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Changing Performance of Business Groups over Two Decades: Technological Capabilities and Investment Inefficiency in Korean Chaebols

Listed author(s):
  • Kineung Choo
  • Keun Lee
  • Keunkwan Ryu
  • Jungmo Yoon
Registered author(s):

This article differentiates itself from the large volume of existing literature on business groups, such as Korean chaebols, in several aspects. First, it uses productive efficiency rather than financial efficiency as a performance measure. Second, it defines chaebols in three alternative ways and checks whether the results are robust. Third and most important, it explains the sources of the post-crisis change in the performance of Korean chaebols in terms of technological capabilities and investment inefficiency. This study finds that chaebols have become more efficient than non-chaebols in the post-crisis period compared with the pre-crisis period, that inefficiency in investment has always been critical in determining productive inefficiency, and that after the 1997 financial crisis Korean chaebols have improved their performance by reducing investment inefficiencies and enhancing technological capabilities. The results of this study are consistent with the often-acknowledged advantages of business group firms: first, technological capabilities can be shared among affiliated firms; and second, technological capabilities can be combined with project- or entry-execution capability. This article also shows that, with globalization and liberalization, technological capabilities have emerged to be more important in recent years than in the past when what was more important was exploiting market imperfections and artificial rents. (c) 2009 by The University of Chicago. All rights reserved.

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File URL: http://dx.doi.org/10.1086/592837
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Article provided by University of Chicago Press in its journal Economic Development and Cultural Change.

Volume (Year): 57 (2009)
Issue (Month): 2 (01)
Pages: 359-386

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Handle: RePEc:ucp:ecdecc:v:57:y:2009:i:2:p:359-386
Contact details of provider: Web page: http://www.journals.uchicago.edu/EDCC/

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  1. Ferris, Stephen P. & Kim, Kenneth A. & Kitsabunnarat, Pattanaporn, 2003. "The costs (and benefits?) of diversified business groups: The case of Korean chaebols," Journal of Banking & Finance, Elsevier, vol. 27(2), pages 251-273, February.
  2. Khanna, Tarun, 2000. "Business groups and social welfare in emerging markets: Existing evidence and unanswered questions," European Economic Review, Elsevier, vol. 44(4-6), pages 748-761, May.
  3. Sung-Hee Jwa, 2002. "The Evolution of Large Corporations in Korea," Books, Edward Elgar Publishing, number 2600.
  4. Chang, Sea Jin & Choi, Unghwan, 1988. "Strategy, Structure and Performance of Korean Business Groups: A Transactions Cost Approach," Journal of Industrial Economics, Wiley Blackwell, vol. 37(2), pages 141-158, December.
  5. Kock, Carl J & Guillen, Mauro F, 2001. "Strategy and Structure in Developing Countries: Business Groups as an Evolutionary Response to Opportunities for Unrelated Diversification," Industrial and Corporate Change, Oxford University Press, vol. 10(1), pages 77-113, March.
  6. Kee-Hong Bae & Jun-Koo Kang & Jin-Mo Kim, 2002. "Tunneling or Value Added? Evidence from Mergers by Korean Business Groups," Journal of Finance, American Finance Association, vol. 57(6), pages 2695-2740, December.
  7. Robert C. Feenstra & Gary G. Hamilton & Eun Mie Lim, 2002. "Chaebol and Catastrophe: A New View of the Korean Business Groups and Their Role in the Financial Crisis," Asian Economic Papers, MIT Press, vol. 1(2), pages 1-45.
  8. Choi, Jeong-Pyo & Cowing, Thomas G., 1999. "Firm behavior and group affiliation: The strategic role of corporate grouping for Korean firms," Journal of Asian Economics, Elsevier, vol. 10(2), pages 195-209.
  9. David S. Scharfstein & Jeremy C. Stein, 2000. "The Dark Side of Internal Capital Markets: Divisional Rent-Seeking and Inefficient Investment," Journal of Finance, American Finance Association, vol. 55(6), pages 2537-2564, December.
  10. Carpenter, Robert E. & Guariglia, Alessandra, 2008. "Cash flow, investment, and investment opportunities: New tests using UK panel data," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1894-1906, September.
  11. Joh, Sung Wook, 2003. "Corporate governance and firm profitability: evidence from Korea before the economic crisis," Journal of Financial Economics, Elsevier, vol. 68(2), pages 287-322, May.
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