Financial Crisis and Transformation of Korean Business Groups: The Rise and Fall of Chaebols

378 Pages·2003·1.5 MB·English

by  Sea-Jin Chang

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Financial Crisis and Transformation of
Korean Business Groups
ThisbookarguesthattheKoreanfinancialcrisisof1997wasdueto
the inertia of both the business groups known as chaebols and the
Koreangovernment,whichpreventedadaptationtochangingexternal
environments.AftertheKoreangovernmentstoppedcentraleconomic
planningandpursuedeconomicliberalizationinthe1980s,thetran-
sitioncreatedavoidunderwhichneitherthegovernmentnormarkets
couldmonitorchaebols’investmentactivities.Chaebolspursuedam-
bitiousexpansionsthatoftenlackedastrongeconomicrationale.The
intricatewebofcross-shareholding,debtguarantees,andverticalin-
tegrationresultedinextensivecross-subsidizationandkeptchaebols
from shedding unprofitable businesses. The government’s continued
interventionsinbanks’lendingpracticescreated“moralhazards”for
bothchaebolsandbanks.
Thistreatmentdemonstrateshowthestructureofchaebols,which
wasonceoptimalfortheirrapidgrowth,laterinhibitedotheradapta-
tionsandforallpracticalpurposesbecamenearlydysfunctional.The
bookarguesthatrestructuringofchaebolsshouldfocusonimproving
corporategovernancesystems.Aftersuchrestructuring,theauthorpre-
dicts,chaebolswillreemergeasstronger,morefocusedglobalplayers.
Sea-JinChangisProfessorofBusinessAdministrationatKoreaUni-
versity. Previously, he was a faculty member at the Stern School of
BusinessatNewYorkUniversity.Hehasalsoheldvisitingappoint-
mentsatStanfordUniversityandINSEAD,France.Priortohisdoc-
toralstudyattheWhartonSchooloftheUniversityofPennsylvania,he
workedforlargetelecommunicationcompaniesinKoreaandJapan.
Professor Chang’s research focuses on understanding the process
ofcreatingoperatingsynergiesamongdiversifiedlinesofbusinessand
buildingastronglocalorganizationafterforeignentry.Hisresearchhas
beenpublishedinjournalssuchasReviewofEconomicsandStatistics,
JournalofIndustrialEconomics,JournalofManagementStudies,and
theAcademyofManagementJournal.Hesitsontheeditorialboardsof
severalleadingjournalsinstrategyandinternationalbusiness.Hehas
alsowrittenseveraltextbooksinstrategyandinternationalbusiness.
Tomyteachersandcolleagues
Financial Crisis and
Transformation of
Korean Business Groups
The Rise and Fall of Chaebols
SEA-JIN CHANG
KoreaUniversity
  
Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo
Cambridge University Press
The Edinburgh Building, Cambridge  , United Kingdom
Published in the United States of America by Cambridge University Press, New York
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Information on this title: www.cambridge.org/9780521814355
© Sea-Jin Chang 2003
This book is in copyright. Subject to statutory exception and to the provision of
relevant collective licensing agreements, no reproduction of any part may take place
without the written permission of Cambridge University Press.
First published in print format 2003
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Contents
Preface pageix
1 Introduction 1
FromAsianMiracletoAsianCrisis 3
Chaebols:TheKoreanBusinessGroups 9
TheTheoreticalFrameworkofthisBook 24
2 TheEvolutionofChaebols 43
TheDevelopmentofChaebolsinKorea 45
BriefHistoriesoftheTopFiveChaebols 62
TheGrowthStrategyofChaebols 70
TheEnvironmentalShift 75
3 Chaebols’DiversifiedBusinessStructure 79
TheExtentofChaebols’Diversification 81
IntragroupResourceSharing 87
OrganizationalStructureofChaebols 98
DiversificationandEconomicPerformance 105
4 VerticalIntegrationofChaebols 111
TheScopeofChaebols’VerticalIntegration 113
v
vi Contents
MotivesforVerticalIntegration:ProsandCons 118
PerformanceImplicationsofChaebols’
VerticalIntegration 123
5 TheCapitalStructureofChaebols 131
FinancialMarketEnvironmentsinKorea 133
CapitalStructureofChaebols 141
Chaebols’InternalCapitalMarketsand
Cross-subsidization 149
CollapseofChaebolsandFinancialInstitutions
DuringtheCrisis 157
6 Chaebols’OwnershipandGovernanceStructure 161
CharacteristicsoftheOwnershipStructure
ofChaebols 163
TheCorporateGovernanceSysteminKorea 170
AgencyProblemsinChaebols 176
7 TheRestructuringofChaebols 187
TheRestructuringPolicyoftheKorean
Government 189
RestructuringoftheFinancialSector 191
RestructuringoftheCorporateSector 195
EnhancementoftheCorporateGovernance
System 208
PerspectivesontheRestructuringofChaebols 212
8 Conclusion 217
TheCrisisandtheFallofChaebols:ASummary 219
BusinessGroupsinOtherCountries 224
TheTamingofChaebols 231
TheFutureofChaebolsandtheDevelopmentalState 238
Contents vii
Appendixes
1. DataUsedinthisBook 245
2. ComparingtheProfitabilityofGroup-affiliated
CompaniesandIndependentCompanies 249
3. ProfitabilityofGroup-affiliatedFirms 264
4. TheImpactofVerticalIntegrationinChaebols 275
5. DeterminantsoftheCapitalStructureofChaebols 284
6. ProfitabilityandStockOwnershipofAffiliates 291
7. IntragroupBusinessTransactionsand
OwnershipStructuresoftheTopFiveChaebols 299
8. KeyEconomicStatistics 309
Notes 311
References 327
Index 345