By Kim Tae-gyu
The opposition party’s attempts to revive caps on cross-affiliate investments by conglomerates Wednesday received a direct hit from Fair Trade Commission (FTC) Chairman Kim Dong-soo, the top chaebol watchdog.
Kim said during a breakfast meeting with chief financial officials of listed firms that the investment restriction will end up causing economic inefficiency and thereby should not be brought back.
As he is in charge of monitoring conglomerates, Kim’s comments draw attention because chaebol have been under fire of late due to their seemingly excessive expansion after the abolition of the cap.
Taking his cue from President Lee Myung-bak, top government officials including Minister of Knowledge Economy Hong Suk-woo voiced his opposition to the idea of reinstating the investment ceiling.
“The investment caps are an old-fashioned, one-size-fits-all approach, which neglect the global management environment and the specialty of our specific groups,” Kim said.
“In line with the growth of economic size, corporations naturally tend to extend their business horizons. We should not take issue with the size of companies.”
Under the previous Fair Trade Act, affiliates of big-sized groups with assets of more than 10 trillion won were prohibited from purchasing stakes of other units or nonaffiliated outfits in excess of 40 percent of their net worth.
Originally, the norms were far stricter since the restrictions were applied to any business groups with assets of 6 trillion won and the investment ceiling was 25 percent of the net value.
The limitations were first introduced in 1986 to inhibit over the next decade before being scrapped in 1997. They were revived in 1999 but jettisoned once again under the “business-friendly” Lee Myung-bak administration.
The main opposition Democratic United Party reiterated fresh determination to restore the policy resulting in criticisms from the ruling Grand National Party and the Seoul city administration.
However, Kim was well aware of the fact that the number of affiliates jumped once the restraint on conglomerates’ cross-subsidiary investments was eliminated in 2009.
After concluding that the real problem is big firms’ penetration into segments traditionally reserved for small enterprises, Kim asked chaebol to take alternative strategies like more proactively tapping into global markets.
To create an eco-system where both big and small companies can coexist, the life-time bureaucrat made three suggestions.
“First of all, conglomerates must have a better understanding of win-win growth. Secondly, they have to come up with an internal regulatory system which can self-control their irregularities,” the 56-year-old said.
“Finally, we have to introduce a societal monitoring system on the activities of business groups. Based on such efforts, we have to establish an atmosphere of securing shared growth for both big and small firms.”
To introduce better corporate governance systems, the chairman added that some chaebol should discard the undesirable practice of doling out contracts to their sister companies instead of abiding by fair competition.
The practice raised the ire of people as some tycoons took advantage of the beneficiary companies in intra-group transactions as ways of transferring their wealth to their offspring and keeping it in the family.