PUBLICACIÓN SEMESTRAL DE EL COLEGIO DE LA FRONTERA NORTE vol. 9, núm. 17, enero-junio de 1997
5 Dae Won Choi y Martin Kenny, THE GLOBALIZATION OF KOREAN INDUSTRY: KOREAN MAQUILADORAS IN MEXICO
23 Bernardo Flores Báez, Alien Jedicka y Edward Brown, AFTER NAFTA:
INSTITUTIONAL WAYS TO CREATE ENVIRONMENTAL ASSESSMENT SERVICES AND TECHNOLOGICAL DEVELOPMENT IN MEXICO
33 Ismael Aguilar Barajas, ZONAS LIBRES EN ESTADOS UNIDOS: ALGUNAS IMPLICACIONES PARA LA POLÍTICA ECONÓMICA Y COMERCIAL DE MÉXICO
61 Cristina von Glascoe y Duane G. Metzger, LA PERCEPCIÓN DEL RIESGO AMBIENTAL DEL PLOMO: UNA COMPARACIÓN ENTRE TRES GRUPOS EN TIJUANA, B. C.
75 Félix Arredondo y Alejandro Mungaray, ANÁLISIS DE REDES PRODUCTIVAS EN LA PESQUERÍA DEL ERIZO DE MAR (STRONGYLOCENTROTUS FRANCISCANUS) EN BAJA CALIFORNIA
93 Ovidio González Gómez, Jorge Deantes del Ángel y José Arturo Pérez Sánchez, EFECTOS DE LA DEVALUACIÓN EN LOS FLUJOS COMERCIALES FRONTERIZOS
113 Ofelia Woo Morales, MIGRACIÓN FEMENINA INDOCUMENTADA
131 Víctor Alejandro Espinazo Valle, EL SNTE ANTE LA MODERNIZACIÓN EDUCATIVA Y LA ALTERNANCIA POLÍTICA EN BAJA CALIFORNIA
147 Ana Bergareche, RESHAPING EMPOWERMENT: THE RELEVANCE OF VIOLENCE WITHIN THE NEW INTERNATIONAL DIVISION OF LABOR DEBATE
161 Miguel González Avelar, EL TERRITORIO INSULAR COMO FRONTERA RESEÑAS BIBLIOGRÁFICAS
171 Alfredo Hualde, JAPAN INC. EN MÉXICO: LAS EMPRESAS Y MODELOS LABORALES JAPONESES, DE JORDY MICHELI (COORDINADOR)
177 Helga Baitenmann, AGRICULTURA Y MIGRACIÓN EN EL VALLE DE MEXICALI, DE MARÍA EUGENIA ANGUIANO
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FRONTERA NORTE VOL. 9, NÚM 17, ENERO-JUNIO DE 1997
The Globalization of Korean Industry:
Korean Maquiladoras in Mexico
Dae Won Choi* Martin Kenney**
Este trabajo presenta los resultados de la investigación sobre inversiones manufactureras coreanas en las maquiladoras mexicanas (a las que llamaremos maquilas). Estas inversiones coreanas forman parte de dos corrientes mayores; la primera es la que han seguido las empresas manufactureras de diversos países que están abriendo en México fábricas dedicadas a satisfacer el mercado de Estados Unidos. La segunda corriente ha sido seguida por empresas coreanas que están invirtiendo activamente en el extranjero. La inversión coreana en las maquilas es particularmente interesante porque es la mayor inversión de multinacionales de un país desarrollado en uno no asiático en vías de desarrollo. Los resultados que se presentan en este trabajo son el primer examen a conciencia que se hace de las fábricas coreanas que operan en México.
This paper presents the results of research on Korean manufacturing investment in the Mexican maquiladoras (hereafter, maquilas). These Korean investments are a part of two much larger trends:
The first trend is that manufacturing firms from various countries are opening factories in Mexico dedicated to serving the U.S. market. The second trend is that Korean firms are now actively investing overseas. Korean investment in the maquilas is particularly interesting because it is the largest investment by developing country multinationals in a non-Asian developing country. The results presented here are the first in-depth examinatíon of Korean factories operating in Mexico.
'Visiting Professor Graduate School of International Relations University of Southern California Los Angeles, CA. **Professor Department of Applied Behavioral Sciences University of California Davis.
FRONTERA NORTH, VOL. 9, NUM. 17, ENERO-JUNIO DE; 1997
The current casual acceptance of overseas investment by non-OECD countries is a marked contrast from the commonly held view in the 1970s that believed overseas investors would be only OECD multinationals. This belief changed dramatically in the 1980s as firms headquartered in LDCs and, especially, East Asia became internationally competitive in manufacturing activities that formerly had been the exclusive province of developed countries. By far the most impressive sustained industrial development occurred among East Asian Newly Industrializing Countries (NICs) as indigenous firms in Korea and Taiwan became international competitors in manufacturing. Their success demonstrated conclusively that capital accumulation is possible in LDCs. Moreover, certain firms in these developing countries had developed sufficient manufacturing skills to establish production activities overseas.
Perhaps the most interesting LDC multinationals are the Korean chaebol firms, such as Samsung, Hyundai, Lucky-Goldstar, and Daewoo. These companies have successfully competed with the largest Developed Country multinationals. During the 1980s these firms unleashed an export offensive that gave them significant market penetration in Developed Country markets. By the late 1980s, however, the Korean firms faced significant
changes in the global competitive environment. In North America and Europe, Korean exports confronted newly erected protectionist barriers in product areas ranging from electronics goods such as televisions to steel and numerous other products. A rapid appreciation of the won (though not as rapid as for the Japanese yen) also contributed to an increasing difficulty in exporting. Simultaneously, the Koreans' most significant competitor, Japan, began a massive relocation of labor-intensive production to low-wage environments such as Southeast Asia and Mexico. Finally, Korea's internal environment changed as labor unrest grew and wages rose dramatically (Soon, 1994:87).
This paper presents the results of research on Korean manufacturing investment in the Mexican maquiladoras (hereafter, maquilas). These Korean investments are a part of two much larger trends: The first trend is that manufacturing firms from various countries are opening factories in Mexico dedicated to serving the U.S. market3 The second trend is that Korean firms are now actively investing overseas. Korean investment in the maquilas is particularly interesting because it is the largest investment by developing country multinationals in a non-Asian developing country. The results presented here are the first in-depth examination of Korean factories operating in Mexico.
1 The authors would like to thank the Korean managers who responded to our survey and answered our questions. Dae Won Choi expresses gratitude to IRPS at UCSD and the Korea foundation for their support. Martin Kenney acknowledges the Univeisity of Calitornia Pacific Rim Studies Program and the Matsushita International Foundation for generous support and thanks Shoko Tanaka and James Curry for helpful comments. We also thank the two anonymous reviewers for helpful comments Please address all correspondence to Martin Kenney.
2 Korean firms usually built new manufacturing facilities. Most other third World investors have favored real estate or acquisition of already operating companies. For example, most Mexican investments in the U.S. have been in the form of acquisitions rather than establishing greenfield subsidiaries and bilding factories (Pozas, 1993).
3 For a general discussion of the maquilas, see Sklair 1989; González-Aréchiga and Escamilla (eds.) 1989; Camarillo, 1991.
DAE WON CHOI-KENNEY/THE GLOBALIZATION OF KOREAN INDUSTRY...
The data presented in this paper are the results of interviews conducted by the authors in November 1993 with managers at six Korean maquiladoras. The paper is divided into five sections. The first section examines the trends and forces that compelled the globalization of Korean manufacturers. The second section describes Korean investment in North America and the reasons for establishing maquila operations. The third section describes the integration of Korean firms into the local Mexican industrial environment and their relationships with suppliers. The fourth section examines industrial relations in the Korean maquilas. The conclusion discusses the role of the maquilas in Korean globalization strategies and the implications for Mexican development.
Korean Industry in the Global Economy
Korean firms are now among the largest non-governmental, non-OECD corporations in the world. During the last two decades Korean firms such as Samsung, Daewoo, Goldstar, and Hyundai have developed production facilities and sufficiently sophisticated technology to compete in the global market, largely because Korea suffers from a lack of resources, a small domestic market, and a strong state (Amsden, 1989; Haggard et al., 1991). After a short initial phase of promoting development on the basis of import substitution, Korean industry, with the support of the State, began an intensive policy of export-led industrialization. Few other LDC firns have matched Korean success in penetrating global markets in core industries such as ship building, consumer electronics, automobiles, and semiconductors.
Korean economic success has been most pronounced in the electronics indus
try, where firms such as Samsung have had astonishing growth. In less than 20 years Korean electronics companies have become globally competitive in several electronics industry segments such as microwaves, televisions, VCRs, and DRAM memories (Ernst, 1994; Bloom, 1992; Suárez-Villa, 1990). An example of this growth is Samsung Display Devices, which now supplies an estimated 14 percent share of the global market for picture tubes and satisfies approximately 50 percent of Korean domestic demand (Crane, 1993: 41;
Electronics Business Asia, 1991: 47). For semiconductor DRAMs Samsung has become the world's largest supplier.
Korean industrial success has overcome many difficulties. The most salient problem has been that Korean firms have entered industries in which Japanese firms are the global leaders. The usual Korean strategy has been to take advantage of the lower wages and capital costs in Korea to under-price competitors; the profits were then reinvested to develop highly efficient manufacturing operations in an effort to capture an even greater market share. Due to Korean efficiency and a rapid increase in the yen's value, this strategy has been remarkably successful.
Even today, Korean electronics firms lack overseas marketing channels and use original equipment manufacturing (OEM) relationships with other companies to sell their products. The problem with this method of penetrating the global market is that while it raises production volume, it does not create a separate brand identity (Ernst, 1994; Bloom, 1992). Moreover, profits must be shared with the marketing company. OEM sales are a two-edged sword; they facilitate rapid increases in production volume, but do not develop a market and brand awareness that justifies higher prices. Korean firms are aware of this paradox and continue a determined effort to build distribution networks
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and brand name recognition. This has not been easy, because the market space is occupied by Japanese competitors who are reluctant to surrender market share and use their higher brand awareness and excellent quality to justify slightly higher prices.
The 1980s were a period of remarkable growth in Korean market penetration, facilitated by the rising yen value. In the mid-1980s Japanese firms responded to their decreasing competitiveness by transferring the production of these commodity consumer electronics products to countries such as Malaysia, Thailand, and Mexico. Because of the rapid increase in Korean wages, these countries allowed Japanese firms to enjoy even lower wages. Simultaneously, in Japan consumer electronics factories were automated, and Japanese firms began to add numerous higher value-added features such as stereo sound, wide screen tubes, and other advanced features (1 Hayashi, 1994). The consumer electronics industry is the quintessential example of Japanese response to Korean success.
The other reaction to Korean export success was that U.S. and European firms petitioned their respective governments for protection from Korean television and other electronics imports (Hark, 1991). These various forms of protectionism combined with internal developments in the Korean economy to make further export growth of low value-added commodity type consumer electronics products difficult (Jun, 1990). The combination of foreign protectionism, internal Korean developments, and the responses of their rivals prompted Korean electronics firms to initiate overseas production (Bloom, 1992).
Korean Foreign Direct Investment
Compelled by competition from yet lower wage countries and protectionism, Korean
firms confronted the alternative of either investing overseas or abandoning their newly captured markets. Korean firms chose to invest overseas. Jun (1990) demonstrates that Korean firms were forced into overseas production earlier than would have been ideal. The initial advantages that undergirded their export success were fragile because they were based upon inexpensive, high quality Korean labor and government support. Such advantages are not exportable in the same way as is superior technology, quality and/or brand name recognition. Therefore, when producing overseas the Korean advantages based on the domestic economy were unavailable. And yet there was little alternative. Korean firms were compelled to become multinational producers and to develop their own global division of labor.
Korean foreign direct investment (FDD has evolved through different stages. During the 1970s investment was minimal, due to the substantial trade deficit and the foreign exchange controls of the Korean government. In 1978 foreign exchange regulations were tightened further because of growing concern about capital flight However, in 1980 policy shitted and there was a loosening of foreign investmen1 restrictions. The new regulations eliminated foreign exchange restrictions tor some types of projects and simplified approva procedures. This policy shift was a response to the second oil shock. The immediate goal was to encourage overseas resource development projects to secure access to natural resources such as oil, iron ore, and wood.
After 1986 the level of Korean FDI changed dramatically as the Korean go vernment continued to relax foreign ex change regulations and simplify approva procedures. There are three main reason for this shift: First, a substantial trade sur
DAE WON CHOI-KENNEY/THE GLOBALIZATION OF KOREAN INDUSTRY...
plus provided Korean firms with sufficient revenue and market share to invest overseas. Second, increasing protectionism by developed countries forced large and small Korean firms to initiate overseas production. Third, the appreciation of the won increased the costs of Korean exports. These factors combined with domestic labor disputes, which prompted rapid wage increases. This confluence made the export of labor-intensive, low value-added goods increasingly uneconomical. To maintain competitiveness, Korean firms had to invest overseas.
After initial overseas investments in the Indonesian timber industry in 1968, Korea's foreign investment in manufacturing increased steadily. By 1971 Korean cumulative overseas investment had reached $15 million (20 cases). From the period 1972 through 1988 the amount of annual investment overseas grew steadily. The number and, especially, the value of these investments increased from a cumulative total of $1.4 billion (1 353 cases) in 1988 to over $5.2 billion (2 451 cases) in 1992 (Korean Foreign Trade Association 1993). The Korean garment and shoe industries have made the largest number of individual overseas investments, but the fabricated metal sector which includes household electric and electronic products, has invested the most capital (Ryou and Song, 1993). From 1993 to 1996 Korean overseas investment continued its acceleration as Korean firms built or announced massive investments around the world to produce automobiles and consumer electronics. In 1995 and 1996 L.G, Samsung, and Hyundai announced that they would begin building DRAM semiconductor fabrication facilities in the U.S. and Europe.
The bulk of early manufacturing investments were made by Korean clothing and footwear producers in ASEAN to take ad
vantage of inexpensive labor (Korzenwicz, 1994; Donaghu and Barff, 1990; Barff and Austen, 1993). These were followed by investments in the fabricated metals and electronics industries in ASEAN. As was the case with earlier Japanese investments, Korean investments in Southeast Asia are closely linked with their parent firms. Production equipment is either new or secondhand machines imported from Korea. Further, most raw and intermediate materials are purchased from the parent firm (Ryou and Song, 1993: 17). Until recently, most overseas Korean factories arc simply assembly platforms for semi-knocked down kits and only appendages of the home plants (Jun, 1990; Kim, 1995). In Mexico this will be dramatically altered by the investments in building color television tube factories.
Korean foreign manufacturing investment is growing as profits are reinvested in expansion in developed and developing countries. In some measure, the large scale of this investment has been necessary to overcome the substantial lead of the Japanese competition. With the growth of regional trading blocks, Korean firms have had little choice but to accelerate overseas investment. As the tendency toward trade block protectionism continues, Korean firms will be impelled to respond with still greater investment.
Korean Manufacturing Investment in North America
Korean manulacturing investment in North America has been limited. As of 1992, cumulative total investment by Korean firms in North America reached only $2.1 billion (Korean Foreign Trade Association, 1993:52). Excluding the Pohang Steel-U.S. Steel joint venture that operates a cold strip and hot dip galvanizing
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mill in the San Francisco area, the preponderance of Korean manufacturing investment in the U.S. has been in small high-technology electronics firms, for the express purpose of securing access to sophisticated technology (Bloom, 1992). Canada has received little investment, the important exception being the now defunct Hyundai automobile assembly facility in Quebec. The largest concentration of Korean manufacturing investment in North America is in northwestern Mexico.
Korean investment in North America has had setbacks. For example, in the mid-1980s the Korean auto industry and especially Hyundai Motors experienced rapid sales growth in North America. Some observers thought that Korea would follow the Japanese path and become a major investor in North American auto manufacturing. This belief seemed plausible in 1988, when Hyundai had invested approximately $300 million in Quebec, Canada to build an auto assembly plant capable of producing 100 000 cars per year (Ward's Auto World, 1988). Due to shrinking market share and serious labor problems, Hyundai closed the Quebec facility in 1993 (Wall Street Journal, 1994). Though the Korean auto industry has continued to grow, Hyundai retreated from its initial goal of producing in the developed countries to refocus on the booming Korean market and developing countries.5
Historically, Korean electronics firms have had difficulties producing in the U.S. For example, in 1984 Hyundai purchased
a semiconductor manufacturing plant in Santa Clara, California, but later sold it at a loss (Kirk, 1994). Goldstar and Samsung established U.S. plants, in 1983 and 1984 respectively, to assemble televisions using parts imported from Korea (Bloom, 1992). In the early 1990s these plants were closed and replaced by maquilas. Korean firms retreated from their initial goal of producing in the U.S. and Canada. More recently, in 1995 Korean firms reentered the U.S. market by purchasing majority ownership in U.S. high technology companies. The most significant investment was by Samsung, which purchased a 40.25 percent stake in the failing U.S. personal computer maker, AST, for $378 million (Business Korea, 1995).6
Korean firms now are aiming to produce and export from Mexico to the U.S. and Canada, and since 1990 Korean manufacturing investments in North America have concentrated in Mexico. These investments use the maquiladora program established by the Mexican government in 1965 to attract U.S. businesses that were starting-up plants in Asian countries such as Korea and Taiwan (Sklair, 1989: 9).
Korean maquilas comprise less than one percent of the more than 3 300 maquilas operating in 1995, the vast majority of which are U.S. owned and operated (Alonzo et al., 1996). The actual number of Korean investments in Mexico is disputed. In 1993 The Banco Nacional de Comercio Exterior listed 16 Korean investments. However, our database compiled in 1994
For a discussion of Japanese investment in the United States, see Kenney and Florida, 1993. Recently, auto manufacturers in Korea have added new capacity and are again beginning a concerted export offensive (Kiln and Lee, 1994).
Korean garment firms also have invested in North America. However, these investments concentrated in the Caribbean to take advantage of duty-free access to the U.S. market guaranteed by the Caribbean Basin Initiative. Low wages are the driving force for the garment investments (Yu, 1990; 131, Jun, 1990). For example, there are at least SO Korean apparel assembly plants in Guatemala. These Guatemalan operations employ thousands of workers for wages of $3 per day or less (Golden, 1992). Petersen (1992) has an detailed discussion of maquiladoras in Guatemala that describes the Korean investments.
DAE WON CHOI-KENNEY/THE GLOBALIZATION OF KOREAN INDUSTRY..
FIGURE 1. Location of Korean Manufacturing Establishments in Mexico.
contains 25 separate investments. In 1994 the total value of all Korean manufacturing investments in Mexico was approximately $86 million of the 1992 total $2.1 billion Korean investment in North America of this, $16.9 million was invested in a diverse array of non-maquila operations. With the newly announced consumer electronics operations, the total Korean investment in Mexico will be over $1 billion by 1987. The number of plants is approximately 35, though Samsung's new tube and component production facility in Tijuana is already a massive complex rather than a single plant.
In 1994 Korean firms employed approximately 5,000 Mexicans in northwestern Mexico, but this number will continue to increase rapidly over the next three years to approximately 15,000. Korean employment will remain far less than the approximately 50,000 Mexican employed by Japanese
firms, and only slightly more than one percent of the approximately one million maquila employees in Mexico in 1996 (Alonso et al., 1996). For Korean consumer electronics firms, however, production in their Mexican facilities selves as a central pivot of their entire North American operations.
As Figure I indicates, all the Korean maquilas are located in northwestern Mexico. Moreover, these investments are concentrated in electronics and related industries such as videocassette production, i.e., which account for nine of the fifteen maquila investments. The important exception is the Hyundai Tijuana factory which produces aluminum and steel cargo shipping containers. Hyundai invested $40 million in its Tijuana plant, which in 1993 employed approximately 1 200 workers and was the largest single Korean invest-
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ment until the Samsung consumer electronics complex in Tijuana was built.
In contrast to Japanese investments that have been limited to assembly facilities, initial Korean investment in television assembly facilities proved to be the beginning of far larger efforts. Northwest Mexico is becoming a global center of large-scale Korean investment in television and computer monitor production. In 1994 Samsung announced that it intended to invest nearly $500 million in building a television and computer monitor production facility in Tijuana (Lajud. 1994). In early 1995 Daewoo stated that it would invest a further $ 1 14 million tor the production of monitors, small-size television picture tubes, and elecironic components at its San Luis Colorado TV assembly facility (Cambio, 1996). Finally, LG Electronics announced, by late 1996 it will have invested over $300 million to set up lines at its plant in Mexicali. When fully operational, the LG plant will annually produce more than 6 million cathode ray tubes for color televisions (The Korea Economic Weekly, 1996). When completed, these investments will total more than $900 million, or more than all Japanese firms had invested in Baja California as of 1995.
Inexpensive labor has been the most important single attraction tor the Korean maquilas. Due to the constant price wars in the 25 inch and under television market segments Korean assembly operations in the U.S. could not compete with Mexican-made televisions (Soon. 1994; Bloom, 1992; Yoshihara, 1988). In all of the consumer electronics industry segments occupied by (the Korean maquilas, price competition is severe. In 1993
beginning operators in Tijuana received approximately $1.10 per hour, whereas in the U.S. nonunion electronics assembly wages were $6.00-10.00 per hour. In comparison, in 1992 manufacturing wages in Korea were approximately $4.80 per hour a and increasing at approximately 10 percent per annum (Korean Foreign Trade Association, 199.3). With Korea's competitors enjoying Mexican wages, it was difficult for Korean assemblers to continue production in the U.S.
The trade laws concerning television manufacturing also were an important incentive. After prolonged and repeated trade talks and threats throughout the 1980s the U.S. government threatened •and then imposed trade sanctions on Korean television imports (International Trade Commission, 1984; Bark, 1991). After 1984 the pressure to invest in North America, increased as the U.S. government imposed antidumping duties on Korean televisions and negotiated an orderly marketing arrangement that limited the number of completed televisions that could be imported from Korea. With the eliminatioin of Korean privileges under the generalized system of preferences. Korean imports were subject to the U.S. duly of 5 percent on imported TV sets and 15 percent on imported picture tubes (Kirn, K., 1993: 73ff). The initial response of Samsung and LG was to open plants in the U.S. to assemble televisions with parts imported from Korea. To circumvent the limits on Korean televisions imported into the U.S., Korean firms shipped picture tubes and most of the other major components for assembly in North America. But, the Korean factories in the U.S. operated for only a short
The ultimate fate of this Ins investment may be affected by Lucky Goldstar's decision to purchase majority control of Zenith for $351 million. Lucky now inherits Zenith's large operations in Reynosa and Zenith's television tube production in the U.S. (Carey, 1995;Business Week, 1995).
DAE WON CHOI-KENNEY/THE GLOBALIZATION OF KOREAN INDUSTRY...
period before production was moved to Mexico.