Asia-Pacific Insights: Trade & investment expert Soo-Hyun Lee (Asan Institute] discusses the consequences of interventionism by the governments of Korea and Japan on the two countries’ domestic investment climates.
[By Soo-Hyun Lee]
Despite increasing economic integration, the Japanese and South Korean governments continue to share a resilient bond with business. Government interventionism is hard to miss. From banks to shipyards and technology industries, Japan and Korea have stepped into the business realm at multiple occasions in the name of the public interest. Yet, all isn’t that simple.
Interventions are silently applauded by business executives and implemented in the name of saving jobs. But, occasionally, they also lead to international legal dispute. Hence, they raise two important questions. When will these governments claim their right to regulate in the public interest? And, of course, how does that uncertainty impact the investment climate of two of Asia’s main economies?
Let us take the example of the Republic of Korea. Between 2017 and 2018, Korea made various policy interventions through fiscal policy and legislation.
This happened recently in March 2018 with General Motors (GM) threatening to withdraw its investments in Korea, shutting down its manufacturing plants in the country. GM Korea has long been underperforming both financially and in terms of production due to a rather stark combination of corporate indebtedness and poor financial management. Shutting down its factories, such as the one in Gunsan, would have resulted in the termination of 16,000 workers. Most of whom have yet to receive their wages.
A country divided on whether the government should intervene.
To intervene would essentially reward GM for its poor management practices in Korea using public finance. Yet, doing nothing would mean that the burden would fall almost entirely on the workers in the afflicted areas.
Through long and contentious debates, the Korea Development Bank, a policy bank, therefore decided to enlarge its original investment in GM Korea by $750 million in exchange for, amongst other things, a 10-year presence commitment in the country.
Yet this only drew more attention to a stubborn debilitation of historically key sectors in Korea’s manufacturing base. Korea intervened in GM not because it wanted to maintain the investment, but because the province where the company was located was in economic difficulty. In fact, at the same time in May 2018, the government also identified five regions traditionally fueled by Korean shipyard giants (Hyundai, Daewoo, and STX)as industrial crisis zones, which would receive tax and hiring incentives (See here).
When interventionism becomes complex.
The heavy hand of the Korean and Japanese governments has not always bode well. Korea was brought before international tribunals over the last decade because of its interventionist habits. More recently, in 2017, Japan faced the same challenge after stepping into the sale of Toshiba Memory.
Korea blocking the Korea Exchange Bank sale.
During a period of financial instability in Korea, the U.S. Lone Star Funds firm acquired a majority stake in the Korea Exchange Bank. As the economy recovered in early 2006, LSF attempted to sell its share . Until 2012, however, no transaction succeeded. The Korean government delayed approval of the sale under claims of on-going prudential and tax investigations.
LSF pursued legal action against Korea in 2012. It claimed that it was subject to interventionism in the form of “repeated acts of harassment” as well as “arbitrary and contradictory tax assessments”. In its defence, the Korean Government however argued that the sale of such a domestic financial institution would not only have resulted in considerable non-cyclical impacts to employment. It would also have left the domestic financial industry in disarray.
Japan and Toshiba Memory.
Japan saw a similar story with the sale of Toshiba Memory in mid-2017. The sale attracted competitive offers from foreign bidders including Hon Hai Precision Industry (understand Foxconn). Only, a State-backed policy fund investing heavily in electronics and technology projects was tapped as the preferred bidder.
Interventionism was never hidden. The Japanese government made no mystery as to the need to keep Toshiba’s memory technology and business inside Japan. A government spokesperson, in fact, explained the government’s move. Simply put, the decision to push the acquisition forward was made in the public interest. The move was key protect jobs and Toshiba technology.
Toshiba, indeed, attempted to expedite the sale for a strategic reason. Facing financial difficulties, it needed to avoid its delisting from the Tokyo Stock Exchange. The move was not surprising, it was a tactical step to prevent bankruptcy. In such circumstances, indeed, shareholders typically prepare to unload their assets before prices dwindle and financial institutions seek loan repayments. Given the keiretsu business structure of Japanese conglomerates like Toshiba’s, delisting was a major risk. Its impact could have traveled across a wide network of interlinked subsidiary and affiliated businesses. As such, the acquisition of Toshiba Memory by a foreign investor could have had a deep impact. It could have affected the very fabric of the society. And it could have impacted the domestic economy, thus harming the public interest. Interventionism was necessary.
Interventionism: from public interest preservation to business climate damages?
So why so much fuss, then?
Few would object to the idea of preventing a 140+ year-old national champion be sold off to rivals. Especially when these who would gladly see to Toshiba’s extinction. Even fewer would worry about preventing the sale of a bank should the move destabilize a domestic financial system.
At first sight, public intervention in the economy seems relevant (if not important) to preserve the public interest. Yet, the two cases mentioned above demonstrate that such actions are not without consequence.
Unsurprisingly, both governments assessed their respective decisions as being legitimate. Legitimate within the scope of public interests. And legitimate within the scope of international law. And truth be told, governments have a right to regulate to preserve that public interest.
From an international legal point of view, however, the legitimacy of a government intervention ultimately depends on procedural matters. Call it procedural fairness, if you will.
Without such procedural fairness, public interventions can easily shift matters of public interest into bad business and investment climate signals. Despite good faith and apparent necessity, such actions can conflict with maintaining a predictable and consistent regulatory landscape for investors. Even in economies that enjoy high, stable credit ratings such as those of South Korea and Japan. So, Korea and Japan, beware…
Insights by Soo-Hyun Lee
Contributor to the Asia-Pacific Circle’s insights, Soo-Hyun Lee is an expert on Asian and international trade & investment developments – which he approaches from an economic, legal and policy perspective. Soo-Hyun is a Research Associate at the Asan Institute of Policy Studies in Seoul, the Republic of Korea.
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