The Korean government makes strong efforts to attract foreign investment. The government has publicly encouraged foreign investment and has liberalized policies including an increase in foreign equity ownership, in order to achieve its goals. A group of high-level officials headed by President Roh and the Prime Minister's Office have spearheaded efforts to de-regulate and liberalize the economy. Some foreign companies have responded negatively to the initiatives, claiming the policies do not eliminate trade and investment barriers at the working level. Nevertheless, many foreign companies that already have operations in Korea have increased their involvement in Korea. Other U.S. investors continue to be cautious because of continued concerns over corporate transparency and indebtedness.

Selecting the appropriate partner is one of the most difficult and crucial aspects of initiating a joint venture in Korea. Large Korean conglomerates, often known as chaebols, still exercise considerable influence over the Korean government and financial institutions. The Korean government has recently attempted a policy shift toward the promotion of small and medium-sized businesses, which means that the participation of a chaebol in a joint venture has the potential to create additional obstacles in terms of obtaining necessary approvals and local financing. This is further compounded due to a recent government policy shift towards anti-monopoly behavior. In addition, chaebols tend to insist on operating a joint venture in accordance with the overall policies and business culture of their group, sometimes to the detriment of the foreign shareholder's interest. Though an injection of foreign capital may be deemed necessary for the survival of a company, there is a tendency in Korean business culture to maintain local control, regardless of the percentage invested by foreign entities. A U.S. company may therefore consider assigning its headquarters staff to Korea in order to closely monitor and influence the activities of a newly established joint venture company.

Management control must be evaluated on three levels: 1) shareholder equity; 2) representation on the board of directors; and 3) active management (representative director and subordinate management). Legally, Korean board meetings require the physical presence of all members as well as a quorum of the directors. Therefore, if a foreign investor intends to exercise day-to-day management, a representative director who resides in Korea must be appointed. Moreover, the representative director will need the support of and access to key functional areas of the company in order to manage in accordance with the foreign investor’s wishes. Therefore, the internal organization of a joint venture company as well as key management appointments should be worked out and agreed upon by all involved parties as early as possible.

Compatibility of goals between the Korean and foreign partners is also crucial to the joint venture's success. For example, the foreign investor's primary goal may be to send profit dividends offshore while the Korean counterpart may be most concerned with corporate growth in Korea, particularly through exporting to overseas markets.

To most Koreans, a contract represents the current understanding of a "deal" and is the beginning, rather than an end, to negotiations. If changing circumstances result in omissions or points that no longer accurately reflect the original agreement, then problems will arise. The same is true if the contracting parties change. This type of experience in Korea has led many foreigners to believe that Koreans place less importance on a written contract than Westerners. Though Americans may regard a written contract as legally binding, Koreans may regard the same contract as a "gentlemen's agreement" that is subject to further negotiations should conditions change. Therefore, contract negotiations with Koreans should be viewed as a process of extensive dialogue and as having the following objectives: 1) reaching a common understanding of the deal that includes each party’s responsibilities; 2) recording that detailed understanding; and 3) being prepared to modify the terms of the agreement should there be a change in circumstances.

Certain terms of the commercial relationship between joint venture partners, such as technology transfer, raw material supply, marketing, and distribution should be agreed upon in detail in the joint venture agreement. Though circumstances are slowly changing, Korean companies have not made major investments in research and development. For this reason, there is a large Korean demand for technology transfer licensing agreements from foreign countries whose companies have a comparative advantage in high technology.

American companies should proceed with caution when they enter into a technology licensing agreement. A company’s intellectual property is not necessarily protected and may be particularly vulnerable in the later stages of a business relationship when the survival of the Korean company is dependent on the technology. Although U.S. companies frequently register their patented technology with the Korean Intellectual Property Office (KIPO) before entering into a licensing agreement, the most successful American companies intentionally withhold a small but key component of the manufacturing process or component from their Korean partner. This preventive strategy allows the U.S. company to control the use of the licensed technology as well as maintain the integrity of the licensing agreement.

Korea's legal procedures can be lengthy, cumbersome and expensive when dealing with contract violations. Hence, if at all possible, the best strategy is to prevent all possible conflicts. The identification of a viable and trustworthy business partner from the outset is essential; therefore, foreign investors should exercise due diligence when selecting a business partner.

One precautionary approach is to consult with attorneys throughout negotiations of a contract. A list of attorneys is available at the end of this chapter. In addition to consulting with an attorney, foreign investors should also consult with the Korean Commercial Arbitration Board (KCAB). The KCAB is staffed with counselors who advise U.S. companies on contract guidelines. At the company's request, a KCAB counselor can review the contract and stress the importance of an arbitration clause in the contract with a potential Korean partner. Information on the KCAB can be found at: http://www.kcab.or.kr