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The Peninsula

Where do Chaebols fit in Park Geun-hye’s “Creative Economy”?

Published February 5, 2014
Category: South Korea

By Kristen Lee

During the 1960’s under President Park Chung-hee’s economic stewardship, the founders of today’s chaebol facilitated South Korea’s recovery after the war. These huge family-led business conglomerates became the foundation of the Korean economy and an integral part of Korea’s export-oriented growth. This rapid economic development, known as the “Miracle on the Han River,” transformed the war-ravaged South into an influential global power. Today, the country is an economic model for many developing countries around the world. In 2012, South Korea was Asia’s fourth largest economy with a net operating profit of KRW 141.1 trillion. The country’s top ten chaebol were responsible for about 43.2% (KRW 61.2 trillion) of that total. The slowdown of the Korean economy in 2012, followed by less than predicted growth in 2013, caused some economists and politicians to question Korea’s structural foundations, especially the country’s economic reliance on the chaebol.

Elected in 2012, President Park Geun-hye promised to rebalance the country’s economy by redistributing wealth through “economic democratization.” Unlike her presidential rival, Moon Jae-in, who threatened to dismantle the family-led shareholding structures of the conglomerates, Park promised to turn the conglomerates into more effective and efficient economic players. In July, she stated that one of her goals was to cut the chaebol’s negative aspects, such as their abuse of power and corruption, while retaining their positive qualities; however, South Korea’s sluggish economic growth in 2012 prompted Park to prioritize economic recovery over chaebol regulation.

As large business conglomerates, the chaebol cover many different sectors, making them dependable drivers of Korea’s export-led economic growth. For example, the subsidiaries of Samsung Group, South Korea’s largest chaebol, include the electronic, heavy machinery, insurance, and hospitality sectors. If one industry faces a decline, the negative effects can be buffered by another subsidiary’s growth in a different sector. The vast scales of the chaebol also allow them to achieve economies of scale, contributing to the country’s status as one of the world’s leading manufacturers. This puts Korea in direct competition with Japan, particularly in the electronic, machinery, and automotive markets. When Japan devalued the yen in 2013, Park sought to initiate currency measures to limit the won’s appreciation in an effort to counter declining global demand for Korean products.

The growing concern about Korea’s economic future heightened earlier this month when Samsung reported a decline in smartphone shipments at the end of 2013. Samsung faced stiff competition from Apple’s iPhone and a saturated smartphone market. At the beginning of the year, Korean security firms lowered last year’s projections for Samsung’s 2014 operating profit 7.8% from KRW 41 trillion to KRW 37.8 trillion. With Samsung Group responsible for 21.3% of the country’s total operating profit (KRW 30.2 trillion) in 2012 and Samsung Electronics accountable for 13.1% of the total alone, the lowered projections provide warning indicators about Korea’s future economic growth.

South Korea’s reliance on the chaebol highlights problems not only with the conglomerates themselves, but the country’s economic organization. Although the chaebol drive most of Korea’s current research and development, studies from the University of Chicago and Stanford University indicate that the conglomerate organizational structure stifles innovation because of inertia. While the chaebol have the resources to increase investment in research and development, this is a counterpoint to Park’s economic vision of creating a “creative economy” ecosystem. As part of this initiative, Park took an active role in pursuing foreign markets and expertise through her recent diplomatic trips to India and Switzerland this month and last November to Europe. She urged South Korea’s small and medium enterprises (SMEs) to expand into foreign markets to close the gap between export firms.

Although President Park promised government support for such ventures, Korea’s export-oriented economy puts SMEs at a structural disadvantage. Overshadowed by the chaebol, banks often prioritize loans for large businesses over SMEs, keeping smaller businesses from expanding domestically and overseas. However, the focus of SMEs on Korean markets may not be a bad thing as domestic investment and consumption slowed down in 2013.

Either way, the challenges in expansion faced by SMEs have a wider impact on the Korean economy. As Dr. Lee Il Houng from the Korea Institute of Economic Policy (KIEP) pointed out in a talk at KEI, SMEs’ difficulties in acquiring capital prevents them from hiring new employees. With Korea’s growing unemployment rate, especially among young adults, SMEs represent a significant portion of unrealized job creation potential. In 2012, the chaebol employed only about 6% of Korea’s total labor force. SMEs are willing to expand, but they do not have access to the necessary capital. In addition, smaller enterprises are more willing to make risky decisions in order to survive, which is a quality that stimulates innovation in contrast to the inertia associated with large conglomerations.

Even with recent concerns about Samsung and calls to decrease Korea’s dependence on a select few companies, the chaebol—and their products—have remained symbols of national pride. It will be interesting to see how Park’s creative economy vision will interact with Korea’s existing economic structure and whether the chaebol will transform during her presidency. Eventually South Korea will have to address its economic overreliance on the chaebol, for as President Park has noted, “Growth led by a few big firms and the government is bound to be limited.” How Korea addresses the dichotomy between its reliance on the chaebol and the needs of SMEs will play a significant role in the process of shifting Korea’s economy towards greater innovation.

Kristen Lee is currently an intern for the Korea Economic Institute of America and has a BA in International Relations and East Asia Studies from Boston University. The views expressed here are the authors alone.

Photo from v15ben’s photostream on flickr Creative Commons.

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