CHAPTER 1 – INTRODUCTION 1.1 Background North Korea (also known as the Democratic People’s Republic of Korea, DPRK) is one of the world’s last remaining communist countries. The Juche ideology created by Kim Il-Sung, preserved by his son, Kim Jong-Il, makes it one of the most isolated countries. DPRK’s insistence on self-sufficiency since the 1950s has seen their neighbours, South Korea (also known as Republic of Korea, ROK), over take them in terms of gross national income (GNI) and per capita income, as well as become one of the world’s leading technologically advanced countries. Production efficiency in the factories declined due to a lack of work incentives, agricultural fields remained barren due to shortage of fertilizers, and the transport distribution system collapsed due to decrepit infrastructure. Their closest ally, China, is beginning to be exasperated by DPRK’s constant threats of developing nuclear weapons in exchange for humanitarian aid and economic incentives. The health of Kim Jong-Il remains a great concern for those countries that follow with great interest with the developments in the Korean Peninsula. Countries, including China, and the United States of America (USA), ROK, Japan, and Russia all have important stakes should DPRK collapse suddenly. The top echelon of this anarchical hierarchy is only concerned about political survival and economic gains. This can be seen by the occasional announcements of foreign investments in strategic parts of DPRK using special economic zones (SEZs) such as Kaesong and Rajin-Sonbong. The former being part of the unsuccessful ‘Sunshine Policy’ signed with the late ROK 1 President, Kim Dae-Jung. Under its previous administration, small and medium enterprises (SMEs) were encouraged to invest in DPRK under the processing- on-commission concept in the Kaesong Industrial Complex (KIC). Even though companies ran into barriers such as political instability resulting in the closure of the complex and sudden rise in the wages of the local workers, many other SMEs have continued to express interest to invest in DPRK due to perceived cheaper land and labour cost (Jung 2011). The author had the opportunity to visit DPRK on two occasions from 2006-2007. The impressions obtained from the trip found the country to be interesting and unique. However, strict restrictions were placed on foreigners as passports and mobile phones were confiscated upon arrival into the airport. In addition, data collection was also impossible as local citizens and officials were only allowed to speak to foreigners in a controlled environment. This is consistent with the literature where official estimates and data on DPRK are not readily available. Even when they are, the reliability of the data is always in question. This thesis contributes to existing knowledge by examining the implications of ROK companies’ location decisions on transport and logistics policy developments in DPRK. The research objectives are as follows: • To analyse the political and economic factors affecting DPRK; • To appraise the present conditions of transport and logistics infrastructure in DPRK; • To propose scenarios surrounding development in DPRK; • To evaluate the factors affecting potential investors’ location choices to develop transport and logistics strategies. 2 In order to achieve the research objectives, a combination of qualitative and quantitative research methods is used. In the qualitative research phase, an exploratory study with eight experts was employed to gain deeper understanding of the issues surrounding DPRK. The insights gained, together with the comprehensive literature review led to the next stage of research, (i) in- depth qualitative interviews with 38 experts and (ii) quantitative survey with 80 SMEs and 50 logistics companies. Cross-tabulations and a principal component analysis were used to evaluate their perspectives. The findings add to existing knowledge and provide theoretical and practical implications for governments and companies interested in DPRK. This introductory chapter begins with an overview of what has been written on DPRK and identifies some gaps in the relevant literature which was dated up to 2008 when the data collection was concluded. It moves on to explain the nature of the thesis before concluding with an overview of the structure of the study. 1.2 The Literature on DPRK and Location Choices This section investigates what research has been conducted into DPRK and factors influencing SMEs location choices. 1.2.1 DPRK Researchers constantly face dilemmas when investigating DPRK. The main reason is the lack of meaningful data coming out of the country. DPRK stopped publishing national statistics after the mid-1960s. The lack of information and data is one of the major problems about DPRK (Deok 2002). Scholars researching into DPRK have to rely on predictions and any information that 3 trickles out of the country from time to time. The most recent economic information published by DPRK was in 2002 and 2009 when the country underwent currency and wages reform. The most widely cited figures in public discussions are those produced by ROK’s central bank – Bank of Korea (BOK). However, Noland (2000) is sceptical of the method used by the BOK. It is important to point out that research into DPRK has tended to focus on the political and economic aspects. Research into DPRK’s politics centred on nuclear weapons, succession of Kim Jong-Il, scenarios of DPRK while interests in its economy varies between economic conditions, humanitarian aid, SEZs and reunification costs. Due to the nature of the country, limited research has been conducted into transport and logistical developments in the country. It is imperative to mention that there has been more descriptive than empirical research. Academics have used the historical approach comparing China and Vietnam with DPRK (Harvie, 1992; Herold, 1996; Lee, 1996; and McMillan 1996). ‘Poverty trap’ and ‘big push’ theories have been used to explain economic development and regime change (Lee 2000). A managerial approach (Park, 2005) and marketing concepts (Choe, et al. 2005) have been used to analyse it’s economic strategies. Statistical approaches such as the ‘CGE models’ (Noland et al. 2000), Social Accounting Matrix (Lee and Deok, 2004), and ‘IMAGE Model’ (Meade 1997) have been employed to estimate the deficiency in data. There is limited literature on the topic of transport and logistics in DPRK. Oh’s (2001) work was one of the pioneering studies looking at the strategies for developing transport infrastructure in DPRK. Kim et al (2001) focused on railways which form a major part of the transport network in DPRK, linking all 4 major cities. DPRK is part of the Trans-Asian Highway programme supported by UNESCAP. The project coordinates the development and upgrading of existing regional highways among member countries. Ducruet (2008) focused on ports and shipping. 1.2.2. Factors Influencing the Location Choices of Enterprises Location theories, such as Dunning’s OLI paradigm, have been well researched with regards to FDI by MNEs (Ruzzier et al. 2006). In recent years, more emphasis have been placed on SMEs and their entry strategies (Nakos and Brouthers 2002; Mazzarol and Choo 2003; and Aidis 2005). Much discussion has also focused on the investment decisions of enterprises in emerging economies such as China and Vietnam (Liu et al. 1999; Zhou et al. 2002; Cheng and Stough 2006 and Kawai 2009). However, limited research was found on ROK foreign direct investment (FDI) location choices. Only two research papers were found: (i) Kimura and Lee (1998) investigated the determinants of ROK FDI in manufacturing industries using empirical study and (ii) Kang and Lee (2004) used aggregate and firm level data of Korean and Japanese foreign enterprises in China to investigate the FDI trends and factors which influence location choice. Business enterprises have to consider an array of factors when determining their location choices. They face various types of risks such as political, economic, social and cultural risks. Many studies have criticised the sole use of quantitative factors such as costs (Czamanski 1981 and Bhatnagar and Sohal 2005) in assessing location factors. Oum and Park (2001) used a triangulation approach using literature review, personal interviews and a quantitative survey. 5 1.3 Nature of This Thesis This thesis focuses on DPRK and industrial location choices. It investigates factors which influence the location choices of SMEs and logistics companies which have implications for future transport and logistics policy developments in DPRK. There are many questions that might arise when planning strategies for transport infrastructure and logistics development. How is DPRK going to finance the redevelopment of its transport network? Will ROK or international financial institutions such as the World Bank (WB) or Asian Development Bank (ADB) provide a majority of the financing? Which transport mode should be prioritised? How is DPRK going to induce an increase in freight cargo base? What type of logistics concepts should be introduced in DPRK? What are the likely short, medium and long term strategies? The qualitative phase of the research aimed to answer these questions and develop scenarios for transport and logistics strategies. In the foreseeable future, ROK investors, besides the Chinese, will be the only companies to invest heavily in DPRK. ROK investors have an added incentive to invest in the North due to a number of factors such as relatively lower costs of labour and land. Accordingly, this research seeks to survey ROK investors about their opinions on factors that will determine their investment in DPRK, which has implications on the priorities for transport developments and introduction of logistics concepts. 6 1.4 The Structure of This Thesis This thesis consists of ten chapters, including this introductory chapter. Chapter 2 examines the political economy of DPRK. The chapter begins with an introduction of the geographical landscape, consisting of hills and mountains in the central region, depicting the difficulty for development of transport and logistics.