⑤ Political Environment and Regulation
Companies are affected in many ways by many factors. Among them, changes in the national and international political environment affect management through interest rates, exchange rates, tariffs, trade agreements, supply chain access, tax rates, labor policy, intellectual property rights, and production locations. First, let’s look at the major policies of each South Korean administration, along with the industries and companies that benefited.
The Syngman Rhee government, which began in 1948, started by developing light industries such as flour milling, sugar refining, garment making, and textiles, using foreign aid and government support. Its main goal was “import-substitution industrialization,” producing at home the goods previously imported from abroad in order to reduce import dependence. Samsung, which began as a rice mill in Masan, grew into a conglomerate (chaebol) from the 1950s by founding Samsung Sanghoe, Samsung C&T, Cheil Jedang, and Cheil Industries. The Park Chung-hee government, which began with the 1961 military coup, went through the oil shocks triggered by the Middle East wars of the 1970s. The sharp rise in oil prices, driven by the shocks and the Middle East’s use of oil as a weapon, led to a Middle East construction boom. Large companies that began growing in overseas civil engineering and construction, such as Hyundai Engineering & Construction, expanded with government support into heavy and chemical industries and electronics. This was also the period when the Hanjin Group, which took over the state-run airline Korean Air Lines Corporation from the government in 1969, grew rapidly into Korean Air. Under the Chun Doo-hwan government, which began with the 1979 military coup, heavy and chemical industries that had been duplicated and over-invested in were merged and consolidated under government direction, restructuring the business landscape. Samsung, Hyundai, LG, Daewoo, and other groups expanded rapidly in scale during this period and grew into chaebol. SK in particular entered heavy and chemical industries in 1980 by acquiring Korea Oil Corporation (Yukong), whose sales were about three times its own, and under the Roh Tae-woo government it was selected as the second mobile carrier in 1992, entering telecommunications as SK Telecom. The Kim Young-sam government, which began in 1992 as Korea’s first civilian government, introduced real-name financial and real estate systems and opened the capital market. As large amounts of foreign capital flowed in and out within a short period, the foreign exchange crisis hit, and a string of large companies went bankrupt, including Hanbo, Sammi, Jinro, Samlip, Mido-pa, Haitai, Hanshin Construction, Kia, Ssangbangwool, Newcore, Halla, Daewoo, Chonggu, and Nasan, causing major shifts in the chaebol rankings.
Under the Kim Dae-jung administration, Korea took a US$21 billion bailout from the IMF to overcome the foreign exchange crisis, and had no choice but to implement neoliberal economic policies, including interest rates as high as 29.5%, restructuring across all industries, and privatization of state-owned enterprises. When SoftBank Chairman Masayoshi Son of Japan visited Korea in 1998, he gave President Kim a famous answer when asked for advice on overcoming the IMF crisis: "Broadband, broadband, and broadband." The Kim Dae-jung government’s IT infrastructure buildout and venture promotion policies helped a range of information and content companies grow, including Daum, Naver, Empas, and Nexon. The Roh Moo-hyun administration pursued an active economic globalization policy through FTAs with the US, the EU, Canada, and others, and the IT industry became the backbone and leading industry of Korea. Under the Lee Myung-bak administration, large civil engineering projects such as the 'Four Major Rivers Restoration Project' helped construction and civil engineering firms grow, and a policy of supporting a high exchange rate significantly boosted the profits of exporters. Among the many companies of that time, Lotte in particular benefited, as most of its long-sought projects requiring government permits, such as the Lotte World Tower project, were approved. The Park Geun-hye administration tried to boost economic growth by stimulating construction, which has a strong effect on perceived economic conditions, but the results were limited: growth hovered around 2%, per capita income never passed US$30,000, and national and household debt rose. The Moon Jae-in administration backed a nuclear phase-out and renewable energy as policy. During this period, companies such as SK Group, HDC Hyundai Development Company, and Celltrion saw their assets grow sharply and expanded their businesses.
Let’s also look at the major shifts in the international political environment. The US–China trade war, which began in July 2018 when President Trump imposed 25% retaliatory tariffs on some 800 Chinese imports, has grown into a conflict spanning politics, the economy, and the military. The US faces a presidential election in November 2024, China is in an economic downturn, and Taiwan holds its presidential election on December 13, 2023. How tensions in the Taiwan Strait change after that vote will have a major impact on the politics and economies of the Korean Peninsula and Japan. Since the Russia–Ukraine war escalated into a full-scale conflict in 2022, Poland has placed massive weapons orders with Korea, while Russian oil and gas that once flowed to Europe is now going cheaply to China and India. The US has seen this war as a chance to weaken Russia just by supplying weapons, equipment, and intelligence, without deploying its own troops. Would it really want a ceasefire or an end to the war? Its response will depend on Washington’s calculations.
The Israel-Hamas war, which began with the Hamas attack in October 2023, is rapidly pulling the world’s attention away from Ukraine. That is bound to be a serious threat to Ukraine, which continues to fight with Western support. The war could easily widen into a confrontation between Israel and Iran, and between the US and Iran. If it escalates into all-out war between Israel and Hezbollah, which Iran backs, the chance of US involvement rises further. Recently, Yemen’s Houthi rebels, who are backed by Iran and are enemies of Saudi Arabia, attacked ships in the Red Sea and began exchanging fire with US forces. If the Red Sea, which carries more than 20% of the world’s oil, were blockaded, international oil prices would surge, the balance of advantage among oil producers such as the Middle East, Russia, and the US would shift, and the impact on the global economy would be substantial.
A political environment and regulations that shift constantly have a major impact on B2B customers’ businesses. Vendors that supply parts, materials, equipment, and services to B2B customers need to analyze the factors affecting the industry, the sector, and each client, and build a response strategy.
To be continued