Sources on North Korea 3: Drew Thompson, Silent Partners: Chinese Joint Ventures in North Korea

March 1, 2011 9:00 AM

The SAIS US-Korea Institute has released another useful report, this time on Chinese investment in North Korea. The report aligns with some things we reported this week on our own survey of Chinese firms doing business in North Korea and provides a nice overview of aggregate trends.

First, Thompson finds that investments in North Korea are much smaller on average than those in comparable investment partners. North Korea’s risky business environment limits opportunities for achieving optimal scale. When asked why more of the top Chinese companies were not investing in North Korea, one Chinese investor from a small company responded that “if there were big profits to be made in North Korea, the big conglomerates would push in and drive us out.”

A second finding is the heavy representation of mining and other extractive industries, accounting for fully 41 percent of Thompson’s cases but almost certainly a very much larger share than that in terms of value. It is perfectly reasonable for North Korea to exploit its comparative advantage in raw materials. But the strong bias toward extractive industries also reflects the poor investment climate. North Korea is not in a position to mine, process or sell these minerals on its own; Chinese investors therefore are guaranteed a stream of revenue—in the form of exports--that the North Koreans cannot easily hold up.
Finally, Thompson finds that the majority of Chinese investors in North Korea are not State Owned Enterprises (SOEs) controlled by the central government, but privately owned companies and provincial, prefecture, and municipal-owned SOEs. Only four out of the 138 investors appear to be central-government owned companies. This would suggest Beijing is seeking to encourage private commercial exchange rather than merely providing aid and subsidies, a strategy we endorse in Witness to Transformation.

However, there is both bad and good news in this strategy. On the one hand, it complicates the politics of sanctions since regional companies, and particularly smaller ones, will have even less interest in complying with sanctions than Beijing. On the other hand, provincial authorities in the Northeast are investing heavily in infrastructure, apparently in the belief that an opening of the country is inevitable. From their lips to Kim Jong Il’s ears!

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