Transforming of South Korean Economy and the “Chaebols”’ Riddle

Nadezhda Sargonlska ID 10210680317 EMA- Chinese Economy School of stintings Fudan University Transforming of atomic number 16 Korean Economy and the Chaebols riddle Political Economy of einsteinium Asia Term Paper Professor Dingping Guo October, 2012 Shanghai, China display panel of contents 1. Introduction 3 2. The beginning of Korea 4 2. 1. Collective bequeath for success of randomness Korea 6 3. southerly Korea and unexampled economy 7 3. 1 Reasons behind(predicate) Economic growth 8 4. The Birth of Chaebols 9 4. 1 Factors of emergence of Chaebols 10 4. 2 Chaebol and 1977 Asian Crisis 14 5. Case Study of Samsung conference 15 6. finishing and Recommendation 19 . refereeerence heed 21 1. Introduction southwestern Koreas s significant transformation an evolution from impoverished to soaring-income economy during triad decades kickoff from 1960s to 1990s is sensation of Asian phenomena famous as -Four Asian Tigers- a term exampled to describe the tremendous perfor mance of four Asian economies Hong Kong, Singapore, chinaware and South Korea. between the early 1960s and 1997s, the four Tigers fastly industrialized and principal(prenominal)tained sustained luxuriously growth order (Ref*1).Today, Korea is an example for a market economy, cardinalness noblely developed country which ranks 15th in the orb by nominal gross domestic ingathering and 12th by purchasing power parity (PPP), identifying it as one of the G-20 major economies(Ref*2). In 2010, Koreas trade volume amounted to US$892 billion, ranking the country the 7th largest exporter in the world(Ref*2). Koreas shipbuilding sector currently accounts for about 34% of the worlds total shipbuilding orders. As a major auto manufacturer, Korea produces over 4. 2 zillion vehicles annually.The success of South Korea is frequently called The Miracle on the Han River and it has been identified by several movers where the presidency of commonalty Chung-Hee (1961-1979) played a vita l role. on a lower floor the President lay Chung-Hees era, the organisation played a dominating role in a countrys economy. His policies of shifting away the emphasis from import substitution st ordaingies towards export- orientated industrialization and technical foul progress, favored the development of South Korean economy and psychiatric hospital of a backbreaking business milieu appeared with a result of large conglomerates called Chaebols.To be defined as a Chaebol, an organization should satisfy cardinal conditions it should be owned by family /relatives members and it should cede a diversified business ope proportionalityns ( REF*3). The Chaebols have created much(prenominal) a diversification that, as Anna Fifield said in her article, You can be born in a Samsung hospital and end up in a Samsung mortuary (Ref*4). The giants of yesterday are one of todays best brands in technology field as Samsung, Hyundai and LG. They and the other Chaebols was the core of Korean spectacular growth and dummy up their success can be accredited as South Koreas success.How and why Koreans economy was shaped by historical pointts and what are the reasons behind Chaebol establishment? What was the impact they have created over South Korean economy and could we say Chaebolsare the reason for the Miracle on the Han River. ? Case study of Samsung will be performed in order to give us bust arrangement of one of the largest and famous Chaebol ever and its influence over South Korean economy. 2. The Beginning of Korea The land of the sunrise calmthis is the meaning of Koreas original light upon Choson.The epoch of establishment of this country and its exact geographical location is still a matter of scientific research even it often believed that human occupation in Korea can be traced far into the Pal eolithic period, about 500,000 years ago (Ref*5). In Asia, Koreans history is known to be second longest following that unless(prenominal) of China. (Ref*6) yet there is a belief, match to the Korean legend, that the God-King Tangun a legendary figure born of the son of Heaven, (which human race is still disputable among scholars) and a woman from a bear-totem tribe founded the Korean nation in BC 2333(Ref* 7). non more(prenominal) present- day nations can be praised with so long and rich history even this countrys time has been shaped by difficult and frequent invasions ( as many as 900 by some accounts)( Ref*6), wars and influence from its neighbors. The beginning was often said to be the time of The triad Kingdoms Silla Goguryeo and Baekche where Goguryeo was known to occupy the Yankee vocalism of the peninsula from the Chinese border to the Han River, eon Silla and Baekche have dominated the Southern regions (Ref. 11).But in 668 AD Silla (668-935) co-ordinated the Korean peninsula and start developing a country with an economy, a civilization and Buddhist philosophy. Koryo dynasty from which the English name Korea orig inates succeeded Silla in 935 and the countrys boundaries reached train which is very(prenominal) similar to its current size today. The Choson dynasty displaced Koryo dynasty in 1392 and move the capital to Hanyang-gun (todays Seoul) in 1394. Soon afterwardward Confucianism replaced Buddhist philosophy and was adopted as the countrys official godliness and Hangul -the Korean alphabet was invented.Koreas history was filled with prosperity, besides withal a lot of hapless coming from external forces like lacquer, Mongolia and China and this provoked Korean closed-door policy, famous as cave dweller kingdom. In the beginning in 1876, the Nipponese obligate a series of Western-style trade agreements on Korea, leading to Japans annexation of the country in 1910. Due to growing anti-Japanese sentiment, in 1897 King Kojong declared himself to be emperor of the Taehan Empire, an independent Korea (Ref*9). Eventually this move helped Korea to preserve its own language, cultur e, traditions and sense of identity (Ref*6).However, during the Russo-Japanese fight (1904-1905), Japanese forces moved onto the peninsula despite Korean declarations of neutrality and Japan-Korea Protection Treaty in 1905 gave Japan virtual support over Korea. Korea was colonized by Japan in 1910 year, just exactly at that time many modern aspects of Korean hostelry emerged included rapid urban growth and infrastructure, the expansion of commerce, and forms of mass culture such as radio and cinema, which became wide rotate for the original time. Later had to endure the Korean War (1950-53), solely it has achieved amazing stinting growth in a short period, dubbed the Miracle on the Han River. (Ref* 2) 2. 1 Collective will for success of South Korea During Japanese influence starting 1920 and later (1937-45) harsh measured reintroduced by Japanese, Korea had to go through a lot of confusion coming from changes in values and social order after Japanese colonial rules was introd uced (Ref* 6&10). During its occupation, Japan built up Koreas infrastructure, especially the street and railroad dodges. However, the Japanese ruled with an iron fist and attempted to root out all elements of Korean culture from order of magnitude.People were forced to adopt Japanese names, convert to the Shinto (native Japanese) religion, and were forbidden to use Korean language in schools and business. also the temp of development was rapid and the countrys population was inexperienced and unprepared in sparing aspects and knowledge because was coming for monarchy of over 1000years compared to Europe and Japan. Ideological confrontation was visible in Korean nightclub and shortly after status of families with long traditions history and wealth were no more subjects of respect and power, society followed the money ideology which was a way of survival.Soon after the democracy was introduced by USA in deluxe 15, 1945, with the end of World War II, The Soviets and Americans f ailed to reach an agreement on one unified country and governance, so in 1948 two separate governments were established the Republic of Korea in Seoul called -The American zone, and the popular Peoples Republic of Korea in Pyongyang, North Korea called -The Soviet zone (Ref* 10).This is how the challenge for South Korea and The American zone has started with era of knowledge, where an enthronement of fond and solid instruction and hard behave were again respectable, hence offered an equal chance to success to everybody despite their origin and status. The whole society desired a better life and this is how they have adopted the impression that stinting development is a cultural harvesting representing the corporate will of the people (Ref*6). 3. South Koreas modern economyIn July 1953, after three years of bloody battle in which around three million Koreans, one million Chinese, 54 000 Americans and several other nations including Turkish were killed, the Korean War ended in a truce with Korea still divided into two vernacularly antagonistic states American influenced zone in South and Soviet influenced in North, which were separated by a line called De-Militarized Zone (DMZ). Korea has remained divided ever since(Ref*10). After the official division of Korean peninsula, a modern economy study was introduced by USA in South Korea which was differentiated from Marxism idea popular in Japan.However, after 1965 when Japan and South Korea emendd their diplomatic relationships, Marxism prevailed into their economy simply because was more community oriented, instead individualistic something which was and it is a basic concept of Confucianism which was influenced South Korea in their earlier stages of history. The ideas of individualistic consumer with no intervention of government for business were too far away of Japans model of triple-crown rapid grow which later in years South Korea adopted and adapted into their economical situation Table 1 Comparison between USA and East Asian capitalism 3. 1 Reasons behind Economic growthMutual desire for better standard of living and a chance for success were deeply rooted into societys mind, after the country was left in poverty in the end of Korean War in 1953. The significant growth of South Koreas economy which became independent in 1945 began in May of 1960 when commons Chung Hee and a group of other military officers of the South Korean army took over the control of the government or coup detat(Ref* 11). Soon after that in 1961 Mr. Park Chung Lee became president of South Korea and the strategical planning for economic development started focusing on lifting up the South Korean economy out of poverty.The scheme Park Chung Lee developed was based on that of South Koreas nearest rivals Japan rather than Western policy advisers. (Ref*12) Export oriented policies were implementing as a tool try to focus the shift into international business. South Korea simply had to survive and find a way to expand economically, merely looking outside of its peninsula because with its slim and limited land and natural resources cause from its mountainous terrain and climate, as well the small size of the domestic market shaped the Paradigm shift in their economy. (Ref*13) The emphasis was added on communal productivity, education and quality as Japan did with examples of so called Keiretsu. another(prenominal) measure was the military-dominated government which installed itself after the coup in 1961 quickly announced an end to the corruption of the First Republic and its intention to use economic growth and development through industrialization to legitimize its authority (Ref* 14) and implementing state policies providing the basis for successful late industrialization( Ref*15).Twenty four of the leading businessmen were arrested. The founder of Samsung, Lee Byung Chull, escaped this treatment only because he was out of the country at the time. When Lee Byung Chul l returned to Korea he met with Park and agreed to cooperate with Parks economic development program. Later Lee and other prominent business leaders offered to donate all or a substantial portion of their fortunes to the government. They ended up paying fines but not giving up their businesses (Ref* 15). 4. The Birth of ChaebolsIn the process of export-led market economy the government ruled by President Park Chung Lee for 18 years reign (1961-1979) decided to work with five- years plans, starting the first one in 1962 which was focused on developing the industrial base and setting the stage for South Koreas economic prosperity. (Ref* 16) After this step, the government encouraged their local, domestic business enterprises to work and expand by choosing which markets must be developed and allow entry only to several of those local companies.To be accepted as Chaebol a company need to be family-owned and usually this type of organization is influenced by growth-oriented family-center ed business, where family virile has the dominant role in a hierarchy and almost unfathomable power to which his subordinates are liege (Ref*17). This idea of Pyramid frame of working had an origin of Confucianism which teached several concepts as social hierarchy, harmony and the concept of preservation face, kindness and care modesty and diligence.For instance, in Japanese companies had more visible mutual obligation which is unlikely to be seen in Chaebol structure, where the boss is superior compared to employees. As an incentive for local companies, pecuniary motivations were offered such as low- interest loan, tax breaks and others simply because all the banks were nationalized as well for the purpose of economic development. This is how so called Chaebols -which literally mean business association, were born into South Korean history. 4. 1 Factors of Development of ChaebolsWith its fast speed of industrialization, the economy nourished and supported heavily Chaebols whic h were often family-centered enterprises. Their brands, products and companies diversified quickly and soon they were responsible for the majority of the exported products which simply meant that private owned companies were responsible for biggest share of South Korea economic development. Not only have they expanded in international level, but also started to grow bigger in local land. Brands like Samsung, Hyundai and LG were a measure for quality, technology and innovation.We could say that even today the like conglomerates are still driver force in Korea. Another significant economic decision made by governments planners was to focus market development through export-oriented industrialization (Ref* 18). Because of its enough to produce, but less to consume population and still not existing local markets, all efforts were putting into creating international markets where South Korea could have an advantage and generate a profit. The results started to be visible in fast digit r ate at average 10% annual growth between 1962 and 1994.The large and fast expanding multinational conglomerates enjoyed strong support from government and genuine success of outside(prenominal) markets. While the contribution of agriculture to the economy declined from 37% in 1965 to 3% in 2008, the industrial sector increased its contribution from 20% to 37%, that of work from 43% to 60% and exports remain the cornerstone of this economic development with their share in GDP accelerating from 8% in 1965 to a whopping 53% in 2008(Ref* 13). Table 2 Share of Top 30 Chaebols in South Koreas GDPSource Chaebol Powered Industrial Transformation by Ahn Choong-yong, Korea Institute of Public political science and Korea Times. April 2010 All the conglomerates were liberally permitted to access foreign loans promoted by the government to support fast-paced economic development, while in contrast outflows of domestic capital were effectively curbed ( Ref* 19). The Foreign Direct Investment (FDI) was also restricted in order to keep positive economic growth, except in cases where technology and know-how were involved.In permutation of this, all the Chaebols were obliged to fulfill ambitious plans and to develop for the next three decades. This pecuniary help rattling protected the companies from bankruptcy and soon they turned on into oc bring inus, regulating and expanding into more and more branches, industries and brands, even not related to their core scope of business increasing their power and wealth into public level and became too difficult their decisions to be influenced. For example, a ship building company could decide to enter into a market of cosmetics products or pharmaceutical industry.Of course, simultaneously they opened more factories, created jobs and promoted economic boom. Basically they became a verbalise in South Korea. In this manner they grew so large that the top fifty Chaebols had sales identical to almost 94% of the total national GDP by 1984( Ref*20). In fact as a second measure introduced from President Park Chung Lee was diversifying of Chaebol into heavy and chemical industries, simply to be protected from North Korea . ( Ref*21)As we can see on Table 2, their share in GDP increased dramatically from 9,8 % in 1973 to 29,6% 1989Table 3 The Growth Rate and Total Factor Productivity by country According to International Institute for Management, South Korea is ranked 5th in terms of education level, with 40 percent of the population completing mellower education after high school. This movement into very strong foundation of education was resulted of democracy brought by USA , President Park Chung Lees reforms, but also Confucianisms which, was earlier in history, influenced the social mind of South Korea. Understanding that high level of education and qualified human resources are powerful driver of economy and quality was one of the best tools for sustainable growth. Education system which was a resource hig hly appreciated by tralatitious values in the society and was a chance for everybody in quest of success. Moreover, South Korean workers work more hours of the day than most countries reflecting 10 to 13 percent increases in productivity per year( Ref*22). The willingness of hard-working and co-operating were very important for the efficacy and quality of the economic boom.Krugman (1994) claims that the Four tigers achieved the rapid growth rate because they successfully managed the resources associated with high employment share to population, efficacy of work, up-graded educational standards and the high rate of investment(Ref*19). Looking into Table 3, it is clear that South Korea achieved the highest grow rate of 8,5% per cent annually from 1960 to1994. Table 4 Domestic Saving per GDP (per cent) Another tool which helped Chaebols to flourish was high-saving ratio, which was initially originated from uncertain life conditions and missing social system.In Korea the social welfare system was not well established (Ref*23). In this kind of situation, similar to Chinas beginning, individuals are trying to save as much as they can in order to ensure their future. Furthermore, high nest egg and investments also contribute to capital accumulation. For example, Kim and Lau (1996) extend their input-analysis which covers Indonesia, Malaysia, Thailand and the Philippines reveal that capital accumulation associated with high domestic saving and investment level significantly contributed to strong growth in East Asia.Also, Collins and Bosworth (1996) emphasize that saving, investment and government policy are the main contributor to high capital accumulation ( Ref. 19) 4. 2. Chaebols and 1997 Asian Crisis The pecuniary crisis that hit Asian countries in early July 1997 was an unexpected situation for Four Tigers including South Korea which were witnessed a rapid and sustainable growth in several decades in row, offering high standard of living into their citizens, hi gh annual growth and successful export economy. They were accepted and perceived as models of economic boom.A lot of foreign investment were flowing and then government help like bank loan , preferential policies and incentives which were used to stimulate the economy through so called multinational companies Chaebols . All this led to excessive diversification, a debt, a difficulty to be measured the credibility of a company and its real proportion due to unlimited bank loan with 0 interest they were given lack of business transparency, superior managerial appearance and more. All these reasons led to so called Asian Contagion, this was a series of currency devaluations and other eventsthat spread throughmany Asian markets.As a result of the crisis, South Korea adopted different protectionist measures, government and financial reforms to ensure the stability of their own currency and reforms inside of Chaebols structures. ( Ref*24). 5. Case of Samsung Group Samsung Electronics int egral part of is a multinational, family-owned company with headquarters located in Samsung Town in Seoul called Samsung Group. Samsung Group has grown to become one of the worlds leading and respectuful electronics companies, specializing in digital appliances and media, scycrapers, petrochemicals, fashion, medicine, hotels, semiconductors, memory, and system integration. Ref *25). As diarist Anna Fifield said in her article, You can be born in a Samsung hospital and end up in a Samsung mortuary (Ref*4). They operate in more than 65 different countries as sales and plants also they are responsible for appointing for more than 170,000 employees worldwide. In 2009 the company was classified as largest IT Company in world with biggest sales revenue of memory chips, LCD and LED displays. For TV and smart phones devices markets, Samsung is in top position, especially after launching Galaxy 2 Note competing with Apple and theirs I aggrandize mini and I phone.Its growing share in smart phones and tablets market is very high with around 20% for the first quarter in 2011 compared to 16, 1% in same time precedent year. pic Brief history and Economic Overview The Samsung Group was established in 1938 in Taegu, Korea by Byung Chull Lee and its main scope of business was export of fish, vegetables and fruits to Mainland China. In 1951, Samsung Corporation was officially established with name Samsung Moolsan which means Three Stars (Ref*25).The company started to grow and later in 1958 when Ankuk Fire& Marine Insurance as well DongBang behavior Insurance in 1963 was acquired, the name was changed into Samsung Fire& Marine Insurance and respectfully Samsung Life Insurance. In 1969 Samsung Electronics and Samsung Sanyo Electronics were established, but in 1977 they also merged and diversifying started into heavy, chemical, shipbuilding, IT and other industries. The reasons behind such a diversification could be the same between all Chaebols examples, but very true for S amsung.They assumed that if investing into new business or a product will avoid potential risk of a single bankrupt, gaining knowledge for a technology and know-how patents competitions and bigger market share and another factor could be because of persuading better wealth in order to ensure all the family members. ( Ref* 21) Thanks to its clever moves and business/political decisions Samsung developed clear domestic and international market and 1974 they bought 50% of share of Korea Semiconductors, which gave them the first place of semiconductor manufacture stand up ANALYSISSamsung Group is one of the largest Chaebols in South Korea with world-class quality products and brand. The company has dominance into digital and electronic components markets, with more than 40 existing affiliated companies. Fig. 1 SWOT ANALYSES Samsung Group STRENGTHS Strong brand and sure customers Leader in several markets as IT and electronics Excellent supply chain Capital Confidence authentic and Credibility Innovation Technology level and skilled worker HR Product dodging flunk Serious Competition High Marketing appeal Managerial Behavior Centralization CorruptionOPPORTUNITIES Good economic conditions highly disposable income local market Government support International relations and business end run Technology development THREATS Patents legislations Regulatory issues Technological changes Economic Crisis China Table 5 Samsung Electronics Marketing Expenses Marketing Mix for Samsung Group 4P Product Strategy Samsungs diversified line of products in 3D market for example which is offering LTD, LED and Plasma TV is one of best positioned into product strategy.Their electronic market is also very good example for product strategy which is one of their strengths in SWOT analyses concentrate on unique products and innovation to compete like 3D Plasma TV with unique design and functionality allowed Samsung to became a leader into this direction. Another very well present ed idea of their product strategy is smart phone Galaxy Note 2 which competes directly with Apples I pad mini. Among some of the benefits of Galaxy Note 2 is its display, price, Android operating system, Bluetooth, slightly lighter, removable memory, flash, front tv camera/rear camera and few more. Ref* 26). At the moment this is the best tablet produced by Samsung and as product strategy unique was chosen and improvement inside of the functionality. Price strategy Samsung strategy according their pricing is organism available for more consumers than I pad mini/ I phone, which is persuaded as a luxury and fashionable product, thus its price differentiates sometimes even double less expensive. Another factor regarding price is that Samsung produce a big amount of its and also Apples components which results into higher(prenominal) cost and price for Apples products on market.Thanks to diversification mentioned earlier we can see that Samsung actually have the advantage to produce b y themselves most of the electronic components of their smart phones/ tablets, but also to their competitors, so they became superior in the Pyramid. Promotion strategy This is one of most weak part of SWOT Analyses of Samsung, because it cost billions of USD in advertisements and promotions which are conducted in three continents Europe, Asia and USA. 8 billion USD were spending in Europe compared to 3 billion in Asia and 12 billion in North America.Using famous American singer/groups such as Black Eyes Peas into their promotion strategy is adding high cost for the Chaebol. Product Placement The strategic idea here is that Samsung tablets Galaxy 2 Note are not positioned on the luxury market, but at the same time will not be sold in low-level stores as Wal-Mart. Targeting young people across three continents, Samsung focused on uniqueness, creativity, design and promotion. Apples product focuses on luxury and fashionable segment of the market where consumers are ready to pay more premiums. Conclusion and Recommendations Transforming South Koreas economy was an experiment and example of Tiger measures conducted by the government of President Park Chung Hee in quest of best way to expand the economy in sustainable way and improve the quality of people equally. Focusing on export-oriented economy with solid foundation of education, willingness of hard-work, high saving ratio and allowance of private family- own enterprises in national sectors and important industries helped The Miracle on the Han River to become history of success. Chaebols were and still are enormous part of South Korean Economy, which for three decades created a country -an example for a market economy, which ranks 15th in the world by nominal GDP and 12th by purchasing power parity (PPP), identifying it as one of the G-20 major economies (Ref*2). In 2010, Koreas trade volume amounted to US$892 billion, ranking the country the 7th largest exporter in the world(Ref*2). Koreas shipbuilding sect or currently accounts for about 34% of the worlds total shipbuilding orders. As a major auto manufacturer, Korea produces over 4. million vehicles annually. The majority of export related goods are produced by top Chaebols companies which appeared in late 60s after government of Park Chung Hee offered them unlimited incentives and industries in exchange of economic growth with 10% on average. The impact of those conglomerates was mensural and visible, even though 1997 Asian crisis shaped up them and reformed these octopus inner structures by implementing more transparent policies and less corruption. Nowadays Chaebols are still the driver of South Koreans income and economy.As recommendation for the largest Chaebol at the moments, Samsung Group- focusing on innovation and technology improvement will be useful, because China is starting to emerge and also other competitors are weak point for Samsung. Combing their efforts could be a good strategy in order to protect South Koreans r eputation and export share. Focusing on domestic market and not being so dependent on export. Or being sure that export is enough diversified to keep the profit. Reducing Marketing cost via cheaper, but productive techniques to attract and keep customers. Because for quality there is always a market Reference List . Fogel, R. W. (2005). 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