Chaebols were the result of Korean government's emphasis on export-oriented economic policy. The new government in the 1960s under the leadership of President Park Chung Hee emphasized development and rapid growth of the South Korean economy. This policy encouraged the inflow of foreign capital to fund export oriented economic policy.
But as the global competition increased and barriers to entry for labor intensive products from the Third World heightened during the 1970s, the focus of the Korean economic policy was shifted towards heavy and chemical industries. This was the period when the Korean government intervened in the allocation of resources and channeled resources to specific industry sectors to boost the economic growth. This period also saw the birth of Korean chaebols.
As financial institutions (especially banks) were under quasi-government control, the government was able to have these banks loan huge amounts of money to these chaebols. Such a favorable government policy resulted in many businessmen starting industries which later morphed into conglomerates or chaebols.
A chaebol can be defined as a business group consisting of large companies which are owned and managed by family members or relatives, in many diversified business areas. A single family usually referred to as the founding family, controls the entire web of companies woven around the core company. It has been recorded that the founding family and the owner controls as much as 60 percent of the entire stake of these companies.
In the nineties the top five chaebols (Samsung, Hyundai, LG, Daewoo and SK) accounted for more than 50 percent of Korea's GDP and the top 30 chaebols for 75 percent of all economic activity in Korea. But this scenario has undergone a sea of change. The Asian financial crisis in the 1990s acted as a catalyst for the South Korean economic change. Following the crisis, the South Korean economy saw a rapid downsizing and reconstruction - not only of economic policies, but also the underlying philosophies of Korean chaebols.
Samsung and LG have become the pin-up companies of the post crisis South Korean economy. Both these companies carried out a massive down sizing, divested many business units that were not directly contributing to their core competence, invested heavily in research & development, and instilled a culture centered around building resonating brands. Also, the South Korean economy has allowed foreign direct investment in many industry sectors and thereby facilitated an open economy system that not only nurtures healthy competition but also fosters efficiency, productivity and profitability rather then mere size and sheer dominance on the economy by a handful of companies.
Finally, the immense pressure and stiff competition from China and India in many industries has further pushed the erstwhile Korean chaebols to become lean and mean. Many companies are following the Samsung-LG path. Building up enormous conglomerates with operations in literally every other related or unrelated industry is no more a preferred business option.
South Korean chaebols have indeed come a long way from being over sized companies with no clear business competence to being dominant players in many industries. It will not be a surprise if some of the South Korean companies even become brand leaders in some sectors.
