Routledge Handbook of Korean Business and Management 9781040268155, 1040268153

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‘This Handbook, edited and authored by leading professors in the field, offers a comprehensive exploration of the Korean economy and business landscape. Covering topics from macro-​ economic developments, corporate governance, to human resource management and case studies of chaebols (Korean business groups), it provides invaluable insights into the reasons behind the success of Korean companies. In addition, it addresses emerging issues such as corporate social responsibility, start-​up eco system, and gender diversity, making it an essential reading for anyone interested in Korean business and management.’ Fabian Jintae Froese, Chair Professor of Human Resource Management and Asian Business, University of Goettingen, Germany & Joint Appointment Professor of International Business, Yonsei University, South Korea. ‘This book is a must-read for anyone keen to understand Korea’s swift ascent to global prominence. The editors and authors effectively unpack the roles of government policies, corporate strategies, and management practices in driving Korea’s success. They also highlight how grit and ingenuity can propel a country forward, making it an essential resource for scholars, practitioners, and educators alike.’ Shad S. Morris, Director, Whitmore Global Business Center, Brigham Young University, USA. ‘The authors impart important lessons for international business scholars and managers alike who wish to garner insight into the extraordinary achievements and emerging challenges and opportunities confronting Korean enterprise, and the globally influential economic powerhouse that Korea represents. There is a great deal to learn from this book.’ Danny Miller, Research Professor and Director of Chair in Organization, Strategy and Governance, HEC Montreal, Canada.

ROUTLEDGE HANDBOOK OF KOREAN BUSINESS AND MANAGEMENT

This Handbook, authored by a stellar line-​up of international contributors, explores the diverse phenomena and issues surrounding the Korean business and management world. Offering insights into trends, challenges, policies and initiatives of corporations and government and providing a nuanced portrayal of Korean business dynamics, the Handbook’s approach is centred around four key themes: • Examining the roles played by the government and markets, including labour and financial markets, in Korea’s economic progression. • Addressing macro and micro issues in Korean business and management such as business groups, business–​government relationships, corporate governance, corporate strategy and globalization, human resource management, employment relations, and chief executive officer (CEO) compensation. • Scrutinizing current phenomena by bridging the past and future, exploring mainstream and emerging business issues such as corporate social responsibility, environmental, social, and governance issues, start-​up businesses, diversity and inclusion and the impact of the Fourth Industrial Revolution. • Emphasizing the interplay between agents, structures and institutions. Delving into the intricacies of business and management in a Korean context, this Handbook will be a valuable resource to students and scholars of international business and management, with a particular focus on Asia and Korea. Chris Rowley is Visiting Fellow, Kellogg College, University of Oxford and Professor Emeritus, Bayes Business School, City University of London, United Kingdom. Johngseok Bae is Professor of Management at Korea University Business School, Seoul, Republic of Korea. Hicheon Kim is President of Lotte Academy, Seoul, Republic of Korea. Heechun Kim is Associate Professor of Strategy and Global Management at the Haskayne School of Business at the University of Calgary, Calgary, Canada.

ROUTLEDGE HANDBOOK OF KOREAN BUSINESS AND MANAGEMENT

Edited by Chris Rowley, Johngseok Bae, Hicheon Kim and Heechun Kim

Designed cover image: Getty Images First published 2025 by Routledge 4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2025 selection and editorial matter, Chris Rowley, Johngseok Bae, Hicheon Kim and Heechun Kim; individual chapters, the contributors The right of Chris Rowley, Johngseok Bae, Hicheon Kim and Heechun Kim to be identified as the authors of the editorial material, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-​in-​Publication Data A catalogue record for this book is available from the British Library ISBN: 978-​1-​032-​01873-​7 (hbk) ISBN: 978-​1-​032-​01875-​1 (pbk) ISBN: 978-​1-​003-​18092-​0 (ebk) DOI: 10.4324/​9781003180920 Typeset in Times New Roman by Newgen Publishing UK

CONTENTS

List of Figures List of Tables List of Contributors

x xii xiv

1 Setting the Scene and Overview Chris Rowley, Johngseok Bae, Heechun Kim and Hicheon Kim

1

PART I

Institutional Context

15

2 Labour Market and Korean Workers Young-​bum Park

17

3 Capital Markets and Capital Formation in Korea Hongbok Lee and Soon Suk Yoon

38

PART II

Macro Issues in Big Business Groups

69

4 The Corporate Governance and Practices of Korean Companies Kyung Suh Park

71

5 Korean CEOs from a Governance Perspective: Historical Paradigm Shifts in Group Governance-​CEO Models in Chaebols Dongyoub Shin and Doyoon Kim

vii

89

Contents

6 Business Groups in Korea: Past, Present and Future Hicheon Kim, He Soung Ahn and Juhee Kim

133

7 Government–​Business Relations in South Korea, 2000 to 2022: An Institutional Perspective Joohan Ryoo

159

8 The Strategy behind the Global Success of Korean Firms: Applying the ABCD Model in Practice Hwy-​Chang Moon and Wenyan Yin

180

9 Catch-​up Strategies of Korea’s Big IT Corporations Jae-​Yong Choung and Hye-​Ran Hwang 10 The Rise of Two South Korean Multinationals: How Samsung Electronics and Hyundai Motor Built a Competitive Advantage by Closing the Capabilities Gap Heechun Kim

200

224

PART III

Micro Issues in Korean Businesses and Management

249

11 Putting Korean HRM into the East Asian Context Sunghoon Kim, Ying Wang, Yoshio Yanadori and Chris Rowley

251

12 People Management in Korea: An Organizing Logic Perspective Johngseok Bae, Youngshin Kim, Ji Seong Ryu and Woonki Hong

271

13 Employment Relations: Labour Issues and the Labour Union Young-​Myon Lee

291

14 Executive Compensation in Big Corporations: Unique Features in Korean Firms Ji-​Young Ahn

309

15 Knowledge as a Unifying Factor for an Individual Firm and Macroeconomics in Korea Xijie Fu and Jacky F.L. Hong

329

viii

Contents PART IV

Emerging Issues in Korean Businesses and Management

351

16 Corporate Social Responsibility and Social Entrepreneurship in Korea Jon Jungbien Moon

353

17 The Shifting Startup Ecosystem in Korea: Government’s Efforts to Revolutionize Education and Finance Dohyeon Kim and Woo Jin Lee

365

18 Managing Gender and Diversity in Korean Businesses Hyosun Kim, Seung-​Yoon Rhee, Sanghyeon Sung and Hyesun Kang

382

19 Fourth Industrial Revolution and Employment Issues in South Korea Hyuckseung Yang

400

PART V

Challenges and Future Directions

411

20 The Korean Business System: Evolution and Future Challenges Anne Cox and Chris Rowley

413

21 Conclusion: Lessons, Challenges and Implications Chris Rowley, Johngseok Bae, Heechun Kim and Hicheon Kim

441

Index

463

ix

FIGURES

1.1  South Korea nominal gross domestic product (GDP), 1980–​2022 (in trillion US dollars) 1.2  Gross domestic spending on R&D (% of GDP), 1991–​2021 2.1  South Korea’s total fertility rate, 2010–​2022 2.2  South Korea’s employment share by age group, 2017–​2019 (jobs in thousands) 2.3  South Korea’s union organization rate by sector, 2016–​2021 (%) 2.4  South Korea’s number of non-​regular workers, 2003–​2019 (persons in thousands) 2.5  Age and tenure at time of leaving the longest-​serving job of those aged 55 to 64 after the retirement age extension, 2015–​2021 (in years) 3.1  Foreign ownership of domestic bonds 3.2  Bond market yields 3.3  Trend of the Korea Composite Stock Price Index (KOSPI) (January 4, 1980 =​100) 3.4  Share of foreign ownership in the Korean stock market 3.5  Price-​to-​earnings ratios for the KOSPI 200 Index vs. S&P 500 Index 4.1  Family ownership and CARs (–​90, –​2) in affiliated M&As 6.1  The number of affiliates of Korea Business Group (year 2022) 6.2  The governance structure of NAVER 6.3  The governance structure of Kakao 7.1  GDP per capital of South Korea (1960–​2022) and GDP per capita in USD 7.2  Negotiation chrologoy of Korea’s FTAs 7.3  South Korea export 1960–​2023 7.4  Foreign direct investment inflow to South Korea 1996–​2022 7.5  Korea’s gross R&D investment as a percent of GDP 7.6  Number of registered venture companies in Korea from 1999 to 2022 7.7  Trends in Korean outward FDI 9.1  Entry of Korean chaebol and major licensing and OEM partners in the early stages of semiconductor business 9.2  Commonality of manufacturing process (DRAM and TFT–​LCD) 9.3  Comparison of three major semiconductor-​related conference publications: Sony and SEC (1990–​2015) x

2 3 19 21 25 28 29 49 50 51 53 57 80 151 153 154 161 164 164 165 167 170 175 206 208 217

List of Figures

10.1  Fortune Global 500 Rankings, 1995–​2022 10.2  Hyundai Motor Co.’s US sales units and market share, 1986–​2021 10.3  Samsung Electronics Co.’s brand value, 2000–​2022 10.4  Samsung Electronics Co.’s financial performance, 1985–​2021 10.5  Hyundai Motor Co.’s brand value, 2005–​2022 10.6  Hyundai Motor Co.’s financial performance, 1997–​2021 11.1  East Asian culture by Hofstede 13.1  Trend in union density and members in Korea: 1989–​2022 14.1  Top executive total compensation level and firm performance from 2014 to 2021 14.2  The structure of executive compensation from 2014 to 2021 15.1  Data structure 15.2  Timeline of the coupled process of open innovation in AP 15.3  The conceptual model 17.1  Venture capital investment in Korea, 2017–​2022 (in 100million KRW) 17.2  Structure of KFoF 17.3  Direct government debt financing, 2015–​2021 (in 100million KRW) 17.4  Loan guarantee, 2010–​2021 (in trillion KRW) 17.5  Trend of angel investment in Korea, 2015–​2021 (in 100million KRW) 17.6  Growth of PIA, 2009–​2021 (in million KRW) 17.7  Scale of securities-​type crowdfunding, 2016–​2021 (in 100million KRW) 18.1  The framework of the WLB index 19.1  Trends of real gross domestic product (GDP) and employees in Korea 19.2  Trends of manufacturing production index and manufacturing employees in Korea 21.1  Korea’s trade surplus with China, 2000–​2023 (in billion US dollars) 21.2  Total population and average annual population growth rate, 1960–​2022 21.3  Total fertility rate compared: South Korea and Japan, 1960–​2022

xi

225 231 237 238 240 241 253 297 314 315 335 337 343 370 371 372 372 373 373 374 389 403 404 444 446 446

TABLES

1 .1  Content by themes/​focus, methods and implications 2.1  South Korea’s legal dismissal cost, 2018 (in weekly wage) 2.2  OECD Employment Protection Index (0-​6 Points) 2.3  Dismissal regulations from business viewpoints (World Economic Forum) 3.1  Number of financial institutions 3.2  Total assets of major financial institutions (trillion won, percent) 3.3  Profitability indicators of banks and insurers (percent) 3.4  Financial market size (trillion won, times) 3.5  Money market size (trillion won, percent) 3.6  Capital market size (trillion won, times) 3.7  Chronology of Korean capital market opening to foreign investors 3.8  Market capitalization and number of listed companies of the major exchanges in the world 3.9  Annual purchase value by investor group as a percentage of the total purchase in the Korea Exchange (percent) 3.10  Key parameters for the KOSPI and KOSDAQ markets 3.11  Equity offerings (trillion won) 3.12  The Korea Exchange’s rankings in the world derivative markets (volume: million contracts, notional value: USD billions) 3.13  Top-​ranked derivative contracts traded in the Korea Exchange (volume: million contracts, notional value: USD billions) 3.14  Annual transactions of the derivative products traded on the Korea Exchange (volume: million contracts, notional value: trillion won) 3.15  Korean fintech firms by types of business 3.16  Operating performance of Korean fintech firms (billion won) 4.1  Increasing disparity in the ownerships of the ten largest chaebols 4.2  Related party transactions of the largest 60 chaebols (unit: trillion won) 4.3  Family ownerships and dependency on RPTs 4.4  Successor ownerships and dependency on RPTs 5.1  The historical paradigm shifts of chaebol governance and the CEO role xii

5 22 22 23 41 42 43 44 45 47 48 50 52 54 56 58 59 60 61 64 76 77 77 77 124

List of Tables

6.1  Current state of succession in the top 20 business groups 6.2  Korean companies ranked by market capitalization 6.3  NAVER’s business, service and revenue portion 6.4  Kakao’s business, service and revenue portion 8.1  The determinant factors of firms’ competitive advantage of the four established theories and the ABCD model 8.2  The ABCD model and the theoretical background 9.1  International competitiveness and leading firms by semiconductor product group (2020) 9.2  Similarity of technology innovation process 9.3  Global market share of JUSUNG Engineering (equipment-​related products) 9.4  Content analysis of US patent by technology fields in three Korean semiconductor firms (SEC, Hyundai, LG) 9.5  Number of publications in semiconductor-​related conference proceedings of major semiconductor firms 9.6  Top ten science and engineering-​related journals and conferences (1990–​2020) 9.7  Key features of innovation during catch-​up and post-​catch-​up 10.1  From liabilities of origin to competitive advantage: Samsung Electronics and Hyundai Motor’s three-​step strategy 11.1  Comparison of institutional environments 11.2  Comparison of selective HR practices between Korea, Japan and China 12.1  People management in three organizing logics 12.2  Description of the four companies in 2021 12.3  Organizing logic of Samsung Electronics Company over the decades 12.4  Organizing logic of SK Telecom over the decades 12.5  Organizing logic of Hyundai Motor Company over the decades 12.6  Organizing logic of Kakao over the decades 12.7  Changes in people management practices and organizing logics of case companies 13.1  Union density for major countries: 2000–​2022 14.1  Summary statistics for executive compensation in Korea 14.2  Executives granted stock options by year 15.1  Data sources 16.1  Total annual budget for charitable contributions by Korean corporate foundations 16.2  Budget breakdown by the purpose of contribution at the end of 1994 18.1  Effect of WLB programme availability on gender diversity performance 18.2  Effect of WLB programme utilization on gender diversity performance 20.1  Korean business system: sub-​system and characteristics

xiii

141 148 150 150 185 189 205 209 214 215 216 217 219 227 254 261 273 277 279 281 284 285 286 296 313 315 334 356 356 392 393 425

CONTRIBUTORS

He Soung Ahn is Professor of International Business and Strategy at the College of Business Administration of Myongji University, Seoul, Republic of Korea. Her main research interests include corporate governance, strategic leadership change/​CEO succession, strategic decision-​ making, and corporate entrepreneurship. Ji-​Young Ahn is Professor of Management at Ewha Womans University in Seoul, South Korea. Her research focuses on executive compensation and employee evaluation/​reward, as well as working hours and the women’s labour market. Johngseok Bae is Professor of Management at Korea University Business School, Seoul, Korea. His research focuses on macro human resource management and philosophy of management from the meta-​theoretical framework of personal critical realism. He has published research papers in various journals including Academy of Management Journal, Journal of International Business Studies, Human Resource Management, Industrial and Labor Relations Review and International Journal of Human Resource Management. Jae-​Yong Choung is Professor of Technology Management at School of Business and Technology Management, Korea Advanced Institute of Science and Technology. His current research includes theoretical development as well as empirical investigation of transition phase to leadership (post-​ catch-​up) of East Asian latecomer firms and countries. Anne Cox is Senior Lecturer at the Faculty of Business and Law at the University of Wollongong, Australia. Her research centres on three primary areas: HRM in Asian countries, the transfer of multinational companies’ HRM/​IR policies and practices across borders, and gender equity. Anne’s most recent publications include Stone, R., Cox, A., Gavin, M., and Carpini J. (2024) (11th ed.) ‘Human Resource Management.’ Xijie Fu is PhD student in Management at University of Macau, Macau S.A.R., China.

xiv

List of Contributors

Jacky F.L. Hong is Professor of Management and Head of Department of Management and Marketing in University of Macau. He received his PhD from Lancaster University. He has been researching and publishing papers on the broader themes of organizational learning and knowledge management in multinational corporations in journals such as Journal of Management Studies, Organization Studies, Journal of World Business, Management Learning, Journal of International Management, International Business Review. He is on the editorial review board of Journal of World Business, Management Learning and International Business Review among others. Woonki Hong is Associate Professor of Organizational Behavior in School of Business at Konkuk University, Seoul, Republic of Korea. His research focuses on interpersonal helping, remote work, and organizational justice. He has published in several international journals, including the Journal of Organizational Behavior, Human Relations, and International Journal of Human Resource Management. Hye-​Ran Hwang, is Chief Research Fellow at Daejeon Sejong Research Institute, Korea. Her current research includes theoretical development as well as empirical investigation of regional innovation system and science-​technology policy. Hyesun Kang is Professor of Compliance and Corporate Ethics at Hallym University of Graduate Studies, Seoul, Korea. She has a research interest in the quality of work life and workplace dignity, ultimately aiming to promote active engagement in the workplace. Dohyeon Kim is Professor of Entrepreneurial Strategy at the College of Business Administration and the Dean of Graduate School of Global Entrepreneurship, Kookmin University in Seoul, Korea. He has tried to understand entrepreneurial strategies in large corporates and the behavioural aspects of venture capital. Doyoon Kim is Research Assistant Professor at the School of Business Administration, Ulsan National Institute of Science Technology, Ulsan, Korea. He received his Ph.D. from Yonsei University. His research interests include organization theory, organizational learning, technology management, startup and entrepreneurship. His past works were published in academic journals from diverse backgrounds, including Korean Management Review, Journal of Strategic Management, and Korean Journal of Management. Heechun Kim is Associate Professor of Strategy and Global Management at the Haskayne School of Business at the University of Calgary, Calgary, Canada. His research interests include strategic leadership, family firms and emerging market multinationals. His recent publications include ‘Strategic nepotism in family director appointments: Evidence from family business groups in South Korea,’ published in Academy of Management Journal in 2022 and ‘Chinese multinationals’ fast internationalization: Financial performance advantage in one region, disadvantage in another,’ published in Journal of International Business Studies in 2020. Hicheon Kim is President of Lotte Academy, Seoul, Republic of Korea. Before joining Lotte Academy, he was Professor of Strategy and Organization at Korea University Business School. His professional interests include business groups, corporate governance, corporate entrepreneurship, and strategic human resources management.

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List of Contributors

Hyosun Kim is Professor of Organizational Behavior and Human Resource Management at College of Business and Economics, Chung-​Ang University, Seoul Korea. She is interested in dual agenda, which aims to explore the workplace culture that encourages both wellbeing of their employees as well as organizational effectiveness. She is also interested in ethical leadership and sustainability in modern organization. Juhee Kim, Ph.D. is Professor of Arts and Cultural Management at the Arts and Cultural Management department of Dongduk Women’s University in South Korea. Her research centres on innovation, international entrepreneurship of startups with a focus on investment climate measurement, institutional environment, business model and platforms. She has published her research in refereed journals, such as International Business Review. Sunghoon Kim is Associate Professor at the University of Sydney, Sydney, Australia. His main research interests include strategic human resource management, international HRM and comparative industrial relations. He served as an Associate Editor of Human Resource Management. Selected recent publications: Kim, S., Vaiman, V., & Sanders, K. (2022) Strategic human resource management in the era of environmental disruptions. Human Resource Management and Caprar, D. V., Kim, S., Walker, B. W., & Caligiuri, P. (2022). Beyond ‘Doing as the Romans Do’: A review of research on countercultural business practices. Journal of International Business Studies, 1–​35. Youngshin Kim is Associate Professor of Management at College of Global Business, Seoul Theological University, Bucheon, Republic of Korea. Her research interests encompass the theory of the firm, institutional logics, organizational justice, organizational learning, and organizational change. Her research has been published in International Journal of Human Resource Management, and Human Resource Management. Hongbok Lee is Professor of Finance at Western Illinois University, Macomb, Illinois, USA. His research interest includes corporate finance, investments, and personal finance. He served as Editor-in-Chief of Journal of Finance Issues, 2021–2023, Guest Editor of Managerial Finance, 2015–2018, and President of the Academy of Finance, MBAA International, 2020–2021. Selected recent publications include Waggle, D, Lee, H., and Moon, G., 2024, “Efficient Portfolios with Social Security as an Asset,” Journal of Financial Planning, Vol. 37, No. 12, pp. 86–101; Yoon, S.S., Lee, H., and Oh, I., 2023, “Differential Impact of Fintech and GDP on Bank Performance: Global Evidence,” Journal of Risk and Financial Management, Vol. 16, No. 7, 304. Woo Jin Lee is Associate Professor at the Graduate School of Global Entrepreneurship at Kookmin University in Seoul, South Korea. His research interests primarily focus on the entrepreneurial ecosystem, specifically entrepreneurship education, and angel investment. Dr. Lee has published extensively on topics related to fostering the entrepreneurial ecosystem both at the city and national levels. Young-​Myon Lee is Professor of the Business School at Dongguk University, Seoul, South Korea. His research interest includes non-​standard workers, non-​union employee representation and workplace innovation. He co-​edited The Evolution of Korean Industrial and Employment Relations in 2018 and The Directions of Industrial Relations under Global Era

xvi

List of Contributors

(in Korean) in 2020. Additionally, he authored the 8th edition of Employment Relations (in Korean) in 2023. Hwy-​Chang Moon is President at aSSIST University and Professor Emeritus at the Graduate School of International Studies, Seoul National University, Seoul, Korea. His expertise encompasses international business strategy, national competitiveness, cross-​cultural studies and cross-​disciplinary studies. His recent publications include The Strategy for Korea’s Economic Success (2016), The Art of Strategy: Sun Tzu, Michael Porter, and Beyond (2018), and Global Business Strategy –​Second Edition (2022). Jon Jungbien Moon is Professor of International Business and Strategy at Korea University Business School, Korea University, Seoul, Korea. His research focuses on the intersection of global strategy and sustainability. His recent publications include ‘Do foreign firms help make local firms greener? Evidence of environmental spillovers in China,’ published in Journal of International Business Studies in 2022, and ‘Where does ESG pay? The role of national culture in moderating the relationship between ESG performance and financial performance,’ published in International Business Review in 2023. Kyung Suh Park is Professor of Finance at the Korea University Business School, Seoul, Korea. His research interests include corporate governance, corporate finance, financial institutions, and investments, and he has published academic papers in the Journal of Financial Economics, the Journal of Corporate Finance, the Journal of Financial Markets, and the Journal of Banking and Finance among others. Young-​bum Park is Emeritus Professor at Economics department, Hansung University, Seoul, Korea and Senior advisor at Macoll Consulting Group, South Korea. His main research areas are labour economics, employment and labour relations and the public sector. His publications include Labor is Back: Stories of Policy-​making Process of Employment and Labor Issues in Korea, Hansung Publishing: Seoul, 2023 and Low-​Skilled Temporary Migrant Worker Program in Korea: Employment Permit System, Special Issues on Temporary Workers, Arbor Journal, 2016. Seung-​Yoon Rhee is Professor of Organizational Behavior at Hongik University, Seoul, Korea. She specializes in research topics such as emotion, affect, team processes and safety management. Chris Rowley is Visiting Fellow, Kellogg College, University of Oxford and Professor Emeritus, Bayes Business School, City, University of London and Editor-​in-​Chief of the SCI ranked journal, Asia Pacific Business Review. He has published 220 academic articles, 55 books, 275 chapters and entries and 200 practitioner reports in the areas of human resource management and Asian business and management. He has consultancy and advisory experience with businesses, governments and labour unions and experience of universities in China, Korea, Japan, Malaysia, Thailand, Vietnam, Singapore, Australia, Germany, France, Switzerland, and the US. He regularly gives interviews and expert comments for international news and media outlets. Joohan Ryoo is a Professor of International Business and Strategy and serves as the Head of the Department of Global Strategy and Intelligence at Hanyang University in Seoul, South Korea. His research and teaching focus on global strategy, competitive intelligence, and the interplay between business innovation, geopolitical dynamics, and intelligence analysis. xvii

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List of Contributors

Ji Seong Ryu is Special Appointment Professor at Korea University Business School, Seoul, Republic of Korea. His main area of interest concerns performance management, talent management and leadership development. Previously he was senior researcher at the Samsung Global Research for 20 years. Dongyoub Shin is Professor of Organization Theory at the School of Business, Yonsei University, Seoul, Korea. He received his Ph.D. in Organization Theory from Yale University. His research interests include political sources of institutional change, coevolution between technological systems and institutional systems, and organizational analysis of creativity in arts. His academic works have been published by journals such as Administrative Science Quarterly (2007), Organization Science (2016), and Poetics (2014). Sanghyeon Sung is Professor of Business Administration at Dongguk Business School in Dongguk University, Seoul. His research interests include the growth of enterprises through people, workforce diversity and strategic human resource management. Ying Wang is Assistant Professor at School of Management, Beijing Institute of Technology, China. Her research interests include strategic HRM, international HRM, AI-​HRM and sustainable HRM. Her research has appeared in Human Resource Management, Human Resource Management Journal, and International Journal of Human Resource Management. Yoshio Yanadori is Professor in the School of Commerce at Waseda University, Tokyo, Japan. He is interested in understanding the antecedents and consequences of organizational human resource management practices for various groups of managers and employees. Hyuckseung Yang is Associate Professor of Management at Business School, Yonsei University, Seoul, Korea. He has been interested in people management in the era of the Fourth Industrial Revolution and has published the book People Management in the Great Transformation Era: Beyond the Myths of People Management in the Age of Innovation (2022). Wenyan Yin is Assistant Professor at Seoul Business School, aSSIST University, Seoul, Republic of Korea. Her research areas focus on global value chains, foreign direct investment, international business strategy, national competitiveness, and creating shared value (CSV)/​environmental, social and governance (ESG). Soon Suk Yoon is Professor of Accounting at Western Illinois University, Macomb, Illinois, USA. Research area: accounting and finance. Selected recent publications: Differential Impact of Fintech and GDP on Bank Performance: Global Evidence, Journal of Risk and Financial Management (2023); Are government subsidies or preferential listing policies better for the market performance of tech firms? Evidence from Korea, Asia Pacific Business Review (2023)

xviii

1 SETTING THE SCENE AND OVERVIEW Chris Rowley, Johngseok Bae, Heechun Kim and Hicheon Kim

Introduction The ‘Asian century’ continues as the region remains the growth centre of the world. However, the exact focus of interest has evolved –​from Japan to South Korea (‘Korea’ for short hand from now on), then to China and now maybe to South East Asia, India and beyond in the ­not-​too-​distant future. The exploration of the basis and evolution of business and management practices and government policies in these remains a fascinating subject. Here we focus on Korea, albeit with some comparisons. This example is especially notable given the transformative ‘Miracle on the Han River,’ which propelled the economy from an agricultural backwater to an industrial powerhouse and across a range of diverse sectors from the ‘traditional’ to the more ‘hi-​tech.’ The questions of how we can best see and explain the rise of Asia, specifically Korea, and the exact nature of practices –​ whether they are somewhat specific, as in contingency theory or converging, as in universalism theory, such as with globalization –​ remain fascinating and contested topics. Our Handbook and chapters can be seen in this context and provide some information and shed light on such debates. Why study Korean business and management? The focus on business and management in this Handbook is motivated by the distinctive features of the economy. Renowned for its chaebols or family-​led large industrial conglomerates –​ portrayed as an ‘octopus with many legs’ –​ such as Samsung, Hyundai, SK, and LG, Korea held the position of the 13th largest economy globally, with a nominal gross domestic product (GDP) of US$1.67 trillion in 2022 (see Figure 1.1). This small North East Asian country stands as an unusual case study in rapid economic development, demonstrating remarkable growth post-​1960, driven by its export-​driven strategy. Despite a scarcity of natural resources, Korea evolved into a fully industrialized economy. Navigating through the 1997 Asian financial crisis and joining the trillion-​dollar club in 2004, this impressive ascent has been maintained by the technological edge and global competitiveness of its chaebols in a highly globalized world. Recently, Korea boasted 18 companies on the 2023 Fortune Global 500 list, up from the eight listed in 1995. With the support of the Korean government and spending on R&D (see Figure 1.2), the country stands as a frontrunner in various industries, encompassing semiconductors, LCD displays, mobile phones, steelmaking and automobiles. Moreover, in recent years, Korean cultural products like DOI: 10.4324/9781003180920-1

1

Routledge Handbook of Korean Business and Management

Figure 1.1 South Korea nominal gross domestic product (GDP), 1980–​2022 (in trillion US dollars). Note: Nominal GDP, or gross domestic product at current prices, is a measure of the total economic output of a country without adjusting for inflation or deflation. It represents the market value of all final goods and services produced within a country’s borders during a specific period, typically a year or a quarter. Source: World Bank (https://​data.worldb​ank.org/​indica​tor/​NY.GDP.MKTP.CD, accessed on 06 December 2023).

K-​pop, K-​food, K-​dramas and movies have gained widespread popularity worldwide, adding an intriguing dimension to Korea’s global influence. Consequently, it is no surprise that ‘Korea Inc.’ serves as a role model for numerous companies aspiring to overcome a competitive disadvantage and emerge as global contenders. However, concurrently, the economy and companies must confront the proverbial ‘elephant in the room’ –​ a potential growth crisis that demands attention and strategic resolution.

Purpose of the Handbook The rapid economic development and growth experienced by Korea prompt the exploration of three pivotal research questions. First, what are the reasons and mechanisms behind the ‘Miracle on the Han River’? Second, what distinguishes its business and management in this developmental and growth process compared to those of other countries? Third, how is the trajectory of Korean business and management anticipated to unfold in the future? Consequently, this Handbook aims to provide a comprehensive depiction of Korean economic and business phenomena, delving into their causal mechanisms and developmental trajectories, to derive novel challenges, along with responsive policies and initiatives undertaken by both corporations and government. We also offer implications drawn from these insights for researchers, business practitioners and educators in Korea, Asia and globally. To achieve this aim, a diverse array of perspectives and narratives from contributors is integrated, expanding, complementing and at times challenging, conventional wisdom in the area of business and management. This applies both broadly and specifically within the Korean landscape. Through this approach, the Handbook endeavours to present a multidimensional, multilayered and pluralistic portrayal of Korean business and management. 2

Setting the Scene and Overview

Figure 1.2 Gross domestic spending on R&D (% of GDP), 1991–​2021. Note: Gross domestic spending on R&D is defined as the overall expenditure (both current and capital) on R&D conducted by all resident entities, including companies, research institutes, universities, government laboratories, and others, within a country. It encompasses R&D funded from abroad but excludes domestic funds for R&D carried out outside the domestic economy. This indicator is measured in USD constant prices using the 2015 base year and purchasing power parities (PPPs), as well as a percentage of GDP. Source: OECD (2023), Gross domestic spending on R&D (indicator) (doi: 10.1787/​d8b068b4-​en, accessed on 06 December 2023).

Contextual Perspectives and Arguments In terms of explanations of Korea’s developments, there are a range of possible theoretical explanations. These include the following, which can be applied to Asia and in turn Korea. For example, modernization (Rostow, 1959), dependency (Prebisch, 1962; Frank, 1966), world systems (Wallerstein, 1974; 1976), developmental state (Johnson, 1982), state-​led capitalism or ‘latecomer’ hypothesis (Amsden, 1989; Wade, 1990), business systems (Whitely, 1992; Redding, 1990) and variety of capitalisms (Hall and Soskice, 2001). Some of the later types include (Amble, 2003) or focus on (Hundt and Uttan, 2017) Asia. The later described Korea as having ‘Confucian capitalism.’ The structural-​institutional contexts influence capitalism’s comparatively lower degree of social embeddedness as ethnic homogeneity produced a state-​business alliance as exemplified by the rise of the chaebol, the large business-​centred ‘developmental alliance,’ which helped to ‘organize capitalism from the top’ and narrowed capitalism’s social base. There are also more Asian-​focused explanations. Here explanations include distinctive relational contracting among politicians, state officials and elite entrepreneurs producing ‘rent seeking’ (Krueger, 1974) and enduring inter-​firm networks (Fruin, 1998). A more indigenous explanation is the ‘Flying Geese’ paradigm, which although developed in the 1930s, gained popularity in the 1960s (Akamatsu, 1962). This painted a shifting pattern of Asian manufacturing supply chains. 3

Routledge Handbook of Korean Business and Management

A rapid transition from predominantly agrarian societies to industrialized economies characterized by fast economic growth was usually export-​led but importantly dove-​tailed with sophisticated financial and trading markets. Asian economies caught up with the West in a regionally sequential pattern mirroring how geese fly together. Labour-​intensive manufacture shifted to less-​developed economies as costs increased for ‘lead geese,’ which were compelled to upgrade toward more capital intensive and innovation-​driven sectors, which could produce higher productivity. Latercomers or ‘following geese,’ absorbed new investment, job opportunities and tech transfers, with growth take off. This flying pattern was reproduced, with labour-​intensive manufacturing supply chains shifting from Japan to Asian ‘Tigers’ to Chinese mainland/​coastal provinces and then inland provinces and to ‘Tiger Cubs,’ Malaysia, Thailand, Vietnam, Myanmar, Philippines and India. Interesting here is that some in the 1990s argued the Asian economic miracle was not a model to follow, just a chimera, as it was a ‘mirage’ and ‘myth’ (Krugman, 1994). This was because Asian growth output could simply be due to classic input factors, such as good savings rates and education and labour shifts from the countryside. This growth was based on output per person growth due mainly to increasing primary factor inputs per head of population –​ increasing labour force participation and adding capital to labour. So, growth was more a matter of working with ‘perspiration not inspiration,’ harder not better for Krugman. Such sorts of analysis were debated at the time and more difficult to apply for Asian countries, including Korea, that have developed more technological, sophisticated and value-​added sectors such as electronics, computer chips and now electric batteries and vehicles in an era when labour has become scarcer.

Content Features A distinctive feature of this Handbook lies in its comprehensive exploration of diverse phenomena and issues surrounding Korean business and management in at least four ways. Firstly, the Handbook encompasses both internal aspects of firms and external contextual factors. Contextually, it examines the roles played by the government and markets, including labour and financial markets, in Korea’s economic progression. The dominant player in this evolution has shifted somewhat from the government, through markets, to corporations. Secondly, the Handbook addresses macro and micro issues in Korean business and management, as shown in the structure of the book. While macro issues include business groups, business–​government relationships, corporate governance, corporate strategy and globalization, micro issues cover human resource management (HRM), employment relations, and chief executive officer (CEO) compensation. Thirdly, the Handbook scrutinizes current phenomena by bridging the past and future, exploring mainstream and emerging business issues. Emerging topics discussed include corporate social responsibility (CSR) and environmental, social, and governance (ESG) issues, start-​up businesses, diversity and inclusion and the impact of the fourth industrial revolution. Fourthly, the Handbook emphasizes the interplay between agents and structures/​institutions. The management realm is not a mere aggregation of individuals; it constitutes the entirety of social structures and institutions. Social structures encompass internal relations shaping the intentions and actions of agents, while institutions involve values, norms, rules, conventions and customs. Agents both reproduce and transform structures and institutions, simultaneously internalizing and deliberating them (Fleetwood and Hesketh, 2010). Chapters in this Handbook cover agents such as people in the firm (Chapters 11 and 12) and chairpersons of business groups (Chapters 5 and 10); and, additionally, deal with social structure (Chapter 4) and institutions within the firm (e.g., Chapter 14) and outside the firm (Chapter 7). 4

Setting the Scene and Overview

Content Overview The main arguments presented regarding Korean businesses and management in this Handbook are fourfold. Firstly, Korean industries strategically progressed through several stages, from an emphasis on industrialization to overseas expansion with a fast-​following strategy and ultimately aspiring to become global players with a fast-​mover strategy. Secondly, throughout this journey of economic development, Korean companies, management and other stakeholders have strived to achieve diverse and dynamic fit among relevant factors (Bae, Rowley, and Sohn, 2001). Those dynamic fits include reciprocity between agents and structures/​institutions, congruence among management components (e.g., strategy, structure, critical tasks and culture), alignment between the firm and its institutional context (government, markets and legal institutions, etc.) and consistency between levels of abstraction, that is, perspectives, principles and practices of businesses and management. This Handbook’s collection provides insights into what discrepancies or inconsistencies emerged and what kinds of solutions were taken by each stakeholder. Thirdly, throughout the country’s advancement the main approach has shifted from a government-​led strategy to a more market-​driven approach and, ultimately, a more corporation-​ initiated approach. Corporations have adapted their strategic directions to enhance competitiveness, moving from a focus on reducing capability gaps as fast followers to developing exploratory capabilities. Fourthly, Korea is now encountering different challenges, such as a ‘demographic timebomb’ stemming from falling and very low birth-​rates, imbalances in labour supply and demand, and heightened pressure for ESG compliance. These issues are also explored and this Handbook provides some glimpses into overcoming these challenges. We now present short overviews of all the chapters in this Handbook. We do this to allow readers to quickly see the structure and breadth of scope as well as grasp the main coverage of each of the chapters by theme, theories, methods and implications (see Table 1.1), to allow for quick identification for further reading.

Table 1.1 Content by themes/​focus, methods and implications Chapter

Themes/​focus

Theories/​methods

Implications

2

• Features and challenges of labour market and workforce • Unions and government and their activities and effects

• Thick description on labour market and workforce • Secondary data

3

• Financial markets • Capital formation

• Extant literature • Secondary data

• Labour reformation required (e.g., toward an open labour market, reducing the gap between regular and irregular workers and protecting the vulnerable from unions) • Macro issues, such as low birthrate, ageing population and underutilized female workers need to be resolved • Openness of financial markets to global investors drove growth • Fintech has shown modest growth but profits margins (Continued)

5

Routledge Handbook of Korean Business and Management Table 1.1  (Continued) Chapter

Themes/​focus

Theories/​methods

Implications

4

• The Korean puzzle • Features of corporate governance of firms

• Corporate governance • Secondary data

5

• Changes in model of group-​level governance and role of CEOs (i.e., group owner-​chairs) in overseeing interaffiliate relations within business groups

• Transaction cost economics

6

• Emerging business groups in contrast to traditional business groups

• Institutional voids perspective • Family firm perspective • Case studies

7

• Industrial policies: market reforms, business environment fortification, innovation and digitalization and globalization • New framework for explaining Korea’s economic success

• Institutional theory

• Pursuit of private benefit of control and weak monitoring of controlling families contributed to success and growth • Family control will endure only as long as companies continue to contribute to economic growth • Demystifies the notion of long-​term cooperative interfirm networks, marked by mutual trust and reciprocal complementarity among independent affiliates • Rapidly advancing digital transformation presents substantial threat to existing internal-​market governance and CEO model of business groups • Family firms represent a double-​edged sword, featuring both advantages and disadvantages • Emerging business groups play a pivotal role in propelling and fostering innovation in the economy • Government-​shifted role from a regulatory entity to a facilitator • Both formal and informal institutions significantly influenced the economic trajectory over the past two decades

• IT companies’ catch-​ up strategies • Description of cooperation between large and small companies

• Neo-​Schumpeterian technological innovation approach • Case studies

8

9

• ABCD model • Case studies

6

• Elements in the model crucial for firms to overcome disadvantages and gain competitive edge against industrial leaders in developed countries • Under specific conditions model relevant for leading firms • Catch-​up pattern varies based on entry point in product cycle • Post-​2000s facing an innovation paradox, characterized by sustained R&D investment but limited progress in technology improvement and commercialization

Setting the Scene and Overview Table 1.1  (Continued) Chapter

Themes/​focus

Theories/​methods

Implications

10

• Development of Samsung Electronics and Hyundai Motor

• Capabilities building perspective • Case studies

11

• HRM compared with Japan and China within the context of institutional and cultural environments • Changes in organizing logics and people management practices in four companies

• Institutional approach • Historical and comparative approach

• Closed capability gaps in product quality, design and branding with benchmarked competitors like Sony and Toyota, while concurrently nurturing dynamic capabilities • Success required second-​generation family chair leadership • Influences of historical interactions with Japan and China • Developed a distinctive model divergent from both countries • Potential converging divergence of East Asian HRM • Both internal and external factors interplayed in adopting current people management practices • The four case companies embraced people-​based competitive advantage but with different differentiators

12

13

• Evolution of industrial relations via epochs

14

• Institutional context to executive rewards

15

• Knowledge and open innovation in MNCs • Customer engagement • Evolution of CSR • Emergence of social entrepreneurship

16

17

• More entrepreneurial economy

• Organizing logic perspective • Interviews • Qualitative case analysis with a comparative approach • Employment relations system approach • Extant literature • ‘Optimal contracting’ or ‘shareholder value’ perspective • ‘Rent extraction’ or ‘managerial power’ view • Pay data and empirical analysis • Longitudinal case study

• Extant literature • Secondary data

• Extant literature • Secondary data

• Address labour market polarization and platform economy • Demographic challenges • Prevalence of rent extraction • Reform weak governance

• Customer-​centric approach to open innovation • Customer co-​creation • Need for cooperation, both interaffiliate and group • CSR activities to enhance ESG reputation and performance • Government initiatives and incentives important • Importance of media in fostering innovation (Continued)

7

Routledge Handbook of Korean Business and Management Table 1.1  (Continued) Chapter

Themes/​focus

Theories/​methods

Implications

18

• Gender diversity practices • WLB mechanisms • Effects of fourth industrial revolution on employment and management dynamics

• Extant literature • Secondary data

• Government diversity related measures • WLB mechanisms instrumental

• Resource-​based view • Internal labour market • Management paradigm perspective • Extant literature • Secondary data • Institutionalist theory • System theory • Extant literature • Historical approach

• Strengthen social safety net for increased technological unemployment and enhance learning infrastructure to acquire new skills and knowledge • Shift to agile organization to enhance flexibility, creativity and innovation

19

20

• Historical analysis of business systems and their challenges

• Economy and business systems advanced for several decades through ‘compressed modernity’ • Costs and risks of compressed modernity related to new challenges (skill levels, fertility decline, organizational loyalty, work ethics, etc.), which need to be overcome

Source: Created by the authors.

Part I ‘Institutional Context’ Chapter 2 (‘Labour Market and Korean Workers’) provides those interested in doing business in Korea with a better understanding of the labour market and workers. It argues for a more open labour market where people are valued for their skills and performance, not their educational attainment levels or seniority. It also asserts, somewhat controversially, that labour reforms that make trade unions socially accountable are a prerequisite for an open labour market. Chapter 3 (‘Capital Markets and Capital Formation in Korea’) examines financial markets, focusing on capital markets. It details that Korea’s significant financial development was primarily driven by the growth of capital markets, which grew massively post-​1990s. Both bond and stock markets contributed significantly to the rapid growth of capital markets, both expanding hugely during the period. Capital markets have also been opened to global investors since the late 1990s, attracting massive participation from foreign investors in the equity markets.

Part II ‘Macro Issues in Big Business Groups’ Chapter 4 (‘The Corporate Governance and Practices of Korean Companies’) details that despite the achieve­ments of Korean companies in global markets, they have been criticized for their poor corporate governance and practices. It argues that the unique ownership structures of the chaebols have led to the entrenchment of the controlling families, a factor that has been a very important aspect of their success and growth that helped the families focus on business without concern about challenges to their control. In this regard, the economic system is classified as ‘controlling shareholder capitalism,’ differentiated from the ‘stakeholder capitalism’ or ‘shareholder capitalism’ of other countries. It also overviews the government’s efforts to improve the corporate governance of 8

Setting the Scene and Overview

companies, which has not been very successful due to controlling families’ resistance. It speculates that family control will persist only if their companies continue to contribute to economic growth. Chapter 5 (‘Korean CEOs from a Governance Perspective: Historical Paradigm Shifts in Group Governance-​CEO Models in Chaebols’) examines the historical paradigm shifts of group-​level governance-​CEO models in chaebols focusing on the fit between each model and corresponding environmental conditions in each period. It explains the first period of ‘entrepreneurial governance-​ CEO’ from the withdrawal of Japan in 1945 until 1960. It then discusses the second period of ‘hierarchical governance-​CEO’ during the era of rapid economic development from 1961 to the 1997 economic crisis. Next it analyzes the ‘present governance-​CEO’ model of internal ‘market’ post-​1997 until the mid-​2020s. It also discusses the paradigm shift of the governance-​CEO model stimulated by the fourth industrial revolution and boundaryless globalization post-​2000s and the pressure toward another fundamental transformation that chaebols are facing. Chapter 6 (‘Business Groups in Korea: Past, Present and Future’) presents an analysis of the evolving role of the government in shaping the trajectory of growth, globalization strategies and technological innovation within enterprises following the 1997 Asian financial crisis. From an institutional perspective, it argues that the government transitioned from a ‘regulatory’ entity to a ‘facilitator,’ providing support to foster collaboration among businesses, thereby fostering synergies that drove innovation and reduced uncertainty. This pivotal shift in the post-​crisis relationship between government and business empowered the government to recalibrate its industrial policy, better aligning it with the evolving needs of enterprises. The significant reorientation in the government’s industrial policies manifests itself across four key domains: market-​opening reforms, fortifying the business environment, fostering innovation and digitalization and embracing globalization. Consequently, this approach has led to a more pronounced delegation of leadership in economic development to domestic firms and their global partners. In essence, both formal and informal institutions have profoundly shaped Korea’s economic trajectory over the past two decades. The narrative of Korea’s journey during this period underscores the critical importance of comprehending these institutional dynamics, which have proven to be crucial in navigating economic crises and global challenges. Chapter 7 (‘Government–​Business Relations in South Korea, 2000 to 2022: An Institutional Perspective’) argues that while prior studies of chaebols have largely focused on their institutional void-​filling role, this chapter goes beyond the market failure perspective to explain the recent development and evolution of chaebols in two important ways. First, the family firm perspective is applied to explain the longevity and resilience of chaebols by focusing on their unique features as a family firm. Second, it explores the emerging form of business groups and examines their similarities and differences from traditional chaebols. Chapter 8 (‘The Strategy Behind the Global Success of Korean Firms: Applying the ABCD Model in Practice’) suggests that how latecomer firms can develop competitive advantages is not fully addressed by the main traditional theories, such as the industry-​structure, resource-​ based, dynamic-​capabilities and institution-​based views. It proposes an alternative –​ the agility, benchmarking, convergence and dedication (ABCD) model –​ as these four fundamental factors contributed to overcoming the disadvantages and gaining competitive advantage against the industrial leaders in developed countries. It further suggests the conditions under which the ABCD model can even be relevant for firms to overcome the emerging challenges and sustain their superior positions. Chapter 9 (‘Catch-​up Strategies of Korea’s Big IT Corporations’) focuses on the successful learning mechanisms of the big IT corporations from historical perspectives using theoretical and empirical foundations. It identifies key factors and their characteristics in the catch-​up and 9

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post-​catch-​up periods. First, stylized patterns existed in organizational innovation, architectural innovation and knowledge spillover for the creation of other products in the process of catch-​up. Second, a new phenomenon has been observed in the post-​catch-​up period where not only are leading firms transiting to more science and engineering knowledge creation, but they also experience impediments in creating diversified world products. Chapter 10 (‘The Rise of Two South Korean Multinationals: How Samsung Electronics and Hyundai Motor Built a Competitive Advantage by Closing the Capabilities Gap’) delves into the journeys of Samsung Electronics and Hyundai Motor, unravelling the shared traits that propelled them to global eminence. The chapter portrays the intricate process of closing capability gaps in product quality, design and branding with benchmarked competitors, like Sony and Toyota, while concurrently nurturing dynamic capabilities. This occurred under the astute leadership of their founding family chairs. Additionally, it introduces the intriguing concept of liabilities of origin, which plays a role in shaping these pivotal capability gaps.

Part III ‘Micro Issues in Korean Businesses and Management’ Chapter 11 (‘Putting Korean HRM into the East Asian Context’) compared Korean HRM with Japan and China within the context of their institutional environments and cultural values. It explores how Korea’s HRM was influenced by its historical interactions with Japan, a model of economic development despite colonial tensions and China, the origin of Confucianism, which deeply permeates Korean culture. The chapter documents recent developments in HRM, highlighting the divergence from Japan-​inspired practices towards more neoliberal market principles and the unique cultural traditions that shape Korea’s distinctive HRM practices. It concludes by contemplating the potential convergence and divergence of East Asian HRM. Chapter 12 (‘People Management in Korea: An Organizing Logic Perspective’) explores the evolution of the people management paradigm in companies. It utilizes three organizing logics –​ hierarchy, market, community –​ as a theoretical framework to analyze this shift. In particular, it examines how the organizing logics of Samsung Electronics, SK Telecom, Hyundai Motor and Kakao, the most influential companies in the diffusion of the people management paradigm in Korea, have evolved in response to socio-​economic environments to maintain their competitiveness. The chapter illustrates how each company pursued distinct trajectories in developing its organizing logic in people management. Chapter 13 (‘Employment Relations: Labour Issues and the Labour Union’) argues that Korea’s distinctive employment landscape evolved through historical epochs –​ Japanese colonialism, the Korean War and the transformative ‘Miracle of the Han River’ –​shaping its confrontational industrial relations. Despite the national-​level FKTU and KCTU’s prolonged representation of labour, their efficacy in adapting to contemporary shifts is questioned. Korea requires a novel employment relations’ paradigm due to burgeoning labour market polarization, the platform economy and challenges posed by a rapidly ageing population. Labour and management together with the government need to develop a ‘new’ employment relations’ system it concludes. Chapter 14 (‘Executive Compensation in Big Corporations: Unique Features in Korean Firms’) surveys theoretical and empirical studies on CEO compensation. Firstly, it sets out significant institutional contexts, including pay disclosure rules and various aspects of corporate governance. It presents and reviews pay data from public firms in Korea. Its analysis indicates that CEO pay arrangements seem more consistent with the ‘rent extraction’ view. This includes a remarkably low pay-​performance sensitivity, a low rate of stock-​option utilization and a significant pay increase, particularly under weak governance, it concludes. 10

Setting the Scene and Overview

Chapter 15 (‘Knowledge as a Unifying Factor for an Individual Firm and Macroeconomics in Korea’) focuses on knowledge and innovation. Despite Korea’s impressive economic transformation, understanding about how multinational corporations can develop open innovation through customer engagement remains a significant knowledge gap. Drawing on a longitudinal case study of Amorepacific Corp, a leading Korean beauty and cosmetics conglomerate, this chapter traces the evolving actions to incorporate customer knowledge into their open innovation processes across various levels and time frames. It introduces a co-​opetition framework by outlining a customer-​ centric approach of open innovation and offering some new insights into the customer co-​creation strategy adopted by Korean multinationals.

Part IV ‘Emerging Issues in Korean Businesses and Management’ Chapter 16 (‘Corporate Social Responsibility and Social Entrepreneurship in Korea’) discusses the evolution of CSR and the emergence of social entrepreneurship in Korea from the 1960s. While following a chronological order to capture the evolving scene of CSR among major corporations and the eventual flourishing of the social entrepreneurship ecosystem in the 2010s, this chapter adopts the theoretical lens of nonmarket strategy with comprehensive scope for stakeholders that make up the ESG pillars. Through that lens it argues that CSR activities are a part of conscious efforts towards enhancing the reputation and eventually the performance of firms that practice such activities. Chapter 17 (‘The Shifting Startup Ecosystem in Korea: Government’s Efforts to Revolutionize Education and Finance’) argues that Korea is at a crucial turning point, shifting from a ‘follower’ to a ‘leader’ globally. The government recognizes the need for a paradigm shift towards an entrepreneurial economy to maintain economic power and drive growth. This alteration positions startups at the forefront and challenges the conventional dominance of large corporations. Government initiatives, such as tax incentives and simplified regulations, are fostering an environment that supports entrepreneurship and attracts both local and international talent. Korean startups, employing advanced technology and innovative approaches, are addressing societal challenges and driving economic development. The media plays a crucial role in promoting entrepreneurship, fostering a spirit of innovation, and contributing to the vibrant business landscape. By embracing entrepreneurship, Korea is positioning itself for a prosperous and sustainable business future in the global economy. Chapter 18 (‘Managing Gender and Diversity in Korean Businesses’) details the significant governmental initiatives taken to enhance gender diversity in the workforce and assesses their ramifications. It first explores gender diversity practices within corporate management around the year 2000. It introduces the history of diversity-​related policy measures championed by the government aimed at empowering women in the workplace, such as affirmative action, family friendly certificates and flexible work arrangement programmes. It also evaluates how work–​life balance (WLB) mechanisms have been instrumental in fostering a more gender-​inclusive environment within firms, as evidenced by national data. Finally, it concludes with remaining issues relevant to diversity management in Korea. Chapter 19 (‘Fourth Industrial Revolution and Employment Issues in South Korea’) delves into the profound impact of the Fourth Industrial Revolution on employment and management dynamics. It explores the shift from lifelong employment to an external labour market, accompanied by a rise in gig work. As businesses adapt to a volatile and uncertain environment, management paradigms are evolving towards agility, creativity and innovation it argues. It notes the generational shift in the workforce challenges traditional models, necessitating investments in 11

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human capital and adapting HRM. This chapter also highlights the need for a strengthened social safety net and enhanced learning infrastructure to address the risks of technological unemployment and support workforce transitions.

Part V ‘Challenges and Future Directions’ Chapter 20 (‘The Korean Business System: Evolution and Future Challenges’) employs a com­ bination of institutionalist theory and system theory to analyze the evolving landscape of Korean business and work. It examines critical institutional dimensions, such as the political-​economic backdrop, labour market dynamics, cultural influences, financial structures, education systems, industrial relations and HRM frameworks, all of which significantly shape the formation and evolution of organizations. It then addresses the major socio-​economic challenges, including technological developments and skill formation, fertility decline and shifts in organizational loyalty and work ethics. Its technological advancements are not matched by progress in skill development for labour-​intensive industries. Furthermore, fertility decline and the implications for an ageing population and a shrinking workforce are detailed. The chapter further uncovers the diminishing commitment to long-​term employment and the rise of transactional workplace relationships. Korea’s ability to navigate and respond to these challenges will play a pivotal role in determining its future economic and social trajectory. Chapter 21 (‘Conclusion: Lessons, Challenges and Implications’) sets out the key lessons we can glean from the Korean experience. It comprehensively analyzes and details the challenges and rigidities at multiple levels: global, institutional, industrial, corporates and individual. A trio set of implications are noted: research, practical applications and policy considerations.

Conclusion This comprehensive Handbook covers a diverse array of themes concerning Korean businesses and management, spanning macro and micro levels of analysis, current and future considerations, established and emerging businesses, the interplay between agents and structures/​institutions, theoretical and practical issues, domestic and global contexts, CEO/​executive perspectives alongside those of employees, and the internal content of firms juxtaposed with cultural and institutional contexts. The volume exhibits diversity not only in its thematic coverage, but also in the incorporation of varied perspectives, theories, interpretations, implications and future directions. Through the collective insights presented within this volume, we believe, readers will gain a profound comprehension of Korean businesses and management.

References Akamatsu, K. 1962. A historical pattern of economic growth in developing countries. The Developing Economies, 1(1): 3–​25. Amble, B. 2003. The Diversity of Modern Capitalism. Oxford: OUP. Amsden, A. 1989. Asia’s Next Giant: South Korea and Late Industrialisation. Oxford: OUP. Bae, J., Rowley, C., & Sohn, T. 2001. Conclusion –​Knowledge, learning, and change in Korean management. Asia Pacific Business Review, 7(4): 182–​200. Fleetwood, S., & Hesketh, A. 2010. Explaining the Performance of Human Resource Management. Cambridge, UK and New York, NY: Cambridge University Press. Frank, A. G. 1966. The Deployment of Under-​Development. Berkeley: University of California Press. Fruin, M. 1998. Networks, Markets and the Pacific Rim: Studies in Strategy. Oxford: OUP.

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Setting the Scene and Overview Hall, P., & Soskice, D. 2001. Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. Oxford: OUP. Hundt, D., & Uttan, J. 2017. Varieties of Capitalism in Asia: Beyond the Developmental State. London, UK: Palgrave Macmillan. Johnson, C. 1982. MITI and the Japanese Miracle. Stanford, CA: Stanford University Press. Kim, J.-​F. 2023. 1% reduction in working-​age population reduces GDP by 0.59%: Report. The Korea Economic Daily, May 18. www.kedglo​bal.com/​econ​omy/​newsV​iew/​ked2​0230​5180​007. Krueger, A. 1974. The political economy of the rent seeking society. American Economic Review, 65(3): 291–​303. Krugman, P. 1994. The myth of Asia’s miracle. Foreign Affairs, 73(6): 62–​78. Prebisch, R. 1962. The economic development of Latin America and its principal problems. Economic Bulletin for Latin America, 7(1): 1–​23 Redding, G. 1990. The Spirit of Chinese Capitalism. Berlin: Walter de Gruyter. Rostow, W. W. 1959. The stages of economic growth. The Economic History Review, 12(1): 1–​16 Wade, R. 1990. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialisation. Princeton, NJ: Princeton University Press. Wallerstein, I. 1974. The rise and future demise of the world capitalist system: Concepts for comparative analysis. Comparative Studies in Society and History, 16(4): 387–​415. Wallerstein, I. 1976. The Modern World System I: Capitalist Agriculture and the Origins of the European World-​Economy in the Sixteenth Century. New York: Academic Press. Whitely, R. 1992. Business Systems in East Asia: Firms, Markets and Societies. London, UK: Sage.

13

PART I

Institutional Context

2 LABOUR MARKET AND KOREAN WORKERS Young-​bum Park

Introduction This chapter is to provide those interested in doing business in the Republic of Korea (Korea) with a better understanding of the country’s labour market and workers. Section 2 ‘Population Change, Employment and Labour Market Structure’ analyses the key challenges facing Korea’s labour market that distinguish it from other countries, including a declining birthrate and ageing population, difficulties in creating good jobs and declining job quality, a closed labour market that favours educational attainment levels and seniority, a dual and growing labour market split between large and small companies,1 and underutilized female workers. Section 3 ‘Trade Unions’ describes Korea’s labour unions, which are powerful but do not properly advocate for the vulnerable. Korean unions are very strong, even with an organization rate of 14%. They are organized around large companies and the public sector. Since democratization in 1987, trade unions have represented the working class in key decision-​making processes in Korean society, but their focus on large corporations and the public sector has prevented them from acting as advocates for unorganized workers. Korean trade unions have lost much of the public support due to rampant corruption in construction unions, not taking into account small businesses and the vulnerable in the minimum wage setting process and unnecessary mass protest rallies in urban centres to show off its organizational strength while ignoring the inconveniences of ordinary citizens. Particularly, the Korean Confederation of Trade Unions (KCTU), one of the two pillars of the labour movement along with the Federation of Korea Trade Unions (FKTU), are not trusted by a majority of the public due to its refusal to engage in social dialogue and consensus. Section 4 ‘Government Policies Tackling Key Labour Market Challenges’ analyses Korean government’s major policies tackling key labour market challenges including regulation of using non-​regular workers,2 extended retirement age and wage system reform. These government measures mostly did not achieve what they aimed for. 15 years after the enactment of the Non-​ Regular Workers Acts, which limits the employment period of non-​regular workers, the number of non-​regular workers continues to increase. The zero non-​regular worker policy in the public sector has not been replicated in the private sector and has led to conflicts among public sector workers and controversies about the fairness concerning with the transition of only selected non-​regular workers to regular ones. As the population ages, raising the retirement age has been suggested as DOI: 10.4324/9781003180920-3

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an alternative to maintain economic vitality. However, past experience showed that it can only have a limited effect as long as the dual structure of the labour market and the seniority-​based wage system are maintained, where only workers in large companies and the public sector with the seniority-​based wage system are protected. The Park Geun-​hye administration tried to reform the wage system, including the performance-​based pay system, but it did not succeed, and the current Yoon Seok-​yeol administration is also pushing to introduce a job-​based pay system, but it has not progressed much. The government has not been able to overcome the opposition and backlash from labour. Section 5 concludes this chapter. To create sustainable employment, especially good jobs for young people, the private sector, not governments, must take the lead in job creation. Korea needs an open labour market where people are valued for their skills and performance, not their educational attainment levels or seniority. Labour reforms that make trade unions socially accountable are a prerequisite for an open labour market. Demanding reforms from trade unions that prioritize the interests of large corporations and public sector workers is not siding with employers. Public support for labour reform is high.

Population change, employment and labour market structure Shrinking and ageing population The ‘dead cross population,’ in which the number of deaths is higher than the number of births, has begun (Ministry of the Interior and Safety, Korea, 2021). The total fertility rate, which is the average number of children born to women during their reproductive years (age between 15 and 49), fell to 0.78 in 2022, as seen in Figure 2.1, marking a record low among the member coun­ tries of the Organization for Economic Cooperation and Development (OECD). Various measures have been implemented to resolve the low fertility rate for decades, yet there have been no visible results (Lee, 2022). Measures for the low fertility rate solely rely on finances, which has been found to be ineffective (Lee, 2018). Korea will soon enter an ultra-​aged society as the number of seniors aged 65 or older in 2023 is expected to increase to 20.3% of the total population. However, many of the seniors in Korea continue to work as they cannot afford to retire. The data released by National Human Rights Commission of Korea shocked many people as it was found that one out of four senior citizens contemplated suicide (National Human Rights Commission of Korea, 2018). As of 2018, the rela­ tive poverty rate among Koreans of retirement age (66 and older) is by far the highest among OECD countries with 43.4%. In 2020, 34.1% of seniors aged 65 or older continued to work past their retirement age (Statistics Korea, 2021a, 2021b).

Poor job creation and declining job quality Job creation is a problem. The COVID-​19 crisis induced employment shocks. In 2020 the number of employed persons decreased by 218,000 compared to a year ago. It was the biggest decline in 22 years since 1998, a year after the ‘Currency Crisis’ broke out.3 However, improving the employment situation is expected to be challenging even after recovering from COVID-​19. The employment crisis was under way long before the COVID-​19 crisis. The employment inducement coefficient, which is defined as the number of the people induced into employment when KRW one billion are produced, has continuously decreased to 11.4 (2015), 11.2 (2016), 10.6 (2017), 10.1 (2018 and 2019) (Bank of Korea, 2021). Despite the promise of the Moon Jae-​in administration 18

newgenrtpdf

Labour Market and Korean Workers

19 Figure 2.1 South Korea’s total fertility rate, 2010–​2022. Source: Statistics Korea, 2021b.

Routledge Handbook of Korean Business and Management

(which took office from 2017 to 2022) be a ‘job-​creating government,’ the number of jobs created between 2017 and 2019, prior to the outbreak of COVID-​19, was lower by 400,000 than that of the previous Park Geun-​hye administration, which was in power from 2014 to 2016. From 2009 to 2019, the unemployment rate of OECD member countries fell down more than by 4.0%point. Korea’s unemployment rate went up by close to 1.0%point, which made Korea’s rank 20th among the 37 countries. The quality of jobs has declined as well. The number of jobs decreased except for those in their 60s or older, while the number of employed in their 40s decreased by 50,000 in 2017, 117,000 in 2018 and 162,000 in 2019, as seen in Figure 2.2. The proportion of jobs in the manufacturing industry, which is considered a decent career, decreased from 17.4% in 2016 to 16.3% in 2019. The proportion of jobs with 17 hours or less of working hours per week increased from 4.8% in 2016 to 6.7% in 2019. Deterioration of employment situation was not completely irrelevant to the increase of the minimum wage by nearly 30% between 2017 and 2019 (Lee, 2019; International Monetary Fund, 2019). The government’s job creation policy, which increased the employment rate by creating government jobs for the seniors, resulted in increasing the number of non-​regular workers (Statistics Korea, 2019). Many youths strive to find their dream job in large companies and public institutions, but most of them fail. Youths with high educational attainment levels are more proactive about finding jobs, but there are not enough ‘good’ jobs for them. Nearly 20 percent of youths are either unemployed or underemployed (Statistics Korea, 2022c).4 There are more than 300,000 youths (aged between 15 and 29), who just rest without looking for jobs or undertake education/​training or do housework, including childcare or looking after mental/​physical health problems (Statistics Korea, 2023). The youth unemployment rate (lower rate means higher rank) in Korea in 2009 ranked top fifth in OECD countries but has now fallen to the low-​to-​mid ranks (Korea Economic Research Institute, 2020). From 2009 to 2019, the unemployment rate of OECD member countries fell down more than by 4.0%point. Korea’s unemployment rate went up by close to 1.0%point, which made Korea’s rank 20th among the 37 countries.

Labour market is closed and academic background and seniority matter The first job holds significant impact on future career path. Human resources are mainly evaluated by academic background and seniority. Universities are essential in getting good jobs in the early stages of entering the labour market. It is certainly advantageous to have a college diploma, especially from top universities, when getting a job. Seven out of ten high school graduates enter college while young people have considerable difficulties in getting a job after graduating from college, yet the vicious cycle of going to college is repeated (Park, Y., 2021c). Starting with a large company in the early stages of entering the labour market is important. If you begin with a large company, it is quite easy to get a job at small-​and medium-​sized enterprises (SMEs) or start running a business even if you quit the job midway. If you start as a public official, you will be guaranteed lifetime employment, and even if you retire, you will be guaranteed employment at related agencies for a certain period. Therefore, young people spend years in securing jobs to enter public servants, public institutions or large companies as they start their career. The Korean society has a widespread of seniority-​based wage system, compared to other countries. The average monthly wage of workers with more than 30 years of service in 2020 was KRW 697.1 million, 2.95 times higher than the average monthly wage of workers with less than one year of service. On the other hand, Japan recorded 2.27 times and EU’s average of 1.65 times as 20

newgenrtpdf

Source: Statistics Korea, 2019.

Labour Market and Korean Workers

21 Figure 2.2 South Korea’s employment share by age group, 2017–​2019 (jobs in thousands).

Routledge Handbook of Korean Business and Management

of 2018. Among the 15 countries in EU, Finland (1.24 times) and Sweden (1.30 times) showed a small wage gap based on the number of service years compared to Austria (2.03 times) and Greece (2.09 times), which showed a relatively large gap in comparison (Korea Employers’ Federation, 2021a).

Labour market of large companies is rigid, but workers in SMEs are vulnerable Large companies pay high cost for dismissing workers. Korean companies are required by law to pay 27.4 times the weekly salary in order to lay off one worker, as seen in Table 2.1 (Korea Economic Research Institute, 2019). It is the second highest after Turkey among 36 OECD coun­ tries. The OECD index of employment protection for regular workers in Korea was 2.31 points on a six-​point scale, close to the OECD average of 2.26 points, as seen in Table 2.2 (Park, Y., 2021a). However, the measure for the protection of workers in the case where companies organize or restructure their personnel individually due to difficulties in management was four points, more than one point higher than the OECD average. The level of regulations of the procedure for group dismissal (5 points) and reinstatement in case of unfair dismissal (6 points) was also high. The actual cost of dismissal applied is higher than what is stipulated in the law. Korea’s dismissal cost, subjectively evaluated by companies, is the 25th highest among 140 countries, and the 39th highest in dismissal and employment practices, as seen in Table 2.3. Within OECD countries, the cost of dismissal is the fourth highest among 36 countries, and the 12th highest in employment and dismissal practices. Workers in small employers are vulnerable. Unlike workers in large companies and public institutions, which are thoroughly protected by laws and labour unions, many workers in Korea are yet to be protected by the Labor Standards Act. Several provisions of the ‘Labor Standards Act’ do not apply to businesses employing less than five workers. For example, they are not

Table 2.1 South Korea’s legal dismissal cost, 2018 (in weekly wage) 27.4 21.6 13 8.3 4.3 9.6

Korea Germany France UK Japan G5 Average Source: Korea Economic Research Institute, 2019

Table 2.2 OECD Employment Protection Index (0-​6 Points)

Overall Individual dismissal for restructuring Collective dismissal for restructuring Procedure for collective dismissal Reinstatement in case of unfair dismissal Source: Korea Economic Research Institute, 2019

22

Korea

OECD average

2.31 4 4 5 6

2.26 2.9 2.8 4 2.4

Labour Market and Korean Workers Table 2.3 Dismissal regulations from business viewpoints (World Economic Forum) in 140 countries

OECD member countries

Dismissal cost Dismissal and employment practices Dismissal cost

25th 39th 4th

Source: Korea Economic Research Institute, 2019

guaranteed of 15 days of paid leave in a year, normally given to employees who have worked for at least 80% of the year, unless the business decides to grant paid leave. As of 2019, the number of workers belonging to an establishment with less than five employees was 6,039, 000 accounting for 26.6% of all workers. The Serious Accidents Punishment Act, which enforces criminal liability of business owners responsible for serious accidents, as well as maximum working hour of 52-​ hour per week do not apply to businesses with less than five employees (Park, 2022). Temporary jobs rather than regular ones are more created. Coupang, a Korean platform company, increased its employment the most for the second consecutive year, creating 15,900 jobs, nearly three times the number of Samsung Electronics’ employment growth (5,700 people) in 2021 (Kim, 2022). However, rather than being socially recognized for job creation, Coupang has been under constant controversy. This is because a considerable number of employees are hired either as contract workers rather than regular workers or through contracts with independent businesses (Han, 2020a). Coupang cannot be blamed for not hiring regular workers as it is evident that the demands in distribution and delivery companies, such as Coupang, will not be the same once the COVID-​19 pandemic ends.

Workers in large companies are well paid, but workers in SMEs are much less paid Wage gaps between big and small companies are wide. As of 2020, the average monthly income of workers at large companies is KRW 5.29 million, more than twice that of workers at SMEs at KRW 2.59 million (Statistics Korea, 2022a). Only one in ten who worked at SMEs can get jobs at large companies (Statistics Korea, 2022b). The wages of Korean college graduates relative to high school graduates are high compared to ones in other OECD counties including Japan. As of 2020, the starting salary for college graduates in businesses with 300 or more employees was KRW 50.84 million per year, including base salary, performance pay and overtime pay, which was more than 50% higher than the annual salary of employees in businesses with 30–​299 employees (KRW 33.29 million). There was no significant difference in salary between businesses with 30–​299 employees, businesses with 5–​29 employees (KRW 27.32 million) and businesses with less than five employees (KRW 25.59 million). The starting salary of a college graduate is more than 50% higher for businesses with 500 or more employees than for businesses with 10 to 99 employees Japan does not have a large wage gap between large companies and SMEs. On the other hand, the starting salary of a college graduate in Japan is only 13.4% higher than that of a 10–​99 employee company (Korea Employers’ Federation, 2021b). The entry of Taiwan’s TSMC into Kumamoto, Japan, which competes with Samsung Electronics, has shaken up the talent market in the Kyushu region, where TSMC offers a starting monthly salary of only ¥280,000 (approximately KRW 2.67 million) for college graduates, which is higher than wages of local labour market. The wage gap between college graduates and high 23

Routledge Handbook of Korean Business and Management

school graduates in Korea is lower than the OECD average. In 2020, the wage of a high school graduate on a scale of 100 was 138.3 in Korea, while the OECD average was 143.8 (Ministry of Education, Korea and Korea Educational Development Institute, 2022). Therefore, there is excessive investment in higher education in Korea. Most young adults prefer to work for large companies as college graduates, thus the college enrollment rate is the highest in the OECD and many take gap years for employment, but as a result, only a few enter large companies as college graduates with the rest working in jobs that require a high school diploma. Consequently, national resources are wasted and young adults are facing severe employment difficulties while SMEs are hoping to expand the introduction of foreign labour due to labour shortages (The Korea Economic Daily, 2022).

Korean workers are paid well, but management people are not, compared to other countries Korean workers take more compensation out of national income (NI) compared to workers in other countries. As of 2021, the ratio of compensation of employees to NI in Korea is 68.4% (Statistics Korea, KOSIS. 2020). It has been on an upward trend since 62% in 2017 (Jo, 2022; Oh, 2022).5 In terms of international comparisons, Korea’s ratio of compensation of employees to GDP is 58.5, the 17th highest among 129 countries, according to the Korea Statistical Information Service (KOSIS), which cites the UN’s ‘Sustainable Development Goals 2022’ to estimate each country’s ratio of compensation of employees to GDP. Germany is at 63.2%, France at 59.3%, the United States at 58.2% and Japan at 56.1% (Korea Statistical Information Service, 2020). The operating surplus to GDP ratio is 21.0% in 2021, down from 26.9% in 2017, 25.8% in 2018, 23.1% in 2019, and 21.3% in 2020.6 Korean CEOs and management people’s compensation in proportion to employee compensation is less than the ones in the US. As of 2021, the ratio of the annual salary of registered directors to the annual salary of employees of the 500 largest companies in Korea has a 10.7 times difference, according to the CEO Score, which covers 294 companies that submitted business reports on the survey date. The average annual salary per employee was KRW 81.2 million, and the average annual salary per registered director was KRW 870.1 million. The average annual salary of unregistered executives was KRW 358.9 billion, or 4.4 times that of employees. According to an analysis of the CEO-​executive-​employee compensation gap in Korea’s top 200 companies, as of 2019, the average compensation of registered CEOs was KRW 687.83 million, which was 8.7 times that of employees at or below the department head level, and executives received 3.8 times that of employees. In the US, the ratio of CEO pay to median worker pay for S&P 500 companies was 356 times as of 2021 (Kim, 2023; Park, R., 2020.). In 2020, the highest paid CEO in the US was the chairman of Playtika Holding Corp with KRW 465.5 billion (including stock options), and in Korea, the highest paid CEO was the CEO of NCSOFT with KRW 18.4 billion (including severance pay) (Dr. Ranking, 2022). As the compensation of CEOs of large companies is excessive compared to the minimum wage, some argue that there should be a cap on the wages of lawmakers, public institutions, and private companies (Lee, 2020; E PD, 2019), however the public response is low.

Female workers are underutilized Many of the female workers in their 30s take non-​regular jobs due to marriage, pregnancy, childbirth and childcare (Ministry of Gender Equality and Family, Korea, 2021). Such career interruptions for women in their 30s is a major factor that hinders Korean women’s economic activities. 24

Labour Market and Korean Workers

Despite many efforts to improve women’s status in the labour market over the past few decades, neither their status in the labour market nor difficulties in childcare have shown significant improvements. The gender wage gap of Korea is three times higher (34.6%) than the average of OECD (12.9%) and is the highest among the OECD countries (OECD, 2020a). It has been more than 20 years since men were legally allowed to take parental leave, however, only one in four males opt for shared parental leave with only 10% of parental leave used by men (Kim, Lee & Jeong, 2022). Another issue is that male parental leave is mostly used by workers at large companies and public institutions. The seniority-​based wage system and the dual structure of the labour market are also hindering women’s return to the labour market after childcare or family care. Once they leave their jobs in the primary sector, they can only return as non-​regular workers, causing skilled female talents to avoid marriage or childbirth. If women had left the labour market due to childcare or other household burdens and are to find work again, their past work experience is not considered much and is treated less than young entries.

Trade unions Unions represent only 14 percent of the labour force, but they are powerful There are 2,933,000 labour union members, which only accounts for 14.2% of the total labour force (Ministry of Employment and Labor, Korea, 2022b). Their power comes from the fact that unions are organized mainly around large companies on which the Korean economy heavily depend. Unions with more than 300 members make 13.2% of all unions, or 88.7% in terms of the number of union members. There is a significant difference in the organizational rate based on the size of the company, as seen in Figure 2.3. The organizational rate of companies with more than 300 employees is 46.3%, however, since there are 10.4% of 100–​299 employees, 1.6% of 30 to 99 employees, and 0.2% of less than 30 employees, the smaller the size, the lower the organizational rate. The organizational rate of the public sector is 70.0%, whereas the private sector is 11.2%.

Figure 2.3 South Korea’s union organization rate by sector, 2016–​2021 (%). Source: Ministry of Employment and Labor, Korea, 2022b.

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The labour movement also holds a powerful force in the country’s politics, with more than 30 union-​friendly National Assembly members. The total number of National Assembly members of Korea are only 300.

Unions lack public support Unions have low credibility with trust in labour unions being lower than that of large companies. According to the Korea Institute of Public Administration’s ‘2021 Survey on the Status of Social Integration,’ the percentage of people who ‘do not trust’ major institutions was 52.2% for unions, 46.6% for civic groups, 44.0% for the Central Government, and 43.3% for large companies (Korea Institute of Public Administration, 2021). In the survey of 2013, the distrust of large companies and the Central Government was greater than that of unions, with 66.4% for large companies, 64.6% for the Central Government, 58.0% for unions, and 49.5% for civic groups (Korea Institute of Public Administration, 2013). Support for union strikes is also negative. According to the NBS’s National Barometer Survey (NBS, 2022), 58% of respondents said union strikes should be ‘discouraged,’ outpacing 34% who said it was ‘not an issue.’ The Hankook Research’s survey on the ‘Perceptions of Labor Unions and Strikes in Korean Society’ found that 52% of respondents had a ‘negative’ view of the union strikes, ahead of 31% who were ‘neither positive nor negative’ and 14% who were ‘positive.’ In particular, only 23% of respondents supported strikes over wage increases, 26% supported strikes demanding that subcontractors’ employees be hired as the employees of prime contractors, 31% supported strikes against layoffs due to business difficulties, and 36% supported strikes demanding that non-​regular workers be converted to regular employees. On the other hand, 68% supported strikes to expand safety and rest facilities, while 64% supported strikes to hire more workers to prevent long working hours (The Hankook Research, 2022). The financial transparency of unions is a controversial issue under the Yoon Administration, which took office in 2022, According to a survey by the Korea Political Research Association (KOPRA), 70% of Koreans overwhelmingly support the government’s policy of strengthening the financial transparency of the trade unions, compared to 22% who opposed to it (Korea Political Research Association, 2022).7 Labour unions often make demands and take collective actions that are rather frowned upon. In the past few years, construction sites across the country have been disruptive, even in residential areas, with construction unions protesting to hire their members and, in some cases, threatening construction companies, causing considerable inconvenience to citizens (Kim, 2023; Sim, 2023; Song, 2023). It was difficult for commercial banks to return to pre-​COVID-​19 working hours due to union oppositions, and one commercial bank was piloting lunchtime closures despite customer inconvenience (Shin & Min, 2023).

KCTU lacks social responsibility KCTU which represents labour movement with the Federation of Korean Trade Union is not playing a proper role as a representative of labour union organization in Korea due to its intransigence and stance (Park, Y., 2023). Some criticized it as a force that must be settled for the continued growth and development of Korea (Moon, 2019). KCTU has always been at the scene of severe labour–​management conflicts, such as Renault Samsung’s strike, which was becoming too much of a norm, opposing force to the merger of Hyundai Heavy Industries and Daewoo Shipbuilding & Marine Engineering, unauthorized 26

Labour Market and Korean Workers

occupation of Dangjin Steel Mill, and illegal occupation of many construction sites, etcetera which took place for the last few years (Kwon & Jo, 2020). It may have been a desperate collective action in union perspective, however, for workers in SMEs, it is just a fight between the ones with power. KCTU repeatedly states the government should take special measures to protect the right to unionize workers in SMEs, but as shown by the aftermath of the rapid hike in the minimum wage in 2018 and 2019, many owners of the SMEs earn less than members of the KCTU of large companies and public institutions. KCTU is turning a blind eye on labour reform, which could improve the treatment of non-​ regular workers as well as workers in SMEs and is instead focusing on organizing and recruiting members for their union from large companies, such as Samsung and LG where there are very few non-​regular workers of their own and regular workers of related companies are better treated than regular workers at SMEs.

Government policies tackling key labour market challenges: regulation of using non-​regular workers, extended retirement age and wage system reform Regulations and not-​market-​friendly policies did not solve the problem of non-​regular workers There were 7.42 million non-​regular workers, which was 36.4% of the total employed as of August 2019 (Statistics Korea, 2017, 2019). The treatment of non-​regular workers is far less favourable than the regular workers (Korea Statistical Information Service, 2020). As of August 2019, average monthly wage of non-​regular workers were KRW 1.73 million, which was KRW 1.44 million less than the average of regular workers, accounting for 54.6%. Regulations and laws have not solved the problem of the non-​regular workers. The so-​called ‘Three Non-​Regular Workers Protection Laws,’ which limit the length of the contract period for fixed-​term and dispatched workers to no more than 2 years, prohibit discrimination against non-​ regular workers and establish procedures for remedies, were passed by the National Assembly in 2006. However, these arrangements protecting non-​regular workers have not brought intended results (Park, Y., 2020). Compared to 4.62 million in August 2003, when KOSIS began inves­ tigating the status of non-​regular workers in accordance with the guidelines under the labour–​ management-​government agreement, the number increased to 7.48 million in 2019, as seen in Figure 2.4. During the same period, its proportion among all wage workers also increased by 3.8% points from 32.6% to 36.4%. Since the Non-​Regular Workers Acts took effect the average monthly wage of the non-​regular workers compare to that of regular workers went down to 63.7% in 2007 to 54.6% in 2019. The ‘Non-​Regular-​Worker Protection Act’ eventually led to the declining of employment growth rate, and the companies with labour unions showed relatively poor transition of temporary workers to permanent ones, compared to the other companies (Park, Y., 2018; Park, W., 2018). The Non-​Regular Workers Acts also have rather fixed the dual structure of the labour market. Some of the fixed-​term workers have been converted to full-​time contracts, but many are repeatedly forced to change jobs every 2 years. The policy of ‘zero non-​regular workers’ did not work. Since the launch of the Moon Jae-​ in administration, which pledged to ‘zero non-​regular workers,’ non-​regular workers had rather increased. The number of non-​regular workers increased by 900,000 from 6.58 million in August 2017 to 7.48 million in August 2019 (Statistics Korea, 2019). The conversion rate of fixed-​term workers whose contracts expired to regular workers fell from 10.16% in 2017 to 8.26% in 2018 27

Routledge Handbook of Korean Business and Management

Figure 2.4 South Korea’s number of non-​regular workers, 2003–​2019 (persons in thousands). Source: Statistics Korea (https://​kos​tat.go.kr/​ansk/​, accessed on 06 November 2023).

(Ministry of Employment and Labor, Korea, 2019). It is interpreted as the result of the employer’s choice to hire more non-​regular workers rather than regular workers who have become more difficult to fire due to the government’s labour-​respect policy. Despite some businesses taking measures to cooperate with government policies (Choi, 2018), the policy intention to promote the regulariza­ tion of non-​regular workers in the private sector led by the public sector was unsuccessful. Easing labour inflexibility of the large companies should start, which leads to companies avoiding hiring regular workers and rather excessively relying on non-​regular workers. The increase in ‘decent’ jobs in the private sector, with the support of the labour market, can help improve the issues of non-​regular employment. When the employment stability and treatment of regular workers, especially in large companies and the public sector, are managed at an appropriate level, the private companies’ incentive to hire non-​regular workers will be reduced. It becomes difficult to solve the issues of non-​regular employment when one approaches the said issues by comparing with regular workers at large companies. The wages of non-​regular workers in big companies are higher than those of regular workers in SMEs (Ministry of Employment and Labor, Korea, 2022a). Decent jobs in Korea will be reduced if the same treatment is demanded compared to regular workers at large companies that receive excessive treatment through pushing down competitions with their monopoly and strong labour union. The huge gap in wages between big and small enterprises, regular and non-​regular workers must be narrowed for more flexible layoffs to take place. Workers have no choice but to resist restructuring as there is a huge gap in wages in both large companies and public institutions, and it is difficult to find a new ‘good’ job once they are pushed out of full-​time jobs at large companies.

Extended retirement age with the seniority-​based wage system is not a solution for the ageing population The past policy of extended retirement age of 55 to 60 did not work well. The 60-​year-​old retirement age system was implemented step by step accordingly to company size from 2016 to 2017. According to the research conducted by the Korea Development Institute, which examined the retirement age extension of 2016–​2017, the youth employment decreased by 0.2 for each beneficiary of the extended 60-​year-​old retirement age scheme. The larger the scale of the business,

28

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Figure 2.5 Age and tenure at time of leaving the longest-​serving job of those aged 55 to 64 after the retirement age extension, 2015–​2021 (in years). Source: Statistics Korea, 2021b.

the greater the decline. Businesses with less than 100 employees remained unchanged, while it decreased by 1.9 persons for the business with 100 to 499 employees and 2.6 for the business with 500 to 999 employees (Han, 2020b). Statistics Korea’s data also showed that it did not work. After 5 years since the government legally set the retirement age at 60, the average length of service in the ‘longest-​serving job’ by those with work experience aged 55 to 64 was a little over 15 years, and the average age at the time of quitting was 49.3, as seen in Figure 2.5 (Statistics Korea, 2021a). Compared to 2015 before the retirement age was extended, the average age of employ­ ment turnover increased by 0.3 years and the length of service period increased to 15.6 years by 2020, but decreased again by 0.4 years in 2021. Despite the legally set retirement age, the rate of ‘retirement,’ which was cited as the reasons for turnover of the ‘longest-​working job’ of those with work experiences between 55 and 64 years of age, decreased from 8.1% to 7.5% between 2015 and 2021, while the rate of ‘recommendations of resignation, honorary retirement, and dismissal’ increased from 10.5% to 12.1% (Statistics Korea, 2021a). There is a constant voice emphasizing the necessity of the extension of the current legal retirement age of 60 since Korea is moving to a fast-​ageing society. However, there are priorities before increasing the retirement.8 If extended, it should be manda­ tory for companies to reorganize their wage scheme based on performance and duties along with the extension of the retirement age. Extended retirement age with the maintenance of the seniority-​ based wage system adds the burden of labour costs on companies, resulting in increased pressure for early retirement. There also will be nothing but conflicts between generations caused by the elimination of jobs for young people as the past retirement age extension of 55 to 60 showed. Extended retirement age will benefit only employees in large companies. Retirees from the financial sector, large companies, and public institutions can resume the second phase of life after retirement with funds offered through voluntary retirement. However, there are many workers in companies who cannot afford to do so. It is largely due to the lack of social security system compared to other advanced countries. Many middle-​aged and senior citizens, who have been pushed out of their main jobs, have no other choice but to find simple labour, such as security jobs.

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Wage system reforms were tried, but achieved limited success, and it is still an on-​going issue One of the key challenges in Korea’s labour market has been the reform of the wage system. Due to the complex wage system with low basic wages, considerable distortion occurs in the labour market, and wages become a more conflicting issue. With a complex wage system, government policy often results in unintended consequences: as of 2016, there were more than 50,000 workers subject to the minimum wage while earning an annual salary of KRW 60 million (Kim, 2018). Controversy over the expansion of the minimum wage range9 in connection to hikes in the minimum wage and the legal holiday entitlements10 is also due to the wage structure with low basic wage and many allowances. There are a number of legal disputes regarding ordinary wages, which are ‘steadily paid monthly salaries’ used to calculate overtime, annual allowances, and salaries for new employees. The controversy has heated up since 2013 when the Supreme Court ruled that ‘the principle of good faith’ should be taken into account in the calculation of ordinary wages based on existing agreements, while stating that ‘regular bonus should also be considered part of ordinary wages under the conditions that it satisfies being fixable, periodicity, and uniformity.’ Before the 2013 Supreme Court ruling, the bonus, a main subject of labour–​management negotiations, was not included in ordinary wages following the government guidelines. The financial management balance of a company may change significantly depending on the judgement of the court. This is because the application of the principle of good faith varied depending on the financial situation of the company or the judgment of the court. Many ordinary wages-​related lawsuits filed by workers against employers are still on-​going. Many governments have repeatedly tried wage system reform. The introduction of the peak wage system and performance-​based wage system promoted as part of the labour reform conducted by the Park Geun-​hye administration was also an issue related to the restructuring of the wage system. The Moon Jae-​in administration introduced a job-​based wage system instead of a performance-​based wage system to the public institutions but left the decision to each organization by inducing them through public institution performance evaluations etcetera. The job-​based wage system was introduced in some public institutions; however, the majority of institutions did not bring up the matter into the discussions. The Yoon seok-​yeol administration also pushed the restructuring of the performance-​ and job-​based wage systems as its national policy agenda, and it is encouraging the private sector to introduce a job-​based wage system, but as even public institutions are showing slow progress in introducing the system, it is inevitable that private companies maintain the seniority-​based wage system. There is a growing conflict between generations in the labour market over performance-​based wage distributions, as the MZ generation born in the early 1980s and early 2020s, accounting for 35% of total population (as of 2019), enters the labour market. Korean people no longer desire a lifetime workplace (Koo, 2018), and given the opportunity, the MZ generation does not hesitate to change jobs or express their opinions in their workplace.11 A survey conducted by Korea Chamber of Commerce and Industry (KCCI) showed that 71% of young people do not feel rewarded for their work because of hierarchical corporate culture. 4,000 employees at listed companies in Korea rated 45 points out of 100 on the work methods of the companies. The evaluation of the work method rationality varied between the upper and lower positions of the corporate ladder: the positive evaluation by executives was 69.6% whereas the employees was 32.8% (The Korea Chamber of Commerce and Industry, 2018). This is one of the reasons why major companies recently changed the right people of their companies from previous ‘challenge spirit’ and ‘owner consciousness’ to ‘communication and collaboration’ (Bae, 2018). 30

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The MZ generation now demands wage system reform. Naver, Kakao and Nexon, the leading IT companies of Korea now have labour unions. It is the result of the elevated status of developers with the booming IT industry; however, the MZ generation has stepped to the fore and demanded higher compensations and transparent and reasonable performance-​based wage standards, leading to the establishment of labour unions in Pangyo Valley, Korea’s Silicon Valley. White-​coloured workers in manufacturing companies, are also establishing unions in opposition to the direction of the existing union.12 These unions aim to carry out the demands of the MZ generation via their own methods, apart from labour unions that operate mainly for production workers, which emphasize long service years (Park, J.-​w., 2021). In Hyundai Motor, conflicts are growing between labour unions as production workers demand an extension of the retirement age in union negotiations. However, their voice is out of element as it struggles to overcome the barriers of existing labour unions, failing to restructure its wage system from a seniority-​based to performance-​based wage system. Under Korea’s labour law, a majority union usually leads to collective bargaining. Although the prerequisites for the demands of the MZ generation on a fair wage system can be met only if the government achieves labour reform, such as reform in the wage system, by persuading the existing labour union of production workers, it is never an easy task. Nonetheless, some changes are taking place not only at workplaces where the MZ generation led to the formation of the new labour union, but also at places without the union as the MZ generation is actively calling for their demands to be met (Park, S., 2021).

Discussion and conclusions Are Korean workers happy? Are workers in Korea, which overcame the aftermath of Korean War and became the world’s tenth-​largest economy by achieving a rapid economic growth in GDP per capita from USD 100 to over USD 30,000, happy or content with their jobs? It seems to be the case only for workers in large companies and public institutions. Many young people are having a hard time for getting ‘good’ jobs suitable for their high educational attainment. Nearly 20 percent of youths are either unemployed or underemployed (Statistics Korea, 2022c).13 Non-​regular workers are more than one-​third of the total employed. More than 6,000,000 employees working for establishments with less than five employees are not covered by the Labor Standard Act. Korea ranks highest in the wage gap between male and female employees among the members of the OECD and the women’s labour force participation rate in Korea is much lower than the OECD average. Despite many efforts to improve women’s status in the labour market over the past few decades, it has been slow to progress. Many seniors in Korea work not by choice, but by necessity. Koreans have to work due to the lack of an adequate social security system. Workers in large companies and public institutions are highly protected by laws, social safety net, or trade unions. They are also well paid. The average monthly income of workers at large companies is more than twice that of workers at SMEs.

Open labour market needed The younger generation is heavily devoted to building up academic achievements, such as test scores for English, which are more or less useless at many workplaces and there is an insufficient number of decent jobs for women returning to work after childbirth, and self-​employment often becomes the only option after retirement. 31

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An open labour market must be established to eliminate situations where (1) early retirees are driven into self-​employment, (2) it does matter where you first started your job, or (3) you are not able to move to large companies or public institutions without difficulties or (4) you do not find a job that fits your capabilities when re-​entering the labour market after being economically inactive (Park, Y., 2018). An open labour market is one in which individuals are valued based on their skills, rather than their job tenure at one company or education attainment levels for compensations as well as hiring, promotion, and training. Currently, the Korean government is establishing a national qualification system based on national occupational competencies to build a skill formation system that can be used throughout the entire labour market. Under the national qualification system, workers are evaluated based on their skills and performance, instead of their company affiliation, and skills are built through education and training at workplaces, facilitating the movement of workers between large companies and SMEs. Once the open labour market is built, skilled non-​regular workers in the SMEs will be able to transfer to full-​time employment at large companies, also largely resolving the issues of non-​regular employment. The establishment of an open labour market is also necessary to solve the ‘mismatch’ in the labour market. SMEs are suffering from severe labour shortages, but the fact that foreign workers are continuously introduced into the market due to highly educated youths avoiding employment (Kwon & Kim, 2018).

One of the obstacles to labour reform is the labour movement The prerequisite of ‘opening’ the closed labour market is labour reform, which means changing the framework of labour–​management relations or the system of the labour market in a way that benefits not only labour union members but also non-​union workers and the national economy through public consensus or persuasion of labour unions in their interests. In Korea, labour unions mainly engage in labour movements focused on large companies and regular employment, which indicates labour system reform that requires these unions to give up their vested interests. The labour reform does not side with employers. While the argument that labour reform is needed to reduce labour market rigidities in Korea may seem to only advocate for employers, the dualism in the Korean labour market means that labour reform is a measure crucial for a vast majority of workers who are unable to enter the labour market of large companies. There are no social measures to prevent them from receiving excess benefits from large companies with monopoly power and the public sector where no sole ownership exists in the case of workers in large companies and the public sector, who are less than 10% of all workers. While accommodating the excessive demands from unions, as the monopoly power makes it easy to pass-​through cost increases led by wage increases by price increases in the market, large companies are investing abroad rather than domestically to maintain and enhance their global competitiveness and create jobs overseas since it is difficult for them to lay off workers in Korea. Workers in large companies and the public sector also benefit from a social safety net, including unemployment benefits and statutory retirement benefits. Currently, if one is laid off from a large company, they have to find a new job at SMEs, where compensation is significantly lower than large companies. However, it will be more flexible for workers to move to other large companies as the compensation gap between SMEs and large companies will narrow by the market power once the open labour market is established and hence, the labour market rigidity must be mitigated. There are only a limited number of new jobs in the public sector where 100% job security is guaranteed for young people to enter. The controversy over the Incheon International Airport 32

Labour Market and Korean Workers

Corporation’s unfair hiring practices, which became a major social issue when a regular employee of a partner company of the Incheon Airport was converted to a regular employee of the Incheon Airport due to the Moon Jae-​in administration’s ‘zero non-​regular workers’ initiative in the public sector, paradoxically shows how difficult it is for young people to enter public enterprises (Kang, 2022; Park, J.-​y., 2021; Yang, 2021). The ‘easy dismissal’ will only be logical in articles inside the law as SMEs in Korea are chronically experiencing severe labour shortages. There were concerns over a dismissal wave after the first two years of enactment of the ‘Non-​Regular Employment Act,’ which stipulates the conversion of a non-​regular to a regular worker when exceeding the employment period of two years. However, it was never actualized as the SMEs, most of which employed non-​regular workers, decided to continue hiring non-​regular workers amid labour shortages, rather than laying off their employees after the second year of enactment. The employees of SMEs and non-​regular workers also lack benefits of social security, the results of the labour reform are not on the employers’ side despite the ease of the labour market rigidities.

Conclusions An open labour market with skill-​and performance-​based hiring practices, rather than educational attainment levels, should be formed. The issue of youth unemployment cannot be solved under the current labour market structure, where schools enrolled in the late teens determine lifelong compensations and career paths. The overprotection of regular employees needs to be lifted to create an open labour market where there will be various job opportunities for non-​regular workers, however, this is currently impeded by large companies and regular worker unions. Hence, changes must be made to the large companies and the regular worker unions. There will be a limit to creating jobs in the private sector without an improvement in labour market flexibility such as layoff arrangements even with the economic recovery and growth after COVID-​19 by looking at the cases from the US and Europe in the 1980s and 1990s (Park & Suh, 2002). An open labour market will ensure better conversion rate of careers for non-​regular workers to regular positions through market forces. It will resolve the barriers of labour mobility between SMEs and large companies in vertical subcontracting structure. An open labour market, where one is not evaluated by their job tenure at the workplace, will resolve the structural problems in the labour market that lead to career segregation for women. An organizational culture will be created in which older employees are rewarded for their contributions to the organization, and are able to work under the direction of younger colleagues even with their years of experience at the workplace. This requires close consultation between labour and management and a commitment to consider the people and the country. However, the reality and experience of labour–​management in Korea shows that it is nearly impossible to reach a consensus through dialogue and negotiation between labour–​management parties. Thus, the government must take on a proactive role, such as in promoting labour reforms with more dynamic approach. The public approval rating is high for labour reform measures. The Yoon administration is currently promoting key reform measures in three sectors: labour, pensions and education. According to the NBS’s ‘national barometer survey,’ there was 48% of positive views on labour reform (NBS, 2023), while SBS’s survey shows that the most urgent of the three reform measures is labour reform (44.9%), followed by pension (30.1%) and education (17.3%) (SBS, 2023). 33

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Notes 1 Management circle and trade unions have their own definitions of non-​regular workers, respectively. The scope of trade unions is much wider than that of management circle. Trade unions’ definition of non-​regular workers include regular workers of subsidiary companies of big conglomerates. In this chapter figures relevant to non-​regular workers come from Statistics Korea. Statistics Korea implements an annual ‘Survey on the Economically Active Population by Working Type’ to find the situation of non-​regular worker employment according to the Presidential Tripartite Commission’s 2002 agreement concerning with the definition of non-​regular worker. Statistics Korea’s survey includes not only temporary workers but also other types of non-​regular workers such as platform workers. 2 In Korea, small-​ and medium-​sized companies, which have less than 300 employees, receive much benefits and support from the government. In this chapter small employers or small companies refer to small-​ and medium-​sized companies which have less than 300 employees. Larger companies or enterprise refer to companies, which have more than 299 employees. 3 In December 1997, Korea in a serious financial trouble filed for a bailout programme to the International Monetary Fund. 4 As of May 2022, the unemployment rate of young people aged 15–​29 was 7.2%, and the extended unemployment rate (by dividing the sum of the number of time-​related underemployment and the potential labour force by extended labor force) was 19.8%. 5 Employee remuneration rate over GDP was called the labour’s relative share rate but with the launch of Yoon Suk-​yeol’s administration the labour’s relative share rate was renamed to employee remuneration rate. As the employee remuneration rate was trending upward and the high international comparisons undermined the theoretical basis of income-​led growth promoted by the Moon Jae-​in administration, a statistical reform was discussed to include self-​employed income, but the discussion was suspended with the inauguration of the Yoon Seok-​yeol government. 6 No credible source that allows international comparison on ‘corporate profits as a percentage of GDP’ exists. 7 Support for President Yoon Seok-​yeol’s remarks on eradicating corruption in labour unions was evenly split, with 49% ‘agree’ and 48% ‘disagree.’ 8 There are also calls for opening the closed labour market externally and actively accepting immigrants from foreign countries, but it is a long-​term project. The Korean labour market is quite closed to other nationals compared to other countries. As of 2019, the proportion of employment-​related migrants among long-​term migrants for employment, family or humanitarian reasons was 1% (700 persons) while the average of G7 was 18.7% (OECD, 2020b). The Korean society needs more preparation to promote the introduction of immigrants for residential purposes as one of the measures for low fertility rates as the controversy over the acceptance of Yemeni refugees in Jeju Island in 2018 suggests. In 2018, 484 Yemeni arrived in Jeju Island and applied for refugee status. This incident brought a big controversy in the Korean society. More than 700,000 Koreans signed the petition to refuse these Yemeni as refugees. The government accepted only two of them as refugees and 412 were given a humanitarian sojourn permit. Above all, social awareness and consensus that accept foreign manpower as a member of the Korean society, rather than a separate group, should be widely recognized. Overcoming the closed perception of maintaining the Korean race is a challenge for the entire society (Park, Y., 2021b). 9 Discussion on the revision of a minimum wage system embarked on a full discussion in 2018 since concern on rapid increases of newly decided minimum wage grew. It brought unexpected effects that benefited high-​paying jobs, which eventually increased the wage gap because of its characteristic with low wage and many allowances of the Korean wage system. Increase of minimum wage range, which had been a hot issue, was passed by the National Assembly without reaching a mutual agreement in the labour–​management discussion, causing strong protests from the labour movement. Despite the revision of the law, the change in the timing of the payment of bonuses was a cause of a new labor–​management conflict as the union’s consent was required. 10 The conflict between labour and management was intense as the Ministry of Employment and Labor announced a revision to the Enforcement Decree to reduce monthly working hours, which is the standard for calculating hourly weekly holiday entitlements. At the end of 2018, the government confirmed the weekly holiday entitlements as 209 hours per month siding with the labour movement. However, as both more employers and workers became aware of the existence of weekly holiday entitlements, many small business owners gave weekly entitlements that were not previously given (during any hard time situations

34

Labour Market and Korean Workers due to rapid increase in minimum wage), adding to the cost burden and increasing short-​time employment of less than 15 hours a week. 11 Early January of 2021, an employee with 4-​year experiences in SK Hynix sent out a written request to 28,000 of employees through email and bulletin board to ‘disclose the standard of bonus calculation transparently,’ claiming the 20% of annual salary bonus proposed by the company is lower than half of Samsung Electronics. 1 2 These unions are LG Electronics’ ‘People-​centered Office Workers’ Union,’ Hyundai Motor Group’s ‘Human Resources-​respecting Office Workers’ Union,’ and ‘All-​right Union’ –​ the third union of the Seoul Transportation Corporation. 13 As of May 2022, the unemployment rate of young people aged 15–​29 was 7.2%, and the extended unemployment rate (by dividing the sum of the number of time-​related underemployment and the potential labour force by extended labour force) was 19.8%.

References In Korean Bae, K. 2018. August 27. Qualification criteria of talents have been changed in 5 years. Naeil Shinmoon. October 8. Bank of Korea. 2021. 2019 Input–​Output Tables. Press release. June 21. Choi, H. 2018. 3,200 of non-​regular workers at NH will be converted to regular workers in this year. The Donga Ilbo. March 6. Dr. Ranking. 2022. Comparing wage between CEOs of America’s S&P 500 corporation and major domestic corporation. June 4. Retrieved from https://​m.blog.naver.com/​cari​tas1​728/​22275​9440​798 February 15, 2023. E PD. 2019. [Economic briefing on an inconvenient truth] Do CEOs work 300 times harder than employees? February 2. Retrieved from https://​rising​eco.tist​ory.com/​10 February 15, 2023. Han, H. 2020a. A “good” job for Coupang men. Kyunghyang Shinmun. July 9. Han, J. 2020b. Efficacy of deferred retirement to the employment of youth and the elderly. KDI Policy Forum, 277(2020-​02). Korea Development Institute. Jo, G. 2022. Why Bank of Korea abruptly canceled the new labor income distribution indicator after the regime change. Hankyoreh. August 17. Kang, J. 2022. 5 years have passed since the declaration of “zero irregular jobs at Incheon International Airport Corporation” by President Moon, yet union–​union as well as union–​employer conflict continues. The Korea Economic Daily. May 11. Kim, E. 2022. Coupang, which hired three times as much as Samsung Electronics, increased the number of jobs for local, youth, and women. Money Today. July 22. Kim, J., E. Lee & Y. Jeong. 2022. No. 1 pledge on low fertility rate: parental leave… lowest rate in OECD due to lack of support. No-​Cut News. July 28. Retrieved from www.nocutn​ews.co.kr/​news/​5793​956 February 14, 2023. Kim, W. 2018. 50,000 workers with annual payment over KRW 60 million are still considered “below minimum wage”. The Korea Economic Daily. May 29. Kim, Y. 2023. CEO’s average wage is KRW 687 million, 8.7 times as much as regular employees. Yonhap News. May 7. Retrieved from https://​m.yna.co.kr/​view/​AKR20​2005​0617​1700​003?input=​kkt February 15, 2023. Kim, Y. 2023. Extortion of KRW 200 million for wage and fund in construction site…union officials arrested. Yonhap News. February 7. Koo, J. 2018. Annual turnover rate reaches 28%...freelancer…emergence of “Job Nomad”. The Korea Economic Daily. October 8. Korea Economic Research Institute. 2019. Korea has the Second Highest Dismissal Cost Among OECD Countries After Turkey. April 9. Korea Economic Research Institute. 2020. The Youth Unemployment Rate, for the Last Ten Years, OECD Down by 4.4%p, Korea Up by 0.9%p: Analysis and Comparison of Youth (15–​29 Years Old) Employment Indicators of OECD Countries Between 2009 and 2019. Press release. September 10. Korea Employers’ Federation. 2021a. Wage Gap by Tenure Among Korea, Japan and EU: International Comparison and Implications.

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Routledge Handbook of Korean Business and Management Korea Employers’ Federation. 2021b. Comparison of Korean and Japanese College Graduates and Implications. Press release. November 4. Korea Institute of Public Administration. 2013. Results of Survey on the Status of Social Integration. Korea Institute of Public Administration. 2021. Results of Survey on the Status of Social Integration. Korea Political Research Association (KOPRA). 2022. New Year’s day poll results. Retrieved from https://​ news.ima​eil.com/​page/​view/​2022​1225​1638​1742​499 February 15, 2023. Korea Statistical Information Service. 2020. Retrieved from https://​kosis.kr/​statH​tml/​statH​tml.do?orgId=​ 101&tblId=​DT_​1​DE71​06S&vw_​cd=​MT_​ZTI​TLE&list​_​id=​101_​B1A&scrId=​&seqNo=​&lang_​m​ode=​ ko&obj​_​var​_​id=​&itm​_​id=​&conn_​p​ath=​MT_​ZTI​TLE&path=​%252​Fsta​tist​icsL​ist%252F​stat​isti​csLi​stIn​ dex.do February 14, 2023. Kwon, O. & J. Kim. 2018. Youth unemployment crisis and labor shortages in 1s. Edaily. January 11. Kwon, S. & C. Jo. 2020. Continuous brawl between KCTU and FKTU in front of elementary school, every 5 a.m. in the morning. Chosun Ilbo. February 8. Lee, C. 2019. The Ministry of Employment and Labor acknowledges that employment declined due to the increase of minimum wage. The Asia Business Daily. May 21. Lee, E. 2020. The matter of income inequality becomes intense as the CEO of the major corporation earns 300 to 400 times the minimum wage. Labor Today News. January 30. Retrieved from www.lab​orto​day.co.kr/​ news/​arti​cleV​iew.html?idxno=​162​735 February 15, 2023. Lee, K. 2022. Increasing fertility rate: The need for policies to ease and adapt to the low fertility rate. Segye Ilbo. July 20. Lee, M. 2018. 100% failure of the low fertility rate policy with financial support only… need to improve the entire infrastructure. Donga Ilbo. July 19. Ministry of Education, Korea and Korea Educational Development Institute. 2022. Education at a Glance: 2022 OECD Education Indicators. Ministry of Employment and Labor, Korea. 2019. Establishment Survey on the Contract Workers as of the Second Half of 2018. Press release. March 28. Ministry of Employment and Labor, Korea. 2022a. Survey Results by Employment Type as of June 2021. Press release. May 25. Ministry of Employment and Labor, Korea. 2022b. National Labor Union Organization Status in 2021. Press release. December 25. Ministry of Gender Equality and Family, Korea. 2021. A Look into the Life of Women Through 2021 Statistics. Press release Ministry of the Interior and Safety, Korea. 2021. 2020 Resident Registration Demographics. Press release. January 3. Moon, K. 2019. Only when the KCTU is destroyed, will the nation survive. Union’s criticism on vested interests of the labor world. Maeil Business Newspaper. June 20. National Human Rights Commission of Korea. 2018. Comprehensive Report on Old Aged People Rights. Press release. October 1. NBS. 2022. The Results of National Barometer Survey of November 2022. https://​new​sis.com/​view/​?id=​ NISX​2022​1201​_​000​2107​672&cID=​10301&pID=​10300 February 15, 2023. NBS. 2023. The Results of National Barometer Survey of January 2023. http://​nbsur​vey.kr/​archi​ves/​5237 February 15, 2023. Oh, J. 2022. Bank of Korea, rename the labor’s relative share rate to the employee remuneration rate. Yonhap Infomax. June 16. Park, J.-​w. 2021. The MZ labor unions react against existing unions saying, “We don’t even have a union head”. Maeil Business Newspaper. November 7. Park, J.-​y. 2021. Yoon Suk-​yeol meets with generation MZ “It is unarguable that the youth feels betrayed by the Incheon International Airport Corporation Incident”. ChosunBiz. December 28. Park, R. 2020. [What are your thoughts?] Difference in wage between CEO and employee in America, 320 times; how about Korea? IMPACT. September 2. Retrieved from www.impac​ton.net/​news/​arti​cleV​iew. html?idxno=​439 February 15, 2023. Park, S. 2021. “We just want to get paid for the work done” outcry of MZ generation with collapsing seniority-​ based hierarchy. The Seoul Economic Daily. March 27. Park, S. 2022. Despite the implementation of the Serious Accidents Punishment Act, the number of industrial accidents in the manufacturing industry increased. Dailian. July 19. Park, W. 2018. Effects of regulations on the use of non-​regular workers on the employment decision of enterprises. KDI Policy Forum, 281(2018-​02). Korea Development Institute.

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Labour Market and Korean Workers Park, Y. 2018. Old labor market, and new labor market, and vocational education and training. The HRD Review, 21(4): 2–​7. Korea Research Institute for Vocational Training and Education. Park, Y. 2020. [Park Young-​bum’s economics] The policy of zero non-​regular workers has mass-​produced non-​regular workers. JoongAng Ilbo. March 3. Park, Y. 2021a. [Park Young-​bum’s economics] U.S. and Europe proves the paradox that flexibility in Layoffs help create jobs. Joongang Ilbo. January 19. Park, Y. 2021b. [Park Young-​bum’s economics] Korea has become a country that cannot survive without foreign workers. JoonAng Ilbo. May 18. Park, Y. 2021c. The importance of establishing an integrated system of vocational education and training and a good job-​friendly environment. The HRD Review, 24(4): 2–​7. Korea Research Institute for Vocational Education & Training. Park, Y. 2023. Kairos of Labor: The Past and Future of Labor. Bumwoo. Park, Y. & S. Suh. 2002. Macroeconomic policies and unemployment: experiences and implications of OECD countries. Journal of Social Science, 17(1): 16–​30. SBS. 2023. New Year’s poll. Retrieved from https://​news.sbs.co.kr/​news/​endP​age.do?news​_​id=​N100​7029​ 816&plink=​ORI&coo​per=​NAVER February 15, 2023. Shin, Ho. & S. Min. 2023. Finance union… “a single-​sided arrangement of working hours by the employer… will be sued”. Yonhap News. January 30. Sim, E. 2023. Demand of KRW 600 million for the monthly expenses is too much… the illegal acts of construction union will be terminated. The Korea Economic Daily. February 6. Song, W. 2023. Won Hee-​ryong “Modify safety regulations and guidelines which have turned to means of threat for the construction union”. SBS News. February 8. Statistics Korea. 2017. Results of the Economically Active Population Survey by Working Type in August 2017. Press release. November 3 Statistics Korea. 2019. August 2019 Supplementary Survey Results on the Economically Active Population by Working Type. Press release. October 29. Statistics Korea. 2021a. Results of the Supplementary Survey on Economically Active Population of Aged People in May 2021. Press release. July 27. Statistics Korea. 2021b. 2021 Aged Population Statistics. Press release. September 29. Statistics Korea. 2022a. Survey Results of the Income (Earned from the Job) of Wage Workers. Press release. February 21. Statistics Korea. 2022b. Results of Job Movement Statistics for 2020. June 8. Statistics Korea. 2022c. Employment Trends in May 2022. Press release. June 15. Statistics Korea, KOSIS. 2020. Retrieved from https://​kosis.kr/​statH​tml/​statH​tml.do?tblId=​DT_​2​UNS0​ 103&orgId=​101&langu​age=​kor&conn_​p​ath=​&vw_​cd=​&list​_​id=​R_​SUB_​OTIT​LE_​O​TIT_​UNTI​T_​10​_​ 100​_​40 February 15, 2023. Statistics Korea, KOSIS. 2023. Retrieved from https://​kosis.kr/​statH​tml/​statH​tml.do?orgId=​101&tblId=​DT_​ 1​DE90​46S&vw_​cd=​MT_​ZTI​TLE&list​_​id=​B1A​_​18&scrId=​&seqNo=​&lang_​m​ode=​ko&obj​_​var​_​id=​ &itm​_​id=​&conn_​p​ath=​MT_​ZTI​TLE&path=​%252​Fsta​tist​icsL​ist%252F​stat​isti​csLi​stIn​dex.do September 26, 2023. The Hankook Research. 2022. Public perceptions of labor unions and strikes in Korean society. Retrieved from www.ido​min.com/​news/​arti​cleV​iew.html?idxno=​812​424 February 15, 2023. The Korea Chamber of Commerce and Industry. 2018. A Report on Ways of Working of Domestic Enterprises. The Korea Economic Daily. 2022. [Editorial] Huge wage gap, blamed on the unions of large corporations. February 21. Yang, S. 2021. Corporate executive threatens punishment to the union protesting against the Incheon International Airport Corporation Incident. Newsis. October 14.

In English International Monetary Fund. 2019. Korea Report. May. OECD. 2020a. How’s life? 2020. Retrieved from www.oecd.org/​wise/​how-​s-​life-​23089​679.htm February 14, 2023. OECD. 2020b. Retrieved from www.oecd.org/​migrat​ion/​February 15, 2023.

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3 CAPITAL MARKETS AND CAPITAL FORMATION IN KOREA Hongbok Lee and Soon Suk Yoon

Introduction We present an overview of the Korean financial markets, focusing on the development of capital markets with the hope that this chapter contributes to an understanding of the Korean market by the research community and global investors. Over the last three decades, Korea has shown significant growth in its financial sector along with an expansion of the overall economy. As of 2021, Korea is the tenth largest economy in the world measured by nominal GDP (World Bank, 2022) and has leading global equity and derivatives markets. The Korea Exchange (KRX) operates the markets for stocks, derivatives, and other products, ranks seventh among the exchanges in the world in the number of listed companies, and stands in the top ten derivatives markets for several derivative products in trading volume (The World Federation of Exchanges, 2022). Korea has a well-​diversified portfolio of financial institutions, with over 3,000 institutions operating in banking, insurance, investment, credit-​specialized finance, credit unions, and cooperatives. Banks are the largest financial institutions that possess over half the total assets of the financial sector as of 2021, followed by insurance companies representing about 20 percent of the total assets. Notably, six Korean banks are ranked among the world’s 100 largest banks, with a combined asset value of $2,658 billion as of the end of 2021 (S&P Global Market Intelligence, 2022). Investment companies and a group of credit unions and cooperatives come third and fourth, carrying 10 percent and 9 percent of the total assets of the Korean financial sector, respectively. Korea achieved significant financial development over the past three decades, primarily driven by the growth of direct finance, particularly capital market finance. Total finance in 2021 amounts to 8,531 trillion won ($7,176 billion), representing 412 percent of the nominal GDP, over 60 percent of which is from direct finance, predominantly contributed by capital markets. Capital markets made more than 40-​fold growth from a mere 114 trillion won in 1990 to 4,953 trillion won ($4,166B) in 2021, reaching over 90 percent of direct finance. Both bond and stock markets made substantial contributions to the rapid growth of the capital markets in Korea, increasing their sizes by factors of 66 and 34, respectively, from 1990 to 2021. The bond markets in Korea amounting to 2,298 trillion won ($1,933B) in 2021 consist of government, municipal, financial, special law, and corporate bonds. Currently, the government bond market is the largest, followed by the markets for financial, corporate, special law, and municipal 38

DOI: 10.4324/9781003180920-4

Capital Markets and Capital Formation in Korea

bonds, in that order. The Korean bond markets have been entirely open to foreign investors since 1998. However, the share of foreign ownership in the bond markets remained below 8 percent until 2020. The Korean stock market comprises the Korea Composite Stock Price Index (KOSPI) market, the Korea Securities Dealers Automated Quotations (KOSDAQ) market, the Korea New Exchange (KONEX), and the K-​OTC market. The KOSPI market is the primary stock market, representing more than 80 percent of the market capitalization of the listed stocks in the KRX. The KOSDAQ market provides fund-​raising opportunities to mature small-​and medium-​sized enterprises (SMEs). The KONEX houses early-​stage SMEs and startups before they migrate to the KOSDAQ. As of 2021, the combined market capitalization of the three stock markets amounts to 2,655 trillion won ($2,233B), out of which 2,203 trillion won ($1,853B) comes from the KOSPI market, 446 trillion won ($375B) the KOSDAQ market, and 5 trillion won ($4B) the KONEX market. Foreign investors own a sizable portion of the Korean stock market. During the last two decades, the share of foreign ownership remained at 30 to 40 percent most of the years. Korea has well-​developed markets for various financial derivatives. The KRX, which manages derivatives trading, was among the top ten exchanges in the world in 2021 for multiple derivatives products in terms of trading volume (The World Federation of Exchanges, 2022). The KRX ranked eighth worldwide for stock index futures, second for both stock index options and single stock futures, fourth for long-​term interest rate options and futures, and sixth for currency options and futures. Five derivatives contracts traded in the KRX, including KOSPI 200 options, KOSPI 200 weekly options, Samsung Electronics futures, SK hynix futures, and USD futures, were among the world’s ten most-​traded derivatives contracts in the lines of stock index options, single stock futures, and currency futures in 2021. In contrast to the incumbent banks’ standing globally, the Korean fintech industry is in the fledgling stage. When assessed for the quantity and quality of privately owned fintech companies as well as the local business environment, Korea ranked 26th worldwide in 2021 for fintech industry development (Findexable, 2021). Currently, 337 companies provide various fintech services, including payments/​remittances, wealthtech, P2P lending/​crowdfunding, security/​identity verification, insurtech, fintech SI, and small-​sum overseas remittance. However, the fintech industry has shown a declining operating profit with moderate revenue growth in recent years. This chapter proceeds to review the financial system in Korea in the next section. Section 3 details the capital markets by examining bond and stock markets. Derivatives markets are presented in section 4, and the fintech industry is examined in section 5. Finally, section 6 summarizes and concludes.

Financial System in Korea Financial Infrastructure Financial infrastructure is the legal system and institutions that support and oversee the financial markets and institutions to ensure orderly transactions. Korea’s financial infrastructure consists of systems for central banking, payment and settlement, financial supervision, deposit insurance, and securities exchanges. The Bank of Korea, founded in 1950, is the central bank of Korea that serves as the lender of last resort, formulates and implements monetary and credit policies, issues notes and coins, and imposes reserve requirements on deposits of financial institutions. Korea’s payment and settlement system consists of large-​value payment, retail payment, securities settlement, and foreign exchange settlement systems. 39

Routledge Handbook of Korean Business and Management

Korea has adopted an integrated financial supervisory system where the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) supervise nearly all financial institutions (Bank of Korea, 2018). The FSC establishes supervisory policies and licenses finan­ cial institutions, while the FSS examines and supervises financial institutions. The Korea Deposit Insurance Corporation, founded in 1996, insures banks, insurance companies, investment dealers and brokers, merchant banks, and mutual savings banks. The securities exchange system facilitates the sale, liquidation, and settlement of securities while monitoring the markets. The KRX is the venue for trading stocks, bonds, derivatives, exchange-​traded funds (ETFs), and exchange-​traded notes (ETNs).

Financial Institutions Financial institutions deal with financial transactions, such as deposits, loans, investments, and insurance. As of 2021, there are 3,272 financial institutions in Korea, including 55 banks, 53 insurance companies, 721 investment companies, 131 credit-​specialized financial companies, 79 mutual savings banks, 2,223 credit unions and cooperatives, and 10 financial holding companies (Table 3.1). The banking industry consists of three different types of banks: (a) 15 commercial banks composed of 6 nationwide banks, 6 regional banks, and 3 Internet-​only banks; (b) 5 specialized banks such as Korea Development Bank, Industrial Bank of Korea, Export-​Import Bank of Korea, NongHyup Bank (National Agricultural Cooperative Federation), and Suhyup Bank (National Federation of Fisheries Cooperatives); and (c) 35 branches of foreign banks. Banks are by far the largest financial institutions in total assets, amounting to 3,651 trillion won ($3,071B) and making up 54 percent of the total assets of financial institutions in Korea as of the end of 2021 (Table 3.2). Notably, six Korean banks are ranked among the world’s 100 largest banks by total assets as of 2021-​end (S&P Global Market Intelligence, 2022). They are KB Financial Group Inc. (rank: 61, total assets: $557B), Shinhan Financial Group Co. Ltd. (66, $544B), NongHyup Financial Group Inc. (75, $426B), Hana Financial Group Inc. (76, $422B), Woori Financial Group Inc. (83, $375B), and Industrial Bank of Korea (92, $334B). Insurance companies, consisting of life insurance and non-​life insurance companies, are the second largest financial institutions with total assets of 1,359 trillion won ($1,143B), equivalent to 20 percent of the total assets of the financial sector in Korea. The third largest group is investment companies, comprised of securities companies, futures companies, asset management companies, and merchant banks. Among those, securities companies have by far the biggest total assets, making up about 9 percent of the total assets of the financial institutions in Korea. The next largest group is credit unions and cooperatives (9 percent of the financial sector’s total assets), followed by credit-​specialized financial companies (5 percent). Profitability indicators of banks show commercial banks are the most profitable, followed by the branches of foreign banks and specialized banks. The average ROA (ROE) for 2011–​2021 for commercial banks, foreign banks, and specialized banks are 0.50 (6.73) percent, 0.32 (6.02) percent, and 0.25 (2.78) percent, respectively (Table 3.3). The profitability measures for insurance companies show a stark contrast between life insurance companies and non-​life insurance companies. The average ROA of non-​life insurance companies (1.38 percent) for 2011–​2021 is almost three times that of life insurance companies (0.52 percent), while the average ROE of

40

Capital Markets and Capital Formation in Korea Table 3.1 Number of financial institutions Classification

Financial institutions

Banks

Commercial banks Specialized banks Foreign bank branches

Insurers

Investment companies

Credit-​specialized financial companies

Life insurance companies Non-​life insurance companies

Securities companies Futures companies Asset management companies Investment advisory companies Real estate trust companies Merchant banks

Credit card companies Leasing companies Installment finance companies New technology venture capital companies

Mutual savings banks Credit unions and cooperatives

Credit unions Agricultural cooperatives Fisheries cooperatives Forestry cooperatives

Financial holding companies Total

2021

2016

15 5 35

12 5 43

55

60

23 30

25 32

53

57

58 4 350 294 14 1

53 5 165 159 11 1

721

394

8 26 23 74

8 25 22 31

131

86

79

79

873 1,118 91 141

904 1,131 91 142

2,223

2,268

10

9

3,272

2,953

Notes: (1) The table shows the number of financial institutions in Korea as of the end of recent years. (2) Specialized banks include Korea Development Bank, Industrial Bank of Korea, Export-​Import Bank of Korea, NongHyup Bank (National Agricultural Cooperative Federation (NACF)), and Suhyup Bank (National Federation of Fisheries Cooperatives (NFFC)). Source: Financial Statistics Information System of the Financial Supervisory Service (https://​fisis.fss.or.kr/​ fss/​fsiv​iew/​ind​exw.html).

41

Routledge Handbook of Korean Business and Management Table 3.2 Total assets of major financial institutions (trillion won, percent) Classification

Financial institutions

Banks

Commercial banks Specialized banks Foreign bank branches

Insurers

Investment companies

Credit-​specialized financial companies

Total assets

Life insurance companies Non-​life insurance companies

Securities companies Futures companies Asset management companies Merchant banks

Credit card companies Leasing companies Installment finance companies New technology venture capital companies

Mutual savings banks Credit unions and Cooperatives

Credit unions Agricultural cooperatives Fisheries cooperatives Forestry cooperative

Total

Share

2,178 1,200 273

32.3 17.8 4.0

3,651 ($3,071B)

54.1

992 366

14.7 5.4

1,359 ($1,143B)

20.1

621 5 15 5

9.2 0.1 0.2 0.1

646 ($543B)

9.6

157 87 99 22

2.3 1.3 1.5 0.3

365 ($307B)

5.4

118 ($99B)

1.8

124 440 39 10

1.8 6.5 0.6 0.2

614 ($516B)

9.1

6,752 ($5,680B)

100.0

Notes: The table reports the total assets of major financial institutions in Korea as of the end of 2021. Conversion to US Dollars is based on the closing exchange rate of Korean Won against US Dollar in the Seoul interbank foreign exchange market at the end of 2021 (1,188.80 Won/​USD) obtained from the Economic Statistics System of the Bank of Korea. Sources: Financial Statistics Information System of the Financial Supervisory Service (https://​fisis.fss.or.kr/​ fss/​fsiv​iew/​ind​exw.html); Economic Statistics System of the Bank of Korea (https://​ecos.bok.or.kr/​#/​Sea​ rchS​tat).

42

Capital Markets and Capital Formation in Korea Table 3.3 Profitability indicators of banks and insurers (percent) Year

Commercial banks Specialized banks Foreign banks

Life insurance

Non-​life insurance

ROA

ROE

ROA

ROE

ROA

ROE

ROA

ROE

ROA

ROE

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

0.69 0.54 0.37 0.39 0.32 0.45 0.56 0.60 0.58 0.47 0.49

9.34 7.40 4.91 5.20 4.52 5.88 7.30 7.93 7.92 6.55 7.05

0.61 0.34 –​0.11 0.17 –​0.14 –​0.49 0.33 0.69 0.41 0.33 0.58

6.71 4.00 –​1.29 2.05 –​1.60 –​5.69 3.91 8.20 4.82 3.97 5.51

0.40 0.30 0.30 0.43 0.38 0.22 0.25 0.32 0.28 0.31 0.30

7.94 5.36 4.96 7.86 7.71 4.09 4.45 5.93 5.60 6.37 5.91

1.00 0.75 0.60 0.51 0.52 0.32 0.48 0.48 0.35 0.36 0.38

11.26 8.24 6.36 5.92 5.83 3.73 5.71 5.55 3.87 3.76 4.05

2.10 2.10 1.66 1.26 1.27 1.45 1.49 1.13 0.72 0.79 1.22

14.29 14.29 10.92 9.46 9.60 11.21 11.63 8.86 5.51 5.85 9.22

Average

0.50

6.73

0.25

2.78

0.32

6.02

0.52

5.84

1.38

10.08

Notes: The table reports the profitability ratios of banks and insurance companies in Korea. Sources: Banking Statistics System, Korea Federation of Banks (http://​bss.kfb.or.kr/​); Life Insurance Statistics, Korea Life Insurance Association (www.klia.or.kr/​consu​mer/​stats/​sta​tHom​Sta/​finan​ceSt​ats.do); Monthly Financial Statistics, General Insurance Association of Korea (www.knia.or.kr/​m/​data/​gis​tat/​sta​tist​ ics-​monthl​y02?rptd​ocGr​pCd=​02)

non-​life insurance companies (10.08 percent) is nearly two times that of life insurance companies (5.84 percent).

Financial Markets Financial markets are the venues where financial transactions are systematically conducted between those who demand funds and those who supply them. Financial markets are categorized into direct and indirect financial markets depending on whether or not financial transactions are carried out through financial intermediaries. As seen in Table 3.4, the financial sector in Korea has grown significantly since 1990. Total finance, as a percentage of nominal GDP, has grown to 412 percent in 2021 from 154 percent in 1990, primarily due to the rapid expansion of direct finance. The total finance to GDP ratio is used to proxy for a country’s financial development or deepening (Park, Kim, and Park, 2021). The ratio highly correlates with the financial development index created by the International Monetary Fund (Sahay et al., 2015), according to which Korea ranked seventh among over 180 countries as of July 2022.1 Over the last three decades, Korea achieved considerable financial development, primarily driven by the growth of direct finance, which was mainly contributed by the growth of the capital markets. Total finance in 2021 amounted to 8,531 trillion won ($7,176B), 62 percent from direct finance and 38 percent from indirect finance. Indirect finance is measured by loans and discounts extended to the private sector by banks and non-​bank financial institutions (NBFIs). The share of indirect finance in total finance has declined from 56 percent in 1990 to 38 percent in 2021, amounting to 3,215 trillion won ($2,704B). Loans and discounts by commercial and specialized banks have grown much faster than those by NBFIs. In 1990, NBFIs had a bigger share of indirect

43

Routledge Handbook of Korean Business and Management Table 3.4 Financial market size (trillion won, times) Year

1990

2000

2010

(A) Total finance (% of GDP)

2021

Won

USD

(B/​A)

309.2 (154.1)

1,291.4 (198.2)

4,013.6 (303.5)

8,530.9 (411.8)

7,176.1B

27.6

172.0 (55.6)

558.4 (43.2)

1,447.0 (36.1)

3,215.0 (37.7)

2,704.4B

18.7

Loans by banks (% of indirect finance)

74.0 (43.0)

310.8 (55.7)

987.1 (68.2)

2,050.7 (63.8)

1,725.0B

27.7

Loans by NBFIs (% of indirect finance)

98.0 (57.0)

247.6 (44.3)

459.8 (31.8)

1,164.3 (36.2)

979.4B

11.9

137.2 (44.4)

733.0 (56.8)

2,566.6 (63.9)

5,315.9 (62.3)

4,471.7B

38.7

Money markets (% of direct finance)

23.2 (16.9)

92.3 (12.6)

213.8 (8.3)

363.2 (6.8)

334.3B

15.7

Capital markets (% of direct finance)

114.0 (83.1)

640.7 (87.4)

2,352.8 (91.7)

4,952.7 (93.2)

4,166.1B

43.4

Bonds (% of capital markets)

35.0 (30.7)

423.7 (66.1)

1,112.9 (47.3)

2,297.9 (46.4)

1,932.9B

65.7

Equities (% of capital markets)

79.0 (69.3)

217.0 (33.9)

1,239.9 (52.7)

2,654.8 (53.6)

2,233.2B

33.6

200.6

651.60

1,322.6

2,071.7

1,742.6B

10.3

Indirect finance (% of total finance)

Direct finance (% of total finance)

GDP

2021 (B)

Notes: The table reports the trends in total finance and the relative size of financial markets in Korea. Indirect finance includes loans and discounts from commercial banks, specialized banks, and non-​bank financial institutions (NBFIs). Money markets include markets for call loans, repurchase agreements, certificates of deposit, commercial papers, and short-​term bonds. Conversion to US Dollars is based on the closing exchange rate of Korean Won against US Dollar in the Seoul interbank foreign exchange market at the end of 2021 (1,188.80 Won/​USD) obtained from the Economic Statistics System of the Bank of Korea. The most recent data for money markets are from 2020, and thus the exchange rate at the end of 2020 (1,086.30 Won/​USD) is used to convert the amounts to US Dollars. Sources: Bank of Korea (2017); Park, Kim, and Park (2021); Economic Statistics System of the Bank of Korea (https://​ecos.bok.or.kr/​#/​Sea​rchS​tat); Korean Statistical Information Service (https://​kosis.kr/​index/​ index.do); Statistics for securities deposit for January 2022, Korea Securities Depository (www.ksd.or.kr/​ko/​ info​rmat​ion-​dis​clos​ure/​resou​rce-​cen​ter/​sec​urit​ies-​dep​osit​ory-​sta​tist​ics).

finance than banks, providing 57 percent of indirect finance. However, relative contributions by those two sectors were reversed in 2000 to 56 percent from banks and 44 percent from NBFIs. Loans and discounts in 2021 are 2,051 trillion won ($1,725B) from banks and 1,164 trillion won ($979B) from NBFIs, equivalent to 64 percent and 36 percent of indirect finance, respectively. 44

Capital Markets and Capital Formation in Korea

Direct finance is a major contributor to Korea’s financial development. Direct finance has grown from 44 percent of total finance in 1990 to 62 percent in 2021, amounting to 5,316 trillion won ($4,472B), about 40 times the amount in 1990. Direct finance comprises money market and capital market finances. Capital markets have been a predominant contributor to direct finance growth. The share of capital markets in direct finance grew from 83 percent in 1990 to 93 percent in 2021, amounting to 4,953 trillion won ($4,166B). The last three decades have seen tremendous growth both in bond and equity markets. Bond markets grew 66 times from 1990 to 2021; equity markets 34 times in the same period. Fast growth in both markets expanded the size of capital markets in 2021 to more than 43 times that of 1990. The money markets in Korea show relatively slow growth compared to the capital markets, experiencing 16-​fold growth over the sample period (Table 3.4). As a result, the share of money markets in direct finance has dwindled from 17 percent in 1990 to 7 percent in 2021, amounting to 363 trillion won ($334B). However, the money market’s proportion in nominal GDP increased from 10 percent in 2011 to 19 percent in 2020 (Table 3.5). Out of the five primary money market instruments, the commercial paper (CP) market is the largest, with 186 trillion won ($171B) as the ending balance in 2020, followed by the markets for repurchase agreement (RP) and short-​term bonds (STB). Multiple factors contributed to the growth of financial markets in Korea. The nation’s economic growth, the government’s policies to open capital markets to foreign investors and to promote capital market development, the improvement in the financial market infrastructures since the 1997 Asian currency crisis, and the advances in financial transaction techniques are primary contributors to the financial development in Korea (Bank of Korea, 2017, 2018).

Table 3.5 Money market size (trillion won, percent) Year

Call

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

30.8 28.2 29.0 24.6 17.9 15.8 16.0 13.2 11.5 12.1 11.1B

Won USD

RP

CD

15.6 23.4 24.7 29.5 38.8 51.9 61.5 75.4 92.6 106.4 97.9B

3.4 3.3 3.2 3.5 7.7 6.7 5.4 8.8 13.3 10.0 9.2B

CP 87.1 112.5 126.0 133.8 123.0 140.9 151.2 158.8 182.9 185.8 171.0B

STB

Total

GDP

Share

-​ -​ 12.6 21.0 30.7 34.5 43.1 45.8 54.6 48.9 45.0B

136.9 167.4 195.5 212.4 218.1 249.8 277.2 303.0 354.9 363.2 334.3B

1,388.9 1,440.1 1,500.8 1,562.9 1,658.0 1,740.8 1,835.7 1,898.2 1,924.5 1,933.2 1,779.6B

9.9 11.6 13.0 13.6 13.2 14.3 15.1 16.0 18.4 18.8

Notes: The sizes of Call and RP are measured by average daily balance, while CD, CP, and STB (short-​term bonds) are measured by the ending balance in each year. Share represents the size of the money market total as a percentage of nominal GDP. Conversion to US Dollars is based on the closing exchange rate of Korean Won against US Dollar in the Seoul interbank foreign exchange market at the end of 2020 (1,086.30 Won/​ USD) obtained from the Economic Statistics System of the Bank of Korea. Sources: 2020 Short-​Term Financial Market Review, Bank of Korea (2021); 2015 Short-​Term Financial Market Review, Bank of Korea (2016).

45

Routledge Handbook of Korean Business and Management

Capital Markets Financial instruments such as bonds and stocks are issued and traded in capital markets. The Korean capital markets grew substantially over the last three decades, from 114 trillion won in 1990 to 4,953 trillion won ($4,166B) in 2021, which amounts to a 43-​fold growth (Table 3.6).

Bond Markets Size The bond markets in Korea are venues for government, municipal, financial, special law, and corporate bonds, which achieved a 66-​fold growth from a mere 35 trillion won in 1990 to 2,298 trillion won ($1,933B) in 2021. Government bond markets have shown the most impressive growth during the last three decades, from 3 trillion won in 1990 to 963 trillion won ($810B) in 2021, currently taking the largest share of the bond markets. The growth in the government bond markets is partially due to the diversification of the Korea Treasury Bonds (KTBs) maturities. Until 2011, KTBs were issued with four different original maturities of 3, 5, 10, and 20 years. Then, 30-​year and 50-​year KTBs were, respectively, introduced in 2012 and 2016. Presently, the second biggest bond markets are the markets for financial bonds such as industrial financial bonds, monetary stabilization bonds, housing corporation bonds, and bank bonds (Korea Securities Depository, 2022). The corporate bond markets are the third largest, followed by special law bonds and municipal bonds. Special law bonds include Seoul Metropolitan Subway bonds, Korea Deposit Insurance Corporation bonds, Korea Asset Management Corporation bonds, Korea Electric Power Corporation bonds, and land development bonds (Korea Securities Depository, 2022). The market sizes for those bonds in 2021 are 762 trillion won ($641B) for financial bonds, 317 trillion won ($267B) for corporate bonds, 228 trillion won ($191B) for special law bonds, and 28 trillion won ($23B) for municipal bonds. Municipal bond markets have decreased over the last three decades in their bond market share from 3.1 percent in 1990 to 1.2 percent in 2021.

Foreign Investment in the Korean Bond Markets The Korean bond markets have been entirely open to foreign investors since 1998. Restrictions on foreign investment in listed and unlisted bonds were lifted in December 1997 and July 1998, respectively (Table 3.7). However, foreign ownership of Korean bonds remained small, below 1 percent of the listed bonds until 2006 (Figure 3.1). It increased to 4.5 percent in 2007 and 7.0 per­ cent in 2011 and remained below 8 percent until 2020. Though foreign ownership rose in 2021, it is still below 10 percent. Limited maturities, a paucity of investment-​grade bonds, and withholding taxes discouraged foreign investment in the Korean bond markets (Eichengreen, Lim, Park, and Perkins, 2015).

Bond Yields The yields in the Korean bond markets are often represented by the yields on the 3-​year KTBs and 3-​year corporate bonds (AA-​) (Figure 3.2). The bond yields have been trending down over the last three decades. During the Asian currency crisis, the yields peaked at 24.31 percent for the 3-​year corporate bonds in December 1997 and 17.13 percent for the 3-​year KTBs in April 1998.

46

Capital Markets and Capital Formation in Korea Table 3.6 Capital market size (trillion won, times) Year

1990

2000

2010

(A) Total (% of GDP) Bonds (% of total) Government bonds (% of bonds) Municipal bonds (% of bonds) Financial bonds (% of bonds) Special law bonds (% of bonds) Corporate bonds (% of bonds) Stocks (% of total) KOSPI (% of stocks) KOSDAQ (% of stocks) KONEX (% of stocks) GDP

2021 (B)

2021

Won

USD

(B/​A)

114.0 (56.8)

640.7 (98.3)

2,352.8 (177.9)

4,952.7 (239.1)

4,166.1B

43.4

35.0 (30.7) 3.1 (8.9) 1.1 (3.1) 6.6 (18.9) 2.1 (6.0) 22.1 (63.1)

423.7 (66.1) 73.3 (17.3) 9.8 (2.3) 115.5 (27.3) 97.2 (22.9) 127.9 (30.2)

1,112.9 (47.3) 362.6 (32.6) 15.8 (1.4) 339.7 (30.5) 204.2 (18.3) 190.6 (17.1)

2,297.9 (46.4) 963.3 (41.9) 27.8 (1.2) 762.4 (33.2) 227.5 (9.9) 316.8 (13.8)

1,932.9B

65.7

810.3B

310.7

23.4B

25.3

641.3B

115.5

191.3B

108.3

266.5B

14.3

79.00 (69.3) 79.00 (100.0)

217.0 (33.9) 188.0 (86.6) 29.0 (13.4)

1,239.9 (52.7) 1,141.9 (92.1) 98.0 (7.9)

2,654.8 (53.6) 2,203.4 (83.0) 446.3 (16.8) 5.2 (0.2)

2,233.2B

33.6

1,853.4B

27.9

651.6

1,322.6

2,071.7

200.6

375.4B 4.3B 1,742.6B

10.3

Notes: The table shows the capital market size in Korea. (1) Bond market size is based on outstanding balances at the end of the periods. Government bonds include treasury, national housing, grain, and foreign exchange stabilization bonds. Municipal bonds include urban railway bonds and regional development bonds. Financial bonds include industrial financial bonds, monetary stabilization bonds, housing corporation bonds, and bank bonds. Special law bonds include Seoul Metropolitan Subway bonds, Korea Deposit Insurance Corporation bonds, Korea Asset Management Corporation bonds, land development bonds, and Korea Electric Power Corporation bonds. (Korea Securities Depository, 2022) (2) Stock market size is based on the market cap­ italization of listed stocks at the end of the periods on the Korea Composite Stock Price Index (KOSPI), the Korea Securities Dealers Automated Quotations (KOSDAQ), and the Korea New Exchange (KONEX). (3) Conversion to US Dollars is based on the closing exchange rate of Korean Won against US Dollar in the Seoul interbank foreign exchange market at the end of 2021 (1,188.80 Won/​USD) obtained from the Economic Statistics System of the Bank of Korea. Sources: Bank of Korea (2017); Korean Statistical Information Service (https://​kosis.kr/​index/​index.do); Statistics for securities deposit for January 2022, Korea Securities Depository (www.ksd.or.kr/​ko/​info​rmat​ ion-​dis​clos​ure/​resou​rce-​cen​ter/​sec​urit​ies-​dep​osit​ory-​sta​tist​ics).

47

Routledge Handbook of Korean Business and Management Table 3.7 Chronology of Korean capital market opening to foreign investors Opening initiated

Opening completed

Equities

KOSPI KOSDAQ

January 1992 September 1996

May 1998 May 1998

Bonds

Listed Unlisted

July 1994

December 1997 July 1998

Derivatives

Stock index futures Stock index options

May 1995 July 1997

May 1998 May 1998

KOSPI: Foreign ownership limit Overall limit

January 3, 1992 December 1, 1994 July 1, 1995 April 1, 1996 October 1, 1996 May 2, 1997 November 3, 1997 December 11, 1997 December 30, 1997 May 25, 1998

Limit for individual investors

Private companies

Public corporations

Private companies

Public corporations

10% 12% 15% 18% 20% 23% 26% 50% 55% No limit

8% 8% 10% 12% 15% 18% 21% 25% 25% 30%

3% 3% 3% 4% 5% 6% 7% 50% 50% No limit

1% 1% 1% 1% 1% 1% 1% 1% 1% 3%

Notes: The tables show the dates for the Korean capital market opening for direct investment by foreign investors. Source: Analysis of Investment Trend by Foreign Investors in the Korean Securities Market for Year 2001, Financial Supervisory Service (2002).

Since then, the bond yields declined and hovered around 5 percent until the 2008 global financial crisis. The 3-​year corporate bond yield soared to 8.56 percent in November 2008, resulting in the spread of 4.38 percent between the corporate and Treasury bonds. The corporate bond and KTB yields remained below 3.00 percent since July 2014 and August 2012, respectively. The KTB yield further declined to 1.94 percent in November 2018 and has stayed below 2.00 percent since then. The spread between the yields on corporate bonds and KTBs peaked at 9.35 percent in December 1997 during the Asian currency crisis. Then, it fell to 97 bps in April 1998 and stayed around 100 bps before declining to 47 bps in October 2004 and remaining below 50 bps until September 2007. After that, the spread widened until it topped 438 bps in December 2008 during the global financial crisis. The spread decreased again as the economy rebounded from the global financial crisis. After staying below 50 bps for December 2012–​March 2017, the spread increased to over 100 bps in April 2020 in the early stage of the COVID-​19 pandemic and remained at that level until February 2021. As of December 2021, the spread is 61 bps.

48

Capital Markets and Capital Formation in Korea

Figure 3.1 Foreign ownership of domestic bonds. Notes: The figure shows the percentage ownership of Korean listed bonds by foreign investors based on the balance of holdings at the end of each year. Sources: Analysis of Investment Trend by Foreign Investors in the Korean Securities Market for Years 1999 to 2003, Financial Supervisory Service (2000 to 2004); Foreign Investors’ Securities Transaction Trend for Years 2004 to 2021, Financial Supervisory Service (2005–​2022a, 2021, 2022b).

Stock Markets The Korea Exchange (KRX) A rudimentary stock market came into existence when the Korea Stock Exchange (KSE) began trading in 1956. The Korea Securities Dealers Automated Quotations (KOSDAQ) was formed by reorganizing the over-​the-​counter market in 1997. In 1999, the Korea Futures Exchange (KOFEX) was created. The KSE, KOSDAQ and KOFEX merged in January 2005, becoming the Korea Stock and Futures Exchange, later renamed the Korea Exchange (KRX) in February 2009. The Korea New Exchange (KONEX) was launched as a third venue for raising equity capital in July 2013. The KRX operates the KOSPI, KOSDAQ, KONEX and derivatives markets. It handles, among others, the trading of securities and derivatives; clearing and settlement subsequent to the trading; listing of securities; reporting and disclosure by listed companies; and market surveillance (for the details of the KRX businesses, see the KRX Articles of Incorporation2). The KRX currently ranks 7th globally in the number of listed companies and 15th in market capitalization (Table 3.8). It is also among the top ten derivatives markets for several derivative products in the trading volume (The World Federation of Exchanges, 2022). The KOSPI market is the primary stock market in Korea, where companies meeting stringent listing requirements are listed. The listing criteria include the number of years in operation

49

Routledge Handbook of Korean Business and Management

Figure 3.2 Bond market yields. Notes: The figure shows the yields for the 3-​year Korea Treasury Bond (KTB) and 3-​year corporate bond (AA-​). Source: Economic Statistics System of the Bank of Korea (https://​ecos.bok.or.kr/​).

Table 3.8 Market capitalization and number of listed companies of the major exchanges in the world Ranking

Exchange

Market cap. (USD T)

Share (%)

Number of firms

Share (%)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

NYSE NASDAQ –​US Shanghai Stock Exchange Euronext Japan Exchange Group Shenzhen Stock Exchange Hong Kong Exchanges and Clearing LSE Group London Stock Exchange National Stock Exchange of India TMX Group Saudi Exchange (Tadawul) Nasdaq Nordic and Baltics Deutsche Boerse AG SIX Swiss Exchange Korea Exchange Total for exchanges worldwide

27.7 24.6 8.2 7.3 6.5 6.2 5.4 3.8 3.5 3.3 2.7 2.6 2.5 2.3 2.2 124.6

22.2 19.7   6.5   5.9   5.3   5.0   4.4   3.1   2.8   2.6   2.1   2.1   2.0   1.9   1.8

2,525 3,678 2,037 1,995 3,824 2,578 2,572 1,998 2,053 3,504 224 1,236 492 232 2,406 59,307

4.3 6.2 3.4 3.4 6.4 4.3 4.3 3.4 3.5 5.9 0.4 2.1 0.8 0.4 4.1

Notes: The table shows the market capitalization and the number of listed companies on the major exchanges worldwide as of December 2021. Source: The World Federation of Exchanges (https://​focus.world-​exchan​ges.org/​issue/​febru​ary-​2022/​mar​ket-​ sta​tist​ics).

50

Capital Markets and Capital Formation in Korea

Figure 3.3 Trend of the Korea Composite Stock Price Index (KOSPI) (January 4, 1980 =​100). Notes: The graph shows the trend of the Korea Composite Stock Price Index (KOSPI) for 2000–​2021 relative to the index level of 100 on January 4, 1980. Sources: Korean Statistical Information Service (https://​kosis.kr/​statH​tml/​statH​tml.do?orgId=​343&tblId=​DT_​343​_​201​ 0_​S0​027&conn_​p​ath=​I3).

since incorporation (at least 3 years), firm size (at least 30 billion won of equity capital; at least one million shares to be listed), distribution of shares (at least 500 general shareholders3; at least 25 percent of shares held by general shareholders), and financial performance (measured by sales, profit, and market capitalization). The KOSDAQ market demands less rigorous listing requirements than the KOSPI market and provides fund-​raising opportunities to mature small-​and medium-​sized enterprises (SMEs). On the other hand, the KONEX market is exclusively for early-​ stage SMEs and startups, and the listing requirements are significantly relaxed compared to those of the KOSDAQ market. The KRX has been issuing various capital market-​related indices since 1964. Out of 350 indices as of August 2022, the KOSPI is considered the leading index of the Korean stock market. In addition, the KOSPI 200, widely known as a Korean blue-​chip index, follows the top 200 companies listed on the KOSPI. It is used as an underlying asset for the KOSPI 200 futures and options as well as a benchmark index for several index funds and ETFs.

Size and Participants Over the last three decades, the Korean stock markets experienced remarkable growth, expanding listed stocks’ market capitalization to 2,655 trillion won ($2,233B) in 2021, a 34-​fold growth from 1990 (Table 3.6). As of 2021, the KOSPI market (2,203 trillion won ($1,853B)) accounts for 83 percent of the market capitalization, followed by the KOSDAQ (446 trillion won ($375B)) and KONEX markets (5 trillion won ($4B)). The phenomenal growth of the Korean stock market is

51

Routledge Handbook of Korean Business and Management

also evidenced by the evolution of the KOSPI (Figure 3.3). The KOSPI rose from 100 in 1980 to above 3,000 in 2021. Diverse investors have actively participated in the Korean stock market over the past two decades (Table 3.9). Individual investors have been the largest investor group in terms of annual purchase value, followed by foreign investors, investment trusts, pension funds and financial

Table 3.9 Annual purchase value by investor group as a percentage of the total purchase in the Korea Exchange (percent) Year

Individuals

Foreigners

Institutional investors Investment trusts

Pension funds

Financial investment companies

Other institutional investors

Total

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

83.5 78.0 73.9 64.2 72.4 65.1 63.7 57.5 67.7 64.1 64.5 62.9 59.6 58.8 67.7 66.8 63.1 65.5 64.6 76.9 73.6

6.6 8.9 12.2 19.6 13.9 17.9 18.4 20.4 14.0 16.5 14.6 17.6 21.5 22.3 17.7 19.3 21.6 19.5 19.8 12.5 15.1

4.1 5.6 5.9 7.2 6.5 8.5 8.4 10.0 8.9 6.3 6.6 5.4 4.9 4.7 3.2 2.6 2.3 2.2 1.8 0.9 1.0

2.0 3.1 3.6 5.0 4.1 4.5 5.3 5.9 2.7 3.8 5.3 5.7 4.8 4.5 3.9 3.3 4.3 4.9 5.8 4.3 5.1

1.9 2.5 2.4 1.8 1.4 2.0 2.2 2.9 2.6 3.5 3.4 2.8 4.0 3.8 3.1 3.8 4.7 3.9 4.8 3.8 3.6

1.9 2.0 2.0 2.1 1.6 2.0 2.1 3.2 2.9 4.4 4.3 4.5 4.3 4.6 3.2 3.0 2.8 3.1 2.4 1.0 1.0

9.9 13.2 13.9 16.2 13.7 17.1 17.9 22.1 17.1 18.0 19.6 18.4 17.9 17.6 13.4 12.7 14.2 14.1 14.8 9.9 10.6

Average

67.3

16.6

5.1

4.4

3.1

2.8

15.4

Notes: The table shows the annual purchase value of the listed stocks by investor group as a percentage of the total purchase value in the Korea Exchange. Financial investment companies include securities, futures, and investment advisory companies. Pension funds include National Pension Service, Teachers’ Pension, Military Pensions, Government Employee Pension Service, and the Scientists and Engineers Mutual-​Aid Association (SEMA). Other institutional investors comprise private equity funds, banks, insurance companies, and mutual savings banks. Foreigners include foreign investors registered to the Financial Supervisory Service and unregistered foreign investors. The sum of the percentages does not add up to 100 percent due to the exclusion of other corporations participating in the stock market to repurchase their own shares or manage temporary surplus funds. Source: Korean Statistical Information Service (https://​kosis.kr/​index/​index.do).

52

Capital Markets and Capital Formation in Korea

Figure 3.4 Share of foreign ownership in the Korean stock market. Notes: The figure shows foreign investors’ percentage ownership of Korea Exchange-​listed stocks based on the market capitalization of stocks owned in the KOSPI and KOSDAQ markets. Sources: Status and Analysis of Capital Market Opening for Year 1998, Financial Supervisory Service (1999); Analysis of Investment Trend by Foreign Investors in the Korean Securities Market for Years 1999 and 2000, Financial Supervisory Service (2000 and 2001); Statistics Korea (www.index.go.kr/​potal/​stts/​idxM​ain/​select​PoSt​tsId​xSea​rch. do?idx​_​cd=​1086&stts​_​cd=​108​601&freq=​Y).

investment companies. Individual investors, on average, account for 67 percent of the total purchase value in the KRX, followed by 17 percent foreign investors and 15 percent institutional investors.

Foreign Ownership of the Korean Stock Market Opening the Korean stock market to foreign investors progressed in several phases, beginning in January 1992 and completing in May 1998, when ceilings on foreign investment in equities, except for investment in public corporations, were lifted (Table 3.7). Since then, foreign owner­ ship of stocks has climbed to more than 40 percent of Korea’s total market capitalization in 2003, from about 5 percent in 1992 (Figure 3.4). Foreign ownership in the Korean stock market has remained above 30 percent for most of the last two decades. However, during the 2008 global financial crisis, foreign ownership declined to 27 percent. As of 2021, 29 percent of the stocks are owned by foreign investors.

Key Parameters of the KOSPI and KOSDAQ Markets Table 3.10 presents key parameters for the KOSPI and KOSDAQ markets. The two markets saw a substantial increase in the number of listed firms and market capitalization in the last 17 years. The 53

Routledge Handbook of Korean Business and Management Table 3.10 Key parameters for the KOSPI and KOSDAQ markets Year

2005

2010

2015

2019

2020

2021

Average

KOSPI Number of Companies Market Cap. (trillion won) Trading Volume (billion shares) Trading Value (trillion won) Net Worth to Total Assets (%) Net Profit to Net Worth (%) Net Profit to Sales (%) Dividend Payout Ratio (%) Dividend Yield (%) P/​E P/​B

702 655 116 786 54.1 12.3 7.1 19.2 1.7 11.0 1.6

777 770 799 800 824 774 1,142 1,243 1,476 1,981 2,203 1,215 96 113 116 222 258 113 1,411 1,327 1,227 3,026 3,825 1,496 53.3 56.5 58.6 58.3 57.1 55.3 11.3 6.7 3.4 4.1 8.4 7.6 6.8 5.1 2.9 3.7 6.9 5.1 13.5 21.3 27.3 50.3 19.2 21.2 1.1 1.3 2.0 1.5 1.8 1.5 17.8 15.1 18.2 29.5 12.7 15.0 1.5 1.1 0.9 1.2 1.1 1.2

KOSDAQ Number of Companies Market Cap. (trillion won) Trading Volume (billion shares) Trading Value (trillion won) Net Worth to Total Assets (%) Net Profit to Net Worth (%) Net Profit to Sales (%) Dividend Payout Ratio (%) Dividend Yield (%) P/​E P/​B

918 71 149 446 49.9 1.8 1.0 21.4 0.9 -​ 1.9

1,029 1,152 1,405 1,468 1,532 1,145 98 202 241 386 446 173 161 150 203 405 435 183 483 874 1,060 2,682 2,942 895 53.8 61.4 60.8 60.5 61.1 56.7 3.3 4.5 2.3 4.2 6.3 2.2 2.0 3.7 2.1 4.0 6.3 1.9 17.1 21.1 24.4 21.4 18.5 20.6 0.7 0.6 0.6 0.4 0.4 0.7 -​ 41.8 48.4 62.7 38.7 40.4 1.5 2.1 1.7 2.6 2.5 1.8

Notes: The table reports key parameters for the KOSPI and KOSDAQ markets. Averages are calculated using the data from 2005 to 2021, except for the KOSDAQ P/​E average, which is based on 2011–​2021. Source: Korean Statistical Information Service (https://​kosis.kr/​index/​index.do).

KOSPI market has 824 listed companies as of 2021, while the KOSDAQ market has almost twice as many listed companies (1,532 companies). The market capitalization of the KOSPI market is almost quintuple that of the KOSDAQ market as of 2021. However, both markets experienced a significant decline in market capitalization during the 2008 global financial crisis. Notably, the KOSDAQ market capitalization in 2008 fell below half of that in the prior year. The trading volume and value significantly increased during the COVID-​19 pandemic. Compared to the previous year, the trading volume and value in 2020 for both markets soared to about two-​fold and two-​and-​half-​fold, respectively. Investors’ interest in the Korean stock market continued into 2021, particularly in the KOSPI market, as the trading volume and value increased by 16 percent and 26 percent, respectively. In 2021, 258 billion shares (3,825 trillion won, $3,218B) were traded in the KOSPI market and 435 billion shares (2,942 trillion won, $2,475B) in the KOSDAQ market. The firms in both stock markets show similar capital structures based on the ratios of net worth to total assets: on average, 55 percent and 57 percent for the KOSPI and KOSDAQ, respectively. However, the two markets show a striking difference in profitability. The firms in the KOSPI market are, on average, much more profitable than those in the KOSDAQ market. The average 54

Capital Markets and Capital Formation in Korea

ROE of the KOSPI firms (7.6 percent) in the last 17 years is more than three times that of the KOSDAQ firms (2.2 percent). We see a similar discrepancy in profitability when measured by net profit margin: 5.1 percent for KOSPI vs. 1.9 percent for KOSDAQ. Korean firms have distributed about 20 percent of net income to equity investors, as the markets’ average dividend payout ratios indicate. Both markets show almost the same average dividend payout ratios: 21.2 percent for the KOSPI market and 20.6 percent for the KOSDAQ market. However, investors in the KOSPI market have received a much higher dividend per unit purchase price than the KOSDAQ market participants, as shown by the average dividend yield of the KOSPI market (1.5 percent), double that of the KOSDAQ market (0.7 percent). Price multiples show that the KOSDAQ firms are overvalued relative to the KOSPI firms. The average P/​E of the KOSDAQ firms (40.4) is about three times that of the KOSPI firms (15.0). The average P/​B of the KOSDAQ firms (1.8) is also higher than that of the KOSPI firms (1.2). During the pandemic, in line with the trading volumes and values, the P/​E ratios rose significantly in 2020 to 29.5 (KOSPI) and 62.7 (KOSDAQ) from the previous year’s levels of 18.2 (KOSPI) and 48.4 (KOSDAQ). It is primarily due to a vast amount of liquidity injected into the economy to alleviate the pandemic’s adverse effects, inevitably resulting in inflated stock prices.

Raising Capital by Stock Issuance: IPOs and SEOs Table 3.11 reports the size of new stock issuance in the KRX by initial public offerings (IPOs) and seasoned equity offerings (SEOs) from 1993 to 2021. We can see substantial variations in the amounts raised by stock issuance year by year. During the last three decades, the capital raised by IPOs was the largest in 2021, amounting to 14.5 trillion won ($12.2B) for the KOSPI and KOSDAQ markets combined. The historic IPO value in the year was primarily due to the several massive IPOs exceeding one trillion won by well-​known companies such as Krafton (2.8 trillion won), KakaoBank (2.6 trillion won), Kakao Pay (1.5 trillion won), and Hyundai Heavy Industries (1.1 trillion won) (Financial Supervisory Service, 2022a). The second largest IPO amount was recorded in 2017 when Netmarble Games (2.7 trillion won) and Celltrion Healthcare (1 trillion won) went public. The third highest IPO value in 2010 was partially due to the introduction of Special Purpose Acquisition Companies (SPACs)4 in December 2009. Financing by SEOs was the greatest in 1999, with 35.8 trillion won ($31.5B) raised, as companies relied on the stock market to meet the 200 percent debt-​equity ratio ceiling mandated by the Korean government during the Asian financial crisis. The second highest SEO activity recorded in 2021 was mainly due to equity issuance by some big corporations, including Korean Air (3.3 trillion won), Hanwha Solutions, Samsung Heavy Industries, POSCO Chemical (1.3 trillion won each), and Hanwha Systems (1.2 trillion won) (Financial Supervisory Service, 2022a). The cumulative IPO amount over the last three decades does not differ much between the KOSPI and KOSDAQ markets. However, the total SEO value of the KOSPI market during the period is more than quadruple that of the KOSDAQ market.

The Korea Discount Finance professionals have long noted that stocks of Korean firms are undervalued and trade at a discount relative to those of their global peers. They call this phenomenon ‘the Korea discount.’ The Korea discount is commonly characterized by lower P/​E ratios of Korean stocks compared to their global competitors (OECD, 2018: 75). Figure 3.5 shows the P/​E ratios for the KOSPI 200 and S&P 500 for January 2004–​December 2021. Most of the time, the P/​Es for the KOSPI 55

Routledge Handbook of Korean Business and Management Table 3.11 Equity offerings (trillion won) Year

IPOs KOSPI

KOSDAQ

SEOs Total

KOSPI

KOSDAQ

Total

Grand total

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

0.2 0.6 0.6 1.4 0.5 –​ 1.7 –​ 0.2 0.6 0.5 0.6 0.5 1.1 1.5 0.3 0.5 2.9 1.3 0.2 0.5 0.7 1.2 2.0 2.8 0.6 0.4 1.7 11.4

–​ –​ –​ –​ 0.2 0.3 2.1 2.6 1.3 1.1 0.6 0.4 0.8 0.6 0.8 0.4 1.2 1.4 1.1 0.3 0.6 1.1 2.0 1.9 3.1 1.7 2.0 2.1 3.1

0.2 0.6 0.6 1.4 0.7 0.3 3.8 2.6 1.5 1.7 1.1 1.0 1.3 1.7 2.3 0.7 1.7 4.3 2.4 0.5 1.1 1.8 3.2 3.9 5.9 2.3 2.4 3.8 14.5

2.8 5.4 5.6 3.7 2.7 13.5 33.4 5.8 5.1 6.2 7.2 4.5 1.9 2.4 9.8 1.4 5.6 3.1 8.8 1.4 2.9 3.1 3.8 4.7 2.9 4.7 1.7 4.7 12.0

–​ –​ –​ –​ –​ 0.2 2.4 4.6 1.2 0.5 1.1 0.8 1.6 2.1 3.6 2.3 3.6 1.2 0.6 0.4 0.7 0.6 0.8 1.5 1.5 1.5 1.0 1.4 2.0

2.8 5.4 5.6 3.7 2.7 13.7 35.8 10.4 6.3 6.7 8.3 5.3 3.5 4.5 13.4 3.7 9.2 4.3 9.4 1.8 3.6 3.7 4.6 6.2 4.4 6.2 2.7 6.1 14.0

3.0 6.0 6.2 5.1 3.4 14.0 39.6 13.0 7.8 8.4 9.4 6.3 4.8 6.2 15.7 4.4 10.9 8.6 11.8 2.3 4.7 5.5 7.8 10.1 10.3 8.5 5.1 9.9 28.5

Total

36.5

32.8

69.3

170.8

37.2

208.0

277.3

Notes: This table reports the amounts of new shares sold by initial and seasoned equity offerings in the Korean stock market. Source: Statistics Korea (http://​index.go.kr/​potal/​main/​EachDt​lPag​eDet​ail.do?idx​_​cd=​1084 and http://​index. go.kr/​potal/​main/​EachDt​lPag​eDet​ail.do?idx​_​cd=​1085).

200 have been substantially lower than those for the S&P 500. Excluding the anomalous period of December 2008 through September 2009, the average P/​E ratio for the KOSPI 200 is a mere 65 percent of that for the S&P 500, indicating a significant undervaluation of the Korean stocks. Interestingly, the gap between the two indices’ P/​Es appears to have expanded in the recent decade. Ducret and Isakov (2020) thoroughly investigate the Korea discount by comparing the P/​Es of Korean firms with those of the firms in 27 countries for the 2002–​2016 period. They report that Korean firms have lower P/​Es relative to all three groups of markets, namely, developed 56

Capital Markets and Capital Formation in Korea

Figure 3.5 Price-​to-​earnings ratios for the KOSPI 200 Index vs. S&P 500 Index. Notes: The graph shows the price-​to-​earnings ratios for the KOSPI 200 and S&P 500 from January 2004 to December 2021. Sources: Nasdaq Data Link (https://​data.nas​daq.com/​data/​MUL​TPL/​SP500​_​PE_​RATI​O_​MO​NTH-​sp-​500-​pe-​ratio-​by-​ month); Korean Statistical Information Service (https://​kosis.kr/​statH​tml/​statH​tml.do?orgId=​343&tblId=​DT_​343​_​201​ 0_​S0​033&conn_​p​ath=​I3).

markets, emerging markets, and Asia-​Pacific markets. They also investigate a commonly cited cause of the Korea discount: the dominance of chaebols in the Korean economy. Chaebols are frequently blamed for poor corporate governance and minority shareholder expropriation, potentially resulting in a lower valuation. However, they do not find evidence that chaebols are responsible for the discounted price of Korean stocks. Other potential explanations for the Korea discount frequently offered by market observers include tensions with North Korea, social and political risks, and inadequate corporate governance.

Derivatives Markets Korea has well-​developed markets for derivatives, particularly financial derivatives. The KRX is the venue for trading various derivatives, including stock index futures and options, single stock futures and options, interest rate futures, and currency/​commodity futures/​options. According to the World Federation of Exchanges (2022), the KRX was among the top ten exchanges in the world for various derivatives in terms of trading volume (Table 3.12). In 2021, the KRX ranked eighth 57

Routledge Handbook of Korean Business and Management Table 3.12 The Korea Exchange’s rankings in the world derivative markets (volume: million contracts, notional value: USD billions) Derivative contract

Ranking

Exchange

Volume

Stock index futures

1 2 3 4 5 6 7 8

B3 –​Brasil Bolsa Balcão CME Group Eurex Japan Exchange Group Moscow Exchange Singapore Exchange Taiwan Futures Exchange Korea Exchange

Stock index options

1 2

National Stock Exchange of India Korea Exchange

Single stock futures

1 2

Long-​term interest rate options and futures

Currency options and futures

Notional value

4,636 1,200 428 281 170 169 118 118

21,260 156,903 22,792 14,340 521 NA 7,532 6,759

13,889 759

172,589 62,650

Borsa Istanbul Korea Exchange

1,749 1,225

118 933

1 2 3 4

CME Group Eurex ASX Australian Securities Exchange Korea Exchange

1,372 603 104 54

148,958 104,066 7,234 5,189

1 2 3 4 5 6

National Stock Exchange of India Moscow Exchange B3 –​Brasil Bolsa Balcão CME Group Matba Rofex Korea Exchange

2,268 907 772 201 111 100

2,303 921 10,333 19,340 110 966

Notes: The table shows the Korea Exchange’s rankings of derivative trading worldwide based on the volume of contracts traded in 2021. Source: WFE Derivatives Report 2021, World Federation of Exchanges (April 2022).

for stock index futures globally, second for both stock index options and single stock futures, fourth for long-​term interest rate options and futures, and sixth for currency options and futures. Five derivative contracts in the KRX were included in the top ten most-​traded derivatives worldwide in 2021 (Table 3.13). KOSPI 200 Options and KOSPI 200 Weekly Options were the third and seventh most-​traded derivative contracts, respectively, among the world’s stock index options. At the same time, DRV Futures SamsungElec and DRV Futures SK hynix ranked first and eighth, respectively, in single stock futures trading. USD Futures were the fifth most traded in the world’s currency futures. Table 3.14 presents the trading volume and notional value of the derivative contracts traded in the KRX in the past decade. Based on the trading volume, stock index options have been the most actively traded derivative contracts until recently, only surpassed in 2020 by single stock futures. In recent years, single stock futures have been the most rapidly growing derivatives in the KRX, expanding the trading volume from 45 million contracts in 2010 to more than one 58

Capital Markets and Capital Formation in Korea Table 3.13 Top-​ranked derivative contracts traded in the Korea Exchange (volume: million contracts, notional value: USD billions) Derivative contract

Ranking

Contract name

Volume

Notional value

Stock index options

3 7

KOSPI 200 Options KOSPI 200 Weekly Options

535 188

138 23

Single stock futures

1 8

DRV Futures SamsungElec DRV Futures SK hynix

354 69

238 72

Currency futures

5

US Dollar Futures

99

1,135

Notes: The table shows the top-​ranked derivative contracts in the world traded in the Korea Exchange based on the volume of contracts traded in 2021. Source: WFE Derivatives Report 2021, World Federation of Exchanges (April 2022).

billion contracts in 2020 and 2021. Other derivatives actively traded in the KRX include stock index futures, interest rate futures, and currency futures. Among the three interest rate futures for 3-​, 5-​, and 10-​year Korea Treasury Bonds (KTBs), the most actively traded contracts are the 3-​year KTB futures. Various currency derivatives are traded in the KRX, including futures on US Dollar, Japanese Yen, Euro and Chinese Yuan. The USD futures are by far the most actively traded, followed by Euro and Japanese Yen futures.

Fintech Korea is rated as the most innovative country in the world by the Bloomberg Innovation Index5 (Jamrisko, Lu, and Tanzi, 2021) and possesses one of the fastest Internet connections as well as the highest smartphone ownership rate globally (95% as of 2019 by Pew Research Center, 2019). However, despite such a favourable environment for fintech development, fintech advances in Korea are less than impressive. According to Findexable, which is a global fintech data and analytics company, Korea’s fintech industry ranks 26th as of 2021 (fell from 18th in 2020) among 83 countries assessed for the quantity of privately owned fintech companies, the quality of those firms, and the local business environment (Findexable, 2021).

Types of Fintech Services As of 2022, 337 fintech firms are operating in Korea, according to the Fintech Portal of Fintech Center Korea. Utilizing the taxonomy by the Financial Supervisory Service (2020b) and Fintech Center Korea, Table 3.15 presents various types of fintech businesses and the number of firms in each category. Of the firms on the Fintech Portal, the largest number of firms (83 firms; 25% of the total) offer payment/​remittance services with which customers can make swift payments and remittances using pre-​registered information (e.g., credit cards) on smartphones. Service providers (service names) in this category include Kakao Pay (KakoPay), Naver Financial (Naver Pay), NHN Payco (Payco), and Viva Republica (Toss Pay). Similar services are also provided by big techs and incumbent financial institutions, such as Samsung Electronics (Samsung Pay), LG Electronics (LG Pay), KB Kookmin Bank (KB Star Banking), KEB Hana Bank (Hana N Wallet), and K Bank (Quick Remittance). 59

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Table 3.14 Annual transactions of the derivative products traded on the Korea Exchange (volume: million contracts, notional value: trillion won) Year

Stock index futures

Stock index options

Single stock futures

Single stock options

Interest rate futures

Currency & commodity futures/​options

Vol.

Vol.

Value

Vol.

Value

Vol.

Value

Vol.

Value

Vol.

Value

Value

Total

Vol.

Value

87

9,946

3,526

318

45

22

NM

NM

28

3,101

67

774

3,752

14,161

2011

87

11,260

3,672

436

60

35

NM

NM

38

3,915

71

796

3,928

16,442

2012

62

7,944

1,575

305

100

60

NM

NM

43

4,607

55

620

1,836

13,535

2013

50

6,421

580

263

96

62

NM

NM

41

4,489

53

585

821

11,821

2014

38

4,880

462

179

96

66

NM

NM

31

3,454

50

529

678

9,107

2015

42

4,954

491

185

165

104

1

NM

38

4,300

54

611

791

10,153

2016

44

4,421

359

128

172

122

12

0.3

41

4,757

66

761

693

10,189

2017

67

4,470

555

125

280

271

18

0.3

34

3,923

62

705

1,016

9,493

2018

99

5,286

675

144

502

375

19

0.3

38

4,336

76

840

1,409

10,982

2019

98

4,697

676

129

617

342

25

0.2

44

5,260

87

1,016

1,547

11,444

2020

154

7,390

745

202

1,127

795

5

NM

48

5,703

107

1,264

2,185

15,354

2021

121

8,056

762

199

1,225

1,110

20

0.2

54

6,174

100

1,149

2,282

16,688

Notes: The table reports the annual trading volume and notional values of the derivative products traded on the Korea Exchange. NM denotes not meaningful. (1) Stock Index Futures include KOSPI 200 futures, mini KOSPI 200 futures, KOSDAQ 150 futures, KRX 300 futures, volatility index futures, and sector index futures. (2) Stock Index Options include KOSPI 200 options, KOSPI 200 weekly options, mini KOSPI 200 options, and KOSDAQ 150 options. (3) ETF futures are included in the Single Stock Futures category. (3) Interest Rate Futures include 3-​, 5-​, and 10-​year Korea Treasury Bond (KTB) futures. (4) Currency & commodity futures/​options include US Dollar futures, Japanese Yen futures, Euro futures, Chinese Yuan futures, gold futures, pork futures, Euro STOXX 50 futures, and US Dollar options. Source: KRX Market Data System of the Korea Exchange (http://​data.krx.co.kr/​conte​nts/​MDC/​MDI/​mdiLoa​der/​index.cmd?men​uId=​MDC0​301).

Routledge Handbook of Korean Business and Management

60

2010

Capital Markets and Capital Formation in Korea Table 3.15 Korean fintech firms by types of business Type

Description

Number (percent)

Payments/​ remittance

Streamlined payments/​transfer services using pre-​registered information on smartphones

83 (24.6)

Wealthtech

Asset management and investments (e.g., Robo-​advisors, Digital brokerage, Integrated management of financial assets, Micro-​ investment, Customized recommendation of financial products, Credit score management, Personal financial assistant)

52 (15.4)

P2P lending/​ Crowdfunding

P2P lending: Lending/​borrowing via online platforms without traditional financial institutions as an intermediary; Crowdfunding: Financing projects or new business ventures via online platforms where investors directly purchase securities issued by the fund users

45 (13.4)

Security/​Identity verification

Fraud detection system (FDS), Fast identity online (FIDO), Decentralized identification (DID)

43 (12.8)

Insurtech

New insurance products (on-​demand insurance, pricing auto insurance by the distance or time driven, health-​promoting insurance), Health care (providing customized health care service and rewarding clients by offering mileage benefits or insurance products based on individual’s health record), Machine-​learning-​based AI underwriting system, Digitized filing for claims, Integrated insurance management platforms,

23 (6.8)

Fintech system integration (SI)

Fintech infrastructure services: Firms develop and offer various fintech solutions B2B (e.g., mobile payment solutions, security and identity verification solutions, financial decision-​making solutions based on AI and chatbot, machine-​learning-​based big data analysis, big data based prediction and modelling services, credit rating and contactless loan solutions based on big data, automated machine learning)

18 (5.3)

Small-​sum overseas remittance

Fast overseas remittance of small amounts with lower fees (limit: $5K per transaction/​$50K per individual annually)

14 (4.2)

Other services

Machine-​learning-​based digital compliance platform (regtech), Blockchain-​based payment and financing systems for medical business, Patent search and analysis solutions, Scraping, Risk prediction, AI chatbot system construction, etc.

59 (17.5)

337 (100.0)

Total

Notes: The table reports Korean fintech firms by types of business categorized by the Fintech Portal of Fintech Center Korea and the Financial Supervisory Service (2020b). Source: Fintech Portal, Fintech Center Korea (https://​fint​ech.or.kr/​web/​comp​any/​comp​anyL​istP​age.do).

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The second most actively provided service is wealthtech (52 firms; 15%). These firms offer various asset management and investment services, such as robo-​advisors, digital brokerage, integrated management of financial assets, customized recommendation of financial products, credit score management, personal financial assistant, and micro-​investment. The service providers include (robo-​advisors) Aim, December & Company, Doomoolmori, Fount, and Quarterback Investments; (digital brokerage) Kakaopay Securities and Toss Securities; (integrated management of financial assets) Banksalad, Broccoli, Kakao Pay, and Toss; (customized recommendation of financial products and personal financial assistant) Kakao Pay, Naver Financial, and Toss; (credit score management) Finda and Teamwink; and (micro-​investment) Tickle. The third most commonly provided services are peer-​to-​peer (P2P) lending and crowdfunding services (45 firms; 13%). P2P lending allows people to lend or borrow money from one another via online platforms managed by brokers without going through traditional financial intermediaries. P2P lending platforms are provided by 8 Percent, Lendit, People Fund, Winkstone Partners, and Y Fund, among others. Crowdfunding is the practice of funding a project or a new business venture by raising money from a large number of people via online platforms. Crowdy, Funding For You, Oh My Company, Open Trade, and Wadiz, among others, offer online crowdfunding platforms. A substantial number of fintech firms provide security and identity verification services (43 firms; 13%). These firms employ various digital technologies such as fraud detection system (FDS), fast identity online (FIDO) using biometric authentication (fingerprint, iris or facial recognition), and blockchain-​based decentralized identification (DID). Fintech firms in this business include (FDS) Data Universe, Infinigru, and Korea Expert; (FIDO) BTWorks, Irience, and One More Security; and (DID) AuthLabs and Iconloop. Insurtech is fintech deployed in the insurance field from product development to sales, underwriting, and insurance claims. Twenty-​three firms (7%) on the Fintech Portal provide various insurtech services. Examples include on-​demand insurance, pricing auto insurance by distance or time driven, insurance products that reward healthy lifestyle choices, machine-​learning-​based AI underwriting systems, digitized filing for claims, and integrated insurance management platforms. Insurtech service providers include Bomapp, Carrot General Insurance, GradeHealthChain, LifeSemantics, Small Ticket, and Tobecon. About 5 percent of fintech firms provide B2B fintech infrastructure services. These firms develop and supply various fintech solutions to their client institutions, such as mobile payment, security, identity verification, AI-​based financial decision making, machine-​learning-​based big data analysis, big data-​based prediction and modelling services, automated machine learning, and contactless loans. The service providers include Nomad Connection, Solidware, Tmonet, and Winning I Biometrics. Another service Korean fintech firms provide is fast overseas remittance of small amounts with lower fees (14 firms; 4%). The remittance limit is $5K per transaction and $50K per individual annually as of 2022. The service providers include E9pay, FinShot, Global Money Express, Hanpass, and WireBarley. In addition, many fintech firms (59 firms; 18%) provide other technology-​enhanced solutions, e.g., machine-​learning-​based digital compliance platforms (i.e., regtech), blockchain-​based payment and financing systems for medical business, patent search and analysis, scraping, risk prediction, and AI chatbot system construction. Cryptoassets are controversial investments as Warren Buffett famously said at the 2022 Berkshire Hathaway’s annual shareholders meeting, “If you told me you owned all of the bitcoin in the world and you offered it to me for $25, I wouldn’t take it.” According to the Financial Services Commission (2022), the total market value of cryptoassets in Korea as of the end of 2021 is 55.2 trillion won ($46.4B), and the average daily transaction for the second half of 2021 amounts to 62

Capital Markets and Capital Formation in Korea

11.3 trillion won ($9.5B). Twenty-​four companies are providing trading services for 623 different cryptoassets, and five firms are providing other cryptoasset-​related services, including custody, management, and transfer. There are four primary cryptoasset exchanges, including Upbit (78% market share in 2021), Bitthumb (17%), Coinone (4.5%), and Korbit (0.4%) (Yonhap Infomax, 2022). In general, cryptoasset prices are highly volatile. The Korean cryptoasset market is not an exception, as shown by the average maximum drawdown (MDD =​ (peak value –​ trough value) /​ peak value) of 65% for the cryptoassets traded during the second half of 2021. Faced with the rapid changes in the financial ecosystem driven by technology-​enhanced innovations, incumbent financial institutions are actively seeking collaboration with fintechs and techfins. Partnerships between fintechs and incumbent financial institutions include Qraft Technologies, a provider of AI-​enabled investment solutions, partnering with Shinhan Bank, KEB Hana Bank, IBK Industrial Bank, and Mirae Asset Securities; Fount, a provider of robo-​advisors and AI-​enabled investment solutions, partnering with Woori Bank, KB Securities, Meritz Asset Management, Samsung Life Insurance, and MetLife (Electronic Times Internet, 2019; Maeil Business News Korea, 2022). Examples of techfins cooperating with incumbents include SK Telecom Co. offering deposit products in collaboration with the Korea Development Bank and DGB Daegu Bank; KT Corp., through a partnership with BNK Busan Bank, BNK Capital, Korea Credit Bureau, and KB Insurance, offering online financial services and a mobile notification service for insurance information; LG Uplus collaborating with Shinhan Financial Group on big data businesses and Shinhan Card on credit card products (The Korea Bizwire, 2020). In addition, incumbent financial institutions run internal fintech incubators (or fintech labs) that recruit fintech startups and provide them with offices, mentoring services (legal, tax, accounting, patents, proofs of concept), funding assistance like a direct investment by the incumbents, joint-​ development and marketing of fintech solutions, and opportunities of advancement into the global market utilizing incumbents’ overseas networks. Examples of fintech labs include KB Innovation Hub (run by KB Financial Group), Shinhan Future’s Lab (Shinhan Financial Group), 1Q Agile Lab (KEB Hana Bank), DinnoLab (Woori Bank), and DreamPlus (Hanwha Life Insurance), among others (Financial Supervisory Service, 2020b).

Operating Performance of Fintech Firms Table 3.16 reports Korean fintech firms’ operating performance in recent years based on 186 firms that publicly released their operating performance for three consecutive years, 2018–​2020. We find modest revenue growth and worsening profit. With an overall revenue growth of 13.5% from 2018 to 2020, the operating profit for the Korean fintech industry declined by almost 55%, primarily due to a significant drop in the cryptoasset exchanges’ operating performance. Revenues in 2020 by business types show that the largest revenue was generated in the payment/​ remittance market (2,553 billion won; $2.4B), followed by insurtech (599 billion won; $0.6B), other fintech services (482 billion won; $0.4B), and cryptoasset exchanges (419 billion won; $0.4B). Operating profit in the same year shows that only four service types were in the black, including payment/​remittance, security/​identity verification, cryptoasset exchanges, and other services. The other five services were in the red, with worse losses in the P2P lending/​crowdfunding and insurtech services. Changes in revenues show that revenues rose from 2018 to 2020 for all services except cryptoasset exchanges. The revenue decline for the cryptoasset exchanges was more than 50%, mainly due to a substantial weakening in cryptoasset trading in 2020 compared to 2018. The average daily cryptoasset transaction amounted to 2.6 trillion won in 2018, having shrunk to less 63

Routledge Handbook of Korean Business and Management Table 3.16 Operating performance of Korean fintech firms (billion won) Type

Payments/​ Remittance Wealthtech P2P lending /​ Crowdfunding Security/​Identity verification Insurtech Fintech SI Small-​sum overseas remittance Cryptoasset exchanges Others Total

Number of firms

2020 Revenue

2018

Operating profit

Changes

Revenue

Operating profit

Revenue

Operating profit

45

2,553

33

1,785

–​149

43.0%

Into profit

18 23

71 72

–​23 –​41

53 49

–​10 –​10

34.0% 48.3%

Loss↑ Loss↑

29

220

16

205

19

7.5%

15 8 8

599 51 41

–​33 –​3 –​12

432 39 11

–​8 0.5 –​11

38.7% 30.3% 278.0%

Loss↑ Into loss Loss↑

4

419

256

957

597

–​56.2%

–​57.0%

441 3,973 ($3.6B)

33 459 ($0.4B)

9.1% 13.5%

–​56.3% –​54.9%

36 186

482 4,509 ($4.2B)

14 207 ($0.2B)

–​16.0%

Notes: The table reports the operating performance of 186 fintech firms that publicly released their performance for 2018–​2020. Changes are calculated by (2020–​2018)/​2018. Conversion to US Dollars is based on the closing exchange rates of Korean Won against US Dollar in the Seoul interbank foreign exchange market at the end of 2018 (1,115.7 Won/​USD) and 2020 (1,086.3 Won/​USD) obtained from the Economic Statistics System of the Bank of Korea. Source: CEOscore Daily (2021) (https://​m.ceosco​reda​ily.com/​page/​view/​2021​0810​1556​1967​818)); Economic Statistics System of the Bank of Korea (https://​ecos.bok.or.kr/​#/​Sea​rchS​tat).

than a third (less than 0.8 trillion won) by May 2020 (The Korea Economic Daily, 2020). The lar­ gest revenue growth occurred in the small-​sum overseas remittance market (278%), followed by P2P lending/​crowdfunding (48%), payment/​remittance (43%), and insurtech (39%). Despite revenue growth for most markets, changes in operating profit present a dismal picture of the Korean fintech industry. Except for the payment/​remittance market, all service areas suffered worsening profit. Notably, cryptoasset exchanges and the market for other services recorded a more than 50% decline in operating profit. Fintech SI went into the red in 2020 after showing a meager profit in 2018.

Summary and Conclusions Over the last three decades, Korea achieved significant financial development by improving its financial infrastructure, fostering financial institutions, and reforming financial markets. The expansion of the Korean financial sector has been primarily driven by the extraordinary growth of capital markets that made more than 40-​fold growth from 1990 to 2021. Bond and stock markets each grew 66 and 34 times during the period. The Korean capital markets have been open to global investors since the late 1990s, which contributed to the substantial participation of foreign investors in the equity markets. In most of the last two decades, foreign ownership in the Korean 64

Capital Markets and Capital Formation in Korea

stock markets remained above 30 percent. However, foreign investors’ share of the bond markets has been relatively small compared to the stock markets, staying below 8 percent until 2020. The derivatives market in Korea saw a massive increase in trading volume since its opening to foreign investors in the late 1990s. As a result, the KRX is among the top ten exchanges worldwide as of 2021 for various derivative instruments based on trading volume, including stock index futures, stock index options, single stock futures, long-​term interest rate options and futures, and currency options and futures. Also, five derivatives contracts in the KRX were among the top ten most-​traded contracts globally in 2021 in stock index options, single stock futures, and currency futures. The fintech industry in Korea currently hosts more than 300 firms that provide various fintech services, including payment/​remittance, wealthtech, P2P lending/​crowdfunding, security/​identity verification, insurtech, fintech SI, and small-​sum overseas remittance. In recent years, the fintech industry showed moderate revenue growth of 13.5% and a declining operating profit of almost 55% from 2018 to 2020. According to Findexable (2021), Korea ranked 26th worldwide in 2021 for fintech industry development.

Notes 1 The correlation coefficient between the total finance to GDP ratio and the IMF financial development index is 0.95 in Korea for 1985–​2015 (Park, Kim, and Park, 2021). For the top 20 countries in the financial development index of the IMF, see https://​data.imf.org/​?sk=​F8032​E80-​B36C-​43B1-​AC26-​493C5​B1CD​ 33B&sId=​148120​7801​912. 2 http://​glo​bal.krx.co.kr/​conte​nts/​GLB/​06/​0601/​060​1000​000/​GLB060​1000​000.jsp 3 General shareholders are the stockholders other than the largest shareholder and significant shareholders. For the details of listing criteria, refer to the Korea Exchange at http://​glo​bal.krx.co.kr/​conte​nts/​GLB/​03/​ 0303/​030​3050​100/​GLB030​3050​100.jsp#46c95​ef65​9ccd​5b63​5c10​9e79​9b1d​c81=​1 4 SPACs are paper companies whose purpose is to merge with other companies after raising funds through IPOs. 5 As of 2021, Korea has been the highest ranked country on the Bloomberg Innovation Index for seven of the nine years since the Index started being published. The Index analyzes dozens of criteria, including research and development spending, manufacturing capability, and concentration of high-​tech public companies.

References Bank of Korea, 2016, Short-​term financial market review for Year 2015, Seoul: Bank of Korea, March 17 (in Korean). Bank of Korea, 2017, Financial markets in Korea, Seoul: Bank of Korea. Bank of Korea, 2018, Financial system in Korea, Seoul: Bank of Korea. Bank of Korea, 2021, Short-​term financial market review for Year 2020, Seoul: Bank of Korea, April 12 (in Korean). CEOSCORE DAILY, 2021, The Korean fintech market grew only 13% in the past 2 years; Cryptoasset exchanges shrank by half, Seoul: CEOSCORE DAILY, August 11 (in Korean). Ducret, R. and Isakov, D., 2020, The Korea discount and chaebols, Pacific-​Basin Finance Journal, Vol. 63 (October), 101396. Eichengreen, B., Lim, W., Park Y.C., and Perkins, D.H., 2015, The Korean economy from a miraculous past to a sustainable future, Cambridge, MA: The Harvard University Asian Center. Electronic Times Internet, 2019, Qraft Technologies receiving investment from Shinhan Bank, Electronic Times Internet, January 7 (in Korean). Financial Services Commission, 2022, Results of research on cryptoasset firms for H2, 2021, Press release, Seoul: Financial Services Commission, February 28 (in Korean).

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Routledge Handbook of Korean Business and Management Financial Supervisory Service, 1999, Status and analysis of capital market opening for Year 1998, Seoul: Financial Supervisory Service, January 29 (in Korean). Financial Supervisory Service, 2000, Analysis of investment trend by foreign investors in the Korean securities market for Year 1999, Seoul: Financial Supervisory Service, February 10 (in Korean). Financial Supervisory Service, 2001, Analysis of investment trend by foreign investors in the Korean securities market for Year 2000, Seoul: Financial Supervisory Service, February 12 (in Korean). Financial Supervisory Service, 2002, Analysis of investment trend by foreign investors in the Korean securities market for Year 2001, Seoul: Financial Supervisory Service, March 7 (in Korean). Financial Supervisory Service, 2003, Analysis of investment trend by foreign investors in the Korean securities market for Year 2002, Seoul: Financial Supervisory Service, February 15 (in Korean). Financial Supervisory Service, 2004, Analysis of investment trend by foreign investors in the Korean securities market for Year 2003, Seoul: Financial Supervisory Service, February 16 (in Korean). Financial Supervisory Service, 2005, Foreign investors’ securities transaction trend for Year 2004, Seoul: Financial Supervisory Service, May 23 (in Korean). Financial Supervisory Service, 2006, Foreign investors’ securities transaction trend for Year 2005, Seoul: Financial Supervisory Service, March 13 (in Korean). Financial Supervisory Service, 2007, Foreign investors’ securities transaction trend for Year 2006, Seoul: Financial Supervisory Service, April 9 (in Korean). Financial Supervisory Service, 2008, Foreign investors’ securities transaction trend for Year 2007, Seoul: Financial Supervisory Service, April 21 (in Korean). Financial Supervisory Service, 2009, Foreign investors’ securities transaction trend for Year 2008, Seoul: Financial Supervisory Service, May 22 (in Korean). Financial Supervisory Service, 2010, Foreign investors’ securities transaction trend for December 2009, Seoul: Financial Supervisory Service, January 19 (in Korean). Financial Supervisory Service, 2011, Foreign investors’ securities transaction trend for December 2010, Seoul: Financial Supervisory Service, January 11 (in Korean). Financial Supervisory Service, 2012, Foreign investors’ securities transaction trend for December 2011, Seoul: Financial Supervisory Service, January 12 (in Korean). Financial Supervisory Service, 2013, Foreign investors’ securities transaction trend for December 2012, Seoul: Financial Supervisory Service, January 9 (in Korean). Financial Supervisory Service, 2014, Foreign investors’ securities transaction trend for December 2013, Seoul: Financial Supervisory Service, January 13 (in Korean). Financial Supervisory Service, 2015, Foreign investors’ securities transaction trend for December 2014, Seoul: Financial Supervisory Service, January 20 (in Korean). Financial Supervisory Service, 2016, Foreign investors’ securities transaction trend for December 2015, Seoul: Financial Supervisory Service, January 25 (in Korean). Financial Supervisory Service, 2017, Foreign investors’ securities transaction trend for December 2016, Seoul: Financial Supervisory Service, February 1 (in Korean). Financial Supervisory Service, 2018, Foreign investors’ securities transaction trend for December 2017, Seoul: Financial Supervisory Service, January 30 (in Korean). Financial Supervisory Service, 2019, Foreign investors’ securities transaction trend for December 2018, Seoul: Financial Supervisory Service, January 30 (in Korean). Financial Supervisory Service, 2020a, Foreign investors’ securities transaction trend for December 2019, Seoul: Financial Supervisory Service, January 13 (in Korean). Financial Supervisory Service, 2020b, Global fintech trend and supervisory policies, Seoul: Financial Supervisory Service, December (in Korean). Financial Supervisory Service, 2021, Foreign investors’ securities transaction trend for December 2020, Seoul: Financial Supervisory Service, January 28 (in Korean). Financial Supervisory Service, 2022a, Corporate direct financing in 2021, Press release, Seoul: Financial Supervisory Service, January 25 (in Korean). Financial Supervisory Service, 2022b, Foreign investors’ securities transaction trend for December 2021, Seoul: Financial Supervisory Service, January 27 (in Korean). Findexable, 2021, Global fintech rankings report, Bridging the gap, Findexable, June 29. Jamrisko, M., Lu, M., and Tanzi, A., 2021, South Korea leads world in innovation as U.S. exits top ten, Bloomberg, February 3.

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Capital Markets and Capital Formation in Korea Korea Securities Depository, 2022, Statistics for securities deposit for January 2022, Seoul: Korea Securities Depository, February 28 (in Korean). Maeil Business News Korea, 2022, Fount providing robo-​advisors with 20 financial institutions, Maeil Business News Korea, February 21 (in Korean). OECD, 2018, OECD economic surveys: Korea 2018, Paris: OECD Publishing. Park, Y.C., Kim, J.K., and Park, H., 2021, Financial liberalization and economic development in Korea 1980–​ 2020, Cambridge, MA: The Harvard University Asian Center. Pew Research Center, 2019, Smartphone ownership is growing rapidly around the world, but not always equally, Washington, DC: Pew Research Center, February 5. Sahay, R., Čihák, M., N’Diaye, P., et al., 2015, Rethinking financial deepening: Stability and growth in emerging markets, IMF Staff Discussion Note, No. SDN/​15/​08, Washington, DC: International Monetary Fund, May. S&P Global Market Intelligence, 2022, The world’s 100 largest banks, 2022, S&P Global Market Intelligence, April 11. The Korea Bizwire, 2020, Telcos expand financial services in cooperation with local banks, The Korea Bizwire, June 13. The Korea Economic Daily (Hankyung), 2020, Cryptocurrencies are still alive with a daily transaction of 760 billion won, Seoul: The Korea Economic Daily (Hankyung), July 9 (in Korean). The World Bank, 2022, World development indicators database, The World Bank, July 1. The World Federation of Exchanges, 2022, WFE Derivatives Report 2021, London: The World Federation of Exchanges, April 28. Yonhap Infomax, 2022, The reasons for the changes in the ranking of domestic coin exchanges last year, Seoul: Yonhap Infomax, January 2 (in Korean).

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PART II

Macro Issues in Big Business Groups

4 THE CORPORATE GOVERNANCE AND PRACTICES OF KOREAN COMPANIES Kyung Suh Park

Introduction: The Korean Puzzle Despite the amazing achievement of Korean companies in global markets, and their critical contribution to the rapid growth of Korean economy, they have been criticized for their poor corporate governance and practices. According to the Asian Corporate Governance Association, Korea and its companies were ranked as ninth among 12 Asian countries in their corporate governance in 2021, and its rank had been deteriorating over the years rather than improving. The undervalued stocks of Korean companies, as well presented by ‘Korea Discounts,’ are an empirical evidence of their poor corporate governance. The discounts on Korean stocks amount to 30 to 40% of their fair market values when they are compared with the values of the stocks of other Asian countries based on their PERs or PBRs (Ducret and Isakov, 2020). From the perspective of corporate governance as a deciding factor for the performance and value of firms, it is a challenging question how companies with such a poor governance can still compete with global players, and emerge as the top notch corporations (Shleifer and Vishny, 1997). As frequently argued, corporate governance might be just one of the multiple factors that decide the performance of a company, or Korean companies might have a unique governance system that dominates the other diminishing features of corporate governance for which they are blamed. The Korean government’s policy regarding the ownership and governance of domestic companies has contributed to the emergence of chaebols as the main juggernauts for the growth of the economy, ensuring the stable rule of controlling families above all. Commercial and capital market laws and regulations including the ones for public corporations also have rendered the operations of the internal and external governance systems of Korean companies in their favour. We note that the historical background of the country, where scarce resources had to be allocated by the government in an optimizing way, and firms have been looking for business opportunities in a close relationship with regulators, has also affected the corporate governance of Korean companies. Notably, Korea is known for its conglomerates, called chaebols, and their controlling families, and they have been managed by governance and ownership structures different from those

DOI: 10.4324/9781003180920-6

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of stand-​alone firms as well as from those of foreign conglomerates. Basically, the controlling families of Korean chaebols have ruled their business with very small stock ownerships of less than 4% on average, which have been decreasing over time with the growth of their business. But, the protective policies of the Korean government have allowed them to exploit the affiliated ownerships of very complicated pyramidal structures, helping them maintain their control over their conglomerates, and achieve a very fast growth without worries of losing control. On the other hand, despite the institutional supports, relatively high inheritance tax of Korea has been a factor that has forced those families to seek for self-​interested, and sometimes illegal transactions, to secure enough capital for their successors at the expense of minority shareholders, which has persistently invited the criticism on their poor governance practices. In this chapter, we overview the history of corporate governance in Korea, identify the unique features of its corporate governance, and evaluate their impacts on the performance of Korean companies. We also evaluate the on-​going efforts to improve the corporate governance of Korean companies, and discuss the implications we have from the Korean case.

Development of Corporate Governance and Practices in Korea Ever since the end of the Korean War in 1953, Korea has achieved an unprecedented economic growth and development, and its companies have emerged as global players in many industries, such as semiconductors, mobile phones, car manufacturing, heavy metals and chemicals, and construction, naming just a few examples. The well-​planned support of the Korean government for businesses and entrepreneurs, also enabled a very efficient use of limited domestic resources, which were allocated to investment opportunities where domestic firms could catch up with global leaders with relative ease. In the meantime, domestic markets were protected by trade barriers and undervalued domestic currency until Korean companies could pass through the initial stage of growth and overcome sheer foreign competitions. In this chapter, we overview the development of the corporate governance and practices in Korea, focusing on a few features that differentiate Korea from other countries in its corporate governance.

Family Control The most important feature of Korean companies would be ‘family control’ under the protective policy of the government. Even though it is a very common form of management observed worldwide, Korea is unique in that more than 97% of its companies listed on the Korea Exchange have a controlling family who controls and manages companies in person (Shleifer and Vishny, 1997; La Porta, Lopez-​de-​Silanes, and Shleifer, 1999), and the proportion is well above that of European civil law countries, such as France, Germany, and Italy, or other Asian countries where family control is quite prevalent. A few exceptions to the family control in Korean companies are those companies which used to be public entities but had been privatized, including POSCO, KT, KT&G, and most of the bank holding companies, whose ownerships have been dispersed due to regulatory ownership restrictions. One major concern when a company grows fast is that its controlling ownership is diluted as the company needs more external capital for growth, given the limited wealth of founding fathers and their families. On the path for growth, there comes a moment when the family ownerships decrease to such a level that a control challenge becomes a possibility. To ensure stable management of business, the Korean government had taken a few measures to protect the control of founders. 72

The Corporate Governance and Practices of Korean Companies

First, the government restricted the ownership of any shareholders other than the founding family members to 10% at the maximum up until 1996. The ownership restriction not only protected the family control, but also imbued the idea that Korean companies were the private property of founding families and no other investors can intervene in the management of the companies. It had been such a powerful philosophy and practice that had dominated the corporate culture and the operation of Korean companies throughout the whole periods of economic growth in Korea ever since the Korean War. Secondly, foreign ownerships had been also restricted ever since they were allowed to invest in public companies of Korea in 1991 when the Korean government began the globalization programme to open the Korean stock market to foreign investors. Foreign investors could invest in local stocks up to 14% of outstanding shares collectively up until 1998 when the restriction was removed. Another factor that enabled the controlling families to control their business with minimum level of stock ownerships is the affiliated companies and their ownerships on other member firms including public companies. Korean cases are compared with that of the US or other countries where only holding companies are listed and most of their subsidiaries remain as private companies. Culturally, lack of trust on others, other than family members, also contributed to the reliance on families, partly due to the Confusian culture of the country. Relationships based on bloodlines, schools and hometowns have mattered more than individual capability or achievement in the choice of executives (Ahn, Kim, Lee, and Park, 2017). Top management, which is mostly comprised of family members contributed to securing trust and cooperation among executives in business operations, especially when old business practices sometimes required illegal activities such as accumulation of slush money through accounting manipulation, needed for lobbying regulators and politicians as well as for private perks. The importance of maintaining a good relationship with the regulators and politicians cannot be overemphasized in an emerging economy, which grows fast and depends on regulators who have the authority to decide which conglomerates will be in charge of which business areas. Important industrial projects and businesses were practically allocated by the government across different business groups, and lobbying those in a position to make the decision was a very critical part of business practices and growth. Existence of a controlling family which had the incentive and resources for lobbying was a very important strategic asset for any business groups. Strong stakeholders in Korea including labour unions and regulators also rendered the existence of controlling shareholders in Korea as a better alternative of governance structure. Korea has maintained a very socialistic culture throughout its history, which emphasizes the equality of people regardless of their social status, and in modern times, employees and labour unions have exercised a very strong voice on the management of companies. As Roe (2006) argues, strong stakeholders necessitate the existence of controlling shareholders in the management of companies, which are a nexus of contracts among diverse stakeholders. The positive side of family control would be the efficiency in business decisions in a fast growing economy, and the long-​term commitment of the families to maximizing the value of their companies over generations to come (Anderson and Reeb, 2003). As the sole owner and controller of a company or a chaebol, a controlling family could take a very long-​term view over the management of its business, and invest in long-​term projects of higher risk but higher returns, such as R&D investments. Above all, they could exercise very strong influence on their executives and employees with their authority based on ownerships and control, ensuring a very efficient management of their business, 73

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which is not an easy task for a professional manager. Particularly, in an economy dominated by business groups as a major form of business, the existence of a controlling shareholder is believed to be one of the factors that has contributed to the efficient operation of the business groups simply because their ultimate decision maker was identical even though their ownership structures are all different, and are in some cases public companies with minority shareholders. While business groups, in general, enjoy the economies of scale and scope by sharing resources and knowledge where materials and services necessary for business were internally secured, it was the controlling family that allowed an easy and efficient coordination among the affiliated companies of a business group. On the other hand, the negative side of the family control is that there is not a proper check and balance on the controlling shareholder-​managers who monopolize on the control and management of the group (Shleifer and Vishny, 1997; Park, Lee, and Jang 2004). Alignment of interests between insiders and outside investors is an important condition for a good corporate performance, and is obtained as long as controlling families maintain a large share ownership, but it was not the case for Korean chaebols. Controlling families have enjoyed the private benefit of control through tunnelling, substantial compensation packages from official positions in multiple of affiliated companies, opportunities to buy stocks and assets at deep discounts, etc., with minimum opportunity costs as their cash flow rights could be minimized. The legal tradition of Korea, based on the Civil Law system, also contributed to such a governance structure where conflicts of interests between controlling families and minority shareholders are not severely penalized. Self-​dealing and pursuit of the private benefit of control based on related party transactions across affiliated companies of different ownership structure has been prevalent, but has rarely been penalized in criminal law suits, and collective action suits by minority shareholders have hardly succeeded (La Porta, Lopez-​de-​Silanes, and Shleifer, 1999; Claessens, Djankov, and Lang, 2000; Morck, Shleifer, and Vishny, 1988, 1989, 1990). To maximize the private use of the free cash flow from retained earnings, Korean companies also have maintained very low dividend payout ratios with the average dividend yield of less than 1.3% historically. The low dividend yields made Korean stock investors focus on frequent trading, pursuing short-​term capital gains (Kim and Jang, 2012; Hwang, Kim, Park, and Park, 2013). Empire building also allowed controlling families to diversity their investment risks, but sometimes led to financial failures through reckless diversification and entrenchment, which was a reason for the Asian Financial Crisis in 1997 (Chae, Kang, Lee, and Lee, 2020).

The Structure of Business Groups Another aspect that differentiates the governance structure of Korean firms, and has helped controlling families maintain their control over their business groups is the pyramidal or circuitous ownership structures of chaebols (Kang, Jang, and Park, 2004, 2006b; Kang, Shin, and Chang, 2005; Almeida, Park, Subrahmanyam, and Wolfenzon, 2011). Pyramidal structures are commonly observed in the business groups of other countries, but Korean cases are rather unique in that partial ownership of subsidiaries are allowed in addition to cross or circular ownerships among member firms, which help minimize the capital requirement on controlling families in their investments in affiliated companies. Furthermore, not only the holding or parent companies, but also many of their subsidiaries have been allowed to be listed on the stock exchange, and cross or circular ownerships among affiliated firms were extensively used. Theoretically, each level of pyramidal ownership halves the capital required to own a majority of shares, and circular or cross ownerships even further reduces the minimum equity capital of a controlling family. 74

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As of 2021, due to the extensive use of pyramidal and cross ownership structures, the controlling families of the ten largest chaebols in Korea can control their groups with the average family ownership of 2.4% only while it is complemented by the affiliated ownership of 55.2% on average, allowing an easy majority position at AGMs. The low level of controlling ownerships of Korean chaebols are well compared with the ownerships of controlling families in Europe, where the latter amounts to 39.6% on average (Maury, 2006). Enlarging the size of a chaebol based on a controlling family was a very critical factor for the growth of the Korean economy when it was to compete with global players of larger economy such as the US, Germany, Japan, among others, in the area of car manufacturing, semiconductors, ship building, and chemical manufacturing, all of which critically depend on the economy of scale in business. Not only goods and services, but financial capital was also easily obtained from other member firms, bypassing any hold-​up issues from market transactions (Shin and Park, 1999; Khanna and Palepu, 2000; Guillén, 2000; Chang, 2003; Joh, 2003; Almeida, Kim, and Kim, 2015). When the Korean economy was at an early stage of development and its financial markets still need financial deepening, the internal capital markets added strategic advantage to business groups, especially those ones which own non-​bank financial firms as their subsidiaries (Alchian and Demsetz, 1972; Park, Lee, and Jang, 2004; Joh and Kim, 2013). Related, the Korean government allowed business groups to invest in and control non-​bank financial institutions such as securities companies, asset management companies, insurance companies, finance companies, etc., and those institutions provided scarce financial capital to affiliated companies directly and indirectly when the interest rates were in their double digits due to lack of domestic and foreign capitals up until the 1990s. The internal market for managers also contributed to the nurturing of able and experienced managers through competition throughout their careers (Jung, Lee, Rhee, and Shin, 2019; Chang, 2003; Jeong, Kim, and Kim, 2022). Managers could develop diverse career experiences across different business areas and obtain a broad view on business, industry, economy and politics as well. The role of family or controlling shareholders was more than important in the management of a business group in Korea as the affiliated companies typically have different shareholders, and need an ultimate decision maker at the top of the hierarchy of control. The long-​term interests and commitment by family ownerships also justified the authority of the families needed for the management of a large group of businesses.

Disparity between Ownerships and Control As the business grows fast and the capital requirement to support the growth also increases, the average family ownership of the affiliated companies has continued to decrease. One interesting fact is that the affiliated ownerships have increased more than enough to cover the decreasing family ownerships and contributed to increased control rights of controlling families, despite the continued efforts of the Korean government to reduce the disparity (see Table 4.1). The enlarging disparities between ownerships and control are mainly due to the increasing affiliated ownerships, and are well compared with the cases of European companies where family controls are a very common form of ownership structures and their disparity is about 4.2% (Maury, 2006). The large disparity between ownership and control is one of the reasons for the dominance of the family control discussed above. The practice of the appointment of family members as CEOs regardless of their previous records or ability is partly related with the low ownership levels of controlling families. An incompetent family successor may screw up their business and firm 75

Routledge Handbook of Korean Business and Management Table 4.1 Increasing disparity in the ownerships of the ten largest chaebols

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2021

Family ownerships

Affiliated ownerships

Control rights*

7.82 4.3 3.3 3.1 3.7 3.2 3.1 2.7 2.8 2.6 2.5 2.5 2.4

35.36 38.79 42.2 43.3 46.0 44.7 44.0 52.8 49.5 54.9 55.2 54.2 55.2

44.16 44.72 45.9 47.1 49.8 48.3 47.4 55.7 52.5 57.6 58.0 56.8 57.7

Source: The Fair Trade Commission of Korea, 2021. The control rights include the stock ownerships of non-​ profit organizations and foundations affiliated with chaebols.

values might go down, but capital gains or losses are not a great concern for controlling families since they can enjoy the private benefit of control that is more than enough to cover any capital losses due to incompetent family successors. Furthermore, the stocks they own are not for sale in general as they needed them for their control on businesses. Stocks they own are more like a fixed asset, thus non-​tradable, for a family. Higher stock price might even be a burden for the family in case stocks need to be inherited to successors as the inheritance tax rates of Korea amounts to more than 60% for the highest tax bracket. If the market for control is well developed, the decreasing ownership of controlling families would have led to the change in the control, but the affiliated ownerships were large enough to protect them from any takeover threats. The increasing ownership by affiliated companies is a way of supplementing the decreasing ownerships of the controlling families, but also reflects the increasing challenge by minority shareholders including corporate governance funds in the form of shareholder activism in corporate management (Choi, Cho, and Sul, 2014). We have been observing increasing ratios of votes against the managerial agendas on AGMs, and the cases of shareholder proposals by minority shareholders including nomination of candidates for independent directors have also increased, even though most of them have failed as the agendas proposed by management usually prevail in the shareholder meetings.

Related Party Transactions and Tunnelling Despite the economy of scale and scope in Korean chaebols, a negative side of the opaque ownership structures of chaebols and the increasing disparity between cash-​flow rights and control rights of the families would be the conflicts of interests between the controlling families and minority shareholders simply because differential family ownerships across affiliated companies provide opportunities for tunnelling (Kang, Jang and Park, 2006a; Kang, Lee, Lee, and Park, 2014). Conglomerates, by nature, internalize transactions for efficient production of goods and services, and controlling families have been able to exploit the situation by pursuing private benefit of 76

The Corporate Governance and Practices of Korean Companies Table 4.2 Related party transactions of the largest 60 chaebols (unit: trillion won)

RPTs

2011

2012

2015

2020

129.9 (12.5%)

163.9 (13.7%)

142.3(11.8%)

161.0(11.6%)

Source: The Fair Trade Commission of Korea, 2021. Numbers in () are the average proportion of RPTs out of the total transactions of chaebols. Table 4.3 Family ownerships and dependency on RPTs Ownerships by family Dependency in 2015 Dependency in 2020

20%~less than 30% 9.0% 9.8%

30%~less than 50% 11.3% 12.2%

50%~less than 100% 16.5% 15.3%

100% 34.6% 28.6%

100%

Source: The Fair Trade Commission of Korea, 2021. Table 4.4 Successor ownerships and dependency on RPTs Ownerships by successors or family Dependency in 2015 Dependency in 2020

20%~less than 30%

30%~less than 50%

50%~less than 100%

12.5% 22.7%

23.1% 24.0%

25.5% 24.3%

59.4% 32.4%

Source: The Fair Trade Commission of Korea, 2021.

control through the related party transactions. Some of the affiliated companies, mainly owned by family members, exist only to charge brokerage fees for transactions involving external suppliers (see Table 4.2). Another interesting fact about the RPTs in Korean chaebols is that the dependency of an affiliated company on RPTs tends to be higher if it is owned more by family members and even more so if the family member is a potential successor, which suggests that an important function of the RPTs is to avoid the heavy gift tax or inheritance tax of the country (Yang, 2016, Chung, Choi, and Jung, 2019). As Table 4.3 shows, an affiliated company, 100% owned by a family, has a dependency of 34.6% on RPTs while the dependency increases to 59.4% if a successor owns it 100% in 2015, for example. Partly due to the efforts of the Government to reduce the RPTs of private benefit, the dependency has decreased over time to 28.6% and 32.4%, respectively, in 2020. The types of transactions between related parties are diverse, and very interestingly include securities transactions where family members have an opportunity to buy the securities of affiliated companies at deep discount before their IPOs (Kang and Baek, 2003; Yoon, 2004; Hwang and Kim, 2016; Kim, Lim, and Yoon, 2017). A well-​known example involving securities transactions to support a successor would be the case of the Samsung Group when its successor received the gift of KRW 6 billion in 1995 and began investing in the affiliated companies before they went public. Presumably, he had opportunities to purchase those securities well below their fair market values, and the market value of the shares he owns has increased to about KRW 14 trillion by the end of 2023. One of the reason why those obvious cases of benefiting family members have been prevalent in Korea without any objection by the BODs is because, by the Korean Commercial Act, the fiduciary duty of managers is limited to company, but not to shareholders, and issues of undervalued securities to a family member was not necessarily illegal in Korea under its civil law tradition. 77

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The Fair Trade Commission of Korea has tried to curb the conflicts of interests by imposing penalties on those RPTs that were suspected to benefit family members. It requires an approval by the Board of Directors and disclosure of RPTs involving more than 10% of equity capital or KRW 10 billion. It also imposes penalty on RPTs when a family owns more than 30% of a subsidiary, or RPT exceeds 30% of its sales since 2013 unless they satisfy the necessary conditions for exemption, where the criteria are the efficiency, urgency, and secrecy of the RPTs. However, those conditions are very subjective depending on how they are interpreted and there had been a continuum of legal disputes between the KFTC and companies over the necessity of the RPTs. Unless the differential ownerships of controlling families across affiliated companies are resolved, the disputes will continue. The holding company system was one of the measures to lessen the conflicts, but it allowed the subsidiaries of a holding company to remain as a listed company, and the conflicts of interests still persist.

Weak Independence of the Board of Directors Malfunctioning of the board of directors is another aspect in Korean corporate governance (Kim, 2006; Kang, Kook, and Yoon, 2015). First of all, they are dominated by controlling shareholders, as about two thirds of the board members on average are executive managers, and non-​executive directors are mostly searched and nominated by insiders, that potentially would hurt their independency. Even though there exists a ‘nomination committee,’ which is mainly comprised of non-​executive directors, the long lists of candidates for directors are prepared by the management in most of the cases. We observe rare cases of objection to board agendas in a board meeting, but directors are less likely to have another term if they object to the managerial agendas. Independent directors are rarely penalized for breach of fiduciary duty in Korea whose legal system originated from the civil law of European countries, and prosecutors have difficulty proving the breach of the fiduciary duty of Korean managers and directors. Civil remedy through derivative action suits or class action suits are rarely tried or successful, if tried, as there is no practice of discovery, and plaintiffs have the burden of proof in general even in a civil law suit. There are cases of shareholder proposals for nomination of directors, but the managerial nominees are usually elected at the AGMs as they are dominated by insiders. The more serious problem with the non-​executive directors of Korean companies is that most of them have no managerial experience in business (Joh and Jung, 2012; Lee and Chung, 2017). More than 85% of the outside directors are professors, lawyers, accountants or ex-​government officers, including prosecutors and tax officers, who might be experts in their own area, but are not familiar with corporate management, which involves capital investments and risk taking. One reason for avoiding directors with managerial background in Korea is the concern for the secrecy of business and lack of trust on outsiders. Due to the weak legal responsibility or fiduciary duty, Korean managers tend to not trust managers from other companies.

Passive Monitoring Role of Institutional Investors Given the lack of expertise and economic incentives of minority shareholders, institutional investors are supposed to play a monitoring role in corporate management. However, other than the National Pension Service of Korea, most of the institutional investors or financial institutions in Korea are subject to the influence of business firms simply because the former relies on the latter for their business, not to mention that major number of financial institutions in Korea except commercial banks are owned and controlled by chaebols. Until the Korean Stewardship Code was introduced in 2017, institutional investors in Korea mostly followed ‘the Wall Street Rule’ and rarely voted against the AGM agendas of Korean companies (Park, 2000; Kim, and Yon, 2014; Kim, Byun, and Lee, 2014; Kim, Park, and Jung, 78

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2020). According to the Korea Corporate Governance Service, which provides proxy service for institutional investors at AGM meetings, the average objection ratio of the domestic institutional investors on AGM agendas was only 0.6% in 2012, while the proxy service agent recommended ‘votes against’ for 18% of the total AGM agendas. Even the National Pension Service is not free in engaging in its investee companies due to the 5% or 10% ownership disclosure rules. Unlike its counterparties in other countries, any institutional investors owning more than 5% of investee company shares in Korea, need to reveal and report their intention of investments, and if they invest with the intention of managerial engagement, the details of the reporting requirements are strengthened. An interesting case was that demanding more dividends used to be classified as an act of engagement, and required stricter disclosure requirements even though it was a principal right of shareholders. It was only in 2019 when the Financial Services Committee of Korea relaxed the rule, and the demand for change in dividend policy does not require any strengthened reporting requirement. The dispute related with dividend practice shows that controlling shareholders in Korea still enjoy monopolistic control on the management of their companies, and that any type of an engagement by institutional investor to improve the governance practice of a company can be interpreted as a challenge to existing managers. Foreign investors are supposedly in an independent position to monitor and exercise shareholder rights against the malpractices of Korean companies because they are free from any business or ownership relations with the latter (Park, Shin, and Choi, 2004). However, they are subject to negative sentiment of local people against engagements by foreign investors (Kim, Eppler-​Kim, Kim, and Byun, 2010; Garner and Kim, 2013). When private equity funds such as the Tiger Fund or the Elliott Management of the US engaged in the management of SK or Samsung Group of Korea, they had to face a negative public reaction. Despite the improper business practices of controlling families, they are interpreted as the sole owner of their business, and engagement by foreign investors are interpreted as an interruption in the control of local companies. Even the capital gains obtained by foreign investors were criticized as a free lunch exploiting the undervaluation of Korean companies even though domestic investors including the controlling families also benefited from substantial rises in the stock prices due to the foreign engagements. After the introduction of the Stewardship Code in 2017, the exercise of voting rights by domestic investors are showing some changes. The objection ratios have been increasing to 4.1% in 2021 on average, but still much lower than those of foreign investors. Despite the increasing votes against management agendas, we rarely observe cases where managerial agendas fail to obtain the approval of majority shareholders, simply because the friendly ownerships of controlling families dominate most of the AGMs unless they have serious financial or reputational issues.

Weak Market for Control As a general sentiment exists that a company is the private property of a controlling family in Korea, challenge for the control of a Korean company is rarely observed. Lack of competition for corporate control in Korea as an external disciplinary mechanism is another factor that features the corporate governance of Korean companies and perpetuates the entrenchment of family managers of dubious capability. Incompetent or immoral managers have been rarely disciplined since hostile takeovers are socially unacceptable forms of control change unless the managers commit serious crimes or show socially unacceptable behaviours. Large control premiums enjoyed by insiders, mainly due to tunnelling of wealth, also impede the change in control in Korea (Cheong and Kim, 79

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2019). In any case, the family controls are protected by affiliated ownerships (Kang, Jang, and Park, 2006b), and are challenged only if financial disasters force them out. Accordingly, corporate mergers and acquisitions executed in Korea are mostly friendly, and are between affiliated companies in many cases. However, those affiliated M&As are another source of the conflicts of interests between the minority shareholders of affiliated companies because the controlling family ownerships are usually different for bidder and target companies. In their study on the changes in the stock prices of companies involved in affiliated M&A deals, Park, Jung and Kim (2018) found that the cumulative abnormal returns around the M&A event dates (–​90, –​2) are a positive function of the ownerships by controlling families, and affiliated companies with lower family ownerships tend to show negative CARs (see Figure 4.1). The empirical results suggest that stock investors in the stock market already knew that the M&A deals would be executed in favour of the controlling families in terms of their transaction prices. In a famous lawsuit involving the exercise of appraisal rights in the affiliated M&A between Samsung Trading Co. and Jaeil Fabrics Co., the Seoul High Court (Case-​2015 Ra20189) judged that the management intentionally delayed the disclosure of a good news on Samsung Trading Co. to favour the controlling family who owns more shares of Jaeil Fabrics Co., and raised the appraisal value by about 20% for the minority shareholders of Samsung Trading Co. The case shows another evidence of a malfunctioning BOD over the approval of the deal. The agenda for the merger deal was submitted to the BOD of Samsung Trading Co. and was approved immediately without any objection by independent directors. Considering the fiduciary duty related with an M&A deal, especially the time and effort to evaluate the appropriateness of a takeover deal including its transaction price, search for other alternatives, or any concern for minority shareholders, the decision was more than swift, possibly showing a case where independent directors in Korea are captivated by management.

Figure 4.1 Family ownership and CARs (–​90, –​2) in affiliated M&As. Source: Park, Jung and Kim, 2017.

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The Asian Financial Crisis and Corporate Governance Reform Cronyism and Failed Governance Ever since the early 1990s, despite its unprecedented success, the Korean economy began to show the symptoms of a country which grew too fast without a parallel development of social infrastructures, which any civil society needs for its sustainable growth. Among others, chaebols, which are characterized by conglomerate business structures and family control, became a dominant power house in the economy, supposedly exercising a substantial influence on regulators and politicians, and building empires of their own through unrelated diversification, for example (Bae, Kwon, and Lee, 2011; Schoenherr, 2019). As expected, the chaebol system of Korea began to have negative impacts on the economy, allegedly suffocating the growth of new and venturous businesses, which has incurred disputes on economic equitability and fairness issues in the society. The deteriorating profitability of chaebols was the most serious problem that even threatened the stability of the whole economy including its financial system. The corporate governance practice of Korean chaebols, which had been touted as the source of fast growth, was by then pointed out as one of the culprits that drove some of the chaebols into financial difficulties and the economy into a financial crisis (Morck, Wolfenzon, and Yeung, 2005; Cho, Shin, and Park, 2016; Yu and Lee, 2016). Among others, the multilayered ownership structures and tunnelling that allowed the pursuit of private interests by controlling families was to blame for deteriorating competitiveness of business groups in Korea (Bae, Kang, and Kim, 2002), Lack of monitoring by the BOD, which is solely comprised of executive officers with no independent directors up until the Asian crisis, wealth transfer through tunnelling, and weak legal penalty on breach of fiduciary duty, among others, led to diversion of corporate resources for the private benefit of controlling families (Park, Lee, and Jang, 2004). Obsession with CEO succession by family members of unverified managerial ability led to improper investment decisions in business. Even illegal activities such as embezzlement were not severely punished under the Civil Law tradition of the Korean law system, and the larger the size of a chaebol involved is, the less are their executives likely to be punished, as symbolized by “Too Big to Jail” (Choi, Kang, Kim, Lee, and Park, 2016; Choi, Kang, and Lee, 2018). Despite the bad performance of existing management and discounted values of companies, change in corporate control occurred only after a business group had wasted all the corporate resources in financial trouble. Facing a financial disruption, failing chaebols exploited affiliated financial institutions as a conduit for corporate financing, which further weakened the monitoring role of financial markets in the Korean economy. The Asian crisis also revealed the weakness of the Korean economy in the process of integrating into the global markets and financial liberalization. Over-​investment financed by foreign debts, mostly short-​term debts, forced its companies and financial institutions including commercial banks to go bankrupt in series as the capital had been invested in failing business with low profitability. The average debt-​to-​equity ratio of Korean chaebols before the crisis amounted to 370%, which should have worked as a warning on the high risk of financial troubles, but the failing conglomerates could continue their business to the last moment of bankruptcy under the government’s exit protection policy of ‘too big to fail,’ with the capital injections from financial institutions including commercial banks. A common feature of bankrupt conglomerates was the diversification into unrelated business areas, which were mostly owned by family members (Bae, Kwon, and Lee, 2011). Lack of transparency in financial reporting practice including accounting fraud also contributed to the spread of the crisis. 81

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Given the failed internal governance, only judicial prosecution could regulate the misconducts of the family, but the legal system of Korea with the civil law origin, was not ready to punish those illegal activities. The Asian financial crisis was a challenge, which 16 of the 30 largest chaebols could not overcome.

The Government’s Reform Policy Independent Directors Understanding that the poor corporate governance of Korean companies was one of the causes of the crisis, the Korean government had revised the Commercial Act and others to introduce extensive measures of new rules starting with ‘the Independent Director System’ in 1999. For the first time in Korean history, listed companies should have at least one independent director on their boards, and the requirement was three or more than half of the size of the BOD if their asset values were larger than 2 trillion won (about US$1.6 billion). Nomination committee and audit committee were required where the majority of their members should be independent. The fiduciary duty of directors and controlling shareholders was also strengthened where de factor directors who do not sit on the board but exercise control on the management of the firms would be liable for any misconducts.

Managerial Transparency The government also forced the top 30 chaebols and companies with assets larger than 2 trillion won to prepare and report combined financial statements. Regulation on related party transactions was strengthened, where transactions larger than 10 billion won (about US$8.0 million) should be approved by the board and disclosed in the case of the top 30 chaebols. Cross ownership was prohibited while existing cases needed to be resolved over a time schedule and the equity holdings of affiliated companies were restricted to no more than 25% of the total equity value of a business group, with no voting rights for shares exceeding the level.1 Debt guarantees among affiliated companies were also prohibited.

Minority Shareholder Rights Another important legal institution introduced after the Asian crisis was the Securities Class Action Suit, effective from 2005. Korea had allowed the Derivative Lawsuit for a long while, but had had only three cases filed by 2004, while no case had been filed before the crisis. Under a derivative lawsuit, the qualification of plaintiff was too restrictive with the minimum of 3% ownership of outstanding shares, held more than 6 months, and the burden of proof lied with plaintiffs. Even if they won, financial award was paid to the company, not to shareholders who bore litigation costs. On the other hand, the burden of proof lies with the defendant under a class action suit, and the awards are paid to the plaintiffs. The securities class-​action suit in Korea applies to four areas of malpractices including insider trading, accounting fraud, failed audit, and stock price manipulation. The minority shareholder rights were also strengthened by lowering the minimum stock ownership eligible for shareholder activism. For example, a shareholder derivative action suit can be initiated with the minimum of 0.01% of stock ownership down from 1% previously. The condition for a shareholder proposal where a candidate for a director can be nominated by shareholders was 82

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eased so that any group of shareholders who collectively own more than 1% of outstanding shares can submit a proposal for AGM. After heated and controversial debates, a cumulative voting system was introduced in 1998 to increase the possibility of minority shareholders to elect a candidate of their own preference on the board. However, the commercial law allowed companies an opt-​out option so that companies can opt not to adopt the voting system by their corporate charter with the approval of shareholders at the AGM. The rules for the market for control was also changed. Previously, any contender for a control should obtain 50%+​1 of shares outstanding, but the threshold was removed in 1999 to facilitate a change in control. Bidders can purchase any amount of shares as they find necessary to obtain the control on target firms. The condition for a compulsory tender offer to minority shareholders would be activated only when a bidder purchases more than 5% of shares outstanding from more than ten shareholders. However, in practice, bidders could have avoided a tender offer by purchasing the controlling shares from a few family shareholders in control, minimizing the required capital for controlling ownerships.2 Above all, the Corporate Governance Guideline was introduced in 1999 following the OECD Corporate Governance Guideline, and public companies were recommended to follow the guideline in their corporate governance practices. The Korea Corporate Governance Service was established under the auspice of the Korean Exchange to monitor and evaluate the governance practices of public companies in Korea. Later on, its role was expanded to the evaluation of ESG management and proxy services.

Holding Company System The holding company system introduced in 1999 was another effort by the government to improve the transparency and accountability of the management of chaebols. Korean companies now can set up a holding company to manage and control its subsidiaries as long as its debt-​to-​equity ratio is less than 100% with more than 30% of ownerships of its public subsidiaries, and more than 50% ownerships of its private subsidiaries. In its pure form where the holding company owns close to 100% of the affiliated stocks, there would be no conflicts of interests between the shareholders of different subsidiaries. However, the Korean government allowed partial ownerships of subsidiaries by a holding company by the demand of the controlling families who were worried about decreasing inside ownerships in a conversion to a holding company system. Despite the good intention of the government, the partial ownerships and listing of subsidiaries failed to stop wealth transfer across subsidiaries for the private benefits of controlling families. The fact that the largest two chaebols in Korea, Samsung and Hyundai Motors, still have not converted into a holding company structure clearly shows the situation the Korean chaebols face today. Even with the partial ownerships of subsidiaries allowed, it will require a huge amount of private wealth for a controlling family to maintain the controlling ownership of a holding company as its equity capital gets larger. The current ownership of Samsung Group by its controlling family amounts to 1.15% on average, and it will be further lowered if the business group converts into a holding company structure. Despite the good intention of the Government, we observe many cases where a stand-​alone company establishes a holding company through a spin-​off, only to increase the family ownership on a newly born holding company as it has a smaller capital than its former business before the spin-​off. Out of the 256 cases of holding companies set up by 2022, we have more cases 83

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of a stand-​alone company, not a chaebol, converting into a holding company. Seemingly, there seems to be no conflict of interests under a spin-​off as shareholders maintain their previous ownerships on both the holding company and its spun-​off subsidiary. But, in the next round of a tender offer for exchange of shares, only controlling shareholders tend to tender their shares of subsidiaries in exchange for the shares of a holding company in return. Once the controlling family comes to own the shares of the holding company only, it tends to charge higher royalty for brand names, higher rents for the lands and buildings, which subsidiaries use, and higher fees for the provision of shared services, creating new sources of wealth transfer between the controlling family and minority shareholders (Park and Jung, 2011; Kim and Wang, 2019).

Discussions and Policy Implications The Korean case of corporate governance, where family control and chaebol system dominates the economy, provides a very interesting case of corporate governance simply because Korean companies and its economy has been so successful while there have been very negative evaluations on their corporate governance. Unlike the cases for western economies where managerial capitalism has been established and the agency issues are mainly between shareholders and professional managers, more important agents who pursue their private interests in Korean companies are their controlling shareholders. Compared with European companies where family control is as prevalent as in Korea, Korean cases are unique in that controlling families in Korea maintain very low ownerships of their companies. As of 2022, the average ownership of the controlling families of chaebols is 3.6%, while their control on their business groups are supported by the affiliated ownerships of 54.7% (The Korea Fair Trade Commission, 2023). As long as the controlling shareholders maintain substantial ownerships and therefore their interests are mostly aligned with the minority shareholders, there would be much less agency issues under family controls, But controlling shareholders whose ownerships are of one digit, but are still able to control their companies show the cases of a very unique ownership and governance structure. However, no one can deny that they have been so successful in contributing to the fast growth of the Korean economy, faster than any other developing countries. One of the most important implication out of the Korean case would be that shareholders are not homogeneous and there are two different groups of shareholders in a company with different objectives and incentives; controlling shareholders who will stay with the companies for a long while, enjoying cash-​flow rights and control rights, and minority shareholders who have cash-​flow rights only with a shorter-​term perspective. Their goals can be very different where controlling shareholders or families, who are strongly motivated by their monopolistic control on their firms and ensuing private benefit of control may contribute to making their companies grow fast and be global players, but at the expense of minority shareholders. In a society where tradition and seniority matters more than individual ability or achievement, where objective evaluation of managerial performances is not easy due to external or uncontrollable factors, or where stakeholders such as labour unions, politicians and regulators are exercising substantial influence on the management of companies, family control might be the second best alternative for business, especially when minority shareholders are short-​term oriented.3 Controlling families do not necessarily pay attention to the stock prices of their company as their shares are not for sale, and are therefore fixed assets. They will care more about the revenues or growth of their companies, and opportunities for private benefit. We may define it as ‘controlling

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shareholder capitalism,’ as compared with stakeholder capitalism or shareholder capitalism in other countries. Another implication of the Korean case would be that the resistance to governance reform is persistent and hard to overcome once controlling families are in power in all the areas of a country and entrenched. It is a well-​known fact that many laws and regulations are not strictly applied to families in control. Possibly corporate governance is a part of the social norms, practices, history and culture of a country, not to mention its legal origin. After opening the economy to foreign investors, the Korean government has implemented a series of reform measures including the independent directors on the BODs and enhanced minority shareholder rights to improve the corporate governance of Korean companies, but their effects have been very marginal and are yet to be confirm. Despite the amazing achievements of Korean companies in the past, the Korean economy and its firms are now facing a challenge in their growth history. Externally, the global economic growth is staggering down, and competitors, no other than those from China, are quickly catching up with or surpassing Korean companies in most industrial areas. Domestically, disputes on economic fairness and the collision between the haves and the have-​nots are building up to threat social stability. At the heart of the disputes stand the Korean companies and their corporate governance practices that favour insiders rather than outsiders or other stakeholders. Corporate social responsibility and the ESG management as a global trend under the climate crisis is an issue that may further disrupt the corporate governance of Korean companies as it may weaken the shareholder rights vis-​á-​vis other stakeholders. As shown by existing research, the managerial agency problem is an issue in pursuing the corporate social responsibility unless it is closely integrated with corporate strategy. Despite the efforts of the Korean government, the high disparity between control rights and cash-​flow rights of controlling families have continued to expand, rather than shrink, enlarging the conflicts of interests between majority shareholders and minority shareholders, and the transfer of wealth in various forms are hard to curb due to the complicated ownership structures of Korean conglomerates even after the introduction of the holding company system. The dominance of family control in Korean companies still persists, and we have no case of manager controlled companies except a few public entity turned private companies, where there is another serious issue of corporate governance as regulators continue to intervene in their management including the election of their CEOs. Some of the newly established chaebols such as Naver, a platform business, announced that the descendent of their founding members would not participate in their management, but still a rare exception.

Conclusion Despite the fact that Korean companies have maintained their old governance practices, people in Korea, in general, still believe and hope the controlling families to be the main players for the growth of the Korean economy simply because they have been rather successful in their business. Accordingly, we expect that the future of the corporate governance of Korean companies will critically depend on their performances and contribution to the economy and also the society. Social pressure due to the increasing division between the haves and the have-​nots in the country will affect overall institutions including the government’s corporate governance policy. Family control will be challenged if it is unable to show outcomes, and its opaque ownership structure will be subject to social challenge. Change in the judicial procedure in Korea to incorporate more of the

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common law practices of the US would be another important factor that will also affect the governance practices of Korean companies. Whatever the future might be, we expect that they will adapt and survive as they have done so well in the past.

Notes 1 The restriction was removed in Feb. 1998 to allow defense against hostile takeovers in Korea, but reinstated in April 2001 due to the surge in circuitous ownerships. 2 In 2022, the Korean government decided to introduce compulsory tender offer system in case a bidder purchases more than 25% of the stocks of a target company, which is expected to be activated with the approval of the parliament. In that case, the bidder will be obligated to purchase just more than 50%+​1 shares. 3 The turnover ratios (annual trading amount/​market value) of individual investors in Korean stock markets are close to 4, implying that the minority shareholders of a public company are changing every 3 months on average.

References Ahn, D., W. Kim, E. Lee, and K. Park. 2017. Congruence within the Top Management: How “Old Boy Network” Affects Executive Appointment and Performance. Seoul Journal of Business, Vol. 23, No. 1, pp. 59–​90. Alchian, A. and H. Demsetz, 1972. Production, information costs and economic organization. American Economic Review, Vol. 62, pp. 777–​801. Almeida, H., C. Kim, and H. Kim. 2015. Internal Capital Markets in Business Groups: Evidence from the Asian Financial Crisis. Journal of Finance, Vol. 70, No. 6, pp. 2539–​2586. Almeida, H., S. Y. Park, M. G. Subrahmanyam, and D. Wolfenzon. 2011. The Structure and Formation of Business Groups: Evidence from Korean Chaebols. Journal of Financial Economics, Vol. 99, No. 2, pp. 447–​475. Anderson, R. C. and David M. Reeb. 2003. Founding-​Family Ownership and Firm Performance: Evidence from the S&P 500. Journal of Finance, Vol. 58, No. 3, pp. 1301–​1328 Bae, K., J. Kang, and J. Kim. 2002. Tunneling or Value Added? Evidence from Mergers by Korean Business Groups. Journal of Finance, Vol. 57, No. 6, pp. 2695–​2740. Bae, S., T. Kwon, and J. Lee. 2011. Does Corporate Diversification by Business Groups Create Value? Evidence from Korean Chaebols. Pacific-​Basin Finance Journal, Vol. 19, No. 5, pp. 535–​553. Chae, J., H. C. Kang, E. J. Lee, and Y. K. Lee. 2020. Controlling Families’ Risk Allocation in a Business Group. Asia-​Pacific Journal of Financial Studies, Vol. 49, No. 1, pp. 67–​98. Chang, S.-​J. 2003. Financial Crisis and Transformation of Korean Business Groups: The Rise and Fall of Chaebols. Cambridge University Press. Cheong, J. and W. Kim. 2019. Family Pay Premium in Large Business Group Firms. Emerging Markets Finance and Trade, Vol. 55, No. 10, pp. 2314–​2333. Cho, S., H. Shin, and S. Park. 2016. Financial Crisis and Corporate Governance. The Korean Journal of Financial Management, Vol. 33, No. 1, pp. 215–​252 (in Korean). Choi, H., Y. Cho, and W. Sul. 2014. 2014. Ownership-​control Disparity and Foreign Investors’ Ownership: Evidence from the Korean Stock Market. Emerging Markets Finance and Trade, Vol. 50, pp. 178–​193. Choi, H., H.-​G. Kang, W. Kim, C. Lee, and J. Park. 2016. Too Big to Jail? Company Status and Judicial Bias in an Emerging Market. Corporate Governance: An International Review, Vol. 24, No. 2, pp. 85–​104. Choi, H., H.-​G. Kang, and C. Lee. 2018. What Constitutes “Too Big to Jail?” Evidence from South Korea’s Family Business Groups. Asia-​Pacific Journal of Financial Studies, Vol. 47, No. 6, pp. 881–​919. Chung, H., S. Choi, and W.-​O. Jung. 2019. Controlling Shareholders’ Tax Incentives and Related Party Transactions. Pacific-​Basin Finance Journal, Vol. 57, pp. 1011–​1081. Claessens, S., S. Djankov, and L. H. P. Lang. 2000. The Separation of Ownership and Control in East Asian Corporations. Journal of Financial Economics, Vol. 58, p. 8.

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The Corporate Governance and Practices of Korean Companies Ducret, R., and D. Isakov. 2020. The Korea Discount and Chaebols. Pacific-​Basin Finance Journal, Vol. 63, pp. 1013–​1096. Garner, J. L. and W. Kim. 2013. Are Foreign Investors Really Beneficial? Evidence from South Korea. Pacific-​Basin Finance Journal, Vol. 25, pp. 62–​84. Guillén, M., 2000. Business Groups in Emerging Economies: A Resource-​Based View. Academy of Management Journal, Vol. 43, No. 3, pp. 362–​380. Hwang, L., H. Kim, K. Park, and R. Park. 2013. Corporate Governance and Payout Policy: Evidence from Korean Business Groups. Pacific-​Basin Finance Journal, Vol. 24, pp. 179–​198. Hwang, S. and W. Kim. 2016. When Heirs Become Major Shareholders: Evidence on Pyramiding Financed by Related-​party Sales. Journal of Corporate Finance, Vol. 41, pp. 23–​42. Jeong, S.-​H., Kim, H., and Kim, H. 2022. Strategic Nepotism in Family Director Appointments: Evidence from Family Business Groups in South Korea. Academy of Management Journal, Vol. 65, No. (2), pp. 656–​682. Joh, S. and J. Jung. 2012. The Effects of Outside Board on Firm Value in the Emerging Market from the Perspective of Information Transaction Costs. Asia-​Pacific Journal of Financial Studies, Vol. 41, No. 2, pp. 175–​193. Joh, S. and M. Kim. 2013. The Drivers and the Stock Market Assessment of Internal Capital Market: Evidence from Business Groups in Korea. Asia-​Pacific Journal of Financial Studies, Vol. 42, No. 2, pp. 287–​313. Joh, S. W. 2003. Corporate Governance and Firm Profitability: Evidence from Korea before the Economic Crisis. Journal of Financial Economics, Vol. 68, No. 2, pp. 287–​322. Jung, B., D. Lee, S. Rhee, and I. Shin. 2019. Business Group Affiliation, Internal Labor Markets, External Capital Markets, and Labor Investment Efficiency. Asia-​Pacific Journal of Financial Studies, Vol. 48, No. 1, pp. 65–​97. Kang, H., H. Jang and K. Park. 2006a. Determinants of Internal Transactions among the Member firms of Korean Conglomerates. The Korean Journal of Finance, Vol. 19, No. 1, pp. 77–​118 (in Korean). Kang, H., H. Jang and K. Park. 2006b. Determinants of Family Ownership: The Choice between Control and Performance. Asia-​Pacific Journal of Financial Studies, Vol. 35, No. 6, pp. 39–​75 (in Korean). Kang, J. and J. Baek. 2003. The Efficiency of Business Group (Chaebol) and Shareholder Wealth Maximization: An Analysis of equity Issues. The Korean Journal of Finance, Vol. 15, No. 1, pp. 1–​47 (in Korean). Kang, M., H. Lee, M. Lee, and J. Park. 2014. The Association between Related-​Party Transactions and Control-​Ownership Wedge: Evidence from Korea. Pacific-​Basin Finance Journal, Vol. 29, pp. 272–​296. Kang, W., H. Shin, and J. Chang. 2005. The Effect of a Disparity between Cash Flow Right and Voting Right on Firm Value and Performance: The Case of Korean Large Business Groups. The Korean Journal of Finance, Vol. 18, No. 2, pp. 1–​39 (in Korean). Kang, Y., C. Kook, and J. Yoon. 2015. How Does Good Corporate Governance Contribute to Firm Value?: Board Independence and Firm’s Cash Holdings. Asian Review of Financial Research, Vol.28, No.2, pp. 309–​350 (in Korean) Khanna, T. and K. Palepu. 2000. Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups. Journal of Finance, Vol. 55, pp. 867–​891. Kim, C. S. 2006. Outside Directors and Firm Value in Korea. The Korean Journal of Finance, Vol. 19, No. 2, pp. 105–​153 (in Korean). Kim, H. and K. Yon. 2014. The Management Monitoring Effect of Institutional Investors’ No Vote. Korean Journal of Financial Studies, Vol. 43, No. 1, pp. 1–​22 (in Korean) Kim, I., J. Eppler-​Kim, W. Kim, and S. Byun. 2010. Foreign Investors and Corporate Governance in Korea. Pacific-​Basin Finance Journal, Vol. 18, No. 4, pp. 390–​402. Kim, S., H. Byun, and E. Lee. 2014. Does “Vote No” Change Corporate Governance and Firm Value? Evidence from the Shareholder Activism of the Korean National Pension Service. Emerging Markets Finance and Trade, Vol. 50, No. 5, pp. 42–​59. Kim, S. and Y. Jang. 2012. Investment Horizons of Foreign Investors and Corporate Dividend Policy. Korean Journal of Financial Studies, Vol. 41, No. 5, pp. 781–​812 (in Korean). Kim, S., K. Park, and C. Jung. 2020. The Effects of Stewardship Code on the Exercise of Voting Rights by Institutional Investors at Shareholders’ Meetings. Korean Journal of Financial Studies, Vol. 49, No. 4, pp. 515–​543 (in Korean).

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Routledge Handbook of Korean Business and Management Kim, W., C. Lim, and T. J. Yoon. 2017. Who’s Leaving Money on the Table? Evidence from IPO s within Business Groups. Asia-​Pacific Journal of Financial Studies, Vol. 46, No. 3, pp. 413–​444. Kim, W. and S.-​F. Wang. 2019. Price Deviation Supported by Arbitrage: Evidence from Family Business Groups. Asia-​Pacific Journal of Financial Studies, Vol. 48, No.3, pp. 362–​385. La Porta, R., F. Lopez-​de-​Silanes, and A. Shleifer. 1999. Corporate Ownership Around the World. Journal of Finance, Vol. 54, No. 2, pp. 471–​517. Lee, C. and C. Y. Chung. 2017. Effects of Former Bureaucrats as Outside Directors on Firm Performance and Value: Evidence from Financial Firms in the Korean Market. The Korean Journal of Financial Management, Vol. 34, No. 4, pp. 159–​195 (in Korean). Maury, B. 2006. Family Ownership and Firm Performance: Empirical Evidence from Western European Corporations. Journal of Corporate Finance, Vol. 12, No. 2, pp. 321–​341. Morck, R., A. Shleifer, and R. W. Vishny. 1988. Management Ownership and Market Valuation: An Empirical Analysis. Journal of Financial Economics, Vol. 20, pp. 293–​315 Morck, R., A. Shleifer, and R. W. Vishny. 1989. Alternative Mechanisms for Corporate Control. American Economic Review, Vol. 79, pp. 842–​852. Morck, R., A. Shleifer, and R. W. Vishny. 1990. Do Managerial Objectives Drive Bad Acquisition. Journal of Finance, Vol. 45, pp. 31–​48. Morck, R., D. Wolfenzon, and B. Yeung. 2005. Corporate Governance, Economic Entrenchment, and Growth. Journal of Economic Literature, Vol.43, No. 3, pp. 655–​720. Park, K., 2000. The Role of Institutional Investors in the Corporate Governance of Korean Firms, in The Present and the Future of the Korean Firms, edited by S. Lee, by Institute of Future Management. Park, K. and C. Jung. 2011. Tunneling or Propping: Functions of Business Groups Under Spin-​offs. Korean Journal of Financial Studies, Vol. 40, No. 3, pp. 461–​499 (in Korean). Park, K., C. Jung, and S. Kim. 2018. Investors Already Know What Controlling Shareholders Will Do This Summer –​ A Study on the Conflicts of Interests Between Controlling Shareholders and Minority Shareholders in Affiliated Mergers. Korean Journal of Financial Studies, Vol. 47, No. 5, pp. 741–​777 (in Korean). Park, K., E. Lee, and H. Jang. 2004. Role of Controlling Shareholders in the Corporate Governance of Korean Firms. The Korean Journal of Finance, Vol. 17, No. 2, pp. 163–​201 (in Korean). Park, H., H. Shin, and W. Choi. 2004. The Korean Firms’ Agency Costs and Firm Value: Role of Foreign Investors’ Equity Ownership. Korean Management Review, Vol. 33, No. 2, pp. 655–​682 (in Korean). Roe, M. J. 2006. Political Determinants of Corporate Governance: Political Context, Corporate Impact. Oxford University Press. Schoenherr, D. 2019. Political Connections and Allocative Distortions. Journal of Finance, Vol. 74, No. 2, pp. 543–​586. Shin, H. and Y. Park. 1999 Financing Constraints and Internal Capital Markets: Evidence from Korean Chaebols. Journal of Corporate Finance, Vol. 5, No. 2, pp. 169–​191. Shleifer, A. and R. W. Vishny. 1997. A Survey of Corporate Governance. Journal of Finance, Vol. 52, No. 2, pp. 737–​783. The Korea Fair Trade Commission. 2023. The ownership structures of Korean Conglomerate. November 17, 2023. www.egroup.go.kr/egps/wi/mainPage.do. Yang, D. 2016. Pyramid Establishment Resulting from Succession Motivation. Asia-​Pacific Journal of Financial Studies, Vol. 45, No. 2, pp. 254–​280. Yoon, S. 2004. Motives and Direction of Fund Transactions in the Internal Capital Market of Chaebol. Asia-​ Pacific Journal of Financial Studies, Vol. 33, No. 2, pp. 45–​82 (in Korean). Yu, S. and N. Lee. 2016. Financial Crisis, Politically Connected CEOs, and the Performance of State-​owned Enterprises: Evidence from Korea. Emerging Markets Finance and Trade, Vol. 52, No. 9, pp. 2087–​2099.

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5 KOREAN CEOs FROM A GOVERNANCE PERSPECTIVE Historical paradigm shifts in group governance-​ CEO models in chaebols Dongyoub Shin and Doyoon Kim

Introduction Misunderstandings on Korean chaebols’ governance and CEO models This study examines historical changes in the model of group-​level governance and the CEO (i.e., group owner-​chairperson) role in Korean business groups often referred to as chaebols. We view the choice of a particular governance-​CEO model as an outcome of each business group’s attempt for adaptation to distinctive environmental demands in each period. This study pays particular attention to the role of group-​level CEO –​ i.e., owner-​chairperson –​ in the governance of interaffiliate relations within the group. We argue that the governance structure and CEO role of a business group are so tightly coupled with each other that they are virtually inseparable at the practice level. That is, the CEO role of a hierarchical governance structure is completely different from that of a market governance structure. The central role that group-​level CEOs play in chaebols has historically changed with paradigm shifts in their governance structure of interaffiliate relations. In this regard, we trace the historical paradigm shifts of ‘governance-​CEO’ models in Korean chaebols focusing on the fit between each governance-​CEO model and corresponding environmental conditions in each period. Particularly we stress that since the actual dynamics of group-​level governance and CEO role in chaebols are significantly decoupled from what is suggested by the formal structure declared in the group’s official organizational chart (Meyer & Rowan, 1977), the nature of chaebol govern­ ance and CEO role has been widely misunderstood both by scholars and practitioners. It should be also clearly underlined that our discussion of chaebol governance in this paper focuses on the dominant model of each period as an ideal type (Weber, 1949) in the organizational field of Korean chaebols (DiMaggio & Powell, 1983), rather than specific realities and features of each group. The actual governance and CEO models of chaebol groups at the micro level are so diverse that the governance of every single group should be regarded as a distinctive model if we are preoccupied with specifics and details. Moreover, since the dominant model of governance-​CEO at the field level in Korean chaebols has experienced a number of fundamental paradigm shifts since DOI: 10.4324/9781003180920-7

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the late-​1940s when an early form of chaebol first appeared, the generalization of a prototypical chaebol governance in comparison with business groups from other countries in a cross-​cultural perspective without taking into consideration these historical changes can potentially result in a serious misunderstanding. Although Colpan and Hikino (2010) correctly point out that the gov­ ernance structures and organizational forms of business groups are cross-​culturally diverse, we go a step further by arguing that each of the cross-​culturally different business groups has longitudinally changed through occasional paradigm shifts in its history. Thus, without a historical perspective, it may lead to an incorrect characterization of a business group from a particular socio-​cultural context even if we employ a cross-​cultural comparative approach. In this regard, this study examines the historical paradigm shifts in the dominant model of group-​level governance and the CEO role in the organizational field of Korean chaebols (DiMaggio & Powell, 1983; Redding, 2004; Warner & Rowley, 2014). In particular, this study will attempt to demystify the prevalent perception regarding the governance structure of Korean chaebols as a type of interfirm network characterized by long-​term voluntary cooperative relations among a group of independent affiliates based on mutual trust and reciprocal complementarity (Powell, 1990). Unlike this widespread perception, we argue that Korean chaebols have never had network governance in their interaffiliate relations in actual governance dynamics beyond officially declared formal structures until recent years. Instead, we argue that the actual group-​level governance of affiliates within chaebol groups has shifted from an entrepreneurial model in the late 1940s, to a hierarchical model in the early 1960s, and again to an internal-​market model in the early 2000s. Then, Korean chaebols are currently under strong pressures towards another paradigm shift of their interaffiliate governance and CEO role again as of the mid-​2020s.

A structural approach to group-​level governance-​CEO models in chaebols This study pays attention to discontinuous paradigm shifts in the actual governance of interaffiliate relations within chaebol groups. That is, we examine historical changes in the actual governance and CEO role of Korean chaebols focusing on their adaptation to environmental changes from a macro structural perspective (Chandler, 1962; 1977; 1990). In looking into historical changes in chaebol governance-​CEO models, we focus particularly on a number of special periods when discontinuous paradigm shifts occurred (Tushman & Anderson, 1986). Throughout the chapter, we take a macro structural approach that views the role of chaebol CEO from a governance perspective, which may complement the existing micro leadership literature on chaebol owner-​CEOs. In so doing, we will try to abstain from referring to a cultural interpretation, which has been a major academic approach in the early literature on Korean chaebols together with leadership studies (Cho, 1997). We argue that the central mechanism underlying the governance and CEO role of Korean chaebols is a structural phenomenon that can also be applied to other historical and cultural contexts, rather than a unique cultural phenomenon idiosyncratic only to Korean contexts. Therefore, this study will not try to figure out the distinctive characteristics of the Korean CEO role in a cross-​cultural sense, which has already been tried frequently by leadership researchers (Cho, 1997; Kim, Park, & Kim, 2012; Park, Sung, & Jeong, 2010; Shin & Chang, 2005; Warner & Rowley, 2014). In this regard, this study demystifies the prototypical image of chaebol CEOs often depicted as heroic leaders who have achieved the miraculous economic growth of the nation with exceptionally outstanding visions, capabilities, and will power. As pointed out by Pfeffer & Salancik (1978) in the resource dependence literature, the prevalent perception about the heroic

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leadership of chaebol CEOs may be a symbolic attribution to make a cognitively simplified sense of chaebols’ exceptional performance, which in fact was brought about by complex interactions among various factors at multiple levels. This study may have significant academic and practical implications at this particular time, since the governance structure and CEO role of Korean Chaebols are currently undergoing another historical paradigm shift as of the mid-​2020s. The theoretical framework of this study will draw not much from micro leadership literatures (Chang, 2003; Chung & Chan, 2012; Chung & Luo, 2008), but mainly from the literatures of macro organizational theory, such as transaction cost economic and governance structure (Williamson, 1975; 1985), network governance (Powell, 1990), neoinstitutional theory (DiMaggio & Powell, 1983; Meyer & Rowan, 1977), business groups (Colpan, Hikino, & Lincoln, 2010; Granovetter, 1994), structural contingency theory (Lawrence & Lorsch, 1967; Perrow, 1967), and strategic management (Hambrick & Mason, 1984).

Early literatures on chaebol governance and CEOs The academic inquiry of chaebols first started in the 1970s when the unexpected rapid economic growth of Korea attracted attention from the global business and scholastic community (Cho, 1997; Kim, 2003; Kim, 2007; Lee, 2004). Since then, the leadership of chaebol CEOs (i.e., founder-​CEO or owner-​CEO of a chaebol group) has been by far the most popular research agenda in the literature (Cappello, Singh, Singh, & Useem, 2010; Chung & Luo, 2008). The existing literature of chaebol CEOs so far has focused mostly on the ideal-​type entrepreneurial image of heroic individual founders and their successors, such as Lee Byung-​Chul of Samsung and his successor Lee Keun-​Hee, Chung Joo-​Young of Hyundai and his successor Chung Mong-​Koo, and Koo In-​Hoe of LG and his successor Koo Ja-​Kyung (Kim, 2005; Kim & Ahn, 2017; Lee, 1986; Park, Moon, & Park, 2012). Most of the existing studies on chaebol CEOs have focused on figuring out the unique characteristics and styles of individual chaebol leaders mainly through a case-​study method (Kim, 2005; Kim, 2010; Kim & Ahn, 2017; No, Han, & Lee, 2012; Park, Moon, & Park, 2012), rather than systematically figuring out the underlying mechanisms beyond individual attributes. Most of the existing studies have also emphasized the cross-​cultural distinctiveness of chaebol leadership by focusing on the idiosyncratic aspects of Korean chaebol CEOs, such as paternalistic role within the group and exceptionally strong entrepreneurship, different from business leaders of other countries (Cappello et al., 2010; Chung & Luo, 2008; Kim, 2005). This study departs from these conventional approaches that focused on the exceptional leadership of heroically-​depicted individual founders and chairmen, which may have been ‘myth and symbol’ (Meyer & Rowan, 1977) or ‘symbolic attribution and sense-​making’ (Pfeffer & Salancik, 1978). Even if we accept the outstanding entrepreneurial qualities of founders as a fact, it is unreal­ istic to presume that most of the second-​generation chaebol chairmen who have inherited group leadership as the eldest son of the family by bloodline also happen to be exceptionally competent and highly motivated entrepreneurs as well. To logically explain the fast growth and high performance of Korean chaebols over the period of more than a half century since the late 1940s, this study focuses on macro structural dynamics underlying their fast growth, such as governance structures and environmental fit, beyond individual-​level leadership attributes of chaebol owner-​CEOs. To explain the role of chaebol CEO without referring to individual-​level attributes, this study approaches the CEO role from a governance perspective, which will be discussed in detail later. This study also highlights overtime discontinuous changes in models of chaebol governance and the CEO role. We argue that models of governance and the CEO role in

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chaebols have varied widely across time periods depending on dynamically changing environmental conditions that require different governance and CEO. We do not believe that the types of CEO roles observed in chaebols are idiosyncratic to the Korean context only. Without necessarily resorting to limits of cultural and historical particularism, the CEO models of chaebols can be logically explained and applied to other cultural contexts if we employ proper theoretical perspectives. Therefore, this study attempts to propose a theoretical framework that can analytically explain historical changes in models of governance and the CEO role in Korean chaebols that can be applied also to corporate settings of other cultural and historical contexts, rather than trying to figure out the stably sustained idiosyncratic characteristics of Korea chaebols.

The positioning of this study Although the early studies of chaebol owner-​CEOs made significant contributions to the attraction of a worldwide attention to their unique leadership dynamics, they at the same time suffered from limitations in academic aspects. Since most of the early writings on Korean chaebols targeted business practitioners as the main readers (Kim & Lee, 2007; Kim & Seo, 2014), rather than academically-​oriented management scholars, they had limitations in theoretical and analytic rigour in explaining why and how a particular type of CEO role appeared at a particular historical period such as the model of hierarchical chaebol CEOs in the early 1960s and internal-​market CEOs in the early 2000s. By contrast, this study attempts to propose an academically rigorous analytic framework on chaebol governance-​CEO models by departing from the practitioner-​oriented conventional studies. In this regard, the central goal of this study is to suggest a theoretical framework regarding the historical paradigm shifts in governance-​CEO models as responses to environmental changes in Korean chaebols that can be applied to future studies on business groups in other historical and cultural contexts, drawing primarily upon academic literatures of macro-​organization theories. Focusing on the coevolution dynamics between environments and governance-​CEO models, we explain how environmental changes in the Korean economy have brought about changes in the types of governance structures each of which requires a different CEO model. In our discussion, we will have to rely mostly on ad hoc data, since the availability of systematic data on actual governance dynamics and CEO roles inside chaebol groups is seriously low. In addition, since we position this paper as a theoretical essay with actual examples, rather than a rigorous empirical analysis, we will refer freely to anecdotal evidences to back up our argument. We first discuss our theoretical framework focusing on the relationship between environments and governance-​CEO models. Second, from the perspective of this theoretical framework, we explain the first period of ‘entrepreneurial’ governance-​CEO from the withdrawal of Japanese invaders in 1945 until 1960. Third, we then discuss the second period of hierarchical governance-​ CEO during the period of rapid economic development from the military coup in 1961 until the outbreak of the 1997 economic crisis. Fourth, we analyze the currently dominant chaebol governance-​CEO model of internal market during the period of neoliberal transformation from the 1997 economic crisis until now. In the concluding chapter, we discuss the globally ongoing another paradigm shifts of governance-​CEO model stimulated by the Fourth Industrial Revolution and the urgent pressure toward a fundamental transformation that Korean chaebols are facing as of the mid-​2020s.

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Governance-​CEO model as strategic environmental adaptation Difficulties in defining business groups Business groups like Korean chaebols have often been characterized as a typical example of interfirm cooperative network observed mostly in Asian countries, such as Japan, China and India (Carney, 2008; Powell, 1990). However, we argue that this prevalent perception is a misunderstanding stemming from a preoccupation with surface-​level official features such as formal structures. If we look closely into the ‘actual’ managerial dynamics of Korean chaebols, such as how affiliates of a group actually interact with each other, we can instantly realize that similar forms have been observed in a wide variety of different cultural and historical contexts far beyond Asian countries (Kim & Seo, 2014). If it is the case, we may formulate a theoretical framework of governance-​ CEO models that can be applied to the understanding of corporate organizations from other cultural and historical contexts as well as Korean chaebols. One of the central academic challenges in studying a business group is definitional ambiguity. In his well-​known article, sociologist Granovetter (1994: 454) only loosely defines a business group as ‘a collection of firms bound together in some formal and informal ways’ (Granovetter, 1994: 454), which Colpan, Hikino, and Lincoln (2010: 5) view as a network perspective highlighting ‘a fluid, network conception that highlights the multiplex (many types of ties) and porous organization of groups and their mesh with sociocultural systems.’ On the other hand, economists, strategy scholars, and finance people all pay attention to different aspects in their definitions of business groups, such as economic development, risk management and corporate control (Colpan et al., 2010). As we can see from these definitions, the concept of a business group is very open-​ended and, in a sense, ambiguous so that a wide variety of corporate entities can be classified into this particular category of organizational form. Moreover, business groups corresponding to this definition are observed not only in Asian countries like Korea, Japan, China and Taiwan, but also in a wide variety of geographical areas, such as Latin American countries, Turkey, Pakistan, Belgium, France, Italy, Germany, Spain and Sweden (Tsui-​Auch & Lee, 2003; Colpan et al., 2010). For instance, it is difficult to find a qualitative difference between Korean chaebols and Wallenberg Group in Sweden, which a single family has tightly controlled for two centuries. If we look closely into the actual process of corporate-​level decision making, we can instantly realize that the governance-​CEO models of some of the current global leaders in the Fourth Industrial Revolution such as Alphabet, Amazon, and Meta are very close to those of Korean chaebols in terms of the actual ways in which new businesses are constantly created, and interbusiness relations are organized at the corporate level. In this regard, the accurate configuration of corporate-​level governance-​CEO models require attention to the actual dynamics of governance, rather than official legal structures at the surface level. To investigate the actual governance-​CEO models of Korean chaebols, we first examine the typology of governance structures systematically.

The relationship between governance structure and CEO role at the corporate level Unlike the existing literature on chaebol CEOs focused primarily on the extraordinary individual-​ level entrepreneurial leadership of founder-​chairmen (Chung & Chan, 2012; Chung & Luo, 2008), this study pays attention to the role of group owner-​CEOs from a governance perspective at the

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corporate level. We argue that the central role that the CEO of a corporation is expected to perform is defined by its governance structure that determines the underlying principle regulating the interactions between subunits within the corporation (Powell, 1990; Williamson, 1975; 1985). Thus, to understand the role of the group-​level CEO in a business group accurately, we have to figure out the group’s governance structure first. Although the concept of governance structure was first suggested in the economics of organization literature about the mid-​1970s (Williamson, 1975; Jensen & Meckling, 1976; Holmstrom, 1979) and further developed in the macro-​organization theory literature (Granovetter, 1985; 1994; Powell, 1990), the relationship between the CEO role and governance structure has not been dir­ ectly addressed by any of the existing literatures yet. The main reason for this omission would be the difference in disciplinary background. The main disciplinary foundation of the CEO role has long been psychological leadership theories that do not have interest in structural issues like governance. By contrast, we argue that the type of governance structure and the actual role of CEO are so tightly related with each other that a separate discussion of them is likely to produce an inaccurate explanation. For instance, if the actual governance structure of a corporation is hierarchical, its CEO has to play hierarchical roles such as command, enforcement, and sanctioning based on the rule of hierarchical authority within the corporation (Williamson, 1985). On the other hand, if the actual governance structure of a corporation is market, its CEO has to play the market-​like roles such as delegation, evaluation, and rewarding or punishment based on performance outcomes within the corporation (Williamson, 1985). Thus, from now on, we will often use the expression ‘governance-​CEO’ by integrating the two concepts together. For this purpose, we first examine the literature of governance structure.

Prevalent misconception of chaebols as a network governance Although the academic literature of governance structure was started in the mid-​1970s regarding the dichotomy of market and hierarchy in transaction cost economics (Williamson, 1975), another wave of interest in the subject among organization and management scholars was ignited in the early 1990s by the literature of network governance, examples of which often included Korean chaebols (Powell, 1990). That is, with the sudden growth of worldwide interest in an interfirm cooperative network in the early 1990s, Korean chaebols have been often quoted as a salient example of network governance together with Japanese keiretsu (Amsden, 1989; Granovetter, 1994; Hatori, 1989; Powell, 1990). Since legally independent affiliates of a chaebol group actively cooperate with one another on a long-​term basis, the formal governance structure of a chaebol may indeed look like a type of network governance. By contrast, we argue that the formal governance structure of interaffiliate relations in a chaebol group in terms of legal ownership structure does not always show the actual governance dynamics that determine the pattern of the interactions between affiliates. Moreover, we argue that the actual governance structure of a chaebol has not stayed the same throughout their history, but occasionally experienced discontinuous shifts to completely different types, and is currently undergoing another paradigm shifts. As a consequence, CEO models of chaebols also have experienced paradigm shifts in line with the shifts of governance structures. To analyze historical paradigm shifts in the chaebol governance-​CEO model, we should first understand the theoretical concept of governance structure (Powell, 1990; Williamson, 1975; 1984; 1991). 94

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Alternative governance structures: market, hierarchy and network Governance structure refers to the underlying rule, principle or logic on which transactions between economic actors are regulated (Williamson, 1985). As persuasively argued by Williamson (1975), the two core governance structures since the birth of modern industrial society in the late nineteenth century have been market and hierarchy. Market governance refers to the voluntary horizontal exchange of goods and services between independent economic actors (Williamson, 1975; 1985). Therefore, each party chooses whether or not to participate in an exchange according only to his or her individual interest. That is, in a market transaction, each party pursues to maximize his or her own individual interest only. Since two independent economic actors engage in a horizontal exchange, there can be no hierarchical enforcement between them. The only mechanism that mediates demand and supply between two parties is price. The only criterion for the selection of parties is each party’s price performance in a market transaction. In this regard, market governance is a typical outcome-​based control system. The process of production is left completely to each party’s autonomy. By contrast, hierarchical governance refers to the exchange of economic goods between two parties based on command from another actor with a higher hierarchical authority (Williamson, 1975; 1985). Neither of the two parties directly involved in an exchange under a hierarchical governance structure has autonomy not to engage in a transaction ordered by the higher-​authority actor. Thus, the mediating mechanism between actors in hierarchical governance is authority. Based on authority, the higher third-​party actor can enforce his or her choice on the two lower actors directly involved in the exchange. Market and hierarchy are alternative governance structures. That is, they replace each other’s role in economic transactions. In his famed statement on transaction cost economics, Williamson (1975; 1985) explains that the same economic transaction can be governed either by market or by hierarchy and that the choice between them is made by relative transaction cost efficiency, which is expressed as ‘economizing on transaction cost.’ While market and hierarchy have dominated the choice of governance structure since the late nineteenth century, network started to attract a rapidly growing interest worldwide since the early 1990s as the third governance structure significantly replacing or complementing the existing two governance structures (Powell, 1990). The worldwide interest in network governance among both scholars and practitioners in the early 1990s owed significantly to the unexpected high performance of firms from East-​Asian countries, such as Korea and Japan. The governance structure of interfirm relation in these countries looked very different from both typical market and hierarchy. Scholars claimed that the long-​term cooperative relations between independent firms in a Korean chaebol or Japanese keiretsu were close to the structural form of network, different from both the hierarchical governance of vertically integrated firms and the market governance of spot exchanges (Dyer, 1996; Lincoln, Gerlach, & Takahashi, 1992). Then, researchers subsequently found that interfirm cooperative networks as an alternative governance structure was observed not only in East-​Asian countries, but also in Western countries in diverse forms such as alliances (Gomes-​Casseres, 1994; Powell & Smith-​Doerr, 1994) and industrial districts (Best, 1990). As a consequence, an increasing quantity of studies on net­ work governance began to flourish since the early 1990s under various research themes, such as strategic alliance, interfirm cooperation, network-​form organization and relational rents (Dyer, 1996; Granovetter, 1994; Gomes-​Casserres; 1996; Podolny & Page, 1998; Powell, 1990; Powell & Smith-​Doerr, 1994). The key characteristics of network as the third governance structure include repeated long-​term cooperative relations between independent firms, mediation of cooperation 95

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based on trust and reciprocity, the pursuit of joint utility based on interfirm complementarity, voluntary and horizontal cooperation, and permeable boundaries (Bradach & Eccles, 1988; Perrow, 1992; Powell, 1990).

Controversies surrounding network governance: Governance as the logic of exchange With the addition of network governance, the literature on governance structure since the early 1990s has generally presumed these three prototypes –​i.e., market, hierarchy, and network, which this study also employs in our discussion on the choice of governance-​CEO model as an environmental adaptation in Korean chaebols. Even Williamson (1991) who initially had been a strong proponent of the dichotomous typology later acknowledged the existence of a third governance structure that he termed as ‘hybrid’ between market and hierarchy. Nevertheless, it should be noted that the distinction of these three governance structures is often faced with ambiguity at the empirical level. While market-​style spot exchanges are often observed in exchanges between subunits within a firm (Bradach & Eccles, 1988), unequal power relations between legally independent firms in a market exchange actually operate like a hierarchy (Perrow, 1981; 1986; Pfeffer & Salancik, 1978). Above all, the uniqueness of network govern­­­ ance distinguished from the other two has often been controversial. For instance, Burt (1991) submits that compared to market and hierarchy, network has little distinctiveness as a separate governance structure, and that it is more reasonable to regard network as a hybrid located on the continuum between market and hierarchy. On this issue, White (1981) suggests another perspec­ tive that considers network as the social basis from which market arises. However, even after fully considering these conceptual controversies, we still argue that the typology of market, hierarchy and network may serve as an insightful framework for explaining the coevolution between governance-​CEO model and environment in Korean chaebols. It must be underlined that this study regards each of the three governance structures as a distinctive logic of exchanges between economic actors regardless of the location where such exchanges occur. That is, even a transaction between two departments within the same corporation can be ruled by the logic of market governance, if the deal between them is made purely by each party’s interest-​maximization (Powell, 1990). By contrast, a transaction between legally inde­ pendent firms can be regulated by the principle of hierarchical governance, if the deal is affected by the power inequality between them as vividly described by resource dependence theory (Pfeffer & Salancik, 1978).

Group-​level CEO as a structural role embodying governance logic It should be clearly noted here that there is a radical degree of decoupling between formal governance structures and actual governance dynamics in the headquarter-​affiliate relations of Korean chaebols (Meyer & Rowan, 1977). The ways in which chaebol affiliates are actually managed are extremely different from the formal governance structures and official interaffiliate transaction records suggest. Therefore, it is impossible for outsiders who are unfamiliar with the actual governance dynamics of Korean chaebols to understand accurately how interaffiliate transactions within a chaebol group are decided and managed based only on formal contracts and records. For instance, even if the formal ownership structure of a chaebol in the 1990s is largely maintained as it is in the 2010s, the actual role that the group owner-​CEO plays in the two periods may be completely different from each other. 96

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In this regard, we examine historical paradigm shifts in the ways in which interaffiliate relations are actually governed by the headquarters –​i.e., the group’s owner-​CEO –​within chaebol groups. For instance, under a hierarchical governance, the owner-​CEO of a chaebol group tightly controls its affiliates through command and enforcement based on powerful authority as if they are subunits of a hierarchical organization. On the other hand, under a market governance, the owner-​CEO of a chaebol group allows full autonomy to its affiliates in their managerial choices, and then rewards or punishes them later based on performance outcomes like a market within the group. Thus, this study will not distinguish between the governance structure and CEO role of a chaebol group, since each type of governance structure requires a different set of roles from group-​level CEO. That is, we regard the governance of interaffiliate relations as a central role of CEO within a business group. While most of the existing studies on group-​level CEOs in Korean chaebols have focused on the leadership characteristics of the owner-​chairman (or founder-​chairman) as a powerful visionary individual, we pay attention to the structural role of CEO as an organizational apparatus defined by the core logic of governance. That is, we argue that the single most important role of a group-​level CEO as the headquarters of a business group like chaebols is to define how to govern affiliates. Therefore, we emphasize again that the group-​level CEO role and governance structure of chaebols are inseparable from each other. This study emphasizes that the structural role of group-​level CEO embodying the core logic of governance over affiliates in Korean chaebols has experienced a number of significant paradigms shifts throughout their history of more than several decades since the late 1940s. To trace the historical paradigm shifts, we propose a theoretical framework on the choice of governance-​CEO model by chaebols as a response to environmental changes. Since most of the historical paradigm shifts initially begin with environmental changes (Chandler, 1977; Chang, 2003), this study divides the history of Korean chaebols roughly into the four periods focusing on discontinuous environmental changes and discusses the choice of governance-​CEO model as a response to the distinctive environmental conditions in each of the four periods (Tushman & Anderson, 1986). Thus, the rest of this paper will discuss the choice of governance-​CEO model by chaebol groups in each of the following four periods: (1) the entrepreneurial model of group governance-​CEO in the period of nation-​rebuilding, 1945–​1960, (2) the hierarchical model of group governance-​ CEO in the period of rapid economic growth, 1961–​1997, (3) the internal-​market model of group governance-​CEO in the period of neoliberal global marketization, 1998-​present and (4) a newly emerging future governance-​CEO model based potentially on the logic of genuine network for the upcoming period of the full-​blown Fourth Industrial Revolution and digital transformation, present-​future.

The founding period, 1945–​1960: The age of the entrepreneurial model From an ‘industrial void’ We argue that the first period that laid the industrial foundation of the Korean economy began with the end of World War II in 1945. Since 1910, when Japanese army invaded the country, the Korean economy was thoroughly ruined by brutal colonial exploitation by Japanese occupation forces. As a consequence, modern industrial economy in Korea started to sprout only in 1945 when the 35 years of Japanese occupation that had completely destroyed the nation’s economic infrastructure finally stopped with the end of the World War II. Since Japan took advantage of the Korean 97

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economy only for colonial exploitation purpose for more than three decades, no infrastructure for modern industrial economy existed in Korea in 1945. As a consequence, when Japan withdrew in August 15, 1945, the Korean economy was in a state of complete ‘industrial void.’ Our concept of ‘industrial void’ here in this paper is a little different from the usually used term of ‘institutional void’ (Lee, 1986; Lee, 2004, Kim, 2005; Kim, 2010). While most of the other countries that have been referred to as examples of institu­ tional void were literally created as a new nation state from scratch with the end of World War II, the same Korean people and territory had been ruled by strong centralized dynasties for almost 2,000 years until Japanese invasion in 1910. Since the national sovereignty of the same people and territory was simply recovered in 1945, Korea was not a newly emerged nation, but a 2,000 years old nation with three decades of interruption. Particularly, the Chosun dynasty collapsed by Japanese invasion in 1910 had ruled Korean peninsula for 519 years, which is the longest ruling dynasty in the history of the world, with a powerful centralized authority based on a well-​developed bureaucratic administrative system. Chosun dynasty’s long tradition of sophisticated government bureaucracy later contributed to the implementation of an efficient bureaucratic-​authoritarian system for rapid economic growth in the 1960s (Collier 2001; Collier & Cardoso, 1979; O’Donnell, 1988). What Korea completely lacked in 1945 was a modern industrial infrastructure, the situation we termed as ‘industrial void’ in this chapter. The two main economic infrastructures of the Chosun dynasty, 1392–​1910, were well-​ developed agriculture and commerce. What the Chosun economy lacked was a modern manufacturing industry that had started to sprout in the late nineteenth century even in early industrializers like the US, European countries and Japan (Chandler, 1977; 1990). Although Chosun also made various efforts to make a transition to a modern industrial economy in the late nineteenth century, all of them were abruptly frustrated by Japanese invasion in 1910. There are many evidences for Chosun dynasty’s efforts for spontaneous transition to a modern industrial economy in the late nineteenth century. For instance, Chosun constructed an electric power plant and lighting system imported from Edison Electric Light Company in 1887, which was the first among Asian countries and two years earlier than Japan. Therefore, the accurate description of the situation in 1945 is an ‘industrial void,’ rather than an ‘institutional void.’ Moreover, since Japanese invaders thoroughly exploited Korea’s natural resources for 35 years, even the traditional agricultural economy itself was also seriously destroyed. As a result, Korea in 1945 was one of the world’s poorest agricultural countries (The Korea Economic Daily, March 5 2019).

The age of entrepreneurial CEOs: The birth of modern industries from an industrial void It was in this extremely hostile environment of industrial void that the seed of a modern industrial economy sprang up in Korea in 1945. During this nation-​rebuilding period from 1945 until 1960, the government, which struggled hard for the institutionalization of a modern political system could not afford to play much of a role in the nation’s transition to a modern industrial economy (Kim, 2005; Lee, 1986). The national economy remained mainly as an agricultural economy par­­ tially complemented by commerce throughout the period. For instance, about 60% of Koreans worked in agricultures (Oh, 1999). Under this harsh economic condition, the first initiative of transition toward a modern industrial economy was attempted by a few individual entrepreneurs some of whom later grew up to chaebol owner-​CEOs. For instance, a few major chaebols such as Samsung, LG and Hyundai started to find 98

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their first affiliates at this time. The rapid economic growth of Korea since this founding period is well known to the global business and academic community (Cho, 1997; Kim, 2003; Kim, 2007; Lee, 2004). It is undisputable that the central players behind this unprecedentedly rapid economic growth were entrepreneurial owner-​CEOs who founded modern corporations to become chaebol groups later, right after the end of World War II in 1945. The most distinctive characteristic of these early founder-​CEOs was prototypical entrepreneurship close to the term’s textbook definition. Facing the hostile environment of industrial void, a number of individuals equipped with strong entrepreneurial capability and mindset started to build modern industrial corporations from scratch. These early entrepreneurs began mainly with creating basic infrastructure-​related industries that were urgently needed for Korean people’s basic daily livings. It should be noted that what these early entrepreneurial founder-​CEOs attempted was not a market entry to existing industries, but a creation of new industries and markets. For instance, Samsung founded by Lee Byung-​Chul started with food, textile and fertilizer, Hyudai founded by Chung Joo-​Young started with civil engineering and construction, and LG founded by Koo In-​Hoe started with chemical products for daily living such as soap, all for the first time in the history of the nation. These early leaders were prototypical entrepreneurs, since they were founders, owners, CEOs, and new industry-​creators all at the same time (Lee, 1986; Park et  al., 2012). They personally led all the processes of founding and managing new companies continually one after another. In a sense, they were serial entrepreneurs (Lee, 1986; Park et al., 2012) in that a common behavioural tendency of these early entrepreneurial founder-​owner-​CEOs from their startup stage was that they did not stay within or focus on the industry of their first choice but continued to enter unrelated new business areas. This tendency must have been motivated by the environment of extreme ‘industrial void’ during the period in Korea. The rapid growth of these first-​generation entrepreneurs was abruptly disturbed by the outbreak of the Korean War from 1950 until 1953, which completely destroyed the just-​started seeds of modern industries again. The Korean War brought about astronomic damages to the nation. In terms of physical damage, more than 3 million people died, and 74% of electricity, 60% of South Korean industry, 660,100 buildings, 60,766 km of wires, and 9,312 km of bridges were destroyed (Park, 2014). However, as soon as the Korean War ended, the first-​generation entrepreneurial CEOs immediately resumed their continual founding and industry-​creation. For instance, as soon as the war ended, Lee Byung-​Chul, who was Samsung’s founder-​owner-​CEO, founded Cheil Sugary in 1953, Cheil Industry (woolen fabric) in 1954, and Ankuk Insurance in 1958. Also, Ku In-​Hoe, who was LG’s founder-​owner-​CEO, founded Bando Trading in 1956, Goldstar (electronics) in 1958, and Lucky Oil and Fat in 1959.

Individual entrepreneur as a corporative actor and entrepreneurial governance During this period, the concept of modern corporate governance was not even introduced to late industrializers like Korea. Not only corporate governance, but also the modern systems of management in general were not imported to the Korean business community until the early 1960s (Shin, 1998). Therefore, the corporate governance and CEO role of early chaebols during this period from 1945 until 1960 were determined by discretionary judgments of individual founder-​ owner-​CEOs (Weber, 1921). Therefore, although these early entrepreneurs continually founded new affiliates in a broad range of industries, all of them were managed like personal businesses by the individual founder-​owner-​CEOs. 99

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Since the legal and regulatory systems of modern industries were not institutionalized yet during this period in Korea, these entrepreneurial CEOs could freely make whatever business choices they liked in a discretionary manner as long as they were expected to contribute to fast growth. Since the individual founder-​owner-​CEO and the corporation he founded were inseparable from each other, the performance and growth of each group were determined by the individual capabilities, resources and motivation of the founder-​owner-​CEO and family members. During this founding period of modern industrial economy in Korea, there was no governance structure in a modern sense, other than individual entrepreneurs’ discretionary judgment (Weber, 1921; Williamson, 1975). The same individual was the founder, owner and CEO of all the affiliate companies sequentially founded by the person. In this regard, we label this founding period of Korean chaebols as the age of ‘entrepreneurial governance and CEO’ model.

The rapid growth period, 1961–​1997: The age of the hierarchical model Although entrepreneurial CEOs based on individual capabilities, motivation and discretionary judgements during the founding period of Korean economy made diverse bold attempts to fill the industrial void by continuing to create new industries, their efforts were not sufficient for the transformation of the entire national economy to a modern industrial economy. The main cause of this failure in the paradigm shift to an industrial economy during the founding period from 1945 until 1960 was the lack of a centralized nation-​wide planning and coordination system at the institutional level. The turning-​point suddenly came with the military coup in May 1961 led by General Park Chung-​Hee who later became President of Korea.

The developmental dictatorship of President Park and rapid economic growth Although obviously a dictator who authoritatively ruled the country with iron fist from the military coup in 1961 until his assassination in 1979, President Park Chung-​Hee was at least exceptionally successful in the rapid economic development of the nation (Chang, 2003). Forging a powerful coalition among authoritarian politicians, young technocrats trained mostly in the US, and a group of chaebols, President Park successfully mobilized limited national resources for rapid economic growth, the regime often referred to as ‘developmental dictatorship’ (Chung, 2011; Cho, 2003). During his reign, the seriously limited national resources were fully utilized by the government with extreme efficiency to achieve a surprisingly rapid economic growth. The Park government established a tight control over not only public agencies, but also all privately-​owned corporations, banks and research institutes in Korea, and efficiently mobilized them for the rapid industrialization of the national economy. In particular, President Park organized the following three government agencies to tightly control the entire national economy: Economic Planning Board, which set up and executed macro plans for the rapid growth of the entire national economy, Ministry of Commerce and Industry, which had the power to control corporate activities such as the permission of companies’ entries into particular industries and Ministry of Finance with Bank of Korea, which had the power to allocate the limited national financial resources including bank loans and subsidies for chosen companies. Therefore, fully utilizing this absolute power over the entire economic actors and resources, the Park government aggressively aligned corporate activities in line with its national economic policies. Based on this politico-​economic power, the Park government tightly controlled all the actors of the national economy as if they were a huge single corporation, often referred to as ‘Republic 100

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of Korean, Inc.’ That is, to fill the industrial void as soon as possible, the Park government directly managed the entire national economy as if it were the headquarters of a multidivisional corporation pursuing endless unrelated diversifications throughout the 19-​year reign from 1961 to 1979. The central agendas of the Park government’ economic policies included (1) fostering export industries and import-​substitution industries as fast as possible while protecting domestic markets from foreign competition, (2) building heavy industries as the central infrastructure of the national economy and (3) allocating limited national resources to a small number of large chaebols in a concentrated manner and explicitly supporting the export-​oriented chaebols with cost advantages by suppressing labour cost. Due to the small size of the domestic market, the Park government aggressively pushed exports to make dollars by financing export subsidies to chaebols. President Park even did not miss a single monthly export promotion meeting during his 19-​year reign, which contributed to the fast internationalization of Korean firms, which had focused mostly on filling the industrial void of the domestic market until then. The Park government also chose to build the national economy centred on heavy industries, such as ship-​building, automobile, steel-​making, petrochemical and electronics, which was highly unusual for late-​starting underdeveloped countries. Exemplified by the construction of Pohang Integrated Steel Co. (POSCO) in 1968, which later became one of the world’s leading steel mills in the 1990s (Innace & Dress, 1992), the Park government’s obsession with heavy industries consequently contributed to Korea’s fast growth to one of the world’s top-​ ten industrial economies.

The development coalition between chaebols and the authoritarian government Among the three central economic policies of the Park government, the one closely related to the theme of this paper was the concentration of the nation’s then extremely limited resources to a small number of chaebols that the government evaluated to have the highest potential to become competitive in international markets. For chaebols’ part, although they could achieve a near-​monopoly position in any of the domestic markets due to the industrial void, the key constraint was the powerful authoritarian government’s regulation and resource allocation. Therefore, chaebols had to explicitly signal their willingness and capability to follow the government’s economic development policy as faithfully as possible (Shin, 1998). It need be noted that Korean chaebols in this period competed primarily in low-​end niches of international markets. They exported even at lower-​than-​cost prices, the loss from which was compensated by near-​monopoly status in domestic markets that the authoritarian government provided. Because of the aggressive export-​drive by the government and underdeveloped technological capabilities, most of the Korean chaebols chose to compete in low-​end niches in the international market based on cheap labor cost, which remained as chaebols’ international strategy until the mid-​1990s. Throughout this period of rapid economic development, most of the resource allocations were tightly controlled by the powerful government. However, unlike the authoritarian governments of the other underdeveloped countries, the Park government successfully allocated very limited national resources for rapid industrialization. For the efficient allocation of the limited national resources, the Park government concentrated scarce financial resources to a small number of large chaebols, which seemed to be most suitable for building infrastructures for a modern industrial economy including heavy industries from the industrial void as quickly as possible. The authoritarian Park government provided chaebols with various special favours like exclusive financing, 101

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tax exemption and other fringe benefits for exports, subsidies for the import of capital goods, and monopoly status in government-​allocated domestic markets. As long as they faithfully conformed to the government’s guidelines, chaebols were fully supported by the government with all available means at the cost of workers, small-​and-​medium size firms, rural sectors and Korean consumers. The authoritarian politico-​economic institution performed very successfully contributing to the unprecedentedly rapid economic growth of Korea.

The myth of chaebols as an interfirm cooperative network Then, what were the key characteristics of the corporate governance and CEO model during this period of rapid economic development? As we argued, the role of CEO is defined decisively by governance structure. Then, what was the core nature of Korean chaebol’s governance structure during this period of rapid growth? Unlike most of the existing studies on governance focusing on formal organizational boundary, this study pays attention to the actual nature of chaebol’s governance structure and corresponding CEO role regardless of within-​organization or interorganizational transactions. As mentioned earlier, Korean chaebol as an example of an Asian business group together with Japanese keiretsu has been frequently referred to as a typical network governance (Granovetter, 1994; Powell, 1990). While the formal boundary structure of a chaebol group indeed looks a lot like an interfirm cooperative network between legally independent affiliates, the actual ways in which the relationship between affiliates is governed not only are very different from the typical network dynamics, but also have historically experienced a number of paradigm shifts. As suggested in the pioneering work of neoinstitutional theory (Meyer & Rowan, 1977), formal structures and actual organizational dynamics are often significantly decoupled from each other. Thus, we need to demystify the taken-​for-​granted conception of Asian business groups like chaebols as an example of network governance, and instead, look deeply into the actual dynamics that regulate interaffiliate relations and transactions. In this regard, we argue that generalizing the interaffiliate relations of a Korean chaebol as a particular governance structure such as network can result in an inaccurate characterization neglecting not only the actual governance dynamics but also the historical experiences of paradigm shift. That is, the prevalent perception of a chaebol as an interaffiliate network stems from a preoccupation with its formal boundary structure which exposes only a part of the real structure that actually regulates members’ behaviours (Chung & Luo, 2008; Park & Kwon, 2009). Since the role of CEO varies with the types of actual governance dynamics, if we reinterpret the actual nature of chaebol governance, the existing conception of chaebol CEO may have to also be modified accordingly.

The hierarchical model of chaebol governance and the CEO role in the rapid growth period Korean chaebols during the rapid development period had an exceptionally high degree of decoupling between formal governance structure and actual governance dynamics (Meyer & Rowan, 1977). For instance, unlike the general perception, there was neither a formal organizational unit for the centralized coordination of affiliates nor formal hierarchical layer between affiliates within a chaebol group. In the official organizational chart, not only is there no such unit as the Office and Planning and Coordination widely known as the most powerful organizational unit playing the HQ role within the entire group, but also all the affiliates of a chaebol group were horizontally 102

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positioned without any hierarchical layer just as in a typical interfirm cooperative network. Each affiliate has a legal boundary that clearly separates it from the rest of the group. However, unlike this horizontal image of the formal organizational chart, the entire affiliates of a chaebol during this rapid growth period in fact were authoritatively and tightly ruled by the owner-​chairman and headquarter staffs with almost unlimited power. This inaccurate understanding of chaebol governance was widely diffused because most of the existing literatures on chaebol governance were based on the surface-​level observation of formal boundary structures, rather than actual governance dynamics. The literatures of network governance have often treated the governance structure of a Korean chaebol as a variation of a Japanese keiretsu (Granovetter, 1994; Hamilton, Zeile, and Kim, 1989; Powell, 1990; Powell & Smith-​Doer, 1994). We argue that unlike this prevalent perception, the actual nature of chaebols’ governance structure during this rapid-​growth period was very close to a typical hierarchy. That is, all the affiliates of a chaebol group were governed by the strong centralized hierarchical authority of the owner-​chairman and his personal staffs, rather than by horizontal and voluntary interfirm cooperation. This misunderstanding seems to have the following two causes: structural complexity and formal bias. First, the governance structures of chaebol groups in terms of actual ownership structure such as cross-​shareholdings were so complex that even the Korean government and IMF had a hard time figuring them out during the restructuring process after the 1997 economic crisis. Skillfully utilizing various types of sequential cross-​shareholdings among affiliates, chaebols installed an extremely complex system of corporate control, which served as the legal basis of the owner’s absolute power over the entire group without any legal responsibility (Lee & Lee, 2003). The owner-​CEO of a group was able to secure the tight control over the entire affiliates by personally owning only a small amount of shares of a few key affiliates, which sequentially held the shares of the other affiliates (Research Center for Market & Government, 2016). Due to this complexity, most foreign agencies and even scholars were unable to figure out the hierarchical nature of chaebols’ governance structures until the Korean government and IMF forced them to dissolve much of the cross-​shareholdings after the 1997 economic crisis. Second, another source of misunderstanding came from a preoccupation with formal aspects, especially legal organizational boundaries. It should be clearly emphasized that formal structures in chaebol groups were seriously decoupled from actual governance dynamics (Meyer & Rowan, 1977). On the formal and surface level, a chaebol group during the period looked like a hori­ zontal cooperative network between legally independent affiliates, which were clearly separated by formal boundaries between them. If actually independent affiliates had voluntarily cooperated with one another based on mutual benefits, the governance structure among them could have been a network. However, the underlying governance logics of actual interactions among affiliates within a chaebol group during this period did not work in a network-​like way at all. All the affiliates and employees of a chaebol group had to immediately conform to whatever commands the owner-​ chairman ordered just like in a military organization despite the informality of the position (Seoul Economic Daily, 2006). The hierarchical governance and CEO role of chaebols based on informal but extremely strong power during this period were very different from that of network governance centred on reciprocity and trust in a long-​term voluntary cooperative relation (Powell, 1990; Williamson, 1985). Therefore, in order to understand the accurate nature of chaebol governance and CEO role during the period from 1961 until 1997, we need to look more closely into how interaffiliate interactions in a chaebol group operated, focusing particularly on the comparison between network and hierarchy in actual governance dynamics. 103

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Boundaries of network and hierarchy: Chaebol governance from boundary dynamics To figure out the actual governance dynamics of chaebols accurately, we need to comparatively analyze network and hierarchy as alternative governance structures. One of the key criteria to distinguish between network and hierarchy is the nature of boundary. Our framework on ‘actual’ governance dynamics pays attention to the boundaries between affiliates within a business group. When a business group has hierarchical governance over its affiliates, the boundaries between the affiliates of the group are weak in order to maximize the interest of the entire group as a hierarchy. In Williamson’s framework of market and hierarchy, the interests of subunits are willingly sacrificed in order to maximize the interest of the entire firm based on authority in hierarchical governance (Williamson, 1975; 1985). Therefore, the boundaries between subunits within a hierarchical firm are freely crossed to pursue the interest of the entire firm. By contrast, when a business group has market governance over its affiliates, the boundaries between the affiliates of the group are strong in order to maximize the interest of each affiliate. In Williamson’s framework, each economic actor in market governance is independent from each other, and thus focuses only on the maximization of its own interest. On the other hand, when a business group has network governance over its affiliates, the boundaries between the affiliates of the group are clear but often permeable in order to maximize the joint utility of cooperating firms (Powell, 1990). That is, while each affiliate is independent and has a clear boundary distinguished from other affiliates within the group in network governance, the boundaries between them are often dynamically crossed when independent affiliates voluntarily agree to cooperate with each other to pursue joint utilities based on mutual benefits. Therefore, boundaries between affiliates in a business group with network governance are clear but permeable (Granovetter, 1994; Powell, 1990). In this regard, to figure out the actual governance of a chaebol group between network and hierarchy, we need to examine whether the collaboration between affiliates is voluntarily chosen by the participating affiliates or ordered and enforced by a higher authority, and which interest is pursued through interaffiliate collaboration between the joint interest of both of the participating affiliates and the interest of the entire group at the one-​sided sacrifice of a participating affiliate. According to these two criteria, the governance and CEO role of Korean chaebols during the rapid growth period from 1961 until 1997 displayed the characteristics of typical hierarchical governance (Hwang & Kwon, 2012; Park & Kwon, 2009).

The hierarchical nature of chaebol governance in the rapid growth period The hierarchical nature of the governance over interaffiliate collaborations during the period was clearly displayed in the locus of decision making for participating in such collaborations. During the period, an affiliate of a chaebol group did not have any discretionary power to choose whether or not to participate in a collaboration with the other affiliate. All the interaffiliate collaborations were hierarchically planned and enforced by the headquarters composed of the owner-​CEO and supporting staffs in a completely centralized manner (Jung & Kwon, 2006; Kwon & Lee, 2002). For instance, in Samsung Group’s failed attempt to enter the automobile industry in the mid-​ 1990s, the group headquarters formulated and executed the mobilization of enormous resources from all its affiliates in a one-​sided manner (Chang, 2008). This hierarchical process of decision making over the entire affiliates by the group headquarters is exactly consistent with decision-​ making process over subunit behaviours by the firm headquarters in the hierarchical governance 104

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of Williamson’s framework (1975; 1985). By contrast, collaborations between economic actors in network governance are decided voluntarily and horizontally by the participating actors themselves without hierarchical order from higher authority. Another hierarchical characteristic of chaebol governance during this period was the maximization of group interest, rather than affiliate interest. The headquarters of a chaebol group in this period forced all its affiliates to always pursue the interest of the entire group even at the cost of affiliate-​level interest. Thus, all the affiliates were controlled tightly to collaborate with one another for the entire group just like subunits of a hierarchical corporation. As a consequence, there was no competition between affiliates of a chaebol group during this period, whereas the member companies of an interfirm cooperation network in other regions, such as Japanese keiretsu, often engage in competition against each other (Granovetter, 1994; Powell, 1990). Hence, it is pointed out that one of the main roles of keiretsu is to reduce cut-​throat competition hurting both parties, for instance, through mediations by the Presidential Council. Nevertheless, when mediating efforts by Presidential Council fail, they would turn to direct competition (Best, 1990; Fruin, 1992; Miyashita & Russell, 1994). By contrast, affiliates of the same chaebol group in Korea during this period never engaged in competition against one another. In the case of automobile business in the Hyundai-​Kia Group, the chairman’s office unilaterally allocated the market segments where each of the two affiliates –​i.e., Hyundai Motors and Kia –​was permitted to operate so that they could avoid within-​group competition (Kim, 2016). Williamson (1985) points out that one of the transaction cost advantages of hierarchy over market is the internal collaboration of subunits for competition against outsiders, which was the case with Korean chaebols during the period. While there was no competition between affiliates of a chaebol group, the entire affiliates of the group as a whole competed fiercely against the other groups. Regarding the causes of chaebol’s excessively broad diversifications during this period, an interviewee even told us ‘It is unthinkable to purchase equipment, or components produced by rival Chaebols.’ That is, interaffiliate relationship within a chaebol group during the period was all cooperation tightly planned and enforced by the group headquarters composed of the owner-​CEO and supporting staffs, while intergroup relationship between different chaebol groups was fierce competition over a wide range of diverse industries. In other words, the actual governance of interaffiliate relationship within a chaebol group during this period was consistent with the typical interdepartmental relationship within a hierarchical corporation (Williamson, 1985).

Decoupling as a source of misunderstanding on chaebol governance and the CEO role The main source of the prevalent misunderstanding regarding chaebols’ governance structure during this period was the decoupling between formal structure and actual governance dynamics (Meyer & Rowan, 1977). It is well known in Korea that each chaebol during this period was owned and tightly controlled by the designated successor of the owner-​family such as Samsung by the Lee family, Hyundai by the Chung family, LG by the Koo family and SK by the Choi family. The designated successor (usually eldest son) of a chaebol family was referred to as ‘chairman (Hoejang),’ which in fact is an informal title without any legal foundation. Nevertheless, the chairman of chaebol exerted unlimited power within the group. The chairman during this period had the power to found new affiliates, disband existing ones, enter new industries or withdraw from existing ones, and appoint or fire affiliate-​level executives, regardless of business feasibility and without consulting anybody. Widely-​known examples would be the 105

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seriously failed entries into the auto industry, respectively, by Samsung and Ssangyong in the mid-​ 1990s, both of which were attributed to the two chairmen’s personal interests in cars (Business Week, 1998). The asymmetry between the actual power and legal responsibility of chaebol chairmen during this period deserves special underlining. While the chairman of a chaebol group had an almost unlimited power over all the affiliates within the group, he was not held legally responsible for consequences during this period. Instead, the CEO of each affiliate who was formally responsible for all the choices in legal terms had to be personally sanctioned for problems such as excessive debts and loans. This serious imbalance between actual power and formal responsibility in chaebol governance and consequent moral hazard during this period were pointed out as a main cause of the 1997 economic crisis, since many of the attempts that eventually resulted in serious survival risks in the 1997 crisis were initiated and enforced by the personal preferences of the owner-​ chairmen (Chang, 2003; Lee, 2007; Park et al., 2010).

The informal hierarchical power of group chairman from ownership As mentioned earlier, this study views CEO not as an individual leader, but as a structural role of governing the organization. Thus, the chairman as the CEO of a chaebol group in this study is identified as the structural role of governing the entire affiliates of the group. As widely known, a chaebol during this period was a group of affiliate companies owned and controlled by a family centred around the chairman as the heir-​CEO of the family’s corporate ownership. It should be noted that other than this ownership based on complex shareholdings, chaebol chairman in this period was an informal position without any legal basis. At the formal level, the chairman position in fact was no more than the one who owned the controlling shares of the entire affiliates through a complex web of cross-​shareholdings (Lim, 1997). Despite the lack of a formal structural basis, the chairman of a chaebol during this period exerted almost unlimited power within the group, such as founding new affiliates or disbanding existing ones, entering new industries or exiting from existing ones, and appointing or firing top executives of any affiliates (Seoul Economic Daily, 2006). The ultimate power base of chaebol chairmen was the governance structure based on unique ownership structures. A work by Lim (1997) illustrates chaebol’s highly complicated and adroitly-​hidden ownership structures well in this period. According to this study, the corporate control of a chaebol by the owner-​chairman during this period was based on two types of inside shareholdings: direct shareholdings by the owner-​CEO and family members and cross-​shareholdings between the group’s affiliates (Lim, 1997). Skillfully utilizing these two methods of inside shareholdings, a chaebol’s chairman as the owner-​CEO was able to secure the centralized hierarchical control over all the affiliates with a small amount of direct shareholdings in a few key affiliates, which sequentially held shares of other affiliates (Song, 2012). The owner-​CEO of a chaebol group was able to mobilize a huge amount of resources based on this unique structure of corporate control, since the affiliates of the group not only cross-​held the shares of the other affiliates, but also cross-​guaranteed their loans and debts. Based on mutual payment guarantees between affiliates, chaebols were able to easily mobilize external resources needed for their pursuit of relentless expansion. Consequently, the debt ratio of the 30 largest chaebol groups in the mid-​1990s far exceeded 500%, which became the main target of chaebol restructuring right after the 1997 crisis (Lim, 1997; Kim, 1998).

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Chairman and the office of planning and coordination as the informal headquarter Hierarchical governance structure has the headquarters at the peak of its vertical chain of fiats (Williamson, 1975). In this regard, the actual dynamics of hierarchical governance by the owner-​ CEO in a chaebol during this period cannot be accurately understood without taking into consideration the unique role of ‘The Office of Planning and Coordination (OPC)’ as the group-​level headquarter unit. Since chaebol chairmen at the individual level inevitably were subject to limited rationality (March & Simon, 1958), they had an office (also informal) of highly-​talented personal staffs drafted from member affiliates, referred to as ‘The Office of Planning and Coordination (Kihoek-​Jojung-​Sil).’ Despite its informal status, the single most powerful organization within a chaebol group was this office of planning and coordination (OPC) that tightly controlled all the activities of its affiliates as the actual headquarters of the group. The chairman’s ideas and visions were translated by OPC into concrete business strategies and plans that should be implemented by each affiliate at all means. Although the power of OPC radically expanded to include almost all the major strategic decisions, much of managerial decisions, and personnel decisions of all the affiliates, there was no governance mechanism that could monitor or sanction the chairman and OPC, because they did not exist officially at the formal level. Hence, despite their informal status, the chairman as the owner-​CEO and OPC of a chaebol were able to tightly control all the affiliates in a highly centralized and hierarchical manner as if the entire affiliates were a single hierarchical organization. All chaebol chairmen without exception during this period had OPC as an informal office of their personal staffs directly under their control. Since OPC was not a legal entity in a formal sense, it was not supposed to possess its own staffs and budgets. Thus, all the staffs of OPC were employees of one of the chaebol group’s affiliates in terms of legal employment contract, and paid for by affiliates, although they did not go to work to the affiliates. Nevertheless, the best talents within the group were drafted to OPC during the period. It was Samsung that first devised OPC referred to as “The Office of Secretaries (Biseo-​Sil)” in 1959. The other chaebol groups subsequently followed to install OPC directly under the chairman’s supervision to control broadly diversified affiliates since the late 1960s throughout the 1970s, such as LG’s ‘Office of the Chairman’ in 1969, SK’s ‘Office of the Chairman for Management and Planning’ in 1974, Daewoo’s ‘Office of the Chairman’ in 1976, and Hyundai’s ‘Office of Integrative Planning and Coordination’ in 1980. As a consequence, all the 30 largest chaebols had OPC by the mid-​1980s. Although each chaebol group had ‘The CEOs’ Council (Sajangdan Hoeui)’ attended by the CEOs of all the affiliates, it was as a matter of fact nothing more than a communication channel through which the chairman’s orders were unilaterally delivered to the affiliates. Once strategic plans for the affiliates were set up, OPC closely supervised and enforced the implementation of them by each affiliate through tight control mechanisms during this period. A chaebol OPC was usually composed of several teams along the lines of functional areas, such as finance, marketing, accounting/​auditing, production and HRM. In addition, taskforces for emergent issues were frequently organized in OPC (The Seoul Shinmun, Jan 17 2005). The distinctiveness of chaebols as hierarchical governance in this period can be clearly understood through a comparison with the other examples of interfirm networks, such as small firm networks in the Third Italy and Japanese keiretsu (Best, 1990; Perrow, 1992), both of which are voluntary horizontal cooperation networks among independent firms without any particular headquarters or CEO role at the group level.

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Industrial void and aggressive unrelated diversifications by chaebols As this study interprets the choice of governance and CEO role as a strategic response to changing environmental conditions (Chandler, 1962), we have to examine the key strategic orientation of chaebols during the period from the early 1960s until the mid-​1990s. The growth strategy of Korean chaebols during this period is well explained in the nickname ‘octopus companies’ that implies an extremely high level of unrelated diversifications (Chang, 2003). The key environmental condition that motivated such aggressive unrelated diversifications was the industrial void explained earlier. The powerful authoritarian government of President Park Chung-​Hee that emphasized rapid industrialization as the most important policy priority strongly pushed chaebols to diversify continually into new industries as fast as possible by providing them with exclusive resources and policy supports. The aggressive diversification rally of chaebols continued until the outbreak of the 1997 economic crisis. That is, chaebols relentlessly pursued size expansion by continuing to enter whatever new industries even without any commonality with their existing business portfolios. As a consequence, all leading chaebols such as Samsung, Hyundai, LG and Daewoo continued to enter a broad scope range of unrelated industries during the period, such as petrochemical, automobile, ship-​building, construction, electronics, information technology, trading, telecommunication, tourism and distribution. Unlike Korean chaebols, the corporate strategies of most global leading companies during the period were becoming increasingly specialized in a few closely-​related industries in which they had global competitive advantages (Shleifer & Vishny, 1994). Also, most of the strategic manage­ ment literature has favoured related diversification over unrelated diversification by suggesting a variety of advantages, such as low risk, synergy, economies of scale and scope, and the utilization of existing core competencies (Palepu, 1985; Prahalad & Hamel, 1990; Robins & Wiersma, 1995; Rumelt, 1974; Varadarajan, 1986). Nevertheless, Korean chaebols continued to pursue aggressive unrelated diversifications throughout the period.

Strategic rationales underlying chaebols’ aggressive unrelated diversifications According to strategic management literature, the key purpose of unrelated diversification strategy is risk-​reduction under a high environmental uncertainty (Galbraith et al.; 1986; Amit & Livnat, 1988). In this sense, specializing in a few chosen business areas may have been too risky under the situation of this period in which chaebols did not have any strong industry-​specific capabilities in the environment of industrial void. Another explanation could be the reduction of financial risk under the condition of severe resource constraint. It is also suggested that when it was highly uncertain which industries eventually turned out to be profitable under the situation of industrial void, unrelated diversification may have been an efficient means to manage the risk portfolio of chaebol owners’ personal resources (Lim, 1997). On the other hand, we argue that aggressive unrelated diversifications by chaebols during this period was an outcome of the interaction among the environmental condition of industrial void, the authoritarian government’s aggressive push toward the rapid industrialization of the nation, and chaebol owner-​CEOs’ motive for the growth of personal wealth. Since modern industry did not exist at all in most areas during the period, chaebols were able to make profit by just entering nationally-​ needed industries first even without much industry-​specific competence, if only they had the ability to acquire financial resources, a minimum-​level general managerial ability, and support from the authoritarian government. Under the tightly regulated industrial environment during the period, a small number of chaebols were the only actors that had these three abilities in Korea. Hence, 108

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chaebols enjoyed almost a monopoly status in a wide range of industries by continually entering as many business areas as they wanted as long as they could mobilize resources through whatever means including loans and subsidies controlled by the government. During this period, about 30 chaebol groups monopolized almost all industries in Korea (Cho, 1984; Kim, 2017; Seo, 1991).

Advantages of hierarchical governance in unrelated diversifications in industrial void As widely known, aggressive unrelated diversifications by Korean chaebols during this period consequently resulted in an enormous success at least in terms of quantity growth both at the corporate and national levels. In the pursuit of rapid growth through unrelated diversifications, chaebol’s unique hierarchical model of governance and the CEO role served as the key basis of the following three advantages: resource mobilization, economy of scope and safety-​net for risk taking. First, the hierarchical model of chaebol governance and CEO was very efficient in the mobilization and utilization of resources needed for entering new business areas under the condition of serious resource limitation during this period, since it served as a group-​level resource pool for all affiliates based on centralized resource allocation, cross-​subsidization, cross-​shareholding and inside-​trading, as well as the acquisition of external loans based on cross-​guarantees (Kim, 1998). That is, in this particular period of a serious resource constraint, all the resources of an affiliate were actively shared and utilized by all the other affiliates within the group faithfully following hierarchical orders from the powerful headquarters, which centrally planned and enforced the specific types and amounts of shared resources. Second, the hierarchical governance and CEO model of a chaebol group during this period of rapid growth served as an efficient strategic and organizational basis to enter new industries owing to the economy of scope based on the sharing of information, know-​how, competencies and resources among affiliates operating across a wide variety of different industries. Based on the leverage of existing resources and capabilities already proven in its affiliates’ broad past experiences, a chaebol could radically increase the probability of success and reduce risk and cost in entering a new industry (Chandler, 1962; 1977; Collis & Montgomery, 1997; Park & Chun, 2023). Third, another unique strategic advantage of a chaebol system during this period was the buffer or safety-​net effect that enabled an affiliate in a crisis to overcome the temporary problem based on aids from the other affiliates of the group. This particular advantage of a chaebol structure was especially helpful to a young affiliate at the early stage of organizational life-​cycle. When the young affiliate was not mature enough to compete independently, all the affiliates of the group collaboratively overcame the problem by actively providing all types of assistances. It should be noted that this type of pooling behaviour providing a safety-​net for other affiliates was not voluntarily offered, but hierarchically commanded by the group headquarters. If it had not been for this type of safety-​net effect among affiliates, Korean chaebols may not have been able to enter so many risky new industries successfully (Kim, 1997; Oh, 2018).

Double-​sided consequences of chaebols’ hierarchical governance and CEO model Regarding performance outcomes, chaebols’ hierarchical governance and powerful authoritarian CEO during this period have been by and large praised highly as the central organizational

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infrastructure of their rapid expansion and growth. However, from a broader perspective, Korean chaebols’ hierarchical governance centred on powerful authoritarian owner-​CEO and OPC during this period have also received negative evaluations as well. In most cases, powerful chaebol owner-​chairmen and hierarchical governance during the period have been applauded to play the role of central engine behind rapid size growth by efficiently pooling limited resources and capabilities from affiliates and concentrating them to strategically chosen industries (No et al., 2012; Park et al., 2012). The key advantages of hier­­ archical governance and the group CEO were headquarters’ power to make crucial decisions extremely fast without necessarily gaining an agreement of involved affiliates in rapidly changing environments and to allocate limited resources very efficiently without overlapping investments between affiliates (Chandler, 1977; Williamson, 1975). Examples of such a CEO role in chaebols would include Samsung’s entry into the semiconductor industry in 1982, which later became the world’s leader, and SK’s transformation since the 1980s from a textile producer to a high-​tech business group operating in petrochemical, semiconductor and telecommunication industries. At the same time, hierarchical governance and the CEO role in this period have been criticized for producing numerous severe negative effects, such as pursuing the owner-​CEO’s personal interest at the cost of numerous minority shareholders, lowering the accountability of affiliates’ management, and reducing adaptive flexibility by suppressing affiliates’ autonomous decisions. Above all, chaebol groups during the period have been harshly criticized for an abnormal corporate governance system with the imbalance between the unlimited actual power of the owner-​ CEO in key decisions and no legal responsibility for failure or problems. Although a number of major chaebols, such as Samsung, Hyundai, Daewoo and LG, started to send a public signal that they would reduce the power of owner-​CEO and OPC in response to the increasing criticisms since the early 1990s, the actual power of the hierarchical headquarters continued to increase until the outbreak of the economic crisis and IMF bailout in 1997 referred to as ‘the biggest national disaster since the Korean War’ (JoongAng Ilbo, July 14, 1997).

The neoliberal period, 1998–​present: The age of the internal market model In the previous sections, we illustrated Korean chaebols’ hierarchical governance structure and CEO model, which had been often mischaracterized as a type of network governance, during the period of rapid growth from 1961 to 1997. We mentioned that the hierarchical governance of chaebols centred around a powerful authoritarian owner-​CEO and OPC had double-​sided effects. We suggested that while the model contributed to the rapid growth of chaebols and Korean economy under the condition of industrial void based on the efficient resource pooling and allocation through centralized coordination, it was also the central cause of serious problems like low managerial accountability, dispersed resource investments, excessive unrelated diversifications and low competitiveness in each industry, and over-​dependence on powerful owner-​CEOs. These potential governance risks were realized in the mid-​1990s, which consequently brought about the fundamental transformation of Korean chaebols and the entire national economy. This crisis also started initially from environmental changes. The beginning of the crisis was the rapid worldwide institutionalization of a neoliberal political economy, which made the existing chaebol system seriously unfit with the new environment and eventually pushed the entire Korean economy down to the national economic crisis and the IMF bailout of 1997. As a result of the unprecedented crisis, chaebol governance and the CEO model had to go through a fundamental transformation. 110

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The unfolding of the 1997 Korean economic crisis About the early 1997, the Korean economy started to show various symptoms of a serious crisis. At the national level, the Korean economy that had consistently made a rapid growth since the beginning of economic development in 1961 incurred a $20billion trade deficit in the fiscal year of 1996. Several chaebol groups, such as Hanbo, Sam-​Mi, Jinro, Haitai and Kia, went bankrupt in the spring and summer of 1997. In the fall of 1997, the progress of a serious national economic crisis was accelerated. The S&P credit rating of Korea was downgraded by ten steps from ‘AA-​’ in early October to ‘B+​’ (i.e., unsuitable for investments) in December (Chosun Ilbo, December 24, 1997). The exchange rate of Korean currency ‘Won’ rapidly dropped from 800Won to 1,300Won per US dollar in November. To defend the value of Won, the government depleted most of its foreign currency reserve in vain, which just ended in reducing the foreign currency reserve of Korea from $33billion to 7.2billion only in one month of November. The Korean Stock Exchange Index crashed from over 1,000 to 450, which was the lowest in 10 years. The foreign investors rushed to recall their loans, for which Korean chaebols and financial firms did not have any liquidity to pay back. On November 27, 1997, the Korean government declared the bankruptcy of the national economy and applied for $55billion emergency loan from IMF, which was the largest bailout in the history of IMF until then. Even after the signing of bailout deal between IMF and the Korean government on December 3, the crisis continued to worsen. The exchange rate further dropped to 1,964Won per US dollar in early 1998. In 2 months after the outbreak of the crisis, about 7,000 small and medium size firms went bankrupt (The Korea Economic Daily, December 23, 1998). The Korean Stock Exchange Index continued to fall to 280 in early 1998. The unemployment rate rapidly increased to over 8% in late 1998 from 2% before the crisis. In the 1998 fiscal year, the annual economic growth rate was minus 6%. GNP per capita, which had exceeded $10,000 in 1995, fell down to $6,500. Among the 30 largest chaebols, 11 including the fourth largest Daewoo went bankrupt during or right after the crisis. What happened to Korean chaebols and politico-​economic system which had been highly praised as ‘the Miracle of the Han River’ before the crisis? What caused the sudden downfall of the Korean economy in 1997 referred to as ‘the greatest national disaster since the Korean War’ in the country? To understand the 1997 economic crisis from a structural perspective, we pay attention to the paradoxical effects of chaebols’ growth strategy through aggressive unrelated diversifications based on the model of hierarchical governance and CEO (Oh & Jun, 2016). We argue that while this growth model had very effectively served as the main engine of the rapid economic growth for three decades from the early 1960s until the early 1990s, the same model became the central cause of the crisis with environmental changes since the early 1990s. That is, the former ‘success formula’ of the Korean economy became the critical ‘success trap’ with environmental changes (Levinthal & March, 1993).

The disturbed fit caused by environmental changes and the 1997 economic crisis We earlier explained the rapid growth of Korean chaebols with the logic of the fit between the environment of industrial void and the growth strategy of aggressive unrelated diversification by chaebols based on the model of hierarchical governance and CEO. Along the same line of reasoning, we attribute the crisis of chaebols to the disturbance of the fit between these factors. The disturbance was ignited by the following two discontinuous environmental changes occurred 111

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about 1990 that made the Korean development model misfit with the new environment: (1) the maturation of the Korean economy and the consequent vanishing of industrial void, and (2) the worldwide institutionalization of neoliberal politico-​economic system. We argue that the 1997 economic crisis was a result of Korean chaebols’ failure in making the timely transformation of their corporate strategy, governance structure and CEO model that became seriously misfit with the new environment. As explained earlier, the Korean growth model formulated by the authoritarian government of President Park Chung-​Hee in the early 1960s was made of the fast overcoming of industrial void, aggressive exports to low-​end niches of international markets based on cheap labour costs, and the concentration of scarce national resources to a few chaebols. This politically imposed mission was fulfilled successfully by chaebols through aggressive unrelated diversifications. Chaebols were able to grow fast by continuing to create new industries at the minimum quality in domestic markets and competing in low-​end niches in international markets based on cheap labour costs offered by the authoritarian government. Hence, the two key roles of chaebol CEOs were (1) aggressive unrelated diversifications by continuing to create whatever new industries by endlessly founding new affiliates through the hierarchical mobilization of limited resources owned by existing affiliates, and (2) intimate collaborations with the powerful authoritarian government that tightly controlled all the national resources. However, this growth model started to face serious limitations in the late 1980s. Above all, the industrial void of domestic markets was almost filled up by the late 1980s. As a matter of fact, by this time, there were few unexplored industries that existed in developed countries but were domestically absent in Korea. Although the level of product and technological quality was still much lower than that of developed countries, the Korean economy came to possess a full spectrum of modern industries from basic light industries to heavy industries and even high-​tech industries. For instance, Korea by this time produced automobiles, semiconductors, computer and IT products, electronic goods, and petrochemical goods. Of course, chaebol companies competed mostly in low-​end niches in international markets in most of these industries based on cheap labour costs and easy financing backed up by the development-​oriented authoritarian government. But with the vanishing of domestic industrial void about the late 1980s, chaebols suddenly faced a completely new environment in which the existing strategy of just filling industrial void was not enough for survival.

Political democratization and the disappearance of labour cost advantage On top of this, chaebols’ strategy of price competition in international markets based on cheap domestic labour cost suddenly faced a serious obstacle, as the political democratization of Korea in 1987 brought about a sharp increase in labour power. Unlike the previous authoritarian government, the new government elected through democratic voting was unable to provide cheap labour costs by force, which resulted in a rapid increase of the average wage level in Korean firms in the late 1980s. Moreover, challenges from less developed countries such as China and other South-​East Asian countries such as Indonesia, Malaysia, Thailand, and Vietnam equipped with far cheaper labour costs further worsened chaebols’ global competitiveness in low-​end niches about this time. All of these serious environmental changes took chaebols by surprise almost simultaneously in the late-​1980s and early 1990s. The combined effects from these discontinuous environmental changes created an unfamiliar new competitive environment entirely different from the previous environment in which the hierarchical governance and CEO model Korean chaebols and the

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authoritarian politico-​economic institution had performed successfully. To deal with these environmental changes, chaebols should have made a fast transition to middle-​high-​end global niches by significantly upgrading product quality and technological capabilities. Nevertheless, chaebols erroneously responded to the new environment by further intensifying their existing strategy of unrelated diversifications and quantitative growth in low-​end niches (Oh, 2018).

Neoliberalism and the unprepared globalization of the Korean economy On top of these changes in domestic environments, a far more fundamental environmental change occurred in the global institution also about 1990. Often referred to as ‘neoliberalism’ (Kim, 1998; Lee, 2007), this new global politico-​economic institution brought about a completely new envir­ onment of extreme boundaryless market competition on the entire global economy (Ji, 2007). Due to this new global politico-​economic environment, Korea was also forced to open financial and product markets in the early 1990s. The institutionalization of WTO system in the mid-​1990s further weakened the Korean government’s ability to protect domestic markets. As a consequence, Korean chaebols, which had enjoyed a near-​monopoly status in domestic markets until then, suddenly came to face fiercely global competition from powerful foreign firms from more advanced industrial countries not only in global markets but also in domestic markets (Yonhap News, 2017). The biggest shock from the neoliberal globalization on the Korean economy was the opening of the financial market. This opening of the financial market brought about double-​sided effects on Korean chaebols. On one hand, with the opening of financial market, chaebols that had always been under a serious resource constraint due to the small domestic financial industry and tight resource control by the government became able to freely access to a wide range of enormous global financial markets. On the hand, due to the principle of mutualism in market opening in the neoliberal globalization, foreign investors also came to have a free access to Korean financial markets, which made the Korean economy vulnerable to global environmental fluctuations and foreign investors’ predatory appropriation (Kim, 1998; Lee, 2007). Moreover, neoliberal globalization brought about a fundamental change in the dynamics of competition beyond just the opening of markets. Often termed as ‘the new competition’ (Best, 1990) or ‘hyper competition’ (D’Aveni, 1994), the omnidirectional boundaryless competition of neoliberal globalization pushed all the firms of the global economy to compete against all the others in every competitive dimension, such as cost, quality and innovation. Particularly the newly introduced dynamics of omnidirectional boundaryless competition made the long-​term maintenance of competitive position based on a particular advantage impossible, which resulted in the institutionalization of global ‘hyper competition’ in the mid-​1990s (D’Aveni, 1994). That is, the newly institutionalized global neoliberalism brought about a completely new competitive environment of ever-​escalating competition by all against all without any boundary in every competitive dimension. In the new environment, only the fastest, most innovative, highest quality or the most cost-​efficient one in the entire global market could survive with a temporary monopoly status (Best, 1990; D’Aveni, 1994). Therefore, to survive in the new environment of neoliberal global boundaryless competition, all the firms of the global economy had to make a fundamental paradigm shift.

Korean chaebols’ failure of paradigm shift and the 1997 crisis The institutionalization of neoliberal globalization brought about a fundamental paradigm shift of corporate management worldwide, such as radical restructuring as an attempt to adapt to the 113

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completely new competitive environment (Ji, 2007). Although Korean chaebols in this period needed a far stronger transformation due to the above-​explained domestic environmental changes such as the loss of politically provided cost advantages and market protection stemming democratization and the vanishing of industrial void, on top of the newly institutionalized neoliberal boundaryless competition at the global level, they were hesitant to execute the urgently needed transformation in a timely manner. The failure of paradigm shift by chaebols at this time seems to have had a root in the sources of their past success, such as fast growth strategy through aggressive unrelated diversifications to fill industrial void, price competition in international markets based on low labour cost offered by the authoritarian government, and the tight control of affiliates based on the hierarchical model of governance and CEO. That is, although both domestic democratization and global neoliberalization called for chaebols to discard these sources of their past success as urgently as possible, they did not execute the transformation in time despite the rapidly progressing discontinuous environmental changes (Levinthal & March, 1993; Tushman & Anderson, 1986). Korean chaebols rather responded to the completely new competitive envir­ onment by further enhancing their existing growth strategy of aggressive quantity expansion through unrelated diversifications based on the utilization of foreign loans easily available owing to the neoliberal opening of financial markets. For instance, even when the economic crisis was rapidly worsening in the mid-​1990s, Daewoo, then one of the four largest chaebols, further accelerated the omnidirectional entries into new markets by declaring ;The world is wide, and there are numerous markets to enter,’ which eventually led to the group’s bankruptcy during the economic crisis. The environmental change during this period was sharply discontinuous from the previous environments, rather than continuously cumulative environmental change resulted from the intensification of existing competitive dynamics (Tushman & Anderson, 1986). Particularly for Korean chaebols, these environmental changes in the early 1990s had a serious competence-​ destroying effect that would destroy the competitiveness of their existing growth model that had successfully served as their core competence during the rapid growth period from the early 1960s (Utterback, 1994). This failure of fundamental paradigm shift by chaebols was the central cause of the 1997 economic crisis.

The IMF bailout and the forced paradigm shift of chaebol governance and CEO model When the 1997 economic crisis led to the IMF bailout in November, the fundamental transformation of chaebols was enforced by IMF and the newly elected government through various chaebol reform policies in early 1998 (Chang, 2003; Ji, 2007; Rowley & Bae, 2004). About 2 months after the outbreak of the economic crisis, Kim Dae-​Jung who inaugurated as the new President of Korean in February 1998 rapidly executed a massive structural transformation of the Korean economy, especially chaebol governance and business areas. At his inauguration speech, President Kim Dae-​Jung declared that his government would create a truly free market system by minimizing direct government interventions in business activities through aggressive deregulations as much as possible, which was consistent with then globally spreading neoliberal politico-​economic institution. As a crucial step to create a new neoliberal politico-​economic system, the Kim government and IMF above all had to execute a massive restructuring of chaebols, which was the most serious obstacle against neoliberal globalization. 114

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President Kim’s economic reforms during his tenure from 1999 until 2004 included deregulations in all the areas of government policy, the market-​oriented reforms of the financial sector such as allowing the currency value fully determined by markets, the restructuring of government economic agencies, and, above all, massive chaebol reforms. Since chaebols were blamed as the central cause of the national crisis, the government in consultation with IMF implemented diverse chaebol reform policies focusing particularly on transforming governance structure, restructuring business areas and improving financial structure (Bae & Rowley, 2003; Cho et  al., 2014; Jun, Kim, & Rowley 2019; Kim & Lee 2018; Oh, 2018; Redding, 2004; Rowley, 2003; Rowley & Bae, 2004). IMF and the new government enforced the dissolution of chaebol OPCs, the mandatory inclusion of external board members in each chaebol affiliate, the dissolution of cross-​shareholdings and mutual guaranteeing between affiliates of the same group, the reduction of each group’s business areas into core industries, the public reporting of consolidated financial statements for all the affiliates of each group for which the owner-​chairman had actual corporate control, and, the appointment of owner-​chairman as an official CEO who would be held legally accountable for corporate decisions. For instance, the government asked chaebols to reach the financial goal of reducing debt ratio from over 500% of capital to less than 200% by the end of 1999 by either selling affiliates, equities, assets or attracting foreign investments (The Korea Economic Daily, December 16, 1999). To meet this financial goal, the government even demanded to sell profitable affiliates to foreign investors. Moreover, the government and IMF explicitly demanded chaebols to dissolve the existing corporate financing system that had served as a key basis of aggressive unrelated diversifications with a minimum amount of in-​house resources, such as cross-​shareholdings, cross-​subsidization, cross-​ investments and mutual payment guarantees between member affiliates. The government asked chaebols to remove all the mutual payment guarantees by the end of March, 2000 (The Korea Economic Daily, April 8, 1999). The government also prohibited inside trading between member affiliates by newly granting the Korean Fair-​Trade Commission an exceptionally strong power to monitor, sanction and punish inside-​trading and cross-​subsidizing between affiliates of the same group (Yonhap News, April 30, 1998). For the monitoring of unallowed inside subsidization, the government demanded chaebols reporting of consolidated financial statements for all the affiliates under actual corporate control of the same group from the fiscal year of 1999. Another key target in chaebol reform policies by the government and IMF was the disintegration of owner-​CEO and OPC as the peak of chaebols’ hierarchical governance. The government and IMF demanded not only the complete dissolution of OPC, but also the prohibition of group-​level owner-​CEOs from involving in affiliate-​level decisions unless they had a formal position with full legal responsibility. That is, the once-​almighty owner-​chairman would have to give up significant part of their informal power on affiliates. However, any of the reform policies mentioned a possible dissolution of the group structure itself. Thus, although chaebols announced the rapid increase of transparency in governance, a significant degree of the owner-​CEO’s power within the group would sustain in a changed form (The Korea Economic Daily, February 20 1998; Kalinowski, 2008). The major point of change was how affiliates would actually be managed within each group. As explained earlier, until the outbreak of the 1997 crisis, the entire affiliates of a chaebol group were hierarchically managed as if they were subunits of a single hierarchical organization. Now what the government and IMF demanded was a new interaffiliate relation in which they would interact with each other just like independent transaction partners in markets. If affiliates of a group interact with each other in a market-​like way, the headquarters of the group would have to 115

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play the role of an internal market rewarding or selecting out each affiliate based on its firm-​level market performances. As a consequence, the governance and CEO model of a chaebol group would work not in the traditional way of hierarchy, but in the new way of an internal market to be discussed in detail later. While chaebols initially resisted fiercely to this particular demand (JoongAng Ilbo, February 9, 1998), they eventually surrendered to the government’s demand to completely disband OPCs by the end of March, 1998. However, chaebols searched various new alternatives such as newly instituting a holding structure or delegating OPC functions to a core affiliate where the owner-​ chairman would have an official executive position (Chosun Ilbo, February 8, 1998). As a con­ sequence, the powerful informal organizational device of OPC that had long served as the actual headquarters at the group level in Korean chaebols since the 1960s came to disappear and be partially replaced by various new alternatives.

Forced reduction of unrelated diversifications and the end of Octopus Corporation The reduction of chaebols’ aggressive unrelated diversifications was one of the central agendas in the new government’s chaebol reform policies. That is, together with the problems of the owner-​ CEO centred hierarchical governance, the strategic problem most frequently blamed as a key source of the economic crisis was excessive unrelated diversifications with a limited internal resource. Therefore, for the reform of chaebols, the government focused on reducing each group’s business areas through a unique policy called ‘big deal’ –​ i.e., the massive swaps of affiliates and business lines between chaebol groups. Since chaebols were still reluctant to withdraw from their existing businesses regardless of competitiveness, the government specifically designated a number of industries evaluated to be over-​invested by too many chaebols at the level of national economy in order to make each chaebol to concentrate its limited resource and capability on a few specialized business areas. The list of big deals forced by the government included semiconductor, electronics, automobile, petrochemical and aerospace. Among them, the two most fiercely debated big deals were the swap of Samsung’s automobile company and Daewoo’s electronics company, and the merger between LG Semiconductors and Hyundai Semiconductors (Kim, 1998). The process through which big deals were executed well illustrates the conflict between chaebols and the government at the time. Most of the chaebols still did not want to withdraw from any of their existing business areas, whereas the government argued that chaebols could not be trusted to voluntarily reduce their over-​diversified business areas, which had posed a serious threat to the national economy. On the other hand, there were considerable criticisms on big deal policy as well, arguing that the government’s role in the reform should be confined to the establishment of a global-​standard free market system, and that the specific restructuring of chaebols’ business areas should be left to market mechanisms (Kim, 1998). There was an even severer criticism arguing that the central logic underlying the new government’s big deal policy was exactly same with the government-​centered economic intervention in the period of Park Chung-​Hee government’s developmental dictatorship (The Korea Economic Daily, October 14, 1998). Despite the disastrous national crisis caused significantly by their problems, Korean chaebols initially resisted against the reforms demanded by IMF and the government. Some chaebols like Daewoo directly confronted the reform policies by further increasing quantity growth through diversifications. Nevertheless, most of the chaebols were unable to resist the reforms because they were experiencing a serious shortage in financial resources for survival, which were controlled completely by IMF and the government. Then, on March 26, 1998, LG, the third largest 116

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chaebol group, announced its decision for a fundamental transformation of the group governance structure to a loose association between independent affiliates by abolishing its OPC and all the group-​level decision making units such as Strategic Planning Committee and Human Resource Committee (The Korea Economic Daily, April 1, 1998). LG’s initiative in the fundamental trans­ formation of its governance structure signaled an alternative future form of chaebol group and was subsequently followed by most of the other chaebols. Major chaebols explored diverse alternative models of corporate governance that might conform to the reform demands from the new government, IMF, and globalized markets, while still maintaining owner-​CEOs’ corporate control over affiliates as much as possible.

Radical neoliberal transformation of chaebol governance and CEO model Conforming to the pressures from the government and IMF and also from increasingly competitive neoliberal global markets, Korean chaebols actually did make a fundamental transformation of their governance structure and CEO model. For instance, the owner-​chairman of each group assumed a formal CEO position either in a newly installed holding company or a key affiliate such as Samsung Electronics of Samsung Group, the group-​level OPC was abolished, the hierarchical control of affiliates by the group owner-​chairman was radically reduced by allowing each affiliate with autonomy for most of the strategic and managerial choices, the business areas of each group became much more specialized through big deals, and the transparency of each affiliate’s managerial process was far enhanced through the newly adopted mandatory system of external board members and minority shareholders’ movements, and so on. Now, Korean chaebols came to be ruled by so-​called ‘global standard’ governance structures by the early 2000s, which was in fact even far more market-​oriented and transparent than the typical corporate governance of the US and European firms in some respects. With the disintegration of the hierarchical governance structure centred around powerful owner-​chairman and OPC, chaebol groups had to find a new alternative that could make the best of still huge group resources and numerous affiliates in line with the pressures from the government, IMF, and neoliberal globalization. Since Korea paid back all the loans to IMF on December 4, 2000, the IMF regime that had powerfully ruled Korean economy since December 1997 was officially terminated on August 23, 2001. As a result, Korean chaebols came to have more autonomy in their choice of a new governance as long as the Korean government allowed. Moreover, the performances of major chaebol groups such as Samsung started to rapidly improve from 2001. Thus, chaebol groups explored diverse alternatives for a new governance model that might serve as the structural basis for competition in the new globalized neoliberal market environments in the long run, while satisfying the increasing demand for keeping global standard managerial practices.

Internal-​market governance and CEO model for globalized neoliberal environments Since the early 2000s, most of the major chaebols chose a new governance structure ruled strictly by the principle of global-​standard market governance within the group, which this study refers to as ‘internal-​market’ governance and CEO model. That is, the governance of affiliates by market principles within the group was rapidly institutionalized as the new dominant model in the organizational field of Korean chaebols (DiMaggio & Powell, 1983). The new governance and CEO model of a chaebol group aimed at applying an extreme level of market principle not only to the management of affiliates within the group, but also to the management of organizational units and 117

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individual employees within each affiliate. That is, Korean chaebols chose to manage the entire group as if the inside of it were a free market, and to treat interactions between affiliates as if they were purely economic transactions between independent market players. As elaborated by the market and hierarchy framework of transaction cost economics (Williamson, 1975), market governance is positioned at the opposite side of hierarchical gov­ ernance that had long been the dominant governance model of chaebols until the 1997 crisis. Market governance refers to the principle of autonomous horizontal exchanges between independent actors mediated by price to pursue the maximization of each party’s individual interest, whereas hierarchical governance means the principle of forced exchange commanded from higher authority to pursue the maximization of the entire group’s interest (Williamson, 1985). Therefore, the new internal-​market governance of a chaebol group forces all the affiliates to maximize their affiliate-​level performances autonomously and ceaselessly, and then, the group headquarters plays the role of a market mechanism to reward or punish each affiliate according to its performance outcome. Therefore, the shift to internal-​market governance in the early 2000s by Korean chaebols, which had been long ruled by hierarchical governance, meant a radical discontinuous change to the opposite direction. This was not just a change of ownership structure or corporate control, but the fundamental transformation of the entire corporate management at the group level including strategic management, organizational design, performance evaluation and reward, HR, and above all the governance of interaffiliate relations. To make the entire group work like an internal market, Koran chaebols had to go through a completely discontinuous paradigm shift in the early 2000s since they adopted hierarchical governance and CEO model in the early 1960s. There are ample empirical and anecdotal evidences that group headquarters of most chaebols shifted radically to internal market mechanisms for the tight control of affiliate performances about the early 2000s. For instance, the headquarter of Samsung Group announced that it would ‘break down all the barriers that prohibit competition even between affiliates with the motto of “survival of the fittest” and ceaselessly improve its business structures focusing only on profitable businesses (Kyunghyang Shinmun, 2007).’ This new paradigm of group governance in the Samsung Group based on extreme market principles was designed and executed by the headquarters in a centralized manner through extreme performance-​based compensation systems emphasizing relative performance evaluations at all the levels including affiliate, division, team and individual levels. For example, when the semiconductor and mobile phone divisions of Samsung Electronics achieved globally leading market performances during the mid and late 2000s, members of those divisions received exceptionally large performance-​based incentives that dwarfed the pay levels of the other divisions belonging to the same company, which was unprecedented in any Korean companies. Most of the major chaebols also declared the paradigm shift toward internal market models encouraging boundaryless market competition even between member affiliates about this time. However, the internal market mechanism adopted by most of the major chaebols in the early 2000s also generated serious unintended side-​effects, such as overlapping investments, excessive competitions and difficulties in the pursuit of synergy between affiliates belonging to the same group (Kyunghyang Shinmun, 2007). A salient example was the exhaustive competition in the electronic display industry between Samsung Electronics’ LCD division and Samsung SDI, initially assigned with LCD business and PDP business, respectively. However, as soon as the organic light-​emitting diode (OLED) business, referred to as the next-​generation of display business, started to grow rapidly, serious competitions between the two affiliates of the same Samsung Group quickly intensified, which resulted in huge overlapping investments and strategic confusions regarding the future directions of the business (Song, 2013). 118

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Neoliberal meritocracy and a new model of chaebol governance and CEO The internal-​market model of governance and CEO newly institutionalized among most chaebols in the early 2000s emphasized an extreme meritocracy focusing only on short-​term performance outcomes at every level such as group, affiliate, division, team and individual employee, which was exactly opposite to the previous model that had demanded all the members’ full commitment only to the collective performance at the entire group level often at the cost of individual performances at lower-​levels. Consequently, the governance dynamics underlying the group-​level control of affiliates fundamentally changed to the one requiring specific and immediate performance outcomes at each level. Above all, unlike in the hierarchical governance of the previous period in which all the key decisions on affiliates had been directly controlled by the group CEO and OPC to pursue the long-​term performance of the entire group even at a cost of individual affiliate, the new group CEO since the early 2000s did not intervene in the strategic and managerial decision processes of affiliates under the new model of internal-​market. Instead, the group CEO focused on the new role of evaluating and rewarding or punishing each affiliate based only on the affiliate’s own performance outcomes. Decisions regarding affiliate-​level management processes were fully delegated to each affiliate. From the ‘market and hierarchy’ perspective of transaction cost economics (Williamson, 1975; 1985), this particular shift meant a fundamental transformation of underlying governance dynamic from the process control of hierarchy to the outcome control of market. That is, the owner-​CEO who had served as the peak of the hierarchical pyramid at the entire group level until then came to play the new role of a within-​group internal market rewarding or punishing autonomous affiliates based on their performance outcomes. While hierarchical governance directly controls the entire process of economic transactions, such as planning, coordination and implementation, market governance performs the function of selection mechanism focusing only on outcomes without directly controlling the process. In the new internal-​market governance, the role of group-​level CEO also shifted to the new one focused on the evaluation and control of outcomes, departing from the previous role of the hierarchical control of process.

The institutionalization of elaborate performance control mechanisms Related to this shift from hierarchical governance to internal-​market governance, the most crucial challenge for the group CEO’s part was to devise an elaborate performance control mechanism that could evaluate affiliates’ performances accurately and motivate the continuous improvement of performances. Since the direct control of management process for affiliates was prohibited by the government, a high level of autonomy in managerial process was granted at all the levels, such as affiliate, division, team and individual employee. Instead, chaebols devised a new performance control system based on performance outcomes, which until then never attempted under the conventional hierarchical governance structure. This transformation to the internal-​market model of governance and CEO has consequently brought about subsequent fundamental changes in many of the major areas in corporate management related to performance control. Two of the most radical changes were implemented in the HR area at this time. Above all, the system of lifetime employment, which used to be known as a prototypical HR practice and the main motivator of all Korean organizations, was completely abolished. Now the layoff of employees, which used to be unthinkable under the collectivistic organizational culture of the previous hierarchical governance, has become far easier than before. 119

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Contingent employment was also fully allowed as long as it was justified in terms of market situations (Cho et al., 2014; Keum & Cho, 2005; Koo, 2005). Massive downsizings were executed nationwide even in non-​profit or public organizations, not to mention for-​profit business firms (Shin, Park, & Kim, 2022). As a result, the emphasis on employees’ organizational loyalty also disappeared from Korean companies. Another newly institutionalized HR practice at this time was the system of annual performance-​ based pay (Yonbongje). Until the outbreak of the 1997 crisis, the reward system of most Korean organizations was seniority-​based pay. Not only because all the employees were guaranteed for a lifetime employment, but also because all the employees were asked and forced to faithfully follow orders from above within the hierarchy, their rewards such as pay and promotion were decided by the length of tenure working for the organization. However, as the lifetime employment system disappeared, and also as governance structure shifted from process control to outcome control during this period, reward systems also had to change accordingly. Therefore, since this period, the pay and promotion of Korean employees in all the sectors and organizations came to be determined by the evaluation of actual annual performances. Consequently, all the actors at every level of a business group such as affiliates, divisions, teams and individual employees were rewarded by performance outcomes annually measured by increasingly elaborate evaluation systems. When first implemented about the early 2000s, reward systems based on the internal market model literally shocked the entire nation. Until then, the pay difference between employees with the same seniority simply did not exist at all regardless of differences in performance outcomes or job categories, at least not only within the same affiliate, but also within the same group. Therefore, until the mid-​1990s, most Koreans knew roughly how much Samsung people or Hyundai People were paid regardless of their affiliates. However, with the paradigm shift in the early 2000s, chaebol affiliates quickly started to adopt performance-​based pay systems. Then performance-​based reward systems rapidly spread to most business firms and even non-​profit organizations. As a consequence, the pay difference between high performers and how performers in Korean companies have become far more radical than even those in US or European firms. For instance, it is reported that while the amount of performance-​based pay is about 50% of the base salary in high-​performing divisions, it is only 7% in low-​performing divisions within the same Samsung Electronics, which is the most representative globalized company in Korea (Money Today, February 6, 2023). Moreover, since the traditional life­ time employment has been deinstitutionalized right after the economic crisis, most Koreans have come to have the highly unstable status of contract-​based contingent employees. The combined effect of radical meritocracy and contingent employment has produced a highly competitive global top-​ ten economy, but also at the same time an extremely harsh living condition for most Koreans often referred to as ‘Hell Chosun (Korea)’ (Hankuk Ilbo, 2021).

Unexpectedly high performance of the new chaebol system Nevertheless, in terms of performance outcome, the internal-​market model of chaebol governance and CEO generated an unexpectedly high performance and brought about the second prime of chaebols and the Korean economy starting from the early 2000s. Focusing on the new role of internal-​market, the owner-​CEO of a chaebol group started to control the performance outcomes of affiliates tightly and almost harshly, while allowing a near-​complete autonomy on the affiliates’ management processes. Executives of affiliates armed with full autonomy had to prove their managerial ability with specific performance outcomes in the short run. A long-​term time horizon which used to allow a few strategically chosen affiliates operating in future-​oriented industries under the previous hierarchical governance almost disappeared in Korean chaebols. 120

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The standard tenure of affiliate-​level CEOs in most chaebol groups reduced to 3 years. Unless a new affiliate CEO showed a substantial increase in specific performances in a couple of years, that person would be immediately replaced. As a consequence, affiliate-​level CEOs of chaebols in turn harshly controlled their executives, managers and employees in order to survive. Fully utilizing newly allowed contingent employment, elaborate performance measurement systems, and annual performance-​based pay systems, affiliate CEOs squeezed the entire organization and employees to produce specific performance outcomes as fast as possible. A surprising consequence of this historical transformation in governance and the CEO model, some of the chaebol affiliates achieved extremely high performances in global markets. For instance, during this period, the Korean economy came to have a number of the world’s leading companies in some of the major industries, such as semiconductor, electronics and ship-​building. Also, Korean chaebols came to produce publicly-​known specialist CEOs often referred to as ‘star CEOs,’ such as the CEO of Samsung Electronics semiconductor division. Some of them came to be highly respected even by the global business community. The age of specialist star CEOs in which some affiliate-​level CEOs who produced high performance outcomes were more widely known to the public than group-​level owner-​CEOs of chaebols arrived in Korea.

Fast second strategy in the globalized markets However, the biggest strategic challenge that chaebols had to deal with in this period was how to achieve global-​level competitiveness under completely different domestic and global environments with neither leading technological capabilities nor cost advantages based on cheap labour cost. As mentioned earlier, Korean chaebols’ conventional global strategy of price competition based on cheap labour cost offered by the authoritarian government became already useless with domestic democratization in the late 1980s and neoliberal market-​opening in the 1990s. In addition, the new internal-​market model of governance did not allow the group CEO to directly mobilize affiliates’ resources and capabilities for the pursuit of new growth strategies or technological innovations at the group level. Nevertheless, Korean chaebols had to acquire global competitiveness as fast as possible to survive in the new environment of neoliberal boundaryless competition. The global competitive strategy that Korean chaebols chose based on internal-​market governance in this period was so called ‘fast second’ or ‘fast follower’ strategy. The market position of the creative first mover was very difficult to achieve, since chaebols, which had competed mostly in low-​end niches of the global markets based on cheap domestic labour had neither the experience of competing for global leadership nor cumulated advanced technological capabilities. Thus, chaebols decided to follow the innovative global first mover’s choice as fast as possible. With the tight performance-​based control of affiliates, the new chaebols were able to implement the fast second strategy of global competition very efficiently. Since chaebols continued to execute relentless downsizings and enhance performance controls since the 1997 crisis, they were able to achieve a maximum level of cost efficiency and a highest speed in managerial processes. Thus, as fast followers, chaebols began to copy new innovative products developed by creative global first-​movers and make them a little better than the original ones but at a significantly cheaper price as fast as possible. Then chaebols performed the continuous improvement of the imitated products’ quality very fast and efficiently. A representative example for a global fast follower would be Samsung’s Galaxy smartphone’s positioning as one 121

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of the top two global players by slightly improving the technical functions and cost efficiency of Apple’s iPhone. Based on the combined effect of fast second strategy and continuous quality improvement, Korean chaebols performed brilliantly in the global markets, which eventually resulted in Korea’s status as one of the global top-​ten economy.

The double-​sided effects from the internal-​market model of governance and CEO Although the new strategy of chaebols based on the internal-​market model of governance and CEO performed splendidly in the globalized neoliberal markets, it also had a number of serious downsides. In terms of human and social costs, the new neoliberal chaebol system generated severe social problems by making most of the employees into contingent workers who had to constantly suffer from status instability. Since the Korean government’s social security system was still much weaker compared to those of more advanced countries, contingent employment became an additional source of serious social problems causing social instability. In terms of competitiveness, the new chaebol system produced two problems. First, since the new chaebol system emphasized the maximization of short-​term performance outcome by every individual unit and level, such as each affiliate, division, team and employee, it was impossible to pursue those performances that could be achieved only through collaborations between multiple units beyond boundaries between them over a long period. As a result, however promising a business might look, unless each individual affiliate could generate profits far exceeding investments in a couple of years, the affiliate CEO would not enter it. For instance, Samsung Electronics in the early 2000s was the first major firm that acknowledged the increasing importance of convergence among diverse digital areas in the coming age of digital transformation, and, actually the only player that owned the diverse in-​house digital technological and business capabilities to be converged, such as semiconductor, mobile phones, network, computer and related devices, home electronic appliances, digital camera, and so on. As a matter of fact, Samsung Electronics advertised its technological vision of digital convergence in major global media publicizing the creative concept of ‘DigitAll’ in the early 2000s. Nevertheless, Samsung Electronics eventually gave up the pursuit of digital convergence due to its preoccupation with the new performance management system that tightly evaluated and rewarded or punished the short-​term performance of each individual unit, required by the new internal-​market model of governance and CEO role. Not only Samsung, but also most of the Korean chaebols became unable to launch a future-​oriented new business, which required long-​term collaborations among diverse affiliates. Even if affiliate CEOs had completely agreed that the interaffiliate collaboration would generate a significant growth for the entire group in the long run, they would object against such new business of interaffiliate convergence, since affiliate-​level CEOs with the tenure of 3 years were supposed to be rewarded or punished for the individual performance outcomes of their own affiliates, rather than that of the entire group, long before the maturation of the new convergence-​ oriented business. In this regard, the internal-​market model of chaebol governance and CEO brought about double-​side effects. On one hand, the model decisively contributed to the upgrading of the global competitiveness of chaebols and the Korean economy to one of the global top-​ten economies through fast-​second strategy at the entire global level. On the other hand, the internal-​market model brought about not only serious social instability from the extreme neoliberal marketization of employment relations, but also potentially a more serious competitive risk stemming from the inability of long-​term boundaryless collaboration. 122

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Conclusion: The currently ongoing paradigm shift The history of paradigm shifts in the governance and CEO model Korean chaebols This study has reviewed the history of paradigm shifts in chaebol governance-​and-​CEO models. We have argued that governance structures and CEO roles in chaebols are directly related with each other to a mutually inseparable degree. We have also argued that since chaebols have chosen governance and CEO models to adapt to changing environmental conditions of each period, the generalization of them in popularized terms like ‘the Korean-​style management’ may be seriously misleading. In this regard, we have divided the entire history of Korean business groups since the liberation of Japanese invasion in 1945 into three stages and tried to figure the key characteristics of corresponding governance and CEO model in each period. For this purpose, we have examined the sources and consequences of the historical paradigm shifts in chaebol governance-​CEO models from an entrepreneurial model in the late 1940s, to a hierarchical model in the 1960s, and again to an internal-​market model in the 2000s (Table 5.1). We explained that the first model of governance and CEO in Korea was born in 1945 with the independence of Korea from 35 years of colonial occupation by Japan. This period that lasted until 1960 was characterized by exceptionally powerful entrepreneurship of individual businessmen who founded some of the first chaebol groups. The model of governance and CEO role during this first period was centred around individual-​level capabilities and entrepreneurial vision and motivation. Since modern industries and corporate economy were just burgeoning in this period, a full-​blown governance structure did not appear yet until then in Korea. Then came the era of unprecedentedly fast growth led by the developmental dictatorship regime of President Park Chung-​Hee in 1961. The powerful authoritarian government allied with young technocrats and chaebols achieved the miracle of the Han River by price competition strategy based on cheap labour cost in low-​end niches of global markets and by aggressive unrelated diversification strategy to fill industrial void in protected domestic markets. To implement these strategies efficiently, most of the Korean chaebols during the period had a powerful hierarchical governance and CEO model in which the entire affiliates of a group were tightly controlled and managed just like a single hierarchical organization by the almighty informal headquarters composed of owner-​chairman and OPC. However, this period of fast growth and hierarchical governance-​CEO abruptly ended with the 1997 IMF bailout of the defaulted national economy. The unprecedented national crisis was caused externally by the diffusion of neoliberal globalization in international markets and internally by the rapid increase of labour cost and the depletion of industrial void in domestic markets in the early to mid-​1990s. Although these environmental changes demanded Korean chaebols a fundamental shift in strategy, governance, and CEO role, they responded rather by enhancing the existing paradigm, which eventually resulted in the IMF bailout of the national economy in 1997. The nation-​wide crisis in 1997 pushed Korean chaebols to implement a fundamental transformation of their governance and CEO model so that they could compete in the globalized new environment. As a result of both their desperate attempts to survive and pressures from IMF and the new government, chaebols shifted their governance and CEO role to an internal market following the globally institutionalized model of neoliberal marketization about the early 2000s. In this new model of governance and CEO, the headquarters came to play the role of a within-​group market that rewarded affiliates with high performances and punished those with poor performances. The process of affiliate-​level management was left to autonomy, while their performance outcomes were tightly controlled. As a consequence, the inside of each affiliate came to work like a market.

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Routledge Handbook of Korean Business and Management Table 5.1 The historical paradigm shifts of chaebol governance and the CEO role

Period Market Environment Political Environment Domestic Strategy Global Strategy

Source of Competitive Advantage Governance of Affiliates Reward for Affiliates

Entrepreneurship

Hierarchy

Internal market

1945–​1960 Complete Industrial Void Nation Building

1961–​1997 Decreased Industrial Void

1998–​Present Boundaryless Competition Globalized Neoliberalism

Founders’ Individual Competencies

Developmental Dictatorship National Industrial Infrastructure Building Aggressive Export Drive in Low-​End Niches of Labor-​Intensive Industries Cost Competition in Low-​ End Niches

Entrepreneurialism

Tight Hierarchical Control

Market-​Like Autonomy

Beginning of Modern Industries No Global Business

No Systematic Reward Collectivistic Reward

Market Opening and Full-​ Scale Globalization Full-​Scale Globalization

Fast Second in Global Markets

Performance-​Based Reward

Source: Created by the author.

This paradigm shifts of Korean chaebols to an internal market model of governance and CEO role in the early 2000s brought about an unexpected high global competitiveness, which significantly contributed to the rise of Korea to the status of the global top-​ten economies about 2010. Now as of the mid-​2020s, another radical paradigm shift is currently going on stemming mainly from recent changes in technological environments often referred to as ‘the Fourth Industrial Revolution’ or ‘digital transformation’ (Schwab, 2017). This currently ongoing paradigm shift is being propelled not by unique conditions of Korean chaebols or economy, but by the biggest global-​level fundamental transformation since the coming of modern industry society in the late nineteenth century (Seoul Forum, 2017).

The Fourth Industrial Revolution and the currently ongoing environmental changes The currently ongoing paradigm shift has originated from recent breakthroughs in digital technologies about the early 2010s often referred to as the Fourth Industrial Revolution. Moreover, this ongoing paradigm shift has brought about fundamental changes for most of the organizations and nations in the world almost simultaneously since the neoliberal globalization has destroyed all the boundaries between nations and regions. However, Korean chaebols’ current situations have a number of idiosyncratic characteristics. Although the neoliberal paradigm shifts of chaebols in the early 2000s has brought about Korea’s status of one of the world top-​ten economies, the internal-​market model, which is currently the mainstream paradigm still in the early 2020s, has come to face serious limitations and potential crisis. In addition to the social instability stemming from contingent employment and constant restructuring, the current paradigm of Korean chaebols which has focused on the maximization of short-​term quantitative performance at each individual 124

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unit level may face serious competitive problems due to the following two environmental changes currently accelerating at an increasing pace: (1) competition based on creative innovations and ‘the winner takes it all economy’ in which only the creative first-​mover can survive, and (2) the boundaryless convergence of multiple different businesses and technologies. Above all, the currently accelerating digital transformation (Schwab, 2017; Vial, 2019) has a strong potential to pose a fundamental threat to the present governance and CEO model of Korean chaebols as an internal market. To adapt to the currently ongoing environmental change, another fundamental paradigm shift in governance and CEO model has to be urgently considered by chaebols as of the mid-​2020s. Just like the great transformation to the modern industrial economy about the late nineteenth century was ignited by the development of communication and transportation technologies, such as telegram, telephone, railroad and automobile (Chandler, 1977; Polanyi, 1944), the seed of the currently ongoing environmental change was conceived by the accidental simultaneous breakthroughs of a number of key digital technologies, such as the Internet of things (IoT), artificial intelligence (AI), big data and blockchain, and the active omnidirectional convergence among them about the early 2010s. We argue that the most important function of a new technology in paradigm shifts is ‘enabling’ (Shin & Kim, 2022). That is, a new technology propels paradigm shift by enabling a new way of value-​creation and problem-​solving that used to be impossible. For instance, the development of communication and transportation technologies about the late nineteenth century brought about the modern mass-​production economy by enabling firms to produce each product in a mass volume for anonymous consumers residing over broad geographical areas by connecting them as a single integrated market (Chandler, 1977). Then what are the specific enabling effects of recent digital technologies on the current environmental changes? That is, what are the core characteristics and future directions of the currently ongoing environmental changes enabled by the recent developments in digital technologies? About 2010, a series of digital technologies related to connectivity, intelligence and cyber-​ physical system have started to rapidly develop and converge with one another, accelerating each other’s continued developments (Vial, 2019). The potential possibilities of these digital technolo­ gies are so revolutionary that their combined effects are expected to far exceed that of the Third Industrial Revolution ignited by the rapid development of computers about the mid-​to late twentieth century. The core technologies of the Fourth Industrial Revolution include the IoT, cloud computing, big data, AI, blockchain, 3D printing and robotics, and 5G/​6G telecommunication. IoT enables real-​time connections between everything, everyone, and everywhere, cloud computing enables the overcoming of local hardware’s limits, big data enables the overcoming of information limits, AI enables the overcoming of limited intelligence, blockchain enables a near-​perfect trustworthy cooperation, and 5G/​6G telecommunication enables real-​time communication.

The new rule of competition in the age of the Fourth Industrial Revolution The increasingly rapid development and convergence of the digital technologies since 2010 have brought about the fundamental transformation of businesses, markets, organization management, social relations and the entire economy and society across the global community, which is referred to as the Fourth Industrial ‘Revolution.’ Above all, these digital technologies have created a completely new environment of hyper connectivity, hyper intelligence, and cyber-​physical integration, enabling all the economic and social actors to achieve an unprecedented level of speed, scale, scope, precision, and creativity in their thinking, actions and interactions (Shin & Kim, 2022). As a consequence, it is widely believed that with the development of the Fourth Industrial Revolution, 125

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all the technological limits in business activities have almost completely disappeared, and the only limit in business activities now is our imagination. Utilizing these enormous new technological possibilities, corporations all over the globe have rushed to create new values, products, services and businesses, competitively and continuously. Unlike the competition of expanding existing advantages in the previous era, the new rule of the game now is the competition over endlessly creating new advantages faster and more frequently than others. Moreover, since environments constantly change in unexpected ways due to the extremely complex boundaryless interactions among all the actors, organizations and factors from all the industries and sectors, only the first-​mover who generates a creative innovation first can enjoy its fruit. However, it should be underlined that the first-​mover advantage from a creative innovation is monopolistic but temporary, since competitors from everywhere immediately attempt newer and more creative innovations without boundary. Therefore, all the firms fiercely compete against one another to capture the ever-​changing market position of a temporary creative first-​mover continuously. Moreover, as the currently developing digital technologies of the Fourth Industrial Revolution enable all corporations to freely cross all types of boundaries at a real-​time speed, the destruction of boundaries started in the previous age of neoliberal globalization have reached an extremely level. Now real-​time boundaryless competitions among all economic actors constantly intensify not only across geographical boundaries, but also across all types of actual and virtual boundaries at all levels. Thus, the position of creative first-​mover is constantly and fiercely contested by all actors from all industries and sectors. Furthermore, much of the creative innovations are generated at the ecosystem level that spans boundaries across multiple industries, technological areas and sectors, rather than confined within the boundary of a particular area. As is well illustrated by the case of the competition between the iPhone ecosystem and Android ecosystem, interfirm relations within each ecosystem in the age of the Fourth Industrial Revolution are characterized by a highly complex combination of both competition and cooperation, which further makes future environmental changes extremely dynamic and unpredictable. As a consequence, unlike the global leading firms of the twentieth century each of which dominated a particular industry like Ford in the early twentieth century or Kodak throughout the twentieth century, it is difficult to assign the current leaders of the global economy, such as Amazon, Alphabet, and Tesla, to a particular single industry. That is, the entire global economy is currently undergoing an unprecedented paradigm shift to a radically new model completely different from the previous paradigm.

The challenges faced by chaebol governance and the CEO model Under this rapidly ongoing paradigm shift of the Fourth Industrial Revolution, most of the Korean chaebol groups as of the mid-​2020s are still maintaining the previous management paradigm based on the neoliberal internal-​market model of governance and CEO role, which has performed brilliantly for the past two decades since the early 2000s (Seoul Forum, 2017). However, the new environment of the Fourth Industrial Revolution requires chaebols a completely different model of group-​level governance and CEO role far beyond the simple evaluation and rewarding of affiliates based only on specific short-​term performance outcomes at the individual unit level. Considering the extreme volatility, complexity and uncertainty of the Fourth Industrial Revolution (Bennett and Lemoine, 2014), the old model of hierarchical governance that used to tightly controlled the entire affiliates as a single hierarchical organization during the rapid growth period from 1961 to

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1997 will not be able to play the role as a new organizational platform for boundaryless constant creative innovations either.

Concluding remark Throughout this chapter, we have argued and illustrated that governance-​CEO paradigms in Korean business groups have dynamically shifted with historical environmental changes. As explained above, Korean chaebols are currently facing an unprecedented new environment in terms of both competitive boundaries and technological developments. The new environment, often referred to even as the Fourth Industrial ‘Revolution,’ requires the constant generation of creative innovations through omnidirectional cooperation beyond firm, group or industry boundaries. That is, an upgraded version of interaffiliate cooperation or even intergroup cooperation, which were blamed as the cause of the 1997 crisis is now needed under the new environment. The new model of group-​level governance and CEO role must be the one that not only allows chaebol affiliates to maximize their competitiveness in creative innovations individually, but also induces them to collectively generate constant creative innovations through interaffiliates and also external cooperation based on mutual benefits. These features required in the new governance and CEO model are consistent with the prototypical characteristics of network governance (Powell, 1990). Now the age of network governance and rela­ tional CEO may have finally arrived in Korean chaebol groups.

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6 BUSINESS GROUPS IN KOREA Past, Present and Future Hicheon Kim, He Soung Ahn and Juhee Kim

Introduction Few economies in the world have matched the phenomenal economic development of Korea in industrialization. For the first half of the twentieth century, it was a poverty-​stricken, agriculture-​ based Japanese colony, then torn by the Korean war. It was only in the 1960s that the state set out to pursue industrialization by implementing development strategies that entail designating strategic sectors to develop, selecting partners among firms, and arranging financial resources and policy support for them. Since then, the South Korean economy has achieved an unprecedented rapid growth to become the tenth largest economy in the world with its gross domestic product (GDP) per capital jumping from $93.83 in 1961 to $31,489 in 2020. Family-​controlled diversified business groups, also known as chaebols, have played a pivotal role in the phenomenal success of the Korean economy. Chaebols are business groups that consist of legally independent firms that are bound together by a shared family connection of the controlling family (Khanna & Yafeh, 2007). By serving as partners for the state’s development strategy, chaebols were able to overcome resource constraints and diversify into more advanced sectors in accordance with shifting priorities in national developmental projects. Over the previous six decades, some chaebols such as Daewoo and Halla have disappeared due to poor management and bankruptcies, but others such as Samsung and LG have now grown to become strong global players in many industries requiring technological innovation (e.g., semiconductors, mobile phones, automobiles). Following the dominant perspective on business groups, the prior studies on chaebols have largely focused on their institutional void-​filling role (e.g., Amsden, 1989; Chang & Hong, 2000; Kim, 2010). According to the institutional void or market failure perspective, diversified business groups are viewed as organizational responses to the immaturity of external markets and market-​ supporting institutions, which is prevalent in emerging economies (Khanna & Palepu, 1997; Khanna & Yafeh, 2007). In the absence of well-​functioning external markets for capital, labour, and product, business groups serve as internal markets that facilitate sharing and transferring resources to exploit opportunities. Indeed, the genesis and early growth of chaebols are a good example of value-​adding consequences of internal market operations embedded into business groups (Amsden, 1989; Chang & Hong, 2000; Kim, 2010).

DOI: 10.4324/9781003180920-8

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The logic of the institutional void perspective suggests that as markets develop and their institutions mature due to economic development, unique advantages associated with business groups are expected to decline. However, longevity and resilience of chaebols may go against this logic. There have been substantial improvements in markets and market-​supporting institutions over time in Korea. Now Korea represents the world’s tenth largest economy, and its stock market is ranked number 11 in terms of total market capitalization. Korea is ranked number four in terms of the overall Ease of Doing Business Index in 2022 complied by the World Bank while the US is ranked number 6. In 2009, FTSE reclassified Korea from an emerging into a developed economy. The rival index provider MSCI is also considering the upgrade of Korea into a developed market. Although the institutional voids’ perspective may account for the genesis and early growth of chaebols, they may be significantly limited to account for their continuing rise to leading MNCs. In this chapter, we seek to go beyond the institutional voids’ perspective to explain the recent development and evolution of chaebols in two important ways. First, we apply the family firm perspective to explain the ups and downs of chaebols as family firms might be a double-​edged sword. On the one hand, family ownership and management may mitigate principal–​agent conflicts, promote long-​term horizons in investment and strategy, and facilitate the formation of social capital (Miller & Le Breton-​Miller, 2005). On the other hand, family ownership and management may engender principal–​principal conflicts and induce family members to pursue socio-​emotional gains, such as nepotism and keeping family legacy. Thus, the success of family business groups requires exploiting the bright side of family firms while mitigating their dark side. Furthermore, the success of family business groups over generation calls for transgenerational entrepreneurship for renewal of business portfolios and business groups (Jaskiewicz et al., 2015; Rosa et al., 2014). Indeed, leading chaebols such as Samsung and LG represent excellent examples in this regard. They have gone through multiple rounds of succession while restructuring the business portfolios, professionalizing the systems, and maintaining the entrepreneurial spirit. We will take a closer look at the entrepreneurial process in the path of their evolution. Second, we seek to explore the emerging form of business groups. When Korea was hit by the Asian financial crisis in late 1997, chaebols and their viability came to be strongly challenged. The reckless expansion of chaebols was viewed as a major contributor to the financial crisis; some observers even claimed that chaebols had run out of stream as a model for the Korean economy (Kim, 2010). Instead, startups and entrepreneurship came to be viewed as a new source of growth and prosperity that could replace the chaebol-​based model, triggering a multitude of startup formation. Some startups founded in this period prospered, becoming large enterprises whose businesses include various Internet or mobile markets. NAVER is a case in point. Started as a search portal in 1999, NAVER has expanded its business scope to include news portal, webtoon, e-​commerce, digital payment, and other digital services. Kakao has followed a similar path. Started as a social network service or KakaoTalk, Kakao has expanded into various services including e-​commerce, webtoon, e-​commerce, mobility and Internet banking. From one perspective, the evolutionary paths of NAVER and Kakao may be reminiscent of those of chaebols. Having emerged as a leading online platform, they diversified into various markets that represented new opportunities provided by the Internet and mobile technologies. Still, these new opportunities such as e-​commerce, fintech, and entertainment are unknown territories for them that could be considered unrelated to their core business. Indeed, NAVER and Kakao have increasingly become similar to chaebols, being subject to the same regulations as chaebols. From another perspective, there exist quite intriguing differences between these new players and chaebols. NAVER and Kakao are founded around the Asian financial crisis when the viability of 134

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chaebols is challenged and startups such as NAVER and Kakao are hailed as a new model emphasizing autonomy, flexibility and entrepreneurship. These differences in economic circumstances and views about viable organizational models during the founding periods may influence organizational practice and culture during the early days of these players and their effects may persist over time (Stinchcombe, 1965; Marquis & Tilcsik, 2013). While chaebols diversified into asset-​ heavy industries such as electronics, chemicals and shipbuilding, new players have done so into the asset-​light industries where intangible resources play an important role. These differences may translate into how diversification initiatives are organized and how diversified business portfolios are managed. In short, we may observe a new breed of business groups, which may compete against or collaborate with conventional chaebols.

Prior Studies on Chaebols The prior work on chaebols has been based upon the institutional voids or market failure perspectives, which conceptualize chaebols and business groups in general as an organizational solution to overcome, and take advantage of, market imperfections prevalent in emerging economies for capital, human, technological, and other resources (Chang & Hong, 2002; Kim, 2010). Chaebols circumvented these market imperfections by collaborating with the state on national development projects and securing capital and foreign technologies in favourable terms. They also operated internal markets through which affiliated firms co-​developed, transferred, and shared resources with each other. Chaebols’ distinct advantage in resource access enabled them to diversify their business portfolios and evolve into diversified business groups. Facing a shortage of financial capital in the early days of industrialization, chaebols served as an internal capital market among their affiliates. For instance, when a new affiliate was established to begin an entrepreneurial venture, initial equity investments usually came from other group members, and the new affiliate, in return, assumed equity stakes in other group members, creating cross-​sharing holdings among affiliates. Additional financial assistance could also be channeled from other group members by manipulating the transfer prices of intra-​group transactions (Chang & Hong, 2000). In doing so, chaebols could shift financial resources from cash-​rich affiliates into cash-​starved ones, which helped cash-​starved affiliates to overcome liquidity constraints. In the comparison between chaebols and non-​chaebols, Shin and Park (1999) found that chaebol firms’ investments are not influenced by their own cash flow but are instead sensitive to internal cash flow of other group members. By contrast, non-​chaebol firms’ investments are sensitive to their own cash flow. On the other hand, chaebol firms’ investments are significantly related to their own growth opportunities, but this is not the case for non-​chaebol firms. These findings provide compelling evidence that internal capital markets inside chaebols allow their affiliates to share and transfer financial resources, thereby mitigating liquidity constraints and funding their rapid growth. However, chaebol’s finance practices have come under intense scrutiny from the government, particularly after the 1997–​1998 financial crisis. After the onset of the financial crisis, chaebols are criticized as a primary culprit that suffers from over-​leverage, excessive diversification, and over-​investment. In response, the government implements the chaebol reforms, prohibiting cross-​ loan guarantees and cross-​shareholdings among affiliated firms that constitute crucial tools for internal capital market operations. In addition, increasing scrutiny over intra-​group trading from the government has made it difficult to shift cash between affiliated firms by arranging transactions between them. Indeed, Lee et  al. (2009) find that there is strong evidence of internal capital market operations in the pre-​crisis period, 1993–​1996. However, following the government’s 135

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implementation of chaebol reforms, evidence of internal capital market operations disappeared in the post-​crisis period, 1999–​2005. Facing a shortage of well-​trained people in the early days of industrialization, chaebols also served as internal labour markets among affiliated firms (Kim, 2010). Chaebols recruited and trained people at the group level before sending them to their affiliated firms. By training recruits at their group training centers, chaebols overcame the problems stemming from the under-​developed educational institutions and the lack of qualified human talent. In addition, they often transferred and shared human talent among their affiliated firms. For instance, when chaebols started a new venture, they often transferred engineers and managers from their affiliated firms into the new venture (Korea Economic Research Institute, 1995). In the absence of well-​functioning labour markets, the ability to train, transfer, and share human talent among affiliated firms played a crucial role in enabling the chaebol’s rapid growth. The significance of internal labour market operations, however, has declined over time. First, the quality of educational institutions and the supply of qualified human resources have substantially improved over time. According to the OECD’s Programme for International Student Assessment (PISA) that assesses 15-​year-​old students’ scholastic performance worldwide, Korea has been one of the top-​performing countries, ranking ninth in reading, seventh in mathematics and seventh in science in 2018. Indeed, Korea has become one of the world’s highly educated labour forces. Korea ranks fourth after Canada, Japan and Israel, based on the percentage of the citizens aged 25 to 64 who have completed some form of tertiary education, i.e., 2-​year or 4-​year degree or vocational programs (OECD, 2018). If we focus on the young generation aged 25 to 34, Korea ranks even higher, the first in 2021 (OECD, 2021). Thus, the shortage of qualified human resources may no longer be an issue to a large extent; instead, some critics even claim that there is excess supply of university graduates, creating an over-​qualified and under-​employed labour force. Second, mobility across employers has increased substantially, which challenges the advantages of internal labour market operations inside chaebols. Facing the financial crisis in the late 1990s, chaebols engaged in massive layoffs for the first time in their history; therefore, the psychological contract of lifetime employment was breached. Employees seem to be ready to move to another firm in search for higher compensation and better career opportunities. The recent survey by Job Korea, a job web-​portal, found that about 90% of respondents consider moving to another firm. Large firms belonging to a chaebol are no exceptions. These firms now compete against those at other chaebols, big technology companies such as NAVER and Kakao, and startups. In short, creating unique advantages by building internal labour markets inside chaebols has become increasingly difficult. During the early days of industrialization, markets for intermediate products were poorly developed (Kim, 2010). In the explanation of LG’s early business expansion, Chairman Koo Cha-​ Kyung pointed out that some expansion was driven by vertical integration to secure intermediate products for which no qualified suppliers exist (Kim et al., 2004). He stated that ‘My father and I started a cosmetic cream factory in the late 1940. At the time, no company could supply us with plastic caps of adequate quality for cream jars, so we had to start a plastics business’ (Aguilar & Cho, 1985: 3). Indeed, vertical integration was necessary to start a new business and to improve the quality of products, leading to increased business scope of the chaebol. However, along with economic development, qualified suppliers of intermediate products emerged. Now, some Korean firms have emerged as leading global players in markets like memory chips and displays. As a result, vertical integration to secure intermediate products per se has lost much of its relevance. Indeed, after the onset of the financial crisis in the late 1990s, chaebols underwent restructuring 136

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to eliminate certain businesses that they had entered into for the sole purpose of securing intermediate products.

Evolution of Korean Business Groups: A Family Firm Perspective Viewing chaebols through the lens of family firms, rather than solely emphasizing their broader institutional void-​filling role, offers insights into their ability to endure and succeed despite inherent challenges. A family firm perspective highlights the distinctive traits chaebols exhibit as family firms that are not found in businesses without such family involvement. In fact, an important benefit of family control is the clear long-​term perspective that chaebols’ controlling family members have in the family firm (Miller & Le Breton-​Miller, 2005). As stewards to the business, family members tend to be motivated to make decisions with a long-​term orientation that contributes to the continuity of the family legacy and the survival of the companies. At the same time, family leaders –​a critical element in realizing the advantages of family control in chaebols –​ consistently face concerns for the potential lack of managerial capability and experience, mostly due to the fact that family heirs are not chosen from an external labour pool (Dyer, 1989). Although these negative and positive aspects of family control simultaneously coexist, the benefits of family leadership have certainly been manifested in the case of Korean business groups. Considering that chaebols have not only survived but also thrived in terms of performance, it appears that the advantages of family control have not completely been overshadowed by its drawbacks (Gomez-​Mejia et al., 2011). This section, therefore, aims to provide an oversight about how unique features of chaebols as family firms contributed to chaebols’ survival.

Professionalization of Management in Strategic Leadership of Chaebols Despite the strong leadership frequently demonstrated by the owner-​manager in chaebols that have supported both the companies and the business groups’ survival and prosperity over the years, concerns about family leadership exist at the same time. Given the common practice of perpetuating family leadership across generations, nepotism –​and the ensuing lack of professionalization of the business –​ are a recurring criticism placed on chaebols (Stewart & Hitt, 2012). To over­ come these criticisms, chaebols have made extensive efforts to professionalize their management throughout the business group. As chaebols diversified and experienced rapid growth over the course of their trajectory, the need for professionalizing management also became especially timely and necessary. Despite the apparent control that the founder and their families had over the business group, overseeing the entire group became not only inefficient but also increasingly impossible. As the business portfolio of chaebols became more diverse, single owner-​managers found themselves lacking the necessary time and resources to be intricately involved in the day-​to-​day decision-​making processes of affiliated companies. Instead, it was important for family leadership to articulate an overarching vision for the whole business group and to focus more on making critical strategic decisions while other decisions were delegated to professional managers. In the case of LG, the need for professionalization in its management team became salient around the time the second generation succeeded the business group. Founded in 1931, LG grew from a small family business –​named as Rakhee Chemical Works at the time –​to a large diversified business group by the time the first-​son of founder Koo In-​hwoi, Koo Ja-​kyung, became the successor in 1970. By then, it became increasingly necessary to build an effective operating system that fits each business unit and delegating decision-​making authority to professional managers 137

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(Park et al., 2021). In 1989, the group was restructured into 26 different business units called CU (Culture Unit) and devised an executive training programme to groom a professional manager to run each CU. LG’s principle was to train and appoint an insider, rather than recruit a professional manager from outside the group (Park et al., 2021). To this day, LG has several employee training and development programmes with similar principles in place, both at the group-​and affiliated firm-​level. Since 1996, LG Electronics runs its own HPI (high potential individual) programme, which aims to identify and nurture key talents. Employees generally in their early-​30s with around 3 to 4 years of experience in the company are selected as ‘Young HPI’ every 2 years. Young HPIs are rotated across various job functions to gain experience and are given priority in education opportunities within the company. When Young HPIs reach their late-​30s to mid-​40s, approximately 25% of them are selected as ‘Leader HPI.’ While Young HPIs typically receive on-​the-​job training, leader HPIs are given difficult tasks such as a managerial position at a loss-​generating business. The company maintains a pool of key HPI talents, which is updated every few years. The purpose, however, is not to identify the best talent but to find the right people. Similar to LG, the incorporation of professional managers in Samsung was implemented during the tenure of the second-​generation family leader, Lee Kun-​Hee (Song & Lee, 2014). With a strong emphasis on actual job performance rather than academic credentials, Samsung has a superior talent management system that nurtures talent for internal promotion to managerial roles. Since 1991, the chaebol also runs the regional specialist programme with the aims of training selected employees to play a central role in Samsung’s overseas operations. A unique factor, however, is that Samsung is more open towards recruiting competent managers from outside the group. Executive-​level talents are sometimes recruited from outside the company, especially those with experience in prominent global corporations (Song & Lee, 2014). Samsung also actively recruits foreign talent, which contributed to Samsung’s globalization. Owing to such efforts to professionalize the management team, professional managers play a large role in chaebols today. Given that the term Chief Executive Officer (CEO) refers to the key decision-​maker responsible for releasing accurate financial information to market participants, a majority of companies affiliated with business groups release annual financial statements that are signed by professional CEOs. At the same time, caution must be taken as de facto family leaders often have different titles within the executive team (e.g., Chairman). For instance, Samsung Electronics as of December 2021 appoints three professional CEOs, all of whom are not a family member, and the de facto family leader, Lee Jae-​Yong who is the third-​generation descendant of the founder, held the Vice Chairman title. In October 27, 2022, Lee Jae-​Yong was officially promoted to the position of Executive Chairman.1 In the case of LG Electronics, the fourth-​generation Koo Kwang-​Mo holds both the Chairman and the CEO title as of December 2021. As there is another professional CEO, the company has a dual CEO structure. Given that a family leader arguably holds greater power compared to professional CEOs in the family firm, such governance structures could be subject to criticism as an indication of inadequate professionalization. However, the coexistence of the owner-​manager and professional managers helps explain how the upsides and downsides of family leadership are balanced out. Even if the controlling family held managerial control over the group, chaebols have strived and have succeeded in going beyond the initial stage of relying solely on a single family leader. Starting from the recruitment of competent new employees, few carefully designed training and career development programmes have been implemented. Based on extensive training and screening processes, a pool of competent candidates for top management positions from which professional

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managers are usually selected from is identified. Overall, efforts to professionalize management by investing in nurturing professional managers has allowed chaebols to mitigate the dark side of family leadership. At the same time, the family leader with a long-​term perspective focuses on devising a vision and the overall strategic direction of the group. Instead, the decisions regarding business operations are mostly delegated to the professional managers, who are appointed based on managerial competency. Many chaebols’ successful renewal of business portfolios throughout the past several intergenerational transitions is a good example of how the advantages of professional managers and family leadership have reinforced each other. As chaebols thrived as family business groups amidst the major changes in the external environment, they have displayed transgenerational entrepreneurship that resulted in the shift in business portfolios over. Supported by strong family control over the group, the long-​term orientation of the controlling family has often been clearly manifested in major investment decisions. Many key businesses that have made chaebols the global conglomerates today could not have been possible without the long-​term investments made by family owner-​managers. For instance, the de facto family leader’s continuous projection of a strong vision is considered to be a critical reason behind the successful evolution of Samsung into a global conglomerate (Song & Lee, 2014). Samsung’s semiconductor business is one example. Founded in 1938, Samsung started off from a small business that sold exported goods such as noodles and grew into the biggest conglomerate of the country with its business portfolio now ranging from electronics to insurance, shipbuilding, and construction. Samsung is especially a strong player in the global semiconductor industry, where a large portion of its revenue is derived from. In 2021, Samsung’s semiconductor revenue amounts to 73.1 billion US dollars which is 12.3% of the total market (Gartner, 2022). At the time when Samsung announced its diversifying decision into the semiconductor industry in 1983, the industry was dominated by companies from advanced economies such as the US and Japan. Despite skepticism and concerns expressed by stakeholders, second-​ generation family successor Lee Kun-​hee convinced his father to make aggressive investments into developing DRAM semiconductors and released its first 64K DRAM product in December of the same year (Yang, 2012). Shortly after Lee Kyun-​hee officially succeeded his father as chairman, he went on to build an 8-​inch wafer-​based DRAM production line when most of its competitors were focused on a 6-​inch type. This risk-​taking eventually paid off, as Samsung dominates the DRAM market and is consistently the world’s largest DRAM supplier even to this day. In 2021, Samsung had 44% of the DRAM market share.

Intrafamily succession of chaebols’ strategic leadership From a family firm perspective, succession is a central feature underpinning chaebols because their intention for transgenerational control clearly sets family firms apart from non-​family firms (Handler, 1994; Zellweger et  al., 2012). Indeed, one of the primary distinguishing factors of Korean chaebols is the highly visible intergenerational succession within the controlling family. The transfer of family control has taken place –​ and is still currently ongoing –​ in both the ownership and management dimensions. Many of the largest chaebols are now managed by third-​ or fourth-​generation family descendants, while ownership stakes are dispersed among family members spanning multiple generations. The current state of succession in Korean business groups is shown in Table 6.1. Of the top 20 business groups ranked by total assets, 17 groups are family-​controlled. A total of two business groups is currently led by the founder, while the remaining 15 groups are succeeded by the

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descendant of the founder. As of December 2022, second-​generation family successor is currently the most common as six groups are led by the second generation. Yet, leadership succession has been advanced as far as to the fourth generation. While six groups are led by the third generation, two groups are currently succeeded by the fourth-​generation family descendant. Although some also hold the CEO title simultaneously, the most common executive title of family leaders is the President. Chaebols proceed with family leadership transition over many steps that typically take years to be completed. In order to better understand succession in chaebols, it is critical to perceive succession as a process –​ rather than a single event –​ that unfolds in two distinctive dimensions: ownership stakes and managerial control (Cabrera-​Suárez et al., 2001; Handler, 1990). Transfer of ownership stakes is typically initiated long before the leadership transition. This is unsurprising given that it is vital to hold sufficient shares in key affiliated companies within the business group to secure control over the entire group well for the successor well in advance of the leadership transfer. Another less obvious yet realistic reason behind this pattern of ownership transfer, however, lies in the Korean legal system within which chaebols operate. Specifically, South Korea has one of the world’s highest tax rates including that of inheritance tax and gift tax. Inheritance tax rate is 50%, which is the world’s second highest, stands in stark contrast with the average rate of 15% among other OECD (Organization for Economic Cooperation and Development) countries (OECD, 2021). In addition, a premium is added to the tax levied on the inherited shares if the deceased had a controlling interest in the company. As a result, tax burden is a reality for most chaebols. For instance, inheritance tax amounted to approximately $10.78 billion (12 trillion in Korean won) was charged on the family descendants after former Samsung Electronics chairman Lee Kyun-​hee passed away in 2020. As such, tax issues complicate ownership succession and often induce firms to exploit legal loopholes. One of the key criticisms is that chaebols rely heavily on interaffiliate transactions to not only accumulate wealth but also to facilitate succession. By definition, business groups are composed of legally independent firms that can either be publicly traded or privately held. Controlling families are criticized for using unlisted affiliated firms within the business group for their purposes. Compared to the transfer of ownership stakes, transfer of key leadership positions is an even more visible event and attracts greater attention. While the practice of nepotism in leadership succession can contribute to the stability and longevity of the business group, it often carries a negative –​ even pejorative –​ connotation among stakeholders (Vinton, 1998). One of the most common criticisms is whether the family successor is an appropriate candidate with necessary competence. Family heirs start working in the business early on to be ‘groomed’ into a leader. The typical speed of promotion, however, is much faster for these family heirs. Specifically, it typically takes a family heir an average of 5.5 years to become a board director and 14.8 years to become a CEO for the top 30 chaebols in terms of total assets (Kim, 2021). By contrast, it takes an average of 24 years for non-​family employees to become a board director (Goh, 2017). On average, family descendants first joined the family business in their 20s; the average age is 29 (Kim, 2021). This means that an average family successor is in their 40s when they are appointed as CEO. Interestingly, there is no universal succession norm or pattern that applies to all chaebols. Instead, each business group has different succession patterns and adheres to distinctive succession norms. Nevertheless, birth order often plays a large role in chaebols. The LG Group is a good example because the nation’s fourth largest business group and a global conglomerate is well known to follow a strict succession norm of male-​preference primogeniture. As the current LG Chairman is the fourth-​generation Koo Kwang-​mo, the chaebol experienced three major generational shifts

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Table 6.1 Current state of succession in the top 20 business groups* Business group

Name

2

Samsung

SK

141 3

Hyundai Motor Company

Publicly-​ Family held successor’s ownership stake (%) (As of May 1, 2023)

Year of birth

Lee 1968 Jae-​yong

Yes Yes Yes Yes Yes Yes

18.1 10.44 9.2 1.54 1.44 0.09

2

Samsung C&T Samsung Life Insurance Samsung SDS Samsung Engineering Samsung Electronics Samsung Fire & Marine Insurance SK

Chey Tae-​won

Chung Eui-​sun

1960

Yes

17.6

3

SK Discovery SK Chemicals SK Telecom SK Square SK Innovation SK Hynix Hyundai Motor Company

Yes Yes Yes Yes Yes Yes Yes

0.3 0.4 0.0 0.0 N/​A N/​A 2.0

1970

Hyundai Mobis Innocean Hyundai Wia Hyunndai AutoEver Kia Hyundai Glovis Hyundai Engineering Seolim Development Corporation

Yes Yes Yes Yes Yes Yes No No

0.3 2.0 2.0 7.3 1.7 20.0 11.7 100

Gender

Birth Generation order (sons)

Male

1

Male

Male

1

1

3

Family successor’s title

Succession date

Chairman

2022

Chairman/​ CEO

1998

Chairman

2022

Chairman Chairman Chairman/​ CEO Chairman

2007 2012 2020 2020

Chairman

2022

(Continued)

Business Groups in Korea: Past, Present and Future

1

Key affiliated companies

Current family successor

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Table 6.1  (Continued) Business group

Current family successor Name

LG

5

Lotte

Koo 1978 Kwang-​ mo Shin 1955 Dong-​bin

Posco Hanwha

8

GS

N/​A Kim Seung-​ youn Huh Chang-​ soo

Family successor’s title

Succession date

Gender

Birth Generation order (sons)

Male

1

4

LG LG CNS

Yes No

15.7 1.1

Chairman

2018

Male

2

2

Lotte Lotte E&C Lotte Members Lotte Property & Development Lotte Ventures Lotte International Lotte Shopping Lotte Station Lotte Wellfood Lotte Chilsung Beverage Lotte Capital Korea Seven Korea Fujifilm N/​A Hanwha Hanwha Eagles Hanwha Connect GS GS E&C Central Motors

Yes No No No

13.0 0.6 0.3 1.8

Chairman

2017

No No Yes No Yes Yes No No No N/​A Yes No No Yes Yes No

19.99 7.5 10.2 8.7 1.9 1.1 0.9 3.1 9.8 N/​A 18.8 10.0 0.7 4.66 8.28 11.92

N/​A Chairman

N/​A 1981

142 6 7

Publicly-​ Family held successor’s ownership stake (%) (As of May 1, 2023)

N/​A 1952

N/​A Male

N/​A 1

N/​A 2

1948

Male

1

3

Routledge Handbook of Korean Business and Management

4

Year of birth

Key affiliated companies

HD Hyundaia

10 11

NongHyup Shinsegae

12 13

KT CJ

14

Hanjin

Chung Mong-​ joon

1951

Lee 1943 Myung-​ hee N/​A N/​A Lee 1960 Jay-​hyun

Cho Won-​tae

1975

Male

6

2

HD Hyundai

Yes

26.6

Chairman

1987

Female

N/​A

2

Shinsegae E-​Mart

Yes Yes

10.0 10.0

Chairman

1998

N/​A Male

N/​A 1

N/​A 3

N/​A CJ CJ 4DPLEX CJ Foodville CJ ENM CJ Freshway CJ Cheiljedang Hanjin Kal

N/​A Yes No No Yes Yes Yes Yes

N/​A 34.4 5.0 2.6 1.8 0.6 0.4 5.73

N/​A Chairman

N/​A 1994

Chairman

1993 1993 2014

Korean Air

Yes

0.01

Hanjin Jungseok Enterprise Hanjin Information Systems & Telecommunication Topas Kakao Kcubeholdings

Yes No No

0.03 3.83 0.14

Chairman Chairman/​ CEO Chairman/​ CEO

No Yes No

0.14 13.3 100

LS Yesco Holdings LS Cable & System LS Eco Energy LS I&D JS Cable

Yes Yes No Yes No No

3.63 7.85 0.02 1.14 0.02 2.91

Chairman

2018

Male

1

3

143 15

Kakao

Kim 1966 Beom-​su

Male

16

LS

Koo Ja-​eun 1964

Male

N/​A N/​ A 1

Founder 2

2004

(Continued)

Business Groups in Korea: Past, Present and Future

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Table 6.1  (Continued) Business group

Current family successor Name

Year of birth

Gender

Birth Generation order (sons)

Park Jeong-​ 1962 won

Male

1

4

18

DL

1968

Male

2

3

19 20

HMM Jungheung Construction

Lee Hae-​ wook N/​A Jung Chang-​ Seon

N/​A 1942

N/​A Male

N/​A N/​A

N/​A Founder

*

  As of December 31, 2022

Publicly-​ Family held successor’s ownership stake (%) (As of May 1, 2023)

Family successor’s title

Succession date

Doosan Doosan Fuel Cell Doosan Enerbility Won Sang Daelim DL Construction N/​A Jungheung Construction Jungheung Housing Jungheung Building Construction Sajeung Construction Naju Tourism Development

Yes Yes Yes No No Yes N/​A No No No

5.8 0.1 0.1 18.8 52.3 0.5 N/​A 76.7 94.7 81.7

Chairman

2016

Chairman

2019

N/​A Chairman

N/​A N/​A

No No

62.3 14.2

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Doosan

144

17

Key affiliated companies

Business Groups in Korea: Past, Present and Future

in leadership to date and the successor was always the firstborn son.2 While some may question whether the first-​born son is the most qualified family member to lead the family dynasty, the implicit rule certainty has its upside as LG is one of the very few chaebols without publicized sibling rivalry stories. In each leadership transfer, the transition was generally smooth without tension. It seems that abiding by a strict succession norm not only supports the continuity of the family dynasty, but also prevents family feuds that can be disruptive for the family business as a whole. It is important to note that several key features support LG’s leadership transition. First, the ownership structure is characterized by a relatively high level of collective family ownership. As of December 2021, a total of 41.7% of common stocks of LG (i.e., the holding company of the LG group) was held by Koo Kwang-​mo and 27 family members (LG, 2022).3 The shared ownership of the controlling family supports the smooth transition of leadership because the family business group is perceived to be in the hands of the family rather than the individual family heir. Second, younger siblings of the previous family leader are entrusted parts of the business in the form of spin-​offs as the leadership transition unfolds. When the succession of Koo Kwang-​mo became official, LG announced the spin-​off of four non-​electronics affiliates to form LX Holdings in May 2021. LX Holdings is led by Koo Bon-​joon, the younger brother of the late LG chairman Koo Bon-​moo and uncle of the current LG chairman Koo Kwang-​mo. In order to complete the process of the spin-​off, Koo Bon-​joon also sold his ownership stakes in LG Group in order to lower his stakes to 2.04 percent to abide by the current law that requires the chief and relatives to own less than 3 percent for a spin-​off (Kim, 2021).

Discussion Chaebols have managed to endure a series of intrafamily successions that have now extended as far as the fourth generation, while also successfully revitalizing their business portfolio when necessary. Nevertheless, whether chaebols will be able to replicate this historical success in the face of an even more rapid pace of environmental changes remains uncertain. Consequently, chaebols present a multitude of intriguing questions that require answers in the times ahead: What will the future hold for chaebols? Can chaebols remain family controlled like today? More fundamentally, do chaebols need to remain as family firms to survive and be as –​or even more –​successful in the future? In order for chaebols to perpetuate intrafamily succession and ultimately maintain family control in the future, many essential pieces need to fall into place. First, chaebols need a capable family candidate to take over the family dynasty to devise a sound succession plan. Given that many chaebols are now led by family descendants extending to as far as the fourth generation, the task of identifying and nurturing a qualified family candidate has become even more challenging (Lee et al., 2003). While second-​generation family members were able to acquire hands-​on experi­ ence with the founder, those beyond the third generation have typically been born into privilege from the outset, making them more likely to lack an innate understanding of the family business itself. Even worse, the weaker connection between the family legacy and later-​generation family members occasionally lead to their lack of interest in taking over the business. Without a qualified –​and willing –​family successor, it would be increasingly challenging for chaebols to maintain family leadership in the future, as they have done in the past. Second, the public needs to be receptive toward the family heir. Despite the widespread assumption that chaebols and family control in publicly-​traded firms are commonly accepted forms of business in Korea, public sentiment toward chaebols often tends to be unfavourable. 145

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Indeed, there has always been a certain level of public scrutiny and criticism. Public concerns are especially heightened when succession to a family descendant is undergoing. Media outlets frequently raise questions about whether the chosen family successor is in fact the ‘right’ candidate with the suitable credentials. Even if family descendants possess satisfactory credentials on paper, their experience and overall suitability is consistently questioned. The public eye tends to be even less favourable towards descendant family members that are assuming control from the earlier generation. Family successors, thus, are more likely to encounter even greater challenges in terms of legitimacy as their generation becomes more distant from the founder’s generation. Under the circumstances, it is crucial for family successors to adeptly address the legitimacy challenges they face. One approach that chaebols can adopt to overcome these challenges is to strategically devise ways to build legitimacy amidst stakeholder pressures. A recent study by Jeong et al. (2022) suggests that controlling families take active steps to strategically build legitimacy through appointing the family heir as a board member in affiliated firms with the business group. Using a sample of family-​controlled business groups in South Korea, controlling families have been found to use family director appointments to exercise strategic nepotism, which refers to the deliberate practice of appointing family members in prestigious boards –​ and avoiding stigmatizing boards –​ within the business group (Jeong et al., 2022). Specifically, placing family members in the boards of firms with high levels of market performance, reputation or intragroup board interlock is suggested to lead to enhanced opportunities for accumulating managerial resources. Even if there is a qualified family successor who enjoys public perception favourable enough to facilitate the leadership transfer in chaebols, when and whether the successor fully assumes control of the group is a different issue. Even after the leadership baton has officially been passed over to the next generation, does the influence and the lasting imprints of the previous generation family leader immediately disappear? Does the previous family leader completely step down and stop exerting any influence over corporate decision-​making? In chaebols, it is more often the case that the previous generation remains within the group and continues to have a lasting influence one way or the other. For instance, while the family heirs typically hold the Chairman position in key affiliated companies, previous family leaders often hold titles such as Honorary Chairman, which may suggest a lack of authority in the corporate hierarchy. However, the previous generations’ influence over the succeeding later generation family leaders often remains surprisingly strong. Using a sample of South Korean family firms, Ahn (2017) finds evidence that senior generations do in fact cast a generational shadow over the successors’ decision-​making. Authors find that their remaining influence on the family descendant CEOs leads the successor to make fewer and smaller acquisitions, which suggests that senior generations tend to intervene in risk-​taking decisions through monitoring and questioning. Yet, there is a possibility that the generational shadow cast by the senior generations provides the successor with the opportunity to obtain valuable firm-​ specific tacit knowledge (Cabrera-​Suárez et al., 2001; Lee et al., 2003) or an apprenticeship-​like training as a successor (Handler, 1994). Rather than assuming that the appointment of a later gen­ eration family leader marks the conclusion of the succession story in the chaebol, it is crucial to pay attention to whether a generational shadow exists and the nature of its influence on the family heir who leads the group. Last but not least, we should a keep an eye on whether the past succession norms or patterns will continue to underlie future successions in chaebols. As an example, LG Group’s strict succession norm of male-​centred primogeniture has been taken for granted until recently when its current Chairman Koo Kwang-​mo was sued by female family members over inheritance in March 2023. The plaintiffs are demanding a redistribution of the inherited wealth that Chairman

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Koo Kwang-​mo received following the death of the previous Chairman Koo Bon-​moo. It is worth noting that the family feud provoked by the adoptive mother and sisters of the Chairman is the first dispute over inheritance since the chaebol’s inception in 1947 (Choi & Kim, 2023). Although the legal dispute is not anticipated to pose a serious threat to the current Chairman’s management control, the lawsuit does raise a question of whether the longstanding succession norms that have characterized the LG Group will continue to remain solid. Perhaps, change is inevitable. If so, then the more pertinent question to ask is whether change will lie in favour of the chaebols and allow them to persist as family firms.

The Rise of New Business Groups in South Korea Although traditional chaebols have played a crucial role in the economic model of South Korea, a new generation of business groups born in times of a more recent economic paradigm centred on information technology (IT) has joined the chaebol ranks. Concerns about the chaebol-​centric economy have started to surface especially following the 1997 Asian financial crisis. Concurrently, the South Korean economy was characterized by the advent of a new economic paradigm centred on IT and the appearance of an innovative generation imbued with entrepreneurial spirit. During this period, chaebols faced difficulties adapting expeditiously to market changes due to the organizational characteristics (e.g., complex decision-​making structure). In contrast, several startups equipped with IT capabilities and entrepreneurial spirit eventually evolved into large corporations encompassing diverse businesses grounded in the Internet and mobile markets. For example, NAVER and Kakao established their businesses based on the opportunities presented by search and mobile, and subsequently experienced exceptional growth by diversifying their activities into various fields (e.g., messenger, e-​commerce and webtoons). Amidst a market environment undergoing a shift towards a digital economy, these companies disrupted industries that had been previously dominated by chaebols, by strengthening their internal technological capabilities and proactively exploring new business opportunities. By doing so, they emerged as new and dominant corporate forces in South Korea (refer to Table 6.2).

Contextual Background of Emerging Business Groups Since the late 1990s, the rise of computer and Internet technologies has significantly fuelled a global venture boom. South Korea was no exception. What is more, the South Korean government aimed to revitalize the economy in the wake of the Asian financial crisis of 1997, specifically by fostering the growth of ventures. For instance, the government established the KOSDAQ (Korean Securities Dealers Automated Quotations) stock market in July 1996 as a platform for venture capital fundraising. KOSDAQ played a pivotal role in promoting venture capital investment and encouraging entrepreneurial activities by creating a market that allowed for the return of investor funds and shifting the focus from a collateral-​based loan system to one rooted in actual venture capital investment. This interrelationship between investment and return expanded the funding capacity of leading ventures and promoted the growth of startups through IPOs. Furthermore, to create a foundation for nurturing new ventures, the Special Law for the Promotion of Venture Businesses Act was enacted in July 1997. This was developed in recognition of the importance of nurturing a dynamic and innovative venture ecosystem in Korea. As the United States had developed its venture ecosystem over a period of 50 years, there was a sense of urgency to accelerate Korea’s pace of development to avoid being left behind in the global competition for innovation and entrepreneurship (Lee & Choi, 2015). As such, the government sought

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Table 6.2 Korean companies ranked by market capitalization Ranking

2011

2016 Firm

2021

Market Cap*.

1

Samsung Electronics

155.8

2

Hyundai Motor

46.9

SK Hynix

32.5

SK Hynix

3

POSCO

33.1

Hyundai Motor

32.2

4

Hyundai Mobis

28.4

Korea Electric Power Corporation

5

Kia Motors

26.9

6

LG Chem

7

Samsung Electronics

Market Cap*. 253.5

Firm

Market Cap*.

89.9

LG Energy

122.1

Naver

65.6

SK Hynix

87.3

28.3

Samsung Biologics

60.6

Samsung Biologics

52.1

Hyundai Mobis

25.7

Samsung Electronics Preferred Stock

58.1

POSCO Holdings

47.3

21

Naver

25.5

Kakao

54.6

Samsung SDI

40.9

Hyundai Heavy Industries

19.5

Samsung C&T Corporation

23.7

LG Chem

52.7

LG Chem

40.2

8

Shinhan Financial Group

18.8

Samsung Life Insurance

23.8

Samsung SDI

48.7

Hyundai Motor

39.6

9

Korea Electric Power Corporation

16.4

POSCO

22.4

Hyundai Motors

44.2

Naver

35.1

Samsung Life Insurance

16.2

Shinhan Financial Group

21.5

KIA

34.1

POSCO Future Materials

33.3

148

423.8

Source: Korean Exchange/​the unit of market cap.: trillion.

466.8

Firm Samsung Electronics

10

Samsung Electronics

Market Cap*.

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Firm

2023 (Sept.)

Business Groups in Korea: Past, Present and Future

to facilitate the creation of a favourable environment for ventures by offering institutional support for fundraising and removing obstacles in the recruitment of specialized human resources. For instance, the Act implemented a special military service exemption for research personnel to help ventures recruit professional researchers. As a result, first-​generation venture companies such as NAVER and Kakao benefited from the supportive institutional environment, including fundraising through the KOSDAQ system. At the same time, the South Korean government’s initiative to promote the Internet infrastructure provided a favourable technological environment for the growth of ventures, such as NAVER and Kakao. Specifically, the government’s policies to activate the Internet infrastructure included the establishment of a nationwide Internet communication network through the high-​speed Internet communication network project and the implementation of policies to expand personal computer usage via the Cyber Korea Project. Another crucial factor lies in the entrepreneurial zeitgeist of that era. The late 1990s witnessed a surge in the spirit of entrepreneurship, with a notable boom in venture creation. According to South Korean venture statistics, entrepreneurial activity thrived during this period. The number of venture firms more than doubled from 2,042 in 1998 to 4,934 in 1999. This upward trajectory persisted with the count reaching 8,798 in 2000, an increase of over 70% from the previous year. By 2001, the number exceeded 10,000, with a total of 11,392 venture firms. Remarkably, between 1998 and 2001, the number of these firms grew almost six-​fold. Lastly, an interesting aspect of the emergence of new business groups such as NAVER and Kakao relates to their founders’ backgrounds. Both NAVER’s Chairman, Hae-​Jin Lee, and Kakao’s Chairman, Beom-​Soo Kim, are alumni of the class of 1986, often referred to as the ‘86 class generation.’ Notably, Chairman Jung-​Ju Kim, the founder of Nexon (South Korea’s leading game firm), also hails from this same alumni group. This commonality raises a compelling question: why has the class of 1986 produced such innovative and economically impactful leaders? One potential reason could be their early exposure to technology. As students during the mid-​1980s, they had the advantage of being among the first to experience personal computers and the Internet. This foundational knowledge likely positioned their ventures at the forefront of technological innovation, pioneering the path for subsequent startups and business growth. Accordingly, the emergence of the Internet and technological advancements presented a host of new possibilities, which several entrepreneurs recognized as opportunities to pursue entrepreneurial aspirations. The support of the government for venture creation, coupled with the widespread adoption of personal computers and the rapid expansion of high-​speed communication networks, created an environment conducive to entrepreneurial success. As a result, NAVER and Kakao were able to capitalize on these opportunities and establish themselves as a successful new generation of business groups in the emerging technology and Internet industries. As such, NAVER and Kakao discovered growth opportunities in the new field of the Internet industry, and established themselves based on strong institutional support, a favourable technological environment, and the founders’ technical expertise. Moreover, these business areas were unfamiliar to existing large corporations, NAVER and Kakao –​ even with low capabilities compared to traditional chaebols –​could benefit as the first movers and achieve rapid growth.

Are Emerging Business Groups Chaebols? Although emerging business groups like NAVER and Kakao were born relatively recently compared to chaebols like Samsung and Hyundai, their dominance and visibility clearly suggests that they have joined the ranks of traditional chaebols. NAVER, which originated as a search portal, currently holds the dominant position in the domestic search engine market. NAVER holds 149

Routledge Handbook of Korean Business and Management Table 6.3 NAVER’s business, service and revenue portion Business

Revenue portion (%)

Search Platform Commerce Fintech Cloud Contents

45.1 22.0 14.7 13.2 5.1

Source: NAVER Annual Report, 2023. Table 6.4 Kakao’s business, service and revenue portion Business

Revenue portion (%)

Platform Contents

51.6 48.4

Source: Kakao Annual Report, 2023.

58 percent of the market, while Google holds 34 percent (Social Media and Search Portal Trend Report, 2023). Similarly, Kakao, which identified business opportunities in mobile services, has established its leading position in the mobile messenger sector. According to Insight Korea (2023), Kakao currently holds 93 percent of the mobile messenger market in Korea. Drawing on their dominant positions in the search engine and mobile sectors, these emerging business groups have exhibited a proclivity for rapid expansion into diverse markets, encompassing areas such as commerce, contents and finance (refer to Table 6.3 and Table 6.4). One notable fact is that emerging business groups are subject to the same regulations as the traditional chaebols as they grew in size. In 2019, Kakao was registered as a conglomerate by the Korea Fair Trade Committee (KFTC), as its assets surpassed 5 trillion won. Since then, Kakao has actively pursued mergers and acquisitions and established new subsidiaries. As a result, its number of affiliates rose to 147 in 2023, compared to 45 in 2016. This is the second highest number of affiliates in Korea after SK, which has 198 affiliates (refer to Figure 6.1). As for NAVER, the com­ pany was included in the KFTC’s conglomerate list in 2021. The rapid increase in the number of affiliates of emerging business groups has raised concerns, as it bears a resemblance to the past practices of chaebols, which frequently faced criticism for their reckless business expansion by leveraging their market dominance. NAVER, for instance, has broadened its scope to include diverse non-​related business areas, such as fintech, commerce and content, including webtoons, alongside its core search service. Similarly, Kakao has diversified into several seemingly disparate business areas, such as commerce, payment, fashion, taxi-​calling, mapping and content, all based on its mobile platform. The expansion of business and market dominance of NAVER and Kakao have led the government to initiate efforts to strengthen regulation of these platform-​based firms. Since 2021, several bills related to online platform regulations have been proposed with the aim to regulate online platforms to prevent unfair trade practices arising from their dominant market position and to protect consumers. However, the Online Platform Fairness Act, which aims to prevent the reckless expansion and abuse of dominant market positions by giant platform firms, such as NAVER and Kakao, is still under review in the National Assembly as of March 2023 (Ahn et al., 2022). In 150

Business Groups in Korea: Past, Present and Future

Figure 6.1 The number of affiliates of Korea Business Group (year 2022). Source: Korea Fair Trade Commission, 2023.

fact, the Act has sparked questions about whether it is reasonable to regulate platform companies using the same standards as those applied to chaebols in the past. Specifically, criticisms have been raised regarding the difference between the backgrounds of platforms, such as NAVER and Kakao, increasing their market share and expanding into various business areas, and chaebols pursuing diversification (Park, 2021). Furthermore, it has been suggested that it is not appropriate to view the growth path in the emerging digital economy paradigm in the same way as that of the past. Accordingly, these discussions have led to inquiries into whether NAVER and Kakao are really similar to the chaebols.

Distinctive Features of Emerging Business Groups Despite apparent similarities with the traditional chaebols, the new generation of business groups such as NAVER and Kakao are different from the traditional chaebols such as Samsung in various aspects such as the market environment in which they were established, diversification strategies and resource characteristics. First, traditional chaebols and emerging business groups differ in their founding conditions, especially in the market environment. Emerging business groups were founded under favourable market conditions with developed market-​supporting institutions created by the Korean government’s policies aimed at promoting venture creation and stimulating the Internet business. These policies enabled them to access abundant financial markets and robust IT infrastructure systems, thereby facilitating the establishment and growth of their businesses. Second, while chaebols pursued vertical growth during times of industrialization and export growth in Korea during the 1960s and 1970s, emerging business groups were established in the late 1990s and early 2000s during the rapid development of digital technology. They grew in new markets centred on digital technology and opted for a horizontal diversification strategy due to competition with their rivals, rather than pursuing vertical growth in existing industries (Kim et  al., 2015). The strategy of unrelated diversification, or horizontal diversification, is closely associated with the fact that emerging business groups have an asset-​light model. Companies like NAVER and Kakao adopt an asset-​light model for strategic decision-​making, in which they do not necessarily own all their resources, unlike traditional large corporations (Stallkamp et al., 151

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2022). This enables them to operate their business by efficiently sourcing the necessary resources for service provision through the platform. For instance, Kakao provides transportation services by utilizing external taxi vehicles rather than directly owning them, allowing for minimal capital investment and operating costs related to taxi operations and building a more customer-​centric business model by providing services centred around the platform. Likewise, platform firms source required resources externally and connect them efficiently to operate their business. The asset-​light model presents an intriguing explanation for the distinguishing characteristics of platform firms’ diversification strategies, as compared to unrelated diversification or conglomerate expansion. For example, while Kakao’s entry into the account transfer and remittance service sector may seem like unrelated diversification, this service is actually an extension of its mobile messenger service Kakaotalk. The mobile messenger service has already established itself as a platform for users to easily communicate with friends and family, so it is a natural progression to allow for account transfers within this platform. From the user’ perspective, this service can be considered as a part of Kakaotalk’s connected services. Therefore, Kakao’s account transfer service can be viewed as a related diversification rather than an unrelated one. Similarly, NAVER, initially a search service, has expanded into a variety of services, including a portal, blog, cafe, map and shopping. Although seemingly disparate, these services are integrated and merged through the platform. For example, NAVER Pay is available as a payment option for NAVER Shopping. Through these related diversifications, NAVER provides a comprehensive platform that differs from the unrelated diversification strategies employed in the past by traditional chaebols. Lastly, emerging business groups such as NAVER and Kakao differ in terms of their group structure and corporate governance. Traditional chaebols such as Samsung are characterized by a family-​centred leadership with direct or indirect control over the diverse subsidiaries within the business group (Campbell II & Keys, 2002). In contrast, emerging business groups such as NAVER and Kakao have governance structures based on capital markets rather than family control (Kim et al., 2015). However, upon closer examination of their corporate governance, there are some differences between NAVER and Kakao. On the one hand, NAVER’s governance structure is distinct from the chaebol model and promotes an independent corporate culture. Comprising independent corporate entities, NAVER’s management team, including the CEO, is selected by the holding company of NAVER. This structure emphasizes an autonomous decision-​making culture where the professional CEO assumes direct responsibility within the company, rather than relying on a family-​centred leadership style typically observed in chaebols. Moreover, it permits the professional CEO to shape an independent corporate culture while reducing the controlling influence of major shareholders and mitigating potential conflicts with them. Its positive impact on NAVER’s corporate value and sustainability underscores the efficacy of this governance structure. Thus, NAVER’s governance model, distinguished by its establishment of an autonomous decision-​making process and an independent corporate culture, represents a unique characteristic in the South Korean market and contributes to the firm’s success (Kim et al., 2015). On the other hand, Kakao’s structure is characterized by a unique combination of founder, co-​ founder-​led CEO roles, professional managers overseeing subsidiaries, and the presence of family members in the governance structure. Specifically, the Chairman of Kakao, Kim Beom-​su, wields substantial control over the company without the use of a holding company, through personal and company-​owned stakes in numerous subsidiary firms. Chairman Kim’s personal and company-​ owned stakes provide him with the ability to exert significant influence over Kakao’s operations. Notably, three out of four members of the board of K-​Cube Holdings, which is Chairman Kim’s personal investment company, are related to him. The board of director is composed of Chairman Beom-​Su Kim, his sister Hwa-​Young Kim, his spouse Mi-​Sun Hyung, and one additional member. 152

Business Groups in Korea: Past, Present and Future

Figure 6.2 The governance structure of NAVER. Source: Fair Trade Commission, 2022.

In addition, Kakao’s co-​CEOs, Soo-​Yong Jo and Min-​Soo Yeo, as well as the heads of its other subsidiaries, including Seung-​Jo Kwon, head of Kakao IX, Gung-​Hoon Nam, head of Kakao Games, Tae-​Sik Moon, head of Kakao VX, Jin-​Soo Lee, head of Kakao Page, Eun-​Taek Hong, head of Kakao Commerce, and Sang-​Yeop Baek, head of Kakao Enterprise, all have connections to Chairman Kim. These connections include familial ties, academic affiliations, and previous work relationships. As a result, the team at Kakao is closely associated with Chairman Kim’s inner circle of executives, and he has leveraged this relationship to expand the company’s business operations (refer to Figure 6.3).

Discussion The emergence of a new digital economy paradigm based on IT, combined with a social and institutional environment that encourages entrepreneurship, has given rise to a new generation of business groups like NAVER and Kakao that play a crucial role in driving and generating innovation in the South Korean economy. These new players have emerged amidst the growth of the South Korean economy and its industries, and they now assume a crucial role in shaping its future. The evolution of NAVER and Kakao has drawn attention due to uncertainty regarding whether these new business groups will replace or emulate the chaebols and their established practices. The rapid expansion and dominant market positions of NAVER and Kakao have raised concerns about power abuse and reckless business diversification. These issues prompted the South Korean government and National Assembly to introduce the Online Platform Business Fairness Act in 2021. This law aims to limit the market dominance of platform firms, creating a fair competitive environment that protects the rights of vulnerable groups such as consumers and small-​ and medium-​sized enterprises (Ahn et  al., 2022). The act mandates platform companies to disclose information on fees and terms of service, strengthens the handling of complaints, and 153

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Figure 6.3 The governance structure of Kakao. Source: Kakao Annual Report, 2021.

enhances regulation of online advertising. The introduction of this legislation reflects growing public concern about the potential negative impact of platform firms and underscores the need to balance their power and influence in the economy (Lee, 2021). However, there is ongoing debate regarding the regulation of platform firms. Some argue that the rapid growth of these companies and their expansion into seemingly unrelated areas is fundamentally different from the chaebol model, which relied on close government ties and internal resource mobilization mechanisms. These concerns highlight the need for continued scrutiny and careful consideration of regulatory approaches to balance the power of platform firms with the potential risks they pose to competition and the overall health of the economy. On the other hand, while NAVER and Kakao’s entry into new businesses generally follows a digital economy-​based asset-​light model, there are still possibilities for these activities to be considered internal market transactions. According to the 2022 National Audit of the South Korea results, it has been revealed that the internal transactions of NAVER and Kakao subsidiaries have reached one trillion won and have increased significantly over the past 4 years (Lim, 2022). The question of why NAVER and Kakao engage in internal market operation can be answered by examining the platform mechanisms that rely on data and IT technology. Specifically, in 2021, NAVER Cloud was the NAVER subsidiary with the highest internal transaction revenue and share. Established in 2009 through NAVER’s division, NAVER Cloud provided in-​house information services such as IT infrastructure consulting, data centres, networks, storage, and security to its subsidiaries. In 2017, it entered the enterprise public cloud market and in October 2020, it rebranded and officially launched its B2B business (Park, 2020). Based on the technological competitive

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advantage of NAVER Cloud, it can be argued that NAVER’s decision to utilize its subsidiary’s services when entering new platform-​based businesses is a strategic decision. The critical role played by NAVER Cloud in enabling NAVER’s platform expansion by providing expertise and resources to support new business initiatives underscores the importance of IT infrastructure and cloud computing in modern business operations. This highlights the need for platform firms to maintain a robust internal information infrastructure to support growth and expansion. Lastly, the potential divergence in public opinion between conglomerates and platform firms is a topic of interest for future research. In the context of South Korea, conglomerates have often been subject to negative criticism due to allegations of exploiting their dominant market position to obtain monopolistic benefits. Additionally, they have been criticized for maintaining a family-​ centred governance structure rather than a professional management one. In contrast, NAVER and Kakao are perceived as highly innovative organizations that have thrived on the Internet and mobile sectors. These differing social perceptions are also reflected in opinion polls, with a higher percentage of respondents advocating for regulations on conglomerates compared to NAVER and Kakao. Specifically, 63.1% of survey participants believe that regulations on conglomerates are necessary, while only 47.8% hold the same view for NAVER and Kakao, a proportion that falls below the 50% threshold. The Fourth Industrial Revolution presents a high potential for accelerating the growth of NAVER and Kakao, while also suggesting the possibility for other platform firms to evolve into large corporations in the future. Therefore, it is important to pay attention to these emerging platform firms as they develop into new business groups.

Concluding Remarks Korean economy has presented an unprecedented success of economic development from a poverty-​stricken, agriculture-​based society to one of the leading economic powerhouses. Behind the phenomenal transition has been chaebols. In the beginning of industrialization, chaebols came into existence by sharing and transferring financial and human resources to overcome problems associated with institutional voids. Since then, some chaebols continue to transform themselves to become major global players in many industries including shipbuilding, steel, semiconductors, automobiles, and batteries. The evolution of chaebols into leading global players may not be explained by their institutional void-​filling roles alone. Almost all chaebols are family controlled. Family control is a double-​edged sword. In this chapter, we offer accounts about how chaebols take advantage of the bright side of family control while mitigating its dark side. For instance, without the family’s long-​term commitment, Samsung’s success in semiconductor business may be inconceivable. Since embarking on research in electric vehicle (EV) batteries in 1992, LG has succeeded to emerge as a leading EV battery manufacturer. Behind this success is insights, persistence, and commitment over generation by the family chairman. Chaebols have also been active in professionalizing their management. Nurturing and empowering a cadre of professional managers is an important complement to family control and a precondition for managing diversified business portfolios. Chaebols that succeed over generation appear to attain the ‘twin advantages of professionalism and family involvement’ (Stewart & Hitt, 2012: 74). Chaebols as family business groups present an interesting setting for exploring the family dynamism in business. Some chaebol-​affiliated firms are ‘family-​controlled but publicly listed’; as such, they should address concerns from the perspectives of families and investors. For instance, family successors should establish their credibility with family members and with outside investors. Indeed, Jeong et al. (2022) document that controlling families systematically appoint 155

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their later-​generation family members to board positions favourable for building managerial competencies and reputation as qualified executives. Chaebols might be a good research setting to study how family-​controlled but publicly listed firms address potentially conflicting demands from families and investors. In this chapter, we explore the emerging form of business groups such as NAVER and Kakao. Despite some similarities, these digital platforms differ from chaebols. Digital platforms employ asset-​light business models. In addition, they have diversified by building on their capabilities such as customer data and analytics, to expand into new businesses without having to dramatically incur high costs and shift focus. It seems that these digital economies of scale and scope provide a foundation for the emerging form of business groups. Although digital platforms seem to be present in a wide range of countries, they may face different opportunities and challenges depending on national institutional contexts (Heeks et al., 2021). In a country with institutional voids, digital platforms can fill some voids, improving the market institutions, creating and securing business opportunities as business groups do. For instance, in the US, PayPal and other fintech services serve as complements to, rather than as substitutes to, well-​positioned credit card payment systems. In contrast, in China where incumbent payment systems are non-​existent or poorly developed, Alipay and WeChat Pay should develop their own ecosystems, becoming platforms that are accepted more widely than credit cards (Jia & Kenney, 2021). It awaits future research how the evolution of digital platforms differs depending on the national institutional context.

Notes 1 Although Lee Jae-​Yong was appointed as Vice Chairman in 2012, he remained in the position even after his father Lee Kun-​hee fell ill in 2014. 2 In order to abide by the LG’s traditional succession rule, the previous LG chairman Koo Bon-​moo legally adopted his younger brother’s son Koo Kwang-​mo in 2004 after his only son passed away in an accident in 1994. 3 LG transformed its governance structure into a holding company back in 2003.

References Aguilar, F. J. & Cho, D. S. (1985). “Gold Star Co. Ltd,” Case No. 9-​385-​264, Harvard Business School. Ahn, H. S. (2017). Riding off into the sunset? The “generational shadow” and descendant CEOs’ acquisition decisions in publicly listed family-​controlled firms. [Doctoral dissertation, Korea University Business School]. http://​dcol​lect​ion.korea.ac.kr/​jsp/​com​mon/​DcL​oOrg​Per.jsp?sIte​mId=​00000​0077​425 Ahn, Y. G., Kim, Y. H., & Song, M. J. (2022). Economic costs of digital platform regulation: A case study of the ‘Online Platform Fairness Act (Draft)’. Venture Startup Research, 17(5), 237–​250. Amsden, A. H. (1989). Asia’s next giant: South Korea and late industrialization. Oxford University Press. https://​glo​bal.oup.com/​acade​mic/​prod​uct/​asias-​next-​giant-​978019​5076​035?cc=​kr&lang=​en& Cabrera-​Suárez, K., De Saá-​Pérez, P., & García-​Almeida, D. (2001). The succession process from a resource-​ and knowledge-​based view of the family firm. Family Business Review, 14(1), 37–​46. Campbell II, T. L., & Keys, P. Y. (2002). Corporate governance in South Korea: The chaebol experience. Journal of Corporate Finance, 8(4), 373–​391. Chang, S. J., & Hong, J. (2000). Economic performance of group-​affiliated companies in Korea: Intragroup-​ resource sharing and internal business transactions. Academy of Management Journal, 43(3), 429–​448. Chang, S. J., & Hong, J. (2002). How much does the business group matter in Korea? Strategic Management Journal, 23(3), 265–​274. Choi, S. J., & Kim, M. (2023). LG Group chairman sued over inheritance in family feud. Pulse by Maeil Business News Korea. March 18 2023. https://​pulsen​ews.co.kr/​view.php?year=​2023&no=​197​625

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Business Groups in Korea: Past, Present and Future Dyer, J. G. (1989). Integrating professional management into a family-​owned business. Family Business Review, 2(3), 221–​223. Gartner, (2022). Press Release. www.gart​ner.com/​en/​newsr​oom/​press-​relea​ses/​2022-​04-​14-​gart​ner-​says-​ worldw​ide-​semico​nduc​tor-​reve​nue-​grew-​26-​perc​ent-​in-​2021 Goh, W. (2017). Chaebol family, only 4.9 years to promotion... while it takes non-​family members 24 years (in Korean). Feb 8 2017. www.yna.co.kr/​view/​AKR20​1702​0718​6100​003 Gomez-​Mejia, L. R., Cruz, C., Berrone, P., & Castro, J. D. (2011). The bind that ties: Socioemotional wealth preservation in family firms. Academy of Management Annals, 5(1), 653–​707. Handler, W. C. (1990). Succession in family firms: A mutual role adjustment between entrepreneur and next-​ generation family members. Entrepreneurship: Theory & Practice, 15(1), 37–​51. Handler, W. C. (1994). Succession in family business: A review of the research. Family Business Review, 7(2), 133–​157. Heeks, R., Gomez-​Morantes, J. E., Graham, M., Howson, K., Mungai, P., Nicholson, B., & van Belle, J. P. (2021). Digital platforms and institutional voids in developing countries: The case of ride-​hailing markets. World Development, 145, 105528–​105543. Jaskiewicz, P., Combs, J. G., & Rau, S. B. (2015). Entrepreneurial legacy: Toward a theory of how some family firms nurture transgenerational entrepreneurship. Journal of Business Venturing, 30(1), 29–​49. Jeong, S. H., Kim, H., & Kim, H. (2022). Strategic nepotism in family director appointments: Evidence from family business groups in South Korea. Academy of Management Journal, 65(2), 656–​682. Jia, K., & Kenney, M. (2021). The Chinese platform business group: An alternative to the Silicon Valley model? Journal of Chinese Governance, 7(1), 58–​80. Khanna, T., & Palepu, K. (1997). Why focused strategies. Harvard Business Review, 75(4), 41–​51. Khanna, T., & Yafeh, Y. (2007). Business groups in emerging markets: Paragons or parasites? Journal of Economic Literature, 45(2), 331–​372. Kim, B. (2021). Business group 3rd·4th generations, faster promotion compared to their parents' generations (in Korea). CEO Score Daily. Jan 15 2021. https://​ceosco​reda​ily.com/​page/​view/​2021​0112​1005​1059​887 Kim, D. S. (2021). LX holdings chairman prepares to complete spinoff by selling stake in LG. The Korea Herald. Dec 14 2021. www.kore​aher​ald.com/​view.php?ud=​202​1121​4000​612 Kim, D. W., Kim, D. K., Lee, H. G., & Kim, S. C. (2015). A case study of Naver’s governance structure. Korean Journal of Broadcasting, 29(1), 5–​34. Kim, H. (2010). Business groups in South Korea. In The Oxford Handbook of Business Groups (pp. 157-​ 179). Oxford University Press. https://​acade​mic.oup.com/​edi​ted-​vol​ume/​41358/​chap​ter-​abstr​act/​352548​ 545?red​irec​tedF​rom=​fullt​ext Kim, H., Hoskisson, R. E., Tihanyi, L., & Hong, J. (2004). The evolution and restructuring of diversified business groups in emerging markets: The lessons from chaebols in Korea. Asia Pacific Journal of Management, 21, 25–​48. Korea Economic Research Institute (1995). Business groups in Korea (in Korean). Seoul: Korea Economic Research Institute. Lee, K. S., Lim, G. H., & Lim, W. S. (2003). Family business succession: Appropriation risk and choice of successor. Academy of Management Review, 28(4), 657–​666. Lee, M., & Choi, S. (2015). A study on historical review and evaluation of the achievements of the first venture boom. Asia Pacific Journal of Small Business, 37(4), 147–​179. Lee, S., Park, K., & Shin, H. H. (2009). Disappearing internal capital markets: Evidence from diversified business groups in Korea. Journal of Banking & Finance, 33(2), 326–​334. Lee, S. M. (2021). Rational regulatory approaches for online platforms. Administrative Law Review, 64, 127–​156. LG (2022). 2021 Annual report. www.lgcorp.com/ir/dataroom/report/annual Lim, S. H. (2022). Rapid multi-​year increase in internal transactions within Naver and Kakao’s financial subsidiaries. Yeunhap News. Oct 12 2022. www.yna.co.kr/​view/​AKR20​2210​1205​9800​017 Marquis, C., & Tilcsik, A. (2013). Imprinting: Toward a multilevel theory. Academy of Management Annals, 7(1), 195–​245. Miller, D, & Le Breton-​Miller, I. (2005). Managing for the long run: Lessons in competitive advantage from great family businesses. Harvard Business School Press. OECD, (2018). https://​data.oecd.org/​educat​ion.htm OECD, (2021). https://​data.oecd.org/​educat​ion.htm Opensurvey (2023). Social Media and Search Portal Trend Report, 2023. https://​ope​nsur​vey.io/​

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Routledge Handbook of Korean Business and Management Park, H. I. (2021). Controversy over platform regulation sparked by Naver and Kakao... to be put to the test next year. Seoul Business News Korea. Dec 17 2021. www.seda​ily.com/​NewsV​iew/​22V​GG76​UBV Park, H. J., Kim, H., & Kim, J. (2021). Evolution of LG group: A family group perspective. Korea Business Review, 25, 21–​50. Park, S. H. (2020). Naver expands its B2B business. EBN Industry Economy. May 20 2020. www.ebn.co.kr/​ news/​view/​1434​489?sc=​Naver Rosa, P., Howorth, C., & Cruz, A. D. (2014). Habitual and portfolio entrepreneurship and the family in business (pp. 364–​382). The Sage handbook of family business. Shin, H. H., & Park, Y. S. (1999). Financing constraints and internal capital markets: Evidence from Korean ‘chaebols’. Journal of Corporate Finance, 5(2), 169–​191. Song, J., & Lee, K. (2014). The Samsung Way. Book21 Publishing Group. Stallkamp, M., Hunt, R. A., & Schotter, A. P. (2022). Scaling, fast and slow: The internationalization of digital ventures. Journal of Business Research, 146, 95–​106. Stewart, A., & Hitt, M. A. (2012). What can’t a family business be more like a nonfamily business? Modes of professionalization in family firms. Family Business Review, 25(1), 58–​86. Stinchcombe, A. L. (1965). Social structure and organizations. In J.G. March (Ed.), Handbook of organizations (pp. 142–​193). Chicago, IL: Rand McNally. Vinton, K. L. (1998). Nepotism: An interdisciplinary model. Family Business Review, 11(4), 297–​303. Yang, J. (2012). Samsung develops 64K D-​ram... The start of the semiconductor legend (in Korean). Electronic Times. Sept 17 2012. www.etn​ews.com/​20120​9110​688 Zellweger, T. M., Kellermanns, F. W., Chrisman, J. J., & Chua, J. H. (2012). Family control and family firm valuation by family CEOs: The importance of intentions for transgenerational control. Organization Science, 23(3), 851–​868.

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7 GOVERNMENT–​B USINESS RELATIONS IN SOUTH KOREA, 2000 TO 2022 An Institutional Perspective Joohan Ryoo

Introduction This chapter explores the changing role of the Korean government in shaping the growth, globalization strategies and technological innovation of Korean companies since the 1997 Asian financial crisis, with a particular focus on the 20 years leading up to 2022. After experiencing rapid growth in the 1970s and 1980s, the national bankruptcy in 1997 made it challenging for Korean companies to recover and resume normal operations. However, they managed to bounce back since 2000. This chapter investigates why Korea adopted a new government–​business relationship in the past two decades. Prior studies have revealled the vital role of the Korean government in fostering the fast growth of Korean companies before 1997 (Hemmert, 2012; Kim, 2017). The government often acted as a forerunner and regulator to facilitate the development of Korean businesses. However, this close relationship between government and business also led to corruption, unfair benefits and favouritism, eventually contributing to the 1997 economic collapse (Kim, 2011). In the aftermath of the crisis, the Korean government and businesses sought to rebuild and redefine their relationship to avoid similar issues (Rowley, 2013). As a result, Korean companies were better prepared to wea­ ther subsequent crises, including the 2008 financial crisis and the COVID-​19 pandemic, compared to the 1997 crisis. This chapter explores the reasons behind this new government–​business relationship and its impact on the growth and success of Korean companies. The beginning of the twenty-​first century marked a critical period for Korean industries. They faced challenges from a rapidly changing global economy characterized by emerging new technologies, increased environmental standards, ESG1 guidelines, strict international regulations, and sustainability, recycling and climate change issues. The advent of the Fourth Industrial Revolution, driven by technologies such as big data, the Internet of Things (IoT), artificial intelligence (AI), blockchain, and 5G, has presented opportunities and threats for Korean firms operating in areas such as global communications, media, smart technology and platform businesses. Korean companies have undergone significant organizational changes to adapt to this new industrial landscape, including shifts in corporate governance, ownership structure, strategy, organizational skills, and DOI: 10.4324/9781003180920-9

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corporate culture. This change has required a shift from the previous bureaucratic, vertical, and closed decision-​making systems toward a more horizontal and open approach, better suited to the current industrial context (Kim, 2019; Rowley, 2013). However, this transformation cannot be achieved solely by the companies themselves. This chapter explores the new role of government-​ to-​business cooperation and institutional support, which has been critical in enabling Korean firms to adapt to the digital revolution and develop new organizational structures better aligned with the current industrial landscape. This chapter examines the impact of Korean government policies on Korean companies, including business groups and emerging high-​tech giants, in adapting to the digital revolution and other disruptive changes since 2000. It investigates how the government’s vision, direction and institutional settings have affected Korean firms’ abilities to withstand the challenges of the Fourth Industrial Revolution, climate change, and the new normal conditions. While the Korean government has been instrumental in promoting economic development through direct support and industry selection, the traditional government–​business relationship before 2000 was unsuitable for Korea’s economic development and corporate growth. Thus, this chapter uses an institutional perspective to demonstrate how major Korean companies have adapted and innovated within the newly established government–​business relationship over the past two decades.

Institutional Theory: What It Is and How It Works in South Korea The institutional perspective, championed by scholars like North (1990, 1995) and Scott (1995, 2011), has emerged as a key contributor to the study of international business strategy and cor­ porate development (Lynch & Jin, 2016). This perspective underscores the critical role of formal regulations, such as a nation’s constitution, legal framework, informal conventions and self-​imposed restrictions, when evaluating a country’s potential regarding productivity, innovation, FDI, and other economic factors. The institutional perspective has significantly influenced research in political–​economic matters, international relations, and the interactions between government and business within the international business literature (Hennart, 2015; Kobrin, 2001). It offers a structured framework for comprehending how a country’s institutional environment, particularly government policies, shapes firms’ capabilities and strategic conduct within the South Korean context. According to the institutional perspective, businesses function within institutional relationships. These relationships span compliance with legal and political regulations to adherence to informal social norms that establish legitimacy. The institutional perspective underscores the imperative for business leaders to comprehend and harness the broader institutional environment in which their companies operate (Kanter, 1997). It further underscores the significance of delineating the connection between businesses and government, particularly how the government can provide a stable policy foundation for company operations while adapting to changing conditions (DiMaggio & Powell, 1983; Khalil, 1995). Over the past two decades, South Korea has grappled with multiple economic crises. Yet, the South Korean government has demonstrated remarkable institutional flexibility and resilience. For instance, the nation faced substantial adversity during the 1997 Asian financial crisis, similar to the Korean War. More than 2,000 financial institutions saw their assets halved, and 16 out of the 33 largest banks ceased operations, collapsing major companies like Kia Motors, Daewoo Group, and Dong-​A Construction. Out of 30 conglomerates, 17 were either sold or disbanded, and over 100,000 public employees were laid off, leading to widespread despair. The Korean economy embarked on its arduous journey to recovery in 2000 after repaying the full $57 billion 160

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International Monetary Fund (IMF) bailout package on August 23, 2001, exiting the IMF management system. The Korean government’s swift and effective measures, including structural reforms, austerity measures and the successful exit from the IMF bailout program, played a crucial role in recovering the Korean economy. Following the 1997 crisis, South Korea encountered persistent internal and external challenges (Rowley and Bae, 1998b). The government’s efforts to rejuvenate the national economy remained steadfast, nurturing a renewed aspiration to become a global information technology (IT) powerhouse. Notably, swift government policies such as liquidity support and stimulus public spending packages shielded South Korea from the worst impacts of the global financial crisis triggered by the subprime mortgage crisis in 2008. Nonetheless, the 2010s introduced fresh challenges, including trade disputes and supply chain disruptions such as the United States–​China trade war in 2018, political tensions with Japan in 2019, and the outbreak of the Ukraine–​Russia conflict in 2022. Throughout these tumultuous periods, judicious government policies, including trade partner diversification and bolstering domestic industries, have played a pivotal role in safeguarding South Korean companies from severe economic shocks. Despite adversity, be it the COVID-​19 pandemic in 2020 or global supply chain disruptions in 2022, the Korean economy has demonstrated remarkable resilience compared to the early 2000s. The economy has grown significantly, with its size more than tripling from USD 576.2 billion in 2000 to USD 1,798.53 billion in 2021. Meanwhile, the real national income per capita has surged from USD 14,989 to USD 34,994 during the same period (refer to Figure 7.1). These figures under­ score South Korea’s ability to capitalize on opportunities, navigate unprecedented upheavals, and drive radical restructuring. The nation has maintained its competitive edge through technological innovation, diversification into various industries and strategic investments in critical sectors, such as semiconductors, electric vehicles and biotechnology. These endeavours have firmly established

Figure 7.1 GDP per capital of South Korea (1960–​2022) and GDP per capita in USD. Source: (macrotrends, www.macr​otre​nds.net/​glo​bal-​metr​ics/​countr​ies/​KOR/​south-​korea/​gdp-​per-​cap​ita).

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South Korea as a leading player in the global economy, with promising prospects for sustained growth. We can attribute the resurgence of the Korean economy amid multiple crises to timely investments in next-​generation industries, sustained leadership in the IT sector, corporate restructuring, globalization and active participation in global value chain activities. However, this chapter contends that we can ascribe the rise, fall and recovery of the Korean economy before and after the 1997 crisis to concerted efforts to redefine the relationship between the Korean government and businesses –​these efforts aimed to prevent the recurrence of past mistakes, particularly those made during the 1997 crisis. Recent research grounded in institutional theory offers a fresh perspective on the interactions between government and businesses in the Korean market (Wan, 2005; Wan & Hoskisson, 2003). These studies suggest that a country’s resource endowment, encompassing resource factors and institutions, plays a defining role in determining the capabilities required for firms and the optimal strategic actions tailored to that country’s context. For instance, in a resource-​rich nation, market capabilities, such as efficient production skills, are essential (Wan, 2005; Wan & Hoskisson, 2003). In contrast, firms in resource-​poor countries require non-​market capabilities, like influencing public policy, to thrive in resource scarcity. Strategic action is a behaviour aimed at leveraging market or non-​market capabilities to acquire country-​specific resources. Applying this logic, South Korea exemplifies a resource-​driven, high-​growth emerging economy marked by substantial investments in education, research and development. The South Korean government frequently identifies and strategically invests in vital industries, fuelling technological advancements in shipbuilding, electronics, automobiles, heavy machinery and chemicals (Wan, 2005). Thus, businesses have focused on cultivating innovation capabilities requisite for inter­ national competitiveness to harness government investment and institutional support in these domains. Notably, the spectacular advancement in the innovation capabilities of firms in these sectors during the 1970s and 1980s was feasible due to South Korean government-​led policies to bolster these strategic industries. Institutions, including the legal system, are pivotal in shaping a country’s resource landscape, creating a spectrum of opportunities and constraints within diverse home country environments (Wan & Hoskisson, 2003). Since 2000, South Korea has embarked on a transformative journey in its institutional policies, particularly concerning the credibility and efficiency of bureaucratic infrastructure and business transactions. After the 1997 crisis, the Korean government and businesses undertook concerted efforts to ensure financial stability, elevate global competitiveness and enhance profitability (You, 2021; Yoon, 2013). Korean companies, rather than relying solely on close government ties and over-​diversification, have directed their efforts toward adapting to the evolving business landscape through technological advancements and innovation in business models. Simultaneously, the Korean government transitioned from a regulatory role to a facilitator, offering support to foster collaboration among Korean businesses, thus cultivating innovative synergies with reduced uncertainty (Yoon, 2013). This pivotal shift in government–​business relations post-​crisis has allowed the Korean government to recalibrate its industrial policy, better aligning itself with the demands of Korean companies in the new millennium. The transformation has acted as a catalyst for growth, with Korean companies and the government collaborating to ensure a more resilient economy. To adapt effectively to shifting market conditions and external shocks since 2000, the Korean government undertook a significant realignment in its industrial policies and state roles across four key directions: market-​opening reform, enhancing the business environment, fostering innovation

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and digitalization, and embracing globalization. Embracing these new roles, the government sought to shift away from continuous policy interventions and instead encouraged Korean firms to pursue adaptive reforms amid changing economic pressures and market dynamics. In doing so, the government delegated a greater leadership role in economic development to domestic firms and their international partners (Hamilton-​Hart & Yeung, 2021). In summary, formal and informal institutions have shaped South Korea’s economic journey. The institutional perspective, rooted in the works of North (1990, 1995) and Scott (1995, 2011), has significantly reshaped our understanding of the complex interplay between government, businesses and the broader environment. It underscores the fundamental significance of formal regulations, including legal frameworks and constitutions, along with informal norms and self-​ imposed constraints in molding a country’s business landscape. South Korea’s story over the past two decades serves as a testament to the importance of grasping these institutional dynamics, which have been instrumental in navigating economic crises and global challenges. Despite facing numerous crises, South Korea’s remarkable resilience and adaptability are due to the government’s role and policy transformations (Choi, Lee, & Park, 2007). The transition from a regulatory body to a facilitator, promoting collaboration and innovation among businesses, has set a fresh course for the nation’s economic progress. Moreover, the government’s shift in industrial policies, focusing on market-​opening reform, business environment enhancement, innovation, digitalization and globalization, has empowered domestic firms to excel in an ever-​ evolving global landscape. South Korea’s extraordinary growth and role as a global economic powerhouse are the fruits of a collaborative endeavour between the government and businesses, fortified by institutional adjustments and forward-​thinking strategies designed to ensure a resilient and prosperous future.

Economic Opening and Market Reform Following the 1997 financial crisis, the Korean government promoted national competitiveness by opening the domestic market through Free Trade Agreements (FTAs). Over the past 15 years, the Korean government has signed 16 FTAs with 57 countries, including those in the European Free Trade Association (EFTA), Association of Southeast Asian Nations (ASEAN), European Union (EU), and the United States, beginning with Chile in 2004. Initially, Korea focused on signing FTAs with small open economies that served as continental hubs before moving to larger economies. The Korean government then strategically pursued FTAs with resource-​rich countries such as Peru, Turkey, Australia and Canada to address the weaknesses of the Korean economy and establish a complementary FTA network (see Figure 7.2). Through these agreements, Korea has achieved a high degree of product liberalization. It has signed comprehensive and high-​level FTAs that cover a wide range of trade issues, including tariff reductions. In 2012, Korea became the only Asian country to have FTAs with the United States, the EU, and China (Cho et al., 2019). We can summarize Korea’s FTA policy in two ways: first, to maintain and expand existing export markets, especially in the face of competition from major FTA-​signing countries, and second, to strengthen the country’s overall economic system and constitution (Cho et al., 2019). As a result, Korea’s exports to the FTA signatories increased significantly from USD 170.7 billion in 2004 to USD 4,386.6 billion in 2018, with an average annual growth rate of about 7%, higher than the average growth rate for non-​FTA signatories (see Figure 7.3). During the same period, the proportion of Korea’s total exports to FTA signatories expanded from 67% to 73%. In terms of imports, volume increased from USD 1,217 billion in 2004 to USD 3,346 billion in 2018.

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Figure 7.2 Negotiation chrologoy of Korea’s FTAs. Note 1: Countries in highlighted squares are Korea’s FTA partners. Note 2: The FTA partners in bold-​lined boxes included environmental chapters in their FTAs with Korea. Source: (Song, 2021: 324).

Figure 7.3 South Korea export 1960–​2023. Source: macrotrends (www.macr​otre​nds.net/​globa-​metr​ics/​countr​ies/​KOR/​south-​korea/​expo​rts).

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Figure 7.4 Foreign direct investment inflow to South Korea 1996–​2022. Source: STATISTA (www.stati​sta.com/​sta​tist​ics/​1221​147/​south-​korea-​fore​ign-​dir​ect-​inv​estm​ent-​fdi-​infl​ows/​).

Empirical research confirms that FTAs positively impacted the number of import and export items for Korea (Cho et al., 2019). The Korean government actively pursued FTAs to expand businesses into new markets and improve the national economic system through market liberalization. For instance, the government revised more than 40 domestic laws to promote the Korea–​United States FTA and the Korea–​China FTA and reinforced the Monopoly Regulation and Fair Trade Act, Patent Protection Act, and Trade Secret Protection Act, resulting in notable improvements in the domestic trading system (Kim, 2021). These actions helped enhance management transparency and intellectual property rights protection among Korean companies, which were not previously prominent in the Korean economic system (Jun & Rowley, 2014). Additionally, lowering the import–​export tariff rate through several FTA agreements increased the volume of inward foreign direct investments (FDIs) (see Figure 7.4). Numerous studies suggest that an FTA agreement can positively affect a country’s economy (Cho et al., 2019; Chung, 2014), and Korea is no exception. FTAs have provided advantages to Korean firms by enabling them to enter and exploit locational and resource benefits in other countries, join global supply chains, and enhance their revenues and operating profits. For example, the Korea–​US FTA that came into effect in 2012 increased exports to the United States by 7.4% in the first year and 13.6% in the second year (Ahn, 2012). Furthermore, FTAs reduce the cost of imported inputs for Korean firms, making them more cost-​competitive. For instance, the Korea–​EU FTA, which began in 2011, has reduced the average imported input prices by 1.8% and encouraged technological cooperation between partner nations, thereby helping Korean companies to improve their competitiveness (Jung, 2022, 2023). The Korea–​EU FTA also facilitated technology collaboration and access to new knowledge. Trade items have become more diverse, and the volume of Korea’s competitive industries, including petroleum refining, chemicals, electronics, machinery, textiles and automobiles, has expanded. Most notably, since the market-​ opening reform through FTAs in 2003, the productivity of Korean firms has risen from 0.9 percent to 1.4 percent (Lee, 2007). However, there was a negative effect of the FTAs on Korean firms. One of the significant negative effects includes increased competition from foreign firms in the Korean market, led

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by increased imports of foreign products. For instance, the Korea–​Australia FTA, which went into effect in 2014, has increased the import of Australian agricultural products, threatening the market share of Korean agricultural firms. FTAs can also pressure Korean firms to improve their competitiveness to compete with foreign firms with access to the Korean market. For instance, the Korea–​Canada FTA, which went into effect in 2015, has increased pressure on Korean firms to improve their competitiveness in automotive, machinery and chemical products (Lee, 2015). FTAs often require that products meet specific standards and regulations to be eligible for tariff reductions. This requirement can create additional compliance costs and pressure Korean firms to meet these standards. In addition, the Korea–​Japan FTA, which went effective through the Regional Comprehensive Economic Partnership (RCEP) in 2022, requires that products meet specific standards and regulations to be eligible for tariff reductions. This need will likely create additional compliance costs and pressure Korean firms to meet these standards. As a result of the series of FTAs, Korean firms have undergone significant changes in their competitive strategy to exploit the opportunities and cope with increased challenges. Korean firms must become more innovative and competitive to adapt to these changes. They have had to invest in research and development (R&D) to develop new technologies and products that meet the needs of foreign markets. The size of R&D support by the Korean government began to increase significantly in 2000 (see Figure 7.5). Along with this, the leading Korean firms such as Samsung and Hyundai Motor also highly increased their R&D spending for technology innovation and quality improvement (Kim et al., 2012). They have improved their operational efficiency and cost com­ petitiveness to compete with foreign firms (Kim et al., 2012). The Korean government’s implementation of a free trade policy allowed Korean companies to improve their marketing capabilities and increase their understanding of the global market. Governments and businesses have acknowledged the importance of revitalizing free trade to promote international competition and recognize the need for overseas marketing support to achieve this goal. In response, the Korean government shifted its focus toward providing indirect sales and marketing support to enhance export competitiveness, departing from direct support policies like export subsidies and tax support since 2004 (Lee & Jeong, 2013). This support involved government agencies such as the Korea Trade–​Investment Promotion Agency (KOTRA), Small and Medium Business Promotion Foundation (SMBPF) and Trade Association (SMBPF), which helped explore overseas markets, identify potential clients, promote support, gather local market information and provide online marketing counselling. Recent surveys in Korea revealed that the government’s overseas sales and marketing support projects have helped Korean firms establish global customer networks and acquire local knowledge and information in overseas markets (Korea Herald, 2022). Consequently, these projects have significantly enhanced Korean firms’ global marketing capabilities. Much evidence points to the government’s various market-​opening reforms and related policies, offering Korean firms valuable insights into local market preferences, consumer behaviour and cultural nuances (Lee, 2012). Organizations can leverage this knowledge to develop marketing strategies tailored to each market’s specific needs, thereby enhancing the effectiveness of their marketing efforts. For instance, the Korea–​US FTA has helped Korean firms access the US market, the world’s largest consumer market. As a result, Korean firms have gained insights into US consumers’ preferences in automobiles and consumer products, allowing them to tailor their products and marketing strategies to suit better local tastes (Park & Seo, 2015). For instance, Korea developed the Hyundai Sonata Sedan, Kia Optima, and the Samsung Widescreen smartphone based on insights into the preferences of American consumers. FTAs also provide Korean firms

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Figure 7.5 Korea’s gross R&D investment as a percent of GDP. Source: OECD Main Science and Technology Indicators, March 2021 (www.aaas.org/​news/​new/​new-​data-​says-​us-​rd-​ has-​top​ped-​3-​gdp-​first-​time-​ever www.linke​dIn.com/​posts/​chri​stop​here​isgr​uber​_​an-​urg​ent-​wake-​up-​call-​from-​the-​ameri​can-​activ​ity-​7071​8482​0349​ 4555​648-​wImk/​).

access to new distribution channels and marketing platforms. For example, e-​commerce platforms like Alibaba and Amazon have become popular channels for Korean firms to sell their products to global consumers. By leveraging these platforms, Korean firms can reach new customers and expand their customer base in foreign markets. The Korea–​China FTA has enabled Korean firms to access the Chinese market, the world’s largest e-​commerce market (Park, Kim, & Ahn, 2010). As a result, Korean firms have leveraged Chinese e-​commerce platforms like Tmall and JD.com to expand their reach in China (He, 2018). The market opening reform implemented by the Korean government has been instrumental in strengthening Korean firms’ brand recognition, reputation, and collaboration in global markets. By expanding their business to foreign markets, Korean firms can showcase their products’ quality and innovation to a broader audience, thus improving their reputation and building

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brand loyalty among global consumers. The Korea–​EU FTA in 2011 has provided Korean firms access to the European market, renowned for its high product quality and innovation standards. Consequently, Korean firms have showcased their products, such as home appliances, televisions, and smartphones, to European consumers, enhancing their brand recognition and reputation in the region (Joe et al., 2021). FTAs have also opened up many opportunities for Korean firms to collaborate with foreign firms and learn from their marketing strategies. Joint ventures and partnerships have enabled Korean firms to gain access to new technologies and marketing techniques and learn from the experience of foreign firms in marketing their products in different markets. For example, the 2015 Korea–​Vietnam FTA enabled Korean firms to collaborate with Vietnamese firms and better understand the local market and consumer preferences. Lotte Group, a Korean conglomerate in the hospitality and retail business, collaborated with Minh Phu, a Vietnamese retail conglomerate, to develop marketing strategies that are more effective in the Vietnamese market (Phan & Jeong, 2016). In summary, the Korean government’s market opening reform has given Korean firms valuable opportunities to recognize the importance of enhancing R&D and technology innovation in the global markets. Moreover, the reform has helped Korean firms improve their marketing capabilities and local market knowledge in the global markets by accessing new markets, distribution channels, and marketing platforms and collaborating with foreign firms. As a result, the Korean government’s market opening reform has a crucial role in helping Korean firms succeed in the competitive global market environment.

Improvement of the Business Environment The Korean government has historically intervened in corporate activities related to market entry, pricing, business transactions and quality regulation across various industrial sectors (Kim & Cho, 2015). However, such government intervention has had negative consequences, including stifling competition, supporting inefficient industries, and hindering labour market flexibility, ultimately weakening the overall business environment (Rowley & Bae, 1998a). Following the financial crisis in 1997, the Korean government recognized the importance of a favourable business environment as a fundamental principle to ensure efficient organizational activity and fair competition for companies. Therefore, the Korean government undertook various efforts to create a business-​friendly environment, including regulatory reform, improvements in corporate governance, support for small and medium-​sized enterprises (SMEs), and labour market reform (Han & Im, 2008). While there is still much room for improvement compared to developed nations, Korea has achieved undeniable and significant progress compared to the past. First, the Korean government has undertaken regulatory reform to simplify administrative procedures and reduce unnecessary regulations, making it easier for businesses to start and operate in Korea. For instance, the Kim government2 (1998–​2003) established the Regulatory Reform Committee (RRC) to reduce regulatory burdens and promote business-​friendly policies. The Lee government3 (2008–​2012) deployed various initiatives, such as the “One-​In, One-​Out” policy, which requires removing an existing regulation to offset a new one. The Park government4 (2013–​2017) launched the Regulatory Reform 2.0 initiative in 2013, a comprehensive reform programme aimed at simplifying administrative procedures, reducing regulatory compliance costs and promoting innovation. Despite criticisms of those regulatory reform policies, particularly their implementation and effectiveness, they have made significant steps toward creating a more 168

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business-​friendly regulatory environment in Korea (Oh, Choi, & Lee, 2019). As a result of these efforts, Korea has seen substantial improvements in its ranking in the World Bank’s Ease of Doing Business report, ranking 11th in 2020, up from 29th in 2010 (World Bank, 2020). Second, Korean governments strongly recognize that sound corporate governance is critical to a good business environment. Corporate governance refers to the rules, practices, and processes that direct and control companies, including mechanisms for balancing the stakeholders’ interests (OECD, 1999). The Korean government has implemented several initiatives to promote corporate governance, including the Stewardship Code, which encourages institutional investors to engage more actively with companies on corporate governance and sustainability (Son & Yeon, 2018). In addition, the Korea Exchange has introduced several measures to promote good corporate governance among listed companies. These include requirements for companies to disclose information on their governance practices and to introduce an index for companies with high levels of corporate governance (Jang, 2019). The Lee government (2008–​2012) particularly emphasized strengthening corporate governance in response to the global financial crisis (Yim, 2013). In 2009, the government introduced a series of corporate governance reforms, including establishing the Korea Corporate Governance Service, which provides governance evaluation and advisory services to companies. The government also required companies to appoint outside directors to their boards to increase the independence and diversity of boards and improve oversight of company management. The Park government (2013–​2017) continued emphasizing strengthening corporate governance practices. In 2014, the government introduced a new Corporate Governance Code, setting out best practices for listed companies in board composition, shareholder rights, and disclosure and transparency (Jang, 2019). The government also introduced a new stewardship code for institutional investors, which encourages investors to engage more actively with companies on governance and sustainability issues. In addition, the Moon government5 (2018–​2022) has under­ taken corporate governance reform, focusing on promoting transparency and accountability in the chaebol, or family-​owned conglomerates, which dominate the Korean economy. In 2018, the government introduced a new law to strengthen the independence and authority of external auditors to improve the quality of financial reporting and oversight of company management (Cho, 2022). The government also took steps to increase shareholder activism and promote shareholder democracy, including introducing a new rule requiring companies to obtain shareholder approval for significant transactions. Although there is still scope for additional enhancements, these measures have fostered a culture of accountable and transparent leadership within the Korean corporate sector. For instance, since the mid-​2010s, SK Global, the second-​largest Korean conglomerate operating in the energy, chemical, telecommunications and semiconductors industries, has implemented new corporate standards. These standards enhance the disclosure and transparency of SK’s global operations and have increased the trust and confidence that investors and other stakeholders have in Korean companies, leading to increased investment and improved business performance. Corporate governance reform has fostered an environment that enables firms to enhance their global competitiveness in innovation, quality and customer service by promoting responsible and transparent management practices. Third, since the early 2000s, several South Korean governments have actively supported venture companies as they recognized the importance of intangible resources like technology, knowledge and information for economic development. In 1997, the government passed business venture laws after the financial crisis and initiated startup support. For instance, the Kim government (1998–​2003) introduced a startup financial support system to encourage venture companies. 169

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Figure 7.6 Number of registered venture companies in Korea from 1999 to 2022. Source: Statista 2024 (www.stati​sta.com/​sta​tist​ics/​1331​139/​south-​korea-​num​ber-​of-​vent​ure-​compan​ies/​).

The Lee government (2008–​2012) simplified venture business procedures, promoted international networking, and implemented venture-​friendly policies. During the Park government (2013–​2017), the focus was on institutionalizing the re-​challenge of failed venture companies and providing educational and training support. The government established the Korea Institute of Startup and Entrepreneurship Development (KISED) in 2015 to provide startups with mentoring, networking, and funding. The Moon government (2018–​2022) continued the effort to create a start-​up-​friendly environment, including establishing a startup ecosystem and attracting outstanding talent. As a result of these efforts, Korea has seen a surge in entrepreneurship, with the number of startups and venture businesses increasing from 28,000 in 2000 to 129,000 in 2020 (see Figure 7.6). Fourth, the promotion of FDI has been crucial to developing the business environment in Korea, providing many positive benefits to domestic firms. Under the ‘Global Korea’ initiative launched by the Lee government (2008–​2012), Korea aimed to become a global hub for trade, investment and culture. The Korea Trade-​Investment Promotion Agency (KOTRA), a government agency, consistently carried out the core policy of globalizing the Korean economy under the Lee government. It actively engaged in economic diplomacy, including securing orders for nuclear power plants and visiting key trade and investment destinations to bolster exports. Additionally, it facilitated cooperation with resource-​rich countries to ensure a stable supply of resources. It played a pivotal role in assisting Korean companies in entering emerging markets by providing services such as market information, consulting and marketing support. The Moon government (2018–​ 2022) focused on promoting inclusive growth and sustainable development, emphasizing renewable energy and other environmentally-​friendly industries, and launching several programmes and initiatives to attract foreign investment in these sectors. As a result, FDI in Korea has increased significantly. The South Korean government’s efforts to promote FDI have paradoxically increased the inflow of foreign capital into the country (see Bekaert, Harvey, & Lundblad, 2003).6 Foreign investment gives Korean firms access to new capital, technology, and know-​how sources, which can improve their competitiveness in domestic and international markets (Kim and Hwang, 2000). For example, Samsung and Hyundai Motor received substantial investments from foreign investors, including 170

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Apple, Softbank and Tencent. The investment amounts were significant, with Samsung receiving $22 billion and Hyundai Motor receiving $35 billion, both from largely foreign investors. SMEs, the fintech startups in particular, also benefit from foreign investment, gaining better access to new markets, technology transfer, increased financing opportunities and enhanced global visibility. Establishing foreign-​invested industrial complexes (FEZs) has been one of the most successful examples of attracting foreign investment in Korea. These zones offer foreign investors special tax incentives and other benefits to promote investment and job creation in specific industries or regions. The Korean government remains committed to the FEZ programme –​ with 18 FEZs established as of 2022 –​to promote economic growth and job creation and enhance the country’s competitiveness in the global marketplace. Fifth, through a shared growth policy over the last two decades, the Korean government has made significant efforts to promote equal development and knowledge sharing between large corporations and SMEs. Despite Korea’s rapid economic growth, income and opportunity inequality have persisted, leading to social polarization and hampering sustainable growth (Kim, 2017; Hemmert, 2012). In particular, the dominance of a few large corporations in key markets has created unfair relationships with small businesses, resulting in income and employment imbalances. The Korean government launched the ‘shared growth policy’ in 2010 to address these issues, promoting equal development between large corporations and SMEs. The basis of the shared growth policy is growing together and sharing benefits to create a better society. It is not about taking from the rich and giving to the poor but increasing the size of the economic pie and changing the distribution rules to benefit those with less (Jung, 2022). At the company level, the policy aims to eliminate unfair transactions between large corporations and SMEs and reasonably share performance and profits (Jung, 2022). Key elements of the procedure include reduced eco­ nomic power of large corporations, unfair practices in subcontracting, and fair competition for all companies. The Korean government established the Shared Growth Committee in 2010 to address shared growth and social conflict issues between large corporations and SMEs. Since then, shared growth has become a social trend in the Korean economy. The government has played a critical role as a market supervisor, ensuring fairness in the entire business process, supporting SMEs in their growth into large corporations, and designating suitable and exclusive industries for SMEs. Large corporations have worked to become more transparent organizations and have established in-​house organizational units dedicated to shared growth. They provide quick cash payment on contract delivery, R&D support, overseas sales development, and workforce training to their subcontractors and small partners that practice productivity improvement (Jung, 2022). Government agencies also provide active support and mentorship for SMEs’ overseas expansion. Today, shared growth management systems between large, small and medium-​sized companies have become a general business practice among large and small firms in Korea. Major Korean conglomerates, such as Samsung, SK Global and Hyundai Motor, have been leading the way in shared growth initiatives and supporting their small partners with the know-​how to enhance sustainable supply chain management, such as ESG evaluation, consulting and education, behavioural norms and environmental management (Son & Kim, 2022).

Innovation and Digitalization During the mid-​2010s, while the world discussed the Fourth Industrial Revolution, the Korean government formulated national-​level strategies to promote innovation in the digital economy. The Fourth Industrial Revolution, also known as Industry 4.0, is characterized by rapid technological 171

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advancements and changes in industries and societal patterns through increased interconnectivity and smart automation. This revolution involves the integration of technologies such as AI, big data and advanced robotics into work and production methods. Korea experienced tremendous growth during the 1960s to 1990s, driven by robust governmental leadership that propelled the steel, shipbuilding, automobile and electronic industries, laying the foundation for the Han River Miracle. However, the economic crisis of 1997 and the subsequent downturn necessitated a new growth plan (Rowley & Bae, 1998a). The Fourth Industrial Revolution presented an opportunity for Korea to take a giant leap forward. The Korean government’s response to the Fourth Industrial Revolution began in earnest during the Park administration (2013–​2017) and continued under the Moon administration (2018–​2022). In June 2015, the Park government launched the Manufacturing Innovation Strategy 3.0, a comprehensive plan to bolster fourth industrial technologies such as smart factories, big data, cloud computing, IoT and 3D printing (Choi, 2017). The government identified AI and IoT as key emer­ ging industries and pledged over USD 1 billion in AI R&D by 2020, leading firms like Samsung, L.G., and SK Telecom to develop advanced AI technologies for various fields. The government also heavily promoted developing IoT technologies, leading to L.G. Electronics creating an IoT platform called ‘SmartThinkQ,’ which allows users to control their home appliances with their smartphones (Sun, 2019). Additionally, the government invested heavily in building a 5G network infrastructure, helping Korean firms develop new services that require high-​speed and low-​latency connectivity. Finally, the government invested in advanced manufacturing technologies such as 3D printing, robotics and automation, allowing Korean firms to increase efficiency and reduce costs. The Fourth Industrial Revolution prompted a response from the Park government (2013–​2017) and Moon government (2018–​2022), both focused on establishing Korea’s leadership in fourth industrial technology. The Park government introduced the manufacturing innovation strategy 3.0 in 2015, including AI and IoT research and development plans, while the Moon government established the presidential ‘Fourth Industrial Revolution Committee’ to coordinate and oversee policies related to the ecosystem of fourth industrial technology (Cho, 2022). The committee formulated long-​term plans focusing on nine key industries in bio and health, manufacturing and agriculture. The Moon government aimed to lead the country into a people-​centred economy by implementing policies centered on intelligence, innovation, inclusion and communication (Cho, 2022). This strategy involved establishing an industrial ecosystem where companies could com­ municate, share platforms and data, and collaborate to create new business opportunities. Rather than acting as a control tower, the government supported economic players and actively shared necessary knowledge and information. Companies like Kakao Mobility, a Korean internet giant Kakao subsidiary, and Hyundai Motor benefited from government support for ride-​sharing services and the EV market, respectively. Korean government support facilitated Korean companies’ rapid entry into the platform, digital network equipment and information services industries, enhancing their competitiveness in the Fourth Industrial Revolution. For instance, NAVER, a Korean online search and advertising platform, has benefited from the government’s emphasis on innovation and the digital economy, allowing the company to launch several initiatives to promote entrepreneurship and innovation, including a startup accelerator programme and venture capital fund. SK Telecom, a leading Korean telecommunications company, has leveraged the government’s installation of the 5G network to launch several 5G-​based services and played a crucial role in the 5G infrastructure in Korea. Similarly, Kakao, a prominent Korean mobile messaging and platform company, has launched several new services using emerging technologies, such as its blockchain-​based platform Klaytn, which has received government support and investment. 172

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Moreover, the government’s proactive policies in the digital economy have brought about significant structural changes in the Korean industry. Thanks to the government’s support of fast internet and platform infrastructure, small online companies and businesses have rapidly multiplied and gained the ability to compete with large traditional companies (Kim, 2019). For instance, Coupang, a Korean e-​commerce company, has utilized digital platforms to offer faster and more convenient delivery options, effectively competing with traditional retailers like Lotte and Shinsegae. The rise of technology-​based platforms incorporating AI in the financial industry has disrupted the financial sector, including commercial banks, securities firms and insurance companies (Sun, 2019). Toss, a Korean fintech startup, has rivalled traditional banks by offering a mobile-​based financial services platform. The platform allows users to manage their finances more efficiently, leveraging innovative technologies such as biometric authentication and artificial intelligence to provide a seamless user experience and personalized financial advice. The proliferation of online and mobile technologies and fast-​growing platform businesses has compelled traditional leading companies to restructure their competitive strategies. In response, many conventional Korean retailers, such as Lotte and Shinsegae, have launched their e-​commerce platforms, investing heavily in logistics and delivery technologies to compete with online platform companies, such as Coupang and Market Kurly. Likewise, traditional Korean manufacturers like Samsung have adopted smart factory technologies, such as robotics, AI and the IoT to enhance efficiency and productivity. They have collaborated with startups and other digital companies to leverage their expertise and technologies. Hyundai Motor, for example, has partnered with Kakao Mobility to provide ride-​sharing and delivery services to customers. The surge of small online companies in Korea has spurred many traditional firms to embrace digital technologies and devise new strategies to remain competitive in the digital age. This shift creates a more dynamic and competitive business landscape in Korea, benefiting small and large companies. The Korean government played an active role in supporting the digital transformation of Korean companies during the Fourth Industrial Revolution. The rapid pace of business transactions at a low cost, extensive sharing of ideas, and the quick product innovation process using digital technology are the heart of the Fourth Industrial Revolution. Digital transformation is a firm’s attempt to improve its competitiveness by incorporating digital technology into its value chain activities, including raw material procurement, manufacturing process, logistics, marketing, service, etc. (Matt, Hess, & Benlian, 2015). Companies are adopting digital transformation to improve competi­ tiveness in their value chain activities, such as raw material procurement, manufacturing processes, logistics, marketing, services and more. The Park government (2013–​2017) implemented various digitalization policies, such as open innovation and business convergence, which allowed Korean companies to engage in vertical and horizontal cooperation activities. These policies helped firms to source external capabilities. For example, Hyundai Motor partnered with L.G. Chem and Aptiv to develop electric vehicle (EV) batteries and autonomous driving technologies. POSCO, a steel company, invested in Korean startup Innerbottle to create sustainable packaging solutions. Lotte Group, a conglomerate that operates retail, hospitality and chemical businesses, partnered with SK Telecom to develop smart retail technologies and invested in Korean startup Memebox to expand its e-​commerce business. Thus, the Korean government’s support for digitalization has encouraged Korean companies to engage in cooperative activities and enhance their competitiveness in the digital era. During the Moon government (2018–​2022), process automation and the digitalization of large companies progressed rapidly. The Korean government’s digitalization policies facilitated the acceleration of digital transformation for many Korean firms, with the Moon government promoting the development of smart factories, which are highly automated and digitized 173

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manufacturing facilities that use IoT, AI and big data analytics technologies (Cho, 2022). The government provided funding and support for companies to adopt smart factory technologies. It established several pilot projects with major companies such as Hyundai Motor, L.G. Changwon Plant, SK Hynix M14fab, and Hyundai Heavy Industries’ Ulsan Shipyard. Additionally, the Moon government was highly interested in developing smart cities that use advanced technologies to improve the quality of life and urban sustainability. One example of the government’s smart city project is the Songdo International Business District, built from scratch near Incheon and uses advanced ITC technologies (Cho, 2022). Dozens of leading Korean firms, including CISCO, Posco Engineering & Construction, LG CNS, and SK Telecom, are involved in the project. The Korean government’s focus on innovation-​driven policies has spurred companies to plan for the future. As of 2022, leading Korean companies are strategically selecting industries in innovative technologies, such as driverless automobiles, next-​generation semiconductors, biochemicals, secondary batteries, robots and eco-​friendly sectors, to explore competitive products and promising markets for next-​generation businesses. In particular, the secondary battery industry has emerged as Korea’s new primary industry, with L.G. Energy Solution, SK On, and Samsung SDI occupying about 27% of the global market. These firms are expanding their production facilities in North America. Hyundai Motor is also a major player in the EV market, with plans to produce 500,000 EVs annually in the United States by 2025 through a USD 8 billion investment. Three leading Korean producers of EV batteries, SKon, LG Energy Solution and Samsung SDI, are also investing billions of dollars in expanding their manufacturing operations in the United States. The expectation is for these companies to acquire 20% of the worldwide market share, positioning them as a driving force for Korea’s forthcoming economic expansion, second only to China’s share of 60%.

Globalization Since the mid-​1990s, Korean companies’ globalization has driven the continued growth of the Korean economy. In the 1990s, Korean companies began overseas production, which significantly increased in quantity and quality in the 2000s (Rowley & Warner, 2016). South Korea’s invest­ ment in manufacturing abroad, particularly in electronics and automotive sectors, represents a strategic push into key markets. By 2018, investments in these areas constituted 10.5% and 6.9% of its total manufacturing FDI, respectively. Notably, investment in electronics and related technologies surged from USD 20 million in 1990 to USD 5.2 billion in 2018, marking significant growth. This investment is concentrated in China (including Hong Kong), the United States, and Vietnam, highlighting South Korea’s focus on expanding its technological and automotive manufacturing footprint globally (see Figure 7.7). Despite being the world’s tenth largest in GDP and the seventh largest in global export, South Korean companies have a relatively low Transnationality Index and FDI ranking, currently at 38th and 18th as of 2020 (UNCTAD, 2021). However, the expansion of Korean companies overseas has played a crucial role in driving the growth of Korea’s economy. In the 2000s, a prominent feature was the significant internationalization of SMEs, mainly driven by technology companies riding the venture boom. In the past, the Korean government supported SMEs passively with export potential. However, in the early 2000s, South Korea acknowledged the importance of globalizing its technology-​intensive small firms. It formulated an industrial plan accordingly, demonstrating a shift toward a more globally oriented economic strategy. The Venture Association, established in 1995, and the ‘Special Act on Venture Companies,’ enacted in 1997 during the Kim government7 (1993–​1998), contributed to significant growth in size and number. The 1997 Asian Crisis also contributed to the emergence of globalized venture firms, 174

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Figure 7.7 Trends in Korean outward FDI. Source: nationalatlas.ngii.go.kr/​pages/​page_​2030.php.

with many engineers and scientists establishing startups after resigning or being laid off from their former jobs (Hemmert, 2012). Since 2015, there has been a substantial increase in foreign direct investments by small high-​tech firms. Over these 5 years, their overseas investment has more than doubled, transitioning from USD 9.37 million in 2017 to USD 21.88 million in 2021, indicating a significant shift toward market entry through direct investments rather than export-​centric strategies (Kim, 2022). As a result, the globalization of Korean technology venture companies has gained momentum in recent years, with various types of firms emerging, including international new ventures, born globals and global startups (Choi, Han, & Kwak, 2021). Starting in the 1960s, the Korean government encouraged the global expansion of Korean companies due to the limitations of the domestic market. The government pursued an export-​oriented strategy to achieve this, leading to exports contributing to 40% of Korea’s GDP annually from the 1960s to the 1980s (Kim & Hwang, 2000). The global strategy of Korean companies took a new direction with the northern diplomacy of the Roh government,8 which began with the Presidential Special Declaration for National Self-​Reliance and Unification and Prosperity on July 7, 1988 (Bae, 2010). President Roh Tae Woo aimed to strengthen Korea’s relationship with communist blocs such as the former Soviet Union and China by pursuing diplomacy focused on free-​market countries (Ha, 2000). Consequently, the government established diplomatic ties with the former Soviet Union in 1990 and China in 1992. These diplomatic efforts have facilitated the FDIs of Korean companies (Shim, Lee, & Lee, 2019). In the late 1980s, the diplomatic initiatives of the Roh administration (1988–​1993) played a significant role in expanding economic cooperation between Korea and Russia. In 2004, the Roh government9 (2003–​2008) elevated the relationship to a comprehensive partnership, which the Lee government (2008–​2012) further strengthened by establishing a strategic alliance in 2008 (Joe et al., 2021). These diplomatic efforts increased joint investments in IT, agriculture, space, international logistics and natural resource sales between Korea and Russia. As a direct entry point to Eastern European markets, Korea’s partnership with Russia paved the way for Korean companies’ expansion into Western Europe (Ha, 2000). In addition, diplomatic relations with China in 1992 proved to be a strategic opportunity for Korean companies due to its proximity. Between 1990 and 1998, SMEs entered the Chinese market, followed by large manufacturers from 2003 to 2008, taking advantage of China’s low-​cost benefits. After 2008, service-​oriented firms entered the 175

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market with the goal of localization, such as LG H&H, Nature Republic, Kakao, CJ CheilJedang, etc. The diplomatic relations with Russia and China marked a significant beginning for Korean companies’ globalization and expansion into Western Europe and North America, providing valuable global and local experiences for Korean companies. (Park, Kwak, & Yang, 2010) Over the past decade, the Korean government has implemented policies to boost the competitive growth of Korean firms in the global market. The Roh government (2003–​2008) implemented strengthened technology standards, which helped improve economic competitiveness (Park et al., 2010). The Lee government (2008) introduced policies to establish interindustry convergence systems and technology innovation networks to improve financial structures and support technological development (Choi, 2017). The Park government (2013–​2017) implemented policies to upgrade human resources to meet global standards and increase the influx of high-​quality foreign workers (Heo & Lee, 2018). Finally, the Moon government (2018–​2022) aligned policies with global trends in consumer rights, safety, environmental protection, and industrial accident prevention (Heo & Lee, 2018). These policies aimed to support economic competitiveness and techno­ logical development in Korea and have led Korean firms to prioritize corporate social responsibility and social contribution through joint activities with governments and social organizations. They have also encouraged entrepreneurship at all employee levels and ensured fair business practices with subcontractors while recognizing the significance of domestic market competitiveness for global market competitiveness. Since 2017, Korea has faced a significant challenge to its global strategy as Korean firms have been gradually exiting from China, a key foreign market, due to rising competition, political tensions over the US missile defense system, and increasing labour costs. Furthermore, the COVID-​19 outbreak, the Ukraine–​Russia conflict, and the US–​China rivalry have further prompted South Korea to re-​evaluate its global strategy. The Yoon government10 (2022–​) has responded by shifting its focus to encouraging firms to diversify their supply chains, expand their presence in emerging markets, and reduce reliance on exports to China. President Yoon recently announced the ‘Korea–​ASEAN Solidarity Initiative’ to strengthen cooperation between South Korea and the ASEAN countries, including upgrades to the Korea–​ASEAN Free Trade Agreement and proposals to enhance collaboration in electric vehicles, batteries and digital industries. He also announced South Korea’s new Indo–​Pacific strategy, emphasizing the need to foster supply chain resilience and economic security in the region and to create a collaborative and inclusive economic and technological ecosystem. The Yoon government’s new foreign policy vision aims to diversify South Korea’s trade territories, reduce dependence on China for critical minerals and exports, and align with major countries in the Indo–​Pacific region. The government is also identifying the Middle East, South America and the European Union as strategic markets and is pursuing various initiatives to promote infrastructure investments, new free trade agreements, cultural and content industry cooperation and nuclear power collaboration with these regions. Additionally, the government intends to expand collaboration with ASEAN countries in digital transformation and e-​commerce, reflecting the need for Korean firms to shift and adapt their focus to new markets in emerging economies.

Conclusion This chapter explored the Korean government’s role in promoting rapid development, globalization and technological innovation by Korean companies in the last two decades following the 1997 crisis. After the crisis, the government and companies recognized the need to reform the government–​business relationship and adopt new practices to overcome the new century’s 176

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challenges. The Korean government moved away from its earlier approach of government-​led industrialization and shifted its focus toward market-​opening reforms, improving the business environment, and promoting innovation and globalization. In doing so, the government delegated more responsibility to domestic companies and international partners, transitioning from a regulator to a facilitator. Major Korean firms and startups also sought to enhance their technological competitiveness by taking a more active role in their industries by collaborating with the government as partners. While Korea experienced significant industrial changes during the last 20 years, the achievements were not solely the result of Korean companies’ efforts, as the government also played a crucial role in facilitating cooperation and providing institutional support.

Notes 1 2 3 4 5 6 7 8 9 10

ESG stands for environmental, social and governance. President Kim Dae-​Jung Government (the eighth president of South Korea, 1998–​2003). President Lee Myung-​Bak Government (the tenth president of South Korea, 2008–​2012). President Park Geyn-​Hye Government (the eleventh president of South Korea, 2013–​2017). President Moon Jae-​in Government (the twelfth president of South Korea, 2018–​2022). The Korean capital market opened to foreign investors with a 10% ownership limit on January 3, 1992, and fully on May 25, 1998. FDI promotion policies signaled a commitment to a favourable business environment, attracting more foreign capital. President Kim Young-​sam Government (the seventh president of South Korea, 1993–​1998). President Roh Tae-​Woo Government (the thirteenth president of South Korea, 1988–​1993). President Roh Moo-​Hyun Government (the sixteenth president of South Korea, 2003–​2008). President Yoon Seok-​Yeol Government (the twentieth president of South Korea, 2022–​).

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Government–Business Relations in South Korea, 2000 to 2022 North, D. 1990. Institutions, institutional change and economic performance. Cambridge University Press. North, D. 1995. The Adam Smith address: Economic theory in a dynamic economic world. Business Economics, 30(1): 7–​12. OECD. 2005. Corporate governance of state-​owned enterprises: A survey of OECD countries. 233 p. www. oecd.org/​daf/​ca/​corpor​ateg​over​nanc​epri​ncip​les/​31557​724.pdf Oh, S., Choi, C., and Lee, J. 2019. Regulatory reform for fostering an innovation ecosystem. KID Working Paper, 20–​19: 1–​37. Park, K., Kim, I. and Ahn, J. 2010, A study on export promotion program at the Korean small-​medium exporters. International Business Management, 14(2):1–​25 (in Korean). Park, Y., Kwak, J., and Yang, Y. 2010. A historical approach to the foreign direct investment strategies in Korea. Journal of Business Historian, 26(3): 73–​99. Park, H. and Seo, Y. 2015. Impact of the Korea-​US free trade agreement on Korea’s exports to the US. The Journal of International Trade & Commerce, 11(4): 1–​28 (in Korean). Phan, T. and Jeong, J. 2016. Potential economic impacts of the Vietnam-​Korea free trade agreement on Vietnam. East Asian Economic Review, 20(1): 67–​90. Rowley, C. 2013. The changing nature of management and culture in South Korea, in C. Rowley (ed.). Managing across diverse cultures in East Asia, 142–​170. Routledge. Rowley, C. and Bae, J. 1998a. Introduction: The Icarus paradox in Korean business and management. Asia Pacific Business Review, 4(2-​3): 1–​17. Rowley, C. and Bae, J. 1998b. Korean businesses: Internal and external industrialization. Psychology Press Rowley, C. and Warner, M. 2016. Management in South Korea Revisited. Routledge. Scott, W. 1995. Institutions and organizations: Ideas, interests, and identities. Sage Publications. Scott, W. 2011. Total institutions and reinvented identities. Palgrave Macmillan. Shim, J. Lee, Y., and Lee, C. 2019. The role of government in facilitating Korean FDI into Russia. Journal of East Asian Economic Integration, 23(1): 81–​113 (in Korean). Son, I. and Kim, S. 2022. Supply chain management strategy and capital structure of global information and communications technology companies. Sustainability, 14(3): 1–​13. Son, I. and Yeon, K. 2018. Even if the stewardship code is introduced, it will not interfere with corporate management. Mail Economy (Jan. 16 2018) (in Korean). Song, A. 2021. Linking trade and environment in emerging economies: Korea’s ambition for making green free trade agreements. The Pacific Review, 34(2): 321–​350. Sun, M. 2019. How are we responding to the Fourth Industrial Revolution, ZD Net Korea. (Dec. 11 2019). (in Korean). UNCTAD. 2021. World Investment report 2021: Investing in Sustainable Recovery, Annual Report, pp. 1020–​ 2218. https://​unc​tad.org/​sys​tem/​files/​offic​ial-​docum​ent/​wir​2021​_​en.pdf Wan, P. 2005. Country resource environments, firm capabilities, and corporate diversification strategies. Journal of Management Studies, 42(1): 161–​182. Wan, P. and Hoskiisson, E. 2003. Home country environments, corporate diversification strategies, and firm performance. Academy of Management Journal, 46(1): 27–​45. World Bank. 2020. Doing Business 2020: Comparing Business Regulation in 190 Economies, Annual Report. www.doi​ngbu​ssin​ess.org/​cont​ent/​dahm//​doi​nggB​usin​ess/​media/​Ann​ual-​Repor​tts/​Engl​ish/​DB2​020-​rre​ eppo​ort_​web-​vers​ion.pdf Yim, J. 2013. Beyond the Crisis: Regulatory Reform of the Lee Myung-​Bak Administration (2008-​2013), Editorial department, Prime Minister’s Office. (in Korean). Yoon, H. 2013. The change of the economic role of the Korean government and the change of the market institution: A discursive institutionalist approach. Political Science in Asia, 22(1):163–​187 (in Korean). You, J. 2021. The changing dynamics of State-​business relations and the politics of reform and capture in South Korea. Review of International Political Economy, 28(1): 81–​102.

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8 THE STRATEGY BEHIND THE GLOBAL SUCCESS OF KOREAN FIRMS Applying the ABCD Model in Practice Hwy-​Chang Moon and Wenyan Yin

Introduction In the 1960s, Korea was one of the poorest countries in the world, heavily dependent on foreign aid. However, over the last 60 years, it has seen dramatic growth both quantitatively and qualitatively. Korea rapidly upgraded its industrial structure, transforming many Korean firms into global leaders in advanced industries such as electronics, automobiles, steel, machinery and petrochemicals (Moon, 2016). The four factors –​ cheap labour, export promotion strategy, the strong government support and Confucian values –​ are often cited by existing studies (e.g., Amsden, 1989; Chang, 2003; Cho, 1994; Eichengreen, Perkins, & Shin, 2012; Song, 1997; World Bank, 1993) as key to the success of the Korean economy and its firms. However, these factors alone do not fully explain the extraordinary success of the Korean economy and its firms, because not all developing economies and firms with similar factors have achieved comparable growth. Therefore, it is necessary to explore the fundamental factors behind Korea’s success. This book chapter1 specifically focuses on the key strategic factors that have contributed to the success of Korean firms. In the field of strategic management, the most widely accepted theories include the industry-​ structure view (ISV), resource-​based view (RBV), dynamic-​capabilities view (DCV) and institution-​based view (IBV). Each theory addresses gaps in the literature and contributes significantly to understanding the sources of firms’ competitive advantage. The ISV and IBV emphasize the external factors influencing a firm’s performance, but have limitations in explaining the heterogeneity among firms within the same industry or institutional environment. Conversely, the RBV and DCV address this gap by focusing on firm-​specific resources and capabilities. The RBV highlights the importance of firms’ superior resources that are difficult for rivals to replicate. This approach explains the success of first movers from developed economies but cannot satisfactorily explain the diverse sources of competitive advantages, especially for latecomer firms, such as Korean firms in their early growth stages (Moon, 2016, 2022). Although the DCV addresses the significance of firms’ strategic capabilities in adapting to the changing environment and creating

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new advantages, these capabilities are path-​dependent and rely on firms’ unique resources. Therefore, the DCV is considered within the broader scope of the RBV. In their early stages of growth, Korean firms did not focus their resources on R&D expenditures or the development of unique resources. Instead, their emphasis was on finding the right strategic position among incumbent industry players. This strategy is crucial because it allows firms to outcompete their rivals even without significant resource advantages (Moon, 2018). Moreover, Korean firms that have emerged as global leaders, such as Samsung, underwent widescale restructuring and transformation in a relatively short period. Therefore, the competitiveness of Korean firms is derived not only from their adaptation to environmental changes but also from their ability to radically change and continuously upgrade their resources and capabilities to achieve higher goals. The conventional theories previously highlighted are useful for distinguishing the competitive advantages of firms from developed economies versus those from developing ones, emphasizing superiority in resources or other capabilities. However, a complementary approach is needed that focuses on how to create competitive advantages when firms initially lack such superiority compared to their rivals. To address this, Moon (2016) introduced the ABCD model to explain the success strategies of Korea’s economy and its firms from a micro perspective. This approach comprises four factors –​agility, benchmarking, convergence, and dedication, explaining the diverse capabilities to overcome resource disadvantages. Each factor is further divided into two sub-​factors, resulting in a total of eight sub-​factors. This chapter focuses on firm-​level analysis, enhancing the theoretical foundation of the ABCD model’s four factors. It also proposes conditions under which both latecomers and leading firms can benefit from the ABCD approach to create and sustain competitive advantages. The structure of this chapter is organized as follows: the next section explains and discusses the key arguments and limitations of the four mainstream theories of competitive advantage for firms –​ ISV, RBV, DCV and IBV. We then analyze why the four factors –​cheap labour, export promotion, strong government support, and Confucian ethics –​often cited as success factors for Korean firms, are not adequate explanations. Based on an in-​depth, critical review of the existing literature, we introduce an alternative approach –​the ABCD model, and explain its theoretical background. The subsequent section illustrates the success of Korean firms (e.g., Samsung, Hyundai and POSCO) that have evolved from latecomers into global leaders by employing the ABCD model. The final section presents discussions and implications of the ABCD model for both latecomers and leading firms in overcoming various challenges.

Theoretical Background: Four Mainstream Theories for Firms’ Competitive Advantage In the strategic management literature, there are four leading theoretical perspectives: the ISV (Porter, 1980, 1985), the RBV (Barney, 1991; Wernerfelt, 1984), the DCV (Teece, 2007; Teece, Pisano, & Shuen, 1997), and the IBV (Peng, 2002; Peng, Sun, Pinkham, & Chen, 2009). These theories aim to explain the key factors determining the strategy and performance of firms. Among these theories, both the ISV and IBV emphasize external factors as the primary determinants of firms’ profitability, whereas the other two perspectives –​ the RBV and DCV –​ focus on firm-​ specific factors that account for performance variance. The ISV approach, extended from traditional industrial organization (IO) theory and popularized by Porter (1980, 1985) in the 1980s, emphasizes the role of industry structure in driving firms’ strategy and determining performance (Hill & Deeds, 1996). This approach posits that a firm’s

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success depends on the characteristics of the industry in which it competes, requiring adaptation to the market environment for survival and prosperity. While Porter highlighted the role of firm positioning (or generic strategies) in altering industry forces to gain competitive advantages, he maintained that industry structure is the primary determinant of a firm’s performance (Brahma & Chakraborty, 2011; Moon, 2018, 2022). However, Porter’s framework has faced criticism for its lack of concern with history and context (Narayanan & Fahey, 2005; Priem & Butler, 2001). The ISV tends to be more applicable in advanced countries characterized by a ‘stable, market-​based institutional framework’ (Peng, Wang, & Jiang, 2008). In developing countries, where industrial markets are often underdeveloped, less stable and significantly influenced or even shaped by government policies and institutions (Hoskisson, Eden, Lau, & Wright, 2000), the ISV alone cannot fully explain strategic behaviour and variance in firm performance. The IBV approach, rooted in institutional economics (North, 1990) and sociological institu­ tional theory (Scott, 1995), emerged in the strategic management literature during the 2000s and was popularized by Peng’s studies (Peng, 2002; Peng et  al., 2008, 2009). It complements the ISV by addressing the institutional environment or the macro-​contextual aspects to investigate alternative sources of competitive advantage. In advanced countries with well-​developed market conditions, the role of institutions is almost invisible (McMillan, 2007). However, given the sig­ nificant relevance of institutions in developing countries, they should not be treated merely as background or control variables but as an independent variable for determining firms’ performance (Peng et al., 2008, 2009). In this context, how well firms respond to and utilize formal and informal institutions in their strategy will help them better deal with uncertainty, reduce transaction costs and access crucial resources, which in turn will determine their success (Peng et al., 2009). Despite its usefulness in understanding the sources of competitive advantage for firms from developing countries, the IBV neglects firm-​specific factors in its analysis. Therefore, both ISV and IBV have limitations in explaining the heterogeneity among firms within the same industrial and institutional environments. The resources and capabilities of firms also matter, as they show different performance levels when exploiting opportunities and avoiding threats in the same industrial and institutional contexts. In this respect, both the RBV and DCV can complement the limitations of the ISV and IBV. During the 1990s, the RBV emerged and became a popular theory by addressing the heterogeneous firm-​specific factors that explain differences in firm performance. In contrast to the ISV, the RBV argues that resources are heterogeneously distributed among firms, and such resources are the primary elements that determine overall performance and sustainability. Firms possessing valuable, rare, inimitable and non-​substitutable (VRIN) resources will contribute to achieving and sustaining their competitive advantage (Barney, 1991). Despite its significance in enhancing the strategic management literature, it is limited in explaining how firms from emerging economies can build up advantages over time, as they initially lack superior resources compared to their rivals. Another criticism of the RBV is that it is too static, focusing solely on the firm’s resources and thus overlooking the capability to renew resources to sustain competitive advantages. This capability is particularly crucial in rapidly changing environments, as advantages derived from superior resources may be short-​lived, quickly imitated, or nullified by new innovations. To address this limitation, Teece et al. (1997) introduced the DCV. Dynamic capabilities are defined as the ability to integrate, build and reconfigure internal and external competencies to address rapidly changing environments (Teece et al., 1997: 516). Teece (2007) identified three sub-​sets of dynamic capabilities –​sensing, seizing and reconfiguring –​that can trigger changes in resources and guide firms to create new advantages. However, as an extension of the RBV, dynamic capabilities are 182

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path-​dependent and rely on VRIN resources to sense and seize new market opportunities and transform existing competencies into new ones. Yet, these capabilities are less likely to be possessed by latecomers, which often have non-​VRIN or ordinary resources. Therefore, the DCV also has limitations in explaining the sources of competitive advantage for firms from developing countries with limited superior resources. The four leading perspectives mentioned previously in the strategic management literature complement each other by addressing different aspects to explain the sources of competitive advantage among firms. ISV and IBV focus on industrial and institutional environmental factors, while RBV and DCV emphasize internal firm-​specific factors –​resources and capabilities. ISV, RBV and DCV are more aligned with the context of advanced countries, where markets are well-​developed and functional, and firms possess abundant resources to develop core competencies. In contrast, IBV is more applicable to firms from developing countries with fewer resources, explaining how they can navigate and benefit from institutional environments to enhance their competitive advantage. However, it falls short in explaining firm heterogeneity. Therefore, none of the existing theories fully satisfy the explanation of the diverse firm-​specific factors necessary to build up a competitive advantage for latecomers lacking any VRIN resources. In this respect, this chapter seeks to highlight the key firm-​specific factors that can address the limitations cited above in the four main theories. Specifically, this chapter introduces the ABCD model, which helps explain how Korean latecomer firms were able to continuously build up competitive advantages and even outperform industrial incumbents from advanced economies. This model is also useful in explaining why some firms with similar resource endowments can achieve faster growth and compete with other incumbents in the global market.

Literature Review: The Fundamental Factors for the Success of Korean Firms The rapid growth and success of Korean firms have long captured the attention of scholars who have sought to identify the key factors behind it (e.g., Amsden, 1989; Cho, 1994; Chang, 2003; Eichengreen et al., 2012; Song, 1997; World Bank, 1993). Some common variables cited in these studies include cheap labour, export promotion strategies, strong government support for Korean conglomerates or chaebols, and Confucian values. However, upon closer examination, it becomes apparent that these factors are not unique to Korea and can be found in many other developing or Asian countries. Yet, Korea’s economic development remains remarkable in its uniqueness. Here, it is important to distinguish Korean firms from firms in other developing countries with similar resource endowments (e.g., cheap labour) or institutional environments (e.g., export promotion). It is well known that developing countries possess a comparative advantage of cheap labour compared to advanced countries, but among developing countries, there is no significant difference in labour costs (Moon & Yin, 2021). Hence, cheap labour, along with other characteristics such as high labour productivity, is crucial for giving Korean firms competitive advantages. Several studies (e.g., Campos & Kinoshita, 2002; Ma, 2006; Redding & Venables, 2004) have argued that labour cost needs to be accompanied by higher labour productivity, and low labour cost by itself will not automatically create an advantage. In fact, Korea’s labour cost was higher than that of many other Asian developing countries such as China, India, the Philippines and Thailand in the 1970s and 1980s, but its productivity was higher than these countries. Korea’s export promotion policy has attracted significant interest and is considered to have substantially contributed to the country’s economic development. While it should be recognized that Korea is not alone in adopting such a policy, not all countries have been successful in developing 183

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new markets (Oh et  al., 2016). Studies such as those by Haveman (1993) and Zaheer (1995) pointed out that many exporters, suffering from the liabilities of newness on the global stage, have failed to develop new markets. Amsden (1989) also rejected the popular belief that Korea’s economic success was solely through export trade policies and argued that it should be combined with other factors that direct firms to enhance global competitiveness through exports. Moon (2016) illustrated that Korea’s export promotion policy was successful because it provided channels for Korean firms to learn global best practices through imported technology and achieve economies of scale through international market expansion. Such mechanisms have therefore contributed to improving both the cost and quality advantages of the exported goods. This, in turn, allowed Korean firms to compete with other international rivals on the global stage. Regarding the third often misunderstood factor –​strong government support for Korea’s chaebols –​ there should be consideration of other factors beyond simple government support. About 70 percent of the top 10 chaebols listed in the 1970s have remained the same up to the 2000s, but the other 30 percent have changed frequently (Haggard, Lim, & Kim, 2003). It should also be noted that despite the substantial reduction in government subsidies since the late 1980s, Korea’s chaebols have remained competitive. Therefore, given the same institutional environment, the heterogeneity in firm-​specific factors should be crucial in distinguishing successful chaebols from the unsuccessful ones. Finally, Confucianism cannot be considered a fundamental success factor given that many other countries are also influenced by it, including China, which only achieved economic success after 1978 when it opened up its economy. Moon (2016) pointed out that Confucianism has two contradictory effects on economic development. The first is to maintain the status quo, such as preserving the current power relations between rulers and subordinates, which can hinder economic development that often entails improvements and changes to the current economic power status. The second feature of Confucianism is the responsibility of leaders to show diligence and strong dedication. This element can, to some extent, support and contribute to economic development and a firm’s success, but it depends on how firms adopt the positive aspects of Confucianism to favor competitiveness. This indicates that the capability of firms to better exploit and materialize Confucianism is important, rather than Confucianism per se. The above analysis reveals that cheap labour, export promotion policy, government support, and Confucianism are all advantages that can be exploited by most firms in general. Their limitation, then, is in explaining the fundamental factors behind the success of Korean firms. To address the limitations of leading theories on the competitive advantage of firms and the literature on Korea’s success, Moon (2016) introduced the ABCD model. This model addresses the ‘how’ factors, or how firms can build up competitiveness without possessing VRIN resources (as advocated by the RBV) or how to achieve higher competitiveness despite having homogeneous resource conditions with rivals.

The ABCD Model: An Alternative Approach to Competitive Advantage The established theories for analyzing the sources of competitive advantage among firms emphasize heterogeneous resources or capabilities superior to those of rival firms. These factors are very useful in explaining the differences in competitive advantages between firms from developed countries and those from developing ones. For example, firms from developed countries generally boast advanced technologies as their source of growth, whereas growth among those from developing countries is usually driven by cheap labour. However, what existing theories cannot explain is why and how firms can experience greater and faster growth compared to their counterparts with homogeneous resource conditions (see Table 8.1). 184

The Strategy Behind the Global Success of Korean Firms Table 8.1 The determinant factors of firms’ competitive advantage of the four established theories and the ABCD model Firm-​specific advantage

Environmental advantage

Industry-​based view Institution-​based view Resource-​based view Dynamic-​capabilities view ABCD model

Heterogeneous (or VRIN) resources Sensing, seizing, and reconfiguring capabilities based on the theoretical assumption of the RBV Capability of leveraging homogeneous resources for value creation

Industry structure Formal and informal institutional factors

Source: Created by the authors.

The ABCD model was first introduced by Moon (2016) to identify the fundamental factors that have contributed to Korea’s economic success and its firms’ global leadership. Moon suggested that this success should not be attributed to mysterious, inimitable or naturally inherited resources such as Korean culture, but rather to a strategic framework applicable for other latecomers from developing countries to gain a competitive advantage. Developing country firms are often viewed as latecomers or copycats in the global market, but many of them have achieved competitive advantages through the capabilities of leveraging resources not considered heterogeneous or seen as superior to those of other firms. While Moon’s (2016) ABCD model was originally introduced to explain the success of the Korean economy at the national level, Moon actually applied the model to the firm level to address the success of Korean firms, which contributed to the emergence of industrial success and economic growth as a whole. The logic of applying the same model at various unit levels can be traced back to Porter’s (1990) diamond model. To seek the sources of international competitiveness of nations, Porter addressed a different question by asking why firms based in a particular nation are able to create and sustain competitive advantages. To operationalize the model, Porter broke it down to the industry and firm level by selecting the most successful industries and firms based in a certain country and examining the locational attributes contributing to the firms’ competitive advantage. Hence, Porter shifted the unit of analysis from nations to the industrial and corporate level. The following section explains the concepts and theoretical background of the four pillars comprising the ABCD model.

Agility: Speed Combined with Precision to Increase Productivity Agility is composed of two sub-​factors –​ speed and precision, which need to be combined to achieve a competitive advantage. Yet, the RBV and literature on first-​mover advantage (Lieberman & Montgomery, 1998; Szymanski, Troy, & Bharadwaj, 1995) highlight the advantages of entry speed in achieving superior performance over rivals. However, in a fast-​changing and highly uncertain environment, the first-​mover advantage is no longer sufficient to sustain advantages in the long run. The DCV and literature on agility have emerged to address the importance of response speed in coping with a fast-​changing and volatile market but have missed explaining the importance of precision. 185

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For the concept of agility or agile capability, there is no widely accepted definition in the literature (Almahamid, Awwad, & McAdams, 2010). The concept of agility was initially introduced by a group of researchers at the Iacocca Institute, Lehigh University, in the early 1990s to describe the agile manufacturing paradigm, which was then recommended for the United States (US) to regain its leading role in manufacturing (Youssef, 1994). Youssef emphasized the speed of response or flexibility, in particular, for agile manufacturing, instead of just the speed of doing things. Subsequent studies provided various examinations of ‘agility,’ such as agile competition (Goldman, Nagel, & Preiss, 1995), agile supply chain management (Dove, 1996), agile market adaptation (Fliedner & Vokurka, 1997), and agile organization (Sharifi & Zhang, 1999). These studies, however, all emphasized the strategic aspect of speed, i.e., the ability of firms to cope with dramatic changes in the business environment and exploit the opportunities to survive and prosper from the competitive environment. Ganguly, Nilchiani, and Farr (2009) broadly defined the agility concept to address not only the strategic but also the operational perspective of agility and explain how firms can be agile in terms of managing capabilities, resources and business processes. Based on previous literature on speed, this study defines speed by covering three aspects: entry, response and process speed. The third aspect, process speed, is, however, often neglected in the extant literature. It is important to note that speed needs to be accompanied by precision to ensure customer satisfaction. The importance of precision has been extensively discussed in the quality management literature, which refers to integrating a set of management practices (e.g., Total Quality Management, Six Sigma, Toyota Production System, Lean Manufacturing, and ISO 9001) to improve business performance, such as productivity and revenue gains (Deming, 1982; Garvin, 1984). Western approaches to precision emphasize quality improvement through automation and a reduction in human errors, whereas the Japanese approach to precision addresses process techniques accompanied by the human touch (Moon, 2016). The Japanese approach thus emphasizes the important role of both machines and humans in achieving a higher level of precision. Existing studies often discuss the importance of speed and precision separately, whereas Moon incorporated the two aspects into the concept of agility and emphasized their complementary relationship. Jackson and Johansson (2003) suggested that speed should not be the goal in itself but should serve to maintain competitiveness in the market. Therefore, firms need to maintain their speed advantage if precision is ensured rather than compromising it to achieve a certain speed.

Benchmarking: Learning and Best Practices for Efficient Catch-​Up Benchmarking refers to the process of searching for an industry’s best practices that lead to superior performance (Camp, 1989; Moffett, Anderson-​Gillespie, & McAdam, 2008). Contrary to the trad­­ itional view that benchmarking is merely a practice of imitation, some studies, such as Massa and Testa (2004), suggest that benchmarking enhances the ability of firms to both learn and create new knowledge. Schnaars (1994) categorized imitation into two types: duplicative imitation, such as counterfeits and knockoffs, and creative imitation, such as market adaptations and technological leapfrogging. Therefore, benchmarking should be seen as more than simply imitating or being a ‘copycat’; it also involves innovation. Accordingly, Moon (2016) suggests two elements that com­ prise the factor of benchmarking: learning and best practice. This involves learning the existing best practices from industrial leaders, which can lead to the creation of a new set of best practices. Benchmarking is often understated by scholars who have overemphasized the importance of innovation in creating and sustaining competitive advantages. Porter’s concept of a differentiation strategy (Porter, 1980, 1985), along with the RBV and DCV, which are often chosen as the 186

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theoretical background for innovation studies, highlights the importance of possessing unique and inimitable resources or capabilities over rivals. However, such an approach is not always feasible for all firms, especially for latecomers that lack superior resources for such activities. In fact, firms do not have to establish their competitive advantage for all necessary components if they can acquire some of them from the open market. Moreover, unique resources such as state-​of-​the-​art technology are not always in demand nor are they the most commercially viable option for creating higher consumer value (Moon, 2016). This implies that it might be safer and more efficient to first learn the best practices from leading firms to either catch up with them or shift toward a new paradigm. In strategic management studies, learning is often discussed within the literature on absorptive capacity, and the two terms are often used interchangeably (Sun & Anderson, 2010). Absorptive capacity is defined by Cohen and Levinthal (1990: 128) as ‘an ability to recognize the value of new information, assimilate it, and apply it to commercial ends.’ In this regard, it addresses the ability to exploit and internalize outside knowledge and is a critical component of innovative capabilities. Yet, Cohen and Levinthal also emphasized that prior knowledge, such as basic skills and shared language, is crucial in conferring such absorptive capacity. Therefore, a firm’s creation of new best practices depends on its learning capability or absorptive capacity. The difference between existing and new best practices defines the degree of innovation, either as incremental or disruptive. Existing studies often devalue incremental innovation or improvement, respecting only disruptive innovation. However, innovation often begins with learning or imitation. To be more specific, Moon (2016) suggested three processes to achieve successful benchmarking: (1) imitate, (2) improve and (3) innovate.

Convergence: Mixing Synergistically to Create New Advantages Convergence is composed of two sub-​factors: mixing and synergy creation. However, traditional scholars have often emphasized the benefits of specialization or diversification into related industries. Porter (1996: 48) introduced the concept of ‘fit,’ stating that ‘positions built on systems of activities are far more sustainable than those built on individual activities.’ This is because ‘fit’ locks out imitators by creating a chain of interlocked activities. He warned that the growth imperative could be dangerous, as it might reduce fit and thus ultimately undermine competitive advantage. With regard to the areas of diversification, existing studies generally argue that it is more effective and less risky for firms from advanced countries to diversify into related industries, given the well-​developed nature of these sectors (Markham, 1973; Montgomery, 1994). By extending their competitive advantages into related markets, firms can raise entry barriers and sustain their market positions. However, firms can also be profitable by diversifying into unrelated industries, as this facilitates the reduction of transaction costs amidst the risk of high market failure, which is common in developing economies (Khanna & Palepu, 1997). Despite these possible approaches, a mixing strategy alone will not suffice to distinguish between success and failure among firms. For instance, during the 1998 Asian financial crisis, it was unclear which chaebols would succeed or fail. A successful mixing or diversification strategy requires the creation of synergy among intra-​or interfirm activities. Zhou (2011) argued that firms will stop diversifying when they can no longer gain synergies. Markides and Williamson (1996) also emphasized that synergistic mixing can enhance firms’ cost and differentiation advantages by better accessing and exploiting strategic and complementary assets. Moon (2016) further pointed out, with evidence from the ecosystem strategy, that firms do not need to limit themselves to either 187

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related or unrelated diversification. The combination of related and unrelated sectors in a manner that maximizes synergies from the interactions of these sectors is the core of the convergence strategy.

Dedication: Diligence and Goal Orientation for a Strong Commitment Existing studies have focused more on inspiration and creativity rather than perspiration and hard work (e.g., Krugman, 1994). On the other hand, employees’ degree of involvement and willing­ ness to commit positively can also affect firm productivity and business outcomes (Markos & Sridevi, 2010). Dedication has been increasingly recognized as a critical element toward competi­ tive advantage in the studies on employee engagement. Regarding this, there has been no single or generally accepted definition of employee engagement in the literature (Markos & Sridevi, 2010; Shuck & Wollard, 2010). Kahn (1990) was the first to mention employee engagement in the aca­­ demic literature and defined personal engagement as the ‘harnessing of organizational members’ selves to their work roles; in engagement, people employ and express themselves physically, cognitively, and emotionally during role performance’ (p. 694). Kahn’s work is foundational, and many contemporary studies build from his research. Harter, Schmidt, and Hayes (2002), another influential work, added the aspect of an individual’s satisfaction to understand the concept of employee engagement and suggested the linkage between employee engagement and firm profits. Wellins and Concelman (2005) argued that employee engagement is a driving force that inspires employees to advance their performance and influences the degree of job satisfaction among employees. Alfes, Truss, Soane, Rees, and Gatenby (2010) explained that employee engagement will play a positive role in manifesting through enthusiastic contributions of intellectual energy, attitudes of optimism and evidence of constructive relationship with others. Ncube and Jerie (2012) argued that engaged employees will be more likely to be loyal and provide extra commitments to the firm. Therefore, although employee engagement is a personal decision, it affects the organizational-​level performance and is also influenced by various factors related to organizational culture and leadership, in particular (Babakus, Yavas, Karatepe, & Avci, 2003; Moon, 2016). Many studies have contributed to examine both external (e.g., supervi­­ sion, incentives, and working conditions) and internal factors (e.g., training, career development) that help improve employee engagement. Therefore, in addition to the initial intellectual level of employees, dedication can contribute to motivating employees to work harder, thereby improving both quantity and quality of work. The factor of dedication is divided into two elements –​ diligence and goal-​orientation. If employees work diligently under an incompetent leader, the firm will be less likely to undergo positive development. The two sub-​factors are complementary and reinforcing with each other, and thus they need to be combined to strengthen both individual and organizational performance. Many studies have argued that pursuing challenging goals can lead firms to better performance (Lee, Tan, & Javalgi, 2010). Due to the higher level of market and firm failure in developing coun­ tries, effective business leadership is very crucial in mobilizing and allocating limited resources as well as building up competitive advantage (Cho, 1994; Cho & Moon, 2013; Nasomboon, 2014). Business leadership is thus particularly important in setting a clear and consistent vision for the future that will enhance corporate development. They should devote maximum effort to realize the goals and inspire employees to do the same. In doing so, such leadership can positively influence followers by increasing employee engagement toward achieving the company’s goals. The ABCD approach is, in fact, more comprehensive than other theories. As shown in Table 8.2, the ABCD approach covers most of the established and emerging theories. 188

The Strategy Behind the Global Success of Korean Firms Table 8.2 The ABCD model and the theoretical background

Agility Speed

Precision

Benchmarking Learning Best practice Convergence Mixing

Synergy creation

Established theories

Emerging theories

-​First-​mover advantage or entry speed (RBV and first-​mover literature) -​Responsive speed (DCV and agility literature) -​Automation (from labour to capital-​ intensive transition) (quality management literature)

Process or catch-​up speed (economies of speed) Process techniques with human touch (e.g., Toyota Production System, Lean Manufacturing)

Understated by the existing studies as they focus more on innovation Disruptive innovation (innovation studies)

Absorptive capacity (economies of learning) Commercial best practice (e.g., Kaizan, creative imitation)

Understated by the existing studies as they focus on specialization capability (economies of scale) Related diversification by extending the core competence to other areas

Combination capability (economies of diversity)

Dedication Diligence

Inspiration

Goal orientation

Develop unique or inimitable resources

Creating core competence through related and unrelated diversification Perspiration (economies of diligence) Continued growth after catch-​up

Source: This table extends from Table 5.1 in Moon (2016).

The ABCD Approach to Explaining the Global Success of Korean Firms This section illustrates some exemplary success stories of Korean firms in the global market by adopting the ABCD perspective. Although these successful cases can be well explained by all four elements of the ABCD model, in this chapter, we selected the most relevant element that can best illustrate the success of Korean firms. This can also help us understand the limitations of established theories and correct any misunderstandings regarding the fundamental factors behind these well-​known successful cases.

Agility: Hyundai’s Competitive Advantage in the Construction Industry Out of ten bidding companies, including many leading Western firms, Hyundai Construction successfully won a billion-​dollar contract to build a harbor for the Jubail industrial port in Saudi Arabia (Jeong, 2018). This figure was equivalent to half of Korea’s national budget (BBC, 2001), but the bid price was almost US$500 million less than the second lowest bid by a German firm (Moon, 1986). Cheap labour costs alone cannot explain how Hyundai won the project at an extremely low bidding price as the other bidders could also hire cheaper labour from countries such as Egypt, Ethiopia or Sri Lanka. What was more important and fundamental was the Korean firm’s ability to complete the project on a quick schedule while maintaining a satisfactory level of precision. Hyundai hired Korean workers who were much 189

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more productive than their counterparts, and all construction materials, including concrete slabs, were manufactured at Hyundai’s Ulsan shipyard and transported to the Persian Gulf using large barges. The completion period was 44 months, but Hyundai promised a reduction in time by eight months without any conditions (Kim, 2012). Thanks to the shortened construc­ tion period, Hyundai could significantly reduce the construction costs. The agile capability has contributed to Korean construction firms winning many other projects in the Middle East during the 1970s and 1980s.

Benchmarking: Samsung’s Emergence as a Global Leader in the Smartphone Business The benchmarking strategy can help firms gain more competitiveness through effective learning and by adding a set of new best practices instead of relying solely on in-​house development strategies. Samsung Electronics, as a latecomer, launched its first successful Galaxy smartphone in June 2009, which was similar to the iPhone and featured the Android operating system. Over the next couple of years, it quickly caught up with Apple’s market share, and in 2011, Samsung’s market share exceeded Apple’s in the third quarter after launching the S2 model. Although Samsung was sued by Apple for patent infringement and lost this lawsuit in a US court, it has maintained a dominant market share in the smartphone sector up to the 2020s. Moreover, despite starting with a similar look to the iPhone in 2009, Samsung has continuously sought to upgrade and introduce new features to the point that Samsung Galaxy smartphones look very different from iPhones. Samsung has made extraordinary progress, from upgrades such as water resistance and fitness tracking to massive improvements in the quality of its camera, display, and battery power. In many features, such as display and battery, Samsung has demonstrated even higher performance than the iPhone. This has motivated Apple to learn from Samsung’s best practices, such as enlarging the screen size. Initially, Samsung’s copycat strategy was strongly criticized by the media, who stated that ‘copying and clever upgrading are no longer viable… Samsung must reinvent itself as a first-​mover’ (New York Times, 2012). However, in facing a fast-​changing market, had Samsung insisted on in-​house development without learning the best practices of Apple, it would never have been possible for it to overtake Apple and achieve its current success. Moreover, Samsung’s efforts in providing better products beyond imitation have also highlighted that it is not about the most advanced technology but rather about the best commercial practices that can deliver higher values to customers.

Convergence: Samsung’s Successful Entry and Emergence as a Global Semiconductor Maker Another case of Samsung’s success has been its creation of advantages in the semiconductor sector. The company’s revenue grew significantly by 28 percent in 2021, achieving the No. 1 position in this sector by overtaking Intel in terms of market share (Korea JoongAng Daily, 2022). This was unthinkable in the mid-​1970s when Samsung first entered the semiconductor industry. At that time, the global semiconductor market was dominated by leading firms from the US and Japan. Most experts, both inside and outside Korea, expressed negative forecasts regarding Samsung’s decision and predicted its imminent bankruptcy due to its lack of advanced technologies compared to other firms. In addition to learning technologies from leading firms or acquiring them through 190

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mergers and acquisitions, the convergence factor has contributed significantly to supporting the development of semiconductors over a long period. Until the mid-​1970s, Samsung mainly earned its revenues from labour-​intensive and low-​ technology industries such as food, textiles and home appliances (Chang, 2003). Although diver­ sification into unrelated sectors such as semiconductors can be risky and very costly, Samsung continued to invest in that sector despite continuous deficits for the initial 13 years, using the revenues earned from other profitable sectors such as textiles and home appliances. Without a convergence strategy, Samsung would not have been able to develop such a promising business and achieve its current success. Furthermore, although diversification into the semiconductor sector may be considered unrelated diversification based on industrial classification, for Samsung, it is highly strategic and also related diversification. Hence, the relevance of diversification will be highly influenced by the firm’s strategic aspect and capability to make them related, leveraging synergies among different sectors.

Dedication: POSCO’s Work Ethics and Strong Motivation for Success Like Samsung’s entry into the semiconductor sector, POSCO’s entry into the steel industry was met with skepticism. Upon its establishment in the late 1960s, POSCO turned to the International Bank for Reconstruction and Development (IBRD) for financial assistance to build its steel mill. However, the IBRD claimed it was too early for Korea to enter the industry and rejected POSCO’s proposal (Rhyu & Lew, 2011). Undaunted, the Korean government allowed POSCO to use the US$100 million from the Japanese war reparations fund that was originally earmarked for agricultural development (Moon, 2016). In contrast to the skeptics who predicted severe financial deficits in the short term, POSCO achieved profits within six months and further surprised the world by surpassing Brazil’s annual production volume in the 1980s, which had received loans from the IBRD and was predicted to have positive investment returns. POSCO’s success would not have been possible without its employees’ total commitment to work under CEO Park Tae-​jun’s strong leadership. This is particularly evident when considering that the construction site for the steel mill was previously a barren sand field lacking any related or supporting infrastructure. With a strong determination to complete the mission and an action-​ oriented mindset, Park set a good example and spent most of his time on-​site. POSCO’s employees followed his footsteps and worked tirelessly, abandoning all leisure time and focusing only on plant construction. The former CEO of Nippon Steel was also impressed by the passion and diligence of POSCO employees and was surprised by Park’s abilities (Moon, 2016). There is even a famous quote by Park: ‘If we fail, we must turn to our right and drown ourselves in the Young-​ il Gulf’ (DongA Ilbo, 2019). This quote expresses Park’s strong dedication and sense of duty, emphasizing that failure was not an option. The efficacy of the four approaches outlined by the ABCD model is demonstrated not only in the success of prominent firms in traditional manufacturing industries but also in contemporary cases such as the growth strategies employed by Korean cultural firms (Kang, Yin, Kim, & Moon, 2022; Moon & Lee, 2023) and the successful international expansion of Korean global startups in the digital sectors (Yin, Moon, & Lee, 2019). While Korean cultural firms and startups may not possess the diverse resources highlighted in established theories compared to their Western counterparts, they have been able to gain competitive advantages and expand their global market influence by utilizing the ABCD factors.

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Discussion In order to clarify the theoretical contribution, this section discusses the circumstances under which the ABCD model can provide valuable explanatory insights and practical implications for firms. Specifically, we will explore how the four factors (what) contribute to the development and maintenance of competitive advantages, not only for latecomers but also for established firms (who). Additionally, we will provide a detailed analysis of the underlying logic and evidence (why) to support our arguments.

Implications for Latecomers By drawing on the existing literature on the ABCD model, we redefined its four elements and highlighted the key aspects that contribute to the creation of a firm’s competitive advantage, even when the firm initially does not have any superior or VRIN resources. The ABCD model is a helpful framework for understanding the varying performance of latecomers with homogeneous resources compared to leading firms. Regarding agility, the literature has mainly emphasized response and entry speed to become the first mover or keep up with environmental changes. However, we argue that agility will contribute to higher value creation when it is based on speed (response, entry and process) along with precision, as demonstrated in the case of Korean construction firms in the Middle East during the 1970s and 1980s. With agility, latecomers can quickly recognize and seize market opportunities and avoid direct competition from incumbents. Benchmarking needs to go beyond mere imitation. Instead, firms should focus on learning commercial best practices and integrating meaningful features, or even creating new best practices, to achieve new competitive advantages. It is important to note that the best practices are not necessarily the most advanced or state-​of-​the-​art scientific technologies, but rather the commercial best practices that can deliver higher value for customers, as exemplified by Samsung’s smartphone success. When it comes to convergence, the existing literature has mostly focused on diversification –​ whether related or unrelated –​ and its relevance to competitive advantages. However, we have taken a step further than this simple distinction. Specifically, we examine how firms strategically relate seemingly unrelated industries and create new advantages by maximizing synergies among both related and unrelated industries. This strategic aspect of convergence has been demonstrated in Samsung’s development of its semiconductor sector. Lastly, in terms of dedication, drawing upon the employee engagement literature, this factor particularly emphasizes the role of leadership in setting challenging goals and examples. This encourages employees to follow in these footsteps and work tirelessly toward the same goal. Such internal consistency and collaboration within the firm have contributed to Korean firms overcoming one challenge after another. In this respect, the goals among Korean firms are not merely driven by their current status but often go beyond their resource pool and capabilities. Such behaviour is often neglected by conventional theories such as ISV, RBV and DCV, which emphasize the importance of path dependence. Latecomers could also differ in their founding conditions with regards to either firm-​ or environment-​specific factors (Boeker, 1989; Geroski, Mata, & Portugal, 2010; Swaminathan, 1996). The ABCD model can then be useful in explaining firms’ divergent performances despite their similar founding conditions. The success or failure of Korean firms over the past few decades can be attributed to one or more of the four factors in the ABCD model. For instance, the convergence factor can aptly account for the differing performances of Hyundai Motors and Daewoo 192

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Motors, which were the top two automakers in Korea’s auto market until the late 1990s. Aiming to become a conglomerate similar to Samsung or LG, Daewoo pursued an aggressive expansion strategy across various regions and industries in the 1980s and 1990s. However, poor operations and lack of synergies between its various subsidiaries (Kim, 2007; Sull, 2015) and sectors (Park & Kim, 2006) failed to deliver the desired results, leading to poor financial performance and eventu­ ally the collapse of the entire Daewoo Group. The ABCD model can also be useful in explaining the underperformance of firms despite having a superior resource advantage, which could be due to the failure to properly implement the factors of the ABCD model. Take the example of Daewoo Motors (currently GM Korea) again. In 2001, GM acquired Daewoo Motors and rebranded it as GM Korea. However, despite GM’s global competitive advantages, GM Korea’s market share in Korea’s auto market has remained significantly lower. This could be due to strategic mistakes such as slow investment in research and development (R&D), resulting in outdated production facilities (A) (The Korea Herald, 2022), a lack of new model releases (B) (Yonhap News, 2017), a focus on serving the global market rather than converging the global and the Korean markets (C) (Korea JoongAng Daily, 2012), and limited motivation of its employees compared to its Korean counterparts, i.e., Hyundai and Kia (D) (Financial Times, 2019). Therefore, it is essential to consider diverse factors to explain the underperformance of leading firms compared to their competitors. This also highlights that VRIN resources alone do not guarantee market success.

Implications for Leading Firms The ABCD model not only explains the varying performances of latecomers in the catch-​up phase but also proves useful for leading firms to overcome challenges and move forward when they face one or more of the following conditions. The first condition is when a business sector is fast-​ changing. The lifespan of firms’ competitive advantage has become less durable and shortened than before. According to Sheetz (2017), over the past 50 years, the average length of a firm staying on the list of Fortune 500 has shortened from 60 years to 18 years. Similarly, BCG (2015) argues that the lifespan of a business model has reduced from 15 to less than 5 years. Compared to a stable industry, leading firms competing in a high-​velocity environment will need agility, in particular (Eisenhardt, 1989). In such an environment, fast-​changing technology promotes the rapid introduction of new product features and fast-​growing market demand (Low & Johnston, 2009), and latecomers tend to catch up at a faster speed (Giachetti & March, 2010). Hence, the factor of ‘agility’ becomes crucial not only to sustain their existing advantages but also to move forward. The second condition is when strong commercial best practices exist. In a volatile and uncertain environment, firms have become more reliant on newly created external advantages. Moreover, these strategic assets, which used to be durable within a firm, are now becoming available externally in the market. Here, firms adopt crowdsourced product development or outsource certain value chain activities for cost efficiency and quality enhancement (Lanteri, 2021; Taneja & Maney, 2018). Therefore, in a business sector where commercial best practices are prevalent, even if the leading firms have the capability to provide better standards, it would often be more effective for them to learn or adopt such industry standards instead of creating their own. This is because technology leaders are not always guaranteed success in the market; instead, those who can provide higher commercial values to consumers are more likely to succeed (Moon & Yin, 2020a). Therefore, benchmarking, the second factor, becomes critical for leading firms to sustain their position in the market, as evidenced by the failures of Sony versus Apple in the music player sector and Nokia versus Apple in the smartphone business. 193

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The third condition is when the firm has multiple competences. The concept of core competence was first introduced by Prahalad and Hamel (1990), focusing on production skills and technological capabilities. Over the past decades, this concept has evolved into a multifaceted theoretical concept (Schreyögg & Geiger, 2007), encompassing areas such as customer rela­ tionship competence (Ljungquist, 2013), marketing, technological and integrative competencies (Wang, Lo, & Yang, 2004), strategic platforms (Unland & Kleiner, 1996), and strategy (Clark, 2000). However, some studies (Mascarenhas, Baveja, & Jamil, 1998; Moon & Yin, 2020a) have suggested that multiple competencies are more difficult for competitors to imitate than a single type of competence and allow for an interactive effect that is greater than just the combination of individual effects. In this case, firms can sell or acquire various competences in the market. This open innovation strategy not only enhances their competitiveness but also allows them to be more flexible in managing their multiple competences efficiently. Lastly, the fourth condition is when there is technological or market disruption. When leading firms face a crossroad, effective leadership becomes even more crucial in directing the organization and employees toward a common goal. For instance, with the introduction of ChatGPT by OpenAI in November 2022, Google’s monopoly has faced a significant risk for the first time in decades. Conversely, given Microsoft’s past experiences, such as losing against Apple in the smartphone industry and missing out on the popularity of Google’s search engine, the company views this as an opportunity to win the next paradigm shift. Therefore, leading tech firms require full dedication to address market disruptions that can determine their future success. The contrasting performance of Korea’s two traditional leading mobile phone makers, Samsung Electronics and LG, can also be explained by the ABCD model. Both companies were leading players in the 2G mobile phone market, but their different strategic responses to the introduction of the smartphone by Apple resulted in distinct performances between Samsung and LG. LG entered the smartphone market too late and struggled to scale up amidst high competition among rivals (Financial Times, 2021). The company also adopted different approaches to product design and innovation, resulting in rushed prototypes that failed to satisfy broader market demand (Maiorca, 2021). Additionally, LG failed to achieve multi-​core competences, such as advanced displays and memory chips (Nikkei Asia, 2021), and lacked full commitment and dedication to the smartphone sector (Maiorca, 2021), contributing to its poor performance compared to Samsung.

Conclusion Although Korean firms lacked unique competitive resources often addressed in established theories such as RBV for creating competitive advantages, they could overcome the difficulties and disadvantages through the ABCD model. This helped them strengthen their competitive advantages, allowing them to compete with incumbents. When Korean firms emerged as global leaders, it was often seen as a miracle, considering their humble origins. However, if this is simply defined as a miracle, it would offer no insights or lessons for others to learn. The ABCD model can thus help us codify the process and mechanisms by which Korean firms could overcome disadvantages and create new advantages. When the elements of ABCDs are utilized together, they will lead firms to a higher level of competitiveness, although firms do not have to develop them simultaneously. It should be noted, though, that if the two sub-​factors are both at a higher level, the factor of competitiveness will be stronger, whereas if only one sub-​factor is at a high level, then the overall factor of competitiveness will not be as great. Existing studies have often argued for different sets of competitive advantages that are specific to developing country firms. However, the fundamental success factors 194

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of Korean firms are the ABCDs, which go beyond traditional explanations such as cheap labour and export promotion. Yet, the four elements of the ABCD model are not specific to latecomers for catching up with industrial leaders but can also be relevant to leading firms to complement their disadvantages and sustain their advantages in the age of the rapidly changing business environment, such as the Fourth Industrial Revolution. Since the introduction of the ABCD model, there have been both qualitative (Moon, Lee, & Yin, 2015; Moon & Lee, 2023; Moon & Yin, 2020b; Yin, Moon, & Lee, 2019) and quantita­­­­ tive studies (Kang, Yin, Kim, & Moon, 2022; Moon & Yin, 2021) that have applied the model to explain the sources of competitive advantages in different contexts, such as Indian business groups like Tata, Korean startups, and the Chinese film industry, as well as the host country advantage in attracting foreign direct investment. Yet, these studies commonly aim to explain the competitive advantage of latecomers of emerging country firms and how they gain competitive advantages through the ABCD model. Future studies can empirically test how the ABCD model is useful for incumbents or leading firms in upgrading their existing advantages through developing or adopting new technologies, such as artificial intelligence. We can also further extend the mechanism of shaping competitiveness for each element and interactions among the four elements of the ABCD model.

Note 1 This chapter has been partially abstracted and extended with revisions and enhancements based on Moon (2016).

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9 CATCH-​U P STRATEGIES OF KOREA’S BIG IT CORPORATIONS Jae-​Yong Choung and Hye-​Ran Hwang

Introduction In the last five decades, as a latecomer, Korea has successfully achieved production efficiency and technological leadership compared to other countries. The former denotes taking advantage of producing goods at the lowest possible cost using input and process elements while the later describes taking an upper position in producing products with technological assets such as patents, standards, etc. For example, Korea surpassed the catch-​up learning stage and attained leading positions in several sectors where its core competencies reside, such as memory semiconductors, display, mobile phones, shipbuilding and automobiles, which are tech-​hardware-​based mass-​ produced products. Moreover, they recently attained a competitive position in producing more sophisticated, capital-​intensive and high entry barrier products known as complex product systems (CoPS), which are distinct from mass-​produced products. After rapidly catching-​up in telecommunications systems and the military and nuclear industries, Korea undertook the world’s first commercialization of wireless CDMA communication service and the first development of integrated-​type nuclear reactors. It also became the fourth country worldwide to develop a high-​ speed train network and the leading country to export supersonic advanced trainers and light combat aircraft and also large-​scale nuclear reactors. In IT-​related industries, Korean firms performed outstandingly in areas such as DRAM, TFT–​ LCD, F-​memory, and mobile handsets. For example, in 2019 Samsung Display and LG Display together took a global market share of 43% in large-​scale displays and a share of over 98% in OLEDs (KDIA, 2020). Moreover, in 2020 Samsung Electronics maintained the number one spot and SK Hynix ranked third in terms of sales, accounting for 38% and 20% of the memory product market, respectively (KSIA, 2022). Alongside this, Korea’s internet usage is 99% while 98% of adults own a smartphone in 2021 (Wike et al., 2022). Two academic perspectives are relevant for understanding Korea’s innovation system. First, acceleration of the economic growth of Korea and significant catching-​up in technology development have stimulated many attempts to explain the underlying mechanisms and strategic formulations. Second, owing to this, as Korean innovation actors have a possibility to accumulate their own technological capabilities, researchers are interested in whether Korea can sustain a competitive advantage with continuously creating frontier products as a post-​catch-​up strategy. 200

DOI: 10.4324/9781003180920-11

Catch-up Strategies of Korea’s Big IT Corporations

Working from a neo-​Schumpeterian perspective, this chapter focuses on the successful learning mechanisms of the IT industry in Korea from historical perspectives using theoretical and empirical foundations while also exploring the business strategies of Korean companies. This study is designed to achieve three objectives: (1) analyze whether stylized patterns exist (such as technology cycle, core technologies) of technological catch-​up strategies using case studies of DRAM, LCD and telecommunication equipment; (2) highlight the commonalities of technological knowledge (such as modularity versus integral product architecture, technological linkages) and organizational arrangement such as vertical versus horizontal, institutional affinity; and (3) provide a new understanding of how leading business firms are formulating new organizational innovation to sustain international competitiveness (such as new competencies and knowledge sourcing). The proposed research will address the following questions: (1) What are distinct patterns and strategies in building technological capabilities and how have upgrading (post-​catch-​ up) strategies evolved over time among leading IT-​related business groups in Korea. (2) What are the most important challenges or innovative capabilities (including organizational and management capabilities) required for upgrading. In doing so, this study attempts to approach this subject from the perspective of neo-​ Schumpeterian technological innovation rather than a neoclassical approach. In particular, the research is approached from the perspective of technology/​product characteristics and the organizational arrangement of business firms. In the organizational aspect, the analysis is conducted focusing on the institutional aspect in organizational innovation and marketing innovation, and in the technical/​products aspect, the analysis focuses on modular and integrated type (Ulrich, 1995) and close/​open product architecture (Fujimoto, 2007), and mass products and complex product system (Hobday, 1998).1 In this chapter, we argue there are certain commonalities in the catch-​up process as well as limits to upgrading towards post-​catch-​up and therefore believe that studying IT company’s catch-​ up and upgrading provides insights into catch-​up and post-​catch-​up. This chapter is organized as follows: Section 2 ‘Literature on Latecomer Catch-​Up’ presents a literature review of technology catch-​up and Section 3 ‘Big IT Corporations’ Catch-​Up Strategies’ describes three stylized catch-​ up innovation activities. Section 4 ‘Discussion’ draws policy implications and conclusions from the ‘post-​catch-​up’ discussions.

Literature on latecomer catch-​up Technological capability In recent years, there have been theoretical and empirical contributions related to catch-​up at the product, firm and industry levels. Generally speaking, latecomer’s catch-​up from a neo-​ Schumpeterian perspective resides in a capability approach, which sharply contrasts with the neo-​ classical approach where catch-​up is driven by accumulation-​investment in physical and human capital (production function paradigm) (Nelson & Pack, 1999). On the other hand, the former approach stresses (technological) learning and assimilation are critical elements for capability building and accumulation. Namely, for a latecomer attaining technology catch-​up and accumulation of capabilities requires substantial effort (Bell, 1984; Katz, 1987; Dalman et al., 1987; Lall, 1987; Bell & Pavitt, 1993), and an expansion of the capability literature has been suggested (for example, see Dutrénit, 2000; Bell, 2009; Bell & Figueiredo, 2012). More precisely, technological capability refers to the ability to make effective use of technological knowledge (Lall, 1992; Kim, 1997) and consists of skills, knowledge, experience, and 201

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institutional structures and linkages (Bell & Pavitt, 1993). It is suggested that latecomer firms must acquire three capabilities –​ production, investment and innovation (Dahlman et al., 1987) –​and that the technological capabilities to generate and manage technical change can be differentiated with respect to level. The level can be basic, intermediate or advanced and holds either a primary or a support function (Lall, 1992). Moreover, as for the taxonomy, technological capabilities can be distinguished into two criteria of production capability and innovation capabilities. Production capabilities are described as the capability to carry on producing goods and services with given product technology, and to use and operate given forms of process technology in existing organizational configurations. Innovation capabilities are meanwhile described as the capability to create new configurations of product and process technology and to implement changes and improvements to technologies already in use (Bell, 2009).

Non-​technological capabilities Studies of innovations in organizations include generation and adoption of technological and non-​ technological innovations and the understanding of innovation capabilities stems from the traditional wisdom suggesting that technological and organizational innovations are intertwined and co-​evolve. It is also suggested that non-​technological innovation may contribute significantly to a firm’s performance (Damanpour, 2014) and has been progressed in many ways of describing non-​ technological innovation such as from neo-​Schumpeterian to management studies. The former is based on conventional innovation studies where non-​technological (R&D) or non-​R&D innovation are the domain of product and process innovation: organizational (implementation of innovative organizational concepts: structural vs. procedural; intra vs. interorganizational; business processes or organizational structures) and marketing (OECD, 2005). Moreover, non-​technological innov­ ation entails or accompanies design, marketing, administrative, logistics and financial activities, in association with the accumulation of technological capabilities for production and innovation activities by industrial firms (Bell, 2009; Bell & Figueiredo, 2012). The term organization innovation (see Alves et al., 2018) refers to the studies of innovation in an organization, including both business and public organizations, and examines what external and internal conditions influence innovation, how an organization manages the innovation process, and what ways innovation changes organizational conduct and outcomes (Damanpour, 1991). The term administrative innovation refers to the creation of a new organization design that better supports the creation, production and delivery of services or products (Daft, 1978; Kimberly & Evanisko, 1981, Damanpour & Evan, 1984) but does not include innovations in, for instance, marketing or operations’ management (Birkinshaw et al., 2008). The conceptual differentiation of technological and non-​technological innovation comes in part from the definition proposed in the third edition of the Oslo Manual (OECD, 2005, 2018), which identifies process and product innovation (goods or services) as ‘technological innovation’ and marketing or organizational innovation as ‘non-​ technological innovations.’ Moreover, marketing innovation is defined as ‘the implementation of a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing’ and organizational innovation as ‘the implementation of a new organizational method in business practices of the company, workplace organization or external relations.’ In this study, endeavour to investigate non-​technological innovation, which includes marketing innovations (Barañano, 2003; OECD, 2005), organizational innovation, and administrative innovation (Damanpour, 1987), as well as related challenges.

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Although considerable research has been devoted to understanding/​measuring capabilities, rather less attention has been paid to understanding (non-​)technological capabilities of latecomer firms when they move from production capabilities to innovation capabilities.

Modular and integral product architecture Recently, there have been attempts to understand catch-​up strategies from product architecture and characteristics. Product architecture can be defined as the correlation and interaction of individual functions constituting the product’s performance (Ulrich, 1995) and the technical characteristics of the design structure have a large influence on the innovation process and production system structure (Chen & Liu, 2005). Moreover, there may be various classification methods for product design structures, but they can be broadly divided into integral and modular depending on the relationship between functions and parts. More specifically, an integrated design structure has a complex mapping structure between functional elements and physical parts, and is characterized by having a closely coupled interface between the parts. In other words, the degree of integration between parts is high and interdependence is also high. Such technical characteristics require close coordination between the design and manufacturing departments within the company or from the point of view of the user–​ supplier relationship (for example, automobiles, shipbuilding, DRAM and TFT–​LCD). While the modular design structure has a one-​to-​one mapping between functional elements and physical parts, it consists of relatively few parts and it is easy to pursue diversity by changing the building blocks. Namely, the interface according to the industry standard is determined, and it can be seen that the relationship between parts is loosely de-​coupled according to the open characteristic. In other words, it is possible to change functions and product generations only by changing a single component. These technical characteristics mean that design and manufacturing activities can be separated, and specialization and division of labour are possible in terms of the value chain. Product architecture can be classified into integrated and modular types, and Japan has a competitive edge in closed integrated products (Fujimoto, 2005). From this point of view, if we analyze technical characteristics of products and industries, it is possible to gain a deeper understating of the innovation activities of latecomers as well as to incorporate product diversity and limits to product upgrading.

Mass products and complex product system (CoPs) In the process of industrialization and technology development, some latecomers, including Japan, have pursued advanced countries in the field of mass-​produced products such as automobiles, semiconductors and home appliances. By effectively acquiring, assimilating and improving foreign technologies and making them their own, these countries were able to successfully enter fields previously dominated by advanced countries and gain a competitive advantage. However, in the case of complex system products, effective technology learning comparable to that of mass commodity products has not been successfully achieved. The complex product system (CoPS) is different from mass-​produced goods (see Hobday, 1998; Hobday et al., 2000), and has strong characteristics of both technological and non-​technological factors, such as technology-​wise integration capabilities among many components, and a non-​technology-​wise highly politicized market. Recent literature on ensuring market success in CoPS includes the aspects of strategic, functional and project capabilities (Davis & Brady, 2000; 2016), design and integration capabilities (Hobday et al., 2005),

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strategic planning process (Dominguez et al., 2009), innovation process (Davies et al., 2009), and taxonomy-​based CoPS innovation (Acha et al., 2004). In addition, the body of literature on complex product creation by latecomers is increasing, and researchers are focusing on developing capabilities such as managerial capabilities (McKendrik, 1992); government policy and stage model (Hwang, 2000); simple to complex technology gen­­ eration (Hwang, 2000; Texier, 2000; Zhang & Igel, 2001); the role of public research institutes (Choung & Hwang, 2007); the importance of platform design (Son & Choung; 2014); system integration capabilities (Kiamehr et al., 2014); and marketing capabilities and strategy formula­ tion (Kiamehr et al., 2015). These studies on innovation of complex products for latecomers have conventionally focused on building capabilities at the firm and national levels. The above-​mentioned studies are particularly important in understanding the characteristics, building capabilities and management of CoPS. Regarding CoPS, questions pertain to whether hotspot elements arise similar to the case in advanced countries despite their differences in factor endowments. In this regard, researchers explore some difficulties that organizations encounter while growing by acquiring and using new knowledge (Hobday et al., 2005). From the existing literature presented in this section, it could identify three dimensions of catch-​up activities. Detailed studies of capability approaches argue that between internal learning and external knowledge acquisition for production capability building, project execution capabilities are the important elements for catch-​up. In terms of product and the process of innovation sequences, reversing the product life cycle between the product and process of technological improvements was the major trajectories during the catch-​up period. In other words, Korea’s catch-​up mechanisms within the product life cycle theory suggest that technological innovation evolved from a process of innovation to product innovation. In this study, a distinction is made between catch-​up of the global technological frontier that involved imitation and a phase of post-​ catch-​up with the development of new knowledge for globally leading products and the process of innovation. Finally, the role of public institutions such as public research institutes and developmental states played a major role in building large firm’s indigenous capabilities with respect to mass-​produced and complex products. However, limited information is available regarding organizational innovation that how latecomer firms organized inter-​and intrafirm relationships for product creation. Moreover, what are the technological features in producing globally leading products, and the new features of innovation activities during the transition period?

Big IT corporations’ catch-​up strategies Product architecture and organizational arrangement Generally speaking, products developed by firms provide a source of competitiveness and income. However, developing products is not always successful. Among the various factors for successful product development, this section focuses on the product architecture and organizational arrangement. From the perspective of product architecture, it is possible to shed light on the question of why a latecomer firm is successful with a certain product while the same firm fails with another product. As reported statistics have shown different market performance within semiconductor products that are produced by Korean firms. For example, Korean companies have achieved stellar performance and world-​class competitiveness in memory products while they have been less successful in system LSI (large-​scale integration) products. Despite the claims

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Catch-up Strategies of Korea’s Big IT Corporations Table 9.1 International competitiveness and leading firms by semiconductor product group (2020)

Memory products Fabless

Market share and competitiveness

Leading firms (market share)

83% of Korea’s semiconductor sales, 65% of semiconductor export 58% in world market share 2% of Korea’s semiconductor sales 1.6% in world market share

SEC (1st, 38%), SK Hynix (2nd, 20%) LX Semicon (20th, 0.8%) Silicon Mitus (64th, 0.2%)

Source: KISA (2022).

that low levels of investment in system LSI lead to lower performance, the product architecture approach may provide alternative explanations (see Table 9.1). As suggested in the theoretical review earlier, the design characteristics of product manufacturing can be broadly divided into integral and modular architectural design. Once such a view is accepted, it can divide semiconductor products as follows: memory products have a tendency towards integral architectural design while fabless products have modular architectural design. As Hwang (1998) has emphasized, memory product design has the following characteristics: (1) a major source of innovation arises from the integration process, which creates an internal knowledge creation loop centred on manufacturing capability, especially the formation of a close link between the design and production sectors; (2) in terms of interfirm relationships, one of the important innovation activities of manufacturing companies centres on developing the latest manufacturing process technology by forming close relationships between equipment suppliers and manufacturers. In explaining how a Korean memory semiconductor manufacturer caught up and generated distinctive innovation in integral-​type product architecture, it is important to understand the integration process between functional elements and components, especially in the semiconductor industry. Numerous studies have shown how Korean semiconductor firms catch-​up from various perspectives: Kim (1997) suggested a dual approach and internal competition (setting up two different task force teams in Korea and Silicon Valley) for product development; Rim et al. (1998) and others (Cho et al., 1998) have shown that most semiconductor firms relied on licensing or OEM in the early period technology development (see Figure 9.1); Choi (1996) pointed out dynamic techno management (resource exploiting capability, management integration capability, and path navigating capability); Cho et  al. (1998) emphasized the importance of early movers in building plants and entrepreneurial leadership; and from a technological learning perspective Mathews and Cho (1999) analyzed co-​evolution with combinative capabilities and functional capabilities (manufacturing, product development, efficiency improvement). By developing different organizational capabilities firms can expect positive economic outcomes and deepen their technological capabilities. As Choi (1996) emphasized, the importance of task force teams (TFTs) in general, SEC recognized the importance of internal integration in the manufacturing processes from the first stage of product development and manufacturing. The achievement of internal integration has been supported by various means, including (a) the formation of task force teams and (b) newly established departments to encourage internal integration (Hwang, 1998).

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Figure 9.1 Entry of Korean chaebol and major licensing and OEM partners in the early stages of semiconductor business. Source: Lim et al. (1998).

Moreover, there are unique organizational arrangements for intermediary activities to promote internal integration between the R&D department and production department, which include the Product Technology Department (PTD) and Production Technology Center (PTC). SEC established the PTD from the 4M DRAM development project with the role improvement of production-​related technology and the management of the whole production processes in order to achieve manufacturability of the product designs developed by the R&D department. The technological knowledge that is accumulated through improvement processes is often applied in new product development. The PTD took a major role, for example, in the development of a shrunk version of DRAM, which in turn was able to reduce the size of existing products by means of improved manufacturing technology. Moreover, the role of the Product Development Department is particularly apparent in the case of process change. Managers in the Product Technology Department are in charge of the PCCB (Process Change Control Board). The impact of any process change may be to bring about an improvement or decline in yield. Successful process changes contribute significantly to yield improvement, while unsuccessful process changes can damage yield by up to 10%, producing a major loss in total revenues. The PCCB consists of managers from the Product Technology Department, senior engineers from each process unit, and process engineers. It decides on (i) the need for process change, (ii) the method of experimenting on process changes, and (iii) the method of utilizing results of experiments. The PCCB plays a crucial role in innovation in the production processes. Through weekly meetings, the board seeks to obtain a consensus for the changing processes and discuss the problems related to the processes. The PCCB is therefore a key organizational arrangement for complementing the TFT. The PTC is the other main organizational arrangement for improving internal integration. It concentrates on coordination between the processes and encourages communication among process engineers. The main objectives of the centre include (i) balancing between the production lines that specialize in each product generation; (ii) the diffusion of know-​how and problem-​solving experiences from each process and the. production line to the other processes and production lines; and (iii) providing an educational environment for improving the understanding of processes and equipment. These two organizational 206

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arrangements are designed for coordination between R&D and production and, in the latter case, among the individual processes (Hwang, 1998). The overall conclusion to be drawn from the analysis is that SEC, as a latecomer semiconductor manufacturer, was able to gain global competitiveness aligned with integral architectural design of memory products with a business system having a vertically integrated corporate structure, investment capabilities and manufacturing capability. However, not only did Korean conglomerates fail to reproduce organizational capabilities positively in the system LSI business area but also no clear result emerged to foster system LSI business with joint efforts by conglomerates-​government to balance the memory-​driven industrial structure. Similarly, Korea’s system LSI industry has competitiveness only in some items linked to the demand of large domestic companies, such as Display Driver IC (DDI) and CMOS Image Sensor (CIS) for mobile phones. Korean fabless companies are facing growth limits due to a lack of cooperative development with domestic system integrating companies, closed production process operation by domestic foundry companies, and a lack of high value-​added IP. Partially this is due to the mismatch between the organizational characteristics of Korea’s large enterprises and the organizational characteristics required for the production of system LSI business.2

Core competence based on technological linkage Numerous comparative studies have shown that Korea’s sources of wealth come from the industrial competitiveness driven by large corporations. Since the 1990s, Korea has surpassed the catch-​ up learning stage and attained leading positions in several sectors where its core competencies reside, such as memory semiconductors, displays, mobile phones, shipbuilding and automobiles, where hardware-​based mass-​produced products are manufactured. This organization of the industrial district sharply contrasts with SME-​based Taiwan in terms of technological activities (Choung, 1998). It is often suggested that firm-​specific technological competencies of large firms are multifield and stable but limited technological verity (Patel & Pavitt, 1997). In the case of Korea’s large corporations, the business organization appears to be diversified and unrelated, but in this section it is argued that the most prominent feature through the process in terms of accumulating technological capabilities of Korean conglomerates is cross-​industry spillover and complementary assets based on core competencies. That is, a high degree of technological accumulation, in particular, in the IT industry, enabled reproduction of global competitiveness of other related IT industries. Since the 1980s, Korea has switched from a concentration on labour-​intensive products, such as textiles and low-​level ICs, to technology-​intensive products, such as semiconductors, TFT–​LCDs, and mobile handsets. In 2001, Korea was third in global market production of semiconductors, while SEC and LG became world leaders in the production of display components and LCDs, respectively. Finally, with a world first in the commercialization of CDMA technology, Korea secured an unrivalled position in the mobile phone market. Since they entered the semiconductor business, the Korean conglomerates (chaebols) swiftly caught up with the most advanced countries and have become world leaders, at least in the DRAM area, reaching 40% of market share in 2001. Among these firms, SEC performed outstandingly, ranking first in the world DRAM market and becoming the first company in the world to secure 4G DRAM, utilizing a 0.10micron design rule in 1999 (SEC, 2001). To achieve technological compe­ tence in DRAM, not only internal integration for building in-​house capabilities (as described in the previous section), but also public support, played an important role in the early stages of industrial development (Choung et al., 2006). During the period 1981–​1986, public institutions and the 207

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Figure 9.2 Commonality of manufacturing process (DRAM and TFT–​LCD). Source: KDIA (2003).

private sector (Hynix (previously Hyundai), LG, SEC) formed a consensus to develop a nationally based technology for semiconductors. The major leverage for upgrading technological capability was the cooperative technology development consortium for targeting 4M, 16M, and 64M DRAM processing technologies. This arrangement enabled Korean firms to shorten the learning period for base technologies in the early stages of development and has contributed to further enhancement of manufacturing capabilities. A similar configuration of manufacturing capabilities and development path is exhibited in the display industry. Korea is one of the world’s major CRT (cathode ray tube) manufacturers and has recently emerged as a global supplier of TFT–​LCD products, taking 45% of the world market share. TFT–​LCDs create images by changing the molecular arrays of liquid crystals, in which light and darkness are generated and an image is formed when electricity is supplied. The screens consist of a lower glass on which the TFT is formed and an upper glass plate. The TFT–​LCD is divided into three processes: those of the TFT, the cell and the module. The process and processing steps of fabrication (DRAM) and manufacturing (TFT–​LCD) are quite similar as deposition, photolithography and etching steps are common to both industries and high yield rates. The key differences are that the TFT is built on a glass substrate instead of a silicon wafer, and TFT–​LCDs are aimed at larger size, whereas DRAM is aimed at higher density (Figure 9.2). In addition, the TFT requires a processing temperature ranging from approximately 300 to 500℃, compared to about 1,000℃ required for semiconductor fabrication (Choung & Hwang, 2003). Therefore, once the technological capability for the fabrication of DRAM had been acquired and assimilated, it was possible to extend the product portfolio to the manufacture of TFT–​LCDs. This extension was based on the core technologies of deposition, photolithography and etching, which are common to both industries. That is, similarities between the DRAM and TFT–​LCD’s production process technology (technology link or technology relatedness) caused the process technology accumulated in the DRAM industry to spill over into the TFT–​LCD industry (Choung & Hwang, 2003; Park et al., 2003). Moreover, it was found that DRAM’s technological capability transferred into TFT–​LCDs in the form of investment funds, the accumulation of semiconductor technology required for TFT–​LCD R&D, timely investment in technology, DRAM’s production and quality management systems, the movement of key personnel to the TFT–​LCD business, and the capability of organizing production labour (Park, Choung and Min, 2008). Based on the similarities in the technological characteristics, the innovation strategies and competition environment of both products share common characteristics, as shown in Table 9.2. Since the mid-​1990s, technology development in the complex product systems (CoPS) has been driven at the national level and has different technological characteristics from those of mass-​production products. Traditionally, developed countries have some superiority, while the participants of newly industrialized economies have limitations, in developing CoPS. However, in this section, we argue that technological similarity in the process of developing telecommunication 208

Catch-up Strategies of Korea’s Big IT Corporations Table 9.2 Similarity of technology innovation process Characteristics

TFT–​LCD

DRAM

Traits of innovating firms Major sources of innovation

• Large firm integrated vertically • Memory business experience • Higher yield (integration of design and production) • Interaction with parts/​materials/​ equipment firms • Strategic alliance with rival firms • Market driven R&D strategy • Investment capability • Production capability • Customizing capability to meet specs: size (inches), resolution, colour gamut (%), brightness (cd/​m2), response time (ms), weight (g), aspect ratio • Oligopolistic competition but no competition with United States and European countries • Product with high capacity, variety, customized

• Large firm integrated vertically

Key capability of innovation

Change of competition environment and technology

• Higher yield (integration of design and production) • Interaction with equipment firms • Strategic alliance with rival • Investment capability • Production capability

• Oligopolistic competition • Product with high capacity, variety, customized

Source: Reorganized from Hwang (2003).

systems and related products seem likely to catch-​up effectively: the development of (wired and wireless) switching systems and (CDMA and GSM) mobile phones. In both cases, national R&D projects played an important role for developing the system and later manufacturing was carried out by the private sector. The project to develop TDX started in 1976, with two aims: to alleviate the backlog in the installation of telephone lines and to acquire technojlogical capability with respect to digital switching systems in order to promote the growth of the domestic telecommunication equipment industry. To build domestic capabilities of the private sector, public research institutes executed joint cooperate development with large manufacturing firms such as SEC, LG and Hanhwa in the development of the TDX switching system. After TDX was successfully implemented, the government initiated another large-​scale project, the development of CDMA for a digital mobile telecommunication system. In 1990, ETRI launched the ‘digital mobile telecommunication system development project,’ which encompassed a mobile telecommunication switching system, base stations and mobile phones. In the process of developing the CDMA system, a series of factors continued and were reinforced. For instance, during the development of CDMA, the development and work routines that had been used by the TDX development team were also used by the CDMA team. About 40 engineers from the TDX team moved to the CDMA development team to transfer skills related to the working method, routines for system design and integration and risk management, such as testing for abnormalities and conformity. When TDX moved to the wireless division, further developments were made, following a series of discussions. Such developments concerned the philosophy of telecommunication systems as well as system components such as TDX-​based MSC (Mobile Switching System), BSC (Base Station Centre), BTS (Base Station Controller), handsets, and home registers. As a consequence, interrelationships emerged between the technology 209

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sectors. Based on the TDX development, technological capability in digital switching systems was acquired. This capability provided the technological base when ETRI developed the CDMA mobile telecommunication system. Finally, during the development process, four manufacturing firms participated, SEC, Hyundai, Lucky-​Goldstar, and Maxon Electronics. Initially, the four firms were to collaborate on the development of systems and handsets, but the principal goal was to transfer CDMA technologies to private firms for commercialization (Choung & Hwang, 2007). After a public research institute successfully developed the telecommunication system based on technological linkage, private sector of large firms who participated technological development in the process gained considerable technological competencies and leveraged mobile phone manufacturing. At that time, the global mobile communication market was dominated by use of the GSM system, and terminals and base stations heavily relied on technology imports. However, system development with TDX-​CDMA technology linkage led to the birth of world-​class handset manufacturers such as SEC and LG. In conclusion, it is perhaps worth mentioning two main points arising from this discussion. The presence of interfirm competition such as that between SEC vs LG (the latter recently gave up its smartphone business) in mobile phones, Samsung Display vs LG Display are continuing business practices. It may be debatable whether, in the absence of interfirm competition between large conglomerates, businesses (for example, shipbuilding, automobile, home appliances, semiconductors, etc.) would be able to catch-​up rapidly. Second, as described in the case studies, memory semiconductor competitiveness resides in how to make them smaller while display competitiveness provides a source of advantage when manufactured on a larger scale, but there is a common denominator of achieving processing technologies faster than competitors with a focus of manufacturing technology capability. Once we accept the view of technological linkage between products, Korea has a competitive advantage in hardware (i.e., manufacturing) during the catch-​up period on the one hand, but it is highly likely that Korea may face difficulties in acquiring SW-​related technologies, as experienced in Japan (for example, see Anchordoguy, 2000) due to institutional inertia and path dependencies. This is supported by evidence from the smartphone industry that despite SEC being one of the world market leaders it has exhibited less successful results in the development of mobile OS (operating software). Third, based on multiple cases in the semiconductor, mobile handset, and display industries, it is argued that the patterns of post-​catch-​up innovation activities and growth of SMEs in Korea are linked to the national innovation system with linkage to large firms and furthermore flagship products of large firms have led the formation of new value chains, providing an impetus to SMEs. Large corporations have evolved their internal and external network relationships to create competitive advantages while producing world-​class products. Korean SMEs have also engaged in innovative activities through the supply of innovative components and equipment, enabling architectural innovations in the final products of large corporations. Thus a new form of non-​imitative innovation activities, often referred to as ‘escape from imitation,’ has emerged. The relationships between large corporations and SMEs facilitate a symbiotic growth model, fostering architectural innovation by large corporations and the global growth of SMEs. This interfirm collaboration between SMEs and large corporations is also evident in industries such as construction equipment, shipbuilding, marine engines, and home appliances. Choung et  al.’s (2011) research investigates the extent of collaboration between large corporations and SMEs in relation to global products. The study compares the number of collaborations between

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large corporations and SMEs for globally produced products. It is based on government-​published ‘world-​class product’ statistics and analyzes whether SMEs are selected as world-​class products within six flagship product groups led by large corporations (semiconductors, displays, construction equipment, shipbuilding, marine engines and home appliances). The findings reveal a pattern where the final products of large companies are initially designated as world-​class products, followed by the selection of parts produced by SMEs. This pattern exemplifies an innovation system led by large companies, where the growth of highly competitive large corporations reinforces the competitiveness of domestic SMEs.

Product life cycle/​stage-​based technology catch-​up Numerous comparative studies have shown that the innovation process of latecomers (i.e., catch-​up innovation) sharply contrasts with that of advanced countries. Based on Utterback and Abernathy’s (1975) study of process and product of innovation, scholars proposed that latecomers proceed innovation according to a three-​stage model: the acquisition of foreign technology, assimilation and improvement, as well as the reverse sequence (from process of innovation to product rather than product innovation to process innovation), compared to advanced economies (Kim, 1980, 1997; Lee et al., 1988). Another important feature of latecomers’ accumulation of capability comes from Hobday (1995) who found that Asian electronics firms follow a path from simple OEM (ori­ ginal equipment manufacturer) to ODM (original design manufacturer), and finally OBM (original brand manufacturer). Recently, after latecomers built domestic technological capabilities, scholars continued to investigate the catch-​up process in high-​tech product and industries. Lee and Lim (2001) suggest three types of catch-​strategies: path following (e.g., machine tool), path skipping (e.g., DRAM development) and path creation (e.g., CDMA development). Moreover, Choung et al. (2014) suggested that latecomer firms are diversified with respect to product entry strategies. In particular, one evolutionary path is initiated during the mature technology stage from where a firm moves on to develop frontier products in the reverse direction from the original PLC mainly through technology deepening. The second evolutionary path begins with the firm’s entry immediately after the establishment of a dominant design. This is typically followed by the production of various applications through architectural innovation.3 Much of the work outlined above was embedded in stages and type of entry strategies. Since a large number of products or industries have chosen in mature stage products and deepen their technological capabilities by large corporations, researchers have paid less attention to how latecomers create architectural innovation at the firm level. The central distinguishing feature of architectural innovation compared to technology deepening is the alteration of design capability and innovation based on a dominant design and winning the industry competition. The creation of architectural innovation frequently occur in large firm–​SME linkage and their core business areas of large corporations (Choung et al., 2014). The creation of architectural innovation at the latecomer firm level similar to advanced countries depends upon the introduction of new functions to some element technologies or changes to the interface where parts are combined. In addition, architectural innovation can be attained by collaborative learning among system vendors and suppliers of the components, materials and equipment. Choung et al. (2014) investigated many types of architectural innovation with joint development with large corporations (LG Electronics, Hynix Semiconductor, LG Display) and Korean SMEs in smart phone, semiconductor and display manufacturing equipment. LG Display (formally LG Philips LCD) started the TFT–​LCD business in November 1995 and produced a variety of products from mobile to public displays and gained world firsts in the

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development of OLEDs, curved OLEDs and ultra HD displays. The company’s growth appears to have outperformed its competitors by adopting technology developed by a domestic company for a display driver that relied on foreign parts while entering the LCD industry. In 2002, LG Display took the lead in the LCD display market by adopting an architectural innovation-​based MD (multidriver) architecture for a LCD IC driver. The de facto standard was developed and led by a Korean small and medium-​sized enterprise (SMEs) called fabless company Silicon Works (the CEO was a former employee of LG Semiconductor). As of 2009, Silicon Works accounted for 46.7% of IC diver of LG Display products and 11.3% of the global market. This is an example of LG Display enjoying shared growth of a new growth field through incorporation into the forward and backward linkage with value chains and benefitting as the first mover in creating a new type of innovation. That is, LG Display entered the display industry in the mid-​to late 1990s, small and medium-​sized businesses such as Silicon Works recognized the market opportunity and entered the early display parts market by developing new parts based on original technology. The rapid growth of the display market and the rapid growth of large domestic companies with mass production systems as major players in the global market gave Silicon Works an opportunity for rapid growth. Another case of architectural innovation can be found in the mobile phone industry. Korea’s two leading large firms, SEC and LG Electronics, jointly accounted for 30% of the global mobile phone market in 2010. As latecomers among mobile phone manufacturers, large Korean firms adopted an architectural innovation strategy in the catch-​up process and in this process co-​development with suppliers was critical. One of the turning points in mobile phones becoming multimedia devices was the adoption of a camera function. Camera phones debuted in Japan in 2001 and were introduced in Korea in the second half of 2002. Camera phones consist of various components and modules. Among the components, the mobile phone’s camera control processor (CCP), where the image that comes through the lens is transformed into electric signals at the image sensor, is a core component. The CCP, which allows compression, editing and saving of videos or images taken by the mobile phone, is a flagship product of Core Logic (Choung et al., 2014), and was developed cooperatively with LG Electronics, a large Korean mobile phone manufacturer. Upon the development of the camera application processor (CAP), Core Logic also attempted to innovate the mobile phone architecture and develop new processors through collaboration with LG Electronics. The main products of Core Logic include a camera application processor (CAP), a processor for camera phones, and multimedia application processor (MAP), a processor to implement multimedia functions. LG Electronics’ strategy for competition at that time was to maintain a competitive edge over rivals by differentiating its products’ functionality and design, while adopting a separate, dedicated camera phone processor rather than a slow integrated processor to implement multimedia functions. Since its entry into the camera phone market, LG Electronics felt the need to develop a separate, dedicated processor for camera phones. Due to this strategic need, the makers attempted to develop dedicated processors for camera phones jointly with system IC companies capable of producing such processors. South Korea boasts international competitiveness mainly in memory semiconductors, a field that requires massive capital investment, and the key to competitiveness lies in yield improvement through production process innovation centring on large companies. Centring on large companies including SEC and Hynix Semiconductor, Inc., the South Korean memory semiconductor industry currently boasts an overwhelming advantage over other countries in its share in the world market. The semiconductor industry has maintained its growth trajectory since the 1980s, finding applications in computers, smartphones and various other technologies. As of 2022, the worldwide semiconductor market reached an impressive valuation of USD 604 billion. Korea, consistently performing exceptionally, secured a substantial market share of 17.7% in the global semiconductor 212

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market in 2022. Remarkably, Korea has maintained its position as the second-​largest player in the global semiconductor industry for a decade, starting from 2013. Moreover, it commanded a substantial 60.5% share of the worldwide memory semiconductor market. Within this segment, Korea boasted a dominant DRAM market share of 70.5% and an impressive NAND market share of 52.6%. The semiconductor sector has continued to grow since the 1980s as semiconductors have been used in computers, smartphones and others. The global semiconductor market reached USD 604 billion in 2022. Korea held a global semiconductor market share of 17.7% in 2022, and continued to rank No. 2 in the world for ten straight years since 2013 (Invest Korea, 2023). The Korean semiconductor makers thereafter introduced next-​generation products for the first time in the world one after another, which led to heightened pressure for more advanced process technology as well as for adoption/​development of equipment using new process technology. With a higher level of demand from device manufacturers with global competitiveness, equipment makers’ technological innovation capacity has increased, and their potential to become globally competitive firms has become greater. In 1995, SEC asked JUSUNG Engineering to manufacture CVD (Chemical Vapor Deposition) equipment (JUSUNG’s CEO was a former employee of Hyundai Electronics and ASM (Advanced Semiconductor Material, NL)). JUSUNG specializes in semiconductor pre-​process equipment among other processes involving semiconductor and LCD production, and produces a plasma-​ enhanced chemical vapor deposition (PECVD) system for TFT–​LCD panels, CVD and atomic layer deposition (ALD) systems for semiconductors, and etching systems. Joint development also took place as minor modifications were carried out on site for CVD. Since SEC and SK Hynix are global leaders in semiconductor manufacturing, continuation of joint development with JUSUNG took place (HSG, ALD, etc.). During the process, JUSUNG and the client cooperated with each other with the former taking charge of equipment development and the latter providing process facilities required to test the developed equipment. Equipment using new technology is often jointly developed with the client company by undergoing an equipment test process consisting of alpha, beta, and gamma testing, before being committed to the production line. Such testing is conducted at JUSUNG independently, and the equipment can be commercialized only after it successfully goes through the test process and is determined to be appropriate for mass production. In the process of developing ALD equipment, joint development in the form of a consortium with the Korean semiconductor giant Hynix and a component and material company was carried out. In addition, in the production of ALD equipment, proprietary semi-​batch method was adopted instead of the existing batch method or single wafer method to increase productivity. Moreover, JUSUNG shifted its focus to new business areas including the development of PECVD equipment for TFT–​LCDs and started supplying to LCD manufacturers such as LG-​ Phillips. This diversification demonstrates the technological linkage between display and semiconductor manufacturing. In addition, JUSUNG is facing the challenge of diversifying its revenue structure, as a significant portion of its revenue comes from transactions with SK Hynix (customer A) and LG Display (customer B). Recently, the company has been making efforts to secure overseas customers, primarily focusing on the Chinese market. The statistics for the year 2022 reflect these efforts (see Table 9.3). In recent years, innovation performance of globally competitive new SMEs is on the rise in the Korean innovation system, which was typically driven by large firms. Based on multiple cases in semiconductors, mobile handsets and display industries, it is argued that the patterns of post-​catch-​ up innovation activities and growth of SMEs in Korea are linked to the national innovation system with linkage to large firms and furthermore large firm’s flagship products have led the formation of new value chains providing an impetus to SMEs. 213

Routledge Handbook of Korean Business and Management Table 9.3 Global market share of JUSUNG Engineering (equipment-​related products) Category

2007

2012

Domestic Taiwan China Others Total (Million US$)

40% 35% 19% 6% 194.7

65% 17.3% 2% 15.8% 60.7

2017 71% 2.7% 24.4% 1.% 198.2

2022 50% 0.2% 49% 0.8% 321.5

Source: Compiled from DART (2008, 2012, 2017, 2022) database for JUSUNG Engineering.

Upgrading the innovation activities of large business firms Despite that catch-​up mechanisms are identified from product, and institutional aspects that much of the work outlined above, we do not have a sound understanding of the new types of innovation activities in recent years. Among the top 500 companies announced by Fortune in 2021, Korea has 15 (top 100: Samsung Electronics, Hyundai Motors; top 200: SK, LG Electronics; top 500: Kia Motors, KEPCO, POSCO, Hanhwa, KB Financial), Hyundai Mobis, Samsung Life Insurance, CJ Group, SK Hynix, LG Chemical, Samsung C&T). In addition, since 2011, Samsung Electronics and Hyundai Motors have continuously been included in the global top 100 companies in this ranking (Fortune Global 500, 2022). This continuous creation of competitive advantage is built on the belief that continuous R&D investment and patents will go hand in hand. For example, examining the patent ranking in the US PTO, Samsung Electronics (2nd, 8517), LG Electronics (3rd, 4833), Hyundai Motors (24th 1483), SK Group (33rd, 1109), etc. are included (IPO, 2021). The rigorous science and techno­ logical activities and mechanisms of overtaking/​sustaining the leadership of firms require further attention. While we have substantially understood how they catch-​up, little information has been provided on issues of sustaining the competitive dynamics for firms’ growth. Consequently, we can still offer a limited understanding of overtaking mechanisms with respect to knowledge production patterns in firms and strategic knowledge management in firms. In particular, we will discuss how the science and technology innovation indicators that can express innovation capabilities change as a company rises from a catching-​up company to a forging ahead (post-​catch-​up) company. In the 1990s, efforts to achieve science and technology capabilities by private firms were remarkable. The proxy measures of science and technology capabilities such as patenting and refereed publications increased sharply during this period. In the listing of US patents granted to foreign nationals, Korea appeared 7th in 1995, with 1161 patents. This compared with 24th and just 41 patents in 1985 (IPO, 1996) Korea has been gaining an international advantage in elec­ trical technologies, especially semiconductors, image and sound equipment, and general electrical apparatuses (Choung, 1998). Moreover, a patent contents’ analysis showed that Korean chaebol semiconductor firms that focused on their fabrication capability and design capability experienced subsequent development (Choung et al., 2000) (see Table 9.4). As they accumulated technological activities, publication activities followed. With regard to the number of SCI publications, Korea achieved 25-​fold quantitative growth in 2010 relative to the 1990s, reaching 3.3 % of total scientific publications (NTIS, 2011). The most remarkable aspect of large firms’ innovation activities in the mid-​1990s was not only the deepening of technological capabilities but scientific and engineering activities as well. 214

Catch-up Strategies of Korea’s Big IT Corporations Table 9.4 Content analysis of US patent by technology fields in three Korean semiconductor firms (SEC, Hyundai, LG)

Fab Design Assembly Testing Opto Application Equipment Discrete Total

86–​89

90

91

92

93

94

95

Total

3 9 0 0 0 5 0 0 17

15 17 1 0 3 1 1 0 38

33 32 1 2 10 3 0 0 81

40 31 4 0 1 7 3 0 86

73 38 7 2 5 29 6 1 161

105 71 17 4 14 63 9 3 286

144 70 17 12 28 55 3 1 330

413 268 47 20 61 163 22 5 999

Source: Choung et al. (2000).

As documented elsewhere, the main contributor to knowledge production is universities. However, new factors have been identified during the catch-​up process of knowledge production: (1) diversification of knowledge producers such as private firms and public research institutes (mode 1 to mode 2) proportionally increased in scientific fields in Korean knowledge production activities, which is a transformation from the earlier concentration in engineering fields, i.e., leading knowledge production areas in engineering fields rather than science; and (2) leading business groups such as Samsung, LG, and Hyundai group focus on electrical engineering, electronics, and applied physics; i.e., the fields with the highest knowledge production activities for PRIs, universities, and privates sector players are somewhat similar (Choung & Hwang, 2013). While science and engineering activities of latecomer firms, especially large corporations, increased since the early 2000s, we will examine science and engineering capabilities by scrutinizing the changing patterns of knowledge production of such firms during the catch-​up and forging ahead periods. The necessity of a new understanding of scientific and engineering knowledge production of latecomer firms is increasing as the latecomer firms achieved industrial leadership in some sectors. By analyzing citations of the non-​patent literature in patents, international conferences, and journal publications of Samsung Electronics, the following characteristics during the forging ahead stage have been identified: (1) as firms approached the leadership stage, the quality of their patents also increased, (2) the proportion of NPC in patent citation increased; (2) the relative proportion of the foreign knowledge base of SEC tended to decrease; and (3) SEC significantly increased science linkage in the process of the production of scientific and engineering knowledge (Seo et al., 2019). By producing science and engineering knowledge in related business domain areas, including publishing semiconductor-​related journal papers as well as manufacturing frontier-​level semiconductors, SEC was able to catch-​up and forge ahead. In the case of the semiconductor memory market, Japan was the main player in the 1980s–​1990s and had the lion’s share of the market. The top manufacturers were NEC, Toshiba, Hitachi and Sony while South Korean and Taiwanese manufacturers expanded their ability to supply customers. During the catch-​up period in knowledge production, the Korea semiconductor firms published a more modest number of papers (see Table 9.5).4 However, corporate patent production of SEC has consistently increased from the 1990s onwards and finally by the end of 1990s overtook Toshiba and in the early 2000s they overtook Toshiba in terms of conference and journal papers (Seo et al., 2019). Similarly, the 215

Routledge Handbook of Korean Business and Management Table 9.5 Number of publications in semiconductor-​related conference proceedings of major semiconductor firms

Texas Instruments Toshiba Fujitsu Mitsubishi Hitachi Samsung LG Hyundai

1991

1992

1993

1994

1995

1996

Total

Average

38 48 46 34 62 4 0 0

44 24 37 23 52 6 3 1

48 48 9 42 54 17 5 1

84 66 34 59 71 36 6 15

90 98 52 77 106 53 18 19

82 82 43 61 66 71 13 14

386 366 221 296 411 187 45 50

55.1 52.3 31.6 42.3 58.7 26.7 6.4 7.1

Source: Choung et al. (2000).

growing activities of science and engineering publications made it possible to reduce the gap with industry leaders. Table 9.6 provides a comparison of knowledge production between Samsung and SONY during the period 1990–​2020, which is considered an important time for knowledge accumulation where technological capabilities were expanded and deepened.5 Two aspects are worth noting: compared with Sony in active knowledge production activities, Samsung overtook its Japanese counterpart in the total number of publications and was competing in a similar knowledge domain area. Namely, SEC and Sony began to converge in the top ten journal list in terms of their publication (five out of ten journals). A second characteristics is that semiconductor-​related journals and conferences (for example, IEDM, VLSI, Solid State circuit-​related conferences) by Sony are no longer in the top listed journals whereas SEC is sustaining and deepening semiconductor-​related technologies. For an extended period, Samsung and Sony were competitors in the semiconductor field. However, in 2016, Sony Semiconductor spun off from the parent company. In light of this governance change, in addition to analyzing the phenomenon of knowledge convergence as discussed earlier, we conducted an analysis of knowledge production in the same field up to the point of the spin-​off. To do this, we examined the knowledge production processes of Samsung and Sony in terms of catching up, overtaking, or falling behind, specifically focusing on the three major conferences mentioned earlier: VLSI, ISSCC and IEDM. These three conferences are often referred to as the ‘Semiconductor Olympics,’ and many semiconductor-​related companies competitively submit research papers on the latest technological developments to them. It is known that earning acceptance to these conferences is very difficult, and in this sense they are a valuable indicator of a company’s scientific and technological capabilities. As depicted in the Figure 9.3, it is evident that Samsung not only caught up with Sony but also surpassed it in terms of paper publications during the period when it overtook Sony. Sony, on the other hand, exhibits a pattern of decreasing knowledge production. When examining the transformation of the competitive relationship between Sony and Samsung in the period leading up to the spin-​off, it becomes apparent that Samsung had been consistently dominant in terms of paper publications in the three major conferences since 1994. This competitive dynamic is reflected in semiconductor sales rankings as well. Samsung Electronics entered the list of top 20 semiconductor companies in terms of sales in 1988, overtook Sony in semiconductor sales in 1989, and has maintained its position as one of the top ten semiconductor companies since 1992. Furthermore, it has consistently held the second position since 2002 (IC Insights, 2022). 216

Catch-up Strategies of Korea’s Big IT Corporations Table 9.6 Top ten science and engineering-​related journals and conferences (1990–​2020) Samsung 1 2

No

SPIE –​The International Society for 945 Optical Engineering Japanese Journal of Applied Physics 393

Sony

No

Japanese Journal of Applied Physics

344 330

IEEE International Conference on Consumer Electronics, ICCE Lecture Notes in Computer Science International Electron Devices Meeting, IEDM Applied Physics Letters

335

SPIE –​The International Society for Optical Engineering IEEE Transactions on Magnetics

265 241

Applied Physics Letters Journal of Applied Physics

119 110

224

108

221

8

IEEE Transactions on Consumer Electronics SID International Symposium

Journal of the Institute of Image Information and Television Engineers Lecture Notes in Computer Science

87

9

Symposium on VLSI Technology

200

IEEE International Solid-​State Circuits Conference IEEE International Conference on Consumer Electronics SID International Symposium

3 4 5 6 7

10

217

IEEE Journal of Solid-​State Circuits 193

128

101

76 75

Source: Scopus Database.

Figure 9.3 Comparison of three major semiconductor-​related conference6 publications: Sony and SEC (1990–​2015). Source: Scopus Database.

In summary, this section provides an understanding of the catch-​up process drawn from existing studies of the capability building process through which firms behind the frontier firms close the gap on leading firms. Foreign sources (knowledge flow) initially were critical in the period of catching-​up. However, this chapter brings sharply into focus the forging ahead and post-​ catch-​up period, and argues that they differ in terms of science and technological activities. As 217

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described, the latecomer firm SEC accumulated technological capabilities via rapid growth of patents and publications but firms are less dependent on foreign knowledge sources and broadened the domestic sources as they move from post-​catching-​up. Moreover, with time, conference and journal articles increase in engineering areas as well as science linkages to patent applications. As describe in the above section, some industries were able to upgrade successfully, but many of the core industries that maintained competitiveness in the catch-​up exhibit limited to upgrading. Even in the case of firms operating in the same field, upgrading or post-​catch-​up capabilities tend to be more complex. A new organizational arrangement for innovation is critical since learning mechanisms and market and technological uncertainties. In addition, post-​catch-​up activities is described as ‘innovation activities in which the latecomer countries establish new technological trajectories for innovation in a changing competitive environment where scarce opportunity for imitation is present’ (Choung et al., 2014). In general, there are many cases where the achievements of the world’s first path-​generating innovation created in Korea achieved successful results but failed to enter in the global market. Examples include Terrestrial-​Digital Multimedia Broadcasting (T-​DMB), Wireless Broadband Internet (WIBRO), Synchronous CDMA2000 service, and Mobile OS (operating system). In addition to non-​IT industries or long cycle products (such as complex or science-​driven products), areas such as the nuclear and biopharma industries also exhibit difficulties in technology upgrading. Currently, Korean companies are entering the bio-​pharma industry but have only produced positive results in the biosimilar field, which involves replication drug for original biopharmaceuticals. However, it also can be argued that innovation entails a strong nature of process innovation where in this case ingredients and contents similar to those of original drugs are manufactured in a different way.

Discussion As discussed above, the catch-​up strategies of latecomers derived from the experiences of Korean companies can be summarized in the following three categories. First, there is a selective affinity between the architecture of individual products and the organizational arrangement of companies. Depending on the nature of the product architecture, laggards must strategically consider the arrangement of relationships between internal organizations and other companies. In the case of large Korean conglomerates, the close integration between products and manufacturing within the vertically integrated internal organization and the relationship with exclusive suppliers acted as a competitive edge in catching-​up the technology of memory products. Second, technology expansion and a link diversification strategy through linkage between technologies played an important role in the growth of the pursuit stage. A typical example is the case of the entry to the TFT–​LCD industry with similar technical characteristics based on the technological capabilities accumulated in memory semiconductors. Based on the connected technology capabilities, the company achieved growth in the pursuit stage by diversifying product lines and expanding business areas. Third, the catch-​up pattern appears differently depending on the entry point of the product cycle. In the case of industries that have passed the growth phase and entered the maturity phase, as suggested by the traditional catch-​up theory, there is a pattern in which technological capabilities deepen through catch-​up learning. On the other hand, immediately after the dominant design was set, companies formulated architectural innovation by adding product functions or changing the combination method between parts or element technologies worked effectively. In the case studies presented earlier, we identified key factors and their characteristics in the catch-​up and post-​catch-​up periods. First, stylized patterns exist in organizational innovation, 218

Catch-up Strategies of Korea’s Big IT Corporations Table 9.7 Key features of innovation during catch-​up and post-​catch-​up

Catch-​up

Key factors

Characteristics

Non-​technological

Task force team, joint development with SME, Domestic inter-​firm competition Technological linkages

Technological Product architecture Post-​catch-​up and upgrading

Success Impediment

Product/​industry case

TDX-​CDMA, DRAM-​Display Integral product driven DRAM, Display, Mobile phone Science and engineering knowledge Semiconductors production activities Limitation of world’s first product System LSI, Biopharma, SW market creation Creation of science based or log cycle products, Creating regulatory innovation and leading international standards

architectural innovation and knowledge spillover for the creation of other products in the process of catch-​up. Second, a new phenomenon has been observed in the post-​catch-​up period where not only are leading firms transiting to more science and engineering knowledge creation, but also they experience impediments in creating diversified world products (see Table 9.7). In this study we make a distinction between catch-​up and post-​catch-​up activities to shed light on upgrading. Existing empirical research suggests that upgrading is neither easy nor automatic. For example, since the 2000s, Korea has been experiencing an innovation paradox (R&D paradox, i.e., a phenomenon where high R&D investment is maintained while performance in technology improvement and commercialization remains low). At the same time, we are experiencing deficiencies of non-​technological capabilities despite an increase in technical capabilities. During the upgrading period non-​technological capabilities should complement and supplement technological capabilities such as creating and innovating regulation (for example, setting standards, testing for market formation, certification, etc.) marketing, organizational, and financing innovation (Choung & Hwang, 2019). This is something that cannot be experienced in the catch-​up period and new theory development is needed for a better understanding of the current situation and future of Korea innovation.

Conclusion Korean companies have expanded their scope of technological innovation activities during both the catch-​up and post-​catch-​up phases. To ensure continued competitive advantage, the following factors should be taken into consideration. Firstly, innovation activities are occurring in a limited manner, but there should be an acceleration of innovation activities that seize market leadership based on indigenous technologies. Secondly, while interfirm relationships among Korean firms are still relatively insufficient, there is progress in the collaboration between big IT corporations and SMEs. However, to establish a robust backward linkage, involving the collaboration between primary and secondary suppliers is crucial. Fourthly, from a medium-​ term perspective, Korean IT companies need to possess both understanding and application 219

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capabilities of fundamental technologies. They should also seek product differentiation through architectural innovation, ensuring the sustained competitive advantage of Korean companies in relevant fields. Finally, from a technological strategic perspective, managers in the realm of technology management must recognize that pursuing incumbents requires securing absorptive capacity and benchmarking against competitive companies. However, equally essential is the acquisition of scientific capabilities and the establishment of technological competence through selective knowledge production. The chapter acknowledges several limitations that could be addressed through future research. While the study analyzed the successful catch-​up and partial escape from imitation processes of Korean large corporations, there is a need for further analysis involving the mapping of products and scientific and technological capabilities. In particular, the close relationship between product leadership and scientific and technological capabilities warrants attention, but it is important to note that conducting a mapping exercise to establish this relationship can be challenging. Second, there is a need for a detailed analysis of the relationships between SMEs and large corporations. While this study provides descriptions of cooperation between a limited number of large firms and SMEs, further case studies focusing on collaboration in the ‘escape from imitation’ phase are required. Information on how these entities are coping with the uncertainties brought about by the new competitive environment and new product development is lacking. A systematic analysis in this regard is expected to shed light on the growth prospects of SMEs and the innovation models shaping the relationships between SMEs and large corporations.

Acknowledgements This work was supported by the National Research Foundation of Korea (NRF) grant funded by the Korea government (MSIT) (No. RS2023-​00272469).

Notes 1 In the innovation management literature, assembled and non-​assembled products (Utterback, 1994) are commonly used. However, since a large number of products in electronics are under categories of assembled products we do not employ this framework. 2 Many of the system LSI product developments attempted by Korean companies failed, except DDI (2006, SEC) and CMOS Image sensor (1996, SK-​Hynix). Examples include a communication chip (smartphone application processor Exynos (SEC) against snapdragon (Qualcom), A series (Apple), a CPU processor called alpha chip (2000s). In general, DDI is used for LCD and OLED display products and the other is a CIS (CMOS image sensor, feature phone camera chip). It is understood that most system LSI products failed when Korean firms attempted to imitate technological frontier products produced by advanced countries with an objective of a cost advantage while CIS and DDI were successful when they were the world’s first attempt and there was domestic demand. Moreover, these products were leveraged by utilization of mass production of the DRAM fab line. 3 Architectural innovation is achieved by the application of new combinations of the installed components or a new interface among the components within the systems (Henderson & Clark, 1990). 4 IEDM (International Electron Device Meetings), ISSCC (International Solid State Circuits Conference), and VLSI Technology and Circuit Conferences are the important internal conferences for announcing technological activities in semiconductor technologies. 5 According to annual reports in the early 2000s, Sony and SEC were competing in the business domain of area of television, computer and related products. Moreover, Sony (43% MS 2021) and SEC (19% MS 2021) have been competing in the CMOS (complementary metal–​oxide–​semiconductor) image sensor (CIS) market since the 2000s.

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Catch-up Strategies of Korea’s Big IT Corporations 6 IEEE VLSI (very large-​scale integration), IEEE ISSCC (International Solid-​State Circuit Conference), IEEE IEDM (International Electron Device Meeting).

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10 THE RISE OF TWO SOUTH KOREAN MULTINATIONALS How Samsung Electronics and Hyundai Motor Built a Competitive Advantage by Closing the Capabilities Gap Heechun Kim

Introduction During the late 1980s and early 1990s, there was a proliferation of articles and books from both scholars and practitioners explaining the secrets behind Japanese firms’ global success, as the Japanese invasion of global markets was evident. These include just-​in-​time production (Stalk, 1988), competitive collaboration (Hamel, Doz, & Prahalad, 1989), strategic intent (Hamel & Prahalad, 1989), and core competencies (Prahalad & Hamel, 1990). From 1995, Fortune maga­­ zine began announcing the world’s largest 500 companies, the Fortune Global 500, ranked by total revenue. In 1995, Japan was ranked second, with 149 companies on the list compared to the US’s 151. That same year, Sony was one of the most respected brand names, and its consumer electronic products like Walkmans, PlayStations, Trinitron TVs and camcorders were ubiquitous. The Big Three automakers in Japan, Toyota Motor Corp., Nissan Motor Co., and Honda Motor Co., were the leaders of Japan’s growing dominance of the global auto market. In July of that same year, BusinessWeek made a comment on South Korea, saying, ‘It could well become the first country to establish itself as an advanced industrial power since the emergence of Japan’ (Holstein & Nakrmi, 1995: 56). However, it is worth noting that at the time, South Korea’s quest to become the next Japan was complicated by the fact that Japan had colonized South Korea from 1910 to 1945, a fact that had long been a source of resentment among Koreans who were eager to prove themselves (Kraar, 1992). Looking ahead to 2022, Japan had only 47 companies on the Fortune Global 500 list, whereas South Korea had 16 companies, up from 8 in 1995. As a result, it is evident that ‘Japan’s global presence has diminished in contrast with Korea’s rise’ (Fukagawa, 2012: 23). Since the beginning of the twenty-​first century, several elite Korean companies have emerged on the global stage. Most notably, Samsung Electronics Co. (SEC) and Hyundai Motor Co. (HMC) have become global giants, as shown in Figure 10.1, compared to their Japanese counterparts Sony and Toyota. How did these two family-​controlled Korean multinationals rise so spectacularly as global powerhouses?

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DOI: 10.4324/9781003180920-12

The Rise of Two South Korean Multinationals

Figure 10.1 Fortune Global 500 Rankings, 1995–​2022. Source: Created by the author based on information available at https://​fort​une.com/​global​500/​.

There have been numerous books and case studies written about how SEC and HMC achieved their success (e.g., Kim, 1999; Chang, 2008; Taylor, 2010; Song & Lee, 2014; Moon, 2016; Cain, 2020). However, surprisingly little is understood about the significant commonalities, or ‘manage­ ment practices,’ that enabled these companies to go from lacking capabilities to becoming global powerhouses in their respective industries, despite having different starting points. To gain new insight into this issue, a capability-​building perspective (Stalk, Evans, & Shulman, 1992; Ulrich & Smallwood, 2004) is taken, which can be subsumed under the resource-​based view (RBV) of the firm (e.g., Wernerfelt, 1984; Dierickx & Cool 1989; Barney, 1991; Amit & Schoemaker, 1993). The RBV suggests that when companies compete on capabilities, they should focus on honing their core capabilities that ‘will have the strongest and most direct impact on the execution of strategy,’ rather than identifying and boosting weak capabilities that are of little or limited value (Ulrich & Smallwood, 2004: 124). A firm’s capabilities are defined here as its ‘capacity to deploy Resources, usually in combination, using organizational processes, to effect a desired end. They … are developed over time through complex interactions among the firm’s Resources’ (Amit & Schoemaker, 1993: 35, italic in original). In other words, ‘while resources are akin to stocks, cap­ abilities are hinting at process’ (Katkalo, Pitelis, & Teece, 2010: 1176). Furthermore, these cor­ porate capabilities are ‘often developed in functional areas’ (Amit & Schoemaker, 1993: 35). For a company, having a stock of unique functional capabilities, from R&D and design to marketing to information technology, means providing superior value to its customers compared to its competitors (Stalk et  al., 1992).1 According to a 2014 McKinsey survey of 1,448 executives worldwide, these functional capabilities (31% of respondents) ranked second in terms of their contributions to business performance, far above sector-​specific capabilities (10%), but just behind leadership capabilities (35%) (Benson-​Armer, Otto, & Webster, 2015).

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In a particular competitive context, a company can only attain superior performance if it possesses the necessary capabilities, while it will fall short if it lacks such capabilities (Winter, 2000). In cases where a company has the required capabilities, it can pursue an inside-​out strategy by leveraging its unique capabilities in new geographic or product markets (Helfat & Peteraf, 2003; Teece, 2007). In other words, the company starts by looking inward to determine what it can do best and then moves outward to find new markets. However, when a company lacks the necessary capabilities, a capabilities gap emerges, representing the difference between the company’s current capabilities and the capabilities required to align with changing market conditions (Teece, Pisano, & Shuen, 1997) and to achieve desired results in the competitive arena (Capron & Mitchell, 2009; Day, 2011). Despite the relevance of the capabilities gap concept within the RBV framework, there is a lack of process models for explaining how companies can close their capabilities gaps over time. This makes it difficult to offer actionable recommendations to managers who are aware of such gaps but unsure of where to start. The purpose of this chapter is to showcase how the emergence of SEC and HMC was the result of a deliberate process of sequentially closing capability gaps over time (see Table 10.1). This involved three distinct steps, which were influenced by the historical trajectories of these firms (Teece et al., 1997). In order to shed light on this process of developing requisite capabilities and to understand the managerial strategies involved, I have adopted an outside-​in approach to strategy (Day, 2011). With this approach, the company starts by looking outward to determine what the market needs and then moves inward to develop products and services that meet those needs. I thus focus on the external market needs and trends. Additionally, I adopt a dynamic approach to the RBV (Priem & Butler, 2001; Helfat & Peteraf, 2003). In my approach, I emphasize the importance of closing a company’s capabilities gap with benchmarked competitors as a crucial step towards building its dynamic capabilities (Teece et al., 1997). In this regard, Sony and Toyota were considered as benchmarked competitors by SEC and HMC, respectively, as I will show below. Dynamic capabilities allow firms to ‘enhance existing resource configurations in the pursuit of long-​term competitive advantage (RBV’s logic of leverage)’ (Eisenhardt & Martin, 2000: 1106). More specifically, I will illustrate how SEC and HMC bridged the gap between their weak capabilities and the requisite capabilities required to succeed in the US, particularly during the 1990s and early 2000s. This was a phase when many Korean companies were starting to implement a global expansion strategy (Kim, Hoskisson, & Lee, 2015). During the 1990s and early 2000s, the US was the second most popular destination for Korean multinationals, following China (Chang & Rhee, 2011). Compared to the Chinese mainland market, the US market held immense importance for both SEC and HMC due to several factors. First, these companies aimed to bridge the capabilities gap in the American market as it offered a significant opportunity for Korean companies to expand their reach and revenue streams, in comparison to the limited size of the domestic market (Kim & Lee, 2001). For example, in 1985, Business Week ran a cover story titled ‘Koreans are coming,’ which focused on South Korea’s aspirations to broaden its exports to the US market (Helm, Nakarmi, Jang, Holstein, & Terry, 1985). Another article in the same publication emphasized that the success of Korean firms’ strategies would be heavily influenced by their performance in the American market (Nakarmi & Holstein, 1986). To increase their market share and compete against global rivals, these companies needed to close the gap between their products and those of their American counterparts. Moreover, their success in the US market was seen as vital for building their global reputation and long-​term competitiveness in other markets worldwide (Kim et al., 2015). Second, the success of these companies

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The Rise of Two South Korean Multinationals Table 10.1 From liabilities of origin to competitive advantage: Samsung Electronics and Hyundai Motor’s three-​step strategy Samsung Electronics Co. Year founded Transformation’s featured leader Liabilities of origin

1969 1967 Lee Kun-​Hee, the third son of Samsung Chung Mong-​Koo, the second son of founder Lee Byung-​Chul Hyundai founder Chung Ju-​Yung What went wrong with product quality in two South Korea companies: • Traditional success metrics: Overemphasizing sales and market share • Neglected product quality in a sheltered domestic market • Challenges of testing high-​value products in Korea’s low purchasing power market

Implementing the three steps of closing the capabilities gap The Problem: Step 1: Diagnosing the need for • In 1993, low-​quality SEC products change: Using the struggled to find buyers in the quality gap in the US US market market Why It Happened: • SEC managers didn’t know about or chose to ignore the fact that consumers in other countries had negative opinions or perceptions about its products. This lack of awareness or denial was likely because, within South Korea (SEC’s home country), their products were highly regarded Step 2: Setting and The Solution: • Lee Kun-​Hee unveiled a ‘New delivering stretch goals to bridge the Management’ initiative: Change quality gap everything but your wife and children • ‘Quality first, no matter what’ Step 3: Sequentially addressing the capabilities gap in design and branding

Hyundai Motor Co.

The Solution: • In January 1996, Lee Kun-​Hee shifted his focus from efficiency to prioritize product design: Transform the company’s engineering-​driven culture into a design powerhouse • In May 1996, he instructed SEC executives to elevate the company’s brand image from a C+​to an A by 2000: Surpass Sony

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The Problem: • In 1998, HMC became a laughingstock in the US market Why It Happened: • HMC had little incentive to enhance the quality of its cars in the past, given that by the late 1980s, foreign-​made cars constituted a mere 0.1% of vehicles on South Korean roads

The Solution: • Chung Mong-​Koo introduced an ‘Uncompromising Quality Management’ initiative: Match Toyota’s excellence • ‘Quality is our face’ The Solution: • Starting in January 2005, Chung Mong-​Koo pushed the envelope in car designs: Emulate Apple’s approach by crafting products that profoundly connect with customers • In April 2005, HMC unveiled its brand management vision: Become a top five global automaker by 2010

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in the US market was expected to enhance their international reputation, which was critical for their sustained growth and competitiveness in other global markets (Kim et al., 2015). Before delving into the capabilities gaps at SEC and HMC, it is helpful to understand why these gaps exist in the first place. I will introduce the concept of liabilities of origin, which Bartlett and Ghoshal (2000) introduced over two decades ago to describe the inherent disadvantages that emerging economy multinationals face in developed markets due to their national origins. Since government policies can limit firms’ actions (Teece et al. 1997), I consider such policies as sources of liabilities of origins, which contribute to the origin of capabilities gaps that SEC and HMC faced in the US market in the mid-​1980s and 1990s.

The Liabilities of Origin In the late 1970s and early 1980s, some Korean companies, including SEC and HMC, began making their first foreign forays (Wagstyl, 1989; Holstein & Nakrmi, 1995). At that time, South Korea was still an emerging economy with a relatively small domestic market of 38.12 million people in 1980, and many Korean companies were owned and controlled by their founding families (Kim, Hoskisson, & Zyung, 2019). As they were unable to build enough scale in their home country, Korean companies’ primary concern was whether they could export their products globally (Burgess, 1984; Magaziner & Patinkin, 1989). To facilitate this goal, South Korea’s indus­­ trial policies provided resources and incentives, such as subsidies, low-​cost bank loans, and tax rebates for exports, enabling these companies to survive and prosper (Amsden, 1989; Ungson, Steers, & Park, 1997; Moon, 2016). However, these government policies also exposed Korean companies, particularly SEC and HMC, to the liabilities of origin, as I will explain below. In the 1960s and 1970s, South Korea was governed by a military regime led by President Park Chung-​Hee, who spearheaded export-​driven economic policies with the goal of forging a modern, industrialized economy (Moon, 2016).2 To expedite this growth, President Park extended support to strategic export sectors, such as electronics and automobiles, in the 1970s. Simultaneously, he shielded Korean companies operating in these sectors from foreign competition, enabling them to attain economies of scale within the relatively limited domestic market (Amsden, 1989). Nevertheless, this approach fostered a culture within Korean firms that emphasized quantity, prioritizing market share and top-​line growth via the mass production of inexpensive, lower-​quality products over product quality itself. During the mid-​1980s, prognostications from business journalists foresaw that South Korean companies, regardless of their size, would confront their quality issues in developed markets (Burgess, 1984; Butler, 1985; Helm et al., 1985). Nonetheless, it is important to recognize that there were numerous other factors contributing to Korean companies’ lack of emphasis on product quality within their sheltered domestic market, a trend that persisted at least until the mid-​1990s.3 First, ‘sales and market share’ were considered ‘traditional measures of success in South Korea’ (Hitt, Dacin, Tyler, & Park, 1997: 165). Second, this quantity-​oriented strategy may have been more viable for Korean companies, allowing them to avoid direct competition with powerful global players, particularly in the US and Japan, which had superior technology, quality and brand reputation. Finally, their home market could not serve as a rigorous test market for high-​value products because many Korean consumers had lower purchasing power compared to those in developed markets, making them less likely to afford high-​value products. For example, in the late 1970s, SEC had to explore alternative foreign markets for its microwave ovens as they were priced at $350 to $400 in the US, making them unaffordable for many Koreans in its domestic market (Magaziner & Patinkin, 1989). 228

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Building a Competitive Advantage by Closing the Capabilities Gap In the following sections, I will elucidate on the three-​step strategy that SEC and HMC implemented to establish a competitive advantage. This strategy encompasses the following critical phases: diagnosing the need for change using the quality gap in the US market; setting and delivering stretch goals to bridge the quality gap; and sequentially addressing the capabilities gap in design and branding. It is essential to underscore that the successful execution of this strategy at SEC and HMC was made possible under the charismatic leadership of Lee Kun-​Hee, the third son of Samsung founder Lee Byung-​Chul, and Chung Mong-​Koo, the second son of Hyundai founder Chung Ju-​Yung, respectively.

Step 1: Diagnosing the Need for Change –​Using the Quality Gap in the US Market SEC and HMC entered the highly competitive and sophisticated North American market in the late 1970s and early 1980s with their own brands (Wagstyl, 1989). Looking back, entering this market not only allowed for a systematic diagnosis of the capabilities gap, but also acted as a catalyst for these two companies, propelling them forward in their pursuit of building new capabilities for improved performance. Their global success would have been unlikely if they had not made inroads into the US market, despite being at a competitive disadvantage, particularly. According to Kim et al. (2015), Korean multinationals faced the harsh reality that they would have weaker capabilities then their North American counterparts, particularly in the US. When entering this competitive market, SEC and HMC did not have a clear strategy in mind and were not fully prepared to compete. As a result, they found themselves struggling to overcome their weak capabilities, which had a significant impact on their success. Despite this setback, the second-​generation family leaders of these companies, Lee Kun-​Hee and Chung Mong-​Koo, were determined to adopt an outside-​in strategy. This approach compelled the companies to identify and address the significant capabilities gap to win customers in the North American market. As a result, both companies made product quality a top strategic priority. Samsung Electronics Co. In 1993, few could have predicted that SEC, founded in 1969, would transform from a low-​margin company producing cheap, low-​quality products into a global powerhouse selling high-​quality, high-​margin branded products in the consumer electronics industry. However, this success did not come easily. As early as 1985, SEC had already experienced quality problems in the US market, where it established its first sales and manufacturing foreign subsidiaries in 1978 and 1983, respectively (Wagstyl, 1989). By 1985, the company had decided to shed its low-​quality image, but despite its efforts, it continued to struggle (Butler, 1985). Chairman Lee Kun-​Hee had been feeling a sense of perpetual crisis since June 1992, when SEC had grown about two and a half times in size but its stock price had plunged 50% since he became Samsung chairman on December 1, 1987 (Burton, 1993; Grobart, 2013). However, a pivotal moment occurred in late January 1993 when Chairman Lee decided to visit the US (Grobart, 2013). During his visit to a Best Buy store in Irvine, California, the 51-​ year-​old son of Samsung’s founder encountered a compelling business case for a transformative cultural shift. He observed Samsung products pushed into corners, accumulating dust, and facing challenges in finding buyers, even though they were competitively priced compared to their counterparts (Bartlett & Ghoshal, 2000). At that particular Best Buy store, Samsung TVs were priced at $348, whereas Sony and Philips TVs sold for $438 and $418, respectively (Boo & Kim, 2016). Equally significant, Chairman Lee received a valuable insight during his 229

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visit when a sales associate disclosed, ‘We haven’t sold any of those for the last six months’ (Jameson, 1993). In the US market, SEC’s low-​margin, me-​too products such as microwave ovens and TVs sold as loss leaders in large discount outlets like Sears and Kmart by and large (Brown & Doebele, 2004; Chang, 2008).4 According to Bartlett and Ghoshal (2000: 137), ‘[t]‌he problem was that most of Samsung’s managers were unaware of or denied the existence of negative consumer perceptions abroad, largely because Samsung’s products were so well regarded at home.’ In a similar vein, Cain (2020: 81) aptly pointed out that ‘while Samsung may have been the number one com­ pany in South Korea, it was still weak by global standards.’ Chairman Lee was embarrassed and reprimanded his executives for lagging far behind competitors as follows: those products do not deserve the name of Samsung. … Now is a time to do better or die. Our products are still far from catching up with those from advanced countries. We must get rid of a second-​place mindset. If we are not the world’s number one, we will not survive (Song & Lee, 2014: 38). Hyundai Motor Co. Next, I examine how Chung Mong-​Koo transformed the world’s 13th-​largest automaker, known for producing cheap knockoffs of Japanese cars, into a global powerhouse. Founded in 1967, HMC produced its first original car model, the Pony, in 1976. The Pony was a 1500cc subcompact car, and its development was met with concerns about the economic risk of developing a car in South Korea due to the small domestic market size (Hyun & Lee, 1989). However, despite these concerns, HMC went ahead with the production of the Pony. In December of 1983, HMC made its first foray into the North American market by exporting the Pony 2 model to Canada.5 This move marked a significant milestone for the company, as it sought to expand its global presence and compete with established car manufacturers in the highly competitive North American market. Priced at CA$6,500, the Pony 2 model immediately became the top-​selling car in Canada due to its bargain pricing. By 1985, HMC sold 79,072 units, up from 25,123 in 1984, outselling Honda by 16,110 units and Toyota by 22,080 (Jacobs, 2015). In the mid-​1980s, Hyundai cars faced criticism for quality issues (Burgess, 1984). Despite this, HMC recognized the strategic importance of the US market, not only due to its size but also because it served as a stamp of approval for an automaker’s cars in the global automotive industry (Kim & Lee, 2001). It is important to note that the US government imposed voluntary export restraints on cars from Japan starting in April 1981, leading to pent-​up demand at the low end of the US automotive market (Hyun & Lee, 1989). This policy incentivized Japanese automakers to focus on maximizing profits with limited quantities, which resulted in a shift away from small cars to bigger, more luxurious cars. This shift created an opportunity for Korean automakers such as HMC to establish a foothold in the small car market, a hole left by the Big Three in Detroit (Green, 1992). To join a race to this market, HMC hurriedly entered the US market and began selling the US$4,995 Pony Excel (a 1500cc subcompact) in February 1986, which quickly became a popular choice for budget-​conscious consumers (Jameson, 1993). In its eagerness to grow too quickly, the company aimed to offer inexpensive alternatives to non-​creditworthy customers, such as college students, young couples, and lower-​income consumers, as a substitute for buying used cars and the Yugo (Green, 1992; Taylor, 2010).6 By the end of 1986, the company had sold 168,127 units, setting an industry record for an auto importer in its first year. Another important factor in the popularity of the Pony Excel was the perception that HMC cars were of Japanese quality (Daly & Moxley, 2010; Rhee, Barnett, & March, 2003). The company reached its peak in 1987, with the slogan ‘Cars that make sense,’ and sold 264,357 230

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units. Buoyed by its initial success in North America, HMC and its then Chairman Chung Se-​Yung decided to open a CA$400-​million Sonata (a 2000cc compact) plant with a capacity of 100,000 units in Bromont, Quebec, Canada in July 1989 (Wagstyl, 1989). However, that decision proved to be ill-​fated due to insufficient market research, leading to what was internally known as the ‘Bromont nightmare.’ The company believed that manufacturing cars in the Bromont plant would allow it to bypass the import restrictions and quotas that were in place on Japanese cars in the US market, and help break Japan’s stronghold on the North American automarket (Cheney, 1989). However, the success was short-​lived due to a series of quality problems with its cars. In the US, for example, engines overheated, air conditioners did not cool enough, and brakes wore out quickly (O’Dell, 1995). In the Canadian winter, Hyundai cars rusted much quicker due to road salt, and its plastic heater core often froze (Daly & Moxley, 2010). Additionally, the company faced challenges with logistics and labour relations in Canada, which adversely affected its quality and further hindered its ability to sustain its initial success (Wright, Suh, & Leggett, 2009). During the late 1980s, HMC was facing difficulties in the US market. For instance, in 1989, sales of Hyundai cars in the US market plummeted by approximately 30.9% from their peak in 1987 (see Figure 10.2). It is worth noting that HMC may not have had a strong incentive to improve the quality of its cars in the past, as only 0.1% of the cars on South Korean roads were foreign-​made, even by the late 1980s. Additionally, the company was particularly vulnerable to labour disputes and work stoppages in 1989 (Green, 1992), which may have further hindered its ability to improve its cars. By 1993, HMC’s outlook in North America had become grim as sales continued to decline. As a result, the under-​used Bromont factory, which was HMC’s first and only assembly plant outside of South Korea at the time, was shuttered in March 1994 (Jacobs, 2015). In his 1994 New Year’s address, Chung Se-​Yung, then chairman of HMC, declared that the company would prioritize quality over quantity, even if it meant slower growth (O’Dell, 1995). In

Figure 10.2 Hyundai Motor Co.’s US sales units and market share, 1986–​2021. Source: Created by the author based on information available at https://​carsa​lesb​ase.com/​us-​hyun​dai/​.

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line with Mr. Chung’s statement, then President Jeon Seong-​Won told Chosun Daily on January 4, 1994, we try to improve our quality level to the last 1 percent and focus more on quality than quantity for our export business. … Considering our recent experience in Canada [closing the manufacturing plant], we decide to concentrate more on technological improvement than capacity expansion, which should be planned more cautiously (Kim & Lee, 2001: 316). Despite making efforts to improve its technological capabilities (Kim, 1998) and quality of its cars (O’Dell, 1995), HMC continued to experience a decline in US sales. By 1998, the company had managed to sell only 90,000 units, translating to a market share of 0.60% in the US market. This marked a decline from 0.70% in 1997 and a significant drop from the 1.72% market share it held in 1987 (O’Dell, 1998). This disappointing performance came 5 years after the company had announced its commitment to a quality-​focused approach in 1994. Adding to the challenges, the company became the subject of ridicule for its subpar quality on October 30, 1998, when David Letterman, the host of The Late Show, humorously included HMC cars in his ‘Top Ten Hilarious Mischief Night Pranks To Play In Space,’ suggesting prank #8: ‘Paste a “Hyundai” logo on the main control panel’ (Daly & Moxley, 2010). During this time, HMC was growing increasingly concerned about its prospects for success in the US market, leading to serious contemplation of the possibility of exiting this market (Holstein, 2013). These circumstances presented the company with a compelling business case for a transformative cultural shift. Then, on December 4, 1998, Chung Mong-​Koo, aged 60 at the time, took over as the leader of the struggling 31-​year-​old car company and Kia Motors, which he had worked to acquire in October that year (Yang, 1999). This marked a pivotal juncture for HMC, which was expected to plunge its domestic sales by about 55% compared to the previous year due to the 1997 Asian financial crisis (Wright et al., 2009). Although the company’s overseas sales were in a steady increase between 1989 and 1998 (Wright et al., 2009), its US sales were still in trouble during the same period (see Figure 10.2). During a business trip to the US in early 1999, Chairman Chung was confronted with the unsurprising news that poor quality had led to declining sales and demoralized dealers facing numerous recalls (Fahey, 2003). This served as a wake-​up call for both him and the company that his father had founded. From then on, he embarked on a two-​decade journey to orchestrate a fundamental transformation in the company’s prevailing culture, shifting it from an emphasis on volume (how many cars it could produce) to a focus on high quality (how excellently it could manufacture cars) (Taylor, 2010). His experience of having run Hyundai Motor Service, a company that specialized in repairs and after-​sales service, since 1974 may have taught him the importance of quality. Just as important, Chairman Chung’s decision to visit the US further solidified his conviction that ‘The only way we can survive is to raise our quality to Toyota’s level’ (Moon, Armstrong, & Kerwin, 2001: 84).

Step 2: Setting and Delivering Stretch Goals to Bridge the Quality Gap Based on the above observation, it was discovered that both SEC and HMC encountered a significant quality challenge in the US market. Founding families had long constructed crises internally to impose stretch goals on top management and employees to enhance their companies’ technological capabilities, as was the case with SEC (Kim, 1997) and HMC (Kim, 1998). They took the same approach to close the quality gap. In the following section, I examine how Lee Kun-​ Hee and Chung Mong-​Koo, as second-​generation family leaders, led their companies to close the 232

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capabilities gap in product quality by setting and delivering stretch goals. By stretch goals, I mean targets that are deliberately set beyond what is currently believed to be possible or achievable, with the aim of challenging individuals or organizations to push beyond their limits and achieve breakthrough performance (e.g., Ordóñez, Schweitzer, Galinsky, & Bazerman, 2009; Sitkin, See, Miller, Lawless, & Carton, 2011; Tully & Hadjian, 1994). Stretch goals are, by definition, extremely challenging and appear unattainable given the company’s current capabilities, practices, and systems. Due to their nature, stretch goals can be demotivating or overwhelming (Ordóñez et al., 2009). As a result, advocates argue that stretch goals are best suited for a small number of successful and high-​performing companies (Sitkin et al., 2011), which can implement an inside-​out-​strategy and later become visionary companies that take leadership positions in their respective industries (Collins & Porras, 1994). Apple Inc., led by its legendary co-​founder Steve Jobs, known for his reality distortion field (Isaacson, 2011), is a recent example that has come to light. Consequently, the imposition of stretch goals on struggling companies, as well as the vast majority of average companies, can be ‘overprescribing’ (Ordóñez et al., 2009: 6) or ‘asking for trouble’ (Sitkin, Miller, & See, 2017: 97). This is partly because these companies may be unable to master the subtle art of stretch goal management. However, my research contradicts this. It reveals that the strategic use of stretch goals to surpass current capabilities is one of the significant reasons behind the success of SEC and HMC, neither of which were the usual suspects at the time. In other words, stretch goals helped them achieve a match between their weak capabilities and the ones that would be necessary to win where they chose to compete by “[disrupting] complacency and [promoting] new ways of thinking and acting” (Sitkin et al., 2011: 545). Samsung Electronics Co. On June 7, 1993, Chairman Lee dramatically changed the destiny of SEC by announcing a groundbreaking ‘New Management’ initiative during a meeting in Frankfurt, Germany, formally known as the Frankfurt Declaration of 1993. One of the central slogans of this initiative was ‘Quality first, no matter what’ (Nakarmi & Neff, 1994: 75). Chairman Lee made quality a priority over quantity, recognizing that quality was a prerequisite for overcoming SEC’s competitive disadvantage in developed markets (Chang, 2008). This was what Chairman Lee had in mind when, in talking about this initiative, he said, I say the weight of quantity to quality at Samsung should be zero to ten. Not five to five, or three to seven. Quantity should be sacrificed for quality. Samsung is willing to stop production lines if that is what it takes to raise the quality of our products, services, people, and management (Song & Lee, 2014: 41). Chairman Lee instilled a vision within SEC, inspiring the company to aspire to world-​class status akin to industry giants like General Electric, Procter & Gamble, and IBM, with a focus on elevating its quality standards by the year 2000 (Ungson et  al., 1997; Grobart, 2013). His objective was nothing short of transitioning SEC from a culture that prioritized quantity to one that championed quality (Song & Lee, 2014). This was a Big, Hairy, Audacious Goal (BHAG), a term coined by Jim Collins and Jerry Porras in their 1994 book, Built to Last. However, Bae Soon-​Hoon, then CEO of Daewoo Electronics, which was the third-​largest Korean electronics company at the time, told BusinessWeek that ‘Why is [Chairman Lee] doing this? It’s a big risk. You can’t make a good organization innovative in one day’ (Nakarmi & Neff, 1994: 76). To remind Samsung executives that achieving a quality revolution inside SEC would require a significant cultural shift in their logic of growth (Tully & Hadjian, 1994), Chairman Lee famously told them, ‘Change everything but your wife and children’ (Grobart, 2013: 62). However, the 233

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biggest obstacle was the old-​timers of SEC who had long been preoccupied with volume-​driven growth (Kraar, 1994; Nakarmi & Neff, 1994). For instance, Lee Su-​Bin, head of the Samsung Group’s secretariat, confronted Chairman Lee on July 6, 1993, before he proclaimed the ‘New Management’ initiative the next day, saying ‘I’m sorry, sir, but quantity also matters. I think quality and quantity are just like two sides of the same coin’ (Cain, 2020: 86). In November 1993, Chairman Lee decided to replace Lee Su-​Bin with Hyun Myung-​Kwan, who did not belong to the inner circle, as he considered a preoccupation with quantity as Samsung’s chronic disease to cure (Kraar, 1994). Nonetheless, it became evident that SEC had not placed quality as its foremost priority (Grobart, 2013). By late 1994, the defect rate of its Anycall cell phones had surged to 11.8%, as the company pushed to sell them at a rapid pace to keep up with Motorola in its domestic market (Chung, 2021). This case serves as a stark illustration that, despite Chairman Lee’s efforts to transform the culture at SEC, the company continued to operate in a manner aligned with the old culture, rather than embracing the tenets of a new one (cf. Barney, Amorim, & Júlio, 2023). In January 1995, Chairman Lee discovered that the company’s newest Anycall cell phones, which he had given as New Year’s gifts to some employees, did not function as intended (Grobart, 2013). This incident signalled to him that SEC was still making poor-​quality products, despite his 1993 declaration of ‘New Management.’ However, everything changed in March 1995 when Chairman Lee took a dramatic action. He ordered nearly US$50 million worth of cell phones, cordless phones and fax machines to be burned in front of cell phone division head Lee Ki-​Tae, his board of directors, and more than 2,000 employees at the Gumi factory where these products were manufactured (Lewis, 2005). This incident became the unforgettable Anycall incineration episode, making a decisive departure from the past and charting a clear path to the future (Barney et al., 2023). ‘If you continue to make poor-​quality products like these,’ many people at SEC recalled Chairman Lee saying, ‘I’ll come back and do the same thing’ (Grobart, 2013: 63). It was only then that he gained their ‘buy-​in’ for the quality-​oriented culture he had been advocating. The result? Between 1994 and 1996, SEC made significant strides in enhancing the quality of its cell phones. The defect rate saw a remarkable decline, plummeting from 11.8% to a mere 2%, while the company’s market share in South Korea surged from 30% to an impressive 51.5% (Chung, 2021). This remarkable transformation would not have been achievable if Chairman Kim had not experienced a profound sense of embarrassment during his visit to a Best Buy store in Irvine, California, in late January 1993. Nevertheless, the subsequent process of transitioning from the symbolic adoption of the ‘New Management’ initiative to its substantive implementation took a few years for the company and Chairman Lee to accomplish. This implies that the cultural change at SEW would not have been possible had Chairman Kim not resonated with SEC employees’ hearts and minds through a dramatic incident, such as the Anycall incineration incident (see Barney et al., 2023). Hyundai Motor Co. The ‘New Management’ initiative launched by Samsung’s Lee Kyun-​Hee in June 1993 had a broad impact on other family-​controlled conglomerates (known as chaebol in South Korea), including HMC, by early 1994 (Kraar, 1994). As previously mentioned, this initiative seemed to be a powerful catalyst for change at HMC, where Chung Se-​Yung emphasized the significance of quality management in his 1994 New Year’s address (O’Dell, 1995). However, significant changes did not occur until December 1998 when Chairman Chung Mong-​Koo (MK) assumed control of the world’s 13th largest automaker (The Economist, 2007). At the time, HMC was having a challenging year in the US market due to its reputation for producing cheap and low-​quality cars (see Figure 10.2), even though industry experts considered its cars well-​built (O’Dell, 1995).

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Despite being initially dismissed by industry experts as ‘a colorless executive who would promote the status quo by flooding the market with cheap knockoffs of Japanese cars’ (Moon et al., 2001: 84), Chairman Chung defied their expectations. He declared an MK-​style initia­ tive of ‘Uncompromising Quality Management’ with his initial 10-​year objective of matching Toyota’s renowned quality standards (Moon et al., 2001). This initiative involved conducting quality oversight twice a month, encouraging employees to suggest ways to improve quality, and building a US$30 million computer centre to help engineers identify and eliminate defects (Lee, 2007; Moon, Armstrong, & Eidam, 2004). He also promoted engineers with expertise in building high-​quality cars to leadership positions, rather than relying solely on business school graduates (Chang, 2004). The company’s manufacturing plants were decorated with motiv­ ational slogans such as ‘Quality is Our Face’ and ‘Make a Global Car,’ Chairman Chung was willing to shut down the assembly line entirely to ensure quality (Schuman, 2005). HMC also adopted the Six Sigma management discipline at the Namyang R&D Center in 1999 (Chang, 2004). Chairman Chung’s initial endeavours were at odds with the prevailing quantity-​focused culture but harmonized with the quality-​oriented culture he had been championing (see Barney et al., 2023). The result? HMC’s product quality improved significantly over the next 5 years. In April 2004, J.D. Power & Associates’ survey revealed that HMC tied with Honda for No. 2 in initial quality in the US, behind only Toyota and ahead of Mercedes-​Benz. HMC’s quality had jumped by about 29% from the previous year, compared to the industry average of 14% and a 62% improvement since 1998 (Christie, 2004; Holstein, 2013). No other automaker had achieved such a dra­­ matic improvement in quality in such a short time (Lee, 2007). Chairman Chung highlighted this achievement in his 2004 letter to shareholders, stating that HMC had closed the quality gap with Toyota and reached a crucial early milestone. We have made massive inroads in quality and our automobiles now rank highly in notable critics choice awards. Our sales have increased across the global because discerning car buyers have come to accept that the Hyundai brand is synonymous with high quality. It is a quality that now speaks for itself, as we have proven to produce a dependable, reliable, safe, and efficient automobile (p. 4).

Step 3: Sequentially Addressing the Capabilities Gap in Design and Branding As discussed previously, both SEC and HMC struggled with product quality in the 1990s. In order to address this, they focused on closing the quality gap and improving their product. Once product quality had been improved, Chairmen Lee and Chung then set their sights on closing the capabilities gaps in design and branding that had long been neglected in their respective companies. Of course, those gaps were widespread among many South Korean companies as they had long operated as original equipment manufacturers (OEMs), producing products that were sold under the brand names of established market competitors and retailers (Helm et al., 1985; Magaziner & Patinkin, 1989; Yoo & Kim, 2015). For example, in early 1995, larger Korean companies exported about 54% of their products under their own brands, while this figure dropped to 27% for small-​to medium-​sized Korean companies (Ungson et al., 1997). Consequently, many Korean companies had little incentive to develop distinctive design and branding capabilities. However, as SEC and HMC chose to prioritize competition through innovation rather than mere efficiency on a global scale, Chairmen Lee and Chung presented them with a series of stretch goals aimed at enhancing their design and branding capabilities.

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Samsung Electronics Co. Chairman Lee Kyun-​Hee of SEC predicted in the mid-​1990s that products in the electronics industry would quickly become commodities (Chang, 2008), leading him to prioritize product design as ‘the ultimate battleground for global competition in the 21st century’ (Yoo & Kim, 2015: 74). In January 1996, during his New Year’s address, Chairman Lee proclaimed that 1996 would be the Year of the Design Revolution and challenged SEC to close the capabilities gap in product design. To achieve the goal of improving product design, SEC had to fundamentally change its approach to product development. As an engineering-​driven company since its founding in 1969, SEC needed to shift its focus towards design. One way it did this was by setting up the VIP (Value Innovation Program) Center in 1998, a cross-​functional facility where designers and engineers could work together to improve the consumer experience with innovative products (Brown & Doebele, 2004; Lewis, 2005). This shift in mindset was critical for SEC to become a leader in product design and differentiate itself from competitors. The VIP Center was just one example of how SEC was working to bridge the capabilities gap in design that had long been de-​emphasized in the company. As a result, SEC had received numerous design awards at the world’s top three design awards, including the International Forum (iF) Design Award in Germany, the Red Dot Design Award in Germany, and the International Design Excellence Awards in the US, thanks to its improved design capabilities since the 1996 Design Revolution (Brown & Doebele, 2004). Prior to the mid-​1990s, SEC was known as an obscure OEM that sold around 40% of its products to established global companies and retailers rather than to consumers, leading to the perception that it was a low-​cost alternative to other electronics brands (Ungson et al., 1997). In comparison to Sony, SEC’s products were priced between 10% and 30% cheaper (Nakarmi, 1995). However, Chairman Lee recognized that in order to compete in developed markets, SEC needed to establish itself as a high-​end brand that could be mentioned alongside Sony, Panasonic (formerly Matsushita), and Philips, despite its weak global brand image (Chang, 2008; Cain, 2020). It followed that in May 1996, just two months before Chairman Lee was elected as a member of the International Olympic Committee (IOC) at the 1996 Atlanta Olympic Summer Games, he instructed SEC executives to develop a strategy to elevate the company’s brand image from a C+​ to an A by the year 2000 (Kim & Woo, 2003). Yun Jong-​Yong, who became SEC’s Vice Chairman and CEO in December 1996, aimed to transform the company’s brand perception from a provider of cheap, me-​too products to a leader in higher-​margin digital products by improving its marketing capabilities (Hilsenrath, 2000). However, at the time, SEC was struggling financially in the US, where it had significant unsold inventory in warehouses and mounting losses (Edwards, Moon, & Engardio, 2003). In the spring of 1998, Circuit City, then the second-​largest electronics retailer in the US, refused to sell Samsung products, stating that ‘Please don’t come back again unless you have the only product in the world or the cheapest product in the world’ (Chang, 2008: 76). Nonetheless, Chairman Lee encouraged SEC to focus on leveraging sports marketing to enhance its brand awareness globally, including sponsoring the Olympics, beginning with the 1998 Olympic Winter Games in Nagano, Japan (Hilsenrath, 2000; Martin, 2018). In 1999, the company led by CEO Yun Jong-​Yong also looked outside and recruited Eric B. Kim, a Korean American with a Harvard MBA, as executive vice president of global marketing who later spearheaded its worldwide brand marketing strategy. When he launched the global ‘Samsung DigitAll: Everyone’s Invited’ marketing campaign on November 10, 1999, he was confronted with significant challenges in strengthening the company’s marketing capabilities and shifting the organizational mindset (Cain, 2020). Despite the support of CEO Yoon, he met with strong resistance from the engineers within the company, as well as faced challenges in garnering

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Figure 10.3 Samsung Electronics Co.’s brand value, 2000–​2022. Source: Created by the author based on information available at https://​int​erbr​and.com/​best-​glo​bal-​bra​nds/​sams​ung/​.

support from other senior executives in his efforts to improve SEC’s brand during his first 2 years (Khanna, Song, & Lee, 2011). This was hardly a surprise, given that marketers at SEC had long been relegated to second-​class citizens, as its ingrained corporate culture was dominated by engineers. As Mr. Kim recalled, Our managers believed that good products sell themselves, that marketing was nothing more than selling, and that selling was only needed when you had a me-​too or weak product. I have worked hard for four years to educate our divisional managers on the role of marketing and the value of developing and communicating superior solutions for our target customers. We have made progress, but many Samsung managers responded initially with a ‘show me’ attitude (Quelch & Harrington, 2008: 8). In subsequent years, he successfully executed the marketing campaign, helping transform SEC traditionally known as a provider of low-​end products into a leader of the digital lifestyle and a household name (see Figure 10.3). By 2001, SEC had set its sights on becoming the world’s leading electronics brand by 2005, surpassing Sony (Brown, 2001). Although SEC had spent less on marketing than Sony (Chang, 2008), it had closed the gap in brand value by devoting more resources to product categories and countries that offered higher future profit growth (Corstjens & Merrihue, 2003). By 2005, SEC had achieved its goal of becoming the world’s most popular consumer electronics brand, surpassing Sony for the first time and firmly establishing itself as a high-​end brand (Chang, 2008).7 According to the global brand consulting company Interbrand, SEC had the fastest-​growing global brand in 2005, ranking No. 20 and achieving a brand value 14 times higher than its initial evaluation in 2000 when Interbrand began its brand value evaluation. The following year, in March 2006,

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Figure 10.4 Samsung Electronics Co.’s financial performance, 1985–​2021. Source: Created by the author based on information available at Samsung Electronics Co., Annual Reports.

Chairman Lee’s focus on high quality, stylish design, and a strong brand paid off with the release of the wine glass-​inspired 26-​inch Bordeaux LCD TV, which further cemented SEC’s position as a leading electronics brand. By that year, SEC had also become the top player in the global TV market with a 14.2% of market share, surpassing Sony (11.3%) and LG Electronics (8.6%). Chairman Lee Kun-​Hee was widely regarded as one of the greatest family leaders of his era, although he did make some mistakes during his nearly 30 years of leadership. One such mistake was entering the overcrowded auto industry in 1995, largely driven by his personal passion for cars. However, under his leadership from 1987 to 2014 (see Figure 10.4), SEC’s revenue grew by 6,760%, reaching US$196 billion, and the South Korean company became a market leader in several product categories, including flat-​panel LCD displays, colour TVs, smartphones and memory chips (Grobart, 2013; Lewis, 2005). Hyundai Motor Co. According to Holstein (2013: 65), ‘a coherent mix of quality improve­ ment, design, and marketing’ helped HMC accelerated its bid to become one of the top five global carmakers by 2010, a goal that was announced in 2000 (Daly & Moxley, 2010; Moon et al., 2001). However, the company had to close its capabilities gaps sequentially, over extended periods of time. With the leadership of Chairman Chung Mong-​Koo, HMC continued to implement the quality management initiative to make the company achieve the same quality as Toyota through the mid-​2000s (Holstein, 2013). In 2004, Hyundai cars were perceived to be comparable in quality to Toyota and Honda, but the company had to make up for the lack of design capabilities. As a result, Chairman Chung next launched a stretch goal in design. Beginning in January 2005, he embarked on a mission to push the boundaries of car designs, as explicitly indicated in his 2005 New Year’s address (Chung, Kim, & Bencuya, 2014). To beef up its design capabilities, the company not only attracted and motivated design talent in foreign countries such as Germany and the United States but also coordinated both in-​house and foreign design studios (Chung et al., 238

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2014; Holstein, 2013). In fact, when heir apparent Chung Eui-​Sun, the son of Chairman Chung, was promoted to Vice Chairman in August 2009, HMC was truly poised to transform itself into a design-​driven car company (Chung et al., 2014). A month after his appointment, the younger Chung, who knew better than anyone at HMC about the importance of world-​class product design, advised Suk-​Geun Oh, then executive vice president of design, and top designers at the HMC design facility at Namyang in South Korea, ‘Let us contemplate how Hyundai Motor Company can be like Apple and make products that customers love’ (Chung et al., 2014: 7). In December 2009, HMC announced at the Los Angeles Auto Show that it would adopt its new signature design philosophy ‘Fluidic Sculpture’: ‘a marriage of nature and art that borrowed from sand-​sculpted dunes, moving water, and flying birds’ (Chung et al., 2014: 8). Conceived in 2007 by the elder Chung and then chief designer Oh Suk-​Geun, this design language constituted the company’s distinctive design DNA that was progressively incorporated into new car models. It also contributed to its ascent in the US (Ramsey & Ramstad, 2011). At the same time, designers at HMC gained more power in influencing product design than engineers and factory process experts (Ramstad, 2010). Like SEC, HMC also received the world’s top three prestigious design awards. Of course, Chairman Chung’s focus extended beyond design. He had ramped up efforts to fortify HMC’s brand image. In April 2005, HMC unveiled its brand management vision at the 2005 Seoul Motor Show, with the ambitious goal of securing a place among the world’s top five automakers by 2010. In August of the same year, this South Korean car company achieved a significant milestone by earning its first-​ever spot on the list of the top 100 global brands, as announced by BusinessWeek and Interbrand. At the time, Hyundai cars were as well-​built as they were good-​looking as HMC had the ability to manufacture cars with superior quality and design compared to its capabilities in the 1990s. However, prospective buyers were not ready to accept the South Korean automaker as a premium car brand, even though its cars had better quality and sharper designs (Moon et al., 2004; Lee, 2007). In 2007, the Hyundai brand was ranked No. 10 among the 13 automotive brands tracked, according to the 2007 Brand Keys Loyalty Index survey. The survey found that many US consumers still believed that ‘They’re the Kmart of automobiles’ (Elliott, 2007: C7). That year, HMC thus launched the ‘Think about it’ campaign meant to reorient consumer perceptions by challenging them to think about the truth of the Hyundai brand. In January 2009, during the US recession, HMC launched the Hyundai Assurance programme, which was a significant marketing campaign (Mohammed, 2011).8 This programme offered job loss protection to American consumers who purchased Hyundai vehicles, allowing them to return their vehicles without damaging their credit rating if they lost their jobs, became disabled, or went bankrupt within a year after their purchase. This campaign was a bold move and was received positively, bringing more attention to the Hyundai brand and helping the company grow without further price cuts. In 2009, while the US automotive market witnessed a decline of more than 20% in sales, Hyundai’s US sales increased by 8% compared to the previous year (Mohammed, 2011). The Hyundai Assurance programme also helped the company win Ad Age’s 2009 Marketer of the Year by making its marketing more relevant to its customers (Halliday, 2009). South Korea’s lar­ gest automaker, HMC, has been widely perceived to offer great value for money, but it has also moved upscale with the release of pricier brands. Its luxury sedan, the Genesis, was its first internationally recognized rear-​wheel drive model that won the ‘the North American Car of the Year’ award at the Detroit Motor Show in January 2009 (Choi & Bok, 2009). In terms of branding strategy, HMC experienced its most pivotal moment in January 2011, when it unveiled its first worldwide brand campaign, ‘Live Brilliant,’ at the North American International Auto Show. The company adopted ‘modern premium’ as its brand direction and introduced its accompanying slogan, ‘New Thinking. New Possibilities’ (Chung et  al., 2014). The company’s 239

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Figure 10.5 Hyundai Motor Co.’s brand value, 2005–​2022. Source: Created by the author based on information available at https://​int​erbr​and.com/​best-​glo​bal-​bra​nds/​hyun​dai/​.

chief marketing officer at that time, Cho Won-​Hong, viewed its new global branding strategy as a way to improve its emotional quality, which would match its burgeoning reputation for top-​notch functional quality (Greimel & Beene, 2010). Since then, HMC’s yearly brand ranking assessed by Interbrand has continued to climb –​ from 43rd in 2013 to 35th in 2021, trailing Toyota (7th), Mercedes-​Benz (8th), BMW (12th), Tesla (14th), and Honda (25th) (see Figure 10.5). In 2022, the Korean automobile company was ranked No. 92 on the Fortune Global 500 list, making it a powerful force in the US and global automotive markets. Chairman Chung’s impressive leadership and strategic vision have been recognized by various institutions and publications. In 2013, he was ranked No. 6 on Harvard Business Review’s list of 100 best-​performing CEOs in the world, up from No. 29 in 2010 (Hansen, Ibarra, & Peyer, 2013). During his tenure from December 1998 to March 2021, he led HMC’s transformation from a struggling automaker to a successful global brand with an annual revenue of US$88 billion, thanks in part to the introduction of pricier models such as the Genesis and Palisade (see Figure 10.6). The company’s market value increased by $48 billion between 1999 and 2011, and it delivered industry-​adjusted shareholder returns of 2,548%. In recognition of his achievements, Chairman Chung was inducted into the Automotive Hall of Fame in 2020, becoming the first Korean to receive this honor.

Discussion This chapter aims to fill a gap in the literature on the RBV and dynamic capabilities by presenting a process model for explaining how companies go about closing their capabilities gap over time. While the literature tends to prescribe that companies focus on their core capabilities, this chapter argues for the value of a deliberate strategy to close the capabilities gap. The chapter offers a cross-​ case study comparing SEC and HMC, two South Korean multinationals, to illustrate the temporal

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Figure 10.6 Hyundai Motor Co.’s financial performance, 1997–​2021. Source: Created by the author based on information available at Hyundai Motor Company, Annual Reports.

patterns of closing the gap in their capabilities. By taking a dynamic approach to the RBV (Helfat & Peteraf, 2003), this chapter seeks to advance the understanding of the RBV and rejuvenate studies that are often criticized as static (Priem & Butler, 2001). In 1994, Korean companies were struggling to compete in global markets due to their low-​ quality products, which earned them a negative reputation. To improve their competitive advantage, these companies recognized the need to drive for higher quality, but many pundits were not optimistic about their chances of success. For example, Jun Yong-​Wook, then a business professor at Chung-​Ang University in Seoul, was quoted by Fortune magazine as saying that ‘[t]‌he only way out is for [Korean] companies to strengthen their competitive advantage. That’s not going to be easy’ (Kraar, 1994: 153). Today, however, companies like SEC and HMC have emerged as some of the most competitive companies in the world, challenging industry leaders like Apple Inc. and Toyota. While they may seem to have executed an inside-​out strategy effectively, this chapter shows that they also pursued an outside-​in strategy by recognizing gaps in their capabilities and working to fill them. Accordingly, a combination of outside-​in and inside-​out strategies can be effective for companies seeking to improve their competitive advantage and succeed in global markets. Both SEC and HMC engaged in a deliberate process of sequentially closing capability gaps and building up requisite capabilities over time. This demonstrates that a combination of outside-​in and inside-​out strategies can be effective for companies seeking to improve their competitive advantage and succeed in global markets. The case study reported in this chapter highlights the success of SEC and HMC in overcoming the negative reputation associated with the ‘Made in Korea’ label and becoming global leaders in their respective industries. These two companies first focused on improving product quality to counter the stigma of low-​quality products. They then prioritized design, upgrading and combining

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their capabilities in quality and design to excel at upstream activities. This was followed by a shift toward downstream activities, where the companies leveraged their improved product quality and design through targeted marketing efforts to win over customers. One of the key factors in the success of SEC and HMC was the leadership of Lee Kun-​Hee and Chung Mong-​Koo, who championed the transformation process by successfully implementing the three steps of closing the capabilities gap (see Kotter, 1995). Their approach to leadership and management, which has been dubbed the ‘Lee Kun-​Hee Way’ and the ‘Chung Mong-​Koo Way,’ played an important role in the companies’ success. In the end, this case study highlights the critical role of leadership in driving transformative change and demonstrates the importance of a comprehensive approach that combines both inside-​out and outside-​in strategies. Furthermore, my case study provides valuable insights for the family firm literature, challenging the conventional wisdom that family nepotism and inherited family control have negative implications for business success. The study provides a nuanced perspective on the crucial role of second-​generation family successors in driving transformative change and achieving business success through an outside-​in strategy at SEC and HMC. This challenges the idea that family firms suffer from self-​control and moral hazard problems due to altruism, which has been widely discussed in the family firm literature (Schulze, Lubatkin, Dino, & Buchholtz, 2001). Empirical studies (e.g., Pérez-​González, 2006; Bennedsen, Nielsen, Pérez-​González, & Wolfenzon, 2007; Chang & Shim, 2015) have suggested that professional managers are better equipped to manage family firms, but they tend to have shorter tenures and may feel pressure to achieve short-​term performance goals (Gomez-​Mejia, Nuñez-​Nickel, & Gutierrez, 2001). On the other hand, family owner-​managers have more authoritative power to set and achieve stretch goals, reflecting a fundamental shift in their thinking. This highlights the potential benefits of family nepotism in promoting moonshot thinking and ambitious goals.

Conclusion In this chapter, I explore the remarkable journeys of SEC and HMC guided by the insightful leadership of their second-​generation family chairmen, Lee Kun-​Hee and Chung Mong-​Koo. However, crucial questions arise concerning the future prospects of SEC and HMC under the stewardship of the third-​generation family leadership. On October 14, 2020, Mr. Chung Eui-​Sun assumed the helm at HMC, while on October 27, 2022, Mr. Lee Jae-​Yong took up a role previously held by his father, Lee Kun-​Hee, (Kwack, 2019). Nevertheless, these leaders find themselves under tre­ mendous pressure as they navigate unprecedented challenges stemming from the transformative impact of digital technologies such as artificial intelligence (AI) and the Internet of Things (IoT) on the automotive and electronics sectors. As noted by Wolff (1964: 166), ‘Many companies have reached their peaks of success when they were led by great leaders, only to lose ground when a new generation took over.’ The unfolding time will be the ultimate judge of whether both third-​ generation family leaders can adeptly steer their respective companies toward next heights, all while deftly handling the inherent volatility, uncertainty, complexity and ambiguity of the contemporary business landscape.

Notes 1 There is a subtle difference between capabilities and core competencies (Prahalad & Hamel, 1990), in that the former are more visible to customers than the latter (Stalk et al., 1992). However, not all cap­ abilities are created equal. According to Zook (2007), a company’s success is often rooted in only five to

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2 3 4 5

6

7

8

ten valuable capabilities that span across different product categories, such as Apple’s hardware design, Google’s software engineering, and Toyota’s manufacturing. Ulrich and Smallwood (2004) further rec­ ommend that companies excel in no more than three capabilities to avoid diverting leadership attention and energy. For Korean names, I adhere to the convention in which family names precede given names, as is cus­ tomary in Korean culture. For example, by 1984, HMC captured a 75% share of the domestic automarket (Burgess, 1984). At the time, SEC was losing money in the US, even though its overall sales were growing probably because it was doing well in the Middle East, China, and Southeast Asia (Jameson, 1993). Before exporting the Pony 2 model to Canada, the company made its first export by selling six Pony 2 cars in Ecuador in 1976. In 1979, HMC began exporting the Hyundai Pony to European countries, including the Netherlands, Belgium, and Luxembourg (Southerton, 2012). In 1980, the Pony was exported to the UK. The Yugo was a subcompact car that was sold in the United States from 1985 to 1991 (Vuic, 2010). It was produced by the Yugoslavian automaker Zastava Motors and was exported to the US beginning in 1985. The car was sold for a price of around $3,990, which made it one of the cheapest cars available in the US market at the time. Despite its low price, the Yugo was not a commercial success in the US. It had a reputation for being poorly made and unreliable, with frequent mechanical problems and safety issues. In addition to its mechanical issues, the Yugo also faced marketing challenges, as its association with Yugoslavia, a country that was then a communist state, made it an unappealing choice for many American consumers. Ultimately, the Yugo’s poor reputation and low sales figures led to its discontinuation in the US market in 1991. At the time, Chairman Lee reiterated the importance of brand capabilities. Despite the progress made in design capabilities since the 1996 Design Revolution, Chairman Lee’s speech at the Milan Furniture Fair in April 2005 highlighted the need for further improvement in design capabilities. He pointed out that SEC’s design competitiveness was not yet at the first tier and emphasized the importance of seizing consumers’ attention within 0.6 seconds (Song & Lee, 2020). In a similar vein, the ‘Hyundai Advantage’ warranty programme was launched in September 1998, which provided a 10-​year/​100,000-​mile warranty on crucial powertrain parts. This was a bold move, considering the industry’s average warranty period was only 5-​year/​50,000-​mile at the time (Moon, 2016). The program was a significant risk for HMC because the company was losing money in 1998, and there were talks of withdrawing from the US market due to the Asian financial crisis of 1997 (Holstein, 2013). However, the programme succeeded by addressing lingering consumer concerns over the brand’s quality and reliability.

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The Rise of Two South Korean Multinationals Helm, L., Nakarmi, L., Jang, J. S., Holstein, W. J., & Terry, E. 1985. The Koreans are coming: South Korea bets its future on an export drive aimed at the US. BusinessWeek, December 23: 46–​52. Hilsenrath, J. E. 2000. Samsung attempts an Olympian leap. Wall Street Journal, September 28: A18. Hitt, M. A., Dacin, M. T., Tyler, B. B., & Park, D. 1997. Understanding the differences in Korean and U.S. executives’ strategic orientations. Strategic Management Journal, 18(2): 159–​167. Holstein, W. J. 2013. Hyundai’s capabilities play. strategy+​business, 70(Spring): 62–​73. Holstein, W. J., & Nakrmi, L. 1995. Korea. BusinessWeek, July 31: 56–​63. Hyun, Y.-​S., & Lee, J. 1989. Can Hyundai go it alone? Long Range Planning, 22(2): 63–​69. Isaacson, W. 2011. Steve Jobs. New York: Simon & Schuster. Jacobs, A. J. 2015. The new domestic automakers in the United States and Canada: History, impacts, and prospects. Lanham, MD: Lexington Books. Jameson, S. 1993. Doing business: An end to the cheers?: Samsung chairman warns that South Korean companies are headed for trouble if they don’t improve quality. Los Angeles Times, October 12. www.lati​mes. com/​archi​ves/​la-​xpm-​1993-​10-​12-​wr-​45033-​story.html (accessed 1 April 2022). Katkalo, V. S., Pitelis, C. N., & Teece, D. J. 2010. Introduction: On the nature and scope of dynamic capabilities. Industrial and Corporate Change, 19(4): 1175–​1186. Khanna, T., Song, J., & Lee, K. 2011. The paradox of Samsung’s rise. Harvard Business Review, 89(7/​ 8): 142–​147. Kim, B., & Lee, Y. 2001. Global capacity expansion strategies: Lessons from two Korean carmakers. Long Range Planning, 34(3): 309–​333. Kim, H., Hoskisson, R. E., & Lee, S.-​H. 2015. Why strategic factor markets matter: “New” multinationals’ geographic diversification and firm profitability. Strategic Management Journal, 36(4): 518–​536. Kim, H., Hoskisson, R. E., & Zyung, J. D. 2019. Socioemotional favoritism: Evidence from foreign divestitures in family multinationals. Organization Studies, 40(6): 917–​940. Kim, L. 1997. The dynamics of Samsung’s technological learning in semiconductors. California Management Review, 39(3): 86–​100. Kim, L. 1998. Crisis construction and organizational learning: Capability building in catching-​up at Hyundai Motor. Organization Science, 9(4): 506–​521. Kim, L. 1999. Building technological capability for industrialization: Analytical frameworks and Korea’s experience. Industrial and Corporate Change, 8(1): 111–​136. Kim, S., & Woo, I. 2003. Lee Kun-​Hee reform 10 years (in Korean). Seoul, South Korea: Gimm-​Young Company. Kotter, J. P. 1995. Leading change: Why transformation efforts fail. Harvard Business Review, 73(2): 59–​67. Kraar, L. 1992. Korea’s tigers keep roaring. Fortune, May 4: 108–​110. Kraar, L. 1994. Korea goes for quality. Fortune, April 18: 153–​158. Kwack, J.-​S. 2019. Lee Jae-​Yong’s stark contrast with Hyundai Motors’ Chung Eui-​Sun. Hankyoreh, November 6. https://​engl​ish.hani.co.kr/​arti/​engl​ish_​edit​ion/​eng​lish​_​edi​tori​als/​916​036.html (accessed 31 October 2022). Lee, D. 2007. Hyundai’s hard road. Los Angeles Times, February 4. www.lati​mes.com/​archi​ves/​la-​xpm-​2007-​ feb-​04-​fi-​hyund​ai4-​story.html (accessed 25 March 2022). Lewis, P. 2005. A perpetual crisis machine. Fortune, September 19: 58–​76. Magaziner, I. C., & Patinkin, M. 1989. Fast heat: How Korea won the microwave war. Harvard Business Review, 67(1): 83–​92. Martin, T. W. 2018. The corporate giant lurking behind the Winter Olympics. Wall Street Journal, February 8. www.wsj.com/​artic​les/​a-​corpor​ate-​giant-​is-​inte​rtwi​ned-​with-​the-​win​ter-​olymp​ics-​like-​never-​bef​ore-​ 151​8105​418 (accessed 9 April 2022). Mohammed, R. 2011. Ditch the discounts. Harvard Business Review, 89(1/​2): 23–​25. Moon, H.-​C. 2016. The strategy for Korea’s economic success. New York: Oxford University Press. Moon, I., Armstrong, L., & Eidam, M. 2004. Hyundai: Kissing clunkers goodbye. BusinessWeek, May 17: 45. Moon, I., Armstrong, L., & Kerwin, K. 2001. Hyundai gets hot. BusinessWeek, December 17: 84–​86. Nakarmi, L. 1995. Look out, world: Samsung is coming. BusinessWeek, July 10: 52–​53. Nakarmi, L., & Holstein, W. J. 1986. Daewoo vs. Hyundai: Battle of the Korean giants. BusinessWeek, December 15: 72–​73. Nakarmi, L., & Neff, R. 1994. Samsung’s radical shakeup. BusinessWeek, February 28: 74–​76.

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Routledge Handbook of Korean Business and Management O’Dell, J. 1995. Getting some respect: Hyundai puts its Accent in showrooms, to industry praise. Los Angeles Times, March 26. www.lati​mes.com/​archi​ves/​la-​xpm-​1995-​03-​26-​fi-​47211-​story.html (accessed 2 April 2022). O’Dell, J. 1998. Do or Daewoo. Los Angeles Times, April 15. www.lati​mes.com/​archi​ves/​la-​xpm-​1998-​apr-​ 10-​fi-​37823-​story.html (accessed 15 March 2023). Ordóñez, L. D., Schweitzer, M. E., Galinsky, A. D., & Bazerman, M. H. 2009. Goals gone wild: The systematic side effects of overprescribing goal setting. Academy of Management Perspectives, 23(1): 6–​16. Pérez-​González, F. 2006. Inherited control and firm performance. American Economic Review, 96(5): 1559–​1588. Prahalad, C. K., & Hamel, G. 1990. The core competence of the corporation. Harvard Business Review, 69(3): 79–​91. Priem, R. L., & Butler, J. E. 2001. Is there resource-​based “view” a useful perspective for strategic management research? Academy of Management Review, 26(1): 22–​40. Quelch, J. A., & Harrington, A. 2008. Samsung Electronics Co.: Global marketing operations. Harvard Business School Case #9-​504-​051. Ramsey, M., & Ramstad, E. 2011. Once a global also-​ran, Hyundai zooms forward. Wall Street Journal, June 30. www.wsj.com/​artic​les/​SB10001424052702​3036​2710​4576​4139​7126​7185​128 (accessed 25 March 2022). Ramstad, E. 2010. Hyundai looks to beef up design. Wall Street Journal, March 1. www.wsj.com/​artic​les/​ SB10001424052748​7047​5460​4575​0951​0243​1859​856 (accessed 2 April 2022). Rhee, M., Barnett, W., & March, J. 2003. Hyundai Motor Company. Standard Graduate School of Business Case #SM-​122. Schulze, W. S., Lubatkin, M. H., Dino, R. N., & Buchholtz, A. K. 2001. Agency relationships in family firms: Theory and evidence. Organization Science, 12(2): 99–​116. Schuman, M. 2005. Hyundai Revs Up. Time, April 18. https://​time.com/​arch​ive/​6672​284/​hyun​dai-​revs-​up/​ (accessed 19 October 2022). Sitkin, S. B., Miller, C. C., & See, K. E. 2017. The stretch goal paradox: Audacious targets are widely misunderstood and widely misused. Harvard Business Review, 95(1): 92–​99. Sitkin, S. B., See, K. E., Miller, C. C., Lawless, M. W., & Carton, A. M. 2011. The paradox of stretch goals: Organizations in pursuit of the seemingly impossible. Academy of Management Review, 36(3): 544–​566. Song, H.-​S., & Lee, S.-​B. 2020. How the Lee Kun-​hee mobile phone became a blockbuster. The Korea Economic Daily, October 28. www.kedglo​bal.com/​lee-​kun-​hee-​s-​leg​acy/​newsV​iew/​ked2​0201​0280​013 (accessed 27 March 2022). Song, S., & Lee, K. 2014. The Samsung Way. New York: McGraw Hill. Southerton, D. G. 2012. Hyundai and Kia Motors: The early years and product development. CreateSpace Independent Publishing Platform. www.ama​zon.ca/​Hyun​dai-​Kia-​Mot​ors-​Prod​uct-​Deve​lopm​ent/​dp/​147​ 7694​382 Stalk, G. 1988. Time: The next source of competitive advantage. Harvard Business Review, 66(4): 41–​51. Stalk, G., Evans, P., & Shulman, L. E. 1992. Competing on capabilities: The new rules of corporate strategy. Harvard Business Review, 70(2): 57–​69. Taylor, A. 2010. Hyundai smokes the competition. Fortune, 161(1): 62–​71. Teece, D. J. 2007. Explicating dynamic capabilities: The nature and microfoundations of (sustainable) enterprise performance. Strategic Management Journal, 28(13): 1319–​1350. Teece, D. J., Pisano, G., & Shuen, A. 1997. Dynamic capabilities and strategic management. Strategic Management Journal, 18(7): 509–​533. The Economist. 2007. Heading down a dangerous road: Hyundai Motor. January 27: 69. Tully, S., & Hadjian, A. 1994. Why to go for stretch targets. Fortune, 130(10): 83–​88. Ulrich, D., & Smallwood, N. 2004. Capitalizing on capabilities. Harvard Business Review, 82(6): 119–​127. Ungson, G. R., Steers, R. M., & Park, S.-​H. 1997. Korean enterprise: The quest for globalization. Boston, MA: Harvard Business School Press. Vuic, J. 2010. The Yugo: The rise and fall of the worst car in history. New York: Hill and Wang. Wagstyl, S. 1989. The chaebol go international. Financial Times, November 27: VI. Wernerfelt, B. 1984. A resource-​based view of the firm. Strategic Management Journal, 5(2): 171–​180. Winter, S. G. 2000. The satisficing principle in capability learning. Strategic Management Journal, 21(10/​ 11): 981–​996.

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PART III

Micro Issues in Korean Businesses and Management

11 PUTTING KOREAN HRM INTO THE EAST ASIAN CONTEXT Sunghoon Kim, Ying Wang, Yoshio Yanadori and Chris Rowley

Introduction This chapter examines human resource management (HRM) in South Korea (hereafter Korea) as compared to two East Asian neighbours: Japan and China. HRM cannot be properly understood without an in-​depth understanding of the institutional environments and cultural values upon which HRM practices are built (Budhwar, Varma, & Patel, 2016). HRM in Korea was shaped by Korean institutional and cultural environments, which have evolved over the history of Korea’s interactions with two influential neighbours: Japan, the first industrialized nation in Asia and China, the birthplace of Confucianism. Therefore, for us to better understand HRM of contemporary Korea, we need to put it in the comparative context of Japan and China. Placing Korea’s institutional arrangements into East Asian contexts provides valuable insights into Korean HRM. The modern institutions of the Korean economy have traces of Japanese influence during the period of Japanese colonization in the early twentieth century (Kohli, 1994). Despite the enduring enmity between the two nations over colonial history, the highly successful Japanese economy was viewed as a model of economic development for post-​war Korea. In the early stages of economic development, Korean lawmakers and business leaders actively learned from Japan, which made some of the traditional Korean HR practices look similar to those of Japan. However, Korean HRM began to diverge significantly from Japanese HRM since the 1990s, as Korean institutional arrangements embraced neoliberal market principles more aggressively than Japan. Comparing Korea’s cultural environments to those of two Asian neighbours allows us to understand some of the unique and interesting features of Korean HRM. Korean culture is shaped by the strong influence of Confucianism, which originated in China and travelled to Japan via Korea (Kim, Fu, & Duan, 2017). Confucianism deeply influenced what Koreans come to believe as the ‘proper’ way to organize social relations in the family, the community and beyond. Building on the Confucian influence, Korea has developed its own unique cultural identity and traditions that underpinned many unique Korean HRM. Therefore, examining Confucian cultural heritage can provide valuable insights into why certain Korean HRM practices had to be as they are. In this chapter, we compare Korean culture and institutional environments to those of China and Japan. Then we present Korean HRM practices compared to Japan and China. This is followed DOI: 10.4324/9781003180920-14

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by a discussion of major emerging challenges of Korean HRM that are shared by Japan and China. We conclude the chapter with food for thought on the possible convergence and divergence of HRM in East Asia (see Rowley, 1998; Rowley & Bae, 2002; Rowley, Bae, Horak, & Bacouel-​ Jentjens, 2017; Rowley & Benson, 2004).

Korean Culture and Institutions in Context Korean Culture in East Asian Context Korea shares many cultural features with neighbouring China and Japan, while Koreans have strived to maintain their own cultural identity. A notable cultural tradition shared by three East Asian countries is Confucianism (Redding, Bond, and Witt, 2014). Although several other major traditions, such as Buddhism and Daoism, have also been influential throughout history in East Asia, Confucianism is most noteworthy due to its unique and substantial impact on the way Koreans organize their social relations with their family members and work colleagues. Confucianism is an aged scholastic tradition that originated in China. It covers a range of areas that modern academia would call political science, moral philosophy, sociology, psychology and religion. The terminology of ‘Confucianism’ was coined by Western missionaries who perceptively recognized Confucius as the central figure in this tradition. Although its popularity and influence have fluctuated over history, Confucianism is the single most important school of thought that shapes many aspects of Chinese culture and institutions. Although it is not clear when Confucianism was first imported to the Korean peninsula, records suggest that Confucian literature was read in Korea as early as the fourth century. Confucianism was elevated to the official national ideology in Korea during the Chosun dynasty (1392–​1910), replacing once dominant Buddhism. Rulers of the Chosun dynasty were so passionate about Confucianism that people could be criminally charged and punished for expressing ideas that were inconsistent with it. Although Confucianism no longer enjoys the status of national ideology in modern Korea, its cultural influence has been so strong that Korean society cannot be fully explained without considering the legacy of Confucianism. The influence of Confucianism on Korea and other East Asian countries was captured in Hofstede’s (2001) research on national culture. Building on his well-​received work of a four-​dimensional conceptualization of national cultures, he added the dimension of ‘Confucian dynamics’ which he later relabelled as ‘long-​term orientation.’ The Confucian dynamics or long-​term orientation represents several crucial Confucianism values: perseverance, respect for social order, thrift, and a sense of shame. Hofstede and Bond (1988) claimed that these Confucian values are conducive to the miraculous rate of economic development of Confucian heritage in East Asian countries. According to Hofstede’s empirical study (see www. hofst​ede-​insig​hts.com), Korea is the country with the highest possible score in long-​term orienta­ tion (100 out of 100), even outscoring China on this dimension (87 out of 100). Although Korea shares many cultural features with neighbouring China and Japan, the distinctiveness of Korean culture needs to be noted. East Asian cultures are very often stereotyped to be collectivistic and hierarchical for casual Western observers. However, in the eyes of Koreans, the Japanese tend to be viewed as highly individualistic people. This is evident in Hofstede’s findings, in which the individualism score in Japan is more than twice that of Korea’s (see Figure 11.1). In the eyes of Koreans, the Chinese also look different. Compared to China, Korea has a much higher score in uncertainty avoidance. This means that Koreans may view Chinese as people who are more tolerant of situations of ambiguity and the lack of specified rules. This can be seen in the examples of the ‘early mover’ development of electric vehicles in China (Rowley, 2021). 252

Putting Korean HRM into the East Asian Context

Figure 11.1 East Asian culture by Hofstede. Source: Creation of authors based on data from data from https://​geerth​ofst​ede.com.

A notable development in today’s Korean culture is the generational gap in their understanding of the cultural norm. The rapid economic growth over recent decades resulted in generations having drastically different life experiences, which led them to develop different cultural norms and expectations. In general, old generations are receptive to traditional Confucian values and highly interdependent hierarchical organizational culture, while young generations find Confucian-​inspired practices oppressive and counterproductive (Park & Park, 2018). The exist­ ence of such a generational gap forces Korean companies to explore new HR practices that may be more appealing to the more individualistic young generation. Although it may not be as visible as in Korea, researchers observed that the generational gap also plays a role in today’s Chinese workplace. Studies found that some Chinese are more ‘traditionalist’ than others, and they react differently to a leader’s display of authority and collectivistic values (Wan, Zhang, & Li, 2023; Zheng & Ahmed, 2024).

Korean Institutional Environment in East Asian Context Korean systems of capitalism have similarities to those of Japan and China in which the government is presumed to play a significant role in developing the national economy. Table 11.1 summarizes the major features of institutional environments across the three East Asian countries. The comparative institutions literature often calls Korea a ‘developmental state’ in the sense that the government actively engages with the actors of the economy in such a way as to push the economic growth of the nation (Hundt & Uttam, 2017; Witt & Redding, 2013; 2014). In fact, 253

Routledge Handbook of Korean Business and Management Table 11.1 Comparison of institutional environments Category

Measure

Korea

Japan

China

Education and skills

Human Development Index (2022) Employment Tenure

0.929

0.920

0.788

Medium

Long

Skills acquisition Organization principle

OJT, private Company

OJT Company

State intervention in wage bargaining Belligerence: days lost to strikes, average 2000–​2008 Main source of external capital

Medium

Low

Short (private), long (state-​owned) Private Party-​controlled single union High

1,160,940

11,693

n/​a

Banks, non-​ bank financial institutions Market, relationships Chaebol personal network (In-​meak)

Banks

Banks

Relationships, state Qituan qiye Communist Party, personal networks (guanxi)

Top-​down Low Seniority

Market, relationships Keiretsu Intra-​industry loops with strong associations, R&D consortia, supplier and distribution networks Participatory Medium-​high Seniority

Public

Public

Family, state

Family High 0.99

Firms High 1.31

Family, state High –​0.35

Developmental

Residual Developmental developmental, and predatory welfare elements Participatory Bottom-​up and through top-​down associations and committees

Employment relations

Financial system

Allocation criterion Interfirm relations

Presence of business groups Noteworthy other networks

Internal structure

Decision-​making structure Extent of delegation Main basis of promotion and pay raises Governance Main ownership form, large firms Main controlling owner Social capital Interpersonal trust Institutionalized trust (rule of law) State Type

Decision-​making

Top-​down

Top-​down Low Relationships

Source: Adjusted from Witt and Redding (2013). Human Development Index data from https://​hdr.undp.org/​

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the concept of developmental state was originally proposed to characterize Japan in the period of post-​war economic development (Johnson, 1999). In addition to the nature of government, sev­ eral features of institutional environments are shared between Korea and Japan. For instance, both countries are known for their enterprise-​based trade unionism and the traditional life-​long employment arrangements that come with the practice of seniority-​based pay and forced retirement age. The apparent similarities in national systems between Korea and Japan are not a coincidence. This occurred because Korea took Japan seriously as the major reference for economic development (Kohli, 1994). Korea and Japan are geographical neighbours across a 200-​km-​wide sea strait. Throughout history, a substantial amount of interactions were made between the two, although not always amiably. The most intense interaction was Japan’s colonization of Korea in the early twentieth century. Although Koreans remember it as a time of exploitation and oppression, Japanese occupiers left strong institutional imprints in Korea such as the role of government as the active coordinator of economic development (Kohli, 2004). Leaders of postcolonial Korea often took Japan as an explicit reference for Korea’s institutional reformation. For example, the 1953 first Korean Trade Union Act was modelled on 1945 Japanese labour regulations (Koo, 2010). Although not as visible as the similarities to Japanese institutions, Korean institutional environments also have some similarities to those of China. One example of the similarities is the prescribed role of the government in economic development. Although Korean economic systems are getting closer to that of a Western liberal economy, it still assumes that the national government is to be a leader in the development of the national economy. For instance, the Korean government provided direct financial support for the development of the entertainment industry, which helped the growth of the K-​pop industry (Kwon & Kim, 2014). Likewise, the Chinese government takes it seriously to lead the ‘socialist market economy,’ being a major investor itself in many industries. Despite the similarities across the three East Asian countries, Korea’s distinctiveness in its institutional environments should be recognized. Witt and Redding (2013) placed Korea into a different category of business system than Japan and China. They noted that Korea diverges from Japan in several important aspects of national business systems. For instance, the decision-​making structure within Korean firms tends to be hierarchical and top-​down while the Japanese system is more participatory. Labour relations in Korea are much more antagonistic (see Rowley & Yoo, 2008; Rowley & Bae, 2013) than that of Japan. Korea also significantly diverges from China in the degree to which the government exert its influence on economic actors. While the Chinese government pursues a corporatist arrangement and exerts its direct influence on economic actors (such as businesses, banks and labour unions), the Korean government works with economic actors rather indirectly (Lee, Rowley & Yu, 2017).

Korean HRM Compared to Japan and China In this section, we will put a selective set of Korean HRM practices (see Bae and Rowley, 2014) in the context of the East Asian context, highlighting notable commonalities and divergences across three countries. Korean HRM shows many similarities with HRM in Japan and China due to the shared cultural heritage and historical interactions between them. However, since the late 1990s, Korean companies explored new approaches to HRM, actively adopting US-​style HR practices while keeping some of its traditional emphasis on a people-​centred approach. This makes Korean HRM increasingly distinctive compared to Japanese HRM, which maintains much of its traditional competency-​based model, and Chinese HRM, which aggressively adopted Western practices. Comparing Korean HRM practices to Chinese and Japanese practices, we do not intend to cover every dimension of HRM practice or context, such as labour markets (see Rowley, Yoo & Kim, 255

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2011) and unemployment in depth (see Rowley, Yoo & Kim, 2005). Instead, we will present the main and noteworthy examples of Korean HRM that can be better appreciated when it is seen in the context of East Asian cultural and institutional environments.

Recruiting and Selection Traditional staffing practices in Korea have many similarities to those in Japan (Froese, Sekiguchi, & Maharjan, 2018). As in Japan, Korean companies traditionally prefer to attract and select candidates who could ‘grow with’ the company for a long time rather than those who are willing to quickly move on to other organizations. Therefore, job openings often target fresh-​out-​of-​ school, inexperienced young adults. This is believed to contribute to building the firm-​specific human capital of the firm and maintaining a strong organization-​specific culture. As in Japan, Korean companies used to recruit employees through a seasonal (annual or biannual) competitive mass recruiting process. In evaluating job candidates, as in Japan, Korean companies tend to give heavy weight to general abilities rather than specific skills for a particular job (Peltokorpi & Froese, 2016). Although not as clearly pronounced as its similarities to Japanese practices, Korean company’s selection practices share several subtle but important commonalities with those in China. For instance, Korean companies place a high value on candidates’ academic credentials. Degrees from prestigious universities are viewed as a strong indication of candidates’ overall quality. This can be an example of ‘credentialism’ that is observed in Confucian-​influenced societies (Kim, Zhang, Chung, Kim, & Choi, 2020). In China, candidates’ university degrees significantly affect recruiting decisions. The culture of respecting university ranking in Korea is so powerful that it raises societal-​level concerns about education-​based discrimination. In response, some organizations (especially those in the public sector) prohibit job candidates from specifying their alma mater, with the hope of reducing the influence of educational background. Another interesting commonality between Korea and China is the role of candidates’ relational capital in selection decisions. Traditionally, Korean firms heavily relied on Yongo, a Korean form of informal network that is in many ways similar to the guanxi network in China (Horak, 2017; Horak & Paik, 2022; Warren, Dunfee, & Li, 2004). Yongo can be based on university affiliation (hakyun), hometown (Ji-​yeon), and kinship relationship (hyulyon). In this practice, candidates with a strong Yongo with a company’s decision makers are given significant advantage in the selection process. Although the significance of Yongo to recruiting decisions has dwindled over the last decade, it still plays an important role in generating applicant pools, especially for small–​ medium-​sized enterprises (SME) that have limited resources to compete with large organizations in the labour market. The active use of network-​based recruiting in SMEs is also observed in China. Ko and Liu (2017) found that small Chinese firms heavily rely on ‘guanxi’-​based recruiting to overcome the liability of smallness. Despite the historical similarities, today’s recruiting and selection practices in Korea increasingly diverge from those of Japan and China. A case in point is the deinstitutionalization of seasonal mass recruiting. In 2019, Hyundai Motor Company announced that it would no longer hire employees through a seasonal mass-​recruiting process (Park & Lee, 2020). Hyundai’s decision to abandon the well-​established hiring practice was soon followed by other major corporations including LG and SK. As of 2023, about half of Korean companies decided not to rely on mass seasonal recruiting, which is still prevalent in Japan. As for the practice of relying on Yongo in hiring, Korean public institutions adopted ‘blind’ recruitment in 2017, with the hope of reducing the influence of job candidates’ education or family-​based Yongo (Kim, 2023). Although the 256

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efficacy of blind recruitment is being questioned, it is an example of Korean’s efforts to address the downside of relationship-​based recruitment.

Training and Development Similar to Japanese companies, in terms of workforce development and skills formation (Rowley & Yoo, 2013), Korean firms offer a range of developmental programmes, including extensive induction training, on-​the-​job training (OJT) and financial support for higher degrees, such as MBA. Such investments in employees are justified with the assumption that employees will stay and contribute to the organization for a long time (Yanadori & Kato, 2007). Korean organizations, especially the large chaebols, make their new recruits go through extensive newcomer induction programmes that can be called an ‘institutionalized socialization process’ (Fang, Duffy, & Shaw, 2011; Jones,1986; Kim, Cable, & Kim, 2005). Newcomer induction programmes in Korea typically comprise of initial corporate orientation that focuses on corporate values and strategic vision (1 to 4 weeks), OJT and job shadowing across multiple departments (several months) and a commencement ceremony (Kim, Chai, Kim, & Park, 2015). This is quite similar to the newcomer training programs in Japan (Conrad & Meyer-​Ohle, 2022; Mestre, Stainer, & Stainer, 1997). The practice of OJT in Korea relies on the culture of mentorship relations between senior-​junior (Sunbae-​hubae or Sasu-​busasu), which is similar to the culture of the Sempai-​kohai relationship in Japan (Hosomi, Sekiguchi & Froese, 2020). In this arrangement, the senior is assumed to have the hierarchical authority as well as a sense of duty to look after the development of newcomers. Korean firms’ employee development practices reflect the tradition of Confucianism and thereby bear some resemblance to some of the employee development programmes in China. Confucianism explicitly recognizes the value of continuous learning. This cultural heritage allows some Korean companies to frame their employee development programmess as a life-​long learning process. An employee development programme that reflects the Confucian culture of learning is ‘Reading Management’ (Dok-​Suh Management). Under this programme, employees are required to read and discuss a list of books that cover not only business-​related subjects but also topics of social science and humanities. This is in line with the educational programmes found in some Chinese organizations. An illustrative case is the employee development programmes at Fotile, a Chinese company in which employees are required to attend Confucianism classes and formally encouraged to put into practice the principles of Confucianism in their workplace (Liu, Tan, Zhou, & Zhou, 2022; Yang, Fu, Beveridge, & Qu, 2020). Despite the many similarities and shared traditions, there are variations in the training and development practices across East Asian countries. In a comparative study on the automobile industry in Korea and Japan, Chang, Eun, Jung, Oh, and Kim (2009) found that Korean companies, compared to Japanese counterparts, invest less in OJT, partly because the company puts more emphasis on automation and outsourcing than training as a mechanism to enhance labour productivity. Despite the shared tradition of the Confucian ideas of learning and development, notable differences are between today’s Korean companies’ training and development and those of Chinese companies. One example is the Chinese practice of studying national objectives as articulated by prominent leaders’ thoughts. In China, employees –​especially those with Communist Party membership and/​ or those who work for state-​owned enterprises, are expected to attend study sessions in which they reflect on how to align company goals with the national objectives, and how to enhance workplace outcomes accordingly (SASAC, 2022). In contemporary Korea, a discussion of national policies is rarely observed in employee training sessions. 257

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Pay and Benefits The main areas of performance management in Korea have been noted elsewhere (Yang & Rowley, 2023). As in Japan, employees’ seniority has been the major determinant of the base pay structure in Korea. Seniority-​based pay stands on the assumption that employees’ productivity correlates with the number of years spent in an organization. It presumes that employees’ human capital, especially firm-​specific human capital, increases as employees accumulate experience in the organization, which justifies higher pay for more experienced employees. In recent decades, performance-​based pay has gained popularity in Korea, while seniority-​ based pay is often described as something to be abandoned rather than promoted. Since the 1997 Asian Financial Crisis, Korean companies have actively embraced the concept of performance-​ based pay under the rubric of ‘Yonbongjae.’ The growth in the popularity of Yonbongjae was quite notable. While Yonbongjae was used by less than 2% of Korean companies (with more than 100 employees) in 1996, it grew to 38% in 2003 (Park, 2004). As of 2022, over 70% of Korean com­ panies are reported to use Yonbongjae (Joo, 2023). The growth of performance-​based pay in recent decades is not necessarily a unique Korean phenomenon. In Japan, since mid-​1990s, performance-​ pay received substantial attention as a way to enhance labour productivity (Lee, Iijima & Reade, 2011; Takahashi, 2018). In China, dismantling the ‘iron rice bowl’ has been a major agenda for economic reform since the 1980s, rapidly making performance-​based pay a major form of compensation (Du & Choi, 2010). Despite the increased popularity of performance pay in Korea, the norm of seniority-​based pay still persists (Horak & Yang, 2019). According to a recent report, the actual amount of perform­ ance pay occupies only 4.5% (individual performance pay –​2.3% plus group performance pay –​ 2.3%) of total compensation paid to typical office workers in Korea, and the prime component of pay is still base salary (85%), which is predominantly determined by the seniority (Joo, 2023). Studies show that the correlation between employees’ pay and their seniority has remained strong in Korean companies over the recent decades, especially among full-​time permanent workers or ‘regular’ workers whose promotion is primarily determined by the seniority (Park, 2018). The persisting influence of seniority on pay determination is also observed in Japan (Pudelko, 2006). However, studies suggest that company’s declining reliance on the seniority principle appears to be more clear in Japan compared to Korea (Lee, 2011; Shin & Kim, 2021). Some of the benefits programmes in Korea can be explained by the Confucian cultural tradition. For instance, it is customary for Korean companies to reimburse employees’ spending on their children’s education –​ particularly university tuition. Also, Korean companies provide a range of small allowances for taking care of family needs, such as supporting ageing parents. This is in line with the Confucian morality around parenthood and filial piety. Another interesting indigenous Korean practice is Tukgap, which literally means the money for rice cake. This is a bonus payment customarily provided days before the major family-​gathering holidays such as ChooSuk (Korean thanksgiving) and Sulnal (New Year’s Day). Although it is also a norm in China and Japan to provide employees with bonuses around major holidays, no exactly commensurate bonus payment is found in other neighbouring countries.

Retention and Outplacement Traditionally, retention has not been a major concern for Korean companies (Bae, 2012). As in Japan, the contemporary Korean labour market (see Rowley et al, 2011) has a dual-​market structure with two distinctive submarkets: one is a high-​end market for ‘regular’ employment 258

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(Chung-​gyu-​jick) and the other is a low-​end market for ‘irregular’ employment (Bi-​Chung-​ gyu-​jick). Under the ‘regular’ employment arrangement, which once was the dominant form of employment relations in Korea before the 1997 economic crisis, workers enjoy a high level of statutory employment protection and are expected to develop firm-​specific human capital, which creates a lock-​in effect. Despite the recently growing popularity of cross-​organizational career building, the interorganizational mobility in the regular employment market is much less than that of liberal market economies such as the US. Retention of ‘irregular’ workers is not an issue either in Korea because irregular employment, by definition, does not presume a long-​term employment relationship. Therefore, Korean companies did not have to pay serious attention to retention strategies for regular workers. For Korean companies, a concern bigger than retention has been the outplacement of the ‘regular’ employees whose firing is limited by the regulations. Established in Korea, as well as in Japan is the practice of age-​based forced retirement for regular workers. In today’s Korea, it is customary for companies to formally set 55 as the forced retirement age. It used to be viewed as a sensible countermeasure to highly protected employment with a seniority-​based pay system. Without the practice of aged-​based forced retirement, the seniority-​based system may lead to an uncontrollable financial burden for the companies. By outplacing aged workers, companies can control the upper limit of their pay and secure the positions for young new recruits. When Korean companies see the need to downsize their workforce, they often use an honourable retirement scheme with which employees are financially incentivized to voluntarily resign. Recently in Korea, as well as in Japan and China, the forced retirement regime has emerged as a serious societal concern in relation to the increase of the aged working population. Due to the age-​based retirement practice, a substantial number of healthy citizens had to quit their job. In response, the Korean government introduced several regulatory changes with the intention of delaying the overall age of retirement. This is in part inspired by Japan, in which the ageing population issue was addressed by a series of regulations to force companies to increase the retirement age. For instance, in 2013, Japan introduced regulations that encourage companies to raise retirement age beyond 65. The ageing population is also an increasingly critical issue in China. In 2022, the Chinese government introduced a new policy to delay the retirement age (Zhao, Cooke & Wang, 2021). Such changes in regulatory environments force Korean companies to come up with new HRM measures for their workforce that are more diverse in terms of biological age. Korean employees’ pattern of voluntary resignation is influenced by cultural features that are shared across Confucian heritage societies. Kwon (2017) found that the turnover intentions of Korean employees are significantly associated with their sense of marginalization based on In-​ Maek –​an informal social network that is similar to Chinese guanxi. She found that employees are likely to leave if they do not belong to the mainstream informal groups within the organization, in terms of the college alumni network and hometown area.

Industrial Relations Trade unions in Korea are centred around enterprise-​based unions (Rowley and Yoo, 2008), which resembles the industrial relations system in Japan. This is rooted in the changes of labour regulations in 1980 that essentially outlawed any collective actions beyond the boundary of an enterprise (Wilkinson, 1994). Such regulatory change was inspired by Japanese industrial relations that were viewed as the driver of the phenomenal economic success of Japanese companies. However, Korean trade unions are different from those in Japan in their mode of behaviour. Korean trade unions are known to be more militant than Japanese trade unions and have a strong 259

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history of pursuing broader, social agendas, such as democratization (during the period of military dictatorship). Despite the antagonistic union–​management relations (Rowley & Bae, 2013), the normal pattern of employer–​employee relationships in Korea can be described as that of ‘managerial paternalism’ with also a role for employers’ associations (Lee, Rowley & Yu, 2017). Managerial paternalism refers to an ideology that encourages employers to take good care of employees while mandating employees to be obedient to and dependent on their employer (Choi & Peng, 2015). In line with this ethos, often alluded to in Korean society as an ideal organizational culture, is a familial environment in which the benevolent employer and obedient employees diligently work together for the common interest. This Confucianism-​inspired employer–​employee relationship is also touted in China where the idea of ‘harmony’ between management and employees is highly valued. However, Korean union–​management relations are significantly different from those of China. One clear difference is the role of government in labour relations. While Chinese trade unions are formally closely affiliated with the Chinese government, Korean labour unions are independent from the government.

Gender Diversity and Employee Wellbeing This area has been explored using the useful ‘gender-​organization-​system’ framework (Yukongdi & Rowley, 2009; Lee & Rowley, 2009). Gender inequality in the workplace, especially in the pos­­ ition of leadership, is a serious concern in Korea (Lee, Lan & Rowley, 2014) as it is in Japan. As of 2021, only 5% of executives are female in the top 100 Korean companies. This does not mean that female leaders perform badly in Korea and Japan (Rowley, Lee & Lan, 2014). Studies found that gender-​inclusive HRM practices are linked to positive organizational outcomes (Magoshi & Chang, 2009; Kato & Kodama, 2018; Kodama, Odaki, & Takahashi, 2009). Despite the evidence for the effectiveness of gender-​inclusive practices, Korean and Japanese organizations lag behind in recognizing the value of gender equality in the workplace. The delay in the development of workplace gender equality can be ascribed to the long-​held Confucian culture that traditionally made a clear distinction in gender roles (Cho & Choi, 2018; Cooke, 2010; Lee & Rowley, 2009). Extreme work hours have been a major concern of employee wellbeing in Korea as well as in Japan and China. Korea has been one of the highest among OECD countries in terms of work hours. Although the recent introduction of work hour regulations in 2021 began to bring some visible changes in the pattern of work hours, Koreans have been tolerant of the culture of extreme work hours. The cultural legitimation of extreme work hours is in line with a similar ethos in China. Spector et al. (2017) suggest that, unlike workers in Anglo societies, Chinese workers would not perceive long-​work hours as a significant threat to work–​family balance. These have come under pressure by some changes in work ethics in Korea, Japan and China (see Rowley, 2023).

Global Talent Management Korean multinational enterprises (MNEs) rely heavily on an ethnocentric approach to staffing leadership positions for overseas subsidiaries. This is similar to the traditional approach of ethnocentric global talent management in Japanese MNEs (Froese, Shen, Sekiguchi, & Davies, 2020). However, in recent years Korean MNEs outpaced Japanese MNEs in the efforts to embrace a polycentric approach by appointing non-​Korean global talents to leadership positions in key markets. For instance, the North American branch of Hyundai Motors is led by a Spanish-​born Jose Munoz who used to work for other automobile companies, while Toyota America is led by Testuo 260

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Ogawa who worked for Toyota since 1984 right after college. The Korean MNEs’ approach to global talent management also diverges from that of Chinese MNEs, which focuses on using host country nationals rather than parent country nationals as the leaders of subsidiaries in developed countries (Froese et al, 2020). Korean MNEs have been making conscious efforts to enhance their internationalization. Sekiguchi, Froese, and Iguchi (2016) proposed the concepts of ‘internal’ and ‘external’ internation­ alization of MNEs. Internal internationalization refers to globalizing the knowledge, skills and abilities of MNEs’ home country headquarters, while external internationalization is to enhance the global capabilities of overseas subsidiaries. For instance, Samsung has tried to enhance the ‘internal’ internationalization by hiring increasing numbers of foreigners in Korean headquarter offices. LG hired foreigners as their executives at the Korean headquarters and required Korean employees to use English in company meetings. This is also found in Japanese MNEs. Increasing numbers of Japanese MNEs pursue internal internationalization by hiring foreigners as decision-​ makers in the Japanese headquarters; by assigning inpatriates from foreign subsidiaries to Japan; and by adopting English as a workplace language (Conrad & Meyer-​Ohle, 2019; Kim, Reiche, & Harzing, 2022). External internationalization is also tried by hiring host country nationals into leadership positions. Korean MNEs appear to suffer from the liabilities of their origin, especially in developed economies. Chung, Brewster, and Bozkurt (2020) suggest that local employees of Korean MNEs in high-​income countries (such as those in the US) find it difficult to accept HR practices imported from Korean HQs. This phenomenon of liability of origin is also reported in Chinese MNEs operating in developed markets (Cooke, Liu, Liu, & Chen, 2019; Ouyang, Liu, Chen, Li, & Qin, 2019). Table 11.2 compares major features of HR practices across three East Asian countries.

Table 11.2 Comparison of selective HR practices between Korea, Japan and China Korea Recruiting & selection

Japan

China

– Job openings often focus on – Job openings often – External labour market is entry-​level workers focus on entry-​level actively addressed for all positions. workers – Seasonal (annual or – Seasonal (annual or – Employment agencies biannual) competitive biannual) competitive play active roles in mass recruiting process. mass recruiting supplying migrant Increasing popularity of on-​ process workers and low-​skilled demand recruiting workers – Heavy weight is given – Heavy weight is given – Candidates’ academic to general abilities rather to general abilities credentials are highly valued. Problems of than job-​specific skills. rather than job-​specific overqualification in recent Candidates’ academic skills years credentials highly valued – Candidates’ personal connections (Yongo) are influential. (Continued)

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Routledge Handbook of Korean Business and Management Table 11.2  (Continued) Korea

Training & development

Pay & benefits

Retention & outplacement

Industrial relations

Japan

– The ‘blind’ recruitment policy enforced in public sector to reduce discrimination against age, academic credentialism, personal connections – Wide range of – Extensive range developmental programmes of developmental programmes – Serious newcomer – Intense newcomer induction programmes in induction programs in large companies large companies – The value of continuous – The value of learning continuous learning – Seniority has been the – Seniority has been the major determinant of traditional determinant the base pay for regular of the base pay workers, despite growing popularity of performance-​ based pay. – Substantial pay inequality – Increasing popularity between ‘regular’ and ‘non-​ of performance-​based regular’ workers. pay – Confucian cultural tradition – Confucian cultural inspired allowances (family tradition-​inspired care, holiday bonus etc.) allowances (e.g., bonus around major holidays) – A high level of statutory – A high level of employment protection for statutory employment ‘regular’ workers while protection for ‘regular’ precarious ‘temp’ workers workers while precarious ‘temp’ workers – A mandatory retirement age – A mandatory policy allowed retirement age policy allowed – Recent efforts to delay the – Recent efforts to delay retirement age the retirement age – The influence of personal network on retention – Enterprise based union with Enterprise based union antagonistic labor relations

262

China – The importance of candidates’ relational capital (e.g., Guanxi)

– The value of continuous learning – Political ideology training – Seniority once was a major determinant of the base pay

– Established popularity of performance-​based pay – Confucian cultural tradition-​inspired allowances (e.g., bonus around major holidays)

– A mandatory retirement age policy allowed – Recent efforts to delay the retirement age – The influence of personal network on retention National trade union affiliated with the government

Putting Korean HRM into the East Asian Context Table 11.2  (Continued)

Diversity & inclusion Global talent management

Korea

Japan

China

– Norm of familial employer–​employee relations – Trade unions are independent from employer and the government – Very poor female representation in leadership positions – Extreme work hours The dominance of home country (Korean) expats, Increasing number of foreign leaders in Korean HQ and subsidiaries in key markets

Norm of familial employer–​employee relations

Norm of familial employer–​ employee relations

– Poor female representation in leadership positions – Extreme work hours The dominance of home country (Japanese) expats

– Under representation of female in leadership positions – Extreme work hours Host country nations in advanced markets, home country nationals in developing countries

Source: Created by authors.

Case Study: Samsung’s HRM Practices Samsung, now a global technology giant known for its leading positions in consumer electronics and semiconductor products, was established as a trading company in 1938 when Korea was colonized by Japan. The founder Lee Byung-​chul was born into a wealthy family. He grew up in a strong Confucian climate, being taught to read Confucian classics. In his autobiography, Mr. Lee mentioned the Analects of Confucius as the most important book that shaped his personal values during his formative years. Later he attended Waseda University in Japan, majoring in economics and politics. The personal network he came to develop in Japan played a crucial role throughout his life. He spent every January in Tokyo while he led Samsung. He regularly sought advice and inspiration from his Japanese networks, which heavily influenced the way he managed the early days of Samsung. Samsung developed its initial form of HRM system under the leadership of Mr. Lee who embodied the traditional Confucian values and institutional influence from Japan. Until 1997 (the year of the Asian financial crisis), Samsung’s HRM closely resembled that of leading Japanese companies, primarily relying on the seniority-​based system in which fresh graduates were attracted to the company and moved up the corporate ladder, being developed into generalist managers. Although Samsung’s HRM was more individualistic than many other Korean chaebols, Samsung’s major HR decisions primarily followed the logic of seniority. In other words, Samsung’s HRM until 1997 showed characteristics of typical Korean HRM of the period. In the 1990s, under the leadership of Gun-​hee Lee, the third son of founder Mr. Lee, Samsung set out to transform itself from a locally dominating player to a globally respected business. This was accompanied by Samsung’s effort to move away from traditional seniority-​based HRM and follow the ‘Western’ best practice model of HRM that was gaining popularity in Korea as well as

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in many countries. The new model of HRM emphasizes individuals’ performance over their seniority and tries to enhance workforce flexibility at the expense of job stability (Bae, 1997; Rowley & Paik, 2009). The 1997 Asian financial crisis expedited Samsung’s effort to transform its HR system. Samsung increased the performance-​based portion of the pay packages, offered expedited promotion pathways to high-​performers, and flattened the overall organizational structure (Chang, 2012; Pucik & Lim, 2001). Samsung also made conscious efforts to globalize its workforce, by hiring foreign MBA graduates in Seoul headquarters and by sending out high-​potential employees for developmental overseas missions. Today’s Samsung no longer considers Japanese HRM as their model to follow. Samsung exerts ongoing efforts to reduce the dysfunctional elements of Confucian traditions such as overly hierarchical culture or gender bias. However, the legacy of Japan-​inspired seniority-​based HRM still remains strong in Samsung’s HRM. Confucian cultural influence is also still palpable, exemplified in top leadership succession, which is predominantly governed by the logic of family business.

Convergence, Divergence and Converging Divergence The debates around possible systematic national convergence or not are long standing (see Rowley, 1998; Rowley and Benson, 2004). One recent contribution is Rowley et al (2017) whose Special Issue explored distinctive contextual factors of HRM in the Asia Pacific in order to contribute new and non-​Western insights to the convergence-​divergence debates. After establishing a multilevel analytical framework consisting of macro, meso, micro levels, this discusses theoretical trends at each stage, which reveal that countries at different developmental stages possess distinctive political-​economic frameworks, institutions, cultural features and value systems. Studies also analyze the distinctive features of HRM in the respective cultural contexts, including (1) ‘yongo’ and informality in HRM in Korea, (2) ‘guanxi’ in the context of performance appraisal in China, and (3) relationship building by leaders in China. This concludes that first, HRM systems in Asia Pacific remain rather heterogenic with no trend to global convergence, rather, local systems were ‘mixing’ best practice approaches, resulting in ‘hybrids’ while others tended to diverge. Second, the distinctiveness of Asia Pacific HRM revolves around the themes of social ties, informality and interpersonal trust (Ibid.) As shown in the prior sections, Korean HRM shares many commonalities with HRM in Japan and China. This is the outcome of strong forces of convergence between these countries (Rowley, Benson & Warner, 2004). Neo-​institutionalism literature suggests that organizations become similar in their routines and practices due to three forms of isomorphic mechanisms: (1) coercive mechanisms that come from political influence, (2) mimetic mechanisms that encourage organizations to follow the examples of successful others, and (3) normative mechanisms in which the diffusion of an organizational practice is driven by decision-​makers who were trained to take the practice for granted (Dimaggio & Powell, 1983). These three-​fold mechanisms of isomorphism could explain the observed similarities of HRM practices across East Asian countries. Korean companies have been under strong isomorphic pressure to adopt Japanese HRM until the mid-​1990s. Coercive isomorphic pressure was evident as the Korean government, in an effort to build a modern industrial nation, introduced a range of labour regulations that compelled Korean companies to adopt practices that were prevalent in Japan. For instance, the changes in industrial relations policy in the 1980s generated substantial coercive pressures for Korean companies to adopt enterprise-​based trade unions (Porges, 1990). Memetic isomorphic pressure was also vis­ ible as Japanese companies were viewed as a model of success to be imitated. An example is the adoption of seasonal competitive mass recruiting practice in Korea. The practice of seasonal mass 264

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recruiting of college graduates was established in Japan in the early twentieth century. In 1957, the Korean company Samsung first introduced this practice in Korea, and it was later emulated by many other Korean companies. The normative mechanism was also in action, particularly in the early period of economic development (the 1960s–​1970s). Despite the historical enmity between the two countries, many Korean managers reached out to the Japanese to gain insights into how to run their companies. In 1968, Japan occupied 81% of government-​registered foreign technology exporters to Korean companies (Choi, 2021). This suggests that, in this formative period of eco­ nomic development, many Korean business leaders took it for granted that Japanese companies are the most suitable source for new knowledge and innovation. The forces of conversion between Korean HRM and Chinese HRM are subtle but evident as the two countries share the same cultural heritage. Cultural values are important drivers of HRM practices because they influence peoples’ ways of seeing the world and thereby create normative isomorphic mechanisms. As discussed earlier, Confucian culture underpins many HR practices shared between Korea and China. Employees’ tendency to tolerate a paternalistic employer–​ employee relationship can be a good example of the influence of Confucian heritage culture shared by Korea and China. Despite the substantial degree of commonalities acknowledged, there is also notable uniqueness in Korean HRM, even compared to that of Japan and China. Since the 1997 Asian financial crisis, Korean companies have increasingly shifted their major reference from Japanese companies to US companies. Today’s Korean companies are eager to learn more from Western MNEs than from Japanese companies, resulting in a substantially weakened degree of mimetic isomorphic pressure from Japan. Although a similar trend towards a neo-​ liberal economy is also found in Japan (such as the weakening of life-​long employment), the change in Korea appears to be more drastic and far-​reaching, partly due to the shock of the IMF bailout programme (in 1997) that forced Korean companies to depart from traditional HRM arrangements (Choi, 2004). Along this line, an example of the recent change in Korean HRM is the rapid deinstitutionalization of seasonal competitive mass recruiting. Korean companies have utilized this practice since the 1950s, and it is one of the HR practices that makes Korean HRM look similar to Japanese HRM. The abandoning of mass recruiting began in 2019, and as of 2023, most chaebol companies stopped hiring employees through the seasonal recruiting process. On top of the legacy of isomorphism and emerging trends of divergence in East Asia, an important development in Korean HRM is the increasing diversity of HRM practices within each country. While there are companies that still follow the traditional model of Korean HRM, there are also many companies that actively explore new ways to manage people, following the examples of cutting-​edge US tech companies. While there are a substantial number of Korean employees under traditional lifelong seniority-​based HRM systems, there are also a growing number of Korean employees remaining under highly transactional and temporary employment arrangements (Cooke & Jiang, 2017). This tendency of increasing within-​country divergence is also observed in Japan and China (Aoki, Delbridge, & Endo, 2014; Debroux, Harry, Hayashi, Huang, Jackson, & Kiyomiya, 2018). While many Japanese companies still hold onto the traditional Japanese style of HRM (Robinson, 2003), newly emerging Japanese companies are experimenting with new forms of HRM. China is a large economy where the within-​country diversity of managerial practices is noticeable. This is in line with the discussion about converging diversity (Katz & Darbishire, 2002). According to this thesis, what really converges across nations is the growing diversity within a country, which leads to the co-​existence of a range of different HRM systems and practices within a nation (Rowley, 1998; Rowley & Benson, 2002). 265

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Conclusion This chapter placed Korean HRM in the East Asian context, comparing it to HRM in Japan and China. Historical connectivity between these East Asian countries drove the emergence of HRM practices that look similar in their form and underlying cultural and institutional logic. The influence of institutional imprints by Japan and the cultural heritage of Chinese Confucianism is readily observable in today’s Korean HRM. However, the distinctiveness of Korean HRM should not be ignored. Since the Asian financial crisis in 1997, Korean companies have taken Western global companies as their major references, allowing them to deviate from traditional HR practices that were shared with Asian neighbours. Korean organizations are facing challenges similar to those being faced by Japanese and Chinese companies, such as the ageing workforce, technological changes and casualization of work. It would be interesting to see whether these challenges would function as forces of additional convergence between the three countries or strengthen and enlarge the distinctiveness of Korean model of HRM.

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12 PEOPLE MANAGEMENT IN KOREA An Organizing Logic Perspective Johngseok Bae, Youngshin Kim, Ji Seong Ryu and Woonki Hong

Introduction People management refers to the principles, policies and practices integral to the design and implementation of organizational systems related to people. People management paved the way for the growth of companies and the economy in the Republic of Korea (hereafter, Korea) for decades. Korean companies have experienced paradigm-​shifting changes in people management practices since Korea started its industrialization in 1962. The adoption and changes of Korean companies’ people management practices have been strongly influenced by external factors, such as political, economic and societal environments during Korea’s industrialization and by internal factors, such as management values, philosophy and strategic directions of individual corporations. In the case of macro factors, the Korean financial crisis that occurred in 1997 shifted away from traditional people management policies (i.e., internal labour market, job security, and seniority-​based approach) to market-​like organizations (i.e., recruiting experienced people, pay-​for-​performance, and layoff), and the global financial crisis in 2008 further accelerated these transitions (Bae, 2012; Tung, Paik, & Bae, 2013). More recently, the COVID-​19 pandemic, digitalization and ESG (environmental, social and governance) have posed challenges in people management practices, and the internal micro factors also led to changes in these practices. In particular, core values and strategic directions strongly influenced people management practices’ adoption and adaptation. For example, in Samsung Electronics Company, the founder’s value of ‘people first’ has led to the company’s growth over the past few decades. In Hyundai Motor Company, the long-​lasting culture has been shaped by the founder’s spirit of ‘Have you tried it?’ The aim of this chapter is to analyze how big Korean companies have adapted their people management practices to environmental changes to gain competitive advantages. Hence, this chapter’s key deliverables include (1) the trajectory of people management practices of the big business of Korea contingent upon the external environments and management philosophy; (2) a comparison of people management practices among four corporations given different histories, industries, cultural values and strategic positions; and (3) the major challenges that these four companies

DOI: 10.4324/9781003180920-15

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encounter under recent environmental changes, such as the pandemic, digital transformation and ESG approach. To achieve these goals, we utilize three organizing logics (i.e., hierarchy, market and community) (Adler, 2001) as a theoretical framework to analyze people management systems. We cover four big businesses (i.e., Samsung Electronics Company, Hyundai Motor Company, SK Telecom and Kakao) since they are the most influential institutions that spread their management practices to small-​ and medium-​sized companies in Korea. These four corporations are diverse in terms of their industry and history. We gather data through interviews with key HR professionals and executives of four corporations. Then, we examine how the people management practices of the four companies have changed during the past few decades. To this end, we first provide a theoretical framework for the case analysis, followed by the contextual background of the history and features of Korean people management practices. Then, we analyze the four cases based on interview data using our theoretical framework. Finally, we provide implications for research and practice.

Theoretical Framework: Three Organizing Logics in People Management Three Organizing Logics: Hierarchy, Market and Community The organizing logic refers to a fundamental set of ideologies and principles that serve to guide the actions of agents, shape the configuration of management practices and align business activities. People management encompasses organizing logics for configuring people management practices, policies and philosophy (Wright, Dunford, & Snell, 2001). People management practices have been formed and evolved through interactions with both internal factors such as business strategy and culture and external factors such as customers and technology. In this chapter, we employ hierarchy, market and community as three organizing logics to analyze the people management practices of big Korean companies (Adler, 2001). First, the hierarchy logic is coordinated by an authority mechanism that controls individuals through fiat from higher levels of management. The hierarchy logic considers employees as ‘the organization man’ (Whyte, 1956) who are dependent on the organization by internalizing organizational values and norms. Individual employees are treated by their functional roles and positions within organizations’ mechanical division of labour. The hierarchy logic is formed and reinforced by adopting specific types of people management practices. As an illustration, people management practices within the framework of hierarchy logic are characterized by the utilization of an internal labour market with an employment security policy. Employees are selected by their potential and fit with the organizational values. The nature of jobs could be broad and diverse depending on the organization’s demands. Compensation is based on seniority with low incentive intensity, representing vertical pay dispersion by hierarchical ranks and positions. Second, the market logic utilizes cost‒benefit analysis for employment decisions using a price mechanism. Individual employees are conceived as independent and self-​interested homo economicus. On the one hand, the market logic typically adopts an external staffing system with numerical flexibility under a transactional psychological contract (Cappelli, 1999; Lepak & Snell, 1999). On the other hand, the organization makes a long-​term investment relationship with its core (talented) group, a decision driven by a thorough cost‒benefit analysis (Lepak & Snell, 1999). The market logic places a significant emphasis on individual-​based job design and clearly defined

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tasks and job descriptions stipulated in the employment contract. This market logic also entails individual-​based performance evaluation and compensation. Moreover, employees are controlled by the output they produce with high incentive intensity under this framework (Williamson, 1991). Finally, the community logic is coordinated by a trust mechanism. Employees are considered interdependent organizational members who participate in conscious and autonomous collaboration in an organic division of labour (Adler & Heckscher, 2006). In the community logic, individual employees are assumed to be autonomous agents that engage in a mutually reciprocal relationship. People management practices in the community logic are built on the norms of reciprocity (Conner & Prahalad, 1996; Kogut & Zander, 1996; Ouchi, 1979), including enlarged and/​or enriched jobs, collective job performance, and emergent task elements (Ilgen & Hollenbeck, 1991). Organizations taking the community logic coordinate employees’ outcomes through internalized values and norms and autonomous participation in collaboration (i.e., social control) (Ghoshal & Moran, 1996; Kogut & Zander, 1996). Compensation policy in the community logic is characterized by relatively high compensation tied to organizational performance (Pfeffer, 1998). We summarized the features of people management practices within the three organizing logics in Table 12.1. Table 12.1 People management in three organizing logics Organizing logics

Hierarchy

Market

Community

Assumptions about Human Nature

• Organization man • Employees with functional roles for organization • Internal labour market; ‘Make strategy’ • Selection criteria: Potential and organizational fit • Employment or job security • Organization-​based • Fiat-​based various role-​performing • Hierarchical tall structure

• Homo economicus • Independent individuals seeking self-​interest

• Autonomous actor • Community members with reciprocal relationship

• External staffing; ‘Buy strategy’ • Selection criteria: Performance potential, and competencies • Cost–​benefit approach

• Organic internal labour market • Selection criteria: Organizational fit • Long-​term employment

• Individual-​based • Specific job description and employment contract • Individual-​based flat structure • Output control • Autonomy and competition

• Relation-​based • Collaboration among individuals and groups • Relation-​based flat structure

Employment Policy

Work System

Control & Coordination Compensation Policy

• Rule-​and authority-​ based control • Conformity and cooperation • Seniority-​based pay • Individual performance-​ • Weak incentive intensity based pay • High vertical pay • Strong incentive dispersion intensity • High horizontal pay dispersion

Source: Created by the authors.

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• Value-​and norm-​based control • Autonomous participation and collaboration • Competence-​based and organizational performance-​based pay • Moderate incentive intensity • Relatively low pay dispersion

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Change and Hybridity of Organizing Logic in People Management The organizing logic within people management practices can be identified by either examining the top management’s intention toward people management or analyzing the prevailing features of people management practices within a company. We employ the latter approach for this chapter. The dominance of an organizing logic within a company depends on three factors: (1) the intensity of a single people management practice, (2) coverage of a single people management practice, both rooted in a particular organizing logic, and (3) the range of people management practices aligned with that particular organizing logic. Intensity refers to the degree of influence that a single people management practice has on the competences and commitment of employees, whereas coverage represents the percentage of employees covered by that people management practice (Paauwe & Boselie, 2005). Range refers to the percentage of people management practices implemented based on a particular organizing logic. For people management, a company may adopt either a single organizing logic (referred to as a pure type) or integrate multiple organizing logics (namely, a hybrid type). The pure type comprises one of three organizing logics as previously mentioned: hierarchy (H), market (M) or community (C). When using a hybrid type, the organizing logics may serve as either a dominant logic (playing a leading and critical role) or a supplemental logic (acting as a supporting and marginal role). To differentiate between these roles, capital letters are assigned to dominant logic (i.e., H, M or C), and small letters are assigned to supplemental logic (i.e., h, m, or c). The hybrid type can manifest in three forms: dominant–​dominant, dominant–​supplemental, and supplemental–​supplemental. The dominant–​dominant form is represented using capital letters in order of priority, such as HM (Hierarchy–​Market) and MC (Market–​Community). In the case of dominant–​supplemental form, both capital and small letters are used, as seen in Hm (Hierarchy–​market) or Cm (Community–​ market). The supplemental–​supplemental form arises when no dominant logic is present, as seen in hm (hierarchy–​market). This chapter delves into a comprehensive analysis of the shift in organizing logics within Korean big businesses by examining the speed and scope of changes in people management practices during each time period. The speed of change refers to how quickly a logic is introduced and subsequently altered. Certain organizations exhibit agility in transitioning dominant logic (such as SK Telecom, as shown in Table 12.4) or rapidly adopting new organizing logic (such as Samsung Electronics, as shown in Table 12.3), while others tend to be slow in adopting new organizing logics (as observed in Hyundai Motor Company, as depicted in Table 12.5). The scope of change indicates the extent to which people management practices are affected by the adoption of a particular organizing logic. The scope of change is considered narrow when only a limited number of practices or policies undergo modification and broad when a substantial number of practices or policies are affected. Together, the speed and scope of change determine whether the existing organizing logic undergoes a complete transformation, becomes blended with another equally influential logic, or integrates with a weaker logic. Substitutions or hybrid forms of the organizing logic may emerge over time as organizations respond to complex external environments (Kraatz & Block, 2008; Oliver, 1991).

Contextual Background: History and Features of People Management in Korea People management practices in Korea have evolved to enhance competitiveness in response to external socioeconomic environments. The most significant change was attributed to the Korean

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financial crisis in 1997, which precipitated a shift from the hierarchy logic of people management practices into the market-​oriented logic. The changes in the logic of people management that began at this time have played a pivotal role in Korean economic growth. After 2010, fatigue with a strong emphasis on meritocracy and the need for innovation prompted Korean companies to explore community logic in their people management practices. The following outlines the transition of organizing logics in Korean people management practices on three inflection points. Hierarchy as dominant logic before 1997. The rapid economic growth of Korea was primarily driven by a state-​driven development model that concentrated on heavy and chemical industries. Major Korean companies institutionalized a seniority-​based paternalistic people management system during industrialization in pre-​1987 (Tung et al., 2013). Confucian values and collectivism formed the foundation of Korean culture. Korean employees were loyal to their companies and accepted unequal power distribution. Extensive investment in human capital and cheap and hard-​ working labour were important sources of competitive advantage for Korean companies. The first direct presidential election and political democratization in 1987 triggered the human rights movement, which resulted in a strong labour movement with 3,749 union strikes in 1987 (i.e., 13 times the number of strikes compared to the previous year; Kim & Bae, 2004). The rapid economic growth and the legalization of labour unions, however, contributed to the actual wage hike (e.g., 10% growth of labour income in 1987, 15.5% in 1988, and 21.1% in 1989) and decreased exports (Heo et al., 2008). Market logic introduced in late 1997. The people management practices underwent significant changes after the Korean financial crisis of 1997. The bailout programme from the International Monetary Fund (IMF) needed market-​oriented reforms that emphasized labour flexibility and efficiency. As a result, the use of temporary workers and layoffs became widespread practices among Korean companies, which led to a decline in employee trust, and employment relationships became more transactional. As a result, the people management model dramatically shifted from a seniority-​based paternalistic to a market-​based and performance-​oriented model (Kim & Bae, 2004; Tung et al., 2013). During the 2000s, financial and corporate restructuring played a crucial role in propelling major Korean companies to become prominent global players, particularly in the electronic appliance, automobile and semiconductor industries. Korean companies that initially focused on high product quality strategies transitioned their core capabilities toward product innovations and started to recruit global talent. Korean culture and values were changed accordingly. American-​style management ideology and globalization shifted their management style and organizational cultures to a ‘performance-​first’ approach, including internal competition, the war for talent, and strong individual-​based incentive intensity (e.g., market logic in Samsung Electronics Company in Table 12.3). The transition toward community logic after 2010. The 2008 global financial crisis prompted Korean companies to re-​evaluate their ‘performance-​first’ people management practices, which prioritized short-​term results and efficiency. As internal competition within organizations intensified, employee loyalty declined. To succeed in the global market, Korean companies acknowledged the need for creativity and innovation. Consequently, divergences among Korean companies in the extent and pace of adopting community logic emerged to address external constraints and opportunities. During the 2010s, the information and communications technology (ICT) industry became a growth driver of the Korean economy. The government and industries made substantial investments in research and development (R&D), leading to a total R&D spending of 47 billion dollars (60 trillion Korean won) in 2021. Korean start-​ups began to join the unicorn club, indicating

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their success and valuation in the global business. Korean companies became more horizontal, emphasizing relation-​based coordination among talented people to gain flexibility and creativity in the competitive market (e.g., community logic in SK Telecom and Kakao in Tables 12.4 and 12.6). Recently, the younger generation in Korea, taking a significant portion of the workforce, has emerged as a significant driving force for the transformation of corporate culture and management style. The so-​called ‘Generation MZ’, a commonly used term for the combination of millennials and Generation Z in Korea, is characterized by a greater degree of individualism and considers work–​life balance as one of the primary job factors. It was observed that one-​third of Generation MZ were found to quit their jobs within six months. The ageing population and reduction of the working-​age group were other constraints for people management practices. Korean labour reform was enforced in 2017, which stipulated setting an age of 60 for compulsory retirement by employers. Challenges remain for Korean companies to respond to the needs of Generation MZ workers while simultaneously facilitating creativity and collaboration.

People Management Practices of Korean Big Businesses Case Selection To examine the changes and features of the people management practices of large Korean companies, we select four case companies, Samsung Electronics Company, SK Telecom, Hyundai Motor Company and Kakao, that could represent diverse industries. Samsung Electronics Company and Hyundai Motor Company are manufacturing companies, which are semiconductors and information technology (IT) devices (Samsung Electronics Company) and automobiles (Hyundai Motor Company). SK Telecom is a representative company in the ICT industry in Korea and recently entered the platform business. Kakao is a company with mobile platforms and digital content businesses. These companies have various historical backgrounds. Samsung Electronics Company and Hyundai Motor Company were founded in the 1960s, and SK Telecom was established through privatization in the 1980s. Kakao began as a startup in 2010 and has grown into a big business group. More detailed information on the four companies’ business, size and financial performance data is described in Table 12.2.

Samsung Electronics Company Samsung Electronics Company was founded in 1969 for the home electronics business and dived into the semiconductor business in 1983. Samsung Electronics Company became the global No. 1 manufacturer in semiconductors, smartphones and TV, with global market shares of 12.3%, 23.4% and 29.5%, respectively, in 2021. Samsung Electronics Company could become a global company through a radical transformation, the so-​called ‘New Management Program’ in 1993. The 1997 Korean economic crisis and the 2008 global financial crisis became an opportunity to strengthen its core capabilities and expand its business in the global market. The founding philosophy of the Samsung Electronics Company was ‘economic contribution to the nation,’ ‘people first,’ and ‘pursuit of rationality.’ In line with the founding philosophy, Samsung Electronics Company’s current core business philosophy is ‘devote its talent and technology to creating superior products and services that contribute to a better global society.’ Employment policy. Samsung Electronics Company had an annual mass recruitment practice that hired new college graduates twice a year. The job potential and organizational fit were critical 276

People Management in Korea: An Organizing Logic Perspective Table 12.2 Description of the four companies in 2021 Samsung Electronics Company

SK Telecom

Hyundai Motor Company

Kakao

Founding Year

1969

1984

1967

2010

Business

Semiconductors, Mobile and Digital Media Devices, Home Appliances

Telecommunications; Internet Services

Automobile

Communication Platforms, Entertainment & Contents

Number of Employees*

(D) 111,000 (O) 155,000

5,300

(D) 72,000 (O) 50,000

3,400

Total Sales

$232.8 billion

$13.9 billion

$103.1 billion

$51.1 billion

Operating Profit

$43 billion

$1.2 billion

$5.6 billion

$4.97 billion

* (D): Domestic, (O): Overseas Source: Data Analysis, Retrieval and Transfer System (https://​dart.fss.or.kr/​. Accessed on 13 October 2023).

for selection. Samsung Electronics Company believed that people are a critical source of competitive advantage (i.e., ‘people first’), so they invested extensively in in-​house training. Newcomers were provided four weeks of group training to learn the company’s core values (i.e., Samsung Value Program). The company could maintain its culture through socialization and onboarding training of newcomers. It also invested more than 1 billion dollars in a regional specialist programme to nurture global talent. When selected as regional experts, they stayed abroad for one or two years to experience overseas branches. More than 6,000 regional experts were selected as expatriates and global overseas presidents and sent to 80 countries between 1990 and 2020, making substantial contributions to Samsung Electronics Company’s global business. The 1997 Korean economic crisis made important shifts in employment policy. Lifetime employment was weakened, and employees started to retire before 50. After the recovery from the economic crisis, Samsung Electronics Company’s business rapidly expanded in the global market. It began to recruit world-​class talent and manage it for future growth engines. As global business has accelerated since 2008, Samsung Electronics Company started recruiting a significant portion of international hires and experienced workers. The proportion of experienced workers reached 30% in 2020 and continues to increase. The important criterion for selection became job competency over organizational fit or potential. Work system and control. Samsung Electronics Company had an eleven-​job rank system representing a hierarchical power structure. The eleven job ranks were well complemented with the lifetime career development within Samsung Electronics Company. Job descriptions were not clear and blurred among employees and were managed as a job family. For example, when an employee quit or had problems performing their jobs, incumbent employees could easily take over the jobs. The job family system was important in maintaining Samsung Electronics Company collectivistic culture. However, the job security policy was eroded due to the 1997 Korean economic crisis. The job ranks were reduced to seven levels since 2008 and recently reduced into four levels for the horizontal structure and rapid decision-​making process. Samsung Electronics Company also tried to clearly define job roles and responsibilities at the individual, departmental and business levels. Furthermore, Samsung Electronics Company strengthened its job autonomy 277

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and flexibility to respond to the fast-​changing business environment in 2008. While Samsung Electronics Company’s hierarchical culture and formal procedures used to be a primary tool for managing employee behaviours, they shifted its emphasis on employee outcomes and autonomy over compliance. However, Samsung Electronics Company’s headquarters, the so-​called control tower, still has strong authority and makes important business decisions. Compensation. The base salary was primarily determined by seniority, but high performers occasionally jumped up two base salary steps. The seniority system was changed to a mix of base salary and merit-​based compensation after 1997. The variable pay ranged from –​15% to 130% of the base salary contingent on the annual performance level. Samsung Electronics Company also adopted the target achievement incentive (TAI) that provided incentives based on business unit performance. The TAI system provided 100% of the base salary as an incentive for A-​grade business units, 50% for B, and 25% for C every six months. Furthermore, the overall performance incentive (OPI), a type of profit-​sharing practice, was successfully implemented in 2000. Employees could receive up to 50% of the annual salary depending on their business unit performance. Horizontal pay dispersion has gradually increased with the adoption of a performance-​oriented culture since 1998. Employees could receive twice the pay than peers of the same hierarchical ranks after 2008. In some cases, lower-​ranking employees could receive higher annual salaries than higher-​ranking employees. Summary. The people management of Samsung Electronics Company has transformed over three periods (i.e., prior to 1998, between 1998 and 2007, and after 2007). We summarized the company’s organizing logic and relevant people management practices over the decades in Table 12.3. The people management practices during the first period were the hierarchical and seniority-​based model (i.e., dominant hierarchy logic). Pay was linked to seniority, and employees enjoyed keeping their job for life. Job tasks were mostly fiat-​based with hierarchical ranks. After 1998, Samsung Electronics Company started to use market logic with the expansion of its business in the global market. They utilized top talent management to attract talented workers, and hiring experienced workers increased. The market logic of people management has been strengthened since 2008 with decreased hierarchy logic. The pay was strongly aligned with performance. Samsung Electronics Company has recently sought to adopt a community-​based logic for its people management practices, characterized by more collaborative decision-​making and fostering reciprocal relationships with employees in response to the new business environment and an increasing portion of the younger workforce.

SK Telecom SK Telecom started its telecommunications business by acquiring Korea Mobile Telecom through an open bid in 1994 under the government’s privatization policy. SK Telecom led the telecommunications business by commercializing code-​division multiple access (CDMA) in 1996 and 5G in 2019 for the first time worldwide. SK Telecom is the No. 1 telecommunication company in Korea. As of 2021, total sales are 13.9 billion dollars (16,748.6 billion Korean won), and operating profit is 1.2 billion dollars (1,387.2 billion Korean won) in 2021. The total number of employees is 5,300. The company has more than 10 million customers with a 45% market share in Korea. The SK Management System (SKMS), introduced in 1979, was the key success factor for SK Telecom. SKMS was shared and agreed upon by all SK Telecom employees, which presents a fundamental directive for the company’s management. SK Telecom managed its people through a strong organizational culture with SKMS.

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People Management in Korea: An Organizing Logic Perspective Table 12.3 Organizing logic of Samsung Electronics Company over the decades Prior to 1998

1998–​2007

Since 2008

Employment Policy

• Mostly entry-​level hires and in-​house training • Potential & organizational fit for selection • Lifetime employment

• Entry-​level hires and in-​house training • External staffing for top talent • Weakened lifetime employment

• Hires for all job levels (30% experienced workers hired) • Job competency for hire • No lifetime employment

Work System

• Organization-​based with emphasis on top-​ down tasks • Eleven hierarchical job ranks representing a hierarchical power structure • Job descriptions were not clear

• Individual job based • Seven hierarchical job ranks • Individual roles & responsibilities introduced

• Flexible and autonomy-​ based with emphasis on cooperation and coordinated tasks • Four hierarchical job ranks • Clearly defined job roles and responsibilities at individual level

Control & Coordination

• Managed by Samsung Headquarter • Strong culture through socialization and formal authority • Emphasis on compliance and cooperation

• Managed by Samsung Headquarter • Strong culture with core values and performance-​ orientation

• Managed by Samsung Headquarter • Strong culture with core values and performance-​orientation • Emphasis on individual autonomy and responsibility

Compensation

• Seniority-​based pay • Weak individual incentive intensity • High vertical pay dispersion

• Merit-​based pay • –​15% to 130% individual incentive & up to 50% as profit sharing • High horizontal pay dispersion

• Merit-​based pay • Up to 50% incentive as profit sharing (OPI policy) • More intensified horizontal pay dispersion (Up to twice the salary compared to peers based on performance)

Organizing Logic

H

HM

Mc

Source: Created by the authors.

Employment policy. The telecommunication industry manages communication infrastructure and provides customer service. SK Telecom put heavy emphasis on the stable operation of the network and teamwork. They mainly recruited new college graduates and implemented extensive internal training. Due to fierce competition in telecommunication technology in 1997, SK Telecom began hiring experienced workers with relevant expertise. Such hiring practices continued after the 2008 global financial crisis. SK Telecom further hired 50% of new hires from experienced workers in response to the company’s business diversification. Recently, SK Telecom no longer hires recent college graduates from the mass recruitment process; instead, they hire ‘junior talents’

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whenever necessary. Assessing job skills and competencies (e.g., coding tests and previous work experience) has become important in selection. Work system and control. SK Telecom had to strictly comply with the standard rules and the government telecommunication policy to run their business. Thus, SK Telecom wanted its employees to comply with organizational policies and procedures. The company had a fourteen-​ job rank system and a hierarchal decision-​making structure. Roles and responsibilities were not clearly defined. Employees usually performed top-​down orders with low autonomy. However, SK Telecom needed to quickly respond and make decisions to the turbulent business environment after 1997. The company gradually shortened its hierarchical structure to twelve, seven, and five and finally became four levels in 2008. In 2016, they adopted a broadband system in the job grading structure with only two groups (i.e., pay bands A and B). Later, in response to their business diversification during the 2010s (i.e., artificial intelligence, advertising and e-​ commerce), SK Telecom had clear job descriptions for recruiting suitable job performers. They also put more emphasis on a performance-​oriented culture. To accelerate their business, SK Telecom had a major change in core management value, so-​called SKMS, in 2016 and 2020 to strengthen self-​initiated behaviours and creativity. SKMS helps to drive coordinated activities and communications among business units. In the same vein, more emphasis is being placed on social controls, such as peer pressure and organizational culture, rather than outcome controls based on individual performance. Compensation. A seniority-​based system was changed to a merit-​based compensation system in 1999. Individual and organizational performance determine employee compensation. SK Telecom switched its evaluation system from a stacked ranking to an absolute evaluation in 2016. Such a change in the evaluation practice was made by the active discussion between the executives and the employees. The absolute evaluation system helped the employees avoid internal competition and encouraged knowledge sharing and collaboration. In addition, internalization of the company’s SKMS value became an important consideration in the evaluation. They also used an ‘Organization-​specific Talent Review’ session to calibrate the performance evaluation to enhance fairness and transparency. SK Telecom introduced a two-​broadband pay system in 2016. Following a union agreement in 2020, the pay gap between bands has decreased, resulting in reduced salary disparities within the organization. Summary. The telecommunication industry wherein SK Telecom runs its business requires stable network operation and compliance with regulations and policies. Previously, SK Telecom managed its people primarily based on a hierarchical and paternalistic people management practices model. The company had a 14 hierarchical job rank system and controlled employees through formal rules and procedures. SK Telecom also had a mass recruitment practice with extensive training. However, the 1997 Korean economic crisis and fierce competition in the telecommunication industry resulted in market logic being incorporated into the hierarchy logic of people management practices (i.e., Hm, dominant hierarchy and supplemental market logic). The company’s diversification efforts after the 2008 global economic crisis strengthened this tendency toward market-​oriented people management practices, and they also made efforts to safeguard their organizational culture through SKMS, which can be considered an Mc (dominant market and supplemental community) logic. Since 2016, SK Telecom has increased its focus on preserving its SKMS value by prioritizing cross-​departmental collaboration, reflecting a dominant logic that incorporates both community and market logics. Although SKMS has played an important role, challenges remain in building employee trust and collaboration among employees. Table 12.4 summarizes SK Telecom’s organizing logic and relevant people management practices over the decades. 280

People Management in Korea: An Organizing Logic Perspective Table 12.4 Organizing logic of SK Telecom over the decades

Employment Policy

Work System

Control & Coordination

Compensation

Organizing Logic

Prior to 2008

2008–​2015

Since 2016

• Mostly entry-​level hires and in-​house training • Potential & organizational fit for selection • Weakened employment security after 1997 • Organization-​based • Fiat-​based job tasks • Reduction of hierarchical job ranks from 14 to 7 to 5 after 1997

• Entry-​level hires and in-​house training • Starting to hire experienced workers • Weak employment security

• Hires for all job levels (50% experienced workers hired) • Job competency for selection • Weak employment security • Job flexibility • Emphasis on individual and departmental collaboration • Two job levels (broadband)

• Rule-​& authority-​ based control • Emphasis on compliance and cooperation • Relative evaluation with high weight of seniority • Merit-​based pay system from 1999 • Weak incentive intensity Hm

• Job-​based (clear individual roles & responsibilities) • Emphasis on individual and departmental collaboration • Four hierarchical job ranks • Culture control with SKMS with some authority control • Performance-​orientation • Relative evaluation with vitality curve • Strengthened merit-​ based pay system • Incentives aligned with individual & business performance Mc

• Culture control with SKMS • Performance-​orientation

• Absolute evaluation to avoid internal competition • Merit-​based pay system limiting pay differential among employees • Incentive aligned with SKMS value CM

Source: Created by the authors.

Hyundai Motor Company Hyundai Motor Group (Hyundai Motor Company and Kia) achieved the status of being the world’s third-​largest automobile manufacturer in terms of the number of vehicles sold in 2022. Hyundai Motor Company is affiliated to the Hyundai Motor Group, and it assumes a de facto leadership position within the group. The domestic and overseas sales of Hyundai Motor Company were 726,838 and 3,163,888 units, respectively, with the total sales revenues of 103.1 billion dollars (117.61 trillion Korean won) in 2021. Hyundai Motor Group spun off from its parent company, Hyundai Group, in 2000 as a part of Hyundai Group’s restructuring plan. Since then, the company started to build up its unique management policies. The business of Hyundai Motor Company continued growing with a fast-​follower strategy through benchmarking top automotive companies. The high quality of automotive vehicles was the primary focus to be competitive in the global auto market in the 1990s and 2000s. In 2019, Hyundai Motor Company shifted its strategic focus and tried to become a first mover as a smart mobility solution provider. The overseas production of automotive vehicles was 5% in 1997, 35% in 2006 and reached in 58% in 2021 particularly owing to overseas

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plants in India, China and the United States. Overseas sales accounted for 43% in 2001, 63% in 2006 and 81% in 2021. Employment policy. Before 1997, Hyundai Motor Company generally recruited most employees as entry levels from new college graduates through a mass recruitment process. Only 2% of new hires were experienced workers. Such mass recruitment helped Hyundai Motor Company maintain its organizational culture. As they expected long-​term employment relationships, the primary aim of the job interview was to see whether candidates could adapt well to the organizational culture. The company also implemented personality and aptitude tests to examine the person-​ organization fit. However, the Korean financial crisis in 1997 challenged the taken-​for-​granted assumptions of people management for Hyundai Motor Company. Job competence and potential became significant for selection, resulting in the hiring of 8% of experienced workers. In the 2000s, global sales expansion and competition with global automakers inevitably changed their HR strategy and organizational culture. Hyundai Motor Company announced the ‘New HRM System’ in response to globalization in 2006. They redefined the core values and implemented the Global Professional Program (GPP) to attract and retain global top talent; as a result, new hires for experienced workers increased, accounting for 16%. Due to a strategic shift toward smart cities, autonomous driving technology, and robotics since 2019, Hyundai Motor Company has secured talented employees through mergers and acquisitions of high-​tech companies such as Boston Dynamics. In 2020, Hyundai Motor Company abandoned the mass recruitment policy; instead, they hired experienced employees whenever necessary. Experienced workers accounted for approximately 29% of the workforce. Work system and control. The seven hierarchical job ranking system has gradually simplified since 1997 to facilitate employee communication and become an agile organizational structure. In 2019, Hyundai Motor Company had two job rank structures (i.e., non-​managerial and managerial employees) with a four-​grade system (i.e., G1, G2, G3 and G4). For example, G1 and G2 employees are non-​managerial employees who can join union membership under a seniority-​ based system. G3 and G4 employees are managerial employees under a merit-​based system and are excluded from joining the union. Formal job descriptions were not a primary coordinating mechanism until the late 2010s. Individual employees had to follow top-​down directives with a variety of work tasks. Thus, employees worked only for their business units, and coordination across business units was limited. Hyundai Motor Company had a strong ‘have you ever tried it’ culture for controlling employee behaviours. The founder, Ju-​Yung Chung, constantly challenged the status quo and encouraged people to step up to impossible goals. The strong culture shaped employees’ behaviours to achieve assigned tasks regardless of the difficulties they face. Furthermore, the strong ‘have you ever tried it’ culture was reshaped, enabling innovative imaginations in response to the strategic shifts for future business. Compensation. Hyundai Motor Company had a seniority-​based compensation system, a common practice of Korean companies before 1997. The company started a merit-​based incentive plan after the 1997 Korean financial crisis, yet compliance behaviours, social relationships, and attitudes toward people and organizations were still more critical evaluation factors. In the mid-​ 2000s, the performance–​compensation link was gradually strengthened by implementing GPP and attracting top-​talent workers, resulting in 15% of variable pay. Additionally, Hyundai Motor Company tried to manage top talented employees with special treatment for new business (i.e., smart city, autonomous driving). However, such efforts faced strong resistance from the labour union. Hyundai Motor Company used to have a relative annual performance evaluation system. A significant transition in the evaluation system occurred in 2019 because employee acceptance of the forced curve for evaluation eroded, particularly for younger generation workers. The company 282

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also tried to implement a 360-​degree feedback review to complement the absolute evaluation, albeit the labour union disagreed. Summary. Hyundai Motor Company has developed its business in the traditional auto manufacturing industry in Korea. Like other Korean companies, Hyundai Motor Company used the strong hierarchy logic in its people management practices with a paternalistic structure. In 2000, Hyundai Motor Company was established as an independent entity following its separation from Hyundai Group. In pursuit of its global expansion strategy, the company subsequently introduced the ‘New HRM System’ in 2006, aimed at cultivating a performance-​oriented culture and effectively managing global talent. The pay discrepancy among managerial employees became wider. That is, Hyundai Motor Company’s dominant hierarchy logic is supplemented by market logic. After 2019, Hyundai Motor Company’s strategic shift to the frontrunner in the smart mobility industry needed another transition of the organizing logic of people management practices toward community for innovation. The emphasis was placed on both practical expertise that could be readily applicable and cultural fit for hire. An absolute performance evaluation system was newly adopted. However, such changes were not welcomed by the labour union, leading to the absence of a prevailing organizing logic. The changes of organizing logic and people management practices in Hyundai Motor Company are summarized in Table 12.5.

Kakao Kakao is Korea’s leading mobile platform company founded in 2010 for mobile instant messaging services. Merging with an internet portal company, Daum Communications, in 2014 laid the foundation for growth. Total sales were 51.1 billion dollars (6,136.1 trillion Korean won), and operating profit was 4.97 billion dollars (596.9 billion Korean won) with 3,400 employees in 2021. The labour turnover rate was approximately 5–​10% lower than 15% of industry average, and the average year of employment was 4.5 years. The founder of Kakao wanted to manage the startup through a strong community-​like culture. Therefore, ‘community’ and ‘krew’ (Kakao +​crew) were common terms that represented business affiliates and employees, respectively. The core mission of Kakao is ‘Making a better world with people and technology.’ They defined Kakao-​style, the core values shared by all Kakao krews, as emphasizing self-​initiatives, equal power, and fierce debate based on trust. Employment policy. Kakao mostly hires experienced experts (90%) rather than fresh college graduates (10%). They believed that immediately applicable knowledge was important for operational efficiency and performance in the high-​technology industry. At the same time, Kakao also devoted significant efforts to protecting its Kakao-​style value. For example, Kakao only hired job candidates with innate qualities that fit the Kakao style. The interview process had two steps. First, potential peers and leaders interview to filter out unqualified candidates about job competencies and teamwork skills. Second, people management managers, department heads, and executives conduct a second interview for the person-​Kakao-​style fit. In particular, the second interview needed a unanimous decision. After hiring, Kakao provides extensive onboarding training to new krews regarding Kakao-​style, Agit (i.e., Kakao workspace, its software for work together), and communication skills for internalizing Kakao culture. Work system and control. Kakao has a horizontal and performance-​oriented culture. There was no hierarchical job rank system; instead, Kakao managed their krews’ competencies by a six-​growth stage. The growth stages were determined by leader groups and kept private from their peers. As Kakao had an agile and project-​based structure, it did not rely on formal procedures and rules, and the krews performed a variety of tasks with self-​directives, autonomy and flexibility. 283

Routledge Handbook of Korean Business and Management Table 12.5 Organizing logic of Hyundai Motor Company over the decades Prior to 1998

1998–​2018

Since 2019

Employment Policy

• Mostly entry-​ level hire • Organizational fit for selection • Long-​term employment

Work System

• No formal job descriptions • Top-​down directives requiring a variety of tasks • Seven hierarchical job ranks

• Hire for all levels (30% experienced workers hiring) • Emphasis on organizational fit and job competency for selection • Weak employment security for managerial employees • Implementing formal job descriptions with clear individual roles • Work coordination with defined tasks • Four hierarchical job ranks

Control & Coordination

• Informal control through strong organizational culture (e.g., ‘have you ever tried it’) • Relying on formal procedures and system • Relative evaluation with high weight of seniority • Seniority-​based pay structure • Weak performance-​ compensation association

• Entry-​level hires with 9% experienced workers hiring • Organizational fit and potential for selection • Employment security weakened • Implementing formal job descriptions but rarely used • Top-​down directives requiring a variety of tasks • Six hierarchical job ranks • Informal control through strong organizational culture (e.g., ‘have you ever tried it’) • Relying on formal procedures and system • Relative evaluation • Seniority-​based pay for non-​managerial employees & merit-​ based salary for managerial employees • Increasing pay dispersion for managerial employees Hm

• Hybrid (relative +​absolute) evaluation • Seniority-​based pay for non-​managerial employees & merit-​based pay for managerial employees • Increasing pay dispersion for managerial employees

Compensation

Organizing Logic

H

• Informal control through organizational culture (e.g., ‘have you ever tried it’) for innovation • Implementing individual performance-​based control

hmc

Source: Created by the authors.

For example, krews could suggest any business ideas and nurture them for new businesses, such as Kakao pay and Kakao mobility service. The krews could set up when and where to work by discretion. Corporate credit cards were provided to all krew members with minimal guidelines. Kakao also shared all information via an open communication policy, known as ‘100:0,’ which meant everything was shared with their krews, and zero cases in which krews did not know what was happening in the company. All krews should share their tasks, goals, and work progress in the Agit workspace. Compensation. Kakao had individual-​based compensation with unequal pay dispersion. Performance evaluation was primarily determined at the individual level, and team or departmental performance was used as supplementary information. Each krew member had to frequently

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update how much they contributed to their projects and team outcomes via ‘My Note,’ Kakao’s collaboration tool. The self-​report was used as a base for individual evaluation. The individual growth stages and performance determine the base salary. Top performers receive 2.5 times higher incentives than poor performers within the same growth stages. For example, top-​performing groups can receive approximately 15% to 20% of their base salary as an incentive, and intermediate groups generally receive approximately 6% to 8%. Team leaders further calibrate the incentive ranges at their discretion. In addition, Kakao also considered krews’ attitudes and cooperativeness with coworkers via ‘View n Talk,’ a peer review tool. Kakao continues to strengthen the individual incentive intensity; however, procedural fairness and acceptance of incentive decisions were issues. Kakao implemented a well-​functioning compensation appeal process for krews’ fairness perceptions, albeit such an appeal process was a big burden for leaders and departmental heads. Summary. Kakao’s people management practices have been based on strong community logic with a supplemental market logic since its inception (see Table 12.6 for details about organizing logic and people management practices). The Kakao founder wanted to manage their people through a community-​like culture (i.e., ‘Kakao-​style’) with minimal policies and rules. At the same time, Kakao emphasized individualized performance with relatively high pay dispersion. Employees were empowered to perform their jobs with self-​direction, autonomy and flexibility. Additionally, project-​based tasks and the horizontal structure facilitated cooperation among the krews. In approximately 2015, as Kakao expanded its business and grew larger, they placed greater emphasis on both market and community logics, which entailed hiring extensively from outside and implementing higher pay disparities among peers. As the company size increases, standardization

Table 12.6 Organizing logic of Kakao over the decades

Employment Policy Work System

Control & Coordination

Compensation

Organizing Logic

2010–​2014

Since 2015

• Founding members-​oriented management • External hires for rapid business growth • High work flexibility • High self-​initiatives without hierarchical job ranks • Open Communication • Culture control with Kakao style (self-​initiatives, equal power, and fierce debate based on trust) • Emphasis on community membership • No reliance on formal procedures and rules • Individual-​based compensation • High pay dispersion between peers • Peer review for collaboration

• Extensive external hires (90% experienced workers hiring) • Emphasis on both job competency and fit with Kakao style • Competency-​based growth stage • Agile organisational restructuring in response to business opportunities • Open communication using Agit tool • Culture control with Kakao style • Emphasis on individual autonomy and accountability • Standardization and routine procedures needed for growing company size

Cm

Source: Created by the authors.

285

• • • •

Individual-​based compensation High pay dispersion between peers Peer review for collaboration Strong incentive intensity with emphasis on community culture MC

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and routine procedures were necessary to manage and control their krews. Protecting its culture from bureaucratic control remains a challenge.

Discussion Changes in Organizing Logics Until the early 1990s, the people management practices of Korean firms shared many similarities by adopting a seniority-​based system based on the internal labour market. After the 1997 financial crisis, four case companies shared the same experience; these companies tried to adopt a market logic within the firm. However, the institutionalization processes of market logic were so diverse in terms of the intensity and scope of people management practices. Each firm has attempted to take a unique approach with different management ideologies and competition situations, as presented in Table 12.7. Now, we examine the changes in people management practices in terms of their organizing logic. In the case of Samsung Electronics Company, it started from hierarchy logic (pre-​1997: H), Table 12.7 Changes in people management practices and organizing logics of case companies

Changes of Organizing Logics* Influencing Factors: Values, Strategy, Industry, & Institutional Forces

Impact: Core Capabilities

Current Challenges

Samsung Electronics SKT Company

Hyundai Motor Company

Kakao

H (Pre-​1997) ➜HM (1998–​) ➜Mc (2008–​) • Business strategy for global competitiveness • Founding philosophy (i.e., ‘people first’) • Benchmarking (Mimetic isomorphism) • Continuous innovation (product, process, and people)

H (Pre-​1997) ➜Hm (1998–​) ➜hmc (2019–​) • Founder’s value (i.e., ‘Have you ever tried it’) • Globalization strategy • Bargaining power of labour union

Cm (2010–​2014) ➜MC (2015–​)

Hm (Pre-​2007) ➜Mc (2008–​) ➜CM (2016–​) • Management philosophy, SKMS • Privatization and diversification • Innovation strategy

• Startup spirit • Founder’s philosophy (i.e., ‘Kakao style’)

• Technology • Continuous • Platform-​ leadership improvement of based business product quality extension • Growth based on setting new industry • Investment in standards R&D and design • Building trust • Socialization • Needs top • Keeping culture and with SKMS for talent for new community newly employed businesses under community-​based logic over large-​ experienced members strong labour system sized growth union and diversified businesses

* Organizing logics: H/​h: Hierarchy; M/​m: Market; C/​c: Community; Capital letter means high strength and small letter means low strength. Source: Created by the authors.

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moved to a hybrid type with HM (Hierarchy–​Market) logic (1998–​2008), and eventually to Mc (Market with some community logics). SK Telecom started Hm (Hierarchy logic with some market logic) until 2007; the people management practices became Mc (market as a dominant with community as a supplemental logic); and since 2016, the logic became CM. Hyundai Motor Company also started with H (hierarchy) logic until 1997. Since then, the people management practices of Hyundai Motor Company added some aspect of market logic to become Hm (Hierarchy with some market logics) and changed to hmc logic with no dominant logic. Finally, in the case of Kakao, while its people management practices logic was Cm before 2014, the current logic became MC after 2015.

Implications for Research For future research on Korean people management practices, we derived three research questions: (1) the pattern of people management practices changes, (2) the determinants of these changes and (3) the effects of these changes. First, was there any pattern of people management practices changes? What are the similarities and dissimilarities among the four companies in terms of people management practices changes? In the case of the four companies, we could observe at least three types of changes following the intensity and scope of people management practices criteria: logic-​shifting, logic-​mixing and multiple logic. Most companies started their people management practices from hierarchy logic and shifted toward market or community logic. Korean people management practices started from the hierarchy logic because of its traditional cultural background and paternalistic approach. Korean firms had to gain efficiency, flexibility and creativity, which were lacking in hierarchy logic. To go in this direction, Korean corporations shifted toward market logic. What is not clear, however, is the difference in the degree and speed of adoption of market logic. Future studies may need to investigate whether these differences are a strategic choice or are due to some constraining factors. It seems that many Korean firms tried to adopt some form of community logic, which seems to be an ideal type (cf., Adler & Heckscher, 2006). For different reasons, the four case companies reached various levels, such as strong market competition (Samsung Electronics Company) and union resistance (Hyundai Motor Company). Second, how have influencing factors interplayed in the changes of people management practices in each company? Both internal factors (e.g., values and strategy) and external factors (e.g., industry and institutional forces) interplayed in the changes in people management practices. In the case of internal factors, the founders’ management philosophy and values have played a critical role. These values include the value of ‘people first’ (Samsung Electronics Company), the spirit of ‘have you ever tried it’ (Hyundai Motor Company), SKMS (SK Telecom) and Kakao style (Kakao). Such values and philosophy were not changed during the history of each company. However, when these values were applied to people management practices, strategic directions and external factors were also interactively affected. First, strategic directions were substantially considered. For example, when Samsung Electronics Company applies ‘people first’ value to people management practices, the company highly regards technical top talent for technological innovation. External factors also matter. For example, when Hyundai Motor Company applies the spirit of ‘have you ever tried it’ to people management practices, the company has to consider institutional forces such as the strong labour union. Hence, future studies may need to investigate how internal (e.g., values versus strategy) and external forces (e.g., industry, technology such as IT or artificial intelligence (AI), and institutional forces such as the labour union, investors, or government) dynamically interplay for the changes in organizing logics and people management 287

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practices. Recently, Korean firms have been affected by diverse issues from external environments, such as the COVID-​19 pandemic, digital transformation and the pressure of shareholder activism, including ESG. These external factors and internal factors (e.g., organizational culture, generation gaps, and DE&I (diversity, equity, and inclusion) issues) tend to demand more flexible and horizontal people management practices. Finally, are people and people management practices a source of competitive advantage? The four case companies embrace people-​based competitive advantage but with different differentiators. Differentiating factors include people and capital (Samsung Electronics Company), R&D (Hyundai Motor Company), technology, infrastructure, industry standards (SK Telecom) and work style (Kakao). All these factors are directly and indirectly related to people. All these firms regarded people and people management practices as a main source of competitive advantage. We believe that people and people management practices have played a critical role in achieving firm performance differences. These companies have invested heavily in people through training and development and can enhance people’s competencies, motivation and opportunities. Why did Korean companies have to invest in people? We believe that Korean firms had to adopt the unique people management approach with a long-​term perspective to overcome barriers, such as resource scarcity and innovation poverty due to a fast-​follower strategy.

Current Challenges and Implications for Practitioners All four case companies encounter some challenges. In the case of Samsung Electronics Company, the most challenging task to be resolved is to build a trust culture and community-​based system. SK Telecom needs socialization processes with SKMS for newly employed experienced members. Hyundai Motor Company needs to recruit global top talent for new business development under the constraints of the strong labour union. Finally, in the case of Kakao, community logic must be maintained over large-​sized growth and diversified businesses. Given these current challenges, we found practical issues from our case observations. First, we noticed that there is continuity and discontinuity in people management practices. The traditional Korean approach, that is, collectivistic, paternalistic, and seniority-​based, has been perpetuated for a long time. Most companies realized that this traditional approach needs to be changed to gain efficiency, flexibility and creativity. Many companies tried to adopt some form of market logic and had felt tired of the approach. Hence, these companies wanted to adopt community logic but were not easily adopted. When Korean companies adopt new people management practices, they tend to deviate from Korean traditions, although these traditions can have positive aspects, such as emphasizing relations and the common good, caring for people and respecting the wisdom of experienced members. One important issue is how to maintain Korea-​specific advantages while moving forward with new people management practices. Second, many Korean firms experience some sort of generation conflict, especially between the senior and Generation MZ. The Generation MZ are substantially different regarding attitudes toward work, loyalty to the organization, and work–​life balance. On the other hand, situational factors such as digital transformation and distance work affect people management. In addition, Korean firms should properly manage current dominant themes such as DE&I, equality and engagement. A traditional hierarchical, seniority-​based approach with homogeneous ethnic groups has been challenged. Korean firms are less experienced with diversity in terms of ethnicity, race, sexual orientation and even generation. The new normal of organizational culture and working style (e.g., remote working, flexible working) after the COVID-​19 pandemic, new 288

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generations, and new technology such as AI are issues that Korean firms should manage in the future. The third issue concerns domestic–​global balance. The traditional Korean approach to people management practices is somewhat unique from a global perspective. In particular, seniority-​ based compensation and broadly defined roles for each individual are quite unique; hence, it is hard to apply globally. Globalized Korean firms, such as the case companies in this chapter, need to pursue global talent management. Major Korean firms took their global people management practices approach just after 2000. Samsung Electronics Company has kept the global regional expert system for the past 20 years. Its ratio of overseas employees is approximately 58%, and it has global talent management with the traditional Korean way. However, we were not sure whether such approaches would be sustainable in the future. Hyundai Motor Company has increased host country employees and had mergers and acquisitions with companies with global talent. Its ratio of overseas employees is approximately 41%. The tasks of Korean firms should cover how they manage people globally with the global standard of people management practices and simultaneously maintain unique Korean advantages.

Concluding Remarks In this chapter, we investigated the changes in people management practices in four Korean companies. Taking organizing logic as a theoretical framework, four companies (i.e., Samsung Electronics Company, SK Telecom, Hyundai Motor Company and Kakao) were analyzed for the case study. Traditional big corporations (Samsung Electronics Company, Hyundai Motor Company and SK Telecom) first adopted a hierarchy logic and then experienced shifts in people management practices, albeit at different speeds and scopes. These corporations currently have diverse people management practices with different organizing logics. Both internal (i.e., core values and strategic direction) and external (i.e., industry and institutional forces) factors interplayed in adopting current people management practices. Given external constraints, these companies tried to maintain their unique management philosophy and made efforts to gain a competitive advantage through people and people management.

References Adler, P. S. 2001. Market, hierarchy, and trust: The knowledge economy and the future of capitalism. Organization Science, 12(2): 215–​234. Adler, P. S., & Heckscher, C. 2006. Towards collaborative community. In C. Heckscher & P. S. Adler (Eds.), The Firm as a Collaborate Community: Reconstructing Trust in the Knowledge Economy: 11–​105. Oxford: Oxford University Press. Bae, J. 2012. Self-​fulfilling processes at a global level: The evolution of human resource management practices in Korea, 1987–​2007. Management Learning, 43(5): 579–​607. Cappelli, P. 1999. The New Deal at Work: Managing the Market-​Driven Workforce. Boston, MA: Harvard Business School Press. Conner, K. R., & Prahalad, C. K. 1996. A resource-​based theory of the firm: Knowledge versus opportunism. Organization Science, 7(5): 477–​501. Ghoshal, S., & Moran, P. 1996. Bad for practice: A critique of the transaction cost theory. Academy of Management Review, 21(1): 13–​47. Heo, U., Jeon, H., Kim, H., & Kim, O. 2008. The political economy of South Korea: Economic growth, democratization, and financial crisis. Maryland Series in Contemporary Asian Studies, 2: 1–​24.

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13 EMPLOYMENT RELATIONS Labour Issues and the Labour Union Young-​Myon Lee

The Developments of Korean Employment Relations Employment relations constitutes the intricate interplay between employers and workers, whereby workers, in the nascent stages of capitalism, achieved improved remuneration and working conditions through collective bargaining. Throughout the nineteenth century capitalists exerted considerable pressure on governmental bodies to perceive the activities of labour unions or workers’ associations, as actions tantamount to unfair trade practices that impeded the unencumbered flow of labour, which was viewed as a community. Over time, however, these unions have undergone a transformation in status, earning recognition as legitimate entities representing the interests of workers. In the context of the United Kingdom and various European countries, which embarked on industrialization at an earlier juncture, the development of their employment relations has followed a protracted trajectory, reflecting the unique contours of their historical experiences, values and philosophical underpinnings. These factors have coalesced to sculpt their current employment relations landscape (Kaufman, 2006). In contrast, nations that embarked on their industrialization journey at a later date underwent a rapid process in industrialization, precipitating a heightened need to grapple with the adverse consequences of this accelerated development. This trajectory necessitated greater efforts to manage and mitigate the deleterious effects associated with industrialization (Lee & Kaufman, 2018a). Korea’s industrialization journey commenced relatively late in the historical timeline, commencing only in the latter part of the nineteenth century. This belated onset was accompanied by a tumultuous chapter in Korean history by foreign exploitation, notably Japan, culminating in a protracted 35-​year period of Japanese colonial dominion. This period bore witness to the simultaneous coalescence of two distinct yet interlinked movements: an ardently pursued quest for national independence and a resolute labour movement. It is essential to recognize that the struggle against Japanese corporate entities during this period transcended the confines of a conventional labour movement, assuming the contours of a broader independence movement. As expounded by Kim (1992), it becomes evident that this multifaceted struggle encompassed both labour concerns and the broader aspiration for national sovereignty. Following 1945 liberation from Japan, the Korean Peninsula faced profound geopolitical division, resulting in the creation of South and North Korea, under external guardianship. This division initiated a prolonged and contentious conflict, defining DOI: 10.4324/9781003180920-16

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their intricate relationship. The pivotal turning point occurred in 1950 with the Korean War, which caused confrontational and militant negotiation to become the practice rather than peaceful negotiation in Korea. Following the conclusion of the war, Korea experienced a remarkable surge in economic development, commonly referred to as ‘the Miracle of the Han River.’ This transformative phase unfolded against the backdrop of an enduring period of military rule that extended for two decades subsequent to a military coup d’état in 1961. Throughout the era, there existed a persistent campaign spearheaded by intellectuals aimed at toppling the autocratic regime, alongside a labour movement that sought to safeguard the interests of those labourers who found themselves marginalized amidst the rapid economic expansion. These movements catalyzed the emergence of fervent activists who willingly abandoned their erstwhile comfortable existences, wholly dedicating themselves to the cause of championing workers’ rights. Consequently, their modus operandi placed a premium on the preservation of dignity and honour, often prioritizing these principles over pragmatic negotiations aimed at securing material advantages, thus frequently resorting to confrontational strategies.

The Origins and Development of Korea’s Militant Labour Movement The genesis of labour movements in the Western world can be traced back to the eighteenth century, a period coinciding with the advent of the Industrial Revolution in England. However, a distinct contrast emerges when we delve into the scholarly surrounding the Korean labour movement, as elucidated by prominent researchers, such as Kim (1982a) and Kim (1982b). It becomes evident that the genesis of Korean labour movement unfolded over a century later, commencing in 1876, concomitant with the successful inauguration of a seaport. During this epoch, Korea’s abundant resources, encompassing rice and gold reserves, attracted the attention of Japanese and Western powers. Wage labours found themselves predominantly engaged in ore mining and port-​related activities, given that shipping represented the sole viable conduit for the transportation of rice and gold ore. Despite the absence of formalized institutions such as trade unions or collective bargaining, labourers coalesced in collective dissent against deplorable working conditions and the non-​payment of their wages (Kim, 1982a). Nonetheless, the Japanese colonization of Korea in 1910 cast a pall over these collective actions, ushering the labour movement into clandestine channels where it became inextricably intertwined with the broader struggle for independence. Consequently, the labour movement assumed a more confrontational posture, pivoting toward strikes and concerted actions, as opposed to pursuing a more moderate strategy typified by tabletop negotiations (Kim, 1982b; Roh & Brewster, 2018).

The ‘Miracle of the Han River’ and the Great Labour Struggle The aftermath of World War II witnessed Korea’s attainment of independence, albeit swiftly followed by the tumultuous Korean War. Nevertheless, despite these formidable challenges, the nation achieved remarkable economic growth in the aftermath of a military coup d’état, an era famously christened the ‘Miracle of Han River.’ Following Major General Park Chung-​hee’s military coup in 1961, a comprehensive restructuring initiative was launched under the premise that the labour union had become corrupted and necessitated rectification for the betterment of the community. The labour union underwent a substantial reformation, admitting only those union activists who were willing to collaborate with the military dictatorship. This strategy aimed to suppress the labour movement, which prioritized wealth distribution, a stance perceived as obstructive 292

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to the pursuit of ‘grow first, distribute later’ national development policies. Consequently, the labour community found itself compelled to align with the government’s development-​first agenda (Chang, 2002). However, factions of the labour movement, resolute in their refusal to endorse this approach, persisted in their clandestine activities while concurrently engaging in political efforts to overthrow the authoritarian regime (Kim & Bae, 2004). Remarkably, within a mere three decades of recovery from the ravages of the Korean War, the Korean economy achieved its zenith in 1987, marking the culmination of high growth, coinciding with the successful conclusion of the 1986 Asian Games. Consequently, on June 29, 1987, a democratization declaration was heralded, catalyzed by the collective action of citizens in anticipation of the 1988 Seoul Olympics. This declaration ushered in a transition from the indirect presidential election system with a direct one. However, so-​called ‘The Great Labor Struggle,’ aimed at reforming the labour movement, still dominated by company unions, persisted for three years following this historic event (Lee & Lee, 2005). Between 1987 and 1989, the number of strikes exceeded 7,200, a staggering figure surpassing the total recorded in the 40 years since liberation in 1945 (Bognanno, Budd, & Lee, 1994; Lee, 2023; Lee, Bognanno, & Bognanno, 2004; Roh & Brewster, 2018). Over this brief span of three years, the struggle yielded a three-​fold increase in the number of unions and a doubling of union density. Unions sprang up in numerous major corporations, and white-​collar unions were established in fields encompassing media and research institutes. The workers’ demands extended beyond wage increases to encompass the democratization of company-​dominated unions and the eradication of discrimination against production workers. Consequently, the Great Labour Struggle culminated in the elevation of the labor movement to a prominent position within the social fabric.

Rivals in the Labour Movement: FKTU and KCTU The labour union in Korea was characterized by the exclusive dominance of the Federation of Korea Trade Unions (FKTU) until the watershed year of 1987. In the crucible of Japanese colonial rule, the prevailing ethos within the labour movement championed militant resistance against oppression. Following the liberation of Korea in 1945, this movement was formally institutionalized under the moniker of the Chosun Trade Union National Council (CTUNC). However, owing to its affiliation with the Workers’ Party of South Korea, the CTUNC met its dissolution under the auspices of the US military government. In its stead, the Korea Federation of Trade Unions (KFTU, the later FKTU) emerged in 1946 with the patronage of Syngman Rhee, South Korea’s inaugural president, who, at the time, was cooperating closely with the US military administration. It is worth noting that the KFTU, despite its nomenclature, was primarily conceived as a subservient adjunct to political power, aligning itself with Rhee’s political pursuits rather than representing the genuine interests of workers. When a military junta seized control of the government through a coup d’état in 1961, the KFTU underwent a transformation, even modifying its nomenclature to become the Federation of Korea Trade Unions (FKTU) in a strategic manoeuver to align with the government, a move deemed indispensable for its survival during authoritarian regime (Lee, 2023). Despite being subject to criticism for its puppet-​like status, it was perceived as an inescapable choice for survival under the prevailing conditions imposed by the military government at the time. In the aftermath of the epochal Great Labour Struggle, the Korean Congress of Trade Unions (KCTU) emerged as a labour union deeply rooted in the traditions of the labour movement during the Japanese colonial era and post-​liberation period. The leadership of the KCTU remained 293

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resolute in their conviction that steadfastly rejecting any agreements that contravened their core principles was imperative to the realization of their overarching objectives. As a consequence of the triumphant culmination of the Great Labour Struggle, the societal purview of labour leaders underwent substantial augmentation. Nonetheless, notwithstanding the temporal span of three decades that has transpired since that pivotal moment, it remains a notable observation that the labour leaders of yesteryears persist in steering the course of employment relations through a militant style. The failure to witness a transformation in the structure of the labour movement commensurate with the evolving employment relations landscape post the 1987 democratization declaration has led to disappointment among observers. Consequently, the societal perception of labour unions has experienced a notable downturn when contrasted with the more favourable view held during the period of the Great Labour Struggle. The persistence of annual strikes at Hyundai Motor Company until 2019 presented a formidable challenge for management in their dealings with subcontractors. Regrettably these actions yielded no discernible positive effects on the wages and working conditions of labour force employed by these subcontractors. A noteworthy incident occurred in July 2022 when the Korean Metal Workers’ Union (KMWU) engaged in unauthorized occupation of a substantial dock at Daewoo Shipbuilding & Marine Engineering (DSME), resulting in substantial financial losses for the company. Prior to this event, DSME workers had already grappled with a 30% wage reduction owing to the organization’s financial constraints (Korea Herald, 2022). Another significant episode unfolded in November 2022 when truck drivers initiated strikes, demanding an extension of temporary regulations guaranteeing minimum freight rates from the government, citing soaring fuel prices as a primary concern. Following two weeks of strikes, the Cargo Truckers Solidarity Union opted to return to work without securing their demands, albeit leaving behind an estimated economic toll of approximately 2.6 billion dollars. When juxtaposed with strike activities in OECD countries, strike rates in Korea appear relatively elevated.1 In the embryonic stages of the labour movement, disparate organizations tend to emerge in geographically distinct locations. However, as the labour movement matures, there is a notable inclination towards consolidation, emphasizing collaboration over intra-​worker rivalry. In the context of the United States, the initial phase of the labour movement, the American Federation of Labor (AFL), which primarily catered to skilled labours. Subsequently, in the wake of 1930s, the Congress of Industrial Organizations (CIO), which centred its efforts on unskilled labour, were established and eventually amalgamated with AFL in the 1950s, culminating the formation of the AFL-​CIO. Presently, the AFL-​CIO stands as the principal national labor federation in the United States. Conversely, the FKTU, known for its pro-​government and pragmatic orientation, encountered criticism within the labour union sphere. Following its legal recognition in 1995, the KCTU adopted a militant and resolute posture in its engagement with the labour movement, thus setting itself from the FKTU. While FKTU boasts a venerable history and primarily represents members in conventional industries, the KCTU encompasses a broader membership base, including individuals from major corporations, as well as sectors such as metalwork, healthcare, transportation, and the public domain. Despite its roots in the FKTU, the KCTU has charted a distinct trajectory over the past three decades, and it is conceivable that the two prominent union structures will persist into the foreseeable future. This dualistic configuration may pose challenges for the government as it seeks to formulate industrial relations policies and may also present complexities for business navigating the development of industrial relations strategies. However, for workers, this dynamic affords an opportunity to join labour unions and reap the benefits of the competition between the FKTU and KCTU, which vies for the leadership of local unions. 294

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In the academic realm, the analysis of employment relations is commonly categorized into two distinct paradigms: the unitarian and the pluralistic perspectives. However, when considering the evolution of employment relations in Korea, it becomes evident that historical forces such as the opening of ports by foreign powers, the period of Japanese colonial rule, the division of North and South Korea, and the tumultuous Korean War have significantly accentuated the importance of the pluralistic perspective. This perspective posits that labour and employers harbour divergent interests, a notion more prominently exemplified by the confrontational negotiation approach employed by the KCTU.

Underperforming Tripartite Commission In 1997, against the backdrop of a foreign currency crisis that gripped Korea, a historic convergence occurred as labour, management, and the government officially collaborated for the first time since the nation’s liberation in 1945, with the purpose of addressing the pressing national crisis. President Kim Dae-​jung orchestrated the establishment of a tripartite commission in response to the escalating bankruptcy of numerous companies and the economic turmoil stemming from a dearth of foreign currency. Despite the widespread layoffs that accompanied the corporate bankruptcies, the anticipated large-​scale strike failed to materialize, thanks to the efficacy of the tripartite agreement (Jung & Cheon, 2006; Lee, 2020; Park & Chang, 2017). However, notwithstanding the attainment of legal recognition in 2000, the operational effectiveness of the tripartite council has been rather limited since that time (Park & Chang, 2017). This can be attributed to two primary factors. Firstly, the reluctance of the KCTU to rejoin the tripartite council after its withdrawal in 2000 has impeded its functionality. Secondly, agreements brokered by the tripartite council often fail to translate into concrete policies or legal enactments, a predicament exacerbated by obstructionist actions within the National Assembly. Despite President Moon Jae-​in appointing former KCTU Chairman Moon Seong-​hyeon as the head of the Economic, Social and Labor Commission, the KCTU has refrained from engaging in negotiations with the government, resulting in limited progress.

Resurgence of Union Density in the 2010s In the aftermath of the post-​World War II zenith, labour movements across the globe encountered escalating obstacles commencing in the 1970s. This development coincided with the ascendancy of Japan and Germany as dominant players in the global market, particularly in the realms of automobiles and electronic products. Historically, labour unions held a dominant position in controlling labour availability, ensuring favourable wages and working conditions. Nevertheless, with the growth of global trade, the relocation of factories abroad, and increased product imports, the unions’ control over the labour supply gradually eroded. As seen Table 13.1, union density has experienced a widespread decline in almost all countries since the 2000s (Kim & Lee, 2018). Even in the Nordic countries, renowned for their excep­ tional union density, there has been a plateauing or reduction in this metrics since the year 2000. Furthermore, the dismantling of the Berlin Wall in Germany in 1989 and the subsequent dissolution of the Soviet Union engendered the autonomy of Eastern European countries. This transformative event precipitated a substantial downturn in union density across the region, with the majority of countries therein witnessing a decrease to approximately 10%, consequently, resulting in a noteworthy erosion of their social impact. Despite the prevailing discourse advocating for the reconfiguration of labour movement systems to better align with the evolving work landscape, it is noteworthy that labour union density in Korea has, in fact, witnessed an increase over the past decade as seen in Figure 13.1. 295

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South Korea Australia France Germany Japan Norway Sweden United Kingdom United States OECD–​Total

2000

2002

2004

2006

2008

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

12.0 24.9 10.8 24.6 21.5 53.6 81.0 29.8 12.9 20.9

11.6 23.2 10.8 23.5 20.3 52.8 78.0 28.8 12.8 20.0

10.6 22.8 10.5 22.2 19.3 51.6 76.4 28.8 12.0 19.3

10.3 20.4 8.6 20.6 18.8 51.1 74..3 28.3 11.5 18.3

10.5 18.8 10.6 19.0 18.3 49.8 68.3 27.4 11.8 18.0

9.8 18.4 10.8 18.4 18.5 50.5 68.2 26.4 11.4 17.8

10.1 18.2 9.1 19.0 18.4 49.9 67.5 25.7 11.3 17.7

10.3 18.2 9.1 18.3 18.0 49.9 67.5 25.9 10.8 17.3

10.3 17.0 11.0 18.0 17.8 49.8 67.7 25.5 10.8 17.1

10.3 15.1 9.0 17.7 17.6 50.1 67.3 24.9 10.7 16.8

10.2 16.6 9.0 17.6 17.5 49.8 67.0 24.6 10.6 16.5

10.3 14.6 10.8 17.0 17.4 50.0 66.7 23.3 10.3 16.2

10.7 -​ 9.0 16.7 17.2 50.0 66.1 23.1 10.7 16.0

11.8 13.7 8.9 16.5 17.0 49.9 65.5 23.2 10.5 15.9

12.5 -​ -​ 16.3 16.8 50.4 65.2 23.4 9.9 15.8

14.2 -​ -​ -​ 17.1 -​ -​ 23.7 10.3 -​

14.2 -​ -​ -​ -​ -​ -​ -​ -​ -​

13.1 -​ -​ -​ -​ -​ -​ -​ -​ -​

Source: Korea Ministry of Employment and Labor, 2024.1.23, 2022 National Labor Unions Statistics; OECD, http://​stats.oecd.org/​trade union dataset, accessed May 31, 2024; ILO, ILOSTAT data explorer, accessed May 31, 2024.

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Table 13.1 Union density for major countries: 2000–​2022

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(Unit: % [lower bar graph], 1,000 [upper line graph]) Source: Korea Ministry of Employment and Labor, 2024.1.23, 2022 National Labor Union Statistics, press release.

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297 Figure 13.1 Trend in union density and members in Korea: 1989–​2022.

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This notable upswing can be primarily attributed to developments in the public sector (Lee & Lewin, 2018). First and foremost, a pivotal turning point was marked by the granting of unionizing rights to public officials in 2006, a departure from the previous practice that permitted such rights only under exceptional circumstances, Since 2006, public officials in lower ranks below 6 have been accorded the liberty to form or join unions, an alternation that culminated in the participation of over 88% of the one-​million strong lower-​ranking public officials in union activities (Korea Ministry of Employment and Labor (KMOEL, hereafter), 2021). Historically, works councils had been the favoured mechanism over labour unions for public officials, but there has been a discernible shift toward the latter whenever opportunities for change have presented themselves. A notable illustration of this transformation is the formal recognition of the Korea Government Employee Union (KGEU) as a legal union under the Moon Jae-​in administration, thereby legitimizing the membership status of over one hundred thousand individuals who had been embroiled in membership-​related disputes. Furthermore, under the auspices of the Moon administration, a policy endeavour was launched with the specific aim of affecting a transition of contract and outsourced labours into permanent positions within the public sector, resulting in a discernible augmentation in the density of labour unions. While antecedent policies had also sought the conversion of non-​ permanent workers into permanent roles, the Moon government notably espoused the ambition of attaining a zero-​tolerance stance on non-​permanent employment, achieving marked success by transitioning an approximately two hundred thousand individuals out of a total workforce numbering roughly five hundred thousand. Predominantly, these newly converted employees opted to affiliate themselves with labour unions as a strategic means of safeguarding their interests throughout this transformative process. Nevertheless, it is worth noting that the conversion process encountered internal labour conflicts, particularly within large entities such as the Incheon International Airport Corporation and the Korea Expressway Corporation, primarily stemming from the discontent among permanent workers in response to the substantial labour force transition. Presently, these converted workers vociferously demand an abolition of wage and working condition disparities. Significantly, among member nations of Organization for Economic Co-​operation and Development (OECD) countries, the Korea stands as a singular exemplar, having witnessed a substantial surge in union membership subsequent to the year 2010. This surge in membership portends not only a quantitative metamorphosis but also heralds a qualitative transformation within the milieu of labour movements. The overarching expansion in the membership ranks of Korean labour unions has emboldened the labour community to embrace a more assertive strategic posture predicted upon collective action, thereby supplanting the conventional reliance on negotiation as the preferred mechanism for dispute resolution. Moreover, it is imperative to acknowledge that the labour reform policy introduced by the Yoon Suk Yeol Government in the year 2022 has conferred additional impetus upon the unions’ adoption of a resolute stance.

Current Employment and Industrial Relations Regulations In common alignment with numerous other nations, Korea has instituted and rigorously implemented a diverse array of legislative measures to regulate employment relationships. These legislative frameworks and systems predominantly delineate into two principal classifications: those that pertain to individual employment agreements and those that pertain to the realm of collective industrial relations.

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Individual Labour Contracts and Protection The Labor Standards Act (LSA), as highlighted by Kwon (2018) stands as a pivotal legal frame­ work governing individual labour contracts within the context of Korea. In addition to the LSA, a set of specific regulations addressing minimum wage, employment insurance, industrial accident insurance and retirement benefits have been enacted as specialized statues operating within the overarching framework of the LSA. Notably, the LSA is applicable to all workplaces employing five or more individuals, albeit with certain provisions being selectively applied to workplaces with fewer than five employees. Annually, the Minimum Wage Commission convenes to determine the minimum wage rate by the conclusion of June, to be enforced in the subsequent year. As of 2024, the minimum hourly wage has been set 9,860 Korean won, approximately equivalent to seven US dollars. Within the sphere of working hours, the regulatory framework stipulates a standard maximum limit of 8 hours per day and 40 hours per week. Nevertheless, the legislation incorporates provisions that introduce flexibility under specific circumstances. These provisions permit the authorization of overtime labour for a duration of up to 48 hours within a single week, provided that the weekly average remains under 40 hours over a period of two weeks. In instances where an employer establishes a formalized agreement with employee representatives, an extended temporal scope is granted, allowing employees to engage in labour for up to 52 hours within a given week and up to 12 hours on any given day. This extended flexibility remains applicable within a timeframe spanning less than 3 months, all while adhering to an overarching constraint of maintaining an average of 40 working hours per week. It is pertinent to acknowledge that analogous conditions may persist for a subsequent period extending from 3 to 6 months; however, in this scenario, a mandatory requirement ensures that there is an uninterrupted rest period of a minimum of 11 hours between work shifts. In the context of Korea, the concept of employment insurance transcends mere unemployment protection and encompasses support for ongoing education and training endeavours designed to enhance employability. Consequently, it is referred to as employment insurance rather than unemployment insurance. Unemployment benefits are disbursed for a maximum period of 270 days. Individuals engaging in work for more than one hour weekly are categorized as employed, with the prevailing unemployment rate in Korea hovering around approximately 4 percent. Annually, Korea grapples with the sobering reality of more than 2,000 fatalities attributable to industrial accidents and occupational diseases, yielding a fatal injury rate of 10.7 per 100,000 workers in 2021. This rate, when juxtaposed with fellow member countries of the International Labor Organization (ILO), is notably elevated (KMOEL, 2022). In the year 2021, the nation recorded 828 worker fatalities stemming from industrial accidents, alongside and additional 1,252 casualties due to industrial diseases (KMOEL, 2022). In response to this issue, a pivotal legis­ lative measure was introduced in the form of the Severe Accident Punishment Act in 2022, specifically targeting workplaces employing 50 or more individuals, with the overarching objective of curbing severe industrial accidents, including fatal injuries. Concerning retirement benefits, Korean employees are entitled to a minimum of one month’s salary for each year of service if their tenure exceeds one year. For employees who perceive unfair treatments by their employers, avenues for redress are available through applications to the Regional Labor Relations Commissions (RLRC). The RLRC, comprising labour specialists, adjudicates cases free of charge, typically resolving matters within an average duration of 3 months. The nation hosts a total of 12 RLRCs. In instances where the worker remains dissatisfied with the RLRC’s decision, there exists an avenue for recourse through 299

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an appeal to the Central Labor Relations Commission (CLRC). The RLRC handles and annual caseload of approximately 15,000 cases, with over 1,000 cases undergoing reevaluation at the CLRC (NLRC, 2022). Should the worker’s dissatisfaction persist following the NLRC’s ruling, a further option exists for the initiation of legal action in the Administrative Court to challenge the Chairperson’s decision of CLRC, subsequently permitting appeals to the High Court and, ultimately, the Supreme Court.

Union Organizing and Industrial Disputes The regulatory framework governing collective industrial relations in Korea encompasses the Trade Union and Labor Relations Adjustment Act (TULRAA, TUA hereafter). To attain legal recognition as a trade union, registration with the administrative office is mandatory. Notably, since 2011, the coexistence of multiple unions within a single workplace has been permissible. However, in the realm of collective bargaining, the presence of multiple unions necessitates the consolidation of their bargaining representatives. The bargaining representative bears the responsibility of impartially representing other unions that are not directly involved in collective bargaining. Korean labour laws proscribe unfair labour practices (ULP) by employers, encompassing actions such as the dismissal or mistreatment of union members or workers for joining a union, the imposition of unreasonable employment conditions as prerequisites for hiring, unwarranted refusal or delay in collective bargaining, financial support provision to the union, and the mistreatment or dismissal of union members participating in collective action or reporting employer ULP. Notably, these ULP regulations primarily focus on the employer behaviour and do not extend to the activities of the union itself. For instance, certain labour unions resort to physical coercion to enlist members from their own ranks in the context of construction sites, while others create conditions making it difficult for local unions to disaffiliate. In contrast, the United States regulates both employer ULP and union ULP, in addition to scrutinizing the union’s treatment of its members. In cases where negotiations fail, unions are managed to undergo mediation before embarking on industrial action, such as a strike. Private sector enterprises are subject to a 10-​day mediation period, while public sector entities observe a 15-​day timeframe. However, prior to initiating industrial action, a majority vote in favour is required from union members. Typically, the nation witnesses around 100–​200 industrial action cases each year, with durations spanning approximately 20 days –​ three times longer than the duration observed in the 1980s (Lee, 1992; Park, 2018a). Data from the KOSIS homepage reveals 119 industrial disputes in 2021, 132 in 2022, and 223 in 2023, resulting in a cumulative loss of 471 thousand days in 2021, 343 thousand days in 2022, and 355 thousand days in 223 attributable to industrial disputes (KOSIS, 2024). Concerning strikes, employers are prohibited from hiring replacement workers to sustain production and management continuity, but they possess the authority to assign incumbent workers to alternative tasks. Furthermore, employers can defensively enact a lockout the workplace following the eruption of a dispute, entailing a prohibition on striking workers accessing the company premises. Conversely, non-​striking workers may continue regular production and business operations. In situations where industrial action substantially impact daily life, predefined essential services that must be maintained during such action are identified. If over half of the required workers fail to provide these essential maintenance services –​comprising public transportation (subways), water, electricity, gas, telecommunications, blood supply and aviation –​ employers retain the right to enlist new workers to ensure service provision. In September 2023, the Korean Railway Workers’ Union (KRWU) embarked upon a 4-​day strike commencing on the 14th of the month.

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During this period, the operational continuity of the railroad system was sustained at a rate of 70%, thereby mitigating the extent of inconvenience experienced by the general populace. In cases of severe industrial action, the government may invoke its emergency mediation authority to suspend the action for a 30-​day period. It is noteworthy, however, that this authority has not been exercised since the 2005 pilots’ strike at Asiana Airlines.

Labour Polarization within a Superficial Industrial Union Structure In the landscape of industrial relations in Korea, labour unions predominantly coalesce within the ambit of large corporations. The epoch of the Great Labour Struggle in 1987 witnessed the establishment of labor unions within numerous conglomerates known as chaebols, a term often laden with negative connotations (Witt, 2014). Recent developments have seen prominent chae­ bols such as Samsung Group and Shinsegae Group becoming unionized entities. In a noteworthy turn of events in 2020, Samsung Group Chairman Lee Jae-​yong, following the arrests and sentencing of several Samsung vice presidents and executives for unfair labour practices, announced his commitment to ceasing impediments to union formation and activities. In the context of Samsung Electronics, as of the year 2023, at least eight labour unions are organized. Nonetheless, the aggregate membership within these unions has persisted at approximately twenty thousand individuals, which represents approximately 15% of the entire workforce. The labour landscape in Korea has undergone a process of polarization, attributable to a striking contrast in union density. In 2022, workplaces with fewer than 30 employees exhibited an exceedingly low union density, measuring about 0.1%. Conversely, establishments with a workforce surpassing 300 individuals displayed a substantially higher union density of 36.9% (KMOEL, 2024). Large corporations offer high remuneration packages, comprehensive welfare benefits, stable employment opportunities and extended tenures. In sharp contrast, small-​scale workplaces, despite often offering meager wages, substandard working conditions, and precarious employment, frequently lack the presence of labour unions. One factor contributing to the intensification of this polarization is as follows. While company-​based unions in Korea transitioned their union structure to an industrial union format following the Asian financial crisis in 1997, the actual process of collective bargaining predominantly transpires at the level of individual companies (Lee & Na, 2004). Notably, des­ pite the prioritization of industry-​level bargaining by entities such as the FKTU and the KCTU, tangible instances of industry-​level bargaining –​ exemplified by the financial union within the FKTU, the metal union, and the health and medical union of the KCTU –​ effectively maintain a company-​level bargaining structure (Chang, 2018; Chang & Chae, 2004). While this structure affords the advantage of considering a company’s specific financial standing and accommodating the union’s demands within that particular organizational context, it inadequately addresses disparities between companies and fails to foster industry-​wide solidarity.

Stronger Public Sector Union Historically, the establishment of unions among public officials in Korea was a rare exception. However, a pivotal shift occurred in 2006 when lower-​ranked public officials below level 6 were granted the privilege to form unions. This policy change precipitated the emergence of numerous unions among public officials, with an impressive union density over 88%, thereby cementing their significance within the broader labour movement (KMOEL, 2022). Subsequently in 2020,

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the legislative revisions eliminated position rank restrictions, extending union membership eligibility to retirees and dismissed workers. Notably, in 2021, the formation of a new firefighter’s union marked a noteworthy development in this context. The public sector, including public officials, notably diverges from the private sector in that it experiences significantly less interference from employers in union formation, and with institutional leaders often extending their support to such initiatives (Lee & Lewin, 2018). This dis­ tinction has culminated in not only a notable union density among public officials but also within the broader spectrum of public sector workers, bolstering their role within the Korean labour movement. As exemplified, a considerable number of presidents within the FKTU have recently emerged from the public sector. It is foreseeable that, akin to trends observed in other nations, the participation of the public sector in the Korean labour movement will exhibit gradual expansion over time. Unlike the private sector, where global competition introduces challenges to the union’s monopoly position and diminishes its instrumentality, the public sector, encompassing public officials, sustains a monopoly position and is steadily advancing the recognition of the three labour rights that were hitherto subject to limitations.

Outdated Laws and Regulations in Industrial Relations Before the Great Labour Struggle the government displayed a clear inclination toward employers and tolerated their ULP. Nevertheless, the labour landscape in Korea has undergone significant transformations over the past three decades. Despite these changes, the prevailing labour laws in Korea continue to position workers and labour unions in a relatively weaker stance in comparison to employers. This implies that while employers bear obligations and responsibilities, the emphasis on rights is more pronounced for workers and labour unions. While it remains essential to penalize violent and illegal actions, it is pertinent to acknowledge that unions within large corporations no longer occupy a weaker position vis-​à-​vis employers. Consequently, it becomes imperative to engage in discussions regarding ULP committed by union, involving employers and union members to ensure equitable negotiations between both parties. For instance, Korea’s labour legislation should delineate specific penalties for excessive pressure exerted by unions on employers and for the exclusion of non-​striking union members and colleagues. In contrast, the United States’ Wagner Act of 1935 initially delineated ULP by employers and subsequently incorporated ULP by unions in 1947, further extending to encompass actions union members in 1959.

Inflexible Union Leaders Neglecting Fundamental Changes Furthermore, the persistent adherence to the labour movement paradigm of 1987 in Korea poses obstacles to the adoption of labour-​management cooperation by unions and the involvement of KCTU in the tripartite commission. This phenomenon underscores a vulnerability in the nation’s competitive position vis-​à-​vis other countries. A case in point is exemplified by Japan’s Toyota Motor Company, which has effectively averted strike since its inception, in stark contrast to the Hyundai Motor Company Union, where collective agreements have been reached after strikes occurring once every 15 years over the past two decades. Despite the passage of more than three decades since the epochal Great Labour Struggle of 1987, critics contend that South Korea’s industrial relations continue to grapple with a confrontational

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and conflict-​oriented structure. This enduring predicament is attributed to the enduring influence of leaders from that era who occupy influential positions in the labour movement. Despite Korea’s present status as an advanced OECD country characterized by robust international trade and high per capita income levels, the perpetuations of adversarial industrial relations proves detrimental not only to current operations but also to the prospective trajectory of the industry. While labour unions may strive to prioritize job security for their members, they occasionally neglect indispensable adaptations. In the private sector, all enterprises are compelled to compete on a global scale, necessitating continuous enhancements for sustained viability. The failure to do so is poised to erode competitiveness, particularly if wages and benefit costs escalate without concomitant improvements in productivity. Workers who exclusively champion their rights while disregarding their responsibilities run the risk of compromising their employers’ future competitiveness. To ensure future prosperity, it becomes imperative to overhaul the existing labour movement paradigm entrenched since 1987, which hinges on power dynamics and confrontation as the bedrock for conflict and mistrust. By fostering mutual communication grounded in cooperation and trust, potential challenges can be proactively identified, and commensurate countermeasures can be implemented. A pivotal responsibility falls on union leaders in effecting these transformative shifts, as the failure to do so may result in job losses and irreversible harm to the livelihoods of Korean workers.

Current Labour Issues Facing Us Having explored the historical evolution and distinctive features of industrial and employment relations in Korea thus far, we now turn our gaze towards the future. In this context, we shall examine the pertinent considerations and concerns that warrant our attention in the realm of labour issues.

Adapting to the Fourth Industrial Revolution The Fourth Industrial Revolution, characterized by automation, big data, informatization, and robotization, has firmly embedded itself in our society. The upsurge in minimum wage levels has rendered the adoption of automated ordering systems and food delivery robots commonplace. With automation and robotization becoming increasingly cost-​effective, manufacturing facilities are evolving into smart factories, resulting in a substantial reduction in job opportunities that were traditionally undertaken by human labour. These trends are poised to gain momentum as information and automation technologies continue their development, leading to the displacement of existing occupations and a fundamental transformation of work methodologies (Bellace, 2020; Kochan, 2020). Furthermore, unforeseeable changes such as the rapid propagation of infectious diseases like COVID-​19 and the progressively unpredictable repercussions of the climate crisis on the environment further compound the complexity of future predictions. Prior to addressing these anticipated transformations, it is imperative to deliberate on how best to prepare for them. While some businesses may be inclined to reduce human labour in favour of heightened productivity and streamlined operations, this approach diverges from the principles of environment, society and governance (ESG) management. While technology-​driven innovations and manufacturing enhancements do bolster productivity, they frequently overlook the well-​being of workers. Conversely, workplace innovation offers an alternative avenue wherein the interests 303

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of both individuals and organizations can harmoniously thrive, concurrently ensuring sustainable long-​term management (Oeij, Rus, & Pot, 2017). Workers and labour unions are urged to abstain from doing a passive and defensive stance in response to technological shifts, including those associated with the Fourth Industrial Revolution. Instead, they should cultivate collaborative endeavours aimed at augmenting the capabilities and skills of the workforce in tandem with technological advancements, thereby bolstering the competitive edge of companies. Germany, with its longstanding exploration of workplace innovation, continues to seek avenues to facilitate active labour-​management cooperation, fostering an environment where workers can coexist harmoniously with technological innovation.

Addressing Intergenerational Strain in an Aged Society In recent times, there has been a notable demographic shift among corporate members, transitioning from the baby boomer generation, which spearheaded Korea’s rapid economic growth in the 1970s and 1980s, to the MZ generation, born in the 1990s and 2000s (Bristow, 2015; Park, Jang, & Jeon, 2022). Unlike their baby boomer predecessors, who prioritized organizational development over personal loyalty and endured unfavourable working conditions and excessive hours, the MZ generation holds distinct values and perspectives (Coburn & Hall, 2014; Fishman, 2016; Park & Park, 2018; Roberts, 2012). Traditionally, labour unions in large corporations have predominantly represented production workers, leaving office workers without effective representation and vulnerable to various challenges. To address this issue, office workers in many large corporations have initiated the formation of labour unions to advocate for changes to performance-​based pay calculation methodologies and prompt payment practices. However, this situation underscores a broader issue related to the differing values and priorities between the MZ and baby boomer generations. Baby boomers tend to prioritize loyalty to a company, whereas the MZ generation places greater emphasis on higher salaries, career advancements, and immediate job satisfaction. Effectively bridging these generational gaps requires collaboration between labour unions and companies to cater to the distinct needs and expectations of both groups. A noteworthy development is the emergence of new white-​collar unions among MZ office workers and mid-​level administrators at large corporations, a phenomenon that was not prevalent before 2021. For instance, office workers at Hyundai Motor Company, LG Electronics, and SK Hynix organized labour unions in 2021, demanding equitable performance-​based pay structures and incentive programmes. Subsequently, several MZ labour unions established ‘Refresh Worker Council’ in 2023 aiming to explore alternative paths rather than aligning with traditional labour federations like FKTU and KCTU. Furthermore, the work values of the MZ generation significantly differ from those of baby boomers. While baby boomers often seek company loyalty and aspire to reach executive positions, the MZ generation exhibits a preference for shorter tenures with individual firms, opting to switch jobs in pursuit of higher remuneration and career progression (Askari, 2023; Brown, 2023; Twenge & Campbell, 2008). They also prioritize immediate job satisfaction. Addressing the distinctive preferences of the MZ generation, which centre on these values, necessitates a collective effort from both labour unions and companies. As Korea undergoes demographic ageing, it becomes increasing pertinent to consider the role of retirees in the labour force. The 2020 legislative revision allows retirees to engage in production activities and join unions, akin to the practice of the New York State Police Union in the United States. While such a shift is unlikely to occur immediately in Korea, it could potentially lead to 304

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conflicts with the MZ generation if retirees are encouraged to join unions in sectors involving public officials and large corporation, such as Hyundai Motor Company. Hence, it is imperative to devise strategies that accommodate the preferences of both the MZ and baby boomer generations, fostering harmonious labour relations.

Non-​union Employee Representation as Future Trends for Labour Representation The evolving industrial landscape is poised to bring about a transformation in the demand for labour unions. Historically, workplaces with a concentration of workers in close proximity necessitated standardized prerequisites for union activities. However, the burgeoning diversity in work arrangements, encompassing various methods and venues for task execution, is likely to diminish the appeal of labour unions that underscore solidarity. Concurrently, shifts in individual’s values and perspectives, with an increasing number identifying as freelancers as opposed to conventional employees, may, in certain cases, culminate in an expansion of union membership. A distinct prospect on the horizon in the ascendancy of the non-​union employee representation (NER), signifying a departure from traditional labour unions. Reflecting an attitudinal shift, there has been a mounting negative association with labour unions according to attitude surveys. Yet, the imperative to address worker discontentment with employers remains unabated. Consequently, NER could be construed as an alternative mechanism for redressing such concerns. In tandem with the creation of fresh job categories and workplaces, it is highly plausible that novel manifestation of NER will come to the fore. In the Korean context, legislative mandates dictate that workplaces employing 30 or more individuals establish a labour-​management committee (LMC) (Kleiner & Lee, 1997). While a portion of the over 70,000 committees has proved effective in wage negotiations and productivity enhancements, the LMC has encountered censure for predominantly serving as a mechanism to evade penalties and for its constrained capacity to orchestrate collective action. Given the prevailing low union density within small and medium-​sized Korean enterprises, the LMC hold the potential to serve as a conduit for communication aimed at safeguarding worker interests and bolstering productivity in the absence of labour unions (Kaufman & Lee, 2018). Additionally, there have been nascent workers’ organizations, such as chauffeur service workers unions and food delivery workers unions (rider unions). These workers, classified not as wage-​ earning employees under Korea’s LSA, are treated as independent contract workers. Nevertheless, these independent contract workers are entitled to organize or affiliate with a union as per the TUA in Korea. These unions are dedicated to safeguarding the rights of independent contractors, a category that did not exist in the twentieth century. In 2021, the Korea Platform & Freelance Workers’ Mutual-​Aid Foundation was established. While not a labour union per se, its mission revolves around promoting mutual assistance and enhancing health benefits, working conditions, as well as training and education opportunities for its members, encompassing platform non-​standard workers and freelancers. In the foreseeable future, the emergence of an array of nontraditional labour unions and non-​union worker representation initiatives is a prospect we can anticipate.

Conclusion Despite its unique trajectory of industrialization, Korea boasts a robust labour movement, marked by a significant surge in union density –​an anomaly compared to trends among OECD nations. 305

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This post-​1987 political democratization period, known as the Great Labour Struggle, has further amplified the societal role of labour unions. However, the maturation of this movement, now spanning over three decades with its original leadership intact, has resulted in a potential entrenchment within a confrontational framework, limiting adaptability to the evolving socioeconomic landscape. Additionally, unforeseeable disruptions like the COVID-​19 pandemic and impending transformations such as the climate crisis and the Fourth Industrial Revolution necessitate a fundamental shift in Korea’s employment relations paradigm, from conflict to collaboration and trust. How are employers, unions and governments responding to the changing landscape of work dynamics? An argument can be made that the present response is insufficient. To adequately address forthcoming changes, all stakeholders must fulfill their respective roles (Lee & Kaufman, 2018b). Let us commence by scrutinizing the role of employers. Many organizations are increasingly relying on advancements in information and communication technology to enhance productivity through automation and robotization, frequently with reduced human labour requirements. Nonetheless, these initiatives may not wholly exemplify a company’s commitment to social responsibility and the promotion of shared prosperity. It is imperative that companies do not underestimate the significance of nurturing and harness their existing workforce while also integrating novel labour forces. If deemed necessary, proactive engagement in collaboration with unions or worker representatives should be considered. A similar imperative extends to workers and labour unions, particularly as society experiences a diminishing demand for low-​skilled labour coupled with an escalating demand for highly skilled labours. Workers must adapt to this shifting landscape by continually elevating their labour capabilities. Preserving in resistance to change and adopting a defensive posture is unsustainable over the long term. Consequently, workers should actively engage in educational and training endeavours aimed at enhancing their labour competencies. Concurrently, labour unions should play a pivotal role in monitoring industrial restructuring while actively participating in initiatives designed to augment workers’ proficiency. Furthermore, governments should implement measures to dissuade companies from exclusively pursuing manufacturing innovation without due consideration for their workforces’ significance. Persuading labour unions to become more receptive to innovation and to refrain from unconditional opposition and resistance to change, is imperative. The establishment of tripartite consultative bodies at national, regional and industrial levels, in collaboration with experts, can contribute significantly to the identification and resolution of future challenges.

Note 1 Days not worked per 1000 workers due to strikes and lockouts by economic activity in 2020 (per 1000 workers) are as follows: Australia 11.6 (2016), Austria 0.0, Canada 81.7 (2021), Finland 70.0, France 58.0 (2021), Germany 5.2, Korea, Republic of, 27.5, Norway 8.0, Sweden 0.0, Switzerland 0.3 (2019), United Kingdom 154.0 (2018), United States 0.0 (2019) at ILO stats (Korea Labor Institute. 2023. Table 5-​ 3 Number of strikes and lockouts, In Labor statistics abroad -​ Part 5 Industrial relations (in Korean). Downloaded from www.kli.re.kr/​board.es?mid=​a1020​4000​000&bid=​0011&act=​view&list​_​no=​137​ 995&tag= ​&nPage=​4 on October 18, 2024.) .

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Routledge Handbook of Korean Business and Management Lee, Y.-​M., Bognanno, M. F., & Bognanno, M. F. 2004. The evolution of Korea’s industrial relations system and change in the wage–​strike relationship. Korean Social Science Journal, 31(1): 39–​72. Lee, Y.-​M., & Kaufman, B. 2018a. Viewing Korean employment and industrial relations. In Y.-​M. Lee &. B. Kaufman (Eds.), The Evolution of Korean Industrial and Employment Relations, 15–​33. Cheltenham, UK: Edward Elgar Publishing. Lee, Y.-​M. & Kaufman, B. (Eds.). 2018b. The Evolution of Korean Industrial and Employment Relations. Cheltenham, UK: Edward Elgar Publishing. Lee, Y.-​M., & Lee, M. B. 2005. The development of the industrial relations field in Korea. In D. Lewin & B. E. Kaufman (Eds.), Advances in Industrial & Labor Relations, Vol. 14, 279–​299. Bingley: Emerald Group Publishing Limited. Lee, Y.-​M., & Na, I. G. 2004. How did unions protect workers’ rights after the 1997 Economic Crisis in Korea? In Industrial Relations Research Association Series. Proceedings of the 56th Annual Meeting, January 3-​5, 2004, San Diego, CA, USA: 182–​194. www.yumpu.com/​en/​docum​ent/​read/​8297​309/​proc​ eedi​ngs-​of-​the-​56th-​ann​ual-​meet​ing-​lera-​onl​ine-​sorry-​you-​ National Labor Relations Commission. 2022. Statistics for judgment cases. https://​nlrc.go.kr/​nlrc/​pol​icy/​sta​ tist​ics/​det​ail.do accessed on May 31, 2024 (in Korean). Oeij, P., Rus, D., & Pot, F. D. (Eds.). 2017. Workplace Innovation: Theory, Research, and Practice. Cham, Switzerland: Springer. Park, J., Jang, T.-​S., & Jeon, S. 2022. Understanding the MZ generation through consilience with biology and ways for managing the MZ generation, Korean Journal of Management, 30(3): 53–​78 (in Korean). Park, K. W. 2018a. Strike activity in Korea. In Y.-​M. Lee & B. E. Kaufman (Eds.), The Evolution of Korean Industrial and Employment Relations, 268–​286. Cheltenham, UK: Edward Elgar Publishing. Park, M. J. 2018b. New trends in Korean labor interest representation. In Y.-​M. Lee & B. Kaufman (Eds.), The Evolution of Korean Industrial and Employment Relations, 142–​160. Cheltenham, UK: Edward Elgar Publishing. Park, M.-​J., & Chang, H.-​G. 2017. New designing for Koran social dialogue: A New start toward post 1987 labor system. Monthly Labor Review, August: 45–​55 (in Korean). Park, S., & Park, S. 2018. Exploring the generation gap in the workplace in South Korea. Human Resource Development International, 21(3): 276–​283. Roberts, K. 2012. The end of the long baby-​boomer generation. Journal of Youth Studies, 15(4): 479–​497. Roh, K.-​P., & Brewster, C. 2018. The historical development of employment and labor relations in Korea. In Y.-​M. Lee & B. Kaufman (Eds.), The Evolution of Korean Industrial and Employment Relations, 34–​54. Cheltenham, UK: Edward Elgar Publishing. Twenge, J. M., & Campbell, S. M. 2008. Generational differences in psychological traits and their impact on the workplace. Journal of Managerial Psychology, 23(8): 862–​877. Witt, M. A. 2014. South Korea: Plutocratic state-​led capitalism reconfiguring. In M. A. Witt & G. Redding (Eds.), The Oxford Handbook of Asian Business Systems, 216–​237. Oxford, UK: Oxford University Press.

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14 EXECUTIVE COMPENSATION IN BIG CORPORATIONS Unique Features in Korean Firms Ji-​Young Ahn

Executive compensation is a complex, long-​standing and controversial topic across various fields (Edmans, 2017). In addition to the intensive academic debate on its operations, the efficiency and effectiveness of current practices and regulations have stimulated much attention among the public. When discussing the issue of high CEO salaries, there is a significant focus on the wage gap between CEOs and employees. For example, in the case of South Korea, the wage gap between CEOs and employees is approximately 16 times in Korea (Maeil Business News, 2023). Unfortunately, compared to Western economies, including the US, international evidence on CEO compensation is scarce primarily due to data availability (Murphy, 2013). Korea is no excep­ tion. However, the disclosure of executive pay across the globe has improved notably in recent years. For example, Korea has required detailed executive pay disclosures since 2013. Therefore, scholars have been actively involved in this research issue and identified the determinants of cross-​ country differences using newly available data on executive pay for the past 10 years. This chapter sheds light on recent developments by reviewing the theoretical and empirical literature on Korean executive pay. Korea differs widely in corporate governance, ownership structure, executive hiring practices and regulations. However, relatively little is known about how these unique characteristics relate to executive compensation. Therefore, we begin by explaining the institutional contexts with special emphasis on corporate governance in Korea. In particular, we discuss the new rules on pay disclosure, which require firms to disclose information on executive pay if their pay exceeds 500 million Korean Won (KRW, hereafter) since 2013. Then, we present stylized facts about the level and composition of top executive pay, starting with executive pay data on public firms in Korea. There is much debate on what causes the observed facts in pay. There are two broad views. One is the ‘optimal contracting’ or ‘shareholder value’ perspective, which argues that executive pay is an optimal contract, resulting in an arm’s length relationship between executives and the board of directors. This contract can alleviate agent problems by efficiently inducing management decisions to increase shareholder value. The other is the ‘rent extraction’ or ‘managerial power’ view, which posits that top executives set contracts to maximize their own rents at the expense of shareholders’ interests. We discuss empirical studies on executive pay in Korea and their implications to determine the degree to which executive pay is an optimal contract to maximize the shareholders’

DOI: 10.4324/9781003180920-17

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interests. We also discuss policy interventions enacted and proposed so far. Institutional forces shape top executive pay, including legislation, regulations and accounting policies. We carefully evaluate them based on both theory and empirical evidence. The remainder of the chapter is structured as follows. In Section 2, we describe recent changes in corporate governance in Korea. Section 3 provides an account of how executive compensation is set and disclosed. Section 4 presents our data and descriptive statistics about the level and composition of executive compensation –​ Section 5 surveyed theoretical and empirical evidence on CEO compensation in Korea. The paper concludes with a discussion and future directions for research in the final section.

Corporate Governance in Korea Controlling Shareholders and Secondary Agency Problems The definition of corporate governance in Shleifer and Vishny’s (1997) seminal paper focuses on the interests of (outside) shareholders and how they might align themselves with the interests of managers. However, in the US, where dispersed shareholders generally own firms, discussions on corporate governance have evolved around motivating professional managers who do not have much of an ownership stake in the firms they manage to care about shareholder value (Edmans, 2017). Specifically, the dispersed-​ownership context addresses agency costs caused by manage­ ment and shareholder interest misalignment. Therefore, performance-​based pay contracts link CEO compensation to shareholder wealth via performance measurements such as stock prices or accounting-​based indicators, providing a potentially powerful means for attracting, retaining and motivating executives to align with the shareholders’ interests (Jensen & Murphy, 2004). However, publicly traded companies are often under the ownership of groups of shareholders who control significant portions of the company’s equity (La Porta et al., 2000). These shareholders or controlling shareholders have divergent objectives and interests (Bagwell, 1992), and this diver­ sity can lead to conflicts when their goals do not align with those of other shareholders within the firm (Dharwadkar et al., 2000). This conflict that arises due to differences in objectives between controlling and minority shareholders is commonly known as secondary agency problems (Sutton et al., 2018). These conflicts can emerge due to uneven ownership distribution, differential control and power, or board members’ ties to influential shareholder groups (Sutton et al., 2018). When these conflicts exist, they can lead to decisions and actions that prioritize the interests of the dominant shareholders at the expense of minority shareholders (Feldman et al., 2016; Sutton et al., 2018; Villalonga and Amit, 2009; Young et al., 2008). Korea has a distinctive corporate ownership and control pattern, which often results in secondary agency conflicts, having significant implications for the configuration of executive pay (Kim et al., 2022; Sutton et al., 2018). La Porta et al. (1999) reported that business groups and family control typically characterize corporate structures outside non-​US firms. The primary mechanism through which families maintain control over many assets is through intercorporate shareholdings of public member firms that create a pyramidal business group (Kim et al., 2022). This structure makes a deviation between cash flow rights and the control rights of the controlling shareholder, which is not observed often in the US. This structure may exacerbate the agency problem between minority shareholders and controlling shareholders, as the interests of the controlling families may differ from those of minority shareholders (Morck et al., 2005). In addition, extreme private benefits, such as tunnelling from minority shareholders to the heirs of the controlling families, are often observed and considered legal in emerging economies (La 310

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Porta et al., 1999; 2000). Tunnelling refers to transferring assets and profits out of firms to benefit their controlling shareholders (La Porta et  al., 2000). In Korean business groups, this appro­ priation is often realized by related-​party transactions between affiliated firms under common family control. Moreover, controlling families may substantially influence the entire business group. Specifically, controlling shareholders may be involved in forming the board of directors of their affiliates. As a result, there is a concern that the board may lack independence and effective monitoring functions (Cohen et al., 2012). However, under the Korean legal system, the board of directors can decide executive compensation payments, indicating that controlling shareholders can use their influence to design a favourable remuneration payment structure. In sum, the problem of expropriation by controlling shareholders is highly severe in Korea due to a less developed disclosure system and weak corporate governance.

How is Executive Compensation Determined and Disclosed? Setting Compensation Korea’s Company Law states that the shareholders’ meeting has the ultimate authority to make significant decisions, including appointing directors and senior executives (article 382 of the Company Law). The Korean Commercial Code (KCC) is the fundamental law on corporate governance that sets out guidelines and rules about the duties and responsibilities of directors, chairpersons, CEOs and shareholders. The Code states that the controlling shareholder recommends the appointment of directors and the shareholders’ meeting votes on the recommendation. Since 2003, at least half of the directors have been outside directors and have taken no part in the company’s day-​to-​day management (article 542-​8 of KCC). Note, however, that the controlling shareholder still strongly influences the appointment of directors, including independent or outsider directors. The board of directors is responsible for hiring the CEO and the upper echelon of senior management. The board decides the compensation of the CEO and chairperson. Some firms have a remuneration committee recommending compensation and incentive schemes for top management, but the board makes the final decision. There is no special provision for the remuneration of non-​registered officers (or senior management) (article 408 of the Company Law). Directors’ compensation1 can be determined by either the articles of incorporation (AOI) or an ordinary reso­ lution at a shareholders’ meeting (article 408 of the Company Law). If provided for by the AOI, stock options can also be granted to directors by an extraordinary resolution at a shareholders’ meeting. In practice, the aggregate remuneration (or a remuneration cap) for directors is resolved at a shareholders’ meeting. The board in Korea determines individual pay for each director (article 388 of the Company Law). Due to the practices described above, external shareholders’ rights to decisions on executive compensation must be restricted to the approval of the director’s remuneration limit. However, the actual amount of compensation paid at the end of the year tends to be much less than half of the approved remuneration limit over the years, which continues to decline (Edmans, 2017). Put differently, the remuneration limit for executives does not provide any information to external shareholders to reasonably estimate the actual payment. Overall, approving the director’s remuneration limit can hamper shareholders’ exercise of their voting rights over executive compensation decisions and may worsen information asymmetry about the actual amount of executive remuneration paid. Disclosure of executive pay. Current regulations require listed firms to disclose compensation information for registered directors who earn more than 500 million KRW annually. Additionally, 311

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the following items regarding directors’ remuneration are obligated to disclose under the Financial Investment Services and Capital Markets Act (FISCMA): • • • • •

Aggregate compensation for directors approved at a shareholders’ meeting. Average remuneration paid to directors. Stock options granted to directors. The standard for payment of remuneration. Individual compensation for certain directors and specific calculation standards and methods (this disclosure provision only applies where a director’s compensation exceeds 500 million KRW).

Disclosure of executive compensation was not mandatory until 2013 in Korea. Before 2013, this data was available only for share-​based payment in Korea. For cash-​based compensation, companies disclosed figures aggregated at the group level. However, the disclosure rule went through a significant change in April 2013 when the National Assembly amended the FISCMA to require any director whose total pay exceeds 500 million KRW in a given fiscal year to disclose their full pay, its components, and the criteria used to set the compensation in the company’s business reports. According to the disclosure guidelines, total compensation comprises labour income (i.e., salary, bonus, and incentives), retirement income, and other income, including realized gains from stock option exercises (Kim et al., 2022). However, this new rule received criticism for its vulnerability to disclosure evasion. In some controlling shareholder families, unregistered executives are included in the disclosure list as cases of switching to unregistered executives are found to avoid disclosing information on receiving ample remuneration. In response to the vulnerability to disclosure evasion and many actual incidents of executive deregistration by family executives, FISCMA was amended in 2016 to expand the scope of executives subject to mandatory disclosure. In addition to registered directors receiving more than 500 million KRW, non-​registered executives must disclose their pay as long as they are among the top five highest-​paid executives in the company and receive more than 500 million KRW in a given year (Cho et al., 2022). This new rule came into effect in 2018. Disclosure plays a vital role in corporate governance. It allows outside shareholders to obtain the information necessary to monitor management. Also, by reducing information asymmetry, disclosure attenuates the adverse selection problem. Han et al. (2014) examine firms that are not trustworthy in their disclosures. They find that firms designated as unfaithful disclosure firms by the Korea Exchange exhibit significantly negative stock price returns upon designation. However, they show that the adverse stock reaction is mitigated in firms with high managerial ownership. Disclosure can also have unintended effects. Kim et al. (2017) investigate the impact of the new disclosure rule adopted in 2013. They find that executives receive higher compensation after the new law, particularly those who received suboptimal pay in prior years. They posit that this would not have appeared without the pay information of other executives.

Overview of Executive Compensation in Korea This section examines the status of executive compensation of listed companies in Korea after the disclosure obligation by using the pay data of individual executives. First, we present the stylized facts about the level and structure of top executive pay from 2014 to 2021. We then systematically review empirical studies that relate to executive compensation in Korea. 312

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Data and Sample We describe the sample to examine the top executive pay level and composition. FISCMA was revised on May 28, 2013, and implemented on November 29, 2013. Therefore, since the fiscal year ended in December, we have limited our sample firms. Thus, our sample comprises a panel of 9,979 observations of 1,335 firms listed on the Korean Stock Exchange (KSE) or KOSDAQ from 2014 to 2021. In addition, we collected individual compensation information from the FSA (Financial Supervision Authority) data system and listed public companies from the TS2000 dataset. As a result, 4,034 executives from 1,315 companies were included in the final sample.

The Level and Structure of Executive Compensation in Korea Table 14.1 shows summary statistics for directors’ compensation of sample firms for 2014–​2021. Figure 14.1 presents the level of total compensation by year. Annual total compensation is the sum of salaries, bonuses, payouts from long-​term incentive plans, the grant-​date values of option grants, and miscellaneous other compensation. The grant-​date values of restricted stock grants are not included. Table 14.1 shows that the median executives received 850 million KRW (US$600,000) as total compensation, while the mean value was 1,271 million KRW (US$900,000). The average base salary, the most significant portion of the total compensation paid to top executives, is 553 million KRW. Figure 14.1 depicts that the mean total compensation increased from 1,100 million KRW in 2014 to 1,621 million KRW, a 48 percent increase in 2021.

Table 14.1 Summary statistics for executive compensation in Korea CEO pay variable

Mean

SD

25th Percentile

50th Percentile

75th Percentile

Panel A: Pay Level* Total Compensation Salary Bonus Incentive Stock Option Pension Value Other

1,271,219 553,012 320,234 9,537 127,110 227,187 24,260

1,879,543 535,823 667,127 94,350 1,208,915 1,034,473 233,212

599,000 204,000 0 0 0 0 0

850,000 466,822 105,000 0 0 0 0

1,375,000 725,000 360,000 0 0 0 4,000

.57 .24

.32 .25

.26 .001

.58 .17

.86 .41

.05 .13 .02

.19 .27 .08

0 0 0

0 0 0

0 0 .005

Panel B: Pay Composition Base Pay /​Total Compensation Cash Variable Pay/​Total Compensation Stock Option /​Total Compensation Pension /​Total Compensation Other /​Total Compensation Note: Unit: 1,000 KRW, n=​9,979. Source: Created by the author based on TS2000 dataset (www.kocoi​nfo.com/​index.asp, accessed on January 03, 2023).

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Figure 14.1 Top executive total compensation level and firm performance from 2014 to 2021. Note: The average annual CEO pay from 2014 to 2021 is based on T.S. 2000 data. Annual total compensation is the sum of salaries, bonuses, payouts from long-​term incentive plans, the grant-​date values of option grants, and miscellaneous other compensation. The grant-​date values of restricted stock grants are not included. The unit is 1,000 KRW. Source: Created by the author based on TS2000 dataset (www.kocoi​nfo.com/​index.asp, accessed on January 03, 2023).

Top executives typically received few stock options during the periods. The median values of stock options granted each year were zero. The mean value of the stock option grant was 227 million won. It should be noted that these figures are calculated for all top executives, including those who received no stock options. In addition, we need to calculate the value of stock option grants and stock option holdings to calculate precisely the incentives from CEOs’ stock option holdings. Therefore, it is necessary to construct an executive’s total holdings of stock options by adding options granted that year to those given in previous years and by excluding matured options. Unfortunately, firms do not report when and how many stock options are exercised. Therefore, we assume that each CEO holds and does not exercise their stock options until maturity. This assumption is strong. Moreover, we could not obtain information on the value of stock holdings for a given executive. Therefore, it should be noted that the total compensation value in our analysis is underestimated. Table 14.2 also shows the number of executives granted a stock option in the year. The number is constructed by a stock option dummy, defined as 1 if the CEO is granted a stock option in the year and 0 otherwise. It is shown that the proportion of CEOs who receive an option is increasing, although most CEOs do not receive one. For example, 4 percent of top executives received stock options in 2014 and 11 percent in 2021. Descriptive statistics of those who received stock options are also shown in Table 14.1. It is suggested that there is no tendency for firms to use stock options as their primary incentive device in Korea. Typical executive pay packages include five basic components: salary, annual bonus, payouts from (long-​term) incentives, stock option grants and restricted stock grants. Additionally, executives often receive pension plans, perks and severance payments upon departure. Figure 14.2

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Executive Compensation in Big Corporations Table 14.2 Executives granted stock options by year Year

Number of publicly traded corporation

Number of disclosed executives granted no stock options

Number of disclosed executives granted stock options

Percentage of executives granted stock options (%)

2014 2015 2016 2017 2018 2019 2020 2021

1,834 1,922 1,987 2,040 2,111 2,204 2,268 2,356

716 823 829 889 1,451 1,570 1,481 1,626

32 17 25 30 117 91 89 193

4 2 3 3 7 5 6 11

Source: Created by the author based on TS2000 dataset (www.kocoi​nfo.com/​index.asp, accessed on January 03, 2023).

Figure 14.2 The structure of executive compensation from 2014 to 2021. Note: The diagram shows the average composition of executive pay in publicly traded companies in Korea (for a total of 1,315 firms). The TS2000 database is used for the analysis. The figure illustrates the four main components that can be separately tracked over the sample period: salaries and current bonuses, payouts from incentive plans excluding the value of restricted stock, and the grant-​date values of option grants. Source: Created by the author based on TS2000 dataset (www.kocoi​nfo.com/​index.asp, accessed on January 03, 2023).

illustrates the composition of the significant pay components for top executives of the publicly traded firms in Korea obtained from our sample. During the sample period, pay mainly comprised salaries and annual bonuses. The base salary was the largest component of the total CEO compensation package, at an average of 57 percent of total compensation, as shown in Table 14.1. 315

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Figure 14.2 shows that the proportion of base salary to total compensation has declined since the disclosure of executive pay from 60 percent in 2014 to 51 percent in 2021. Bonuses were generally non-​discretionary, tied to annual accounting performance, and paid in either cash or stock. The most significant change in Figure 14.2 is the increase in stock option compensation, from 3 percent to 8 percent. To summarize, the composition of executive pay has changed over time, with fixed salary remaining the most significant component of executive pay, and options have become a non-​trivial part of CEO compensation in Korea.

Literature Review on Executive Compensation in Korea Theoretical Background The rapid increase in top executive pay has sparked much debate about the determinants of chief executive pay. One end of the continuum posits CEO pay as the efficient outcome of a labour market where firms compete for managerial talents. The other views CEO compensation as the result of rent extraction by CEOs (Edmans, 2017). Most literature on CEO compensation is built on principal–​agent theories (Holmström, 1979; Jensen & Meckling, 1976; Mirrlees, 1976). The theoretical model maintains risk-​neutral principals (shareholders) who design an optimal contract for risk-​ and effort-​averse agents in a moral hazard problem (Murphy, 1999). The resulting efficient contract is intended to motivate CEO efforts. Boards design CEO pay and incentives to align shareholder and executives’ interests based on the severity of agency problems, the degree of risk aversion, and the difficulty in monitoring (Core & Guay, 1999; Core et al., 2003; Jensen & Murphy, 1990; Murphy, 1985). Traditional (or primary) agency problems make several predictions on CEO compensation. First, executive pay is positively related to firm performance, reflecting CEO efforts. However, it is relatively muted in the functional form of the estimating equation and other variables to be included (Murphy, 1999). Holmström’s (1979) ‘informativeness’ principle is valid, as it posits that any informative indicator about CEO efforts can be contracted upon. Second, agency theory predicts optimal contracts are inversely related to CEO risk aversion. This is because the incentives at high risk impose too high costs on a risk-​averse CEO. Third, traditional agency models predict that optimal contracts filter out external shocks common across peer CEOs. Relative performance evaluation (RPE) among competitors should matter (Murphy, 1999; Edmans, 2017). For example, in Western economies, CEO compensation contracts mainly use equity-​based incentives to link executives’ payoffs to shareholder value directly. However, the evidence recently surveyed by Edmans (2017) shows that the sensitivity of CEO wealth to stock performance significantly increased in the 1990s, primarily due to rapidly growing option holdings, and remained high in the US. Simultaneously, most CEOs’ equity holding remains low as a percentage of the firm’s total shareholdings (Edmans, 2017). The rent extraction view, on the other hand, suggests that in situations where managers or controlling shareholders have substantial power and influence within a company, they may be inclined to extract excessive compensation or ‘rents’ from the organization, often at the expense of shareholders and the company’s overall financial health (Bebchuk & Fried, 2004). Rent extrac­ tion occurs when individuals in positions of authority use their influence to secure compensation packages higher than what would be deemed fair or competitive without effective corporate governance mechanisms (Bebchuk & Fried, 2004; Bebchuk et al., 2011). For example, the inefficiency

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with which incentive contracts can cause CEO behaviour was destructive over the Enron era 2001, during which option pay appears to have created dysfunctional behaviours, including corporate scandals (Gordon, 2002; Hill, 2006). Although the evidence remains questioned, the 2008 finan­­ cial crisis indicates that the CEO pay structure may have led to excessive risk-​taking in financial institutions (Brunnermeier et  al., 2009). Thus, executive compensation contracts can become a source of, rather than a remedy for, agency costs. Excessive executive pay and pay gaps can lead to entrenched managers adversely affecting firm value (Bebchuk & Fried, 2004; Bebchuk et al., 2011). Traditional agency problems expect that family owners or controlling shareholders have a notable impact on curbing the short-​sighted investment choices made by professional CEOs, functioning as investors with a long-​term perspective. This can lead to improved investment effectiveness and an augmentation of the overall corporate value (Stein, 1989). Furthermore, family owners tend to prefer non-​monetary incentives linked to the company’s sustained success and possess unique expertise and knowledge specific to the company, which is challenging for others to acquire (Kandel and Lazear, 1992; Davis et al.,1997). However, the excessive exer­­ cise of managerial control by controlling shareholders (or family owners) may negatively affect corporate value and give rise to secondary agency conflicts between controlling and minority shareholders (Shleifer and Vishny, 1997; Villalonga and Amit, 2009). Several empirical studies have presented the positive outcomes of family business ownership, mainly in Western advanced countries with dispersed ownership and strong investor protection (e.g., Villalonga and Amit, 2006; Fahlenbrach, 2009), whereas negative outcomes of family control are reported in coun­ tries including Korea, where investor protection is weak, and ownership is concentrated (e.g., Kim et al., 2022) Secondary agency problems have often been documented across large conglomerate firms in Korea (Singla et al., 2014). These can exacerbate CEO rent extraction when powerful executives, such as CEOs or controlling shareholders, have substantial control over corporate decision making. Hence, CEOs or managers can prioritize the interests of dominant shareholders or specific groups within the company over those of minority shareholders (Sutton et al., 2018). This prioritization can lead to compensation decisions that benefit the CEO at the expense of overall corporate performance and the broader shareholder base. In sum, controlling shareholders or CEOs may use their influence to secure compensation packages that are disproportionately favourable to themselves, aligning with rent extraction theory. Additionally, when secondary agency problems exist, they can create an environment where CEO compensation decisions are less likely to be fair, performance-​based, or aligned with the best interests of all shareholders. CEOs with substantial control may have more leeway to secure compensation arrangements unrelated to their performance or market benchmarks, contributing to excessive pay. Furthermore, from the rent extraction perspective, the board may not operate at arm’s length; managers can set or influence their own compensation (Skaife et al., 2013). Therefore, top executives are compensated more than is optimal for shareholders, and to conceal the extraction of rents, executive compensation might be structured sub-​optimally (Bebchuk et al., 2001). Overall, when the rent extraction theory is applied to address secondary agency conflicts in the context of CEO compensation, it highlights the potential hazard of CEOs securing an excessive level of remuneration, particularly when they hold substantial power and influence. This risk becomes especially prominent when conflicts of interest among shareholders are prevalent in the Korean corporate landscape.

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Empirical Evidence on Major Topics in Executive Compensation in Korea Determinants of Executive Compensation Much of the debate about executive pay emphasizes the determinants of payment, particularly the extent to which it is driven by optimal contracting (or shareholder view) or rent extraction consideration. Thus, many studies using the Korean sample have tested the predictions that executive compensation’s level and structure vary widely according to contractual variables and the quality of corporate governance within the firm (Chung & John, 2017; Dah & Frye, 2017; Chen & Chu, 2020). Models that take the optimal contracting view determine the level of CEO compensation subject to contracting restrictions and render executives’ and firms’ outside options in a competitive market for executive talents (Edmans, 2017). The firm’s outside option is to hire a different CEO, and the CEO’s external option is to work with other employers. Therefore, it is crucial to know how the incumbent CEO contributes to firm value compared to the next best executive the firm can hire and how much the executive could earn in the next best job they could take. Thus, this optimal view suggests that high pay can be reasonable because it attracts scarce and productive executive talents. Based on this view, the following predictions might explain the rise in CEO pay over the years. First, the difference between the CEO’s contribution to firm value and that of the next best CEO may have increased, partly because the importance of the CEO’s ability has increased. Second, the CEO’s expected compensation from the next best job may have grown, perhaps because CEO skills have become more transferrable. Chaigneau and Sahuguet (2018) documented evidence consistent with the optimal contracting view. They find that firms monitoring CEO activities can dismiss underperforming CEOs because they have more information about their CEO capabilities. CEOs are paid low salaries when their skills are sufficiently transferable. If monitoring the CEO becomes less complicated, competition for CEOs will intensify, and CEO pay will rise in all companies, including companies whose monitoring capabilities have not changed. Moreover, empirical evidence that shows the positive relationship between the firm size and executive talent, thereby higher compensation, supports the optimal contracting view. For example, Gwon and Moon (2019) show that directors’ remuneration has risen faster than average workers, and executive compensation of large firms has fluctuated more than that of SMEs. The theory can also explain the vast gap in pay levels between the two countries, Korea and the US, attributable to the difference in firm size. For example, the median CEO in the S&P 500 earned $10.1 million per year, substantially higher than those in Korea. In addition, Korean executives primarily receive compensation as a fixed salary, more than 50 percent of total compensation. In contrast, US CEOs mainly received (more than 60%) equity-​based compensation such as options and stock holdings. Hence, options and long-​term incentives are less critical in Korea (Lee & Wu, 2022). However, several empirical studies show evidence that pay practices favouring executives at the expense of shareholders are most abundant when corporate governance is weak, consistent with the rent extraction view. For instance, Kim and Han (2018) find that family CEOs of Korean business groups are paid 60% more than non-​family CEOs (i.e., family pay premiums) in business group firms (or chaebols). This discrepancy is not based on performance-​based pay but instead generated by differences in fixed payments. Similarly, Cheong and Kim (2019) investigated whether family pay discounts documented in the US do not hold in a business group setting. They also test that the compensation offered to family executives may be increased when the proportion of stock holding held by other family members is small, which is often the case in a business group. 318

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Moreover, a recent KCGS survey presents the following evidence regarding family executives (hereafter, family CEOs). When a CEO is a family member, specifically affiliated with the controlling shareholder’s family, or is associated with a subsidiary within a large corporate conglomerate, several patterns in CEO compensation emerge. First, the CEO’s cash compensation tends to be higher. Furthermore, family CEOs typically feature a more substantial proportion of fixed compensation components independent of individual performance within their total cash compensation packages than their non-​family executive counterparts, often designated professional CEOs. One notable finding is that family CEOs are inclined to elevate their cash compensation levels when they anticipate diminished returns via dividends or employ tunneling mechanisms (KCGS, 2020). Additionally, controlling shareholders adopt a selective application of retirement payment rates across executive ranks, a strategic manoeuver to structure their compensation systems to be less contingent on individual performance metrics (KCGS, 2020). Lastly, several studies focus on the monitoring role of external investors, foreign ownership, and institutional investors that may influence executive compensation. Evidence suggests a negative (–​) correlation between institutional investors’ independence and equity ratio and the level of executive pay. For example, Garner and Kim (2013) determine that firms with higher for­ eign ownership tend to have higher pay-​performance sensitivity while their lower foreign ownership counterparts do not. Therefore, foreign shareholders are expected to monitor efficiently by strengthening the link between management performance and remuneration (Cho, 2013; Garner & Kim, 2013). Overall, these empirical findings strongly indicate the possibility that CEO remu­ neration may be subject to rent extraction, primarily driven by the presence of secondary agency problems when corporate governance is weak.

Executive Pay for Performance Sensitivity The relationship between executive pay and performance often aligns CEOs’ interests with shareholders (Jensen & Meckling, 1976), building on an optimal contracting view. For example, Jensen and Murphy (1990) defined the pay-​performance relationship (or sensitivity) as the change in CEO’s compensation according to differences in shareholder wealth through the following equation. ΔCEO Pay =​β0 +​β1ΔShareholder Wealth 

(14.1)

In this equation, the dependent variable is the change in the sum of CEO salary, bonus or other compensation (excluding stock options and pensions) over a year, and the independent variable (ΔSW) is the change in the shareholder’s wealth of the company, which is equal to the rate of stock return multiplied by the beginning-​of-​year company market value (Jensen & Murphy, 1990) Performance indicators such as ROA (return on assets) and ROE (return on equity) are often used in addition to market-​based measures such as stock price returns and total shareholder returns (TSR). However, there is a limitation to measuring the level of CEO inputs or efforts. The coefficient β1 is our primary focus, and a significantly positive value of β1 indicates that pay is tied to performance, creating incentives to align with shareholders’ interests. Many national studies have confirmed that managers’ cash or total remuneration has a positive (+​) correlation with firm performance (Murphy, 1985; Antle & Smith, 1986; Lambert & Larcker, 1987; Kato et al., 2007). In several studies that have examined the CEO pay-​for-​performance sensitivity in Korea, the range of β1 across the studies has been estimated to be from 0.15 to 0.6. For example, with all components of pay included, CEO compensation, on average, increases by 0.15 KRW for 319

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every 1000 KRW increase in shareholder wealth, which is considerably smaller than in any other country. Based on these results, we can conclude that top executives in Korea do not have a strong financial incentive to maximize shareholder value. This is because the base salary level constitutes the most significant part of executive compensation, and a fixed salary does not change much with performance change. The rent extraction view predicts that executive compensation will be less sensitive to performance in firms with more power or under weak governance (Bebchuk & Fried, 2003). Several empirical research suggest evidence consistent with the rent extraction view. For example, the pay-​performance sensitivity of family-​controlled companies in Korea is markedly lower than that of different companies. For example, Kim and Kim (2020) examine how other member firms may influence executive compensation within the same business group. They find that a member firm’s executive cash compensation positively relates to its stock performance and other member firms. This positive link suggests that managers may be compensated for their decision to benefit the controlling family at the expense of the firm they lead. The pay sensitivity to other member firms’ performance exists only in firms where the cash flow rights of the controlling family are greater than those of the managing firm. Kim et al. (2017) investigated that pay-​performance sensitivity in Korea increased only in those firms with strong corporate governance. In addition, they show that the pay-​market performance relationship has improved only for companies with strong corporate governance (Kim et al., 2017). Song and Jung (2014) also find evidence that KCGS governance ratings and executive compensation are complementary. They suggest that well-​governed firms are more likely to pay performance-​based incentives to their executives than poorly governed ones. Furthermore, it is worth noting that an ex-​post-​settling-​up process is essential for aligning the interests of CEOs and shareholders in Korean firms, supporting the optimal contracting view. Based on actual firm performance, the ex-​post settling-​up process determines CEO compensation after a performance period has ended (Chen and Hambrick, 2012). This process is intended to align the interests of CEOs with those of the firm’s shareholders and to provide a way to reward executives for good performance and penalize them for poor performance (Chen and Hambrick, 2012). The ex-​post settling-​up process for CEO compensation in Korea is similar to the method used in other countries. Still, some unique features and cultural factors can affect its implementation. Like other countries, the process involves measuring firm performance over a performance period, determining compensation for the CEO based on that performance, and then adjusting the payout based on actual performance (Pathak et al., 2014). However, there are some critical differences in how the process is implemented in Korea. First, performance measurement tends to be more complex and may include financial and non-​financial metrics. For example, the performance of Korean firms may be evaluated on factors such as market share, product quality, employee engagement, and brand value, in addition to financial metrics such as revenue and profits (Chung & Kang, 2018; Baek & Kang, 2018). In addition, there may be a more significant gap between the original compensation determination and the final payout in Korea than in other countries. This is because the Korean ex-​post settling-​up process may involve a more extensive negotiation process between the CEO and the board of directors, which can lead to adjustments to the original payout (Liu et al., 2023). Cultural factors such as emphasizing hierarchy and loyalty can also play a role in implementing the ex-​post-​settling-​up process in Korea. For example, Korean CEOs may be more likely to accept lower payouts in the event of poor performance out of obligation to the company or the controlling family. Disclosure of executive compensation can explain the difference in the pay-​performance relationship. For instance, the decline in overall performance-​compensation sensitivity found in 2013

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was noticeable in the group that individually disclosed managerial compensation in 2013. It can be concluded that the political burden on companies increased, causing behavioural changes that hindered optimal decision-​making compared to pre-​disclosure (Yun et al., 2015). Evidence suggests that the board is critical in shaping managerial incentives. For instance, Cho (2014) examined that introducing the compensation committee within the board of directors positively relates to pay-​performance sensitivity (Cho, 2014). In addition, there was a positive (+​ ) significant relationship between the board’s ratio of outside directors and managerial compensation (cash compensation per registered executive), and the ratio of outside directors did not significantly affect the pay-​performance sensitivity. Furthermore, the introduction of the audit committee is negatively related to the level of CEO compensation. The audit committee, however, does not necessarily increase pay-​performance sensitivity, while the compensation committee increases the intensity of executive incentives (Cho, 2014). Lastly, cultural values can explain the weak CEO pay-​for-​performance sensitivity in Korea. Some studies investigated the impact of national culture on the relationship between CEO pay and firm performance and showed that the positive relationship between CEO pay and firm performance was weaker in countries with high levels of power distance and uncertainty avoidance (Yermack, 2006; Faccio & Wu, 2015). These results suggest that cultural values can influence the adoption of compensation practices more closely aligned with shareholder interests (Tosi & Greckhamer, 2004). In addition, Korean culture strongly emphasizes teamwork and joint decision-​ making, making it difficult for CEOs to be seen as the sole driving force behind the firm performance. Instead, success is often attributed to the collective efforts of the entire organization, which can reduce the importance of CEO compensation as a motivator (Chen & Hambrick, 2012). Relatedly, Korean firms often have a strong tradition of employee loyalty and commitment, creating a sense of shared ownership and responsibility for the company’s success. Thus, this can reduce the need for high levels of CEO compensation to motivate employees and drive performance. In sum, these factors suggest that the link between CEO compensation and compensation may be weaker in Korea than in other countries.

Use of Stock Option Grants for Top Executives Equity-​based compensation, including stock options and restricted stock holdings, is widespread in the US and other countries. Stock options can be justified if the CEO’s actions affect firm risk by inducing them to take value-​adding risky projects (Smith & Stulz, 1985). Dittmann et al. (2010) also demonstrate that the observed use of options is associated with levels of CEO loss aversion because stock options provide a downside risk hedge. Thus, the shareholder value view posits that an option contract is optimal for the firm to grant the CEO an option contract to motivate risk-​taking. On the other hand, criticism against executive option grants has also been raised. Little evidence suggests stock options are mainly designed to solve the agent problem (Yermack, 1995). Instead, a manager may decide when to grant or exercise options to maximize compensation using private information (Yermack, 1997). It has also been criticized that the stock options structure may not be effectively designed to be exploited by managers for their benefit due to the absence of relative performance indicators and lock-​up requirements (Bebchuk et al., 2002). In Korea, stock options were introduced in 1997, and option grants for the top executive are not popular in the listed companies, with only about 10% of firms using them, as presented in Table 14.2. By revising the Securities Exchange Act in 1997, the Special Measures Act on the Promotion of Venture Companies in 1998, and the Commercial Act in 1999, the scope of stock

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options was sequentially expanded to listed companies, venture companies and stock companies. Nevertheless, the proportion of listed firms that use stock options is still low, at about 10%, as presented in Table 14.1. The reason for this is that, first of all, legislation strictly bans the granting of stock options to controlling shareholders, major shareholders (10% or more) and related parties thereof (see Article 340-​2 (2) of the Commercial Act). Moreover, from the rent-​extraction perspective, it seems plausible that controlling shareholders are strongly incentivized to design compensation structures unrelated to performance or do not align with the interests of external shareholders when corporate governance is weak. Hence, the utilization rate of stock purchase or stock options associated with shareholder value, a metric intricately linked with overall shareholder value, is found to be significantly limited, registering at less than 10% among the entirety of publicly traded companies. Little empirical research analyzes a firm’s decision to grant stock options to executives, given their perceived limited practical value. One exception is the study conducted by Kim and Jung (2022), who examined a sample of firms that provide stock-​based incentives to their executives. Their empirical findings reveal that various firm characteristics significantly influence executive compensation through stock-​based incentives. This suggests that larger, more stable, and expanding firms are more likely to offer stock-​based incentives to their executives. Notably, option-​based incentives tend to be more prevalent among executives with shorter tenures, aligning with recent research that views options as a means of sorting rather than stock grants (Hales et al., 2015). This result implies that the overall use of option incentives in the economy is relatively limited. However, for companies that do offer options, it indicates a significant focus on incentive design based on optimal contracting principles. However, research on the impact of stock option grants on executive behaviours and performance has yielded markedly divergent conclusions. For instance, Lee et al. (2011) investigated the influ­ ence of stock option grants on earnings’ management. Specifically, their findings indicate that firms with higher values of exercised options and a higher option delta tend to engage more extensively in earnings’ management than other firms. Furthermore, they confirm that this relationship becomes more pronounced in situations characterized by information asymmetry and in samples where executives sell stocks acquired through stock option exercises. Kim et al. (2022) also examined the effects of stock option grant announcements using a sample of Korean banks. Their research reveals that stock option grants result in significant and negative abnormal returns. However, they note that this adverse effect is mitigated by the presence of foreign block-​holders and a higher ratio of outside directors that exceeds the legal minimum requirement. Collectively, the evidence tends to align with the darker side of stock options, supporting the rent extraction perspective.

Consequences of Executive Pay Much of the discussion about executive compensation focuses on the determinants of executive pay. However, the question of the ‘effects’ of executive compensation is an even more critical question. The theory has clear-​cut predictions. The optimal contracting view suggests that higher (or more intensive) incentives should increase firm value. It also predicts that options should lead CEOs to take more risks. The theory suggests that short-​term incentives such as annual bonuses should lead CEOs to take short-​term actions. Furthermore, closer to its optimal level, the firm’s value will be increased by setting any compensation aspects –​ the level, composition, pay-​ performance sensitivity, and time horizon (Edmans, 2017). Despite its unambiguous theoretical predictions, empirical evidence of the effect of executive pay on various outcomes was somewhat mixed. It might be partly because empirically testing 322

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that executive pay has causal effects is remarkably difficult. Moreover, pay practices, or pay-​ setting processes, are the endogenous outcomes of a complicated process involving the board, the executives, compensation consultants, etc. Consequently, they are related to many observable and unobservable firms, executives, and industry heterogeneity that affect the relationship. Several studies attempted to prove that excessive remuneration negatively affects firm value by calculating the excess or abnormal pay. Excess pay is mainly determined by a residual beyond the expected compensation level through regression analysis (Core et al., 2008; Cai & Walking, 2011; Larker et al., 2011; Carter et al., 2016). It is predicted that the weaker the governance captured by the board’s independence and monitoring capabilities, the greater the excess executive compensation (Brick et al., 2016) or increased related party transactions such as tunnelling (Hope et al., 2019), and consequently negatively affect corporate value. In addition, excess pay is likely to increase if the manager’s influence is concentrated or the controlling family participates in management. Relatedly, Chung et al. (2015) reported that managers’ excess remuneration negatively affects firm value, and that voluntary disclosure alleviates the negative association consistent with the rent extraction view.

Discussion This chapter has surveyed the theoretical and empirical studies on executive compensation in Korea. Throughout the review, we have focused on the following points. First, executive compensation contracts have evolved. Specifically, Korea has seen a decreasing trend in fixed salaries and a shift toward performance-​based compensation such as bonuses and long-​term incentives. This is partly because the labour market for executives in Korea has experienced an expanded demand, resulting in the increased utilization of various incentive mechanisms to attract individuals with exceptional managerial skills and stimulate managerial efforts (Kim et al., 2017). Other potential factors include boards learning to improve compensation practices and institutional and regulatory changes over time. Second, the observed executive pay arrangements have shared common features among international evidence, including a significant increase in pay level and a gained importance of stock options since the 2010s. Additionally, there has been a recent surge in the utilization of restricted stock compensation tied to performance criteria rather than time-​vesting conditions (Yonhap News, 2023). Furthermore, compensation practices result from two conflicting drives –​ shareholders’ interests to maximize firm value, executives’ desire to pursue their self-​serving rents and institutional factors, such as law, management practices, culture and social norms. Thus, no single theory fits all the variations in executive compensation in Korea. From the optimal contracting and traditional agency framework, it is presumed that boards of directors engage in executive compensation contracts that maximize shareholder value, with executives serving as representatives appointed by shareholders. However, in practice, substantial skepticism exists regarding the extent to which boards of directors in Korean companies actively perform advisory and supervisory roles independently of the management or controlling shareholders. Additionally, most publicly traded firms are part of larger business conglomerates, raising concerns that controlling shareholders may design compensation contracts for subsidiary company executives, enabling them to receive substantial remuneration or providing incentives for cooperation in furthering their interests, leveraging their influence over the entire corporate group (Kim et al., 2021). Our analysis indicates that current pay arrangements in Korea appear more consistent with the rent extraction view, including a remarkedly low pay-​performance sensitivity, a low rate 323

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of stock-​option utilization and a significant pay increase, particularly under weak governance. Additionally, anecdotal evidence suggests that when the CEO is a family member (i.e., part of the controlling shareholder’s family) or affiliated with a subsidiary company of a large business conglomerate, the CEO’s cash compensation tends to be relatively high, leading to an increased disparity in compensation between the CEO and other executives and regular employees (KCGS, 2020). Family CEOs often set high cash compensation levels when anticipating limited benefits through dividends or tunnelling practices (KCGS report, 2020). Notably, the cash compensation of family CEOs is determined independently of their performance, even when strong internal monitoring mechanisms are in place. The influence of these factors diminishes as corporate governance quality improves, suggesting a greater likelihood of being driven by secondary agency problems. The results also imply that where controlling shareholders (or family CEOs) may instigate issues related to executive compensation for their personal benefit, it becomes imperative to bolster internal corporate governance mechanisms to effectively curtail inappropriate exercises of influence by controlling shareholders. In practice, indirect regulation can be implemented through heightened oversight by the board of directors and compensation committees, coupled with the reinforcement of disclosure requirements on executive compensation (Kalyta, 2009). By adopting such measures, the sway held by executives (or controlling shareholders) over executive compensation can be constrained, thereby mitigating agency problems and enhancing corporate value.

Conclusions The examination of executive compensation in big corporations, with a focus on the unique features within Korean firms, reveals a complex interplay of economic, institutional and cultural factors. The regulatory framework and governance mechanisms in Korea play a pivotal role in shaping executive compensation practices. The government’s active involvement in corporate governance, coupled with evolving regulatory frameworks, has led to a dynamic landscape where executive pay is subject to scrutiny and modification. This unique blend of cultural influences and regulatory interventions underscores the need for a nuanced understanding of executive compensation in Korean corporations. Considering the short history of executive pay research since the new disclosure in Korea, there are many unanswered questions, making it an area for future research. Even basic questions, such as the causal effects of compensation on firm and individual outcomes, pay practices in private firms and for top executives below the CEO, and the pay-​setting process for controlling shareholders remain unexplored in Korea. Additionally, research should aim to provide more detailed analysis and insights into several factors. These include the disparity in executive compensation between large and small business conglomerates, the impact of heterogeneity among family members, such as generational differences and involvement in management, and the relative incentives for dividend income and other tunnelling mechanisms on executive compensation. It is also worth noting that the current disclosure system for executive compensation in South Korea does not clearly distinguish fixed and variable compensation components, which limits the accurate measurement of executive compensation structures, such as the proportion of fixed pay to variable pay. Therefore, future improvements are necessary to expand the scope of disclosure and enhance the qualitative aspects of disclosed information. Furthermore, executive compensation can interact with other management research topics such as group dynamics, collaboration and competition within teams, wage inequality and shareholder structure. The possibilities also open avenues for further endeavours. The various 324

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changing features of compensation practices, such as new regulations, recent disclosures, compensation consultants and performance-​vested equity, provide opportunities for new empirical research. Hopefully, significant expansions in this field will allow us to gain greater insights into executive pay in Korea.

Note 1 The term ‘director’ is specified in the relevant legal text, ‘director’s compensation’ is interchangeably used with the same meaning as ‘executive pay.’

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Executive Compensation in Big Corporations Kato, T., Kim, W., & Lee, J. H. 2007. Executive compensation, firm performance, and Chaebols in Korea: Evidence from new panel data. Pacific-​Basin Finance Journal, 15(1): 36–​55. KCGS. 2020. Final Report on Analysis and Implications of Executive Compensation in Publicly-​Traded Firms in Korea in 2019. Seoul: Korea Corporate Governance Service. Kim, H., & Han, S. H. 2018. The compensation structure of family business groups. Pacific-​Basin Finance Journal, 51(C): 376–​391. Kim, H., & Kim, W. 2020. Does tunneling explain the sensitivity of executive compensation to other member firms’ performance? Journal of Business Finance & Accounting, 47(9–​10): 1268–​1289. Kim, J. Y., & Jung, S. M. 2022. Determinants of stock-​based incentives: Evidence from Korean firm-​level data. Seoul Journal of Economics, 35(1). Kim, S. J., Kim, H. S., & Sul, W. S. 2011. Corporate governance and the effectiveness of the executive stock option grant. The Korean Journal of Financial Management, 28(2): 45–​70. Kim, S. Y., Lee, K. R., & Shin, H. H. 2017. The enhanced disclosure of executive compensation in Korea. Pacific-​Basin Finance Journal, 43: 72–​83. Kim, W., Kim, W., & Park, K. S. 2022. A survey of research on the corporate governance of Korean firms. Asian Review of Financial Research, 35(1): 151–​213. Lambert, R. A., & Larcker, D. F. 1987. An analysis of the use of accounting and market measures of performance in executive compensation contracts. Journal of Accounting Research, 25: 85–​125. La Porta, R., Lopez-​de-​Silanes, F., & Shleifer, A. 1999. Corporate ownership around the world. The Journal of Finance, 54(2): 471–​517. La Porta, R., Lopez-​de-​Silanes, F., Shleifer, A., & Vishny, R. 2000. Investor protection and corporate governance. Journal of Financial Economics, 58(1–​2): 3–​27. Larcker, D. F., Ormazabal, G., & Taylor, D. J. 2011. The market reaction to corporate governance regulation. Journal of Financial Economics, 101(2): 431–​448. Lee, C., & Wu, L. 2022. A comparison of CEO pay-​Korean listed firms and U.S. listed firms. Applied Economics Letters, 29(2): 155–​158. Lee, S. C., Lee, K. T., & Choi, S. 2011. Relationship between executive stock option exercises and earnings management. Asia-​Pacific Journal of Financial Studies, 40(6): 856–​888. Liu, H., Liu, H., & Yin, J. 2023. The impact of clawback provisions on executive cash compensation. Review of Quantitative Finance and Accounting, 61(1): 35–​62. Maeil Business News. 2023. Korean executives paid 16 times more than employees in 2022. The Maeil Business News. March 28. Accessed online at https://​pulsen​ews.co.kr/​view.php?year=​2023&no=​239​455 Mirrlees, J. A. 1976. The optimal structure of incentives and authority within an organization. The Bell Journal of Economics, 7(1): 105–​131. Morck, R., Wolfenzon, D., & Yeung, B. 2005. Corporate governance, economic entrenchment, and growth. Journal of Economic Literature, 43(3): 655–​720. Murphy, K. J. 1985. Corporate performance and managerial remuneration: An empirical analysis. Journal of Accounting and Economics, 7(1–​3): 11–​42. Murphy, K. J. 1999. Executive compensation. In C. A. Orley & D. Card (Eds.), Handbook of Labor Economics, 3(B): 2485–​2563. Amsterdam: Elsevier. Murphy, K. J. 2013. Executive compensation: Where we are, and how we got there. In G. M. Constantinides, M. Harris, & R. M. Stulz (Eds.), Handbook of the Economics of Finance, Vol. 2(A): 211–​356. Amsterdam: Elsevier. Pathak, S., Hoskisson, R. E., & Johnson, R. A. 2014. Settling up in CEO compensation: The impact of divestiture intensity and contextual factors in refocusing firms. Strategic Management Journal, 35(8): 1124–​1143. Shleifer, A., & Vishny, R. W. 1997. A survey of corporate governance. Journal of Finance, 52(2): 737–​783. Singla, C., Veliyath, R., & George, R. 2014. Family firms and internationalization–​governance relationships: Evidence of secondary agency issues. Strategic Management Journal, 35(4): 606–​616. Skaife, H. A., Veenman, D., & Wangerin, D. 2013. Internal control over financial reporting and managerial rent extraction: Evidence from the profitability of insider trading. Journal of Accounting and Economics, 55(1): 91–​110. Smith, C. W., & Stulz, R. M. 1985. The determinants of firms’ hedging policies. Journal of Financial and Quantitative Analysis, 20(4): 391–​405. Song, D. Y., & Jung, S. C. 2014. Corporate governance structure and managerial compensation in Korea. The Korean Journal of Financial Management, 31(4): 179–​206.

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15 KNOWLEDGE AS A UNIFYING FACTOR FOR AN INDIVIDUAL FIRM AND MACROECONOMICS IN KOREA Xijie Fu and Jacky F.L. Hong

Introduction Currently the fourth-largest economy in Asia and the eleventh-largest in the world, South Korea has undergone a remarkable transformation (Lee & Lee, 2019) in recent decades. Evidence of South Korea’s reach abounds in everyday life: a woman watching a Korean soap opera on a Samsung smart phone and even the faint sounds of a catchy K-​pop song playing on the radio. Such scenes are familiar even to those living outside South Korea. Among various growth factors, knowledge has been prioritized by the Korean government (Jung, Eun & Lee, 2017) as a means for transforming the economic structure from an export-​led model into a knowledge-​based economy with a specific focus on technological development and innovation (Choe & Lee, 2017). Advances in technology over the last few decades have transformed knowledge work as well as the permeability of professional, organizational and work boundaries in unprecedented ways (Jasanoff, 2004; Leonardi & Baily, 2008; Benner & Tushman, 2015). One of the signifi­­­ cant changes is the need for establishing flexible organizational relationships (Davis, 2016). In some sectors, such as computing and communications, there is a constant demand for establishing interorganizational networks to access essential resources for innovation (Powell, Koput & Smith-​ Doerr, 1996; Ahuja, 2000; Sytch & Tatarynowicz, 2014). In this regard, opening up scientific and technological collaboration beyond organizational boundaries holds a great potential for cross-​ disciplinary innovations (Hargadon & Sutton, 1997; Jeppesen & Lakhani, 2010; Davis, 2016). For example, a growing number of organizations are experimenting with new ways to collaborate with customers and suppliers, to supplement their internal R&D efforts throughout their process of product development (Laursen & Salter, 2014; Schemmann, Herrmann, Chappin & Heimeriks, 2016). However, the processes through which open innovation unfolds (Vanhaverbeke & Cloodt, 2014), especially when customers are involved, remains a puzzle (Huston & Sakkab, 2006) that needs to be addressed. Yet, amid the dynamic transformation, there remains a significant gap in our understanding of how Korean multinational corporations (MNCs) adapt over time by engaging customers in open innovation (Langley, 2007; Radziwon & Bogers, 2019; Williams & Lee, 2016). Given the DOI: 10.4324/9781003180920-18

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important role played by Korean MNCs in global value chain integration via their affiliations and exports (OECD, 2017), it will be beneficial for policy makers and business practitioners both in Korea and abroad if new light can be shed on the generation and integration of innovative ideas and knowledge with customers during open innovation activities. In the wider global context, the dynamic business environment demands value co-​creation with various stakeholders, customers in particular, as partners for continuous development and growth (Sarmah & Rahman, 2017). Even though Prahalad and Ramaswamy (2004) called for integrated understanding about the processes of customer co-​creation, the existing literature mostly still adopts a piecemeal approach, compartmentalized into areas such as user toolkits (Hippel, 2001), user-​involvement (Hwang & Kim, 2011; Nishikawa, Schreier & Ogawa, 2013), customer participation (Muhdi & Boutellier, 2011) and idea selection (Piezunka & Dahlander, 2015). In this chapter, we aim to bridge these gaps in the literature by delving into how Korean MNCs can collaborate with their customers to integrate diverse knowledge sources for open innovation. The context of Korea offers a unique perspective, given its rapid economic growth, government-​ driven innovation initiatives, and the pivotal role played by Korean MNCs in global value chains. As we analyze a historical case study of Amorepacific Corp (AP), a leading beauty and cosmetics conglomerate with a history spanning over 70 years (Kim, Song, Rho & Lee, 2016), we aim to contribute to a broader understanding of customer involvement in open innovation while also uncovering insights into the distinctive dynamics shaped by the Korean context. AP has achieved great success in collaborating with customers to bring innovative products to market throughout various innovation phases under the firm’s orchestration. We draw on a wide range of secondary data sources, such as company annual reports, corporate news releases, industry reports, newspapers, and journal articles to analyze how AP has been able to engage and collaborate with its customers in open innovation process. Our chapter makes two contributions. Our first addresses the need for deeper understanding about how the firm’s permeable boundary can be opened up to gain access to new knowledge from external sources. Most of the current literature on open innovation emphasizes the use of external and internal knowledge flows and their impact on firm performance (Chesbrough, 2003a; Cassiman & Valentini, 2016; Fu, 2012; Gassmann, 2006; Vanhaverbeke, Chesbrough & West, 2014). Based on our findings, we develop a co-​opetition framework to identify customer specific roles and contributions throughout the open innovation process. By uncovering how the focal firm can orchestrate the dynamics of competition and cooperation and integrate diverse knowledge from customers under the open innovation archetype (Bican, Guderian & Ringbeck, 2017), we have sought to make these concepts more actionable not only during idea generation, but throughout the entire process of innovation. Our second, we extend the open innovation literature into the Korean context (Giroud, Ha, Mo & Ghauri, 2011; Lim, Hemmert, & Kim 2017; Song, Park & Kwak, 2018) by analyzing the collab­­­ orative practices adopted by a Korean MNC for ‘the best use of internal and external knowledge in a timely way’ (Chesbrough, 2003a, p. 13). Given the important role played by Korean MNCs in global value chain integration via their affiliations and exports (OECD, 2017), to the best of our knowledge, there is a limited prior understanding about how Korean MNCs have been able to collaborate with customers in open innovation (Shvetsova & Lee, 2021) and evolve over time (Langley, 2007; Radziwon & Bogers, 2019). We offer new insights into the distinctive open innov­­ ation strategy of customer co-​creation adopted by Korean MNCs. The chapter is structured as follows. First, we provide a comprehensive review of the background literature on open innovation and customer co-​creation strategies. Second, we discuss the 330

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research methodology and context of our case study, laying the foundation for the subsequent analysis of our main findings. We conclude the chapter by identifying the theoretical contributions, implications for practice, and directions for future research.

Literature Review Open Innovation Following the increasing call for a better understanding about how openness can enhance a firm’s innovation ability and thereby bring benefits to a firm, research into open innovation has skyrocketed in the last decade (Chesbrough 2003a; Laursen & Salter, 2006; West & Bogers, 2014). The paradigm of open innovation has become popular, leading to a surge in research from various perspectives (Jin & Ji, 2018; Shim, Pak & Choi 2018; Wang & Zeng, 2019) and industry sectors (Triguero, Fernández & Sáez-​Martinez, 2018; Yap & Rasiah, 2017). For example, NASA obtained knowledge through crowdsourcing and created a new strategy focusing on collaboration (Davis, 2016). Although the concept of open innovation is relatively new, the intellectual roots go far back in history (Christensen & Kjær, 2005), such that related ideas and practices, such as lead user (von Hippel, 1986) and absorptive capacity (Cohen & Levinthal, 1990) have long been implemented by companies (Huizingh, 2011). A core assumption is that firms cannot innovate in isolation, and they must engage with different types of partners to acquire external ideas and resources to stay abreast of competition (Chesbrough 2003a; Laursen & Salter, 2006). The open innovation model focuses on how organizations can utilize the ideas and knowledge of external actors in their innovation processes (Laursen & Salter, 2006). As Chesbrough (2020) argues ‘Not all the smart people work for us. We need to work with smart people inside and outside our company’ (p. 41). Accordingly, an organization needs to open its boundaries to allow valuable knowledge to flow in from the outside while collaborating with partners, customers and/​ or suppliers (Enkel, Gassmann & Chesbrough, 2009). The widespread acceptance of the concept of open innovation is a reflection of globalization, which encourages collaboration among innovation value chains (Tirmizi, Malik & Hussain, 2020). Firms are increasingly opening their bound­ aries and applying various methods to participate in user-​driven innovations (Shrestha, Krishna & von Krogh, 2021) by tapping into users’ product knowledge and experience (Chesbrough, 2003a; Enkel, Bogers & Chesbrogh, 2020). Innovative firms involve users (Bradonjic, Frankie & Lüthje, 2019) and customers (de Jong, Ben-​Mehahem, Franke & von Krogh, 2021) in the ‘fuzzy front end’ of their new product development. The open innovation paradigm is best understood as the antithesis of closed innovation, where firms focus on generating internal innovation activities to develop new products, and then commercialize these on their own (Chesbrough, Vanhaverbeke & West, 2006; Chesbrough, 2012). Following Chesbrough and Bogers (2014), we adopt the definition of open innovation as ‘a distributed innovation process based on purposively managed knowledge flows across organizational boundaries, using pecuniary or non-​pecuniary mechanisms in line with the organization’s business model’ (p. 33). This process has a broader scope of leveraging external sources of knowledge to drive internal growth, and has become an umbrella concept to integrate many existing activities (Gronlund, Ronnberg & Frishammar, 2010; Huizingh, 2011). According to Enkel et al. (2009), open innovation can be divided into three core archetypes. First, the outside-​in archetype refers to the model, under which companies enrich their own knowledge base by integrating external knowledge (Chesbrough & Crowther, 2006; Enkel et al., 2009). Various researchers have analyzed how firms obtain knowledge for innovation from 331

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outside the firm, including from suppliers (Homfeldt & Simon, 2019), universities (Buganza & Verganti, 2009), or customers (de Jong et al., 2021). Second, the inside-​out archetype refers to how organizations allow under-​utilized knowledge or ideas to flow outside for others to use in their own businesses (Chesbrough & Crowther, 2006; Enkel et al., 2009). This could entail licensing out a technology or participating in other segments through joint ventures (Enkel et al., 2009). Third, the coupled-​process combines both outside-​in and inside-​out models (Chesbrough & Crowther, 2006; Enkel et al., 2009). This archetype involves knowledge co-​creation with various partners through alliances, cooperative arrangements, and joint ventures, in which give-​and-​take activities are crucial for success (Enkel et al., 2009). In our chapter, we adopt the coupled process archetype to represent the entire open innovation process through which a focal firm can co-​create knowledge with their customers.

Co-​creating Innovation with Customers In this era of open innovation, researchers have investigated the role of customers in the new product development process (Chesbrough, 2003b; Hobo & Chen, 2006). Prior studies feature customers as the central player in the open innovation process, and their ongoing participation has become crucial (O’Hern & Rindfleisch, 2010). As argued by von Hippel (2016), involving customers in innovation of major importance in enhancing the competitiveness of the focal firm (Schweisfurth, 2017). Technological developments have increased the importance of customer engagement in the innovation process (Baldwin & von Hippel, 2011). For example, the Internet has enabled the establishment of online user communities and has made it easier to exchange ideas (von Hippel, 2016). 3D printing and other technologies involve customers in the co-​creation process to develop individualized products (Rayna, Striukova & Darlington, 2015), while social media are shaping how corporations ingest signals from customers (Dahlander, Gann & Wallin, 2021). However, a challenge is that only a small volume of data can be put into use in the design of new products (Dahlander, Gann & Wallin, 2021). Conceptually speaking, customer co-​creation is different from customer involvement during a single point of idea exchange (Füller, Matzler, Hutter & Hautz, 2012). Co-​creation occurs when customers actively participate in all phases of the innovation process, comprising idea generation, product development and commercialization activities (Hoyer, Dorotic, Krafft & Singh, 2010). According to Füller and Matzler (2007), customers can undertake different roles in contributing across three stages of the innovation process. The first, idea generation stage focuses on the identification and generation of opportunities, fresh ideas and novel concepts (Füller & Matzler, 2007). Highly innovative customers are key external resources for this stage, serving as idea-​generators, who most promising ideas and concepts can be selected from a range of alternatives for further processing (Füller & Matzler, 2007). During the second, design and engineering stage, customers serve as co-​creators (Lengnick-​Hall, 1996) with their creativity and problem-​solving skills con­ tributing to the generation and evaluation of new product designs (Füller & Matzler, 2007). In the third and final, test and launch stage, customers take up the roles of end-​users or buyers to actually test and try-​out the products and they may also come up with ideas for improvement (Füller & Matzler, 2007).

Critiques Ever since Prahalad and Ramaswamy (2004) called for a better understanding of the concept of customer co-​creation, existing research has mostly adopted a piecemeal approach. Current 332

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literature has overlooked the specific contributions of customers throughout the open innovation process (Bican et al., 2017). Instead, research areas have been compartmentalized into specific domains, including the toolkit (Hippel, 2001), user-​involvement (Hwang & Kim, 2011; Nishikawa et al., 2013), motivational factors (Muhdi & Boutellier, 2011), collaboration activities (West & Bogers, 2014), stakeholder management during ideation (Hennala, Parjanen, & Uotila, 2011) and idea selection (Piezunka & Dahlander, 2015) stages. Moreover, since multiparty collaboration has been conceived as the nexus of open innovation (Obradovic, Vlacic & Dabic, 2021), while the existing literature has emphasized the benefits of collaborating with customers (Schweitzer, Buchinger, Gassmann & Obrist, 2012; Boudreau, Lacetera & Lakhani, 2011), it has neglected the role of competitive forces as another key driver of open innovation (Bullinger, Neyer, Rass & Moeslein, 2010). Limited research has paid attention to how the focal firm can combine both the dynamics of competition and cooperation while integrating customers’ ideas throughout the entire open innovation processes. In order to address this gap in the literature, we investigate how a Korean MNC has been able to harness competitive dynamics while cooperating with their customers to implement open innovation. Through our historical case study of AP, a Korean MNC, we shall analyze how the firm engages customers and integrates both competition and cooperation into open innovation processes.

Methodology Research Setting In this chapter, we aim to provide a contextualized explanation (Hong, 2012; Welch et al., 2020) on how MNCs can integrate their customers’ knowledge for new product development (Williams & Lee, 2016). We have adopted a longitudinal case study method (Zhao, Tan, Papanastassiou & Harzing, 2020) to achieve a better understanding and provide insightful analysis about the coupled process of open innovation. Drawing on Turnheim and Geels’ (2013) process-​tracing approach to go ‘inside the black box,’ our case study reveals the patterns of unfolding actions in changing contexts across different levels and temporalities (Sewell, 2005). We selected AP as the focal company on the basis of their efforts in co-​creating innovations with their customers. AP is a South Korean beauty and cosmetics conglomerate, operating more than 30 beauty, personal care and health brands (Amorepacific, 2022a). The company has expanded its international operations since opening its first overseas branch in Hong Kong in 2004, and has established stores in more than ten countries worldwide (PwC, 2021). AP, as a leading innovator in South Korea’s beauty and cosmetics industry, has appeared in Forbes’ annual list of the World’s Most Innovative Companies in 2016 (Amorepacific, 2022). AP has collaborated closely with their customers to foster innovation by bringing creative ideas through its network of collaborators (Amorepacific, 2022). Some examples include the brand’s line of best-​selling ampoules and its novel cushion technology, both of which were successful products developed in collaboration with customers (Amorepacific, 2022, 2023). In addition, AP has embraced various social media channels to interact with existing and prospective customers through deeper connection, allowing customers to influence the development of new products. AP’s focus on innovation and emphasis on customers as the core of their innovation model make it a suitable case study for the Korean MNCs’ open innovation process.

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Routledge Handbook of Korean Business and Management Table 15.1 Data sources Data types

Amount

Use in analysis

Newspapers Company annual reports

25 5

Corporate news releases

17

Social media Facebook data Instagram data Twitter data Blog data Journal article

35 Posts 15 Posts 6 Posts 3 Posts

Obtained insights about customizing activities of AP. Provided background information of AP and a holistic understanding of the open innovation strategy of AP. Provided information about activities involving customers and insights into crowdsourcing. Provided assurance to the activities described by AP and obtained insights about customers’ endorsement.

Industry reports

1 2

Provided initial impression about the customer-​centric approach in new product development process. Obtained additional background information of AP and organizational context of AP.

Source: Created by the authors.

Data Collection To capture AP’s open innovation activities, we drew on multiple secondary data sources that contain descriptions of open innovation involving customer co-​creation in AP, including journal articles, newspapers, company annual reports and industry reports, to identify their specific activities and initiatives featuring customer involvement and interactions (see Table 15.1). Moreover, the first author also participated in an online test designed by AP for customization to generate some personal insights about their activities in the commercialization phase.

Data Analysis Our analytical approach was inductive and involved iteration between our data and emerging theory. We started the first phase of analysis by browsing through the company annual reports and the journal articles to establish a holistic understanding about the company’s accomplishments in the realm of open innovation. We followed Corley and Gioia’s (2004) coding procedures to iden­ tify and interpret the intrinsic meanings at each phase of AP’s open innovation process. During initial analysis, it appeared to us that AP was adopting a customer-​centric approach to open innovation. We then returned to the literature about customers’ roles in innovation processes (Füller & Matzler, 2007; Huston & Sakkab, 2006) to make sense of what was most interesting in our data. At this point, we recognized that our data were able to shed light on AP’s continuous engagement with customers in open innovation activities. Thus, we identified our first-​order codes related to customer co-​creation and iterated these with the literature as new codes and themes emerged (see Figure 15.1). As the research progressed, we then turned to the corporate releases and newspapers as data sources and discovered that AP involved their customers by using an ‘idea contest’ for new product development, which drew our attention to look for the competitive dynamics during AP’s collaborative activities and to return to the related literature on idea selection (Piezunka & Dahlander,

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Figure 15.1 Data structure. Source: Created by the authors.

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2015). We then found that AP provided a common platform and knowledge source for customers to work in different teams to collaborate and compete while further improving their ideas. Our analysis of social media contents generated additional first-​order concepts about online contests and activities orchestrated by AP. During the second-​order analysis, we started to examine similarities and differences between our emergent themes of crowdsourcing and the classification of Schweitzer et al. (2012) to refine our coding. We then probed the idea of ‘co-​opetition’ involving customers across the three stages of innovation. We drew on the idea that firms engage in both competition and cooperation (Ritala, Armila & Blomqvist, 2009; Tsai, 2002) in interorganizational relationships (Bengtsson & Kock, 2000; Lado, Boyd & Hanlon, 1997; Luo, 2004) for creating value and developing resources (Hong & Snell, 2015). This could be seen as a strategic perspective in which firms are able to recognize mutual dependencies with suppliers, customers, and competitors (Afuah, 2000). We then consolidated the second-​order themes, distilled them further into aggregate dimensions, and built the data structure (see Figure 15.1), which provides a graphical representation of how we progressed from initial data and concepts to overarching themes throughout the analysis. During the final stage, we reconciled different interpretations by establishing consensual decision rules about how themes could be coded (Gioia, Corley & Hamilton, 2013). Our epistemological approach was based on interpretivism, through which we sought to include context, narrative explanation and personal engagement (Stake, 1995) to capture the characteristics in AP’s open innovation processes. Thus, using a ‘thick description’ (Stake, 1995, p. 108) method for our case study enabled us to derive insights to build on existing theories of customer co-​ creation (Hoyer et al., 2010) in innovation. To ensure the trustworthiness of the data, first, we adhered closely to the constant comparison techniques underlying Corley and Gioia’s (2004) method. These approaches provided the basis for rigorous collection and data analysis. Second, the co-​authors held regular meetings to manage the data and discuss the emerging categories to ensure they were accurately categorized. Third, we collected secondary sources through multiple channels. Through data triangulation (Yin, 2014), we cross-​checked corporate news releases, newspapers and social media contents to ensure that all customer co-​creation activities of AP were fully captured. Fourth, our stance here was to generalize theory by choosing an exemplary case (Gioia, Corley, & Hamilton, 2013). AP’s focus on innovation and emphasis on customers as the core of their innovation model made it a suitable case to analyze MNC’s open innovation process. The coding processes helped to represent AP’s implementation of open innovation in collaboration with customers. We now go on to explain AP’s related activities undertaken during each phase of innovation in the following findings section.

Findings Our analysis revealed that AP was employing a multitude of strategies to engage customers in the process of product innovation across various innovation phases, all orchestrated by the firm. We structured our case study findings according to the three innovation phases, namely idea generation, development and commercialization (Hoyer et al., 2010). We identified AP’s open innov­ ation strategies involved in each phase as customer involvement, customer empowerment and customer reinforcement, and illustrated their associated customer co-​creation practices. AP conceived their overall open innovation approach as ‘idea contests,’ designed to solicit voluntary participation from customers to generate ideas and solutions. However, these innovation contests were not merely competitive. Instead, they integrated cooperation as another driver for 336

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Figure 15.2 Timeline of the coupled process of open innovation in AP. Source: Created by the authors.

better innovative performance. Each phase revealed how AP developed its coupled open innovation archetype (Enkel et  al., 2009) with sustained customer involvement in various activities, enabled customers to utilize resources, and strengthened customer relationships with customized service. By drawing inferences from our data, we identified the co-​existence of competition and cooperation in AP’s open innovation strategies as elaborated below.

Phase 1: Idea Generation AP organized the ‘AP Innovation Day’ for joint innovation and technology development. This showcased some innovative ideas with product development partners to invited customers, and listened to their feedback to find new opportunities to grow together (Corporate News Release 7). In addition, AP sought to collect customer insights by holding consumer forums and innovative product exhibitions, aiming to inspire them to generate more creative ideas. In the idea generation phase, the company focused on various ways to involve customers for crowdsourcing ideas. For example, The most visible feature in this site is the expansion of customer participation contents ... to strengthen communication with customers. Amorepacific provides ... an online Q&A service ... in which customers can participate with the company, and they have ... community where customers can produce and share information (Corporate News Release 1). AP diversified its ways of engaging customers by launching an online Q&A customer forum, actively motivating customers to exchange their own ideas with other customers for brainstorming purposes. Additionally, AP introduced IOPE LAB, a dedicated research space where customers could experience skin research activities. The unique initiative enabled researchers to interact directly with customers in person and gained inspiration for new research ideas. These activities signified AP’s commitment to fostering a cooperative orientation in its customer engagement activities. However, we also discovered that AP-​generated innovative product ideas through some contests, as illustrated in the following quote. Sweet Idea is an open innovation program conducted by ETUDE to receive diverse ideas from customers and turn the dreams and imaginations of customers into reality (Company Annual Report 2). 337

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This contest was held by one of AP’s brands, Etude House, allowing customers to contribute their ideas of new cosmetics design. Notably, one of the ideas was selected and eventually realized in the brand’s nail polish line. Similarly to this design campaign, AP also generated ideas for its Eco-​Handkerchief design from customers. To set up an interaction process with customers, AP adopted various activities to crowdsource customers’ ideas. However, it is worth noting that the participating customers exhibited varying levels of innovativeness. Highly innovative customers were sought to provide valuable inspiration in the initial phase, necessitating a selection process to identify those with the most promising ideas for further development: The 1st screening at the preliminaries –​ Evaluation of the applicants by staff members (Corporate News Release 12). Announcement of the 1st Screening: Application screenings /​Teams ... website (Corporate News Release 13). To summarize, as a key part of the idea generation phase, AP attracted customers’ knowledge contributions through a cooperative strategy, using various means for crowdsourcing ideas for the design of new products and contributing to opportunity recognition. There was also a competitive element, which served as an idea screening process, under which customers were invited to pitch proposals in order to qualify for the second round of evaluation. AP thus obtained innovation ideas by soliciting and incorporating customers’ insights.

Phase II: Development In this section, we delve into how AP transforms innovative ideas into action by positioning their customers as co-​creators. AP has been embarking on collaborative efforts with their customers in the realm of new product development by empowering them to devise new product designs or refinements while supporting them by providing access to the company’s resources, which indicates a cooperative orientation during this process. Nevertheless, AP assumed full responsibility for evaluating and determining which products should be produced. We found that AP’s customer empowerment approach focused on two dimensions, namely product refinements and resource utilization. About 300 prosumers participate directly and indirectly in developing products, including on-​line surveys, Focus Group Interviews (FGI), and product evaluation meetings (Company Annual Report 2). AP established its ‘prosumer community’ as a dedicated platform for soliciting opinions from these professional consumers through focus group interviews in evaluating potential products. Under this circumstance, customers had opportunities to go beyond knowledge sharing activities, directly partake in testing new products during the development phase, and to provide feedback for subsequent product refinements. AmorePacific has paid much attention to an ethnographic survey ... their marketers have been meeting customers directly through the Direct Consumer Contact (DCC) program since 2007, observing their behavior, and sharing their experiences ... In the meantime, they have discovered the hidden needs of the customers, which could not have been revealed with a quantitative survey to develop innovative products (Corporate News Release 2). 338

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In particular, the Melody Cream, which was launched to celebrate the 66th anniversary of founding, was created by actively reflecting prosumers’ opinions through in-​depth interviews and product evaluation meetings (Company Annual Report 2). AP’s approach has extended beyond mere consumer surveys; it has collected feedback through in-​ depth interviews and direct observations, enabling the company to unearth valuable insights into consumer needs. This engagement has allowed customers the opportunity and freedom to channel their creativity into evaluating new product ideas during trials, elaborating a product concept, and discussing and improving the alternative solutions. Complex patterns of interaction between customers and AP have emerged during the development phase, reflecting the need to mobilize a widely dispersed set of resources and competencies. AP has also offered various forms of support to customers in developing new products by enabling them to utilize the resources provided by both internal and external stakeholders. In addition, AmorePacific will manage idea groups of the awardees for six months and award the best group. This is intended for the continued attentiveness to the voice of their customers through the future talents ... and reflecting their suggestions on our new products, thus transcending the limits of the typical one-​time company-​hosted event (Corporate News Release 12). Supports and Awards: ... activities such as experiencing beauty environment, using new products, making cosmetics and visiting the Estherapy, etc (Corporate News Release 12). During this process, customers invested their time and effort in communicating with AP’s dedicated mentoring teams. They attended the training sessions that explored the company’s background, a crucial element that may shape their perceptions about the product concepts and better behavioural intentions in the process, including corporate commitment and loyalty. Simultaneously, AP offered external resources as a customer empowerment initiative, further bolstering their support for product planning and engineering. To develop a product that customers can truly rely on, we collaborated with the Korean influencer, Director Pi, from product development to... Customers learned about the product from Director Pi’s YouTube channel, and ... Starting with real reviews from customers, we engaged in genuine communication regarding the entire process from development through to the application of ... together with an influencer trusted by customers (Corporate News Release 16). Multiple knowledge sources, such as key opinion leaders’ (KOLs) knowledge of products, were provided by AP during this process and other stakeholders’ involvement and their interdependence played a significant role in the development of new products under a longitudinal process. For example, The collaboration is also expected to draw expertise from Tmall Innovation Center, Alibaba’s in-​house product co-​creation program, which relies on Alibaba’s 674 million active users to extract consumer insights and conduct ... to packaging (China Daily 1). The deal will see AmorePacific use Alibaba’s insights ..., with the companies having launched the initiative to fast-​track the launch of new products using the data (Global Cosmetics News). 339

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Under such an initiative, the first batch of two co-​created skin care products, banking on data feeds that track people’s favored formula and packaging (China Daily 2). AP has been facilitating customer co-​creation by supporting the latter with data from a third-​party platform, for leveraging to identify and design joint value creation activities during the development stage. Unlike corporate R&D teams, who work together for a long period of time, innovation contests entail temporary organizational arrangements with limited opportunities for the participants to adjust their behaviour due to time constraints. As part of the customer empowerment strategy, AP was cooperating with customers as well as other stakeholders for knowledge sharing. In summary, during the idea development phase AP deliberately set up a competitive environment. This included an innovation contest to inspire customers’ creativity, combined with arrangements to increase the submissions’ quality by assessing the extent of their alignment with the brand, their, and their safety. During competitive interactions, customers had opportunities either to form teams or to compete individually against others according to their own preference. Dynamics of cooperation and competition thus co-​existed among customers.

Phase III: Commercialization During this phase, AP seeks to enhance its relationships with customers through continuous interactions with them as end-​users through social media posts, corporate websites, and application software. Therefore, we try to get inspired by “strong customer experience,” ...We always study what our customers want and strive to provide a new experience based on continuous communication with customers (in-​cosmetics Connect). To engage the customer experience, AP offered various touchpoints for testing the products. These provided ample opportunities to innovate by harnessing customers’ diverse cognitive and social attributes. For example, ‘Powder and Play’ is a service one can experience only at the showroom designed by reflecting an idea by a customer about shadow palettes (Corporate News Release 24). At the ‘Face Tailor Zone’, a makeup artist offers professional face consulting and finds the perfect foundation color that matches customers’ skin tone for customers ... machine (CNR25). AP Business center a place of gathering that offers special experience and value to customers through a wide range of beauty & health culture classes (Corporate News Release 24). An AR game was created with Cica as a character. To play the game, the audience need to catch the Cica characters to earn points (Kingdom Digital 13). Customers have opportunities to experience leading-​edge makeup training programmes and to participate in games relating to the marketing of new products. After acquiring deeper understanding 340

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of the functions and effects of key ingredients, they are better equipped to share their informed insights. AP also provides additional incentives to motivate customers’ participation. For example, during these events, participants are encouraged to ask questions, for which AP attempts to provide prompt responses. By seeking to delight customers at various demonstration events, AP also invites and induces direct feedback from customers and fosters synergy among their ideas for product adaptations for. For example, Amorepacific launches a new 1:1 life beauty customized brand, CUSTOM.ME. CustomMe is a brand that provides customized beauty customized to each customer through mobile skin analysis service (Corporate News Release 3). The ZEPETO HERA pop-​up store will be available at ZEPETO ... and you can enjoy interacting with other users with ZEPETO’s 3D avatar (Facebook 1). ‘Mind-​linked Bathbot’ is a solution delivered by robot analyzing the feelings of customers by reading their brainwaves and creating a bath bomb of a fragrance and color that reflect the analysis on the spot. When a consumer wears the headset equipped with 8 sensors, the robot measures real-​time brainwaves and ... by analyzing data (Corporate News Release 21). The purpose for each customized activity is to leverage value-​adding as a means to induce reciprocal customer sharing as part of the innovation activity. AP harnesses its technology as a platform for incorporating customers in the co-​design process for AP’s personalized products, such as its customized 3D printing mask and emotion sensors for health care products. The value-​added product development events during the commercialization phase have been designed to provide compelling experiences that build trust and foster commitment among customers. On top of customer involvement and empowerment as processes for facilitating new product development, customer reinforcement serves to deepen relationships within and among existing and potential customers. While AP continues to work closely with customers, it also explores various ways to obtain endorsements of its products through online contests: Share your experience in using any Bija Cica Care product and stand to win ... away (Corporate News Release 22). Snap the most creative photo/​video of the ... that you’ve purchases. Post it on your Instagram Post or Story. Tag the official account with the hashtag... (Facebook 3). These endorsement contests required customers to record their reviews of the products and share them with their friends on social media platforms. Online customer integration allows ongoing access to potential customers. After the initial product trials, customers are encouraged to undertake their own testing options and parallel tests, giving rise to a multiplicity of data sources.

Discussion Drawing on multiple documentary sources, our qualitative case study reveals that the focal firm, AP, has adopted multiple means for instilling customers’ involvement in the different phases of product innovation under the firm’s orchestration. AP’s distinctive open innovation model 341

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incorporates both competitive and cooperative mechanisms as means for collecting and sharing knowledge with their customers. These are embedded throughout the idea generation, development and commercialization phases, and aim to foster enhanced customer experience by holding customization activities and endorsement contests (see Figure 15.3). AP has thus based their overall open innovation approach on ‘idea contests,’ which call for voluntary participation from customers to generate ideas and solutions.

Theoretical Contributions We have made two contributions to extant literature in open innovation. First, we have analyzed how the focal firm has combined the dynamics of both competition and cooperation to induce and integrate customers’ ideas under the open innovation archetype (Bican et  al., 2017). Prior studies have argued the importance of customer engagement in the innovation process (Baldwin & von Hippel, 2011), and have conceived multiparty collaboration as the nexus of open innovation (Obradovic et al., 2021). Such studies have, however, been limited to emphasizing the benefits of collaborating with customers (Schweitzer et al., 2012; Boudreau, Lacetera & Lakhani, 2011) rather than analyzing the use of a combination of competitive and cooperative drivers for open innovation (Bullinger, Neyer, Rass & Moeslein, 2010). In analyzing the strategies adopted by AP in each phase of open innovation, we have constructed a co-​opetition framework to shed light on the cooperative and competitive mechanisms for involving customers. Our analysis goes beyond the extant ‘connect and develop’ paradigm (Huston & Sakkab, 2006), which is underpinned by an exclusively collaborative model of open innovation (Schweitzer et al., 2012; Boudreau, Lacetera & Lakhani, 2011). AP selectively drew on the cooperative and competitive dimensions, depending on the nature of each of the customer co-​ creation activities adopted as outside-​in processes during the idea generation phase. For example, AP adopted various means for cooperating with customers to crowdsource innovative ideas and thereby bring these into the opportunity recognition process. AP also invited customers to join competitive activities, such as pitching their innovation proposals. Moreover, our emergent categories of customer involvement featured in AP’s innovation contests reveal competitive dynamics that have been overlooked by extant literature. In this inside-​out process, customers are empowered to utilize resources provided by other stakeholders and channelled to them by the company while competing to provide the best ideas. During these events, customer involvement transcends knowledge sharing and embraces direct customer participation in various activities arranged by AP. These insights go beyond prior research, which has suggested that extensive interaction takes place between customers and other stakeholders through joint actions during product innovation (Wießmeier, Thoma & Senn, 2012). According to our findings, AP harnessed on its technology as a platform for integrating customers into their value-​adding process for product customization. Existing literature suggests that positive reinforcement, such as rebates and offers, increases customers’ tendency for product retention (Gelbrich, Gäthke & Hübner, 2017). Our findings go beyond this by demonstrating that the commercialization phase can induce value-​added product development by arranging customization experiences and endorsement contests that enhance satisfaction, trust and commitment among customers by providing and leveraging compelling experiences. Our second contribution is to provide contextualized insights into of the distinctive open innovation strategy adopted by a Korean MNC for customer co-​creation. Given the important role played by Korean MNCs in global value chain integration via their affiliates and exports (OECD, 2017), there is limited prior understanding about how they collaborate with customers in open 342

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343 Figure 15.3 The conceptual model. Source: Created by the authors.

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innovation (Langley, 2007; Radziwon & Bogers, 2019; Shvetsova & Lee, 2021). Our analysis has provided rich contextual details about how AP goes about generating and integrating innovative ideas and knowledge from customers through their open innovation activities.

Implications for Practice In addition, our findings have two managerial implications. Firstly, AP, as our focal company, demonstrates some exemplary practices to inform business executives and policymakers on how MNCs can collaborate closely with their customers to foster innovation by bringing creative ideas through its network of collaborators. Specifically, our findings about arranging idea contests as a co-​opetitive approach for open innovation highlights the importance for MNCs of opening up their firm boundary in order to engage customers in developing new products. Secondly, aspiring MNCs might consider adopting various strategies for customer co-​creation during the different innovation phases, including customer involvement, customer empowerment and customer reinforcement. While customers can be involved in the initial stage of product innovation through crowdsourcing and pitching, they also need to be empowered to collaborate with other stakeholders at later stages. Furthermore, MNCs can enhance customer relationships and customer satisfaction through endorsement contests, training programmes, and customization experiences.

Limitations While we have offered some unique insights, our chapter has two main limitations. The first limitation is the typical concern associated with a single-​case study in that its specific institutional setting could limit the transferability of our findings (Nag, Corley & Gioia, 2007). It is probable that different MNCs operating in different industries and regions may exhibit differences in their approaches to incorporating customer co-​creation into open innovation. Hence, caution should be exercised when extrapolating our insights to diverse organizational contexts. However, we believe that our findings are applicable to other MNCs with the coupled open innovation archetype. Our basic aim is not to generalize, but rather to offer a contextualized and rich analysis regarding the use of customer co-​creation activities during each phase of open innovation. We thus invite future research that investigates customer involvement in the open innovation processes of other firms in different industries and/​or countries. Moreover, it would be interesting to open up the black box and see how the focal firm can collaborate with other stakeholders, such as suppliers (Hong & Snell, 2015), under a co-​opetitive setting for innovation. Second, it is also imperative to acknowledge the limitation stemming from our exclusive reliance on secondary resources for data collection in this study. While secondary data resources, including corporate reports, news releases and industry reports, have provided a valuable foundation for our analysis of customer involvement in open innovation at AP, they inherently lack the depth and nuances that can only be gleaned from investigating the first-​hand experiences and perspectives of key participants. The absence of direct engagement with customers, employees and other relevant stakeholders may have constrained our ability to capture the intricacies of their motivations, challenges and experiences within the open innovation processes. While secondary data analysis has enabled us to construct a holistic view of AP’s innovative practices, it does not replace the insights that could be derived from directly obtaining qualitative data from individuals intimately involved in open innovation activities, and/​or from participant observation. Therefore,

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it is important that future research endeavours can consider supplementing secondary data analysis with primary data collection methods, such as in-​depth interviews or direct observations, to provide a more comprehensive understanding of the role of customers in open innovation.

Conclusion In summation, the scrutiny of AP’s deployment of open innovation and customer co-​creation yields substantive enlightenment for multinational corporations, particularly within the milieu of the South Korean economy. Our qualitative case study accentuates the imperative of integrating both cooperative and competitive elements to actively involve consumers in the innovation continuum. AP’s approach, encompassing idea contests and the sustained consumer involvement from ideation to market introduction, mirror the broader shift in South Korea towards the knowledge-​ based economy by tapping into external knowledge resources. Furthermore, AP’s case sheds light on the evolution of South Korean MNCs in the global market, exemplifying how such firms are integrating customer-​centric roles and contributions within the open innovation process. This approach resonates with South Korea’s transformation into a knowledge-​based economy by leveraging technological advancements and emphasizing co-​creation with customers. The context of South Korea’s rapid economic growth, government-​ driven innovation initiatives and the pivotal role played by Korean MNCs in global value chains all contribute to the unique dynamics and strategies observed in AP’s case. As South Korean firms leverage open innovation and customer co-​creation to enhance their global competitiveness, there is an increasing need for business leaders and policymakers to gain a deeper understanding of the strategies employed by these firms. By drawing on South Korea’s distinctive economic landscape and emphasizing innovation and customer involvement, MNCs can align their practices with the evolving global market trends while maintaining a competitive edge. Given South Korea’s significant influence on Asian and global economies, further research and practice in this area will contribute to a broader comprehension of open innovation and its implications within the South Korea context.

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PART IV

Emerging Issues in Korean Businesses and Management

16 CORPORATE SOCIAL RESPONSIBILITY AND SOCIAL ENTREPRENEURSHIP IN KOREA Jon Jungbien Moon

Corporate Social Responsibility as a Non-​Market Strategy A non-​market strategy can be defined as a series of goal-​driven actions that a firm takes on in order to obtain and maintain competitive advantage in its non-​market environment that includes stakeholders, such as governments, local communities, news media and NGOs (Baron, 2012; Oberholzer-​Gee & Yao, 2007). In contrast, market strategy can be defined as a series of goal-​driven actions that a firm takes on in order to obtain and maintain competitive advantage in its market environment that includes stakeholders such as customers, suppliers, employees and shareholders (Bach & Allen, 2010). It is worth noting that, in the current global economic system that is ever-​ growing in complexity, a clear-​cut distinction between market and non-​market environment may be difficult, or even futile, to achieve. There is growing integration between market and non-​ market environments, and a non-​market issue related to customers, such as data privacy protection for the platform industry, or a market issue related to the local community, such as building a new business model that benefits local communities, is growing in importance. Therefore, this chapter adopts Baron (2012)’s framework of integrated strategy, which argues that firms can better accom­ plish sustained competitive advantage by integrating market strategy components such as market structure analysis, competitor analysis and branding, with non-​market strategy components such as non-​market issue analysis, institutional analysis, and non-​market positioning. From a theoretical point of view, non-​market strategy and integrated strategy adopt the instrumental stakeholder theory (Donaldson & Preston, 1995; Freeman et  al., 2010; Jones, 1995). Instrumental stakeholder theory is primarily concerned with the benefits a firm can gain by investing in stakeholder relations: providing sufficient consumer surplus to its customers, investing in enhancing the productivity of employees and suppliers, preserving and conserving the natural environment, sharing prosperity with local communities, and so on. It argues that stakeholder management is important because it is instrumental in obtaining superior performance, and hence, long-​term prosperity and survival. In the same vein, Edmans (2020) emphasizes the pie-​growing mentality, as opposed to the pie-​splitting mentality, that is necessary for business success. Barney (2018) states that a firm’s capability to build a constructive relationship with its stakeholders can be a source of competitive advantage, as it meets the VRIO criteria: valuable, rare, inimitable and DOI: 10.4324/9781003180920-20

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organizable. Jones et al. (2018) second this view by agreeing that firms can achieve sustained com­ petitive advantage by adhering to the advice of instrumental stakeholder theory. Mellahi et  al. (2016) state that research on non-​market strategy has taken on two separate streams: one focusing on corporate social responsibility, and the other on political strategy. Dorobantu et  al. (2017) further classify non-​market strategy into adaptive, transformative and additive non-​market strategy. Adaptive non-​market strategy emphasizes compliance and risk management stemming from the non-​market environment, while transformative non-​market strategy emphasizes achieving competitive advantage through active involvement in the non-​market arena, such as politics, playing a zero-​sum game against rival firms. Finally, additive non-​market strategy pursues a win–​win relationship with various stakeholders by suggesting a vision for society and leading constructive efforts to achieve social goals. Korean firms have exhibited all three types of non-​market strategies. From early on, large firms practiced transformative non-​market strategy, especially in the political sphere, trying to outmanoeuver the rival firm and gain favourable legislation, regulation and tax treatment. The zero-​sum nature of transformative non-​market strategy, though, sometimes backfires and leads to a scandal. Since the 1990s, more Korean firms started to adopt adaptive nonmarket strategy with an emphasis on compliance. It was only in the 2010s, after the introduction of creating shared value (CSV), that Korean firms took additive nonmarket strategy seriously (Porter & Kramer, 2011).

Fledgling Capitalism (1953–​1970s) By the end of the Korean War in 1953, the South Korean economy was one of the poorest in the world. The war decimated the young workforce, destroyed infrastructure, and uprooted most families’ economic foundations based on agriculture. Out of this total devastation, though, a fledgling new capitalist order was being born. With the traditional ruling class losing their economic base as a consequence of the war, people could dream of upward mobility in social and economic status for the first time in more than 500 years. The fact that everybody was poor, combined with the long-​standing culture of meritocracy, provided each and every young Korean with an incentive to work hard and make a living for themselves in a non-​traditional way. Corporations started to exist from the Japanese colonial period, but it was the Liberation of Korea in 1945 that provided real opportunities for many aspiring Korean entrepreneurs. Samsung, Hyundai, LG, SK, Hanjin (parent firm of Korean Air), and Lotte all came into existence with the patriotic vision of the business, such as ‘repaying the country through business success,’ or some variant thereof. Entrepreneurs such as Samsung’s founder Lee Byung-​chul, and New Ilhan, the founder of Yuhan Corporation, one of the oldest Korean corporations that still exists, symbolize the spirit of corporate social responsibility during this period. According to Hofstede, Korean culture is characterized as more collectivist and less masculine. Korea’s individualism score is 18, while the masculinity score is 39. In comparison, US scores are 91 for individualism, and 62 for masculinity (Hofstede, 2022). Along with a high degree of long-​term orientation and low degree of indulgence, Korean culture is well-​suited for implicit CSR (Matten & Moon, 2008; 2020). Based on these cultural traits, Korean people share a highly egalitarian mentality. Growing inequality as a byproduct of fast economic growth generated envy, resentment and conflict, and these were aggravated by corruption in government and by the fact that some of the business moguls took advantage of assets left behind by the Japanese when they were forced out of Korea after their defeat in World War II. In response to an unfriendly popular attitude toward them, entrepreneurs and corporate managers felt the need to show their goodwill to society. 354

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Therefore, CSR in this period targeted two key stakeholders: governments, especially the central government under an authoritarian regime, and the community. With substantial size and influence over the Korean economy, corporations were active in philanthropic efforts. Sunkyung Group (now SK) made a lasting impression in corporate philanthropy by sponsoring a quiz show for talented high school students that is televised and commanded a high rating in the society that values education and hard work. These efforts later turned into the establishment of a foundation that provided scholarships for college students and academics. Samsung established its own fine-​ art museum and supported Korean artists. These efforts are consistent with the view put forth by Ahn & Park (2018), which, by analyzing eight of the longest-​surviving Korean listed companies, found that a company’s CSR actions enhanced relational social capital and moral legitimacy, and thereby benefited its long-​term survival by helping the company to overcome performance crises or improve its performance. Some of the philanthropic efforts were the result of arm-​twisting by the government. Wherever there was a natural disaster such as a flood or typhoon, there was a donation drive, led by major corporations and their founders. And if there was a corporate scandal, corporate philanthropic efforts followed in the form of establishing a charitable foundation, donation of a large sum or large entity, etc. This can be viewed as a penance, or offsetting CSR effort, in order to keep the criticism on chaebol firms at bay (Kotchen & Moon, 2012; Krüger, 2015; Kang et al., 2016).

Seeking Legitimacy in the Fast-​Growing Economy (1980S –​early 2000S ) After the assassination of President Park, Chung-​hee in 1979, and the tragedy of the bloody submission of the Gwangju Democracy Movement in May 1980, there was a new era in Korean society and economy. According to the Bank of Korea’s official statistics, the Korean economy grew at an impressive 10.3% per year during the 1980s, and a booming middle class was created (Bank of Korea, 2022). There was also a widening gap between the rich and the poor. This brought some level of resentment among the Korean population against those who struck it rich. Naturally, chaebol groups were often the most visible targets. In order to mitigate the resentment, and obtain social legitimacy, more and more corporations turned to engaging in corporate philanthropy. Most of the top-​30 Korean chaebol conglomerates founded and operated charitable foundations with various purposes, ranging from providing welfare to the disadvantaged to promoting arts and science. The largest such foundation was the Asan Social Welfare Foundation, funded by Hyundai Group, and its total asset was $373 million by the end of 1994.1 All in all, there were 27 corporate foundations with total assets over $10 million. The total annual budget for charitable contributions by Korean corporate foundations amounted to over $400 million in 1995, and its annual growth rate in the 1990s was well over 100% (Jung, 1996). Tables 16.1 and 16.2 below detail the growth of charitable contributions by Korean corporate foundations and the breakdown by purpose. During this period, Korea was transitioning from an authoritarian regime to a full-​fledged democracy with free and fair elections. The 1980s saw a fierce struggle between Korean firms and their employees. By 1987, pent-​up demand for higher wages and better working conditions for workers led to the establishment of active labour unions in almost every large firm. Strikes became an annual ritual, and Korean corporations experienced growing pains in modernizing their industrial relations to suit the pluralistic democratic society. Chaebol corporations were also an integral part of the efforts leading to the hosting of the 1988 Summer Olympic Games in Seoul, as Chung, Joo-​ young, the founder of Hyundai Group, played a key role. In 1996, Korea became a member of the OECD, and achieved per capita GDP of a USD 10,000. With the flourishing middle class that was politically active, the scene was ripe for a big 355

Routledge Handbook of Korean Business and Management Table 16.1 Total annual budget for charitable contributions by Korean corporate foundations Year

1992

1993

1994

1995

Total budget (USD millions) Growth rate (%)

105

152.8 145

335.6 219

411.5 122

Source: Jung (1996). Table 16.2 Budget breakdown by the purpose of contribution at the end of 1994 Area of contribution

Number of foundations

Total budget (USD thousands)

Average budget (USD thousands)

Education Research Welfare Medical support Arts Awards Construction of facilities Total

66 47 26 10 8 19 28

14,584 14,287 16,560 415 1,718 4,665 283,385 335,614

220 303 636 41 214 245 10,135

Source: Jung (1996).

transformation with respect to the business–​society relationship. Korea was transitioning to a fully functioning liberal democracy in this period, with the first peaceful transition of power among major political parties. Modernized and globalized, Korean corporations were gradually growing out of the government’s shadow and became proactive in social engagement. The emergence of activist shareholders in Korea in the aftermath of the Korean foreign exchange crisis of 1997 shifted corporations’ focus toward shareholders. It was during this period that corporations started to take minority shareholders seriously, as the Korean capital market was opened up to foreign investors and the standards of global capital market were introduced to Korean regulators. Since corporate governance is the theme of Chapter 9 of this book, I will be brief about this topic, but it is necessary to include this topic in a comprehensive ESG framework. The minority shareholder movement, led by notable figures such as Jang, Ha-​Sung and Kim, Sang-​Jo, both of whom later would serve as chief economic advisors to President Moon, Jae-​in in the late 2010s, changed the way corporations viewed the stock market and minority shareholders. Before the 1997 Korean foreign exchange crisis, corporations subscribed to the belief of ‘too big to fail (TBTF)’ and borrowed as much as they could from banks and other financial institutions in order to finance their growth. In addition, they viewed a publicly listed corporation just like a private equity fund (PEF), and treated their non-​controlling shareholders as limited partners (LP) of a PEF, not as those who have the shareholder right protected by their corporate platform following the one-​share, one-​vote principle. With the first major economy-​wide crisis in Korean history, and the ensuing shakeup of the Korean stock market, corporations gradually opened up to the Anglo-​American mode of corporate governance and reformed their practices accordingly. Using a cross-​sectional data from 2005, Oh et al. (2011) found that institutional ownership and foreign ownership shares were positively associated with CSR ratings for large Korean listed firms, while managerial ownership share was negatively associated with CSR ratings.

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This period also saw the establishment of Korea Corporate Governance Service (KCGS, later renamed to Korea Institute of Corporate Governance and Sustainability in 2022), a research arm of Korean Exchange, that provided corporate governance ratings for major Korean listed firms (similar to IRRC), and also provided investment advisory service to institutional investors (similar to ISS). KCGS started to publish its governance ratings for Korean listed firms in 2003, and the ratings expanded to include environmental and social pillars in 2011, making it the first and the most trusted provider of ESG information in Korea to date.

Globalizing CSR and the Blossom of Social Entrepreneurship (2008 onward) As always, Korea was catching up on global trends quickly, this time on corporate social responsibility, social enterprise and ESG evaluation. Even though young Koreans perceived CSR practices of multinational corporations less favourably than their American counterparts (Kim & Choi, 2013), there was a series of events that led to new awakening on the importance of suppliers, customers and the natural environment. The Namyang Dairy scandal in 2013 raised awareness on the importance of sustainable supply chain management, and the recall of the Samsung Galaxy Note 7 in 2016 marked a milestone in customer protection. And there was a renewed interest in the natural environment, with renewable energy, clean production and green innovation took the centre stage in many corporations. Meanwhile, a growing number of Korean companies started to publish annual sustainability reports, and some of them started to get global recognition through inclusion in sustainability indices, such as the Dow Jones Sustainability Index (DJSI). Notably, Samsung Electronics adopted a ‘green innovation’ strategy in 2008, and launched green memory devices. Its 20 nano class DDR3 DRAM and solid state drives (SSDs) improved energy efficiency so that it created economic value for customers and at the same time it creates the environmental value of reducing CO2 emissions (Weigand, 2013). NAVER, Korea’s largest online platform operator, built one of its data centres named ‘Gak’ as an eco-​friendly building and got LEED Platinum certification. Built in the city of Chun-​cheon, it utilizes the cold deep-​down water of Soyang Lake as a coolant and reduces energy consumption by 73.8% compared to conventional data centres. In May 2013, a scandal broke out at Namyang Dairy Corporation, the second-​largest milk producer in Korea. A young sales representative harassed a much older local milk dealer with a threat, full of expletive language. The conversation was recorded and leaked to the general public, and shook the Confucian Korean society that values revering its elders. The CEO issued a public apology and promised to reform its problematic relationship with dealers and suppliers. However, due to a widespread boycott, Namyang’s sales declined substantially, making its close competitor Maeil Dairy surpass Namyang in sales. Its stock price also fell by 25% in 3 months. It was one of the most serious events that showed the power of consumer boycotts, and reminded Korean managers of the importance of treating smaller business partners with fairness and dignity (Lim, 2021). In August 2016, Samsung Electronics launched its new Galaxy Note 7, a much-​anticipated new version of its prized cell phone line. The new model harboured a serious flaw, though, that its batteries could overheat, resulting in the device catching fire. Because of the safety concern, the US Department of Transportation issued a ban that passengers cannot carry the device on board an airplane, and Samsung had to recall the new model globally. When the recalled phones also turned out to have a similar problem, Samsung made a conscious decision to discontinue the sale of the device and offered compensation for customers. Internally, the cost of the recall and eventual discontinuation was estimated to be KRW 10 trillion (close to USD 9 billion at the exchange rate in 2016). But Samsung’s brand value and stock price rebounded quickly as the event left a lasting 357

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impression that the company values customer safety dearly. Eventually, Samsung successfully launched Galaxy Note 8 the next year. This was another landmark as to how corporations should treat their customers and deal with potential risks that can jeopardize the safety thereof. Volkswagen’s dieselgate scandal hit Korea as well, and the Korean government responded by banning the sales of affected models of Volkswagen and Audi in Korea, sending yet another message to highlight the importance of business ethics. Through this series of events, Korean corporations had a chance to look back on their practices with respect to suppliers, customers and other stakeholders, and upgraded their internal monitoring, reporting and enforcement system to meet global sustainability standards, one scandal at a time. In the 2000s, the concept of social enterprise following the Nobel Peace Prize-​winning entrepreneur Muhammad Yunus was introduced in Korea. Following the passage of legislation promoting social entrepreneurship in 2007, hundreds of social enterprises sprang up. Park Won-​soon, who would later go on to serve as the Mayor of the Seoul Metropolitan Government from 2011 until 2020, was one of the most notable early Korean social entrepreneurs. He established The Beautiful Store as the first accredited social enterprise in Korea. As of November 2022, there are a total of 3,436 social enterprises accredited by the Korea Social Enterprise Promotion Agency. Social enterprise can be defined as an enterprise with a clear social objective and a sustainable business model (Yunus, 2010). Korean social enterprise ecosystem was burgeoning since around 2010, with impact investors such as Sopoong, Root Impact, and Crevisse Partners financing innovative social entrepreneurs. Interestingly, Chung, Kyung-​sun, founder of Root Impact and a grandson of Hyundai’s founder Chung, Joo-​yung, is playing a key role in this ecosystem. Public–​private partnerships are expanding fast in order to achieve positive social change. Sopoong alone invested in 47 social ventures by the end of 2019 (Sopoong, 2019). SK Group and its Chairman Chey, Tae-​won initiated a social-​value-​driven business, leading to the social progress credit (SPC) programme that rewards social value created by innovative social enterprises after appraising the amount of social value carefully (Jung & Shin, 2022; Serafeim et  al., 2020). Korean social enterprises such as Enuma are being recognized globally. Below I introduce the stories of some of the best-​known social enterprises in Korea. Tree Planet was founded in 2010 by Kim, Hyoung-​soo and Chung, Min-​chul, who met during their military service. It provides a smart phone/​tablet game application where users can grow virtual trees. When the virtual tree grows sufficiently, Tree Planet turns the virtual tree into a real tree by building a forest. Users have the naming right, and they are kept updated on the tree’s growth. The business model works because the company provides a platform among a triad of stakeholders: users who are willing to plant trees but do not have enough time or knowledge to do so; companies with financial resources who want to advertise their eco-​friendly image but lack a good stage; and environmental NGOs who know how to plant and grow trees but lack funds. Users gladly play games during their spare time even without any monetary compensation; companies can place ads on the game application in order to gain positive publicity; and environmental NGOs get the funds necessary to build a forest. Using this method, Tree Planet has created more than 110 forests by planting more than 700,000 trees around the world, including in countries like China, Mongolia, Japan, India, Cambodia, the US, as well as Korea. Third-​place winner of the Global Social Venture Competition (GSVC) in 2011, Tree Planet is one of the oldest and most recognized social enterprises in Korea (Shin et al., 2013). They also have extensive global partnerships with Toyota, Hanwha, ShakeShack, and Double A. Bear Better was founded by Kim, Jung-​Ho, a founding member of NAVER, and Lee, Jin-​Hee, a former HR executive of NAVER, and tries to build a sustainable business by hiring young people with developmental disorder. According to some statistics, only 37% of people with disability are 358

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employed in Korea, and only 23.2% of people with mental disability are employed, with much lower average income earned in comparison to workers without such disabilities. There is a law in Korea that mandates firms to hire workers with disability up to 2.7% of their workforce, and pay fines proportional to the discrepancy between the required and actual level. For larger corporations, the annual fine could be a substantial amount. The law also offers firms the option of purchasing from suppliers that hire predominantly disabled workers. Even though disabled workers’ productivity level is about half of non-​disabled workers, Bear Better could be competitive because customer firms can reduce their fines by half. By choosing the B2B business of printing brochures to large business firms, Bear Better has been successfully providing jobs to hundreds of workers with developmental disability. Its social impact goes even beyond the numbers, as customers who worked with Bear Better reported that they could break out of their prejudice against people with developmental disability. Enomad produces Enomad Uno, a portable hydropower generator that can charge cell phones and portable batteries, sold more than 20,000 units in the US by March 2020, and has a partnership agreement with Patagonia. Enuma was founded in 2012 by a married couple, Lee, Sooinn and Lee, Gunho who had extensive experience in creating online games (Enuma, 2022). Motivated to help their son born with special needs, they developed an on-​line education system that is easy, fun and accessible to many children, especially those underprivileged children in places like Africa. With their learning game software Kitkit School, they shared a $15 million grand prize at the Global Learning XPRIZE competition in 2019. Its Todo Math and Todo English products record over 8 million downloads worldwide. Marymond was established in 2012 by Yoon, Hong-​jo. The company sold accessories and clothing such as phone cases, diaries and T-​shirts, with the flowery design inspired by the suffering of surviving Korean ‘comfort women’ who suffered enslavement by the Japanese army during the Second World War. Designers of the Marymond products visited the survivors frequently, listening to their stories, and came up with the flowery design that would match the story best. 50% of its operating profit was donated for helping out surviving comfort women and building a memorial for their suffering. With the story that touched deep inside the emotional core of Korean people, Marymond soon gained popularity and business success, helped in part by many celebrities’ public display of wearing its product. In 2018, though, the company took a hit as a personal scandal broke out about the past history of the founder’s family member in the middle of the Korean Me Too movement. A consumer boycott followed, and the company eventually ceased its operation in 2021 as it was mired in financial trouble. This story shows both the promise and vulnerabilities of Korean social ventures. Supported by socially conscious consumers who are keen on social justice and Korean history, a successful business model can be launched. The market is relatively small, and long-​term business success is difficult to achieve because public support can wane very quickly as a result of a scandal or mishap. The maturation of the social enterprise ecosystem, both in terms of new ideas and the deepening of the market, is the task for the next decade.

Facing Future Challenges with Global Perspectives In conclusion, Korean corporations have been fighting to gain legitimacy both at the national level and at the global level, and corporate social responsibility has been a conscious and integral part of those efforts. Just like in other aspects of business, they quickly caught up on the global standards of corporate social responsibility and social entrepreneurship as well. There are never-​ ending series of emerging challenges: climate change, the Net Zero Initiative, human rights issues 359

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in the global supply chain, and the unresolved issues of corporate governance, to name a few. With renewed confidence after the relatively successful management of the COVID-​19 pandemic and the growing global influence of K-​culture, however, Korean corporations will aspire to be among the global leaders in corporate social responsibility and social entrepreneurship in the coming decades. Samsung Electronics, for example, is pursuing sustainability through global partnerships based on its superior technological capability. It is partnering with the Gates Foundation and successfully manufacturing waterless toilets that can help alleviate sewage pollution in less-​developed countries and help achieve UN Sustainable Development Goal (SDG) 6: clean water and sanitation (Kim & Kim, 2022). It is also partnering with Patagonia and successfully launching the sales of washing machines that can filter microplastics. Microplastic pollution is a global health concern, and part of the problem stems from non-​filtered wastewater containing microplastic fibres from machine-​washing synthetic fabric. Therefore, building an advanced washing machine that can filter microplastics during the washing process helps achieve UN SDG 14: life under water. SK Corporation is pursuing ‘double bottom line (DBL)’ where they aspire to balance the financial bottom line with the social bottom line. Its social progress credit (SPC) programme is attracting global attention, as a novel attempt to evaluate and compensate for the social value created by participating in social ventures (Jung & Shin, 2022; Serafeim et al., 2020). Kia Motors also initiated a partnership with Ocean Cleanup, a globally renowned NGO, in April 2022, and started to support its activities of cleaning the ocean off of plastic wastes, another activity in congruence with UN SDG 14: life under water. Many Korean multinational enterprises (MNEs) earn the majority of their revenue in foreign markets, and they are constantly conducting foreign direct investments and cross-​border mergers and acquisitions. For them, the support of foreign stakeholders is a valuable resource, and they had better invest in relationships with key stakeholders worldwide. There was a major development in the global shipbuilding industry, for example, when global no. 1 manufacturer Hyundai Heavy Industry was trying to acquire global no. 2 manufacturer Daewoo Shipbuilding and Maritime Engineering, which was mired in financial trouble. Due to the failure in obtaining the approval of foreign antitrust authorities, the deal fell through, and it is just another example that managing stakeholder relationships well is a crucial element for business success in the globalized world. Corporate diplomacy, defined as MNE non-​market strategies that both respond to and shape country diplomacy and international relations, will be an important aspect of corporate capability in the near future, and Korean MNEs will devote more and more attention and resources toward CSR-​related activities in pursuit of successful corporate diplomacy (Li et al., 2022).

Dynamics of Korean Modern Economic History and Current Issues in CSR and Social Entrepreneurship Yuhan Corporation, a pharmaceutical firm founded in 1926 by Dr. Ilhan New, is one of the oldest and most successful corporations in Korea. It was listed in the Korean stock market in the 1960s, and has consistently beaten the market. Since its initial public offering in Korea Stock Exchange in 1962 until the year 2021, its annual stock return is estimated to be 12.79%, which handily beats KOSPI’s annual return of 9.36%, calculated from 1980 to 2021.2 In a sense, Yuhan Corporation is the Korean version of Johnson & Johnson, a company that is old and innovative at the same time, and has performed very well financially as well as socially.3 However, Yuhan’s market cap­ italization in 2022 stood at slightly less than $4 billion, and it ranks around 76th in Korea. (In 360

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comparison, Johnson & Johnson ranked 9th in the US stock market in terms of market capitalization.) Ahead of Yuhan in market capitalization ranking in Korea, there are subsidiaries of long-​ standing conglomerates such as Samsung, LG, SK, Hyundai Motors, Hanwha, and Lotte, banking holding companies such as KB, Shinhan, and Hana, privatized former state-​owned enterprises like POSCO, KT, KT&G, and KEPCO, along with a host of diverse successful ventures that came to exist more recently, such as Naver (online platform), Kakao (online platform), Celltrion (bio), Krafton (game), NCSoft (game), Hybe (entertainment), and NetMarble (game). Yuhan has maintained an excellent reputation in terms of its overall ESG performance over the course of its history. The fact that so many younger companies whose ESG performance was not as good as Yuhan’s have become much larger firms with global leadership in their respective industries sums up the history of success of the Korean economy and corporations that made it possible over the last 70 years. Whether it can continue its path, is to be seen. I would like to mention some of the ongoing issues in the area of CSR and social entrepreneurship in Korea (Lee, 2022). First, even though there has been a new wave of awareness about the importance of sustainability in the name of ‘ESG management’ since 2020, the level of understanding about sustainability among Korean companies is still not quite high. Out of about 1,600 publicly traded companies in Korea, only 900 of them are covered in the KCGS ESG rating system, and only about 350 of them are included in the ESG ratings of major global evaluators such as MSCI or Refinitiv. This is mainly due to the lack of reliable information published by the companies. Many Korean executives still consider CSR simply as corporate philanthropy, and hence, view CSR as an expense item rather than an investment. This lack of awareness, along with a lack of expertise on CSR, is a fundamental issue to be addressed in order to further the development of CSR in Korea. Second, on the environmental front, Korea’s energy grid is still heavily dependent upon fossil fuel and nuclear, and it poses a grave challenge for Korean companies. As a major global manufacturing hub, Korea’s transition to a net zero carbon emission economy is seriously constrained by the availability of reliable renewable energy sources. With the world’s most visible companies such as Apple, Google, and Microsoft targeting to achieve scope 3 net zero within the next 30 years, and with major Korean firms being the suppliers to them, the pursuit of net zero is a make-​or-​break pursuit for the Korean economy and Korean businesses alike. Third, on the social front, the issue of diversity is still in its nascent stage in Korea. Korea has been quite a homogenous society for a long time, and it also values seniority, following its Confucian tradition. As a result, many of Korean corporate executives share similar backgrounds: they are mostly men in their 50s and early 60s. This kind of homogeneity could be beneficial when Korean firms were playing the role of followers, as it fosters fast decision-​making and top-​down implementations. Now that Korean firms are among the global leaders who should pioneer innovations, it could be a problem. Increasing organizational diversity takes time, and there will be twists and turns, but it is a winding path that Korean companies should take in order to be true global standard bearers. Fourth, even though there was a wave of ESG management since 2020, most Korean companies focus mainly on E and S while putting G on the back burner. Corporate governance has been a contentious issue since it was first raised at the end of the 1990s, and it is still a highly politicized issue. There is a debate on the place of governance in ESG: some regard governance as the foundation on which environmental and social improvements are made possible, and they even consider ESG as extended corporate governance (Bebchuk & Tallarita, 2020). The others, on the other hand, claim the equivalence of three pillars and argue that corporate governance is just one dimension of the overarching ESG umbrella (Savitt & Kovvali, 2021). It remains to be seen 361

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whether the wave of ESG management can be an organic extension of the corporate governance reform movement in Korea, or it will be a replacement thereof. Finally, the social entrepreneurship ecosystem of Korea is at a crossroad. There has been a great increase in size and diversity, but in terms of maturity, there is a lot to be desired. Part of the problem is the limited size of the domestic market, which limits the growth and financial sustainability of social enterprises. Due to the lack of resources, many of Korean social enterprises are primarily oriented towards domestic business, even though their business model is easily scalable beyond the national border. Utilizing the world-​class Korean companies as partners, Korean social enterprises had better target global markets and stakeholders. The other issue is more institutional. The Social Enterprise Promotion Act of Korea mandates that the authority to accredit a social enterprise rests in the hands of the Secretary of Employment and Labor. It follows that the initial purpose of the Korean government’s social enterprise policy was primarily to increase the employment rate, especially for those disadvantaged segments of the population who are older, less educated, or with disabilities. A newly enacted Special Act on Venture Promotion, under the jurisdiction of the Ministry of SMEs and Startups, defines social ventures as those who pursue social value and economic value in an integrated way. This is a more innovation-​oriented definition. This dichotomy between social enterprise and social venture can be confusing, and it could also lead to a turf war between two ministries that claim jurisdiction over the social enterprise ecosystem in Korea. Graafland & Smid (2019) found evidence against CSR decoupling, as there was a significant positive influence of high-​quality CSR policies on the quality of CSR implementation, and also a significant positive influence of high-​quality implementation on CSR impacts. According to them, even having a weak CSR policy is better than having no policy at all in achieving some degree of CSR implantation, and having a weak CSR programme is better than having no such programme in terms of social impacts. In this regard, Korean firms have embarked on a journey on the right track, again being the fast learner they are renowned for in the areas of environmental, social and governance performance.

Concluding Remarks Looking down from satellites, the night landscape of the Korean Peninsula exhibits a remarkable contrast: a sea of lights in the south versus almost complete darkness in the north (Henderson et al., 2012). It is a good example of what economists call ‘a natural experiment,’ where two coun­ tries with similar initial conditions show very different paths of economic development depending on the economic system each side has adopted. Korea’s combination of a market economy and a democratic political system has served its people well, accomplishing remarkable economic growth and nurturing world-​renowned corporations. Compared to our neighbour in the north, there is no doubt that a market economy brings economic prosperity better than a planned economy. At the same time, Korea is grappling with the usual problems that other market economies are facing: income and asset inequality, sky-​high real estate prices in the Seoul Metropolitan area, increasing intergenerational wealth transfer, and the resulting lack of economic mobility. Most notably, the country is contending with the world’s lowest fertility rate, which threatens the sustainability of the nation itself. In the face of these challenges, Korean firms feel the urgency of addressing them in the tradition of CSR. From their experience, they understand that successful corporations need a healthy society (Porter & Kramer, 2006). Korea’s continued prosperity, at least partially, will depend on innovative ideas in the realm of CSR and social entrepreneurship that can help alleviate, if not solve, these significant social challenges. 362

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Notes 1 The exchange rate of USD 1 =​KRW 1000 is applied for numbers in Tables 16.1 and 16.2. 2 Even though Korea Stock Exchange opened in 1960s, it really took off in the 1980s, and therefore the gap between Yuhan’s stock and the KOSPI index would only be bigger if the time frame for KOSPI annual return calculation goes back to the 1960s. 3 Yuhan happens to be a joint venture partner of Johnson & Johnson. They share ownership of Johnson and Johnson’s Korean subsidiary, Janssen Korea.

References Ahn, S.-​Y., & Park, D.-​J. (2018). Corporate social responsibility and corporate longevity: The mediating role of social capital and moral legitimacy in Korea. Journal of Business Ethics, 150(1): 117–​134. Bach, D., & Allen, D. (2010). What every CEO needs to know about nonmarket strategy. MIT Sloan Management Review, 51(3): 40–​48. Bank of Korea. (2022). National Account. www.index.go.kr/​potal/​main/​EachDt​lPag​eDet​ail.do?idx​_​cd=​ 2736, accessed on Nov. 24, 2022. Barney, J. (2018). Why resource-​based theory’s model of profit appropriation must incorporate a stakeholder perspective. Strategic Management Journal, 39: 3305–​3325. Baron, D. (2012). Business and Its Environment, 7th edition. Pearson. Bebchuk, L. A., & Tallarita, R. (2020). The illusory promise of stakeholder governance. Cornell Law Review, 106: 91–​178. Donaldson, T. & Preston, L. (1995). The stakeholder theory of the corporation: Concepts, evidence, and implications. Academy of Management Review, 20(1): 65–​91. Dorobantu, S., Kaul, A., & Zelner, B. (2017). Nonmarket strategy research through the lens of new institutional economics: An integrative review and future directions. Strategic Management Journal, 38: 114–​140. Edmans, A. (2020). Grow the Pie: How Great Companies Deliver Both Purpose and Profit. Cambridge University Press. Enuma. (2022). Who We Are. https://​enuma.com/​abou​tUs, accessed on Nov. 24, 2022. Freeman, E., Harrison, J., Wick, A., Parmar, B., & de Colle, S. (2010). Stakeholder Theory: The State of the Art. Cambridge University Press. Graafland, J., & Smid, H. (2019). Decoupling among CSR policies, programs, and impacts: An empirical study. Business & Society, 58(2): 231–​267. Henderson, V., Storeygard, A. & Weil, D. (2012) Measuring economic growth from outer space. American Economic Review, 102(2): 994–​1028. Hofstede, G. (2022) Hofstede Insights. www.hofst​ede-​insig​hts.com/​fi/​prod​uct/​comp​are-​countr​ies/​, accessed on Oct. 31, 2022. Jones, T. (1995). Instrumental stakeholder theory: A synthesis of ethics and economics. Academy of Management Review, 20(2): 404–​437. Jones, T., Harrison, J., & Felps, W. (2018). How applying instrumental stakeholder theory can provide sustainable competitive advantage. Academy of Management Review, 43(3): 371–​391. Jung, K.-​H. (1996). Social responsibility and social contribution activities of Korean firms. Yonsei Business Review, 33(2): 233–​251. Jung, S-​M., & Shin, J. (2022). Social performance incentives in mission-​driven firms. Management Science, 68(10): 7065–​7791. Kang, C., Germann, F., & Grewal, R. (2016). Washing away your sins? Corporate social responsibility, corporate social irresponsibility, and firm performance, Journal of Marketing, 80: 59–​79. Kim, D., & Choi, M.-​I. (2013). A comparison of young publics’ evaluations of corporate social responsibility practices of multinational corporations in the United States and South Korea. Journal of Business Ethics, 113(1): 105–​118. Kim, Y., & Kim, T. (2022, Aug. 22). Samsung, Gates Foundation Develop New Concept Toilet, UPI News Korea, www.upi.com/​Top_​N​ews/​World-​News/​2022/​08/​29/​Sams​ung-​Gates-​Fou​ndat​ion-​conc​ept-​toi​let/​ 683166​1798​989/​ Kotchen, M. J. & Moon, J. J. (2012). Corporate social responsibility for irresponsibility? B.E. Journal of Economic Analysis and Policy, 12(1): Article 55. Krüger, P. (2015) Corporate goodness and shareholder wealth. Journal of Financial Economics, 115: 304–​329.

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17 THE SHIFTING STARTUP ECOSYSTEM IN KOREA Government’s efforts to revolutionize education and finance Dohyeon Kim and Woo Jin Lee

Introduction Emerging from the destruction of the Korean War, South Korea has undergone a remarkable transformation over the past half-​century, achieving significant industrialization and impressive economic growth. Nonetheless, this journey has been characterized by a distinct growth model focused on catching up with advanced economies through cost-​cutting and high-​efficiency production strategies. Regrettably, this formerly effective strategy has now reached a point of diminishing returns, as South Korea’s industries have ascended to the pinnacle of the global economy. South Korea is at a unique crossroads, transitioning from its former position as a follower in the global economic landscape to that of a leader with a significant mission: to effect a paradigm shift from a ‘managerial’ to an ‘entrepreneurial’ economy. This transformation has become essential as the nation navigates the challenges associated with sustaining its economic prowess and fostering continued growth. Consequently, the Korean government has taken proactive measures to facilitate the transition to an entrepreneurial economy. These measures include implementing various policies to nurture and strengthen the entrepreneurial ecosystem. In this context, startups and developing a vibrant startup ecosystem take centre stage. In South Korea’s context, the significance of startups and the development of a robust startup ecosystem cannot be overstated. This strategic shift departs from the traditional dominance of large corporations, such as Samsung and Hyundai. Fostering entrepreneurship and innovation is now essential to South Korea’s economic adaptability and global competitiveness over the long term. Korean startup’s unwavering dedication to cutting-​edge technology is fundamental to their success. Graduates from prestigious educational institutions are eager to leverage their expertise in fields such as artificial intelligence, biotechnology, and sustainable energy solutions. These startups are essential to advancing various industries, propelling South Korea to the vanguard of innovation. In conjunction with the innate talent and innovation, government initiatives have bolstered the startup ecosystem. Tax incentives, easier access to funding, and streamlined regulatory processes have created an environment conducive to entrepreneurial endeavours. Not only have these measures attracted local talent, but they have also beckoned global entrepreneurs and DOI: 10.4324/9781003180920-21

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investors who recognize the enormous potential inherent in South Korea’s burgeoning startup landscape. In addition to being economic growth drivers, Korean startups are also at the forefront of addressing pressing societal issues. They actively participate in crucial areas, such as healthcare innovation, environmental sustainability and digital infrastructure fortification. In this way, they transform the Korean business landscape into a dynamic and adaptive entity. Throughout the past decade, the Korean government has utilized the media to widely promote venture policy and celebrate the success of entrepreneurs. Engaging in such promotional activities through the media has played an important role in assisting numerous Koreans to understand entrepreneurship and develop a favourable attitude toward it. In Korea, a vibrant media landscape devoted to venture and startup coverage thrives. In this field, prominent publications include Venture Square, Platum, EO (Entrepreneurship & Opportunity), Startup Weekly, and Outstanding. In addition, there is the Asan Entrepreneurship Review (AER), which primarily uses in-​depth teaching case studies to disseminate valuable insights into the methods by which Korean startups achieve growth. According to Steve Blank, the media plays an important role in increasing the market visibility of startups and the participation of potential users, thereby assisting early-​stage startups in boosting the confidence of potential investors. From this perspective, these various media outlets have contributed significantly to the spread of entrepreneurship in Korea. However, Isenberg (2010) argued that the media can play an important role in changing people’s attitudes, but in some cultures, it is frowned upon to boast about the success of entrepreneurs in public. Nonetheless, disseminating startup success stories through the media can expedite the incorporation of startups into social discourse and increase positive perceptions of the opportunities offered by entrepreneurship. Therefore, the media’s role in promoting and encouraging entrepreneurship in Korea cannot be understated. As a tool for highlighting startup success stories, promoting entrepreneurship education, and fostering a culture of innovation, the media has played a significant role in fostering an environment where entrepreneurial spirit can thrive in Korea. In summation, the emergence of startups and the vibrant startup ecosystem in South Korea are crucial factors in determining the nation’s future prosperity. They serve as catalysts for innovation, drivers of economic growth and enhancers of Korea’s global competitiveness. As South Korea continues to nurture and empower its startups, it positions itself for a prosperous and sustainable entrepreneurial future, capable of overcoming the challenges of the twenty-​first-​century global economy.

A. Organizational and administrative initiatives from government institutions From the ruins of the Korean War, South Korea has achieved successful industrialization and remarkable economic growth over the past 50 years; however, the Korean growth model, which aims to catch up with developed countries through cost reduction and high-​efficiency production, is no longer applicable, as it has been incorporated into the pinnacle of world-​class industries. Now, Korean industries face a new challenge, as the country becomes a leader with a mandate to realize the paradigm shift from a ‘managerial’ to an ‘entrepreneurial’ economy. Accordingly, the Korean government has taken the initiative to implement various policies to establish an entrepreneurial ecosystem in preparation for the transition to an entrepreneurial economy.

Korean government creating an entrepreneurial economy The speed of Korea’s economic expansion is one of its most important defining characteristics. It took the Korean economy only 30 years to reach a per capita gross domestic product (GDP) of 366

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US $10,000. In contrast, the UK and the US took over 200 years, and Japan took nearly 100 years to reach the same amount. In addition, Korea, which had been reduced to ruins by the Japanese colonial period and the Korean War, achieved world-​class growth in various industries, such as semiconductors and automobiles, in a short period. In his 1996 book, ‘The Next Society,’ renowned futurist Peter Drucker explains that Korea has accomplished in 40 years what the UK, the US, Germany, and France achieved in 100–​250 years. He added that entrepreneurship was the driving force behind Korea’s rapid economic growth. The government’s role is another significant factor explaining Korea’s economic growth. In the past, ‘chaebol’ conglomerates were the primary drivers of Korea’s economic growth, which was effectively achieved through timely government support and pressure. Using the fast-​follower strategy, which increases market share by imitating the technological prowess of global firms, Korean corporations have grown rapidly but steadily; the Korean economy has also grown alongside the ‘chaebols.’ At the time, these corporations’ strategic activities were referred to as ‘creative imitation,’ and the Korean economic system simultaneously developed a need for ‘innovation’ (Kim, 1997). Meanwhile, the pressure to reform the economic structure to accommodate the era of the Fourth Industrial Revolution, which requires creativity and convergence, is beginning to grow. In the pursuit of transforming Korea into an entrepreneurial economic structure, the government has formulated policies, such as creating a virtuous cycle of an entrepreneurial ecosystem for job creation and startup growth from the 1990s to the present (Baek, 2012). In regions with frequent market failures and lengthy payback periods, it is difficult for the private sector to achieve growth on its own. In this regard, a country’s startup activities and venture capital (VC) investment are closely related to the system and policies that establish the rules for economic activity, as well as the National Assembly and government that create and implement them. Furthermore, it has close ties to the National Assembly, which formulates such policies, and the government that carries them out. Regarding Isenberg’s (2010) entrepreneurship ecosystem model and the OECD framework, government policy or regulation is a significant factor in the entrepreneurship ecosystem. Korea’s entrepreneurial ecosystem was necessary for the government’s initiative in these perspectives. Since 2010, numerous studies have examined the framework of the entrepreneurial ecosystem within entrepreneurship research. The first objective was to identify and analyze the causes and effects of the factors that strengthen national entrepreneurship (Spiegel, 2016). Government initiatives are required until the entrepreneurial field is sustainable and competitive. In response, the Korean government enacted the Small and Medium Business Startup Support Act in 1986; since then, it has promoted policies to support startups and established an ecosystem for entrepreneurship. Since the 2000 International Monetary Fund crisis, Korea has worked particularly hard to strengthen the structure of its ecosystem for entrepreneurship. The evolution and transformation of entrepreneurship in South Korea can be described by identifying three distinct waves (Kim, 2022). The first wave of entrepreneurial activities (1960s to 1980s) in South Korea was a seminal period characterized by the emergence of entrepreneurship, with a focus on large conglomerates. This era paved the groundwork for the nation’s industrial development, as major chaebols such as Samsung and Hyundai embarked on ventures spanning key national sectors including construction, food and apparel. Their endeavours frequently relied on international assistance and collaborative partnerships to launch and sustain business operations. The second wave of entrepreneurship (post-​IMF crisis through the early 2000s, preceding the venture bubble) primarily centred around small and medium-​sized enterprises (SMEs). During this phase, concerted efforts were made to nurture SMEs and ventures, implementing policies aimed at cultivating these entities. Concurrently, the global expansion of venture capitalism influenced 367

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South Korea, resulting in a shift away from traditional manufacturing and hardware-​centric industries. Instead, the government actively pursued industrialization policies that emphasized the production of semiconductors and electronics. The third wave of entrepreneurship (early 2010s to the present) emerged, with the proliferation of smartphone platforms playing a significant role. This era marked the beginning of ‘entrepreneurship for the masses,’ which was accelerated by the South Korean government’s pursuit of its ‘Creative Economy.’ national agenda. In tandem, the establishment of ‘Startup Nation’ emerged as a significant policy objective. Collectively, these initiatives sparked the inception of a second venture boom in South Korea.

Rapid growth and evaluation of the Korean entrepreneurship ecosystem During the first period of the venture boom in Korea,1 60,000 firms were established annually; however, this number remained stagnant until the late 2000s. Meanwhile, since 2012, the number of these new firms has reached an all-​time high, and by 2020, more than 120,000 firms will be established annually. The number of unicorns increased from 2 in 2016 to 13 in 2020. Additionally, VC investment can demonstrate the expansion of the Korean entrepreneurial ecosystem. During the first period of the venture boom, the amount of new venture investment was approximately 2 trillion South Korean Won (KRW); thereafter, it stagnated until it reached 720 billion KRW in 2008; however, it rose sharply in 2016 and reached an annual high, then exceeded 4 trillion KRW in 2019. Global indicators that evaluate the ecosystem for entrepreneurship show the success of the Korean government. Startup Genome, a global evaluation agency, ranked Seoul’s entrepreneurship ecosystem as twenty-​first among over 270 cities in 2020, sixteenth in 2021 and tenth in 2022. Every year, Startup Genome releases the ‘Global Startup Ecosystem Report’ for approximately 280 cities in over 100 countries. Additionally, the social reputation of entrepreneurs has improved considerably. Annually, the Global Entrepreneurship Monitor survey publishes a report analyzing the current state of entrepreneurship in countries around the world and conducting an international comparative analysis of entrepreneurship. According to their results, the number of successful entrepreneurs has increased from 60.2 points in 2016 (ranked 46th globally) to 86.0 points in 2019 (7th globally). Furthermore, the rate of hesitating to start a business out of fear of failure improved dramatically from 31.5% in 2016 (ranked 22nd worldwide) to 7.1% in 2019 (ranked first worldwide). The Korea Institute of Startup and Entrepreneurship Development analyzed keywords from news articles published by 50 major media companies registered with the Korea Press Foundation over the past three decades and reported on the evolution of the societal perspective on entrepreneurship. As a result of analyzing keywords related to entrepreneurship from 1991 to 2020, the number of related news articles increased by more than 100 times, from 810 in 1991 to 101,937 in 2019. In the past decade, startup and unicorn-​related news has increased more than 20 times (Ministry of SMEs and Startups, 2021, p. 19). In the entrepreneurial ecosystem of the government initiative, the Korea unicorns have now reached 18, and the employment size of ventures and startups has exceeded that of the four largest conglomerates. These results represent the external growth facilitated by Korea’s venture policy. In Korea, reform of startup regulation, increased venture investment volume, and the diversification of government venture support policies were all implemented during the past decade. Nevertheless, from the perspective of the entrepreneurial ecosystem, a culture in which entrepreneurs are respected, 368

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entrepreneurial talent is developed through creative education, and the local entrepreneurial ecosystem is developed and deployed must emerge in the future.

Pursuing sustainable growth through changes in the role of the government The Korean government has established an entrepreneurial economic structure to create a framework for establishing an entrepreneurial ecosystem and expanding internationally; however, the government’s role must change for the subsequent growth stage. However, without the active participation of the private sector and the market, creating a virtuous cycle within the entrepreneurial ecosystem will be impossible. In 2019, the government will install a regulatory sandbox to solve the regulatory problems faced by startups; however, regulations for startups remain a problem. Recent emphasis has been placed on the shift to a negative regulatory system. In addition, it is necessary to foster an environment in which entrepreneurs can actively engage in business activities and a culture that respects entrepreneurs to facilitate the discovery of various Korean entrepreneurs as role models. Many successful Korean businesspeople hide from the public eye to avoid being monitored or subjected to cynical assessments of their wealth. After achieving great success, most Korean startup founders do not remain CEOs; thus, they avoid becoming proudly successful role models. They assume the position of board member or chairperson (Hsieh, 2022). Zoltan Acs, a professor at George Mason University in the United States and the founder of GEDI, stated, ‘Korean society’s support for entrepreneurs to create new businesses and create wealth is stingy. In this status quo, it will be difficult for Korean companies to show further development’ (Kim, 2022).

B. Broadening reform and support from finance policymakers Entrepreneurial finance in Korea One of the most important indicators of a startup ecosystem is the amount of VC investment. People in the Korean startup ecosystem have long bemoaned the difficulty of raising capital for Korean startups. The complaints result in better-​than-​anticipated outcomes: Korea has one of the highest VC investments per GDP among OECD countries. Statistics from the first half of 2022 indicate that VC investment continues to increase despite fears of a recession, at least in Korea. The Korea Venture Investment Corporation (KVIC) has played a critical role in the growth of VC investment in Korea. As the general partner, it manages the Korean public Fund of Funds as a public investment corporation. KVIC typically invests in VC funds that adhere to KVIC’s proposed investment policies. Therefore, VC firms typically submit investment proposals to KVIC that meet the policy objectives of each account. Since KVIC has been the largest and most important limited partner for Korean VC funds, the fee structure, fund duration, and reporting system that KVIC requests have become de facto industry standards. In recent years, Korea Growth Investment Corp. (often referred to as K-​growth), another public fund, has emerged as a major source of capital for VC funds. Most Korean VC funds rely heavily on public funds such as KVIC and K-​growth. MSS (2022) reports that public sector funding for VC funds is approximately 30%; however, public limited partners, including KDB and public pension funds, account for approximately 40%–​50% of venture funds. This high proportion can be interpreted as a sign of policy success and a lack of private funds in the Korean VC market; 369

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Figure 17.1 Venture capital investment in Korea, 2017–​2022 (in 100million KRW). Source: Korea Venture Capital Association, Ministry of SMEs and Startups (MSS).

however, in recent years, private investors have joined the market in greater numbers, in part as a result of the government’s efforts to encourage private investment since 2010. Despite Korea’s relatively high volume of VC investments, many startups rely on debt financing. Figure 17.3 shows that the Korean government is actively implementing direct loans to SMEs. The government’s primary policy is to fund startups and SMEs through loan guarantee programmes. According to the OECD (2018), Korea provides the second-​largest loan guarantee (as a percentage of GDP) for SMEs, behind Japan; however, this does not include credit guarantees from local governments. Given this, Korea is likely the most generous country regarding SME loan guarantees. There are three major loan guarantee institutions in Korea: the Korea Credit Guarantee Fund (KODIT), the Korea Technology Finance Corporation (KOTEC), and the Local Credit Guarantee Foundation (LCGF). KODIT provides banks with loan guarantees for SMEs with high credit scores but inadequate collateral. KOTEC guarantees loans for innovative SMEs. LCGFs are local government agencies that perform the same function as KODIT for local SMBs; however, the lines between the three agencies are blurring. Access and availability to loans are high in Korea due to the abundant supply of credit guarantees for SMEs (including startups); however, it is also criticized as a source of financial market distortion, weakening equity financing markets and increasing banks’ moral hazards. KODIT and KOTEC have recently begun investing in startups they guarantee in response to these criticisms.

New sources of money The lack of informal investors has been a problem on the Korean startup financial market for a long time; however, angel investment has increased rapidly in recent years and will surpass 600 billion KRW in 2021. The introduction of income deductions is the primary driver of angel investment, which now comprises 10%–​20% of VC investment. The deduction was initially 10% in 2010 but increased to 50% in 2014. Now, small angel investment is 100% deducted from income, and institutional devices, such as the formation of angel investment matching funds (2011), the professional angel investor registration system (2014), and the creation of secondary angel funds (2016), have all played a role.

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Source: KVIC (2022).

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Figure 17.2 Structure of KFoF.

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Figure 17.3 Direct government debt financing, 2015–​2021 (in 100million KRW). Source: KOSTAT, 2022.

Figure 17.4 Loan guarantee, 2010–​2021 (in trillion KRW). Source: KODIT, KOTEC, LCGFs.

Currently, angel investments are typically made through personal investment associations (PIA), which are typically managed by an experienced angel investor using funds from less experienced angel investors. PIA is considered to have significantly lowered the threshold for angel investment, as investors are no longer required to find and manage investees while enjoying the associated tax effects. It has grown so rapidly that the government has recently enacted several regulations to limit its quantitative expansion and improve its quality management.

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Figure 17.5 Trend of angel investment in Korea, 2015–​2021 (in 100million KRW). Source: Korea Business Angels Association, 2022.

Figure 17.6 Growth of PIA, 2009–​2021 (in million KRW). Source: Korea Business Angels Association.

It is not certain that angel investment will continue to expand. During the information technology bubble of the year 2000, angel investment funds grew rapidly in response to the market boom and vanished quickly when the market crashed, indicating that they were susceptible to market fluctuations. Concerns about an economic recession necessitate additional efforts to achieve more stable growth without a precipitous decline in angel investment funds. In addition, the angel

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investment exit mechanism should be bolstered to adjust the too-​low cap on income deductions. Angel investors are more susceptible to exit than VCs. Their contractual rights are weak, and their knowledge of commercial sales is limited. Therefore, the design of exit assistances, such as increased secondary funds and connections with BDC, must be examined. In addition to angel investments, the crowdfunding market is expanding; however, crowdfunding in Korea is not accurately measured. In 2021, Wadiz, the largest crowdfunding website, surpassed 200 billion KRW. Consequently, the market size may be between 300 billion and 400 billion KRW; however, the scale of securities-​type crowdfunding in Korea is relatively modest. Crowdfunding is somewhat biased toward compensation type and is not considered a source of startup funding perhaps in part due to excessive regulations, which provide a research opportunity. Recent trends in Korea’s startup funding market are most notable for the growth of Corporate VC. Since the middle of the 1990s, the Fair Trade Act’s various regulations have made it difficult for conglomerates to advance new businesses, despite their role in Korea’s remarkable economic growth. In addition, the ‘principle of separation of financial and industrial capital’ prohibits entry into the financial industry on a fundamental level. This regulatory system was established due to numerous historical instances in which corporate difficulties nearly led to the demise of the financial industry, as Korean chaebols permitted their financial institutions to make excessive loans to affiliated enterprises. The problem is that Corporate VC, one of the best tools for innovative new businesses and embracing market innovation, was also bound by this regulatory system. Since the middle of the 2000s, large Korean companies have acknowledged the importance of open innovation and corporate venturing despite these restrictions. They have participated in the startup ecosystem in several ways, including investment in VC funds, collaboration with accelerators, and the acquisition of a few startups. In 2020, regulations on Corporate VC were relaxed. Now, a chaebol can establish its VC through its holding company. LG, GS, Hyosung, and CJ are merely a handful of examples. This

Figure 17.7 Scale of securities-​type crowdfunding, 2016–​2021 (in 100million KRW). Source: Korea Securities Depository (2022).

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does not simply imply that the total volume of VC investment funds will increase. As numerous studies demonstrate, it may contribute to the revitalization of chaebols. Mergers and acquisitions (M&A) between large companies and new businesses are also expected to increase. Interestingly, this pattern is also exhibited by unicorns, as well as by chaebols and other old and large companies. Yanolja, Zigbang, Smartstudy, and Musinsa have recently established corporate VC firms with close ties to their primary businesses.

Remaining problems Minimal exit options are one of the greatest challenges facing Korea’s startup ecosystem. Through initial public offerings (IPO) and M&A, entrepreneurs and investors (e.g., venture capitalists) can ‘harvest’ the value created and be rewarded for taking risks. This evidence suggests that the startup exit market has been inadequately developed. According to the Korea Venture Capital Association (2017), in 2016 only 3.1% of VC-​backed startups resigned via acquisition. Another source, for instance, paints a much more pessimistic picture by stating that ‘virtually all Korean startups’ exit through mergers and acquisitions (McKinsey & Company 2015, 14). The rate in the United States is 86% higher. As a result, startups in the Korean startup ecosystem rely heavily on IPO rather than M&A, although the IPO itself faces an accessibility issue. In addition, virtual asset-​related regulations are still unclear, so the investment market for virtual assets is inactive. Korea represents only 1%–​2% of the global market for virtual assets. Many startups attempt to raise capital through ICOs or IEOs or liquidate projects through security token offerings (STOs). Consequently, the number of crypto VCs is growing; however, Korea is largely oblivious to this trend, and a regulatory framework for the new virtual asset market should be established. The regulations should include measures to maintain market order, such as the ICO/​ IEO process (including pre-​ICO sales), disclosures, white papers and appropriate sanctions. In addition, the existing capital market legislation must be reorganized to reflect the characteristics of the digital/​virtual asset market to ensure the sustainable growth of the domestic STO market. During the presidential election campaign, the new government promised to revise its policies in this process, but the results are pending.

C. Entrepreneurship education initiatives in the Korean context We are seeing broadening entrepreneurship reform and support from finance policymakers and growth in entrepreneurial initiatives from government institutions. However, the normative focus of Korean education on creativity and entrepreneurship is also changing. For almost two decades, much energy, attention and resources have gone into changing the mindsets of students and learners in Korea in terms of fostering their abilities to contemplate how they think, how they can be creative, and how they can reframe their paths to success. The following describes how these efforts have contributed to revolutionary outcomes and how they have limited impact unless additional sociocultural and demographic forces are overcome.

Korean pedagogy toward creativity and innovation Historically, Korean education has been characterized by a rigid administrative hierarchy, rote memorization, and robust behavioural control (McGuire, 2007; Yoon & Rönnlund, 2021). More recently, stimulated by curriculum revisions in 2009 and additional educational policy reform (such as emphasizing institutional accountability for the results of national level achievement tests 375

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during the K–​12 years), it has been acknowledged in Korea that creativity, in particular, must be introduced early on to foster ‘national capacity building’ and maintain Korea’s economic competitiveness (Macpherson & Hyung, 2015; Jang, 2020). The paradigm shift entailed the transition from uniformity to diversity and flexibility; from imitation to creativity; from obedience to participation; from centralization to decentralization; from control to autonomy and accountability… to an education in reasoning, critical thinking ability, and creativity, as well as responsible moral judgment, aesthetic sensitivity, and character-​building’ (Kim, 2010). The educational reform in Korea has indirectly impacted the startup ecosystem in three ways. First, there has been a shift in policy toward curriculum development for creativity and entrepreneurship. According to previous PISA and TIMSS reports, Korean students excel in reading literacy, mathematics and science but score below average in drive and motivation, particularly concerning their openness to problem-​solving, self-​perceived locus of control and intrinsic motivation (Kwon et al., 2017). As a policy response, the 2015 national curriculum reform (NCR) in Korea aimed to educate ‘creative, integrated and competent’ individuals (Ministry of Education, 2014, p. 1). The NCR committee and the Ministry of Education asserted that excessive rote mem­ orization, test-​driven assessment and test-​driven learning had resulted in unacceptable stress among South Korean students. In addition to causing stress, the reliance on content-​heavy curricula has been blamed for ignoring or downplaying the importance of encouraging students to develop problem-​solving and critical thinking skills (Jang, 2020). The 2015 NCR has also cited Steve Jobs’s successful entrepreneurship as an example of a meaningful mindset that Korean social and educational policy could foster to combat future labour market uncertainty and change (Jang, 2022). Second, proposals to alter the structure of student assessment, including the role of the all-​ important annual national exam (suneung) in Korea, are currently under discussion at the national level (Shepherd, 2021; Ro, 2018). According to a centuries-​old tradition rooted in Confucianism, where ‘man is perfectible through education and that only the most learned should govern the country and society’ (Kwon et al., 2017, p. 61), people were chosen for prestigious government positions based on highly competitive regional and national examinations. Exam preparation was the primary focus of formal education. Between 1954 and the early 1990s, the Korean government made numerous modifications to the national testing policy in an effort to increase the overall academic quality of university applicants. In 1993, the current version of the CSAT was established, and the government permitted post-​secondary institutions to determine their own admissions requirements using the minimum score from students’ high school transcripts (Korea Institute for Curriculum and Evaluation, 2005). Over the past decade, the test’s names of sections, range of question content, number of test items, length of exam, and scoring systems have been revised. Some argue that such shifts indicate an unstable policy that is sensitive to public opinion (Oh et al., 2008).2 Third, we are beginning to see growing recognition of the value of failure to human development. The Korean culture has a strong stigma associated with business failure (Schüler, 2022). Decades ago, Korea developed a success-​obsessed culture in which failure was deemed invalid and worthless. While a global movement for sharing stories of failure has been growing for nearly a decade, extensive institutional reform in Korea has only begun in the past few years. In 2018, a small community in Mokpo called ‘Don’t Worry Village’ (괜찮아마을) was established with government funding; the village encourages young South Koreans to embrace past failures and 376

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experiment with new ideas (Moon, 2020). In September 2018 and September 2019, the Korean government sponsored and coordinated an annual ‘Fail Expo’ (실패박람회) to educate individuals to become more accepting of self-​challenge and failure (Lee, 2019). In Korea, a movement is forming to redefine the meaning, value and culture of failure. The design and experience of the events above and initiatives can always benefit from a different understanding of the phenomena surrounding failure anxiety.

Outcomes from Korean university entrepreneurship efforts An explosion in various metrics reflecting entrepreneurship education has been correlated with all this broad reform, and the number of Korean public schools creating entrepreneurship programmes has grown significantly. Government officials and educators in Korea have been busy developing student programmes. Since 2002, the Korean Ministry of SMEs and Startups has implemented ‘Youth BizCool,’ a programme that promotes entrepreneurship and mock startup education, as well as student startup clubs (Korea Institute of Startup and Entrepreneurship Development, KISED, 2020). 487 elementary and secondary schools have participated in Youth BizCool as of the year 2020. Thousands of additional schools now offer additional hands-​on startup education. As a result of early achievements, the KISED was established as a business incubator foundation in 2008, offering a broader range of entrepreneurship education and training programmes. Since then, middle and high schools across Korea have developed their own entrepreneurship education, with some producing dozens of project-​based outcomes annually. At the postgraduate level, the number of courses, degrees, departments and graduate schools emphasizing entrepreneurship has increased dramatically in Korea. In 2022, Kookmin University, Keimyung University, Korea University (‘창업경영대학원’), Sungkyunkwan University, Yonsei University, and Pusan National University have offered Master’s degrees in entrepreneurship through their graduate schools specializing in entrepreneurship. The government subsidizes the salaries of lecturers, educational support expenses, educational development expenses, networking activities and general operating costs through KISED, which provides annual funding of US$600,000. Furthermore, KISED has also developed university entrepreneurship centres, subsidizing three university centres with US$500,000 per year (KISED, 2020).

Roadblocks challenging future success from entrepreneurship education reform At least five roadblocks challenge the continued upward progress in outcomes related to entrepreneurship education reform. First, national statistics suggest that startup education outcomes are typically insufficiently affected to justify educational expenditures. The entrepreneurial output at the highest level of education, the university, is still unimpressive. According to the Korea Herald (2017) Business Daily (미주헤럴드경제), government support for university entrepreneurship programmes in Korea is approximately 209 billion KRW, while startup revenue during the same period has only been 102 billion KRW (Heo, 2020). While revenue is not the only indicator of success in entrepreneurship education and can logically lag behind programming expenditures, many leaders in the entrepreneurship ecosystem continue to bemoan the inability of output to justify educational expenditures. Students must be inspired to pursue greater financial or societal impact, especially since innovative startups with rapid growth remain the most respected indicator. Second, Korea is also experiencing dramatic demographic changes, particularly a decline in birth rates. This is not a good sign for the future of post-​graduate education in Korea. In 2021, 162 four-​year university enrollment quotas were unmet in the United States. According to the 377

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Korean Council of University Education, enrollment periods were extended to fill 26,129 vacancies, which is 2.7 times higher than the previous year and the highest number of vacancies in the past 16 years. More than 90% of these vacancies were at universities outside the greater Seoul metropolitan area, with acceptance rates falling significantly compared to the previous year (Seo, 2021). This low number is attributed to Korea’s declining birth rate. Suppose it continues to fall at the same rate that social commentators expect. In that case, entrepreneurship education may need to expand beyond the university, targeting older population segments raised on more traditional Korean pedagogical systems and lacking direct experience with creative thought. In other words, the effectiveness of entrepreneurship training programmes would likely decline. Third, entrepreneurship still needs to be de-​stigmatized among students and their parents. Parents could be encouraged to be more accepting and encouraging of their children’s efforts to develop their creativity and explore entrepreneurship during their school years. In April 2017, the ‘Presidential Youth Committee’ (대통령직속 청년위원회) surveyed 423 young entrepreneurs regarding their parents’ attitudes toward their startup; 28.1% of these parents opposed their children creating startups. These parents’ top two objections to startups were that they wanted their children to find stable employment (37.8%) and that startup success was difficult (22.7%) (Korea Herald, 2017). Many of today’s parents insist that their children pursue stable, regular employ­ ment, primarily with large, stable chaebols such as Samsung, LG or Lotte. In addition, some may subscribe to the cultural history in which academics and government officials have a higher status than businesspeople (“양천제”). Government and educational programmes should welcome parents into the learning process and educate them on the importance of entrepreneurial thinking in today’s large corporations and startups. When parents drop off their children at a school or entrepreneurial training programme, schools and programmes should not always reject them. Even if they are not allowed to physically join their children during educational sessions, parents could still be offered some information access in today’s YouTube and Zoom world. Existing medium-​sized enterprises could participate more in entrepreneurship education. Large corporations such as Samsung have steadily developed entrepreneurship and innovation programmes for the benefit of students, but chaebols cannot support all the promising student ventures on their own. Although Samsung now has an in-​house startup incubation programme for its employees (Song, 2020) and Hyundai and SK have recently partnered to foster mobility and connected-​car startups, many students still believe that Korean chaebols are hostile to student entrepreneurship efforts and startup success. The government should consider incorporating successful medium-​sized businesses into a national research and development network that can be leveraged to form partnerships with new student startups. Those successful medium-​sized businesses would ideally be vetted and certified regarding their resources, commitment, reputation and collegiality toward students. The Korean government could recruit and collaborate with financial institutions to play a larger role in developing innovative financing programmes that encourage partnerships between successful medium-​sized enterprises and award-​winning student startups. In contrast to popularizing and glorifying successful entrepreneurship in countries such as the United States, Korea’s culture of successful entrepreneurship is largely hidden (Guthey et  al., 2009). Failure is stigmatized in Korea, but successful entrepreneurs are also susceptible to stigma and privacy violations. The Korean government must find a way to give successful business owners celebrity status and make them stronger role models. People may be cynical because wealthy and successful entrepreneurs are not forthcoming about their achievements. Numerous successful Korean entrepreneurs conceal themselves from the public, preventing the monitoring and scrutiny of their actions. After achieving tremendous success, most Korean startup founders do not

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typically remain CEOs; rather, they frequently transition into the background as board directors or chairs. Ultimately, there is minimal opportunity to ‘cheerlead’ the successful entrepreneurs in Korean culture, as we see in American culture. The absence of these role models deprives students of one source of inspiration. Dramatic angel-​investment TV shows like the USA’s ‘Shark Tank’ or the UK’s ‘Dragon’s Den’ would be a good start.

Concluding remarks The Korean government has contributed significantly to the development of the startup ecosystem through its organizational and administrative initiatives. From the 1990s to the present, the government has created a virtuous cycle of an entrepreneurial ecosystem for job creation and the growth of startups. Government initiatives have been necessary for the Korean entrepreneurship ecosystem to develop and thrive. After experiencing the International Monetary Fund crisis in 2000, the government has enacted policies to support startups and established an ecosystem for entrepreneurship. The Korean entrepreneurship ecosystem has experienced three waves of entrepreneurial activity in each period based on government initiatives. The first wave of entrepreneurship occurred between 1960 and 1980, when large corporations became the focus. The second wave of entrepreneurship occurred between 1990 and the turn of the millennium, when Korea’s policies to encourage venture businesses took shape. The third wave of entrepreneurship began in 2010 and is still ongoing; during this wave, the creative economy and the second venture boom emerged. The rapid expansion of the Korean entrepreneurial ecosystem is evidenced by the increasing number of new companies founded each year, the soaring number of unicorns, and the sharp increase in VC investment. Global indicators that evaluate the entrepreneurial ecosystem also show the Korean government’s achievements well. Startup Genome, a global evaluation agency, ranked Seoul’s entrepreneurial ecosystem twenty-​first among over 270 cities in 2020, sixteenth in 2021, and tenth in 2022. In Korea, entrepreneurs’ social standing has also improved significantly. Annually, the Global Entrepreneurship Monitor survey publishes a report analyzing the current state of entrepreneurship in countries around the world and conducting an international comparative analysis of entrepreneurship. According to their results, the number of successful entrepreneurs has increased from 60.2 points in 2016 (ranked 46th globally) to 86.0 points in 2019 (ranked first) (7th globally). In addition, the rate of reluctance to start a business out of fear of failure improved significantly from 31.5% in 2016 (second worldwide) to 7.1% in 2019 (first worldwide). The Korean government and media must continue to support the growth and culture of Korean startups in the future. The government can accomplish this by fostering an entrepreneurial culture, cultivating entrepreneurial talent through innovative education, and developing and deploying the local entrepreneurial ecosystem. The media can play a role by promoting enterprise policy and recognizing the achievements of entrepreneurs. The Korean government has contributed significantly and positively to the growth of the startup ecosystem. The government’s initiatives have helped foster a thriving environment for startups. Consequently, the Korean startup ecosystem is now among the most innovative and dynamic in the world.

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Notes 1 The venture boom was formed in earnest in the late 1990s and early 2000s and refers to a social trend or phenomenon in which domestic technology startups and venture investment have rapidly increased along with global trends. The first venture boom was led by the government and centred on dot-​com companies. Recently, the second boom in ventures led by the market and the private sector has been rising. [Source: Korea Policy Briefing (www.korea.kr).] 2 Despite these changes, according to policymakers, many students still struggle to find their career path, even after entering university, because they often choose their major based on the CSAT score that satisfies its admission requirement rather than choosing the major they would enjoy studying. Thus, some scholars suggest abolishing the CSAT exam altogether, allowing individual universities to select their students with complete independence, which includes various aspects of student achievement other than academic achievement.

References Guthey, E., Clark, T., & Jackson, B. 2009. Demystifying Business Celebrity. London, UK: Routledge. Heo, J. Y. 2020, November 6. Start-​up is “In Seoul Sweeping”?…30% of start-​ups and start-​ups are “nearly half” of universities in Seoul and the Seoul metropolitan area. UNN News. http://​news.unn.net/​news/​arti​ cleV​iew.html?idxno=​236​699 Hsieh, C. 2022, October 10. How can Korea’s social culture evolve to support its entrepreneurship education? Mail Business Newspaper. Retrieved from www.mk.co.kr/​news/​busin​ess/​9717​623 Isenberg, D. J. 2010. How to start an entrepreneurial revolution. Harvard Business Review, 88(6): 40–​50. Jang, S. B. 2020. Legitimising the need for another curriculum reform and policy framing: The case of South Korea. Journal of Curriculum Studies, 52(2): 247–​269. Jang, S. B. 2022. Creating entrepreneurs: National curriculum change in South Korea. Curriculum Inquiry, 52(1): 51–​74. Kim, L. 1997. Imitation to Innovation: The Dynamics of Korea’s Technological Learning. Harvard Business School Press. Kim, S. 2022. Diagnosis of the Korean startup ecosystem and direction of support. Science and Technology Policy Institute (STEPI), 298: 1–​43. Kim, Y.-​H. 2010. Education and economic growth in Korea. In C. J. Lee, S.-​Y. Kim, & D. Adams (Eds.), Sixty Years of Korean Education: 326–​359. Seoul, Korea: Seoul National University Press. KISED. 2020, n.d. Smart KISED: Tech-​based startup support institute for Smart Korea. Internal Brochure. www.kised.or.kr/​gall​eryD​ownl​oad.es?bid=​0005&list​_​no=​653&seq=​1 Korea Herald. 2017. Youth start-​up: Overcoming parental opposition is the challenge. http://​biz.her​aldc​orp. com/​view.php?ud=​201​7050​1000​482 Korea Institute for Curriculum and Evaluation. 2005. The History of Ten Years of CSAT. Seoul: Korea Institute for Curriculum and Evaluation. Korea National Statistical Office. 2022. Direct debt from MSS (100 mil. KRW), 2015–​2021. Korea National Statistical Office. Retrieved from www.kos​tat.go.kr Korea Venture Capital Association. (2017). 2017 Annual Report: Venture Capital Investment Trends and Analysis in South Korea. Korea Venture Capital Association. Retrieved from www.kvca.or.kr Korea Venture Investment Corp. (KVIC). 2022. Korea Fund of Funds structure and management. Korea Venture Investment Corp. Retrieved from www.k-​vic.co.kr Kwon, S. K., Lee, M., & Shin, D. 2017. Educational assessment in the Republic of Korea: Lights and shadows of high-​stake exam-​based education system. Assessment in Education: Principles, Policy & Practice, 24(1): 60–​77. Lee, M. H. 2019, May 15. Grand opening of “Fail Expo” held in Chuncheon. Korea Bizwire. Macpherson, R., & Sun Hyung, P. 2015. Educational administration as national capacity building: Towards South Korea becoming a creative learning state. Asia Pacific Education Review, 16(1): 13–​26. McGuire, J. M. 2007. Why has the critical thinking movement not come to Korea? Asia Pacific Education Review, 8: 224–​232. McKinsey & Company. (2015). The Future of Korean Startups: Accelerating Growth Through Mergers and Acquisitions. McKinsey & Company.

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The Shifting Startup Ecosystem in Korea Ministry of Education. 2014. 2015 Humanities and Science Integrated Curriculum General Guidelines. http://​ncic.go.kr/​ Ministry of SMEs and Startups. 2021. Analysis of Changes in the Korean Entrepreneurial Ecosystem. www. mss.go.kr/​ Moon, G. 2020, January 9. The young Koreans pushing back on a culture of endurance. BBC.com MSS. 2022. Policy Brief. www.korea.kr Oh, S. H., Ahn, B. Y., Park, J. S., Kim, Y. P., Kim, A. J., Park, K. K., … Nam, K. K. 2008. Report on CSAT. Department of Administrative Reform. Seoul: Bobmunsa. Ro, J. 2018. Capable teachers, mundane teaching: Korean novice teachers’ experience in a high-​performing education system. Pedagogy, Culture & Society, 26(4): 1–​17. Schüler, D. 2022. Institutional change and entrepreneurship as occupational choice—​The case of South Korea. Journal of International Entrepreneurship, 21(2): 1–​55. Seo, E. 2021, May 12. Provincial universities face impending doom with low enrollment. Korea Joongang https://​kor​eajo​onga​ngda​ily.joins.com/​2021/​05/​12/​natio​nal/​social​Affa​irs/​uni​vers​ity-​seoul-​metro​ Daily. poli​tan-​area-​birth-​rate/​202105​1220​3500​467 Shepherd, S. 2021, November 27. Reform “Suneung”. The Korea Times. Song, S. H., 2020, May 18. Conglomerates foster growth of internal startup units. The Investor. https://​m.thei​ nves​tor.co.kr/​view.php?ud=​202​0051​8000​798&np=​1 Spigel, B., 2016. Developing and governing entrepreneurial ecosystems: The structure of entrepreneurial support programs in Edinburgh, Scotland. International Journal of Innovation and Regional Development, 7(2): 141–​160. Wadiz. 2021 Wadiz funding trend 2021. Wadiz. Retrieved from www.wadiz.kr/​web/​wpage/​wad​iztr​end/​2021 Yoon, J., & Rönnlund, M. 2021. Control and agency in student–​teacher relations: A cross-​cultural perspective on Finnish and Korean comprehensive schools. Education Inquiry, 12(1): 54–​72.

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18 MANAGING GENDER AND DIVERSITY IN KOREAN BUSINESSES Hyosun Kim, Seung-​Yoon Rhee, Sanghyeon Sung and Hyesun Kang

Introduction South Korea’s (henceforth Korea’s) meteoric economic ascent since the 1960s transformed it from one of the world’s most impoverished nations to a developed powerhouse. However, the journey of Korean women towards equality and empowerment has not mirrored this upward trajectory. The annual Gender Gap Index by the United Nations evaluates countries on gender disparities across multiple dimensions such as economic participation, education, health and political representation. In 2021, Korea was positioned 102nd out of 145 countries, with an especially concerning rank of 123rd in economic participation (Crotti, Pal, Ratcheva, & Zahidi, 2021). This underscores the pressing challenges facing gender disparity in Korea, despite numerous attempts to amend the situation. In this chapter, we delve into the significant governmental initiatives taken to enhance gender diversity in the workforce and assess their ramifications. We begin by exploring gender diversity practices within Korean corporate management around the year 2000. Then our focus will shift to policy measures championed by the government to empower and support women in the workplace. Moreover, we evaluate how work–​life balance (WLB) mechanisms have been instrumental in fostering a more gender-​inclusive environment within Korean firms, as evidenced by national data. Finally, we conclude with an analysis of the evolving circumstances that might shape the gender diversity landscape in Korea’s corporate sector in the foreseeable future.

K-​Management in need of change The Korean professional landscape has historically been dominated by men, with a managerial structure that prioritizes hierarchical order and values seniority (Park, 2014; Sung, 2022). This workforce dynamic can be traced back to the 1960s, during which the government’s growth strategy was primarily geared towards maximizing efficiency. The strategic direction at the time was significantly shaped by Confucian patriarchal values, the emphasis on communal norms, and a military-​oriented ethos, culminating in a management style that was distinctly male-​centric. In this era, the prevailing perception was that women predominantly served as the primary caregivers at home with domestic obligations. Even those women who entered the professional 382

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domain were often relegated to supporting roles (Lee & Rowley, 2009). As a result, the prevailing organizational culture of the time, coupled with societal norms, reinforced gender inequalities, and limited the full participation of women in the workforce (Yukongdi & Rowley, 2008). The seniority-​based human resource management (HRM) system, which was essentially male-​centred, demanded unwavering commitment to the organization and necessitated long working hours. This environment posed substantial hurdles for women striving to climb the professional ladder1. While the male-​centric approach to HR management may have been effective for achieving rapid quantitative growth through catch-​up strategies exploiting the ample labour supply in the early years of industrial transformation, it has proven inadequate in responding to changing social conditions, thus potentially undermining the competitive advantage of Korean corporations. The “Miracle of the Han River,” which propelled Korea’s economic growth, was overshadowed by long working hours and a skewed allocation of gender roles in society. The seniority-​based personnel practices incited intraorganizational competition among contemporaneous recruits, with an ‘up or out’ system that made it difficult for mid-​career employees to find their place in the organization (Park, 2014). Moreover, despite high education levels among women, social advancement for women in Korea remains among the lowest in the OECD (Yang, 2021), a striking indicator of inefficiencies in HRM. In an era where creativity defines competitiveness, the insular nature of HR management could be a critical weakness of the so-​called K-​management. Fortunately, the subsequent years have heralded positive societal and economic shifts, encompassing democratic transitions, economic crises leading to corporate restructuring, and an enhanced adaptability in corporate strategies. These changes have been accompanied by a growing demand for women’s participation in the workforce, the integration of foreign labour, and advancements in rights for the disabled. Consequently, by the 2000s, the imperative to manage diversity has become a new paradigm for Korean companies, with gender diversity emerging as a prominent challenge in the corporate sector, and work–​family balance becoming instrumental in its achievement.

Government initiatives for improving gender diversity in Korea Promoting gender diversity through legal reforms2 With the enactment of the Equal Employment Act in 1988, Korea took a step towards establishing gender equality in the workplace (Sung, 2022). The fruition of this act was facilitated by the civil movement for democratization that took place throughout the 1970s and 1980s, culminating in the adoption of a new Constitution and the reinstatement of democratic government in 1987. That the new Constitution included an article declaring the principle of equal rights was not unprecedented. However, the actualization of the Equal Employment Opportunity Act in 1988 marked a significant stride forward by prohibiting discrimination based on gender, religion, or social status in workplaces. Subsequently, in 1996, the Framework Act on Women’s Development was implemented to promote gender equality based on individual dignity, protect motherhood, eliminate gender-​centric discrimination, and enhance women’s capabilities to cultivate healthy families and contribute to national and societal advancement. This legislation underwent revisions and was superseded by the Framework Act on Gender Equality, which was operationalized in 2005. The purpose of this Act is to achieve gender equality in diverse spheres including politics, economy, society and culture by outlining the responsibilities of the State and local governments to implement the principle of gender equality (Article 1). The underlying principle of this Act is to shape a society wherein 383

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both genders enjoy equivalent responsibilities and rights. It seeks to address and eliminate gender-​ based biases and practices, grounded in human dignity and respect for human rights, by promoting equal participation and fair treatment in all areas. Even with the enactment of the Equal Employment Act, the employment rate for Korean women lingered at a mere 49.8% as of 2004, plummeting even further for those with academic credentials. In response to this, an affirmative action policy was introduced in 2006 to tackle the economic dormancy prevalent among female college graduates, which was seen as a significant loss in terms of national HRM. The policy identifies firms with a disproportionate female workforce or scant representation of women in managerial roles, deeming them potentially discriminatory, and calls for measures to identify and address the factors impeding women’s employment. The policy applies to national and local public institutions, publicly funded enterprises, corporations with more than 300 employees, and private companies with more than 500 employees. Business owners falling short of maintaining a female workforce and managerial staff constituting 70% of the industry average are mandated to provide reports on the formulation of proactive employment enhancement strategies for women, along with their performance and complementary plans. The system evaluates the optimal utilization of both male and female manpower, gender wage gaps, objectives related to women’s employment, and the improvement plans for comprehensive HRM and work–​ family balance. Workplaces that continue to fail to meet the set benchmarks are disclosed through official publications and run the risk of being excluded from government procurement projects. Since the enactment of progressive employment improvement measures, there has been a notable ascent in the ratio of female managers within the purview of the legislation, rising from 10.2% in 2006 to 21.3% in 2021. Concurrently, the overall percentage of women in the workforce has increased from 30.77% in 2006 to 37.78% in 2021 (Korea Labor and Employment Service, 2021; https://​nosa.or.kr). The trajectory also marks a gradual surge in women’s engagement in economic activities, ascending from 48.4% in 1995 to 50.5% in 2006, and further to 53.6% in 2023 (Statistics Office, 2023). Similarly, the statistics reveal that the diversity in Korean corporations along other dimensions has increased as well. The employment rate of the elderly exhibited a modest increase from 66.0% in 2015 to 67.5% in 2017, and finally, 66.9% in 2023, post the introduction of the retirement age 60-​year-​old system (Statistics Korea, 2023). In the case of compulsory employment concerning the disabled, it has risen by around 1% point from 1.86% and 1.97% in the private and government sectors respectively in 2009, to 3.06% and 2.86% in the corresponding sectors in 2023 (Statistics Korea, 2023). The number of foreign employees also experienced a subtle increment, moving from 0.791 million in 2012 to 0.855 million in 2023 (Statistics Korea, 2023). However, even amidst the rising influx of women workers in Korea, the age-​employment curve for women shows an M-​shape, illustrating periodic withdrawals from the workforce, typically during phases of pregnancy and child-​rearing (Lee & Rowley, 2009). Prolonged working hours, male-​centric workplace cultures, and entrenched societal stereotypes regarding gender roles have contributed to forcing women to take career breaks, frequently leading to irreversible exits from the workforce. Conversely, a fraction of women chooses to prioritize their careers over marriage and childbirth, inadvertently contributing to the nation’s declining birth rates. To address these multifaceted issues, fostering work–​family compatibility has become a national agenda reflected in various supplementary measures and initiatives undertaken by the government.

Promoting family-​friendly culture in business and society A principal endeavour has been the advocacy for a family-​friendly culture in business and society. In 2007, amendments were made to the Equal Employment Opportunity Act to include work–​family 384

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balance as an additional objective. The title of the Act was altered to the Equal Employment Opportunity and Work-​Family Balance Assistance Act in the same year (Chin, Lee, Lee, Son, & Sung, 2012). The Act on the Promotion of Creation of Family-​Friendly Social Environment also came into existence in 2007. These legislative Acts aimed at improving the quality of life for both genders by supporting the work–​family balance for employees, intending to ensure equal employment opportunities. These enactments have subsequently facilitated the implementation of various systems for maternal well-​being and support, policies to promote women’s employment, and mechanisms that advocate for WLB. Korea’s dwindling birth rate has been the driving concern behind the implementation of these family-​friendly policies. Since the 1960s, Korea actively enforced birth control policies, successfully reducing the average number of offspring per household from six in the 1950s to two by the 1980s. Nevertheless, the relaxation of birth control policies by the government in the 1980s did not arrest the declining birth rate, reaching below 1.5 children per household in the early 1990s. This worrisome trajectory led to the introduction of diverse policies designed to stimulate childbirth. However, the birth rate further declined to 1.09 children per household in 2005, causing heightened concern among policymakers (Yun et al., 2022). This escalated concern compelled a shift in focus towards the transformation of Korean society to be more family friendly. This led to the initiation of a ‘certification of family-​friendly companies’ system, aimed at acknowledging companies and public institutions that exemplify family-​friendly values and practices (Jang & Ahn, 2021). Acquiring the certification necessitates companies’ compliance with 13 legal requirements related to family-​friendly practices. These include implementing a 40-​hour work week, providing reduced work hours during pregnancy, protecting the rights of pregnant employees, and offering sexual harassment prevention training, among other measures. The assessing committee evaluates firms across five domains: top management leadership, childcare support, flexible work arrangements, readiness and maintenance of family-​friendly culture, and employee satisfaction with family-​friendly management. Firms demonstrating unique family-​friendly policies, such as dependent care programmes, affirmative action programmes for leadership roles, reduced work hour jobs, and the availing of annual leaves, may receive additional points. Once certified, firms retain the title for 3 years, with the possibility of a one-​time renewal for an additional 2 years.3 Certified firms are also granted a family-​friendly certification emblem, permissible for use in their promotional activities. The ideology of a family-​friendly work culture was initially alien to the broader Korean corporate sector. Predominantly, companies expected extended work hours from their workforce, and family-​friendly policies were not warmly received. Some firms viewed such policies as naive and idealistic government intervention, potentially jeopardizing their competitive standing in the business landscape. To incentivize firms to participate in the certification program, the Ministry of Gender Equality and Family (MOGE) offered complimentary training sessions on cultivating family-​friendly work environments. These sessions covered topics such as managing work–​family conflict for individual employees and facilitating strategies for middle managers and HR staff to promote work–​family balance among their teams. Participating in these training sessions earned companies additional points during their applications for the family-​friendly certification. While some companies have initiated substantial modifications after attaining the family-​ friendly certification, the acknowledgement is sometimes considered an initial step and may fall short of the anticipation of employees, fostering cynicism (Kim & Faerman, 2013). To counteract this, firms are offered the opportunity to undergo family-​friendly consulting post-​certification, with priority given to small-​ and medium-​sized firms. Additionally, MOGE has facilitated the 385

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establishment of a Family Friendly Forum for certified companies, allowing HR managers to exchange best practices for executing family-​friendly policies and to discuss their impact on firm performance. As a result of these efforts, there has been a substantial increase in the number of certified family-​friendly firms, escalating from 14 in 2008 to 4918 in 2021. The widespread adoption of the certification programme is also attributed to the collaborative efforts between MOGE and other governmental agencies, providing added incentives to certified firms such as extra points for government-​supported funding. Various financial incentives, such as reduced interest rate schemes and waivers on credit saving commissions, are also extended to certified firms. Additional benefits include priority processing for CEOs of certified companies during airport procedures. In summary, MOGE’s family-​friendly certification programme has had a pivotal influence on the business culture in Korea. Analyzing the Family Friendly Index between certified and non-​ certified firms reveals that the efforts orchestrated by MOGE over the last decade have effectively contributed to a progressive transition towards more family-​friendly working environments in Korea (Rhee & Lee, 2021). However, there exist criticisms regarding the certification programme’s focus on HR policies while neglecting workplace practices that can more significantly address work–​family conflicts and enhance workplace effectiveness. In addressing these aspects, the Ministry of Employment and Labor (MOEL) has played a substantial role in instigating changes in workplace practices.

Promoting flexible work arrangements and workplace innovations Despite the growing acknowledgement in Korea regarding the importance of promoting flexible work arrangements and related progressive practices, advancements in this domain have been gradual, requiring concerted and meticulous efforts of employees, corporate managers, and government agencies, all participating at different phases of the process. While MOGE’s objectives were centred around changing the prevailing cultural norms, MOEL focused on modifying workplace practices with the aim of enhancing the representation of women and older workforce members. Researchers have long advocated for flexible work arrangements as effective solutions to reintegrate disadvantaged workers into the workplace (Allen, 2001; Kwon & Kwon, 2013; Park, Kim, Koo & Park, 2007; Thompson, Beauvais, & Lyness, 1999). Moreover, it has been emphasized that any changes from the adoption of flexible work arrangement should contribute to both employee well-​being and organizational productivity to ensure their sustainability (Bailyn, 1993; Bailyn, Fletcher & Kolb, 1997; Meyerson & Kolb, 2000; Kim, Bailyn, & Kolb, 2016). This approach, known as the Dual Agenda (Bailyn, 1993), has been embraced by MOEL in several initiatives to implement flexible work arrangements in organizational settings.4 In 2008, MOEL initially focused its efforts on the health sector, a domain with a substantial female workforce. Many hospitals were experiencing high turnover rates, especially among nurses. This was partly due to the then on-​going accreditation of university hospitals, which offered higher salaries and more prestigious career opportunities. Consequently, nurses from medium-​sized hospitals were enticed by the promising prospects at these universities, triggering a ripple effect. With the influx of new nurses failing to meet the burgeoning demand, governmental strategies were devised to reintegrate nurses who had previously exited the profession due to work-​family conflicts. The case of Cheongju Hospital played a crucial role in the early phases of cultivating flexible work policies. MOEL subsidized a pilot study aimed at the formulation of reduced work-​hour positions in two regional hospitals (Kang et al., 2014). By applying the dual agenda perspective, 386

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researchers proposed a ‘collaborative interactive action research’ methodology. This approach enabled consultants and staff to collaboratively investigate the issue of ‘time’ implicated in work–​ family conflicts. Cheongju Hospital earnestly incorporated this strategy, with four departments participating in the pilot study, including hospital wards, medical examination centres, general administrative offices, and general affairs departments overseeing sanitation workers. Through the study, Kang and the participants learned that each department encountered unique time-​related challenges necessitating tailored solutions. These included designated night shifts for wards, reduced work schedules for medical centres, flexible work arrangements for administrative offices, and increased wages for sanitation workers to accommodate reduced working hours. An unexpected finding from the pilot project was the realization that wage adjustments could act as a hindrance to the implementation of flexible work arrangements. For example, nurses at Cheongju Hospital initially embraced the idea of instituting nursing jobs constrained to daylight hours. However, the subsequent disclosure of the anticipated wage levels for such arrangements led participants to realize that the compensation would undergo substantial reductions, thereby diminishing the appeal of condensed-​hour jobs (Kang et al., 2014; Kim, Bailyn, & Kolb, 2016). Similarly, sanitation workers at the hospital, struggling to balance work and family due to long working hours, found their limited compensations a deterrent to opting for reduced-​hour jobs. Upon the mutual recognition of the various work–​family conflict situations through the project, there was a unanimous consensus that, should funding be secured, prioritizing work–​family support for sanitation workers should take precedence. This prompted MOEL to advocate for fiscal allowances from the budget department to both corporations and their workforce when facilitating various models of flexible arrangements, thereby compensating for the fiscal deficits accrued from reduced working hours. Although financial subsidies for flexible working arrangements are beneficial, they alone are not enough to catalyze the widespread adoption of transformed workplace practice in organizations. As articulated by Bailyn (1993, 2017), it is crucial that such changes serve the dual purpose of enhan­­ cing employee well-​being and firm productivity. Achieving this dual agenda often requires systematic change management, including diagnosing workplace culture and practices and experimenting with new work arrangements. Following the dual agenda approach proposed by Rapoport et al. (2002), Kang and the design team set the goal of concurrently achieving work–​family balance and departmental efficacy. They experimented with various working hour arrangements and meticulously evaluated work–​family balance performance and departmental performance metrics such as work–​family satisfaction and client waiting time. The experimental outcomes provided evidence to participants, hospital management, and policymakers that carefully designed flexible work arrangements can, indeed, enhance productivity while mitigating work–​family conflicts for employees. The successful implementation of reduced work-​hour jobs catalyzed the amendment of the regulation on the reduction of working hours during childcare periods into the Equal Employment Opportunity and Work-​Family Balance Assistance Act in 2012. This established the groundwork for the introduction of reduced working hours across various other sectors. Consequently, workers who qualify for childcare leave can also now opt for reduced working hours, ranging from a minimum of 15 hours to a maximum of 30 hours weekly. With the inauguration of President Park Geun-​Hye in 2013, the initiative to cut down working hours gained priority within MOEL’s list of agenda. The taskforce team spearheading this initiative evolved into an independent department named the Employment Culture Improvement Department. This department presided over the orchestration of workplace innovation consulting programmes and cultural transformation initiatives. Additionally, the government engaged in synergistic efforts with large corporations 387

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to create reduced-​hour jobs specifically for women workers who needed extra time for childcare. However, this initiative drew criticism for creating low-​quality jobs for women. Addressing this critique, the focus of the programme realigned, emphasizing the improvement of conditions for those already in employment rather than creating ‘new’ occupational prospects. Frontec stands as a prime example of successful utilization of government support policies (Kim & Ahn, 2018). Upon the appointment of Mr. Min Suhong as Frontec’s CEO in 2013, he faced numerous challenges. Much like other small-​sized manufacturing firms in Korea, Frontec experienced difficulties in attracting young individuals to blue-​collar jobs. In response, they installed an automatic assembly line facility to hire foreign workers instead. However, recurrent malfunctions plagued the system, and the limited Korean language proficiency of the foreign employees hindered swift problem-​solving. Seeking counsel from the Ministry of Small and Medium-​sized Firms, Frontec was advised to abandon the automatic manufacturing facilities and concentrate on total quality improvement with workers who could communicate with management. Frontec then discovered that the Career Development Center for Women (Saeil Center) was recruiting and training women seeking to re-​enter the workforce after a career break. Given the difficulties in male recruitment, Frontec pivoted towards employing women. To facilitate women employees’ care responsibilities, significant modifications were made including restructuring workstations, reducing work hours, and providing transportation, amongst other adjustments to make the traditionally male-​dominated workplace more comfortable for women. The preliminary experiments on select workstations revealed heightened productivity under the new system, prompting the replacement of all foreign employees with women workers operating on reduced work hours. The multifaceted support from government not only provided financial aid but also enhanced Frontec’s workflow by accommodating the work–​family needs of women workers. It is worth noting that Frontec’s triumph was not solely due to government subsidies. Persistent efforts in refining work processes to accommodate employee needs and availing governmental assistance were equally crucial. Subsequent to initial adaptations, Frontec instituted training for women workers as operators and altered operational processes to make the job better suited for women workers. In essence, the escalating emphasis on workforce diversity can be attributed to changing social and economic outlooks and legal requirements. As companies navigate through the quest for adaptability and competitive edge, embracing diversity is not just a trend but a necessity, both within and outside organizations. The demand for effective diversity management has grown substantially. While the appreciation for diversity remains unacknowledged in certain corporate sectors, Frontec’s journey highlights the potential benefits and successes that come from intentional efforts to embrace and manage diversity.

Empirical assessment of efficacy of WLB measures in Korean workplaces Work–​family balance survey and WLB Index Given the intricate relationship between gender diversity in the Korean labour market and WLB among workers, this section provides an empirical assessment of WLB systems and their effectiveness in advancing gender diversity and related goals in Korean companies. This evaluation utilizes the annual Work–​Family Balance Surveys, initiated in 2011 by the Korean Women’s Development Institute at the behest of MOEL. By 2018, the survey was registered as official statistics by Statistics Korea under the Ministry of Economy and Finance, witnessing a participation leap from 1,000 to over 5,000 companies. Encompassing a range of industries, sizes, and 388

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regions, the survey stands as a comprehensive tool for assessing the overall WLB status of Korean companies. Companies exhibit variance in the implementation and utilization of maternity protection systems, family care programmes, and flexible working hours for their employees. Rhee et  al. (2020) formulated an index using national statistics from the 2018 and 2019 Work–​Family Balance Surveys, measuring the adequacy of WLB systems. The study examined three domains of WLB systems: life, work, and organizational support areas. Rhee et al. (2020) outlined a progression of a company’s WLB maturity through three phases: introduction and awareness of work–​life policies (Stage 1), employee engagement based on perceived utility (Stage 2), and significant changes in organizational diversity through active usage of the system (Stage 3). Building on this conceptualization, Rhee et al. (2020) proposed a WLB model that integrates input, throughput, and output components of WLB practices within organizations (see Figure 18.1). The input factor includes the extent of employees’ awareness of the availability of WLB systems, while the throughput factor represents the degree of utilization of the actual WLB system. The maturity of both WLB input and throughput factors is anticipated to result in WLB output, reflecting diversity outcomes within organizations. As shown in Figure 18.1, the constructed WLB

Figure 18.1 The framework of the WLB index. Source: Rhee et al, 2020, reproduced with permission.

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index is composed of the input and throughput components across the three domains and has demonstrated positive relationships with a variety of diversity outcomes (Rhee et al., 2020). In the following section, we draw on WLB index framework by Rhee et al. (2020) to examine the influence of WLB input and throughput on the gender diversity performance in organizations. Our central inquiry is to determine whether meaningful relationships exist between the availability of WLB arrangements (WLB input), the utilization of WLB practices (WLB throughput), and the gender diversity performance of a company.

The role of WLB availability and utilization on gender diversity performance The availability of WLB programmes (WLB input) was measured with three factors: (1) the extent to which employees could use maternity protection/​family childcare support and flexible work arrangements, (2) the existence of these implemented practices within the organization, and (3) the conditions under which these practices were made available. (1) Questions related to the degree of accessibility were measured on a 0 to 2 scale, ranging from ‘fully accessible to anyone in need of the specific program’ to ‘completely inaccessible.’ (2) Questions concerning the actual implementation of the practices were assigned a 1 for ‘yes’ and 0 for ‘no.’ (3) Questions regarding the conditions of availability within the organization were scored between 0 and the maximum score agreed upon through discussion. The utilization level of WLB practices (WLB throughput) was assessed by considering four key factors: (1) the utilization of maternity protection/​family childcare support practices and flexible work arrangements in the preceding year, (2) the average duration of usage, (3) the number of employees who utilized them in the preceding year, and (4) the degree to which the organization complied with working hour regulations. (1) The question regarding the existence of a usage record for the practices in the preceding year was assigned on a binary scale, awarding 1 for ‘yes’ and 0 for ‘no.’ (2) Questions concerning the average duration of usage were evaluated by allocating points according to the intervals established by legally prescribed timeframes. A duration below the legal threshold received 0 points, meeting the legal standard received 1 point, exceeding the legal standard by the first interval received 2 points, and exceeding by the second interval received 3 points. (3) The number of employees who utilized the practices in the preceding year was rated proportionally to the number of intended beneficiaries of the practices. (4) Questions pertaining to the organization’s compliance with working hour regulations were discussed and assigned a score ranging from 0 to the agreed-​upon maximum points. Gender diversity performance is defined as the demonstration of gender-​balanced HR and employment practices, including the gender composition of the workforce and various programmes designed to support women employees. Specifically, we examined gender diversity performance through the following five outcome measures: (1) Employment continuity through pregnancy and childbirth: The Work–​Family Balance survey asks HR managers about the pattern of employment status of women workers during 390

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(2)

(3) (4) (5)

pregnancy and childbirth, categorized as (i) quitting before childbirth; (ii) quitting after maternity leave; (iii) returning to work after maternity leave; and (iv) taking childcare leave after maternity leave. This data served to assess how easy it is to use maternity and childcare leave within organizations. A return to work or taking childcare leave after maternity leave was construed as indicative of superior gender diversity performance. Career management after childcare leave: HR managers were inquired about the pattern of employment status of women workers after childcare leave, categorized as (1) resuming full-​ time employment; (2) transitioning to reduced-​hour employment; (3) quitting after six months; (4) quitting within six months; and (5) quitting without returning. We created a dummy variable, designating the first two categories as 1, and the latter three as 0. Proportion of female employees: this ratio was determined by dividing the number of female employees by the total number of employees. Proportion of female executives: this involved dividing the number of female executives by the total number of executives. Gender equity in personnel decisions: HR mangers rated the degree of gender discrimination in personnel matters using six items, such as ‘Men are preferred in recruitment when qualifications are analogous between genders’, ‘Gender-​based pay disparities exist for equivalent ranks,’ and ‘Promotional prospects for women diminish as they ascend to elevated ranks.’ The average score of these six items was used.

Additionally, we categorized firms into three groups: female-​minority, female-​balanced, and female-​majority. These classifications were incorporated into our analysis, controlling for the effect of gender composition. The gender composition in a company’s management hierarchy can serve as a crucial indicator of its gender diversity performance. However, such configurations typically manifest over an extended timeframe, reflecting a tendency to adjust gender composition in reaction to legal and policy measures (Pereira, 2020; Stojmenovska, 2019). WLB-​supportive practices can positively shape gender composition by fostering a favourable environment for female employees. Aspects such as an annual rise in the proportion of female workers and managers, absence of adverse repercussions after using WLB programmes, and gender-​neutral HR practices can stimulate a sustained influx of women in organizations. Companies with a sound WLB system can attract female talent and contribute to a more gender-​ balanced workforce. Simultaneously, firms with a significant proportion of female workers may recognize the imperative of work–​family balance given its ramifications on both individual and organizational performance. Causality may run in either direction. In other words, while WLB practices may fluctuate annually, the gender composition of the entire workforce may remain relatively static in the short term. Therefore, we controlled for gender composition in our analysis using the gender balance variable and examined whether the availability and utilization levels of WLB provide additional insight into gender diversity performance. We controlled for firm size and industry as well. The results of the influence of WLB input and throughput on the gender diversity performance in organizations are shown in Table 18.1 and Table 18.2. Both the presence (WLB availability) and active use (WLB utilization) of WLB systems had significant positive relationships with several diversity performance indicators. Specifically, WLB availability had positive relationships with continued employment during pregnancy and after maternity leave (b =​ 0.344**), career management after childcare leave (b =​ 0.667**), and gender equality in personnel decisions (b =​ 0.185**). Similarly, WLB utilization positively influenced taking childcare leave after 391

Routledge Handbook of Korean Business and Management Table 18.1 Effect of WLB programme availability on gender diversity performance Employment continuity through pregnancy & childbirth WLB Availability Controls Size: ~29 Size: ~99 Size: ~299 Size: 300~ mining industry public utilities industry waste treatment industry construction industry wholesale and retail transportation industry lodging and restaurant industry finance and insurance industry publishing and information service industry real estate and rental industry technology service industry facility management industry education service industry health and social welfare industry arts and sports industry association and personal services industry balanced gender composition female majority composition F R² Adjusted R²

Career management after childcare leave

Proportion of female employees

Proportion of female executives

.013

.005

Gender equity in personnel decisions

.344**

.667**

.007 .101* .176** .199** -​.010 .032 .015 .015 .040 .004 .029 .089* .139**

.056** .057** .021 -​.012 -​.025 -​.056** -​.014 -​.026 -​.040* .004 -​.047* -​.033 .045*

-​.019 -​.054** -​.036 -​.016 -​.019 .029 -​.015 .015 .039+​ .012 .065** .034 .059**

.010 -​.063** -​.088** -​.091** -​.010 -​.017 .025 .023 .012 .008 .089** -​.015 -​.022

.004 -​.001 .003 .038 -​.077** .047* .018 -​.024 .071** .072** .129** .074** .037

.015 .089* .044 .091* .110* .077* .038

-​.002 .003 -​.005 -​.037+​ -​.016 -​.046** -​.012

.015 .060** .017 .125** .129** .063** .066**

.026 -​.003 .031 .086** .128** .000 .064**

.076** .082** .049* .137** .202** .090** .108**

.373** .649**

.102** .337**

.114** .187**

155.516** .704 .492

47.199** .446 .195

46.693** .417 .171

-​.017 -​.020

.001 .006

22.935** .216 .207

200.918** .690 .474

.185**

Notes: ** p< .001, * p< .01, +​p< .05. Source: Created by the authors.

childbirth (b =​ 0.322**), career progression after childcare leave (b =​ 0.205**), and gender equality (b =​0.190**) in personnel decisions. However, neither WLB availability nor WLB utilization had an immediate effect on increasing the ratio of female executives or the overall female employment rate from the previous year. Notably, gender composition variables such as having a balanced gender ratio or a female-​majority in companies significantly influenced the proportion of female employees and executives. This suggests that having a significant number of female employees is crucial for increasing gender representation within the firm, highlighting the importance of affirmative action policies. 392

Managing Gender and Diversity in Korean Businesses Table 18.2 Effect of WLB programme utilization on gender diversity performance

WLB Utilization Controls Size: ~29 Size: ~99 Size: ~299 Size: 300~ mining industry public utilities industry waste treatment industry construction industry wholesale and retail transportation industry lodging and restaurant industry finance and insurance industry publishing and information service industry real estate and rental industry technology service industry facility management industry education service industry health and social welfare industry arts and sports industry association and personal services industry balanced gender composition female majority composition F R² Adjusted R²

Employment continuity through pregnancy & childbirth

Career management after childcare leave

Proportion of female employees

Proportion of female executives

.322**

.205**

.030

.021 .129** .159** .172** .009 .052 .018 .008 .013 -​.002 .040 .070+​ .148**

.170** .219** .166** .122** -​.074** -​.004 -​.030 -​.114** -​.110** -​.036 -​.118** -​.061** .063**

-​.018 -​.054** -​.041* -​.024 -​.019 .025 -​.017 .014 .036 .010 .064** .030 .057**

.012 -​.059** -​.080** -​.080** -​.011 -​.012 .026 .022 .013 .008 .089** -​.012 -​.020

.031 .029 .004 .023 -​.089** .035 .009 -​.046* .041 .057** .110** .048* .032

.014 .085* .037 .105** .120* .100** .042

-​.060* .027 -​.025 -​.061** .011 -​.033 -​.027

.014 .057** .016 .123** .127** .062** .064**

.026 .000 .031 .088** .131** .001 .065**

.057* .073** .039 .120** .196** .084** .096**

-​.018 -​.032

.028 -​.012

.371** .648**

.104** .338**

.111** .176**

20.332** .443 .187

41.841** .429 .180

155.836** .704 .493

47.294** .447 .195

47.220** .419 .172

-​.022

Gender equity in personnel decisions .190**

Notes: ** p< .001, * p< .01, +​p< .05. Source: Created by the authors.

It is worth noting that although WLB availability and WLB utilization were found to aid in retaining female talent, they did not significantly shape the overall gender balance. This suggests that promoting WLB policies alone may not necessarily lead to an increase in gender representation within firms. Our observations resonate with past findings suggesting that relying exclusively on work–​ family balance initiatives might be insufficient in achieving gender equality in organizations (Wynn, 2019). Female workers who use WLB policies may still encounter prejudice or be viewed as less committed compared to their male counterparts. Real progress toward gender diversity 393

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may remain elusive unless organizations challenge deep-​seated norms about the ‘ideal worker assumption,’ regardless of robust WLB systems in place (Acker, 1990; Bailyn, 1993, 2017; Blair-​ Loy, 2009; Williams, 1999).

Remaining challenges and issues in gender and diversity management in Korea This chapter has reviewed the measures initiated by the Korean government, corporations, and the broader society to address the gender diversity challenges. Despite significant progress in workplace practices, the gender diversity landscape in Korea still faces an uphill battle. For example, Korea bears the distinction of having one of the most significant gender wage gaps among OECD countries (Yang, 2021). Moreover, only 3.3% of board positions in Korean listed companies are occupied by women (Yoon, 2021). Even as the initiation of gender diversity programmes is on the rise, their practical implementation and execution seem to have a long way to go. Official reports often paint an encouraging picture of gender diversity and sensitivity in Korea, but ground realities in workplaces do not necessarily echo this optimism. Beyond mere metrics such as the number of companies adopting gender diversity programmes or the percentage of employees utilizing them, a deeper analysis is imperative. This should probe the genuine depth of gender-​diverse and gender-​ sensitive shifts in workplace culture, exploring factors such as top and middle management’s support for gender diversity, women workers’ perceptions of gender equality, and other aspects that shed light on a true shift in organizational culture (Carboni, Parker, & Langowitz, 2022). Historically, Korea’s quest for gender diversity and equality has revolved around fostering a family-​friendly workplace culture and achieving WLB. With Korea registering the fifth-​highest average work hours among OECD nations and yet languish at 29th out of 38 in labour productivity (OECD, 2022), the government has rightly identified extended work hours as a barrier to women’s economic participation. Thus, their strategy has tilted towards indirect solutions such as legislating work-​hour reductions and endorsing family-​friendly WLB programmes. At this early stage, the government’s policy focus emphasizes the promotion and adoption of these programmes. However, it is imperative that future endeavours prioritize their effective implementation and execution. The horizon should eventually encompass more direct interventions advocating gender diversity and equality. A genuine shift in workplace culture and societal perceptions around gender diversity and equality necessitates a sustained effort. The Korean government, through legislation and policy efforts, has initiated momentum for change yielding immediate gains. The challenge now is to harness this initial thrust and steer Korea towards a deep-​seated appreciation and integration of gender diversity and equality principles. The remainder of this concluding section offers a glimpse into evolving circumstances bound to influence Korea’s gender diversity journey in the foreseeable future. The magnitude of their impact –​ whether propelling or impeding the progress achieved –​ remains to be seen. What is undeniable, though, is the need for relentless experimentation and innovation in workplaces, with the active involvement of leadership at all levels and the workforce at large.

MZ generation: generational difference in Korean society The surge of Millennial and Gen Z (MZ) workers in the labour market has sparked an interest in generational diversity in society. While much focus has been directed towards gender diversity, the importance of understanding and addressing generational differences in the workplace is 394

Managing Gender and Diversity in Korean Businesses

increasingly clear. Each generation brings a unique lens through which they view work, driven by their distinct values, preferences and experiences (Shin & Song, 2022). While attractive compen­ sation packages and robust benefits continue to influence MZ workers’ job choices, other factors are emerging as equally significant. They emphasize a balanced work–​life dynamic and prioritize time spent with their families. The enactment of laws such as those against workplace bullying, reflects the assertiveness of MZ workers in safeguarding their rights. They lean towards inclusive workplaces that promote horizontal relationships and foster collaboration over hierarchy. The geographical location of workplaces, proximity to cultural hubs, and access to quality education for their children also weigh heavily in their employment decisions. The current generational conflict evident in Korean society is rooted in deep-​seated value divergences across age groups (Kim & Kim, 2022). The MZ workforce, distinct from previous generations, values work environments that prioritize WLB, autonomy, competence and equality. Recognizing these evolving preferences, both the Korean government and companies have recalibrated their strategies and policies. This transformation is an ongoing process that demands continued investment and a future-​forward vision. Simultaneously, bridging the communication gap between generations is crucial. Initiatives such as workshops or dialogues that foster intergenerational interactions can serve as platforms for mutual understanding, helping harmonize varied perspectives and needs.

Gender issue and ESG management Gender diversity has emerged as an important issue from an environmental, social and governance (ESG) perspective. The global ESG movement has prompted the Korean government to scrutinize the underrepresentation of women in leadership roles in Korean companies. While the OECD average for women on corporate boards stands at 25.9%, Korean listed companies report a meager 3.3% (Yoon, 2021). A study by the Asian Corporate Governance Association places Korea 9th out of 12 Asian countries in terms of gender diversity on corporate boards (KICGS, 2021). As of 2020, among Korea’s top 200 listed companies, a scant 4.9% (or 65) of board members were women. Alarmingly, 73% of these companies had boards devoid of any female presence. These statistics highlight the urgent need for a strategic shift in Korean companies towards establishing gender balance at all levels, particularly at the upper echelon. To address the gender imbalance on corporate boards, a 2020 amendment to the Capital Market Act mandates that listed companies with total assets over 2 trillion won should diversify their board’s gender composition within 2 years, precluding single-​gender boards. Consequently, these firms have intensified efforts to onboard at least one female director, which is also in line with global ESG requirements. Organizations like the Korea Corporate Governance Service organization and the Korea Exchange are championing the inclusion of gender equality metrics in Korea’s ESG evaluation index. Such advancements signal a promising shift towards embracing gender diversity and equality in the corporate landscape.

Pandemic and gender diversity The ramifications of the COVID-​19 pandemic have been pervasive, with women encountering heightened challenges in employment spheres. In 2020, female temporary workers aged 50 to 54 faced the sharpest rise in unemployment, highlighting the vulnerabilities of non-​regular, temporary female workers who had intermittent career trajectories prior to the crisis (Yang, 2021). Furthermore, early pandemic statistics reveal that female temporary workers (1,048,000 in number) 395

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were twice as likely to take a leave of absence compared to their male counterparts (559,000) (Kim, Koo, et al., 2020). Given the cultural context where women predominantly manage care­ giving responsibilities, pandemic-​induced lockdowns and social distancing measures amplified their duties (Hwang et al., 2021). Such prolonged absences can derail women’s career trajectories, suggesting the pandemic’s lasting implications on female employment. To counteract the pandemic’s toll on gender diversity and equality, several strategic interventions can be proposed. The Korean government could incentivize small and medium-​sized enterprises –​ major employers of women workers –​to offer family care leave to their employees. Encouraging firms to endorse paternity leaves or family care leave for men could also redistribute family responsibilities. Tax incentives for small and medium-​sized enterprises that hire women returning post-​career breaks could further level the playing field. In the post-​pandemic era, companies are gravitating towards hybrid work models, encompassing both on-​site and remote operations. This transition necessitates vigilance against subtle biases that may emerge against those who work from home more frequently than others (The Economist, 2022). The proximity bias could inadvertently result in com­ panies favoring on-​site employees at the expense of those operating remotely. Unfortunately, such biases might disproportionately impact women or parents of young children who might be less visible at physical office spaces. As the pandemic has reconfigured workplace norms, a more nuanced examination of emerging challenges is warranted to ensure inclusivity and fairness in this new paradigm.

Gender conflict as a major issue in politics The deepening of gender divides into Korean political discourse is of growing concern. In the 2022 Presidential election, the alliance between candidate Yoon Seokyeol and Lee Junseok spotlighted the sentiment among young male voters who felt marginalized. This sentiment stems from multiple factors. First, even amidst the rising educational and professional contributions of women, traditional beliefs valuing men over women persist within Korean society. Second, the mandatory military service for Korean men, once rewarded with additional employment points, was ruled unconstitutional in 1999 citing its discriminatory nature against women and physically challenged. This sentiment resonated in the 2022 electoral promises with Yoon pledging to dismantle MOGE, thereby symbolically alienating women voters and deepening gender divide, especially among the younger generation (Kim & Lee, 2022). It remains to be seen whether President Yoon’s bid to dissolve MOGE will succeed, given the legislative majority’s dissent. Nonetheless, even if MOGE is dismantled, it does not necessarily imply that gender equality drives by the government will be abandoned altogether. As discussed in this chapter, MOEL has championed gender diversity through affirmative action programmes, and the Ministry of Health and Welfare has strategized to amend socio-​cultural conditions affecting gender diversity, particularly in light of Korea’s dwindling birth rates. Therefore, we anticipate a continuation of the highlighted policy initiatives. However, the widening divide around gender issues in the political arena indicates that ‘family-​friendly initiatives’ might have limited impact on advancing gender equality in Korea. Pioneering societal and organizational reforms often confront resistance from traditionally dominant stakeholders. The current gender divide underscores the urgency for constructive discourses rooted in the principles of justice and equal opportunities for every gender and marginalized groups.

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Conclusion The aim of this chapter was to shed light on the gender and diversity management practices in the Korean business landscape. While there are multiple facets to diversity management, gender diversity stands out as a prominent challenge in the Korean corporate sector. To address this issue, the Korean government has embarked on initiatives to promote women’s progression in society. Efforts to tackle challenges such as long working hours and the country’s declining birth rate have led to the introduction of a series of work–​family balance and WLB policies. The ultimate goal is to create a harmonious society where both genders find a supportive work environment and where a balanced work–​life dynamic is prioritized. As we move forward, it becomes crucial to build upon this momentum and cultivate a culture in Korean corporations and society that recognizes the value of gender diversity and equality.

Notes 1 Opportunities for job openings for foreigners were also restrictive until the 2000s, and the disabled com­ munity faced similar difficulties in securing employment opportunities. 2 Citations of laws and their articles in the chapter are based on the information available on the website of ‘Korean Law Information Center’ (www.law.go.kr/​LSW/​eng/​engM​ain.do). 3 Firms need to apply for the certificate again after 5 years. 4 MOEL coined the term ‘il-​ga-​yang-​deuk’ as a slogan to their policy initiatives, implying that their policy initiatives will benefit both work and family. This term is a twist from a Chinese proverb ‘il-​geo-​yang-​ deuk’ which originally means killing two birds with one stone.

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19 FOURTH INDUSTRIAL REVOLUTION AND EMPLOYMENT ISSUES IN SOUTH KOREA Hyuckseung Yang

Introduction In March 2016, in Seoul, Korea, a Go match between world-​class Go player Lee Sedol and artificial intelligence (AI) Go player AlphaGo captured the attention of the global community. The result of the match, which AlphaGo won by a score of 4:1, shocked the world because it showed that AI had surpassed human performance in Go, one of the most sophisticated brain games developed by humans. Now, we are in a period of great change in civilization in which we must seriously consider and prepare for how humankind will coexist with AI. In the words of Google CEO Sundar Pichai (2018), ‘AI is one of the most important things humanity is working on. It is more profound than, I dunno, electricity or fire.’ The World Economic Forum (WEF) made the Fourth Industrial Revolution the theme of its 2016 annual forum. Dr. Klaus Schwab, the founder of the WEF, argued that the Fourth Industrial Revolution had arrived (Schwab, 2017), classifying the new wave of big change as a new industrial revolution because the speed, scope and depth of the change were so profound. It is not within the scope of this chapter to discuss whether or not the changes currently underway can be defined as the Fourth Industrial Revolution. However, it is clear that discontinuous, profound changes are taking place that are different from those of the industrialization era of the twentieth century. The digital virtual world and the big data on it are expanding exponentially. AI, based on deep learning algorithms, is advancing dramatically. A newly formed meta-​verse world in which the physical world and the digital virtual world are integrated is becoming a major field for daily activities. These changes are opening up a new business world that is fundamentally different from the past when the physical world was the basic infrastructure of business. With digital platforms as anchors, there are virtually no restrictions on how people connect and communicate with each other, no matter where they are. In the physical world, it was impossible for more than 5 billion people to be connected without being constrained by time and space. By securing such hyper-​connectivity, information sharing is facilitated, and a new platform-​based business model based on it is rapidly expanding. 400

DOI: 10.4324/9781003180920-23

Fourth Industrial Revolution and Employment Issues in South Korea

As the digital virtual world becomes a new business infrastructure, not only the boundaries of traditional industries, but also the boundaries of traditional markets that were subject to geographical restrictions are collapsing. Non-​face-​to-​face, contactless platforms are eroding the way traditional white-​collar workers performed work in the office. The COVID-​19 pandemic is acting as a catalyst to accelerate the entry into a new world built on the integration of online and offline. During the COVID-​19 pandemic, most educational institutions, public organizations and private companies have overcome the forced disruption of traditional face-​to-​face work by working remotely through hyper-​connected platforms. The big wave of digital transformation equipped with AI is triggering changes in all areas of business, including business model, strategy, production process, value chain management, sales and marketing, employment, decision making, etc. However, this chapter will focus on employment and management issues. This chapter will focus on the following research questions: (1) How will the intelligent automation technologies that are driving the Fourth Industrial Revolution affect employment? (2) How will they affect the way organizations are managed in the Korean context? (3) What are the implications of these changes for government policy and organizational management?

Global and Domestic Context Employment and management issues in the era of the Fourth Industrial Revolution must be dealt with in the context of the changing characteristics of the business environment. Today’s business environment characterized by volatility, uncertainty, complexity and ambiguity (VUCA) is driven by the rapid speed of technological advancement. Business models, products and services are changing rapidly. Innovators armed with new technologies are quickly emerging, making it much more difficult to predict the direction and speed at which the competitive ecosystem of the market will change than in the past. The emergence of the VUCA environment requires companies to change their competitive strategies as a whole, as the ability to quickly respond to changes in the business environment and the ability to continuously innovate have become more important. Furthermore, Korean companies must address employment and management issues in the social, cultural, demographic and legal context of Korea. First of all, Korea is a country with high enthusiasm for education. As of 2021, the tertiary education completion rate of Korean adults (25–​64 years old) was 51%, higher than the OECD average of 41%, and that of young adults (25–​34 years old) was 69%, higher than the OECD average of 47% (OECD, 2022). The high level of education of Koreans suggests that they may have higher acceptance and adaptability to new technologies driving the Fourth Industrial Revolution than other countries. Additionally, one of the cultural characteristics of Koreans, known as the ‘quick-​quick’ culture, which refers to the tendency to get things done quickly, suggests that they would adapt quickly to the newly emerging business environment. On the other hand, the social safety net is weak especially compared to Northern European countries (e.g., Denmark) that have established a ‘flexibility and security model,’ which combines a comprehensive income safety net for the unemployed, retraining programmes, and counselling services run by the government, and an active labour market policy. The infrastructure for upskilling job changes of laid-​off workers and the social safety net for preserving their income are insufficient to support employment flexibility in Korea. Regarding the legal context, Korea’s Labor Standard Act (1953 and its amendments) restricts management’s discretion to discharge employees. With Clause 23, employers should not discharge 401

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employees, suspend them from office, cut their pay, or discipline them without just cause. This contrasts with the ‘employment-​at-​will’ principle. Business managers have repeatedly demanded that the Labor Standards Act be amended so that companies can freely discharge employees to secure employment flexibility, but labour unions and their federations have strongly opposed the amendment because of the weak social safety net and retraining programmes for the unemployed. Finally, the proportion of the elderly population in Korea is rapidly increasing. Korea’s population aged 65 and over is growing at the fastest rate among OECD member countries. As of 2021, the proportion of the population aged 65 and over in Korea is 16.56%, with an average annual growth rate of 4.1% between 2015 and 2020, which is much higher than the OECD average of around 2.7%.

The Possibility of Worsening Technological Unemployment Unlike the trajectories created by previous industrial revolutions, the labour substitution effect of intelligent automation technologies is anticipated to cause a problem of insufficient demand for knowledge workers. The problem of technological unemployment has historically been an issue that arises whenever an industrial revolution caused by technological leaps occurs. However, recent technological unemployment appears to have a different pattern from what was experienced in the past. Brynjolfsson & McAfee (2014) confirmed that the decoupling phenomenon between labour productivity and private employment has been worsening in the United States since 2000. According to their analysis, although labour productivity increased, private employment also showed a pattern of increasing up until 2000. This is because even if labour productivity increased due to the use of new technologies, the price of the product decreased, and the demand for the product increased as a result, resulting in an increase in private employment. However, the fact that private employment no longer increases in a similar pattern when labour productivity increases means that the price reduction effect of the increase in labour productivity does not lead to an increase in demand for labour. The fact that the low economic growth rate has become the new normal in advanced countries reflects this reality. It can be seen that the supply capacity of products has reached a state that exceeds the demand for products. At the end of the twentieth century, as the global supply chain system reached maturity, the manufacturing industry, in particular, shifted to overcapacity (Benanav, 2020). Under conditions where the economic pie does not grow, the replacement of labour by automation increases the possibility of worsening technological unemployment because companies have fewer incentives to expand investment due to overcapacity. The Third and Fourth Industrial Revolutions, triggered by the digital and AI technology revolution, are gradually deepening intelligent automation that can replace knowledge workers. Therefore, ongoing technological unemployment is predicted to be worse than in the past. The fact that the world economy currently suffers from chronic low labour demand is evident in economic trends such as jobless recovery from economic crises, stagnant wage levels and widespread employment insecurity. Since Korea has already achieved a high utilization rate of industrial robots in the manufacturing industry, it was predicted that technological unemployment would not be severe. In 2016, based on the number of industrial robots per 1,000 manufacturing employees, Korea had 63 robots, which is much higher than 31 in Germany, 30 in Japan, and 19 in the United States (Arntz, Gregory & Zierahn, 2016). As for the employment reduction effect due to the use of industrial robots in the United States, as of 2007, for every one robot per 1,000 workers, an average of 5.6 positions were lost in the overall economy, and wages fell by 0.5%.

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Figure 19.1 Trends of real gross domestic product (GDP) and employees in Korea. Source: Created by the author.

However, the high rate of automation in Korean companies thus far suggests that as intelligent automation technology continues to advance, there is a greater possibility that it will be actively used to replace knowledge workers. Additionally, the high growth rate of the elderly population in Korea will also act as a factor promoting investment in automation. According to a study, for every 10% increase in the ratio of workers aged 56 or older to workers aged 26 to 55, the ratio of robots per 1,000 workers increased by 0.9 units (Susskind, 2020). The impact of intelligent automation technologies on employment in the Korean economy has not yet been dramatic. The economy as a whole is in the early stages of adopting intelligent automation technologies through experimental applications while expanding the infrastructure for digital transformation in traditional businesses. As shown in Figure 19.1, we are seeing a gradually larger gap between real GDP growth and employment growth. This trend is more pronounced in the manufacturing sector (see Figure 19.2). This is perhaps a continuation of the trend in the Korean economy where manufacturing has been at the forefront of automation technology adoption. With the rapid growth of the digital platform-​based economy, social conflicts have arisen over demands and resistance to new business models. In the last decade, conflicts have emerged in several service industries between stakeholders based on traditional business models and those who have adopted digital platform-​based business models. For example, in 2014, an application program (i.e., app) called Lawtalk was launched to connect lawyers with clients, and at one point, over 4,000 lawyers signed up. In 2015, however, the Korean Bar Association (KBA) made it a violation of its internal rules to sign up for the platform to get clients. The Korean Bar Association took disciplinary action against its members who did not withdraw from the platform. The legal battle over this was protracted, involving the Constitutional Court and the Korea Fair Trade Commission, and it was not until late September 2023 that the Ministry of Justice decided to reverse the KBA’s disciplinary action. It was a symbolic conflict of interest that was predicted to

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Figure 19.2 Trends of manufacturing production index and manufacturing employees in Korea. Source: Created by the author.

emerge with the digital transformation. Similar conflicts have already occurred in the taxi industry, the non-​face-​to-​face healthcare industry, and so on. In addition, as digital platform-​based businesses take hold in various service sectors, there is a growing number of gig workers who form instant employment relationships through digital platforms. The number of gig workers has increased dramatically since the COVID-​19 pandemic. The number of platform workers was about 800,000 in 2022, which is 3.0% of the employed (15–​ 69 years old), an increase of 13.4 thousand (20.3%) from about 660,000 in 2021 and an increase of 580,000 (263.6%) from about 220,000 in 2020 (Ministry of Employment and Labor, 2022). As of 2022, 74.3% (590,000) of platform workers were male and 25.7% (205,000) were female. By age, those in their 40s (35.3%) showed the largest increase compared to the previous year, followed by those in their 30s (31.0%) and 50s (21.5%), while those aged 15–​19 (△57.19%) and 20s (△11.3%) showed a decrease.

Employment Mode and Management Issues From the Internal Labour Market to the External Labour Market The Fourth Industrial Revolution is causing management issues in various ways. The increased volatility and uncertainty in the business environment implies that companies’ strategies will inevitably change accordingly. Firstly, as digital infrastructure expands, innovative business models and strategies are rapidly emerging. In the era of industrialization, the focus of competitiveness was on maximizing efficiency, but now the focus is shifting to how to continuously induce creativity and innovation. There has never been a time when innovation was not important to secure sustainable competitiveness. However, as the lifecycles of goods and services continue to shorten

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and the infrastructure of businesses is transformed into digital form, creativity and innovation are more important than ever. In addition, in the VUCA environment, a company’s ability to respond flexibly to the high volatility of the market is much more important than in the past. This change is the reason why businesses are adopting the ‘firing and then aiming’ approach in strategy (Collins & Hansen, 2011), which is replacing the traditional ‘aiming and then firing’ approach. Also, in terms of the product or service development process, a process that emphasizes a finished product or service from the outset is being replaced by an agile process that puts intermediate prototypes into the marketplace and refines them based on customer reaction and feedback. In the face of the VUCA business environment, companies’ efforts to increase the agility and flexibility of their organizational operations are also reflected in the mode of employment relationship. Traditionally, long-​term employment relationships, the so-​called lifelong employment mode, were dominant in Korean companies. Accordingly, internal labour market (ILM) practices such as internal promotion and seniority-​based pay were widely used in HRM. And ILM-​based practices had the advantage of reducing employment-​related transaction costs in a stable and predictable environment (Williamson, 1981). However, the life-​time employment practice began to decline in Korea after the 1997 Asian Financial Crisis. Article 23 of the Labor Standards Act, which legally supported life-​time employment, was partially relaxed to allow for workforce restructuring in the case of business difficulties. Long-​term employment relationships and ILM-​based practices have been increasingly under pressure to be replaced by market-​based employment relationships. To increase operational flexibility, employers have been increasing their use of contingent workers, and as a result, the percentage of contingent workers has been steadily rising, especially in the wake of the COVID-​19 pandemic as well as after the 1997 Crisis. Also, the labour market for experienced workers, which was rare in the days when life-​time employment was the mainstream, continued to expand. As a result, the practice of conducting regular recruitment to hire new employees in accordance with the graduation season has decreased, and the practice of hiring experienced workers on an as-​needed basis has significantly increased. According to the Korea Enterprises Federation’s ‘2023 New Hire Survey Results’ of 500 companies with 100 or more employees, 67.4 percent of respondents said they only recruit on an as-​needed basis. In addition, 25.4 percent of the respondents said that they use a combination of regular recruitment and as-​needed occasional recruitment, and 7.2 percent said that they use only regular recruitment. In the same survey, when asked about the biggest change they anticipate in the job market (with the option to answer multiple questions), 53.4 percent of respondents said ‘increased preference for experienced workers,’ and 47.8 percent said ‘more as-​needed occasional hiring.’ With the rapid development of information and communication technologies (ICTs), the information asymmetries faced when hiring from the external labour market have been significantly reduced compared to the past, and as a result, transaction costs have been and will continue to be lower. This means that the use of market-​based practices that can increase the flexibility of workforce management has increased. When it comes to the application of AI technology, AI interviewing has seen a rapid expansion in Korea. One of the reasons for this is that blind hiring has been mandated in public institutions and public companies to reduce unfair nepotism in the hiring process. More and more companies are using AI interviewers to interview all applicants, unlike in the past when only those who passed the paper-​based screening process and personality test were interviewed at the final stage.

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The Shift of the Management Paradigm Companies are required to change the management paradigm to one that can effectively respond to the VUCA environment. The increase in environmental volatility and uncertainty requires companies to think deeply about how to transform into an organization that can achieve continuous innovation and respond flexibly to unexpected changes in the environment. Above all, the effectiveness of the hierarchical bureaucracy that supported the mass production system in the industrialization era of the twentieth century needs to be re-​examined in terms of promoting creativity and innovation and enhancing agility. A hierarchical bureaucracy is effective in reducing the likelihood of making an error in work or decision-​making and increasing efficiency by encouraging coordinated actions. However, it is very likely to act as a constraining factor in activating continuous innovation and agility because it limits the autonomy and discretion of employees and increases the rigidity of their work behaviours. On the other hand, creativity and innovation can be activated when an organization encourages new ways of thinking and learning through experimental trials and even failures. Ghoshal and Bartlett (1997) emphasized the importance of organizational culture that promotes creativity and innovation. In this context, they reminded us that a significant shift began to take place, where individualized corporations symbolized by the inverted pyramid began to replace traditional bureaucratic organizations. In other words, a shift from a centralized control-​oriented management paradigm to a decentralized autonomy-​oriented management paradigm began to take place. Such a paradigm shift can be seen as a response to the increased volatility and uncertainty in the business environment. Creativity and innovation do not emerge through bureaucratic management, but rather they tend to sprout from an organizational culture characterized by autonomy, diversity and openness, trust and a willingness to take on challenges, as well as support and encouragement. In such an organizational culture each member of the organization could fully unfold their capabilities and talents. Meanwhile, the decentralized autonomy-​oriented management paradigm causes communication and coordination costs. This is because the demand for multidirectional communication and coordination among employees will increase when they are allowed to autonomously perform their tasks. However, communication and coordination costs can also be greatly reduced thanks to the development of ICT (Malone, 2004). The widely spreading virtual real-​time contact tech­ nology, meta-​verse technology, and collaboration platform technology enable the communication and coordination process to go beyond the limits of traditional face-​to-​face methods. In that context, the rapid development of natural language AI such as ChatGPT is expected to greatly increase the potential of AI technology in performance management. By paving the way for systematic analysis of the content of work-​related communications between collaborators in a meta-​verse space through digital collaboration platforms, it is expected that agile performance management will become easier than ever before as real-​time analysis of each person’s work progress, contributions and performance capabilities, and practical feedback based on them, will be possible. However, it should be noted that seamless communication and coordination are not guaranteed by just having real-​time connectivity. If people have different beliefs and interests, communication and coordination between them is difficult to achieve effectively. One of the prominent phenomena appearing in social network systems (SNS) is that people with similar beliefs and interests form their own groups. When conflicts occur between different groups based on controversial issues, confirmation bias is strengthened within each group, and conflict between groups is further worsened (Sunstein, 2009). In that sense, the development of ICT is only one necessary condition 406

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for seamless communication and coordination. To reduce communication and coordination costs by utilizing such technical platforms, it is necessary to support the sharing of an organization’s values and common goals by employees and to change the pay system and related HR systems so that members have a common interest. Meanwhile, employment and management systems are path-​dependent in nature as they influence employees’ interests, attitudes, and behaviours, acting as a force to maintain the system and resist change. If interventions are made to improve the existing system with a similar orientation, resistance is less likely. However, when the orientation of interventions is significantly different from that of the existing system, strong resistance to change is anticipated. Therefore, it is challenging to introduce a new system that goes against the existing structure of interest, attitudes, and behaviours and make it take root in the organization. This explains the coexistence of inconsistent features of different systems introduced at different times in companies with a long history of industrialization. However, the Korean economy, which started industrialization late, experienced compressed growth, achieving industrialization in a shorter period than advanced economies. Korean companies grew rapidly through a fast catch-​up strategy, adapting quickly to changes at each stage of industrialization. This suggests that resistance to change in Korean companies would be relatively small compared to those in advanced countries. The large-​scale generational change that is taking place in Korean companies is also playing a decisive role in changing the management paradigm. Most of the baby boomers, who are accustomed to traditional values, retire, and the MZ generation, born between 1980 and 2004 in Korea, occupies an increasingly large proportion of the economically active population. In 2015, that share was about 30%, and in 2019 it increased to 47.2%. The MZ generation workers, who are no longer guaranteed life-​time employment, do not consider the seniority-​ based pay schedule to be fair. Since they do not have a long-​term prospect in the employment relationship with the company they belong to, they tend to prefer to receive a salary commensurate with their contribution right away. The significant increase in the share of Generation MZ can contribute to a greater acceptance of change when it becomes time to move to a new flexible management system.

Policy and Managerial Implications Policy Implications The Fourth Industrial Revolution presents several challenges for Korean society. Intelligent automation technologies have the potential to increase technological unemployment and are biased in favour of high-​skilled workers, which could exacerbate polarization of labour. Not only that, but if the current production overcapacity persists within the global supply chain system, the employment-​boosting effect derived from such labour productivity increase will be far from sufficient to offset the labour displacement effect of intelligent automation. More importantly, as the workers being replaced by intelligent automation may not possess the skills and competencies demanded by the newly created jobs, it is highly likely that they will not be able to take up those jobs. This will pose a serious challenge to society in terms of technological unemployment. Therefore, Korean society needs to strengthen its social safety net for those at high risk of being replaced. Additionally, it should enhance its learning infrastructure to increase accessibility to 407

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continuous learning and help workers acquire the skills and competencies required for the newly created jobs. A social safety net for precariats who will be driven into underemployment is also necessary. If we are not prepared with social safety nets and learning infrastructure for career transitions that alleviate the technological unemployment, it will be difficult for Korean society to effectively overcome the waves of the Fourth Industrial Revolution.

Managerial Implications As we have seen earlier, the large-​scale changes triggered by the Fourth Industrial Revolution, fuelled by digital transformation and technological innovations based on AI and big data, are anticipated to drive a profound shift in the business environment and competitive landscape, demanding a paradigm shift in management across various business areas. The competition based on efficiency has transformed into a creativity and innovation-​based competition that can create new paths in the midst of high uncertainty and volatility. Companies are required to shift to an agile organization that can effectively respond to a highly volatile environment and secure flexibility in operations. Companies are also required to transition from an organizational structure and management paradigm optimized for efficiency to one that fosters flexibility, creativity and innovation. Such a paradigm shift in management requires a comprehensive change in HRM. For instance, when hiring people, potential and the capacity to effectively adapt to a highly volatile work environment, supported by learning abilities, are becoming increasingly important rather than past achievements and immediate performance (Fernández-​Aráoz, 2014). The per­ formance management systems that typically set Key Performance Indicators (KPIs) in advance, evaluate employee performance based on those KPIs, and reward accordingly are now being replaced by continuous feedback and performance support systems that encourage innovative and experimental approaches, while acknowledging that existing work practices may not be optimal. Moreover, reward systems are undergoing a transformation to make recognition and rewards more appealing to employees who set stretching goals and demonstrate creativity and innovation in achieving them, rather than those who follow predictable and stable promotion paths in a hierarchical career ladder and receive incentives based on past performance. Investments should also be made to acquire and develop human capital to prepare for future uncertainties in advance. In terms of human resource development, there is a need to invest in creating conditions for employees to continuously learn, in order to prepare for the risk of skills and knowledge obsolescence that increases with the shortened half-​life of them, as well as the unpredictability of the skills, knowledge, and abilities (KSA) that will be needed in the future. Such investments are aimed at promoting the enhancement of KSA, which may be useful in the future even if they are not immediately necessary for job performance, similar to buying real options to hedge against the future uncertainty of asset value. Meanwhile, investing in improving employees’ general human capital has vulnerabilities because the return on investment would disappear when they leave the organization. From a resource-​based perspective, for companies to maintain sustainable competitiveness, they must possess rare and valuable human capital, specifically firm-​specific human capital with low mobility and imitability, and provide them with opportunities to utilize their skills efficiently (Campbell, Coff & Kryscynski, 2012). However, it should be noted that as the half-​life of technology and knowledge has become much shorter, and the volatility of the business environment has increased dramatically, it is essential for organizations to meet the demand for newly emerging technologies and knowledge. Korean companies are increasingly meeting such needs by sourcing experienced

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workers with general human capital from the external labour market. This trend is predicted to continue in the future. However, if companies rely solely on the external labour market for their core talent, securing sustainable competitiveness based on unique internal resources that cannot be imitated may become more difficult. Therefore, companies need to develop strategic plans to acquire and retain core talent with general human capital, and enable them to reach their full potential. To maintain sustainable competitiveness in a VUCA environment, creating an organization where talents with general human capital can stay and fully utilize their capabilities without leaving the company is more important than anything else. For instance, if there is a supportive organizational culture that allows individuals to fully utilize their potential, and if there is good teamwork and motivation for growth among collaborators, individuals with general human capital will be less likely to leave the organization, even if they are offered competitive pay from outside.

Conclusion The Fourth Industrial Revolution is reshaping Korea’s employment landscape. The acceleration of AI and digital platforms is challenging traditional business models, leading to a shift in employment modes and management paradigms. The impending challenges in Korea’s employment landscape stem from the potential exacerbation of technological unemployment. Unlike previous industrial revolutions, the current trend indicates a decoupling between labour productivity and private employment, suggesting a novel pattern of technological unemployment. Korea’s early adoption of industrial robots, especially in manufacturing, increases the likelihood of intelligent automation replacing knowledge workers. The rise of platform-​based economies has led to conflicts in various service sectors, reflecting the clash between traditional and digital business models. The gig economy has expanded, particularly after the COVID-​19 pandemic, emphasizing the need to address evolving employment modes and associated management issues. In response to the Fourth Industrial Revolution, companies are shifting from internal labour markets to external labour markets for staffing, embracing flexibility and agility. The life-​time employment relationship has gradually given way to market-​based employment relationships, driven by the adoption of hiring practices focusing contingent and experienced workers. The rise of AI technologies, including AI interviewing, is reshaping hiring processes and contributing to increased workforce flexibility. The management paradigm is undergoing a shift from a centralized control-​oriented paradigm to a decentralized autonomy-​oriented paradigm, which emphasizes creativity, innovation and flexibility. The generational change within Korean companies, with the MZ generation becoming predominant, further accelerates this shift, aligning with the need for adaptive and forward-​thinking organizational cultures. Policy implications include the necessity for Korea to strengthen its social safety net, enhance learning infrastructure and address potential technological unemployment challenges. Managers need to adapt to the paradigm shift by focusing on agility, continuous learning and fostering a supportive organizational culture. Investments in human capital, strategic talent acquisition and retaining core talent are crucial for sustainable competitiveness in the volatile and uncertain business environment. Overall, proactive policies and adaptive management strategies are essential for navigating the challenges and harnessing the opportunities presented by this transformative era.

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References Arntz, M., Gregory, T., & Zierahn, U. 2016. The Risk of Automation for Jobs in OECD Countries: A Comparative Analysis. Working Paper. Benanav, A. 2020. Automation and the Future of Work. NY: Verso. Brynjolfsson, E., & McAfee, A. 2014. The Second Machine Age. NY: Norton & Company. Campbell, B. A., Coff, R., & Kryscynski, D. 2012. Rethinking sustained competitive advantage from human capital. Academy of Management Review, 37(3): 376–​395. Collins, J., & Hansen, M. T. 2011. Great by Choice. NY: Harper Business. Fernández-​Aráoz, C. 2014. 21st-​century talent spotting. Harvard Business Review, 92(6): 46–​56. Ghoshal, S., & Bartlett, C. A. 1997. The Individualized Corporation. NY: Harper Business. Korea Enterprises Federation. 2023. 2023 New Hire Survey Results. www.kefpl​aza.com/​ Malone, T., 2004. The Future of Work. MA: Harvard Business Review Press. Ministry of Employment and Labor. 2022. Size and working conditions of platform workers in 2022 (Digital Labor Response TF). News Brief, December 27. OECD, 2022. Education at a Glance 2022: OECD Indicators. Paris: OECD Publishing: 45–​46. Pichai, S. 2018. Google CEO: A.I. is more important than fire or electricity. CNBC, February 1. Schwab, K. 2017. The Fourth Industrial Revolution. London: Penguin Group. Sunstein, C. R. 2009. Going to Extremes. Oxford University Press. Susskind, D. 2020. A World Without Work. NY: Metropolitan-​Books. Williamson, O. E. 1981. The economics of organization: The transaction cost approach. American Journal of Sociology, 87(3): 548–​577.

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PART V

Challenges and Future Directions

20 THE KOREAN BUSINESS SYSTEM Evolution and Future Challenges Anne Cox and Chris Rowley

Introduction The business system in South Korea (‘Korea’ from now on) is a fascinating topic and provides the context and operational framework for business and management. Within this, the area of ‘work’ –​ and how it is undertaken and managed –​ retains its importance and relevance for participants, practitioners and policy makers. This is the case in Korea and especially in light of its institutional and cultural context and idiosyncrasies. The different perspectives taken on the management of work –​unitary versus pluralist –​also remain important and frame and influence much of both the practitioner and academic debate, albeit even if it is sometimes implicitly and unacknowledged. This chapter employs a combination of institutionalist theory and system theory to analyze the evolving landscape of Korean business and work. While prior research has explored these domains independently, we bridge the gap by integrating insights from both. Part I examines critical institutional dimensions: the political-​economic backdrop, labour market dynamics, cultural influences, financial structures, education systems, industrial relations and human resources (HR) and HR management (HRM) frameworks, which significantly shape the formation and evolution of organizations in Korea. Part II then addresses major socio-​economic challenges faced, including technological developments and skill formation, fertility decline and shifts in organizational loyalty and work ethics. Specifically, technological advancement presents a binary scenario, with achievements in information and communication technology but slow progress in skill development for labour-​intensive industries. Fertility decline is explored from a historical perspective, highlighting the multifaceted factors contributing to the dramatic reduction in birth rates, with implications from an ageing population and a shrinking workforce. The analysis further uncovers the changes in organizational loyalty and work ethics, discussing the diminishing commitment to long-​term employment and the rise of transactional workplace relationships. Sound health management and supportive policies helped Korea emerge swiftly from the pandemic (Pareliussen, 2022). It concludes that by emphasizing the need for adaptive policies and strategies to address these challenges in the national business system. Korea’s ability to navigate and respond to these challenges will play a pivotal role in determining its future economic and social trajectory.

DOI: 10.4324/9781003180920-25

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Overview The post-​1960s rapid development of Korea into an ‘Asian Tiger’ and economic powerhouse with ‘the Miracle on the Han’ has been the subject of a breadth of research and analysis and in depth. It can be examined at twin levels in terms of first, wider macro debates about the factors and sources of development and second, more Asia-​specific ‘ingredients’ of development. There is the useful business systems field with variety based on differences in societal institutions which encourage-​discourage forms of economic organization with a firm’s characteristics; pattern of organization; interaction with other agents, especially finance and employment relationships (Redding, 1990, 2005; Whitely, 1992, 2000, 2007; Witt and Redding, 2014; Whitley and Zhang, 2016). Similarly, the varieties of capitalism literature is based on differences in the co-​ordination of economic actors and institutional relationships (Hall and Soskice, 2001), product markets, labour markets, finance, welfare and education (Amble, 2003) or economic agents contesting the ends and means of development and policies, describing Korea as ‘Confucian capitalism’ (Hundt and Uttan, 2017) or ‘innovation-​led’ capitalism (Harada and Tohyama, 2012). State capitalism or the ‘latecomer’ thesis stressed the state’s role as prime mover in development (Amsden, 1989; Wade, 1990) and developmental state theory and its different aspects were synthesized and applied to East Asia (Onis, 1991; Castells; 1992; Johnson, 1982, 1994, 1999). Others noted distinctive relational contracting among politicians, state officials and elite entrepreneurs with ‘rent seeking’ (Tullock, 1967; Krueger, 1974) and enduring interfirm networks (Fruin, 1998). Some even painted a regionally sequential pattern of manufacturing spatial relocations in the ‘Flying Geese’ paradigm (Akamatsu, 1962). More specifically on Korea, Rowley and Bae (1998) present a broad and historical perspec­ tive on the determinants of Korean economic success and model of industrialization and internal internationalization, covering organizational capabilities and management roles and focuses on the Korean financial crisis, latecomer catch-​up strategies and electronics industry. Similarly, Rowley, Sohn and Bae (2002) examine managing Korean business in terms of organization, cul­ ture, HR and change covering entrepreneurship, chaebol, dynamic collectivism and corporate culture. Rowley and Paik (2009) explore Korean management in terms of HR, marketing, finance, strategy, overseas affiliates, small firms and entrepreneurship and gender. Rowley and Warner (2015) cover corporate culture, gender, international HRM in Korean multinational enterprises (MNEs), organizational citizenship behaviour, informal relation-​based networks of yongo, yonjul and inmaek, absorptive capacity, technology acquisition and performance in international collaborative formations, machinery firms and exports, distance and disinvestment of MNEs’ entry mode and experience. More focused work includes the transition of Korean management and culture (Rowley, 2002) and gender (Kim and Rowley, 2009) and female managers (Lee and Rowley, 2009) and executives (Rowley, Lee and Lan, 2015). To build on –​ and distinguish itself from –​ such work, this chapter adopts a combination of institutionalist theory and the system theory to analyze Korean business and work. Both have analyzed the connections between contemporary society and its institutions and, at first glance, appear to have arrived at distinct responses to these questions (La Cour and Højlund, 2013). They examine the key institutions, namely political-​economic background, labour market, culture, financial, education and training, industrial relations and HRM systems that significantly impact on the formation and development of organizations. Institutionalism argues that dominant institutions are integrated and their features mutually reinforcing, therefore, national institutional arrangements are strong and robust and demonstrate significant inertia in the face of pressure for changes (Hollingsworth, 1997). The effects of 414

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variations in businesses’ institutional contexts on companies’ behaviour are prominent, as a ‘firm will gravitate towards the mode of coordination for which there is institutional support’ (Hall and Soskice, 2001: 9). The influence of such social institutions is so strong that they can almost be regarded as additional factors of production which become the basis of competitive advantage or disadvantage (Maurice, Sellier and Silvestre, 1986; Lane, 1992; Porter, 1990). For Hasse (2005: 60) institutionalism’s top-​down approach in understanding organizations fails to acknowledge ‘selective and idiosyncratic processing of norms and expectations’ of organizations. On the other hand, systems theory offers an approach for understanding organizations’ ‘both internal processes and external links’ (Hasse, 2005: 261). The critical principle of systems theory is that it describes the interdependencies and inter-​relations of systems and their components as well as how they react to the environment. Even as organizations draw upon external systems’ contributions, a concept often referred to as ‘interpenetration’ (Luhmann, 1995: 210–​254) and ‘structural coupling’ (Luhmann, 1997: 92–​120), the ultimate responsibility for determining the manner in which they leverage these external contributions lies with the organizations themselves (La Cour, 2006). Applying the two theories in a complementary manner allows a holistic frame­ work for this chapter. Part I’s analysis will help us to understand the framework within which Korean companies operate. We will focus on the three pillars of institutional theory: regulative, normative, cultural-​ cognitive (Scott, 1995). Part II then focuses on the major socio-​economic challenges that Korea faces, namely technological developments and skill formation, fertility decline as well as the challenges from within organizations, such as diminishing organizational loyalty and changing work ethics.

The Tranforming Korean National Business System Political-​Economic Background After World War II Korea was divided along the 38th parallel. From the beginning, North Korea was strongly influenced by the Soviet Union. In the South, the US military was in charge. In 1948 the Republic of Korea was formally established and the National Assembly adopted a constitution which established a presidential system of government. Korea has since transformed its economy. The process of economic reform can be divided into three periods, with important milestones: (1) 1961–​1979, when President Park Chung Hee effectively ran the nation, carrying out the process of rapid industrialization and economic growth; (2) 1980–​1997, when a number of reform policies were deployed in order to transform the economy to a free market system; and (3) 1998 – after the Asian Financial Crisis, when reforms were undertaken under International Monetary Fund (IMF) sponsorship.

(1) 1961–​1979 Economic development relied on a government-​led development strategy (Kim, 2002) and tight link with business (Chang, 2003; Lew, 1995). This was exemplified by the development of the chaebols, the family-​owned diversified conglomerates that controlled a large portion of the national economy (Hauge, 2020). The government’s authoritarian policy toward workers maintained peaceful industrial relations by repressive actions against the labour movement (Rowley and Bae, 2013). The role and nature of trade unions did not conform to the Western liberal-​democratic 415

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model of unions as independent representatives of collective employee interests. Instead, state-​ union relations were embedded in a form of state corporatism (Rowley and Yoo, 2008). In the mid-​1970s, ignoring warnings from the World Bank, an ambitious expansionist programme to develop heavy and chemical industries commenced (Lee, 2009). By the late 1970s, Korea faced many economic problems, such as trade deterioration caused by the second oil crisis, inflation and unutilized capacity and low profitability in some of the heavy and chemical industries (OECD, 2000). Such challenges created motives to change policies and institutions. In 1979, President Park was assassinated and the new government committed the country to economic reforms, guided by US economists (Moon, 1994).

(2) 1980–​1997 The new government commenced a significant shift in the political economy from the state-​led regime to a liberal market economy. This change was mainly in macroeconomic policies that brought rapid growth. This period was characterized by the rapid expansion of the chaebols due to increasing independence from the government for their financial needs (Kang, 2002). Their roles in the economy gave them political power to impact on the reform process. The economic reform had an enormous impact on the structure of the economy and working conditions. The shift from labour market repression to liberalization in the mid-​1980s created a substantial change in industrial relations. Employees gained a greater voice in employment relations (Yee, 2003; Rowley and Yoo, 2008). Consequently, a large number of unions were established between 1987 and 1989 and there was a remarkable increase in union membership. The solidarity among unions of various sectors (public, private, regional and industrial sectors) increased significantly (Yee, 2003). The number of strikes also rose rapidly, which impacted on labour productivity, international competition and GDP (Park, 1991). Weakly prepared institutions for policy changes were seen as an explanation for tensions in industrial relations. The shortage of experience and knowledge in bargaining and negotiating between unions, management and government did not bring about reasonable compromises in labour disputes (Kim and Lee, 2001; Rowley and Bae, 2013). Growing pressures from globalization, combined with an increase in labour costs and labour market rigidity, significantly affected the productivity and profitability of the chaebols from the late 1980s, which was blamed as a foundation for the economic crisis of 1997–​1998 (Kim and Lee, 2002) with impacts on many areas, including HRM (Rowley and Bae, 2001) and labour rights (Kim, Bae and Rowley, 2000). To increase labour market flexibility and match labour laws to international standards, as required to be a member of the OECD, the government made the first major market reform in 1996 by passing a law that favoured employers’ interests. However, this law faced objection from trade unions and workers. As a result, the government was forced to withdraw and revised the law to make it more pro-​labour. The new version still did not gain approval from both business and labour. The Asian Financial Crisis 1997–​1998 was the premise for a more sophisticated change later on.

(3) 1998 – After the Asian Financial Crisis In 1990, Korea’s current account balance started to deteriorate because of rising inflation, currency appreciation and global recession. The current account in 1991 recorded a deficit of US$8.7 billion, over four times the level of 1990 (Kihwan, 2006: 3). The consecutive bankruptcies of 416

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several large chaebol saw Korea on the brink of bankruptcy in November 1997 and in December Korea signed a 3-​year Stand-​By Arrangement. The arrangement included financing for a total of US$58.4 billion from the IMF, the World Bank, the Asian Development Bank and a group of countries –​the largest rescue package in the history of the IMF (Coe and Kim, 2001). Since the crisis, Korea implemented many macroeconomic, financial and corporate restructuring policies not only in line with its agreement with the IMF, but also on its own judgment.

Labour Market The labour market has a variety of aspects (Rowley, Yoo and Kim, 2011). It is characterized by a gradual decrease in the labour force and greater job polarization and non-​regular employment. A shrinking and ageing workforce have become significant challenges for Korea and elsewhere. Assuming that participation rates in each age group remain constant, the labour force reached its highest point at 27.2 million in 2022 and will decrease by 21% to approximately 21.5 million by the middle of the century (Jones and Urasawa, 2013). The low fertility rate contributes to an ageing workforce. The average age of workers in Korea has been increasing steadily (OECD, 2018). The declining labour participation rate can impact on the economy, such as lower economic growth and productivity and an increased burden on the social welfare system. According to Park and Lee (2019), the low labour force participation rate in Korea has been linked to a high level of income inequality, with the elderly and women being the most affected. By 2050, more than one-​third of the population will be over the age of 65 and around half of all workers will be aged 50 and over (OECD Employment Outlook, 2023). As the population ages, the demand for healthcare services and other social services will increase, while the labour force will decrease. These trends will put pressure on the social welfare system and the labour market. There is job polarization, a phenomenon where employment opportunities shift from middle-​skill occupations to either low-​skill or high-​skill occupations. One of the main drivers is technological advancement, which led to the automation of many routine tasks, resulting in the displacement of workers. Another factor is the globalization of the economy, which increased competition and put pressure on firms to reduce labour costs. As a result, firms outsourced low-​skill jobs to developing countries or replaced them with automation. This trend resulted in a widening income gap and an increase in the number of working poor. On the other hand, high-​skill jobs, particularly in technology and finance, have experienced steady growth, leading to an increase in the number of high-​ income jobs. The decline in middle-​skill jobs has been most pronounced in the manufacturing and construction sectors, which have been most affected by globalization and the income gap between high-​and low-​skilled workers widened, contributing to income inequality (Kim, 2015). The labour market is also characterized by dualism between employment that is ‘regular,’ in permanent, well-​compensated jobs with strong protection and benefits and ‘non-​regular,’ that is not permanent, such as part-​time, temporary, or contract work, often captured by the word ‘flexibility’ (Rowley, Yoo and Kim, 2011) and typically characterized by lower wages, benefits and job security. Non-​regular workers often have limited access to social protection programmes, such as unemployment insurance and pension plans, so are more vulnerable to income loss and poverty during periods of joblessness or retirement. According to Jones and Urasawa (2013), the share of temporary workers, who account for more than one-​third of non-​regular workers in Korea, was the fourth highest in the OECD in 2010. Non-​regular employment has been increasing steadily and is now more prevalent than regular employment (Kim, 2021). The casualization of the labour market was a direct consequence of the neoliberal economic reform implemented by the government under the guidance of the International Monetary Fund 417

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(IMF) as a condition for the financial bailout programme (Shin, 2013). This included enhance­ ment of flexibility in the labour market, restructuring of the financial market and reforms of the public sector and corporate governance (Shin, 2013). Employers began to replace regular workers with non-​regular workers and hire non-​regular workers for new positions. The wage gap between regular-​non-​regular workers widened from 33.9% in 2002 to 44.6% in 2011 (cited in Shin, 2013: 336 with Shin, 2013: 336). Wage is even more striking when gender is taken into account with female non-​regular workers earning just 38.3% of what male regular workers earned in 2010 (Shin, 2013). As commented on by Ching and Yoon (1995), Korean women are ‘the oppressed of the oppressed,’ in the capitalist social division of labour. The typical image of a working woman has been that of a ‘permanent casual’ susceptible to unstable and unorganized employment (Fuentes and Ehrenreich, 1983; Chang, 2010a). According to a study by Kim and Kim (2020), non-​regular workers in Korea are more likely to experience psychological distress and job dissatisfaction than regular workers. This is because they face greater uncertainty and instability in employment. Non-​regular employment can also have negative effects on the economy. The transformation of the labour market and the proliferation of new types of non-​regular employment post-​2000 has resulted in deepening inequality and poverty and struggles by non-​regular workers seeking to improve employment terms and conditions (Shin, 2013).

Culture Culture has widespread and deep implications for business and management (see Rowley and Bae, 2003). Confucianism, a philosophical and ethical system originating from China, constitutes one of the fundamental underpinnings of Korean culture. It was introduced during the Joseon Dynasty (1392–​1910) and is founded on moral and virtuous principles such as kindness, loyalty, respect for social norms, filial piety and social harmony (inhwa). Society has been significantly influenced by Confucianism, particularly the concept of inhwa, which emphasizes the promotion of harmony between people, particularly unequals, through consensus. As a collectivist society, this places great emphasis on individuals living in a harmonious hierarchical order. In Korean culture, status is determined by various factors, including age, gender, education, family background, wealth and occupation. Koreans believe in the importance of demonstrating total loyalty to parents and authority figures, such as rulers, elders and organizational leaders, as well as individuals occupying high hierarchical rankings within their hierarchy. Consequently, workers view themselves as owing the same loyalty to employers and supervisors as they do to their parents and family elders. In turn, it is expected that superiors will demonstrate concern for the well-​being of subordinates (Alston, 1989). The profound influence of Confucianism on the values, attitudes and behaviour norms was represented by their hard work ethics and significant human relationships in organizations. Organizations were considered as an extended family system, which was strongly hierarchical, paternal and traditional oriented (Park, 2013). Within the family sphere, the division of labour remains unequal, with responsibilities of housework and childcare still undertaken mostly by women. The central feature of the division of labour is captured by one of the principles of Confucius: ‘Men are primarily outside the home, and women are primarily inside the home.’ Confucianism has left imprints that are difficult to remove. Complex families are the norm in Korea. With the vast majority being two-​generation nuclear households, the burden of family care on women can be very significant. Family responsibilities in general were seen a large obstacle for women to overcome in careers (Lee, Lan and Rowley, 2014; Rowley, Lee and Lan, 2015). 418

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Confucian characteristics in Korean are consistent with Hofstede’s (2023) six cultural dimensions. First, Korea is hierarchical and values hierarchical order. The presence of hierarchy in an organization is viewed as a reflection of inherent inequalities. A centralized structure is favoured and subordinates are expected to follow directives issued by superiors. The ideal leader is considered to be a ‘benevolent autocrat.’ Second, Korea is collectivist, valuing a strong and enduring commitment to the group, whether it be a family, extended family, or wider network of relationships. Loyalty is considered paramount and takes precedence over other societal norms and regulations. This emphasis on strong relationships within the group results in members taking responsibility for one another. The relationship between employers and employees is viewed in moral terms similar to that of a family connection and decisions regarding hiring and promotion take into account the employee’s affiliation with the in-​group. Management is perceived as the management of groups. Thirdly, according to Hofstede (2023), South Korea scores low on motivation towards achievement and success and is thus considered a consensus society. Managers in such countries prioritize achieving consensus, and individuals place value on equality, solidarity and quality in their work lives. Conflicts are typically resolved through negotiation and compromise. Incentives, such as free time and flexibility, are preferred. A successful manager is one who provides support and decision-​making is typically achieved through active involvement of the team. Fourth, Korea ranks highly in uncertainty avoidance, displaying strict adherence to established codes of behaviour and beliefs, while remaining intolerant of unconventional ideas or practices. The importance of security is highly valued and innovation may be met with resistance. Fifth, Korea is a pragmatic, long-​term oriented society. In the corporate world, there is a strong emphasis on long-​term goals, such as steady market share growth, rather than short-​term financial gains. This approach is aimed at ensuring the longevity of companies, with a focus on serving stakeholders and benefiting society for generations to come, rather than short-​term profits. Sixth, Korean society values restraint. It places less importance on leisure time and regulating the satisfaction of their desires. Behaviour is limited by social norms and self-​indulgence is perceived as inappropriate. Over the past decades, Korean popular culture, often referred to as ‘K-​pop culture,’ including K-​pop music, K-​dramas, K-​film, K-​fashion, etc. has emerged and has become a significant cultural export and gained immense global popularity. It encompasses various forms of entertainment, including music, television, film, fashion, and more. K-​pop groups and solo artists such as Astro, Blackpink, BTS, PSY and K-​dramas and K-​film, such as Train to Busan, Parasite, The Host, Squid Game, have international fans. K-​pop culture serves as a manifestation of Korea’s cultural evolution. It simultaneously signifies a clear departure from traditional cultures towards a more Western one (Lie, 2012). For instance, in traditional Korean music, a pentatonic scale was prominent and the emphasis was on melismatic and raspy vocalization, with performers often remaining stationary to enhance the auditory experience. Conversely, K-​pop consistently employs a diatonic scale, incorporates English phrases into lyrics, features a distinctly syllabic singing style reminiscent of Western pop and integrates dance as a crucial element of the performance (Lie, 2012). The global spread of K-​pop culture, the ‘Hallyu Wave,’ continues to evolve and expand its reach, making it a prominent force in the global cultural landscape.

Financial Market and Banking System Developments here can be divided into two stages on the fulcrum of the Asia financial crisis: before and after. 419

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Before the Asian Financial Crisis The banking system was strictly controlled by the government and was a vital policy tool in allocating financial resources. The capital of banks was mainly allocated to the chaebols and specific industries. It was hard for less-​favoured industries to gain access to capital. During the 1970s and 1980s, the government attempted to liberalize financial markets by reducing its intervention in the operation of commercial banks. In the early 1980s, the government started to open financial markets to foreign competition to increase market efficiency, but delayed this process until the mid-​1980s. Due to US pressure and OECD entry requirements, the government finally opened the financial market (Park, 1996). The government allowed foreign banks to establish multiple branches and to compete equally with domestic ones. A number of domestic banks were also established, albeit owned mainly by the chaebols. The government also allowed the chaebols to participate further in the financial market. Specifically, the chaebols were now permitted to own and control life insurance and investment trust companies. In addition, the government deregulated both long-​ and short-​term interest rates to be more market-​oriented. While financial liberalization facilitated the chaebols in gaining more freedom to search for financing, the government gradually lost its control over the chaebols. However, the liberalization of financial markets was without prudential regulation. The accounting and disclosure standards expected of financial institutions were below international best practices and market-​ value accounting was not widely practiced (Kihwan, 2006). Furthermore, the government gave many incentives for the chaebols and specific industries to access bank loans. As a result, the chaebols’ expansion relied significantly on credit rather than on their own resources (Krueger and Yoo, 2001). Due to easy lending and competition, the chaebols exclusively expanded their operations, overstretching and involving inefficient projects. Therefore, they were extremely vulnerable when the crisis happened. Some powerful chaebols, such as Hanbo and Kia, experienced financial difficulties and went bankrupt in 1997. The combination of these factors led to the inevitable failure of the Korean financial and banking system in the 1997 Asian Financial Crisis.

After the Asian Financial Crisis Post-​1998 various measures to reform the financial system were implemented. The government deregulated the operation of non-​bank financial institutions (NBFIs), a vital lending channel additional to banks. Weak banks were restructured through nationalization and mergers. The Financial Supervisory Commission was set up as an extra measure to reorganize non-​performing loans and reinforce banks’ capital base. Restrictions on foreign investors were removed and foreign banks and securities firms were allowed to open subsidiaries. In addition, foreign investors could wholly own Korean banks and financial institutions. The domestic bond market and stock market were opened to attract foreign investment (Kim, 2002). Foreign investors not only provided capital and sophisticated financial management skills, but also enhanced competition in the financial markets (Claessens, 2001). Post-​crisis reforms made the banking sector healthier and improved performance and practices. Sub-​standard and non-​performing loans decreased significantly from W61 trillion in 1999 to W15.1 trillion in 2002. Banks’ revenues were improved with the extension of various products and services (Baek, Cha and Lee, 2015). Banks and NBFIs seemed to build a firm base to overcome the shock of the global financial recession in 2008. However, economists advised that Korea should reduce government involvement in supporting the financial system to become more market-​oriented (Tsutsumi, Jones and Cargill, 2010). The Korean financial market remained 420

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robust, although the COVID-​19 pandemic crisis generated liquidity risks. The government and the Bank of Korea still need measures to intervene with financial markets to reduce the vulnerability caused by the COVID-​19 global medical emergency and impacts.

Education and Training System Workforce development and skill formation has been a driving force in the Korean miracle (Rowley and Yoo, 2013). Education and training can be classified as a unitary system (Maurice, Sellier and Silvestre, 1986), where achievement in formal education is regarded as a crucial indi­ cator of competence and ability and only ‘failures’ enter practical training, which has low prestige. Education has long been seen as a means of achieving upward social mobility and gaining respect. Therefore, there is an ever-​increasing demand for higher education and a tough examination-​based system of selecting students creates intense competition for acceptance to universities, particularly high-​ranking ones (Kim and Woo, 2009). Until the early 1990s, the government still adopted strict control over various aspects of the educational system, including the establishment and operation of colleges and universities, number of students, selection criteria, etc. Comprehensive education reforms have been carried out since the mid-​1990s to improve the quality of Korean education. In addition, the government invested more in R&D for high-​tech projects and launched the ‘Brain Korea 21’ project and policy initiatives, such as ‘World Class University,’ ‘Humanity Korea,’ ‘Social Science Korea.’ Furthermore, the government removed restrictions for colleges and universities with more market orientation and competition (Pritchard, 2004: 509). They were allowed to own patents and intellectual property from research conducted by staff, making it possible to transfer these inventions to industry and permitted to run start-​up businesses on campus. As a result, these policy reforms improved the quantity and quality in the Korean education system. Currently, there are about 203 universities and 136 community colleges in Korea (Facts and Detail, 2023). However, Korean higher education has received modest funding from the govern­ ment. According to OECD data (2020), Korea spends about 5% of its GDP on the education sector, but the majority is from private expenditure. The existing higher education system is a combination of the German and American models. The German model influenced higher education during the Japanese colonial periods (1910–​1945). Thus, several of the characteristics, such as equality in social status between universities, seniority in the academic relationship, can be seen (Shin and Jang, 2013). After independence from Japan, universities approached the US university model through the spill-​over effect of foreign-​educated academics. They applied the US course-​based credit system (rather than the German seminar-​based courses) and department system rather than the German chair system. The US model relies mainly on the private sector as the main source of higher education (Teichler, 2009). Furthermore, the system adopts the US way in providing mass higher education. As a result, there has been a significant growth of enrolment in Korean universities (Lee, 1989).

Industrial Relations System The industrial relations regime can be seen as being underpinned by tensions, such as between ‘waves of anti-​unionism’ (Rowley and Bae, 2013) and moves towards neo-​corporatism (Rowley and Yoo, 2008) and the development and increasing importance of employers’ associations (Lee, Hye-​Jeong, Rowley, Chris, & Yu, Gyu-​Chang, 2017). Before 1987, repressive labour policies depoliticized and weakened the national federation of labour unions, the Federation of Korean 421

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Trade Unions (FKTU) by amending labour laws to prohibit political participation by labour unions and banning the collection of political funds for labour unions (Kim, 1993). This was motivated by political, rather than economic, reasons (for anti-​unionism see Rowley and Bae, 2013). This is different from other export-​oriented economies, such as Indonesia, which enforced repressive labour policies to ensure international competitiveness based on low labour costs and to induce foreign investment (Deyo, 1987). As a result of the loss of political rights and its financial base, for almost two decades the FKTU was subordinated to the state, as well as the chaebol. Activities were limited to purely economic issues, such as basic rights in the workplace and economic welfare (Choi, 1989). During the early 1980s, further harsh labour measures were imposed, including the legalization of enterprise unionism and the prohibition of third-​party intervention in labour disputes. Such control was successful in maintaining cheap labour for industrial development and preventing workers from taking industrial action. With the legal restrictions, labour’s bargaining power vis-​à-​vis employers became even weaker and, therefore, management arbitrarily disregarded protective labour laws, paid illegally low wages, dismissed labour activists or fell into arrears in wage payments. In addition, during the use of mediation or arbitration, government agencies pressurized unions to settle on terms favourable to management. A wave of changes started in June 1987 with the ‘Democratic Struggle,’ a nationwide pro-​ democracy movement that generated mass protests and forced the government to hold elections, which led to the establishment of the Sixth Republic. These social movements paved the way for an outburst of labour disputes, especially in capital-​intensive industries and showed the pervasive discontent despite economic growth. As a result, the numbers of trade unions and their density increased significantly. The 2,658 local unions (1986) almost tripled to 7,882 (1989). The number of industry federations increased from 16 to 21 during the same period. Union density, the ratio of the number of union members to total workers, also increased from 14.7% (1987) to 23.7% (1989) (Kim, 1993). The growth in unionization led to the revision of the Trade Union Law in 1987, which relaxed legal constraints on union organizations (Song, 1999). Many newly established unions refused to affiliate with the state-​controlled FKTU, organizing their own federations, resulting in the establishment of a second national union, the Korean Confederation of Trade Unions (KCTU) in 1995. The new unions included national federations of chaebol-​based unions, such as at Kia and Hyundai, as well as regional unions, such as the Masan and Changwon Unions Association. In the public sector, the National Teachers Union was formed in 1989, partly to counter the perceived authoritarian nature of education. The KCTU had become a formidable force, regarding themselves as an indispensable ‘check’ to the power of the state, employers and the FKTU. Overall, the KCTU and FKTU have contrasting political positions with regards to management. The KCTU is recognized for its aggressive approach, whereas the FKTU leans towards moderation and social collaboration (Lee and Lee, 2009). The financial crisis of 1997 saw the collapses of many conglomerates. The IMF’s bailout caused nation-​wide economic restructuring, downsizing of companies and employee layoffs. Unemployment rocketed from 2.5% to a peak of 8.5% in early 1999 with over one million Koreans thrown into poverty (OECD, 2000: 9). In an effort to secure jobs the KCTU organized the Great Strike of 1997, including approximately 30,000 people at a rally and demanded political reforms and protection from arbitrary layoffs. The results were disappointing. The government gave significant discretion to the chaebol with respect to layoffs. Although the KCTU was now a legitimate force that could not be ignored, voices of discontent within the union were growing. Faced with the severe consequences of the crisis and requirements of the IMF agreement, in 1998, the

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government launched the Korea Tripartite Commission (now known as the Economic and Social Development Commission), as an advisory agency under the Office of the President. Although considered as a ‘historic compromise,’ Han, Jang and Kim (2010) argue that it has not reduced the antagonism between unions and employer organizations. Korean industrial relations have been characterized as adversarial due to the confrontational relationship between employers and employees, particularly between management and labour unions (Han, Jang and Kim, 2010). This has resulted in frequent strikes and labour disputes that have disrupted production and affected the overall performance of firms. The decline in union membership in recent years has been partly attributed to adversarial labour relations, which have led to a negative perception of labour unions among both employers and employees. The percentage of unionized workers has declined from around 24% in the 1990s to 14.4% in 2020. This decline has had a significant impact on the labour market as unions traditionally played an important role in protecting the rights and interests of workers. The government has attempted to address the issue of adversarial industrial relations by introducing labour laws and regulations that protect worker rights and encourage collective bargaining. In 1980, the Labour Management Council Act made provision for the establishment, composition, matters for consultation and reporting and operation of Labour Management Councils (LMC). In 1997, this was replaced by the Promotion of Worker Participation and Cooperation Act whereby an LMC must be established in each business or workplace employing 30 workers or more with the right to decide working conditions. A LMC is composed of an equal number of members representing employers and workers and have a say on all HR matters and especially they act to prevent labour disputes and handle workers’ grievances. In the absence of a union, an LMC becomes the only legal or institutional mechanism through which workers can have their interests and demands reflected in the workplace (Kim and Song, 2019). Therefore, they are considered as the primary mechanism to present the interests of employees in non-​union enterprises.

HRM System We can distinguish three distinct phases: (1) before 1987; (2) 1987–​1997; (3) 1998 onwards.

Before 1987 HRM was characterized by seniority-​based paternalistic system and lifetime employment. Mass recruitment of university graduates directly from universities for entry-​level positions and extensive training and development for internal career paths created a strong internal labour market and generated employee loyalty and commitment. The seniority-​based paternalistic system impacted on many HRM practices, such as promotion, training, performance evaluation and rewards. Employment security was popular (Tung, Lee and Chen, 2013). This HRM system was relatively effective for ‘imitation’ strategies that Korea pursued in order to achieve rapid economic growth through a cheap, but hardworking, workforce (Rowley et al., 2002).

1987–​1997 Firms changed their strategies from ‘imitation’ to ‘innovation’ (Kim, 1997), with tremendous efforts to improve their technology and organizational capabilities, products/​service quality and to expand internationally. To do that, firms started to apply various new practices. Competence-​ based and performance-​based HRM were increasingly emphasized. Competency became an

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important factor in hiring and promotion, performance evaluation and rewards (Kim and Bae, 2004). Hierarchy was lessened and empowering employees in decision making was encouraged (Kim, 1997).

1998 Onwards The Asian Financial Crisis produced impacts for Korean. Enterprises faced substantial demands to reinforce global competitiveness and transparency, a period during which many Korean firms assumed a global position (Bae, 2012). With the reform of the Labour Standard Law, Korea’s life-​ time employment system and seniority wage system, which was observed to have weak flexibility and low motivational effects (Kim and Park, 1997), slowly eroded. The flexible labour market policy introduced in 1998 has led to layoffs and legalization of temporary work. The unemployment rate more than doubled, from 2.5% (1997) to 6.8% (1998) (OECD, 2005). Employers responded by gradually reducing the core workforce in a variety of ways and significantly increasing non-​ regular workers to cut labour costs. Firms underwent restructuring, downsizing and benchmarking initiatives to shift from seniority-​based to market-​based and performance-​based systems (Yang and Rowley, 2008). With respect to recruitment, firms adopted a combination of internal and external hiring practices targeting both recent graduates and experienced personnel. Employment security was offered selectively to certain employee groups and reliance on external labour markets for recruitment resulted in a rise in turnover among highly qualified personnel. Remuneration packages became more contingent on performance (Tung et al., 2013). In short, there was a decline of the seniority wage system, familial structure and life-​time employment and growth of layoffs, early retirement, job insecurity and increased competition at the workplace. The HRM system continues to have such trends, with features showing more performance-​ based, top-​talent-​focus and flexibility-​orientation. Although this is in line with some global practices, it also challenges the traditional system (Tung et al., 2013). We are left with some ser­ ious and important questions: How have these changing working conditions and HRM systems changed the way Korean workers think about work? How has their work ethic changed? What is the future shape of the Korean HRM system? The main features of the Korean business system are summarized in Table 20.1.

Institutional Evolution and Economic Competitiveness Part I has covered the main characteristics of Korea through the description and analysis of the national business system’s key sub-​systems. Whitley (1999: 54) classifies different business systems according to their broad traits and distinguishes five types of business environment: dirigiste, state-​guided, collaborative, arm’s length, particularistic, each favouring the formation and development of certain dominant types of economic organization: artisanal, allied, cooperative, isolated hierarchy, opportunistic (pp. 84–​85). Applying this typology shows Korea possesses different business system facets and types, with some characteristics of dirigiste (business development is highly dependent on the state’s industrialization policies, the state directly intervenes in the economy), state-​guided (the state has loosened its grip on economic activities and businesses are getting more self-​directed) and particularistic (weak collective intermediaries and norms governing economic activities and the largely personal nature of authority relationships). In the middle of a radical transformation process, in Korea, as in other economies, new and old systems are both present, making the scenario more complex.

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The Korean Business System: Evolution and Future Challenges Table 20.1 Korean business system: sub-​system and characteristics Sub-​system

Characteristics

Political-​economic

Economic growth, with exception of 1997 Financial Crisis 1961–​1979 • State-​led economic regime • Tight link between government & business • State-​union relation in form of state corporatism 1980–​1997 • Liberal market economy established • Shift from labour market repression to liberalization • Led to increased union membership, number of unions & strikes 1998-​> After the Asian Financial Crisis • Reforms of financial and banking sector • Increased labour market flexibility

Labour market

• Gradual decrease of labour force participation • Job polarization • Significant share of non-​regular employment

Culture

Significantly influenced by Confucianism Hofstede’s research suggests Korea is a society: • Values hierarchical order • Collectivist • Feminine • High uncertainty avoidance • Pragmatic, long-​term oriented • Values restraint

Financial market and banking system

Before the Asian Financial Crisis • Strictly controlled by government • Resources mainly allocated to chaebols & specific industries • 1970s–​1980s attempts to liberalize financial markets • Reduced intervention in operation of commercial banks • Mid-​1980s opened financial market to foreign banks & chaebols • Interest rates deregulated • Financial market became second largest in Asia by mid-​1990s After the Asian Financial Crisis • Various reform measures • Restructuring of weak banks through nationalization & mergers • Financial Supervisory Commission set up • Foreign banks/​securities firms open subsidiaries without restriction • Opened domestic bond & stock market to foreign investors • Improved banking sector, performance & practices • COVID-​19 crisis generated liquidity risks

Education & training

• • • • •

Unitary system Until early 1990s still adopted strict control over system Comprehensive education reforms since mid-​1990s Privatized and commercialized Western-​influenced educational system (US and German) (Continued)

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Routledge Handbook of Korean Business and Management Table 20.1  (Continued) Sub-​system

Characteristics

Industrial relations

• • • •

HRM

Before 1987 • Seniority-​based paternalistic system & lifetime employment • Organizations an extended family system, strongly hierarchical, paternal & traditional oriented 1987–​1997 • Hierarchy lessened & empowered employees in decision making encouraged • Started to apply various new practices, such as competence-​based & performance-​based HRM 1998 onwards • Life-​time employment system & seniority wage system eroded • Gradually reduced core workforce & increased non-​regular workers • Restructuring, downsizing & benchmarking initiatives to shift from seniority-​ based HRM to market-​based & performance-​based systems • Reliance on external labour markets for recruitment • Remuneration packages are largely contingent on performance

Significant changes in last few decades Transformation from state control to liberalization Increasing trade union militancy, number of unions & strikes Labour Management Council role in preventing labour disputes & handling grievance, especially in non-​union contexts

Source: Created by the authors.

On the whole, the Korean institutional evolution has been a success. Following several decades of rapid economic growth and global integration, Korea has evolved into a technologically advanced industrialized economy. In 2017, per capita GDP exceeded the $30,000 mark and the country entered the advanced economies group (Ku-​Hyun, 2022). Key sectors at the forefront of this economic power include electronics, telecommunications, automobiles, chemicals, shipbuilding and steel. Korea scored 79.62 points out of 100 on the 2019 Global Competitiveness Report (World Economic Forum). The score was composed from 12 economic dimensions including institutions, infrastructure, information and communication technology (ICT) adoption, macroeconomic stability, health, skills, product market, labour market, financial system, market size, business dynamism, and innovation capability. A higher score meant that Korean has a high degree of competitiveness. Noticeably, the nation’s robust digital competitiveness served as a significant driver for economic transformation across various sectors, including businesses, government, and society as a whole. According to the IMD World Competitiveness Centre (2022), Korea ranked eighth globally, signifying its favourable digital orientation and access to capital. Korea also excels in digital infrastructure, earning high marks for ‘future readiness’ –​a measure of its preparedness to leverage digital transformation (IMD, 2023). It stood second globally in this regard, trailing only Denmark, as indicated by the IMD World Digital Competitiveness Ranking.

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The Future of Work New Challenges to the Business System Looking at the Korean business system through the institutional and system theory lenses it is clear that the system is witnessing a society’s evolution in terms of the development of organizations and society. As detailed in Part I, since the 1960s changes and dynamism have existed within each component institution and, thus, in the national business system as a whole. Internal sources of dynamism include bottom up pressure of change to increase productivity and the state’s national development strategies, while external sources of dynamism include the global intensification of political, economic, social and cultural relations. Korea is facing dual challenges from both developing countries like China, Malaysia and Thailand and from the protectionist regimes in the advanced capitalist societies. Korea has lost competitiveness based on low wages and has to upgrade technologies and skill level to compete in higher value-​added markets. This, coupled with a rapid decline in the workforce population plus changing work ethics, make the road to the future challenging to Korea.

Technological Developments and Skill Levels Korea has a binary situation when it comes to technological development. On the one hand, the economy ranks first in the world in ICT adoption, with a well-​developed high-​tech industry, strong digital infrastructure and high rates of digital penetration (OECD, 2021). Korea also has a strong ranking in the innovation pillar, especially in R&D commercialization of innovation. On the other hand, in export labour-​intensive industries, skill levels have only shown signs of a slow improvement. The nature of the education and training system and industrial relations (as analyzed in Part I) have posed significant constraints to future technological and skills development. In the earlier stages of industrialization, which were based on labour-​intensive industries. Koreans in Tayloristic assembly lines had work that was simple and repetitive, focused on fabricating, assembling and packing. The level skills required for those jobs were low and were well serviced by the educational and training system. In the following stage of industrialization, which was based on capital-​intensive industries, workers engaged in a mass production system. This, in general, required semi-​skilled workers to optimize long production runs of standardized goods (Weinstein and Kochan, 1995). In the case of Korea, however, the nature of mass production did not involve skilled manufacturing and engineering levels, as in advanced countries (Lipietz, 1987). Therefore, while workers in the Korean mass production system was more skilled than their counterparts in labour-​intensive industries, their skill level tended to be lower than that of workers in the mass production systems in advanced countries. In the 1980s, the necessity for industrial restructuring to cope with international competition made the economy more technology-​dependent. Labour shortages in manufacturing and wage hikes in the late 1980s also pressed employers to increasingly introduce new technologies, including the automation of production processes, to reduce labour costs. The increasing automation, however, did not improve workers’ skill levels. The development of Hyundai Motor Company (HMC) and their expansion strategy in Korea and overseas illustrated this. The 1960s–​1970s was the era of Hyundai’s mass production, relying on using a standardized assembly process, which required more physical labour. However, the 1980s’ introduction of automation did not bring about increased skill levels of workers, who engaged in more intensified repetitious tasks imposed by the

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automated work process (Cho, 1995). Similarly, in the 1980s, Hyundai transferred its production system to the US, where the key to success, such as in Hyundai Motor Manufacturing Alabama, was in their relatively low dependence on skill formation and high reliance on numerical flexibility of its production system, which contrasted with its Japanese counterparts. So, Hyundai’s production system in their overseas subsidiaries did not require highly skilled labour either (Jo and You, 2011). Korea is an example of ‘late industrialization,’ a process in which the country learns from earlier innovator nations rather than innovate themselves. Therefore, the government promoted technology transfer with the procurement of turnkey plants and capital goods while restricting direct foreign investment (Kim, 1997). The production process, thus, relied on minor local adapta­ tion and the implementation of already debugged production processes and products. As a result, the need for the problem-​solving skills and involvement of workers in the production process was minimized. The lack of a significant effect from technological changes on skill levels in the late 1980s can also be explained by the fact that the introduction of new technology was not accompanied by the transformation of work organization. As the literature of flexible employment relations suggests, workers’ skills are enhanced in organizational settings that facilitated the development of worker skills. A comparison with Japan sheds light on this situation. The Japanese organization of production is based on a hierarchical integration of traditional blue-​collar workers into the development and utilization of manufacturing technology, taking organizational learning to the shopfloor level (Lazonick, 2002). The integration of blue-​collar workers in the production process delivered good results in the machinery and metals industries, where cooperative efforts in production processes are required. The normative pattern in large Japanese firms, which nurtured long-​term employment, steadily rising salary and status, contributed to internal skill formation and the development of the internal labour market. Furthermore, in Japan, technological development was accompanied by flexible work organization. Work was organized so as to enhance worker skill level and to create multiskilled workers through job rotation and active worker involvement in production tasks (Nakamura and Nitta, 1995). Job rotation was initiated by work groups rather than by man­ agement and it helped increase understanding of machinery and equipment by experiencing a wide range of jobs. In contrast, work organization in Korean firms did not require workers to develop an understanding of the machinery, equipment and production process. Job rotation’s main purpose was to distribute work evenly among the work unit, not to enlarge worker experience and knowledge of a wide range of jobs (Park and Lee, 2019). Furthermore, Korean workers were less likely to have discretion over their production process and were reluctant to suggest ideas for improvement of the production system and quality control (Kim and Lee, 1995; Kim, 1995). Cho, Lee and Kuruvilla (2006) argue that the main reason for the under-​development of flex­ ible work organization in Korean firms was the presence of adversarial labour relations. Korean employers were suspicious of the benefits of a flexible work organization. Workers regarded any involvement in management-​led programmes, such as quality circles, as a ‘pro-​management’ tactic (Kim and Lee, 1995). In comparison, company unionism prevailed in large Japanese firms. Kerr et al. (1960) argued that the nature of Japanese industrial relations was fundamentally ‘pater­ nalistic’ while Dore (1973) called the ‘collective’ paternalism of large Japanese enterprises ‘welfare corporatism.’ Employers and enterprise unions did not perceive any basic conflict of interests (Matsumoto, 1991). Therefore, enterprise unionism contributed to the virtual disappearance of damaging labour conflict, moderation in wage demands and a nearly conflict free industrial environment (Jeong, 2006). 428

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Furthermore, the low level of skill among Korean workers was the consequence of ineffective government-​led education and training programmes. To start with, the education system fails to adequately prepare students for the technological demands of the new economy. It is still heavily focused on traditional subjects like maths, science and languages, with less emphasis on computer science, coding and other skills increasingly in demand in the tech industry (Kim and Lee, 2017). The system also focuses on memorizing and test-​taking skills, rather than on fostering creativity, critical thinking and problem-​solving abilities, a major obstacle to meeting technological demands (Dittrich and Neuhaus, 2023). Insufficiency of both public and private investment in vocational training limits the system in both qualitative and quantitative aspects. Korea relies heavily on the training offered to employees by companies, especially on-​the-​job training (OJT) and worker ability to learn from experience. OJT is the major type of training, given by skilled senior workers to new workers as needed on the shop floor. However, this OJT is not structured and by nature and can be monotonous and unplanned. In general, the time required to acquire skills is relatively short in most Korean firms. The absence of structured training results in the situation that the skill required is limited in depth and scope (Kim, 1995). While there have been some efforts to reform the education system, as discussed earlier, evidence suggests that more needs to be done to ensure that students are well-​equipped to succeed in the new economy. As Lee, Moon and Kwon (2019) argue, this may require a fundamental shift in the way that schools approach education, with a greater emphasis on creativity, innovation and interdisciplinary learning. Without such reforms, the Korean education system may continue to lag behind in meeting the technological demands of the new economy.

Fertility Decline Korea is facing a ‘demographic timebomb.’ Many countries, including Korea, have faced falling fertility rates for some time. Without immigration, the implications of fewer children are obvious. Over time there will be a shift in societal, economic and business requirements, such as fewer schools and child-​related products but simultaneously more elderly care homes and products dovetailed with fewer workers. Research in demography and sociology has relied on a set of common factors to explain the decline in fertility rates in Korea. These include the growing level of education among women, the increasing participation of women in the labour market, a shortage of childcare facilities, changing attitudes toward family values, gender equity, decreased influence of parents and relatives in childbearing decisions, a preference for quality over quantity in children, the high cost of raising children and intense societal competition, among others. However, it is most clear to see the effects of the economic crisis that affected Korea in the late 1990s (analyzed in Part I), on the timing and the number of births. The aftermath of such economic crisis has continued contributing to the decrease in fertility rates in Korea. Fertility decline in Korea since the second half of the twentieth century has been dramatic. In the 1950s, Korea was primarily an agricultural society and large families were seen as desirable for economic reasons, with children viewed as a source of labour on family farms (Kim and Lee, 2013). The total fertility rate (TFR) fluctuated around 6.0 until the 1960s, then rapidly declined. The economy had shifted towards industrialization, and smaller family sizes became more advantageous. The government began to promote family planning through various policies and programmes, such as providing information on contraception and offering incentives for small families (Kim and Lee, 2013). Moreover, the growth in education and employment opportunities

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for women resulted in a delay in marriage and childbearing (Park, Cho and Kim, 2017). Many young women had access to education, which encouraged them to enter the workforce and to delay marriage and childbirth until later in life. The TFR in the 1970s continued declining, but the causes for decline were somewhat different. Economic crisis and family planning programmes drove the decline (Choe and Park, 2006). Economic crisis in 1997 also contributed to a further drop in fertility (Kim, 2013) with a significant impact on the unemployment rate, which more than doubled between 1997 and 1998. Although the unemployment rate declined, it remained high. The persistent trend of high youth unemployment rates highlighted the challenges faced in transition from school to work. While some younger individuals were able to secure employment, their jobs were often part-​time or temporary due to the prevalence of such positions relative to regular full-​time jobs in the labour market since 1999. These conditions have resulted in Korean youths delaying their entry into marriage and childbearing. During times of economic hardship, many workplaces preferred hiring workers with work experience to avoid additional training or re-​education costs. This led to higher youth unemployment rates and difficulties for young people transitioning from school to work, marriage and childbearing. During economic hardship, the consequences of layoffs were also significant for adults, who once being laid off, often found it challenging to re-​enter the formal job sector, exacerbating economic hardship and potentially leading to divorce. The soaring divorce rate in Korea since the economic crisis was likely a reflection of these circumstances. At the same time, female sterilization was introduced in the early 1970s and widely accepted and an intensive campaign was conducted to reduce ideal family size and lessen ‘son preference.’ In addition, abortion and advancement of sex-​detecting technology kept the TFR in Korea in decline in the 1970s (Choe and Park, 2006). The TFR continued to decline in the 1980s. It dropped below the replacement level (2.1) in 1983 and has continued declining. The decline slowed to some extent in the 1990s. However, given the very low level of TFR in this period, the incessant decline was still remarkable. Patterns in fertility decline, however, differed from earlier in several aspects. First, increasing women’s economic participation contributed to fertility decline (Choi, 2004). There was also an increase in the proportion of childless women. While only 9% of women would remain childless according to parity progression schedule in 1990, 16% of women would do so under the 2000 schedule (Choe and Park, 2006). In the 2020s, trends continued. The TFR in Korea has steadily declined over the years. In 1990, 2000, and 2006, the TFR figures were 2.4, 2.0, and 1.9, respectively (World Health Organization, 2008). In 2022, Korea again recorded the world’s lowest fertility rate with the number sinking to a new low of 0.81 –​down from 0.84 the previous year, a sixth consecutive decline and compared to the advanced economy average of 1.6 (Mao, 2022). Although socio-​economic development is associated with fertility decline in most industrialized countries (Bryant, 2007), the Korean experi­ ence is notable because of the extremely rapid pace of decline with socio-​economic development. This simultaneous transformation of several aspects of social life is one of the most important features of ‘compressed modernity’ in Korea (Chang, 1999). The extremely low fertility rate arouses public concern about the long-​term socio-​economic implications of this trend. As mentioned in Part I, Korea is currently experiencing a shrinking workforce and an ageing population. The ageing workforce can have significant implications for the economy, including reduced productivity and participation rates and higher healthcare costs. As the population ages there will be an increased demand for social welfare services, including healthcare and social care services. Moreover, a smaller workforce means a smaller tax base, which may lead to a reduced capacity to fund public services, including social welfare programmes. This 430

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may result in a reduction in the quality and availability of social welfare services, which can have significant implications for the well-​being of the country’s citizens (Kim and Lee, 2021). To address the challenges posed by low fertility rates, Korea has implemented a range of policies aimed at reversing it. This includes financial incentives, such as cash bonuses for parents, tax reductions and increased childcare facilities, as well as policies aimed at improving work–​life balance, such as increased parental leave and flexible working hours (Choi, 2019). However, the effectiveness of these policies remains unclear. Current fears are ironically reminiscent of earlier concerns about over population and the enforcement of family planning programmes (Choe and Park, 2006).

Organizational Loyalty and Work Ethics Hasse (2005: 260) highlights that, even though sociological institutionalism predominantly emphasizes a top-​down perspective on organizations, it falls short in recognizing the ‘discriminative and distinctive interpretation of norms and expectations’ within organizations. Through the system lens, which focuses on different and sometimes contrasting ‘voices’ within the system, this section discusses the demise of organizational loyalty and shifting work ethics in Korea. An initial interesting paradox here concerns working hours. Korea has long annual working hours and fewer holidays than other Organization for Economic Development Co-​operation and Development (OECD) countries (Kim and Min, 2023). There is a widespread movement towards fewer annual working hours in many countries. Even in the epicentre of high annual working hours, Korea, it is declining. According to the results of the Working Conditions Surveys between 2006 and 2020, in 2020, the percentage of workers exceeding 52 hours weekly has decreased over time. However, it is noted that with 6% of wage earners working for more than 52 hours weekly, this percentage is still approximately 10%–​15% higher than that in developed countries in Europe or America (Kim and Min, 2023: 3/​7). At the same time as this trend, we can note some Asian comparisons in terms work ethic changes. There has been change even in Japan, the land of the fabled ‘salaryman’ (sic), with a national and organizational culture consensus of over-​riding loyalty and commitment to companies and ‘karoshi,’ or death due to overwork or work-​related stress and exhaustion. Here there has been the emergence of so-​called ‘Freeters,’ a portmanteau of ‘free’ from freelancer and the German ‘arbeiter’ or labourer. These are individuals who are not in full-​time employment or under-​employment. Another example is China with working ethics evolution with some ‘pushback’ from the expectation and hustle culture of ‘996’ (working 9am to 9pm 6 days per week) of working 72 hours a week with no extra pay. The tech billionaires of Alibaba and JD.Com long endorsed the practice. There has been a youth rebellion against this and mind-​numbing work (Tharoor, 2021) with the emergence of the ‘tang ping’ or ‘lying flat’ movement. The term was coined by a job quitter who went travelling and hanging around and who did not see anything wrong with that with a social media post calling young people to ‘reject the crushing pace of life, relentless competition and the empty promise of consumerism.’ Young workers especially show antipathy and only do the bare minimum to get by. We may find some explanations for this in China’s ‘burden of the three mountains’: housing, education and healthcare. As a result, Gen Z and other young people feel like they cannot change their life. This has progressed into a new form in 2022 with ‘bai lan’ meaning ‘let it rot.’ The term comes from basketball where teams give up when losing a match. Staff might not perform their best as they join a workplace. On the other hand, young workers see it as an answer to burnout from excessive companies (Arasa, 2022). 431

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Such work ethic change ideas as the above also have some global traction and can be seen as part of the Great Resignation’s ‘existential epiphanies’ about work–​life balance. This is also reflected in the idea of so-​called ‘quiet quitting.’ This refers to passively compliant staff who do just enough to get by and clock out when contracted hours are completed. The idea rapidly found fame after Zaid Khan, a 24-​year-​old software developer, posted a TikTok video (in July 2022) sitting in New York subway station, reflecting. Over piano music his gentle narration caught the mood: ‘You’re not outright quitting your job but you’re quitting the idea of going above and beyond. You’re still performing your duties but you’re no longer subscribing to the hustle culture mentality where work has to be your life’ (Gapper, 2022). Such developments and trends need to be seen in context in Korea. With the demise of long-​term employment and seniority-​based earnings, loyalty and life-​commitment, traditionally characterized employees, are no longer the social norms in Korean organizations. Several studies indicated that loyalty and life-​time commitment of Korean employees to their company are declining, especially among younger employees (Choi, 2004). In particular, after the massive corporate restructuring during the Asian economic crisis, employee loyalty to companies significantly weakened. Workers are also well aware that hard work alone no longer guarantees that they can remain with the same company for a long time. As the workplace has become increasingly transactional, a substantial number of workers are constantly looking to switch jobs that offer better pay and benefits. Surveys show that Korean workers’ commitment to their work is low. The Global Employee Commitment Report 2002 from market researchers Taylor Nelson Sofres (TNS), surveyed 20,000 employees in 33 countries and found that Korean workers to be the least committed to their work (Park and Kim, 2005: 10). The TNS survey, showed that 55% of Koreans were uncommitted to both the work they did and the company they worked for. In a more recent survey conducted on 38,000 Koreans, those who prioritized work over family life decreased from 53.7% in 2015 to 43.1% in 2017 (Lee and Park, 2021: 324). Increased job insecurity has led to a deterioration of job satisfaction among Korean workers. Job satisfaction surveys, which included questions regarding types of work, relationships with co-​ workers and superiors, working conditions and promotional opportunities, show that overall job satisfaction declined noticeably between 1997 and 2002 (Gil-​Sung and Kim, 2005). In the 1997 survey by KRIVET, 75% of workers were either very satisfied or satisfied, falling to 67.6% in 2002 (Gil-​Sung and Kim, 2005: 12). Other surveys further demonstrate workers’ increasing dissatisfac­ tion with various aspects of work, including job security, wages, working conditions and opportunities for promotion. A survey of the members of the KCTU shows that 59% of the respondents expressed dissatisfaction with their work (Kang, 2002: 308–​309). After the financial crisis began, for example, it was recognized that those who survived layoffs in large conglomerates developed so-​called ‘ADDS’ or ‘After Downsizing Desertification Syndrome,’ meaning they suffered mentally after seeing colleagues dismissed and those able to keep their job felt guilty and suffered from continuing job insecurity, work overload and stress from working in unfamiliar settings if dispatched to a different department through restructuring. Another emerging pattern that deserves mention is a growing number of self-​sufficient, self-​ governing, unemployed people who never leave or have returned to their parents, even though they are in their 30s and even 40s. Known as the ‘kangaroo tribe,’ it suggests the image of an overgrown marsupial that has not left its mother’s pouch. According to a 2021 report from Korea’s national statistics office, more than 50% of unmarried adults between the ages of 30 and 40, and 44% of those between 40 and 44, still lived with their parents (Na, 2021). Some 42% of them were unemployed because they were unable to find jobs or were voluntarily jobless as they refused to 432

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work for reasons ranging from unsatisfactory wages and benefits to poor working conditions and unsuitable working hours (Na, 2021). The Korea Institute of Child Care and Education’s report in 2017 revealed that Korean parents’ perception of the acceptable length of time to support children has drastically changed. Compared to 2008, the figures from 2016 showed a 60% increase in parents who said they were willing to provide financial support for their children until they find employment, up from 14.7% to 23.6%, while the figures for those who said they would support their children until marriage also increased to 12% from 10.2% over the same period (Yim, 2017). A work ethics crisis has become more obvious after the COVID-​19 pandemic. An interesting recent report in the Korean media (Yu, 2022) was entitled: ‘World Discovers Quiet Quitting Long After Korea Did,’ arguing that Korea may be ahead of the curve with this US post-​pandemic phenomenon. Korean workers, even before the pandemic, were getting serious about work–​life balance and ‘…trying to get beyond workaholic ways’ (Ibid.). In a December 2021 Saramin (Korean online recruitment website) survey (with 3,293 respondents), 70% (ranging from 78.5% of those in their 20s, 77.2% in their 30s to 59.2% in their 50s and 40.2% in their 50s) said people should not work more than what they get paid for (Sung-​Kuk, 2022). Companies were avoided because of too much overtime for 31.5% and low salary compared to workload by 23.5% (Ibid). After work life, with hobbies, etc., was a new focus of concentration for Korean workers. Instead of working overtime for their main employer, some do other paid work (Ibid.). A Newworker (gig worker platform) May 2022 survey, around 40% of office works have such experience of a side-​ job, with nearly 60% willing to look for a side gig for financial reasons (Ibid.). The easing of COVID-​19 restrictions and social distancing from spring 2022 has revived the time-​honoured office ritual of after-​work meal gatherings –​ ‘hoeshik’ and similar events, such as company retreats or weekend hiking with co-​workers (CNBC, 2022). However, even before the pandemic an increasing number of Koreans, particularly younger workers, were already souring on company dinners and similar events and considered it an obsolete company culture that intruded on employee’s personal time (Ibid.). According to some, the pandemic may ensure that the old ‘hoeshik’ culture is fading for good as employees experienced extra off-​work related hours (Ibid.). According to Incruit Corp (a recruiting website operator) survey, nearly 80% of respondents said their companies’ meal-​gathering culture had changed during the pandemic, with 95% of them expressing satisfaction over the change (Ibid.). Of course, this may be another issue when there are generational differences. In terms of where work takes place physically, interestingly some companies sought a middle ground opting for a hybrid model instead of full-​fledged return-​to-​office scheme, such as SK Telcom, operating new workspaces to allow employees to choose whether to work from home, at their head office or at small dispersed work spaces that it had opened (Ibid.).

Conclusion We have detailed and analyzed Korea’s development using institutional and system theories and their critical dimensions. The major socio-​economic challenges now being faced were also detailed and explained. Korean economic development was able to achieve in a few decades what took the West two or three centuries. Such compressed modernity is not without costs and risks that threaten the sustainability and further development of the country (Kyung-​Sup, 2010). Kyung-​ Sup (2010: 444) defines ‘compressed modernity’ as a civilizational condition in which economic, political, social and/​or cultural changes occur in an extremely condensed manner in respect to both time and space, and in which the 433

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dynamic coexistence of mutually disparate historical and social elements leads to the construction and reconstruction of a highly complex and fluid social system. The consequences of modernity compression can be observed in Korea at both macro and micro levels. At the macro level, the speedy industrialization without proper level of skill formation coupled with rapidly declining fertility threatens the sustainability of economic development. As the social institutions, such as the state, industrial relations and education and training and welfare systems, exhibit weaknesses in delivering social functions and utilities, individuals and families are left to their own devices to either give up or fill in these gaps. At the micro level, Korean women have experienced dramatic changes in marriage patterns, fertility, family relations, etc. The number of ‘kangaroo persons’ are increasing forming a ‘tribe’ of their own. A tribe that instead of contributing to the development of their society is the burden of it. Compressed modernity also leads to the obvious consequence of the changing work–​life priority and work ethics. We note that compressed modernity is by no means a unique phenomenon that can only be seen in Korea. It is a common feature in East Asia, including Japan and China, where the ascendance in global political economy has seen them rising as newly established industrial powerhouses and catching up with advanced capitalist economies (Chang, 2010b). Like in other East Asia countries, Korea’s ability to adapt to the new environment, to design and utilize proper economic and social policies is needed to ensure the sustainably of these countries’ economic and social systems. The future of Korea is dependent on such actions.

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21 CONCLUSION Lessons, Challenges and Implications Chris Rowley, Johngseok Bae, Heechun Kim and Hicheon Kim

Introduction In this Handbook we outlined a range of possible routes and explanations for the economic development of South Korea (Korea for shorthand). We also presented a broad range of topics and themes, both in content and coverage, of research and data on Korean business and management. In this concluding chapter, we summarize what we learned from chapters of this Handbook followed by challenges and future directions. Finally, we suggest implications for researchers, practitioners, corporations and policy makers. For swift and easy references for readers, the conclusions of the individual chapters in this collection are presented in the Appendix.

Key Lessons from the Korean Experience Through the description, analysis and conclusions of chapters in this Handbook, we can learn key lessons in terms of both core capabilities and rigidities and challenges (see the next section for rigidities and challenges). Are there core capabilities specific to Korea but which can still have lessons for others and even be transferred globally? First, in the process of economic development and growth, the performance of Korean businesses and management can be characterized as a learning process. Korea’s economic development and growth stages can be divided into four periods: (1) early 1960s to mid-​1980s (industrialization process); (2) mid-​1980s to late 1990s (overseas expansion as fast followers); (3) early 2000s to late 2010s (becoming global players); and (4) after 2020 (at a new crossroads). During the first two periods, Korean businesses and management had a rapid and comprehensive learning experience. A few previous writings conceptualized the Korean industrialization as a learning process (Bae, Rowley and Sohn, 2001; Kim, 1997). A World Development Report (1998/​9) also attributed the rapid growth of gross national product (GNP) in Korea to its success in acquisition and utilization of knowledge. This successful learning process continued in the following periods. The most unique thing about this learning process is ‘quickly’ identifying the object of learning and rapid acquiring relevant knowledge (Chapters 8 and 15). In the 2000s, Korean companies had to explore new knowledge and technologies to grow into global players. This new learning process required different content and approaches. However, previous experience of rapid learning DOI: 10.4324/9781003180920-26

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placed many burdens and liabilities on both agents and institutional learning contexts (cf., Bae et al., 2001). Simultaneously, in addition to the burden ahead, Korean businesses and management are faced with the task of overcoming new challenges, such as the Fourth Industrial Revolution, environmental, social and governance (ESG) issues, and post-​pandemic transition. This new wave of learning process requires interfirm and intergroup relations and collaboration (Chapters 5 and 9), co-​creation with customers through the open innovation process (Chapter 15), and the development of the start-​up ecosystem (Chapter 17). Second, the Korean economy, national branding and competitiveness have experienced substantial growth, partially fuelled by an increase in the country’s ‘soft power’ in the global marketplace. Power, in this context, is defined as the capacity to influence others to achieve desired outcomes. It can be categorized into two main types: ‘hard power,’ which is formal and often coercive and ‘soft power,’ which is informal and emanates from the allure of a nation’s culture, political ideals, and foreign policies (Nye, 2004). At the national level, hard power typically stems from a country’s military strength or economic prowess, enabling it to coerce others. Conversely, soft power is derived from the appeal of a nation’s cultural contributions, political principles and international policies. In particular, the recent Korean success story is distinguished by the nation’s ascent as a cultural powerhouse on the global stage, exemplified by Korean cultural phenomena such as K-​pop, K-​food, K-​dramas, and movies. While Korea is internationally recognized for its manufacturing-​focused growth model, its cultural content industry has emerged as a global contender over the past decade (Adams, 2022). In 2022, Korea achieved a remarkable milestone, posting a record trade surplus of US$1.23 billion for cultural products and services. This figure represents a staggering 1,339% increase from 2013 when the country recorded its first trade surplus of US$85.5 million for cultural products and services (Yi, 2023). It is now evident that Korean companies selling cultural products no longer face so-​called ‘liability of origin,’ meaning they no longer encounter the challenges associated with being labelled as ‘Made-​in-​Korea’ in foreign markets. Third, the critical role of people is another feature that has contributed to the process of economic development and growth. We can consider three groups of people: family chairs in chaebols, professional management and employees. Thanks to the insight, persistence and dedication of chaebol families, some Korean industries have become global players, such as the semiconductor industry (Chapters 5, 6 and 10). In addition, chaebol family chairs actively developed, deployed and empowered professional managers like Yun Jong-​Yong, who served as Samsung Electronics Co.’s chief executive officer for 12 years until May 2008. These non-​ family executives played an active role as ‘agents’ by motivating employees, assuming responsibility, developing new businesses for each company, and achieving unit performance. Finally, employees also played a critical role (Chapters 11 and 20). In the process of industrialization, most companies came to have a paternalistic model of human resource management (HRM) with a ‘hierarchy logic’ and later came to have various models of HRM systems, affected by both internal factors (e.g., philosophy and strategic direction) and external factors (e.g., industry and institutional forces) (Chapter 12). Until the early 2000s, these three groups of people in Korea were characterized by hard work, sacrifice, quick learning and loyalty to the organization and superiors. These have all come to be questioned (Chapter 20). One interesting issue remains working hours and labour productivity. Korea retains some of the highest annual working hours in the world, despite government attempts to reign them back. In 2022, Germany reported 1,341 annual hours worked per worker, with the OECD average at 1,752, compared to Korea’s 1,901 –​ the second highest after Mexico and fifth highest in the G20 after Coumbia, Mexico, Costa Rica, and Chile (OECD, 2024). 442

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Fourth, Korea’s ‘ppalli-​ppalli’ (‘speediness’) culture serves as a key factor in understanding the phenomenon of the ‘Miracle on the Han River’ (Moon, 2016). For example, it explains how Korean companies could effectively implement a catch-​up strategy (Chapter 8). In their daily lives, Koreans are driven by the desire to do everything quickly, be it eating, driving, delivering, working or disembarking planes. The nation’s speedy culture fosters a cut-​throat competition among its three telecommunications firms, compelling them to expand and enhance their networks (Choe, 2011b). Thanks to this cultural emphasis on speed, Korea has achieved tremendous eco­ nomic growth and industrialization in a relatively short period, surpassing competitors from the US, Europe and Japan that had previously dominated the global scene (Moon, 2016).

Challenges and Rigidities As mentioned earlier, the success journey of Korean businesses and management faces a myriad of diverse and complex new challenges, along with persistent rigidities that exhibit resistance to change. These can be categorized across five levels: global, institutional, industrial, corporate and individual.

1.  Global Level While Korea rapidly developed its economy, it grapples with numerous global challenges, challenging both the economy and its companies. Most notably, the economic cold war between the US and China, which began in July 2018 during the Trump administration, has adversely impacted the Korean economy and companies. In 2022, Korea recorded a trade deficit of US$47.78 billion, marking the worst trade deficit since 1956 (Kim, 2024). That same year, with the dollar value of trade between the US and China reaching a record high of US$690.6 billion (Altman & Bastian, 2023), Korea’s trade surplus with China notably decreased to US$1.21 billion (see Figure 21.1). Even more concerning, Korea recorded a trade deficit of US$18 billion with China in 2023, posting its first annual trade deficit with China in the 31 years since they established diplomatic relations in 1992 (Nulimaimaiti, 2024). Meanwhile, the country’s overall trade deficit for 2023 amounted to US$9.97 billion, representing a decrease of approximately 79% from US$47.78 billion in 2022 (Kim, 2024). This decline was partly influenced by the diplomatic move of Korean President Yoon Suk Yeol and the government to decouple –​ meaning, to radically disengage –​ from China, amid the trade tensions and geopolitical conflicts between the US, Korea’s long-​standing security ally and China, the country’s biggest trading partner (Snyder & Byun, 2024).1 However, this move, which expli­ citly chose the US over China, could be self-​defeating and may further backfire on the Korean economy (Kim & Cha, 2016), especially as the US government shows signs of abandoning the de-​coupling strategy from China (Demarais, 2023). Perhaps the biggest political challenge for the current administration and its China strategy may arise from the sharp drop-​off in Korean exports to China. Furthermore, given the heavy dependence of Korean industries on the Chinese market, the Yoon administration has also emphasized an urgent need to de-​risk its economic ties and trade with China, signifying a strategy to decrease exposure to Chinese markets and supply chains (Cha, 2023). However, this is easier said than done. For example, Samsung Electronics, despite being the world’s largest smartphone maker, has lost its competitive advantage in China to local competitors like Xiaomi, which produce more affordable Android smartphones. The company experienced a significant decline in its Chinese market share, dropping from 20% in 2013 to just 1% in 2018 443

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Figure 21.1 Korea’s trade surplus with China, 2000–​2023 (in billion US dollars). Source: www.stati​sta.com/​sta​tist​ics/​657​629/​south-​korea-​trade-​bala​nce-​with-​china-​since-​free-​trade-​agreem​ent/​ (accessed on December 6, 2023).

(Cao, 2024). Consequently, Samsung Electronics found it more practical to relocate its smart­ phone business to Vietnam and India, where the company was the top-​selling brand and could benefit from lower costs such as cheaper labour. By contrast, Samsung finds itself scrambling to figure out how to de-​risk its irreversible investments in major semiconductor production facilities designed to cater to its global customer base in China (Liu & Jin, 2023). The predicament arises as its significant semiconductor operations in China have become a liability following the passage of the US CHIPS and Science Act in 2022, along with Korea’s participation in the Chip 4 Alliance with the US, Japan and Taiwan in March 2022. This legislation imposes restrictions on semiconductor business activities with China while encouraging increased investments in the US. Notably, Samsung Electronics and SK Hynix have jointly poured over US$52 billion into establishing and expanding their operations in China (Liu & Jin, 2023). SK Hynix finds itself in a situation akin to Samsung Electronics. Chairman Chey Tae-​won expressed the gravity of the situation during a news conference in July 2023, stating, ‘To give up the largest market that is China? We won’t be able to recover’ (Liu & Jin, 2023). For both Samsung Electronics and SK Hynix, China, as the world’s second-​largest economy, is too significant to neglect or ignore. Consequently, the considerable risk arises if they were to distance themselves or withdraw from ongoing commitments, given the potential losses involved. The challenge is exacerbated by their inability to smoothly transition their business to alternative markets that might serve as potential replacements for China. The intricate nature of their irreversible investments, coupled with the constantly evolving geopolitical landscape and the politicized nature of de-​globalization, adds an extra layer of complexity to the strategic decisions these companies must navigate.

2.  Institutional Level The role of the Korean government is a double-​edged sword. Industrialization tool place under government leadership. This was a natural start due to the low maturity of companies and the market. 444

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The government shifted its strategy from the earlier government-​led approach to a market-​opening reform approach, taking on the role of ‘facilitator’ from the previous ‘regulatory’ agency (Chapter 7). Three challenges stand out. First, politicians have positional authority because they are in a position of public power. Now that companies are gaining capabilities and the market is maturing, the government sometimes oversteps its authority even though it should be relieved of its leading role. Second, there is also the task of overcoming various problems arising from compressed modernization and rapid economic growth. One of these tasks is to enact and amend appropriate legislation in a timely manner (cf., Chapters 2, 3 and 13). Finally, social consensus is needed to resolve conflicts between various stakeholders and the government must play an appropriate role in this process. In addition, we are currently witnessing a novel phenomenon wherein the industrial policies of foreign governments exert a significant influence on the corporate strategies of Korean companies, especially in a world that is becoming more fragmented and less globalized. Take the US government’s CHIPS and Science Act of 2022, for instance. This policy places its foremost priority on guaranteeing domestic access to advanced semiconductor manufacturing capacity, specifically for military and essential commercial purposes. Simultaneously, it imposes significant restrictions on the sale of advanced semiconductor equipment to China, which pose challenges for Korea’s leading chipmakers that rely on China as a manufacturing base and market. Its primary aim is not to ensure the profitability of Samsung Electronics and SK Hynix’s operations, both domestically and internationally. Ironically, Korean companies, nurtured in domestic markets where the government shifted from a regulatory role to that of a facilitator, now find themselves navigating an unfamiliar environment. Remarkably, we are entering a new era in which the US government not only influences corporate investment decisions in China but also in the US. This is a similar stance with electric vehicle and battery manufacture –​and replicated by the EU. Shih (2023) recently highlighted that governments worldwide are increasingly intervening in the private sector through industrial policies aimed at assisting domestic sectors in achieving goals that markets alone are unlikely to attain. This emerging era of industrial policy contrasts with the traditional formula for economic success, emphasizing free trade, unfettered markets and minimal government intervention (Nasar, 1991). In light of this shift, does it imply that the Korean govern­ ment will need to reassume a significant intervening role in shaping its economy? Indeed, it does. Nevertheless, only time will reveal whether and how it chooses to do so. Korea now faces an indigenous serious peril of prosperity: a shrinking and rapidly ageing population that poses a potential impediment to economic growth (see Figure 21.2). With the world’s lowest fertility rate, standing at just 0.72 as of 2023 –​ the average number of children born to a woman during her reproductive years –​ New York Times columnist Ross Douthat recently issued a warning, albeit with some exaggeration, suggesting that Korea could be at risk of disappearing (Douthat, 2023).2 The country’s working-​age population in 2050 is projected to decrease by 34.75%, totaling 23.98 million people compared to the 2022 figure of 36.76 million. By contrast, the dependent population is anticipated to surge by 44.67%, rising from 15.06 million people in 2022 to 21.79 million in 2050 (Kim, 2023). A recent study by the Korea Economic Research Institute unveiled that a 1% decline in the working-​age population due to low birth rates and an ageing population, coupled with an increase in the dependent population, could lead to a reduction of 0.59% in the gross domestic product (GDP) (Kim, 2023). In comparison, Japan reported a fertility rate of 1.26 in 2022, a country that has long been affected by a steep decline in its working-​age population (see Figure 21.3). A noteworthy observa­ tion is that with the decline in the Japanese working-​age population, domestic consumption weakened, leading to Japanese firms dropping off the Fortune Global 500 list (Black & Morrison, 2019). The correlation between the decline in the working-​age population and Japanese firms 445

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Figure 21.2 Total population and average annual population growth rate, 1960–​2022. Source: Statistics Korea, https://​kos​tat.go.kr/​board.es?mid=​a2010​8070​000&bid=​11747 (accessed on December 6, 2023).

Figure 21.3 Total fertility rate compared: South Korea and Japan, 1960–​2022. Source: World Bank, https://​data.worldb​ank.org/​indica​tor/​SP.DYN.TFRT.IN?locati​ons (accessed on December 6, 2023).

leaving the Fortune Global 500 list was noted at 94%. Regrettably, Korea may face an even more challenging situation in the future. The implication is evident: faced with the challenge of a population cliff, the Korean government should initiate comprehensive interventions sooner rather than later to avert a growth crisis.

3.  Industrial Level The large, diversified Korean business groups controlled by founding families added significant value to their affiliated firms by filling institutional voids, defined as the absence of specialized 446

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intermediaries, regulatory systems and contract-​enforcing mechanisms (Khanna & Palepu, 1997; Chapters 5 and 6). Their value-​creating activity was facilitated through their symbiotic relationships with the authoritarian government, influencing various government decisions, such as issuing business licenses, providing special loans and tax credits and regulating domestic competition. It is an undeniable fact that the chaebol, a term that combines the Korean words ‘chae’ (wealth) and ‘bol’ (clan), played critical roles in rapid economic growth and industrialization. However, this success came at the expense of other players in the economy, such as squeezing domestic suppliers and hindering the growth of small-​ and medium-​sized enterprises (SMEs) (Marlow, 2015). The benefits of the chaebol’s economic success have seen little trickle-​down to SMEs, which are the backbone of a sound economy. Since the Roh Moo-​Hyun administration (2003–​2008), Korean conglomerates have been under pressure to share growth and profits with SMEs. For instance, in 2011, Samsung entered co-​ prosperity pacts with small partners and suppliers to provide financial support and other assistance (Choe, 2011a; Chapter 9). Since the initiation of the ‘creative economy’ initiative by the Park Geun-​Hye administration in 2013, the government has been allocating funds towards seed capital, incubators and networking opportunities to support emerging entrepreneurs (The Economist, 2020). However, the effectiveness of such efforts in yielding meaningful results remains uncer­ tain. Instead, chaebol groups continue to rely on interaffiliate transactions –​ a common target of antitrust scrutiny –​ often conducted under unfair conditions, thereby undermining market competition. According to the Korea Fair Trade Commission, the regulatory authority for economic competition in Korea, transactions among affiliates of the country’s ten largest business groups reached US$120 billion (156 trillion won) in 2021, marking a 15.1% increase from the previous year (Jo, 2022). Now, at the industry level, Korea faces the daunting long-​term challenge of shifting from an economy predominantly dominated by family-​controlled big conglomerates to one fueled by SMEs, including entrepreneurial startups, which employ close to 90 percent of workers (Marlow, 2015; The Economist, 2020). In 2013, McKinsey & Co. drew a parallel between the Korean economy and a frog in a pot of boiling water slowly heating up. A decade later, the metaphor holds true as the temperature of the water in the pot has increased (Hwang et al., 2023). ‘Korea Inc.’ confronts a notable challenge in the form of a persistent productivity gap between large firms and SMEs. In the OECD (Organization for Economic Co-​operation and Development) countries on average, SMEs (1–​249 employees) are approximately 50 percent as productive as large firms (250+​ employees) in the manufacturing sector. However, in Korea, SME productivity is only about 30 percent that of large firms (Hwang et al., 2023). This abundance of unproductive SMEs positions Korea as the country with the fourth-​largest productivity gap among OECD nations, after Ireland, Greece and Mexico. How should the Korean government fix this problem? Politically, the Korean government cannot simply leave the fate of SMEs to market forces (Atkinson, 2021), especially given that many Korean SMEs carve out niches as suppliers to their large counterparts (Borowiec, 2019). Instead, it should implement supportive measures to ensure that SMEs become more productive and thrive. For instance, the government should actively help SMEs attract talented employees, as well as produce more high-​end products. These initiatives will empower SMEs to compete on a more level playing ground against chaebol companies (Kwon, 2022), fostering a more dynamic and inclusive economic landscape. In parallel to these efforts, the government acknowledges the necessity for a paradigm shift towards an entrepreneurial economy as entrepreneurship serves as the catalyst for innovation, job creation and economic growth (Chapter 17). Encouragingly, the number of start-​ups in Korea is on the rise, thanks in part to the efforts of the government to establish an entrepreneur-​friendly business environment (Chapter 7). 447

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Universities are developing talent oriented toward start-​ups. Even more noteworthy, a new breed of business groups, exemplified by information technology conglomerates like NAVER and Kakao, has emerged through opportunity-​driven entrepreneurship over the past decade (Chapter 6). However, it is uncommon for Korean start-​up firms to displace incumbent firms, many of which are affiliated with business groups, within an industry and to grow and thrive in Korea’s start-​ up ecosystem for several reasons. First, they often opt to enter niche markets. Apparently, this strategy makes it difficult for these start-​up entrants to scale up their businesses. One solution to such a potential problem is that they plan for globalization from the ‘get-​go’ (Choi et al., 2015). Second, domestic venture capitalists are often reluctant to invest large-​scale capital and support that are prerequisite for start-​ups to grow into big winners often referred to as ‘unicorns’ (Hwang et al., 2023). For example, Coupang has successfully established a unique competitive advantage in Korea, warding off global giants such as Amazon and Alibaba in its home market (Farrell, 2021). Founded in 2010, the Korean e-​commerce pioneer fortified its position by developing an independent delivery system, assuring customers that orders placed before midnight will be delivered by dawn the next morning. Notably, customer-​centric Coupang facilitates easy returns by permitting customers to leave items outside their doors. However, since 2015 the company has been primarily backed by SoftBank Group, a multinational investment holding company based in Japan. Finally, start-​ups may find it hard to lure experienced R&D engineers away from established large companies like Samsung Electronics and LG Electronics, which now run their own intrapreneurship programmes (Choi et al., 2015). In the current economic climate, amidst a fundamental shift towards the digital economy and digital trade, we suggest that the Korean government reignite economic growth by nurturing a robust digital ecosystem. While SMEs currently lag behind chaebols as the primary engine of economic growth (The Economist, 2020), it is essential for the government to diversify beyond traditional manufacturing sectors like semiconductors, electronics and automobiles. Instead, there needs to be a concerted effort to embrace the digitally competitive economy, where even entrepreneurial start-​ups can thrive. In fact, digital technologies such as artificial intelligence (AI), 5G, cloud computing, virtual reality, augmented reality, the Internet of Things and blockchain have the potential to empower companies of any size like NAVER (Chapter 6), Coupang and Woowa Brothers, enabling them to readily surmount scale-​related challenges at home. The practical challenge, though, is that because the domestic market is relatively small, their revenue growth can stall rather quickly at home. Certainly, they can accelerate their global market penetration in a more digitally connected, borderless world (Lund, Manyika & Bughin, 2016). Digital globaliza­ tion, defined as ‘the globalization of firms enabled by digital assets’ (Verbeke & Hutzschenreuter, 2021), represents a massive area of growth for these firms. Nevertheless, it is important to rec­ ognize the obstacles that digital companies face when expanding globally (Chen, Li, Shaheer & Stallkamp, 2022; Verbeke & Hutzschenreuter, 2021), although addressing these obstacles is beyond the scope of this Handbook.

4.  Corporate Level Four challenges stand out prominently among Korean firms at the corporate level. First, in general, companies must adapt to unprecedented new environments, such as the Fourth Industrial Revolution and blurred and dynamic competitive boundaries (Chapter 19). This demands a commitment to continuous creative innovations to secure a sustainable competitive advantage. Second, there are several tasks in their transition from being ‘fast followers’ to ‘first movers’ in terms of their innovation strategy. Hyundai Motor Co., for instance, is undergoing a transformation 448

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from being a ‘fast follower’ in the combustion engine vehicle market to becoming a ‘first mover’ in the era of electric vehicles (Kim & Bae, 2023). For a successful transition, companies must estab­ lish a new congruence among strategy, structure and culture. For example, many companies, particularly those controlled by founding families, exhibit an organizational structure resembling the top-​down command-​and-​control model typically observed in military organizations (Chapter 5). Correspondingly, the chaebol culture is often perceived as rigid and risk-​averse, with notable exceptions at global powerhouses like Samsung Electronics (Marlow, 2015). In a culture that tends to discourage bold and innovative thinking and ‘creative destruction,’ companies may encounter challenges in successfully navigating the wave of the Fourth Industrial Revolution (Chapter 19). To enable Korean companies to thrive in the Fourth Industrial Revolution, it is crucial to empower employees at the team level by granting more autonomy and the authority to make decisions (Papay, 2019). This is particularly relevant as more Millennials (born 1981–​1996) and Generation Z (born 1997–​2012) cohorts, often referred to as Generation MZ in Korea, increase their presence in the workforce (Chapters 18 and 20). Unlike older generations (Boomers and Generation X) accustomed to the top-​down command-​and-​control model at companies aiming to become fast followers, Generation MZ is reshaping the workplace, tending to value individual freedom, fairness, transparency and bottom-​up communication (Kim, 2022; Chapters 12, 13 and 20). Therefore, it is imperative for Korean companies to develop more agile and flexible organizational structures to adeptly navigate the challenges posed by the Fourth Industrial Revolution or digital transformation (Chapter 19). This serves as a prerequisite for them to aspire to be the first movers in their respective industries. In addition, instead of adhering to the traditional, closed innovation model, they may adopt open innovation (Chesbrough, 2003). This involves exploring collaboration with external partners, such as customers, suppliers, established competitors and entrepreneurial start-​ups, to co-​create and share new technological knowledge and resources (Chapters 9 and 15). Second, large Korean companies that have previously experienced success must avoid falling into the curse of deeply embedded knowledge and acknowledge the necessity for a well-​organized unlearning process, one that entails effectively discarding obsolete and misleading knowledge (Nystrom & Starbuck, 1984; Rowley & Poon, 2010). However, unlearning is a daunting task, as established organizational capabilities or routines, encompassing rules, procedures, strategies and cultures, are entrenched within organizational systems (Levitt & March, 1988). In a similar vein, Leonard-​Barton (1992) highlights that companies, in addressing environmental and market changes, must renew or replace their core capabilities. However, the paradox in managing these core capabilities is that they can transform into core rigidities, hindering the development of new capabilities. For instance, in 1999, Samsung Electronics, under CEO Yun Jong-​Yong, appointed Eric B. Kim as executive vice president of global marketing to enhance marketing capabilities. Despite backing from the CEO, Kim faced opposition from engineers and senior executives, highlighting the company’s deep-​rooted culture that prioritized engineers over marketers (Chapter 10). It is crucial to acknowledge that if the top managers of Korean companies steadfastly adhere to established routines when facing uncertainty, the probability of effective unlearning and the development of new capabilities decreases. One practical strategy to foster unlearning is to contemplate the comprehensive replacement of these managers (Nystrom & Starbuck, 1984). Third, a concerted effort is necessary to narrow the capability gap among interaffiliate firms within a business group. The typical family-​controlled conglomerate is structured around a primary flagship affiliate, accompanied by sister affiliates, each endowed with distinctive capabilities. Examples include Samsung Electronics within the Samsung Group, Hyundai Motor within the Hyundai Motor Group, SK Innovation within the SK Group and LG Electronics within the LG 449

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Group. As a result, effective management of the entire business group as a portfolio of capabilities becomes crucial. However, there is a need to narrow the capability gap between the flagship company and the other companies to fortify the resilience and cohesion of the entire business group. Chang and Hong (2000) have documented that Korean business groups share group-​wide resources among their affiliates, coordinated by group-​level headquarters composed of group chairs and supporting staff (Chapter 5). For instance, these groups commonly establish group-​ level R&D centres, collectively funded by affiliates, where technological innovations resulting from these collaborative efforts are shared. Similarly, group-​wide advertising, jointly financed by affiliates and focusing on the image of the business group rather than individual affiliates, generates significant scale and scope economies. For example, Hyundai Motor and its sister company Kia, have cultivated substantial technological synergy and engaged in both cooperation and competition (co-​opetition) since the former acquired the latter in 1998 (Chapter 5). As a result, Hyundai Motor and Kia secured the 85th and 196th positions, respectively, on the 2023 Fortune Global 500 list. However, such instances are not commonplace. A notable capability gap between the flagship company and other entities in the business group affects the group’s dynamics and may reveal a vulnerability. The inherent interdependence in conglomerate structures, where the flagship acts as the linchpin, implies that challenges encountered by the flagship –​be they financial or operational –​can destabilize the entire group. This interconnection spans not only financial aspects, but also encompasses reputation, market perception and investor confidence. To mitigate this contagion risk, it is vital for other affiliates to bolster their capabilities and proactively address potential disruptions stemming from the flagship. Finally, Korean companies should take proactive steps in embracing environmental, social and governance (ESG) investing. Studies have documented that companies that prioritize ESG initiatives can enhance their reputation (Chapter 16), build trust and strengthen their brand value (Lee, Raschke & Krishen, 2022; Maaloul, Zéghal, Ben Amar & Mansour, 2023). Positive public perception can contribute to customer loyalty and attract a broader human talent base. In addition, many institutional investors and funds now incorporate ESG criteria into their long-​term investment decisions (Maxey, 2023). Furthermore, governments worldwide are increasingly empha­ sizing sustainable and responsible business practices and companies that proactively address ESG issues are better positioned to navigate changing compliance landscapes. When it comes to the ‘E’ in ESG, for instance, the Biden administration in the US enacted the Inflation Reduction Act (IRA) in 2022, allocating US$1 trillion for investments in electric vehicles, renewable energy, hydrogen and other zero-​emissions technologies (Ip, 2023). Likewise, Korean companies like Samsung Electronics Co. are facing mounting pressure to align with initiatives such as RE100 (Son, 2022). RE100 (100% renewable energy) seeks to expedite the shift to renew­ able energy sources and encourage corporate leadership in sustainability. Participating companies commit to sourcing 100% of their electricity from renewables within a specified timeframe. In addition, Korean companies must not overlook the ‘S’ in ESG, as there is a growing emphasis from both consumers and employees on socially responsible and sustainable practices (Chapter 16). This is exemplified by the focus on diversity, equity and inclusion (DEI) in the workplace (Chapters 12 and 18). In contemplating the pivotal factors for the long-​term success of an organization –​investors, customers or employees –​Korean companies often depict employees as having lesser importance (Chapters 2 and 13). Nevertheless, a 2019 Gallup survey revealed a 21% increase in profitability in companies with engaged employees whose needs are met (Stoller, 2021). It is essential to recognize that prioritizing employees ultimately yields benefits for both customers and investors. As well-​documented at Southwest Airlines in the US, happy

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employees are more likely to ensure customer satisfaction, leading to increased sales and profits that shareholders appreciate (Parker, 2007). To excel in the ‘G’ aspect of ESG, Korean companies must institute significant corporate governance reforms aimed at safeguarding minority shareholder rights, among other measures (Chapter 4). This necessity is underscored by research studies conducted by Bae, Kang and Kim (2002) and Baek, Kang and Lee (2006). Additionally, their boards should cultivate essen­­ tial expertise in ESG and environmental issues to effectively oversee sustainability investing, as highlighted by Sloan (2023). In summary, taking ESG investing seriously is not just about meeting ethical and societal expectations –​ it is a strategic imperative for companies looking to thrive in a world where sustainability, responsibility and resilience are integral to long-​term success. Companies need to more from mere rhetorical ‘lip service’ and ‘green washing’ to the reality of commitment, support and change.

5.  Individual Level In the context of individuals, several emerging concerns are salient: those pertaining to the Fourth Industrial Revolution, the post-​pandemic landscape, growing interest in creativity and diversity and the presence of founders’ family CEOs. First, the advent of the Fourth Industrial Revolution and the spread of platform-​based companies brought about significant changes in Korea’s industrial environment and people management practices, exemplified by companies such as Kakao and Coupang (Chapters 12 and 19). Diverging notably from traditional corporate giants, these newly emerged companies manifested disparities across numerous dimensions, encompassing the way of working, business models and governance structures. Nonetheless, notwithstanding these distinctions, they exhibit strikingly analogous constraints when it comes to issues related to people. Regarding Coupang, its utilization of a platform-​based business model has notably advanced customer convenience. Furthermore, its workforce has continuously expanded, comprising approximately 68,000 executives and employees as of 2023. Nonetheless, the prevalence of poor working conditions and overburdening workloads has resulted in health and safety incidents. Throughout Korea’s industrialization trajectory, many individual workers have borne the burden of the ‘growth-​first, distribution-​later’ policy. Unfortunately, employees engaged in new paradigm businesses propelled by emergent technologies continue to encounter analogous challenges. Turning to Kakao, the company has recently encountered substantial turmoil stemming from managerial ethical lapses. While it is necessary for startup entities to grant autonomy and foster creativity during initial growth stages, as companies mature, establishing various mechanisms to effectively utilize organizational capabilities becomes paramount. Regrettably, Kakao’s failure to undertake such measures has been evident, compounded by limitations in laying foundational groundwork and building public trust. Moreover, the practice of ‘revolving door personnel,’ characterized by the cyclic rotation of a limited pool of executives into various upper echelons, has impeded the deployment of diverse and adept professionals. Secondly, post-​pandemic concerns persist, particularly concerning the dynamics of remote work. Much in the business and management world changed in early 2020 with the onslaught of the COVID-​19 pandemic and medical emergency. While many things have seemingly returned to some normality, not all will. The area of hybrid working has changed the landscape and over-​ turned normal with the very technology seen as such a threat pre-​pandemic so liberating in many ways, albeit with its own dark side of remote surveillance and always ‘at work.’

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Amidst the COVID-​19 outbreak, prominent Korean corporations such as Hyundai Motor and LG Electronics instituted remote work protocols, affording employees the opportunity to work from home once or twice weekly. However, as of 2024, after the pandemic eases, these firms have discontinued such arrangements. In particular, in the absence of formal organizational guidelines, the establishment of remote work principles was left to team leader discretion to maintain continuity with existing practices and whether or not to maintain them varied. How are IT companies responding to this regard? Kakao, for instance, transitioned to a 100% remote work model during the pandemic, only to revert to an in-​office work mandate from 2024 onwards. In contrast, NAVER’s approach is slightly different. The company delineates working modalities and offers employees the flexibility to choose between remote work and office commutes. Given the prevailing ambiguity among most Korean enterprises regarding this issue, its resolution remains imperative for the foreseeable future. Thirdly, while the significance of top management remains undeniable, there is a discernible trend towards diminishing their influence. Consequently, it becomes imperative to establish and facilitate mechanisms wherein employees can unleash their full potential and creativity, but such provision is limited. While fostering creative engagement among all team members is essential, the key question is how to unlock their innovative potential in an environment where loyalty to the organization and superiors is significantly diminished. As highlighted earlier, the distinctive mindset and work ethos of the Generation MZ (Chapter 20) necessitate concerted efforts to integrate them into organizational community and foster collaborative synergy. Additionally, active measures to implement the social values included in the ESG approach are essential, as mentioned earlier. Ensuring human rights, upholding fairness, embracing diversity, promoting work–​life balance (Chapter 18) and fostering horizontal and transparent communication, all represent pivotal challenges that demand prompt resolution by major Korean corporations. Furthermore, the turnover rate among new employees, particularly within the Generation MZ, is notably elevated. According to a survey conducted by Korea Management Association Consulting of 1,000 people who had been employed at a listed company for less than 3 years, a staggering 83% indicated either changing jobs or contemplating such a move (Dong-​A Ilbo, 2023). Moreover, respondents identified ambiguity in work goals, excessive management intervention and lack of support as profoundly challenging and mentally debilitating experiences. Such responses pose a significant challenge to Korea’s traditional leadership and people management practices on the one hand and to building an organizational culture for creativity on the other. Finally, descendent CEOs, who assume leadership roles due to their familial ties with the company founders, still need to demonstrate their ability to be effective and ethical leaders for their chaebol companies (Chapter 6). Nepotism has historically been prevalent in these companies, favouring family members over professional managers (Jeong, Kim, & Kim, 2022). For instance, in 2020 Mr. Chung Eui-​Sun assumed leadership at Hyundai Motor Group, and on October 27, 2022, Mr. Lee Jae-​Yong assumed a role previously held by his father, Lee Kun-​Hee, at Samsung Electronics (Kwack, 2019). Both third-​generation family leaders are now facing pressure to dem­ onstrate their suitability for the top positions and justify their selection (Chapter 10). Adding to this complexity, some, if not all, descendent CEOs must navigate the ethical and legal risks of doing business in Korea, as they have faced convictions for white-​collar crimes, bribery and other charges (Soble, Kwaak, & Choe, 2017). Consequently, ethical misconduct in leadership emerges as a significant concern for descendent CEOs in many Korean conglomerates, who often exploit their political influence in their home country (Tejada, 2017). Nevertheless, the present moment provides a timely opportunity for them to take the lead in establishing a role model for ethical leadership. 452

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Implications We next set out implications in a trio of areas.

1.  Research Implications We will now detail key implications for research. First, theoretical work is needed to show the reality of various management phenomena that have emerged in the process of Korean companies securing competitive advantage and globalization. Although much research has been conducted by applying existing theories to Korea’s management situation. Now there is a need for theory development and research that better reveals Korea-​specific management situation, e.g., CEO compensation, roles of professional management as agents in Korea, etc. Second, Korean corporations persist in exploring optimal frameworks for HRM. Initially rooted in a paternalistic paradigm characterized by ‘hierarchy logic’ (Chapters 11 and 12), the landscape evolved post-​1997 to incorporate ‘market logic,’ subsequently integrating elements of ‘community logic.’ Unlike before, where all people within the firm were managed through a single system, the current people management practices are characterized as multifaceted and multilayered. This complexity is exacerbated by a confluence of factors including the imperatives of diversity and inclusion (Chapter 18), the multifarious applications of AI (Chapter 19), considerations of social value (Chapter 16), and the challenges posed by an aging populace (Chapters 2 and 20). Korean companies are at a crossroads in their pursuit of ‘competitive advantage through people.’ Therefore, there exists a need for further inquiry into what organizing logics should be institutionalized in what way within companies with multiple businesses where diverse people and various influencing factors are present. For instance, Hyundai Motor Company, until 1997, adhered predominantly to ‘hierarchy logic.’ Subsequent to this period, it progressively integrated market logic, culminating in the adoption of a hybrid model encompassing all three (‘hierarchy,’ ‘market,’ ‘community’) organizing logics albeit without strict adherence to any singular logic (Chapter 12). This hybrid model is the outcome of dynamic interactions among core values, business imperatives, technological advancements, and labour unions. Careful research is warranted on how these shifts in organizing logic and consequent changes in HRM configuration affect the organization’s competitive advantage. Third, the ‘Korean puzzle’ remains unexplained in corporate governance (Chapters 3 and 4). Despite their opaque governance structures, how could some family-​controlled firms like Samsung Electronics Co. and Hyundai Motor Co. have managed to transcend their modest origins and emerge as formidable global competitors? Unravelling this puzzle necessitates a nuanced examination that distinguishes between the expansion of the corporate value ‘pie’ and the distribution of its ‘slices’ among controlling family shareholders and minority non-​family shareholders. Conventional corporate governance research has predominantly concentrated on addressing the principal–​principal agency problem, a manifestation of the challenges arising during the distribution of wealth between controlling family stakeholders and their minority counterparts. This scrutiny has often revealed a disproportionate allocation of wealth favouring the former (e.g., Bae et al., 2002; Baek et al., 2006). However, it is equally crucial to underscore that some family-​controlled firms have not only navigated the complexities of wealth distribution but have also excelled in generating additional value under the stewardship of their founding families (Chapter 10). To comprehend the success of family-​controlled firms, it is imperative to transcend the conventional narrative centred on wealth allocation disparities. Instead, a holistic exploration is required to uncover the mechanisms through which these firms, despite their opaque governance structures, 453

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have been adept at creating substantial value. This reframing of the discourse acknowledges that while governance challenges persist, certain family-​led enterprises have successfully balanced the interests of controlling and minority stakeholders, fostering an environment conducive to sustained value creation and global competitiveness.

2.  Practice Implications We next detail a trio of key implications for practice. First, business groups exist across economies, emerging and advanced (Coplan, Hikino & Lincoln, 2010; Coplan & Hikino, 2018). As such, the evolution of chaebol and associated challenges and responses would provide lessons for executives at business groups in other countries. Business groups often rose to function as a solution for imperfections in factor markets and as a mechanism of exploiting their core competencies across different industries. The evolution of chaebol demonstrates how they have adapted their characteristics and transformed to fit the shifting market and institutional settings. To complement the advantages of family control, chaebols have sought to professionalize their management. In seeking for new sources of growth and prosperity, they have often revisited and restructured their business portfolios. It is important for executives to think ahead the evolutionary paths of their business groups and get prepared. Second, in a diverse and complex environment, such as changes in the global business environment, declining birth rates, changes in people’s mindsets and the emergence of new technologies, Korean companies must secure management capacities for new transitions. The US–​China tensions and trade wars provide a global environment that is substantially different from before, and individual companies are faced with the task of responding in close cooperation with the government. Low birth rates, weakening employee loyalty and ageing issues pose great challenges to securing and maintaining technological capabilities. Third, in light of the above, there needs to be a change in corporate skills. Starting from school systems and through to university education and executive development, there is a greater need to generate, nurture and build global competencies, a multidimensional construct that requires a combination of knowledge, skills, attitudes and values applied to global situations or intercultural situations according to the OECD’s PISA 2018 framework. This also requires effective leadership, which can be built on the Rowley and Ulrich (2012a; 2012b) framework of ‘3Cs’ and skills, not just technical but especially human and even more so conceptual (Katz, 1955) and critical thinking. The capacity for imagination is also crucial for envisioning a good life in the future, serving as the catalyst for innovation.

3.  Policy Implications We now detail three key implications for policy. First, recently, as political polarization has formed and the permanence of government policies has weakened, the government’s advantages have become increasingly limited. The current conservative government has a very different stance from the previous progressive government on various issues, such as corporate tax, labour issues, education system and real estate policy. The populism of politicians is being revealed in Korea as well as the same phenomenon in many other countries. In order to develop and implement sustainable policies, various discussions and dialogues between social constituents are needed. Despite the imperative for social dialogue, the functionality and effectiveness of the Economic, Social, and Labor Commission, commonly known as the Tripartite Commission, remain impaired. The

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Korean Congress of Trade Unions (KCTU) exhibits reluctance towards active engagement within this framework (Chapters 2 and 13). Second, the Korean government should work towards establishing and maintaining amicable relations with China. Under the leadership of President Yoon Suk Yeol, who took office in 2022, the government has displayed an anti-​China stance in its foreign policies. Notably, it adopts a position of de-​coupling from the world’s second largest economy, which serves as Korea’s largest trading partner, contributing to over a quarter of its total exports in 2022 (Davies, 2023). However, decoupling from the Chinese economy, especially under the influence of the US, poses a complex challenge for Korean companies. Complete economic decoupling between Korea and China is both practically impossible and undesirable. In fact, the Biden administration in the US has shifted its policy towards China from outright decoupling to a ‘small yard, high fence’ approach regarding economic restrictions. This strategy involves setting up high fences in selected technological areas, such as AI, quantum computing and advanced semiconductors, while maintaining broader trade benefits with China (Nam, 2023). Korean companies may find it necessary to lessen their reliance on China; however, they should simultaneously explore opportunities for independent economic relationships with Chinese partners (Davies, 2023). The foundation for such initiatives lies in fostering positive political ties between the Korean government and the Chinese government. Third, the Korean government should contemplate the prospect of transforming North Korea into an ‘economic asset’ (Dingli, 2010: 21). Given the current adversarial relations there will be a growing need for a shift in its hard-​nosed stance. Confronted with one of its most significant challenges –​ a declining population –​ the Korean government, lacking a realistic alternative to reverse this demographic trend within a generation, may consider actively accepting immigrant entrepreneurs from foreign countries (Chapters 2 and 20), as well as overseas Koreans and their younger generations with a global mindset. Alternatively, exploring economic engagement with North Korea could present a viable option. The government is acutely aware of the ‘Korea discount,’ a phenomenon wherein Korean firms are valued lower than their counterparts in other countries (Chapter 3). A significant contributing factor to this valuation gap is the geopolitical risks associated with North Korea. For instance, when North Korea conducted a nuclear weapon test and launched a short-​range missile on May 25, 2009, the Korea Composite Stock Price Index (KOSPI) experienced a sharp decline of up to 6.3% (Heckman, 2010). For now, given the significant uncer­ tainty in inter-​Korean relations, relaunching economic co-​operation with North Korea may pose challenges. Nevertheless, there may come a time when the government feels compelled to re-​ engage with the North as a reliable population policy to address the shortage in the labour force.

Conclusion Our Handbook has covered a diverse range of topics with Korean business and management from a range of perspectives. This was undertaken in five parts covering the institutional context (labour and capital markets); macro issues (corporate governance; CEOs; government relations; strategies; IT; competitive advantage); micro issues (HRM; people management; employment relations; compensation; knowledge); emerging issues (CSR and social entrepreneurship; start-​up ecosystem; diversity, Fourth Industrial Revolution); and challenges and future directions (business system and future of work). Our traverse over the fascinating cultural and institutional terrain underpinning and forging Korean business and management has thrown up several important points and conclusions. Yes, the power of the waves of globalization have washed over the country, but the barriers of a

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distinctive culture and some institutions remain too weak and ameliorate such waves and force them along different, quieter channels. We can see this played out in areas such as business organization (chaebols) and employment (work ethics). Finally, Korean business and management faces a range of threats –​ some of which pose existential challenges. These range from de-​globalization or de-​risking to ageing and changing work ethics. Effectively addressing these challenges requires academics to deliver research that is both pertinent and accessible, calling for leaders in business, politics and policy to engage with it. Subsequently, these leaders must employ creative and innovative thinking to envision the future and devise solutions, a task that also requires critical thinking. This is our clarion call.

Notes 1 China constituted 84.3% (US$45.59 billion) of Korea’s total annual average trade surplus of US$54.07 billion over the 11-​year period 2010–​2021 (Park, 2023). As of 2022, China accounted for around 40% of the Korean exports in the semiconductor and petrochemical sectors, which were among the top five export industries in Korea, along with automotive, refining and steel industries (Chung, Jeong & Kang, 2023). That means that China is already a big customer of Korea. 2 The replacement-​level fertility rate, necessary to sustain a country’s population from one generation to the next without migration, is approximately 2.1 children per woman.

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Appendix: Overview of Main Conclusions Part I. Institutional Context Chapter 2 ‘Labour Market and Korean Workers’ concluded that developing a more open and flexible labour market could have benefits, such as reducing youth unemployment, increasing job opportunities for non-​ regular workers with better employment rates in terms of non-​regular to regular and small to large firm conversion rates, reducing gender career segregation, creating organizational cultures in which older employees are rewarded for contributions and able to work under the direction of younger staff. However, the difficulties in reaching a labour market consensus through dialogue and negotiation between labour and management requires government action on labour reforms. Of course, there is a line here in terms of encouraging numerical flexibility and its perceived benefits comes at the cost of weakening practices encouraging functional flexibility and skills. Chapter 3 ‘Capital Markets and Capital Formation in Korea’ concluded that significant financial development was achieved by improving financial infrastructure, fostering financial institutions and reforming financial markets. The expansion of the financial sector was driven by the extraordinary growth of capital, bond and stock markets. Capital markets opened up to global investors, contributing to the substantial participation of foreign investors in equity markets. As a result, the KRX was among the top ten exchanges worldwide for various derivative instruments based on trading volume. The fintech industry was composed of over 300 firms that provided various services, including payment/​remittance, wealthtech, P2P lending/​crowdfunding, security/​identity verification, insurtech, fintech SI, and small-​sum overseas remittance.

Part II Macro Issues in Korean Businesses and Management Chapter 4 ‘The Corporate Governance and Practices of Korean Companies’ concluded that companies have retained their governance practices, with one perspective suggesting that controlling families remain crucial for the economy due to their historical success. The future trajectory of corporate governance hinged on the ongoing performance and contributions of these families to the economy and society. Social pressures arising from the growing divide between the ‘haves’ and ‘have-​nots’ would impact on institutions and corporate governance policies. The sustainability of family control was contingent upon demonstrating positive outcomes and addressing challenges related to opaque ownership structures, which may face social scrutiny. Furthermore, changes in judicial procedures, aligning more with US common law practices were identified as a crucial factor influencing governance practices. Regardless of the uncertainties, the chapter concludes that companies will adapt and endure, drawing on their historical resilience and adaptability. Chapter 5 ‘Korean CEOs from a Governance Perspective: Historical Paradigm Shifts in Group Governance-​ CEO Models in Chaebols’ concluded that the chaebols find themselves in a new environment marked by shifts in competitive boundaries and technological developments –​ the ‘Fourth Industrial Revolution.’ This requires the continuous generation of creative innovations through omnidirectional cooperation that extends beyond firm, group or industry boundaries. In contrast to the interaffiliate and intergroup cooperation models criticized as contributing to the 1997 crisis, the new era calls for an upgraded version of cooperation. This new model of group-​level governance and CEO roles should not only enable chaebol affiliates to maximize their competitiveness in creative innovations individually, but also encourage them to collectively generate constant innovation through interaffiliate and external cooperation based on mutual benefits. The chapter concluded that the age of network governance and relational CEOs may have finally arrived in Korean business groups.

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Routledge Handbook of Korean Business and Management Chapter 6 ‘Business Groups in Korea: Past, Present and Future’ concluded that chaebol-​driven economic development originated from the strategic sharing and transferring of financial and human resources to address challenges associated with institutional voids supplemented by being family-​controlled, with both advantages and drawbacks. At the same time chaebols professionalized their management and recognized the importance of nurturing and empowering a cadre of professional managers, a crucial complement to family control and a prerequisite for effectively managing diversified business portfolios. The chapter noted the emerging forms of business groups, exemplified by NAVER and Kakao and that despite some similarities, these digital platforms employed asset-​light business models, diversifying by leveraging capabilities, such as customer data and analytics to enter new businesses without incurring high costs or shifting focus dramatically. The authors concluded that this utilization of digital economies of scale and scope laid the foundation for the evolving form of business groups. Chapter 7 ‘Government–​Business Relations in South Korea, 2000 to 2022: An Institutional Perspective’ concluded that post-​1997 Asian financial crisis, both the government and companies recognized the imperative to reform the government–​business relationship and adopt new practices. The government shifted from its previous model of government-​led industrialization, redirecting its focus toward market-​opening reforms, enhancing the business environment and championing innovation and globalization. This transformative approach saw the government relinquishing some control, transitioning from a ‘regulator’ to a ‘facilitator.’ Concurrently, major firms and startups actively sought to bolster their technological competitiveness by assuming a more proactive role in their industries and collaborating with the government as partners. It concluded that the accomplishments were not solely the result of companies’ efforts; the government played a vital role in facilitating cooperation and providing institutional support. Chapter 8 ‘The Strategy Behind the Global Success of Korean Firms: Applying the ABCD Model in Practice’ concluded that although firms lacked unique competitive advantages, as suggested by established theories, an alternative ABCD model transcended traditional explanations, going beyond factors like cheap labour and export promotion and all its elements did not necessarily have to be developed simultaneously. It concluded that the model was not applicable just to latecomers seeking to catch up with industrial leaders as it was relevant for firms aiming to sustain their advantages in changing business environments. Chapter 9 ‘Catch-​up Strategies of Korea’s Big IT Corporations’ concluded that firms expanded their scope of technological innovation activities during both the catch-​up and post-​catch-​up phases. Continued competitive advantage required four factors should be taken into consideration. First, an acceleration of innovation activities that seize market leadership based on indigenous technologies. Second, collaboration between primary and secondary suppliers to establish a robust backward linkage. Third, focus on mastering fundamental technologies and applying them while also pursuing product differentiation through architectural innovation. Fourth, recognition of the importance of absorptive capacity and technological capabilities achieved through selective knowledge production. Chapter 10 ‘The Rise of Two South Korean Multinationals: How Samsung Electronics and Hyundai Motor Built a Competitive Advantage by Closing the Capabilities Gap’ concluded that Samsung Electronics and Hyundai Motor closed their capabilities gap with the leadership of their second-​generation family chairs. However, questions arise concerning their future prospects under the stewardship of the third-​generation family leadership stemming from challenges US–​China geopolitical tensions and the transformative impact of digital technologies such as AI and the Internet of Things on the automotive and electronics sectors.

Part III Micro Issues in Korean Businesses and Management Chapter 11 ‘Putting Korean HRM into the East Asian Context’ compared Korea with Japan and China as their historical connectivity drove the emergence of HRM practices that looked similar in form and underlying cultural and institutional logic. However, the distinctiveness of Korean HRM should not be ignored. Since the 1997 Asian financial crisis companies have taken Western global companies as their major references, with deviation from traditional practices. Korean organizations are facing challenges similar to those being faced by Japanese and Chinese companies, such as ageing workforces, technological changes and casualization of work. It concludes that these challenges could function as forces of additional convergence between the three countries or strengthen and enlarge the distinctiveness of Korean HRM. Chapter 12 ‘People Management in Korea: An Organizing Logic Perspective’ applied an organizing logic as a theoretical framework to four companies to analyze changes in people management practices. Traditional big corporations (Samsung, Hyundai, SK) first adopted a hierarchy logic and then experienced shifts in people

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Conclusion: Lessons, Challenges and Implications management practices, albeit at different speeds and scope. These corporations had diverse people management practices with different organizing logics. Both internal factors (i.e., core values and strategic direction) and external factors (i.e., industry and institutional forces) interplayed in the adoption of people management practices. It concluded that given external constraints, these companies tried to maintain their unique management philosophy and made efforts to gain a competitive advantage through people and people management. Chapter 13 ‘Employment Relations: Labour Issues and the Labour Union’ concluded that confrontational labour relations limited adaptability to change and disruptions, which required a fundamental shift from conflict to collaboration and trust. Yet, many organizations were increasingly relying on automation and robotization with reduced labour requirements. However, companies should not underestimate the significance of harnessing existing workforces and proactive engagement in collaboration with unions or worker representatives. A similar imperative extended to workers and unions. Workers can adapt by continually elevating their capabilities and engaging in educational and training while unions monitor industrial restructuring while participating in initiatives to augment workers’ proficiency. Furthermore, governments should implement measures to dissuade companies from exclusively pursuing innovation without workforce considerations. It concludes that the establishment of tripartite consultative bodies at national, regional and industrial levels, in collaboration with experts, can contribute significantly to the identification and resolution of future challenges. Chapter 14 ‘Executive Compensation in Big Corporations: Unique Features in Korean Firms’ noted that a complex interplay of economic, institutional and cultural factors were relevant to rewards. The regulatory framework and governance mechanisms played a pivotal role in shaping compensation practices. The government’s active involvement in corporate governance, coupled with evolving regulatory frameworks, led to a dynamic landscape where executive pay was subject to scrutiny and modification. It concluded that this unique blend of cultural influences and regulatory interventions underscored the need for a nuanced understanding of executive compensation in Korean corporations. Chapter 15 ‘Knowledge as a Unifying Factor for an Individual Firm and Macroeconomics in Korea’ developed a case study of Amorepacific Corp’s deployment of open innovation and customer co-​creation. This yielded lessons, especially the imperative of integrating both cooperative and competitive elements to actively involve consumers in innovation. Amorepacific Corp’s approach, encompassing idea contests and sustained consumer involvement from ideation to market introduction, mirrored the broader shift in Korea towards a knowledge-​based economy by tapping into external knowledge resources. Furthermore, it shed light on the evolution of Korean MNCs in the global market, exemplifying how they were integrating customer-​ centric roles and contributions within the open innovation process. The context of rapid economic growth, government-​driven innovation initiatives and the pivotal role played by Korean MNCs in global value chains, all contributed to the dynamics and strategies in the case. As firms leveraged open innovation and customer co-​creation to enhance competitiveness there was an increased need for leaders and policymakers to gain a deeper understanding of the strategies employed by these firms. It concluded that by drawing on the distinctive economic landscape and emphasizing innovation and customer involvement, MNCs can align their practices with the evolving global market trends while maintaining a competitive edge.

Part IV Emerging Issues in Korean Businesses and Management Chapter 16 ‘Corporate Social Responsibility and Social Entrepreneurship in Korea’ argued that governance-​ CEO paradigms in Korean business groups have dynamically shifted with historical environmental changes. The chaebols are facing a new environment in terms of both competitive boundaries and technological developments, Fourth Industrial Revolution, required the constant generation of creative innovations through omnidirectional cooperation beyond firm, group or industry boundaries. That is, an upgraded version of interaffiliate cooperation or even intergroup cooperation, which were blamed as the cause of the 1997 crisis, was now needed. It concluded that the new model of group-​level governance and the CEO role must be one that not only allows chaebol affiliates to maximize their competitiveness in creative innovations individually, but also induces them to collectively generate constant creative innovations through interaffiliate and external cooperation based on mutual benefits. Chapter 17 ‘The Shifting Startup Ecosystem in Korea: Government’s Efforts to Revolutionize Education and Finance’ concluded that the Korean government contributed to the development of the start-​up ecosystem through its organizational and administrative initiatives, creating a virtuous cycle of an entrepreneurial ecosystem for job creation and start-​up growth. Government initiatives were necessary for the entrepreneurship

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Routledge Handbook of Korean Business and Management ecosystem to develop and thrive, with three waves of entrepreneurial activity: 1960–​1980, when large corporations became the focus; 1990–​2009, when policies to encourage venture businesses took shape; 2010 onwards, when the creative economy and the second venture boom emerged. It concluded that consequently the start-​up ecosystem was now among the most innovative and dynamic in the world. Chapter 18 ‘Managing Gender and Diversity in Korean Businesses’ concluded that while there are multiple facets to diversity management, gender diversity stands out as a prominent challenge in the corporate sector. To address this issue, the government embarked on initiatives to promote women’s progression in society. Efforts to tackle challenges, such as long working hours and a declining birth rate, led to the introduction of a series of work–​family balance and WLB policies. The ultimate goal was to create a harmonious society where both genders find a supportive work environment and a balanced work–​life dynamic is prioritized. It concluded that it is crucial to build upon this momentum and cultivate a culture in corporations and society that recognizes the value of gender diversity and equality. Chapter 19 ‘Fourth Industrial Revolution and Employment Issues in South Korea’ concluded that the Fourth Industrial Revolution was leading to a shift in employment and management with the potential of technological unemployment. Early adoption of industrial robots, especially in manufacturing, increased the likelihood of intelligent automation replacing knowledge workers. The rise of digital platform-​based economies led to conflicts in various service sectors, reflecting the clash between traditional and digital business models. In response companies were shifting from internal to external labour markets for staffing, embracing flexibility and agility. The lifelong employment model was gradually giving way to market-​based employment relationships, driven by the adoption of contingent workers and experienced hiring practices. The rise of AI technologies, including AI interviewing, was reshaping hiring and contributed to workforce flexibility. Management was undergoing a shift from hierarchical bureaucracy to decentralized autonomy-​oriented approaches, emphasizing creativity, innovation and flexibility. The demographic change within companies, with the Generation MZ becoming predominant, further accelerated this shift, aligning with the need for adaptive and forward-​thinking organizational cultures it concluded.

Part V Challenges and Future Directions Chapter 20 ‘The Korean Business System: Evolution and Future Challenges’ argued that Korea underwent compressed modernity, which was not without costs and risks that threaten the sustainability and further development. The consequences of modernity compression can be observed at both macro and micro levels. At the macro level, fast industrialization without a proper level of skill formation coupled with a rapidly decline fertility rate threatens the sustainability of economic development. At the micro level, women have experienced dramatic changes in marriage patterns, fertility, family relations, etc., and leads to the obvious consequence of the changing work/​life priority and declining work ethics. It concludes that ability to adapt to the new environment, to design and utilize proper economic and social policies is needed to ensure the sustainably of these countries’ economic and social systems.

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INDEX

ABCD model: agility 185–​6, 189–​90; benchmarking 186–​7, 190; codifying success 194; contexts, differences 195; convergence 187–​8, 190–​1; dedication 188–​9, 191; diligence 188; factors 181; global success, explaining 189–​91; goal-​orientation 188; latecomers 192–​3; leading firms 193–​4; origination 185; theoretical background, and 189 affiliate firms 73–​5, 104–​5, 115–​18, 150, 449–​50 Amorepacific Corp (AP): commercialization 340–​1; customer co-​creation 336–​41; data analysis 334–​5; data collection 334; idea development 338–​40; idea generation 337–​8; MNC, as representative 345; open innovation process 337 angel investment 370, 372–​4 Asian financial crisis: bonds and KTBs 46; corporate governance 81–​2; financial market and banking system 420–​1; impact 424; resilience 160–​1

investment 75; new players 134–​5, 147–​9 see also emerging business groups; structures 74–​5; succession 139, 141–​4 business system 424–​6; challenges 427, 443–​52; corporate challenges 448–​51; global challenges 443–​4; implications 453–​5; individual challenges 451–​3; industrial challenges 446–​8; institutional challenges 444–​6; key lessons 441–​3; policy implications 454–​5; practice implications 454; research implications 453–​4; theory 3; threats 456 business-​to-​business (B2B) fintech infrastructure services 61–​2

banking system 419–​21; after Asian Financial Crisis 420–​1; assets 42; before Asian Financial Crisis 420; global ranking 38; loans 43–​4; profitability 40, 43; types 40 benefits and rewards 119–​20, 258, 432–​3 board of directors (BOD): hiring CEO 311; independence 78, 82; performance 91; reform 82; voting rights 78–​9 bond markets 46–​9; foreign investment 46, 48; foreign ownership 49; growth 45–​6, 64; size 46–​7; value 38–​9 bond yields 46, 48 Buddhism 252 business group: capability gap 449–​50; core competencies 454; family controlled but publicly listed 155–​6; family owned see chaebols;

capital markets 45–​57; finance 38; foreign investment 64; growth 38, 43; raising capital 55 capitalism: Confucian 3; controlling shareholder 84–​5; employment relations 291; fledgling 354–​5; state-​led 3; systems 253 cash flow rights 74, 135, 310, 320 Central Labor Relations Commission (CLRC) 300 CEO: chaebol model 89; chaebol role 93-​5 see also chaebol governance chaebol governance: actual 90–​1, 96 alternatives 95; big deal 116; CEO model 89–​90; CEO role, relationship 93–​4; challenges faced by 126–​7; defining business groups 93; disturbance of fit 111–​12; early literature 91–​2; economic crisis 111; entrepreneurial model 97-​100 see also entrepreneurial governance structure; environmental changes 111–​12, 124–​5; forced reduction of unrelated diversifications 116; founding period 1945-​ 60 97–​100; founding period 1961-​1997 100–​10; fourth industrial revolution 124–​6; generalizability 123; governance-​CEO 94;

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Index group-​level 89; heroic leadership approach 90–​1; hierarchical model 100-​10 see also hierarchical governance structure; historical paradigm shifts 123–​4; interfirm cooperative network 93, 95–​6; internal market model 110-​22 see also internal market governance; intimate collaborations with government 112; labour cost advantage disappearance 112–​13; legitimacy 452; misunderstandings 89–​90; neoliberal globalization 112–​13; neoliberal period 1998-​ present 110–​22; network governance, as 94, 127; new competition rule 125–​6; paradigm shift 89–​90, 113–​14, 123–​7; political democratization 112–​13; President Park, and 112, 123; radical neoliberal reform 117; reform policies 114–​16; risks 110; role of CEO 91–​2; structural approach 90–​1; structural role of CEO 96–​7; structure 94; study, positioning 92; theoretical framework 93–​7 chaebols: actual ownership 103; affiliate management 115–​16; bankruptcy 81; conflicts of interest 78; control rights, disparity 76; cronyism 81–​2; definition 71–​2; definitional ambiguity 93; diversification 135, 139; emergence 71; external markets, and 133; failed governance 81–​2; family firm perspective 134, 137–​47; governance see chaebol governance; institutional void 133–​4; internal capital market 135–​6; leadership transition 140; meaning 1; organised capitalism 3; philanthropy 355; price competition strategy 112; prior studies 135–​7; professionalisation of management 137; protective Government policies 72; public perception 155; related party transactions 76–​8; scrutiny 135; success 447; succession norms 140, 145–​7; successor support 77; term 447; traits 136; tunnelling 76–​8; vertical integration 136–​7 cheap labour: democratization 121; low end niche 112, 123; success factor, as 180, 183 China: Confucianism 252; gender diversity 260; global talent management 260–​1; human resource management (HRM) 251, 255–​63; industrial relations 259–​60; institutional environment 254; market dependence 443; pay and benefits 258; recruitment 256–​7; relationship with 455; retention 258–​9; similarities with 255, 264; training and development 257; Western practices 255; work ethics change 431 Chosun dynasty 98 collective bargaining 31, 291, 300, 422 competitiveness: agility 189–​90; alternative model 184-​91 see also ABCD model; benchmarking 190; capabilities 226; catch up factors 219–​20; convergence 190–​1; dedication 191; developed/​ developing countries 181; diagnosing need for change using quality gap in US market 229–​32; digital 426; digital mobile telecommunication

209–​10; display 210; established models 184; Fourth Industrial Revolution 126; Free Trade Agreements (FTAs) 163; growth 442; Hyundai Motor Co. (HMC) 229–​30; innovation 201; institutional evolution, and 424–​6; integrated strategy 353–​4; interfirm 210; people management 288; quality 241; research and development (R&D) investment 216; Samsung Electronics Co. (SEC) 229–​30; semiconductors 205–​6, 210; sequentially addressing gap in design and branding 235–​40; stretch goals to bridge quality gap 232–​5; technology-​dependent 427 complex product system (CoPS) 200; mass products, and 204; similarity in technological process 208–​9; technology upgrading 218 Confucianism: capitalism 3; influence 251, 418; meaning 252; patriarchal values 382; success factor, as 184; training and development 257 conglomerates see chaebols consumer boycott 357 contingency theory 1, 91 control: family see family control; ownership, and 75–​6; rights 75–​6, 84–​5, 310; weak market 79–​80 controlling shareholders 73, 84–​5; executive pay 310–​11 cooperatives: assets 42; number 41; ranking 38 core competencies: catching up 207–​11; Japanese success 224 corporate capabilities: closing gap 226–​8; competitive advantage, and 226; definition 225; liabilities of origin 228; product quality 228; resource based view (RBV) 225 corporate governance 310–​11; board of directors 78; corporate social responsibility 85; definition 310; development 72–​4; disclosure 312; emerging business groups 152; ESG management 85; global player, and 71–​2; holding computer system 83–​4; independent directors 82; Korean puzzle 71–​2, 453; managerial transparency 82; minority shareholder rights 82–​3; poor 71; reform 81–​5, 169; social justice 73, 85; strengthening 169 Corporate Governance Code 169 Corporate Governance Guideline 83 corporate social responsibility: 1953-​1970s 354–​5; 1980s –​early 2000s 355–​7; 2008 onward 357–​9; corporate foundations 355–​6; corporate governance 85; current issues 360–​2; decoupling 362; future challenges 359–​60; globalizing 357–​9; instrumental stakeholder theory 353; non-​ market strategy, as 353–​4; political strategy 354; social prosperity 362 COVID-​19 pandemic: during 54; dividends 55; employment shocks 18; firm value 55; gender diversity 395–​6; market capitalisation 54; people management 271; profitability 54–​5; remote work, and 451–​2; resilience 161; work ethics 433

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Index credit unions: assets 42; number 41; ranking 38 credit-​specialized financial companies: assets 42; number 41; ranking 38 crowdfunding 374; peer-​to-​peer (P2P) 61–​5 cryptoassets 61–​2 culture 418–​19; collectivist 354; country comparison 251–​2; dimensions 419; distinctness 252–​3; East Asian context 252–​3; family-​ friendly 384–​6; generational differences 253; human resource management (HRM) 251, 265; importance 418; K-​pop 419; market-​opening reforms 166; masculine 354; products 1–​2; speediness 443; values 265; women’s role 382–​3 customer co-​creation: case study 333–​41; critiques 332–​3; multinational corporations (MNCs), and 342–​4 Daoism 252 derivatives market 38–​9, 57–​9; financial 57; growth 65; KRX 58; top ranked 59; trading volume 58, 60 developmental state theory 3, 253–​5, 414 digital platforms: economy, based 403–​4; infrastructure, as 400; institutional void 156; traditional models, and 409, 462 digital transformation: chaebol governance 124–​5; conflicts 404; emerging business groups 153; government role 173–​4, 176; impact 401; infrastructure 403; knowledge, and 329; leveraging 426; people management 271–​2, 289; Samsung 122 direct finance 43–​4; expansion 38, 43 dismissal regulations 22–​3, 33 diversity: current issues 260, 361; family-​friendly culture 384–​6; flexible work arrangements 386–​8; gender norms 418; government initiatives 383–​8; legal reform 383–​4; MZ generation 394–​5; political issue, as 396; remaining challenges 394–​6; work-​life balance arrangements, and 390–​4 dynamic-​capabilities view (DCV) 180–​3 East Asian context: convergence 264–​5; culture 252–​3; divergence 264–​5; institutional environment 253–​5; isomorphism 264–​5 economic development: 1961-​1979 415–​16; 1980-​1997 416; 1998-​after Asian Financial Crisis 416–​17; ABCD model 189–​91; adversity 160–​3; agriculture 133; catch up strategy 200-​1 see also technological catch up strategy; cheap labour 180, 183; Confucian values 180, 184; determinants 414; entrepreneurial economy, to 365 see also entrepreneurship; equal 171; export promotion strategies 180, 183–​4; government initiatives 366–​9; government role 159; industrialization 133; institutional maturity

134; Japan, and 224; learning process, as 441–​2; political-​economic background 415–​17; poverty, from 98, 133, 180; rapid 1–​3, 133, 253, 367; reciprocity 5; shared growth 171; sources 414; strong government support 180, 184 education: creativity and innovation 375–​7; quality 136; reform 376–​9, 429; system 421 emerging business groups: affiliations 150; asset light 151–​2; chaebols, as 149–​51; conditions 147; contextual background 147–​9; corporate governance 152; distinctive features 151–​3; entrepreneurship 149; first venture companies 149; founder backgrounds 149; horizontal diversification 151; internal market 154; market conditions founding 151; public perception 155; rapid expansion 153 employee wellbeing 260 see also labour market employment insurance 299 employment policy: Hyundai Motor Group 282; Kakao 283; Samsung Electronics Company (SEC) 276–​7; SK Telecom 279–​80 employment relations: adversarial 423, 428; changes in business model 451; China 259–​60; current labour issues 303–​5; development 291–​2; digital world 400; employer role 306; Fourth Industrial Revolution 303–​4; industrial union structure 301; intergenerational strain 304–​5; Japan 259–​60; non-​union employee representation 305; outdated laws 302; pluralistic perspective 295, 413; regulations 298–​303; system 421–​3; unitarian perspective 295, 413 entrepreneurial governance structure: characteristics 99; historical paradigm shifts 124; individual entrepreneur as corporative actor 99–​100; industrial void 97–​8; modern industries, birth of 98–​100; prototype entrepreneurship 99 entrepreneurship: angel investments 370, 372–​4; crowdfunding 374; demographic changes 377–​8; destigmatising 378; direct debt financing 372; education 375–​9; educational reform, impact 376; expenditure on education 377; failure, and 376–​8; finance policy, and 369–​70; first wave 367, 379; government creation 366–​8; government role 369, 379; loan guarantees 372; medium sized firms 378; new money sources 370–​5; problems 375; rapid growth 368–​9; roadblocks, educational 377–​9; second wave 267–​8, 379; startups see startups; third wave 368, 379; university 377 equity markets 8, 45–​6, 64 ESG (environmental, social and governance): compliance 5; corporate governance, and 85, 361–​2; environment 450; gender diversity 395; governance 451; investment 450–​1; people management 271; performance 361–​2; social 450–​1 executive pay 312–​16; agency problems 316–​17; attracting talent 318; board 321; causal

465

Index effect 324; consequences 322–​3; controlling shareholders 310–​11; corporate governance, and 318; cultural values 321; data 313; determinants 318–​19; disclosure 311–​12, 320; ex-​post settling-​up process 320; excessive 322; external influences 319; family owned 319; firm size 318; Hyundai Motor Group 282–​3; Kakao 285; level 313–​16; optimal contracting perspective 309, 316, 320, 322–​3; packages 314–​15; performance sensitivity 319–​21; rent extraction perspective 309, 316–​17, 320, 323; research areas, as 324–​5; Samsung Electronics Company (SEC) 278–​9; setting 311–​12; short termism 322; SK Telecom 280; stock options 321–​2; structure 313–​16; theoretical background 316–​17; wage gap 309; women 383 exports 164; China 176, 443, 455; Free Trade Agreements (FTAs), and 163; global competitiveness 184; government strategy 101–​2, 175; multinational corporations (MNCs) 330, 342; promotion 112, 183–​4; tax rebates 228; United States 226 family control 72–​4, 138, 453–​4; challenging 79–​80; European companies 84; negatives 74; popularity 85; positives 73–​4 family: affiliates 449–​50; capability 145; control see family control; executive pay 319; firm perspective 134, 137–​9, 242; friendly culture 384–​6; labour division 418; previous leader 146; professionalisation 137, 155; public support for heir 145–​6; stretch goals 242; succession 139–​45; training 138 family-​friendly certification programme 385–​6 fast-​following strategy 5, 281, 288 fast-​mover strategy 5, 367 Federation of Korea Trade Unions (FKTU): decline 422; dominance 293 fertility decline 5, 19, 413, 429–​31, 445 financial institutions 40–​3; assets 42; fintech, and 63; number 42 financial markets 43–​6, 419–​21; after Asian Financial Crisis 420–​1; before Asian Financial Crisis 420; factors 45; size 45 financial sector: infrastructure 39–​40; growth 38, 43; over investment 81 fintech 59–​64; business types 61; changes 63; conditions 59; global ranking 39; operating performance 63–​4; ranking 65; smartphone ownership rate 59, 200; types 59–​63 first movers 121, 180, 191, 448–​9 flexible working 386–​8 Flying Geese paradigm 3–​4 foreign direct investments (FDIs): promoting 170–​1; trends in inward 165; trends in outward 175

foreign markets: alternative 228; business expansion 167–​8; global strategy 176; liability of origin 442; multinational enterprises (MNEs) 360; research and development (R&D) 166 foreign-​invested industrial complexes (FEZs) 171 Fourth Industrial Revolution: chaebol governance 124–​6; characterisation 171–​2; civilization, impact on 400; domestic context 401–​2; employment relations 303–​4; future planning 174; global context 401; government policies 171–​4; human capital investment 408–​9; labour market 404–​5, 408–​9; management issues 404–​7; managerial implications 408–​9; opportunities 159–​60, 448; platform work 403–​4; policy implications 407–​8; rapid entry 172; social safety net 407–​8; start-​ups 173; technological unemployment 402–​4; traditional firms 173; wave of transformation 400–​1 Free Trade Agreements (FTAs) 163; chronology 164; expansion of export markets 163–​5; firm changes, and 166; local market preferences 166–​7; negative effects 165–​6; new marketing techniques 168; new platforms 167; reputation enhancing, as 168 gender equality see diversity gender gap 382, 394 Generation MZ: diversity 394–​5; generational differences 394–​5; people management 275; wage reform 30–​1 Global Korea initiative 170 global talent management 260–​1 globalization: challenges to strategy 176; competitiveness, developing 121–​2; corporate strategies, influence 445; domestic market limits, and 175; government policies 174–​6; internationalization of SMEs 174; neoliberal 112–​13; unpreparedness of economy 112–​13 governance structure 94: alternatives 95, 104; emerging business groups 152; logic of exchange, as 96 government: embracing globalization 174; enhancing business environment 168–​71; fast internet infrastructure 173; fostering innovation and digitalization 171–​4; interventions in business 168; market-​opening reform 163–​8; protective policies 72; role in growth 159, 163, 176, 445; strategy 5; success factor, as 184 Great Labour Struggle, the 292–​3, 306 gross domestic product (GDP) 1–​2, 133, 403 hierarchical governance structure: advantages in unrelated diversifications 109; affiliates 104; aggressive unrelated diversification 108–​9, 112; boundary dynamics 104; chairman’s informal power 106; competition between affiliates

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Index 105; consequences 109–​10; decoupling 105–​6; development coalition with government 101–​2; dictatorship of President Park 100–​1; group interest 105; hierarchy in rapid growth period 104–​5; historical paradigm shifts 124; industrial void 108–​9; interfirm cooperative network 102–​3; meaning 95; misunderstandings 103; model and role in rapid growth period 102–​3; office of planning and coordination 107; rapid economic growth 100–​1 human resource management (HRM): 1987-​1997 423–​4; 1998 onwards 424; before 1987 423; China, and 255–​63; comparison of practices 261–​3; competency-​based model 255; converging diversity 265; cultural values 251, 265; first job’s impact 20; Japan, and 255–​63; optimal frameworks 453; Samsung 263–​4; shortage 136; system 423–​4; US-​style 255; Western influence 266; Western practices 255–​6 Hyundai Motor Co. (HMC); Toyota, and 225; brand image 239; brand marketing strategy 238–​4; brand value 240; compensation 278; competitive advantage 189–​90; design stretch goal 238; diagnosing need for change using quality gap in US market 230–​2; employment policy 276–​8; financial performance 241; fluidic sculpture 239; organizing logic 284; people management 281–​3; quality problems 231; slogans 235; stretch goals to bridge quality gap 234–​5; strikes 294; three step strategy 227; uncompromising quality management 235; US sales 231–​2; vision 240; work system and control 282 illegal activities 72–​3, 81–​2, 302 IMF bailout 114–​16, 123 indirect finance 43–​4 individual labour contracts 299–​300 individualism 252–​3, 263, 276, 354 industrial disputes 300–​1 industrial relations see employment relations industrialization: adapting 407; business expansion 136–​7; early days 135–​6; history 291; impact 133; internal labour market 136; technology development 427–​9 industry-​structure view (ISV) 180–​1 initial public offerings (IPOs) 55–​6, 77, 147, 375 institutional environment 253–​5; challenges 444–​6; comparison 254; investors’ monitoring role 78–​9; isomorphic pressures 264–​5; neo-​institutionalist mechanisms 264; role in growth 162–​3 institutional theory 160–​3, 413–​14; meaning 414–​15 institution-​based view (IBV) 180, 182 insurance: assets 42; global ranking 38; profitability 43; types 40 insuretech 61–​2 integral architectural design 203, 205

internal labour market: external, and 404–​5; hierarchy logic 272, 283–​5; industrialization 136; mobility 136 internal market governance: affiliate competition 118; annual performance pay 120; double side effects 122; emerging business groups 154–​5; fast second strategy 121–​2; historical paradigm shifts 124; meritocracy 118; neoliberal globalized environment 117–​18; new model, as 118; performance control mechanism 119–​20; unexpectedly high performance 120–​1; unintended side effects 118 investment companies: assets 42; number 41; ranking 38 Japan: competency-​based model 255; employee wellbeing 260; global success 224; global talent management 260–​1; human resource management (HRM) 251, 255–​63; individualism 252; industrial relations 259–​60; institutional environment 254; mass recruiting 256, 265; pay and benefits 258; recruitment 256–​7; retention 258–​9; similarities with 255, 264; training and development 257; welfare corporatism 428; work ethics change 431; working age population 445–​6 job: creation 18–​19, 367, 379, 447; quality 18–​19; security 32, 273, 277, 417, 432 Kakao: asset-​light 152; compensation 284; emerging business groups, as 149–​51; employment policy 282; governance structure 152, 154; management ethics 451; organizing logic 286; people management 283–​4; work system and control 284 kangaroo tribe 432–​4 Kim administration: economic reform 115 knowledge production: conferences 217; economy, based 329; journal publications 215–​17; universities 215; unlearning 449 Korea Composite Stock Price Index (KOSPI) market 39, 49; COVID-​19, during 54; dividends 55; firm value 55; key parameters 53–​5; market capitalisation 54; price-​to-​earnings ratios 57; profitability 54–​5; trends 51 Korea discount 55, 71 Korea Exchange (KRX): derivatives 57–​8; equity offerings 56; foreign ownership 53; indices 51; initial public offerings (IPOs) 55; investor groups 52; Korea discount 55, 71; listed companies 50; market capitalization 50; participants 51–​3; ranking 38; seasoned equity offerings (SEOs) 55; size 51–​3; stock issuance 55 Korea Fund of Funds 369, 371 Korea Inc 2; productivity gap 447 Korea New Exchange (KONEX) 39, 49

467

Index Korea Securities Dealers Automated Quotations (KOSDAQ) market 39, 49; COVID-​19, during 54; dividends 55; firm value 55; key parameters 53–​5; market capitalisation 54; profitability 54–​5; venture capital investment 147 Korea Trade-​Investment Promotion Agency 170 Korean Congress of Trade Unions (KCTU): emergence 293–​4, 422; social responsibility 26–​7 Korean Railway Workers’ Union (KRWU) 300–​1 K-​OTC market 39 Labor Standards Act (LSA) 299 labour market 417–​18; academic background 20–​2; aging population 18, 417; casualisation 417–​18; challenges 17, 27–​41; closed, as 20–​2; extended retirement age 28–​9; female workers 24–​5; Government policies 22–​27; happy 31; job polarization 417; large companies 22–​4; movement 32–​3; nonregular workers 22–​3; open 31–​3; reform 32–​3; seniority 20–​2; SMEs 22–​4; supply and demand 5; wage system reform 30; young workers 30 labour movement: development 294; origins 292; resurgence of trade 295–​8; rivals 293–​5; tripartite commission 295, 423 large companies: ABCD model 193–​4; collaboration with SMEs 210–​11, 220; labour market 22–​4; pay 23–​4; rigid 22–​3 latecomers: ABCD model 192–​3; advanced countries, and 211; catch up literature 201–​4; complex product system (CoPS) 203–​4; entry strategies 211; hypothesis 3; innovation model 211; Korea as 200; mass products 203–​4; non technological capability 202–​3, 220; product architecture 203, 218, 220; technological capability 201–​2, 220 law: civil law system 74; dismissal 22–​3, 33; new ventures 147; outdated 302; reform 168–​9 leadership approach: charismatic 229; competence 188, 194; family-​centred 152; heroic 90–​1; mistakes 238; professionalisation 137; role 242; traditional 452; transparent 169; succession 139–​45 LG Group: architectural innovation 211–​12; expansion 136; leadership transition 145; male succession 146–​7; professionalising management 138 management structures: bloodline relatives 73; capabilities 454; change needed 382–​3; connectivity 406; Fourth Industrial Revolution 404–​9; influence 452; male centric 382–​3; paradigm shift 406–​7, 409 manufacturing: capability 208; technological unemployment 402–​4; technology intensive products 207; TFT–​LCD industry 208, 218

market governance structure 95–​6, 104; internal 117–​18 mergers and acquisitions (M&A) 80, 150, 190–​1, 375, 420; cross-​border 360; employees 282, 289 minority shareholders: corporate governance 82–​3; movement 356 ‘Miracle of Han River’ 1, 292–​3; diversity, and 383 mobile telecommunication 209-​10; architectural innovation 212 modernization 3, 445–​6 modular architectural design 203, 205 Moon administration: Fourth Industrial Revolution 172–​3; permanent labour 298 multinational corporations (MNCs): financial crisis 422; foreign markets 360; innovation 329–​30, 342–​5; talent management 260–​1; value chain 329–​30 multinational enterprises (MNEs) see multinational corporations (MNCs) mutual savings banks: assets 42; number 41; ranking 38 National Pension Service 78–​9 NAVER: asset-​light 152; digital economy based 153–​4; emerging business groups, as 149–​51; governance structure 152–​3 neoliberalism 112–​13, 117 neo-​Schumpeterian perspective 201–​2 net zero: carbon emission economy 361; challenges 359; Samsung Electronics 357; technology 450 network governance: chaebol governance 127; chaebols, and 94; controversies 96; literature 94 nonregular employment 22–​3, 417–​18; female workers 395; zero policy 22, 27, 33 North Korea 455 octopus companies: chaebols, as 108; end 116–​17 Online Platform Business Fairness Act 153 open innovation 331–​2; archetypes 331; competition-​ cooperation drivers 342; conceptual model 343; customers, with 332–​3; limitations 344–​5; multinational corporations (MNCs), and 330, 342–​4; practice implications 344; research setting 333 organizational loyalty 431–​3 outplacement 258–​9 ownership structures: affiliations 73, 75; challenge for control 79; control, and 75–​6; controlling shareholders 73; cross 75; family 72; foreign 73; foreign interruption 79; pyramidal 75; restrictions 73; secondary agent conflicts 310–​11; trust, lack of 73 Park administration: dictatorship 100–​1; exports policy 228; Fourth Industrial Revolution 172; labour market changes 18 payment/​remittance services 59, 61

468

Index peer-​to-​peer (P2P) lending/​crowdfunding services 61–​5 people management: big businesses 276–​89; case selection 276; change of organizing logic 274; changes in practices 287; community logic 273, 275; compensation 278–​9, 280; competitive advantage 288; domestic-​global balance 289; dominant logic 274; economic progress, and 442; employment policy 276–​7, 279–​80; features 274–​5; generational conflict 288; hierarchy logic 272, 275; history 274–​5; Hyundai Motor Group 281–​3; influencing factors 287; Kakao 283–​4; market logic 272–​3, 275; meaning 271; organizing logics 272–​3; practitioner implications 288–​9; research implications 287–​8; Samsung Electronics Company (SEC) 276–​8; SK Telecom 278–​81; theoretical framework 272–​4; traditions, and 288; transition 271; work system and control 277–​8, 280 Pohang Integrated Steel Co. (POSCO)191 political democratization 17, 112–​13, 355–​6, 383, 422 political populism 454 product recall 357–​8 public approval: labour market reform 33; trade unions 17, 26 recruitment 256–​7; AI interviewing 405; mass 256, 265 Regional Labor Relations Commissions (RLRC) 299–​300 regulatory environment: business-​friendly 168–​9; reform 168–​9 research and development (R&D): commercialization of innovation 427; investment 167; knowledge production 215; national projects 209–​10; paradox 219; private firms 214; publications 214–​17; spending 1, 3; strategic position 181 resignation: Great 432; recommendations of 29; voluntary 259 resource-​based view (RBV) 180–​2; corporate capabilities 225, 240 retention 258–​9 retirement 28–​9, 259, 304 ROA (return on assets): executive pay 319 ROE (return on equity): executive pay 319 Roh administration: globalization policies 175–​6 Samsung Electronics Company (SEC): Anycall incineration episode 234; brand marketing strategy 236–​8; brand value 237; compensation 278; competitive advantage 190; core competence 207–​10; cultural shift 233–​4; diagnosing need for change using quality gap in US market 229–​30; diversification 139;

employment policy 276–​7; financial performance 238; green innovation strategy 357; HRM practices 263–​4; knowledge production 216; latecomer, as 205–​7; market entry 190–​1; market share 214 ; new management 234; organizing logic 279; people management 276–​8; product recall 357–​8; professionalising management 138; Sony, and 225; stretch goals to bridge quality gap 233–​4; technological linkage 213; three step strategy 227; US sales 230; vision 233, 237; work system and control 277–​8; year of design revolution 236 seasoned equity offerings (SEOs) 55–​6 securities: assets 40; crowdfunding 374; exchanges 39–​40; foreign investment 48; successor support 77; trading 49 security and identity verification services 61–​2 semiconductor: commonality of process 207; competitiveness 205–​6; knowledge production 215–​16; market position 212–​13; organizational arrangements 205–​7; patents 215 shareholders: conflicts of interests 85; controlling 73, 84–​5, 310–​11; minority 82–​3, 356; monitoring rights 78–​9 SK Telecom: compensation 280; employment policy 279–​80; organising logic 281; people management 278–​81; work system and control 280 skills 427–​8; corporate 454 small-​and medium-​sized enterprises (SMEs); collaboration with large companies 210–​11, 220; foreign investment 171; funding 39, 51; internationalization 174; labour market 22–​4; labour shortages 33; mobility 32; pay 23–​4; profit sharing with 447; shared growth 171; trade unions 27; wages 31 small-​sums overseas remittance 61–​2 social entrepreneurship 358–​9; current issues 360–​2; maturity 362 Sony: Samsung, and 216, 224, 226, 236–​7 startups: collaborating 173; displacing incumbents 448; foreign investment 175; Fourth Industrial Revolution 173; government support 169–​70; landscape 365–​6; media role 366; new model, as 134; productivity 447; registered number 170; unicorns 368; venture capital investment 367, 369–​70, 374–​5 Stewardship Code 78–​9, 169 stock market 39, 49–​57; foreign investment 65; growth 64 strategic management: learning 187; theories 181–​3 succession 77, 139–​45 sustainability: current understanding 361; reports 357 systems theory 413–​14; meaning 414–​15

469

Index talent management 260–​1, 318 technological catch up strategy: core competence 207–​11; key features of innovation 220; large firms innovation activities 214–​18; meaning 201; organizational arrangement 204–​7; product architecture 204–​7; product life cycle 211–​14; technological linkage 207–​11; upgrading 214–​18 trade deficits 443 trade unions: development 291; leaders 302–​3; organizing 300–​1; origins 292; public sector 298, 301–​2; public support 17, 2; resurgence 295–​8; sector, by 25; strength 17, 25–​6; system 421–​3 traditional industrial organization (IO) theory 181–​2 training and development 257, 421, 428 tunnelling 74, 76–​8, 81, 310–​11 unemployment benefits 32, 299 unfair labour practices 300–​1; Incheon International Airport Corporation 32–​3 United States 229–​32; entrepreneurship 378; free trade agreement (FTA) 163–​5; labour movement 294, 300; productivity 402; startups 375 universalism theory 1 voluntary resignation 259

wages 258; average 20; CEO-​employee gap 309; college graduates 23–​4; country comparison 24; executive see executive pay; large companies 23; management 24; performance based 30; reforms 30; seniority-​based system 20–​1, 28–​9, 258; statutory minimum 299 Wall Street Rule 78–​9 wealthtech 61–​2 work ethics 431–​3 work system and control: Hyundai Motor Group 282; Kakao 283–​4; Samsung Electronics Company (SEC) 277–​8; SK Telecom 280 workforce see labour market working age population 18, 445–​6; demographic timebomb 5 working hours 299; declining 431; flexible 386–​8; long 383, 397 work-​life balance: programme availability 390–​4; survey 388–​90; utilization of practices 390–​4; WLB index 388–​90 World War II: aftermath 292, 295; colonial exploitation 97–​8; social entrepreneurship 359 Yoon administration: foreign policy 176; labour market changes 18

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