structure of a Korean manufacturing firm employing more than 200 people was on average 17.3 percent equity, and 82.7 percent debt.
Despite this, President Park himself was not personally corrupt. His strong leadership and integrity ensured that the system did not dissolve into chaos. Furthermore, he encouraged an important shift that resulted in Korean firms developing into world-beaters. During the 1950s, large Korean companies were engaged in import substitution. This is when the government blocks imports and allows domestic firms to make the blocked products (usually very inefficiently) and sell them in the local market. President Park’s shift was to instruct the companies to export as well, and thus Korean firms had to learn to compete on the international stage. High import tariffs remained, ensuring that Korean products kept their advantage at home, but the necessity to compete abroad meant that groups like Samsung and LG became highly efficient operations.
Not all could make it. Though it is true that Korea’s economic miracle was a result of partnership between the state and industry, one aspect of proper capitalism did remain: it was still possible to fail. Especially in the early days, bankruptcies were more likely than may be imagined. Gaepung, one of Korea’s five largest firms during the 1960s, had disappeared by the mid-1970s; Dongmyung, which was the world’s largest seller of plywood in the early 1970s, went under in 1980. Since the mid-1980s, though, the top ranks of the largest Korean firms have been more stable. Between 1983 and 2000, only two business groups lost their place in the top ten. This could be due to the fact that large Korean firms and the Korean economy as a whole are both more stable now; it could also be due to reduced political interference.
The sprawling conglomerates that grew under Park’s auspices became known simply as daegieop (big business), or chaebol. The word chaebol comes from the same (originally Chinese) characters that make up the Japanese word zaibatsu, which means a kind of “financial clique.” The model for the chaebol was the vertically integrated zaibatsu conglomerate from nineteenth-century Meiji Japan, only more centralized and without the ability to own banks. The state controlled the banks, allowing President Park to keep hold of the purse strings.
Lotte is probably the most ubiquitous chaebol from the perspective of the Korean consumer. Founded in Tokyo in 1948 by Shin Kyuk-ho, a Korean living in Japan, Lotte first entered Korea in 1967 with a confectionery business, before spreading out with President Park’s blessing. One can still buy a Lotte chocolate bar today. In fact, Lotte is Korea’s dominant maker of chocolate, cookies, and other snacks. But one might also purchase the chocolate in one of the many large Lotte Department Stores. Within a Lotte Department Store or Lotte Cinema, one will likely find a café named Angel-in-us or a fast food restaurant named Lotteria. Both are owned by Lotte. One may live in a Lotte apartment and protect it with Lotte insurance. One’s weekly shopping may be done at a LotteMart. Lotte Group has over sixty subsidiaries, employing over 60,000 people. It has a credit card company, too—but no bank.
The Chaebol Approach
Chaebol-style capitalism was, and to some extent still is, very different from the dictionary definition of capitalism. Not only was industry directed by the state, but the chaebol corporations were rigidly hierarchical and bureaucratic, influenced by Confucian culture. Firms were expected to treat workers as sons, and workers were expected to respond in kind by thinking of their chairmen as father figures and offering absolute loyalty. It was a paternalistic style of management reminiscent of the father-son relationship in Confucianism. Companies would give employees gifts on their birthdays and national holidays, much as a parent would do for a child. When the close family member of a worker died, the firm would also assist with funeral expenses. Leadership of chaebol was also a family concern—literally. Sons of chairmen were accelerated through the ranks, and given subsidiaries to run; the one who did the best job would eventually inherit the chairmanship of the whole group from his father. All the major chaebol today are run by descendents or in-laws of founders. In that respect, it is scarce wonder that foreign journalists often jokingly compare chaebols with North Korea, the supposedly socialist state that is now on its third generation of monarchical rule.
From the 1960s, chaebol wages were kept low and unions banned—but headcounts were higher than they would naturally have been. The corporate philosophy was of “growth together,” everyone working for the same goal of national economic development. The state supported this with poster campaigns exhorting people to work hard and hit government-set export targets. Chaebol bosses typically owned just a small percentage of their companies, with much of the rest belonging to banks or the state. Import tariffs on critical industries were kept high, in order to protect nascent domestic firms.
The economy was so dominated by these muneo kyeongyeong (“octopus businesses,” each with a battery of subsidiaries) that true competition—a cornerstone of capitalism—simply did not exist in the domestic market. Chaebol had to be competitive on an international scale, a feat they accomplished extremely well. However, if you were a Korean consumer, the only choice was usually a chaebol-made product. It was also often a reverse-engineered, intellectual property rights–busting product copied from elsewhere.
Furthermore, the power of these companies, supported by the state, meant that there was no real culture of entrepreneurship in South Korea. For a talented young person, the most attractive jobs other than in the professions of doctor or lawyer were either in the civil service or entry-level positions with the likes of Samsung or Hyundai. The possibility of having a truly self-made Korean Bill Gates was little more than zero. If one looks at the Kospi-100 index of the largest Korean firms (the equivalent of the Dow Jones or FTSE indices) even now, one still finds that the vast majority of them are chaebol. The largest conglomerate, Samsung, accounts for a full 20 percent of South Korean exports.
Less than ten non-chaebol companies in Korea have ever managed to generate annual revenues of 1 trillion won (around US $900 million). This small club is tech- and Internet-firm- heavy, containing Humax, the digital TV set top-box manufacturer; NHN, the operator of search portal naver.com; and online game-maker NCSoft. The Internet in particular is proving to be a leveler, as it provides a realm of business where, according to one young entrepreneur, “some kid with a smartphone” is not necessarily at a disadvantage relative to the chaebol.
It is still the case though that one should not compete with the chaebol. Chaebol are no longer supported financially by the government, but their sheer size due to their past advantage makes taking them on a foolish endeavor. For an ambitious entrepreneur, one’s goal should be either to sell to a chaebol, or find a blue ocean—unexplored or unexploited territory—in the way NCSoft and NHN did. If one cannot do that, then the international market offers possibilities: Humax, a company started by a group of Seoul National University engineering students following a conversation in a bar, managed to join the trillion won club by selling their products mostly overseas.
Jeong Ju-young
President Park rewarded the companies that most fulfilled his wishes—those who would build a particular road, hospital, or bridge, for example, in time and on budget. According to one insider, the two that did this best were Lee Byung-chul’s Samsung, and Hyundai, which explains at least in part why they are still the most dominant chaebols today. They were naturally more able, and their reward for this was a better head start.
Today’s business students may know plenty about Samsung, but the story of Hyundai is more revealing. The founder, Jeong Ju-young—born into rural poverty in Tongchon, Gangwon Province (in present-day North Korea)—is a model of resilience, unshakeable self-belief, and determination. His story is the story of South Korea: he started with nothing, and, relying on his capacity to overcome any problem, he took on the world—albeit with some help from Park Chung-hee, with whom he shared a strong bond over their shared belief in national development. His autobiography, available for free online in English as well as Korean, is to be recommended for anyone interested in learning more about the development of South Korea.
According to General Park’s advisor Kim Dong-jin, Jeong had a singular lack of self-doubt. The two would have meetings in which Park would detail some long, complicated project and ask, “So, can you do it?”—to which Jeong always responded, “Yes, of course I can do it.” Later, Kim Dong-jin would ask Jeong, “Do you really understand what the president wants you to do?” Jeong would