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

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

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

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

Synopsis

Sea-Jin Chang 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. Once 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. 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 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 re-emerge as stronger, more focused global players.

Excerpt

The Asian Crisis in 1997 affected almost everyone in Korea. Thousands of companies went out of business, and many workers lost their jobs. Foreign investors fled the country, major banks became insolvent, and the government depleted its foreign reserves as the country went bankrupt. This crisis was financially and emotionally painful for me. I had returned to Korea in 1994. At that time, Korea’s prospects looked bright. Korean firms continued to grow at a phenomenal rate and had expanded aggressively overseas. Every Korean I met was proud of his country, and businessmen were confident that Korea would soon catch up to Japan, which had served as a role model for Korea. As one of the faithful, I sold my stock in U.S. companies and invested the proceeds in Korean firms. Right after the crisis, however, my net worth in dollars had shrunk to one eighth of what it had been. My wife once teased me, asking how a business school professor could be such a lousy investor. Like many Koreans, I was determined to find out who had ruined my country and stolen my pride.

The widespread consensus was that chaebols were to blame for Korea’s downfall. Chaebols, which are powerful groups of . . .

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