For South Korea, It's Business as Usual

South Korean businesses, and even global investors in the country, are unfazed by North Korea's threatening tactics

By Moon Ihlwan

The gate for a cross-border road to North Korea used for the passage of people to its Kaesong industrial complex. WON DAI-YEON/AFP/GETTY IMAGES

North Korea might seem like the last place South Korean investors and businesses would want to be right now. After all, North Korea this week threatened to attack targets in the South just days after conducting a test explosion of a nuclear device.

But ask around at the Kaesong Industrial complex, located just north of the border between the two countries, and you'll see a different reality. South Korean investors and businesses are hardly in a hurry to pull their money and employees out of the area. That's because almost nobody thinks there's an imminent risk of war. "There's absolutely no sign of panic or even worries in factories at Kaesong," says Jung Seung Eui, director of manufacturing at Samduk Tongsang, which makes running and hiking shoes at its Kaesong facility. "We hope and still believe the current situation will be resolved in one way or another."

Samduk is one of about 100 South Korean companies that operate factories at Kaesong. Many of those companies have seen big financial benefits from hiring North Korean workers and would prefer to stay put. Samduk's Jung says labor costs there are a fraction of what they are in South Korea and at least one-third lower than in China. The facility, which employs 2,800 North Korean workers and 15 managers from the South, has also improved its efficiency: Productivity has risen between 10% and 20% annually, says Jung.

Of course, the pilot project at Kaesong has had its share of hiccups. An experiment in integrating North Korea with its far wealthier capitalist southern neighbor, Kaesong isn't immune to recent shifts on both sides—and could even be the big loser if relations deteriorate. North Korea now seems determined to keep the regime together at all costs. That's been a priority for top officials since leader Kim Jong Il suffered a stroke last summer and dropped from public view. Meanwhile, South Korea's conservative President Lee Myung Bak has tried to rein in the North since taking office in February 2008. Lee's administration has cut off $200 million worth of annual food and fertilizer aids to pressure Pyongyang to abandon its nuclear-weapons programs.

Just Bluffing?

The surprising calm among businessmen in Kaesong reflects how accustomed South Koreans have become to threats from North Korea. It also highlights the perception gap that exists with the West. Many in South Korea and other countries in the region believe that the North is just as eager to avoid a full-scale military confrontation as everyone else despite its hostile rhetoric. (Some took precautions: Chinese fishing boats cleared out of waters off the Korean peninsula, according to Korean media reports.) "People in Korea and those who closely follow the Korean question have learned lessons from Pyongyang's numerous provocations," says Choi Soo Young, senior researcher at the government-funded Korea Institute for National Unification. "Threats and provocations are part of its political game."

It's not just gung-ho Korean businessmen who are unfazed by North Korean tactics; few investors seem to be panicking. This week, global investors helped drive Korean shares higher, buying some $800 million worth of shares on the Seoul bourse in the four days since the North detonated a nuclear device, according to the Korea Exchange's statistics.

And on May 28, when South Korea and the U.S. raised their military-alert level for the Korean peninsula in response to the North's declaration that it was prepared to attack and would no longer respect the truce ending the 1950-53 Korean War, share prices in Seoul actually rose 2.2%. On May 29, stocks finished mostly unchanged, with the key Kospi index rising 0.3%. "I don't see any major impact from North Korean threats," says Kim Hag Ju, strategist at brokerage Samsung Securities in Seoul. "If you look at what happened following North Korean provocations in the past decade, jitters were short-lived."

Moon is BusinessWeek's Seoul bureau chief.

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