03 February 2003 00:00 [Source: ACN]
'What is the first phone call you make if you are raided by the tax office?' asked a South Korean chemical trader during our discussion about the difference between business practices in South Korea and my home country, Britain.
In my naivety I replied 'to my lawyer'. He laughed and said: 'Don't be stupid, to your friend in the tax office.'
In Britain people don't tend to mix with tax officers given that they are generally viewed as even lower down the social and evolutionary scale than accountants, lawyers and journalists.
But seriously, the point is that in Britain and many other Western countries, there is a reasonably common belief, misguided or otherwise, that the law is fair and uniformly applied and that if you haven't done anything wrong, or if you have done something wrong but there are good enough mitigating circumstances, it's best to trust in the system. Plus, many Westerners are fearfully respectful of the law.
When I explained all of this to him, the trader said that despite all the legal reforms since 1997, many South Koreans don't believe that the legal system is fair or uniformly applied and will therefore rely on contacts to get them out of a sticky spot.
I pointed out that if everyone kept dodging the law through their friends in the tax office and other regulatory departments (the trader mentioned how he escaped a speeding ticket by ringing up his cousin who was a police officer), then the legal system had no chance whatsoever of being even-handed. He looked at me blankly, and so we switched to talking about football and went for a beer.
From a Westerner's perspective, pulling in favours from the huge and complex web of friends, acquaintances and semi-acquaintances that South Koreans spend hours building up and maintaining in karaoke and other bars is a form of corruption that should be eradicated. To expect this to happen overnight would indicate a major cultural ignorance.
The family is of huge importance to the South Koreans I know, after which come all the other social connections.
The South Koreans are incredibly sociable - they are always willing to drink the night away, and pay for all the drinks, and then turn up for work early the next morning sharp-suited and doused in after-shave to hide the residual smell of alcohol - but it is not just because they like being friendly and genuinely love company.
It is also because the family, followed by friends, colleagues and old school or army mates count more than any public institutions - more so than in the West - hence, you need to expend a great deal of energy maintaining relationships.
The view is that you owe your loyalty primarily to the people you know and not to the concept of democratic, open and fairly administered government and businesses.
To defraud a company or to skip your taxes is nowhere near as bad as stealing from a relative or friend, or even allowing them to lose face by not showing them enough respect.
Several writers on South Korea comment that this is reflected within companies, where the greater loyalty is to your immediate work group and not to the company itself.
When a boss is sacked or resigns, then his coterie goes with him, in the same way that political parties have disintegrated in South Korea when their leaders have quit. It is the relationships that make the institutions and not the other way round.
Maybe this is a very commonsense approach. Why put your trust in the government or in any company? The government and companies in every country have a depressing habit of screwing over the individual.
This reliance on family and friends, which goes back centuries, might well have been made even stronger by the brutality (although it was enormously economically successful) of the military dictatorship that was in power up until the late 1980s. Plus many politicians and businessmen have hardly done the institutions they represent any favours by becoming embroiled in numerous corruption scandals.
But to get away from all this excessive theorising, the point about 'relationships corruption', to give it a label, is that it clearly puts foreigners at a disadvantage and not just when it comes to avoiding tax investigations and speeding tickets. There are stories of investment approvals being turned down or taking a long time to come through because the foreign applicant lacked the right connections.
And another difficulty, or rather expense, foreigners face when doing business in South Korea, as is the case just about everywhere else in Asia, is the need to fill those little brown envelopes.
The extent of bribery is hard to gauge. In some cases, it seems to amount to just a few nice meals and drinks in sometimes shady bars, and is therefore no more than many people, men that is, would expect in any country where they were about to commit to a business relationship.
In other cases, though, substantial amounts of money do change hands to smooth regulatory and other wheels.
Again, there is nothing you can do about it; it is not going to go away. As one foreign investor puts it: 'You might as well howl at the moon.'
But if you can live with the corruption in its various forms and also another fact of life for a foreigner in South Korea - xenophobia - the country seems like a great place to live and to work. I've only visited South Korea, but I am really sold on the place. There is so much to like and admire about the South Koreans.
Of the xenophobia, a foreign petrochemical executive who works in South Korea for an overseas major believes that you can forget about this generation. He believes that the next generation will probably be better.
There are signs of improvement as South Korea becomes a much more open economy, as the number of students educated abroad increases and as the general exposure to outside influences becomes ever greater, say observers.
What was once a closed country is now much more open, with the tales of foreigners being followed down the street and stared at relegated to the past.
But the point is that the South Koreans still see themselves as one race, one people, tied together by blood, with some foreigners suggesting that this leads to a sense of superiority and therefore racism.
And when South Koreans gather together in large numbers, what might be mere highly fevered patriotism is seen by some as xenophobia, as was demonstrated during last year's World Cup. To return to corruption again, that match against Spain? Come onÉ
But at the same time, this patriotism can be a wonderful thing. You would have to be stone-hearted not to have been moved to tears, wonder and respect by the pictures on the television of elderly ladies queuing up to hand over their gold jewellery to help replenish the country's foreign-currency reserves during the Asian financial crisis.
And even if the foreigners who complain of xenophobia are right, the South Koreans are very generous on an individual level to strangers from a foreign country.
On two occasions, where I rather dimly tried to use the Seoul underground (I don't speak a word of Korean), I've been given directions and on one of those occasions, I was led out of the subway station and right to the door of the office block I was looking for by my volunteer guide who had spotted me trying to read a Korean language map upside down.
Another thing to admire about South Korea is what is mis-described as its 'economic miracle' up until 1997. It is not a miracle at all; it is down to sheer hard slog and lots of initiative.
Okay, the South Koreans did copy foreign technology and ideas - I love the story about the founder of Daewoo who went to the US, bought some shirts, brought them home, got his staff to copy the designs and went on to build a multi-billion dollar business empire.
But good luck to them. After the devastation of the Korean War where an estimated 3m Koreans lost their lives and just about every building was flattened, who can blame the South Koreans for a little bit of copyright piracy?
There is really so much to admire. In 1948, per capita income in South Korea was US$86, on par with Sudan's. 'Korea can never attain a high standard of living,' wrote a US military official. 'There are virtually no Koreans with the technical training and knowledge to take advantage of the country's resources.' It was assumed that 50 years hence, per capita income would still be around the same level. South Korea's per capita income was US$18 000 in 2001, one of the highest in Asia.
The Asian financial crisis brought to a head shady corporate governance practices that had been around for years. Companies such as Daewoo, which was burdened by bad debts bigger than New Zealand's gross domestic product, went under as the economic model that had served South Korea so well was discredited: state-directed lending to strategic industries run by chaebol that were given enormous latitude to do as they pleased for the sake of nation building. South Korea wasn't really a pure capitalist economy, but was in fact one of the few places where socialism, perhaps even communism, mixed with capitalism actually worked.
And post-1997, another 'miracle', which was again, in fact, down to sheer hard work and bags of initiative, has been brought about.
The legal changes have been substantial and the banks have been recapitalised and are now free to lend to whom they choose (at present, because many corporates are still in restructuring mode, most of this lending is going to consumers).
Even with the 'relationships corruption' that still dogs the legal system, a framework is now largely in place to keep South Korea in the global economic premier league. It is worth noting that South Korea has introduced more structural reforms than any other Asian country since 1997.
More needs to be done, though.
Foreign investors say that the unions remain too strong, for example, and add that it remains extremely difficult to lay employees off due to a very tough labour law.
And there is a general feeling among foreign investors that the reforms, although substantial, could have gone much farther.
But President-elect Roh Moo-hyun has promised to carry on the good work. He has pledged to stick to outgoing President Kim Dae-jung's 'five plus three' principles of corporate reform which include cutting intra-group loans and holding management more responsible for business performances.
On the issue of reforming the labour law, Roh is said to believe that there should be flexibility in the labour force, in other words bosses should be able to make redundancies for restructuring purposes.
However, what is raising concern is that he has promised to mediate between management and unions. The feeling is that because of his socialist leanings, he might favour the unions.
The other achievement since 1997 is to accelerate the process of providing the products that are sufficiently value added to justify South Korea's high labour costs.
No longer can the country hope to compete with the likes of China or Thailand in commodity production. The mistake exposed by the Asian financial crisis was the buildup in South Korea of too much commodity capa-city in everything from chemicals to steel.
South Korea is making some fantastic 'clever products'. My favourite is the LG Electronics sensor which is attached to the front of refrigerators. It detects when you are at crisis point, for example, you are down to your last bottle of Hite beer, and sends a signal via the Internet to the supermarket to deliver another batch.
This is the initiative I mentioned earlier and is another paradox about South Korea, like the collective xenophobia versus the kindness, warmth and hospitality displayed to foreigners.
The paradox here is that the education system still does everything it can to stifle initiative. Learning is still very much by rote and thinking 'out of the box' is positively discouraged.
Foreign investors moan about employees who are unwilling to think, or even frightened of thinking, for themselves, and who are not adapting readily to the enormous changes that are being introduced in the way South Korea does business.
The investors add that hierarchy remains very important due to Confucianism which instructs that everyone should have a place in society and that for the sake of harmony, social positions should not be challenged. As a result of this respect for harmony, challenging your boss in public 'think sessions' is simply not done.
A further discouragement to pointing out that what your superior has just suggested makes about as much economic sense as building another cracker and PE plant in South Korea, is the concept of face. If you make him look foolish before his peers, he will lose respect and he will be deeply hurt. South Koreans are very emotional and can frequently and easily be raised to anger or reduced to tears.
Now I'm back on to the negatives, I might as well carry on. Despite all the legal and financial sector reforms, I still hear stories of one set of accounts being kept for small investors, one set for the tax office, a further set for the accountants, yet another set for the accounts department of the company concerned, with the final and only true and full set in the hands of the heads of the chaebol.
Corporate governance is still a little shady, which is hardly surprising when you realise that many of the affiliates of the chaebol remain unlisted. How can one produce proper, consolidated and fully transparent accounts when the activities of large chunks of the conglomerates have no obligation to disclose what they are up to?
And despite efforts to rein back their powers, the chaebol bosses still have the power to shift money around as they please, and, according to some commentators, to skim off the top.
Although there is no suggestion that he gained any personal financial benefit, Chung Mong-hun, chairman of the Hyundai Group, is currently under investigation for secretly funnelling US$420m to North Korea.
The money was allegedly lent by banks to Hyundai on the direction of the government and then shipped to the communist regime in order to bribe North Korea's President Kim Jong-il to take part in the historic June 2000 meeting with South Korea's President Kim.
I guess the fact that this has come to public light and there is an investigation is good. But if there was proper transparency, there would be no way Chung could have got away with this in the first place, assuming the allegations are true.
To return to the attitudes of workers, foreign investors also moan that the old habit of chasing market share for the sake of market share persists.
For years, a company in South Korea was judged successful only if it achieved double-digit sales growth every year and forget the profitability.
Nobody, anyway, really knew if any chaebol affiliate was really profitable because of accounting hampered by all the undeclared cross-subsidisation of other businesses within the same conglomerate, and the mysterious appearances and disappearances of large lumps of off-balance-sheet cash.
Overseas executives with several petrochemical companies say that the practice of selling at whatever price is necessary to achieve a sale, even if this means under-cutting Middle Eastern producers, persists.
'You've got to keep a close eye on them [the marketing team],' says a second overseas executive with a South Korean petrochemical joint venture. 'As soon as you turn your back, they start selling at daft prices again and when you confront them, they deny it.'
This leads neatly on to another negative - the accusation that South Koreans can be economical with the truth when it comes to dealing with foreigners.
Maybe this is due to the fact that a South Korean wouldn't want you to lose face by saying no to your request.
If he says yes immediately, then he probably means yes, but a yes with a slight hesitation could actually mean a no.
A much more damning view is that some South Koreans don't worry about deceiving a foreign businessman because a lie to an outsider isn't really a lie in the way that it would be to a fellow national, or even more seriously to a family member, friend or colleague.
And, of course, if the lie benefits the country or the family member, friend or colleague, it's viewed as a virtue.
There was an extraordinary period in 2000-01 during efforts to merge Hyundai Petrochemical and Samsung General Chemi-cals when a colleague and I were fed entirely different sets of 'facts' by officials from both companies.
These related to an asset valuation and the terms for the proposed joint venture, for example. It quickly became apparent that somebody was either being entirely economical with the truth, or everybody was lying a little bit, in order to use the press to achieve his own interests. There were those within both companies who wanted to either scupper the proposed merger or see it succeed.
But still, as I said, I am really sold on South Korea. The energy, the determination, the sheer drive and also the genuine warmth of the place is wonderful. It restores your faith in humanity.
At the same time, there are the negatives, but you can say this about any country. I could write far more about the negatives of doing business in Britain.
Sadly, though, quite a few of my contacts have a real downer on South Korea. One particular contact hates doing business there because of the corruption and the lies he says he's been told.
I'll leave the last words, however, to the first expatriate worker with the overseas petrochemical company that mentioned the xenophobia.
'If you want to be happy and successful, get involved,' he says. 'Do not judge South Korea from your first two-day visit. South Korea is a great country that hides its treasures very well. This is a very deep country with strong people and strong traditions.'
As South Korea attracts more and more Westerners, especially in the information technology and financial sectors, the country seems to be undergoing a paradigm shift in its culture as old and traditional values and views rub up against modern and progressive thoughts and practices.
An average South Korean school kid, who prefers a whopper at Burger King to the traditional food his mother has prepared for him, serves to illustrate the clash of western and eastern cultures in the country.
But there is a deep-rooted sense of patriotism that the Koreans feel for their homeland.
A journalist from England, who has lived and worked in South Korea for almost a decade and has a Korean wife, told this scribe that during the Asian financial
crisis, the South Koreans donated their gold jewellery in order to help the country replenish its foreign currency reserves. After he finished the anecdote, he was still shaking his head in disbelief at what he had witnessed.
Therefore, it comes as no surprise that Korean pop – and would you believe it hip hop – is a multi-billion dollar industry that makes the cash register at music stores ring louder than international acts such as Robbie Williams or Eminem.
As a Westerner visiting South Korea, you need to learn some of the time-tested social mores which are not going to go away anytime soon. For instance, it is much better to greet a Korean lady with a bow than with a handshake. Kissing her on the cheeks is a strict no-no!
If you want to do business with a South Korean or just want to network, you are better off starting the interaction with questions intended to establish his well-being and the health of his family over a drink. These are questions that would be seen as too personal in the West for somebody you were meeting for the first time.
Being purely business-like might be viewed as being too direct, and even too cold, by the sensitive Koreans with an emotional bent of mind.
While exchanging business cards, it is common practice for the younger associate to hand over his card first as a mark of deference. A senior colleague is then obliged to reach for his card in order to dignify the junior associate’s introduction.
South Koreans lay great store by education and usually list all their academic achievements in their resumé, and sometimes even on their name cards.
Appearance is very important in South Korea. Wearing a jacket in the office and in the evening is therefore a must.
Think of Seoul as being close to Santa Barbara as I am sure any South Korean plastic surgeon who knows about the South Korean obsession with looks will testify. – Iqbal Anand
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