[KS] KSR 2004-09: _The Evolution of Large Corporations in Korea: A New

Stephen Epstein Stephen.Epstein at vuw.ac.nz
Sun Jun 20 08:36:27 EDT 2004

_The Evolution of Large Corporations in Korea: A New Institutional 
Economics Perspective of the Chaebol_, by Jwa Sung-hee. Cheltenham, 
UK: Edward Elgar. 256pp. (ISBN:  1-8406-4883-X).

reviewed by Matthew Shapiro
University of Southern California
mattheas at usc.edu

	The Evolution of Large Corporations in Korea was written to 
show why all current government intervention into the market, 
specifically that which affects the functioning of Korea's chaebol, 
or large corporations, must cease. As stated in the introductory 
chapter, "the role of the [Korean] government should be limited to 
defining the external economic and social environments, and should be 
confined to preserving the spontaneity and endogeneity of the market 
order." The text, thus, continues the neoliberal-developmental state 
debate of the World Bank, Alice Amsden, and other scholars of East 
Asian political economy.

	Author Sung-Hee Jwa focuses upon the chaebol for several 
reasons. First, the chaebol fit nicely into the 
"agent-organization-institutions" framework, which adheres to the 
tenets of new institutional economics. Such a framework attempts to 
show how government intervention into the market skews patterns of 
competition and disrupts the incentive structure. Such disturbances 
have greatly affected the chaebol, exemplified in the text with a 
pointed look at the failings of Samsung Motor Company. A second 
reason, however, that Jwa writes so fervently in favor of 
liberalization of the Korean market can be inferred through his 
affiliation with a self-stated neoliberal research institute, the 
Korea Economic Research Institute (KERI). Funded by the Federation of 
Korean Industries, it is in KERI's (and Jwa's) interest to produce 
research that supplements the existing Korea-related neoliberal 
literature. Note that key sources throughout the discussion, Inhak 
Hwang and Byoung Ki Lee, are similarly affiliated with KERI, hinting 
at a biased selection of evidence.

	Throughout the text, Jwa examines the interaction between the 
government's industrial policies and the chaebol's responses and 
shows that the chaebol have relied upon a 30-year policy pattern of 
entry barriers, support, and exit barriers. Jwa acknowledges that the 
study does not consider the effects of non-economic institutions upon 
the relationship. For the sake of parsimony and "positive" economics, 
therefore, cultural and political institutions have been excluded 
from the analysis.

	Examining industry concentration ratios (via the Herfindahl 
index) and market concentration ratios, Jwa shows that high levels of 
concentration by the chaebol are correlated with market inefficiency. 
Nonetheless, he goes on to say that chaebol ownership and management 
concentration - distinguishing features of Korea's large corporations 
- do not necessarily produce detrimental results, in relative terms. 
What is important, Jwa argues, is that the government establish an 
institutional framework to correct the distorted incentive structure 
which may be observed in the chaebol's behavior. In other words, let 
changes in corporate governance arise from a competitive and 
unconstrained market. Building upon these conclusions and applying 
the methods of new-institutional economics, Jwa concludes that 
chaebol formation, the particular managerial behavior of the chaebol, 
and excessive diversification of the chaebol resulted from a lack of 
credibility among Korea's property rights system. This lack of 
credibility caused chaebol owners to spread the risk of future losses 
by extensive diversification. Jwa details this phenomenon within the 
context of theoretical and empirical works by Coase, North, 
Williamson, and Eggertsson. To validate his hypothesis, Jwa also 
presents a regression of several nations. While this econometric 
model does partially account for the determinants of Korean firms' 
diversification behavior, it does not directly support the neoliberal 
call for termination of government intervention. A much more salient 
model, thus, would have analyzed the effects of government reforms 
upon competitiveness. Since Jwa does not venture into the realm of 
non-economic institutions, such a model is not possible in the 
context of the book.

	The book concludes with a call for a secure property rights 
system, transparency in corporate governance, and increased market 
competition in order to remedy the defects of the Korean economic 
system. What is lacking from this list of proposals, however, is a 
call for extensive scrutiny of the chaebol to determine their role in 
these defects. Jwa does mention the chaebol's moral hazard practices 
(dishonest behavior in situations in which behavior is not perfectly 
monitored), but does not attempt an explanation beyond the fact that 
they are the result of government intervention. What may be necessary 
is a more specific look at the "two stage decision-making model" 
presented earlier in the text, moving beyond a superficial look at 
how the chaebol receive economic allocations through non-market means 
(i.e., business and political relations) and how such allocations are 
invested. Such a detailed examination would require Jwa to look 
specifically at the function of moral hazard in the evolution of the 

	Jwa repeatedly asserts that the recent increase in 
anti-chaebol sentiment among the Korean populace is unwarranted and 
misplaced, but this view does not recognize that there is indeed 
widespread antipathy towards the government, largely due to an 
increasingly unconstrained media. Rather than frame the chaebol as a 
victim of interventionist government policies, Jwa should recognize 
that the public is well aware of the government's failings. 
Furthermore, had Jwa preferred to test empirically whether 
anti-chaebol sentiment is unwarranted, he could have examined Korea's 
Gini coefficient (a measure of income distribution) and unemployment 
rates. According to available data, income distribution has been 
relatively equal, but unemployment rates increased following the 
currency crisis. Given the large number of people negatively affected 
by the decreasing productivity of chaebol, increases in the 
unemployment rate should be correlated with increasing antipathy 
towards the chaebol. The reasons why Jwa avoids this key 
macroeconomic indicator are not clear.

	Although The Evolution of Large Corporations in Korea is a 
well-packaged and thorough presentation of chaebol development within 
the context of neo-liberal precepts, the discussion would have been 
much more effective if it had, within the parameters of 
new-institutional economics, brought qualitative evidence for 
economic reforms into play. Anecdotes, interviews, and detailed 
histories of the chaebol's evolution are much more appropriate for 
such an elaborate attempt to explain the evolution of these 
conglomerates. Similarly, analyses of the roles of Korean culture and 
Confucianism should have been introduced. No matter the success of 
neo-liberal reforms, testing the effect of personal connections and 
human relationships on business dealings in Korea will remain 

Shapiro, Matthew 2004
_The Evolution of Large Corporations in Korea: A New Institutional 
Economics Perspective of the Chaebol_, byJwa Sung-hee (2002)
_Korean Studies Review_ 2004, no. 09
Electronic file: http://koreaweb.ws/ks/ksr/ksr04-09.htm
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