Via the Peterson Institute, a look at the readiness of South Korean SMEs to enter the North Korean market:

We are often negative about the business environment in North Korea and the DPRK government’s struggle to solicit foreign investment. With the case of inter-Korean investment, we also find, however, that it is the South Korean businesses themselves that are leading the push to expand economic relations with Pyongyang. We noted several months ago that the Korean Federation of Industries, the trade association that represents the chaebols, was pushing to open an office in Pyongyang. And we recently have come across survey results from the Korea Federation of SMEs, a trade association of small and medium-sized enterprises—the smaller-than-chaebols—that demonstrate broad SME interest in doing business in the North as well.

The results showed that 44.5 percent of Korea Federation of SMEs members said that they would examine the possibility of entering into North Korea to do business if circumstances allow and 5 percent replied with an even more affirmative “yes” regarding their interest. 30 percent said they would not enter into the North and the other 20.5 percent said they had no interest.

Strikingly, when asked if they were aware of the jangmadang “private market places” in North Korea only 22 percent said they had knowledge of them. This suggests that the vast majority of SMEs—and even the majority of those expressing interest in doing business in North Korea—are simply unaware of transformations in the North Korean economy. Furthermore, three fourths of respondents see increased cooperation between China and North Korea as having either a positive or minimal effect on inter-Korean relations. If there are widespread fears of China crowding out inter-Korean economic cooperation, the SMEs don’t seem to be particularly worried.

Mirroring the results from above, when asked specifically about doing business in North Korean SEZs the results reflected the general sentiment of the previous question. Regarding intentions for conducting business in North Korean SEZs, again approximately half answered at least somewhat positively—either “if the circumstances allow” (40.8 percent), “they would enter” (4.0 percent), or “they would fully enter” (3.4%). This is compared to 51.7% who said they had no intentions of doing business in North Korean SEZs at all.

When asked about which factors they would consider when deciding whether or not to do business in the SEZs (see graph below), the highest response was “the easing of political and military tensions” (47.7 percent), followed by “personal safety guarantees of investors” (19.0 percent), and “South Korean government assistance” (11.8%). Not surprisingly, for South Korean entrepreneurs with an eye on investment in the North it’s clear that they believe this will happen through SEZs. These results reflect findings from a 2012 Haggard-Noland firm-level survey report that found that firms were particularly keen to operate in the Kaesong Industrial Complex specifically because it was an island of ROK government protection. The Kaesong case, however, has also shown us the complications with the use of North Korean labor, which is a politically sensitive issue in the United States, and would likely have to be addressed if the South is planning to vastly expand SEZ cooperation.

We mentioned last week that the ROK government would need to provide insurance guarantees to South Korean firms looking to do business in the Rajin SEZ linked ROK-DPRK-Russia coal shipping project. The Korean Federation of SMEs survey suggests South Korean firms are demanding not just loan assistance but also ROK government protections that ameliorate their concerns over security issues, whether they be military clashes or personal safety.

This survey shows that many South Korean SMEs are interested in investing in North Korea and if the security situation improves there is great potential for business-driven North-South economic integration. The holdups are multifold: President Park’s May 24 measures banning most North-South economic activity; and more significantly, reluctance from Pyongyang to open up to the kind of investment that could bring broad economic transformation.

In the South, there is also general ignorance over North Korean domestic economic developments, namely the expanse of the “jangmadang generation.” Clearly the vast majority of SMEs are not conducting in-depth research on North Korean marketization and potential opportunities for their firms. But the other side of the coin is that perhaps if firms were more knowledgeable about the North Korean economy they would be even less sanguine about doing business in the North. Nevertheless, North-South information flows will continue to expand (in both directions) and if political tensions abate there are a significant amount of South Korean SMEs open to setting up shop up north.