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Kristiina Korhonen FOREIGN DIRECT INVESTMENT in a CHANGING

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Kristiina Korhonen FOREIGN DIRECT INVESTMENT in a CHANGING K ristiina K ORHONEN : FOREIGN DIRECT INVESTMENT IN A CHANGING POLITICAL ENVIRONMENT A CHANGING POLITICAL : FOREIGN DIRECT INVESTMENT IN Kristiina Korhonen FOREIGN DIRECT INVESTMENT IN A CHANGING POLITICAL ENVIRONMENT FINNISH INVESTMENT DECISIONS IN SOUTH KOREA A-265 ISSN 1237-556X HELSINKI SCHOOL OF ECONOMICS ISBN 951-791-973-5 2005 ACTA UNIVERSITATIS OECONOMICAE HELSINGIENSIS A-265 Kristiina Korhonen FOREIGN DIRECT INVESTMENT IN A CHANGING POLITICAL ENVIRONMENT FINNISH INVESTMENT DECISIONS IN SOUTH KOREA HELSINKI SCHOOL OF ECONOMICS ACTA UNIVERSITATIS OECONOMICAE HELSINGIENSIS A-265 © Kristiina Korhonen and Helsinki School of Economics ISSN 1237-556X ISBN 951-791-973-5 ISBN 951-791-974-3 (e-version) Helsinki School of Economics - HSE Print 2005 Acknowledgements The initial impetus for this study was given years ago by Professor Park Sam-Ock at the Seoul National University. Therefore, with great honour, it has been a pleasure to have him as official examiner and opponent of this study. Accordingly, it has been a great privilege to have the leading Finnish scholar in foreign direct investment, Professor Jorma Larimo from the University of Vaasa as the official examiner of my study. The study was conducted at the Helsinki School of Economics (HSE), including the Department of Marketing, the Center for Doctoral Studies and the Center for Markets in Transition (CEMAT). I am also thankful for an opportunity to conduct parts of my study at the Nordic Institute of Asian Studies (NIAS) in Copenhagen in 2004. I would like to express my deep appreciation to several individuals for their support. I started my studies under the guidance of Professor Emeritus Kai-Veikko Vuoristo, who is certainly one of the key persons behind my interest in Asia. Especially, I want to thank him for writing dozens of successful references throughout the years. His successor, Professor Jarmo Eronen read carefully several versions of my study and gave many constructive comments that helped me to progress in my study. Professor Emeritus Niilo Home made a significant contribution in supervising my study in terms of thesis structure and logic. Dr. Pekka Killström shared his insight into the strategy-performance model and made numerous valuable suggestions for the improvement of my study. Professor Emeritus Reijo Luostarinen discussed with me on the general setting of the study and the methodologies. I am also thankful to Professor Riitta Kosonen, who has offered me an opportunity to continue with the post doctoral studies at the CEMAT. My sincere thanks for the inspiring discussions go to Dr. Erja Kettunen-Matilainen. I have also received help and suggestions from Dr. Jorma Pietala, Dr. Sonn Jung-Won, M.Sc. Laura Erkkilä, M.Sc. Virva Haltsonen, Manager Lee Byung-min, System Architect Antti Lehtinen, M.Sc. Jarkko Lehtinen, M.Sc. Mervi Lipponen, M.Sc. Réa Maxwell, and LL.M. Mikko Saarikivi. I am grateful to all respondents and interviewees involved in this study. Their interest and patience in answering my questions has been invaluable. The personnel of the Korean Embassy and the Korea Trade Center in Helsinki has always been willing to help me. Furthermore, I am indebted to all of those Korean professors, research fellows, civil servants, diplomats and other individuals, who deepened my understanding of Korea and Koreans during seven years in Korea, in and out, in the 1990s. For the financial support, I want to express my gratitude to the Foundation for Economic Education, the Jenny and Antti Wihuri Foundation, the Ella and Georg Ehrnrooth Foundation, the HSE, the Research Foundation of the HSE, Marcus Wallenbergin liiketaloudellinen tutkimussäätiö, and the NIAS. This is probably the right place to thank also my mother Eira Korhonen for financial aid as well as childcare. My father Rauno Korhonen, who found himself in Korea long before me in the 1950s, could not see this study completed. This study would not have been possible without the support and persuasion of Dr. Pekka Killström. I want to thank him on the intellectual companionship we have shared. My daughter Choi Yoon-Hee has sacrificed evenings, weekends and holidays for omma’s research. I hope that I did not place too heavy demands on the ten year old girl and that my love tempered her longing. Helsinki, November 2005 Kristiina Korhonen Abstract This dissertation contributes to an understanding of foreign direct investment (FDI) in a changing political environment. The theoretical framework of the study is positioned to the geography of enterprise approach, but it has been contributed with theories from the fields of strategic management, international business, and political economy. The empirical focus is on the Finnish investment decisions in South Korea (hereafter Korea). The research problem of the study asks how a transnational corporation (TNC) perceives and reacts to the change in the host country’s political environment. Investment literature has basically studied the spatial aspects of FDI separately from the growth and performance of the firms, while the present study aims to combine them. The present study argues firstly that the relevant factors having an impact on the investment decisions and the performance of the TNCs can be recognised with the help of Lahti’s strategy-performance model. The model is modified by incorporating the general macro-environment of the firm explicitly to the model. Based on literature, it is believed that firms interpret the location conditions of the host country into a special set of location factors, which are crucial from their strategy perspective. With the help of the modified strategy-performance model, the firm’s relative optimal location can be explained by linking the location of the firm to the purposes of the firm: the firm invests where it can operate successfully. Secondly, the present study argues that the political environment of the firm in the host country may have a special role among the other parts of the firm’s environment (natural, economic, demographic, cultural, and technological). The argument is based on the supremacy of the host government to use its political power in order to intervene in FDI. On the other hand, the literature has emphasised the TNCs abilities to bargain with the host government. The present study states that TNC may not need to bargain alone but may lobby help from its home government. Therefore, this study adds a concept of authority services to the list of TNC’s bargaining techniques. The modified strategy-performance model was empirically applied to the case of Finnish investment in Korea during 1984-2002 when Korea’s political environment and investment policy in particular underwent profound change. The turning point is year 1998 when the Korean government drastically liberalised its investment policy in the aftermath of the Asian crisis. Therefore, the present study compares Finnish investment during the restrictive period in 1984-1997 with the liberal period in 1998-2002. The data includes national and regional level statistical data from both Finnish and Korean sources, as well as firm level data from Finnish investors collected using a questionnaire. Both types of data are supplemented and cross-checked by interviews. The empirical results suggest that the change in the political environment in Korea in 1998 had a clear impact on Finnish investment in Korea. However, the change cannot be totally separated from the other simultaneous changes, among which, the role of technological environment of the firm in Korea has been the most influential. The empirical results indicate that repeat investments had been engaged regardless of the investment policy liberalisation, but the acquisitions had not taken place without the change in Korea’s investment policy. In a changing political environment, the authority services provided by the Finnish government were crucial to Finnish investors. 1 The empirical results suggest that the the modified strategy-performance model can be successfully used to analyse the impact of change in the firm’s external environment. However, any further evidence on the particular role of the political environment among the other parts of the firm’s general macro-environment was not found. Each firm emphasised different variables of the external environment, which reflects the fact that firms perceive the same host country differently according to their strategies. Therefore, each firm also reacts to the political change differently. This justifies the use of concepts of location conditions and location factors. The results indicate that firms scan their political environment continuously in order to anticipate and respond to possible changes. Therefore, respondents did not regard the political environment of the firm as important, although it had an impact on their investment decision-making. Key words: foreign direct investment, political environment, strategy-performance model, location conditions, location factors, South Korea, Finnish investment 2 Table of contents Abstract............................................................................................................................. 1 Table of contents .............................................................................................................. 3 List of figures ................................................................................................................... 5 List of tables ....................................................................................................................
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