Korea’s economy is led by a handful of large business groups, most of them being family-controlled chaebol. Their influence is growing, as evidenced by an increase in their contribution to the nation’s gross domestic product. The 10 largest business groups, on an asset basis, accounted for 75.6 percent of GDP last year, up 20.6 percentage points from 2008.
Another measure of their dominance in the nation’s economy is their market capitalization. The combined market value of the companies under their wings is half the amount of all listed companies in the nation. Among them are such honors students as Samsung Electronics, Hyundai Motor and Hyundai Heavy Industries, which have become global leaders in their respective business areas.
Few would deny the crucial role they have played in catapulting Korea from rags to riches in a short period of time. But it will do much more harm than good if the nation’s economic power remains concentrated in the hands of a select few. As warned by many, Korea will dig its own grave if it fails to change course and help small and medium-size enterprises to grow into big businesses.
Among those warning against chaebol domination are three Koreans with distinguished credentials, who have come out this week to say the Korean economy will face a grave risk of crumbling if it continues to remain under the sway of a small number of business groups. They are Hwang Chang-gyu, Ahn Cheol-soo and Chang Ha-joon.
Given his background, Hwang may be least expected to make such an assertion. Hwang, who climbed up the corporate ladder to become a Samsung Electronics president and chief technology officer, now heads a team working on the government’s strategy of promoting research and development.
Better known for “Hwang’s Law” of packing twice as much memory into a computer chip each year, he draws public attention to Finland’s excess reliance on Nokia, which accounts for a quarter of Finnish exports. As he notes, the Finnish economy itself is being shaken, as Nokia’s hand-held device sales have plummeted in the global markets. Now Finland is being driven to pursue “non-Nokia” growth, as reported by Bloomberg.
Hwang says official assistance must be channeled into small and medium-sized enterprises and that risk-taking entrepreneurship is what big Korean businesses need now if they wish to avoid following the footsteps of Nokia, which has failed to meet Apple’s smartphone challenge.
Chang Ha-joon, a Cambridge economist and author of “23 Things They Don’t Tell You About Capitalism,” agrees with Hwang when he calls on Korean big businesses to arm themselves again with risk-taking entrepreneurship, as they previously did “to create something out of nothing.” He rightly accuses large Korean corporations of focusing on paying out dividends to serve the interests of large shareholders rather than spending on research and development and productivity promotion.
He says productivity must be raised for Korea’s entire manufacturing industry. As he notes, Korea’s manufacturing industry is far behind those of advanced nations when it comes to productivity, though it may excel in chip making, auto assembly, shipbuilding and some other sectors.
The most critical of the chaebol-driven economy among the three is Ahn Cheol-soo, dean of the Graduate School of Convergence Science and Technology at Seoul National University, who turned himself from medical doctor to developer of anti-computer virus programs and to university professor. He accuses Samsung, LG and other Korean conglomerates of luring independent ventures into their own “menageries” by contracting them as their exclusive suppliers.
As he says, this practice is smothering investments by venture capitalists. Few invest in ventures if they find it extremely difficult to recoup their investments promptly. But conglomerates will become more innovative and resilient if they take over ventures, instead of keeping them as their exclusive suppliers, which will also boost investments by venture capitalists.
Summing up, Hwang, Ahn and Chang propose that the nation establish a new industrial policy in favor of small and medium-size enterprises and free them from the grips of conglomerates. They also recommend conglomerates raise productivity through their own research and development and, if necessary, acquire ventures and other technology-intensive corporations. These recommendations are undoubtedly crucial advice that economic policymakers and conglomerates will have to heed.
