Korea’s Business Environment: Common Threat Factors Facing Korean Companies

In 2017, the World Bank ranked Korea 5th out of 190 countries in ease of doing business. However, the World Economic Forum (WEF) and IMD ranked Korea 26th and 29th, respectively, in national competitiveness (their assessments of national competitiveness also take the business environment into account). The WEF and IMD rankings, which also consider government regulation and the labor market, are probably more accurate.

However, the business environment as perceived by managers may diverge from the indices published by these research institutions. The foreign reports mentioned above primarily examined the business environment at the level of policy and institutional conditions. This report, by contrast, divides the business environment into five areas—policy/institutional environment, international environment, macroeconomic environment, sociocultural environment, and market/industry environment—and reviews the factors that have recently been threatening Korean managers in each area. Since it is impossible to discuss every sector of Korean industry, the report focuses on identifying threat factors commonly perceived by Korean firms across the broad management environment, with the aim of drawing general policy implications.

As expected, Korea’s policy and institutional environment has recently been changing in ways that make it extremely difficult to do business. In particular, increases in the minimum wage, court rulings on ordinary wages, shorter working hours, and the nuclear phase-out are expected to increase firms’ cost burdens. In addition, as the authority of the Korea Fair Trade Commission has expanded, concerns over price controls have also been growing.

But Korean businesses face major international threats beyond formal regulations and institutions. The recent North Korean nuclear crisis and the China risk stemming from retaliation over THAAD deployment show that a security crisis can translate directly into a management crisis, making business leaders keenly aware that “security is the economy.” By contrast, the macroeconomic environment may be seen as less threatening than other factors, since variables such as oil prices and exchange rates present both risks and opportunities at the same time.

Meanwhile, this report identifies sociocultural factors—often not emphasized in other reports—as major recent threat factors. In particular, it points out that anti-business sentiment among the public has not subsided and that, together with the growing popularity of the “social economy” and “social enterprises,” hostility toward ordinary profit-seeking businesses is increasing.

Finally, the report identifies the following market/industry threat factors: 1) intensifying competition, 2) the demographic cliff, and 3) militant labor unions.

In conclusion, the average Korean business manager must respond effectively not only to policy and institutional threats but also to threats in the international environment, the sociocultural environment, and the market/industry environment. The government should reduce new regulations and interference in prices (including wages) and instead devote its energy and resources to minimizing other threats facing businesses. In particular, there should be a shared recognition that responding wisely to the North Korean nuclear issue and reducing uncertainty in consultations over the alliance and THAAD deployment would also reduce the anxiety of economic actors. In addition, investing at the national level in education so that the public—especially younger people—do not develop negative perceptions of profit-seeking businesses would greatly help build human resources over the long term. Lastly, addressing the demographic cliff and militant labor unions will also ultimately require prudent government judgment and an appropriate policy response.

Original title: 우리나라의 기업환경 : 한국 기업공통의 “위협요인”을 중심으로

Author: Woong-hee Lee

Date: 2017-09-15

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=report&pn=3&idx=10734