Chaebol Essay ⋆ Business Essay Examples ⋆ EssayEmpire

The Korean word chaebol is used to refer to the highly diversified business groups contributing to the post– World War II industrialization in South Korea. Family ownership has not been significant in chaebols; despite this, the control of chaebols by founding families is typically due to cross-shareholding. For example, the chairman of a chaebol and his family might hold 10 percent of three core firms, and the three core firms in turn could own equity in some 20 or 30 affiliates. The chaebol family will therefore have effective control of an affiliate when the core firm holds 50 percent of it singly or jointly.

The roots of chaebols can be traced to the Land Reform Bill in 1950, an attempt by the Korean government to compensate the landlords’ loss of land with opportunities to invest in former Japanese-owned plants. The chaebols were further involved in Korea’s export-led development strategies since the 1960s. By entering into industries selectively targeted by the government, they were able to obtain cheap loans, tax deductions, tariffs, and subsidies that provided the basis for their economic influence in the economy. The top 20 chaebols’ shares of Korean manufacturing output increased from 7 percent to 29 percent between 1972 and 1982.

During the 1980s, the Korean government switched to more indirect and functional support of strategic industries. In research and development (R&D), tax deductions were replaced by allowances of tax-free reserves for expenses incurred. Korean chaebols responded to the policy incentives and upgraded themselves; examples of such strategic orientation included Samsung and LG’s investment in the forefront of display and semiconductor technology. The chaebols’ investment in R&D also enabled them to pursue growth strategies via integration into the technologically sophisticated inputs. By the early 1990s, the chaebols accounted for Korea’s significant shares in world exports within categories such as consumer electronics goods; paradoxically, chaebols were having one of the lowest corporate profitability levels in the world. The chaebols’ technological capability also paved the way for their expansion abroad during the 1990s.

Overall, chaebols’ influence in the Korean economy can be seen in the fact that the top five chaebols accounted for approximately 10 percent of gross national product by 1998. In addition, they had diversified vertically and horizontally, the latter being in unrelated business areas. Hence, the chaebol Samsung consists of affiliates ranging from consumer electronics, electronic components, shipbuilding, insurance, hotels, department stores, public relations, and amusement parks.

The acceleration of liberalization within the Korean economy under its first civilian president, Kim Young Sam, in 1993 had led to a massive inflow of foreign capital into Korea. The chaebols therefore switched from their traditional reliance on government loans to foreign loans in financing, which resulted in a surge of debt/equity ratios before the Asian financial crisis. The top 10 chaebols attained a debt/equity ratio of over 500 percent in 1997, which could be considered unusually high among Asian firms.

The reform program initiated by the Korean government after its consultation with the International Monetary Fund (IMF) led to changes in chaebols; the most notable are the decrease of debt/equity ratios and the use of flexible labor strategies. The financial restructuring was achieved by the public listing of stocks and the sales of affiliates. The flexible labor strategy, on the other hand, derived from the U.S. system and was related to the elimination of nonmarket based practices such as lifetime employment and a seniority-based system for the first time in chaebols’ history. The chaebols practiced mass redundancy among permanent employees; these employees were replaced by temporary employees. The chaebols also required remaining employees to take early retirement.

Other new measures included performance incentives and the use of stock options. The restructuring in chaebols, coupled with the reshaping of corporate cultures, has resulted in profitability among the best achievers. For example, Samsung Electronics is currently one of the most profitable firms in Asia and produces quarterly profit figures to market analysts. Though the conception and growth of chaebols during the postwar period had been intertwined with the policy initiatives of the Korean government, their future growth will depend on their abilities to observe market discipline and compete in the fast-changing environment. Only the most efficient chaebols will survive in the long run.

Bibliography:

J. Chang, Financial Crisis and Transformation of Korean Business Groups (Cambridge University Press, 2003);
K. Chung and B. Eichengreen, The Korean Economy Beyond the Crisis (Edward Elgar, 2004);
Harvie and H. H. Lee, “Export-Led Industrialization and Growth: Korea’s Economic Miracle,” Australian Economic History Review (2003);
Heon Joo Jung, “Competition and Corporate Governance in Korea: Reforming and Restructuring the Chaebol,” Journal of East Asian Studies (v.7/3, 2007);
H. Jwa and I. K. Lee, eds., Competition and Corporate Governance in Korea (Edward Elgar, 2004);
Sook Jong Lee, “The Politics of Chaebol Reform in Korea: Social Cleavage and New Financial Rules,” Journal of Contemporary Asia (v.38/3, 2008);
OECD, Economic Survey (1994).

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