South Korean companies: Needed on the home front Conglomerates that lifted Korea out of poverty are now creating more opportunities abroad Hands off the workers: the union is a strong presence at Hyundai Motor in South Korea Flanked by rolling woodland and close to the peak of Mount Jiri, Namwon is one of South Korea's most scenic towns. But its location in the southwestern province of Jeollabuk-do did it few favours when the military ruler Park Chung-hee unrolled his transformative industrialisation of the 1960s and 1970s. Investment by powerful chaebol conglomerates benefited Seoul and southeastern port cities, while the region around Namwon felt far less impact. Decades later Namwon - one of the poorest towns in the country - shows the lasting regional disparities left by that policy. Industry here amounts to a few small factories making dumplings and textiles - although the regional government is seeking to woo investment by offering help with finance and drawing attention to Namwon's low land prices. But in the absence of the chaebol - family-run conglomerates that the government long fostered and protected as national champions - there is little reason for Namwon's young people to stay. "I've been running this shop for 35 years, watching the population of Namwon go down," says Lee Ki-yong, 57, from behind the counter of his small photography studio. If a chaebol invested here and made jobs, that would have a good effect - but they don't see the value. Today, unease with South Korea's chaebol-­led economic model - long visible in neglected regions such as Namwon - is increasingly conspicuous at a national level. The sprawling conglomerates have served as the engine of the nation's export-driven economic development - one of the most rapid of any country - and the overseas success of groups such as Samsung and Hyundai is a powerful international emblem of this growth. But at home the chaebol are a source of growing disenchantment, with many citizens complaining "that the government has done a lot to help business but business did not do its share by creating jobs," notes Mo Jongryn, a professor at Yonsei University. The fear is that they are creating their growth and new jobs abroad rather than at home. The number of South Korean workers employed by large manufacturers declined by 1.6 per cent between 1995 and 2011, according to the consultancy McKinsey. In a country of 50m people, the 30 largest chaebol groups only employ about 1.23m, or 7 per cent of salaried workers, according to the latest estimate from the Federation of Korean Industries, a business lobby group. Income inequality has grown, with real wage increases consistently lagging behind the broader economy. The country's growth in per capita gross domestic product from $86 in 1948 to $22,590 last year is frequently referred to as an economic miracle - but it is one that South Koreans will consider incomplete until they have closed the gap with the advanced economies of North America, western Europe and Japan. And time is not on Seoul's side. One of the world's lowest birth rates - driven in part by a national obsession with education which means most children receive private tuition - will within a few decades translate into one of the world's most aged societies. To address these challenges, there are growing calls from politicians and the public that the chaebol-led model must be revamped to allow innovative new companies to grow. And in a quirk of history, it is Park Chung-hee's daughter who is tasked with overhauling the economic framework that dates to his rule. "Our economy is at a crossroads," Park Geun-hye said at a technology conference a few weeks after her inauguration as president in February. The economic model of the past, based on following the advanced countries, has hit a structural limit. Creating growth abroad Moving overseas lessens companies" labour worries If Hyundai Motor executives are feeling pressure from public opinion at home, it must be a pleasure for them to visit Montgomery, Alabama, where the company has run a factory since 2006. "Hyundai is extremely popular here," says Todd Strange, the mayor of the Alabama state capital, who estimates that the Hyundai factory has boosted the city's economy by nearly $2bn since it was established in 2006. Capacity has steadily increased over the past seven years at the car plant, now Montgomery's largest private sector employer, while the city has benefited from an influx of supplier companies that have sprung up around it. "It's been beyond our wildest dreams and expectations," Mr Strange says. Montgomery is just one of many communities around the world that have reason to celebrate the global expansion of the chaebol. Citizens of the Chinese city of Xi'an have informally named one thoroughfare "Samsung Street," in honour of that company's $7bn investment in a semiconductor plant, due to open next year. GS Group's Caltex subsidiary last month opened a compounded resin plant in the Czech Republic, a few weeks after the Vietnamese port city of Hai Phong celebrated an investment plan by LG Electronics worth $1.5bn. "The chaebol have done a hell of a job of expanding globally," says Mark Mobius, executive chairman of Templeton Emerging Markets. They're waking up to the reality that they're global companies, not just Korean. South Korean groups built little foreign production capacity until the late 1990s but have since expanded enthusiastically to exploit lower labour costs and move production closer to key markets. Outbound foreign direct investment reached $105bn in the five years to 2012 - up from $47bn in the five years before. But while this trend is helping to drive the companies" global growth, it is also contributing to the decline in manufacturing employment at home. "The shift towards more offshore production does cap the benefits that the chaebol can provide to the [domestic] economy," says Ronald Man, an economist at HSBC. The companies say that they are still investing in South Korea. Samsung, for example, says it is spending billions of dollars on new production lines at its semiconductor plant at Hwaseong, calling the domestic plants a "mother factory that develops and disseminates the latest and most advanced technologies" to the foreign operations. Yet manufacturing operations in South Korea are increasingly automated, while the labour-intensive work is outsourced to lower-cost jurisdictions such as China or Vietnam. Although Samsung's surging growth in mobile devices has driven a rise in its workforce from 158,000 to 270,000 over the past four years, only 8 per cent of the extra jobs were created in South Korea. Meanwhile, the domestic share of Hyundai Motor's vehicle production has fallen from 73 per cent in 2005 to 43 per cent last year as it opened factories from Turkey to China. Analysts see little chance of capacity expansion at home, partly because of labour problems. Production rates at Hyundai's Korean plants are about 23 per cent below those of the Montgomery plant, says Angela Hong at Nomura, while wages are about 40 per cent higher. For Choi Byung-il, president of the Korea Economic Research Institute, this is symptomatic of an unfriendly labour climate that has undermined investment by the chaebol as well as inbound FDI. The country's unions are notoriously disruptive. During Ms Park's visit to the US in May, she was warned by Dan Akerson, chief executive of General Motors, that the company's presence in the country - long dogged by strikes - could be threatened by an ongoing legal struggle on bonuses and overtime pay. Rigid employment law is also seen by Standard Chartered as a factor behind the troubles of its South Korean subsidiary, which slumped to a Won22bn ($20m) net loss in the third quarter of this year. However, Ms Park - who campaigned on a platform of "economic democratisation" - has shown little inclination towards sweeping labour market liberalisation. Instead there have been labour-friendly measures such as putting pressure on the chaebol to reduce their use of temporary workers, who account for 32 per cent of the national workforce and earn a third less on average than permanent staff. Such measures are an overdue response to complaints that "the people at the bottom have not profited properly" from the success of the chaebol, says Shin Seung-chul, president of the Korean Confederation of Trade Unions. But for critics such as Mr Choi, they underscore the futility of government hopes of reversing the trend of manufacturing moving offshore. "Unless the labour market becomes much more flexible, I don't think that kind of effort is going to be successful," he says. Instead we need to change the paradigm - to grow on the basis of being innovative and creative. No room for entrepreneurs? Start-ups find it difficult to secure funding "I would let you have a ride but the paint's still wet," says Bom Kim, a 34-year-old Harvard Business School dropout, gesturing at the blue slide that juts out from a climbing wall to greet visitors to the new home of Coupang - a shopping website that is one of South Korea's fastest-growing start-up companies. The office is more reminiscent of Silicon Valley than Seoul - the floor of one meeting room is strewn with rocks, while another contains deckchairs. With more than 21m users and Won1.3tn worth of sales projected to take place on its site this year, Coupang is a harbinger of a new wave of innovative young companies that will hold the key to South Korea's economic future, according to the "creative economy" manifesto that Ms Park has put at the centre of her policy platform. But Coupang's story lays bare the scale of the challenge facing this plan. In a country where 100,000 graduates applied for a single entry test at Samsung last month, it was hard at first to convince talented staff to join a start-up instead of a chaebol, Mr Kim says. "Non-existent" early-stage investment in South Korea meant that start-up funding had to come from the US. And when Coupang goes public - which it plans to do next year - it will list in New York, where investors "understand what we're trying to do better." Steps to improve the funding environment for start-ups are central to the "creative economy" blueprint. Measures include a new stock market for growth companies, and a Won500bn state fund that will invest in promising young businesses. "Certainly, people's interest in setting up ventures has increased thanks to increased financial support from the government," says Chang Young-wha, head of OEC, which helps young people set up IT ventures. But he questions how much government policy can do to instil "entrepreneurial spirit," and worries that civil servants are ill-placed to guide funds towards the most promising small businesses. "It could actually undermine market forces," he warns. Mr Chang is not alone in his unease about heavy-handed state intervention. The big banks all trade at significant discounts to their book value and have built little international presence. "The government steps in very deeply into the management of the financial institutions," says Hwang Young-key, a former chief executive of two of the leading banks, who believes interference has discouraged innovation and long-term thinking. The weakness in the financial industry reflects broader problems in the service sector as a whole, the consultancy McKinsey said in a report this year, noting that productivity in services was just 40 per cent of that in manufacturing. Collaborative chaebol Some insist conglomerates can boost small businesses Cho Won-dong, Ms Park's chief economic adviser, agrees there is a role for services in a more "value added economy." But manufacturing must also be at the heart of this drive, he adds, brandishing the design of a futuristic-looking flying boat. "Once this kind of plane is commercialised, it has a great future," Mr Cho says. And the technology is developed by a small firm - because small firms are agile, they can be more creative than the large firms. The story of Wingship Technology, the aircraft's six-year-old developer, is an example of how the chaebol can play a role in fostering the next generation of South Korean start-ups. Wingship received early-stage investment from Daewoo Shipbuilding and Marine Engineering, while Samsung C&T has helped it market its products abroad. This contrasts with the widespread condemnation of the chaebol for smothering the growth of smaller businesses by aggressively pushing down the prices of their suppliers or using their economies of scale to push independent rivals out of business. Such criticism is "a bit unfair," says Park Chan-ho, secretary-general of the Federation of Korean Industries, the main lobby group for the chaebol. "I expect co-operation with smaller businesses to increase . . . for example, the large companies can set out an R&D plan and delegate the work to smaller companies," he says. The chaebol are still growing. I don't think their role will diminish.