Seven Business Models for Success of North Korea's Economic Reform

Abstract

IntroductionThe North-South Korean economic cooperation has been expanding since it was made official in 1988. The amount of trade between the two Koreas has increased from $18,724 in 1989 to $190 million in 2009. The sustained development of the two Koreas' economic cooperation is a result of efforts by not only the private sector but also the public sector, academia, nongovernmental organizations (NGOs), and the Korean public. This cooperation represents more than just practical results from economic cooperation between the two Koreas; it is a barometer by which the possibility of Korean unification may be gauged.The North-South Korean economic cooperation started off by trading restricted items and by the consignment processing of manufacturing industries, and in 2002, a joint Korean industrial park, the Gaeseong Industrial Complex, was established in North Korea. For South Korea, Gaeseong is an opportunity to utilize North Korea's low-wage workers, which would enhance the competitiveness of South Korean companies. On the other hand, North Korea could achieve much-needed economic growth by attracting South Korea's investment in the North's special economic zones (SEZs). At present, 116 companies have moved to the Gaeseong SEZ, employing 40,000 North Korean workers. The accumulated production volume between January 2005 and November 2009 was $729 million, and the exports were $120 million. The Gaeseong SEZ is planning to include 2,000 companies with 350,000 workers and is targeting an annual production volume of $16 billion.Previous studies on the North-South Korean economic cooperation have approached the topic mainly in the context of domestic and foreign policies, not in the business context.1 That is, previous studies have generally regarded well-organized business models and management ability as exogenous variables. Based on this assumption, an examination of the North-South Korean economic cooperation in the business context should yield a deeper understanding of the project's sustainability. Further, such an approach may induce higher levels of participation in the project by all sectors of Korean society.This paper examines how the North-South Korean economic cooperation and firms in North Korea could achieve success. In addition, the paper illustrates a profitdriven North-South business model and provides applicable cases for each model. The paper also determines the types of firms that would most likely succeed for each of the four SEZs and discusses the practical implications.North-South Korean Economic Cooperation Business ModelsThis paper classifies the business types of the two Koreas by using productive combinations of economic resources. The neoclassical school looks at labor, capital, and natural resources, among others, as main economic resources.2 Today, such resources also include production and technology/management know-how. These added factors are essential in explaining not only the issue of trade but also the phenomenon of foreign direct investment.3 As stated above, the North-South Korean economic cooperation has developed from consignment processing to direct investment, which would be difficult to explain only through the natural resources indicated by the neoclassical school.4In this regard, this paper assumes four economic resources-natural resources, labor, technology/management know-how, and capital-as the factors in the classification of North and South Korea's business types and stages of business development. Although hundreds of combinations could be made from the four economic resources because of duplicate use, classifying every possible model is not practical in the real-world context. Therefore, only seven types of businesses are discussed.The first business type is the Indirect Manufacturing Model, which combines North Korean labor with South Korean capital. The second type is the Direct Manufacturing Model, which combines North Korean labor with South Korean technology/management know-how. …