This page intentionally left blank Financial Crisis and Transformation of Korean Business Groups This book argues that the Korean financial crisis of 1997 was due to the inertia of both the business groups known as chaebols and the Korean government, which prevented adaptation to changing external environments After the Korean government stopped central economic planning and pursued economic liberalization in the 1980s, the transition created a void under which neither the government nor markets could monitor chaebols’ investment activities Chaebols pursued ambitious expansions that often lacked a strong economic rationale The intricate web of cross-shareholding, debt guarantees, and vertical integration resulted in extensive cross-subsidization and kept chaebols from shedding unprofitable businesses The government’s continued interventions in banks’ lending practices created “moral hazards” for both chaebols and banks This treatment demonstrates how the structure of chaebols, which was once optimal for their rapid growth, later inhibited other adaptations and for all practical purposes became nearly dysfunctional The book argues that restructuring of chaebols should focus on improving corporate governance systems After such restructuring, the author predicts, chaebols will reemerge as stronger, more focused global players Sea-Jin Chang is Professor of Business Administration at Korea University Previously, he was a faculty member at the Stern School of Business at New York University He has also held visiting appointments at Stanford University and INSEAD, France Prior to his doctoral study at the Wharton School of the University of Pennsylvania, he worked for large telecommunication companies in Korea and Japan Professor Chang’s research focuses on understanding the process of creating operating synergies among diversified lines of business and building a strong local organization after foreign entry His research has been published in journals such as Review of Economics and Statistics, Journal of Industrial Economics, Journal of Management Studies, and the Academy of Management Journal He sits on the editorial boards of several leading journals in strategy and international business He has also written several textbooks in strategy and international business To my teachers and colleagues Financial Crisis and Transformation of Korean Business Groups The Rise and Fall of Chaebols SEA-JIN CHANG Korea University 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 www.cambridge.org 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 - isbn-13 978-0-511-06490-6 eBook (NetLibrary) - eBook (NetLibrary) isbn-10 0-511-06490-X - isbn-13 978-0-521-81435-5 hardback - isbn-10 0-521-81435-9 hardback Cambridge University Press has no responsibility for the persistence or accuracy of s for external or third-party internet websites referred to in this book, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate Contents Preface page ix Introduction From Asian Miracle to Asian Crisis Chaebols: The Korean Business Groups The Theoretical Framework of this Book 24 The Evolution of Chaebols The Development of Chaebols in Korea Brief Histories of the Top Five Chaebols The Growth Strategy of Chaebols The Environmental Shift 43 45 62 70 75 Chaebols’ Diversified Business Structure The Extent of Chaebols’ Diversification Intragroup Resource Sharing Organizational Structure of Chaebols Diversification and Economic Performance 79 81 87 98 105 Vertical Integration of Chaebols The Scope of Chaebols’ Vertical Integration 111 113 v vi Contents Motives for Vertical Integration: Pros and Cons Performance Implications of Chaebols’ Vertical Integration 118 123 The Capital Structure of Chaebols Financial Market Environments in Korea Capital Structure of Chaebols Chaebols’ Internal Capital Markets and Cross-subsidization Collapse of Chaebols and Financial Institutions During the Crisis 131 133 141 Chaebols’ Ownership and Governance Structure Characteristics of the Ownership Structure of Chaebols The Corporate Governance System in Korea Agency Problems in Chaebols 161 The Restructuring of Chaebols The Restructuring Policy of the Korean Government Restructuring of the Financial Sector Restructuring of the Corporate Sector Enhancement of the Corporate Governance System Perspectives on the Restructuring of Chaebols Conclusion The Crisis and the Fall of Chaebols: A Summary Business Groups in Other Countries The Taming of Chaebols The Future of Chaebols and the Developmental State 149 157 163 170 176 187 189 191 195 208 212 217 219 224 231 238 Contents vii Appendixes Data Used in this Book Comparing the Profitability of Group-affiliated Companies and Independent Companies Profitability of Group-affiliated Firms The Impact of Vertical Integration in Chaebols Determinants of the Capital Structure of Chaebols Profitability and Stock Ownership of Affiliates Intragroup Business Transactions and Ownership Structures of the Top Five Chaebols Key Economic Statistics 299 309 Notes References Index 311 327 345 245 249 264 275 284 291 Index debt-equity ratios, of chaebols, 14, 50, 52, 74, 135, 141–46, 157, 165, 195–96, 213, 222, 223, 255, 285, 287, 314 (n20) debt guarantees, 100, 123, 153–56, 222, 257, 273, 274 Korean banks and, 40, 57, 58, 135 debt structures, of chaebols, 314 (n15) decentralization, 241 Degussa, 201 Delphi, 122, 312 (n8) democratization, 236 department stores, Samsung ownership of, 64 deregulation, by Korean banks, 35, 51, 57–61 developing countries business groups in, 27, 28–31, 38, 229–31, 309 (n24) as Korean competitors, 16 market imperfections in, 28 developmental state, of chaebols, 31, 241–44 Diamond Ad, 115 Diners Card, 151 diversification of chaebols, 19–20, 39, 48, 64, 70–109, 75, 221, 277 economic performance and, 105–9 entropy measure of, 83 group-unrelated, 267–68 measurement of, 81–84 motivations for, 84–87 unrelated, 81, 83–84 Dongah Group bankruptcy of, 157 structure and assets of, 12 vertical integration of, 113 Dongbu Group, structure and assets of, 12 Dongkuk Group, structure and assets of, 12 Dongrib Group, rank of, 50 Dongsuh Industries, 64 Dongyang Broadcasting Company, 66 Dongyang Group rank of, 50 structure and assets of, 12 Doosan Group, 46, 207, 208, 240 structure and assets of, 12 Dow Chemical, 199, 201 downstream integration, 115, 121, 129, 207 DRAMs, 206, 207 dumping, 237 Durbin-Watson statistics, 268 Eastern European countries, privatization in, 23, 28, 31 economic liberalization, 219 economic performance, diversification and, 105–9 Economic Development Plans (Korea), 53–54, 133, 142 Economic Planning Board (Korea), 48 economic reform, in Korea, El Corte Ingles, 230 electronics, chaebol manufacture of, 53, 54, 64, 69, 75, 84, 86, 102, 113, 207 emerging economies, 241 entrepreneurs, chaebol founders as, 49, 310 (n10) entropy measure of diversification, 83–84, 267 350 Index environmental shift, effect on chaebols, 75–78 equity investments, of chaebols, 95, 100, 164, 257, 262, 272, 274 equity ownership of chaebols, 303, 304 of zaibatsu, 25 Erie Railroad, 232 Euro [currency], 226 Europe, conglomerates in, 224–27 European Union, 230 Evans, Peter, 62 evolutionary perspective, of chaebols, 31 export industries, 48, 50, 53, 56, 76 export subsidies, Korean eradication of, 58, 76 expropriation of minority shareholders, 238, 292 through inside trading, 178–81 through internal transfer pricing, 181–85 external labor market, chaebol use of, 72–74 Fair Trade Act, 10, 57, 58, 165, 223, 239 Fair Trade Act (1993), 154 Fair Trade Act (1994), 163 Fair Trade Act (1998), 156 Fair Trade Commission (Korea), 126–27, 128, 129, 151, 152, 154, 163, 185, 190, 211–12, 237, 238, 244, 245–46, 293, 312 (n1), 313 (n12), 315 (n1; n24) familial succession, in chaebols, 221 family ownership of chaebols, 12, 25, 26, 40–41, 108, 158–59, 163–64, 171, 178, 183, 191, 262, 295 of conglomerates, 25 Federal Reserve Bank, effects on Korean bankruptcy, Federation of Korean Industries, 65, 211 Fidelity, 226 financial crisis (Korea), 3–9, 35, 37, 69, 133, 140 chaebol bankruptcies in, 157–58 as system failure, 219–20 transformation from, 223–24 financial distress, 256 financial institutions chaebol failure effects on, 158–60 chaebol ownership of, 63, 69, 102, 115, 313 (n15) nonperforming loans of, 159 financial markets, in Korea, 133–41 financial restructuring, of chaebols, 195–204 financial sector, restructuring of, 191–95 financial services, as chaebol business, 64, 66, 68, 71, 74–75, 135–41, 220, 311 (n11) Financial Supervisory Board, 203, 246, 314 (n8) fire insurance companies, chaebol holdings in, 286, 290 Five-Year Economic Development Plans, 118 Fligstein, Neil, 231–232 floating exchange rate, foods, chaebol manufacture of, 64, 86 351 Index Ford Motor Company, as Hyundai supplier, 63 foreign aid, to Korea, 47 foreign capital effect on chaebols, 41, 50, 63, 76–78, 142–43, 220 effect on early U.S., 232 foreign capital attraction, to Korean stock market, 18 foreign currency reserve, in Korea, 307 (n3) foreign debts, 285 foreign direct investment, in Korea, 19 foreign exchange crises, in Latin America, 141, 194 foreign exchange crisis, in Korea, 41, 102, 107, 133, 189 foreign exchange rates, escalation of, 3, 4, 5, foreign investment, in Korea, 4, 54, 133, 135–36, 190, 209, 219, 231–32 forward integration, 115, 119–20, 124, 125, 278, 279, 280, 281, 283, 297 France, 25, 225, 242 conglomerates in, 309 (n22) Franco, Francisco, 229–30 FSO (Poland), chaebol acquisition of, 14 Fuji Bank, 228 General Agreement on Tariffs and Trade (GATT), 76 general and administrative expenses, 277 General Electric (GE), structure of, 25, 176, 227 general trading companies, chaebols as, 53–57, 66, 67, 68, 70, 72, 84, 115, 311 (n13) Germany, 141, 142, 225, 226 governance system of, 21, 308 (n19) Glesjer test, 268 global competition, effect on chaebols, 36, 76, 220 global convergence, of businesses, 31, 319 (n17) Global Fortune 500 List, chaebols in, 11 globalization effect on keiretsu, 229 in Korea, 62, 69, 231, 236 GM (General Motors), 122, 225, 237 Goldfelt-Quandt test, 268 Goldman Sachs, 195 Goldstar, 67 Gould, Jay, 232 governance structures (See also corporate governance) of chaebols, 109, 127, 161–85 governance systems (See also corporate governance) of chaebols, 36–37, 39, 170–85, 190 definition of, 20–21 foreign investors and, 232–33 government chaebol relationship to, 71–72, 73 intervention by, in Korea, 133–35 in Korea, 237–38 restructuring policy of, 189–91, 208 Granovetter, Mark, 309 (n24) gross national product (GNP) chaebol contribution to, 10–11, 54, 56, 194, 204 352 Index zaibatsu contribution to, 25 group-affiliated companies, profitability of, 249–74 group-level advertising, 90, 92 group-level staff organization, of chaebols, 100, 104, 209 group-level strategies, 108, 109 Group Steering Committees, of chaebols, 103, 104 growth, of chaebols, 84, 86, 106 grupos economicos (Latin America), chaebols compared to, 24, 28, 91, 224 Haitai Group, 12, 157, 178 Halla Group, 12, 157 Halla Heavy Industries, 157 Hana Bank, 59, 136, 192, 195 Hanbo Group, bankruptcy of, 3, 4, 13, 20, 157 Hangil Research Center, 318 (n20) Hanglass Group, rank of, 50 Hanhwa Group, bankruptcy of, 157 Hanil Bank, 59, 136, 192 Hanjin Group, 206, 207 rank of, 50 structure and assets of, 12 Hankook Machinery, 69 Hankuk Fertilizers, 65–66 Hankuk Flange, 64 Hanil Group, structure and assets of, 13 bankruptcy of, 157 Hansol Group, structure and assets of, 12 Hanvit Bank, 192, 194 Hanwha Group, 46, 206, 207 rank of, 50 structure and assets of, 12 Hanyang Group, rank of, 50 Hausman’s specification test, 320 (n4) heavy equipment, chaebol manufacture of, 15, 53–57, 63, 64, 69, 72, 75, 84, 118, 221, 237 hedge funds, Asian bankruptcy effects on, heteroscedasticity tests, 268 H&Q, 195 Hoechst, 319 (n8) Honam Oil Company, 67 Hong Kong Shanghai Bank, 235 hostile takeovers, 170, 175, 225 hotels, Samsung ownership of, 64 hot money effect on foreign exchange, role in Korean crisis, 14 Housing & Commercial Bank, 59, 195, 235 human resources, sharing of, 91–95, 108 Hungary, 28, 194 Hwaseung, bankruptcy of, 157 Hynix See Hyundai Electronics, 206, 235, 312 (n2) Hyosung Group, 12, 205 Hyundai Aluminum, 114 Hyundai Construction, 63, 64, 96, 114, 169 Hyundai Corporation, 115 Hyundai Department Store, 64 Hyundai Electric Machinery, 64 Hyundai Electronics, 64, 114, 140, 199, 205, 206, 207, 312 (n2) Hyundai Elevator, 114 Hyundai Engineering, 114, 169 Hyundai Engines, 64 Hyundai Fire and Marine Insurance, 137, 139 353 Index Hyundai Group, 9, 11, 46, 62, 66, 237 advertising by, 90 bank holdings of, 59, 136 diversification of, 64 equity ownership of, 304 family members in, 108–9 financial companies of, 137, 139 founding of, 49, 63 as general trading company, 72 growth of, 310 (n9) history of, 63–64, 311 (n16) internal transactions in, 103, 104, 297 labor practices of, 96, 108 management of, 103, 104 nonbank holdings of, 61 overcapacity of, 19–20 ownership structure of, 169 power plants of, 54 rank of, 50 restructuring of, 195–96, 205, 207, 311 (n17) shipbuilding by, 54, 64 structure and assets of, 12, 14, 99 vertical integration of, 64, 113, 114, 116–17, 118, 128 Hyundai Heavy Industries, 63, 64, 96, 114, 129, 153, 169, 205 Hyundai Industrial Development, 114 Hyundai Investment Trust, 64, 127, 129 Hyundai Livart, 64, 114, 129 Hyundai Logistics, 115, 127 Hyundai Marine & Fire Insurance, 64 Hyundai Merchant Marine, 64, 115, 121, 129, 169 Hyundai Motor, 63, 64, 96, 114, 115, 129, 169, 240 Hyundai Motor Service, 115 Hyundai Oil Refinery, 114 Hyundai Petrochemical, 64, 114 Hyundai Pipe, 64, 114 Hyundai Precision, 64, 114 Hyundai Securities, 64, 127, 129, 139, 140 imitation, by chaebols, 49 import substitute industry, in Latin America, 23, 28, 48 import substitution policy in Korea, 47 in Latin America, 29 Inchon Steel, 114 indemnity insurance companies, chaebol holdings in, 61 India business houses in, 24 chaebol plants in, 14, 69 “tunneling” in, 185 Indonesia business groups of, 27 as Korean competitor, 16, 76, 261 money crisis in, Industrial Bank of Japan, 2228 inertia force, 222 inflation rate, in Korean crisis, 51 infrastructure, regulatory, 242 ING Bank, 195 inheritance tax, 171–72, 178 In-Hwoi Koo, 66 Initial Public Offering (IPO) stocks, 178 innovation, by chaebols, 49 inside trading, expropriation through, 178–81 354 Index installation financing, by chaebols, 137 insurance companies, 60 chaebol holdings in, 64, 67, 71, 74, 86, 136, 195 interaffilate loans, 149–53 interest rates of chaebol affiliates, 138 in Korean bankruptcy, 5, 6, 50, 133 internal business trade, by chaebols, 37, 38 internal capital market chaebol dependence on, 30, 40, 72, 149–56 creation of, 29 internalization, in chaebols, 38, 275 internal labor markets business groups and, 29 chaebol dependence on, 30 internal pricing schemes, 262 internal transfer pricing, 181–85 International Bank for Reconstruction and Development (IBRD), 6, 189, 191, 203, 208 international competition, 236–37 International Finance Corporation, 195 International Monetary Fund (IMF), aid to Korea by, 3, 5–6, 7, 8, 21, 32, 57, 143, 189, 190, 191, 208, 215, 237 intragroup loans, 100 intragroup sales, of chaebols, 113 intragroup transactions, among chaebols, 41, 100, 127, 297–306 investment trusts, chaebol holdings in, 60, 68, 74, 137, 286 irrationality, chaebols perceived as, 84 Italy, 184 Japan, 142, 225 See also keiretsu; zaibatsu corporate governance systems in, 171, 172, 175, 315 (n7) debt-equity ratios in, 141 as Korean competitor, 16 Korean occupation by, 48, 65, 66, 71 zaibatsu dissolution in, 212 Japanese yen See yen [Japanese currency] Jinro Group bankruptcy of, 4, 20, 157 structure and assets of, 12 Joonang Daily News, 66, 94, 95, 96 junk bonds, 318 (n3) Kaepung Group, rank of, 50 Kangwon Bank, 59, 136, 192 Kapeul, bankruptcy of, 157 keiretsu chaebols compared to, 24, 27, 105, 171, 184, 224, 239 formation and structure of, 27, 29, 212, 223, 227–29, 310 (n1), 312 (n11), 319 (n9; n11; n12; n13; n14) Keopyung Group bankruptcy of, 157 structure and assets of, 13 KEPICO, 64, 114 Khanna, Tarun, 28–29 355 Index Kia Group, 237 bankruptcy of, 3, 4, 157 overcapacity of, 19–20 rank of, 50 structure and assets of, 12 Kia Motors, 205 Kim, Dae-Jung, 190 Kim, Eun-Mee, 36 Kim, Sung-Soo, 45 Kim, Woo-Choong, 68 Kim, Young-Sam, 62, 64 K-Mart, 225 Kobe Bank, 228 Kohap Group, 12 Kolon Group, 12, 205 Kommertzbank, 195 konzern (Germany), 25, 225 Kookmin Bank, 59, 136, 192, 195, 235 Koram Bank, 59, 69, 136 Korea, 142, 242 economic transition of, 20–24, 47–53 Japanese occupation of, 45, 46, 310 (n2) postliberation period in, 39 restructuring policy of, 189 U.S aid to, 48 Korea Accounting Research Institute, 317 (n14) Korea Asset Management Corporation (KAMCO), 192, 193, 317 (n4) Korea Development Institute, 204, 308 (n14) Korea Exchange Bank, 195 Korea First Bank See Cheil Bank Korea Flange, 114 Korea Foreign Exchange Bank, chaebol ownership in, 59 Korea Heavy Industries, 205, 207 Korea Investor’s Service (KIS), 245, 247, 293 Korea Mobile Telecom, 70, 72, 181 Korean Airlines, 53 Korean Fair Trade Commission (KFTC) See Fair Trade Commission Korean Standard Industry Classification (KSIC), 83, 260, 267 Korean War, 5, 38, 46, 63 Korea Peace Bank, chaebol ownership in, 59 Korea Stock Exchange (KSE), 165, 183, 210, 236 index fall of, 4–5 Korea Telecom, 240 KOSDAQ, 236 Krugman, Paul, 19, 134, 308 (n17) Kukdong Group, 50, 157 Kukje Group disbanding of, 60, 311 (n15) rank of, 50 Kumho Group, 12 Kumkang Development, 115, 129 Kyobo Life Insurance, 138, 139 Kyungnam Bank, chaebol ownership in, 59 labor, shortages of, 53, 76 labor force, in Korea, 48, 91–95, 170 labor movement, Korean suppression of, 32, 36, 57 labor productivity, of chaebols, 18–19 labor productivity index, 19 Ladies Professional Golf Association (LPGA), 90 356 Index La Porta, Rafael, 141, 170, 184, 316 (n17) late development theory, of chaebols, 30–31 Latin America, 48, 91, 242 See also grupos economicos business groups in, 29, 72 currency and debt crises in, 23, 141 foreign exchange crises in, 141, 194 privatization in, 31 LCD, 237 Lee, Byung-Chul, 47, 49, 62, 64–66, 99, 176 Lee, Jae-Yong, 178, 180 Lee, Kun-Hee, 178 Leff, Daniel, 29 leverage, of chaebols, 256, 267 leveraged buyouts (LBOs), 318 (n2; n3) LG Allied Signal, 199 LG Cable, 67 LG Caltex-Oil, 67, 96 LG Chemical, 67, 84, 96, 169, 200, 211 LG Electronics, 67, 84, 96, 169 LG Energy, 201 LG Fire Insurance, 139 LG Group, 9, 47, 71, 237 bank holdings of, 59 equity ownership of, 305 family members in, 109, 211–12 financial companies of, 137 as general trading company, 72, 84 growth of, 310 (n9) history of, 66–68 intragroup transactions in, 299 labor practices of, 96, 97 management of, 103, 104 nonbank holdings of, 61, 139 ownership structures of, 169 rank of, 50 restructuring of, 195–196, 199, 200–1 structure and assets of, 12, 14, 99 vertical integration in, 113, 115, 127, 297 LG Honeywell, 199, 201 LG Industrial Systems, 201 LG Information Communication, 67 LG Instruments, 67 LG International, 67 LG Investment Trust, 68 LG LCD, 201 LG Marine and Fire Insurance, 67 LG Merchant Bank, 68 LG Polychemical, 67 LG Securities, 68, 139 LG Semiconductors See Hynix, 68, 205, 206, 207 LG-Shipley Co., 200 LG Telecom, 68, 201, 211 liberalization of foreign investment, 78 by Korean government, 58, 62, 75 life insurance companies, chaebol holdings in, 61, 137, 139, 140, 286, 290 liquidity, of chaebols, 256, 266–67 liquor business, chaebols in, 178 Livart See Hyundai Livart loan(s), to chaebols, 129, 136, 149–53, 158 logistics, of chaebols, 86 London Stock Exchange, 243–44 Long-term Capital Management, Asian bankruptcy effects on, 357 Index Long-term Credit Bank of Korea, 192 long-term debts, 285 Lotte Group, 12, 50 Lucent Technologies, 122 machinery, chaebol manufacture of, 86, 102 Mahathir bin Mohamad, 307 (n8) main banks system (Japan), 175 management buyouts (MBOs), 318 (n2; n3) Mannesmann, 226 market imperfections, effects on chaebols, 37 market share, 277, 278, 279, 280, 281 Maxter, chaebol acquisition of, 14 McArthur, Douglas A., 212 media holdings, of Samsung, 64 Meiji Renovation Era, zaibatsu formation in, 25 merchant banks, chaebol holdings in, 60, 74, 137, 138, 286 mergers and acquisitions of chaebols, 209 in U.S., 224 Metlife, 195 Mexico, 141, 143 Middle East, chaebol construction in, 68 minimill technology, 20 Ministry of Finance, in Korea See Ministry of Finance and Economy, 22, 133, 134, 183, 169, 314 (n10) minority shareholders in chaebols, 37, 41, 86–87, 101, 107, 142, 170, 181, 184–85, 208, 210, 241, 314 (n18) expropriation of, 238, 292 rights of, 174–175, 214 Mitsubishi Bank, 228 Mitsubishi Group, family ownership of, 25 Mitsubishi Motors, 228 Mitsubishi Oil, 228 Mitsubishi Real Estates, 228 Mitsui Bank, 228 Mitsui Chemical, 228 Mitsui Group, 25, 228 Mitterand, Franỗois, 25 Miwon Group, structure and assets of, 12 Mongolia, 45 monopolistic profits, of chaebols, 51 Moody’s, 245 moral hazard, of chaebol bailouts, 57, 134, 313 (n4) multicollinearity tests, 269 multidivisional structure, of chaebols, 99–103 multinational corporations business group alliances with, 29, 91 chaebols and, 29 in U.S., 100 mutual debt guarantees, of chaebols, 74 mutual funds, 225 Nasan, bankruptcy of, 157 NASDAQ, 227, 236 NEC, chaebol venture of, 54, 94 networks, chaebols as, 309 (n23) Neuer Markt, 227 Neuveau March´e, 227 Newbridge Capital, 195, 235 Newcore Group, 12, 157 New York Life, 195 358 Index New York Stock Exchange (NYSE), 241–42 Nikko Securities, 228 Nippon Mining, 199, 201 Nippon Oil, 228 Nippon Trust, 228 Nissan, 177, 228 nonferrous metals, manufacture by chaebols, 53 nongovernment organizaitons (NGOs), 214 OEM (original equipment manufacturing), of chaebols, 49 Office of Chairman, 99 Office of Secretaries, 99, 100, 102 oil refining, as chaebol industry, 49, 205 oil shocks, effects on Korean industries, 54, 56 Okpo Shipyard, 69 operating efficiency, of chaebols, 105–7 ordinary least squared (OLS) regressions, 268, 294, 295 organizational structures, of chaebols, 98–105 organizational ecologist, on adaptation, 34 OTIS, 199, 201 outsourcing, 121 overcapacity, of chaebols, 57 ownership structure, of chaebols, 161–85, 297–306 Palepu, Krishna, 29 Park, Chung-Hee, 47, 53, 57, 68, 133, 135 Park, Heung-Sik, 45 Park, Seri, 90 patrimonial logic, of chaebols, 30 pension funds, 225 People’s Solidarity for Participatory Democracy, 78, 214, 233, 236, 317 (n18), 318 (n20) per capita income, of Korea, Perez Companc, 91 performance, vertical integration and, 123–124 personnel, intragroup transfer of, 122 petrochemicals, chaebol manufacture of, 53, 64, 66, 205, 206 petroleum industry, chaebols in, 67, 207 Philip Morris, 225 Philips, 199, 201, 237 Pinochet, Augusto, 140 Pitch IBCA, 192 plastic goods, chaebol manufacture of, 67 Plaza Accord (1985), 60 Poland, 24, 69, 242 portfolio diversification, in business groups, 28 portfolio investment, in chaebols, 78 PowerGen, 199, 201 power generation machinery, 207 power plants, chaebol development of, 54 precision machinery, chaebol manufacture of, 66 presidents’ meetings, 103–105 principal-agent problems, 172 privatization, 242 in Korea, 21–22, 51, 53, 58 in Latin America, 91 productivity indices, 308 (n16) professional managers, 239–40, 291 359 Index Quantum Emerging, 195 return on invested capital (ROIC) of chaebols, 14, 123, 255, 282, 288 of U.S firms, 308 (n15) reverse causality, 183–84 Rhee, Syngman, 47 Rho, Tae-Woo, 58, 60, 62, 71 risk aversion, by chaebols, 84, 134 Rockerfeller Center, 228 Rohm & Haas, 199 Romania, 14, 69 Royal Philips Electronics See Philips Rumelt, Richard, 81, 83 Russia, 45, 242 Asian economy effects on, privatization in, 24 railroad vehicles, 205, 207 random effects model, 320 (n4) R&D See research and development (R&D) real estate, chaebol holdings of, 58 reception of debt guarantee, 285 Regent Pacific, 195 regression analyses, 282 related diversification, 278 relief funds, 134 Renault, 66, 228 research and development (R&D), by chaebols, 87, 101, 106, 121, 124, 125, 255, 260–61, 265, 269, 275, 283, 320 (n3) resource-based theory, 264 resources, allocation of, 51 resource sharing, 87–98, 107 restructuring, of chaebols, 41, 42, 109, 187–215, 223 retailing, chaebols in, 63, 84 Return on Asset (ROA), 320 (n2) Sachs, Jeffrey, 6, 307 (n4) Saehan Motors, 69, 204–5 Sakura Bank, 228 sales growth, 286, 293 Salim Group, chaebols compared to, 27 Sambo Securities Company, 69 Samsung Advanced Technology Institute, 87 Samsung Aeronautics, 66 Samsung Construction, 90 Samsung Corning, 66, 87, 118–119 Samsung Corporation, 65, 90, 94, 95, 96, 169, 177 Samsung Credit Card, 66 Samsung Display Devices See Samsung SDI Samsung Electro-Mechanics, 66, 87, 95, 120 Samsung Electronics, 66, 84, 86, 87, 94, 95, 96, 107, 120, 177, 180, 214, 240 profitability of chaebols, 14–15, 86, 106, 247, 255–56, 291–96 leverage and, 321 (n9) promissory notes, 138, 287 Prudential, 195 public companies (Korea), 106, 260, 286 profitability of, 252–53 punctuated equilibrium, in organizational change, 34 Pusan Bank, chaebol ownership in, 59 pyramid structure, of shareholding, 184, 316 (n17) 360 Index Samsung Engineering, 90, 180 Samsung Everland, 95, 180 Samsung Fire Insurance, 138, 139 Samsung Group, 9, 11, 20, 46, 47, 62, 205, 237 advertising by, 90, 92–93 bank holdings of, 59, 136 cross-shareholding in, 156 diversification of, 176–77 equity ownership of, 303 family members in, 109, 153, 178 financial companies of, 137, 139 founding of, 47, 49 as general trading company, 72 growth of, 86, 100, 310 (n9) history of, 64–66, 71, 311 (n18), 312 (n5) intragroup transactions in, 178–80, 298 labor practices of, 94–98, 100, 101 management of, 103, 104, 105, 176 multidivisional structure of, 99, 100, 101–2 nonbank holdings of, 61 organizational structure of, 102 ownership structures of, 169 rank of, 50 restructuring of, 195–96, 205, 207 sales composition of, 86, 87, 88–89 shipbuilding by, 54 structure and assets of, 12, 14 vertical integration in, 113, 115, 118, 127, 128, 297 Samsung Heavy Industries, 66, 90, 95, 177 Samsung Life Insurance, 65, 90, 137, 138, 139, 153, 169, 180 Samsung Merchant Banking, 66 Samsung Motors, 66, 94, 95, 96, 98, 107, 176–77, 205, 207, 237 Samsung Petrochemical, 66, 90 Samsung SDI, 66, 87, 95, 118, 120, 177 Samsung SDS, 90, 180 Samsung Securities, 66, 138, 139, 287 Samsung Semiconductor See Samsung Electronics, 66 Samsung Shipbuilding, 66 Samyangsa, 45 Samho Group, rank of, 50 Sanyo, chaebol venture of, 54 Saudi Arabia, 70 Schrempf, Jurgen, 225 Schumpeter, Joseph, 219 scope, economics of, 84 Securities and Exchange Act, 210 Securities and Exchange Commission, in Korea, 174–75, 242 securities and exchange commissions, in Europe, 243 securities companies, chaebol holdings in, 60, 61, 64, 68, 74, 136, 138, 286 Securities Transaction Law, 315 (n5) semiconductors, chaebol manufacture of, 54, 66, 68, 86, 114, 176, 199, 205, 207 seniority-based promotion, 101 Seoul Bank, 192, 194 Seoul Investment and Trust, 151 shareholder activities, effect on chaebols, 78 shareholders expropriation by, 184–85 legal rights of, 172 361 Index shareholder value, maximization of, 84 Shinhan Bank, chaebol ownership in, 59, 136 Shinho Group, structure and assets of, 12, 157 Shinjin Group, 50 Shinsegae, 66 shipbuilding, by chaebols, 53, 63, 64, 66, 75, 86, 114, 176, 207 shipping, chaebols in, 64 short-term debt, 62, 146, 149 short-term speculative funds, 78 Siemens, diversification of, 25 single business, diversification of, 83 SKC, 97, 120, 167 SK Capital, 169 SK C&C See Daehan Telecom, 181, 182 SK Chemical, 70, 84, 97, 120, 167 SK Construction, 70, 167, 169 SK Corporation, 70, 120, 167 SK Distribution, 181, 182, 183 SK Energy Sale, 167, 169 SK Gas, 70, 97, 167 SK Global, 70, 167, 169 SK Group, 9, 11, 46, 47 bank holdings of, 59 family members in, 109, 167 financial companies of, 137 as general trading company, 72 history of, 70–71 intragroup transactions in, 302 labor practices of, 97 management of, 103, 104 nonbank holdings of, 61 rank of, 50 restructuring of, 195–96 structure of, 99 vertical integration in, 113, 127, 128, 297 SK Insurance, 71 SK Oxychemical, 70, 167 SK Securities, 139, 167, 169 SK Shipping, 70 SK Telecom, 70–71, 167, 169, 170, 181, 183, 214, 262 cross-subsidization of, 129 sociocultural environment, of Korea, 30, 31 sogo shosha, Korean companies modeled after, 56 S-one, 180 South America See also grupos economicos Asian bankruptcy effects on, South Asia, wages in, 34 Southeast Asia, business groups in S&P See Standard & Poors (S&P) Spain, 141, 229–30 spin-offs, 209 Ssangyong Group, 12, 50, 205 standard of living, Korean improvement of, Standard & Poors (S&P), 195, 245 state bureaucracy, role in Korean economy, 35–36 steel manufacture, by chaebols, 53 stock exchanges chaebols listed on, 106, 127, 183 cross-national, 233 stock market, in Korean crisis, 7, 17, 78, 185 strategic business unit (SBU), 29, 265 strategic effectiveness, of chaebols, 107, 109 362 Index strategic industries, in Korea, 133 structural inertia, of chaebols, 31–38, 220–22 subsidization See also cross-subsidization of chaebols, 127, 189 Sudan, 69 sugar, chaebol production of, 65 Sumitomo Bank, 228 Sumitomo Chemical, 228 Sumitomo Group, family ownership of, 25 Sungwon Construction, bankruptcy of, 157 Sunkyung Group See also SK Group structure and assets of, 12 Sweden, 184 synergies, of chaebols, 37, 39, 87, 95, 106, 185, 189 synthetic textiles, chaebol manufacture of, 49 Taechang Group, rank of, 50 Taegu Bank, 136 Taegu Department Store, bankruptcy of, 157 Taiyo Bank, 228 tariffs, removal of, 76 tax credits, for chaebols, 86 Technical Assistance Loans, 203 technology, chaebol transfer of, 310 (n10) telecommunications, chaebols in, 68, 70–71, 86 television products, chaebol manufacture of, 87 tender offers, 209 textiles, chaebol manufacture of, 86 Thailand business groups of, 27 money crisis in, 3–4 “three low” economic boom, 263 Tiger Economies, Tiger Fund, 214 Tongil, bankruptcy of, 157 trade wars, Korea as target of, 57 trading companies, chaebol use of, 25 transfer-pricing schemes, of chaebols, 41, 126 tunneling, 185 underdeveloped markets, business group role in, 28 unfair business practices, of chaebols, 211–12, 313 (n12) United Kingdom, 241, 242 debt-equity ratios in, 141 United States, 242 aid to Korea by, 65 Asian bankruptcy effects on, conglomerates in, 24–25, 224–27 corporate restructuring in, 212 debt-equity ratios in, 141 governance systems in, 21, 171, 174, 184 Hyundai exports to, 63 unrelated diversification, 278 upstream integration, 121 Uruguay, currency and debt crises in, 23 Uzbekistan, chaebol plants in, 14 value creation, in chaebols, 39 Vanderbilt, Cornelius, 232 venture capital firms, chaebols as, 95 363 Index vertical integration advantages of, 118–21 of business groups, 28 of chaebols, 39–40, 64, 66, 75, 81, 83, 111–29, 189, 221, 274, 275–83 definition of, 113 disadvantages of, 39, 121–23 performance implication of, 123–29 Vietnam, 69 Vivendi, 225, 227 Vodafone, 226 Volvo, 237 W R Grace, 225 wages, of Korean workers, 16, 34, 57–58, 261 Welch, Jack, 176 welfare issues, in Korea, 58 wholesaling, chaebols in, 84 windfall profits, 46 won [Korean currency], 47, 63 overvaluation of, 4, 7, 16, 17, 18 woolen goods, Samsung production of, 65 World Bank, 3, 32, 57 World Trade Organization (WTO), 76, 237 World War II, 25, 27, 76, 223 Yasuda, family ownership of, 25 yen [Japanese currency] depreciation of, 16, 17, 38 Plaza Accord and, 60 Yukong See SK Corporation, 70, 72 zaibatsu chaebols compared to, 24, 25, 38 dissolution of, 27, 212–13, 223, 318 (n23) growth of, 27 Zenith, chaebol acquisition of, 14 364 ... Perspectives on the Restructuring of Chaebols Conclusion The Crisis and the Fall of Chaebols: A Summary Business Groups in Other Countries The Taming of Chaebols The Future of Chaebols and the Developmental... Crisis Chaebols: The Korean Business Groups The Theoretical Framework of this Book 24 The Evolution of Chaebols The Development of Chaebols in Korea Brief Histories of the Top Five Chaebols The. .. blank Financial Crisis and Transformation of Korean Business Groups This book argues that the Korean financial crisis of 1997 was due to the inertia of both the business groups known as chaebols and