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Mergers and acquisitions in Korea : The leading edge of foreign direct investment

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  • Mergers and acquisitions in Korea
  • Alexander, Arthur J.
  • The U.S.-Korea Institute at SAIS


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Title Mergers and acquisitions in Korea
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Sub Title

The leading edge of foreign direct investment

Material Type Reports
Author(English)

Alexander, Arthur J.

Publisher

Washington, DC:The U.S.-Korea Institute at SAIS

Date 2008-10
Series Title; No Korean Economy Series / 08-02
Pages 19
Subject Country South Korea(Asia and Pacific)
Language English
File Type Link
Subject Economy < Direct Investment
Holding The U.S.-Korea Institute at SAIS

Abstract

Three main trends characterize global foreign direct investment (FDI): it is reaching new highs, driven by increased cross-border mergers and acquisitions (M&A); there has been a growing importance of private equity and other collective investment funds; and services now account for the bulk of world inward FDI. (UNCTAD 2007, xv-xvi)
These observations about the global economy are directly applicable to Korea, where many of the main trends are occurring. The importance to Korea of these observations is that they signify new approaches to investment across a different mix of industries by different kinds of players. The shifting circumstances surrounding FDI means that government agencies are involved in oversight that are new to the issue and that competition is affecting domestic industries and companies in new ways. Consequently, public perceptions of foreign investment are being challenged by the new actors, many of which often are seen to lack legitimacy by private citizens as well as by many government officials.
The importance of FDI to Korea stems from two sets of circumstances. First, Korean economic development is now in a phase of deceleration, a common occurrence among successful developing economies. For the past 40 years of high-speed growth, the nation depended on rapid increases in the quantity and quality of capital, as well as on substantial improvements to human capital as evidenced by higher levels of education and training. However, future growth of the more mature economy will be decided by productivity gains coming from doing things better and more efficiently, rather than from simply expanding along the margins.
Second, by implication, anything that improves the incentives for higher productivity also enhances growth prospects. FDI has been associated with productivity gains in economies that possess a supportive infrastructure. Korea meets this requirement: a world-class educational establishment; an efficient transportation and communica-tions infrastructure; and financial institutions learning to play in the international big leagues. However, FDI has been notably low in Korea, despite quite large increases of foreign presence that followed substantial opening since the mid-1990s. Therefore, investment by foreigners in Korea has the potential to make large contributions to the country’s economic future.
This report reviews the principal source of Korea’s FDI, its cross-border mergers and acquisitions. The major source of data is the same one used by UNCTAD, the SDC Platinum database compiled by Thomson Reuters Corp., which was acquired by The Paul H. Nitze School of Advanced International Studies (SAIS) at Johns Hopkins University for this research. The source covers approximately 672,000 M&A transactions from 1985 to the present; globally, since 1990. Each record includes transaction announcement and completion dates, names and nationalities of buyer and target firms, industries of participants, percent of outstanding shares that are acquired, and transaction value. Only about 60 percent of completed transactions list the deal’s value; however, the missing information appears to be for smaller agreements, the absence of which does not seem to affect total dollar values significantly. The raw database includes many transactions that were never completed, mainly because the parties never reached agreement on the deal. To be included in the analysis, a transaction had to be completed and, following the definition of FDI, at least 10 percent of the target company’s shares had to be owned by the buyer upon completion of the transaction. The date attributed to the transaction is the year the deal became effective, not the announcement date. Approxi-mately 525 inward M&A deals met these criteria.

User Note

This paper was prepared exclusively for the U.S.-Korea Institute’s Korean Economy Working Paper Series.