What Are Chaebol Structures in South Korea?

What Is the Chaebol Structure?

The chaebol structure is a business conglomerate system that originated in South Korea in the 1960s, creating global multinationals with huge international operations. Chaebol is an English transliteration of the Korean word 재벌, which means plutocracy, rich business family, or monopoly, and the chaebol structure can encompass a single large company or several groups of companies.

Understanding the Chaebol Structure

South Korea's chaebols represent a group of large business entities that are very important to the nation's economic structure. Investment in South Korea's research and development (R&D) is largely driven by chaebols. Chaebols represent roughly half of the value of the country's stock market. They are generally industrial conglomerates that are made up of different affiliates.

Chaebols are owned, controlled, and/or managed by the same family dynasty, generally that of the group's founder. Family members are usually placed in management positions, which gives them more control over the way the businesses operate. Although some of the originating families are not necessarily majority stakeholders in the chaebols now, they may still have some association with them.

There are roughly two dozen well-known family-owned chaebols that operate in the South Korean economy. Samsung, Hyundai, SK Group, and LG Group are among the biggest and most prominent chaebols. These companies account for more than half of the country's exports. And together, they help bring in the majority of South Korea's capital from foreign sources.

Chaebols have generally had a great relationship with the South Korean government. Support from the federal government for chaebols began after the Korean War as a way to help rebuild the economy. Since the 1960s, the federal government has provided and guaranteed special loans, subsidies, and tax incentives to chaebols, especially to those involved in the construction, steel, oil, and chemical industries.

Chaebols vs. Keiretsus

The chaebol structure is often compared with Japan's keiretsu business groups, but there are some fundamental differences between the two. Chaebols are generally controlled by their founding families, while keiretsu businesses are run by professional managers. Chaebol ownership is also centralized, while keiretsu businesses are decentralized.

Criticisms of the Chaebol Structure

A charge often leveled against the chaebols is that they have impeded the development of small and medium-sized businesses in South Korea, creating massive imbalances in the economy. While the South Korean government has made occasional attempts to curb the power and influence of chaebols over the years, these efforts have met with mixed success.

Another concern about chaebols is that consolidating significant market resources into these conglomerates puts the economic stability of South Korea at risk should they fail. Samsung, for example, on its own has grown to represent some 20% of the gross domestic product (GDP) in South Korea.

Chaebols are often accused of hoarding profits and expanding their operations and factories overseas rather than reinvesting in the domestic economy. This is contrasted by about 90% of workers in the country working for small and medium-sized businesses, meaning a small portion of the overall population is employed by conglomerates that hold considerable sway over the country’s economy.

The concentration of market power and reliance on chaebols has made South Korea dependent on these conglomerates to the point where the government has to support these entities during financial crises. This is also problematic as smaller, more nimble businesses from other countries offer more competition.

Though chaebols often comprise a multitude of business units with extensive manufacturing capabilities, the sheer size of the overall organization can be a detriment when swiftness is needed. Furthermore, their ability to innovate and grow may not keep pace with the speed and dexterity of smaller companies from other nations. When chaebols suffer from such slow or stagnating growth, the effects can be felt significantly across large segments of South Korea’s economy.