China-Japan Korea FTA and Opportunities for India

First Published in The Hindu Business Line

While most Indians are familiar with Asean, and businesses are aggressively seeking to tap the huge Southeast Asian market, there is a new trade bloc in the making, not too far away, that could deliver more economic benefits.
The Big-3 East Asian economies — China, Japan and South Korea — which account for roughly 17 per cent of global trade, 22 per cent of the global population and 20 per cent of the world’s GDP, kicked off negotiations in the last week of March, aimed at signing a trilateral free trade agreement. They made small but meaningful progress in their first round of talks late last month, seeking to roll out a free trade bloc that would be the world's third largest after North America and the European Union.

 THE CONTEXT
Talks between the neighbours have begun amid a slew of moves to lower trade barriers, as they seek to bolster economic growth, hit by the global financial crisis. These thriving economic ties are among the rare positive signs for relations among three traditional rivals.
Historically, Japan’s colonial occupation of South Korea until 1945 and its World War atrocities in China still rankle across the region, while more recently territorial disputes over the sovereignty of a few islands have strained relations even further (Japan-China for the Senkaku/Diaoyu islands, Japan-South Korea for the Takeshima/Dokdo islets).
However, despite their ongoing differences, they are set on reaching a pact, especially now that all three countries are under new leaderships — Xi Jinping, Shinzo Abe and Park Geun-hye.

 ECONOMIC MIGHT
China, Japan and South Korea are Asia’s largest, second largest and fourth largest economies. With a market of 1.5 billion people, the total GDP of the three countries was $14.3 trillion and total trade reached approximately $5.4 trillion in 2012.
While China is the main trading partner for Japan and South Korea, Japan and South Korea are China’s fourth and sixth largest trading partners. These statistics underline the region’s growing weight in the world economy, after more than two decades of swift growth in China and the rise of Japan and South Korea as industrial dynamos.
The trilateral FTA would create a massive economic zone, smaller only than the North American Free Trade Agreement (NAFTA) and the European Union. As major world economies, the Big-3 are not only geographically adjacent, but also important partners in trade and investment. If these FTA talks are successful, it will be a huge boost to the region.

 SYNERGIES INVOLVED
Their economic relations are complementary, so establishing this trilateral FTA will reduce the influence of many trade barriers and build a huge market. Geographically, these three countries are neighbours, but economically, they are on different growth paths and at different development stages. Japan has the most developed economy, but the economy of South Korea, which took off in the seventies is quickly growing and catching up. China opened up its economy in the eighties, and since then its growth has been more than impressive. They are all outward-looking and depend for growth on their relations with other economies, trading heavily among themselves.
 They are already highly integrated -- Japan and Korea are the major resources of FDI flow to China, while China is their major market. So far, the strategies adopted by the Big-3 have maintained their specific interests and relative political and economic influence. In spite of this, their trilateral relationship has expanded gradually, encouraged by growing interdependence and shared economic interests.
 Given the economic troubles of Europe and the United States, East Asia cannot continue to depend heavily on these markets. The trilateral FTA could greatly expedite the expansion of intra-regional market, the improvement of production capacity and efficiency.
 OVERCOMING BARRIERS
There is no denying that the Big-3 are divided by political mistrust, trade barriers and diverging investment policies, that would make for difficult negotiations. First, they would have to overcome a lot of issues, including the opposition of farmers in all the three countries, and of course, the various territorial disputes that regularly strain diplomatic relations. Negotiating a three-way deal among countries at different stages of development, and each with businesses lobbying for protection is by itself a very complex affair.
It may also take quite a while for the countries to conclude their negotiations and actually strike a treaty. Normally, it takes around two to three years to conclude FTA talks with a major trading partner, but this may take even more time, considering the importance and size of the involved countries and the fact that they are three-way negotiations. The ongoing negotiations can also be easily interrupted by any flare-up in political tensions.
Let’s not forget North Korea. Beijing faces incessant demands from Tokyo and Seoul to put more pressure on Pyongyang, whose nuclear weapons ambitions and rocket tests have alarmed the region. Any knee-jerk reaction by North Korea could derail all talks.
The lessons from the European Union suggest that economic cooperation can precede some intricate political issues in order to achieve regional integration. Market integration in East Asia would have to cope with the obstacles to a high level of cooperation. 
OPPORTUNITY FOR INDIA
Among the Big-3, India’s trade relations with China are the strongest, despite the fact that there is no FTA in place between the two countries. Total trade between both sides amounted to $75.59 billion in fiscal year 2011-12 (9.51 per cent of India’s total trade).
On the other hand total trade between Japan and India was just $18.43 billion (2.32 per cent), and Korea-India trade was lower at $17.45 billion (2.19 per cent). Taken together, India’s trade with the region amounts to $111.47 billion, a share of 14.02 per cent of its total trade with the rest of the world. Although there is talk of an FTA between China and India, not much progress has been made.
There are no government sponsored feasibility studies as yet and negotiations seem distant.
 India signed a watered-down FTA, what they call a Comprehensive Economic Partnership Agreement (CEPA), with Japan and Korea in 2011, but the ground results are far from satisfactory. There has been a gradual increase in Indian exports and investment in both regions, but the potential remains largely untapped. In fact, the agreement seems to have largely benefited Japanese and Korean companies, which are making inroads into India.
 Since an FTA with China seems a distant dream, and is likely to involve many rounds of negotiations spread over years, this is the opportune time for Indian policymakers and businessmen to study how they can leverage the CEPA with Japan and Korea, to take advantage of a trilateral FTA in East Asia and make inroads into the Chinese market.

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Challenges before South Korea's New President

First Published in EPW,Vol-XLVIII, No. 10, March 09, 2013

On 25 February, Park Geun-hye, the daughter of former military ruler Park Chung-hee, was sworn in as South Korea’s first woman president following her tightly contested election victory on 19 December 2012.1
In more ways than one, her election marks a historic breakthrough for a traditionally Confucian country2 whose social, political and business fields are dominated by men. Although the country has shown a remarkably high level of economic performance over the past few decades,3 its global ranking in gender parity is not much to talk about.
Women hold only 14.7% of parliamentary seats, and only 79.4% of adult women have reached a secondary or higher level of education compared to 91.7% of their male counterparts. According to the Gender Development Index of the United Nations Development Programme (2011), female participation in the labour market is only 50.1% compared to 72% for men.

Background
Park’s rise to the top post has raised hopes that it could herald a significant gender power shift and help normalise the idea of women holding positions of power, even as historical evidence in other Asian countries suggests that the ground reality is far more complex and only makes for good media headlines.
Moreover, this is not Park Geun-hye’s first stint at the presidential office Blue House. Born in 1952 as the eldest of three siblings, she moved into Blue House in early 1964, shortly after her father, Park Chung-hee, an army general, grabbed power.4
After spending her school years at Blue House, she enrolled at a local university to study electronic engineering, and, following graduation, left for France to continue her studies. She had to return abruptly in August 1974, after a gunman killed her mother in a botched assassination attempt on her father. For the next five years, she served as the acting first lady until the intelligence chief gunned down her father in 1979.
While it can be argued that she did not have control over her father’s regime, the fact remains that she was from a privileged background, with access to power. Following her father’s assassination, she spent the next 18 years out of the public eye, a period during which, as noted in her autobiography (Park Geun-hee 2007), she endured the betrayals of many of her father’s close aides and also devoted much of her time to reading books on history, philosophy, and visiting cultural heritage sites across the country in an effort to broaden her perspective.
The liberal intelligentsia however has a different story to tell (The Hankyoreh 2012). They claim that all her activities were focused on the restoration of her father’s image, by defending the military coup as a revolution to save the nation, using the bogey of a North Korean communist invasion. She published several books, and appeared regularly in the media justifying the violence committed by her father’s regime.
Throughout her father’s rule, the state’s routine invocation of the threat of communism effectively blocked any popular demand for democratic participation in the political process. The regime functioned in a manner that extended beyond the routine infliction of violence by the state on its citizens, into a realm where the state authority infiltrated every corner of civil society to both control it, and stifle its potential (Korea Democracy Foundation 2010).
Park claims that the Asian financial crisis, which dealt a devastating blow to South Korea’s pride and economy,5 proved to be a turning point in her career and she decided to rejoin public life. She was first elected to South Korea’s National Assembly in 1998, serving five terms as a representative.
Many critics argue that she used it as an opportunity to put her father back on the pedestal.6 This she has apparently succeeded in doing, by becoming the 18th president of the country, and its leader for the next five years. With her success, she has also ensured that conservatives will have held power for a decade since her predecessor Lee Myung-bak took office in 2008.
However, despite her ideological affiliation, her victory owes a lot to her embracing a liberal agenda in areas like economic democracy. During her campaign, she came out with a relatively progressive platform on issues like chaebol reforms7 and social welfare. Park said she would “tend closely to the public’s needs like a mother of ten determined not to let the children go hungry”.
Her promise was that as the first female president, she would adopt a “maternal” approach to her leadership. As a single woman who has never married, she also said she is married to her country and pledged to think only about the people’s happiness.
Park surely realises that pre-election pledges are one thing, but actual governance is a totally different cup of tea. Particularly since there are many daunting challenges that she faces – not just the economic slowdown, but more importantly North Korea’s third nuclear test in defiance of United Nations (UN) resolutions, just 13 days before she assumed office.

  Economic Challenges
Amid the continuing global financial crisis, South Korea’s economy has slowed down significantly in recent years. The government estimates that the economy grew 3.3% in 2012, but many worry that it could actually have been lower. It would follow 6.2% and 3.6% gains reported for 2010 and 2011, respectively. Things could ease to some extent this year, but risks, which have dogged the export-driven economy throughout 2012 are likely to remain in place, and the country could enter into a phase of low growth (Ministry of Strategy and Finance 2013).
The country is highly dependent on exports,8 which makes it even harder to recover. The prolonged eurozone debt problems and a possible global slowdown, as well as low domestic consumption and volatile exchange rates only accentuate the economic uncertainties. At present, there is very little that Park can do to provide an immediate boost to the economy.
An export-oriented country will always find times difficult when the world’s major importers are experiencing sluggish growth (ASAN Institute of Policy Studies 2012).
 Another problem is the indebtedness of the Korean public. Today, household debt stands at greater than 160% of income, making a reorientation of the economy towards domestic consumption very difficult. The government will therefore have to make effective management of the macroeconomy its first priority in order to successfully deal with internal and external risks, continue to help boost the economy, and pursue inclusive growth.
 The long-term challenges include a rapidly ageing population, inflexible labour market, and heavy reliance on exports. As a candidate, Park promised to work for the livelihood of individual families, making several pledges aimed at reversing the collapse of the middle class. She vowed to implement policies to improve growth, create jobs and increase social welfare spending.
 She also highlighted the importance of reforming large conglomerates that dominate the economy by promising that she will stop their unfair practices and excessive profit-seeking. While this is certainly a core issue in rebalancing the country’s wealth distribution, her party has always been strongly pro-business, and there is every likelihood that she will back away from strong reforms.
Now, with power in her hands, the focus may be on economic growth and job creation rather than on reining in the chaebols. Clearly, keeping the campaign pledges will not be easy.

North Korea Relations
This year marks the 60th anniversary of the armistice agreement that ended the combat phase of the Korean War. The North Korean nuclear negotiations have lost all momentum. The six-party talks are part of a distant past and North Korea’s third nuclear test on 12 February, conducted in defiance of international warnings, have put a sudden halt to Park’s proposal to reach out to the communist neighbour.
During her campaign, she disapproved of the hard-line policy that came to define her predecessor over the past five years and said that a friendly relationship with North Korea will be the core of her foreign and security policies. Inter-Korean relations were effectively cut off during the Lee Myung-bak administration due to a string of provocations committed by North Korea and the response by Seoul.9 Park said she would find middle ground between the approaches of South Korea’s previous presidents – Roh Moo-hyun, who gave the North unconditional aid, and Lee Myung-bak, who treated it as an adversary. Back in 2011, Park announced her vision for foreign relations, national security, and unification policy, an idea she called “diplomacy of trust and a new Korean Peninsula”.
The measures she described emphasised incremental approach over radical changes in inter-Korean relations (Park Geun-hye 2011). This was clearly done to woo large sections of the voters who disapproved of the traditionally hard-line stance of her political party towards North Korea, and it worked in the elections.
What she did not expect was that Pyongyang would go to any extent to guard its regime and increase its negotiating power, even before she could occupy her seat. Moreover, even as the UN is in the process of discussing what actions it should take to penalise the country, North Korea warned it can acquire intercontinental ballistic missiles to counter hostile forces and bolster its self-defence capabilities.
On the whole, Park has made clear on numerous occasions that she cannot allow the North to have nuclear weapons, yet stressed her commitment to engaging the communist country in a dialogue to deal with all outstanding issues. The nuclear detonation has effectively tied up her options, since South Korea is likely to join other countries in sanctions. Such a stance can cause North Korea to take a more tough approach, making it harder for her to make any conciliatory overtures.
 To make matters worse, just two days before her inauguration, the North Korean military’s representative at the truce village of Panmunjom was quoted by the official Korean Central News Agency as saying that the peninsula is facing “a grave situation where a war may break out any moment”.
The latest developments will clearly jeopardise inter-Korean relations that otherwise could have made headway under her administration. It will force her to reassess her “Korean Peninsula confidence building process”, which she has said is the cornerstone for better inter-Korean relations.
With pressure to fix the domestic economy and South Koreans’ individual welfare along with a desire to see improved relations with North Korea, Park will have to work quickly on both fronts to have a chance of succeeding. Her ability to handle relations with North Korea while working towards solutions to domestic issues will decide her legacy in the Blue House other than of being South Korea’s first woman president.
  Notes
1 Since its transformation into a republic, the Korean government, except for a brief period between August 1960 and July 1961 when a parliamentary system was in place, has maintained a presidential system. Under the Sixth Republic that began in 1987, the president is directly elected for a single five-year term by plurality vote. It was a two-way competition between Park Geun-hye and the opposition candidate Moon Jae-in. With a high voter turnout of 75.8%, Park defeated her liberal rival by 3.6 percentage points garnering 15.77 million votes.
 2 For 2,500 years Confucian teachings have influenced the thought and behaviour of people in China, Korea, Japan and Vietnam. Confucianism drew a clear distinction between the woman’s domestic sphere and the man’s public sphere, in the belief that the law of nature gave women an inferior and subordinate position in all aspects of life.
 3 Popularly known as the “Miracle on the Han River”, South Korea’s highly accelerated export-fuelled economic growth, including rapid industrialisation, technological achievement, education boom, exponential rise in living standards, rapid urbanisation and globalisation transformed it into a wealthy and highly developed country with a globally influential trillion-dollar economy.
 4 Park Chung-hee led a 1961 military coup, dislodging South Korea’s very first experiment with parliamentary democracy.
 5 For South Korea the consequences of financial and economic crisis and the intervention of the IMF in overcoming the accompanying problems were extremely painful. These problems included: a large number of bankruptcies of industrial firms and private banks; the increasing pressure on industrial firms to carry out rapid restructuring; massive dismissal of workers; currency devaluation; drastic decrease in domestic households’ demand caused by income reduction and high interest rates, etc. An average of more than 100 companies went bankrupt each day and the number of laid-off workers increased from 5,00,000 to more than 1.2 million in only a few months.
 6 Park Chung-hee won wide respect for transforming the poor war-ravaged nation into an economic juggernaut, but is also reviled in some quarters for his human rights abuses. Still, many older South Koreans remember the almost two-decade rule with fondness thanks to the economic successes of his government.
 7 Chaebol refers to a South Korean form of family business conglomerates, such as Samsung, LG, Hyundai, and SK. Since the Asian financial crisis, several attempts have been made to decentralise their management, strengthen their accounting practices, enforce anti-trust laws and impede the ability of families to retain control.
 8 The weight of exports in the South Korean economy hit an all-time high in the first nine months of last year. Exports of goods and services amounted to 57.3% of GDP, according to data by the Bank of Korea, the highest since the central bank began compiling related data in 1970.
 9 In 2010, North Korea sank a South Korea naval vessel resulting in the deaths of 46 sailors and shelled an island in the Yellow Sea that left four dead, while in 2008 a woman tourist was killed at the Mount Kumgang resort. The North also detonated its second nuclear device in May 2009 and launched a long-range rocket despite warnings issued by the international community. Seoul halted most exchanges and cooperation projects between the two sides in May 2010.

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SMEs in India Deserve a Better Deal

First published in The Hindu Business Line: ____________________________________________________________________
How often have we read that small and medium enterprises are a strategic asset for the Indian economy? We are told that they contribute nearly 8 per cent of the GDP, 45 per cent of the manufactured output and 40 per cent of exports. The sector provides employment to about 60 million people through over 26 million enterprises producing over six thousand products.
 However, what is seldom mentioned is that many of them are at the mercy of the larger corporations, with no effective relief from the existing government policies. For instance, delayed payments by large companies and the resultant crippling effects have always been the bugbear of SMEs, but at the risk of losing their large orders, they do not legally complain.
 While the government efforts have always focused on ways to ease credit restrictions, strengthen training, marketing, technological support, exit policies and cluster development, very little thought has gone into the relationship between large corporations and their sub-contractors. At the risk of being accused of bringing back the “control regime,” our policymakers could well take a look at the recent initiatives in South Korea, a country that has built its strong economy on the basis of capitalistic free market principles.
 On May 22, the nation's top conglomerate, Samsung Electronics, found itself in the national anti-trust agency's crosshairs, falling afoul of the unfair practices law for its repeated cancellation of parts' orders to small contractors.
 The Korea Fair Trade Commission (KFTC) announced that it is imposing a $1.4 million fine on the company for withdrawing orders long after payments are due. It said that among 1.5 million parts orders placed by Samsung Electronics between January 2008 and November 2011, some 2 per cent or 28,000 orders were reneged on unreasonably. This left suppliers with bursting inventories, interest payments owed and disruptions to their production schedules. Although the company has strongly refuted the claims, this just goes to show that SMEs in South Korea which have been unfairly treated by their larger counterparts can always bank on help from government agencies. The same may not be true for Indian SMEs.
  RESERVED FOR SMES
 The anti-trust agency's proactive steps can be traced to the ‘shared growth' policy of the present government under President Lee Myung-bak, a former high-profile businessman. He has been pursuing co-prosperity between conglomerates and SMEs since last year as a means of addressing economic polarity.
As a response to concerns that big companies were thriving while small ones weren't under his administration, a ‘‘Presidential Commission on Shared Growth for Large and Small Companies'' was launched in December 2010, as a private institution, which is formally independent from, but actually supported by, the government.
Since its formation, the commission has announced many policy instruments to promote shared or mutual growth of large companies and SMEs through what it calls “cooperation profit distribution.” Representatives from both SMEs and large companies agreed to introduce the system and a number of proposals were then announced, including a list of business areas restricted only to SMEs.
 The commission recently announced a list of 79 products that it believes should be produced by SMEs rather than big ones, an attempt to prevent big companies from driving smaller ones out of promising markets. The conglomerates have reluctantly accepted this proposal.
  INDEX OF INCLUSION
 ‘Name and Shame' is another tool used by the Commission. It released a ‘‘shared growth index'' earlier in May, tracking how large businesses have made efforts to realise shared growth.
 Of the 56 large conglomerates subject to the index calculation, seven companies received the lowest grade of “improvement needed”, while six companies, including Samsung Electronics, POSCO, and Hyundai Motor Company, received the highest grade of “superior”. Twenty companies were ranked as “good” and 23 others were listed as “average”. The index has been calculated by combining the performance assessment of the conglomerates by KFTC, plus a personal survey of 5,200 contractors of the 56 companies.
Large companies that received the lowest mark in the assessment will not face any disadvantages. However, 26 companies with the satisfactory grade or above will be given various incentives from government agencies, including tax breaks and subsidies.
 It is the first time that the shared growth index has been calculated. Although some conglomerates may not be content with the index, it is desirable for them to acknowledge the commission's effort to improve the environment for achieving co-prosperity between conglomerates and SMEs.
 In fact, following its active involvement in the ‘‘shared growth'' agenda, many large enterprises have recently reached mutual agreements with subcontracting SMEs for fair trade and shared growth. Two prominent examples of such arrangements are Samsung and Hyundai's agreements with their respective subcontractors.
  GOVERNMENT PUSH
 Nine Samsung group affiliates, including Samsung Electronics, made cooperative agreements for shared growth with 5,200 subcontractors. The package of financial assistance amounted to $5.7 billion, among which R&D support comprised $1.7 billion.
 Samsung agreed to induce its subcontractors to make cooperative agreements with lower-level sub-subcontractors, and provide them with incentives. Similarly, six Hyundai group affiliates, including Hyundai Motors, made cooperative agreements for shared growth with roughly 1,600 subcontractors. The package of financial assistance amounted to $3.9 billion, with R&D and capacity investments making up $2.3 billion.
Hyundai promised to provide 300 R&D support manpower for its subcontractors. This is just the beginning, and many more large companies have announced similar initiatives.
With a small push from the government, the Korean companies have realised that they need to share the burden of their sub-contractors.
 That is what is lacking in India. Any number of laws can be enacted but effective implementation is crucial. It also requires a concerted effort by the government; so that the large corporations in India automatically devise their own ways to help their sub-contractors survive and share their growth.
Many companies may still be doing it on their own initiative, but if there is a government push, it will make a world of difference.

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Lessons for Retail Giants Hoping to Enter India

First published in Business Standard: __________________________________________________________________
After a quiet period, intense lobbying for opening up multi-brand retail once again seems to be hotting up. On May 24, Carrefour’s India head, Jean-Noel Bironneau, met Commerce Minister Anand Sharma, and his counterparts from Wal-Mart, Tesco and Costco will no doubt follow soon.
 Ever since the government announced its decision to allow foreign direct investment (FDI) in multi-brand retail trade, and then backtracked, there have been a flurry of articles on the pros and cons of such a move.
There is no clear answer and those in favour and against FDI have expressed ample views. So, another attempt to do so would be futile, although it must be stressed that allowing FDI does not mean that the global retail giants will automatically wind up capturing the market.
 Take their experience in South Korea, home to one of Asia’s most dynamic and largest retail markets, ranking fourth behind Japan, China and India, with a relatively wealthy population. Wal-Mart and Carrefour have had to beat a retreat after struggling for years to increase market share. Tesco is the only successful foreign retailer, going from strength to strength.
 The varying success of these three retail giants in South Korea has become must-read case studies for all potential foreign investors. It also holds lessons for them in the Indian market, given the high complexities in terms of a wide geographic spread and distinct regional consumer preferences. Historically, South Korea kept its major retailing operations closed to foreign ownership. It was only in 1988 that the government began a series of three-year plans designed to improve the efficiency and productivity of the retail and distribution industry.
The first stage of this process occurred in 1989 when regulations on the establishment of foreign companies’ subsidiaries and the inflow of FDI were eased. Then, foreign retailers were permitted to establish stores at a maximum size of 1,000 sq m, as prescribed by the second stage of the open-up policy. The regulations on the number and size of retail outlets of foreign companies were further relaxed in the third stage of the programme beginning in 1993, when foreign companies were allowed to open up to 20 stores with each store not exceeding 3,000 sq m.
 It was not until 1996 that FDI in the Korean retail market was completely liberalised and foreign retailing companies began expanding there in earnest. Sensing huge opportunities, Wal-Mart, Carrefour and Tesco entered the country around the same time, but adopted different strategies.
 Wal-Mart attempted to penetrate the Korean market by building stores in distant areas where land prices were low, replicating the US strategy of smaller-city store build-up. It had only 16 stores in all of Korea with just one in the Seoul metropolitan area and could not achieve economies of scale.
The company expected the Korean consumers to drive to its stores for price shopping as American consumers do. However, this location strategy did not match well with the Korean consumers’ lifestyle and shopping habits. They prefer to buy smaller units on a more frequent basis and to have accessibility to a store within walking distance.
 As a result, Wal-Mart faced serious challenges in implementing its core competence in South Korea. Moreover, it could not enjoy its buyer power in the local vendor market and had no control over its Korean supply chain and procurement. Eventually, it packed its bags in 2006.
 Carrefour had a similar story. Despite its experience elsewhere, the company failed to localise its stores to a sufficient extent. Instead, it tried to introduce its global practices and strategies in the country. Its store layout, ambience, products and location failed to attract customers. The company wanted to attract customers by providing them high-quality products in bulk at low prices. Its stores were styled like warehouses and were simple in appearance compared to the stores of its competitors. Initially, customers were enthusiastic, but most of them were not bulk purchasers.
 Also, unlike other markets, Korean customers prefer a clean and sophisticated atmosphere along with low prices. At the time of its exit in 2006, Carrefour was the fourth-largest retailer in the country, with 32 hypermarkets. The company had invested $1.5 billion, making it the largest foreign investor in the Korean market, but that was not enough to guarantee it success.
 In contrast, Tesco had an effective “localisation” strategy for downstream activities. It entered the market by forming a joint venture with a major local partner, Samsung, leveraging its knowledge and expertise of the local market. Tesco devoted considerable attention to transferring its core capabilities to this new market, but did not attempt to iterate the British version of its retail format.
It gradually increased its stake in the company to 95 per cent, but continued to localise its 450 stores, consisting of both large hypermarkets and small Express stores. Also, of Tesco’s 27,000 staff in Korea, only four are expatriates. As a result, it became one of Tesco’s biggest success stories, generating a third of its overseas sales.
 One key factor that contributed to Tesco’s success was its ability to create “value” that is suitable for the Korean tastes and preference. While other foreign brands like Wal-Mart and Carrefour have failed, Tesco’s Korean brand, Homeplus, is moving from strength to strength, as it closes the gap with the market leader E-mart.
It also has leveraged Korean’s love for high-tech, having just launched innovative virtual stores in subway and bus stops where customers can use their smartphones to buy products that are delivered right to their homes.
 These stories contain valuable lessons for the global retail companies who now wish to expand their presence in India, whenever the law permits. Their multi-brand retail strategy has to be different from their wholesale cash and carry stores. Moreover, it is important to heavily localise operations keeping Indian tastes in mind, with or without a domestic partner. Blindly applying western business models for the Indian market will not work.

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Outbound Tourism Policy Need of the Hour in India

It is more or less a quarterly gimmick by reporters in the Indian media who cover tourism. Since early 2011, they have been issuing reports (perhaps on ‘dry news days’) that the list of countries whose citizens will be provided Tourist Visa-on-Arrival (VOA) at international airports is being expanded. Do a Google search for ‘India visa on arrival’ and you will know what I mean. Under the policy implemented since January 2010, India currently issues VOA to 11 countries including Japan, Indonesia, the Philippines, Cambodia, Laos, Vietnam, Singapore, Myanmar, Finland, Luxembourg and New Zealand. Citizens of these countries can get a single entry visa on arrival with a maximum validity of 30 days, at Delhi, Mumbai, Chennai and Kolkata Airports. This list is sought to be expanded to include 13 countries largely from Europe, south-east Asia, even as more entry points will be included. The expansion of the list will no doubt give a major boost to the tourism industry in India, as more visitors land up on its shores. Tourism is not only a growth engine but also a big employment generator. Worldwide, the industry generates eight percent of jobs, and it is estimated that each job in the tourism industry creates two additional jobs in other sectors. As noted in the Declaration adopted by Tourism Ministers from G20 economies at the recent summit in Merida, Mexico, on May 16th, visa facilitation is central to stimulating economic growth and job creation through tourism. In particular, G20 economies could boost their international tourist numbers by an additional 122 million, generate an extra $ 206 billion in tourism exports and create over five million additional jobs by 2015 if they improve their visa processes. The Ministry of Tourism statistics show that foreign tourist arrivals in India during 2011 were 6.29 million, growing from 5.78 million during 2010. Last year, India received 12,761 tourists under the VOA scheme, the largest numbers coming from New Zealand and Japan with 2,762 and 2,344, respectively. These are still relatively low figures, if you compare the number of tourists who visited China last year (135 million). Though, it is still a good start, what is worrying is the fact that MEA is not looking at mutual reciprocity with countries in implementing the VOA policy. Rightly, the focus is to attract international tourist traffic and turn India into a major tourist destination, but regrettably, the plight of the outbound tourist is completely ignored. Today, Indian travelers and the estimated 25 million strong overseas Indian community require a processed visa from their country of residence, to visit all the major G20 economies (except Indonesia which allows for VOA). Information provided by the International Air Transport Association (IATA) shows that some 59 countries and territories provide visa-free or VOA access to holders of Indian passports.These include countries such as Burundi, Bolivia, Cape Verde, Central African Republic, Comoros, Djibouti, El Salvador, Ethiopia, Gambia, Guinea-Bissau, Guyana, Mozambique, Nauru, Sao Tome & Principe, Samoa, St Lucia, Timor Leste, Togo, Tuvalu and Kosovo, which hold little to no interest for the desi leisure traveler. It is only countries on the list like Thailand, Egypt, Cambodia, Indonesia, Hong Kong, Tanzania, Kenya, Madagascar, Maldives, Mauritius and Seychelles that may pique the interest of the Indian tourist. For that matter, the top tourist destinations for outbound Indian travelers last year were Singapore, USA, Malaysia, Thailand, China, Dubai, Hong Kong, UK, Italy, Australia, Switzerland and Canada. Since India’s tourism policy has been focusing on inbound travelers, the policy approach on outbound tourism has been relatively insufficient. This despite the fact that Indian outbound tourists topped 12.5 million, double the number of inbound tourists. The UN World Tourism Organisation predicts that the country will account for 50 million outbound tourists by 2020, while the ‘Kuoni Travel Report India 2007’ predicts that total outbound spending will cross the $28 billion mark in 2020. Pointers should be taken from the new study by London-based Centre for Economics and Business Research (CEBR), unveiled on May 10th. It highlights that outbound travel directly contributes over £22bn to the economy, representing 1.6% of UK GDP. With the inclusion of contributions made by industries supplying the sector, the total economic impact rises to over £54bn, or 3.8% of UK GDP! In addition to its economic contribution, the outbound sector makes a significant contribution to jobs. When jobs that are reliant on supplying the industry are taken into account, this reaches 5.2% of total UK employment. The report also reveals that the total tax take from the outbound sector is £6bn per year, with £1.2bn raised from indirect taxes such as Air Passenger Duty (APD). This is a significant contribution. Although there are no similar studies for India, it goes without saying that the Indian holidaymakers also spend at the local travel agent and shop for clothes, accessories, cameras, toiletries and other essentials before they embark on a trip. This consumer spending has a direct impact on the domestic economy, not to mention employment generation and taxes. Our policymakers assume that by going abroad on holiday, money is being taken out of the Indian economy. On the contrary, outbound tourists make a huge contribution to the Indian economy, both directly and indirectly. The government must recognize and support outbound travel in its current and future policies and plan strategies to deliver growth to the wider economy. The first step should be to simplify overseas travel for Indian tourists. Additionally, it should work to generate and promote demand for overseas travel in cooperation with the relevant ministries, state governments, travel agencies, airlines and overseas national tourism organizations. This segment needs to be tapped to benefit the Indian economy, and the policymakers ought not to ignore it.

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European Investors in Taiwan

European investments in Taiwan have been steadily increasing over the past two decades and the dramatic rise has been in parallel with the founding and rapid expansion of the European Chamber of Commerce Taipei (ECCT). The ECCT started with just 50 founding members in 1988. Since then it has expanded to approximately 400 companies and organizations and 700 individual members. As noted by Mr. Freddie Hoeglund, CEO of ECCT, today, European investors account for approximately 30% of all foreign direct investment in Taiwan, making them the largest group of foreign investors in Taiwan, well ahead of the next largest investors, the United States and Japan. “EU investment in Taiwan has exceeded $30 billion, far exceeding investments from the United States of $22.01 billion and Japan of $16.64 billion. The steady increase in investments over the past two decades indicates that Europeans remain confident in Taiwan’s economic prospects. Also, Taiwan rose five places on the list of the EU’s trading partners to 14th place, up from 19th place in 2009,” he said. Taiwan is of interest to European investors for a number of reasons, notably because of Taiwan’s important and dynamic role in the global economy, especially in global information and communication technology production chains. The country also has many other advantages such as a good transport and communications infrastructure, a relatively consistent legal system, a highly skilled and stable workforce, a functioning and affordable universal healthcare system and a good quality of life. These have been made possible thanks to sensible and progressive policies and programs made and implemented by the Taiwan government, although more needs to be done. Mr. Hoeglund noted that through a network of 28 industry and support committees, the Chamber has been successful in addressing specific concerns and providing concrete recommendations to all levels of government to facilitate improving the business environment. The ECCT annually publishes a series of position papers that comprise issues identified by its committees as hindering the further development of their respective industries and provide recommendations to the government of Taiwan for improvement of the business environment on general issues as well as industry-specific problems. They also serve to keep the European Commission, the European Parliament as well as the governments of individual European Union member states informed about Taiwan’s business environment. “Through lobbying government and formulating Position Papers, the ECCT ensures that the European agenda remains on the list of priorities of the Taiwan government. The government has taken our opinions seriously and taken action to improve the investment environment based on our recommendations. Since we began publishing position papers, we have seen progress made on an average of 20-30% of issues raised by its industry and support committees every year,” he said. The Chamber has a successful track record in promoting the business interests of European companies through communicating with all levels of the Taiwan government on a wide variety of business issues such as tax reform, labor standards laws, improved harbor administration and entry-exit regulations. Through regular committee activities, meetings with government officials and the formulation of Position Papers, the Chamber works with Taiwan's political and business leaders to ensure that conditions for European businesses in Taiwan continue to improve. “The ECCT's lobbying initiatives bring issues, which have an impact not only on European interests in Taiwan, but also Taiwan's economy and society, to the attention of the Taiwan government. Annually, we meet the government officials at least 70 to 80 times. We also frequently provide opportunities for members to meet with government officials, NGOs and the European Commission.” He also noted that recently the Chamber launched the Low Carbon Initiative (LCI). The objective of the LCI is to showcase and promote the best European low carbon solutions and practices in order to help Taiwan to meet its goals to reduce carbon emissions in Taiwan. The LCI will be structured based on its three main objectives arranged in three platforms: Advocacy with the Taiwan government on the best policies to reduce emissions; Best Practices - Showcasing European low carbon solutions ; and, CSR and Education - Raising awareness about low carbon solutions. Fourteen European firms from the Chamber have already signed up as founding members and have begun planning activities. This will include launching a website and holding seminars, workshops and a major exhibition and conference in June this year. European companies already contribute a lot in various fields towards energy saving, efficiency and consequently sustainability but, in order to reduce emissions, more effort is needed to increase Taiwan’s renewable energy installations and improve energy efficiency, especially in buildings, which account for up to 40% of Taiwan’s energy use. The chamber is also involved in the EU’s satellite development program. It has been granted funding by the European Commission as part of a consortium, called GNSS.Asia, of five European chambers (from China, South Korea, Japan, India and Taiwan) under the European Business Organisations (EBO) World Wide Network. The global navigation satellite system (GNSS) Asia project falls under the EU’s FP7 program and is linked to promoting technology development related to the Galileo satellite project. The GNSS.Asia consortium’s objective is to develop potential research and industrial partnerships between EU and Asian organisations, including Taiwan. Among the other recent initiatives, Mr. Hoeglund said that the Chamber recently commissioned Copenhagen Economics to conduct a follow up to its 2008 Trade Enhancement Measures (TEM) agreement study, which analyzed the case for a free trade agreement between the EU and Taiwan. The new study, to be conducted in the first half of 2012, will update the original study, taking into account important developments that have occurred over the past four years, including the Economic Cooperation Framework Agreement (ECFA) between Taiwan and mainland China and Korea’s FTAs with the European Union and USA. The original study made a clear case for a TEM agreement. The report on the study’s findings concluded that a trade deal would boost Taiwanese exports to Europe by €9.84 billion, in particular benefiting Taiwanese manufacturers of electronics and machinery and it would boost Taiwan’s annual GDP by €3.8 billion. The study also concluded that a trade deal would increase annual EU GDP by €2 billion while European exports to Taiwan would increase by €11.8 billion. Such a deal would therefore increase jobs and wealth in both Taiwan and the EU. Since the release of the original study report, the ECCT has been actively supporting a TEM by calling on the governments of both the EU and Taiwan to begin conducting studies and engaging in preliminary negotiations on a potential TEM, he said. In this context, he noted that his visit to Seoul from April 25th to 27th, along with an ECCT delegation was a good opportunity to learn about the FTA negotiations. The agreement was implemented in July last year, and the EUCCK played a very important role in assisting the European Commission. “The visit was part of the ECCT’s ongoing interactions with other chambers in the Worldwide Network of European Business Organisations (EBO). We visited Beijing in 2011 and Shanghai in 2010. During this trip, the delegation was briefed by experts from EUCCK and the EU’s representative in Seoul on details of Korea’s recent free trade deals with the EU and the United States. The delegation also had the opportunity to meet and exchange ideas with their industry counterparts to talk about business developments in their respective industries and regulatory issues in Korea and Taiwan.” He observed that many of the problems that EU investors face in Taiwain are similar to the issues faced in Korea prior to the FTA. For instance Taiwan has double-testing requirements and Taiwan-only standards, which have hindered imports of European electronics products, automobiles, pharma, cosmetics and other goods. Decisive action to harmonize Taiwan’s regulatory environment with international standards would go a long way towards improving Taiwan’s competitiveness and attractiveness as an investment destination, he noted. Speaking on the ECFA, he said that it is a preferential trade agreement between the governments of China and Taiwan that aims to reduce tariffs and commercial barriers between the two sides. The pact, signed on June 29, 2010, in Chongqing, was seen as the most significant agreement since the two sides split after the Chinese Civil War in 1949. The ECFA has been compared with the Closer Economic Partnership Arrangements mainland China signed with the Special Administrative Regions: Hong Kong and Macau. The deal is thought to be structured to benefit Taiwan far more than mainland China. The advantage to Taiwan would amount to $13.8 billion, while mainland China would receive benefits estimated at $2.86 billion. It is too soon to measure the full impact of the ECFA on European business but ECCT members have benefited from efforts so far taken to normalize cross-Strait business relations. The two sides signed off on an initial early harvest list of 539 products from Taiwan and 268 items from China to be exempted from tariffs starting on June 1st, 2011 and have since removed around 600 items from the list of products banned from import into Taiwan from China. This leaves another 2,126 items still subject to negotiation. Many of the items banned or restricted are manufactured by European corporations in China. The ECCT supports the move towards greater cross-Strait business normalization but the benefits of the opening up are being countered by the import ban or restrictions on the import of some 2,100 products manufactured in China. While the number of items on the list has fallen from over 2,700 last year, most of the items regarded as priority items manufactured by European companies in China remain banned or restricted. The ban fosters protectionism, hurts Taiwan’s own industry and consumers and works against the promotion of Taiwan as a regional hub. The ban on numerous models of cars and trucks manufactured by European automakers in China means that local consumers and businesses are deprived of superior quality vehicles at reasonable prices. “The ban on various motors and other electrical engineering equipment forces our member companies to source these products from alternative, more expensive production locations. This directly leads to a cost disadvantage when selling these products in Taiwan.” Lifting the ban and other restrictions would benefit businesses and consumers in Taiwan and make Taiwan more attractive to international investors. In turn this would boost Taiwan’s competitiveness. Tariffs currently in place are already low and the main benefits the EU would gain from a TEM would be in addressing non-tariff barriers (NTBs), just as the recent EU-Korea FTA has done. An EU-Taiwan TEM will be able to tap into the additional trade flows between Taiwan and Mainland China. Gains from an FTA will increase with the ECFA in place and subsequent agreements that would eliminate many of the remaining trade and investment barriers across the Taiwan Strait. Direct beneficiaries will be Taiwan-owned companies and JVs with European partners but ultimately all players will benefit from a more open business environment, he said.

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Tips for Korean Companies Doing Business in India

It is now close to two and a half years since Korea and India implemented the Comprehensive Economic Partnership Agreement (type of FTA), but economic relations between both sides is growing slowly. Although bilateral trade has been growing on an average at 20% annually over the last five years, the investment figures are much more modest. Compared to $2.52 billion in 2001 total trade stood at $ 20.57 in 2011, with a target of $ 30 billion set for 2014. However, Indian investment in Korea is still a low figure of $1 billion, while Korea’s total investment in India is just $2.3 billion. Some of the Indian companies with a presence in Korea are Novelis Inc., Tata Motors Limited, Mahindra and Mahindra, Nakhoda Ltd., and M/s Creative Plastic. Major Korean companies active in India include Hyundai Motor, Samsung Electronics, LG Electronics, POSCO, Hyundai Mobis, Wia Corporate, Lotte Group, Doosan Heavy Industries and Hankook Tires. In addition some 150 others have smaller businesses in India. I would argue that if more Koreans companies do not explore the Indian market, they will be left behind their global competitors. Having emerged as a global center for services and outsourcing, India is also becoming an attractive destination for outsourcing industrial production, specifically for specialty manufacturing. In addition, the expanding Indian middle class is about the same size as the population of the US. It has seen a significant rise in its desire to buy high-quality consumer products, thereby providing a large domestic market for companies that choose to set up consumer manufacturing operations and sales centers in India. Further, it is expected that as India continues to grow, its need for development of its physical and human infrastructure will correspondingly increase. In this context, it is anticipated that India will require some $500 billion over the next five years in investments into the infrastructure sector. All in all, there is little doubt that Korean companies need to devise an appropriate India-strategy. The Indian business market is large and bubbling with newer opportunities in possibly every sector - financial services, telecom, IT, automobiles, media, real estate and alike. The large talent pool of India also offers extensive opportunities. To explore these opportunities extensively, Korean companies need to build up strategic partnerships with the Indian industry. They should first keep India as a key focus, and after that, devise bold, long term targets. The entire decision-making process should be extensive so that India-specific business models pertaining to product, value and pricing can be effectively built. However, one should remember that there are also a number of key cultural challenges in India that can create misunderstanding and conflict as well as huge direct and indirect costs to the organisation if overlooked. Navigating the challenges of doing business in India can be difficult without a comprehensive understanding of Indian social and business culture. India is a country riddled with complexities – distinct differences in culture, language, class, hierarchy and communication styles. So a first-timer’s experience doing business in India can be both exciting and extremely vexing. I list below a few tips that may help you understand Indian business culture. Firstly, the attitudes towards authority are similar to Korean culture. Traditionally a caste society with roots in Hinduism, Indian culture places a high importance on authority and status. Communication between levels is relatively closed so valuable insight or suggestions from employees in lower positions will rarely be shared with their superiors. In this context, Koren companies will feel at home. Like in Korea, Indians have a high tolerance to uncertainty, generally accepting social etiquette and norms instead of rules and regulations. Even though rules do exist, the low level of adherence to them creates huge challenges for companies setting up business in India ,who are used to following Korean regulations. Another similarity between Korean and Indian business cultures is the focus on relationship and trust building. As is the communication style. Indians have a preference for indirect, high context communication. In other words, Indians prefer to see the whole picture, place a high importance on the impact relationships, body language and emotion have on communication and will often avoid saying ‘no’. What might be a bit upseting for Korean businessmen is the lack of respect for time schedules in India. People’s attitudes towards punctuality are relaxed and they tend to change priorities depending on their importance. Most Korean companies are accustomed to the ‘ppalli ppalli’ way of working which requires adherence to strict deadlines and fast decision-making, so they may struggle to cope with the idea that when doing business in India, time cannot be controlled. In India there are a number of cultural differences to keep in mind, especially as they relate to the day to day interactions with Indian clients and employees. The traditional caste system has been outlawed, however the large power distance indicates that the attitudes still remain. As a result, it will be important to make sure to adhere to formal titles and take great care to treat all with a great deal of respect. There is a lot of subtle emphasis on class and hierarchy. Language compatibality is also one thing that must be taken care of. Most Koreans are used to ‘American English’ which is quite different from ‘Indian English.’ Although most university graduates and Indians residing in major urban centres have a very high level of English, understanding them can be challenging, because of the different vocabulary and expressions as well as heavy accents. Many people are unaware of these differences and expect communication with Indians to be simple. In India, business is usually done over lunch as opposed to dinner. Remember to check what their culinary preferences are as many people in India are vegetarians and don’t drink alcohol. Also, gift giving is not a very important part of business and if receiving one, they should never be opened in the presence of the giver. Understanding the cultural differences which exist when doing business in India is only the first step. Korean companies must also develop strategies to effectively cope with these challenges. This will help companies maximize the immense opportunities and benefits of doing business in India.

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Interview: Mr. Chip Pitts, Vice Chair/Chair Designate, Fairtrade International

Fairtrade International (FLO) is a non-profit, multi-stakeholder association that develops and reviews Fairtrade Standards, assists producers in gaining and maintaining Fairtrade certification and capitalizing on market opportunities. Its mission is to enable the sustainable development and empowerment of disadvantaged producers and workers in developing countries through Fairtrade certification by: setting international Fairtrade Standards; facilitating and developing Fairtrade business; supporting producers in making maximum use of the opportunities offered by Fairtrade certification; and by promoting the case for trade justice in debates on trade and development. FLO is the only organization in the world that specializes in Fairtrade standard-setting. 25 members around the world produce or promote products that carry the FAIRTRADE Certification Mark. They developed the Fairtrade labeling model and are responsible with the global board of directors for governance and decision making within FLO. Its members include three producer networks, 19 labeling initiatives, two marketing organizations, and one associate member. The Europe Korea Foundation, philanthropic arm of the EUCCK, has been involved as it’s marketing organization for the initiative in South Korea since early last year. As noted by Mr. Chip Pitts, Vice Chair/Chair Designate of the FLO Board, Fairtrade represents a new way to do business that looks holistically at the supply chain to address market failures and their social impact at source. It is not about aid or charity, but about recognizing the global community as having rights and responsibilities that extend across all of its stakeholders. “This is a really exciting time for FLO because Fairtrade has had an exponential growth over the past years. This mega-trend of Fairtrade which leads to more sustainable, and more equitable economic relations is something we need to build on. We have to make sure that the movement is always at the cutting edge of being relevant and high impact for small farmers and workers in the quest for a more just world.” One of the focuses of the board is to take cognizance of the changing dynamics, the fact that there are these competitive approaches that are coming up, including ones that focus just on sustainability, or just on environment, or just on human rights or labor rights. The nice thing about his particular label is that it represents all of these things- environmental, human rights and labor rights. It also really contributes to the companies’ needs to have sustainable supply chains, he said. He observed that Fairtrade certification benefits marginalized producers and workers in the Global South in four critical ways. First, it provides producers with guaranteed prices that are higher than conventional world market prices, particularly in volatile tropical commodity markets. Second, it supports organizational capacity building for the democratic groups that are required to represent small-scale producers and workers. Third, it enhances production and marketing skills for participants and their families which extend beyond Fairtrade Certified production. Fourth, it provides a social premium to finance broader community development projects, such as health clinics, schools, better roads and sanitation, and other social services. Mr. Pitts is an academic, technologist, attorney, businessperson, and activist who has led technology enabled grassroots campaigns and coalitions for human rights, economic development, and social justice in the United States and in various countries around the world. Having started his international career with a public interest law firm working against apartheid in South Africa, he then became a partner at the world’s largest law firm, Chief Legal Officer of Nokia, Inc., and founding executive of startup companies in Silicon Valley and Austin while offering volunteer leadership to various non governmental organizations. He is also an advisor to the UN Global Compact and former Chair of Amnesty International USA, and serves on several other global boards and advisory boards, including the Business and Human Rights Resource Center (London), the Negotiations Center (Dallas), and the Electronic Privacy Information Center (D.C.). During the current academic year, he is serving as a Visiting Professor at CEIBS (Shanghai), Kyung Hee University (Seoul), and the Center for Human Rights (University of Minnesota), in addition to ongoing teaching in Corporate Social Responsibility and Sustainable Development at Stanford Law School and Oxford University. “I prioritized my personal activities in this region because despite being one of the most connected regions in the world, in terms of economic globalization, Asia is a bit of a laggard when it comes to human rights and social compliance.” For this reason, although the Fairtrade movement has been making inroads in many Asian countries, it has not made much of an impact in China. There are nascent pilot efforts because of the government obstacles that have to be overcome. Notwithstanding this, the other emerging markets are coming on-line and and are acting in big way. Without a doubt the ‘second world’ economies will be driving the process in the future, he said. There is a nascent ASEAN mechanism for human rights now, with the establishment of a Working Group whose primary goal is to establish an intergovernmental human rights commission for the region. It is a coalition of national working groups from ASEAN states which are composed of representatives of government institutions, parliamentary human rights committees, the academe, and NGOs. It is still at an early stage, while the mechanisms in America and Europe are well established. Even the African system is actually quite strong, while Asia is a latecomer, he said. “Asia is at the forefront of economic liberalization, but needs to catch up when it comes to CSR and human rights. We have seen amazing progress just in the last five years and there is a rapid race to catch up with the global norms. Not just WTO and commercial norms but also best practices and social norms. This old idea that CSR is just about philanthropy or giving back a percentage of your profits, that was dominant five years ago, is changing rapidly in countries like India, Malaysia, Indonesia, China and also definitely here in Korea.” “This is partly being aided by the United Nations Global Compact and the new UN Business and Human Rights Framework which have very strong roles for the State to protect rights. They also have roles for civil society and businesses, whereby human rights must be respected. It is not a discretionary matter anymore, but rather an imperative...a global norm, crystallized in ethical norms and also in soft law and hard law. We are seeing an explosion of soft law standards on this topic. In every industry in the world there is a code of conduct and often those codes are made into hard law,” he noted. The UN Global Compact is a strategic policy initiative for businesses that are committed to aligning their operations and strategies with ten universally accepted principles in the areas of human rights, labor, environment and anti-corruption. The UN Framework on Human Rights and Business comprises the State’s duty to protect human rights, the corporate responsibility to respect human rights, and the duty to remedy abuses. “Asia is playing catch up, and the opportunity that Fairtrade presents is something that should be compelling to all stakeholders. It is in the interest of government and businesses as well as producers. It addresses the trust deficit that businesses are having globally and is a non-partisan, neutral, common- sense way to have more fair, sustainable trade that is in the interest of everyone. Moreover, consumers, too will benefit as they don’t want to be part of unethical trade,” Mr. Pitts noted “Human Rights are about empowerment. This was one of the best things going. Having studied international development, and been active with a lot of anti-poverty initiatives around the world, ranging from direct cash grants to less direct systems, I think that the Fairtrade system represents a sort of culmination of a market-based system based on enhanced transparency in the value of the supply chain but also enhanced equity. It has the potential to contribute a changed consciousness globally where we as consumers, business people, government, all the stakeholders, we all need to be aware that the old idea of “business as usual” --exploitation, violating labor rights, and destroying the environment -- is not only wrong morally is not sustainable. We cannot have business like that in the world; it’s not fit for our current population. That’s what fair trade represents...not just the commercial perspective but also people and the planet.” Fair trade guarantees that there are minimum standards that all rights will be complied with standard processes. So instead of the classic race to the bottom we have the race to the top. All companies can compete on a level playing field. “Frankly it’s sort of a microcosm of the core challenge of the 21st century economy: How do we have a more sustainable and ethical capitalism, showing the way for an equitable relationship between capital and the supply chain -- one that will be sustainable for the future? We can avoid these frequently recurring and ever more intense and problematic financial crises. Fairtrade and CSR offer circuit breakers for global capitalism so that we can achieve a more level playing field and a more resilient system that will allow people to survive and prosper in the future.” Speaking on the challenges that the movement faces, he said that the organization has to ensure that it is an adaptive learning enterprise, that can take on board scientific challenges like climate change, but also not lose its core anti-poverty mission, which is essentially to connect producers and consumers more fairly. It has to do so in a more equitable fashion, so that farmers and workers who are often excluded from the global economic system have a means of earning a more sustainable living, with more empowerment, more autonomy over their lives. “What we need is economic development, not growth, so that people have opportunities. We have to look at ways in which these are interrelated. South-South trade is increasing, and that’s a reality we have to encourage and recognize. We need to be cognizant of the need to have much bigger impact. We want to take it to next level and make a much bigger dent in global poverty by bringing more people into system,” he said.

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Interview: Mr. Robert McKellar, CEO- Asia Pacific, Savills Asia Pacific Ltd.

The Savills Group, established in 1855, advises on allmatters of commercial, residential and leisure properties. It provides a comprehensive range of advisory and professional property services to developers, owners, tenants and investors alike. These include consultancy services, facilities management, space planning, corporate real estate services, property management, leasing, valuation and sales in all key segments of commercial, residential, industrial, retail, investment and hotel property. The company which is listed on the London Stock Exchange, has an international network of more than 200 offices and associates throughout the Americas, the UK, continental Europe, Asia Pacific, Africa and the Middle East, offering a broad range of specialist advisory, management and transactional services to clients all over the world. In Asia Pacific, it has over 44 regional offices comprising 20,000 staff. This regional market includes Australia, China, Hong Kong, Japan, Korea, Macau, Taiwan, Thailand, Singapore, Vietnam, with associate offices in Malaysia, Indonesia and New Zealand. As noted by Mr. Robert McKellar, Chief Executive Officer- Asia Pacific, Savills Asia Pacific Ltd., the company offers a unique combination of sector knowledge and entrepreneurial flair, giving clients access to real estate expertise of the highest caliber. “We choose to focus on a defined set of clients, offering a premium service to organizations and individuals with whom we share a common goal. Last year our revenue was approximately $500 million. We sold $9.2 billion worth of real estate in 2011, guided over 21000 valuations for $320 billion,managed over 111 million sq. m. of real estate property and leased over 2.4 million sq. m. for commercial, industrial and retail,” he noted Savills is synonymous with a high quality service offering and a premium brand, taking a long term view of real estate and investing in strategic relationships, he said. Mr. McKellar was appointed CEO, in March 2005 and is responsible for overseeing Savills’ regional operations across the Asia Pacific region. He relocated to Seoul in July 2009 to be able to focus more on North East Asia, while continuing to oversee the company’s operations across the region. At the same time, Savills increased its management team in the region, and delegated responsibilities for businesses in China and South East Asia to several core individuals reporting to him. Mr. McKellar joined the group in December 1988 as Financial Controller and then Managing and Financial Director for Savills Commercial Ltd., before being appointed Finance Director for Savills Plc in July 2000. Prior to working for Savills he worked for BP Minerals Ltd. and Babcock Power in London,and British Steel Corporation in Scotland. “There are several reasons why I chose to relocate to Seoul, as Asia Pacific CEO. Logistically, it is easier to travel to Shanghai, Beijing, Tokyo and Singapore. Our focus is North East Asia and it made sense to be based in part of the region. I see no reason why regional CEOs should be based in Singapore and Hong Kong all the time. Moreover, I travel all the time anyway, so I could be anywhere,” he said. He also noted that Korea is the third largest economy in Asia and is still a very big and attractive real estate market. “I think it is good for any CEO in Asia Pacific to spend time in Seoul. Because, then you begin to understand the market here and it is a good experience. Spending time in a market like Korea should be an opportunity anyone would welcome. We know it is much more difficult here than Hong Kong and Singapore. We all know it, but that adds to the value. Other reason is that Korean are big investors overseas, so why not spend time here and talk to the institutional investors.” This, despite the fact that Korea is not the biggest market for Savills. Looking at its split in terms of profile, the company is very heavily geared towards Hong Kong, China, Macau and Taiwan which account for 75 percent of its business in Asia Pacific. Other big markets are Singapore and Australia. “Korea and Japan are smaller. They are more mature, and more difficult to do business in. The emerging markets like China and Vietnam are easier for us to get a position there. More mature markets like Korea and Japan are difficult because of historical barriers to entry. Having said that, I must add that the opportunities in Korea are tempting.” In Korea, Savills has around 140 staff doing property management, investment sales, leasing, valuation, project management and closed asset property management. “Performance in 2011 was OK, it wasn’t great. We were profitable last year, the same as 2010 and the global economic slump did not really affect us because property management, asset management are consistent businesses. As regards investment sales, we roughly did two last year and two the year before. Leasing was quite good, but generally speaking it was OK...much the same as 2010.” “This year the company has got a few deals, a few investment transactions it is working on, and hope to transact soon. In fact last year would have been much better, if they had managed to complete one or two deals that slipped into 2012.” “We also reduced our costs. This year will be better, although not as good as Hong Kong or Singapore, but certainly better than 2011.” Speaking on the advantages that Savills enjoys vis-a-vis local competitors, he noted that being international players they can bring in international clients into the market and also can take the Korean clients overseas. Many Korean institutional investors are investing in London, since it is a very attractive capital market for overseas investors, and Savills can offer the ability to acquire real estate in Europe and other overseas markets. One of its strengths is internationalization, compared to local competitors. “We have some systems and applications and procedures which are international that help us to manage real estate in places like Korea and offer overseas sales that local players cannot offer.” For that matter, Savills is one of the advisors to the biggest institutional players in Korea, the National Pension Service, which has over $300 billion in assets. NPS aims to boost overseas investments to about 20 percent of its assets by 2016, up from 12.9 percent. “We are lucky to be able to advise some of the large institutions in Korea. Increasingly, we are seeing that capital flows are going from east to west...not just the Koreans, but the Chinese and Singaporeans too. This will continue to happen. Especially in big cities like London.” As regards the opportunities for investment arising from the eurozone sovereign debt crisis, McKellar noted that a lot of assets are going cheap. “However, most of the overseas investors tend to want to go to London as the prime focus since it is a liquid market, and a very big institutional market. Other markets in Europe tend to be less attractive. Even the other European investors are buying real estate in London because of the problems they perceive in the eurozone. There will be opportunities in eurozone if you are brave.” “While places like France and Germany continue to be attractive, most investors are focusing on London and the Scandinavian countries where there is less volatility. Europe will come back. The great thing about real estate is that it goes in cycles. The key is buying it near the bottom of the cycle. It’s all about timing,” he said. He picked as for the potential markets that will do well this year, besides London, “Australia is another market which has tremendous opportunity. It is a very transparent market, and the economy is strong with net immigration. In terms of risk, Indonesia may be stable, but real estate investments in Jakarta will give very good returns. Hong Kong and Singapore on the other hand continue to be volatile.” “I would consider Korea to deliver high returns, as long as you can access the product. Unfortunately, the real estate market is tightly held by the conglomerates. Many German funds want to come here, but are unable to proceed further.” In terms of product mix, he noted that despite global economic conditions, Asia Pacific’s retail sector will continue to grow off the back of continued consumer demand. “The retail fundamentals remain solid in the region, with sustained consumer spending in Hong Kong, Shanghai and Beijing. China has been the most significant growth driver for 2011 which has consequently led to higher retail rents in Chinese cities.” He also noted that the Asian market has become a prime target and pertinent region for retailers resulting in an increase in investment sales and retail constructions. This will continue, especially as new opportunities arise in countries like Vietnam and India. Referring to the challenges that a company like Savills faces in the Asia Pacific region, Mr. McKellar said that being a listed company, there are many compliance constraints which the local competitors, especially in China take advantage of. “The Asian way of doing business strongly relies on relationships, whereas the western model is different. Having to adjust to this is quite a challenge. Moreover, regulations in Asia tend to change very quickly and are unpredictable.” “We however still consider the region to be an exciting place to do business. We are expanding this year, to move into Malaysia, Indonesia and New Zealand. We are also keen on India, especially the retail sector.”

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Interview: Mr. Kwon Hyouk-se, Governor, Financial Supervisory Service

The Financial Supervisory Service was established on January 2, 1999, under the Act on the Establishment of Financial Supervisory Organizations by bringing together four supervisory bodies-Banking Supervisory Authority, Securities Supervisory Board, Insurance Supervisory Board, and Non-bank Supervisory Authority-into a single supervisory organization. The primary function of the FSS is examination and supervision of financial institutions but can extend to other oversight and enforcement functions as charged by the Financial Services Commission (the former Financial Supervisory Commission) and the Securities and Futures Commission. In an exclusive interview, Mr. Kwon Hyouk-se, Governor, FSS, speaks about his priorities, touching on many topics that are in the news.

Uncertainties in the global financial market continue due to the eurozone financial crisis. Can you briefly evaluate the Korean economy and financial market? The uncertainty emanating from the euro-zone debt crisis clearly has had a broadly dampening effect on global market outlook. To date, however, the overall extent of the impact of the debt crisis on the Korean economy and financial markets appears not as grave as initially feared. Korea’s exports continue to grow at a fairly steady pace, and the general expectation is that the economy will maintain growth momentum with improving employment and trade surplus. Looking ahead, a continued slowdown in the developed countries will likely mean slower export growth. Korea’s exports, however, are less dependent on these markets than in the past, so the overall growth trajectory should remain intact. In the financial markets, stock prices and exchange rates did fluctuate more than usual as was the case in other markets, but they are now settling down to more normal levels. I would also stress that the overall soundness indicators of financial institutions remain firm. Speaking more broadly, the declining proportion of short-term external borrowings in the banking sector and the sizable foreign currency reserve, currently in excess of USD300 billion, should leave no doubt about the strength of our foreign currency liquidity conditions. The introduction of hedges funds is seen by many as an innovative development if the Korean financial markets and acknowledge their economic utility, however detractors have also pointed out their risks. What are the measures to be implemented in order to minimize their potential side effect? Do you have plans to improve laws and regulations for the stable growth of the industry? Regulators imposed a 400% cap on leverage and derivatives trading of hedge funds against their assets as a way to minimize potential side effect. There are other similar checks and safeguards on hedge fund risk exposure, counter-party risk, and liquidity risk. Unlike global hedge funds, local hedge funds will start out as regulated entities. As the new funds take hold in the local investment market and become more established, there will be opportunities to take stock of where the market stands and whether more accommodating regulations are warranted. Most financial institutions in Korea have active Corporate Social Responsibility programs as they know they owe society and Korea a debt of gratitude. Do you think enough is being done? The spread of the anti-Wall Street protests in the U.S. and elsewhere is one manifestation of the general public’s desire for greater accountability and more socially responsible business conduct from the financial industry. In Korea, we do see financial institutions reducing their service fees and giving more to public causes to do their part as responsible corporate citizens. The general reception from ordinary citizens, however, seems be that the financial industry can and should do more, especially in doing away with arbitrary or heavy-handed industry-wide customs and practices that harm consumers. Less credit bias against the socially disadvantaged and low-income borrowers would also help. Since you took office, you have continuously emphasized the need for prudential supervision and financial consumer protection. Why? In the wake of the 2008 global financial crisis, financial consumer protection has emerged as a major policy priority worldwide. We see this in the common principles on consumer protection in the field of financial services that the OECD developed for all financial service sectors. As I alluded to earlier, the anti-Wall Street protests is just one of the growing calls on many fronts for better, more proportionate checks and balances on financial institutions for consumer protection as well. What financial institutions can draw from these developments is that consumer protection matters, matters enormously and that they should engage in an earnest effort to integrate consumer protection into their overall risk management from a long-term strategic perspective. Can you give us an evaluation of the progress made for financial consumer protection? What are the future directions? Because several mutual savings banks were on the verge of collapse when I took office, my early priority was to restore the public’s trust in financial institutions and to reinforce consumer protection. This led to the revamping of our organizational structure and the realignment of our supervision and enforcement focus to consumer protection so that we can better deal with anti-consumer practices. We have also expanded programs to improve consumer finance literacy and education. This year, we are going to take an aggressive stance on consumer protection as a key objective and commit ourselves to implementing the OECD principles on financial consumer protection. Under the KorEU FTA, both parties are expected to allow offshore data processing within 2 years from 1.7.2011 and additionally the FTA also calls for increased flexibility in allowing delegation of more back office function to onshore affiliates and offshore affiliates. The latter will require a change in business delegation regulations and licensing guidelines. What is the FSS’ position on this? The free trade agreements with the EU and the U.S. provide for offshore data processing for foreign financial institutions with some restrictions. For instance, restrictions may apply for certain types of customer data such as sensitive personal data in need of special care and protection and data deemed necessary for supervision purposes. It was also agreed that the implementation of offshore data processing would be suspended for two years when the agreements take effect to give time for fine-tuning of the supervisory processes and additional safeguards needed for handling of private information and preventing data breach. Following the ratification of the Korea-EU FTA by the National Assembly in July 2011, a task force comprising representatives from the Financial Services Commission and legal consultants has been working on a detailed implementation plan. The expectation is that the level of financial data to be allowed for offshore processing would be determined with an extensive review of private information protection policies at home and elsewhere and case studies of financial data protection and offshore data processing facilities in other jurisdictions. The FSS has recently urged banks to restrict the dividend pay-out ratio in order to further strengthen capital basis. In the cases of foreign banks (branches and subsidiaries) with only one shareholder, shouldn’t the FSS allow a little more flexibility in dividend pay-outs considering that the parent companies stand ready to inject capital as and when needed? The FSS is not contemplating any blank restriction on bank dividend pay-out practices, domestic or foreign. But there should be no argument about unjustifiably outsized dividend pay-outs that undermine the essential capacity to absorb losses or threaten the long-term capital soundness. Asset soundness and financial market conditions may deteriorate unexpectedly, and U.S. and European bank regulators nowadays keep a close eye on bank dividend plans and capital levels under various stress scenarios. This is a prudent step, and it makes sense for banks to set aside more when they can to strengthen their capital positions. In 2011, Korea’s financial market and FSS were marked by many big or small events. Can you tell us what was the most rewarding and memorable work progress this year? Regulators sought to keep financial markets calm and orderly by expediting resolution of the insolvent mutual savings banks and taking timely measures aimed at household debt growth and potential spillover effects from the euro-zone debt crisis. With regards to consumer protection, we significantly increased our supervisory resources and beefed up our internal oversight structures to better focus on such consumer priorities as more rational service fee structures. We also targeted small-cap share price manipulation (the so-called “theme-driven share trading), insurance fraud, loan fraud, and voice phishing as the four key consumer protection priority and reinforced our prevention efforts. In a move broadly aimed at revitalizing organizational culture and capability, we also carried out a large-scale personnel shuffling, brought about a clearer division between supervision and examination responsibilities, and sought to expand assistance to various disadvantaged groups. Briefly could you explain to us the supervisory policy and examination directions for 2012? The priority will be on safeguarding financial markets from disruptions that may be triggered by the euro-zone debt crisis. To this end, the FSS intends to step up monitoring of capital flows and encourage domestic banks to secure more foreign currency liquidity as an additional buffer against external risks. In addition, we are going to keep a close watch on the credit conditions of small- and medium-sized enterprises as well as industries especially vulnerable in a downward economic cycle such as construction, shipbuilding, and shipping. Our supervision of household debt growth will also continue in 2012. With more low-income households expected to come under financial pressure in 2012, we will continue to take strong supervision and enforcement actions against abusive business practices and conduct by financial firms. This will include more vigorous monitoring and supervision of private money lenders and consumer credit providers that prey on low-income borrowers. In terms of examination, we will be looking to improve the professional competence and efficacy of our safety and soundness examination. This means applying examination resources and intensity proportionate to the size of financial institutions. We will also intensify the scrutiny on abusive practices that harm consumers and small businesses. Financial firms will also be held to account for non-arm’s length transactions with large shareholders.

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