Introduction
The purpose of this paper is to present a country analysis that focuses on the suitability of South Korea as an export destination for goods produced in Saudi Arabia. The analysis will highlight the various macro-environmental factors that are likely to affect imports in South Korea. These include the country’s economic system, legal system, political system, and cultural characteristics. Based on the results of the analysis, recommendations will be made on whether South Korea provides an expansion opportunity to SABIC through exportation. SABIC is one of the largest producers of petrochemical products in Saudi Arabia.
The company produces several chemicals, which include ethylene, propylene, and butane (SABIC, 2014). These chemicals are used for industrial purposes, especially, for the manufacture of packaging materials (SABIC, 2014). As an international company, SABIC is looking for growth opportunities in highly industrialized countries to increase its revenue. Thus, the analysis in this paper will shed light on the extent to which South Korea is a suitable market for exporting SABIC’s ethylene.
Membership in International Organizations
One of the major factors that facilitate bilateral trade between Saudi Arabia and South Korea is the fact that both countries belong to the World Trade Organization (WTO).South Korea became a member of the WTO in 1995, whereas Saudi Arabia was admitted as a member of the organization in 2005. Membership in the WTO facilitates trade between the two countries in the following ways (Gantz, 2013). First, elimination of tariff and non-tariff barriers to trade is one of the guiding principles that facilitate trade among members of the WTO. This means that goods from Saudi Arabia can easily access the South Korean market without facing barriers such as quotas and high import duties (Gantz, 2013).
Second, South Korea has the obligation to treat Saudi Arabia in the same way as it treats its major trading partners who are also members of the WTO (Gantz, 2013). This means that goods from Saudi Arabia cannot be rejected in South Korea due to their origin. Third, the WTO has set guidelines to regulate competition among its members. The guidelines include the level of subsidies that governments can provide to their firms and the accepted pricing strategies (Gantz, 2013). These guidelines ensure that imports in the member states are not negatively affected by unfair competition from locally produced goods through aggressive pricing.
Currently, South Korea is in the process of finalizing a free trade agreement (FTA) with the Gulf Corporation Council (GCC). The FTA agreement aims at eliminating all tariff and non-tariff barriers to trade between South Korea and the GCC (Gantz, 2013). The Agreement will benefit Saudi Arabia since it is one of the member countries in the GCC.
The Political System
The political system in “South Korea is based on a Republic form of government” (Ramirez, 2010, p. 14). Generally, South Korea has a democratic system of government where most holders of political offices are directly elected by the citizens to serve for a limited period. The government of South Korea has three branches. These include the executive, the legislature, and the judiciary. The executive consists of the president, the prime minister, and their deputies. The cabinet is also part of the executive (Ramirez, 2010). The president is the head of the state and is directly elected by the citizens for a fixed term of 5 years. The prime minister, on the other hand, is appointed by the president. The prime minister supervises the functions of all government ministries.
The legislature comprises the national assembly whose members are directly elected by the citizens to serve for a period of four years (Ramirez, 2010). The role of the legislature is to formulate and to enact laws that are used to govern the country. It also performs oversight functions by ensuring that the government is run efficiently. South Korea has an independent judiciary, which consists of three courts. These include the Supreme Court, the Appellate Court, and the Constitutional Court of Korea.
Over the years, democracy has improved significantly in South Korea. This achievement is partly attributed to the efforts made by previous regimes to ensure inclusion and transparency (Ramirez, 2010). In addition, the elective system has provided opportunities to several people to lead the country, thereby promoting accountability. The democratic system of governance has enabled South Korea to achieve political stability by avoiding the wars that hindered its economic growth in the 20th century (Ramirez, 2010). Political stability promotes economic activities, thereby providing growth opportunities to businesses through high demand for their products.
Economic System
South Korea has a market-based economy where economic activities are mainly undertaken by the private sector. The government intervenes through regulation and economic stimulus packages. South Korea’s economy is the 15th largest in the world in terms of nominal GDP, and the 12th largest in terms of purchasing power parity (PPP) (Holcombe, 2013). Currently, South Korea is one of the fastest growing developed countries.
In 2013, the country’s GDP grew by 2.3%, thereby reaching a value of $1.6 trillion. Over the five years to 2012, the country’s GDP grew at an average rate of 2.9% (Holcombe, 2013). South Korea’s GDP per capita was $32,272 by the end of 2012 (Holcombe, 2013). The country also boasts of a low unemployment rate of only 3.3% as at the end of 2013. Similarly, South Korea’s inflation rate is only 2.2%. These statistics imply that South Korea has a stable macroeconomic environment that promotes consumption in the private sector.
Unlike most developed countries, South Korea lacks key natural resources such as iron and oil. As a result, economic growth in South Korea is mainly driven by rapid expansion in the manufacturing sector, which accounts for 39% of its GDP (Holcombe, 2013). The country’s main industries include the automobile, petrochemical, electronics, and textile. South Korea also has a large service sector that accounts for over 50% of its GDP (Holcombe, 2013).
South Korea uses a progressive taxation system. Thus, individuals pay income tax at rates that range from 6% to 35%. Most imported goods in South Korea are subject to taxation. The valuation of the imported goods takes into account the cost of the imported good, insurance, and freight. The government charges different rates of import duty for various goods. The rate varies from “zero to forty percent, with the average rate being 4.17 percent” (Holcombe, 2013, pp. 3-13). Apart from the import duty, imported goods are subject to “sales tax, education tax, transportation tax, and special consumption tax” (Holcombe, 2013, pp. 3-13). The sales tax is charged at a rate of 10 percent of the value of the imported good.
Legal System
South Korea’s legal system is based on civil law. Court precedents are important, but are not officially considered as part of the country’s law. The “international treaties which South Korea is a party are considered to be part of its law” (Ramirez, 2010, pp. 12-17). The most important laws are the Acts or statutes that are formulated by the country’s national assembly. The Acts become law after being approved by the president. There are also rules and regulations that are formulated by various ministries to facilitate operations in various sectors of the economy (Ramirez, 2010).
South Korea has six major codes which include “the Constitution, the Civil Code, the Commercial Code, the Code of Civil Procedure, the Criminal Code, and the Code of Criminal Procedure” (Ramirez, 2010, pp. 12-17). These codes provide the main laws that are enforced by the judiciary. Specifically, the laws are enforced by the country’s hierarchical court system. Overall, the Supreme Court is the highest court in the country that provides directions on constitutional matters. The courts of appeal allow individuals and organizations to petition the decisions made by lower courts.
Situation with Proprietary Rights and Corruption
The stable legal system in South Korea facilitates protection of proprietary rights. The country’s proprietary rights index in 2012 was 70 (Bidet & Eum, 2012). This means that citizens’ property rights are highly protected by the country’s laws. As a result, citizens and businesses can acquire and use various properties without fear of losing them through illegitimate means. In South Korea, intellectual property is protected through copyright, patents, and trademarks. Citizens and businesses are often required to register their intellectual properties with the relevant authorities such as the Korean Intellectual Property Office in order to enjoy the protection provided by the law (Bidet & Eum, 2012).
Citizens and businesses can enforce their property rights through mediation, civil action, and criminal prosecution (Bidet & Eum, 2012). Mediation involves settling the disputes over property rights through independent committees such as the Intellectual Property Committee. Parties whose property rights have been infringed can also apply for civil action or criminal prosecution in order to be compensated for the infringement or to reclaim exclusive ownership of their properties.
The government of South Korea has put in place several measures to reduce corruption in the country. In 2011, the Protection of Pubic Interest Whistle-blowers Act became law (Bidet & Eum, 2012). The Act protects whistle-blowers in the government and private sector from victimization. Thus, it encourages citizens to report cases of corruption to the law enforcement officers. The government has also digitized most of its operations and introduced one-stop shops to provide services in order to eliminate opportunities for bribery (Bidet & Eum, 2012). Despite implementing these measures, South Korea still experiences corruption in both the public and the private sector. The main factors that contribute to high corruption in the country include poor corporate governance, inconsistent enforcement of laws, and non-transparent regulatory procedures.
Cultural Characteristics
South Korea has a rich culture that is characterized by a distinct language (Korean), dressing, cuisine, and values. The most important values in the country’s culture include hard work, modesty, and respect (Ramirez, 2010). The culture of the country is highly influenced by Confucianism. Confucianism is a system of behaviors and ethics that define the responsibilities of an individual to others based on their relationships. Confucianism emphasizes the importance of the family, which is often headed by the father. South Korea is characterized by high levels of urbanization where over 80% of its population of 50 million people lives in urban areas (Ramirez, 2010).
South Korea also has a corporate culture that is very different from those of western countries. South Koreans prefer indirect communication where business people often avoid saying ‘no’ even if they actually mean no. Establishing strong relationships and trust enables South Korean entrepreneurs to close business deals (Bidet & Eum, 2012). Thus, foreigners who intend to invest in South Korea are likely to succeed if they are introduced to the country’s businessmen by a third-party.
South Koreans prefer formality when conducting business. They prefer to be addressed by their titles rather than their first names. Business partners are expected to be punctual for meetings and to apologize in advance if they expect to be late (Bidet & Eum, 2012). Unlike in most western countries, negotiations in South Korea usually take long and can involve several trips before an agreement is reached. Generally, South Koreans believe in obtaining the best deal on the negotiation table. Thus, they start their negotiations from an extreme level and settle for a compromise that meets their desired business objectives (Bidet & Eum, 2012).
Demand for Ethylene
Ethylene is used to produce several products, which include polyethylene, ethanol, styrene, and glycols (KPIA, 2013). These products have a variety of industrial applications. For example, polyethylene is used to manufacture plastics, medicine, and packaging materials.
The demand for ethylene in South Korea is very high due to the following reasons. First, the high growth of the country’s manufacturing sector has increased the demand for packaging materials (KPIA, 2013). Similarly, the demand for ethanol has increased since it is used in the automobile industry as fuel and in the manufacturing sector to produce a wide range of products, which include perfumes and explosives. Second, rapid urbanization in the country has increased demand for building materials (Holcombe, 2013). For instance, polyethylene is often used to manufacture plastic pipes and other building materials. This increases the demand for ethylene, which is the main material for producing polyethylene.
In 2012, the demand for ethylene in South Korea increased by 4.5% to 7,230,000 tones (KPIA, 2013). In addition, the production of ethylene increased by 3.5% to 7,780,000 tons (KPIA, 2013). The increase was attributed to the construction of new production plants in the country. The demand for ethylene is expected to grow by at least 3% in the next two years (KPIA, 2013). The main challenge facing production of ethylene in South Korea is the fact that the country lacks adequate supply of cheap oil and gas, which are used as feedstock. This reduces the competiveness of the ethylene produced in South Korea since its price has to be high due to the high cost of oil.
Critical Analysis
Stable Macroeconomic Environment
The stable macroeconomic environment in South Korea has the following implications for the companies that produce ethylene. To begin with, the rapid growth in the country’s GDP will cause an increase in the citizens’ purchasing power (Arnold, 2010). As a result, the demand for various products such as plastics and medicine whose production depend on availability of ethylene will increase. The expected increase in demand will be supported by two factors namely, low unemployment rate and inflation rate. The low unemployment rate of 3.3% means that majority of the citizens are in gainful employment (Deepashree & Agarwal, 2006). Thus, they are able to spend, thereby increasing the demand for ethylene by consuming manufactured products that require packaging materials (Arnold, 2010). The low inflation rate of 2.2% will enable manufactures to purchase ethylene at stable prices, thereby increasing demand.
The main economic threat is that South Korea depends on the export of its manufactured products to countries such as China and the European Union. If economic downturn in these markets leads to low exports of manufactured goods, the demand for ethylene in South Korea will reduce significantly (Deepashree & Agarwal, 2006). Although current economic growth in South Korea is strong, the future remains uncertain. Empirical studies indicate that advanced economies often experience very low economic growth as most of their markets reach mature stage (Deepashree & Agarwal, 2006). In this regard, low economic growth in future may reduce the demand for ethylene in South Korea.
Economic Liberalization
As a market economy, South Korea has focused on trade liberalization by joining the WTO and signing free trade agreements with other countries. Membership in the WTO will benefit companies that export ethylene to South Korea. Specifically, their products will benefit from low import tariffs in the country. Although import duty is low in South Korea, imported goods are subject to numerous taxes. The taxes reduce the competitiveness of imported goods by increasing their prices (Zimmerman & Blythe, 2013). In this context, foreign firms that are exporting to South Korea are expected to internalize part of the import taxation costs in order to maintain the competitiveness of their products. However, internalizing the taxes can severely reduce profit margins, thereby exposing the firms to the risk of making losses.
Although trade liberalization in South Korea eliminates barriers to entry, it also facilitates high competition. The country has already signed free trade agreements with the European Union, the US, and China (Gantz, 2013). These countries are the world largest producers of ethylene. Thus, their entry in the South Korean market will lead to a significant increase in competition. High competition is likely to cause a downward pressure on prices, thereby reducing the profits of companies that produce ethylene in South Korea (Zimmerman & Blythe, 2013). In this regard, the factors that will determine the success of the incumbent firms and new entrants are product quality, ability to reduce production costs, and access to an efficient distribution system.
Political Stability
Political stability will lead to a predictable business environment, which promotes investments in the economy. In particular, stability reduces political risks such as war that usually hinder the growth of businesses through destruction of property, increase in the cost of capital, and reduction of demand. A low political risk enables businesses to develop and implement long-term growth plans since they can predict the future outcomes of the plans (Zimmerman & Blythe, 2013).
Generally, political stability will enable South Korea to attract foreign direct investments and to encourage its large enterprises such as Samsung and LG to increase their production capacities. Successive governments have been implementing policies that promote the growth of local businesses. These include building transport and communication infrastructure to promote international trade. As a result, the economy will grow, thereby improving citizens’ purchasing power and supporting demand for industrial products. In this context, political stability will lead to a high demand for ethylene in South Korea.
Although South Korea enjoys political stability, new regimes might discourage economic growth by adopting policies that are not business friendly. For instance, increase in business and personal income taxes will reduce purchasing power and aggregate consumption in the economy. As a result, the demand for ethylene will reduce (Arnold, 2010).
Culture
The cultural characteristics of South Korea present both opportunities and threats to international companies that intent to join the country. South Koreans value hard work and modesty, which usually lead to high income (Bidet & Eum, 2012). In addition, South Koreans prefer to live in urban areas rather than rural areas. These aspects of the South Korean culture promote expenditure on products such as plastics that are manufactured using ethylene.
However, negotiating business deals with South Koreans presents several challenges. To begin with, trust and personal relationships play an integral role in winning business deals (Zimmerman & Blythe, 2013). For instance, a foreign company that is looking for a local business to distribute its products is likely to succeed if it approaches the local firm through a well-known third-party rather than directly. This can be a challenge to foreign firms that do not have third parties to connect them with the right business partners.
The indirect communication style that South Koreans use also creates a challenge when negotiating a business deal. South Koreans will not clearly state their positions when they are not interested in a business deal (Bidet & Eum, 2012). This can lead to misunderstanding among the negotiating parties. In addition, South Koreans have high expectations when negotiating a business deal. For instance, they may request for significantly high profit margins, thereby reducing the competitiveness of the goods of their foreign partner.
Strong Demand for Ethylene
South Korea has a strong demand for ethylene. The demand is likely to increase in future as the economy grows and the population increases. However, local producers of ethylene are less competitive than their counterparts in countries that produce oil. This perspective is based on the fact that South Korea’s firms rely on imported feedstock, which is often expensive due to fluctuation of the exchange rate and international oil prices (KPIA, 2013). This means that companies that export ethylene to South Korea can gain a competitive advantage if they are able to supply their products at a lower cost (Gantz, 2013).
Specifically, they will be able to gain market share easily if their ethylene is cheaper than that produced in South Korea. However, South Korean firms have access to advanced technologies and huge financial capital. Thus, they can develop improved production techniques to lower their costs of production. As their products become more competitive, the companies that export to South Korea are likely to find it difficult to take advantage of the high demand since they have to factor shipment costs in their prices.
Stable Legal System and the Fight against Corruption
The stable legal system provides a level playing field for both local and foreign firms to compete fairly in the ethylene market. Specifically, the country’s laws prohibit anti-competitive practices such as predatory pricing and formation of monopolies. The government’s commitment to fight corruption also eliminates opportunities for coalition between unethical firms and industry regulators to gain competitive advantages through unlawful means. The implication of the stable legal system and low corruption is that foreign firms that export ethylene to South Korea will be able to compete effectively with their local counterparts (Zimmerman & Blythe, 2013). In addition, the legal system facilitates entry through strategies such as exporting by providing a framework for enforcing business contracts.
Recommendations
Based on the critical analysis, SABIC should export its ethylene to South Korea due to the following factors. First, there are no significant entry barriers in the South Korean market. Since South Korea and Saudi Arabia belong to the WTO, SABIC’s ethylene will benefit from low import duties. The tariff and non-tariff trade barriers that are likely to affect the competitiveness of SABIC’s ethylene will be eliminated after South Korea and the GCC enforce their free trade agreement. Second, South Korea presents an important opportunity for growth. The demand for “ethylene is likely to continue to rise in future as the economy grows and the population increases” (KPIA, 2013, p. 5).
SABIC can easily take advantage of this opportunity because it has access to cheap feedstock and advanced technologies to supply ethylene at competitive prices in the export market. Given this cost advantage, SABIC’s ethylene is likely to compete effective in South Korea. As a result, the company will make profits by selling its product at the average industry price (Zimmerman & Blythe, 2013).
Third, the stable political system in South Korea promotes investments and growth of businesses. In this regard, SABIC has the opportunity to develop a long-term export plan in order to serve the South Korean market effectively. The long-term perspective will enable the company to recover its cost of entry, thereby improving its shareholder value. Finally, SABIC can take advantage of South Korea’s culture by building trust and strong relationships with established distributors to market its product. The local distributors have a good knowledge of the market. In addition, they are likely to have adequate contacts with the companies that use ethylene. Entering into strategic partnerships with local firms will enable SABIC to reduce distribution costs (Zimmerman & Blythe, 2013). In addition, it will enable the company to access its partners’ customer base and to overcome cultural challenges such as language barriers.
Conclusion
South Korea provides a suitable market for exporting ethylene from Saudi Arabia. The country has a growing demand for ethylene. The growth is supported by the country’s stable macroeconomic environment that supports consumption of manufactured goods. Since South Korea is a member of the WTO, ethylene imported from Saudi Arabia will benefit from low import duties. Moreover, South Korea has stable political and legal systems that promote the growth of both local and foreign companies. In this regard, SABIC should consider exporting its ethylene to South Korea in order to expand its market share and to increase its profits. However, the company should implement measures to deal with intense competition in the Korean market. Specifically, it should consider supplying high quality ethylene and charging competitive prices in order to gain a competitive advantage in the market.
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