The Pacific Review, Vol. 25 No.

2 May 2012: 247–268

Upgrading the ‘software’:

The EU–Korea Free Trade
Agreement and sociocultural
barriers to trade and investment

Judith Cherry

Abstract In October 2010, the European Union (EU) and the Republic of Korea
signed a free trade agreement that went into effect in July 2011 and aims to increase
levels of bilateral trade and investment by dismantling existing tariff and non-tariff
barriers. In this article, we highlight the importance of a third class of barriers: social,
cultural and institutional barriers to trade with and investment in Korea that cannot
be legislated for under the new agreement but that can serve as ‘hidden stumbling
blocks’ to its implementation and effectiveness. We argue that the phenomenon
of ‘mismatched globalization’ (in which economic globalization outpaces cultural
globalization) is still apparent in Korea, as evidenced by the continuing existence
of these ‘soft’ barriers which include, inter alia, the gap between policy and imple-
mentation; the lack of predictability, consistency and transparency in the regulatory
environment (including IPR protection); education systems; labour militancy; and
attitudes towards globalization. These findings resonate with Dent’s (2006) argu-
ment that ‘deficient capacity’ in terms of technocracy, industry and/or institutional
arrangements can pose problems for developing countries seeking to negotiate and
implement bilateral trade agreements with more developed countries. In the case of
Korea, the long-term ‘soft’ social, cultural and institutional barriers identified and
discussed in this article act as a constraint on the country’s institutional capacity
functions and thus have the potential to hinder the full and effective implementa-
tion of the EU–Korea Free Trade Agreement and reduce the economic benefits that
the signatory parties hope to gain from it.

Dr Judith Cherry is the Lecturer in Korean Business and Management at the School of East
Asian Studies, University of Sheffield. She is the author of Korean Multinationals in Europe
and Foreign Direct Investment in Post-Crisis Korea: European Investors and Mismatched Glob-
alization. Dr Cherry was awarded the MBE in 1999 for services to exports to Korea.
Address: School of East Asian Studies, University of Sheffield, 6–8 Shearwood Road, Sheffield
S10 2TD, UK. E-mail: j.a.cherry@shef.ac.uk

The Pacific Review

ISSN 0951-2748 print/ISSN 1470-1332 online
C 2012 Taylor & Francis

http://www.tandfonline.com
http://dx.doi.org/10.1080/09512748.2012.658849
248 The Pacific Review

Keywords South Korea; European Union; free trade agreement; culture; trade;
investment.

Introduction
On 6 October 2010 the European Union (EU) and the Republic of
Korea (South Korea – hereafter, Korea) signed a free trade agreement
(FTA), which went into force on 1 July 2011. For the European Commis-
sion (EC), the FTA with Korea was the first such agreement negotiated
under its 2006 Global Europe initiative and, for Korea, it forms part of an
ambitious programme of bilateral and regional free trade negotiations that
was launched in 1998. In pursuing a ‘deep’ or ‘broadband’ FTA with Korea,
the EC aimed to go beyond provisions for the removal of conventional tar-
iff barriers and address a wide range of non-tariff barriers that can hinder
everyday business activities and act as a deterrent to trade and investment.
Following the 1997 Asian financial crisis, the Korean government demon-
strated its determination to create a more transparent and welcoming busi-
ness and inward investment environment in order to attract the foreign cap-
ital, technology and know-how needed to ensure the sustainable growth of
the domestic economy. Successive administrations since 1997 have taken
action to address problems relating to the ‘hardware’ associated with trade
and inward investment by reforming legislation and regulations and re-
vamping systems and institutions. While praising the outcomes of these
reforms, EU executives interviewed in 2006 and 2007 expressed concerns
about continuing problems arising from the ‘software’ aspect of doing busi-
ness in Korea; challenges in this area related to attitudes, perceptions and
culture that included the mismatch between government policy and its im-
plementation at the working level and the lack of transparency, consistency
and predictability in the implementation of trade- and investment-related
regulations (Cherry 2007).
The interviewees felt that there was a clear ‘mismatch’ between the pace
of economic and cultural globalization in Korea and, consequently, a gap
between the speed of change in Korea’s ‘hardware’ and ‘software’. The Ko-
rean government could take action to formulate new policies relating to
trade and investment and revamp the institutions charged with handling
these issues. It could not, however, legislate for changes to the social, cul-
tural and institutional environment in which business was done, force a
change in the perceptions and attitudes of its people towards foreign par-
ticipation in the domestic economy, or bring local business culture closer
to European styles of doing business (Cherry 2007). A second set of inter-
views with EU executives, carried out during the final stages of the FTA
negotiations in 2009, suggested that, while the gap or ‘mismatch’ between
economic and cultural globalization had narrowed to some degree, it was
still a significant potential barrier to trade and investment.
This article considers the possible impact of ‘mismatched globalization’
and social, cultural and institutional factors on the impact and outcomes
 J. Cherry: Upgrading the ‘Software’ 249

of the EU–Korea FTA and argues that they continue to represent a ma-
jor challenge to European firms operating in Korea – a challenge that is
unlikely to diminish in the near future. Furthermore, as the FTA cannot
legislate for changes in Korea’s ‘software’, foreign executives must develop
an understanding of Korean culture and society and formulate strategies for
adapting to them, while the process of social change, however slow, takes
place. We begin with a brief overview of the concepts of economic and cul-
tural globalization, followed by an explanation of Dittmer’s (2002) three
phases of ‘hybrid globalization’, to which we added the fourth phase of
‘mismatched globalization’ in 2007. This, together with background infor-
mation on FTAs and a discussion of Dent’s (2006: 57) concept of ‘deficient
capacity’ as it relates to the effectiveness of these arrangements, provides
the framework and context for the discussion that follows on the potential
impact of social, cultural and institutional barriers to trade and investment
on the successful implementation of the EU–Korea FTA.

Economic and cultural globalization

Contemporary economic globalization has been described as the ‘cutting
edge’ or ‘vanguard’ of globalization (Dittmer 2002: 21; Drache 1996: 57),
characterized by ‘flows of trade and finance within the major regions of
the world economy’ (Held et al. 2003: 55), ‘the entire world becoming a
single market transcending national borders’ (Yoo 2002: 101), and ‘an in-
crease in trade, capital movements, investments and people across borders’
(Woods 2000: 1). Held et al. (2003: 55) argue that, to these basic definitions
of economic globalization, we must add a sense of the stretching of global
networks, the speed of global flows, and the intensity and impact propen-
sity of global interconnectedness. Advances in information technology and
communications, combined with the deregulation of key markets, have fa-
cilitated the creation of global networks in finance, production and trade
(Woods 2000: 2–3). New technology enables firms to extend their business
activities across the globe and makes it possible to move capital around
the world at the click of a button. The increasing volume and speed of
transcontinental trade and global capital flows can have significant impli-
cations for nations and the policies that are formulated and implemented
by their governments.1
While globalization clearly possesses a material aspect, involving as it
does identifiable and recordable flows of goods, services, finance, invest-
ment capital and workers around the globe, it also involves the dissemina-
tion of information, images, thoughts, values and ideas. Developments such
as the increasing reach of global mass media companies, the dominance of
English as a global lingua franca, the development and widespread adop-
tion of the internet, satellite and digital technology, and the deregulation,
liberalization and privatization of the communications and media industries
250 The Pacific Review

have made possible global cultural flows and exchanges that are unprece-
dented in their scale, scope, speed and accessibility. It is important to note
that the infrastructure used to convey and disseminate popular culture is
also used to gain access to business and commercial information. Indeed,
Held (1999: 341, 368) refers to the ‘rise of Western popular culture and
interbusiness communication’ as ‘the primary content of global cultural in-
teraction’. The movement of business personnel around the world as ex-
ecutives undertake assignments as expatriate managers, the importing of
business practices and governance systems by foreign investors, and access
to corporate information through the media or internet all contribute to the
flow and exchange of business information and business culture.

‘Hybrid’ and ‘mismatched’ globalization

In 2002, Lowell Dittmer (2002: 22) introduced the concept of ‘hybrid glob-
alization’, arguing that the globalization of many Asian countries, including
Korea ‘has been moving in counterpoint with (their) attempt to maintain a
distinctive normative regime and political-economic culture.’
Dittmer notes the paradox inherent in the fact that many of the Asian
states that have sought to protect their cultures have been among the great-
est beneficiaries of economic globalization through increased access to ex-
port markets and to the capital, technology and know-how necessary for
economic and industrial development. However, he maintains that this
paradox must be seen in the context of the Asian approach to embracing
globalization, which has been ‘highly selective’ with the ‘realm of ultimate
values . . . typically . . . excepted’ (Dittmer 2002:34).
Dittmer identifies three phases of Asian globalization. During the first
(‘expansive globalization’), which lasted from the 1960s to the late 1990s,
the Asian ‘hybrid globalizers’ were ‘(shifting) smoothly into mercantilist
mode’, developing their export industries and penetrating western markets.
He describes the phenomenon of the ‘one-sided and partial’ adoption of
globalization, as ‘economic free-riding went in tandem with the preserva-
tion of distinctly Asian political and cultural values’ (Dittmer 2002: 34).
During this phase of globalization, economic modernization and industri-
alization in many Asian countries was underpinned by the Confucian value
system with its focus on education, diligence, frugality, discipline and hierar-
chy. The creation of close and often corrupt relations between the state and
big business, the suppression of labour, the lack of transparency in financial
matters and corporate governance, and the organization of major corpora-
tions showed little sign of change in the face of increasing integration into
the global economy. The first major challenge to these nations and their
‘institutional alternatives’ came with the 1997 Asian financial crisis, which
forced a re-evaluation of the institutions and systems that had driven their
earlier successes. Thus the second phase of globalization – ‘capital flight
crash globalization’ – came with the outbreak of the 1997 financial crisis,
 J. Cherry: Upgrading the ‘Software’ 251

when the Asian values that had been hailed as a major factor in the region’s
success came under attack by those who held them responsible for its eco-
nomic downfall. Many of those who had lauded the achievements of the
Asian developmental state now predicted its demise in the face of neolib-
eral reform.
The third phase of globalization – the ‘austerity globalization’ experi-
enced by countries implementing the reform programmes and austerity
packages mandated by the International Monetary Fund (IMF) as a con-
dition for providing bailout funding – was a period of rapid change in terms
of institutions, systems and regulations. According to Dittmer, those com-
mentators who continued to uphold the primacy of Asian values and laid
the blame for the crisis on globalization were in the minority. The majority
of the crisis countries who sought financial help from the IMF accepted a
remedy that he describes as ‘homeopathic’: curing globalization with more
globalization and even greater integration into the global economy. Dittmer
(2002: 34–6) concluded that, with the discrediting of the Asian ‘capitalist de-
velopmental state’, Asian values, systems and institutions would come un-
der increasing scrutiny as the recovering crisis nations sought to adapt and
bring them into line with international standards and market discipline.
In the case of Korea, we have argued elsewhere the existence of a fourth
aspect of globalization, that of ‘mismatched globalization’ (Cherry 2007). In
the wake of the 1997 crisis, the Korean government sought to boost levels of
inward foreign direct investment (IFDI) with the twin aims of helping Ko-
rea recover from the crisis and ensuring sustainable economic growth. Al-
though the reforms implemented by the Kim Dae-jung and Roh Moo-hyun
governments achieved some notable successes, Korea’s performance in at-
tracting IFDI lagged its potential, given its ranking in the global economy.
Interviews with European investors and officials in Seoul in 2006 revealed
a range of cultural, social and institutional issues that continued to serve as
barriers or hindrances to trade and inward investment, despite successful
efforts by the Korean government to reform the country’s legislation and
institutions. There was a clear distinction between the ‘hardware’ reforms,
targeting legislation, regulations, systems and institutions, and the changes
in ‘software’, encompassing culture, business practices, perceptions and at-
titudes. The term ‘mismatched globalization’ derives from the consensus
among interviewees that the survival of deeply-embedded Asian values
and socio-politico-cultural systems amidst sweeping reforms to the econ-
omy and the business environment reflects the disparity between the rapid
pace of economic globalization and the far slower speed of change in social,
cultural and political areas.
It is important to note here that, in presenting the concept of ‘hybrid
globalization’, Dittmer’s focus was purely on economics and economic pol-
icy. The aspect of ‘mismatched globalization’ highlights the importance of
non-economic factors that undoubtedly existed during the previous three
phases of globalization. However, in the case of Korea and possibly other
252 The Pacific Review

Asian countries, the significance of these non-economic factors was brought

into sharp focus after the 1997 crisis, as economic globalization continued to
accelerate while the pace of cultural globalization lagged behind, increasing
the gap between the two.

The EU–Korea Free Trade Agreement

Recent years have seen a proliferation of bilateral and regional FTAs,
which Dent (2007: 458) defines as: ‘A negotiated set of preferential mar-
ket access concessions, trade-related rules and protected industry interests
forged between signatory parties.’ The rapid growth in these arrangements
reflects, to a great extent, increasing doubts about the prospects for a suc-
cessful conclusion of the Doha Development Agenda talks and the capac-
ity of the World Trade Organization (WTO) to adequately regulate world
trade (Cho 2001: 91–2). Following the implementation of the North Amer-
ican Free Trade Agreement in 1994, the deepening of Asian regionalism
and the wave of FTAs among Asian countries in the wake of the 1997 fi-
nancial crisis, there has been a growing trend for governments of developed
and developing countries to pursue bilateral and regional trade arrange-
ments, while maintaining a commitment to the WTO-led multilateral pro-
cess. By dismantling barriers to trade, FTAs seek to enhance terms of trade,
increase local firms’ access to export markets, international supply chains
and sources of cheaper parts and components, and allow consumers access
to a wider range of competitively-priced goods (Dent 2006: 20; Goyal and
Joshi 2006: 750; Krueger 1999: 107; Urata 2002: 27–8).2
In 2006, the EC announced a new phase in its external trade policy with
the publication of Global Europe: Competing in the World. A Contribution
to the EU’s Growth and Jobs Strategy. The rationale for the new strategy
was the fostering of open markets through the pursuit of a ‘new gener-
ation’ of bilateral and regional trade agreements that would boost trade
and investment and thus contribute to economic growth and job creation
within the EU by acting as a ‘powerful stimulus to competition, innovation
and productivity growth’ (European Commission 2006). While offering as-
surances that it remained committed to the multilateral process led by the
WTO and the successful conclusion of the Doha Round, the EC announced
its intention to achieve the maximum benefits for the EU by negotiating
‘deep’ bilateral or regional agreements that went beyond the simple elim-
ination of tariffs and included non-tariff barriers such as those relating to
standards, certification and testing, intellectual property rights (IPR), and
regulatory transparency (Barfield 2007: 2; Edwards et al. 2007: ii–iv; Rollo
2008: 2).
There were three key commercial motivations for the Global Europe
strategy: to minimize the negative impact of FTAs signed by trade part-
ners and third countries (especially the potential trade diversion effects in
 J. Cherry: Upgrading the ‘Software’ 253

favour of the USA); to forge strategic links with countries already experi-
encing high rates of growth or forecast to do so in the future; and to ensure
the implementation of international commercial regulations such as those
pertaining to the protection of IPR (Woolcock 2007: 4). The priority mar-
kets selected as potential FTA partners under the Global Europe strategy
were ASEAN, South Korea and Mercosur (comprising Argentina, Brazil,
Paraguay, Uruguay and Venezuela); in making its selection the EC con-
sidered market potential (in terms of current and future market size and
growth); the level of protection faced in the market by European exporters
and investors; and the likelihood that European firms might be shut out or
disadvantaged by bilateral agreements already being negotiated or consid-
ered with other trading partners. The focus on Asia reflected the growth
in trade flows between Europe and Asia and the EC’s desire to strengthen
and enhance European links with the region (Barfield 2007: 2–3; Gavin and
Sindzingre 2009: 9).
According to all the above-mentioned criteria, South Korea was an obvi-
ous priority country for the new strategy. In 2007, the year in which nego-
tiations got under way, Korea was the EU’s eighth most important trading
partner and the EU ranked as Korea’s fourth most important trading part-
ner (Edwards et al. 2007: ii). The level of protection faced by European
investors in the Korean market encompassed not only tariffs and duties but
also a variety of non-tariff barriers and social, cultural and institutional chal-
lenges that were raised annually by the EU business community in Korea
through the European Chamber of Commerce in Korea’s Trade Issues and
Recommendations. Finally, the signing of an FTA between Korea and the
USA on 30 June 2007 provided an important stimulus for the EC to com-
mence talks with the Korean government. Negotiations for the EU–Korea
FTA began in May 2007 and the FTA was initialled on 15 October 2009 and
signed a year later.3
New trade opportunities in goods and services worth €19.1 billion would
be created for EU companies, most notably in chemicals, pharmaceuticals,
iron and steel, auto parts, footwear, spirits and medical equipment. New
sectors in the service industry would be opened up, including financial and
legal services, telecommunications, environmental services and shipping,
and EU exporters would benefit from a reduction of €1.6 billion in the du-
ties levied annually on their products. The FTA would also result in the
dismantling of non-tariff barriers to trade including technical standards and
certification, and provide greater transparency and predictability on regu-
latory issues such as IPR protection (EUCCK 2010; Europa 2010). The EC
also reported the inclusion in the FTA of significant provisions relating to
the liberalization of investment in the manufacturing and service sectors,
including telecommunications, satellite broadcasting, express delivery ser-
vices and legal services (European Commission Trade 2010b: 1, 7).4
From the documentation published prior to and following the signing of
the EU–Korea FTA in 2010, it is clear that there were high expectations
254 The Pacific Review

within the EC regarding the economic benefits that would be generated

by the successful implementation of the agreement. However, in his work
on FTAs in the Asia-Pacific region, Dent (2006) identifies what he terms
‘deficient capacity’ as a potential problem for developing countries wishing
to engage effectively in bilateral trade agreements. Dent (2006: 57–8) ar-
gues that insufficient numbers of trained and experienced technocrats able
to analyse, negotiate and implement FTAs, a lack of coherence in foreign
economic policy formulation, insufficient local industrial capacity to exploit
the opportunities in new or expanded FTA markets, and the inability of
domestic legal and sociocultural frameworks and institutions to implement
the agreement can serve to frustrate efforts to implement such deals fully
and maximize their net welfare effects.
According to Dent (2006: 247–51), developed countries like the USA and
regions like the EU may choose as potential FTA partners more advanced
developing countries with the capacity – technocratic, industrial and insti-
tutional – to accommodate the ‘broad band’ measures they seek relating
to market access issues such as financial services liberalization, competition
policy and government procurement. Korea, which has signed FTAs with
both the US and the EU, has relatively strong capacity functions in terms of
its pool of experienced and talented technocrats and the ability of its major
export industries to adapt to new market conditions; it is in the area of insti-
tutional capacity that problems may arise. Dent (2006: 247) defines this as:

The ability of the nation’s institutional frameworks (e.g. legal, socio-

cultural) to accommodate the various policy-related commitments in-
corporated into the FTA, such as on intellectual property rights and
competition policy. Examples of “institutions” . . . mainly relate to
agencies . . . and associated laws and rules devised to enforce legisla-
tion once enacted.

Weak institutional capacity functions may hinder a developing country’s

ability to implement and enforce key requirements of an FTA, a situation
that can be exacerbated by the continuing existence of social and cultural
barriers to trade and investment and outdated ‘software’ that hinders the
ability of agencies to enforce the provisions of the FTA.

The EU–Korea FTA: social, cultural and institutional barriers

to trade and investment
The following analysis of the potential impact of social, cultural and insti-
tutional barriers to trade and investment on the EU–Korea FTA is based
primarily on a series of interviews carried out in Seoul in September 2009,
before the agreement was initialled and the text made public. In total, 23
expatriate executives and officials working for a wide range of companies
and institutions were interviewed; some of the interviewees were existing
 J. Cherry: Upgrading the ‘Software’ 255

contacts and others were introduced by staff at the European Chamber

of Commerce in Korea (EUCCK) or by the interviewees themselves. All
the interviews, which were conducted in English, were semi-structured and
based on a range of questions prepared in advance, but with the flexibility
to explore interesting issues that arose in conversation. All but three of the
executives were interviewed individually; the one-on-one interviews lasted
between one and two hours and the group interview lasted for two hours.
At the outset, the primary aim of the interviews conducted in 2009
was to assess the expectations of the EU business community regarding
the proposed EU–Korea FTA. However, during the interviews, frequent
references were made to the importance of social, cultural and institutional
issues when doing business in Korea, which resonated with the outcomes
of interviews carried out with EU executives in 2006–7 regarding hin-
drances and barriers to inward foreign direct investment in Korea. At that
time, EU executives and officials had praised the improvements made to
Korea’s ‘hardware’ but had also highlighted continuing challenges arising
from ‘software’ issues that acted as barriers to doing business in Korea.
These included the mismatch between government policy and its im-
plementation at the working level; the lack of transparency, consistency
and predictability in the implementation of regulations; the quality of
education; the militancy of labour; and attitudes towards globalization and
foreign capital. Although Korean business culture was not seen as a major
impediment to trade and investment per se, interviewees emphasized the
need for investors to understand and, in some cases, adapt to local cultural
practices (Cherry 2007).
The problems and challenges highlighted by interviewees in 2006–7 were
by no means new; Korean and western authors writing in the late 1980s and
1990s had discussed the role and influence of the government, the problems
associated with red tape, hierarchy, bureaucracy and unpublished rules,
labour unrest, protectionism, education, anti-foreign sentiment and legal is-
sues such as contracts and the protection of IPR. In addition, readers were
strongly advised to make efforts to understand Korean business and soci-
ety, the Confucian underpinnings of Korean structures and systems, and to
be aware of the need for patience and persistence when working in the mar-
ket and with local companies (Choi and Wright 1994; De Mente 1988; Jang
1988; Leppert 1996; Cherry 1993). In the twenty-first century, a substantial
amount of advice about doing business in Korea has become available on
the internet, authored both by government bodies such as UK Trade & In-
vestment (UKTI) and by commercial operations such as eHow and World
Business Culture. These websites also highlight key issues including the im-
portance of understanding Confucianism and issues relating to hierarchy,
personal relations and legal matters as well as the need for patience in busi-
ness dealings.
With these considerations in mind, it became clear that the second aim
of the 2009 interviews should be to determine to what extent, if any,
256 The Pacific Review

these specific long-term social, cultural and institutional barriers and the
phenomenon of ‘mismatched globalization’ had changed since the initial
interviews, and to assess their potential impact on the implementation and
effectiveness of the FTA between the EU and Korea, within the context of
Dent’s (2006: 57) concept of ‘deficient capacity’.

Policy and implementation

The significance of the issues relating to culture, society and institutions dis-
cussed in the interviews were highlighted by one executive who described
them as ‘barriers that no-one can describe in a contract’; the FTA would
not be able to legislate for them and they could easily act as ‘hidden stum-
bling blocks to trade and investment’. A prime example of these challenges
could be found in the area of policy and implementation. In 2006–7, in-
terviewees highlighted the ‘mismatch’ between the public pronouncements
of the Korean government regarding trade and investment policy and the
implementation of those policies by working-level officials, who often man-
aged to slow down, dilute or even block the changes promised at higher lev-
els of government. Although executives who were re-interviewed in 2009
saw some progress compared with the situation three years previously (and
even more compared with 10–15 years ago), they felt that bureaucracy re-
mained one of the main barriers to doing business in Korea, with consid-
erable potential to upset the successful implementation of the FTA. The
frustration felt in the foreign business community was evident in the views
expressed by one interviewee:

When we raise key issues, they understand, they absolutely sympa-

thize, they “are looking at it”, they “will address it” . . . and then noth-
ing. It’s just a game. We go through a charade, they nod and say the
right things. We all nod and shake hands and then I go and see the
[ministry] the next day and the next month and the next year.

Paradoxically, a positive factor highlighted by many interviewees was the

high degree of access they enjoyed to the regulators and officials, access that
would be unheard of in many of their home countries. But the ‘fantastic’
access masked the key problem: while the officials were accessible, they
were ‘still not very good at listening’ and, as indicated above, discussions
between foreign executives and Korean government officials did not always
result in the desired action.
Even while expressing their frustration at this state of affairs, many exec-
utives were sympathetic to the challenges facing the officials at both higher
and lower levels and acknowledged the cultural and institutional issues in-
volved. One interviewee had been offered an explanation by a Korean col-
league: that people at the working level of government lacked confidence
 J. Cherry: Upgrading the ‘Software’ 257

and, fearing being reprimanded or criticized, tried to find the most con-
servative and the least risky solution so that nobody could accuse them of
having made the wrong decision. Another, somewhat contradictory, expla-
nation highlighted the importance of a shift during the presidency of Roh
Moo-hyun (2003–8) from obedience and strict adherence to the orders is-
sued by the Ministry of Finance or the Blue House (presidential palace)
to a disempowering of key ministries and a democratization of the whole
government that had encouraged lower-level officials to challenge their su-
periors and take action on their own initiative. Finally, one interviewee felt
that, while the government was well aware of, and was frustrated by, the
mismatch between policy and implementation and the dilution of its inten-
tions, it was cautious about taking any action that seemed to favour foreign
firms over domestic interests. This resulted in a ‘slowly, slowly’ approach,
with the government moving ‘at their pace and not the pace that we would
want them to go at.’

Predictability, consistency and transparency

A second important barrier related to the policy–implementation gap was
the ‘inability or lack of willingness . . . to be clear-cut and transparent’,
which created frustrations among foreign businessmen trying to get a clear
and accurate grasp of the regulatory framework within which they were
operating. Indeed one executive went as far as to say that the method in
which regulations were implemented ‘would still, in most cases, be seen as
a protectionist barrier with or without an FTA’. For foreign businessmen
setting up a new business in Korea, it was vital to have clarity on the regula-
tory framework and consistency in the application of laws and regulations.
More than one interviewee related experiences of getting different inter-
pretations from different officials on different days – with very little being
written down – and thus having to conduct their day-to-day operations in
the hope that they had asked the right questions and had the right con-
versations, and that the interpretation upon which they were relying would
continue to be acceptable.
For the executives, another frustration lay in the differences in process as
regards new legislation; in contrast with the process familiar to them (one
of consultation and debate through public enquiries, commissions and the
like, to clarify the intent of the legislation and case law to facilitate inter-
pretation), there was no case law in Korea and no preamble to the legisla-
tion. According to one interviewee, the approach in Korea was to imple-
ment legislation, acknowledging its imperfections and expecting to address
any flaws or problems at a later date. This highlighted a major issue for
the Europeans: the differing approaches to law, contracts and other forms
of legislation. The received wisdom among businessmen operating in Ko-
rea and the advice given by business culture experts was that, in Korea,
258 The Pacific Review

contacts were more important than contracts. Whereas Europeans saw leg-
islation and contracts – including the FTA document – as the final word
and enforceable by law, for the Koreans they were more symbolic, repre-
senting the relationship that had been established and constituting a liv-
ing document, to be amended and corrected in the light of subsequent
developments.

Education
In the interviews conducted in 2006–7, education was identified as another
key challenge for the expatriate manager. While it was generally acknowl-
edged that the Korean education system had served the country well during
the years of rapid industrialization, many interviewees felt that the tradi-
tional system, with its focus on repetition and memorization, and cultural
taboos regarding challenging the views and opinions of educators, left Ko-
rean graduates ill-equipped to deal with the demands of international busi-
ness. Specific concerns related to the lack of focus on initiative, creativity,
analysis and critical thinking; many interviewees felt that they could not
expect these attributes from graduates but would, instead, have to dedicate
resources to developing these vital skills. The interviewees in 2009 endorsed
these views but were at pains to point out that, despite the hard work and
persistence that were required on the part of the employer, once Korean
employees had been trained and given instructions, they worked hard and
achieved good results: ‘To go from issue to solution to planning and execu-
tion, you have to follow every single step – you have got to push every time
and it can be exhausting. It’s very stimulating when it works but you need
to have a huge load of energy.’

Labour
In 2006 and 2007, European investors in Korea confirmed the common per-
ceptions of the militancy of Korean labour unions and commented in par-
ticular on the drama and spectacle of labour demonstrations, which could
be unnerving for newly-arrived expatriates and discouraging to potential
investors. However, they also noted that, given the relatively short period
that had elapsed since the 1987 democratic reforms provided for the for-
mation of free labour unions, it was unsurprising that labour–management
relations were characterized by conflict rather than cooperation. Intervie-
wees at the time felt that labour militancy and unreasonable wage demands
could be a strong deterrent to firms considering entering the Korean mar-
ket; three years later, executives felt that, with the unions getting weaker
and wage demands becoming more reasonable as the effects of the global
financial crisis were felt, the situation had improved. But they noted that
labour was still a big issue, especially for large firms in the automobile man-
ufacturing and financial sectors, and warned that predictability was an issue
 J. Cherry: Upgrading the ‘Software’ 259

and there was still ‘an element of hostility and . . . always an undercurrent’
in labour–management relations. Once again, the interviewees’ frustration
was evident, but it was also clear that an understanding of Korean culture
helped them appreciate the underlying issues and causes:

I can have a good conversation with the head (of the union) and I
think we have come to a solution to a thorny issue. I go home, pour
myself a glass of something and think “That’s that out of the way . . .
fabulous!” I go in the next day and there are 20 of them in my office
with their headbands and their waistcoats, shouting in unison . . . how
did this happen? But that’s part and parcel of it – the drama and the
theatre.

Intellectual property rights

In addition to the purely cultural issues mentioned above, there was an im-
portant non-tariff barrier in the area of commercial regulations that had
strong sociocultural underpinnings, which meant that any efforts to disman-
tle the barrier from a ‘hardware’ perspective (through legislation) could be
thwarted by ‘software’ issues (attitudes and perceptions). The issue was IPR
protection, which was presenting similar challenges to those highlighted
three years previously but which also presented two new dimensions in
2009. A typical story was told by the manager of a foreign firm who lost
his case in the Supreme Court when he tried to take action against a Ko-
rean national who was using the company’s trademarks and logos, after the
judge ruled that the firm’s globally-recognized brand was not sufficiently
well known in Korea. Another expatriate reported that, in his lawsuit for
IPR violation, the judge was lenient in his treatment of the Korean busi-
nessman involved, on the grounds that ‘he was just one man and our firm
is a big multinational’. Yet another manager felt that IPR violation was
treated as a ‘minor, magistrates’ court type of crime’; under the current sys-
tem, he saw little point in bringing cases to court as it made more sense to
spend US$100,000 on advertising than on a court case that resulted in the
violator being fined US$100. Again, the interviewees understood the cul-
tural and institutional roots of the problem: that copying was seen more as
a compliment than an illegal action – as one interviewee wryly remarked
‘learning from the best!’.
The two new dimensions to the issue were, firstly, that Korean firms were
now becoming the victims of IPR violations and that, secondly, increasing
amounts of fake goods were being sold via the internet in Korea, where
website owners were not held responsible if firms sold counterfeit goods
through their site. In many cases, goods (counterfeits of both Korean and
foreign products) were being manufactured in China, shipped to the USA,
sold via mobile phones and despatched to Korea. Accordingly, the big
260 The Pacific Review

Korean companies were now waking up to the global effects of IPR vio-
lation and bringing the issue to the forefront, raising hopes among foreign
investors that Korean firms could convince their government that a crack-
down on IPR violations would be in everyone’s best interests – Korean
firms, foreign investors and local consumers alike.

Attitudes towards globalization and foreign participation

in the Korean economy
The interviews in 2006–7 took place around the time of the Lone Star
controversy, when anti-foreign capital sentiment became a major issue in
Korean society after the American private equity firm made significant
profits on the sale of assets it had purchased in Seoul in the wake of the
1997 financial crisis. Additionally, Lone Star was able to claim exemption
from part of the taxes on the profits thanks to a tax agreement between
Korea and the Netherlands, the country through which it had arranged the
deals. While none of the executives interviewed at the time felt that there
was anti-foreign sentiment on an individual level, they were concerned at
the nationalistic fervour and anti-foreign capital sentiment aroused by me-
dia reporting on these and other corporate deals. From a cultural perspec-
tive, they recognized that Korea’s turbulent history had left a legacy of fear
of foreign influence, control and domination, that restrictions on overseas
travel until 1987 had restricted Koreans’ experiences of other countries and
cultures, and that the desire to limit foreign participation in the economy
remained in some quarters of society.
By 2009, when Korea had emerged from the chaos following the 1997 cri-
sis and was being tipped to lead the world out of the current global financial
crisis, anti-foreign capital appeared to have abated. This, the interviewees
felt, was directly related to the nation’s economic success and improved
standing in the global economy; they observed that anti-foreign capital sen-
timent had increased in times of economic difficulty and then waned as con-
fidence and a sense of control increased and fears about inward investment
diminished. A number of interviewees highlighted the difference between
Korea being required to open up to foreign companies by the conditions
attached to the bailout funding offered by the IMF in 1997 and choosing to
open the economy and conclude FTAs with key trading partners as a matter
of choice and from a position of strength. Nevertheless, the general consen-
sus was that there were still ‘mixed feelings’ about foreign companies and
that the sense of economic nationalism and anti-foreign capital sentiment
could reappear were such an important and high-profile case to arise again
today.
As far as Korea’s integration into the world economy was concerned, the
consensus among interviewees in 2006–7 was that, for many Koreans, glob-
alization was a ‘one-way street’ where the aim was for Korea to export and
invest more overseas while continuing to restrict imports and the entry of
 J. Cherry: Upgrading the ‘Software’ 261

foreign firms. This would be a key issue for the FTA, which had deregula-
tion, liberalization and the dismantling of barriers to trade and investment
at its very heart. Indeed Korea’s commitment to global trade, as evidenced
by its ambitious FTA programme, was a strong indication that Korea
was changing from the old ‘hermit kingdom’ mentality. The interviews in
2009 revealed altogether more positive appraisals of the Koreans’ attitudes
towards globalization; while the view of globalization as a means to increase
exports and penetrate more markets remained, many executives had wit-
nessed ‘quite a bit more openness to sharing and coming to solutions to-
gether’, especially in some high-tech areas where the Korean conglomerates
did not feel so strong. They felt that the idea of doing business with foreign-
ers was now well established as a means of opening up more opportunities
globally, not just selling into markets but accessing them together. The one
exception seemed to be the less-experienced small and medium-sized enter-
prises, which were more comfortable in the role of supplying and working
with the major Korean conglomerates.
Change was also coming in the form of a new generation of managers who
had been posted overseas or who had studied abroad and then returned
home with a global vision. However, given the hierarchical structure of Ko-
rean society and business, it might take time for these young managers to
rise to positions in which they could effect real change.
I think the younger guys think of themselves as part of the global com-
munity – there are a lot of kids that we take in as graduates of overseas
universities who are very globally minded. They are very frustrated with
the middle-aged group who are very old fashioned, traditional and stuck in
their ways, the hierarchies and everything else. That is slowly disappearing
but it is a generational change. In addition to serving as barriers to trade
and investment, the social, cultural and institutional issues highlighted by
the interviewees in 2006–7 and 2009 also had the potential to weaken the
effectiveness of the proposed FTA. The issue of ‘contacts vs contracts’ was
particularly pertinent in that the FTA itself was a major contract between
the two parties. Problems could arise from the difference in the interpreta-
tions of the agreement between the Europeans’ view that legislation should
be followed to the letter and should be interpreted by the courts and the
Koreans’ perception that contracts were living documents to be amended
in the light of future developments:

When you think you have signed on the bottom line that is only the
start of the negotiations. The Europeans think “We’ve got the con-
tract.” No, no, no . . . you don’t understand. This is not a contract –
this is the start of a relationship to get somewhere down the track.

Interviewees also foresaw problems in the interpretation of the English doc-

ument and its translation into Korean; even with the same text, the under-
standing on either side might be different. As one interviewee observed,
262 The Pacific Review

the phrase ‘better transparency’ might result in the Koreans moving closer
to the European position but still remaining at a level that was unaccept-
able to EU business. Given the ambiguities of the Korean language, some
were concerned that the Korean translation should accurately reflect the
intent of the original English documentation. One interviewee, however,
could see the benefits of having vaguely-worded legislation and develop-
ing an interpretation as the FTA went into effect. There was, however, an
important caveat: that there had to be a level playing field with the agreed
interpretation applying to all players.
In terms of the effective implementation of the EU–Korea FTA, some in-
terviewees warned that potential exporters and investors in the EU should
not think that, once the FTA went into force, doing business in Korea would
no longer be ‘challenging’ or ‘difficult’. The regulatory side of trade and in-
vestment might become clearer and tariff barriers would be lowered and
eliminated, but the ‘software’ (perceptions, mindsets, attitudes and culture)
would take time to change. The FTA would not be able to address issues
such as the gap between policy and implementation, the lack of predictabil-
ity, consistency and transparency, perceptions of and attitudes towards for-
eign residents in Korea, union militancy, or the quality of education in
terms of producing executives equipped to succeed in the global economy.
Change would come over time as a result of shifts within Korean society,
such as the gradual move towards a more multiracial and multicultural so-
ciety as the number of migrant workers increased and more international
marriages took place. Change would also occur within Korean business,
as local firms recognized the mutual benefits of the requests and sugges-
tions being made by the foreign business community. When asked whether
‘hardware’ or ‘software’ presented the greater challenge to the European
business community at the moment, one executive replied:

Software! Because you are not talking about anything other than cul-
ture. How do you change somebody’s culture? Korea is opening up
more but this is not something that is going to happen in a year or in
a decade – it’s going to take a number of decades.

Given that social, cultural and institutional issues would remain in the
medium term at least, a natural progression in the interviews was to the
action that foreign businesses could take to smooth the path before them.
There was a widespread recognition of the fact that expatriates looking to
make money from the market could not go into Korea demanding social
change for their own benefit. Rather, it was incumbent upon them to un-
derstand why things operated the way they did and then work with and
around the situation, promoting change that would benefit Korean and for-
eign firms alike. One expatriate manager felt that it was vital to be flexible,
to match his expectations to what could actually be achieved, and to seek ‘a
balance between patience and forcefulness, between pushing and waiting’.
 J. Cherry: Upgrading the ‘Software’ 263

Ultimately, the general consensus was that it was vital for executives going
to Korea to realize that it was up to them to understand the culture, appre-
ciate that it would change over time, and find a way to deal with it while
that process was going on:

I do think that people doing business here have to be a lot more under-
standing of Koreans and Korea. If you read the history you can under-
stand why the Koreans might be a little reticent to trust foreigners or
to challenge their own regulators, or to behave in a non-hierarchical
way, or to promote young people . . . or any of the problems that
Western companies have with the Korean culture.

Overall there was optimism about the prospects for changes to the coun-
try’s ‘software’, based on the interviewees’ knowledge of Korea’s history
and the ‘character and intelligence of its people’. Interviewees noted that
the Koreans were more globally minded than they used to be, they travelled
more, their English language ability was increasing, and larger numbers of
Koreans were studying overseas. In the interviewees’ eyes, the ‘soft’ barri-
ers were slowly changing as more and more people came back from visits,
work or study overseas and they had a much better understanding of inter-
national business culture. Here the executives evoked memories of the ‘can
do’ spirit of the 1980s, observing that, once the Koreans put their minds to
something that they wanted to do and that they were convinced was in their
interests, they could do anything.
Some interviewees were quick to point out that the cultural issues arising
from the FTA were not unique or confined to Korea; the differing views on
contracts were common in the rest of East Asia and cultural issues could
prove just as much of a hindrance to Koreans trying to do business in the
EU. The sheer diversity of the EU market could slow down the implemen-
tation of the FTA just as much as the cultural uniqueness of Korea. One
executive warned about the ‘whinge factor’ when dealing with expatriates
and drew an interesting parallel between divorce lawyers and the national
chambers of commerce in Korea; the former only sees marriages that are
in trouble and the local chambers mostly deal with the problems associ-
ated with doing business in Korea. It was, he noted, important to bear
in mind that, while many of the complaints were quite justified, foreign
firms were choosing to remain in Korea and were making money in the
market.
However, the overall consensus was that potential EU exporters and in-
vestors had to be aware that the FTA could not and would not resolve the
social, cultural and institutional issues that acted as hindrances or barriers to
doing business in Korea or narrow the cultural gap between Europeans and
Koreans. Although these issues would not necessarily undermine the im-
pact of the EU–Korea FTA, they had the potential to slow down its imple-
mentation and weaken its effectiveness. The phenomenon of ‘mismatched
264 The Pacific Review

globalization’ still existed in Korea and was likely to persist for some time
to come. As one executive observed: ‘Cultural globalization is not matching
the pace of economic globalization. It is happening as we speak, but it is not
happening as fast.’

Conclusions
In October 2010 the EC and the government of the Republic of Korea
signed a ‘deep’ FTA that aims to increase bilateral economic interactions
by dismantling tariff and non-tariff barriers to trade and investment. In this
article, we have highlighted the importance of social, cultural and institu-
tional barriers to trade with and investment in Korea – barriers that cannot
be legislated for by the new FTA but that can serve as ‘hidden stumbling
blocks’ to the effectiveness of the new agreement. We have argued that
the phenomenon of ‘mismatched globalization’ is still apparent in Korea,
as evidenced by the continuing existence of these ‘soft’ barriers which in-
clude, inter alia, the gap between policy and implementation, the lack of
predictability, consistency and transparency in the regulatory environment
(including IPR protection), education systems, labour militancy, and atti-
tudes towards globalization.
These findings resonate with Dent’s (2006) argument that ‘deficient ca-
pacity’ in terms of technocracy, industry and/or institutions can pose prob-
lems for developing countries seeking to negotiate and implement bilateral
trade agreements with more developed countries. In the case of Korea, the
long-term ‘soft’ social and cultural barriers identified and discussed in this
article can act as a constraint on the country’s institutional capacity func-
tions and thus have the potential to hinder the full and effective implemen-
tation of the EU–Korea FTA, depriving the signatories of the full range of
economic benefits that they anticipate from the agreement.
As can be seen from many of the comments made by the EU executives
and officials interviewed for this article, the persistence of ‘soft’ barriers to
trading with and investing in Korea can be explained from a variety of polit-
ical, economic and sociological perspectives. There was frustration with the
‘mismatch’ between the policies formulated and pronounced by the govern-
ment and the actual implementation of those policies by working-level offi-
cials, and with the unwillingness of those lower-level bureaucrats to take re-
sponsibility for the interpretation and implementation of regulations. This
led to a lack of predictability and consistency for foreign executives in
their dealings with the regulators of their sectors. This clearly demonstrated
the weak ‘institutional capacity’ functions highlighted by Dent (2006)
and the problems presented by ‘mismatched globalization’; while the in-
stitutions themselves had been revamped and reformed after the 1997 cri-
sis, the attitudes, behaviour and working practices of working-level officials
could and did undermine the best intentions of policy makers at the highest
levels.
 J. Cherry: Upgrading the ‘Software’ 265

The continuing importance of hierarchy and personal connections within

Korean society was evident throughout the government and business com-
munity, and underpinned the widespread perception in Korea that, as far as
a legal document or agreement was concerned, the contact or relationship
that it symbolized was more important than the contract itself, which was a
living document to be amended in the light of experience. This issue of ‘con-
tacts vs contracts’, which had long been a feature of the Korean government
and business environments, would take on a new dimension when the con-
tract to be interpreted and implemented was an FTA. This issue brings into
sharp focus the problems confronting the EU, the USA and other countries
in engaging in an FTA with Korea; it could not be assumed that Korea’s rel-
ative strength in technocratic and industrial capacity functions also implied
a strong institutional capacity to implement the ‘letter of the law’ as far as
the FTA was concerned.
Another important example of weak institutional capacity functions
could be seen in the constraints placed upon the legal framework in
Korea in the area of IPR protection. Here the intent of regulations that
had been revised to become as robust as those in many developed countries
could be thwarted by people within the institutions who took a lenient view
of violations, or manufacturers who viewed the copying of ideas, designs
and even products as a compliment to the originator rather than a serious
crime. Attitudes towards IPR violation were shaped in part by the pedagog-
ical approaches adopted in the traditional Korean education system, with
its focus on memorization and regurgitation of facts rather than analysis,
creativity and autonomous thinking. Here Korea’s social and cultural insti-
tutions had become part of the country’s ‘deficient capacity’ and the ‘mis-
match’ between economic and cultural globalization. The education system
left graduates ill-equipped to deal with the demands of global business and
the needs of foreign investors. Furthermore, it reinforced the emphasis on
hierarchy within Korean society that discouraged students from engaging
in debate with their educators, and created difficulties in human resource
management such as the promotion of younger executives to positions of
authority over members of the older generation. For both Korean- and
western-managed firms the economic promise offered by the FTA might
well be compromised by the lack of skilled and trained executives to work
in the overseas branches of Korean firms or in foreign-owned firms operat-
ing in Korea.
Labour–management relations have been a major issue for foreign in-
vestors in Korea since the democratic reforms of 1987 allowed the forma-
tion and operation of effective trade unions. Over the past two decades,
labour–management relations have begun to move from conflict to cooper-
ation and compromise, but still proved to be an area of concern for western
executives managing large-scale firms in sectors such as financial services.
While the Korean government had made substantial efforts to enhance
the business and investment environment to attract foreign investors and
266 The Pacific Review

enhance labour–management relations within foreign-invested firms, some

of the unions clung on to the tactics of ‘drama and theatre’ that could ap-
pear so intimidating to foreign executives, which they saw as part and parcel
of the negotiation process.
The decision to pursue a range of FTAs with developing and developed
countries was a key element of the Korean government’s ongoing commit-
ment to achieving a greater degree of integration into the global economy.
However, the ability of the government and its agencies to implement that
policy – Korea’s ‘institutional capacity’ – was constrained both by concerns
that it would be perceived as favouring foreign firms over domestic interests
and the awareness of the lingering fear of foreign domination and economic
control. Thus, expressions of economic nationalism and anti-foreign capital
sentiment could hinder the implementation of the policy by undermining
the government’s efforts to create a business-friendly environment for for-
eign traders and investors.
Among the executives and officials interviewed for this article there was
a real sense that change was happening in Korea, albeit at a slower pace
than they might wish. The interviewees cited examples of progress in the
area of policy and implementation, enhanced levels of engagement and di-
alogue with the government, improved labour–management relations, evi-
dence of efforts in educational reform and changing attitudes towards the
global economy. They saw signs of change in Korea’s society, culture and
institutions but had no doubt that the process of change would be a slow
one; many of the ‘soft’ barriers to trade and investment had existed for
decades and would inevitably remain in the short to medium term. The
interviewees’ message was unequivocal: while the signing and implemen-
tation of the EU–Korea FTA would lead to the dismantling of many im-
portant barriers, it would not per se turn Korea overnight into an easy
place to do business. In order to take full advantage of the opportunities
offered by the FTA and to achieve or sustain success in the market, traders
and investors had to develop an understanding of Korea’s political, social,
cultural and institutional environments, and adapt to the challenges they
presented.
The interviews carried out with EU executives and officials in 2006–7 and
2009 first identified and then confirmed the continuing existence of the phe-
nomenon of ‘mismatched globalization’ in Korea. The significance of the
‘soft’ barriers to trade and investment discussed in this article resonates with
Dent’s (2006) discussion of ‘deficient capacity’, as the mere fact of the ex-
istence of the FTA between the EU and Korea does not guarantee the full
and effective implementation of its many provisions and the removal of all
barriers to trade and investment. The ‘soft’ barriers could not be included
in the FTA negotiations or legislated for in the final agreement, but they
have acted as a hindrance to business in the past and will continue to do
so for some time to come. It is, therefore, vital for the EC, the EU mem-
ber states and individual firms to recognize the impact of these factors on
 J. Cherry: Upgrading the ‘Software’ 267

doing business in Korea and to adopt strategies to deal with the challenges
they present, if the EU–Korea FTA is to achieve its potential in terms of an
increase in bilateral trade and investment.

Notes
1 For an excellent overview of the globalization debate, see Held and McGrew
(2002, 2003).
2 For a detailed discussion of motivations for and effects of FTAs, see Dent (2006).
3 At the time of writing, both the US–Korea and EU–Korea agreements were
awaiting ratification.
4 For the full text of the agreement, see European Commission Trade (2010a).

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