Unleash the ‘Animal Spirits’ of Korea’s Small & Medium Enterprises


The Financial Times had an important story over the weekend decrying the emergence of a two-tiered economy in Korea, and it is getting some play in Korea. Koreans are loathe to admit this (don’t criticize the team to foreigners), but any outsider can see this almost immediately here, and just about every non-Korean social scientist I know in-country agrees that this is a huge problem.

By two-tiered I mean the enormous concentration of market power and political access concentrated in the largest 200 hundred or so Korean companies, while small and medium enterprises (SMEs) struggle to find credit, and Korean households pile up debt (now at 150% of income). Non-Koreans will recognize such brands as Samsung, Hyundai, or LG, but others include widely visible names in Korea like SK or Posco. Like Japan’s infamous keiretsu, Korean mega-companies often sprawl into many different sectors, building cross-sectoral conglomerates (the Korean word is chaebol). SK, e.g., owns a telecom service, gas station chain, and real estate distributor. The chaebol have become so massive, that they enjoy many distinctly unearned, oligopolistic benefits of size.

1. They are ‘too big to fail.’ Chaebol in trouble can usually go to the government for help, as many did in the Asian Financial Crisis (AFC). In the 1997 IMF bailout of Korea, the big IMF condition was breaking the chaebol into smaller, more competitive, less openly oligopolistic firms. The chaebol have fought this ever since, often using bribery and political connections, to re-scale the commanding heights. Even Korea’s ‘reformist’ administrations – Kim Dae Jung and Roh Moo Hyun (1997-2007) – got tarred with scandal for taking bags of cash from Korea’s biggest companies. By contrast, Korea’s small and medium enterprises have no such informal political safety net. Anyone walking down the same street in Korea for more than a year or two can see the dramatic merry-go-round of small businesses here. Korea is filled with mom-and-pop stores just one or two bad months away from bankruptcy.

2. Size means political influence. It should surprise absolutely no one that the sheer bulk of the chaebol gives them inordinate, collusive political influence. The most obvious mark of this is the pardons extended to top chaebol officials convicted of a crime. More important is the informal pressure of the government on Korean banks to loan to the biggest firms at generous rates. The not only encourages recklessness at the top, it squeezes Korea’s SME’s at the bottom. Perhaps most scandalous of all, the chaebol were able to terrify the Korean state and taxpayer into picking up the bill of the Korean AFC. The Korean AFC was not caused by reckless sovereign or household borrowing. It was the chaebol, who then, mirabile dictu, dumped their debt onto the state, which ultimately forced the government to approach the IMF. Koreans traditionally blame the IMF for the crisis, but it was in fact, because the Korean state, terrified of the consequences, ‘generously’ nationalized the debt of Korea’s corporate sector. In truth, I suspect the Korean government was bullied by the wealthiest corporate heads in 1997 talking about what will happen to Korea if the government doesn’t give them the money immediately – a shakedown.

3. Cross-sectoral holdings allow a firm to leverage success in one sector for success in another. Even within a sector, Korea is often oligopolistic. The telecom industry is dominated by just two providers (SK and KT – a duopoly), resulting in exorbitantly expensive IT/long distance rates. These sorts of oligopolistic effects are well-known. Yet worse is the regular invasion of wholly unrelated sectors, in which the market power of one sector is used to push into other. The best know example of this to westerners is Microsoft. For more than a decade, MS used its power in operating systems (Windows) and office software (MS Office) as leverage to crush rivals in other areas where MS was weaker – browsers (Netscape), instant messaging (ICQ), media players (WinAmp), etc. In Korea, it is vastly more predatory and oligopolistic, as the chaebol often expand into areas wildly unconnected to each other, a practice that can only be explained by extraordinarily weak anti-trust enforcement, regulatory ‘looking away,’ and the political connections to give an unstated veneer of approval. Even Adam Smith rejected excessive concentration (monopolies, duopolies, oligopolies), and I can think of not credible market explanation whereby SK is the country’s biggest telco, real estate holder and gas station chain simultaneously. These outcomes are so blatantly political and ridiculous, that I am amazed Korea sees so little populism.

But corruption, scale, and political influence can’t be the only reason. Korea could elect genuine progressives to push through deconcentration. Even the Reagan administration broke up AT&T, right? And here is perhaps the most insidious element of the chaebol – they have convinced Koreans, a) that they are the flag-bearer toward the rest of the world, and b) that if they went through bankruptcy that Korea’s economy would implode.

a) Corporatized nationalism. Korea is a small place, bullied often by its neighbors, with a language no one learns, a culture that’s not easily distinguishable from China or Japan, and a nuclear lunatic running half the country. But as anyone living here for about 5 minutes can tell you, they are intensely nationalistic and absolutely determined that the rest of the world know who they are. That is why Yuna Kim is a legend here – not because she is a good skater, but because she brings the world’s attention to Korea. The chaebol have masterfully exploited that absolutely desperate craving for attention.

When the EU FTA was up for debate, the government ran commercials on TV showing smiling white people in European locales using Korean goods – helpfully pointed out as from Samsung, LG, etc. In trains, airports, bus terminals, on the government TV networks, etc, one sees an endless stream of government promotional commercials and videos showing dynamic-looking Korean businessmen talking up this or that Korean export product to someone who looks like a foreigner (i.e., a white guy in a suit). The Korean news gives you a regular diet of chaebol agit-prop, as the ups-and-downs of Samsung, SK, LG, Kia, etc are reported religiously. And the dream job of just about every Korean student I’ve ever had is to be a jet-setting corporate executive for Samsung. Koreans have routed their nationalism through their MNCs, and the chaebol take advantage of this to blackmail the state when necessary – particularly soft loans from the government.

b) Korea is Korea, Inc. is chaebol-land. Almost as bad is the widespread belief in Korea that if the chaebol are threatened, then somehow Korea will collapse. I see this all the time in conversations here. Despite all the above arguments for anti-trust action, my interlocutors inevitably retrench to fear – what would Korea look like if Posco went bankrupt? That Korean demand for the products Posco used to make would persist and therefore encourage new market entrants seems to arcane. That start-ups are often more efficient and more innovative (Facebook vs Microsoft) suggests even more unnerving change. That shaking up markets usually reduces consumer prices by forcing established winners to work harder is irrelevant: Koreans are ready to pay higher prices at home if that it what is required for Korea, Inc. to carry the Korean flag abroad. In the end, Korea must have national champions – not because they are champions, but because they are national. If Korea is a divided country of minor global importance (ie, no one cares about us politically), then we must have, economically, megacompanies to broadcast our national awesomeness. In the end, if Korea must be Korea, Inc. in order to get globally noticed, then its ok to be chaebol-land.

If this is depressing, there are obvious answers that do not require the government to forcibly to delimit some areas for the SMEs and some for chaebol, nor to beg the chaebol to be nice. And these would bring Korea into greater compliance with OECD norms and best practices on corporate governance:

1. Halt easy credit for the chaebol, while creating a pool of such capital for small business, modeled on the US Small Business Administration. The Korean SME sector is the most dynamic economic force in the country, taking huge risks to build neighborhood-enriching corner shops. This is far gutsier than mega-companies with lots of government buddies producing variants on the same product every year. The Korean Jeff Bezos or Mark Zuckerberg is out there, but I guarantee he is not a mid-level salary-man at Samsung. The government needs to unleash the ‘animal spirits’ of Koreans; access to bank credit on an equal playing field is the obvious place to start.

2. Enforce anti-trust law. Oligopolies create so many negative effects that even the conservative Reagan administration broke up AT&T and achieved a 70% reduction in long-distance rates. There is no possible economic justification for consumer-punishing cross-sectoral conglomerates. Western regulators would long ago have forced chaebol spin-offs. More firms means more competition, more innovation, and lower prices.

3. Stop sterilizing the won’s appreciation. ‘Fine-tuning’ is a laughable euphemism for forcing depreciation at the behest of chaebol exporters. It creates obvious costs – 5000 won for an import beer at HomePlus – for consumers. Korea’s inflation rate is now 4.2%; an easy way to return purchasing power to Korean consumers would be for the currency to rise.

19 thoughts on “Unleash the ‘Animal Spirits’ of Korea’s Small & Medium Enterprises

  1. Excellent analysis, love your blog. One thing though. From the 70s onwards, the Korean government dictated chaebols’ business strategies. The government did encourage banks to give generous loans, but they also told the chaebols which markets to enter, and when they didn’t want to, forced them to, even if it was risky or did not make business sense for good of the country. Some of those were successful, like POSCO, and some were not, like Samsung Motors. Imho all the accrued debt at the AFC was partly the governments fault too.


    • Thanks for the compliment. How nice of you to say, especially when flaming is so much more common. Are you located in Korea?

      Your points are well taken. You are right that the ROKG pushed firms into all sorts of sectors. So to a certain extent, it had the AFC coming. Good point.

      It might interest you to know that I submitted this to the Chosun Ilbo as an op-ed, but they rejected it. I wonder if it cut to close to home.

      Thanks for reading.


      • I live in rainy Britain. I’m not surprised they rejected it to be honest, seeing how many articles there are on how well the chaebols are doing in the business section. ^^


  2. I agree with items #1 and #2 of your description (“Too Big to Fail” and “Size Means Influence”). Korea’s dirigiste development model invited (and continues to invite) rent-seeking at every turn.

    I am, however, skeptical of some of the prescriptions in this piece. The Korean government has, at various times, tried numerous financial support programs for SMEs and yet, the sector continues to flounder. Could it be that the government – in addition to crowding out any nascent venture capital markets – has been subsidizing uncompetitive business models?

    Moreover, monopolies/oligopolies tend to be unsustainable in the absence of state protection. Yes, AT&T was broken up by the government, but it was also created by the state in the first place. I worry that anti-trust policy is all too often used by uncompetitive firms to attack their rivals (see: AMD vs. Intel). Ideally, opening up Korea’s markets to maximum global competition and minimizing rent-seeking (by limiting the power of the state to bestow favors upon firms) may be more effective in leveling the playing field.

    Incidentally, I put together a paper on the subject of SMEs a couple years ago which touches on many of the same themes as this post. If nothing else, you might find the bibliography to be of interest. You can access it here.

    Thanks for another thought-provoking post. I always enjoy reading your site.


    • Thank you for the compliment. I appreciate the readership.

      I looked at your paper. I would like to read a proper copy. Has it been published? Can you please email me copy in PDF: robertkelly260@hotmail.com. Are you a grad student or something?

      On your comments, where is the Korean version of the Small Business Adminisration? And that can only work if the chaebol don’t get special favors anymore. As long as soft-loans and government buddies abound for mondo-oligopolists like Samsung, SMEs here will never get off the ground.

      It might interest you to know that I submitted this to the Chosun Ilbo as an op-ed, but they rejected it. I wonder if it cut to close to home.


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  4. Hello; this was extremely interesting and, I thought, dead on as someone who has lived in Korea for 5 years. I would add one more point though: the government should also officially crack-down on outdated business practices such as “Kwaligeom”. Kwaligeom is a practice where a failed business will sit on a property unless someone who wants to move in will “buy them out”.

    This is a huge impediment to people with a few thousand dollars and a dream. Mind you, this buy-out money isn’t for a business that’s already in place. It literally goes to businesses that have already failed but are just sitting on the property. Retail real estate in Seoul is even more precious than in places like New York that have fairly clear-cut business and residential districts. It’s all very muddled here, and having a failed business charge upwards of $20,000 on top of the rental deposit can be ludicrous for entrepreneurs whose parents aren’t fairly well-off.


    • Thanks for reading. I am glad you liked it.

      I don’t know the practice you describe, but it sounds like it stunts a secondary-market in property. As you say, that might open space for SMEs and allow greater fluidity.


  5. Do you believe that the dictates of Korean culture with respect to serving those interests which are senior to one’s own, render such a breakup of larger companies either impossible to execute politically or ineffectual in rendering such a breakup useful? My thought is that even if a breakup was forced, the higher priority of interpersonal subservience to one’s seniors as well as the well-entrenched grey- and black-market operation of bribes of ‘protection money’ would mean that government would be symbolic at best. An article recently on thugs hired to forcefully remove vendors in Insadong comes to mind, which can be read here: http://blog.jinbo.net/CINA/archive/20110530
    A more ‘official’ article was in either the LA Times or the Washington Post, but I was unable to turn it up. Thanks for the insights – it helps to be reminded that one’s personal reactions to absurdities such as this are indeed founded on a more basic principle that mere culture ethnocentrism.


    • I try to avoid ‘culture’ as an explanation for too much. It is easy to slip into stereotyping or racism; I agree with your concern about ethnocentrism. I think chaebol overconcentration is primarily an institutional legacy, now deeply entrenched, of Park Chung Hee’s importation of Japan’s development model. The early choices of the 60s and 70s are now locked-in, and so it is very hard to unwind.


      • I think you nailed it on the head right here. Park’s five-year plans, the importation of the Japanese way, the ossification of the institutions… now it’s tough to undo. It seems like a lot of Koreans I know sense there is something wrong yet few can articulate the need to de-chaebolize. Rather, every kid I know wants to put himself into the system as a company man rather than be on the vanguard of those who find employment in a small/medium firm just as good if not better than in a chaebol. I know several Koreans with perfectly good careers who think they are failures because they don’t work for Samsung. Sad. I’m not a failure because I don’t work for Proctor and Gamble or Unilever. In fact, I think I’m lucky not to.


      • Well said. I see that too. Working as a jet-setting executive for Samsung has become the end-all-be-all of far too many Korean college students.

        This gets to the point I was trying to make about how the chaebol exploit Korean nationalism and insecurity. Koreans are so desperate for global ‘status’ that they’ll put up with almost any misbehavior from their conglomerates, because they believe that those conglomerates are the reason people in the world know what Korea is. Ie, Koreans indentify Samsung with Korea so much, that Samsung can do anything it wants and Koreans will put up with it. This opens huge room for corruption and influence-buying, and it is the reason why the Korean state agreed to bail-out the chaebol in 1997, which then created the crisis.


  6. Found this blog about two months ago…been reading articles here and there since then…

    I always find the entries to be a fascinating read, even if outside my normal area.. (CS major that moved into computational linguistics kk). When I first came to Korea, I was baffled to see gas stations and telecom outlets with the same branding… (among other things). A (Korean) friend of mine suggested that if I wanted to stay longer to further acquire the language, opening a small business could be a means to that end, but I reached a similar conclusion when I looked into it more…. (i.e., not such a friendly environment for it…)


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