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On December 5, 2014, a Korean Air flight preparing to depart New York for Seoul was forced to return to its gate because an executive was furious about how she had been served a packet of macadamia nuts. Cho Hyun-ah, then a vice-president of Korean Air and the daughter of the airline group’s chairman, had received the nuts in their unopened packaging rather than on a plate. She berated the cabin crew and ordered the chief flight attendant removed from the aircraft.
The incident became internationally known as nut rage. In South Korea, however, it represented something much larger than an executive losing her temper. It was an example of gapjil, a Korean term describing the abuse of power by someone who occupies a stronger position and believes that those beneath them have little choice but to submit. Cho belonged to the family controlling Hanjin Group, one of South Korea’s powerful family-run conglomerates known as chaebols.
The scandal produced legal consequences, although the final outcome reinforced public arguments about elite accountability. In December 2017, South Korea’s Supreme Court upheld a ten-month prison sentence suspended for two years, ruling that Cho’s actions did not constitute the particular aviation-security violation originally disputed on appeal. Her behaviour had nevertheless revealed the extraordinary authority that a corporate heir could exercise over employees.
Chaebols such as Samsung, Hyundai, SK, LG and Lotte occupy central positions in South Korea’s economy. They manufacture semiconductors, cars, ships, batteries and electronics while operating businesses across construction, finance, telecommunications, retail and other industries. Their achievements helped transform a devastated, impoverished country into one of the world’s most technologically advanced industrial economies.
Yet the same corporate system concentrated immense economic influence in the hands of a relatively small number of families. It created tensions between controlling shareholders and outside investors, between conglomerates and smaller suppliers, and between highly paid corporate employees and workers elsewhere in the economy.
The contradiction is fundamental to understanding modern South Korea. The chaebols were not simply private empires that grew powerful despite the government. They became powerful partly because the government deliberately helped build them, creating an economic development model whose greatest strengths eventually became some of its most persistent weaknesses.
What Makes a Chaebol Different From an Ordinary Corporation?
A chaebol is a large South Korean business group composed of numerous legally separate companies connected by ownership relationships, commercial arrangements and the influence of a founding family. The term is commonly associated with Samsung, Hyundai, SK, LG and Lotte, although South Korea has many smaller family-controlled business groups. What distinguishes the model is not simply corporate size or diversification, but the combination of extensive business operations and hereditary control.
Consider Samsung. Although people often speak about Samsung as a single corporation, Samsung Electronics, Samsung C&T, Samsung Life Insurance and Samsung Heavy Industries are separate companies with their own financial statements, shareholders and boards. Their relationships nevertheless allow them to operate within a broader business network historically influenced by the founding Lee family.
This differs from the simplest form of a conventional conglomerate, where an identifiable parent company owns subsidiaries through a relatively straightforward corporate structure. Chaebols have historically relied on more complicated arrangements involving strategically positioned affiliates, cross-shareholdings and overlapping commercial relationships. Control over a limited number of important companies can produce influence over a much wider network.
Family ownership is not unique to South Korea, and a family-controlled company is not inherently inefficient or unfair. Founders may legitimately transfer shares to their descendants, and capable heirs can become effective executives. The difficulty arises when control over several publicly traded businesses remains concentrated within one family despite substantial ownership by pension funds, institutional investors and ordinary shareholders.
Chaebols are also sometimes compared with Japan’s keiretsu, which are networks of companies connected through business relationships, financial institutions and shareholdings. There are historical similarities, but the Korean model is particularly associated with continuing founding-family influence across generations. A company’s chairman may therefore command authority that extends beyond the shares personally registered in the family’s name.
This produces a distinction between economic ownership and managerial power. Someone can own a relatively modest financial interest in a corporate group yet exercise substantial influence over appointments, investment decisions, mergers and the distribution of resources among affiliates. The consequences become especially important when different companies within the same group have different shareholders.
The chaebol system was not created according to one master corporate blueprint. It developed over decades as entrepreneurs, banks, state officials and industrial policymakers responded to South Korea’s extraordinary economic circumstances. Understanding those circumstances explains why the government once considered concentrating resources behind selected businesses an effective national strategy.
Why South Korea Chose to Build Its Economy Around Powerful Families
When the Korean War ended in 1953, South Korea faced an enormous reconstruction challenge. Industrial facilities, transport networks and public infrastructure had suffered extensive destruction. The country possessed limited natural resources, inadequate domestic savings and relatively little foreign currency with which to purchase machinery or industrial technology.
Its domestic market was also small and poor. Businesses could not rely on an affluent population to purchase increasingly sophisticated manufactured goods, while financial institutions lacked the capital needed to support major industrial projects. Under these conditions, developing internationally competitive industries through ordinary private investment would have been exceptionally difficult.
During the 1950s, South Korea initially pursued import substitution, encouraging domestic producers to manufacture goods that would otherwise have been imported. Tariffs, licences and other protections helped local companies develop without immediately confronting established foreign competitors. American aid provided essential economic support, financing imports and helping the country maintain basic economic activity.
Several future chaebols already existed. Samsung had begun as a trading business before expanding into sugar refining and textiles. Hyundai developed through construction, while the predecessors of LG established businesses in chemicals and consumer products. Their founders demonstrated considerable entrepreneurial ability, but these companies had not yet become the vast industrial organisations familiar today.
The decisive transformation followed General Park Chung-hee’s military coup in 1961. Park regarded rapid economic development as essential to national security, political legitimacy and South Korea’s survival in a divided peninsula. His administration believed that the country could not afford to wait for market forces alone to assemble the industries needed for modernisation.
The government consequently adopted a more ambitious programme of state-directed, export-oriented industrialisation. Successive five-year economic plans identified priority sectors and directed resources towards the infrastructure, manufacturing capacity and technological capabilities required to compete internationally. Rather than supporting every business equally, policymakers concentrated assistance on selected companies considered capable of carrying out national industrial objectives.
Control over finance was particularly important. By bringing commercial banks under state control and directing their lending, the government acquired considerable influence over which businesses received scarce credit. Favoured firms could obtain financing on advantageous terms, while government guarantees made some foreign borrowing easier. Tax concessions, import restrictions, licensing arrangements and other incentives reinforced the position of selected manufacturers.
The advantages were substantial. A company seeking to construct a shipyard, establish a steel-processing facility or enter automobile manufacturing required enormous capital long before it could expect meaningful revenue. State assistance reduced the financial barriers that might otherwise have prevented such projects from beginning.
However, South Korea’s system was not simply a programme of distributing money to politically connected businesses without expectations. Companies were encouraged, and often pressured, to meet export targets, improve production capabilities and compete in international markets. Businesses demonstrating commercial success could receive continued support, while underperforming firms risked losing access to credit or being reorganised.
This performance-oriented element distinguished the strategy from forms of protectionism that allow domestic companies to remain permanently insulated from competition. South Korean businesses could receive protection at home while facing demanding customers and established competitors abroad. Their ability to generate exports gave policymakers a measurable indication of whether industrial investments were producing internationally marketable goods.
Economist Larry Westphal’s influential study of South Korea’s export-led industrial policy examined how government intervention interacted with international competition and industrial development. The experience demonstrated that selective support could help build productive capabilities, although it did not establish that every intervention was efficient or that the same strategy would succeed under different conditions.
During the 1970s, the government increasingly emphasised heavy and chemical industries, including steel, shipbuilding, machinery, petrochemicals and automobiles. These sectors required coordinated investments in factories, ports, electricity, engineering, finance and skilled labour. Large diversified business groups could undertake projects that isolated smaller companies would have struggled to finance or manage.
The resulting economic arrangement was neither conventional laissez-faire capitalism nor a fully state-owned industrial system. The government established strategic priorities and directed resources, while privately controlled businesses executed major investments and competed for commercial success.
This partnership accelerated development, but it also created a lasting relationship of mutual dependence. The government increasingly relied on large corporate groups to achieve national objectives, while those groups depended on government policy and access to finance. Over time, temporary developmental advantages became embedded in the structure of the economy.
The Economic Miracle Was Real
Any assessment of the chaebols must begin by recognising what South Korea achieved. Within a few generations, the country moved from extreme postwar poverty to becoming a major exporter of sophisticated manufactured goods. Its companies developed capabilities in industries previously dominated by established American, European and Japanese producers.
The transformation was visible across the economy. South Korea built modern ports, transport infrastructure, power facilities and industrial cities while expanding engineering education and technical training. Manufacturers acquired foreign technology, adapted production methods and gradually developed their own expertise in increasingly complex products.
Chaebols were especially effective at mobilising resources for industries requiring large upfront commitments. Shipbuilding illustrates the challenge. Constructing a competitive shipyard requires land, specialised facilities, equipment, engineering knowledge, international contracts and extensive financing before a vessel can be delivered. A diversified conglomerate could coordinate several of these activities within its wider business organisation.
Similar advantages existed in automobiles and electronics. Developing globally competitive manufacturing required networks of component suppliers, quality-control systems, logistics operations, research facilities and overseas distribution channels. Large groups could coordinate investment across several businesses and use earnings from established operations to finance newer, riskier projects.
This internal ability to move resources between activities was particularly valuable when South Korea lacked mature financial markets. A profitable construction or trading operation could help support investment in manufacturing, reducing reliance on external investors who might have been unwilling to finance unfamiliar Korean industries.
Over time, firms that had originally entered relatively simple industries became international competitors in advanced manufacturing. Samsung developed into a leader in semiconductors and consumer electronics. Hyundai became a major global automotive producer, while LG and SK expanded across electronics, batteries, chemicals, telecommunications and related technologies.
These achievements were not merely the result of protection from foreign competition. A company that survives only because domestic consumers cannot purchase imports is very different from one capable of selling advanced products across the world. South Korean chaebols ultimately had to develop genuine manufacturing capabilities, invest in research and meet increasingly demanding international standards.
Their success also supported a broader ecosystem of engineers, technicians, transport providers, equipment manufacturers and suppliers. Investment in research and manufacturing created opportunities beyond the direct employees of individual conglomerates. Large exporters became important sources of foreign currency, tax revenue and technological development.
It would nevertheless be misleading to attribute South Korea’s economic miracle entirely to a handful of wealthy families. Industrial workers, public infrastructure programmes, education, technology transfers, foreign markets and government institutions were indispensable. The chaebols were central participants in a much larger national transformation.
Their size also carried economic advantages that remained valuable after the developmental period ended. Semiconductor fabrication, advanced battery manufacturing and global vehicle production continue to require extraordinary levels of capital and technical coordination. Breaking large corporate groups into smaller businesses would not automatically make these industries more productive.
The chaebols therefore created genuine national wealth and internationally competitive capabilities. But the institutional arrangements that helped them accumulate capital also encouraged an increasingly dangerous assumption: that expansion itself was evidence of success and that sufficiently important companies could continue borrowing without facing the full consequences of failure.
That assumption would be severely tested in 1997.
How the Chaebol Growth Machine Helped Cause the 1997 Crisis
South Korea’s industrial development model created incentives that became increasingly problematic as the economy matured. Government support and preferential access to financing had initially helped firms overcome genuine shortages of capital. As chaebols expanded, however, those advantages could encourage executives to pursue growth without giving sufficient attention to profitability, financial risk or the efficient allocation of resources.
The problem involved expectations as much as formal policy. If lenders believed that a major conglomerate was strategically indispensable, they might assume that the government would intervene rather than permit its collapse. Corporate executives could similarly believe that creditors would continue providing finance because their organisation was too important to fail.
Economists describe this type of incentive problem as moral hazard. When decision-makers expect somebody else to absorb part of the cost of failure, they may accept risks that would otherwise appear excessive. In South Korea, the relationship between government officials, banks and industrial groups sometimes weakened the discipline that ordinary creditors and investors were supposed to impose.
Many chaebols diversified aggressively, acquiring or establishing businesses in industries with little direct relationship to their original expertise. Diversification could reduce dependence on a single market and create useful operational connections, but it also produced sprawling organisations that were difficult to manage. Some groups operated simultaneously in manufacturing, retail, construction, finance, hospitality, chemicals and international trading.
The financing arrangements created further vulnerabilities. Affiliates sometimes guaranteed one another’s obligations, allowing weaker businesses to borrow with support from stronger companies in the same group. Although this could lower borrowing costs, it also meant financial distress in one subsidiary could threaten otherwise healthy operations elsewhere.
High debt intensified the danger. Debt-to-equity measures compare a company’s borrowing with the capital provided by its owners, indicating how heavily a business relies on creditors. A company with a 500% debt-to-equity ratio, for example, owes five units of debt for every unit of equity, making it especially vulnerable when profits or access to financing decline.
By the time of the Asian financial crisis, leverage among South Korea’s largest conglomerates had reached extraordinary levels. IMF analysis of Korea’s financial crisis documents the corporate borrowing problems that magnified the shock, with historical estimates placing debt-to-equity ratios for major chaebols at several times their equity.
These vulnerabilities existed before the regional crisis reached its most destructive stage. In early 1997, Hanbo Steel collapsed under heavy debts, exposing troubling relationships involving business executives, financial institutions and political figures. The scandal demonstrated how questionable lending and political connections could undermine the allocation of capital.
Later that year, financial panic spread across East and Southeast Asia. Investors and international lenders became increasingly concerned about the ability of companies and financial institutions to repay their obligations. Capital withdrawals, currency depreciation and deteriorating market confidence placed severe pressure on economies dependent on short-term foreign financing.
South Korea was especially exposed because highly indebted companies and financial institutions needed continuing access to credit. Businesses that had borrowed internationally faced additional difficulties when the won depreciated, making foreign-currency liabilities more expensive in domestic terms. Financial problems spread between companies, creditors and banks, turning corporate fragility into a national crisis.
The government sought international assistance, and the IMF coordinated a substantial financial rescue with other lenders. The programme required extensive changes in financial supervision, corporate governance, banking practices and the restructuring of troubled businesses. These conditions reflected concern that weak disclosure, excessive leverage and complicated ownership arrangements had allowed risks to accumulate without sufficient oversight.
The crisis produced numerous corporate failures and restructurings, but the most dramatic example emerged from Daewoo.
Founded by Kim Woo-choong, Daewoo had developed into one of South Korea’s largest conglomerates. It operated in automobiles, shipbuilding, electronics, machinery, construction and international trading, often expanding through extensive borrowing. Kim had built the company around an aggressive philosophy of international growth, but the strategy became increasingly difficult to sustain as financial conditions deteriorated.
Even after the 1997 crisis exposed the dangers of heavily indebted conglomerates, Daewoo continued attempting to expand. Management appeared to believe that additional scale, asset acquisitions and future revenue could eventually overcome its financing problems. Instead, borrowing obligations mounted while investor confidence weakened.
In 1999, Daewoo collapsed with debts commonly estimated at more than $50 billion, making it one of the largest corporate failures of its time. The group was dismantled and restructured, while creditors, employees, suppliers and financial institutions faced enormous losses. Kim Woo-choong fled South Korea before eventually returning and facing prosecution.
Daewoo exposed the dangers of combining concentrated managerial authority with obligations distributed across creditors and the wider economy. A founding family or dominant executive could direct corporate expansion, but when the strategy failed, the damage extended far beyond those who had made the decisions.
The crisis did lead to meaningful reforms. Authorities restricted certain guarantees between affiliates, strengthened financial disclosure, encouraged restructuring and improved banking supervision. Foreign investors gained greater influence in Korean capital markets, and surviving business groups generally reduced their leverage and concentrated more heavily on competitive operations.
The resulting chaebols were often financially stronger than their predecessors. However, reforms that addressed excessive borrowing did not necessarily resolve the underlying distribution of corporate power.
Indeed, the disappearance of weaker conglomerates helped make several surviving groups even more important to the national economy. South Korea emerged with stronger global manufacturers, but control over many of those businesses remained concentrated in the same founding families.
How Chaebol Families Keep Control Without Owning Everything
The most persistent governance issue within South Korea’s chaebol system is the difference between owning a company’s economic value and exercising authority over its decisions. Corporate law gives shareholders financial and voting rights, but complex ownership arrangements can allow a family to influence businesses in which its direct financial interest is relatively limited.
Consider a simplified example involving three companies. A founding family owns a controlling stake in Company A, which owns a significant stake in Company B. Company B, in turn, owns shares in Company C. By controlling Company A and influencing the boards and voting decisions throughout the chain, the family may exercise considerable authority over Company C without personally owning a majority of its shares.
The precise outcome depends on voting rights, ownership percentages and other shareholders, but the underlying mechanism is straightforward. Financial ownership is distributed across several entities while managerial influence remains concentrated. Outside investors may provide substantial capital without receiving comparable influence over group strategy.
Some chaebols historically used circular shareholding arrangements, in which affiliated companies held shares in one another through interconnected loops. Such structures could reinforce family influence and make it difficult for outsiders to understand where effective control resided. South Korean regulations have restricted many of these arrangements, although complex affiliate ownership remains important.
These structures can create conflicts between the interests of the controlling family and those of shareholders in individual companies. To a family that regards the entire conglomerate as a single inherited business empire, moving resources between affiliates may seem like an ordinary internal decision. To investors who own shares in one particular affiliate, those same transactions may transfer value away from the company in which they invested.
Imagine that a profitable listed company purchases assets from another business controlled by the founding family. If the price is fair and the transaction creates genuine value, there may be no problem. If the buyer pays substantially more than the assets are worth because doing so benefits the family, outside shareholders effectively bear part of the cost.
Similar conflicts can arise when profitable contracts are assigned to privately controlled affiliates, services are purchased at inflated prices or merger terms favour businesses important to a family’s succession arrangements. Economists often describe the extraction or transfer of value through such arrangements as tunnelling.
The OECD’s analysis of governance within Korean business groups highlights the challenges that arise when directors must make decisions involving affiliated companies with different shareholders. The central issue is whether individual boards act in the interests of their own companies or primarily follow the strategic preferences of the wider controlling group.
Hereditary succession intensifies these tensions. A founder may acquire control by building a successful enterprise, but later generations inherit their position through family relationships rather than an open competition for leadership. That does not mean descendants are necessarily unqualified. It does mean that the mechanisms determining their authority differ from those governing most employees and many professional managers.
This is connected to the broader problem of inherited advantage and the economic cost of nepotism. Family connections do not automatically make a leadership appointment inappropriate, but they become economically damaging when inherited status replaces accountability, competence and fair consideration of other stakeholders.
South Korea’s history contains numerous examples of chaebol executives and heirs facing investigations, convictions or public criticism over allegations involving bribery, embezzlement, assault and succession arrangements. The Korean Air nut-rage scandal was unusually visible because the abuse happened in front of passengers, but concerns about executive privilege extend into much more consequential corporate decisions.
In 2017, for example, Hanwha heir Kim Dong-seon received a suspended sentence following an assault case involving bar employees. Incidents involving the families controlling major businesses reinforced public perceptions that inherited status could encourage misconduct, even though such individual cases cannot establish that every chaebol leader behaves similarly.
South Koreans have sometimes referred informally to a three-five rule, describing the perceived tendency for influential executives to receive prison sentences of approximately three years suspended for five years. It is not an actual legal rule or a reliable description of every prosecution, but it captures public frustration over cases in which business leaders have received lenient treatment or later presidential pardons.
Governments have sometimes justified pardons or the return of convicted executives to leadership by invoking investment, employment and national economic interests. Such arguments illustrate how corporate indispensability can complicate accountability. When a company is considered essential to national prosperity, policymakers may face pressure to treat its leaders differently.
The broader question is therefore not whether South Korea should permit families to own businesses. It is whether those families should be able to exercise disproportionate control over publicly owned companies, influence transactions that affect other shareholders and retain authority without sufficient independent scrutiny.
The Korea Discount: Why Investors Distrust Family Control
South Korean companies have historically traded at lower stock-market valuations than many comparable businesses in other developed economies. Investors and analysts commonly describe this persistent valuation gap as the Korea discount. Although the size of the discount varies across industries and market conditions, it has become an important measure of concern about Korean corporate governance.
A low share price does not necessarily mean that a company is unsuccessful. Investors value businesses partly according to their expectations about future profits, risks and the returns they will personally receive. A company can manufacture world-class products and generate substantial earnings while still attracting a lower valuation if shareholders doubt that those earnings will translate into dividends, buybacks or sustainable growth in their investment.
Chaebol ownership structures can contribute to that uncertainty. Investors may worry that management will prioritise family succession, affiliated companies or the preservation of control over decisions that maximise value for all shareholders. Related-party transactions, complicated mergers, duplicate listings and the retention of excess cash can strengthen these concerns.
However, corporate governance is not the only explanation for the Korea discount. South Korea faces geopolitical uncertainty because of its confrontation with North Korea, while several of its largest industries are cyclical and capital-intensive. Semiconductor earnings, for example, can fluctuate substantially, making comparisons with companies in different industries misleading.
Inheritance taxation has added another dimension to the debate. South Korea has historically imposed high inheritance taxes on substantial estates and transfers of controlling shareholdings. Supporters view these taxes as a mechanism for limiting dynastic concentrations of wealth, while critics argue that they can encourage complicated succession strategies and create incentives for families to resist higher valuations around ownership transfers.
These concerns do not establish that every chaebol family intentionally suppresses its company’s share price. Ownership transfers, taxes, valuation and governance interact in complicated ways, and claims about deliberate undervaluation require evidence about particular companies and decisions.
One revealing example emerged in the battle for control of Korea Zinc. The company became the centre of a high-profile struggle between existing management and rival shareholders, bringing questions about ownership, governance and minority investor interests into public view.
In 2024, Korea Zinc proposed a substantial new share issuance while its controlling interests were engaged in a corporate-control dispute. Critics argued that the proposal could dilute existing shareholders and strengthen management’s position. Following regulatory scrutiny and investor opposition, the company withdrew the disputed rights-issue plan in November 2024.
The case illustrates both the vulnerability and the potential protection of shareholders. Corporate-control disputes can motivate decisions that investors regard as harmful, but regulators, public scrutiny and shareholder resistance can also prevent such decisions from proceeding.
For international investors, the distinction matters. Their concern is not necessarily that Korean family businesses lack technological or commercial ability. It is that control structures may allow insiders to benefit from transactions whose costs are shared with outside investors.
Domestic investors face similar choices. Korean households and institutions can invest abroad when they believe foreign markets provide better governance, shareholder returns or diversification. Their willingness to commit capital to Korean businesses depends partly on confidence that controlling families and corporate boards will treat them fairly.
Closing the Korea discount therefore requires more than improving corporate profits. It requires credible rules and practices ensuring that shareholders can benefit from those profits without being disadvantaged by transactions designed primarily to preserve inherited control.
The Other Korean Economy: Suppliers, Small Businesses and Unequal Power
The influence of chaebols is often expressed through comparisons between their enormous sales and the size of South Korea’s economy. Figures for 2024 indicated that the five largest business groups generated combined sales equivalent to approximately 40% of the country’s nominal GDP, according to published business-group sales comparisons.
That comparison demonstrates corporate scale, but it must be interpreted carefully. Revenue is not the same as economic value added, and sales by different businesses can count intermediate transactions more than once. It would therefore be incorrect to claim that those five groups literally produced 40% of Korean GDP. Their economic significance is substantial, but concentration should be examined using appropriate measures of industry ownership, employment, exports and market power.
The consequences of corporate concentration extend well beyond shareholders. Thousands of smaller Korean businesses depend on chaebols for purchasing contracts, manufacturing orders, logistics services and access to international markets. For those suppliers, a major conglomerate can be both an essential commercial partner and an exceptionally powerful customer.
Consider an independent component manufacturer supplying a large automotive company. Winning a long-term contract can provide reliable demand, financing opportunities, technical assistance and access to an international production network. The relationship may allow a small firm to develop capabilities that would otherwise be difficult to acquire.
The difficulty appears when dependence becomes extreme. If one corporate group accounts for most of a supplier’s revenue, losing that customer’s business may threaten the supplier’s survival. The purchaser can consequently possess substantial bargaining power when negotiating prices, delivery schedules and contractual obligations.
Hyundai and Kia illustrate the significance of this relationship. Operating within the same broader automotive group, they hold a dominant position in South Korea’s domestic vehicle market and coordinate extensive supplier networks. Their scale supports internationally competitive production, but it also limits the number of comparable domestic buyers available to specialised component manufacturers.
Suppliers may face demands for detailed cost information, lower prices, exclusive arrangements or greater access to production technology. Such requests are not inherently unlawful or unreasonable; major manufacturers need to manage quality, expenses and supply-chain risks. Problems arise when buyers use their superior position to impose unfair conditions, appropriate proprietary technology or transfer excessive costs onto dependent businesses.
Complaints about similar practices have emerged across electronics, retail and other industries. Smaller firms have raised concerns about delayed payments, compulsory promotional expenses, excessive price reductions and the misuse of commercially sensitive information. Individual allegations require evidence and should not be treated as proof that every large Korean buyer engages in misconduct.
The underlying economic problem is nevertheless clear. A supplier can possess a formal contractual right to reject a proposal while lacking a practical commercial alternative. Even when legal remedies exist, fear of retaliation or the loss of future business may discourage complaints.
This imbalance helps explain why economic concentration can weaken competition without creating a literal monopoly in every industry. A powerful buyer can influence the conditions under which smaller businesses operate, even if consumers retain some choice between competing final products.
The division is particularly important because South Korea’s business population contains enormous numbers of small and medium-sized enterprises. These businesses employ much of the workforce, but many operate with lower productivity and less access to technology, finance and international markets than the country’s largest manufacturers.
The OECD’s research on productivity differences between large and small Korean firms identifies persistent structural weaknesses in the SME sector. The gap matters because national prosperity depends not only on a handful of successful exporters but also on how efficiently the broader economy uses labour, capital and technology.
Chaebol dominance is one contributing factor, but it does not explain every difficulty faced by smaller businesses. Weak competition in some service industries, limited management capabilities, regulatory obstacles and policies that discourage firms from growing beyond certain size thresholds also influence productivity.
This last problem creates a different type of distortion. Government programmes intended to help SMEs can sometimes make remaining small financially advantageous, reducing incentives to expand and improve efficiency. Addressing corporate concentration therefore cannot substitute for reforming the wider business environment.
The challenge is to retain the productive benefits of large supply chains while allowing independent businesses greater opportunities to compete, innovate and grow. Smaller firms should be able to benefit from relationships with major manufacturers without becoming permanently dependent on a few powerful customers.
An economy can produce internationally dominant corporations while leaving a much larger population of businesses struggling to improve their productivity. That division affects not only entrepreneurs and suppliers, but also the quality of jobs available to ordinary workers.
World-Class Companies, but Not Enough World-Class Jobs
South Korea’s economic achievements conceal a deep division within its labour market. Employment at a major corporation often offers significantly higher salaries, more generous bonuses, stronger benefits, better training and greater job security than employment at a smaller company. These differences make positions at prestigious firms exceptionally desirable.
However, such jobs account for a relatively limited portion of total employment. Research by the Korea Development Institute found that establishments employing at least 300 workers accounted for approximately 14% of South Korea’s employment in 2021. This figure describes large establishments rather than chaebol-controlled companies specifically, but it illustrates how much of the workforce operates outside the largest workplaces.
The distinction matters because the benefits of South Korea’s most successful companies are not distributed evenly across its labour market. A graduate entering a leading semiconductor manufacturer may enjoy a very different career from someone with similar qualifications joining a small subcontractor or service business.
Pay is only part of the difference. Major employers often offer clearer promotion structures, stronger training systems, superior workplace benefits and greater social prestige. Smaller firms may struggle to match those conditions, especially when their own profitability depends on negotiating with powerful corporate customers.
This creates intense competition for a relatively narrow group of positions. Young Koreans may regard employment at Samsung, Hyundai, LG, SK or another major organisation as a pathway to long-term financial security. Employment at a lesser-known company can appear less attractive even when the work requires substantial skill.
The incentives influence education long before students enter the workforce. Prestigious universities become especially desirable because they are associated with better access to elite employers and professional networks. Families consequently invest heavily in academic achievement, while students accumulate qualifications intended to distinguish them from equally competitive applicants.
Graduates may spend additional years preparing for corporate recruitment examinations, public-sector competitions or professional qualifications rather than immediately accepting employment they regard as insecure or poorly rewarded. The result is an uncomfortable coexistence of high educational attainment, difficult transitions into preferred careers and skill mismatches.
The OECD Economic Survey of Korea 2026 identifies labour-market dualism as a significant structural challenge. Differences in employment protection, compensation and working conditions make movement between better and worse jobs difficult, while the pursuit of prestigious careers can delay entry into stable employment.
This is not evidence that all young South Koreans are unemployed or that the country possesses the highest youth unemployment rate among advanced economies. The more important problem is the mismatch between the qualifications people acquire, the jobs they consider desirable and the opportunities available across the wider business sector.
The division also affects companies. Smaller employers struggle to recruit highly qualified workers when applicants expect significantly better compensation and career prospects elsewhere. That makes improving productivity even harder, reinforcing the original disparity between large and small businesses.
Employment protections can complicate the picture further. Workers with established positions at successful large firms may be reluctant to leave, while employers may hesitate to expand permanent recruitment when they expect employment relationships to be difficult or expensive to adjust. Non-regular workers and employees in smaller organisations can experience a very different level of security.
These economic incentives influence major personal decisions. Young adults who cannot secure stable employment may postpone moving out, purchasing housing or getting married. Career interruptions and demanding workplace expectations can make parenthood particularly difficult for women, who continue to face substantial disadvantages when domestic responsibilities conflict with professional advancement.
The full explanation of South Korea’s demographic crisis also involves housing costs, educational competition, gender expectations and changes in marriage and family formation. Chaebols are not solely responsible for these pressures, but the scarcity of highly rewarded employment outside a relatively small number of elite organisations intensifies them.
The contradiction is that South Korea has succeeded in creating some of the world’s most competitive companies without creating equally competitive employment opportunities throughout its economy. Corporate technological success can coexist with insecurity among the workers and businesses operating beyond its most prosperous institutions.
Reforming that imbalance requires improving opportunities outside the chaebol sector, not simply making existing elite jobs more difficult to obtain.
Can South Korea Reform the Chaebols Without Weakening Its Economy?
Reforming the chaebol system presents South Korea with a problem that is much more difficult than identifying powerful families or condemning corporate misconduct. The country’s largest business groups are deeply integrated into its productive economy. Weakening them without considering their role in exports, technology, employment and investment could damage the very prosperity reformers want to distribute more fairly.
Samsung and SK are major participants in the global semiconductor industry. Hyundai is an internationally important automotive producer, while LG operates across electronics, batteries and other advanced technologies. Large Korean industrial groups also possess significant capabilities in shipbuilding, chemicals, engineering and international manufacturing.
These businesses support extensive networks of employees, suppliers, researchers and professional services. They undertake investments that can require years of spending before generating commercial returns. Their technological capabilities and international relationships cannot simply be replaced by dividing large organisations into smaller companies.
This gives chaebol families an important political argument. When proposals threaten established control structures, business leaders can warn that interference might discourage investment, reduce competitiveness or jeopardise employment. Such warnings can be self-serving, but their economic consequences cannot automatically be dismissed.
The difficulty is compounded by the resources that large conglomerates can deploy. Major corporate groups can employ prominent law firms, fund research, maintain relationships with policymakers and purchase advertising across influential media organisations. Smaller businesses and individual shareholders possess far fewer resources.
That does not mean every politician, lawyer, journalist or academic is controlled by chaebols. Economic influence operates through incentives and dependencies rather than requiring universal obedience. A supplier considering legal action may fear losing contracts, while a professional-services firm may hesitate to jeopardise a major client relationship. Policymakers must also consider how financial markets and employees might react to aggressive interventions.
Workers themselves can oppose reforms they perceive as threats to their livelihoods. An employee who benefits from a high salary, extensive training and strong workplace protections may distrust proposals to dismantle the organisation providing those advantages. Even workers who dislike hereditary management can reasonably worry about the consequences of radical corporate restructuring.
The central question is therefore how to distinguish productive corporate scale from abuses of concentrated power. Some benefits of large business groups arise from their ability to coordinate capital, technology and production. Other advantages come from weak competition, privileged transactions or insufficient accountability. Reform must target the latter without unnecessarily destroying the former.
South Korea has attempted to achieve this balance for decades. Following the 1997 crisis, governments tightened financial reporting, restricted certain cross-shareholding practices and introduced stronger corporate-governance requirements. Some reforms reduced corporate risk, but ownership networks adapted, enforcement remained uneven and founding families retained substantial influence.
A more recent initiative began in 2024, when financial authorities launched the Corporate Value-Up Program. The programme encouraged listed companies to examine their valuations, improve communication with investors and develop plans for strengthening shareholder returns.
The approach reflected growing concern that Korean businesses were not receiving valuations consistent with their earnings and technological achievements. Policymakers drew inspiration partly from Japan’s efforts to encourage listed companies to improve capital efficiency and corporate governance.
However, Value-Up depended heavily on voluntary participation. Companies could publish plans with varying levels of ambition, while others could decline to participate. The programme could encourage better behaviour, but it could not by itself compel boards to prioritise shareholders over controlling families.
More consequential changes followed through revisions to South Korea’s Commercial Act. After President Lee Jae Myung took office in 2025, lawmakers strengthened provisions concerning directors’ responsibilities and the protection of shareholder interests. Reforms approved that year broadened the duties of directors towards shareholders and strengthened elements of board independence and audit oversight.
These measures addressed a longstanding corporate-governance concern. Directors could previously defend some decisions by claiming that they benefited the company or wider business group, even when minority shareholders believed that the economic advantages flowed disproportionately towards controlling insiders.
The OECD’s assessment of Korea’s 2025 governance reforms identified the changes as important steps towards stronger shareholder protections, while emphasising the need for effective implementation.
Further legislation followed in February 2026, when parliament approved amendments requiring listed companies to cancel treasury shares under specified conditions. Newly acquired treasury shares generally had to be cancelled within one year, while existing holdings were subject to transitional requirements.
Treasury shares are shares that a company has repurchased from investors and continues to hold. While held by the company, they generally do not carry ordinary voting rights. However, retaining them can create opportunities for corporate-control strategies if they are later transferred to friendly investors or affiliated parties.
Mandatory cancellation limits one mechanism through which management could reinforce its position without providing an equivalent benefit to shareholders. It also makes the relationship between share repurchases and shareholder returns more straightforward.
These legislative reforms were significant because they moved beyond voluntary promises and addressed specific mechanisms used to preserve corporate control. Nevertheless, legal changes do not automatically alter how boards behave, how courts interpret directors’ obligations or how willingly investors challenge management.
An early example emerged in June 2026, when activist investor Flashlight Capital Partners challenged governance practices at S1, a Samsung-affiliated security company. The fund accused the company’s board of giving excessive priority to the broader Samsung Group and pressed for changes involving independent directors, disclosure and the use of excess cash.
The dispute was important because it concerned more than the financial performance of one business. It raised the question of whether directors of a publicly traded affiliate should serve that company’s shareholders independently of the preferences of a powerful corporate group.
Shareholder activism is not automatically justified in every dispute, and controlling shareholders are not necessarily acting improperly whenever they reject outside investors’ proposals. But credible challenges create opportunities to test whether formal governance rules are capable of restraining decisions that unfairly benefit insiders.
South Korea’s reform prospects therefore cannot reasonably be described as hopeless. Its institutions have demonstrated the ability to investigate corporate wrongdoing, dismantle failing conglomerates, regulate ownership structures and enact stronger shareholder protections. Whether these measures produce lasting behavioural changes depends on enforcement, judicial interpretation, corporate incentives and the willingness of investors to exercise their rights.
The most effective reforms will not necessarily be those that make large corporations smaller. Stronger board independence, transparent related-party transactions, fair treatment of minority shareholders, improved competition and more productive opportunities for smaller businesses may address the central problems without sacrificing industrial scale.
The relationship between the government and chaebols helped create South Korea’s economic miracle because it concentrated resources at a time when concentration could accelerate development. The challenge now is to ensure that an arrangement originally designed to strengthen the national economy does not remain an indefinite justification for inherited privilege.
The chaebols helped build modern South Korea. Their factories, technologies, investment networks and international businesses represent productive achievements that took generations to establish. Treating those achievements as meaningless because some controlling families have abused their influence would be as misleading as ignoring those abuses because the businesses are economically successful.
The deeper problem is that institutions created to mobilise resources for national development allowed entrepreneurial authority to evolve into hereditary corporate control. A system that once needed concentrated decision-making increasingly faces the challenge of ensuring that its most powerful organisations remain answerable to shareholders, suppliers, employees and public institutions.
The Korean Air nut-rage incident became a symbol of this problem because it made an abstract power imbalance visible. An executive’s inherited authority was treated as sufficient reason to disrupt an international flight and subject an employee to humiliation. Similar inequalities can have far greater economic consequences when they influence corporate transactions, employment conditions or government decisions.
South Korea does not need to choose between preserving its most successful businesses and accepting unrestricted family control. Its next stage of development depends on maintaining the industrial capabilities that made the chaebols valuable while strengthening the competition, accountability and legal protections that prevent economic success from becoming permanent private entitlement.
Last Updated on October 20, 2026 by Aseem Gupta