![]() The headquarters of Korean industrial conglomerates, or “chaebol,” such as Samsung, LG, Hyundai, SK and Hanwha, are shown in this April 16, 2007 file photo. These chaebol have played a vital role in Korea achieving a “miracle performance,” as the country’s development has been described by the World Bank. / Korea Times |

South Korea's industrial conglomerates, which operate many business lines simultaneously and are often controlled by a single owner or family and commonly known as "chaebol," have been the most important driving force behind Korea's modern ``compressed'' growth and industrial transformation. It is widely agreed that Korea's modern economic development has occurred within a unique paradigm of an export-based, but government- and chaebol-led industrialization strategy with varying degrees of government intervention. Over time, the respective role of chaebol and their relationship with the government have constantly evolved to adjust to the changing international and domestic environment toward performance-based criteria.
In the past half century or so, Korea has emerged from being one of the poorest agrarian economies in the world to being a near-developed country, joining the OECD in 1996. Thanks to grants and foreign aid received during the post-Korean War period, particularly from the United States, Korea was able to escape from the poverty trap. In 1965, the per capita incomes of North Korea and the Philippines were three times that of Korea. Korea suffered from a paucity of mineral resources. For any attempt at industrialization, Korea had to import a variety of mineral resources such as oil, iron ore, copper, gold and silver. At present, however, Korea enjoys a per capita income of around $20,000, produces a number of global champion products and represents the first example of a country evolving from an aid recipient to an aid provider.
At the outset of the birth of Korea's modern economy initiated in its first five-year economic development plan (1962-1967), Korea adopted an export-oriented development model to take maximum advantage of almost ``unlimited but educated labor forces'' while providing various ``carrots and sticks'' in the forms of incentives and disincentives by the government, and relying on foreign borrowing to finance massive capital requirements.

In the 1960s, Korea's major exports were labor-intensive products such as wigs, plywood, footwear and low-quality clothing and apparel. At present, however, Korea has become a major exporter of semiconductors, iron and steel, ships, automobiles, electronics and electrical appliances with world-renowned brand names.
Korea's leading multinationals like Samsung, Hyundai, LG and POSCO can be found next to the world's most famous corporations on the Fortune Global 500 list. These chaebol have played a vital role in Korea achieving a ``miracle performance,'' as the country's development has been described by the World Bank.
This begs the question: How were these chaebol formed from scratch, what role have they played during Korea's rapid economic development process and what challenges do they face in the years to come?
In some respects, the chaebol model was patterned after the Japanese pre-war zaibatsu designed to help Japan catch up with the West following the Meiji Era. Indeed, under a synergistic partnership between the government and big business, Korea dramatically shortened the typical phases of industrial transformation that took most developed nations more than a century to achieve. Korea's government-led industrial growth has been accelerated in conjunction with export expansion policies, which aimed ultimately at enhancing the international competitiveness of Korean exports.
By departing from the import substitution regime adopted by most developing countries in the 1960s, Korea's export-based orientation has resulted in a spirit of ``competition and learning'' in Korean enterprises' management practices at all levels. Winning an export order itself means that Korean export companies had passed an international test in terms of price and non-price competitiveness in an overseas market. In due process in the global market, Korean firms have been able to learn at arms' length advanced production methods and business practices.
Provision of incentives, including unrestricted automatic access to banks credit, interest subsidies and tariff exemptions on imported intermediate goods and facilities for export activities across the board, has triggered start-ups of labor-intensive manufacturing companies of varying size, small and large alike.
The initial success of the export drive in the 1960s has provided policy makers and businesses across the manufacturing sector with a great deal of confidence, which resulted in both rapid growth as well as a sense of satisfaction, which came with winning an international ``competition.'' As Korea entered the 1970s, the Park Chung-hee government suddenly shifted the country's economic policy focus from light manufacturing to the ``heavy and chemical industries'' (HCI).
At the onset of industrialization, Korea emphasized the promotion of absorptive capacity as well as the indigenization of foreign technology through reverse engineering, while restricting both foreign direct investment (FDI) and foreign licensing. As a result, Korean firms were able to assimilate imported embodied technology so rapidly that they managed to undertake subsequent expansion, and upgrade their industrial structures. Formal R&D was not important when imitative reverse engineering was operational. As Korea started to upgrade its economic structure, however, private-sector R&D led by Korean conglomerates grew far larger in scope than public sector R&D expenditure.
Korea's conglomerate-dominant industrialization strategy was at one time a winning strategy at the expense of financial sector development. However it created a repressive financial regime, providing an oblique mechanism for channeling financial resources even to ailing industries. A ``too big to fail'' mentality for both chaebol and the financial sector created a serious moral hazard, while investment decisions seemed to address the objective of increasing single-minded market shares and total output more than assuring adequate profitability.
In order to create a more robust and resilient Korean economy in the 21st century, chaebol are needed to develop more synergistic partnerships utilizing a level playing field principle in the domestic market with small- and medium-size industries, which are a major source of employment. Furthermore, growing pressure for corporate social responsibility has come from the general public in Korea.
Chaebol have now transformed into a more transparent holding company-type structure and should also start demonstrating new governance systems, which are not necessarily family-controlled yet able to make speedy but wise decisions. When Korea was faced with an economic crisis, a warning call used to come from chaebol heads. While the most recent crisis was unfolding, Chairman Lee Kun-hee of Korea's largest business group Samsung: ``It is a real crisis. First-class companies are collapsing. Most of Samsung's flagship businesses and products will become obsolete within ten years. We must begin anew.'' Korea's future might rest on the extent that chaebol live up to this critical self-assessment.
Chaebol and Heavy and Chemical Industry Promotion
As Korea succeeded in exporting labor-intensive goods, President Park envisioned establishing a more comprehensive industrial model and targeting a must-do approach as a way to catch up with high-income economies and to get ahead of competition from labor abundant latecomers. The government's promotion of HCI was also significantly motivated by the necessity to build up the country's national defense capability against potential North Korean aggression and in preparation for a reduction of U.S. ground forces stationed in Korea.
The most extensive government intervention occurred by identifying shipbuilding, iron and steel, machinery, non-ferrous metals, textiles, electronics and petrochemicals as future key industries at strategically positioned locations on Korea's coasts and enacting seven sector-specific industry promotion acts. Thus, government involvement became industry-specific and quite often firm-specific by providing preferential bank credit and various tax benefits. Despite the government's lucrative incentive systems, most big companies were very reluctant at first to commit themselves to such big, risky and unprecedented projects.
However, the objective of HCI policy and subsequent target-specific incentives eventually fostered the growth of chaebol by further allowing two key management mechanisms as contained in cross-shareholdings and mutual loan repayment guarantees among subsidiaries for bank borrowings. To exploit economies of scale as well as scope and private R&D potential, the Korean government intentionally aided capital formation of the chaebol to allow subsequent diversification of their business lines. Thus, Korea's conglomerates were able to manage businesses ranging from ``potato chips to microchips'' to minimize inherent risks involved in a few untested HCIs. Government control over policy loans of their financial intermediaries served as the most powerful leverage to tame chaebol into strategic sectors. As a major shareholder of commercial banks and as full owner of special purpose banks, the government provided viable HCIs with almost ``unlimited'' financial support and tax advantages. The HCI support system proved to signal the government's implicit commitment to rescuing seemingly inefficient projects in order to induce business entrepreneurs to engage in HCI projects.
As a result of HCI promotion, the economic concentration of chaebol increased quickly. This concentration also affected market structure by creating both monopolies and oligopolies in major industries. While pushing through government-led HCI projects without building indigenous technological capability, Korea had to confront a series of serious challenges. The global energy crises in 1973 and 1979 severely affected Korea's nascent-stage HCI projects, most of which proved to be energy intensive. However, the world energy crisis provided Korean companies with new global business diversification opportunities in the oil-rich Middle East by actively engaging in a variety of labor-intensive SOC projects funded by the enormous petro-dollar earnings of the major Organization of the Petroleum Exporting Countries (OPEC) members.
The financial position of the highly indebted, top 30 chaebol, is compared to those in the U.S., Japan and Taiwan. It should be noted that the financial leverage of Korean firms was four times as high as that of Taiwanese manufacturing firms. Faced by chronic excess demand for capital under a high-growth regime, highly leveraged chaebol incurred financial costs of more than double those of their major trading partners. In order to overcome their financial difficulties, they expanded and diversified their business lines instead of downsizing. As time went by, highly leveraged chaebol caused the Korean economy to become more vulnerable to external shocks of major scale as was witnessed during the Asian financial crisis.
During the Asian financial crisis in 1997-98, Korea surprised the world twice. First, Korea sought out the largest-ever emergency financial assistance from the International Monetary Fund (IMF) in order to avoid a moratorium on her foreign debt. Secondly and surprisingly, the Korean economy bounced back to positive growth in 1999 from its lowest-ever growth rate of -6.7 percent in 1998 while registering the largest-ever trade surplus amounting to $41.3 billion in 1998.
Under the IMF conditionality, Korea carried out a comprehensive series of reform measures, focusing on banking and corporate restructuring. The Korean chaebol had to reduce their debt-to-equity ratio to less than 100 percent from higher than 400 percent, while adopting global practices on governance and disclosure standards. While significantly improving their financial positions through downsizing and focusing on core areas under a new governance system, chaebol played a major role in realizing the needed record surplus during the Asian crisis period.
First, although the HCI drive contained import substitution content in terms of subsidies at the onset, the government emphasized that the products from the HCI projects had to be exported to bring in competition orientation. Second, there were no outright ``free lunches'' when the government provided government policy loans to chaebol so that mismanaged conglomerates were forcefully pushed out of the market when the government undertook rationalization programs to eliminate over-lapping projects. For example, the collapse of the Daewoo Group, then the third-largest chaebol in 1999, was followed by the bankruptcy of more than half of the then top-30 conglomerates. Third, Korea has been rather fortunate to have such entrepreneurs of the likes of Lee Byung Chull, Chung Ju-young and Koo Ja-kyung, who responded with managerial wisdom, fully willing to take risks, but with winning business strategies that were effective on an international scale. Fourth, in response to serious challenges brought about by the crisis, Korean chaebol heads recognized the importance of technological breakthroughs to escape from the inefficiencies which to a certain extent contributed to the crisis. Fifth, Koreans' firm commitment to higher education provided a critical mass of hard-working engineers and skilled workers. Sixth, in light of the severe competition that had existed among chaebol despite the monopolistic and oligopolistic market structure, the combination of favorable industrial policy based on performance standards and the principle of reciprocity and dynamic entrepreneurship of Korea's chaebol owner-managers enabled the country to succeed in establishing globally known brands such as Samsung, Hyundai, Daewoo, SK and LG, in areas including automobile assembly, semiconductors, shipbuilding, iron and steel. |
![]() |