Part 4

Changes in the Korean Management System Developments in Korea's business environment after the 1997 financial crisis have substantially changed management practices. Ongoing reform of businesses and banks and the elimination of chaebols' privileges and their collusion with government have meant that Korean companies and banks can no longer act as monopolies. They have to compete against foreign counterparts who are well equipped with capital and technology. The myth that big companies and banks would never fail has already disappeared.

In order to survive, therefore, Korean companies will need to operate as efficiently as their foreign competitors. Under these circumstances, Korean companies will not be able to retain their traditional management system, although that part of the system that is deeply ingrained in Korean culture is unlikely to disappear easily. For the sake of survival, Korean companies will need to replace "clan management" with management by efficient professionals. Labour's flexibility will eliminate the costly and inefficient convention of guaranteeing lifetime employment. The seniority system with a long hierarchical structure will not survive in the long term under increasing international competition. As job security at domestic companies declines and lifetime employment disappears, unions' militant tactics will be mitigated. Furthermore, the loyalty of employees towards companies will abate, undermining the practice of top-down decision making and autocratic leadership.

Foreign firms will find it easier to operate in Korea, not only because of the change in the Korean management system, but also because of the increasing availability of competent workers who will accept employment.

As the myth of chaebols' infallibility disappears and job security in domestic companies declines, Korean workers' preference for working for domestic firms rather than foreign ones will decline. Once laying off workers becomes a common practice among Korean companies, early-retired middle managers will be readily available for foreign companies. Talented female workers will remain an important source of recruitment for foreign companies.

As foreign companies and investors come to play an increasingly important role in the Korean economy the importance of personal relationships in business operations will diminish, and the existing business networks will change as a result. Under the scrutiny of foreigners, personal relationships may not influence business operations, as they did so powerfully in the past. For the sake of their survival, many Korean suppliers and financial institutions will volunteer to be incorporated into the industrial network formed by foreign companies.

Economic Prospects The Korean economy has been recovering since 1999, and for a number of reasons. These include an extension on short-term maturities on short-term foreign debt; restored macroeconomic stability; export expansion due to the depreciated currency value; a more accommodating monetary and fiscal policy; a broad range of structural reforms to establish a more market-oriented economy; the restoration of foreign confidence in the Korean economy and increases in foreign capital inflows. Added to these is the economy's resilience, evident in its recovery from a number of setbacks in the past. The 1997 financial crisis has proven to be a force that has united Koreans in the cause of helping the economy recover and prosper. Above all, the economic fundamentals, including the high savings rate, a well-educated workforce and advanced production infrastructure, remain sound. This series of developments contributed to rapid economic recovery in 1999.

The Korean economy is unlikely to grow in the medium term as quickly as it did in the past, at seven to nine percent a year. The potential growth rate will decline due to the slower growth of factor inputs. As the economy matures, national savings and investment rates will moderate, and in view of recent developments in demography and education, the human capital accumulation rate will also slow. Finally, as the Korean economy advances further, it will become increasingly difficult for Korea to attract foreign technology.

As the economy matures in the medium term, not only will the growth rate slow, but its industrial structure will change. Until 1997, Korea supported the manufacturing sector with massive investment and protected it from international competition, while it neglected the service sector.

As the economy is liberalized further, the service sector will develop and expand at a relatively faster pace. In particular, Korea has realized how fragile existing industries are and how important it is to develop high technology and knowledge-intensive industries. Hence, the government has already highlighted the need to strengthen the knowledge base as a critical part of its national development strategy. As Korea is far behind advanced countries in high technology and knowledge-intensive industries, it is eagerly seeking foreign partners to develop them.

The Korean economy certainly is recovering from the crisis and for different reasons. One is the success of the institutional and structural reforms, which has in turn raised the confidence of foreign investors in the Korean economy There is also the prospect that the economy will continue to grow at a moderate rate in the medium term, along side renewed optimism that the Korean economy is now transforming itself into a knowledge-based economy. The implications of doing business in Korea, for both domestic and foreign firms, are clear. The Korean market is now wide open and it is markedly easier to do business there than ever before. But it is also more competitive than ever. There is thus a major business opportunity for companies with proprietary technology and insights into the Korean system to participate productively in the new direction of the Korean economy.