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The Peninsula

The Rationale for a German Firm’s Investment in the Kaesong Industrial Complex

Published June 10, 2014

By Troy Stangarone

A little more than a year after North Korea initially withdrew its workers from the Kaesong Industrial Complex, South Korea announced that German manufacturer Groz-Beckert has received approval to open an office in Kaesong to supply industrial needles to textile factories in the complex. This will make Groz-Beckert the second foreign investment in Kaesong and the first since the complex reopened last fall.

Attracting international investment to the complex has long been a goal of South Korean administrations, with the Lee Myung-bak administration reportedly having reached out to IKEA to invest in Kaesong. However, in the aftermath of Kaesong’s suspension last year, the Park Geun-hye administration has actively sought foreign investment into the complex to provide additional support for the complex and to provide disincentives for North Korea to engage in similar activities in the future.

However, as noted previously on this blog, it is not unsurprising that the first foreign firm to invest in Kaesong since 2008 is not a globally recognized firm. At the time we noted that the initial foreign firms to invest in Kaesong are likely to be those that “either have a high tolerance for risk or are already familiar with the business environment in North Korea.” With Groz-Beckert setting up a sales office rather than a production facility, the level of risk seems minimal. While a future shutdown would impact potential sales to South Korean customers in the complex, it would not more broadly impact the firm’s production or its ability to supply customers in other parts of the world. So, it will not face the prospect of canceled orders due to a shutdown as happened with Daewha Fuel Pump and its Indian customers last year.

Additionally, Groz-Beckert is unlikely to face the type of sanctions or reputational risk that likely led to the Japanese company Hata withdrawing from its joint venture, Taesung Hata, in 2008. Taesung Hata, a joint South Korean-Japanese venture, was one of the early firms in Kaesong and had been one of the showcase factories when I visited Kaesong in 2006 and 2008. However, by December of 2008, Hata, withdrew in the aftermath of North Korea’s nuclear test and a loss of sales to a U.S. firm that had recently learned of the goods production in North Korea. While Groz-Beckert is expected to employ two North Korean staff, because it is selling products to South Korean firms produced abroad rather than producing products in Kaesong, it should not face the same type of reputational or sanctions risk as Taesong Hata.

For these reasons, it makes sense that a company like Groz-Beckert would be one of the initial foreign firms to invest in Kaesong.

At the same time, while Groz-Beckert is not investing in a manufacturing facility in Kaesong, its role as a first mover into Kaesong is important. Because of the political and economic risks of investing in Kaesong, foreign firms have been reluctant to take the plunge. However, if Groz-Beckert’s investment is successful, while operations at the complex continue to normalize and progress on issues related to transportation and access to the internet and cell phones continues, it could help to encourage additional foreign firms to consider moving forward on investments in Kaesong.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the authors alone.

Photo from the author’s visit to Taesung Hata in 2006.

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