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The Four Largest South Korean Business Groups and Foreign Technology: Acquisition of Technology and Foreign Direct Investment
Abstract
This paper deals with the acquisition of foreign technology and with foreign direct investment by the four largest South Korean business groups. Major conclusions are: (1) the groups successfully acquired foreign, state-of-the-art technology for large-scale production of lower and middle market segment products within a very broad range of industries; (2) the most important current problems for the groups (lack of own high-technology and low equity and profit rates) are genuine results of the same strategy, which led to the successful acquisition of foreign non-high-end technology; (3) although all four groups undertook foreign direct investment of considerable scale, these investments were mainly restricted to a few geographic areas and product groups, and it is far too early to speak of a real ‘globalization’ of group operations.
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NOTES AND REFERENCES
In the following, the terms ‘Korea’ and ‘Korean’ refer to the Republic of Korea or South Korea.
Daewoo, Hyundai, LG and Samsung are referred to as the four chaebol. Since April 1993 the top 30 conglomerates are defined as chaebol by the Korean government and are subjected to special rules (OECD, Korea: OECD Economic Survey. May 1994, OECD, Paris, 1994, p. 171, n. 21).
Marcus Lippold, South Korean Business Giants: Organizing Foreign Technology for Economic Development. Daewoo, Hyundai, LG and Samsung (Bcrichte aus dem weltwirtschaftlichen Colloquium der Universität Bremen, No. 44), Universität Bremen, Bremen, 1996. I would like to thank John L. Enos for proposing this new version and Cheryl Weise and Anctte von Ahsen for checking it. Furthermore, comments by the two referees helped to eliminate some deficiencies of the paper.
More detailed references are included in Lippold, op. cit. See also John Ravenhill, The Political Economy of East Asia 2. China, Korea and Taiwan, Vol. 1, Elgar, Aldershot, 1995; Alice H. Amsden, Asia's Next Giant. South Korea and Late Industrialization, Oxford University Press, Oxford, 1989; John L. Enos and W.-H. Park, The Adoption and Diffusion of Imported Technology. The Case of Korea, Croom Helm, London, 1988; Roger L. Janclli, Mating Capitalism: The Social and Cultural Construction of a South Korean Conglomerate, Stanford University Press, Stanford, 1993; Leroy P. Jones and Il Sakong, Government, Business, and Entrepreneurship in Economic Development: The Korean Case. Studies in the Modernization of the Republic of Korea: 1945–1975, Council on East Asian Studies, Harvard University Press, Cambridge, MA, 1980; Richard Luedde-Neurath, ‘State intervention and export-oriented development in South Korea’, in Gordon White (ed.), Development States in East Asia, Macmillan, London, 1988, pp. 68–112; UNIDO, The Engineering Industry in the Republic of Korea. A Success Story in a Critical Perspective, 1986; and Larry E. Westphal, ‘Industrial policy in an export-propelled economy: Lessons from South Korea's experience’, Journal of Economic Perspectives, 4, 3, 1990, pp. 41–59. In addition, The World Bank, The East Asian Miracle. Economic Growth and Public Policy, Oxford University Press, Oxford, 1993; and two related papers in The World Bank Research Observer, 11, 2, 1996—Joseph E. Stiglitz, ‘Some lessons from the East Asian miracle’, pp. 151–77 andjospeh E. Stiglitz and Marilou Uy, ‘Financial markets, public policy, and the East Asian miracle’, pp. 249–76—discuss similarities and differences among the eight Asian economies (Hong Kong, Indonesia, Japan, South Korea, Malaysia, Singapore, Taiwan and Thailand).
Average real GDP growth rate over the last 30 years in Korea was about 8%.
Original data taken from Sang-Hun Choe, Der Stellenwert der Mischkonzeme (Chaebols) im koreanischen Industrialisierungsprozeβ. Dargestellt am Beispiel des Werdegangs und der Strukturmerkmale Samsungs (in German), Dissertation, Universität Hamburg, 1994, p. 118; Amsden, op. cit., pp. 116, 126; Wolfram Högel, Modell Korea? Evolution und Erosion des Koreanischen Entwicklungskonzepts. Die Steuerungsfunktion eines unternehmerisch handelnden Staates in ihrer Auswirkung auf die Branchenstruktur (in German), Peter Lang, Frankfurt a.M., 1992, p. 288; Daewoo, Mews from Daewoo. April 1993, Daewoo Corporate Culture Dept., Seoul, 1993, p. 5; Jones and Sakong, op. cit., pp. 262, 350–62; Goldstar, Goldstar Welcomes You, n.d. (c. 1993), p. 6; Samsung, 1992 Annual Report, Sulzbach, Seoul and Ridgefield Park, NJ, 1993, p. 65; Matthew Montagu-Pollock, ‘The Chaebol adapt’, Asiamoney, May 1995, Supplement, p. 19; Business Week, 13 March 1995, p. 25; Economist, 18 October 1997, p. 84. The International Financial Statistics Yearbooks of the IMF were used for exchange rates (to convert original data in won) and GDP data.
Janelli, op. cit., pp. 126–7.
Fortune, 7 August 1995, 5 August 1996 and 4 August 1997. Obviously financial statements must be read with caution (see, e.g. Economist, 13 December 1997, p. 67).
Jones and Sakong, op. cit., pp. 273–4.
Daewoo, News from Daewoo. April 1994, Daewoo Corporate Culture Dept, Seoul, 1994, p. 8.
In the following, the term ‘founder’ always refers to the original founder (or his successor) and his family. The term without inverted commas refers to the founder personally.
Montagu-Pollock, op. cit., pp. 19–23; OECD, op. cit., pp. 60–3.
Hattori, op. cit.
The term actual indicates that the presented structure is based on (my own perception of) real existence and behavior of group companies or institutes—not on official charts or announcements.
Jones and Sakong, op. cit., and Edward S. Mason et al., The Economic and Social Modernization of the Republic of Korea. Studies in the Modernization of the Republic of Korea, 1945–1975, Council on East Asian Studies, Harvard University Press, Cambridge, MA & London, 1980, together give a fairly complete picture of the story.
Jones and Sakong, op. cit., pp. 281–2.
Taniura, op. cit., p. 468.
Throughout the industrialisation period and even after privatisation [of banks, since the mid-1980s], over 50 per cent of bank loans fell into the category of policy loans; that is, designated loans for targeted industries or for particular activities such as exporting or R&D.’ Ha-Joon Chang and Richard Kozul-Wright, ‘Organising development: Comparing the national systems of entrepreneurship in Sweden and South Korea’, Journal of Development Studies, 30, 3, 1994, p. 881. See also Jung-En Woo, Race to the Swift: State and Finance in Korean Industrialization, Columbia University Press, New York, 1991, especially Chapter 6.
Proponents of the market view place unconditional faith in the capital market profit rate in making decisions about how much should be invested in which projects. They believe that because this rate is determined by market forces it is inviolate. Yet there is nothing sacred about it. It reflects the sociopsychic view of financeers about what rate of return they require in order to accept risk.’ Amsden, op. cit., p. 322.
See Westphal, op. cit.
The measures used included not only visible tariffs and quotas, but nearly everything from administrative chicanery to ‘buy Korean’ campaigns to the denial of access to foreign exchange for importers (Luedde-Neurath, op. cit.). The combination of policy for promoting specific industries with the general export promotion policy is discussed by Westphal, op. cit.
Economists devote much time to getting resources to the right industry, whereas getting them to the right individual may be [at least, if there are great deviations from the ‘ideal’ competitive model] far more important.’ Jones and Sakong, op. cit., p. 305 original emphasis).
Daewoo—the youngest of the four chaebol—developed in this way. Daewoo, April 1994, op. cit., p. 4; Jones and Sakong, op. cit., p. 364.
Enos and Park, op. cit., pp. 232–3.
As the government, directly or indirectly, secured most of the financing, it could always enforce its priorities. With time, the chaebol anticipated these priorities in their actions. This common approach to negotiations ensured that all potential suppliers had to guarantee certain standards to all possible Korean producers. This fostered negotiating power on the Korean side.
Indeed, transfer conditions differ greatly within one method (e.g. capital goods import, turnkey project, licensing/consulting, joint venture): ‘More important than the differences in the methods of transferring technology is the maneuvering possible within each method … some foreign partners and suppliers will do much more than others in transferring their technology to developing countries.’ Carl J. Dahlman, Bruce Ross-Larson and Larry E. Westphal, Managing Technological Development. Lessons from the Newly Industrializing Countries, World Bank Staff Working Papers, No. 717, World Bank, Washington DC, 1985, pp. 33–4 (emphasis added). Often first Korean projects were turnkey projects (ibid., p. 22).
Amsden, op. cit., p. 74.
In the case of capital goods—which were relatively low-priced in Korea (Colin I. Bradford, Jr, ‘Trade and structural change: NICs and next tier NICs as transitional economies’, World Development, 15, 3, 1987, pp. 306–10)—this caused one inconsistency in the government's industrial promotion policy: low prices hindered the domestic production of capital goods. Since the mid-1970s the government has tended to give preference to domestic producers of capital goods and promoted respective exports. Larry E. Westphal, Yung W. Thee, Linsu Kim and Alice H. Amsden, ‘Republic of Korea’, World Development, 12, 5/6, 1984, pp. 509–10.
See Yung Whee Rhee, Bruce Ross-Larson and Garry Pursell, Korea's Competitive Edge. Managing the Entry into World Markets, Johns Hopkins University Press, Baltimore, 1984 (esp. pp. 61–3); Michael Hobday, Innovation in East Asia. The Challenge to Japan, Elgar, Aldershot, 1995.
Janelli, op. cit., p. 151; Amsden, op. cit., p. 151.
Janelli, op. cit., p. 140.
Chan Sup Chang, ‘Human resource management in Korea’, in K. H. Chung and H. C. Lee (eds.), op. cit., p. 197.
See for example, Taniura, op. cit., p. 482. Russell Mardon, ‘The state and the effective control of foreign capital: The case of South Korea’, World Politics, 43, 1, 1990, pp. 111–38 offers a good description of the use of foreign capital for economic and technological development under domestic ownership and control in Korea.
Such terms as ‘centralized’ and ‘hierarchical’ abound. Again, Janelli, op. cit., offers the most comprehensive description (especially Chapters 4 and 5).
Amsden, op. cit., p. 209.
Enos and Park, op. cit., pp. 234, 248.
Sanjaya Lall, Building Industrial Competitiveness in Developing Countries, OECD, Development Centre Studies, Paris, 1990, pp. 45–51; Linsu Kim, ‘Technological transformation of Korean firms,’ in K. H. Chung and H. C. Lee (eds.), op. cit., pp. 117–18.
Enos and Park, op. cit., pp. 147–75; Brian Levy and Wen-Jeng Kuo, ‘The strategic orientations of firms and the performance of Korea and Taiwan in frontier industries: Lessons from comparative case studies of keyboard and personal computer assembly’, World Development, 19, 4, 1991, p. 369.
See, e.g., Chan K. Hahn, ‘Korean manufacturing strategy’, in K. H. Chung and H. C. Lee (eds.), op. cit., p. 140.
Amsden, op. cit., p. 151.
See, e.g. LG Electronics, LG Electronics Brief 1995, LG Electronics Inc., Seoul, n.d. (c. 1995), p. 23; Samsung Group, Public Affairs Dept., The Samsung Magazine, April 1997, Seoul, 1997, p. 25; and Daewoo Group, Corporate PR Team, Daewoo Fact Book 1996. Daewoo Around the World, Seoul, 1996, p. 20. Indeed, it is nearly impossible to look into any publication by the chaebol without reading about these things. It must be said, however, that the chaebol still realize and admit that they are not at the world technological frontier (see, e.g. Samsung Group, Samsung Newsletter January-February 1996, Seoul, 1996, p. 9).
See J. R. Chaponnière, ‘The newly industrialising economies of Asia: International investment and transfer of technology’, STI Review, 9, OECD, Paris, April 1992, pp. 65–131, esp. pp. 112–17; and Mike Hobday, ‘East Asian latecomer firms: Learning the technology of electronics’, World Development, 23, 7, 1995, pp. 1171–93.
Recently, the acquisition of Western companies possessing their own know-how is one way the chaebol have tried to gain access to frontier technologies and markets. Hyundai acquired hard disk manufacturer Maxtor and AT&T's semiconductor division, LG acquired Zenith Electronics and Samsung took over German camera manufacturer Rollei and US computer manufacturer AST Research. In addition, Daewoo tried unsuccessfully to acquire Steyr-Daimler-Puch of Austria and Thomson Multimedia, and Samsung considered for some time the acquisition of East German whiteware producer Foron as well as Dutch airplane manufacturer Fokker. These takeovers were not without risk because the firms acquired were generally in a weak state and in desperate need of a partner. The gamble, however, might pay off since the chaebol, in compensation for these risks, paid low prices for company assets, technological know-how and market access.
See Enos and Park, op. cit., p. 41, and Amsden, op. cit., p. 233, 263 for official Korean data on approved technology contracts by country and industry (1962–84/81). Most contracts fell into the areas of chemicals/petrochemicals, machinery and electronics. For data on approved licensing in the auto industry, see Joseph H. Stern et al., Industrialization and the State. The Korean Heavy and Chemical Industry Drive, Harvard University Press, Cambridge, MA, 1995, p. 159.
These words indicate that some chaebol FDIs considered in Table 5 should be more appropriately considered as a source of technology and not as having superior production capabilities.
However, as Korean technological knowledge grew, the Koreans often tried to force out the foreign investor. See Martin Hart-Landsberg, The Rush to Development. Economic Change and Political Struggle in South Korea, Monthly Review Press, New York, 1993, pp. 90–3.
It is very hard to evaluate the difference between these terms in publications. Nonetheless, there is a clear trend away from such terms as ‘license agreement’ towards such terms as ‘technological co-operation’ or ‘joint development’. However, ‘a lot of what South Korean firms consider research and development spending is actually money spent on reverse engineering attempts rather than basic research’ (Hart-Landsberg, op. cit., p. 254).
According to Business Week, 16 September 1996, p. 33, LG, Samsung and Daewoo were, respectively, the 3rd, 5th and 7th largest TV producers in the world. With the realization of the intended takeover of Thomson Multimedia (which finally failed), Daewoo would have become the world's largest TV producer.
Eu-Chul Lee, ‘High-tech borderland’, Samsung Newsletter. May/June 1996, Samsung Group, Seoul, pp. 13–14; Business Week, 12 August 1996, p. 20; and Handelsblatt, 3 April 1998, p. 14.
There are possibly two exceptions where the chaebol operate as independent actors at the upper end of the market: DRAMs and computer monitors. In addition, some high-end products/parts (e.g. fighter airplanes, submarines, high-speed trains) are produced under foreign license without any room for strategic decisions about world-wide product strategies by the chaebol.