EFFECTS OF SOUTH KOREAN MARKET LIBERALIZATION ON THE SOUTH KOREAN RETAIL MARKET Eun Jin Hwang Thesis submitted to the Faculty of the Virginia Polytechnic Institute and State University in partial fulfillment of the requirements for the degree of Master of Science in Clothing and Textiles Marjorie J. Norton, Chair Jessie Chen-Yu Rebecca Lovingood December 17, 1998 Blacksburg, Virginia Keywords: South Korea, Market-opening, Foreign direct investment, Retailing industry, Liberalization, Chaebol, Trade deficit, Apparel Market, Clothing and Textiles, Over- consumption, Frugality campaign, Parallel importing Copyright 1998, Eun Jin Hwang 1 The Effects of South Korean Market liberalization on the South Korean Retail Market Eun Jin Hwang (ABSTRACT) South Korea is a country that is poor in natural resources and capital and remains behind many other nations in technological development; however, South Korea's unique development strategy has led its economy to high growth over the last three decades. During 1997, South Korea began to experience a serious financial crisis, including bankruptcies of many of its conglomerates, a drastic depreciation in the international exchange rate of the South Korean currency, and an increasing foreign debt. Currently South Korea is struggling to compete with products from both industrialized nations and newly industrializing nations. The current crisis has occurred as South Korea has been engaged in extensive market-opening. Knowledge is lacking about South Korea's intricate and rapidly changing political and economic climate. The purpose of this research was to explore and clarify the interrelated factors that have contributed to South Korea’s present economic problems, especially those facing South Korea’s retailing industry. The qualitative methodology of "grounded theory" was used in this study. Grounded theory is a general methodology for developing theory that is grounded in data which are systematically gathered and analyzed. Theory evolves during the research process through a continuous interplay between analysis and data collection. ii This research attempted to discover the factors, or themes, that have affected the South Korean economy and retailing industry. The following factors were identified: (1) foreign direct investment; (2) the price-gap between imported goods and domestic products; (3) South Korea’s trade deficit; (4) perceived over-consumption of luxury items by South Korean consumers; and (5) the chaebol, or South Korean large conglomerates. The economic factors that have led to the current difficulties facing the South Korean retailing market are complicated and interwoven. South Korean retailers will have to address these factors in the future, and attempt to find solutions. It is hoped that the knowledge resulting from this will be of benefit to South Korea's attempt to compete in a global marketplace. iii DEDICTAION To my parents, Jin Ky Hwang and Ki Ja Hwang and to my friends iv ACKNOWLEDGEMENTS The completion of this research project is no solitary accomplishment. My sincere appreciation is extended to many individuals who invested time and effort in the completion of the study. First and foremost, I would like to express my sincere gratitude and appreciation to Dr. Marjorie J. Norton, my mentor, advisor and friend. Discussions with Dr. Norton were a faithful source of inspiration, encouragement and motivation to me. I would also like to thanks Professor James Littlefield in Marketing, for his guidance and encouragement. To the other committee members, Dr. Jessie Chen-Yu, Assistant Professor of Clothing and Textiles, and Dr. Rebecca Lovingood, Professor and Head of the Department of Near Environments, I also would like to express my gratefulness for their insightful suggestions, invaluable assistance, and words of encouragement at various stages in the research process. Very special thanks are also expressed toward other friends and my family members. Finally, a very special thanks to my parents Jin Ky Hwang and Ki Ja Yoo for their loving encouragement and support throughout my life. I would like to dedicate this thesis to my parents, for their unconditional love, support and understanding. v TABLE OF CONTENTS ABSTRACT ...............................................................................................................................ii DEDICATION...........................................................................................................................iv ACKNOWLEDGEMENT ..........................................................................................................v LIST OF FIGURES ....................................................................................................................x LIST OF TABLES.....................................................................................................................xi CHAPTER I INTRODUCTION ...............................................................................................1 Origin and Importance of the Study.................................................................................1 Problem Statement ..........................................................................................................2 Purpose of the Research...................................................................................................4 The Need for the Research...............................................................................................5 Organization of the Research...........................................................................................6 CHAPTER II LITERATURE REVIEW....................................................................................8 PART I: Theoretical and Methodological Background of Research .................................8 Trade Liberalization in Developing Countries..................................................................9 Methods in Liberalization Research...............................................................................10 Empirical Studies...............................................................................................10 Theoretical Studies ............................................................................................12 Porter’s Competitive Advantage Theory.................................................15 Liberalization: Trade Regulations...........................................................16 Market-opening and Interest Group Politics............................................17 Retailing and the Internationalization Process.........................................19 Foreign Direct Investment in Developing Countries ...............................20 South Korea’s Market Opening Strategy.................................................23 Problems with South Korean Retailing ...................................................24 Summary.......................................................................................................................24 CHAPER III The Context Of The Research: South Korean Economic History, 1948-1997.......................................................................................26 Introduction...................................................................................................................26 Five-Year Economic Development Plans.......................................................................27 President Rhee Syng Man’s Administration (1948-1960).......................................................................................................28 vi President Yun Bo Sun (1960-1962)....................................................................30 President Park Chung Hee’s Administration (1963-1979).......................................................................................................30 The First Five Year Economic Development Plan (1962-1966) ...........................................................................................32 The Second Five-Year Economic Development Plan (1967-1971) ...........................................................................................33 The Third Five-Year Economic Development Plan (1972-1976) ...........................................................................................34 The Fourth Five-Year Economic Development Plan (1977-1981) ...........................................................................................35 President Choi Kyuha’s Administration (1979-1980).........................................35 President Chun Doo Hwan’s Administration (1980-1988)..................................36 The Fifth Five-Year Economic Development Plan (1982-1986) ...........................................................................................36 President Rho Tae Woo’s Administration (1988-1993) ......................................36 The Sixth Five-Year Economic Development Plan (1987-1991) ...........................................................................................37 The Seventh Five-Year Economic Development Plan (1992-1997) ...........................................................................................38 President Kim Young-Sam’s Administration (1993-1998) .................................38 The New Economy Five-Year Plan (1993-1997) ...........................................................................................39 Summary ..................................................................................................................................40