Tourism Cluster in South Korea

MICROECONOMICS OF COMPETITIVENESS
TOURISM CLUSTER IN SOUTH KOREA
SHREYAS SATHE JINGYI HUANG SHRADDHA SHUKLA LU CUI TING DING
18 April 2014
Microeconomics of Competitiveness
TABLE OF CONTENTS
Tourism Cluster in South Korea
EXECUTIVE SUMMARY 4 ASSESSMENT OF OVERALL BUSINESS ENVIRONMENT AND POLICY ..5 The legacy of South Korea5 Religion..8 Geography regional position ..9 Macro and micro-policy choices10 Macro Policy10 Micro Policy.11 Developed infrastructure..11 Labor market..11 National Business Environment analysis 12 1) Factor conditions12 2) Demand conditions..13 3) Context for firm strategy and rivalry14 4) Related and supporting industries.15 OVERALL ECONOMIC PERFORMANCE16 Macro performance 1. GDP...........................16 2. Productivity17 3. Inflation.. 18 4. Currency18 5. Fiscal stability19 6. Employment...20 Micro performance 1. Trade..20 2. FDI21 3. Education21 4. GCR survey data.22 IN-DEPTH ANALYSIS OF TOURISM CLUSTER OF SOUTH KOREA.22 1.History of the cluster Phase 1 Strengthening of Tourism Infrastructure (1960s) 22 Phase 2 Revitalization of International Tourism (1970s) 23 Phase 3 Development of South Korean National Tourism (1980s) .24 Phase 4 Balanced development of International and Domestic Tourism (1990s) 25 2.The cluster today.26 3.Cluster Diamond..29
IDENTIFICATION OF STRATEGIC ISSUES34 1. International Disputes & Heavy dependencies on China and Japan34 2. Inconvenience Issues in South Korea35 3. South Korea could be heading for Deflation .35 4. Accommodation shortage..37 5. High overseas carrier prices37 6. Travel Agencies...38 POLICY RECOMMENDATIONS...39 Recommendation 1 : Re-branding the South Korean Tourism..39 Recommendation 2 : Invest on accommodation facilities.40 Recommendation 3 : Introduction of " Tourist Police " system40 Recommendation 4 : Implication of Monetary easing policies ...41 Recommendation 5 : Government action for Taxi problem .42 Recommendation 6 : Targeting global market without losing the current market..42 CONCLUSION & PREDICTING THE MARKET IN 2023...43 REFERENCES .44
EXECUTIVE SUMMARY South Korea has experienced an amazing economic development during the past 50 years. The legacy is a high-level combination of modern and traditional culture of Korea. The unique south Korea culture such as the food, architecture, religion and entertainment has contributed to the diversity of traveling resources of South Korea. Besides, the Korean government has conducted the policy to promote the development of South Korea, including the well-developed
infrastructure, the motivated innovation and education policy, the powerful internal consuming capacity and completed industry network. Nevertheless, there is still some economic barriers such as the Chaebols group and decreasing labor competing capacity have limited South Korea's development. The country has been laying more emphasis on tourism industry since the settlement of Korean War. After several phases of development, South Korea has become an important tourist destination and tourism also accounts for an indispensable proportion of GDP. In the diamond analysis, several factors have been identified. The positive factor conditions includes capital and cultural legacy, as well as cultural tourism, human resources, tourism infrastructure and accessibility of transportation, while lacking natural tourism resources is a shortage for factor conditions. South Korean tourism is faced with rapid increasing domestic demands and more slowly increasing international demands. Well-developed related and supporting industries are also crucial for the development of tourism. Advantages over rivals and cooperation agreements have provide a favorable platform for South Korean tourism though it is in a market of hyper competition.
Through concrete analysis of the macroeconomics in South Korea, we could notice that the Korean is recovering fast from 2008 financial risks and the overall economic performance is good. But because the volatility of the global economy environment, the economic developing speed of South Korea is slowing down. In terms of the microeconomics performance, the import& export trade, education results, FDI and the rank of global competitiveness are all improving. But there are also some problems to solve. Finally , we look at the different strategic issues and recommendations to the cluster and also see what would be the position of the tourism cluster after a decade in South Korea.
ASSESSMENT OF OVERALL BUSINESS ENVIRONMENT AND POLICY The legacy of South Korea With an amazing economic development during the last 50 years, Korea is now a modernized vibrant nation that still maintains its traditional culture. Korea has a long history that could date back to 2333 B.C. Koreans are largely ethnically homogenous which made their culture highly concentrated. The culture of South Korea is a combination of modern culture and traditional culture. The traditional culture is from the culture of Korea, which shares the same culture with North Korea. The modern culture is shaping with development of industrialization of South Korea and it is highly influenced by the Western culture, particularly the USA. The culture of South Korea is very diversified: Traditional Korean culture and Modern Entertainment culture .
Korea is a peninsula jutting out from the world's largest continent, which has helped form the unique Korean characteristics: a combination of traits associated with continental and island people. Korea has a long history of interacting with the continental cultures of Asia such as China. Long history and unique cultural characteristics have given South Korean a culture of great splendor. Korea food is very famous which has become a symbol of South Korea. Rice is the staple of most Koreans like most of the other Asian countries. A Korean traditional meal is not complete
without kimchi, a mixture of various pickled vegetables such as Chinese cabbage, radish, green onion and cucumber. Certain types of kimchi are made spicy with the addition of red chili pepper powder, while others are prepared without red chili peppers or are soaked in a tasty liquid.
Another cultural symbol of South Korea is the entertainment culture, which is called The Korean Wave referring to the increase in the popularity of South Korean culture since the late 1990s. The Korean Wave is especially popular in Asia and it was firstly driven by the spread of Korean dramas televised across East and Southeast Asia during its early stages. Besides, the Korean-pop is the main factor that has driven Korean Wave from a regional development into a global phenomenon. Young adults and teenagers are the main audiences of Korean Wave and some of the outstanding symbol of Korean Wave has attracted the attention of the world, for example, Psy, who became a world-wide celebrity thanks to his song Gangnam Style who has got 3 billion views on YouTube. Moreover, with the growing acceptance of South Korean pop culture as a valid form of entertainment in many parts of the world, the government of South Korea has used the Korean Wave as a tool of soft power for promoting the national image and developing international status. Apart from this, the increasing influence and popularity of South Korean pop culture have also promoted the image of South Korean goods and products in international market. Religion The religion culture in South Korean is not single and there are a wide variety of religions that have influenced Korean people's way of thinking and behaviour. In the history of Korean, religion used to be closely related to political functions where political power made use of religions to control people and the country while the function of religion has changed in modern times. Under the influence of ancient China, Korea used to have Shamanism, Buddhism, Taoism or Confucianism. Nevertheless, in modern times, the Christian faith has
become the dominant religion bringing forth yet another important factor that may change the spiritual landscape of the people. Freedom of religion is guaranteed by the Constitution in Korea.
Geography regional position
South Korea is a country in East Asia, constituting the southern part of the Korean Peninsula. It shares land borders with North Korea to the north, and overseas borders with China to the west and Japan to the east. Based on the geographical position of South Korea, there are tree countries that South Korean has attached great importance to: North Korea, China and Japan. The Korean president Park had stressed her trust-building strategies for improving and stabilising relations with these countries. Inter-Korea relationship came from the historical issue, the long-term complicated relationship between South Korea and North Korea has been an important element that influences the development of South Korea. The tension of this relationship could be a treat to the future of South Korea while regional policy of Seoul
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government calls for both strengthening deterrence against Pyongyang as well as remaining open to engagement and it continued providing humanitarian assistance to North Korea and reiterating its openness to dialogue. China and Japan are the other two countries that play an important role in the regional strategy of South Korea. In order to strengthen and develop the relationship with the two countries, South Korea has adopted a trust-based approach to relations with China and Japan for the growing economic interdependence among China, Japan and South Korea and languishing political-security cooperation.
Macro and micro-policy choices Macro policy South Korea is a major international economic power and it also plays an important role in Asia. South Korea achieved rapid economic growth through exports of manufactured goods and its macroeconomic policy is export-led economy, which makes its economy highly, relied on the international business environment and consequently a fragile economy. Since 2011,South Korean has suffered a decreasing growth, declining from a 5.4% rate in Q1 to a 1.4% rate in Q4. The government strengthened its overseas economies and motivated its export business in the world market. Besides, the economy of South Korea is very innovative which motivated the long term GDP growth. While the growth of economy is not stable because that South Korea imports virtually all the energy it consumes with the uncertainty comes from the international oil price. Korean has been making of its advantages of high innovation to improve the countrys energy power such as electricity power. With respect to public finances, the Central government continued running a low budget deficit but changes in the tax reform are likely.
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The overall South Korean economy is characterized by moderate inflation, low unemployment, an export surplus, and fairly equal distribution of income.
Micro policy
Developed infrastructure: South Korea has a very advanced and modern infrastructure, which has been expanding since the 1960s. Both the South Korean government and the private sector are involved in the financing, construction, and operation of various infrastructure projects and services. The South Korean telecommunications system is among the best, the most modern, and the fastest growing in the world1.
Labor market:
From the period of 1960s, South Korea has experienced a high speed growing, its openness to the international market has attributed to this, and its high qualified and expanding labor force has also helped the country fulfilled this target. The rising of South Korean labor market is together with the increase of education system of its work force. People are well educated and meet the standard of the development of economy.
( Korea, South - Infrastructure, power, and communications, Encyclopedia of the nations, see at http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Korea-South-INFRASTRUCTURE-POWER-ANDCOMMUNICATIONS.html)
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National Business Environment analysis
1) Factor conditions
The infrastructure in South Korea is highly developed which is very advanced and modern. Over the first 20 years of the 21st century, the government will spend more than US$300 billion on airports, roads, railways, and mega-resorts. Additionally, it will spend US$60 billion on the construction of more than 100 new power-generation facilities.
2
South Korea has an extensive and well-kept system of roads, the system is being improved by the government under the increasing pressure of transportation. For example, the government
Korea, South - Infrastructure, power, and communications, Encyclopedia of the nations, see at http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Korea-South-INFRASTRUCTURE-POWER-ANDCOMMUNICATIONS.html
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has invested in the project to develop the highways, regular train and bus services around the country. Besides, the air transportation system and sea transportation is also well developed. The South Korean telecommunications system is among the best, the most modern, and the fastest growing in the world.
The service industry is also well developed, service industries included insurance, restaurants, hotels, laundries, public bath houses, health-related services, and entertainment
establishments. In South Korea, the retail industry is advanced, South Korea has a very large and growing retail sector including small-scale traditional shops, restaurants, larger and modern establishments as well as various foreign retailing networks. Together with the improvement of transportation and communication, increasing incomes, enhanced consumer sophistication, and government tax incentives, the service industry has been well encouraged and developed.
2) Demand conditions
The domestic market of South Korea is large due the increasing income standard. Korean customers demands are increasing both in the quality diversity. According to the Global Competitiveness Report, Korean buyer sophistication and the degree of customer orientation ranked at 16. The customers demand ranged from a variety of consumer products such electronics, automobile, entertainment products which could meet the increasing living standard and high level lifestyle of Korean people.
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3) Context for firm strategy and rivalry
The main characteristics of the Korean business environment is the dominant role of some industrial groups known as Chaebols which are unique to Korea.
Richard M. Steers, Yoo Keun Shin, and Gerardo R. Ungson defined the Korean chaebol as "a financial clique consisting of varied corporate enterprises engaged in diverse businesses and typically owned and controlled by one or two interrelated family groups." The majority of Korean economy is dominated by this kind of industrial groups. On one hand, Chaebols could maintain the stability of economy development of South Korea; on the other hand, because of the independent powerful position of Chaebols, it is difficult for SMEs and foreign companies de develop business in South Korea. The market and resources have been controlled by local Chaebols and there are full of barriers for the other companies. Besides, the close relationship between the government and Chaebols makes it more difficult to break the barriers. The poor transparency of public administration and the existing barriers to FDI limited Koreans ability to bring new skills, capabilities and technologies.3
South Korea is a high innovative country due the national encouragement of high technology and education development. The government strictly sets up the intellectual property rights, such as amendments and fines for breaking the related regulations, to guaranteeing the innovation development in South Korea. The local labor is high qualified and increasing while it is losing its competitiveness compared to the Chinese labor market with a low cost in manufacturing industry.
3
Doing business South Korea, reference for business, see at http://www.referenceforbusiness.com/encyclopedia/KorMan/Korea-Doing-Business-in-the-Republic-of.html
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4) Related and supporting industries
The capacity of supporting industries in South Korea is strong, the well-developed manufacturing industry has laid solid foundation for the other industries such as electronics, telecommunications, automotive and service industry. Both Electronics and automotive industry are the main power of innovation, which could interact and cooperate for promoting the overall industry development. Interactive supporting industries not only increase the productivity of manufacturing industry but also have a positive influence on the daily and business environment.
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Microeconomics of Competitiveness OVERALL ECONOMIC PERFORMANCE Macro performance 1. GDP
South Korea is a developed country and one of the wealthiest countries in the world. South Koreas economy started from 1960s and kept developing with high speed to the late 1990s. The per capita GDP in South Korea grows from 87 dollars in 1982 to 10548 dollars in 1996, which is called the Miracle on the Han River. From 1970 to 2013, the averaged GDP growth rate is 1.7 percent. Below is the chart of GDP Growth Rate in South Korea, which is reported by the bank of Korea. We could notice that it dropped a record low of -7.0 percent in March of 1998. Because it suffers a lot in the 1997 Asian financial crisis and after that, the economy in South Korean enters in mediumspeed growth period. Following the financial crisis in September 2008, South Korea was once considered to have the possibility to become the second country in bankruptcy after Iceland. However, the situation changed. Korea recovered the fasted among the 30 member states in the OECD (Organization for Economic Cooperation). Last year, the GDP in the fourth quarter increased 0.90 percent compared with the previous quarter. Now, in terms of the market economy, South Korea ranks 15th in the world by GDP, and it ranks the 12th about the purchasing power parity.
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2.
Productivity According to the productivity index of South Korea, the averaged index from 2008 to 2013 is 108.94. It ranked about 30th in the world. Compared with its GDP ranking, its comparatively low. From the analysis of South Korean economists, the main reason is the low labor productivity in 17
services owing to too many restrictions in services industry. And many others consider its related to tax control system developed by the government for the manufacturing industry.
3.
Inflation From 1966 to 2014, the averaged inflation rate of South Korea is 7.91. And the highest point reached to 32.51% in October of 1980 and the lowest point is 0.17% in 1999. In the consumer price index(CPI), housing, water, electricity, gas and other fuels are the most important classifications, which account for 17% of total weight. And the service is about 5.4%. In recent years, the economy of South Korea showed a slow recovery trend. And the central bank of South Korea said the inflation will keep low for the being and it remained the its rate at 2.5%. In 2013, the inflation rate of the full year was only 1.3%, which is far below the 2.5%-3.5% target range that is set by the Bank of Korea (BOK). And it is the lowest since 1999(0.8%). But in the monetary policy outlook in 2014, the BOK stated that the reasons for the current price pressure eased only because temporary supply and policy changed. Therefore, it still forecasts that the inflation rate of South Korea would go up to 3.8% in2014 and expand to 4.0% in 2015.
4.
Currency The currency of South Korea won demonstrates the tendency of rapid appreciation recently. The won always behaves unstable and looks like Korea is a part of emerging market. Now the rapid appreciation of won has made export-led Korean economy raised the alarm. To avoid excessive appreciation, South Koreas central bank has taken some interventions into foreign exchange market. The appreciation of won is not favorable for those large export-oriented enterprises, but it could save domestic market and improve the life quality of citizens.
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Microeconomics of Competitiveness 5. Fiscal stability
From the financial stability report of Korea in 2013, we could generally speaking that the South Korean financial system was stable, even though it exists some uncertainties abroad and domestically. Because of the international financial market was becoming more stable in the United States and China, the external economic environment have improved. On the other side, the domestic economic condition is not that positive. Firstly, the hosing market sluggishness in continuing and in 2012 the household debt expanded by 5.2%. Secondly, because of the increase of the loan ratios and the decline of the profitability, the financial structure stability of corporate sector is not improving. In terms of the banking sector, the profitability has worsened. And at the same time, in some parts of the non-bank financial sector, financial stability is also deteriorating. We could get this information from the financial stability map below.
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Microeconomics of Competitiveness 6. Employment
Between 1999 and 2014, the averaged unemployment rate in South Korea is 3.64%. And according to the statistics in March of 2014, the unemployment rate decreased to 3.5%. On a monthly basis, the services created about 196 thousand new jobs. Therefore, on the whole, the unemployment rate in South Korea is not very high. However, the employment rate is only about 59%, which is similar to some south European countries who suffered from economic crisis, like Italy (56.9%) and Spain(59.4%). So many people are afraid that South Korea may enter into employment downturn phase. The main reasons of the employment difficulty are the over high enrolment rate of universities and the new poste is decreasing. Micro performance 1. Trade South Korea is an export-orientated country, with the export amount of 5597 million dollars in 2013, which increased 2.2% than 2012. And also because of lack in natural resources, it is highly dependent on import of raw materials and industrial supplies. In 2013, the total imported amount is 5155 million dollars. Among those, the oil import account a lot, with 3.074 million barrels imported per day. Trade surplus was 44.2 billion dollars. These figures make South Korea the 7th largest export country and 10th largest importer in the world. To boost global trade with other countries, South Korea has established its network of free trade agreements since 2003. It also signed the FTA with US, which plans to remove off 95% of the trade tariffs. According to the trading environment outlook analysis of Korean Ministry of Commerce Industry, the economy of EU and other advanced countries have hope to pick up, global business would be more stable, with the increase competitiveness of Koreas major
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export commodities, most export commodities are expected to grow. The estimated exports will reach 5955 billion and imports will get 5620 billion. 2. FDI Foreign direct investment is a vital part of the Korean economy. It counts about 12% of the exports. Since the financial crises in 1997, the government of South Korea has been active in its effort to attract FDI in Korea. It expanded a lot over the last decade. Until 2012, the FDI in Korea has reached 162.58 billion dollars, which increased 18.9% than in 2011. Data show that in 2012, Japan has the biggest investment scale in all the foreign investments, which accounts for 27.9%. China ranks the second with 24.6%. And the services sector accounts for the largest part---58.9% of the total investment scale. To improve Korean foreign investment environment and protect investors interests, the government took many actions. For example, the government reduces the corporate taxes and simplifies the administrative procedures. They also established a new system to protect the intellectual property rights. At the same time, South Korea has other strengths for foreign investors. It locates near East Asian, which occupies two-thirds of the worlds population. And it has the trend to become the worlds largest market and production center. It would be a good strategy for foreign countries to use Korea as a test platform, and then it can easily expand to other markets.
3. Education Owing to the high results of Korean education, it has been praised for many years. From the results of the international school tests, South Korean has been one of the highest achievers. Thanks to the education, it brings lots of talents for the economic development of Korea.
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However, it is also criticized for the intensely competitive system, which caused the high suicide rate in Korea. The students in South Korea ranked second in the OECDs triennial program for International Student Assessment, which measures the scholastic performance of 15 year olds in over 60 countries. Good results come from long hour studying time. The children in South Korea spend 220 days in school, which is much longer compared with 180 days in United States. And the children often spend 13 hours a day to study. In the higher education, in 2012, almost 72% of South Korean high school students went to the university.
4. GCR survey data According to the global competitiveness index of 2012-2013, South Korea ranked 19th of 144 countries in the world, which improved 5 compared with 2011-2012 and entered the top 20 again. From the catalogues in the index, South Korea ranked the 9th with its outstanding infrastructure, and its macroeconomic environment ranked 10th with its 2 percent growth in GDP. Whats more, its not surprised that because of its high-qualified education system, South Korea got the 11th in primary education and 17th in higher education. Furthermore, the countrys capability of innovation (16th) is also very remarkable. But, there are some factors arise our concerns, for example, South Korean labor market efficiency ranked 73rd and its financial market development ranked 71th. These areas still have a lot to improve.
IN-DEPTH ANALYSIS OF TOURISM CLUSTER OF SOUTH KOREA 1. History of the cluster Phase 1 Strengthening of Tourism Infrastructure (1960s) South Korea had spent several years to rebuild the country after the Korean War ended in the year of 1953. It was not until 1961 that South Korea started developing tourism industry. The Tourism Revitalization Law of South Korea established in August, 1961 was the first law to regulate tourism industry (Li, B., 2006). In 1962, South Korea merely hosted 15184 foreign tourists, and the foreign exchange income reached $4.63 million (Korea Tourism Organization,
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2014), which is a tiny number compared to today. In the same year, South Korean government implemented its first five-year plan and established an organization which later proved to be crucial to the tourism industry of South Korea Korea National Tourism Corporation (KNTC) (Ahn, J., & Ahmed, Z. U., 1994). In the following several years, South Korean government has devoted lots of capital to improve the infrastructure, including the completion of highways and opening of new tourism attractions (Liu, Y., 2009). As a result, the number of foreign tourists increased to over 173335 (more than 10 times that of 1962) and foreign exchange earnings reached $46.77 million (Korea Tourism Organization, 2014). Year Visitor Arrivals (number) 1961 1962 1963 1964 1965 1966 1967 1968 1969 11,109 15,184 22,061 24,953 33,464 67,965 84,216 102,748 122,686 Korean Departures (number) 10,242 10,242 11,860 20,486 19,796 35,095 40,374 67,381 72,311 Tourism Receipts (US$1,000) 1,353 4,632 5,212 15,704 20,798 32,494 33,817 35,454 32,809 2,374 2,166 2,276 2,381 1,662 3,193 8,396 10,487 10,964 -1,021 2,466 2,936 13,323 19,136 29,301 25,421 24,967 21,845 Tourism Expenditures (US$1,000) Balance (US$1,000)
Table 3-1 Visitor Arrivals, Korean Departures, Int'l Tourism Receipts & Expenditures in 1960s Phase 2 Revitalization of International Tourism (1970s) With the accelerating economic development of South Korea, the government was focused on promoting the development of tourism industry. During this period, South Koreas economy has grown steadily, and the living standard of people improved accordingly; as a result, tourism industry developed gradually because of the increasing demand of people. In order to promote
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tourism industry, South Korean government established Tourism Revitalization and Development Fund Law of South Korea and Tourism Areas Exploitation and Promotion Law of South Korea in 1972 and 1975 respectively (Li, B., 2006). South Korea joined World Tourism Organization (UNWTO) in 1975 (World Tourism Organization UNWTO, 2014). In 1978, the number of international tourists increased to 1.08 million and tourism receipts grew to $408.11 million (Korea Tourism Organization, 2014). Later, the government drew up a long-term development plan for tourism industry in 1979 (Liu, Y., 2009). Year Visitor Arrivals (number) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 173,335 232,975 370,656 679,221 517,590 632,846 834,239 949,666 1,079,396 1,126,100 Korean Departures (number) 73,569 76,701 84,245 101,295 121,573 129,378 164,727 209,698 259,578 295,546 Tourism Receipts (US$1,000) 46,772 52,383 83,011 269,434 158,571 140,629 275,011 370,030 408,106 326,006 12,424 14,808 12,570 16,984 27,618 30,709 46,234 102,714 208,019 405,284 34,348 37,575 70,441 252,450 130,953 109,920 228,777 267,316 200,087 -79,278 Tourism Expenditures Balance (US$1,000) (US$1,000)
Table 3-2 Visitor Arrivals, Korean Departures, Int'l Tourism Receipts & Expenditures in 1970s
Phase 3 Development of South Korean National Tourism (1980s) With the continuous high speed economic development, South Koreas tourism industry became freer and more open. During this period, government has kept investing in tourism in order to improve life quality of South Korean people, instead of to simply earn foreign
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exchanges. The government declared the liberalization of international tourism, which enabled South Korean people to travel abroad. Besides, the growth of Koreas international tourist arrivals was particularly substantial in the late 1980s thanks to the 1988 Olympics held in Seoul (Ahn, J., & Ahmed, Z. U., 1994). The visitor arrivals and tourism receipts in 1988 were 2.34 million and $3.27 billion respectively, grew by 24.9% and 42% compared to those of 1987 (1.87 million and $2.30 billion respectively) (Korea Tourism Organization, 2014). Year Visitor Arrivals (number) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 976,415 1,093,214 1,145,044 1,194,551 1,297,318 1,426,045 1,659,972 1,874,501 2,340,462 2,728,054 Korean Departures (number) 338,840 436,025 499,707 493,461 493,108 484,155 454,974 510,538 725,176 1,213,112 Tourism Receipts (US$1,000) 369,265 447,640 502,318 596,245 673,355 784,312 1,547,502 2,299,156 3,265,232 3,556,279 349,557 439,029 632,177 555,401 576,250 605,973 612,969 704,201 1,353,891 2,601,532 19,708 8,611 -129,859 40,844 97,105 178,339 934,533 1,594,955 1,911,341 954,747 Tourism Expenditures (US$1,000) Balance (US$1,000)
Phase 4 Balanced development of International and Domestic Tourism (1990s) After the liberalization of tourism, South Korean people were more inclined to travel abroad, in the meantime, tourist arrivals increased more slowly. As a result, the increasing tourism deficit brought severe challenges to South Korean economy (in 1996, the deficit amount was $1.53 billion) (Korea Tourism Organization, 2014).
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In order to change the situation, South Korean government adopted a series of measures to increase the inbound tourism, including reforming the structure of tourism, improving tourism infrastructure, marketing to the neighboring countries, etc (Liu, Y., 2009). Year Visitor Arrivals (number) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2,958,839 3,196,340 3,231,081 3,331,226 3,580,024 3,753,197 3,683,779 3,908,140 4,250,216 4,659,785 Korean Departures (number) 1,560,923 1,856,018 2,043,299 2,419,930 3,154,326 3,818,740 4,649,251 4,542,159 3,066,926 4,341,546 Tourism Receipts (US$1,000) 3,558,666 3,426,416 3,271,524 3,474,640 3,806,051 5,586,536 5,430,210 5,115,963 6,865,400 6,801,900 3,165,623 3,784,304 3,794,409 3,258,907 4,088,081 5,902,693 6,962,847 6,261,539 2,640,300 3,975,400 393,043 -357,888 -522,885 215,733 -282,030 -316,157 -1,532,637 -1,145,576 4,225,100 2,826,500 Tourism Expenditures (US$1,000) Balance (US$1,000)
2. The cluster today From the end of last century to today, the focus of South Korean tourism is to revitalize the inbound tourism and to promote cultural tourism. Since the Asian financial crisis, tourism has been considered a critical factor to shake off the shadow and restore national economics by South Korean government. In terms of the exploitation of the tourism resources, South Korea has excavated many tourism sites and events which could display the cultural characteristics of South Korea. As a matter of fact, natural tourism resources is not bountiful compared to its neighboring countries
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like China because of the small area merely 100,032 square kilometers, about the size of Hungary (93,000 square kilometers) and Jordan (97,700 square kilometers) (AsianInfo, 2014). Nonetheless, South Korean government has developed cultural tourism products vigorously so as to enrich tourism resources and to build the image of power of cultural tourism. To be more specific, there are nine tourism attractions in South Korea that have been granted as World Cultural Heritage by UNESCO (World Heritage Convention, 2014). Besides, South Korean government has been promoting a phenomenon called Korean Wave, which refers to the increase in the popularity of South Korean culture since the late 1990s. Korean Wave shows the growing acceptance of South Korean culture in the world, especially in some regions like East and Southeast Asia, Middle East, and Latin America. Usually expressed through the forms of pop music, TV dramas, and movies, Korean Wave also has a huge impact on the tourism industry of South Korea. Back in 2002, after the airing of the TV drama Winter Sonata, the revenue of related tourism sites and products was more than 3 trillion Won (roughly US$2.9 billion) (Zhang, X., 2014). South Korea has also held several international tourism conventions and exhibitions; the government had even provided a special fund to invite journalists all over the world to take part in the experience tours, which has created the word-of-mouth effect for South Korean tourism (Liu, Y., 2009). At the end of 2013, South Korea has attracted over 12 million international tourists, and tourism receipts reached $14.30 billion (Korea Tourism Organization, 2014).
Year
Visitor Arrivals (number)
Korean Departures (number) 5,508,242 6,084,476 7,123,407 7,086,133
Tourism Receipts (US$1,000) 6,811,300 6,373,200 5,918,800 5,343,400
Tourism Expenditures (US$1,000) 6,174,000 6,547,000 9,037,900 8,248,100
Balance (US$1,000)
2000 2001 2002 2003
5,321,792 5,147,204 5,347,468 4,752,762
637,300 -173,800 -3,119,100 -2,904,700
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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
5,818,138 6,022,752 6,155,047 6,448,240 6,890,841 7,817,533 8,797,658 9,794,796 11,140,028 12,175,550
8,825,585 10,080,143 11,609,878 13,324,977 11,996,094 9,494,111 12,488,364 12,693,733 13,736,976 14,846,485
6,053,100 5,793,000 5,759,800 6,093,500 9,719,100 9,782,400 10,321,400 12,396,900 13,448,110 *14,303,000
9,856,400 12,025,000 14,335,900 16,950,000 14,580,700 11,040,400 14,291,500 15,544,100 16,519,900 *17,838,200
-3,803,300 -6,232,000 -8,576,100 -10,856,500 -4,861,600 -1,258,000 -3,970,100 -3,147,200 -3,070,900 *-3,535,200
*: estimate Table 3-5 Visitor Arrivals, Korean Departures, Int'l Tourism Receipts & Expenditures 2010 2013
In the case of tourist origins, according to Korea Tourism Organization (2014), East Asia and Pacific accounts for 83.3% of the total overseas tourists, among which China and Japan are the two biggest origins of international visitors (36.8% and 21.4% respectively); the market sizes of Europe and Americas are very similar (6.2% and 6.9% respectively).
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Africa 0.32% The Pacific 0.80% Europe 4.98%
East Asia & Pacific 85% Taiwan 4.26%
East Asia & Pacific 66.91%
Americas 5.54%
Japan 17.19%
Figure 3-1 Tourist Origin of South Korea in February, 2014
3. Cluster Diamond
As was done in the case of South Korea, the diamond model analysis is now to examine the competitiveness of the South Korean tourism cluster. Factor Conditions According to Michael Porter (1990), factor conditions can be categorized by basic factors and advanced factors. In terms of South Korean tourism industry, the availability and abundance of capital and cultural legacy are important basic factors. On the other hand, well-developed infrastructure, transportation network, human resources of tourism and tourism areas can be categorized as advanced factors. As analyzed above, the natural tourism resources of South Korea is not bountiful; nonetheless, the cultural legacy of South Korea has been kept in a good shape. South Korea has
29
excavated many tourism sites and events which could display the cultural features to the international visitors, which ensures the attractiveness of South Korea. Human resources including tour guides, the employed of hotels, restaurants, tourism sites play an critical role in South Korean tourism they represent the image of country, which means if they cant give tourists a good impression, the tourism industry of South Korea may be affected in the long run. South Korea has maintained a high level of school enrollment in past several years, the enrollment of tertiary (ISCED 5 and 6) of 2013 was 98%, which is the highest among all economies (The World Bank, 2014). The high level of education provides a platform for the cultivation of relevant talents. Besides, the South Korean government has been aggressively investing and improving tourism infrastructure. According to the World Travel & Tourism Council, South Korea has invested KRW 8,062.8 billion (which accounted for 2.3% of total investment) in 2013. The number should rise by 4.2% in 2014, and rise by 4.2% pa over the next ten years to KRW 12,717.4 billion in 2024 (2.4% of total) (Turner, R. 2014). In the ranking of The Travel & Tourism Competitiveness Index 2013 (Blanke, J. & Chiesa, T., 2013), South Korea came to the 25 th place compared to the 32nd in 2011, which can clearly show the improvement of South Korean tourism infrastructure. The accessibility of transportation is also an important factor for tourism industry. The high coverage of transportation network enables international visitors as well as domestic tourists to travel more often, which creates substantial tourism receipts for South Korea. Demand Conditions Both domestic and international demand for tourism plays an important role in providing the competitive advantage for the industry. The more complicated and demanding tourists are, the more multidimensional the tourism industry has to launch to satisfy the demand. This, on the other hand, stimulates the emergence of innovative tourism products and services, and thus creates competitive advantage.
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In recent years, although the tourist arrivals and tourism receipts have been increasing, the balance remains negative (as is shown in Table 5). The phenomenon partly due to the increasing Korean departures and their rising expenditures overseas, but also indicates that the foreign demands of South Korean tourism is increasing too slowly to generate profit for South Korea. Related and Supporting Industries Tourism is a multidimensional industry which collaborates with various sectors of the economy, such as catering, hospitality, transportation, shopping and entertainment, etc. The tourism cluster of South Korea enables the rapid development of tourism industry. South Korean government emphasizes on the education of relevant talents for tourism because of the importance of human resources. Tourism training institutions have been encouraged to provide qualified tourism workers every year. To be more specific, more and more universities have offered courses and on-the-job trainings in terms of tourism planning and management (Chan, C. H.et al, 2001). The accommodation industry is composed of (chain) hotels, resorts, hostels and private residence, among which hotels, especially high star hotels, accounts for biggest revenue margin. In recent years, South Korean government has been being focused on standardizing operations and management of hotels and increasing numbers of hotels. In general, the hospitality industry is well-developed. Due to the development of tourism industry, more and more famous multinational hotel groups like Accor, Hilton, InterContinental also have set branches in South Korea. Shopping and entertainment industry also has seen a substantial development. Lotto World, for example, located in south-eastern Seoul, is the largest indoor theme park; Yongyin Farmland was voted one of the worlds top ten theme parks (Chan, C. H.et al, 2001). There are also many shopping centers targeted tourists, especially in metropolitan areas and some famous tourist sites such as Seoul, Jeju-do, Pusan, etc.
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Context for Strategy, Structure and Rivalry In recent years, outbound tourism, as well as inbound tourism, has been increasing, and the main destinations are China, Japan, and other Asian countries. South Korea has confronted with huge competition from these rivals, especially China and Japan. For example, ski resorts has been thriving and are currently economically available in north-eastern China while hot spring resorts are one of the main tourism attractions of Japan. Undoubtedly, these two economies have brought about significant impact on South Korean tourism. Nevertheless, South Korea enjoys advantages over China and Japan to some degree. For example, the tourism infrastructure of China is not as developed as that of South Korea, and Japanese tourism is much more expensive (Chan, C. H.et al, 2001). In order to better compete with its rivals, South Korea has also signed agreements to guarantee the tourism collaboration with other countries. For example, a contract which enables Chinese tourists to travel to South Korea more easily has been signed in November, 2013 (Business Korea,2013).
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Context for Strategy, Structure and Rivalry Advantages over rivals (+) Cooperation Agreements (+) Hyper-competition (-)
Factor Conditions
Capital and cultural legacy (+) Cultural tourism (+) Human resources (+) Tourism infrastructure (+) Accessibility of transportation (+) Natural tourism resources (-)
Demand Conditions Domestic demands (+) International demands (-)
Related and Supporting Industries Education (+) Accommodation industry (+) Shopping and entertainment industry (+)
Figure 3-2 Diamond Analysis of the Cluster
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IDENTIFICATION OF STRATEGIC ISSUES The following are the main strategic issues based on Porter's Diamond Model that the tourism industry in South Korea is currently facing: 1) International Disputes & Heavy dependencies on China and Japan : The South Korean tourism shows large dependencies on the Chinese and Japanese customers, especially Chinese. A research shows that, a Chinese tourist that stayed for average 6.8 nights , spent $207 per day4. Chinese and the Japanese together contribute to more that 50% of the tourism. This is a really large number. But this dependency make take another turn as there is recently high tension from both sides , China and Japan and a ever prevailing tension from North Korea. Moreover , Seoul and Beijing face each other in marine time dispute in South China sea, while the shadow of the historic relationships with both China and Japan is still prevalent. So the only stance South Korea faces is to be neutral. As of now, Seou ls inclination has been to adopt a balanced stand on its relations with Beijing and Tokyo. However, South Koreas future policies, will be determined by the course of trilateral relations between China , Japan and the U.S.5 Although the dispute between these three countries cannot be very directly related to tourism, such factors should not be underestimated because there are many other tourist destinations in Asia which can attract tourist and there is a possibility that Korean tourism can lose its attractiveness.
4 5
http://tx.english-ch.com/teacher/ackie/level-b/how-japanese-and-chinese-tourists-in-korea-differ-/ http://www.turkishweekly.net/columnist/3852/-south-korea-between-china-and-japan.html
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2) Inconvenience Issues in South Korea : South Koreas tourism industry is at risk becoming a victim of its own success. The number of complaints from the holiday makers are on the rise with the rising number of tourists. As mentioned previously, Korea has become a highly attractive tourist destination, with tourist arrivals nearly getting doubled from 6 million in 2005 to 11 million in 2012 and are expected to be about 15 million by 2015. But with it, increasing number of theft and scams are reported by tourists. According to the Korea National Tourism Organization, these complaints have increased by nearly 100% (i.e. doubled) from 468 in 2009 to 897 in 2012. In addition to these, other tourist complaints for setbacks such as lack of directional signs or heavy traffic accounted for about up to 1,024 issues in 2012, which were nearly 640 in 2009.There are also various cases when taxi drivers overcharge the tourists. To deal with such issues the ministry of Tourism introduced the " Tourist Police " concept in South Korea which is quite common in many countries6. 3) South Korea could be heading for Deflation : Concerns are rising about the Korean economy that it is drifting towards a more like Japanstyle deflation, because it has now entered a low-growth, low-price period along with a stagnant economy. According to Statistics Korea, The annual growth rate was recorded less than 1 percent for almost three consecutive months. It was 0.8 percent in the month of September and 0.7
http://blogs.wsj.com/korearealtime/2013/08/05/koreas-arrivals-up-tourist-police-needed/
35
percent in October. This was the longest period of less than 1 percent growth after the 14 month period after the 1999 Asian financial crisis. Moreover, the export price index in November'13 was the lowest in five years and nine months (90.59). Experts claim that the trend here resembles the one in the Japans case when the country was about to go into a decade-long slump and deflation. The consumer price growth remained less than 2.5 percent for 18 months, which is less than the bottom limit of the price growth range which the Bank of Korea (BOK) aims to maintain (2.5-3.5 percent). Nation's potential growth is forecasted to decrease further under these situations till 2016 as the number of working population is going to decrease, resulting in lower working hours.The South Korean Wons appreciation may continue like the Japanese Yen used to, which will inturn decrease Korean exporters competitiveness. Economists claimed that the chance of South Korea entering deflation is lower than Japans previous conditions but the nation needs to take precautions. The Hana report said the government should understand the nations economic situation correctly to prevent this scenario. It said , Japans long-term depression came from a vicious circle of bubble burst, asset deflation, economic slump and a series of failures in government policies. Not to follow Japans suit, the government needs to improv e fiscal and financial policies.7
http://www.koreatimesus.com/?p=3826
36
Monetary easing is required in this case as the consumer price growth has been less than the BOKs target range for more than a year. The central bank must cut the base rate more, as lower rate won't cause inflation or asset bubble for the time being. 4) Accommodation shortage : Despite of tremendous increase in South Korean tourism over the last 4 years , the country faces shortage of travel accommodation and is unable to meet with the current demands. The inbound arrivals of tourists reached nearly 11 million in 2012, but by a recent study conducted, the demands of theses tourists were not fulfilled efficiently . This is potentially one of the main weakness of South Korean tourism that is affecting its long term scope as a perfect tourist destination. Though this problem of accommodation seems minimal , it has actually very negative impacts on the tourists because the easy availability of travel accommodations contributes largely to the overall experience of tourists . This is in a way that, if availability is low, the local population try to take advantage of it by increasing the prices which in-turn have negative effects on tourism. 8 5) High overseas carrier prices : As the tourism in South Korea continues to increase over the past few years, there is an increase in the number of international tourists from all over the world visiting Korea. So
http://www.euromonitor.com/travel-and-tourism-in-south-korea/report
37
because of this, there was increasing demand for low cost overseas carrier. This is major concern for the tourists in South-Asian countries as they face the price burden.9 6) Travel Agencies: The vast growth of South Korean tourism has promoted a similar kind of expansion in the number of travel agencies operating in South Korea. Increased competition is always healthy, but the huge number of new operators have trimmed the profit margins for all domestic agencies. Thus, some of the operators are unstable and hence assemble poor-quality tours. The Ministry of Tourism is putting all its efforts to revise agency regulations to assist in the industry's growth. One way to improve this situation is to encourage international travel agencies, such as Thomas Cook and Cox & Kings, to operate in South Korea. These agencies which are well organized and firmly funded can make a standard to which other local tour operators could aim and thus contribute to improved quality of services.10
10
Ibid
Ahn, J. & Ahmed, Z.U. 1994, "South Korea's emerging tourism industry", Cornell Hotel and Restaurant Administration Quarterly, vol. 35, no. 2, pp. 84.
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POLICY RECOMMENDATIONS The following are the policy recommendation for the South Korea Tourism based on the analysis and the strategic issues the cluster is facing: Recommendation 1 : Re-branding the South Korean Tourism "Visit Korea" is a government-sponsored two-year promotion which is currently under way to push another side of the country that many perceive as an emerging industrial giants who are still technically at war with their unpredictable neighbour to the north. The figure illustrates that even if China and Japan contribute to 54.1% of tourists, the remaining market is open for re-branding the South Korean image.
We recommend that this program should not only be concentrated to Asian countries but also to western countries. This can be done by making ties with other tourism offices, private
39
airlines and tourist agencies like Thomas Cook. It will take some time as it is a long term investment , but in coming years it will modify the international perspective towards South Korea. Recommendation 2 : Invest on accommodation facilities Solving South Korea's long term problem of travel accommodation was a challenging task as the South Korean Government had to forecast the number of tourists that would come the next coming years. If there was a steadiness or an increase , the plan had to go forward. The South Korean government finally announced a four-fold plan to boost the construction of travel accommodation over the country. The plan consisted of the following objectives : 1. grants from government; 2. eased rules & regulations for constructing travel accommodation facilities; 3. support for the renovating the existing motels as budget travel accommodation; and 4. certification and management guidelines to maintain quality assurance Thus by 2015, the South Korean government will aim for offering 38,000 new hotel rooms and 8,000 rooms in other travel accommodation in addition to the existing accommodation by implementing this plan. Recommendation 3 : Introduction of " Tourist Police " system Koreas tourism industry heavily relies on tourists from Japan and China. As they visit for some very specific purposes, like that of beauty treatments or to make a visit to Korean celebrity
40
hotspots, the competition for their business increases raising the persuasion of locals to make fast money out of the tourists. The tourist police system was introduced by National Police Agency in association with the Ministry of Culture, Sports and Tourism and the Seoul Metropolitan Government. South Korea's Tourism Board (KTO) said that the government decided to start the force of 101 men and women, in response to the rising number of visitors to Seoul. To make it toursit friendly , their clothes were designed by the same designer of PSY and the tourist police also performed on the famous Horse dance by PSY.11 The tourist police are assigned with task to protect tourists from theft or being ripped off, and also to observe travel agencies, tourist shops and restaurants in order to prevent any incidents. In addition to this, the police officers will offer tourists information regarding attractions, directions and transportation, accommodation, Korean culture, and even medical services. Recommendation 4 : Implication of Monetary easing policies There are also some problems regarding the economic policies of South Korea, which is eventually heading into a deflation mode which is same as the Japan style deflation which is typically a low growth and low price era in a typically stagnant economic phase of South Korea. It is very evident from economic policies around the world that a safe level of inflation is actually a very important and essential factor for achieving a decent economical growth. In fact South Korean government should consider designing a more quality and intelligently priced focussed economy will be an effective policy to improve this economic deflation.
11
http://edition.cnn.com/2013/10/17/travel/seoul-tourist-police-gangnam/
41
Recommendation 5 : Government action for Taxi problem A fast action has to be taken by the government to solve the Korean taxi problem. Even if the current system is profitable, it is illegal and promotes practices like dumping fares. One view says that , as the taxi fares in South Korea are one of the lowest in the world, the taxi drivers are more inclined to the business class passengers or the high-paying passengers. Moreover, due to the low rates ,locals prefer to take a taxi rather than public transit, which creates a shortage of cabs for tourist hire. We recommend a new wage system for taxi drivers, so that they are assured a rational income. Fares should be increased sufficiently to cover increased wages. Since fares are so less, they can be increased without making them unreasonable. Authorities could check wage rates and payment systems in different places as models for Korea's taxi system. We also recommend that the government should also set minimum qualifications and training standards for taxi drivers. Recommendation 6 : Targeting global market without losing the current market We strongly recommend South Korea to focus on the worldwide tourists. It is true that most of the tourism in South Korea is contributed by Chinese and Japanese visitors. This is one of their markets which will always be a strong advantage as both China and Japan being neighbouring countries look positive to South Korea as a tourist destination. Whereas it needs to do a rebranding of its image to some of the western countries as they see the North Korean threat and safety issues and thus hesitate to visit South Korea.
42
CONCLUSION & PREDICTING THE MARKET IN 2023 To conclude with the cluster analysis, we will see the position of this cluster in 2023. As we can clearly see from the charts below, the tourism cluster in South Korea is predicted to grow in next decade. The contribution of this cluster towards employment would not grow much but the total contribution to the GDP will increase by approximately 30,000 KRWbn ( Korean Won in billion ). Tourism has played an important role in the South Korean economy in the past (evident in 1998 at the time of Asian financial crisis) and will keep on contributing the economy in future. It has multi-faced advantages as it brings in money and also create employement. At this time, to develop this growing cluster, the governement must take precutions and implement proper stategies . With around 5000 years of cultural heritage coupled with high standard of tourism products, the tourism in South Korea is set to assume a grater importace in the South Korean economy.
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