Chaebol – Meaning, Importance, Drawbacks, and More

A chaebol is a type of business structure that evolved and spread in South Korea. Basically, Chaebols are a group of large companies that are under the control of a family or monopoly. These are very large businesses with massive international operations. In such a business structure, there is one large company along with several smaller companies. Samsung, LG, and Hyundai are all examples of such types of business structures. Though the chaebol concept started and grew in South Korea, however, it owes its existence to Japan because these structures came into being during the period of the Japanese occupation of South Korea.

The term Chaebol is a combination of two Korean words – ‘chae’ means wealth and ‘bol’ means clan.

In Chaebols, it is not necessary that founding families own majority stakes in the companies. Instead, the founders or their descendants retain control because of their association with the companies. Usually, the family members hold key positions in the management, and this gives them more control and influence over the business operations of the group.  

Largely people confuse Chaebols with Japanese Keiretsu. However, both the business structures have a lot of differences. For instance, the management and control of Chaebols rest with the family owners. In contrast, professional executives manage and control Keiretsu. Another difference is that there is a centralization of ownership in Chaebols. In Keiretsus, there is a decentralization of ownership.

Importance of Chaebol

Chaebols are very important to South Korea’s economy. Such companies are the primary driving force behind the research and development (R&D) in the country. The importance of Chaebols can be understood from the simple fact that almost half the value of South Korea’s stock market and more than half of South Korea’s exports are controlled by these Chaebols. Such companies also bring in the majority of the foreign investment in the country.

Chaebol’s origin traced back to the 1960s, i.e., after the Korean War. At the time, to rebuild the economy, the government also gave full support to such companies. Such companies get tax incentives, special loans, subsidies, and other benefits from the government.

Five Biggest Chaebols

Following are the five biggest Chaebols:

Samsung

Founded in 1938, it is the biggest Chaebol. It was initially used to export fruit, dried fish, and noodles, and now is among the biggest companies in the world. Samsung now deals in electronics, luxury hotels, hospitals, and more. Samsung Electronics is the group’s biggest subsidiary and accounts for about 14% of South Korea’s GDP.

Hyundai

Founded in 1947, it was initially in the construction business. Now, the company deals in automotive, shipbuilding, financial and more segments. Following the death of its founder in 2003, Hyundai broke up into five different companies. Hyundai Motor is the third biggest automaker globally, while Hyundai Heavy Industries is the biggest shipbuilding company in the world.

SK Group

This group came into existence in the early 1950s after the acquisition of Sunkyong Textiles by the Chey family. Now, the group comprises about eighty subsidiaries that mainly operate in the energy, communication, financial, insurance, construction, and chemical segments. SK Telecom is the biggest wireless carrier in the country, while SK Hynix is the second-biggest memory chip maker in the world.

LG Corporation

This group got its name after the merger of Lucky and GoldStar. Initially, it was a chemical and plastics company but later undertook heavy investments in consumer electronics, telecommunications networks, and other industries. In 2005, LG spun off a separate entity called GS, whose core business includes energy, retail, sports, and construction.

Lotte

This chewing gum company was founded in 1948 in Tokyo but was shifted to South Korea in 1967. Lotte Group deals in food products, theme parks, department stores, electronics, energy, and more industries. It is the third biggest gum maker globally, and its Lotte World Tower in Seoul, with 123 stories, is the tallest building in the country.

Chaebol – Are They Losing Importance?

Chaebol’s business structure is still working very well for South Korea. However, they are less popular now than they were earlier. And there are many reasons for it. For instance, South Korea’s democratic transition in the late 1980s led to the creation of labor unions. The emergence of labor unions had a little but important impact on the Chaebol system.

Then there were some reforms in the early 1990s when the country became a member of WTO (World Trade Organization) and OECD (Organization of Economic Cooperation and Development) that also had some impact on the powers of Chaebol.

The 1997 Asian financial crisis was a major test for the Chaebol system. The crises lead to debt crises, dropping currencies, and recessions in several Asian countries. Following the crisis, many of the biggest conglomerates in South Korea went bankrupt.

Following the crisis, the country had to agree to an international bailout package, which was led by the IMF (International Monetary Fund). Owing to the terms and conditions of the package, South Korea has to come up with many reforms, such as reducing government subsidies, corporate transparency measures, and more. Such reforms also lowered the power of the Chaebols.

Still, Chaebols enjoy a considerable influence over South Korea’s economy. Though because of all these factors, their level of influence and control has definitely been diluted over the years.  

Chaebol

Concerns or Drawbacks of Chaebol

Though Chaebols have been the backbone of the South Korean economy for quite a while, questions are being raised over their structure and business practices.

Usually, Chaebols are so big that if they fail, it could result in economic instability. For instance, Samsung accounts for about 20% of South Korea’s GDP (Gross Domestic Product). If this Korean company fails to perform or goes bankrupt, it may result in an economic downturn in the country.

Chaebols have also received criticism for hoarding profits. They also face accusations of impeding the development of small and medium businesses in the country.

Another accusation against such companies is that they reinvest their profits overseas and not in their home country. This is one primary reason why small and medium-sized local companies are big critics of such type of business structure.

Lack of flexibility is another major concern with Chaebols. As they are so big, it generally takes them some time to react to the market changes. It also means they are slow to match the innovation and growth ability of the smaller firms. Owing to such reasons, it is possible that Chaebols underperform. So underperformance of a few such entities can have a significant adverse impact on the growth and performance of the Korean economy.

Another criticism is that Chaebols result in monopolies and the concentration of capital. Moreover, these companies have also received criticism for their proximity to the government. They regularly face accusations of influencing government decisions and fostering a corruption culture. There are several instances of Chaebols bribing prominent government officials to gain undue favors.

Final Words

Over the last two decades, discussions have been ongoing over reforming Chaebols so as to address their criticisms and make them more accountable. Several laws and measures have come up in recent years, resulting in many high-profile convictions. For instance, Samsung chairman Lee Kun-Hee had to resign in 2008 after tax evasion accusations. Still, critics argue that these reforms are slow and incomplete because Chaebols still enjoy massive power in South Korea.

Frequently Asked Questions (FAQs)

What is Chaebol?

A chaebol is a business structure that has its roots in South Korea. Basically, these are a group of large companies that are under the control of a family or monopoly. These are very large businesses with massive international operations.

What are the reasons for Chaebol losing importance?

Chaebol’s business structure is still working very well for South Korea, but they are less popular now than they were earlier. And the reasons for it are:
1. South Korea’s democratic transition in the late 1980s led to the creation of labor unions which had a little but an important impact on it.
2. The 1997 Asian financial crisis was a major test for the Chaebol system, which led to debt crises, dropping currencies, and recessions in several Asian countries.
3. Following the crisis, South Korea came up with many reforms, such as reducing government subsidies, corporate transparency measures, and more, which lowered the power of the Chaebols.

How did Chaebols originate?

Chaebol’s origin traced back to the 1960s, i.e., after the Korean War. At the time, to rebuild the economy, the government also gave full support to such companies. Such companies get tax incentives, special loans, subsidies, and other benefits from the government.

How is the term Chaebol derived?

The term Chaebol is a combination of two Korean words – ‘chae’ means wealth and ‘bol’ means clan.



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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