Korea: Economic Hub of Northeast Asia?
In yesterday's Korea Herald (July 27, 2005), I read an interesting article, "There is no such thing as 'Korea Discount'" (A Reader's View), by Joonho Um that explains why foreign investment is so low in Korea.
Um argues against the common Korean complaint that Korean stocks automatically suffer a 'Korea Discount,' i.e., that the stocks are underpriced on the market because Korean companies are "listed in a nation not well recognized in the West" (19e).
He acknowledges that "Korean companies' stock prices are [the] lowest in Asia and among the lowest in the world," but he argues that they should be this low because:
The market is intelligent enough to know that companies in Korea in general have extremely high insider ownership structures and therefore lack the necessary transparency needed to make the right investment decisions by outsiders. (19e)
Korean businesspeople should therefore not complain about the lack of foreign investment, says Um, because:
Korean listed companies have shown many times over that when times are good and earnings high, they will most likely NOT share the fortunate results with ALL shareholders but resist decapitalization and invest in needless and inefficient new entities in order to place their relatives, friends and often incompetent children in positions of power (e.g. president, CEO, etc.) and to launder/divert money. Of course, when times are bad and failure looms, ALL shareholders lose, including the outside individual holders who were left clueless of the upcoming demise in the first place. (19f)
This is pretty damning, but for anyone who's lived in Korea and paid even cursory attention, it shouldn't be surprising.
The similarly unsurprising result of this is that "most sane people" will "only speculate, not invest" in Korean companies (19f). A larger consequence is a poor stock market for Korea (hence the 'Korea Discount' complaint). A modern, democratic nation needs a rich stock market, Um explains, because:
A strong stock market creates jobs for new ideas and therefore creates a society that is low in unemployment and a society that value[s] and encourages individual contributions to society. (19g)
Um strongly implies that Korean society does not do these things, and I think that he's right.
I would also add that until it Korean society does do these things, it will never attain the Roh administration's goal of making Korea an "Economic Hub of Northeast Asia."