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PESTLE ANALYSIS
Summary
South Korea has been politically stable since becoming a democratic state. However, its relationship with North Korea
continues to present a strong challenge. South Korea fell into a brief financial crisis in 1997 due to structural weakness in
the banking sector, however strong economic and financial reforms quickly countered the downturn and put the country
back on a growth path by the following year. With the opening up of markets after the financial crisis in 1997, the country
became one of the largest technology markets in the world. As far as social issues are concerned, the country has low
population growth and fertility rates, leading to an ageing population. Furthermore, the country has a highly qualified labor
force, which makes it possible to both produce and commercialize advanced technologies. The country is also well
equipped with extensive broadband network and telecommunication facilities. Legal procedures in the country are time
consuming and complex, which makes it very difficult for foreign investors. The environmental scenario of the country is
characterized by the breach of emission standards, which is reaching unreasonable limits in spite of its relatively small area
and population in comparison to other countries.
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PESTLE analysis
Political analysis
Overview
South Korea had a turbulent political past, characterized by frequent changes in government, little political freedom and
military coups. However, in 1986 the democratic process was streamlined and the president was vested with maximum
power. Due to the centralization of authority, policy making became straight forward. The president is the chairman of all
the committees, which makes it very easy to co-ordinate and run the whole system. The country also has strong political
and economic support from the US. Although South Korea has been a democracy for over two decades, the military
continues to wield considerable power. There is a high-degree of political violence in the country and relations with North
Korea continue to be tense. This is costing South Korea both economically and politically. There have been frequent
summits between the two countries; however they have so far failed to reach a consensus.
Table 3:
Current strengths
Current challenges
Centralization of power
Political violence
Future risks
Source: Datamonitor
DATAMONITOR
Current strengths
Centralization of power
In South Korea, the president plays a key role in both the economy and polity of the country. The president is the head of
state, head of government and chief of the armed forces. The president has the power to execute and amend any laws or
policies of the country. He also has the power to dissolve the national assembly. Due to the centralization of power in the
hands of the president, he has to regulate and solve all administrative issues. All the committees in South Korea are
headed by the president and are known as presidential committees. This makes it very favorable in terms of consistency
and mutual co-operation and interdependence among various national and state bodies. The new president, Lee MyungBak, has created the Korea 747 Vision, a policy completely focused on all round economic development. He aims to
expand growth to 7% and double per capita income to $40,000. One of the policy's most ambitious aims is to make the
country the seventh largest economy in the world in a decades time.
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PESTLE analysis
Current challenges
Military influence in South Korean politics
The military staged coups in 1961 and 1980 and it continues to influence political decisions and policies. Although 1986
saw the direct election of a president formulated by the constitution, the constant military threat posed by North Korea
means that military leaders still exert considerable influence over the country's political decisions. After a short naval battle
with North Korea in 2002, a summit was held in North Korea in 2004 in an attempt to improve relations between the two
countries. Although the summit did not result in any major changes, one third of the US troops stationed in South Korea
were withdrawn. As a result, both military leaders and other political parties in South Korea demanded that security issues
be prioritized among national policies, which has perpetuated the military's strong influence in South Korean politics.
Political violence
South Korea has been witnessing political violence in the past four decades. Political violence in the country began due to
different protests staged by the students to overthrow the presidents during 1960s and 1970s. By the late 1980s, violenceprone student radicals, although a small minority, demonstrated increasing effectiveness in organizing temporary lock outs
and arson against facilities. In 1988, under the general guidance of the National Association of University Student Councils
or the Seoul Area Federation of Student Councils, small groups of students staged more than two dozen raids on the US
diplomatic and military facilities. After the presidential elections, the political violence seems to have reduced but it could be
still used as a means of resistance.
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PESTLE analysis
Future prospects
Confidence building measures with North Korea
The two Koreas are still officially at war and the situation remains fraught. In early October 2007, a historic Korean summit
was held in Pyongyang, North Korea. During this summit, both countries agreed that a solution to the historic rivalry over
border issues needs to be found and as such both sides have signed a peace declaration aimed at replacing the armistice
with a permanent peace treaty. In addition, the summit also resulted in an agreement between North and South Korea to
establish a joint economic area in the border port city of Haeju in 2008. The proposal included joint fishing areas along the
sea border and a joint shipyard at Haeju. This is seen as a necessary first step towards thawing relations between South
and North Korea.
Future risks
Uneasy relationship with North Korea
South Korea has made consistent efforts towards reconciliation with North Korea. However, provocative military actions
and North Korea's efforts to build and acquire nuclear weapons are a cause for concern. Moreover, the intrusions by the
North-Korean ships in the South-Korean seas ended in a short naval battle in 2002. In late 2007, the summit resulted in
boosting cooperation between the two countries especially in the area of transportation and logistics. However, the
intrusions by the North-Korean ships into South-Korean seas have continued even in 2008, which have increased the
tension between the two countries. Furthermore, North Korea warned South Korea over the alleged sending of the
propaganda leaflets into its territory in May 2008 with the concomitant escalating of tensions between the two countries.
The relations between the two countries continue to remain tense and North Korea continues to remain a major military
threat to South Korea.
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PESTLE analysis
Economic analysis
Overview
The economic structure is well supported by government policies in South Korea. Due to strong economic reforms, the
country has continued to experience steady economic growth. The powerful export sector is the main reason for economic
growth in the country. Although the country is developed in terms of all-round economic health, and provides a good
investment climate, it still suffers from structural weaknesses due to very stringent rules on imports and FDI. These
restrictions are affecting the domestic market and make it internationally uncompetitive. Even though the country is on a
path of economic growth, it has been affected by declining FDIs. Furthermore, the nuclear test conducted by North Korea
has created uncertainty among investors in South Korea, which has led to instability in markets.
Table 4:
Current strengths
Current challenges
Future prospects
Future risks
Nuclear crisis
Source: Datamonitor
DATAMONITOR
Current strengths
Powerful export sector
th
South Korea is now the worlds 12 largest economy, growing at a rate of 5.4% in the third quarter of 2007. This was
largely due to exports, which were on a roll, with the country's export volume standing at $325.5 billion in 2006, compared
to $284.4 billion in 2005. According to the central bank, the export pattern is going to be similar for the coming years. Most
of this comes from electrical and electronic products, which brought in about $91 billion. South Korea is now one of the
largest producers of computer memory chips and mobile phones. The magnitude of exports acts as a major attraction
drawing foreign investors to South Korea.
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PESTLE analysis
Current challenges
Low level of imports
In South Korea, the level of imports is comparatively low compared to its Asian neighbors. The import tariffs, duties and
restrictions are highly regulated and as a result, the countrys import volume is considerably lower compared to other
countries. Consequently, the imports required for production are scarce both for domestic and foreign corporations. Imports
to South Korea stood at $356 billion in 2007 compared to $917 billion for China and $570 billion for Japan during the same
year.
Future prospects
Competitive tax policy
The previous tax policy had a differentiated tax system for domestic and foreign corporations. In tax reforms implemented
in 2007, the government brought in an equitable tax system, with a corporate tax rate of 25% for both domestic and foreign
corporations. This should augur well as it will not only attract more foreign firms to the country but also increase
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PESTLE analysis
competition. This tax rate is certainly lower than its rivals' China and Japan and is expected to be cut further to 20%, which
will bring greater fiscal freedom to markets.
Future risks
Nuclear crisis
The constant tension with North Korea is creating economic ramifications in South Korea. Worries over North Korea's
nuclear ambitions have now been branded as the biggest hazard to the South's economy by the nation's central bank. The
nuclear test conducted by North Korea has been credited with causing a range of problems, from the falling stock market to
hollowed-out foreign investment. Although the recent summits have improved relations, there is still a lot of uncertainty with
regard to its relations with North Korea. This has now become a major disadvantage for the countrys economic growth
prospects.
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PESTLE analysis
Social analysis
Overview
In South Korea, the wages are generally higher than other neighboring countries and the labor force is well educated and
technically qualified. The countrys literacy rate is one of the highest in the world; however, the country's low fertility rate still
presents a significant challenge as South Korea is faced with an increasingly ageing population. In spite of rapid
urbanization, government spending on social welfare is low. The labor unions are resistant to the rising wage disparity,
which continues to be a serious problem for South Korea.
Table 5:
Current strengths
Current challenges
High wages
Ageing society
Rapid urbanization
Future prospects
Future risks
Wage disparity
Source: Datamonitor
DATAMONITOR
Current strengths
High wages
South Korea has one of the highest wage levels in Asia. The minimum wage payable in South Korea is $3.84 per hour,
$30.74 per day and $868.27 per month. This is much higher than the wages paid by its regional counterparts. High wages
also mean that there are a large number of people willing to join the industry and this continuous flow of people into the
sector ensures that there is continuous production, and a consistent output. Moreover, the level of output and productivity is
higher due to infrequent layoffs. High wages have also enhanced the standard of living in the country which is higher than
any regional economy in Asia.
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PESTLE analysis
Rapid urbanization
After the Korean War, rapid industrialization brought on a massive population shift from rural to urban areas. Approximately
30 million rural dwellers have migrated to urban areas over the last four decades. As a result, the urban ratio increased
from 35.8% in 1960 to 88.5% in 2002, with the urban population increasing by approximately 800,000 a year. The major
characteristic of urbanization has been the concentration of people and economic activities in the metropolitan region of
Seoul. The population in the Seoul Metropolitan Area grew from 5 million (20.8%) in 1960 to 21 million (46.3%) in 2000.
Furthermore, the country was supported by the US since the time of attainment of independence from Japan. This
longstanding relationship with the US provided the country with strong infrastructural support which contributed to the
development of its cities.
Current challenges
Low fertility rates
South Korea has one of the lowest fertility rates in world. The total fertility rate was as low as 1.28 children per woman
compared to 1.75 in China and 2.81 in India. According to a special report by the UN Population Fund, State of World
Population 2007, South Korean women registered the fourth lowest fertility rate among the 155 nations surveyed. The high
divorce rate in the country plays a large part in this. South Korea has one of the highest divorce rates in the world, although
the US still tops this list. Continuation of low fertility rates will have a negative impact on the population growth of the
country, which in turn will have an adverse effect on the economic growth through declining labor force.
Ageing society
Due to the low fertility and high divorce rate, South Korea is now classed as one of the ageing societies in the world. In
2006, the population aged between 014 comprised just 18% compared to more than 31% in India. In addition, the
population above 65 years was more than 9% compared to 5% in this population group in India during the same period.
This causes a huge concern in terms of future productivity and economic activity.
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PESTLE analysis
Future prospects
Low unemployment rate
The unemployment rate in South Korea is one of the lowest in the world, which is mainly due to labor market reforms in the
early 1990s. In 2007, it stood at just 4%. In order to systematically cope with unemployment problems caused by a
slowdown in economic growth; the government passed several major laws. The Employment Insurance Act (1993), the
Basic Employment Policy act (1995) and the Vocational Training Promotion Act (1997), were some of the policies which
laid the ground work for South Korean employment policies. Various efforts are further being made to improve employment
support services. For instance, services that are aimed at specific, vulnerable groups such as the YES program for young
people and "Restart" for the homeless; are being rolled out. These programs provide encouragement and give students the
opportunity to venture into higher studies and new avenues.
Future risks
Wage disparity
The percentage of earned (labor) income out of total national income fell from 63.1% in 1996 to 58.2% in 2002, before
increasing again to 61.4% in 2006, although this is still below the figures recorded before the 199798 Asian financial crisis.
The wage disparity of the lower 10% of earners versus the upper 10% rose to a factor of 5.4 in 2006 from 4.8 in 2001,
meaning that wages for the top deciles of earners were nearly five and a half times greater than those of the lowest deciles
of earners, a factor higher than the US under the same parameters. South Korea also held a dubious first place in terms of
abuse and discrimination against part-time and short-term contract workers among OECD members. While the
unemployment rate is comparably low and real wages have increased, both the quality of employment and structure of
income redistribution pose a future risk.
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PESTLE analysis
Technological analysis
Overview
South Korea has been historically known for technological innovation. Moreover, with a highly educated workforce and well
equipped infrastructural facilities, the country is a favored destination for R&D. South Korea is the most wired country, in
terms of communications and internet facilities, in the world. The gap between innovation and commercialization is also
very small in South Korea. There are about 900 R&D centers that include foreign participation in South Korea, although
over regulated governance and low cost competitive neighbors cause a major threat to the country.
Table 6:
Current strengths
Current challenges
Future prospects
Future risks
Over-regulated governance
Source: Datamonitor
DATAMONITOR
Current strengths
Robust telecom sector
South Korea has world's highest broadband internet subscription rate, while the countrys 68% mobile-phone penetration
rate is also one of the highest in the world. South Korea also introduced the world's first commercial wireless broadband
(WiBro), satellite digital media broadcast (DMB), and telephonic-DMB services. WiBro services began in 2005 and are now
being run on a commercial basis (in August 2006, Sprint of the US adopted Samsung WiBro technology as its wireless
communication platform). Satellite digital multimedia broadcast (DMB) services began on a commercial basis in June 2005.
Terrestrial DMB began on a pilot basis in the second half of 2005 and was placed on a commercial footing in 2006. On the
mobile telecom front, commercial WCDMA services began in 2005, HSDPA was due to begin in 2006 and HSUPA in the
first half of 2007. All these developments act as major attractions to foreign technology investors to set up their R&D
centers in the country.
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PESTLE analysis
Pantech are among the world's largest mobile firms. Major South Korean companies have joined the celebrated Fortune
500 list.
Current challenges
Scarce natural resources
South Korea has very few natural resources as the majority of the country is covered by high mountains. As a result, any
natural resources required for advanced biological research are hard to come by, and the scope of such activities is
completely restricted to imports of such materials. This presents a problem in terms of encouraging technological
advancement in biotechnology and related areas.
Future prospects
Government policies promoting R&D
The South Korean government has formulated favorable policies to encourage foreign firms to locate their research centers
in the country. These policies are focused on developing new growth engines and making industrial improvements. The
government has employed a variety of methods to attract the R&D centers of cutting-edge institutions and corporations
such as Pasteur (France), Cavendish, University of Warwick (the UK), Novartis (Switzerland), Intel, HP, IBM and Microsoft
(the US).
As part of these efforts, in 2003, the South Korean government implemented the "Free Economic Zones Act" to improve the
business environment in South Korea and bring it to the same level as that in advanced nations. The government provides
tax breaks and financial support to foreign firms moving into government-designated Free Economic Zones (FEZs) in
addition to various other measures aimed at boosting foreign investment in R&D. The consistency in the policies is
expected to improve R&D prospects in South Korea.
Multinational corporations have begun to pay serious attention to the rapid growth in the technology sector and the state-ofthe-art technologies available in the South Korean market. As a result, there has been a dramatic increase in the number of
corporate research institutes and R&D centers built in South Korea. These research facilities are a key element of most
companies' headquarters. As of September 2005, the total number of foreign investment R&D centers reached 901,
including 137 corporate R&D centers that are wholly owned by foreign investors. The US owns 52 R&D centers (100%
foreign owned) in the country, followed by Germany, which owns 17 R&D centers. The Netherlands, France, Switzerland,
Singapore, and China also own R&D centers in South Korea. Growing number of R&D centers will enhance the countrys
research competence.
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PESTLE analysis
Future risks
Foreign companies pulling out of the country
Although the South Korean government has a favorable attitude towards investments into R&D, there is a lot of local hatred
against foreign companies. This has been a growing concern among foreign companies operating in South Korea and may
lead to further problems due to the influence of the labor unions. In January 2007, chip maker Intel Corporation announced
closure of its R&D center in South Korea. Although the company announced this as a strategic move to consolidate its
centers around the world, the South Korean government will need to monitor the R&D environment to ensure that this does
not develop into a trend among large R&D companies.
Over-regulated governance
Government intervention has always been a long standing weakness among East Asian economies and South Korea is no
exception. With more and more markets opening up, there is a growing need to reduce restrictions, various business
procedures and processes. Moreover, increased competition from neighboring economies will pose a risk to further
investment in South Korea if these processes are not streamlined.
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PESTLE analysis
Legal analysis
Overview
The South Korean judiciary is based on the US and German court systems and juries are not present during trials. The
country also has an exclusive constitutional court, which keeps a check on government decisions and law making. Very few
students pass the tough law examinations in South Korea and, consequently, the country is facing a shortage of judges.
After becoming a member of the OECD, South Korea gained the status of a developed country and it provides one of the
most attractive regulatory incentives for industrial development among the OECD nations. The country earns a very large
income from exports, which makes it an attractive destination for FDI. However, procedural delays and hostility towards
foreign investors act as a discouragement.
Table 7:
Current strengths
Current challenges
Regulatory incentives
Absence of juries
Future prospects
Future risks
Source: Datamonitor
DATAMONITOR
Current strengths
Regulatory incentives
A major attraction for investing transnational companies is the array of incentives offered by the South Korean government.
Among all the OECD countries, South Korea offers foreign investors some of the best incentives in the south east Asian
region. Among the incentives offered, financial incentives include reductions/exemptions of corporation, local, and income
taxes, as well as cash grants for investment in high-tech industries that have a broad economic impact. In addition to
offering major financial incentives, the Free Economic Zones (FEZs) of Incheon, Gwangyang, and Busan/Jinhae are
committed to creating an international business and living environment. These incentives are attractive to investors looking
to enter the country.
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PESTLE analysis
had all of the world's top 20 corporations. This is due to the relaxed tax policy and the fact that reinvestment of earnings is
not compulsory. The country's high export earnings make it one of the most attractive destinations to invest in.
Current challenges
Absence of juries
The South Korean political system is based on balance and checks among the president, parliament and the judiciary.
Constituents select the president and members of parliament through a direct vote. The president and parliament appoint
the judges of the Supreme Court. The South Korean legal system does not have juries; instead the court is composed of
one or three judges who hear cases. South Korea is relatively unusual among developed countries in that it does not use
juries in its judicial system. This makes it difficult for people to engage with and participate in the country's judicial system.
This creates incompatibility between the South Korean judiciary and most western models, such as the US and German
systems on which the country's judiciary is allegedly based.
Future prospects
Judicial system similar to the US and Germany
The South Korean legal system is similar to that of Germany and the US. For instance, the South Korean constitution was
established in 1948, and was influenced in part by the US legal system. In many respects, judicial law is compatible with
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PESTLE analysis
that of the both US and many European countries; as a result the South Korean judicial system should not be totally alien
to investors from these parts of the world.
Future risks
Judges quitting for private practice
One of the problems for the South Korean legal system is that many competent judges and prosecutors have left their jobs
to start their own private practices, usually for economic reasons. To solve this problem, the Supreme Court is attempting to
select judges that are practicing lawyers. This problem has come about because judges must serve long, 10 year terms at
each level without receiving any real growth in income. If this trend continues, it will become more difficult to persuade the
younger generation to pursue legal studies.
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PESTLE analysis
Environmental analysis
Overview
South Korea has modest natural resources. Government policies and directives on environmental development have lead
to the formation of national eco parks and environmentally-friendly technology. The government has adopted several
control measures in urban areas and is promoting environmental education in schools and business communities.
However, South Koreas high emission levels are a cause for concern.
Table 8:
Current strengths
Current challenges
Soil erosion
Future prospects
Future risks
Source: Datamonitor
DATAMONITOR
Current strengths
Promotion of national parks
South Korea's national parks are well preserved and protected public land in the country. Most forms of development are
prohibited on this land. National parks cover 6.6% of the country's total area, and are typically located in mountainous or
coastal regions. The country's largest mountain park is Jirisan National Park in the southwest and the largest marine park is
in Dadohae, which has an area of more than 2,200 sq km. These form the main biological and natural resource reserves for
South Korea and government ensures there is no development in these areas.
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PESTLE analysis
The South Korean government has also pledged to try to freeze its greenhouse gas emissions at 2005 levels until 2012,
when the first period of the Kyoto Protocol on climate change expires. The move is the country's first government initiative
to rein in carbon dioxide and other gas emissions to help combat global warming.
Current challenges
Limited natural resources
In South Korea, high mountains cover 80% of the land, making it unusable for farming and agriculture. As a result, natural
resources in the form of plants and ecology are widely missing in the country, which makes the country highly dependent
on agricultural imports. Due to the high mountain ranges, South Koreas per capita natural resource endowment is poor and
it has very few exportable natural resources. Moreover, the attempts made by the government for conservation and
protection of forests also been unsuccessful due to high mountain terrains making conveyance a difficult task.
Soil erosion
Over the centuries, Korea's inhabitants have cut down most of the ancient Korean forests, with the exception of a few
remote and mountainous areas. The disappearance of the forests has been a major cause of soil erosion and flooding.
Infrastructural development and increased requirement for wood is exacerbating the problem.
Future prospects
Environmental technology development
The Ministry of Environment has been making a focused investment into the research and development of major
environmental technologies, with the goal of expanding the domestic environmental market, job creation, and increasing
exports. Simultaneously, information technology (IT), biotechnology and environmental technology are now considered
core industries for strategic national development. Environmental technology development includes projects such as G-7
and the Eco-Technopia 21 project, which have already been launched. These projects are focused on developing
technologies for conservation and they increase the prospects for environmental conservation in South Korea.
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PESTLE analysis
using specially equipped trucks with hands-on environmental education tools and materials. The ministry is also promoting
environmental education in the business sector.
Future risks
Rising emission levels
With more than 500 million tons of carbon dioxide emissions in 2007, South Korea is one of the largest producers of CO2 in
the world. This kind of emissions level enhances its environmental risk which may subsequently dent approval of new
industries in the country. South Korea is also the ninth largest consumer of ozone-depleting chlorofluorocarbons. Despite
being small in size and having a small population, it heavily contributes to environmental damage. This could be a future
risk for the countrys environmental front, and will soon lead to international pressure to reduce emissions levels.
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