Paths to Globalization: Korean chaebol and Chinese SOEs

1
Paths to Globalization Korean chaebol and
Chinese SOEs

• James P. Johnson, Ph.D.
• Crummer Graduate School of Business
• Rollins College
• November 30, 2006

2
Overview

• How did South Korea and China succeed in
  developing their economies 1950-2005?
• What similarities and differences explain their
  growth trajectories?
• What challenges do they face as they seek to
  maintain or improve their ranking among the
  worlds major economies?
• Institutional theory Resource-based view of the
  firm

3
Cultural Values
PDI Power Distance index IDV Individualism MAS
Masculinity UAI Uncertainty Avoidance index LTO
long-Term Orientation
4
Cultural Values (2)

• Similarities
• Confucianism
• Particularism
• guanxi
• in-mek
• Strong central govt.

• Differences
• Uncertainty Avoidance
• Long-Term Orientation
• Masculinity
• Power Distance

5
South Koreas chaebol

• Family-owned conglomerates
• Led S. Koreas economic expansion in 1960s
• Horizontal integration
• Not permitted to own banks
• Govt.-controlled banks directed preferential
  loans
• Low-risk chaebol investments in capital-intensive
  industries such as petrochemicals, steel,
  shipbuilding, cars and semiconductors
• Technology transfer via alliances with foreign
  firms brought much-needed resources

6
South Koreas chaebol

• Institutional Theory (Oliver, 1991)
• when national institutions are weak or absent,
  conglomerates serve as their own intermediaries
• able to internalize transactions, thus reducing
  transaction costs
• Resource-Based View (Barney, 1991 Peteraf, 1993)
• a firm's strategy should be based on its unique
  resources and capabilities
• Sustainable competitive advantage is achieved by
  continuously developing existing resources and
  creating new resources and capabilities

7
Result

• GNP grew 8 per year
• US2.3 billion (1962)
• US204 billion (1989)
• GNP per capita
• US87 (1962)
• US4,830 (1989)
• Chaebol were financially independent and secure
• Producing for expanding domestic market
• By 2005, world leaders in mobile phones, TVs,
  flat-screen displays

8
South Korea -- 1997

• By mid-1990s, chaebols were swamped in debt
  much of it short-term
• Financial crisis exports to Asia dried up
• Banking system broke down as chaebols could not
  service their debts
• Restructuring of banking system
• Restructuring of the chaebols

9
Chaebols Reborn

• Some chaebols recognized the need to focus on
  greater value-added activities, such as design,
  brand-building and advertising.
• Lucky Goldstar ?LG
• Samsung Electronics dropped sub-brands (Plano,
  Tantus, Yepp)
• Samsung
• increased the number of its design staff in Seoul
• opened design centers overseas
• flattened the corporate hierarchy by encouraging
  designers to pitch ideas directly to top
  executives
• focused on become the world leader in mobile
  phone handsets

10
Results

• Samsung is a world leader in consumer electronics
  and mobile phones
• LG is the world leader in flat-panel displays
• Hyundai becoming a global leader in autos
• All are developing global reputations for design,
  functionality and quality

11
Chinas SOEs

• Dengs Reforms (1978)
• Socialism with Chinese characteristics
• Agricultural reforms
• Special Economic Zones
• Reallocation of state resources
• SOEs to be the engines of growth
• Produced almost 75 of Chinas GDP in 1975

12
Chinas National Industrial Output 1978-1999
Cooperatives in labor-intensive industries and
foreign invested companies (FIEs), not SOEs,
were the main drivers of Chinas economic
growth.
13
Reform of the SOEs

• By the late 1990s, SOEs were perceived to be
• Cumbersome
• Inflexible
• Inefficient
• Overmanned
• Need for reform was acknowledged but
  implementation was slow

14
Reform of the SOEs (2)

• 2002
• 50 of China's 159,000 SOEs had launched their
  enterprise reform
• 50 are thought to be losing money
• BUT
• 11 Chinese SOEs entered the Global Top 500 list
• Chinese private firms (Haier, Lenovo, Huawei,
  Baosteel) seem to be more competitive in global
  markets

15
Where Now?

• Barriers to reform in Korea
• Inflexible labor market volatile labor relations
• Legal environment deters FDI
• Xenophobia
• Barriers to reform in China
• State sector consumes 66 of resources
• Fear of widespread job losses in some industries
• Distrust of market institutions reliance on
  political connections
• Lack of skills in skills in innovation,
  marketing, branding, distribution, human
  resources

16
Conclusion

• Chinese firms need to leapfrog the incremental
  stages or organic growth via the acquisition of
  the strategic resources that they will need in
  order to compete in the 21st century
• Chinese firms need to use inward FDI to learn
  critical management skills from their foreign
  partners and to acquire key technologies