Economic Performance of Group affiliated companies in Korea

Economic Performance of Group affiliated companies in Korea...

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' Acailewy of Managptiient lourna! 2000, Vol. 43. No. 3. 429-448. ECONOMIC PERFORMANCE OF GROUP-AFFILIATED COMPANIES IN KOREA: INTRAGROUP RESOURCE SHARING AND INTERNAL BUSINESS TRANSACTIONS SEA JIN CHANG Korea University JAEBUM HONG Korea Information Service This study examined the economic performance of the firms associated with Korean business groups by explicitly addressing groupwide resource sbaring and internal business transactions. The results show tbat group-affiliated firms benefit from group membership through sharing intangible and financial resources with otber member firms. Further, this study shows tbat various forms of internal business transactions, sucb as debt guarantee, equity investment, and internal trade, are extensively used for the purpose of cross-suhsidization. A business group is defined as a gathering of formally independent firms under the single com- mon administrative and financial control of one family. The importance of chaebols, the Korean business groups, needs no emphasis within the context of the Korean economy. The 30 largest chaebols accounted for 40 percent of Korea's total output as of 1996. Business groups such as Sam- sung, Hyundai, LG, and Daewoo have as many as 80 affiliated companies under their roofs (see Table 1). Those groups participate in a variety of indus- tries, including semiconductors, consumer elec- tronics, construction, shipbuilding, automobiles, trading, and financial services (Ungson, Steers. & Park, 1997). Business groups are not unique to Korea. They are a prevalent form of diversified corporation in many emerging economies, although their specific characteristics may vary from country to country (Gheniawat & Khanna. 1998; Granovetter, 1994). Leff (1978) interpreted this phenomenon as a re- sponse to market imperfections and argued that the business group serves three primary functions. First, it is an organizational structure for appropri- ating quasi rents, which accrue from access to scarce and imperfectly marketed inputs such as capital and information. Second, it offers an alter- We appreciate the comments and helpful suggestions from three anonymous reviewers and the guest editors as well as those from Mauro Guillen, Bruce Kogut. John Lafkas, Jeho Lee, Tom Pugel, and seminar participants at Korea University and New York University. Financial support from the Korea Research Foundation (KRF 98- O01-COO767) is gratefully acknowledged. native to portfolio diversification when markets for risk and uncertainty are absent. Third, it eliminates problems arising from bilateral monopoly or oli- gopoly through the use of vertical integration. Ghe- mawat and Khanna (1998) proposed similar views. They contended that business groups replace poorly performing or nonexistent economic insti- tutions (such as banks or external labor markets) that are taken for granted in developed countries.
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