Korean Chaebols Success Factors behind Recovery from 1990s Financial Crisis - Case Study Example

Running Head: Korean Chaebols – Recovery from Financial Crisis Korean Chaebols – Success factors behind Recovery from 1990s’ Financial Crisis [Author’s Name] [Institution’s Name] Introduction Chaebols are the large family-owned and controlled business entities operating in South Korea for many decades (Hilton et al, 1999, p199). Chaebols play vital role in determining the direction and performance level of the Korean economy and it is also widely accepted that chaebols were among the major factors that worsened the effects of financial crisis upon the Korean economy due to their flawed structure and organization. However, the post crisis reforms and restructuring strategies implemented in the chaebols system have now resulted in efficient performance of chaebols and it is regarded that Korean economy became able to recover from the financial crisis of late 1990s due to the efficient performance and adequate restructuring of chaebols (Buzo, 2002, p187). At present, chaebols are successfully operating in South Korea significantly contributing towards the economic development (Choe and Chinmay, 2007, p232). The essay aims to discuss the performance of Korean Chaebols after the financial crisis that hit Korea along with many other Asian countries in late 1990s. The essay examines the recovery path adopted by the Korean Chaebols to identify the factors that have contributed towards re-stability of these conglomerates after the financial crisis. It is revealed that financial crisis draw devastating impact upon the performance and growth of Chaebols however, they recovered from the crisis within few years with the help of government support and adequate business strategies and planning. Korean Chaebols Before and After 1990s Financial Crisis Chaebols are the South Korean business conglomerates that have attained strong position at international level and own several multinational enterprises. There are several dozen Chaebols working in Korea that are mainly operated by Korean family controlled corporate groups (Fields, 1995, p35). These Chaebols enjoy government support as well as finance that allow them evolving as well known international brands. Some of the well known Chaebols operating in South Korea include Samsung, LG and Hyundai etc. Traditionally Chaebols have played a very important role in economic as well as political progression of Korea. Chaebols have significantly contributed towards the development of new industries, markets and expansion of trade relation at international level (Kim, 1991, p272). It has been widely accepted that Chaebols have well supported Korean economy in attaining the position of East Asian Tiger (Rowley et al, 2001, p21). Chaebols use to play dominating role in the economy of Korea because these entities remain the focus of attention of the government policies and support during pre and post crisis era. In the pre financial crisis era, the success of chaebols in Korea was favored by their close affiliations with the government. The chaebols are giant business entities that traditionally enjoy complete support from the government. The chaebols are provided with adequate government policies’ support, corporate financial support and dividend policies. The main characteristics of chaebols include concentrated family ownership, major share in bank ownership and influential political affiliation. Based upon these factors, chaebols have attained stable position in the political economy of Korea (Buzo, 2002, p187). The financial crisis in 1997 disparaged the economy of Korea and appeared as great challenge for the chaebols as well. At that time, there were 30 large chaebols operating in South Korea. Out of these 11 chaebols were collapsed during July 1997 to June 1999. The main reason for this massive crumple was the heavy amount invested by the chaebols in expert oriented manufacturing commodities. Chaebols had adopted a negligent attitude towards the domestic markets due to which the downturn in the overseas market bestowed them incalculable devastation (Rowley et al, 2001, p21). Furthermore, experts also revealed another reason behind the chaebols’ failure that they had built overcapacity in order to compete with each other. It could be understood from the fact that there were seven giant automobile manufacturing companies operating by the chaebols by the end of 1990s that were more than enough to comply with the capacity and need of the country population (Pucik and Lim, 2001, p137). When the crisis hit the chaebols, they became severely indebted and it became difficult for them to arrange finance for their expansion and operations. The amount of unpaid debt went significantly high for most of the chaebols and many of them were collapsed due to the bankruptcy. The collapse of Daewoo Group in 1999 has been regarded among the largest corporate bankruptcies because the group failed to pay debts of US$80 millions. The weaknesses and mismanagement within the chaebols were exposed at the eve of the financial crisis and the situation demanded the restructuring and reorganization of the chaebols to recover from the aftermaths of the financial crisis (Shim and Steers, 2001, p22). Path of Recovery The identification of major flaws and weaknesses in management of chaebols compelled the policy makers to initiate the restructuring of chaebols in order to enable them recovering from financial crisis losses. There was also international pressure upon South Korea to restructure the chaebols because IMF offered package of $58 billion supported the Korean economy in coming out from the financial crisis consequences but it was one of the major requirement imposed by IMF that South Korea has to revise and improve the structure of chaebols. The need to bring transparency and accountability within the operational structure of chaebols was also identified by the experts and related organizations (Choe and Chinmay, 2007, p232). The process of restructuring and reformation of chaebols began under the leadership and supervision of South Korean President Kim Dae Jung who induced several important reformed and strategies in the system of chaebols. There were professional managers employed at the chaebols for the management of various business activities (Rowley et al, 2001, p21). It was also decided that the chaebols will concentrate more towards core competencies rather focusing upon the unprofitable businesses so that it become possible for them to reduce their debt burdens. The blind and unrealistic focus of the chaebols upon the capacity expansion was identified as an important reason behind failure of chaebols. It was then decided that the chaebols will focus more towards value and worth of the business operations rather going for massive expansion across the globe (Lee and Han, 2006, p305). The business practice of chaebols was transformed from 1998 following an accord that defines different plans and regulations for the reorganization of chaebols. It was decided that more responsibility will be led on the shoulders of the chaebol leaders regarding the outcomes of their managerial performances. The financial health would be improved through concentrating more towards core competencies and elimination of loan guarantees among the affiliates. These principles were implemented into the system of chaebols and the recent performances of the chaebols have improved considerably as a result of the implementation of these principles (Shim and Steers, 2001, p22). The successful recovery of Korean chaebols from the financial crisis is backed by the fact that there was great realization of the weaknesses of the system in practice before the crisis and during the phase of recovery, adequate steps were taken to remove all the weaknesses identified during the crisis. The relationship of the chaebols and government took a new turn in the situation and rather providing support to the chaebols, the government expressed its intentions towards the restructuring of their management system. The chaebols’ restructuring plan was announced to explain the reformed induced to improve the system. These reformed were based upon the recommendation of IMF as well as the government policies and strategies designed to restructure of chaebols (Lee, 2002, p143). Rule based governance reformed implemented in the chaebols system result in the adaptation of internationally recognized accounting systems and disclosure rules. Independent board of director was constituted for monitoring the business matters and the barriers to the foreign investment were also reduced to encourage foreign investment and hostile takeovers. The government also provided financial support to chaebols allowing them reducing their debt-equity ratio and over diversified operations. As a result, the affiliated of twp thirty chaebols were reduced to 584 in 2000 that were 821 in 1997. There was also decline recorded in the dept-equity ratio of chaebols that was 3.96 in 1997 and declined to 1.93 in June 2000 (Shim and Steers, 2001, p22). An important step taken towards inducing reforms in chaebols system is the implementation of National Tax Service (NTS). NTS was assigned the task of checking the stock movement of four major international companies including LG, Hyundai, Samsung and SK. The major purpose of this extensive probe is to monitor the activities of these conglomerates to assure if these companies are handling the wealth of the company in adequate manner without violating pertinent rules. The share movement of NTS is also monitored to track the shift in the ownership of shares of the company and to identify of the holdings of son or daughter of the owners have increased considerable over time. The main purpose of this monitoring is to assure that the funds of the company are not transferred to the inheritors of the owners to avoid the payment of heavy taxes (Buzo, 2002, p187). The policies and reforms implemented by the government to reorganize the chaebols are major factors behind the success of the chaebols during the pre and post financial crisis era. Before the crisis, the chaebols were successful because they enjoy the support and favor of the government. After the crisis, the chaebols were again retain a successful position in the economy of Korea because the government efficiently emphasize towards the restructuring of chaebols and enacted adequate policies to bring significant level of improvement in the performance of chaebols (Rowley et al, 2001, p21). Conclusion The above discussion unveils the factors behind the success of the chaebols in South Korea and explains the process through which the chaebols are enabled to recover from the financial crisis of late 1990s. It is revealed that there were several major weaknesses and flaws in the organizational structures and business practice of chaebols that came in front of the world during the financial crisis when many of the leading chaebols faced bankruptcy. The recovery process of the chaebols after the financial crisis was led by the Korean President who went for introducing some transformational reforms within the business practice of chaebols. The chaebols reforms changed the working and organizational patterns of the chaebols and compelled them towards gaining more value through these operations rather focusing towards expansion. The monopoly of the local families in the chaebols was also reduced through the appointing independent members in the board of directors of certain chaebols. Furthermore, the government also financially assisted the chaebols in paying off their debts. As a result of these steps, the chaebols recovered from the divesting effects of the financial crisis and become able to play positive role in the economic progression of the country. The recovery of chaebols from the financial crisis made South Korea first Asian country to convalesce from the financial crisis. South Korea came out from the financial crisis aftermaths by early 2000s and one of the main factors contributing towards this recovery was the restructuring of chaebols. After the reforms and reorganizations, the chaebols become more profitable and competitive then before and become in position to support the economic development of the country more positively. The entire discussion could be sum up with the conclusion that there are some major factors that contributed the success and recovery of the chaebols after the financial crisis of 1997. The cooperation, commitment and attention of government towards the reorganization of the chaebols, the financial aid provided by IMF along with condition of restructuring the business patterns of chaebols and the cooperation of the chaebols managers to adopt the reforms introduced by the government are the major factors that allow chaebols retrieve from the financial crisis and become significant contributors of Korean economy. References Buzo, A. (2002). The making of modern Korea - Asias transformations. London: Routledge. Choe, S. and Chinmay Pattnaik (2007) "The Transformation of Korean Business Groups after the Asian Crisis," Journal of Contemporary Asia, 37, 2, pp. 232-55 Fields, K. J. (1995). Enterprise and the state in Korea and Taiwan. London: Cornell University Press. Hilton, R., Mark, A. and Kugler, J. “Economic Crisis and the Future of Oligarchy, Institutional Reform and Democratic Consolidation in Korea,” edited by Larry Diamond and Doh Chull Shin. Hoover Press, pp199-232 Kim, E.M. (1991) "The Industrial Organization and Growth of the Korean Chaebol: Integrating Development and Organizational Theories," in G. Hamilton (Ed.). Business Networks and Economic Development in East and Southeast Asia, Hong Kong: University of Hong Kong, pp. 272-99. Lee, S.J. (2002) "Financial Restructuring in Korea and Japan: Resolution of Non-performing Loans and Reorganization of financial Institutions," Journal of East Asian Studies, 2, 2, pp, 143-85. Lee, S.J. and T.J. Han (2006) "The Demise of Korea, Inc.: Paradigm Shift in Koreas Developmental State," Journal of Contemporary Asia. 36, 3, pp. 305-24. Pucik, V. and Lim, J. (2001) ‘Transforming human resource management in Korean chaebol: a case of Samsung’, Asia Pacific Business Review, special edition on Korea, pp.137-161. Rowley, C., Bae, J. and Sohn, T. (2001) ‘Introduction: capabilities to liabilities in Korean management’, Asia Pacific Business Review, special edition on Korea, pp.1-21 Shim, W. and Steers, R. (2001). The entrepreneurial basis of Korean enterprise: past accomplishments and future challenges, Asia Pacific Business Review, special edition on Korea, pp.22-4 Read More