Restrictive Internet platform in Korea

First published in The Korea Herald.


The Korean government has finally announced its plans to start removing the troublesome ActiveX software from public websites later this month in order to create a more user-friendly Internet environment.

For long, this tech-savvy country has been stuck in a time warp with its slavish dependence on Internet Explorer.

ActiveX controls were one of the many troublesome regulations that President Park Geun-hye vowed to remove in her signature deregulation initiative, and it is good to notice that the government is moving fast.

It is a software framework that defines reusable software components in programming language and has become an integral part of the country’s Internet landscape.

Because it is a nonstandard software, it sometimes has trouble interacting with different browsers and is not really appropriate for mobile platforms. In particular, the system requires users to submit authentication certificates issued by local authorities, making it impossible for people to buy products or make financial transactions online without using Internet Explorer with the ActiveX plugin. In addition, websites of government bodies also use this technology for Internet security.

The Ministry of Government Administration and Home Affairs announced on March 3 that it would draw up a set of guidelines to remove ActiveX controls from public websites and implement it later this month.

The government has been seeking to help develop alternative technologies to replace the ActiveX controls, the home ministry said, adding that private sector website operators would also join the move to get rid of them in cooperation with other ministries.

Accordingly, the Ministry of Science, ICT and Future Planning is currently in charge of similar efforts vis-a-vis the private sector. The ministry is also planning to complete its private-sector ActiveX removal efforts by the end of this month.

However, one should not get our hopes too high. Back in 2009, the government and the Korea Communications Commission announced these very same objectives and even set up a task force. They grandly stated that they would make it mandatory for online shopping malls and financial institutions to provide subscribers with an alternative to ActiveX.

It was loudly cheered at that time, but then slowly forgotten, and the policy gathered dust. The same issue is now being revisited and it is hoped the authorities walk the talk.

To provide a little context to this situation, the Korean government was among the first to encourage shopping and banking online, but many people were concerned about Internet safety. The goal was to make Internet shopping very secure, so the government created its own system to authenticate the identities of online buyers. To make purchases, shoppers had to supply their names and registration numbers and apply for government-issued “digital certificates,” which they could present to sellers as proof of ID. This required the additional plug-in ActiveX ― which worked in tandem only with Internet Explorer, the browser that reigned supreme at that time.

Times changed and technology advanced, but the authorities continued with this piece of regulation. As a result, in Korea, when using Web browsers such as Chrome Firefox or Safari, online shopping often begins with a warning that the ActiveX plugin is required.

Those who use Apple computers or have installed Linux variants ― which cannot run Internet Explorer ― are virtually banned from doing any online financial transactions.

They have to either partition their computers and install Windows on one side, or rely on their office desktops, PC rooms and helpful neighbors.

It is really vexing, and I should know, having been a victim of this digital discrimination myself. I replaced my desktop with iMac way back in 2008. While I refuse to have anything to do with Internet Explorer, and also replaced Windows with Ubuntu on my laptop, I had to reluctantly install Windows on a partition of my Korean wife’s iMac, since she has to do most of the shopping and bank work online.

The funny thing is that Microsoft now supports ActiveX in Internet Explorer only as a legacy technology and actively discourages the use of the protocol. In fact, in a security advisory put out by the company a few years ago, the company actively discouraged the use of ActiveX.

It said: “Unfortunately, ActiveX controls are like any other software program ― they can be misused. They can stop your computer from functioning correctly, collect your browsing habits and personal information without your knowledge, or can give you content, like pop-up ads that you don’t want. Also, ‘good’ ActiveX controls might contain unintended code that allows ‘bad’ websites to use them for malicious purposes … . Here’s a good rule to follow: If an ActiveX control is not essential to your computer activity, avoid installing it.”

However, the Korean authorities appear to have ignored the warnings. So it is about time they are straightening things out. This will not only ease the hassles for customers but also grow the e-commerce business.

Last year, the Federation of Korean Industries carried out a survey on this issue and found that Koreans overwhelmingly approve the scrapping of the ActiveX framework, citing it as a hindrance.

According to a survey by the lobbying group for the country’s large conglomerates on 700 people nationwide, 78.6 percent of respondents said they wanted ActiveX software to be discontinued and replaced by a more up-to-date support system that is not so restrictive.

Going into details, the federation said 79.1 percent complained the framework made it a hassle to purchase products online, with 71.7 percent saying it affected bank transactions.

“This is the reason why despite Korea’s advanced information technology infrastructure, the proportion of its online shopping sector compared to its GDP, is much smaller than the United States, Japan and China,” the federation claimed.

For that matter, retail e-commerce sales in the country are expected to reach $36.76 billion in 2015, according to the latest eMarketer estimates of e-commerce and total retail spending around the world. Those figures give South Korea the third-largest retail e-commerce market in the Asia-Pacific, after China and Japan.

There is no doubt that if ActiveX is scrapped, it will breathe new life into the domestic online market place that could attract more buyers at home and abroad. It will go a long way in boosting the e-commerce market in the country, making it a growth engine.

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Korea's growing M&A activity

First published in The Korea Herald.

Mergers and acquisitions in Korea scaled new heights last year as companies undertook massive restructuring and big deals were struck.

According to the Global M&A Market Review published recently by Bloomberg, the M&A market nearly doubled to $79.7 billion in 2014 from the previous year. This is also four times more than the $20.4 billion recorded in 2011.

It is not very difficult to guess the reasons for the M&A boom. For starters, many companies were sitting on massive cash piles, while the slowdown in the economy and their weak earnings forced businesses to restructure and discard their poorly performing units.

A string of megadeals including the merger between Daum Communications Corp. and Kakao Corp. and the merger between Samsung SDI and Cheil Industries contributed to the growth in the total M&A volume.

Other notable deals were the acquisition of Oriental Brewery by Belgium’s Anheuser-Busch InBev and the acquisition of Tyco Fire & Security services by The Carlyle Group.

One recent megadeal that made headlines involved Korea’s biggest chaebol, Samsung Group, which struck a deal a few months ago to sell four of its chemical and defense affiliates to Hanwha Group for 2 trillion won ($1.8 billion).

According to industry experts, we can expect more M&A this year given the cheaper financing costs under low interest rates and also because of moves by the Korean government to tax companies sitting on huge cash piles.

In October last year, the Bank of Korea cut its benchmark interest rate by a quarter percentage point to 2 percent, matching a record low set in the aftermath of the global financial crisis. It is widely expected to cut rates again to boost the tepid economic growth -- its next monetary policy committee meeting is scheduled for Feb. 17.

News reports suggest that as many as 700 local companies are likely to be hit by a new tax on internal cash reserves, which is part of the government’s three-pronged taxation initiative announced in August.

Companies that have more than 50 billion won in capital will face the new tax. A single 10 percent tax will be imposed on companies that use less than 80 percent of their annual revenues for investment, wages and dividends from this year.

The initiative is a cornerstone of the economic plan of Finance Minister Choi Kyung-hwan to boost the domestic economy by forcing businesses to use some of their cash to raise employees’ wages, invest in facilities and raise dividends for investors. However, some companies might try to reduce their cash reserves by actively seeking out acquisitions.

As economic theory suggests, the M&A benefits are manifold. They can generate cost efficiency through economies of scale, enhance revenue through gains in market share and even bring the companies tax gains.

To narrow it down, the benefits can be listed as increased value generation, increase in cost efficiency and increase in market share.

All this should be good news for the Park Geun-hye administration, which announced proposals in March last year to give a much-needed boost to M&A activity and expand the local market.

It aimed to increase the volume of the local M&A market by announcing proposals to amend and abolish a number of regulations so as to encourage corporate takeovers and more private-equity-backed M&A deals. The plans include easing regulations on private equity firms and providing capital for M&A.

To boost private equity-backed M&A deals, the government said it would discard voting right restrictions and also strict disclosure obligations placed on PEFs under the fair trade law.

The government also announced it would make it easier for PEF-owned companies to list their shares on the local stock market. Until now, strict rules on investor protection blocked such companies from going public.

Other steps include expanding the size of a fund for the M&A activities of startups and small and medium-sized firms to around 1 trillion won within the next three years, and also introducing tax-exemptions for M&A deals carried out through a share exchange.

On the face of it, the volume of M&A activity in 2014 appears to suggest that the government push seems to be working. However, a closer look shows that not everything is as rosy as it looks.

The number of M&A deals were actually lower at 468 last year, versus 482 in 2013. A few deals have been very large, which in turn pushed up the total volume of transactions.

The M&A deals that occur in Korea take place mostly to improve the financial health of large companies by selling affiliates, rather than acquiring venture companies related to the new growth engines. In contrast, overseas M&A deals are more focused on means to secure new growth engines.

Mergers between affiliates of a large company and the division of a large company into affiliates for a shift in corporate governance continues to be one of the most active types of domestic deals.

Meanwhile, business transfers and mergers by large companies to diversify business -- apart from a few -- have declined due to uncertainty in the economic environment. Abroad, deals between companies in the same industry and across all different industries for external growth and business diversification are active. The Korean M&A market has clearly been dominated by acquisitions of domestic companies in the country. While cross-border deals are still lower, accounting for less than 3 percent of the total M&A transaction volume. This needs to pick up for the companies to make a global mark.

Without a doubt, much more progress is needed in the M&A sphere in Korea, and one should not just go by the transaction volumes that have been recorded. It is still in a nascent stage.

Another point that needs to be made is something that has been largely glossed over by economic commentators -- the impact of M&A activity on economic growth.

Neoclassical economic theory is primarily concerned with why M&A occur and views them either as responses to industry shocks, such as new regulations, technologies, liquidity constraints and competition or as responses to industry life cycles. The implications of M&A for economic growth, however, are largely ignored.

In Korea too, the consequences of M&A remain less studied than the reasons why mergers occur. Maybe it is time for Korean economists to do a comprehensive study on the impact of M&A activity on the domestic economy. It is bound to provide valuable policy advice to our policymakers.

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Korea-India economic ties slow to take off

First published in The Korea Herald.


It has now been five years since the India-Korea Comprehensive Economic Partnership Agreement ― a de facto free trade agreement ― went into effect, but the trade statistics do not present a very rosy picture.

It was widely anticipated that the CEPA, which came into effect in January 2010, would lead to more bilateral trade and investments. South Korea has abolished tariffs on 93 percent of Indian imports, and India has done the same on 75 percent of Korean imports. Besides, the agreement sought to increase the interactive trade account, as it includes investment in various sectors like goods, services and even intellectual property.

However, according to the latest statistics released by the Korea International Trade Association, while bilateral trade has slightly improved, it is still way below expectations.

Bilateral trade between both countries was $12.15 billion in 2009, which spiked to $17.11 billion in the first year of the agreement. However, since then, it has been a rollercoaster ride, increasing to $20.55 billion in 2011, and then falling to $18.84 billion and $17.57 in the following two years. In 2014, bilateral trade inched up a little to $18.05 billion ― well below the CEPA target of $30 billion.

Clearly, there is something wrong here. Even as Korea’s bilateral trade with the U.S. and the European Union has leaped, its economic relationship with India appears to be stumbling.

It is a wonder what happened to the grand proclamations that were made when the CEPA was being negotiated and finally signed.

Clearly, while considerable scope exists, it is not possible to pump up trade between both sides without government efforts. It is all the more important for South Korea to do so, as its economy has thrived on export-led industrialization.

Now, coming to the foreign investment figures. According to the latest statistics published by Eximbank Korea, total Korean investments in India to the end of 2014 amounted to just $3.53 billion ― 1.3 percent of their $270.43 billion overseas investments.

In comparison, Korean companies have pumped $49.69 billion into China, $15.70 billion into Hong Kong, $10.72 billion into Vietnam, $7.96 billion into Indonesia and $6.02 billion into Singapore. In the entire Asian region, Korean companies have invested $115.57 billion.

Looking at it from India’s point of view, the latest available analysis of FDI equity inflows by the Department of Industrial Policy & Promotion shows that Korea continues to rank low with only around $1.5 billion in investment.

Clearly the economic ties are still way below potential and CEPA has not really been very effective.

It is true that large Korean brands are household names in India and their strength has grown in the years since they first started operations. However, the fact remains that Korean FDI inflows have been growing at a very tardy pace, and companies seem to be keener to explore other emerging markets.

Many Korean companies were the first movers as FDI investors in India, following the spate of reforms and liberalization since 1991. They started to invest by forming joint ventures with local companies or established wholly owned subsidiaries, predominantly in automobiles and white consumer goods. With clever business models, they managed to make deep inroads into the Indian market in a relatively short period of time, led by technology giants Samsung Electronics, LG Electronics and Hyundai Motor. More recently Lotte Group, Doosan Heavy Industries and POSCO have become familiar names in the Indian business lexicon.

It may come as a surprise, therefore, that India figures quite low on the list of favored investment destinations for Korean companies.

Part of the explanation could be the nontariff barriers that continue to exist in India. The main irritants for Korean companies there are poor infrastructure, corruption, labor management, taxes, administrative services, fluctuating government policies at the central and state levels, political intervention, and customs and clearance procedures. Such uncertain policies have made investors opt for divestment or delaying their planned investment as they consider India a less attractive investment outlet than other Asian countries.

A case in point is the troubles faced by POSCO in India ever since it decided to start operations there. It has still not gotten clearance to start full-scale operations and the latest news suggests that there could be further delays.

As for Indian investments in Korea, among the noticeable investors are Tata Motors (which acquired Daewoo Commercial Vehicle in 2004); Novelis Inc., a subsidiary of Hindalco Industries Ltd. (which acquired Alcan Taihan Aluminum Limited in January 2005); and Mahindra and Mahindra (which acquired Ssangyong Motors in March 2011). Among the smaller investors are Nakhoda Ltd. and Creative. While Indian software companies such as TCS, Wipro and L&T Infotech have a small presence in Korea (with representative offices), they have not made any large commitments.

Does this mean that Korea does not offer any potential for Indian businesses? On the contrary: As an FDI destination, the nation has several strengths compared to China and Japan.

The economies of India and Korea are highly complementary in terms of factor endowment, capabilities and specialization. If the investment barriers are effectively tackled, India’s cost-effective human resources may complement growing labor scarcity and rising wages in Korea, and a number of companies may consider India an ideal destination for their relocation or global sourcing.

As experts have noted, India’s booming knowledge-based service industry complements the hardware and manufacturing-based economic structure of South Korea. India’s capability in the pharmaceutical, IT software and auto components industries usefully complement Korean competence in heavy engineering, automobiles, machinery and electronic hardware.

So it is all the more important for the two governments to become more active in sorting out the problems and realizing the full potential of the CEPA. India could make a conciliatory gesture and give permission to POSCO to start full-fledged operations.

Luckily for Korea, Indian Prime Minister Narendra Modi ― unlike his predecessor ― is business-friendly. Realizing this, most of the advanced countries are rushing to strengthen ties, with U.S. President Barack Obama even making a second state visit to India during his tenure ― something unprecendented ― and has accepted the invitation to be India’s Chief Guest at its Republic Day celebrations on Monday ― the first by a U.S. president. Modi has promised to bring sweeping economic reforms to make doing business in India easier. He is well on his way to doing it, and it not too late for the Park administration to take the initiative and sort out the problems plaguing trade and investment relations by initiating a comprehensive dialogue.

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Curious case of Uber in Korea

First published in The Korea Herald.


Over the past couple of years, the sharing economy ― a system built around the sharing of human and physical resources ― has caught the world by storm. While the practice of sharing goods has always been common between closed groups ― friends, family and neighbors ― now the concept has evolved into a profitable business model.

It has been helped largely by the strides in information technology that led to the worldwide boom in Internet penetration and smartphone use.

The sharing economy has many advantages. It can reduce costs for available goods, services and time. You can use a product or service only when necessary, and don’t have to deal with the normal headaches. On the other hand, an owner can unlock the potential value of an item, such as a room, a vehicle or a consumer good when it’s not in use. The sharing economy also offers access to things that might not be practical to own or obtain.

Some of the most notable businesses that have boomed on the concept of the sharing economy are Airbnb, Snapgoods, DogVacay, RelayRides, TaskRabbit, Getaround, Liquid, Zaarly, Lyft, LendingClub, Fon and Poshmark.

With the range of services offered, one can rent a room or a whole home, get petsitters for dogs, allow people to borrow cars from neighbors, help people to hire others for jobs and tasks, rent bikes and cars, and even get hard cash when in need, share a home Wi-Fi network, and buy or sell used clothes.

Given the huge advantages that this system offers, similar services are bound to proliferate around the world, and most likely in technology-driven Korea.

On the face of it, people should welcome such businesses with open arms and governments should have no objections.

Then why is it that the so-called sharing economy business Uber is being hauled over the coals by the Seoul city government? And moreover, is the government unfairly targeting the app that helps summon a car for a cost?

As 2014 drew to a close, the Seoul Central District Prosecutors’ Office issued an indictment against CEO Travis Kalanick and the firm’s Korean unit for violating a law prohibiting individuals or firms without appropriate licenses from providing or facilitating transportation services.

This was immediately met with protest by the company, which was echoed by countless “sharing” enthusiasts across the world.

However, although I am all for disruptive technologies and hugely back the concept of the sharing economy, I am with the Seoul government on this case.

Over the past several months, Uber has asked the mayor of Seoul to revise the laws so that citizens can use the service without worrying about breaking the law. However, even after it was flatly refused it went ahead and started offering the service without getting clearance.

It began offering UberX as a paid service, with a base fare of 2,500 won ($2.24), with an additional 610 won per kilometer and 100 won per minute. By comparison, base fare for local taxis starts at 3,000 won plus 100 won per 142 meters and 100 won per 35 seconds.

It smacked of arrogance to believe that since they were able to operate in so many cities around the world, they should be able to operate in Seoul. Uber had no right to start services when they knew that it was a gray zone they were operating in, and had been repeatedly warned.

The company knows that under current laws, anyone using his own passenger car to carry paying customers is subject to imprisonment for two years or less, or fines of up to 20 million won.

When you want to start a flourishing business, you just don’t abuse the goodwill of the government and cock a snook at the authorities. Wait till all the regulatory hurdles are cleared and then start your business. Lobby for amending the regulation, but do not jump the gun.

To make matters worse for the company, a city ordinance has been passed to criminalize the violators and reward up to 1 million won to those reporting illegal Uber taxi operators beginning in January. Using a private car for a taxi service is also punishable by an immediate six-month suspension for that car.

Coming to my second point of defense of the Seoul government decision. The reason Uber has grown so quickly worldwide is because it is not regulated the same way that traditional taxi services are. Proponents of the service say that it’s about time for monopolistic, overregulated city cab services to be broken up. They argue that people deserve options, better pricing and more nimble technology, which Uber offers.

However, the way I see it, taxis are a public utility and the government has every right to regulate them. Imagine if companies started offering other public utilities without regulation ― a sure recipe for chaos and disaster.

It is not very easy to get a taxi service license in Seoul, and the market is already saturated with around 6,000 taxis. Given this, the service offered by Uber has the potential to deal a severe blow to the taxi industry, whose hands are tied due to excessive regulations, even as the upstart “illegal” taxis are waiting to pounce on the opportunity. Most taxi drivers come from a lower-income background, and it is like kicking them in the stomach; the issue is not about depriving “unregulated” taxi drivers of additional income as Uber is making it out to be.

On top of it all, data privacy is something that has not been clearly addressed by the company. There are also doubts about the screening process and the training that is provided to the Uber drivers, which has become an issue in many cities. Because of the way their system operates, the safety concerns will only increase. Maybe that is why Uber claimed that “UberX is safer than any other mode of transportation in Seoul.”

However, safety is not really an issue for the public when it comes to taxis in Seoul. The taxis here are amongst the safest in the world, unlike in, say, Delhi. It is just an ad line that holds no water. Moreover, the company says the same thing in all places it operates, but molestation cases are not dying down. The company has a standard answer when faced with such cases: We are cooperating with the authorities. We are just a platform to connect people to drivers and are not directly responsible.

Given these clouds, it will be better for the company to clear all the regulatory hurdles before offering the service here, instead of readying for a legal battle.

Having said that, now that the Seoul government has taken on Uber, it should ensure that the misdemeanors of its taxi drivers ― for example rash driving or refusing passengers ― should be strictly dealt with. It should push forward regulations strengthening the crackdown on taxi drivers, and increase the supply of alternative transportation. Once the public stops complaining about the existing taxi services, the government will be on a firmer footing.

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