Paper Total - Balloga, 1 Abram Balloga ECON 4450 Term Paper...

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Balloga, 1 Abram Balloga ECON 4450 Term Paper 5/5/2009 American National Champions In pre-competitive research, Korea has in place such institutions as government research institutes in information technology . With regard the size and distribution of firms the policy in Korea is for promoting national champions, where they receive the comparative advantage by pre-competitive industrial policy . It is important to continually upgrade industries to fentd off competition from low wage economies . Here it is necessary to accumulate human capital and establish brand names linked to high value-added industry. In 1997 the thriving newly industrialized economies (NIEs) of southeast Asia fell into an economic crisis, for many it was the most severe in the past 50 years. 1 In Korea, this recession may be attributed to a liquidity crisis resulting from massive amounts of debt accumulated from its national champion firms heavily investing in industrial upgrading in sectors like semiconductor and automobile production . Low returns and constant borrowing led to unusually high debt to equity ratios in chaebol firms like Samsung and Hyundai, making them extremely vulnerable in the event of recall of those debts. 2 In light of this situation, Seung-Hyun Lee studied the effects of industrial policy on various firms as well as the efficacy of real options investments in chaebol firms versus smaller companies . His research supports the notion that “real options take on their greatest value during periods of abnormally high uncertainty faced by firms, since these constitute the circumstances under which managers require the most 1 Lee, Seung-Hyun. pp 2 2 Lee, Seung-Hyun. pp2
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Balloga, 2 flexibility.” 3 Real options are investments which offer firms ‘outs’ or a variety of directions management can pursue when presented with obstacles . Lee points out six different types of real options investments made by Korean firms prior to the 1997 crisis – capital, R&D and patents, international sales base, human capital, firm and product reputation, and network relationships . R&D was found to be the most effective of these strategies for providing flexibility in the event of turbulent economic times such as the recession – “Investment in R&D can ultimately result in improvements in existing products, new products in line with emerging demand, reduction in costs or increase in quality.” 4 This type of investment lends itself well to industrial upgrading that is necessary for product innovation and increasing firm flexibility in the event of sudden economic changes . Interestingly there was a negative correlation between the size of firms and the efficacy of their real options investments, with smaller firms having the advantage of flexibility over large firms in adapting to uncertain economic conditions. 5
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This note was uploaded on 06/25/2009 for the course ECON 4450 taught by Professor Wan during the Spring '09 term at Cornell University (Engineering School).

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Paper Total - Balloga, 1 Abram Balloga ECON 4450 Term Paper...

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