseas work undertaken by South Korean contractors to US$2-3 billion during 1986-92. To promote the overseas construction activities, the South Korean Government passed the Overseas Construction Promotion Law in 1975. This law allows the overseas construction firms to obtain credit guarantees from both locally based banks and domestic banks. It also defines various tax incentives available to overseas construction firms. The Overseas Construction Promotion Law led to the huge expansion of over·seas construction activities. However, this law, when combined with a real-estate-led booming economy, also induced the companies to embark on a policy of irrational over-expansion. Hence the introduction of the Rationalization Plan for Insolvent Overseas Construction Companies in 19R5. Overseas construction activities have been experiencing another surge since 199:1. Their volume increased from US$2.8 billion in 1992 to US$5.1 billion in 1993 and US$7.4 billion in 1994 (Table 6.3). This resurgence is mainly due to the rapid expansion of the Southeast Asian construction market. The share of the Middle East dropped sharply from 56.2 per cent in 1990 to 30 per cent in 1994 while the share of Southeast Asia increased from 33 per cent in 1990 to 60 per cent in 1994. The prime market of the South Korean overseas construction companies has shifted from the Middle East to Southeast Asia. Another feature of this overseas construction resurgence is that the South Korean construction firms have become more prudent, paying more attention to the profitability of the projects. This new attitude stems from the hard lessons learned during the 1980s as a result of over-expansion.

Ill. Southeast Asia as a Big Emerging Construction Market

Southeast Asia's construction market began to grow rapidly from the late 19ROs, and especially since 1991. The share of the Southeast A~ian region has therefore

Lee Kyuban[;


TABLE6.3 South Korea's Overseas Construction by Region

(In US$ million) Region Middle East Asia Africa North America and Pacific Central and South America Europe Total








11,391 I ,920

1,442 766 40

5,812 712 106

868 1,888 236

568 2,117 26

1,810 2,583 300

2,304 4,452 118












17 6,770

9 3,038


326 S,ll7


5 13,321

SOCRCE: Overseas Construction Association of Korea.

been increasing sharply both in the world overseas construction market and in South Korea's total overseas construction contract amount. According to l~'ngineering News-REcord, the region's share in the overseas construction marketjumped from less than 20 per cent in 19H2 to more than 30 per cent in 1994. South Korea's construction contract value from the Southeast Asian region has shown a far more spectacular rise. In l9HO the figure was a mere US$0.4 billion but in 1994 it had increased to US$4.5 billion. The countries in Southeast Asia are experiencing rapid economic growth and huge construction investments are being made. In particular, large-scale infrastructure projects are being undertaken to support further economic development and to upgrade living standards. Most experts expect the expansion of Southeast Asia's construction market to continue in the future, in view of the role of infrastructure in economic development. Infrastructure development is essential for production activities as well as for sustained economic growth and raising social welfare levels. Findings from research carried out by the Construction Economy Division in the Korea Research Institute for Human Settlements (KRIHS) also confirm the close relationship between economic development and construction (infrastructure) investrnen t. Using United Nations (UN) data on forty-one representative countries from 1960 to 1987, regressions were carried out between per capita gross domestic product (GDP) and the share of various f(>rms of construction investments in the GDP. Cubed function of per capita GDP best fitted the construction investment behaviour. As the economy grows, the share of construction investment in the GDP increases rapidly. The increase is usually explained by the need for industrialization, urbanization, basic infrastructure, and housing. The construction investment reaches its peak of about 14.5 per cent of GDP at the level of per capita GDP of US$4,000-5,000. When per capita GDP increases further, the

South Korean Cunstrurtiun Industry in Southeast Asia


share of construction investment tapers ofT slowly and then stabilizes when per capita GDP reaches US$12,000. There may also exist a certain relationship between the existing stock and new investment. In Britain and the United States, which have a long history of industrialization, the construction investment pattern is quite stable at around 10 per cent of GNP. However, .Japan, which has a relatively short history of industrialization, has a longer period of construction investment that is over 20 per cent of GDP. Many newly den~lopcd industrial countries that are experiencing rapid and compressed economic growth will most likely show construction investment behaviour similar to Japan's. South Korea is also showing an abnormally high constn1ction investment compared to international standards. Many Southeast Asian countries arc at a stage where the construction investment ratio is at its peak. Taking into account their short history of industrialization and their continuing rapid economic growth, a sustained level of high construction investment can be expected. According to Wharton Econometric Forecasting Associates (V\TEFA) and Korea Exim Bank prediction, the share of Southeast Asian region's overseas construction market in the world overseas market will be growing (Table 6.4). One other interesting feature of the region's construction market is that foreign participation will be slowly increasing also but still be below the share of over-seas construction in the world market. This ref1ccts Southeast Asian domestic contractors' capability and high standards of quality. TABLE6.4 Trends in Southeast Asia's Overseas Construction (In VS$100 million) 1991




Construction Investment

World (A) Southeast A'ia (B) B/A (%)

2.5,0RO H,3HH 33.4

27,7H.5 9,708 3.5.1




l 6,079 40.4




2,270 4HO 21.1

6.H 1.2

8.2 4.9


Overseas Market World (C)

Southt>ast Asia (D) D/C (%)


760 24.5

4,020 1,000 24.9

10.1 6.8

10.1 6.2

Share of Overseas Construction

C/A (%) D/B (%)

0JOTE: Except for 1991, all li~un·s an· predicted ya]ues. SOURCES: WF.FA and Korea Exim Bank.




IV. Construction Industry Climate in Southeast Asia The construction market in Southeast A~ia is now experiencing a great expansion. Southeast Asian economies have shown a high level of growth during this decade and this trend will continue in the near future. Therefore, the need for infrastructure and city redevelopment in response to the rapid industrialization and urbanization is enormous and urgent. The construction market in Southeast Asia has shown an annual growth rate of 10 per cent or more. SoutheastA~ian economies have certain unique features in the Asian context. First, they are much more open to foreign direct investment compared with South Korea and .Japan. For example, multinational enterprises lead the Singapore economy. This openness allows more room for foreign construction activities in both the public and private sectors. Secondly, SoutheastA~ian countries have been much quicker to let financial markets develop. The stock markets of Thailand, Malaysia, and Indonesia were allowed to take ofl early on the path to economic development, enabling companies to raise money without heavy borrowing from banks. There has also been more willingness to let foreigners invest in the stock market~. Singapore has emerged as one of the major offshore banking centres in the world. The openness of the Southeast Asian economies resulted in the setting up of branches of the top thirty international construction and enginee1·ing firms in the region. The construction industry in SoutheastA~ia has been transformed during the last thirty years through the process of competing or collabm·ating with foreign firms. For example, in Singapore construction contractors have transformed themselves from family-style businesses to large companies with professional management and diversified interests such as property development and supply of building materials. fn the 1990s they have continued to strengthen their capability. A large proportion of the public sector building work in Singapore, including public housing, is carried out by the local construction companies. I lowever, the capacity of the construction firms in Southeast Asia as a whole does not enable them to carry out large and complex construction projects such as hospitals, oflice complexes, and large-scale civil engineering works. Hence foreign contr·actors are active in such projects, with local firms acting as partners or subcontractors. Another feature of the construction industry in Southeast Asia is that there are wide differences in the construction labour situation among the countries. Singapore is short of construction labour, while Indonesia has a surplus. Even though there arc some restrictions on cross-border labour movement~, the construction market in Southeast Asia is characterized by multinational workers with different wage levels in various construction fields. This allows for efficient and cost-effective implementation of construction projects. However, cross-border labour movements also create problems. Cultural and ethnic differences, the reluctance of foreign workers to undergo training, and their search for better

South Kormn Construction Industry in Southeast A.1ia


paying jobs create social problems and an unstable construction labour structure. Moreover, the lower wages of foreign workers create social tension throngh the downward pressure on the wages of local workers. The construction industry in Southeast Asia is not well organized compared with .Japan and South Korea. Organizations of contractors, subcontractors, and construction workers are either weak or almost non-existent. This implies that thne is no concerted eflort. to develop a better construction system. LT p to the end of the 1980s, the orientation of the contractors' organizations was purely commercial. A more industry-oriented approach has emerged recently, resulting in efforts to organize subcontractors and workers which may help to m-crcome the fragmented nature of the construction industry in Southeast A~ia. The construction contract-awarding system in Southeast Asia is quite well organized in the sense that the roles of contract awarder~ contractor~ and inspector are quite clear. In particular, the contract awarders assume a bigger role in the planning and inspection process, thereby making possible the application of high standar·ds of quality in the construction process. Contract awarders, especially in the private sector, usually hire consultants to prepare the tender documents which arc very specific and detailed. In the public sector tenders will go only to the registered contractors. Registered contractors are classified into several categories based on the upper limit of the size of the contracts which they can carry out. Once the basic requirements have been met, bidding is open to every finn and the contract-awarding process is clean and clear. A very strict site control in respect of the environment and safety factors and a systematic cross-inspection system imposed on the contractors arc other features of the construction industry in Southeast Asia. This kind of contract awarding and management system of construction projects is burdensome to the contractors due to its complexity hut it has merit for the contractors by redncing the risk in project implementation. The contracting process in the private sector is almost the same as in the public sector, but the process is not as clear and clean. Contract awarders can exercise their preference in respect of contractors' reputation, financing package, etc.

V. Why Southeast Asia? South Korean construction activities in the overseas markets have intensified in the 1990s partly because of domestic reasons. Pressure on South Korean contractors to look abroad for new orders grew intense as many new construction firms entered the domestic market after the liberalization of construction licences. Also the fact that the domestic market is in a transitional period, moving from regulation to competition and from quantity to quality, and therefore unstable, pushes established South Korean contractors to look for business abroad.


Other than the fact that the South Korean contractors arc expanding their overseas construction activities and that the Southeast A~ian construction market is rapidly growing and hence attractive to overseas contractors, why is Southeast Asia drawing so many South Korean contractors? In the beginning cultural and historical affinity and many large-scale projects funded by the World Bank, A~ian Development Bank (ADB), and.Japan's Overseas Economic Co~operation Fund (OECF) must have played a major role. However, as South Korean contractors grew into the market, these factors became less important. More important was the fact that the market demand structure apparently matched the South Korean contractors' comparative advantage and fitted their stage of development. The comparative advantage of South Korean contractors was mainly in labour-intensive civil engineering construction and building works. Before the mid-l980s, for instance, building construction and civil engineering contracts covered over 90 per cent of the total contract value abroad. In striking contrast, plant construction accounted for below 10 per cent. Since then the balance has been improving as contracts for plant construction have increased. By 1994 they comprised 33.2 per cent of the total contracts (Table 6.5). This change in the structure of the contracts awarded ref1ects the partial response of the South Korean construction firms to the changing economic conditions. Wage increases and competition with developing countries make it more diflicult for South Korean contractors to maintain the competitive edge in labour-intensive works. So South Korean contractors have to move away from markets with low value-added simple works to those with high valueadded and more difficult works like engineering. Despite such efforts, South Korean construction firms still remain inferior to those of the developed nations in the area of high-technology construction: engineering, architectural services, and project financing. At the same time they are losing their competitive edge in the labour-intensive works because of the increase in domestic labour costs. To stay competitive, South Korean contractors are increasing the percentage of local and third-country workers f()r their overseas construction projects. TABLE 6.5 South Korean Foreign Construction Contracts Awarded by Type of Works (In percentages) Work Type







Civil engineering Building construction Plant construction


46.7 39.5 14.8



21.5 54.0 24.5

49.5 32.3 18.2

33.2 33.6 33.2


6.0 13.6

TABLE6.6 Local Worker Employment Ratio in South Korean Overseas Construction Projects

Total (A) Korean Local (B) B/A(%)



147,183 131,137 16,046 10.9

222,816 162,017 80,299 27.1

l\'OTE: Local workers include third-countn workers. SOCRC:E: Korea Qyerseas Construction Association.

1986 102,494 35,697 43,797 42.7

1989 54,319 18,162 36,167 66.2

1991 41,789 9,417 32,872 77.4

1992 41,643 7,888 33,788 8l.l

1993 39,983 6,783 33,200 83.0

1994 38,218 4,924 33,294 87.1

fee Kyubang


Local workers comprised only ll per cent of the work-force in 1980 but by 1994 the proportion had jumped to about fl7 per cent of the total workers employed at the foreign work sites of South Korean contractors (Table tl.(i). This trend will continue into the future. Southeast Asia's huge infrastructure and housing-related construction market and relatively abundant workers meet the South Korean contractors' need for diversification. South Korean contractors still have comparative advantage in building and civil engineering projects where management of the labour force is important and willingness to work hard in difficult conditions critical. As a result, contracts orig·inating from Southeast Asia have been increasing rapidly and the South Korean share in the construction market has also been increasing. Indeed, almost half of all South Korean overseas construction activities arc now carried out in the Southeast Asian region (Table 6. 7). Reflecting recent trends, in a sun·ey carried out by KRIHS, the South Korean construction industry's perception of the Southeast Asian region has been very favourable. The survey evaluated the various overseas construction markets on financial capability, market demand, regulations, country risks, and local contractors' capabilitie~. Southeast Asia wa'i evaluated highly in most of these aspects (Table 6.8). On the question of which construction market they saw as the most promising and in which they would expect to increase their share, 36.2 per cent indicated Southeast A5ia, putting that market at the top with China (27.0 per cent) in second place. \Nhat needs to be clone for South Korean contractors to be better established in Southeast Asia? Most indicated that localization is the most urgent strategic need. South Korean contractors in the past have not blended enough into the local social and economic environment. The attitudes arc changing these days. For instance, Hyundai recently established its Asian headquarters in Singapore

TABLE 6.7 South Korean Construction Activities in the Southeast Asian Market (In US$ billion)










146.5 42.6


Southeast Asia

6.8 0.7

2.8 2.1

5.1 2.6

Overseas Construction Market


South Korea's Overseas Construction Activities

World(%) Southeast Asia (%)

1.6 0.2

SOURCES: Engineering News-Rerord; Korea Overseas Construction Association.


South Korean Construction Industry in Southrast 1bia

TABLE 6.8 Evaluation of Regional Construction Markets (Scale of I to 5)

Southeast Asia Southwest Asia China .Japan Middle East North America South America Western Europe Eastern Europe Russia Africa Occania

Financial Capability

Market Demand

2.67 1.61 1.97 4.46 :u7 4.14 2.21 3.94 2.30 1.50 1.45 3.52

3.04 3.80 3.!)6 3.15 ;).38 2.58 2.56 2.45 2.80 1.95 2.33



Country Risks

2.62 2.71 3.69 4.36 2.63 3.05 2.79 3.39 2.85 3.10 2.25 3.05

2.76 3.36 3.37 1.30 3.07 1.57 3.26 1.5 3.35 3.45 3.45 1.67

Local Construction Capability 2.92 2.26 2.97 4.50 2.39 4.10 2.68 3.94 2.65 2.89 1.60 3.57

NOTE: For financial capability, market demand, and local construction capability high numbers mean L1vourable conditions while the opposite is the case for the remaining two factors. SOCRCE: Heung ( l 0.12 0.58

99.51 98.24 95.63 98.84 97.10 90.88 98.05 97.22 98.57 ')8.17 9!J.55 98.94 98.87 95.65 99.41 96.30

0.22 0.69 2.25 0.48 1.10 2.76 0.50 1.03 0.67 0.51 0.26 0.54 0.29 1.44 0.18 1.67

98.80 97.06 9'1.11 98.12 94.7.~

88.53 96.35 95.31 97.56 96.30 98.54 97.87 97.07 92.02 9H. 7') 9:1.18

Friend's Home

0.45 1.28 '1.81 0.60 2.56 5.43 1.09 2.21 1.11 1.23 0.61 0.85 1.15 3.93 0.37 2.12


NijJOn i'oapongsakorn and Wi]it Wonp;warerthip

TABLE 7.6 Characteristics of Visitors to Thailand by Gender, Age, and Nationality, 1991-94 (In percentages) 1991 Country of Residence

Age Under 15



55 and oYer



Americas United States Canada

4.56 2.7il

6.81 9.17

68.70 70.65


64.26 61.59



Europe Belgium France Germany Italy Netherlands Spain Switzerland United Kingdom

2.25 2.43 2.50 1.67 2.30 0.93 2.21 2.94


74.96 69.60

64.77 57.71 64.53

35.23 12.29 35.47



60.54 52.60 60.85 62.:)1

47.40 39.15

Asia Australia Ne-w Zealand India Japan South Korea Malaysia Philippines Singapore Taiwan China Hong Kong SOURCE:

5.16 ~.~6

7.14 2.36 2.70 5.13 ~t5S

6.07 4.85 1.08 G.78





76.03 73.70

8.59 il.06 13.06 Ei.l7 12.04 12.72 16.44 I 0.~8 5.62 12.79 7.94 7.60 10.74 7.09 n~2


72.36 66.97 67.52 68.19 (i9.3il 68.92 66.44 70.47 77.'19 73.14 67.79 71.85 71.22

14.60 20.64 12.42 10.41 15.41 10.51 12.37 14.92 15.28 15.73 7.04 15.~4

25.24 11.61 11.02 13.19 16.62 19.98 8.6il

TAT, Thailand 11nnism Sialistiml NPj}()r/, \'arious issues.

58.2il 62.28 77.44 71.09 57.19 71.18 51.67 6il.58 53.4~

75.31 59.51




41.72 37.72 22.56 28.91 42.81 28.82 4il.33 31.42 46.57 24.69 40.49


South Kormn Tourism in Southeast Asia: Thailand

TABLE 7.6 (Continurd)

1992 Country of Residence

Age Under 15



5.7 and over



Americas United States Canada

5.43 4.42

7.39 7.91

67.R1 7o.:l7

19.37 17.30

63.97 61.43


Europe Belgium France Germany Italy Netherlands Spain Switzerland United Kingdom

3.47 3.04 2.54 l.?i4 2.()6 0.61 2.80 2.85

7.46 8.28 7.77 11.24 9.73 8.26 12.11 14.94

73.14 67.64 75.93 75.9.1) 72.32 79.54 71.53 65.84

15.93 21.04 13.76 11.27 1?i.89 11.59 13.56 16.37

62.57 56.98 63.54 61.01 57.21 61.00 62.62

Asia Australia New Zealand India .Japan South Korea Malaysia Philippines Singapore Taiwan China Hong Kong

4.91 454 5.70 2.60 2.08 5.15 4.64 5.65 5.10 1.06 7.55

12.16 11.59 16.97 12.27 6.28 12.39 8.54 6.59 1{).()4 4.33 12.~1 I

67.03 68.24 69.89 66.34 65.80 70.55 77.69 75.27 6651 74.63 70.57

15.R9 15.18 7.44 18.79 2.7.84 11.91 9.13 12.49 18.35 19.98 9.57

57.66 60.19 79.73 68.12 56.86 70.01 50.27 71..70 52.99 79.92 58.88



~)7 .43 43.02 36.14 36.46 38.99 42.79 39.00 37.38

42.34 ~)9.81

20.27 31.88 4:U4 29.99 49.73 2850 47.01 20.08 41.12

Nipon Poajmngmkorn and Wijit Wongwareethip


TABLE 7.6 (Continued) 1993 Country of Residence

Age Under 15



55 and over



Americas United States Canada

4.75 3.74

6.75 R.R8

67.61 69.51

20.R9 17.H7

64.97 60.32

35.03 39.68

Europe Belgium France Germany Italy Netherlands Spain Switzcdand United Kingdom

2.14 3.12 2.78 1.77 2.10 1.13 3.23 2.82

9.08 7.38 8.57 10.63 9.10 8.06 9.79 12.63

70.99 68.69 73.99 77.09 73.44 80.74 72.47 67.92

17.79 20.R1 14.66 10.51 15.36 10.05 14.51 16.63

61.43 59.87 62.16 63.99 61.30 53.34 62.21 63.01

38.57 40.13 37.84 36.01 38.70 46.66 37.79 36.99

Asia Australia New Zealand India Japan South Korea Malaysia Philippines Singapore Taiwan China Hong Kong

4.87 2.66 5.10 2 ..SO 2.33 4.83 3.70 6.51 5.49 0.64 7.97

12.12 13.39 16.62 13.38 5.89 11.64 9.44 7.04 10.10 2.73

68.30 6H.39 71.12 66.70 65.53 69.91 77.37 73.59 6.'J.74 74.99 71.19

14.71 15.56 7.16 17.42 26.25 13.62 9.49 12.R6 18.67 21.64 9.20

58.81 60.19 H0.67 66.86 54.79 66.92 50.57 68.44 53.05 H0.83 60.65

41.19 39.H1 19.33 33.14 45.21 3:1.08 49.43 31.56 46.95 19.17 39.35


South Korean 1iJUrism in Southeast Asia: Thailand


TABLE 7.6 (Continued) 1994

Country of Residence

Age Under 15



55 and over



Americas United States Canada

4.10 3.76

6.4H H.39

67.07 67.92

22.35 20.38

63.R6 59.65

36.14 40.35

Europe Belgium France Germany Italy Netherlands Spain Switzerland United Kingdom

2.10 3.03 3.11 1.71 2.06 0.97 3.22 2.78

9.33 6.22 7.56 9.28 7.48 7.15 9.25 12.04

71.47 67.76 72.80 77.90 74.29 H2.37 71.65 68.44

17.10 22.99 16.53 11.11 16.17 9.51 15.88 16.74

61.29 56.86 62.18 63.92 60.75 55.50 60.66 62.33

38.71 43.14 37.82 36.08 39.25 44.50 39.34 37.67

Asia Australia New Zealand India Japan South Korea Malaysia Philippines Singapore Taiwan China Hong Kong

4.93 3.95 Fi.22 2.76 2.9H 6.04 3.67 7.28 5.47 1.31 7.28

10.51 10.69 15.38 12.R4 6.68 11.95 8.99 7.42 9.7H 6.28 12.98

68.77 69.26 71.01 66.35 65.28 69.07 76.99 73.72 6H.54 75.60 70.66

24.79 17.10 8.39 18.05 25.06 12.97 10.35 11.5H 16.21 16.81 9.71

59.71 59.HI 78.51 66.19 52.88 62.R6 49.42 ()8.68 54.24 62.91 57.54

40.29 40.19 21.49 33.81 47.12 37.14 50.58 :H.32 c15.76 37.09 42.46


Nipon l'oapun[!sakurn and Wijit WongwareethijJ

TABLE 7.7 Characteristics of Visitors to Thailand by Occupation and Nationality, 1991-94 (In percentages) 1991 Occupation

CountrY of Residence







Americas United States Canada

27.27 25.52

12.29 9.98

19.33 20.04

9.73 13.65

5.51 4.66

1055 11.52

Europe Belgium France G-ennany Italy Netherlands Spain Switzerland United Kingdom

22.07 25.51 24.86 21.38 23.17 28.78 22.99 ;)0.64

10.59 R.52 9.89 9.81 1255 12.73 11.70 12.67

19.02 18.73 18.01 29.25 15.61-\ 21.19 20.03 16.47

13.56 9.06 11.56 14.04 11.28 H59 11.46

2.25 0.52 2.92 1.18 1.1-\1 0.93 :1.71 'i.ll

6.74 5.25 8.99 8.48 k.07 3.74 6.14 10.29

Asia Atlstralia :-Jew Zealand India Japan South Korea Malaysia Philippines Singapore Taiwan China Hong Kong

26.52 22.97 7.83 13.29 7.64 11.77 15.10 14.30 2.'19 13.56 11.68

14.02 14.75 3.23 21.51 3.87 8.61 10.'i5 12.64 3.1-\0 7.28 11.23

17.1 ') 17.76 39.36 25.42 31.81 :n.43 32.'i0 2:\.8:\ 43.!i'i 31.01 36.66

14.24 11.31 12 ..~1 13.29 9.09 13.60 16.88 7.80 1.94 12.94 9.11i

4.49 3.62 8.57 5.44 15.12 9.90 6.01 5.42 11.70 1.54 9.00

9.96 10.07 13.60 6.98 4.83 6.87 7.00 6.59 !i.3!i 2.04 7.76



TAT. Thailand "J!Jurimt Statistical Rrjlort, yarious issues.

South Korean Tourism in Southeast Asia: Thailand


TABLE 7.7 (Continued) 1992 Country of Residence

Occupation Professional



I ,abourer



Americas United States Canada

27.R'l 26.5:\

11.79 11.17

15.34 16.95

I '\.11 14.20

5.28 4.'\'l

12.66 12.'16

Europe Belgium France C-ennany Italv J\:etherlands Spain Switzerland l'nitcd Kingdom

26.91 2'\.96 26.79 22.64 24.95 29.'\2 2:'3.29 29.95

10.81 8.84 9.R2 R42 11.92 10.25 10.85 1'\.%

14. ](j 14.72 13.41 26.46 12.50 17.52 16.47 1'1.02

1R.92 14.1'l Hl.'\4 20.6'\ 16.R9 1RB 16.99 15.12

1.2'\ 0.49 2.99 1.'\8 1.64 1.11 '\.62 5.09

7.17 6.51 7.R2 7.57 7.75 4.27 7.07 10.26

27.10 29.2R 9.28 14.62 8.28 12.14 16.11 20.02

14.21 1'\.91 2.36 19.60 '\.06 8.08 8.54 14.76 4.00 10.79 11.05

14.'\1 12.17 35.14 2'\.16 27.09 21.1') 2R.'i0 17.89 40.96 42.67 :\2.!15

16.70 15.27 14.62 14.97 11.04 20.66 21.38 12.55 6.:'30 12.11 1U7

4.45 4.83

10.56 11.30 12.42 9.15 4.90 7.'10 8.59 6.31 'i.7'l 1.50 9.15

Asia Australia New Zealand India Japan South Korea Malaysia Philippines Singapore Taiwan China Hong Kong

:>.W> 1:\.03 I :>.00

7.55 5.8'\ 15.26 ~l.40

6.10 5.41 10.16 l.'l9 9.70

Nifmn Puaj)()ngsakom and Wijil Wongwareethip


TABLE 7.7 (Continued)

1993 Country of Residence

Occupation Professional






United States Canada

27.08 25.39

1 1.98 11.76

22.1G 14.44

15.21 16.78

4.H2 :1.00

11.01 12.07

Europe Belgium France c;ennanv Italy Netherlauds Spain Switzerland United Kingdom

19.73 21.92 22.10 17.87 22.22 25.13 21.98 28.6il

8.9H 8.51 9.15 k ..'\9 11.43 9.62 10.66 l:l.57

17.82 1 J .59 14.63 13.65 21.59 '1.93 1555 15.52

27.97 1H.27 2l.11 26.31 20.HO no1 20.23 16.07

1.62 0.39 2.70 1.62 1.71 1.34 3.4:\ 4.67

6.H4 5.88 9.08 H.29 7.tiil 4.% 5.82 9.94

Asia Australia New Zealand India Japan South Korea Malaysia Philippines Singapore 'faiwan China Hong Kong

2"1.51 2!i.49 11.45 I 1.12 7.26 16.52 19.4"1 18.HO 4.32 9.44 1:\.71

13.75 14.40 2.54 18.49 2.il2 0.99 8.27 15.26 3.57 18.18 J 1.64

14.83 1.'\.39 33.41 22.21 24.79 19.42 24.28 1H.78 3il.58 37.03 32.51

18.34 IH.57 17.34 16.90 17.47 lil.97 23.63 12.Wl 8.52 13.19 12.8">

4.67 4.hH 6.h1 5.74 1'i.Hil 10.81 6.22 5.80 10.22

10.77 9.43 l1.:l6 9.96 4.41 7.39 6.35 7.7il 5.H3 1.00 9.72





South Korran Tourism in Southeast Asia: Thailand

TABLE 7.7 (Conlinurd) 1994 Occupation

Country of Residence







Americas United States Canada

2!1.7!1 2!1.1R

13.43 12.31

13.06 14.39

15.49 16.43

!1.30 3.RO

10.10 11.73

Europe Belgium France Germany Italy Netherlands Spain Switzerland United Kingdom

18.33 20.78 20.83 19.0R 19.R3 23.20 21.38 27.94

9.18 8.53 9.23 9.26 11.5S 10.07 11.32 15.77

10.19 12.32 11.67 20.22 11.46 14.11 12.78 11.36

27.38 17.52 22.25 27.37 20.75 23.90 20.75 17.19

1.00 0.65 2.61 1.29 1.87 0.65 3.94 4.79

5.31 8.37 6.55 7.09 5.24 5.83 8.80

Asia Australia New Zealand India Japan South Korea Malaysia Philippines Singapore Taiwan China Hong Kong

2!1.64 24.67 8.73 13.0!1 6.69 IO.R6 17.68 16.08 3.47 7.85 12.51

I !1. 9!1

12.5!1 11.79 35.90 2l.R9 22.67 18.23 23.53 17.18 37.93 23.37 31.48

18.46 19.69 17.23 19.65 19.04

4.30 3.44 R.34 6.21


2.{)5 16.98 2.3!1 9.93 8.9!1 18.80 !1.90 19.00 11.60


24.20 11.63 6.65 2!1.58 13.69


11.35 6.82 5.92 9.78 1.2!1 7.9R


9.R9 9.30 11.02 9.0!1 4.79 8.03 6.63 7.51 5.63 1.4!1 R.56


Nipon Poapongsakom and H'ijil Won,l!;wareethijJ

The occupations of tourists from South Korea seem to vary a great deal, as do those from other countries coming to Thailand (see Table 7. 7). But there are some categories of occupations of the South Korean tourists that exhibit a different pattern and trend from those from other countries. Besides housewives, the lar·gest group of South Korean visitors consists of clerks (23 per cent in 1994). However, its share declined substantially over the 1991-94 period. At the same time, the share of labourers visiting from South Korea increased by 10 percentage points. The percentages for professionals and administrators are the lowest and have shown a declining trend, probably reflecting the more equal income distribution in South Korea. The number of tourists who are students and children from South Korea is very low compared to those from other countries. Only about 4 to S per cent of the tourist~ are students. The percentage ofretirces is even lower: not even l per cent, unlike tourists from European countries visiting Thailand, many of whom are retirees. Like South Korea, other Asian countries have a low percentage of retirees visiting Thailand. The majority of the South Korean tourists coming to Thailand come on a firstvisit basis. Most tourists from other countries have already been to Thailand before. China and Taiwan are the only other countries that have more tourists coming to Thailand for the first time. Tourists from European countries and other countries in Asia and North America come to Thailand mostly on a wvisit. Most South Korean tomists coming to Thailand for the first time come in group tours. In 1991, 7 4.75 per cent of the tourists from South Korea came in group tours. vVhen compared with tourists from other countries, this number is very high. The United States had only 20.15 per cent of its tourists coming in with groups. Most other countries also had low percentages. Countries with as high a percentage as South Korea are Taiwan and China.

3. Factors Mfecting Tourism in Thailand Knowledge of the responsiveness of demand for tourism to changes in key explanatory variables is important to the planning officers in the tourist industry because, given the sizable tourism industry in Thailand and ASEAN, changes in demand will have large macroeconomic repercussions on the host economy. There are two approaches to estimate the demand f(Jr tomism. The first approach is a system of demand models which estimate the share of the tourism budget. The objective of the model is to explain the distribution of tourists' expenditure of one nationality among different destinations. Due to data unavailability, this studv will not use this method. The s~cond approach is a single equation approach which can be used to measure the impact of explanatory variables upon the number of anivals, tourist

TABLE 7.8 Regressions of Visitor Arrivals and Tourism Receipts in Thailand :\lominal Prices Visitor ArriYals 1

Independent Variables


Constant Pricl" of crude oil~ Exchange rate 4 ''~'orld trade:' Lagged arrivals Gulf War Visit Thailand Year AR (1) 6

77.805 -16.588 5.400 0.152 0.895 -511.812 228.889 -0.840

R-squarcd D-W F-statistics Sample years

0.999 2.825 993.978 1977-94





price index of exports (1990 price). The regressions are corrected for the first order serial correlation.

SOCRCFS: \\10, Yearhook ojTrmri.1m Stali.11in 1994; Bank of Thailand, ;',fonthly F:conomir Heport, various issues.


Nijion Poajiongsakorn and Wijit Wong;wareethif!

expenditures, and the length of stay by tourists. The consumer theory posits that tourism demand depends on relative prices (as measured by the exchange rate), income (as proxied by GDP), transport cost, and other variables such as political disturbances and government promotional campaigns. However, in practice this method suffers from at least two problems, that is the identification problem and inadequate information on relative prices. Table 7.8 presents the estimates of two demand equations, that is number of arrivals and tourism receipts. The explanatory variables include two price variables, the price of crude oil and the exchange rate. \Vorld trade is a proxy for income.:1 The lagged arrivals variable is included to pick up the past trend. While the Gulf War dummy variable is expected to pick up the impact of war, the dummy variable of Visit Thailand Year ( 1987) is postulated to have a positive effect on tourism in Thailand. We provide two sets of regressions, the first one using the nominal values and the second one using the real values. We will first describe the results based on the nominal values. In the arrival equation all variables but one are statistically significant and have the expected signs. The insignificance of the exchange rate should not be surprising because it has remained very stable, resulting in very small variations in the explanatory va1iables. The receipts equation performs poorly since three variables are not significant. The results in Table 7.8 confirm that price and income variables, if measured properly, are important factors explaining the demand for tourism. The important message is that political disturbances have the strongest negative impact on tourism demand. The government's effort to promote tourism can also significantly increase the number of tourist arrivals, but not their expenditures. Therefore, it is not clear whether the government's effort to promote tourism is worth the cost. In Table 7.8 we also provide the regression estimates in which all the nominal variables are deflated by the proper price indices. The tourism receipt variable is deflated by the 1990 consumer price index; price of crude oil by the 1990 world export price index; and exchange rate by the inflated rates in the United States and Thailand. Unfortunately, the results arc even poorer than the regressions whose variables are in nominal terms. Therefore, we will not discuss the results. But we believe that further work on model specification and proper measurement will significantly improve the results. Based on the first set of regressions whose variables are in nominal values, we have also provided forecasts of the number of tourist arrivals and receipts for 1995-2000, based upon three scenarios: (I) a base case scenario where every actor is assumed to follow past trend or remain constant; (2) high growth of world trade; and (3) continuation of the government's promotional efforts. In the base case scenario the number of arrivals is expected to reach 9.15 million in 2000 while tourism receipts will exceed 230 billion baht in 2000 (see Table 7.9). If trade grew at 5 per cent per year, the number of arrivals would

TABLE 7.9 Forecast of International Arrivals and Tourism Receipts in Thailand, 1995-2000 Arrivals (thousand persons)

Receipts (million baht)

Base Scenario

Trade Growth 5% p.a.

1990 1994

5,298.86 6,166.50

.'),298.86 6,166.50

5,298.86 6,166.50

110,572 145,211

110,572 l4.'l,211

110,572 145,211

Forecast 199.') 1996 1997 1998 1999 2000

6,651.87 7,143.60 7,639.08 8,138.06 8,640.30 9,145.60

6,701\.RO 7,214.39 7,726.1\2 8,246.01 8,771.88 9,304.39

6,880.7.') 7,372.49 7,867.97 R,366.9.'l R,i\69.19 9,374.49

156,673 171,280 185,998 200,819 215,737 230,745

1.'JR,4.'l6 173,491\ 188,746 204,201 219,8.')8 235,711\

155,1\43 170,450 1R5,16R 199,91\9 214,907 229,915

Year Actual

Active Tourism Promotion Base Scenario

Trade Growth 5% p.a.

Active Tourism Promotion

:-..;oTES: The following assumptions are used: 1. World trade is forecasted by using the import and export regressions import= 885.4fi48 + lfi2.973fi year export = 882.7514 + 154.3686 year 2. Crude oil price remains at US$15.87 per barrel. 3. Exchange rate also stavs constant at 25.00 baht per US$. 4. The forecast is based on the first two regressions in Table 7.8 which use the nominal values of price of crude oil. exchange rate, trade, and tourism receipts. SOCRCE: Estimated from regressions in Table 7.8.


Nipon Poaj)()ngsakorn and Wijit Wong;wareethijJ

TABLE 7.10 Regression of Tourist Arrivals in Thailand, 1980-94 South Korea

Independent Variables










-1 ,043,596.00






























207, I \!2.80








South Koreans travelling hlr pleasure 13,669.52


Oil price Income per capita GulfWar 1990 Lagged arriYals Visit Thailand Year 1987 and An & Craft Year 1989-90 Real exchange rate AR(l)


Adjusted R2 F-statistics Durbin-\\'atson test :'\OTES:

I. 2. 3. 4.






2. 7312


AR( 1) is included in cases where there is a serial correlation problem. Oil price is deflated by 1990 export price index of each country. Income per capita is in 1990 price. Real exchange rate= country i exchange rate/CPI in country i 25 baht/CPI in Thailand

SOURCES: Calculated from TAT, "1/wiland Tourism Stati1tical RPjJort: IMF ( 1994): and oil prices.

South Korean 1innism in Southmst Asia: 'Fhailand

TABLE 7.10 (Continued)



Germany 1

Gerinany 2



L' nitcrl Stales























-4 253









-7:-l,6H'J. 72
































2.90f,d inf(nmation on what tourists tended to spend their mont>y on was provided. It showed that most of the money spent by South Korean tourists was on shopping. According to the tour operators, they preferred to buy Thai silk, jewellery, handicrafts, and expensive vicleo-casst>ttes recording their vacation activities in Thailand. An average of US$70.5 per day was spent on shopping alone in 1994. This amount, compared to that spent by tourists from other countries, was quite high. Tourists from other countries who spent about the same amount included those from Taiwan, .Japan, Hong Kong, and China. South Koreans also spent more on entertainment, US$20.56 per day per person in 1994, compared with the 0\'erall a\'cragc of only US$12.H f(n tourists from all countries. To explain tlw differences in the average length of stay and average expenditure of tourists from different countries, two 1 egressions are estimated. \\'t' postulatt' that the differences should be attributed to personal characteristics such as age, gender, and occupation, per capita income, purpose and frequency of visit, travel arrangcmcn ts, and type of accommodation. From the regressional analysis in Table 7.12 it was found that the level of per capita inconw of tlw country of origin had a positive impact on the length

TABLE 7.11 Average Expend iture and Length of Stay of Tourists in Thailan d Axerage Expend iture (baht/p erson/d ay) Countn of Residen ce Total East A.sia Indones ia :\hlavsia Philippi nes Singapo re China Hong Kong Japan South Korea Taiwan Europe Austria German y Italy United Kingdom America s Canada United States South Asia Oceania Middle East Africa

Length of Stay ( davs/ person)










3,910.50 3,800. 71 3,656.64 4,370.92 4,16Ul0 3,430.42 3,894.55 4,l.':i6.36 5,177.54 3,651.04 2,929.70 2.236.87 2,763.51 3,.')44.06 2,929.49 :l,5:12.3S 2,835.77 3,732.20 3,487.27 3,156.99 :3,133.83 3,301.35

4,219.41 4,422.28 3,376.81 4,415.31 4,406.96 3,974.35 4,199.68 4,897.39 3,598.11 5,236.73 2,088.9:3 2,264.90 l ,972.29 l ,83l.OiJ 2,367.04 2,281.71 2,391.!5 2,234.39 4,889.93 2,385. 79 4,643.40 4,410.15

4,176.16 3,828.21 3,705.14 4,828.74 3,822.29 4,043.33 3,107.69 4,8H4.95 4,582.87 4,6:J4.64 2,487.19 2,118.22

2,()10.22 1,991.24 2,393.13 2.40:1.08 3,2G8.40 1,951.17 3.~~!H.86

2.222.18 1,51l.4H 2,251.9H 2,!1-35.66 2,631.04 2,220.17 2,744.:)9

3,075. 78

2,43.':i.30 2,3GO.Ei 3,000.00 3,07l ..':i3 2,734.35 3,2!0.02 3,726.47 ~'1,49H.44

:1,500.00 2,723.51 2,553.92 2,442.71 :3,211.89 2,449.32 3,025.95 2,532.62 3,133.01 2,682.57 2,566.:31 2,450.00

SOL'RCE: TAT. Thailand Tuuri11n Statistim l RPjmr/, sarious issues.



2,519.10 2,205.32 :3,446.62 2,:)97.14 3,525.16 4,610.51 2,805.61 4,5:36.06 4,181.25











5.15 4.38 3.H8 4.96 4.54 9.53 .':i.78 5.09 3.74 6.41 10.91 12.32 13.63 9.19 9.25 7.39 7.67 7.41 6.35 6.R6 11.31 7.46

4.86 4.05 3.09 4.31 4.40 8.48 :i.71 5.36 !).91 5.46 11.17 12.87 13 ..79 9.18 10.32 8.39 9.58 8.42 7.3;) 7.40 10.52 7.68

4.83 S.74 3.32 4.72 4.78 7.23 5.34 5.18 3.97 0.89 11.27 13.37 13.11 8.87 12.03 7.76 8.35 7.81 7.43 7.46 10.38 :"i.97

3.09 4.64 8.44 6.65 4.19 -l. () 1 5.79 9.41 12.60 7.H6 7.63 6.68 8.G6 6.41


4.17 4.07 4.65 :J.35 11.32 5.29 4.70 3.38 8.52 10.85 l0.92 14.00 9.:r1 9.33 7.:J2 7.36 7.64 6.17 9.9?'J 7.85

South Kormn 7!JUrism in Soulhms/ Asia: Thailand


TABLE 7.12 Regressions Explaining Tourists' Length of Stay and Tourism Expenditure in Thailand, 1990-94

Independt>nt Variahlt>s

Length of Stay coefficient t-statistics

0.01 Per capita income Length of stay 0.()2 Exchangr Co-operation and lnYestment (SCCI), Vietnam.

TABLE 8.3 Top Ten Foreign Investors in Vietnam Country Taiwan Hong Kong ~~ Japan 4 Singapore 5 Republic of Korea 6 Australia 7 United States 8 Malaysia ~) France 10 British Virgin Islands 2

No. of Projects

Total Capital (US$)

215 177

3.1 billion 2.2 billion 1.6 billion 1.4 billion I .4 billion 775 million 701 million 665 million 619 million 556 million

llO 105 123 49 42 41 66 37

NOTE: I. As at I 0 August l99'i. ~- List includes only projects actually operating. SOURCE: State Committee for Co-operation and lnYcstmenl (SCCI), Vietnam.

Nguyen Gia Hao


FIGURE 8.1 South Korean Investments in Vietnam