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South Korea in the Fast LaneEconomic Development and Capital Formation$

Young-Iob Chung

Print publication date: 2007

Print ISBN-13: 9780195325454

Published to Oxford Scholarship Online: September 2007

DOI: 10.1093/acprof:oso/9780195325454.001.0001

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(p.389) Appendix 8.1: FDI of the United States and Japan and Their Firms

(p.389) Appendix 8.1: FDI of the United States and Japan and Their Firms

South Korea in the Fast Lane
Oxford University Press

There were a number of differences, some of which are rather subtle but notable, in the FDI of the United States and Japan. To begin with, the scale of U.S. investment in Korea was larger than that of the Japanese. U.S. businesses on average invested about $1.6 million in 1971–72, while the average Japanese investment was a little more than a third of that amount ($600,000). In later years, U.S. investment has been about 1.7 times that of the Japanese; specifically, about $1.5 million for the United States and $900,000 for the Japanese. While Japanese firms were much more export oriented, shipping out about 70 percent of their production, U.S. firms were more import oriented. Japanese firms ran up large trade surpluses in 1984–86 and accounted for more than 65 percent of Korea's trade surplus in 1986. In contrast, U.S. firms ran up trade deficits in 1984–86. In addition, the sectoral distribution of FDI from the two countries was different. U.S. FDI was concentrated primarily in petrochemicals, transportation equipment, and electronics, while Japanese investments were heavily weighted toward hotel services, electronics, petrochemicals, and textiles and garments. However, more recently a larger proportion of Japanese FDI has begun to be channeled into electronics and electrical equipment, transportation equipment, petrochemicals, and financial services.

The intensity of the use of labor and capital in their investments was also considerably different. The Japanese investment per employee was much smaller than that of the United States. The same pattern emerges when total capital, including that of local partners, is divided by the number of employees. By that measure, Japanese firms used even less capital per employee than domestic manufacturers. To put it somewhat differently, the proportion of capital goods in U.S. investments was significantly higher than that of the Japanese. When investments are divided among labor‐intensive, low‐technology, and capital‐intensive industries, more Japanese than U.S. FDI was in the labor‐intensive industries. Japanese firms hired more (p.390) than three times as many workers. Nearly nine‐tenths of the products that Japanese FDI firms produced were reported to have been outdated (in terms of reliance on capital goods in contrast to labor) and resembled the type of goods produced in Western countries in earlier decades. U.S. FDI was concentrated in the same group, though to a lesser extent, and the proportion of capital goods in U.S. investments was significantly higher than for the Japanese. Consequently, the value added per employee was much larger for U.S. firms.

Between Japanese and U.S. businesses, the number and sophistication of investment in new technology showed considerable difference. Japanese partners gave more assistance to Koreans in the assembly of machinery and maintenance, whereas U.S. partners apparently provided more patented technology. The number of licenses from Japan during 1962–80 was 2.5 times larger than that from the United States (2,321 vs. 1,057) (Korea Newsreview, August 29, 1987), but the largest amount of royalties—$863.5 million, or 44.2 percent of the total—went to the United States, while Japan came next with $608.2 million, or 31.1 percent. The average fee for a Japanese license was less than half that paid to U.S. firms. Korean businesses paid an average of $816,935 for each piece of U.S. technology and $262,042 each for Japanese, which seems to indicate that the latter was rather modest and not as technologically advanced. Nonetheless, Japan's share of royalty payments have increased, while those to the United States have decreased over time. Japan's share increased from 24.8 percent in 1983 to 31.5 percent in 1986, while the U.S. share dropped from 54.5 percent in 1984 to 46.6 percent in 1986.

The investments of the United States and Japan on the whole complemented, rather than competed with, each other over time. While U.S. investments augmented native ones, the Japanese investments often competed against the medium‐sized and small Korean businesses. Nearly nine‐tenths of their output was in the production of Western goods.

The returns on FDI appear to have been reasonably high, but there was a sharp difference in the ratio of profit remitted to remaining FDI among different countries. The total profit rate (remitted dividends plus reinvested profits and royalties as a percentage of the outstanding balance of FDI) averaged 12 percent per year during 1984–87. FDI in Korea was reported to have been more profitable than commercial loans, and it tended to have higher profits than its Korean counterparts in most manufacturing industries. The average ratio of profits to value added for foreign firms was 45.9 percent, in comparison to 40.5 percent for domestic firms. On the whole, remittances stemming from investment at the end of June 1986 totaled $713 million. The ratio of remittances to investment has largely remained at 5 to 6 percent since the 1970s, with that of 1986 registering 6.8 percent, the highest level since 1978.

The United States and Japan received the most income from South Korea, almost 43 and 30 percent of the total profits of $807 million remitted between 1977 and 1987, respectively. While the Japanese dominated investment (for the period between 1969 and 1986, Japan was the predominant investor in South Korea), topping the list with 52 percent, and their share constituted about 46.6 percent of total FDI (Korea Herald, September 18, 1986), they received 30 percent of the total profits remitted between 1977 and 1987. The U.S. share constituted 33.1 percent of total (p.391) FDI, but the United States received almost 43 percent of the total profits remitted for the same period. U.S. firms sent home about 10 percent, while Japanese firms returned only about 3 percent. Consequently, the amount of Japan's unrepatriated capital was one and a half times larger than that of U.S. companies.

The management style of the two countries was visibly different. While proportionally more U.S. firms provided assistance in patented technology and technical assistance than did the Japanese firms, Japanese direct investments made a larger contribution to indigenous management know‐how than did U.S. direct investments. In the assembly of machinery and maintenance, proportionately more Japanese firms provided assistance. In addition, the ownership distribution between the two countries was quite different. While wholly owned investment was 34 percent for the United States at the end of 1987, it was only 19 percent for Japan (similarly, the large bulk of investment from Europe was directed toward co‐owned projects).