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A semantic error can occur when referring to "businessman".  Anyone who owns a small business or shop considers himself a businessman.  In the West, these same people would be called shop owners, merchants, and small business entities.  There is a distinct difference in business knowledge and power distribution between these people and the much smaller group who control the land and the wealth of the nation.  The smaller group of power and control corporation owners will be referred to as "businessmen" in this article.  Another semantic error is most Korean corporations are really chaebels.  So, when we speak of Korean corporations, we are really talking about chaebels.

As a consequence of the Americans winning the Second World War, the Koreans were liberated from the Japanese.  However, the old traditional ways were deeply rooted and business continued as usual.  Even after the Korean War, nothing really changed.  The present day businessmen were raised in the old traditional values without the benefit of modern or Western education.  In fact, many of them were lucky to be literate.  Most of them were children at the time of the Korean War.  So, they embrace the values and traditions of their parents.  Their first exposure to the 20th century was gratis the United States.

To complicate matters further, when the Japanese deposed the King of Korea, the royal family just went underground.  They maintained a silent and shadowy hold through the various family connections and Confucian hierarchy.  Despite the fact that they are reputed to be a democracy, the royal family still maintains power and control through the "High Society People" by means of family control of the large corporations or chaebels, using democracy as a façade.

One must consider that Korea has been the traditional battlefield for the Chinese and the Japanese for centuries.  Each would invade the other using Korea as the staging ground because of its strategic location.  The Koreans developed a tenacious grasp of their heritage and traditions as a direct consequence of outside interference over the centuries.  It is no wonder that they hold onto those values as if their very lives depend upon it.  In many cases, it did.  These are the foundations of their present day attitudes toward all foreigners.  Now that they are in control of their own country, they exhibit isolationism and nationalism to extreme.

So, how does a chaebel work?  They are incorporated under Korean law.  The majority stockholder is usually a senior family member.  There are three sets of books.  One set is reserved for the taxman, who gets paid under the table at tax time.  The second set is reserved for the stockholders to view.  The third set is the actual cash record.  The senior family member and majority stockholder may be the only one who ever sees this record.  There are several articles in "The Economist" that cover this territory.

Personal and corporate expenditures are most often mixed out of the same bank accounts.  Any surplus is withdrawn and distributed among family members in a clandestine way.  These cash transactions are frequently carried out under fictitious names.  This makes tracing any of the money virtually impossible.  It is not unusual to find large estates owned by people who do not exist.

There are no spreadsheets or financial documents that indicate the health of the business.  If you were going to purchase the company, there is no convenient means to make a valuation of the company.  The usual method of operation is depletion of the cash reserves into hidden accounts and assets, such as property.  The company operates on cash flow until there is a downturn.  A corporate president may become extremely upset over minor cash flow disruptions.  He cannot reveal his hidden assets and cash, but must still pay bills and wages.  Then, loans are sot from friendly bankers to make up for the deficit.

The bankers never qualify their clients.  Most loans are made on the basis of friendship and family connections.  The loans are rarely, if ever, secured loans.  Occasionally, the corporate assets are used as security.  Since the corporations are frequently in debt in excess of their value and the real wealth has been spirited away, these loans can never be repaid.

Since OEM (Original Equipment Manufacturer) deals with foreigners are the most common in Korea, we will start with one example of how things might work.  Suppose that an American company has developed a technology and manufactures it.  They become interested in a Korean company for production to reduce labor and other related costs.  An interested Korean will open negotiations.  The Korean government may give the Korean businessman a factory apartment, including utilities, for free for a limited time.  Or, the Korean government may give the Korean businessman a loan that does not have to be repaid under a certain set of conditions.  To the American, the Korean has an on going business in a small factory.  It cost the Korean businessman nothing to set up.  The American company gives the Korean businessman 40% of the price of the contract to purchase parts and materials.

Now, things start to get interesting.  The contract may only be for two years, at which time it must be renewed.  The Korean company completes delivery of the products.  After one year, there is a large amount of money on the "investor" set of books.  With this in hand, he gets his friends to invest.  With the additional cash, he runs down to the bank and gets a large loan from his local banker family friend.  All of the money just evaporates.  Now, the cash flow from product shipments to the US is only covering wages and loan interest.

The second year ends and it is time for contract renewal.  The Korean company is having financial problems at this point.  So, they raise the price on the contract.  The Americans agree.  The same process repeats itself for the next two years to the immense enrichment of the company owner and his family.  But the next time it happens, the Americans back away and take their business to China.  Now, the company is bankrupt.  The bank has a bad debt and the stockholders may have incurred some liability for the loans.  Everyone loses except the company owner and his family.  He may drink and cry in public, but he is only unhappy that the cycle did not repeat again.  If you were a stockholder, you may be interested in where all of the money went.  You will never find out.  This is one reason why corporate bankruptcies are very common.

Another example is the medical company that bought a hospital in Korea.  The deal was for cash.  Once the transaction was completed, the party selling the hospital opens a new hospital across the street.  All of the doctors and hospital staff move across the street.  Since the Koreans are very loyal and respectful of their physicians, they move across the street as well.  Now, the medical company has an empty building with no staff.  One might think that new staff and physicians could be hired and the patronage of the old patients renewed.  The patient's loyalty to their doctors will prevail.  No new patients ever appeared.  The entire investment was lost. 

A Korean business man spent four years developing a relationship with a Malaysian.  The Malaysian finally agrees to a joint venture in Malaysia.  But, he wants a contract with guarantees in the event of breach.  He also wants to use modern accounting methods and have a means to keep track of the money.  The Korean backs away making lame excuses.  The real reason is that he did not want anything in writing, especially a contract.  His remark was, "You must understand the Korean way.  This is how we do business in Korea.  You don't trust me."  He openly displayed insult over the Malaysian distrust.  It was an affront to his honor and reputation.  Actually, he would have disappeared all of the cash and the Malaysian was smart enough to know what the Korean was about.  The deal never happened for good reason.

During the last economic crisis in Korea, Hyundai received a loan from the IMF.  One of the conditions was that Hyundai use modern accounting methods and that the banks involved exercise modern loan qualifications.  Hyundai agreed to all of the demands and conditions of the IMF loan.  Then, it was business as usual.  Hyundai is on the rocks again and one of the major American motor manufacturers withdrew.  The pit is bigger and deeper than ever before, with the assistance of IMF money.

Don't even think about investing in a Korean Internet company.  There is only Korean software in Korea.  If there is no Korean version of an application or Internet development tool, it does no exist in Korea.  Except for some government agencies and large multinational corporations, there are very few bilingual web sites.  They say you must learn Korean, if you want to see their web sites.  When asked if they are interested in international business and exposure, they express their self-sufficiency.  The vast majority of Korean web sites are built by hand with a text editor or modified copies of code taken off of the Internet.  Starting your own company and doing it your way will result in problems with the government due to competition with government owned communication systems and government owned Internet construction companies, such as Kornet.  If  AT&T can get burned, you probably can too.  If the locals don't take your money, the government will.

There is a famous story in Korea about a Korean businessman who fell into disfavor with the chaebels.  He was found to be too competitive with one of the major chaebels.  His company was heavily cutting into the profits of one of their monopolies.   The government went after him and his business, tooth and nail.  After much scandal and notoriety, it was discovered that he had registered the company as a foreign entity incorporated in Hong Kong.  Due to international complications that corporate seizure would have precipitated, he became untouchable.  As the story goes, if the Korean government had expelled the company from Korea without the ability to seize the assets, it would have destabilized the economy.  If they can do this to one of their own, consider what they can do to you.

Deals that would be called "Bad Faith" or fraud in the West, are very common in Korea.  Remember, you are a foreigner.  They do not see it as unethical.

If you start your own company in Korea, follow these rules:

1) Do not allow majority stock ownership by Koreans.
2) Do not appear to compete with government owned monopolies.
3) Do not compete with any of the major corporations (chaebels).
4) Do not make complicated financial entanglements with Korean banks.
5) Do not allow them to understand your technology.
6) Do not give them access to client lists and marketing data.
7) Do not share technical documents.
8) Do not sign your name on any piece of paper that is not a legal contract.

Can you conduct business in Korea?  Yes.  But, you must go through KOTRA.  They will help to keep things above board.  Contracts will be difficult to negotiate.  Disputes will probably arise for which KOTRA is prepared.  They will help you to keep from getting skinned.  Maintain majority stock ownership.  And, keep any sensitive documents out of the country or hidden and locked.  If you are going into a product area where one of the chaebels or their associates is already engaged, get them involved as a minority stockholder.  Always involve your embassy in any deal.  KOTRA is equipped to deal with it.  And, you must maintain on site control.  You cannot just come back once every six months to see how things are going.

Many of the new international business laws in Korea have changed in favor of foreign investors by pressure from the IMF.  This is where KOTRA comes into play.  They will definitely help to keep an even playing field.  But, you must keep your eyes open to avoid the pitfalls, even then.  But, whatever you do, do not invest in a chaebel.  You would be better off donating your money to a reputable charity.

You have two choices.  One is a joint venture Western style, and follow the rules listed above.  Go through your embassy and KOTRA or forget it.  The other is to register as a foreign entity.  You must still get your embassy and KOTRA involved to protect yourself.

One saving grace is that many of the young people have been educated in the West.  They are fully aware of the problems and understand modern fiscal practices.  Once they begin to take over control from their relatives, the business climate can be expected to change for the better.  However, you may trust human behavior to gravitate toward conditions of power and control.  Abuse is a repeating cycle in any culture.

The Korean way is a very old way.  It is predicated upon preserving the Korean traditional values and their old feudalistic and Confucian hierarchy.  It is a Plutocracy.  It is a classic example of Power and Control.  Many of the young people openly demonstrate against it and are dealt with harshly.  The majority of Korean people know what is going on, and guardedly express disgust with the chaebels.  They all know that democracy in Korea is a facade.  My recommendation is, if you are not a professional that understands Korean culture, do not get involved.  The Koreans are a very proud people.  Be careful not to insult them with your understanding of reality.
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