One of the most robust Asian economies
South Korea is located in East Asia, in the southern part of the Korean Peninsula, with a population of 51.7 million. South Korea is separated from North Korea by the Demilitarized Zone (DMZ), established after the 1950-1953 war. Under international law, the two countries remain at war. From time to time, there is an escalation of tension in their relations.
After a period of military rule in the 1960s-80s, South Korea has embarked on a path of transition. The transformation into a democratic state with a free-market economic model has made South Korea one of the most robust Asian tigers. In 2021, the country’s gross domestic product was $1.81 trillion ($34,997 per capita). In the GDP structure, industry accounts for 32.4%, services for 57%, and agriculture for 1.8%. As for the business environment, 99% of companies (7.2 million) are small or medium-sized enterprises (SMEs).
South Korea is the fourth largest economy in Asia. Its characteristics include low production costs, developed infrastructure, and a skilled labor force. Previously focused on semiconductor exports and later on car exports, South Korea is now growing through domestic and foreign investment, exports, and innovation. South Korea is also one of the leaders in the energy transformation, with goals defined in the 2019 Hydrogen Economy Roadmap of Korea.
The growth of the Korean economy since the late 1990s has been supported by cultural expansion, known as the Korean Wave (Hallyu). Subsidized by the government, the creative industries (films, music, games, cuisine) promote South Korea as a market and increase sales of South Korean products and services. This way, popular culture also becomes a soft power policy tool for the government in Seoul in world politics.
Population of South Korea
South Korea’s population is 51.7 million people. Koreans are one of the most ethnically homogeneous nations in the world. Due to economic growth, the number of immigrants arriving in South Korea increased in the early 20th century. Currently, the number of foreigners is about 1.9 million. The largest foreign communities are Chinese (840,000), Vietnamese (208,000), and Thai (171,000). The largest Western community is Americans (140,000).
In 2022, about 50% of Koreans declared themselves non-religious. The largest religious groups are Protestants (20%), Buddhists (17%), and Catholics (11%). South Korea is an urbanized country. According to estimates, half of the population lives in the Seoul Metropolitan Area. Seoul alone currently has about 9.5 million residents. Other major South Korean cities include Incheon, Busan, and Daegu.
Koreans are a rapidly aging society. People aged 65 and older now account for 16.7% of the population, compared to 6.9% in 2000. In the coming years, this trend will determine the structure of consumption. On the other hand, the aging of the population also implies a need for the government to increase healthcare expenditures. Accordingly, more advances in the medical services sector and innovative technologies should be expected.
Economy of South Korea
South Korea is the fourth largest economy in Asia after China, Japan, and India. Economic liberalization has been accompanied by modernization processes that have increased the competitiveness of South Korean products in foreign markets. The success of the transformation and leading position in the global economy is evidenced by South Korea’s membership in the Organization for Economic Cooperation and Development (OECD) and the G20, which includes the world’s largest economies.
The growth driver of the South Korean economy is exports. It was boosted by structural adjustments to the economy in the early 1990s and focusing on high-tech industries. As a result, South Korea is a leader in the automotive, shipbuilding, defense and steel industries, and electronics and telecommunications. Among the leading companies are manufacturers of smartphones, TVs, home appliances, and electronic components, and semiconductors are also finding their way to the global market.
Korean products, like Taiwan’s, compete in the global market with lower prices than Japanese and higher quality than products made in China. South Korea’s high-tech industry and green technology sector have also been growing in recent years, boosted by the Green New Deal that the government is implementing. As a result, projects in renewable energy, nuclear energy, hydrogen, biofuels, biotechnology, nanotechnology, and cybernetics are on the rise.
A distinctive feature of the economy is the chaebols, hierarchical conglomerates that account for a large portion of GDP. The top five chaebols are Samsung, SK, Hyundai Motor Company, LG, and Lotte, which accounted for nearly 55% of the total revenue of major business groups in 2022. However, the business environment is changing with emerging innovative startups. In 2021, startups Coupang and Naver were among the top 10 companies. There are also growing calls for reforming how chaebols operate within the structure of the South Korean economy.
International trade
South Korea is the world’s tenth-largest economy by GDP, the seventh-largest exporter, and the ninth-largest importer. South Korea’s exports are worth $644.4 billion, and its imports are $615 billion. South Korea’s main trading partners are China, the United States, Japan, Australia, Saudi Arabia, Vietnam, Germany, Hong Kong, India, and Singapore.
The group of most imported goods is oil and mineral fuels (22.4%), electrical machinery (18.7%), industrial machinery (11.2%), ores (4%), precision instruments (3.66%), motor vehicles and parts (3.25%), iron and steel (3.01%), organic chemicals (2.6%), plastics (2.3%) and inorganic chemicals (1.79%). These are followed by pharmaceuticals, chemicals, precious stones and metals, copper, aluminum, iron and steel articles, meat, cereals, and seafood.
Among the most exported goods are electrical machinery (31.2%), industrial machinery (11.8%), motor vehicles and parts (10.4%), plastics (6.7%), oil and mineral fuels (6.21%), iron and steel (4.34%), organic chemicals (3.65%), precision instruments (3.46%), ships and boats (3.42%), and iron and steel articles (1.52%). In addition, cosmetics, pharmaceuticals, rubber, inorganic chemicals, paints, dyes, paper, and glass are also exported.
Trade agreements
South Korea has entered into many trade agreements. These have been concluded with both countries and associations of countries.
South Korea has signed free trade agreements with the following countries:
Australia
Cambodia
Canada
Chile
China
Colombia
Costa Rica
El Salvador
India
Indonesia
Israel
Guatemala
Honduras
New Zealand
Nicaragua
Peru
Singapore
Turkey
United Kingdom
United States
Vietnam
Agreements with associations of countries:
Association of Southeast Asian Nations (ASEAN)
European Union (EU)
European Free Trade Association (EFTA)
Asia-Pacific Economic Cooperation (APEC)
Regional Comprehensive Economic Partnership (RCEP)
In April 2022, South Korean authorities decided to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).
South Korea-European Union relations
South Korea and the European Union have a close relationship. Relations were elevated to a strategic level by the signing of the Framework Agreement in May 2010. It introduced cooperation on major global issues. It is legally tied to the European Union-South Korea Free Trade Agreement ratified in December 2015.
The FTA eliminated many bilateral import tariffs and non-tariff barriers. Before the agreement, only 2% of EU agricultural products went to Korea without duties. It was also the first FTA to include labor and sustainable development provisions. Under the stipulations, labor and environmental protection issues were incorporated into trade relations.
South Korea is the EU’s ninth-largest export market. For South Korea, the EU is the third-largest export market. In 2021, trade in goods between the two sides amounted to 107.3 billion euros (mainly industrial machinery, transportation equipment, and chemicals). In turn, trade in services was about 19 billion euros (mostly transportation, licensing, and telecommunications services). The European Union is the largest direct foreign investor in South Korea, ahead of Japan and the US.
Opportunities and challenges
The pro-trade policy of the South Korean government provides suitable conditions for exports to the South Korean market. Commitment to free trade increases the scope of preferential tariffs, ensures procedural simplification, and facilitates the settlement of trade disputes. Economic cooperation is also supported by free economic zones (Busan/Jinhae, Gwangyang Bay, Gyeonggi, Daegu/Gyeongbuk, Chungbuk, East Coast, Gwangju, Ulsan), where entrepreneurs may benefit from government financial support.
Given the structure of South Korean imports, an opportunity for entrepreneurs is cooperation in infrastructure projects and the supply of materials, specialist equipment, and parts for the shipbuilding and machinery industries. Also, the ICT sector (especially telecommunications, IT, and e-commerce) offers promising prospects. In addition, there are considerable opportunities in the pharmaceutical, cosmetic, and food industries (especially in meat and cereal exports).
The growth potential is also in the energy transformation and hydrogen economy-building projects in the energy and transportation sectors. South Korean authorities in 2022 announced three growth strategies (the so-called 3UPs) aimed at building a hydrogen supply chain, developing infrastructure, and increasing innovation. Regardless of the industry, entrepreneurs interested in expanding into South Korea should consider local traditions, consumer preferences, and the local business culture.