Business Risk and Ethics in Prospective Emerging Markets: The Case of Sports Sponsorship in North Korea

Abstract

IntroductionSince the death of Kim Jong-il in 2012, the international media has speculated whether the new leader, his son Kim Jong-un, will put economic development on his political agenda and open up the North Korean economy for foreign investors. In his new year's speech held in 2013, Kim Jong-un called for far-reaching reforms in the following year including an opening up of the economy to foreign investors and achieving better relations with South Korea.1 While skepticism remains as to whether an economic opening can be achieved in the short term, potential foreign investors need to focus on business opportunities and market attractiveness.While not yet being considered an emerging market by the major indices,2 the popular media ascribe the country basic potential to become an emerging market in the future due to its relatively large domestic market, with its population of 24 million inhabitants and due to its richness in natural resources (e.g., gold, silver, copper, magnesite, coal, uranium and iron ore). If economic reform takes place, Goldman Sachs, for instance, sees enormous growth potential in the North Korean economy.3 The bank's analysis of the North Korean economy assumed the value of domestic mineral resources at 140 times of the 2008 gross domestic product (GDP). However, the country has a relatively young and technologically educated labor force which is available at low labor costs of around USD 160 per month.4A comparatively small but increasing number of international investors have already ventured into business with North Korea. The Cairo-based firm Orascom established the first GSM mobile phone network there in 2008 and contributed to funding the construction of the 105-story Ryugyong Hotel, located in the capital, Pyongyang, that is planned to open in 2013 and which will be managed by the Swiss luxury hotel group Kempinski Hotels.5If North Korea fully opens up its economy to foreign investors, the business opportunities will be plentiful.The Ethical Dilemma SituationDespite potentially lucrative business prospects, international investors are at the same time faced with ethical dilemmas and substantial business risk when intending to invest in North Korea. From a theoretical point of view, ethics in business used to be defined as "behavior that is consistent with the principles, norms, and standards of business practice that have been agreed upon by society."6 But what if society is not free to participate in political decision-making processes but is instead oppressed by a dictatorial leadership, as is the case with North Korea (more details will be provided in the further course of the study)? How should foreign investors respond to such an environment? Engage in business activities and risk receiving bad press that may cost them consumers in the firm's home country?7 Theoretically it is assumed that a country which violates human rights, in which legal arbitrariness prevails, in which corruption is high and which lacks predictable rules in business does not attract foreign businesses and remains economically backward.8 Firms usually weight chances, risks and ethical concerns in order to benefit from first mover advantages or to skip a venture in emerging markets.9 As this case will show, levels of tolerance towards ethical issues differ among countries that show an interest in doing business with North Korea.It has to be noted that research on North Korea is inherently difficult. Data availability and data credibility are typical problems. However, as foreign firms are already engaged in sponsoring North Korean athletes and media started reporting about those experiences, a decent base of information is made available in order to discuss ethical dilemma situations in international business. This is of particular value for research aiming at practical relevance and implications for managers.Achievements and International Recognition of North Korean AthletesThe North Korean sports industry is one of the sectors which is attractive to international investors since on the one hand it lacks financial resources, but on the other hand it has achieved international recognition ever since the soccer World Cup in England in 1966 when the North Korean team beat Italy 1-0 and made it to the quarter finals. …