international finance

Different large companies aim at expanding their business operations into international markets with different entry strategies .Foreign Direct Investment is a global market entry strategy where companies invest (direct investment) into the building or establishing a new plant in a foreign country market while the core investor retains full control over the investment (Sell, 2001). FDI provides the organization with new technologies, capital resources, products, management skills from the diverse and skilled workforce, organizational technologies and potential cooperation and gets a larger share of cross-border opportunities for the local businesses. This paper discusses the theories of FDI and their application, the types of FDI, assesses the political and country risks in South Korea as well as implications of operating exposures to the venture.

Greenfield investment and Brownfield investment are very applicable in the global business. The Greenfield Investment would best explain Coca-Cola's investment in South Korea. It stipulates that multinational corporation enters into the new international market and build new factories, plants, or stores, new hubs for distribution, offices and living quarters from scratches (Stepanok, 2012). Many corporations prefer Greenfield investment because it is more cost-effective in the long run. It provides companies with a high degree of direct control over the new foreign investment project, operations and production process (Stepanok, 2012).

Strategically, Greenfield provides corporations with strategies of production and pricing that allows the business to adapt to the new target market by having a highly segregated market and customers according to their demands (Hoshino, Turnbull, and Ghahroudi, 2018). Greenfield, unlike the brownfield investment where the corporation leases or purchases existing production facilities to launch a product line in the foreign market, provides the corporation with complete ownership of any of its subsidiary firms (Watkins, 2002). Coca-Cola Co. is among the US greatest firms that invest in the significant global Greenfield projects. Thus, there is a robust applicable background for the Greenfield to the project in South Korea.

The Monopolistic advantage theory is an international business approach explaining the significant reasons that firms have to go abroad and compete with the foreign country’s indigenous competitors for a given product or service (Wilson and Baack, 2012). Given the continual globalization and regional agreements, the theory would extend the company investment in the region by emphasizing on the element of Coca-Cola control over its acquired assets and its subsidiaries assets and operations.

Horizontal is a type of FDI where the corporate investment is made for conducting the same business activities in a foreign market as at the home country of that business (DeSare and Caprioglio, 2012).However The vertical FDI is concerned with the expansion of a firm into a series of production processes that are of different types of operations from the parent in foreign countries (DeSare and Caprioglio, 2012).Coca-Cola company uses Horizontal FDI; the benefit would be the existence of an already established relationship between the parent and the subsidiary firm who get the access product requirement from the parent.

Another theory is “OLI” which stands for Ownership, Location, and Internalization; three facets that determine the firm’s decision to venture into Multinational business (Hoshino, Turnbull and Ghahroudi, 2018). The Ownership advantage relates to the benefits specific to a nation and the nature of the owners of the corporation. There are three major categories of firm-specific advantages that enable the MNE to thrive in the market they include monopolistic advantage, technology advantages, and economies of scale advantage (Wilson & Baack, 2012). First, monopolistic advantage provides the MNC with the privileged access to input and output resources in the market through ownership of intangible assets. Second, technology advantages broadens the firm’s scope of knowledge and innovativeness in the market and lastly, economies of scale advantage provides the MNE with a large scope of economies, benefits from the international diversification of international business risks and broaden the access to financial assets (Hoshino, Turnbull and Ghahroudi, 2018).

The Location advantage arises from the location choices of the MNEs which provide them with different resources, essential institutions, and conducive regulations. They mainly exist in three forms; Economic, Political, and Social advantages  (Hashai and Ramamurti, 2011). Economic benefits relate to the quality and quantity of factors of production provided by that particular country’s economy such as market, production and transport. Political benefits instigates those specific and general governmental policies that will affect the cash flows of the FDI and international productiveness, and social advantages revolve around the cultural and language differences which could be a barrier (Brakman and Garretsen, 2008).

Internalization advantage relates to the transfer of ownership benefits across national boundaries against the edges other strategies. Internalization of MNEs is characterized by incremental procedural process from domestic to higher global market involvement because of limited local resources and knowledge (Eiteman, 2018). The process aids in the assessment of the alternative ways that firms consolidate the core competencies creation and exploitation. Internalization in OLI theory enables the MNCs to indulge in the exploitation of these core competencies.

The OLI theory is vital in explaining the business venture of Coca-Cola in the South Korean Market. First, Ownership advantage will potentially address the concerns over why some corporations go international and present some of the Coca Cola’s firm-specific assets or privileges that will minimize the operating costs abroad. These assets are used in production operations at different locations globally without any signs of ineffectiveness (Hashai and Ramamurti, 2011).For instance, the product development, management structure, and marketing strategies and skills of the company are it most valued assets something termed as “headquarter services” (Helpman, Melitz and Yeaple, 2003).

Location advantage addresses concerns on the exact location in South Korea that Coca-Cola chooses to operate. Relatedly, the horizontal FDI is critical in a plant located in South Korea to improve Coca-Cola’s foreign market access. Coca Cola’s horizontal FDI is facilitated by the corporation’s secret formula for all its sodas and support for all its brands globally with this ingredient.

Internalization influences Coca-Cola’s choice to operate in the South Korean Market, trading off savings in transaction activities, holding up and monitoring costs involved in the wholly owned subsidiary against the other modes of market entry. Notably, positive changes have been reported over decades in the South Asia relative GDPs and substantial difference in the restrictions on FDI among these Countries (World Bank, 2018).

Coca-Cola continues to use the Greenfield approach to all its global operations and investments because of the need for full control over its global investments (Stepanok, 2012). Coca-Cola is among the world greatest marketing companies aiming at attaining economies of scale and scope for its products. Therefore, Greenfield Investment brings a theoretical perspective of how Coca-Cola penetrates the global (South Korean) market.

South Korea is a better country selection. First, the cost of labor in South Korea is relatively lower; a vital facet in Coca-Cola Co.’s aims at maximizing profits and reducing costs to edge its competitors in the market. Secondly, Korea continual and consistent economic growth. According to the statistics Portal (2018), the revenue in Food and Beverage sector in South Korea accumulates to US$8,317M in 2018 with an expected annual growth rate of 4.9% thus expected to be US$10,057m by 2022. Therefore, to share in this growth the country proof suitable.

South Korea has an average wage per month of 1382.92USD (Tradingeconomics.com, 2018). The wage rate is lower than the France and United Kingdom’s wage rates of 1684.17 and 1645.20 USD per month. . As a result, South Korean market labor costs cheaper and low salary .After the economic stagnation period, the country’s GDP growth rose to 3.1% owing to household consumption, improvement in real estate businesses and measures in both the fiscal and monetary policies (Heritage.org, 2018). Thus, to be profitable, Coca-Cola should venture into a long-term commitment to explore the significant market aspects and prosper as the economy improves.

South Korea is a politically stable state since its democratic evolution. The political and sovereignty risks, President Moon in a summit with the North Korean Kim Jong-un agreed to eliminate the risk of war and work in unison towards denuclearization of Korea (Lee,2018). Political risks such as risks of foreign exchange shortages, revolutions, wars, arbitrary government action have continued to decrease. The average value of political risks of South Korea has continued to remain at the minimum of 1 index point since 2014 (TheGlobalEconomy.com, 2018). However, the consistent effort of President Moon towards calming the nuclear concerns in North Korea tends to provoke military actions and the North Korean government towards nuclear weapons (Turak, 2018). The political efforts are focused on creating incomes, consumptions, and employment for the South Korean population

President Moon Jae-in political move to replace the two key economic officials in his administration was an economic move towards growth in the Asian economy (Harris, 2018). Over the recent months, the economic aspects are on the first row of the South Korean politics with the slowly growing job opportunities weighing down the approval ratings of President Moon. The president upon his election pledged to create jobs and minimize the social inequalities predominated by few wealthy conglomerates (chaboel). Therefore, the economical replacement focused on revitalizing the trademark of “income-led growth” policy, a key concern for the president (Harris, 2018).

The president implored conglomerates to undertake investment activities back to the home country as well to create more jobs for the state and promote the states social welfare as well as advance the country’s technology (Salmon, 2018). All these affect the company to be established in the South Korean market through exposure to political risks, economic losses from any unexpected political adverse events and create an environment full of political and economic anxiety. Positively, he aims at promoting the social lives of the citizens would generate a flow of customers with purchasing powers.

The government of South Korea is desirable for an FDI market entry. It has a well-established Foreign Investment Promotion Act which provides protection as well as restrictions for FDI. The President of South Korea has rallied to establishing a fair economy in the country. The president’s economic democracy initiative through the fair economy aims at making the ordinary citizens, businesses from small, medium and conglomerate well off in unison(Harris, 2018). Thus, the government promotes foreign direct investments in the country through guaranteeing external remittance, the similarity in treatment as any other South Koreans enterprise, simplifying procedures for commencement and existence of state mediator position to FDI and providing for tax reliefs (Nordeatrade.com, 2018).

The major challenge in the Korean economy is political risks, transfer risk, war risks, and expropriation risks (TheGlobalEconomy.com, 2018). The risk of expropriation covers any breach of FDI contract by the Korean government or possible negative change in attitude towards the foreign businesses. Transfer risks relate to an economic consideration of the countries solvency, and war risk refers to the looming tension that may precipitate to brutal violence.

a)Fig.1

b)Fig.2

c)Fig.3

The South Korean economy has recorded a progressive economic development over the few years. Fig. 1 shows the country’s GDP growth in USD that has had progression based on the first and third quarter annual reports. As of 2017, the GDP as at the third quarterly was 394.6 implying a consistently productive economy(Heritage.org. 2018). Business productivity is considerably rising and constant. The inflation rate must be declining.

Fig. 2 shows how the average wage of the country has changed over the years. There has been a slow but progressive increase. Low average salary economically means more potential workers are hired into organizations in the country at least wage rates (Heritage.org., 2018; World Bank, 2018). Subsequently, the rate of unemployment declines, with the production cost. Indeed, the consistency in the cost of labor over the years means little of industrial unrests is expected.

Fig. 3 shows FDI contribution to the GDP of South Korea. In 2017 statistics show a decline to 1.957 trillion (World Bank, 2018). The South Korean market and government policies have promoted both in and out FDI operation with other international MNCs. Thus, The FDI statistical data provides that the sector has met a series of successes worth being part of.

Corporations entering a foreign market through the FDI strategy are concerned with the sovereignty risks associated with the new target market or foreign country (Dlabay, and Scott, 2011). Before the project’s next phase, scrutiny of the South Korean ability to meet its public, domestic and external debt is essential to estimate the risk of default that the FDI may face. The political risk of a political system and its effect on the economy through political policies and regimes poses a significant influence on the FDI in South Korea. Any slight changes political perspective will expose the new FDI to the risks of foreign exchange shortages, effects of revolutions and arbitrary government action that will result in losses.

The democracy of South Korea is challenged by poor governance, corruption, incompetent leadership, political conflicts, volatile public opinion as well as social polarization ("Political Challenges in South Korea," 2017). The results of these challenges are continued risk of the transaction, transfer as well as other economic uncertainties. The FDI project will be exposed to economic policies, political factors as well as the social culture in the country. Consequently, political protection policies making Coca-Cola successful could as well become the doom to its operations. Because the political fear in the South and North Korea government through their war weapons, a nuclear tension could shutter down business operations any second. Such pressures are innovation and investment killers (The National Interest, 2018).Coca-Cola seeks to invest in an economically sustaining environment, and any considerable risks could sabotage their goal for global operations. The risk of expropriation affects the FDI in the case where the economy shifted, and policies disfavor the activities of MNCs in the South Korean market (Hoshino, Turnbull and Ghahroudi, 2018). Such may affect the overall performance of the FDI and suppress the operations of foreign investments and narrow their profits.

Economic or operating exposures have come one of the central concerns for MNEs. South Korean economic growth has globally landed it to the 11th most developed country (World Bank, 2018). In the midst of these increasing global economic development, Currency volatility, shifting exchange rates subject a considerable influence and impact on the company’s or subsidiary’s operations and profitability in the foreign market (Dlabay and Scott, 2011). There are important types of exposures that result from currency volatility; translation exposure, transaction exposure, and economic/operating exposure. Economic exposure or strategic exposure measures the degree to which “any change in the present value of a firm as a resulting from changes in the future operating cash flows caused by the occurrence of an unexpected change in exchange rates” (Eiteman, 2018). The future market value of Coca-Cola could be subject to future cash flows and market value uncertainty because of these unexpected currency fluctuations. By December 31, 2015, the South Korean won exchanged at 1169.26 against the USD, 1207.68 in 2016, 1063.11 by the end of 2017 and currently stands by November 1, 2018, it was 1126.19 against 1USD (EWY, 2018). These statistical figures provide that the South Korean won has experienced a significant fluctuation over the few past years a fact which could pose a threat to the economic value to the Coca-Cola. However, the variation has changed more to the positive side except in 2017.

In the long term, a substantial or anticipated change in the exchange rate can affect the company’s competitiveness significantly not only overseas but in the domestic market (Salmon, 2018). Because the firm will sell its products cheaply in South Korea in case of an adverse effect on the exchange rate the same products they sell to other markets and local markets at a higher price. The consumers or large scale buyers may prefer importing the same product at lower prices from South Korea rather than from The U.S. this would deteriorate the market value of the company, the sales revenue as well as the competitiveness of the company. Economic exposure affects Coca-Cola’s competitive position. According to Reitman (2018), the company’s profitability and operations are changed when the home currency of the MNE strengthen making production more expensive, yet the profit yielded are dismal and persistently decreasing. Shareholders of the MNE are interested in the wealth maximization, and successfulness of the project in South Korea may lead to further expansion and reinvestment to stay in an economic advantage scenario (Helpman, Melitz, and Yeaple, 2003; Salmon, 2018). Thus, investing in the South Korean market is advisable, but great consideration for the market fluctuation, economic factors as well as political factors are important.

Brakman, S. and Garretsen, H. (2008). Foreign direct investment and the multinational enterprise. Cambridge: The MIT Press.

Desare, T. and Caprioglio, D. (2012). Foreign investment. New York: Nova Science Publishers

Dlabay, L. and Scott, J. (2011). International business. Mason, OH: South-Western Cengage Learning.

Eiteman, D. (2018). Multinational Business Finance. [S.L.]: Pearson.

EWY. (2018). Stock Quote and Charts for iShares MSCI South Korea Capped ETF. Retrieved from https://ycharts.com/companies/EWY

Harris, B. (2018). South Korea’s president replaces top economic officials | Financial Times. [Online] Ft.com. Available at: https://www.ft.com/content/53f5cb4c-e3f3-11e8-a6e5-792428919cee [Accessed 13 Nov. 2018].

Hashai, N. and Ramamurti, R. (2011). The future of foreign direct investment and the multinational enterprise. Bingley: Emerald.

Helpman, E., Melitz, M. and Yeaple, S. (2003). Export versus FDI. Cambridge, Mass: National Bureau of Economic Research.

Heritage.org. (2018). South Korea Economy: Population, GDP, Inflation, Business, Trade, FDI, Corruption. [online] Available at: https://www.heritage.org/index/country/southkorea [Accessed 22 Nov. 2018].

Hoshino, Y., Turnbull, S. and Ghahroudi, M. (2018). Foreign Direct Investment. Singapore: World Scientific Publishing Co Pte Ltd.

Lee, S. (2018). The Transformation of South Korean Politics: Implications for U.S.-Korea Relations. [online] Brookings. Available at: https://www.brookings.edu/research/the-transformation-of-south-korean-politics-implications-for-u-s-korea-relations/ [Accessed 20 Nov. 2018].

Nordeatrade.com. (2018). Foreign direct investment (FDI) in South Korea - Investing - Nordea Trade Portal. [Online] Available at: https://www.nordeatrade.com/fi/explore-new-market/south-korea/investment [Accessed 13 Nov. 2018].

Political Challenges in South Korea. (2017, April 6). Retrieved from https://www.eastwestcenter.org/research/visiting-fellow-programs/posco-visiting-fellowship-program/political-aspects-of-korea-related-issues

Salmon, A. (2018). South Korea expands its investment destinations. [Online] Atimes.com. Available at: http://www.atimes.com/article/south-korea-expands-its-investment-destinations/ [Accessed 13 Nov. 2018].

Sell, A. (2001). Foreign direct investment, strategic alliances and the international competitiveness of nations. Bremen: Institut für Weltwirtschaft und Internationales Management.

Stepanok, I. (2012). Cross-border mergers and Greenfield foreign direct investment. Kiel: Institute for the World Economy.

TheGlobalEconomy.com. (2018). South Korea Political risk, long-term - data, chart

TheGlobalEconomy.com. [Online] Available at: https://www.theglobaleconomy.com/South-Korea/political_risk_long_term/ [Accessed 13 Nov. 2018].

The National Interest. (2018). South Korea Has a Secret Weapon If North Korea Starts a War. [online] Available at: https://nationalinterest.org/blog/the-buzz/south-korea-has-secret-weapon-if-north-korea-starts-war-23338 [Accessed 18 Nov. 2018].

The Statistics Portal. (2018). Food & Beverages - South Korea | Statista Market Forecast. Retrieved from https://www.statista.com/outlook/253/125/food-beverages/south-korea [Accessed

Tradingeconomics.com. (2018). South Korea Total Wages | 2008-2018 | Data | Chart | Calendar | Forecast. [Online] Available at: https://tradingeconomics.com/south-korea/wages [Accessed 13 Nov. 2018].

Turak, N. (2018). Korean leaders plan an end to war and 'complete denuclearization'. [Online] CNBC. Available at: https://www.cnbc.com/2018/04/27/korean-leaders-release-statement-promising-to-eliminate-risk-of-war.html [Accessed 13 Nov. 2018].

Watkins, C. (2002). Greenfields, Brownfields and Housing Development. Real Estate Issues. Blackwell Publishing.

Wilson, R., & Baack, D. (2012). Attracting Foreign Direct Investment: Applying Dunning's Location Advantages Framework to FDI Advertising. Journal of International Marketing, 20(2), 96-115. Retrieved from http://www.jstor.org/stable/23268748

World Bank (2018). Foreign direct investment, net inflows (BoP, current US$) | Data. [online] Data.worldbank.org. Available at: https://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?end=2017&start=2013 [Accessed 13 Nov. 2018].

World Bank (2018). Trends and Determinants of Foreign Direct Investment in South Asia. [Online] Openknowledge.worldbank.org. Available at: https://openknowledge.worldbank.org/handle/10986/16522 [Accessed 13 Nov. 2018].

South Korea's FDI net Inflow from 2013 - 2017

FDI net Worth

2013 2014 2015 2016 2017 2.1379999999999999 1.8440000000000001 2.4079999999999999 2.4369999999999981 1.9570000000000001

Years

FDI net inflow in Trillions USD

GDP of South Korea since 2013 - 2017

Q1 2013 2014 2015 2016 2017 296.7 312.20999999999992 326.61 343.44 358.81 Q3 2013 2014 2015 2016 2017 321.3 332.48 351.88 366.99 394.6

First and third Quarterly reporting 2013 - 2017

South Korea GDP in billion USD

Average wage

2013 2014 2015 2016 2017 33033 32840 33424 34555 35191