Seoul's business leaders and analysts welcome the decision as a move to open the door to lucrative projects for rehabilitation of Iraq, with estimates reaching up to 100 trillion won ($85 billion). The country's construction and high-tech firms, in particular, expect huge benefits from "the new Middle East boom."
But some economists voice concerns that Seoul's military support for the U.S.-led operation in Iraq may trigger a hostile response from the Middle East and hurt trade with the South Korean major export market.
Finance-Economy Minister Kim Jin-pyo said the troops dispatch would benefit South Korea's economy by reassuring investors about a solid alliance between Washington and Seoul.
The central Bank of Korea also said that South Korea's participation in the U.S.-led operation in Iraq would greatly improve its relations with American investors, which can revitalize the inflow of foreign investments, which has been sluggish throughout this year.
The country's main stock market rebounded 1.13 percent on Monday with the news of troop dispatch plan unveiled over the weekend. Construction shares registered five-percent-range rises thanks to favorable expectations following the government decision.
"Given that over 40 percent of the local stock market is foreign-owned, friendly relations with foreign investors will surely help the local economy," said Kim Yong-churl, a Korea University professor.
Lee Keun-mo, an economist at Good Morning Shinhan Securities, said Seoul's compliance with the U.S. request for troops would also ease trade disputes between the two countries.
The South Korean economy, the world's 12th-largest, has suffered from the geopolitical risk due to North Korea's nuclear and missile ambitions and a strong wave of anti-American sentiment.
South Korea pledged to deploy up to 10,000 combat troops and military engineers to Iraq and donate $200 million for post-war reconstruction.
Seoul officials said the decision to send troops was in their country's "national interest" citing stronger ties with the United States are vital for peace on the Korean peninsula and for a long-awaited revival of South Korea's export-dependent economy.
The Federation of Korean Industries, the lobbying arm for large conglomerates, welcomed the troop dispatch decision, saying it would help boost the image and credibility of South Korea in the United States. "The troop dispatch decision was inevitable for South Korea in light of its huge economic benefits," it said in a statement.
The government pledged to make a series of measures for local business to make aggressive inroads into the Iraqi market. "We plan to invite some 60 companies from Iraq and Middle East nations to Seoul as part of efforts to make inroads there," said Park Bong-kyu, a trade chief at the commercial ministry.
"South Korea's exports to the country are expected to reach $300 million within one or two years after U.N.-imposed economic sanctions against it were lifted," said Bae Chang-heon, an official at the state-run trade-promotion agency KOTRA. South Korea-Iraq trade volume last year posted $124 million, divided into $86 million exports and $38 million imports, but direct exports fell noticeably after the Iraq war.
"South Korean builders are also expected to win about $1 billion worth of construction orders in Iraq," he said. For now, only three South Korean firms are doing business in Iraq, including Daewoo International and Hyundai Engineering and Construction.
The prime beneficiary of troop dispatch would be Hyundai Engineering and other local builders, which are seeking to retrieve more than $1.27 billion worth of overdue bills from the Iraqi government. Hyundai Engineering was preparing for a new lawsuit in Britain in an effort to secure $1.1 billion payment from Iraq.
Hyundai Engineering's financial troubles began in 1991 when U.N.-imposed economic sanctions in the wake of the Gulf War led to the freezing of all Iraq-related credit and debts. At that time, Hyundai Engineering was involved in 16 construction projects in Iraq. Its uncollected Iraqi payments now stand at $1.1 billion dollars, including interest.
Hyundai said redemption of the Iraqi money would drastically improve its finances. "Troop dispatch will help us secure orders in the course of U.S.-led reconstruction of post-war Iraq," said a spokesman for Hyundai, the country's largest engineering unit.
KTF, South Korea's second-largest mobile carrier, has emerged as a bidder for lucrative projects in the Middle East, buoyed by hopes that troops will help South Korean businesses win contracts there.
The decision was made after a group of Iraqi officials from the transport and telecommunications sectors traveled to Seoul on the invitation of the Korean government. KT Corp, the country's largest fixed-line operator, also showed interest in the establishment of telecom networks and broadband Internet services in Iraq.
The country's oil refiners are also seeking business deals in Iraq as South Korea can secure a sufficient supply of Iraqi oil on a long-term basis. South Korea is the world's fourth-biggest oil importer and imports most of its crude requirements from the Middle East.
Samsung Electronics and LG Electronics, the country's main home appliances producers are also pushing to establish branch offices in Iraq to beef up their Middle East market base. Iraq has emerged as a hot market for their color TVs, air conditioners, washing machines and mobile phones.
But some analysts express concerns that the troop dispatch may trigger hostile sentiment among the people in the Middle East and hurt trade between the two sides. "South Korean businesses can suffer disadvantages in the wake of growing anti-U.S. protests in Iraq," a local builder said.
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