Globalisation and State Intervention: Government – Business Relations

Globalisation introduced external factors, including international organizations and MNCs, into the equation between government and business, complicating their interactions.  The tendency shows that foreign private actors may serve as better allies of local private actors than of local governments since they have a similar goal on lifting constrains from governments.  Also, the increasing importance of IGOs (intergovernmental organizations) unquestionably undermines governments' authority, but its relationship with governments need not be antagonistic.  Often, the rules set out by IGOs need a strong government to implement in the domestic arena, where IGOs are still unable to directly intervene. 

An example was the IMF's intervention in Korean restructuring during the Asian financial crisis.  During the 1990s, Korean business gained independence from government-controlled resources and their bargaining power increased, but the financial crisis weakened the strength of Korean private sector and gave advantages to the government.  Since the financial resource, including the IMF bailout, held by the government was the only available resource for the private sector during the crisis, the government obtained sufficient power to direct the action of private firms.  Under the pressure of the IMF, the government stopped rescuing sick chaebols and allowed their bankruptcy.  Without guaranteed rescue, businesses have to exchange their compliance for the rescue when they face financial difficulty.  Reducing the size of chaebols also undermined chaebols’ influence in political and economic decision-making.  The crisis and the IMF intervention moved the relationship between government and business in Korea toward the direction in favour of the government.

In addition, foreign investors are also entering the Korean economy.  The crisis made the Korean government relive its restraints on the entry of foreign investment. Foreign investors can purchase Korean companies through M&A, or invest in Korean stock market more easily.  Foreign ownership in Korean listed companies jumped from 13% in 1996 to over 30% at end-2000. By 2000, foreign investors owned 55% of the shares of Samsung Electronics and 44% of Hyundai Electronics.  The rapid growth of foreign investment in Korean companies increases foreign intervention in the economic development.   

In addition to maintaining macroeconomic stability, states were involved in the guidance of economic development towards rapid growth.  Thus, they were characterized by a more intensive government intervention. They allocated capital resources to selected growth sectors by means of credit control, subsidies, and tax-reduction, and maintained or created the advantages obtained from external exchanges through manipulation of exchange rates and maintenance of a low wage level.

Globalisation weakens the state’s control over capital allocation.  Due to high mobility and availability of capital in the global arena, capital resources can be easily secured from the global market, making the ones controlled by the states relatively insignificant to private enterprises.  To countries that heavily depend on capital allocation to conduct intervention such as Korea, globalization of finance disarms the states' instrument to control the private sector. Conglomerates in Korea can easily obtain alternative financial resources from global markets without depending on the supply from the government, shown by the increase of long-term external debt not guaranteed by the government.  The ratio of the private non-guaranteed long-term debt to the total long-term debt increased from 9.6% in 1970 to 48.7% in 1997.  A reason of chaebols’ resorting to foreign financial resources is governmental limitation of their access to domestic credits.  In order to curb chaebols’ expansion and pursue efficiency, President Kim Young Sam set quotas for their domestic loans.  This policy did not really stop the increase of chaebols’ debt; instead, it forced chaebols to turn to international markets to search for their financial input.

This study gives the second tier NIEs a signal that, under globalization, they are probably unable to adopt the same state-intervention strategies.  Hence these developmental patterns and strategies may be no longer suitable in the newly globalized world, and a new strategy that can properly cope with globalization is needed for other industrializing economies.

Globalization brings challenges, especially to the countries with a malfunctioning financial system or in the unfavorable places of the global division of labor.

Korea is notorious for the heavy debt burden of its companies. Between 1991 and 1996, the average debt/equity ratio of Korean firms in manufacturing sector was more than triple that of Taiwan and almost twice that of the U.S. The financial situation of the dominant chaebols in Korea suffered even heavier debt burden than did average firms.  The average debt/equity ratio of the top 30 chaebols was 403.8%, compared with 304.7% for the whole manufacturing sector.  By the end of 1997, the top 30 chaebols bore W 357 trillion debt, equivalent to 85 percent of GDP, and about two-thirds of the debt was carried by top 5 chaebols, indicating that Korean debt is also highly concentrated.

In the 1990s, the threshold of turning debt problems into crises was tremendously lowered due to the interconnection of financial markets. In the Asian financial crisis, the contagion of exchange rate plunge in the region weakened Korean capacity to repay the debt in dollars.  Even though the debt ratio in 1997 was not as high as the ones in the early 1980s, under the catalysis of exchange rate plunge, a mild debt problem may be quickly transformed into a crisis.   Korea did not maintain an amount of international reserves large enough to cover debt service and short-term debt.  In 1997, the amount of total external debt was 6.7 times and the amount of the short-term debt was 2.6 times larger than that of the international reserves. After the crisis, Korea has taken a series of measures to improve this situation, including lowering the debt ratio of chaebols, eliminating cross-debt guarantee, concentrating on core business, and purchase of non-performing loans, etc. The amount of bad loans as a percentage of total loans dropped from 12.9% in December 1999 to 5.01% in September 2001.  The debt ratio in manufacturing sectors decreased from 400% in 1997 to 200% in 2000.

Taiwanese and Korean MNCs have actively sought multi-nationalization of their activities since the late 1980s but in different patterns and therefore own different abilities to take advantage of new global opportunities.

In terms of area, the majority of Taiwan’s investments went to China and Southeast Asia (52%), and the purpose of investing is to avoid increasing production costs for their labor-intensive goods. Although large in number, these MNCs have little significant meaning in enhancing Taiwan’s ability to cope with globalization, being limited to neighboring countries and still being engaged in production.  Foreign investments of Korean companies are spread all over the world and range from acquiring raw materials to market expansion.  Korea invested a large amount in the OECD countries.  From 1997 to 2001, Korean investment in Asia only accounted for 33% of all outward FDI, while investment in North America and Europe jumped to 45%. Marketing and research were the major functions carried by these investments. Due to chaebols’ selling networks worldwide and each major company having its own global marketing channels, they can easily distribute their products overseas. Korean MNCs are more prepared than Taiwanese ones to grasp the fruits of globalization.

A country’s inward FDI is also an indicator of the impact of globalization.  Greater FDI inflows means that a country owns stronger competitiveness that foreign investors would like to explore. Another important variable influencing inflow of FDI is government restriction, which reduces the opportunities of technology upgrade stimulated by foreign companies and the chance to attract more foreign capital. Korea’s Economic nationalism and fear of foreign dominance resulted in a strong tendency to refuse FDI entry. Taiwan held a much more open attitude toward FDI.  Many studies show that technological development in Taiwan benefitted a lot from the presence of foreign companies.  On average, inward FDI/GDCF (gross domestic capital formation) ratio in Taiwan was much higher than in Korea.  After the financial crisis, Korea changed its strategy to actively absorb FDI.  This made the ratio of Korea increase rapidly from 0.7% of 1991-1994 to 13.6% of 1999-2000, contributing to the successful recovery of the Korean economy.

A third way to explore the possible responses of a country's producers to globalization is examining the mode of their business.  Companies engaging in consumer markets have benefited more from globalization than have the ones in the OEM (original equipment manufacturing) markets, partly because accompanying the enlargement of the global markets, marketing costs (advertising and distribution) become increasingly high.  Superior brand-images of existing global marketing giants assist their products to be accepted by the customers of new markets, quickly occupying them. In Romania, for example, IBM was the leading computer seller in 1996, and in Poland, Hewlett Packard secured 73 percent of the ink-jet printer market in 1997.  In other words, globalization offers existing large firms more chance to bring their superior marketing capability into full play.

On the other hand, companies with only good production ability (e.g. OEM producers) need to be subject to frequent challenges of globalization. Under the trends of global technology diffusion and ever-changing production conditions, it is relatively easy for a new OEM firm to enter the market and for competitors to take away the advantage on production of existing firms, especially second tier NIEs with a much lower labor cost. In Taiwan, the personal computer industry had been recognized as one of the most successful industries in selling products with their own brand names (OBM, Original Brand-name Manufacturing), instead of OEM (37%) in 1988. However, this situation tremendously changed during the 1990s.  By 1997, at least 61% of Taiwanese export computers were sold on an OEM base.  It indicates that Taiwan have encountered serious difficulty when they tried to market their own products and develop their own global strategies.

In contrast, Korean major electronics firms have experienced a rapid increase in OBM production during the 1990s. In 1997, Samsung made 80 percent of its products under its own brand name, a sharp increase from 1993’s 55 percent. LG Electronics, one of the major electronics firms with a high OEM ratio in Korea, reduced their OEM business from 52 percent to 40 percent between 1995 and 1997. Global strategies not only create new sources of competitive advantage, but provide a better foundation for proactive innovation instead of passive response to foreign OEM customer requests. In the new global economy, a firm with less innovation ability will suffer huge disadvantage in international competitiveness.

The Development of the New Economy

With globalization, the capacity of innovation becomes a crucial source of competitiveness, and strengthening the capacity is a necessary approach to cope with globalization.  The other important element of the new economy is the application of information and communications technology (ICT).

For a long period of time, the R&D expenditure in Korea was higher than in Taiwan.  The expenditure in Korea by percentage of GDP is 25% higher than Taiwan.  However, if we look into the composition of R&D, we can find that in the manufacturing sector, Taiwan invested more portions in high-tech industry than Korea.  In fact, in 1999, Taiwan spent 58% of its total R&D expenditure in high-tech manufacturing, and there was 48% in Korea. In terms of numbers of patents granted by the USPTO, Taiwan is better than Korea.  In 2001, the number of patents granted to Taiwan was 6,545, ranking the fourth, comparing to Korea’s 3,763 and the eighth place.  However, the number of patents increased faster in Korea than in Taiwan.  From 1990 to 2001, the average increase rate in Taiwan was 20.25%, while in Korea, it was 26.24%.  According to an analysis by USPTO, in 1999, the major technological fields in which Taiwanese enterprises obtained the patents were semiconductor device manufacturing, electrical materials, static information storage and retrieval, and chairs and seats.  For Korea, they were liquid crystal, cell, elements and systems; static information storage and retrieval; semiconductor device manufacturing; dynamic magnetic information storage or retrieval.

With regard to the application of ICT, Korea is well known by its widespread of the use of the Internet.  It has the largest portion of national population who are Internet users in the world. Taiwan is also in the list of the first tier countries, but it still lags behind Korea. The percentage of the broadband users among population is 51.7% in Korea and 18.2% in Taiwan.  This is partly attributed to the promotion of the Korean government since the financial crisis. Compared to Taiwan, Korea spent more money on R&D, but most concentrated on the businesses that chaebols focus on.  Judged by the wide range and variety of Taiwan’s patents, Taiwan’s R&D may cover different fields of industries. The high number of patents indicates a country’s innovative capacity.  In addition, Korea’s advance in ICT application provides it with a solid foundation to cope with globalization. No matter in terms of production, marketing, or communication, the Internet is a necessary tool to extend business operation to the globe.

The Human Development Index (HDI) is a composite statistic used to rank countries by level of "human development". The HDI is a comparative measure of life expectancy, literacy, education and standards of living for countries worldwide. It is a standard means of measuring well-being, especially child welfare. It is used to distinguish whether the country is a developed, a developing or an under-developed country, and also to measure the impact of economic policies on quality of life.

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  A long and healthy life: Life expectancy at birth
  
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  Access to knowledge: Mean years of schooling and Expected years of schooling
  
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  A decent standard of living: GNI per capita (PPP US$)
  

It is the global spread of labour-use across international borders in the face of increasing globalisation and industrial competition. It is the spatial division of labour which occurs when the process of production is no longer confined to national economies. This has led to a trend of transference, or what is also known as the "global industrial shift", in which production processes are relocated from developed countries to developing countries. This is because companies search for the cheapest locations to manufacture and assemble components, so low-cost labour-intensive parts of the manufacturing process are shifted to the developing world where costs are substantially lower. Companies do so by taking advantage of transportation and communications technology, as well as fragmentation and locational flexibility of production. From 1953 to the late 1990s, the industrialized economies' share of world manufacturing output declined from 95% to 77%, and the developing economies’ share more than quadrupled from 5% to 23%.

It is TNC driven, as they have the capital required for global investments.