Korea to Expand KIC’s Objectives?

Ashby Monk

The Chief of Korea’s Presidential Council on National Competitiveness, Kang Man-soo, delivered a provocative message to President Lee Myung-bak today. He said the government should use the SWF to advance strategic and national interests abroad. Here’s Kang’s statement:

“We will seek to strengthen Korean companies’ global investment capabilities to encourage M&As of competent overseas firms, especially in the energy and resources sector.”

And here’s The Korea Herald reporting on the meeting:

“Kang said the scope of asset management by the sovereign wealth fund Korea Investment Corporation will be expanded to help finance M&As abroad.”

According to the article, the idea is to “benchmark” Chinese policy:

A presidential council said Tuesday it will support Korean businesses’ mergers and acquisitions of foreign companies as part of efforts to raise national competitiveness…Beijing has backed Chinese businesses’ overseas M&As since 2009, using its $2 trillion foreign reserves.”

So let’s add Korea to the list, along with Japan and India, of countries who are actively (and transparently) considering using SWFs to achieve strategic and political objectives. I just wrote a post on the politicization of SWFs (see the good comments as well), so I won’t repeat myself here. However, I will say that there does seem to be a growing recognition among these Asian economies that energy security is one of the pressing challenges of the 21st century. And just like the present “currency war”, it seems this looming “resource war” will be fought in virtual space: the global financial market.

5 Responses to “Korea to Expand KIC’s Objectives?”

  1. 1 MMcC January 12, 2011 at 4:17 am

    I think it’s important to remember how effectively the head of an industry lobby can “seem to be doing something” by making such representations – publicly – to their local SWF. It’s easy press, if (cynically, and) little else. By contrast, it’s also easy to underestimate the extent to which Asian SWF senior staffers were impressed in their politically-formative years by the PR and investment disasters that Japan Inc’s MITI-led industry assistance efforts caused in the US and elsewhere. I’d suggest (although I’m no expert on KIC) that Asian SWFs are extremely wary of risking their international political capital in such an obvious way, especially given the suspicions about such “supportive” measures to be found in Australia, the US and non-British Europe. More likely, in my view, is that SWFs allowed to do so by their charters will come up with Calpers-style schemes for project-specific domestic investments and thereby give themselves at least a couple of arms’ lengths from any overseas M&A. Even that looks fairly risky, I suspect, if you’re Chinese.

    • 2 Ashby Monk January 12, 2011 at 7:09 am

      Yes. Agree to agree, Mike. It is risky. As I said in a recent post, though, why does the West care if a SWF is being transparent about pursuing a resource investment for strategic purposes? If the KIC said to,say, Canada, we’re interested in investing in this oil sands project. We’ve ascribed this economic value to the deal. But we also see this deal as being part of our nation’s resource security. So we’re going to pay you a premium on top of the economic value. Now, Canada’s a winner here, but they are still worried about Korean influence over their firms. After all, the implicit reason for ascribing this additional value will be that Korea now has some influence over who the oil is ultimately sold to. But so long as the price remains a market price, I’m not sure that would bother the Canadians. Follow me? Or have I gone off the deep end?

      • 3 MMcC January 13, 2011 at 1:20 am

        Ashby, I think extending your example a little bit illustrates the problem SWFs face in pursuing some extra-economic goals. KIC and Canada, acting like grown-ups, decide there are no problems in principle between them in Korea’s SWF attempting to secure Korea’s oil suppply through investment and an investment is arranged and announced, making reference to the extra-economic premium being paid. One hour later, Australia’s government announces that all Korean investments in that country’s natural resources industry will be frozen and reviewed to determine the extent of KIC’s “manipulation of stock prices for purely political purposes” and that any further investment by KIC will be subject to special panel review. The problem, for an SWF, isn’t having extra-economic goals, it’s admitting them. Of course, it’s more of a strawman problem than a real one: there are essentially no circumstances under which an SWF’s resources investment cannot be justified as purely economic. All any SWF needs to do is suggest that they expect the resource to be worth considerably more 20+ years from now than the market expects. As SWFs are about the only investors who might credibly be thinking on such timescales, who’s going to disagree?

  2. 4 MMcC January 13, 2011 at 1:37 am

    Sorry – I hit “Post Comment” halfway through the response.

    That’s the problem from the SWF’s perspective, what about the problem for those governing the nation that receives an explicitly extra-economic investment? Like the Asian SWF managers I mentioned earlier, I remember that period in the late 80s when pro-business Republican moderates in the US were being excoriated daily by their right-wing colleagues as lackeys for and sellouts to Japan. Now that so many countries’ right wings have adopted resource security as a rallying cry and, in combination with the Greens, operate two of the most effective bully pulpits around, how many governments really want to face charges of “disinheriting the nation’s children for the benefit of an Asian superpower” etc ad nauseam? Moreover, if the concept of extra-economic value is introduced to the discussion, whose oppostition party is likely to believe that the government fully extracted it from the buyer? It’s a political mess and that’s without touching on the usually very ugly effects of the fact that countries with a real hunger for resources and an well-heeled SWF to deploy tend not to be populated by Caucasians… Better for both buyer and seller to maintain the dual fronts that, whatever the price paid, it was a market price for purely economic value and that offshoring of influence/control is just the price of globalization. Or have I now gone off the deep end?

  3. 5 Ashby Monk January 13, 2011 at 6:55 am

    Very sensible! This is great: “The problem, for an SWF, isn’t having extra-economic goals, it’s admitting them.” I think the 3rd party reaction of, say, the Australians or Americans to a KIC investment in Canada based on political motivations would be a problem. The fund would be acknowledging that politicians do have some influence at some point in the investment decision-making process. That would end up roiling somebody somewhere…and could lead to the SWF’s investable universe shrinking. So we’re back to where we started…deny, deny, deny. Cheers. A

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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