South Korean business stuctures

1
South Korean business stuctures

• Dr. Kristiina Korhonen
• Center for Markets in Transition

2
Chaebol

• South Korean business groups consisting of large
  companies
• traditionally owned and managed by the founder
  and his family members
• operate in many diversified business areas
• the pioneering force behind South Koreas
  economic growth
• foreign loans guaranteed by the government

3
Distinctive features of chaebols

• family control and management
• paternalistic leadership
• centralised planning and coordination
• entrepreneurial orientation
• power-seeking rather than profit-seeking
• close business-government relationship
• school ties in hiring

4
Impact of the Asian financial crisis on chaebols

• of the 30 largest chaebol, 11 collapsed between
  July 1997 and June 1999
• in 1999, the collapse of the Daewoo Group was the
  largest corporate bankruptcy in history
• chaebols were forced to restructure
• to make Big Deals, or to swap assets and merge
  business units with each other
• to concentrate on certain industrial sectors
• to lower the debt-equity ratios
• as the economy has grown well during the 2000s,
  some restructuring measures have been postponed

5
Economic reforms

• liberalisation of capital markets and FDI
• labour market reform allowing lay-offs
• the resolution of unsound financial institutions
• corporate sector reform
• eliminating cross-debt guarantee
• promoting transparency
• strengthening the rights of shareholders

6
Overexpansion of chaebols?

• Overconcentration
• Korean economy is concentrated around a small
  number of chaebols
• vulnerability to outside shocks
• Overinvestment
• Korean economy grew at an average annual rate of
  8 between since 1960s to mid-1990s
• corresponding level of investment averages around
  30 per year over the same period
• Overdiversification
• it was the government policy to force chaebols to
  diversify
• some concentrated chaebols failed
• Overborrowing
• chaebols debt has been 2-3 times their equity
• no opportunities for equity finance

7
Major problems of chaebols

• Institutional problems
• absence of well-functioning capital market
• Managerial problems
• poor management
• inadequate governance
• deficient accountability.

8
Impact of government interventions on chaebols

• a reduction of debt equity ratios below 200 was
  required
• bank loans to the chaebols were restricted or
  chaebols were forced to pay back some of their
  loans in advance
• inter-company guarantees in loans were restricted
  
• the internal capital market is removed although
  the Korean capital market is underdeveloped
• cross-shareholding within chaebols was restricted
• cross-shareholding in use in other economies,
  such as United States and Japan

9
Korean small and medium sized enterprises

• 99.8 of the entire enterprises
• totally about 3 million SMEs
• 84,000 medium enterprises (with 50300
  employees),
• 230,000 small enterprises (with 1050 employees)
• 2.68 million micro-enterprises (with less than 10
  employees)
• 86.5 of total employment (10.4 million
  employees)
• sub-contractors of large enterprises due to their
  relatively low wages
• known for weak working conditions