Asia's Cheapest Market Review

Barron’s: 12/17/2012
WM1.01 - Analyse the physical, economic, and social factors that have influenced international business relationships over time.

Summary

South Korea is a developed country in Asia that has avoided recession even during the global financial crisis. It’s stock market is among some of the cheapest ones in the world with trading at just nine times the 2012 profits. However, it has a reputation of being a mainly cyclical market, attracting foreigners to the variety of gadgets and cars that are produced there. At one point when South Korea’s economy slowed, the country’s net debt to equity reached 300% leading to earnings getting wiped out by the interest expenses. Korean companies had leverage down to 44% by the end of 2011, but they can take more action to reward shareholders as the 14% dividend-payout ratio could increased all the way up to 27%. Internationalization of the shareholder base is said to cause some changes in behaviour, however. South Korea’s population is rapidly aging too with its young to old ratio (old classified as those 65 years and above, young as below 65) expected to decrease from 12.6 to just 5.4 by the year 2020, which would make it among the worst in Asia. That could lead companies to pay more dividends in order to attract more investors. The country’s cultural profile has began to benefit from Asia’s middle class even before PSY’s top watched video on Youtube, “Gangnam Style”. The country also has increased its exports by 3.9% caused by an 11% increase in exports to China and 29% to Southeast Asia. In terms of its economy, South Korea’s current unemployment rate is 3% while the inflation rate is a ‘tame’ 1.6% and the currency’s value may rise due to the increased export of electronics. The overall economic growth is expected to rise from 2.2% up to 3% this year.

"Gangnam Style" singer PSY is a great representative of South Korea's pop culture industry today
Source: Shazamers.com

Connection

Many  factors can have major influences over different countries’ international business relationships. The main social factors as mentioned about South Korea include certain population characteristics like age, race and sometimes even gender. In South Korea, the population’s age ratio from young to old is generally expected to decrease between now and 2020 which might make the country less appealing for some investors or convince companies to pay more dividends to attract and appease these investors. Another social factor that may influence their international business relationships is the country’s culture. For instance, if a country’s culture involves inequalities between people based on gender, age, or race, most businesses may be less likely to build relationships with that country in fear of their employees being treated poorly or not being able to hire certain people. South Korea’s pop cultural industry however, is currently very strong with the rise of K-pop artists like PSY - with Youtube’s most watched video - and SHINee. Foreign record labels may be more inclined to sign these artists before those in their home country because they are already so successful in Asia and can therefore help the record companies. 

Economic factors that influence international business relationships are the unemployment rate, the inflation rate, and the currency’s exchange rate. A low unemployment can seem both attractive and unattractive though. If a business sees it as a country with a very motivated workforce, they would think it is attractive because they might find more people who are interested in working for them. But at the same time, some might assume that with a low unemployment rate of 3% comes fewer people who are actually looking for a job or willing to switch jobs for another company. The inflation rate is also influential in international business relationships because it generalizes the price changes on a year to year basis and since South Korea has one of Asia’s lower rates at 1.6%, it makes for a more stable economy with fewer price fluctuations each year. Lastly, the currency exchange rate is a highly significant economic factor that influences these trade relationships. Many companies in North America operate factories in other places with lower exchange rates, meaning their currency is of a lower value than the American or Canadian dollar. South Korea’s currency is very low compared to the American dollar (1,074 wons = $1US) and could therefore allow American businesses to operate at cheaper rates. 

The physical factors may include geographical features like location. South Korea is located closest to China, Japan, and of course North Korea, but China and Japan are the top two countries it exported to in 2012. Taking each of these factors into account, South Korea looks like it could become one of the better markets in Asia one day, but should develop more international business relationships that will allow it to achieve higher levels of economic growth.

$1 US =  ₩1,074, Source: ivanenkorea.com