5 weak points in Korea's move to realize "hub ambition"

5 weak points in Korea's move to realize "hub ambition"

Can Korea become a hub for regional headquarters of multinational corporations?

  • min read


5 weak points in Korea's move to realize "hub ambition"

Can Korea become a hub for regional headquarters of multinational corporations? Over the past weeks this question has become a trendy topic for TV programs and economic articles. Government officials and politicians come forward with ambitious visions ahead of the presidential election. Foreign representatives and expatriates enthusiastically join the discussion with passionate views. Why such interest? Does harboring regional hubs matters so much to the future of Korea and is the issue properly phrased? How to think rationally about Korea's ability to attract more of these head offices?

The first important caveat is that regional hubs are very ubiquitous species: Not all hubs are equally attractive to the Korean economy. Regional headquarters tend to vary considerably in scope and size. Some companies keep very lean regional offices with no more than half a dozen employees, while others handle their most critical management functions at regional level and maintain sizeable regional staffs. Some companies split their business in different processes, managed from different locations: For example, treasury in one place and customer service in another. In Asia, the notion of region is also quite vague. For some company, it covers the whole Asia, for others only North Asia. China or Japan are sometimes integrated and sometimes kept separate. Regional boundaries may or may not extend as far south as Australia or as far west as India.

In the end, this "hub" concept is so elusive that it seems inadequate and simplistic to keep a tally of regional hubs as a measure of economic progress. What matters for Korea is to attract the most strategic investments from the most reputed foreign corporations, hubs or not hubs. These can be regional R&D centers which foster knowledge and boost scientific vitality, logistics or customer service centers which create many jobs and rejuvenate economically troubled provinces, large scale factories which bring in foreign currencies and irrigate a wide network of local suppliers or large retail outlets which capitalize on the growing domestic consumer demand.

A quick look at Europe's long experience with regional hubs should shed some light on these issues. The most successful European countries at attracting these hubs have adopted very different strategies leveraging their unique areas of strengths. Out of the seven or eight criteria, which foreign investors typically look at when selecting an investment destination, these countries usually score very high on a couple of dimensions and maintain an acceptable level on all the others. Ireland has developed great telecom infrastructures, an attractive fiscal environment and consistent, pro-investment foreign policies but is not distinguished in terms of location or labor relations. Holland has one of the most culturally and linguistically versatile population in Europe and a central location but not the most advantageous tax system. France offers a central location, good infrastructures and an attractive living environment but suffers high taxes and a rigid, confrontational labor environment.

Likewise, it seems unrealistic to expect Korea to become a "foreign investment heaven" with high scores on all dimensions in the near term. Rather, Korea needs to carefully pick its "areas of excellence" while matching the level of any advanced economies on other dimensions. Korea already scores high and can achieve a truly differentiated position on several important criteria. Its location at the heart of North Asia is ideal for regional business. Its transportation and real estate infrastructures rank among the best in the world with such crown jewels as the new Inchon airport, the TGV and the Pusan or Incheon harbors. Its technology and telecom infrastructures are first rate. Its domestic consumer market is increasingly large and attractive for advanced products and services. Finally its labor force is renown throughout the world for its high level of education and hard work ethics. Those "areas of excellence" need to be continuously nurtured, reinforced and communicated by the Korean administration.

Echoing these five areas of strength, Korea needs to address five areas of relative weaknesses hindering the inflow of quality foreign investments. First, its tax rate remains relatively high compared to other investment candidates. Second, its regulatory environment is sometimes blurry, with inconsistent interpretation and application, creating frequent fear of arbitrary treatment among foreign investors. Third, its regulatory barriers still hinder the free flow of goods and service. Fourth, its labor environment is tumultuous with rigid social laws, high labor costs and frequent labor conflicts. Fifth, its workforce is not yet global, neither culturally nor linguistically: In the public mindset, national origin largely defines individual or corporate identity, making it difficult to look at any international business problem without an overriding consideration for national interest.

Improving perception on these five dimensions should be key goals of economic policy. In these electoral times, politicians should refrain from "flattering" the most protectionist or xenophobic fringe of the population for short-term political gains, as it deeply undermines the credibility of any pro-investment program. Finally, policy makers should make it a priority to turn the companies already present in Korea into the country's most enthusiastic advocates. Whether their name is Volvo, Renault Samsung, BASF, Carrefour or Newbridge, what these companies will say to the next potential foreign investor about their Korean experience is the ultimate test.

Bertrand Pointeau is a Managing Partner with Bain & Company Korea.


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