15 december 2002

Confucianism and Chaebol

Introduction

Throughout the eighties’ and nineties’ of the previous century, I eagerly followed the Korean chaebol. On the one hand I criticized them when they disappointed me, on the other hand I was proud of them when they did well. Nevertheless, they made an impression on me. Representing modern Korea, these national heroes are like favorite sons burdened with the duty to bring a secure future for all Korean citizens (or: state-directed business planning [1]. Quite literally “sons” actually, since boys in Korea traditionally have a more advantaged role in family and society as a whole. Comparing to my own situation, my whole Korean family closely watches my performance: giving me and simultaneously reminding me of the responsibilities that I have.
During my stay in Korea I study the basics of Korean culture everyday. Inevitably, I find out that the roots of Korea are closely intertwined with the Chinese philosophy Confucianism.

What is the secret of these little empires – founded after the Korean War, but finally growing bigger somewhere in the 70s’ after the “Big Push” – who helped transform Korea into a Top-15 global economy in less than 20 years? After the devastating Korean War, South Korea was virtually bankrupt – some even say it was the poorest country in Asia. The giant leap under president Park was impressive, and much is owed to the chaebol of that time. But did the powerful clans really do it themselves alone?
In this research paper I will answer the question: What is the influence of Confucianism on Korean chaebol, and what will their future look like in the 21st century?

The founding of Chaebol
The chaebol owe their establishment to patrons of landed families like LG’s Ku and Samsung’s Yi
[2]. However, they owe their survival and development to the first presidents of the Republic of Korea (ROK).
In order to create a buffer state between North Korea and Japan (Cumings: “the US was willing to indulge certain countries, especially places like Korea sitting on the fault lines of the Cold War”), the US heavily supported the infant Korean economy after the Korean War. The chaebol were the first to benefit from the huge amounts of cash the US poured into Korea in the 1950s and 1960s. And, in return for the lucrative favors granted by president Rhee, chaebol chairmen supported the ruling party – to be charged of it later (for example Yi Pyeong-cheol of Samsung). Nevertheless, the per capita GDP (Gross Domestic Product) grew from a mere US $87 in 1962 to US $ 10,543 in 1996 [3]. Especially president Park (and to a lesser extent Rhee) is known for his “guided capitalism” [4].
After having conquered the local market, the chaebol now received the privilege to export overseas, illustrated by the Export Day established by president Park. During his rule, there was much emphasis on comparing a company with a family. Quite literally, the Saemaul Movement had as its slogan “Treat employees like family”. As the Han and Song China emperors were attracted to Confucianism, president Park and chaebol chairmen were also, because it would depict them as a “Godfather” (or, to help them centralize power as happened during the transfer of power from Tang to Song China [5]).

Chaebol characteristics
Korean chaebol and Japanese zaibatsu (now succeeded by modern keiretsu) share the same Chinese character. Chaebol means: jae (finance) + bol (clique) = wealth family. However, the main distinctions are that the founding families chaebol even now still are in control (whereas keiretsu are run by professional executives) and that chaebol are prevented from owning affiliate banks
[6].
During the 1970s, the state owned all banks in Korea who in turn were very soft with regard to lending money towards their favorite sons: the chaebol. A very remarkable fact is that the interest rate during this period was minus 6.7%… Additionally, there literally was a close relationship (inter-marriage) between (top) chaebol officers and (top) government officials. Thus Cumings calls the chaebol groups the “parastate”. These marriage practices can be compared to those during Koryeo dynasty.

The problems of these chaebols were that – before 1997 – they borrowed too much money (to invest in too many diverse businesses), since the lending circumstances were too lenient and the chaebol made no profit with this overcapacity (see figure).
As a matter of fact, in 1996 the profit margin of Samsung and Hyundai (the two biggest chaebol then) was only around 3%. All other chaebol that were smaller (Hanbo and Jinro for example) had even lower profit margins: 1.7-1.9 % [7]. They both collapsed in 1997. Additionally, their debt was between 50-100% of their total assets.
So now what exactly is the (either positive or negative) influence of Confucianism on the chaebol?

Confucianism in corporate Korea
There is a strong influence of Confucianism throughout Korea. After all, it was the state religion for more than 500 years. And, according to Mr. Fukayama (Nobel Laureate 1995), who said it is safe to assume that: "Asian cultural values are more hospitable to paternalistic authoritarianism
[8]" – a typical Confucian trait. In other words, family values can easily become nepotism; consensus could be turned into wheel greasing and conservatism can lead to an inability to innovate [9].
Confucianism (and nationalism!) also helped to motivate the labor force to sacrifice their personal lives in order to work hard for the countries’ welfare. Now I will shortly lay out the characteristics of Confucianism in corporate Korea.
Like in the military, there is a strong hierarchy, top-down decision-making and emphasis on loyalty. To be specific, I mean loyalty towards the employer/network. The network represents the “family”, the inner circle.
On the other hand, to say it bluntly: since managers generally are promoted according to age rather than competence, even dim-witted managers are able to make as much money as their more qualified colleagues (who share the same age). So then why bother excelling in your job when it does not make a difference anyway? One could compare it with the system of the former Soviet Union. Even though it is safe, it is not very motivating at all (especially for the ambitious employee who could generate new business from which the whole company can profit). Nowadays this means that more ambitious students rather work for foreign companies who do appreciate their input and reward them accordingly – which of course has consequences for Korea’s general competitiveness.
But even though there are strong family values – and alleged corruption, Korea’s low Gini coefficient (the lower the coefficient, the lower the income inequality) of 0.34-0.38 from 1965-1990 (global average around 0.50) showed a “relatively egalitarian distribution of income” [10] – which is rare for countries that are in their early industrialization.

Chaebol in the 21st century
Still, Korea’s future looks bright and people have reason to be optimistic. How come? To remain globally competitive, Korea is investing heavily in Research and Development (R&D). Indeed, many PhDs from the US and other western countries are doing research for big chaebol.
Additionally, due to the fact that captains of industry and policymakers together in deliberation councils can openly discuss investments in new innovative businesses (in contrast with, for example: The Netherlands and Germany), chaebol can gain first mover advantage in new and strategic areas with the help of the government.

However, a thing that is bound to change in Korean bussiness life is the (until now poor) treatment of shareholders. If Samsung Electronics could convince its investors of the “goodwill” of its corporate governance, it would be able to attract much more capital from the stock market, invest in new strategic markets and truly become bigger than rival Sony from Japan
[11].
And, with “teamwork” – now a popular term in business schools worldwide – it can be easily functional for the Korean chaebol (since they have a Confucian background): as long as it is changed. Since the distinction in Japan, Korea and China is clearly made between “Uchi and Soto” (within the group, outside the group – or “Ren chi Ren” in Chinese: people eat people [12]), and globalization makes the marketplace smaller; now Korea only needs to make the group of insiders (Casa Nostra?!) bigger and the group of outsiders smaller…

Conclusion
Even though in Korea they are omnipresent, in global business most of the chaebol still are insignificant. And: despite the domestic and overseas success of past (Daewoo) and contemporary (Samsung, LG, Hyundai) chaebol, some disapprove of the powerful grip of some founding families on the management board (leading to the collapse of several top-20 chaebol in 1997). How will this develop in the future?
The Confucian influence on Korean chaebol is still strong. Nonetheless, Korea (under pressure from the IMF) was able to close down hopeless banks – which lent too much bad loans to chaebol – swiftly after the 1997 Asian Crisis. This impressive act (in the financial world people hope this is soon to be followed by Japan!) boosted investors’ confidence in Korea. It also symbolically buried Korea’s love affair between the state-owned banks and corporate chaebol – probably even to get away from Confucian ideals when they could endanger Korea’s future as a whole?

In order to continue to be aggressive in the future (and finally be able to compete with foreign companies in the domestic auto industry, for example), the pursuit of R&D should balance out the lack of incentive and downsides of life-long employment of the Korean Confucian-corporate system. Also, Korean chaebol should get ready to meet the real life out there: in other words embrace globalization. Competition will make them stronger and better in the end. Finally: “collective enhancement is only feasible if the individuals forming the collective enhance themselves as well”
[13].
References
[1] Rozman 2002
[2] Cumings 1997
[3] Financial Times
[4] MERIT research memorandum 1994
[5] de Bary 1988
[6] The Economist Intelligence Unit (EIU) Country Profile 2001
[7] Chosun Ilbo 1997, LG Economic Research Institute
[8] Fukuyama 98
[9] Financial Times
[10] Campos, Root 1996
[11] Far Eastern Economic Review
[12] EAMSA conference 2000 INSEAD Singapore
[13] EAMSA conference 200 INSEAD Singapore

Bibliography

Books

de Bary, Wm. 1988, East Asian Civilizations, Harvard University Press, Cambridge
Cumings, B. 1997, Korea’s Place in the Sun, W.W. Norton & company, New York London

Publications
  • Campos J.E., Root H.L. 1996, The Key to the Asian Miracle, The Brookings institution
  • Corsetti G., Pesenti P. & Roubini N. 1998, What caused the Asian currency and financial crisis? New York University, CEPR and NBER
  • EIU Country Profile South Korea The Economist Intelligence Unit Limited 2001
  • Hassink, R. 1994, South Korea: Economic miracle by policy miracle?, Maastricht Economic Research Institute on Innovation and Technology (MERIT) Research Memorandum South Korea
  • Richter F-J., Kidd J.B. & Li, X. 2000, Asian Management, A Reconceptualization, EAMSA conference 2000, INSEAD Singapore
  • Rozman, G. 2002, Decentralization in East Asia: A reassessment of its background and potential, Development and society Volume 31 Number 1, June 2002, pp. 1~22
  • SURVEY: THE KOREAS Renouncing heaven’s mandate
  • Jul 8th 1999 From The Economist print edition
  • What would Confucius say now?
  • Jul 23rd 1998 SINGAPORE From The Economist print edition
  • Yet another Asian value
  • Jul 30th 1998 From The Economist print edition
World Wide Web

Asian Values and the Current Crisis, Francis Fukuyama comments in Bank's new 'Development Outreach', Asian Values, 9-3-99 [Online],
[2002 Dec. 18]

Management in Korea: background and traditions, FT Mastering Management Online - Management in Korea background and traditions [Online],
[2002 Dec. 18]

BOOK REVIEW, Business Networks in Asia: Promises, Doubts, and PerspectivesBy Frank-Jürgen Richter, ed., Quorum Books, Greenwich, CT, 1999, 320 pp., JIM Vol_8 No_2 2000 - Book Review [Online],
[2002 Dec. 18]

Asian Values and Civilization, Francis Fukuyama, ICAS Fall Symposium, Asia's Challenges Ahead, University of Pennsylvania, September 29, 1998, Institute for Corean-American Studies, Inc., Francis Fukuyama Lecture [Online],
[2002 Dec. 18]

ICM/Lect4/99, ISSUES IN CONTEMPORARY MANAGEMENT, LECTURE: WEEK 3, 8/8/99, Professor Mark Turner, School of Administrative Studies, ICM+Lect4+99 [Online],
[2002 Dec. 18]

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